CIAO DATE: 10/00

Citigroup, Microsoft and Global Firm-Host Country Relations: The Public-Private Interplay in U.S. Economic Diplomacy

Geoffrey Allen Pigman

International Studies Association
41st Annual Convention
Los Angeles, CA
March 14-18, 2000

 

I.Introduction: ‘Domestic’ Politics To Global Economic Policy, Government Relations to Firm-State Diplomacy

The international economic policy of nation-state governments has traditionally characterized a set of practices centered around assessing constituent interests vis-à-vis other governments and actors in the global economy, adopting policies to advance those interests and pursuing those policy objectives by a combination of negotiations with other governments, domestic legislation and administrative and regulatory action. The international economic diplomacy of states in particular, as it has long been understood both by traditional diplomats themselves in the tradition of haute politique and by the diplomatic studies community in academia, has referred to the venues, processes and protocols within which diplomats interact with one another in pursuit of their governments’ international policy objectives. Historically these activities were sharply delineated from domestic political bargaining between representatives of private interests and the domestic policy formulation processes of which such bargaining formed a part. Yet the ground has been shifting under these traditional understandings of international economic policy and diplomacy as structural change has transformed the global economy at an accelerating pace. The boundaries between policy formation, policy implementation and diplomacy have become much more porous, and the frontier between the domestic and the global has become increasingly evanescent. There has been a dramatic profusion in the types of actors that are subjects in the increasingly complex interaction of global economic diplomacy to encompass firms, multilateral governmental organizations and independent organs of civil society (non-governmental organizations).

These changes in the making of global economic policy and diplomacy affect governments of all nation-states, and they affect all firms that engage in significant business activity across national borders. But the greatest impact of this type of structural change affects states with the largest economies and the largest, most globally active private enterprises. The federal government of the United States and U.S.-based transnational firms are the best exemplars of these phenomena. Examination of change in the global economic policy and diplomacy of the U.S. government and U.S.-based transnational firms also highlight the increasing importance of diplomacy between firms and the governments of nation-states in which they are based. Two very untraditional tableaux of economic diplomacy in the United States in 1999, sweeping liberalization of the financial services industry and the U.S. Department of Justice’s antitrust assault on the Microsoft Corporation, have had a greater impact on the global economy than other more obviously cross-border diplomatic events, such as the failed attempt to launch a new World Trade Organization multilateral trade liberalization round at the November 1999 ministerial meeting in Seattle and the Clinton administration’s failure to negotiate China’s accession into the WTO. By exploring how and why that is so, this paper seeks to explain what the two cases reveal about how structural change in the global economy has changed the making of economic policy and economic diplomacy in the United States.

 

II.Remaking the Landscape for Economic Policy and Diplomacy

The basic argument about structural change in the global economy that I am advancing is not unfamiliar. In the 1990s accelerating advances in information and communications technology have had a broad, if differential, impact upon the structures of the global economy. Among the significant effects has been the facilitating of the participation of non-state actors, such as firms, multilateral organizations and NGOs, in worldwide political processes of economic decisionmaking. ₁ Moreover, it has made the economic policy and diplomatic behavior of nation-states and private firms become more alike. ₂ The increased speed, volume and extent of diffusion of information flows have forced governments of states and managements of firms alike to become more responsive to the constituencies that they serve. Information technology has meant accountability of leadership groups to their citizens, stockholders, stakeholders, members, consumers and other constituent groups has increased and become much more important. The development of communications channels has meant that communication methods and styles between leaderships of states and firms with their constituents have converged and have become more crucial to governance relative to institutional mechanisms such as elections and proxy contests. This transformation of communications has meant it has become possible for governments and management teams to be kept apprised of the views and preferences of their constituencies ever more in real time and thus to be obliged to decide how to respond on an ever shorter time horizon. Disintermediation of governance, the reign of the opinion polls daily conducted by the likes of CNN, Gallup, the New York Stock Exchange and the NASDAQ, problematizes structures of representative government in nation-states just as it limits the ability of some firms’ management teams to operate in relative anonymity. Increased channels of communication and disintermediation of governance have led to increased transparency in the making of international economic policy and the conduct of international economic diplomacy, but greater transparency has not led uniformly to more economically or socially optimal outcomes, as the recent US-EU economic conflicts and the recent difficulties of the International Monetary Fund, World Bank and WTO in making reforms and policy attest. ₃

A second equally far-reaching effect has been that the material interests of many of the actors and their increasingly interlocking constituencies have been altered significantly, redrawing traditional politico-economic cleavages in a direction increasingly pitting those governments, firms and elements of civil society able to gain from the technologically advanced, ‘wired’, globalized economic space against those unable to do so. ₄ As the category of actors able to benefit from globalization has grown, it has permitted ad hoc coalitions of interest to form around particular issue agendas and objectives between different combinations governments, firms, multilateral organizations and NGOs more frequently than might previously have been the case. ₅ However, this process of cross-border multi-actor coalition formation has not guaranteed success in achieving policy objectives, as the same technological advances that have facilitated the formation of such coalitions have also allowed for coalitions of interests opposed to forces of globalization to form, mobilize support and achieve successes in particular diplomatic interactions, as opponents of the 1998 Multilateral Agreement on Investment (MAI) demonstrated. ₆

A third significant effect stands somewhat counterposed to the second effect:

an increasing number of policy decisions affecting the global economy are a product of policy processes that, initially at least, appear purely domestic or otherwise internal to the polity in which they are taking place. As the two case studies to follow illustrate, the fact that in the global information economy policy conflicts and negotiations can take place between different actors but within a single political jurisdiction of a large political unit, such as the United States or the European Union, belies the far-ranging nature of the actors and interests represented in the policy process and bargaining surrounding it.

 

III.Assessing Economic Policy and Diplomacy Performance in the United States

The same technology-driven processes of economic transformation that brought about the end of the Cold War and the ongoing reincorporation of the former Soviet bloc into the global market economy , the decade-long structural recession in Japan and the so-called ‘longest economic boom in U.S. history’ have led many to argue that the United States as a nation-state has entered a period of revived global hegemony or dominance. The claim immediately poses problems, because to discuss any nation-state in such an aggregate form in the current global economic environment may serve to confuse more than it clarifies. If ever it was useful to treat the U.S. government as a proxy for the aggregate economic interests, policy objectives and diplomatic activities of the United States, by the late 20th century that moment had passed. Today, in addition to the U.S. government, a long list of globally active private firms, including Citigroup, Microsoft and many others, call the United States ‘home’ in terms of corporate governance. Likewise numerous global NGOs also have the United States as their home base. Moreover, and crucially, whereas once the stuff of foreign policy and diplomacy, economic or otherwise, was haute politique between governments of sovereign nation-states, the economic policy and diplomacy of major U.S.-based actors, government and private, increasingly engages as much with interlocutors that are also U.S.-based as with those based in other nation-states. General discussion of the fading of the boundary between domestic and international politics and policy needs to focus more specifically on how actors interact and what the outcomes are, and to distinguish between actors based on measures such as economic size, reach and power resources rather than legal/institutional measures of sovereignty.

With this in mind, we can assess at a broad level the economic policy objectives and accomplishments of the U.S. government and U.S.-based transnational firms in terms of how they each view their own achievements. We can then compare these perceived achievements with more general characterizations of the performance of the U.S. economy in the 1990s. The paradoxes that emerge can be illuminated and explained by recourse to the two case studies that follow. Beginning with the U.S. government, the activist international economic policy agenda promoted by the Clinton administration was an explicit response to the changes in the global economy already underway at the time they took office: promoting a favorable global business climate by embracing the Greenspan strategy of focusing on low and stable interest rates first; spreading the gains of U.S. economic growth institutionally by negotiating successful international economic agreements (NAFTA, APEC and the GATT Uruguay Round); identifying emerging markets with rapidly growing middle class populations and promoting exports to and investments in those markets by U.S.-based firms (the Big Emerging Markets strategy); and successfully combining geopolitical objectives with global economic objectives in tasks such as securing the adhesion of former command economies to the global market system (by, for example, promoting cooperation between U.S. and Russian firms in the strategically crucial commercial aerospace sector). ₇ As their term in office nears its end, Administration officials point to a range of measures of success in their stewardship of U.S. economic policy and the diplomacy used to further policy objectives: 20 million new jobs created, historically low combination of inflation and unemployment, a surge in productivity over the past several years on a scale not seen for decades, the recovery of U.S.-based industries seen as under competitive threat in the 1980s (such as semiconductors and supercomputers), and the democratization of shareholding in the United States (and, increasingly, in the rest of the world). ₈ Share ownership in the United States, either direct or indirect, increased from 53 million to 69.3 million persons between 1989 and 1995, while the volume of shares traded rose from 40 million in 1990 to 170 million in 1998. ₉ Regulatory reforms and internet trading have disintermediated the marketplace for securities and enabled individuals to become in effect their own portfolio managers. Commercially and culturally, Wall Street and Main Street have become one.

Major U.S.-based global firms each had different policy objectives and strategies to achieve them, which of necessity included ever more diplomacy and bargaining with other global actors. However, the nature of structural economic change suggests that certain generalizations can be made about corporate policy objectives in this period, such as entering new markets, achieving global brand identity and penetration and positioning the firm as one of the handful of global players emerging within many industries, as well as achieving technological dominance in the industries in which they compete and effectively managing, if not minimizing, ever more complex sources of risk. U.S.-based firms can point to major accomplishments over the period, ranging from general measures such as growth in market capitalization and increases in the major stock market indices to more specific achievements such as emerging as the dominant players in the exploding internet and e-commerce industries and concluding major alliances, mergers and acquisitions that have strengthened their positions in their respective markets (Citicorp-Travelers, AOL-Time Warner, Amoco-BP, Daimler Benz-Chrysler, GE Capital’s acquisitions of Japanese and other Asian financial services assets, Wal-mart-Asda, to name just a few sectors). Moreover, in the period since the end of the Cold War new firms founded in the 1980s and even in the 1990s to develop and exploit new technologies for the consumer marketplace have propelled themselves into the top ranks of U.S. and global business: the rise of America Online is perhaps the best example. One quarter of the top one hundred U.S.-based firms measured by market capitalization were not in business twenty years ago, a record of corporate renewal unprecedented in the twentieth century. ₁₀

Yet despite this record of economic successes justifiably held high by government and firms alike, a broader analysis would identify a much more mixed record of accomplishments, failures and missed opportunities for both the public and the private sector to capitalize on what is generally now acknowledged to be one of those relatively infrequent moments of structural transformation that enable extraordinary levels of economic growth for limited periods of time. In the 1990s Congress, always efficient in representing the interests of individual constituents and constituencies even when the aggregation of those interests has not equalled the expressed interests of the American public at large, became more and more dominated by particularist interests feeling threatened by processes of globalization. ₁₁ Whilst this shift has not translated into increased backing for protectionist or other non-liberal international economic policies, it has bolstered a longstanding cross-party subcurrent of diffidence towards multilateral engagement and commitment of any kind, as the Pat Buchanan-Ralph Nader axis of opposition to the United States joining the WTO illustrated. ₁₂ The Clinton administration, notwithstanding their early successes at moving the GATT Uruguay Round and NAFTA treaties through Congress, since 1995 have failed to persuade Congress to renew fast-track negotiating authority for further multilateral trade agreements, such as the envisioned Free Trade of the Americas initiative. Congress has renewed Fast Track regularly since its inception in 1974, so their unwillingness to renew it for several years now can be seen as significant. ₁₃

Likewise the administration have thus far been unable to muster sufficient support in Congress to grant permanent most favored nation (recently renamed ‘normal trading’) status to the People’s Republic of China, a prerequisite for securing China’s entry into the WTO. Members of the administration, as well as managements of major U.S. and European-based transnational firms and governments of European states, have viewed committing the Beijing government to the rulebook of liberal international trading behavior as one of the essential strategic responses to the ongoing global revolution in technology and explosion of the consumer markets in the emerging market nations. Yet change in Congress alone cannot explain the mixed record of U.S. economic policy and diplomacy in the 1990s: the Clinton administration have also been unsuccessful in achieving numerous economic policy objectives requiring more traditional state-state diplomacy with other powerful governments: launching a new WTO multilateral trade round, the MAI and the continuing carousel of sectoral trade disputes with the European Union, among others. And, as is discussed at greater length below, the administration have undertaken seriously flawed diplomatic engagements with U.S.-based firms such as Microsoft.

U.S.-based transnational firms, for their part, as a group have achieved only mixed successes in opening new markets to exports of goods and services and to the types of direct and portfolio investments that will achieve high and stable rates of return. For firms, a global policy to promote the type of business environment in emerging market economies of necessity involves a mix of policy collaboration and coordination with the U.S. government and cooperation with governments and firms in emerging markets nations. The range of firms’ specific policy objectives generally include lobbying governments of emerging markets nations to change their legal and institutional structures to make them more favorable to direct and portfolio investment, convincing governments to reduce barriers to imports of goods and services, and partnering with firms based in emerging market economies to enter the market through exports and domestic production as well as to change institutional structures, and direct negotiations with national and regional governments in developing economies to assure favorable tax and regulatory environments for new investment. Equally important, however, is the relationship between a firm and the government of its host country, in this case the United States. Firms need to agree and coordinate policy objectives with the U.S. Government for promoting an open, liberal and stable global economy and business climate through bilateral and multilateral diplomatic processes and initiatives. Crucially, firms also need to negotiate with the U.S. government to promote and retain the most favorable U.S.-based institutional and regulatory structure in which to achieve their overall growth objectives. This set of policy objectives ranges from seeking the most lenient and least distorting taxation regime to promoting reduction of legal barriers impeding U.S.-based financial services firms from competing globally to defending one’s firm against rent-seeking activities of competitors attempting to use political-institutional means to enhance their own competitive position at one’s own firm’s expense. ₁₄

A major test of U.S.-based firms’ ability to achieve policy objectives in this was their response to systemic economic crises with the potential to disrupt global economic growth as a whole. The Mexican crisis of 1994 and the Asian and Russian financial collapse of 1998 showed that firms could act responsively and in cooperation with governments and the international financial institutions to limit the damage to their financial interests from systemic instability. The collaboration between major U.S. financial services firms and the Federal Reserve to cover for the collapse of the Long Term Capital Management hedge fund is a particularly good example of how such cooperation can limit risk and minimize losses. Yet by the same token firms, especially those in financial services, paid a huge price in terms of returns on investment and overall profitability because their global economic policy and diplomatic strategies failed to prevent systemic crises from happening at all. The Russian market, with its population of 145 million potentially middle class consumers, vast natural resources and still globally viable aerospace industry, is a particular example of a missed opportunity for U.S. firms. U.S.-based firms in the aerospace sector, such as Lockheed Martin, Boeing and Pratt & Whitney, have benefited substantially from doing business in Russia and with Russian-based firms in the context of private-private, private-public and public-public diplomatic processes begun under the auspices of the Gore-Chernomyrdin Commission and encompassing NASA-Russian Space Agency cooperation on the International Space Station and a trade liberalization agreement that made possible numerous and growing private joint ventures in the commercial satellite launch business. The progress in this sector shows both what is possible and how limited have been achievements by U.S. in many other sectors in doing business in Russia. ₁₅

No two cases illustrate better the contrasts in U.S. government and corporate economic policy and diplomacy than those of the Citicorp-Travelers merger and financial services reform and the antitrust case against Microsoft. Both cases highlight major successes and failures of global economic policy and diplomacy by the U.S. federal government and the firms alike, and both also highlight the increasing impact of diplomacy between transnational firms and their host country governments upon the global economy.

 

IV.Financial Services Reform and the Citicorp-Travelers Merger

The longrunning process of reform of the structure of the financial services industry in the United States took a quantum leap forward in November 1999 when Congress passed and President Clinton signed the Gramm-Leach-Bliley Act, which in effect repealed two pillars of twentieth century financial services regulation, the 1933 Glass-Steagall Act and the 1956 Bank Holding Company Act. Under the new legislation, commercial banks, investment banks, securities, houses insurance companies, mutual funds and other types of financial services companies can merge and compete in markets for all types of financial services. ₁₆ The Glass-Steagall era regime of financial services regulation separated commercial banking from securities underwriting, other investment banking activities and the selling of insurance, real estate and other financial assets. Glass-Steagall and the legislation that followed it was a response to the 1929 stock market crash and the public perception that large U.S. financial services firms in the 1920s were too powerful and did not serve the public interest. Commercial banks, other financial institutions and the public all acquiesced in extensive state regulation of the industry, including obligations to serve the communities in which they took deposits and limitations on levels of interest that different types of banking institutions could pay to depositors, and received from the government guarantees that the savings of small depositors would not be wiped out if commercial banks became insolvent, which provided security for individuals and insurance for banks against the likelihood of runs in periods of instability. Financial institutions supported the Glass-Steagall regime because it allowed each type of firm to compete within a limited universe of like institutions.

As the U.S. economy and the global economy began to change rapidly from the 1960s, The attractiveness of sheltered competition diminished. As competition in financial services began crossing borders at a faster rate, firms in the industry needed to grow to survive. Pressure from the public and from financial services firms initiated a process of deregulation of the industry, beginning with the elimination of restrictions on deposit interest rates starting in the 1970s and continuing in the 1980s with the ‘Big Bang’ deregulation of securities trading and the beginning of a phaseout of longstanding restrictions against banking institutions doing business across state lines. ₁₇

Yet despite extensive lobbying by various firms and industry groupings within the financial services sector for more far-reaching liberalization from the early 1980s onward, the balance of support in Congress remained in favor of slow, incremental change throughout much of the 1990s. The lack of an emerging consensus on reform was in part a function of rivalries between industry groupings, such as the American Bankers Association and the Securities Industries Association, that had evolved precisely as a result of the regulatory structure subdividing the overall financial services industry and that had fostered fear of competition in a deregulated environment from firms in other industry subgroupings. Equally, competition between government regulatory agencies and between their respective champions on each presidential policy team and in Congress over control of a reformed regulatory structure, such as has taken place between the Federal Reserve, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation and the Securities and Exchange Commission, has effectively served to limit the scope for successful legislative compromise. ₁₈

The globalization of competition between financial services firms driven by technology and earlier rounds of global financial services liberalization, which reached fruition in the 1990s, followed closely by the extensive de-territorialization of consumer and institutional financial services transactions brought about by the internet, changed material interests significantly. Traditional sources of income for firms, such as commissions on securities transactions and spreads between loan and deposit interest, declined, as has firms’ use of bank loans for funding, whilst revenues from selling consumers bundled packages of financial services including loans, mutual funds, pension plans and insurance, and investment banking advisory fees for mergers and acquisitions and originations increased. In order to maximize revenue from loan portfolios and other asset classes financial institutions have securitized and resold the assets. The advent of internet banking and trading has shifted material interests further by cutting costs of doing retail branch/high street banking and selling related bundles of consumer financial products, as well as costs of trading securities, substantially. Electronic transfer of funds has cut costs to banking institutions and their corporate clients alike. Firms able to take advantage of the new technology have been privileged substantially, whilst those left holding expensive networks of branches have been disadvantaged. The internet holds the prospect of even more radical change, as the direct sale of fixed income products to retail and institutional investors and initial public offerings of securities online portends downward pressure on financial services firms’ income from investment banking origination and advisory fees.

These shifts in material interests in turn altered the discourse of financial services reform in the United States, the parameters within which the debate is conducted. Whereas the Glass-Steagall discourse had been framed in terms of overarching objectives of protecting consumers from financial services firms that were either large and rapacious or small and in danger of collapse, the discourse that emerged in the 1990s instead framed the ability to serve consumers in the context of needing to grow, merge and acquire in order to survive in a global marketplace. By 1997 only two of the world top ten banks measured by asset size were U.S.-based, the American Banker reported. ₁₉ Disintermediation of markets and the emergence of the internet as a delivery channel for financial services to consumers has led to a cultural shift whereby it has become the norm for U.S. consumers to educate themselves about and conduct their banking, saving and investing activities actively, online in an information-rich environment. Hence in 1999 what the public expected from the U.S. government and from financial services firms was dramatically different from what it had been in 1969.

By the mid-1990s the Clinton administration, the leaderships of the House and Senate financial services committees and the top managements of most of the major firms engaged in financial services had just about grasped the impact of the previous round of financial services liberalization and the subsequent structural changes in the global economy, which moved them all towards the need to accelerate the pace of financial services reform to facilitate U.S.-based firms’ global competitiveness. Yet in 1998 there still was not a coalition of the willing on Capitol Hill: a major financial services reform bill failed in that year. In the year that followed, however, firms and legislators alike were stampeded by the internet banking and trading revolution. Within a year, firms were showing very different results depending upon how well and how fast they adopted e-business strategies, and the media were saturating the public consciousness with the possibilities and merits of e-commerce. At this point all bets were off in Congress: financial services reform became perceived as essential to keep U.S.-based firms globally competitive. Sen. Phil Banking Committee Chairman Phil Gramm (R.-Tex.) said, ‘This bill is going to make America more competitive on the world market.’ ₂₀ Sen. Charles Schumer (D.-N.Y.) put it particularly pointedly: ‘The future of America’s dominance as the center of the financial world is at stake.’ ₂₁

Yet often structural change and discourse shifts alone are not enough to change the legislative balance in Congress amidst long-entrenched institutional differences. If a single act of economic policy and diplomacy could be identified as precipitating the creation of a coalition of the willing to complete financial services reform in 1999, it would be the Citicorp-Travelers merger announced in April 1998. Citicorp and Travelers announced that they would merge to form Citigroup in a $140 billion transaction creating a global financial services firm with 100 million customers in 100 countries. ₂₂ The merger, when announced, pressed the envelope of U.S. financial services regulation and went some distance beyond. Under existing law, the firms were permitted to form a bank holding company that could hold all their existing businesses for up to 5 years, but would then have to divest themselves of some business activities if the regulations were not modified in the intervening period. ₂₃ Such divestiture, had it been required, would have rendered the prospect of a merger considerably less attractive to management and stockholders of both firms. For Citicorp and Travelers to take the decision to merge was thus a hugely significant act, both public and private, in their diplomatic relationship with the U.S. government. The newly constituted Citigroup was challenging the U.S. government publicly, at the same time that management were working with members of the administration and Congress privately, to enact financial services reform legislation. In effect, by being ‘too big to fail’, Citigroup were daring the Federal Government not to pass a reform bill. ₂₄ CEOs Sanford Weill of Travelers and John Reed of Citicorp joined in a coalition of the willing extending from Treasury Secretary Lawrence Summers in the Clinton administration to a bipartisan array of leaders on Capitol Hill including Sens. Schumer and Phil Gramm (R.-Tex.) and Reps. Jim Leach (R.-Ill.) and Tom Bliley (R.-Va.). By acting as they did, Weill and Reed changed the balance of support for U.S. financial services legislation and achieved their own central global economic policy objective of growing and merging to remain competitive.

The importance of the Citigroup-U.S. government relationship to how the financial services industry was reformed in 1999 is further illustrated by where legislators redrew the boundary between permissible and impermissible activities. Major retailers, such as Dillards and Wal-mart, had sought permission to enter the financial services industry by opening thrifts in order to manage cash flow better, improve balance sheet performance and create access to short term capital inexpensively. But the coalition of the willing in autumn 1999 did not extend to allowing nonfinancial businesses into financial services. That step may have to wait until the likes of Wal-mart and Bank of America decide to merge. The big winners from financial services liberalization in 1999 were already large firms in particular financial sectors, like Citicorp in banking and Travelers in insurance, that are now able to compete more equally on the global playing field with European universal financial services firms such as Deutsche Bank and HSBC. ₂₅ On that more level playing field the newly constituted Citigroup purchased the investment banking arm of U.K.-based Schroders plc even as HSBC (which itself changed its host jurisdiction from Hong Kong to England) has moved to become a national brand in retail banking in the United States through its takeover of Republic National Bank.

 

V.The Federal Government’s Antitrust Case Against Microsoft

The U.S. government’s antitrust case against Microsoft is an ideal example of what can happen when global firm-host country diplomacy fails, and it illustrates vividly key weaknesses in the global economic policies of both the U.S. federal government and Microsoft. Backed by rival firms of Microsoft, including Netscape, Sun Microsystems and Oracle, that were complaining that Microsoft was a monopoly and was abusing its monopoly power by bundling its Explorer internet browser software with its widely used Windows operating system, the Clinton Justice Department investigated Microsoft’s competitive practices and in 1999 decided to charge Microsoft with violations of the century-old federal antitrust statute. The case then proceeded under the auspices of the judiciary, with Judge Thomas Jackson issuing a finding in November 1999 that Microsoft is indeed a monopoly and a decision expected at any time on whether the judge considers Microsoft to have abused its monopoly power in the marketplace. If, as many observers expect, Judge Jackson rules against Microsoft, he is empowered to mandate remedies that could include, in extremis, the dissolution of Microsoft into three separate firms. ₂₆

The Microsoft case as it has unfolded is problematic first and foremost because of the unique position of Microsoft in the contemporary U.S. economy and, by extension, the global economy. Microsoft may well have engaged in various objectionable business practices for which they might be criticized by their competitors, but even if proved true Microsoft’s infractions must be considered of a second order of importance in U.S. government economic policy terms relative to the importance of Microsoft’s corporate health. Whilst Microsoft is neither the largest U.S.-based firm in terms of output or profit, and the value of its exports do not equal that of Boeing, Microsoft is arguably the single most important firm structurally to U.S. dominance of the technology-driven, information-rich ‘New Economy’. By developing its Windows operating system and promulgating it throughout the global marketplace to a level of overwhelming dominance, Microsoft has created a global standard platform on which individuals and businesses, particularly small and medium-sized enterprises, can conduct their core administrative functions and communicate with one another. Moreover, it is a standard with a built-in mechanism for continuous technological advancement and renewal, wherein Microsoft benefits by innovating and selling upgrades to its customers, and its suppliers are given the incentive to keep innovating in line with the increasing capacities of Windows. The Windows standard also has a structural incentive to become ever more affordable to new consumers in emerging markets, as long-range declining marginal costs of production and Microsoft’s own interest in discouraging new entrants in the operating system market encourage price cutting. Microsoft has also been innovating and cutting costs to make the latest generation of Windows competitive in the large firm market, which has thus far been dominated by other, Unix-based operating systems. To comprehend the value of the Windows standard to global business communication and interoperability, one need only recall the competition between the Beta and VHS videocassette formats in the 1970s and then imagine a Tower of Babel of rival operating systems, some of which state-subsidized national champions, wherein not only might organizations not be able to share data easily with other firms in the same or other countries, but wherein the same firm might not be able to share data between its own offices in different countries using different dominant (and perhaps privileged) operating systems. A similar format rivalry has delayed the entry of high definition television for years and kept its cost beyond the reach of most consumers.

The importance of Microsoft and of Windows to the New Economy underscores the essentially political nature of the issue raised by the rent-seeking activities of Microsoft’s competitors. In terms of setting global economic policy objectives and using diplomacy with its host country government in pursuit of those objectives, Microsoft was in a strange way the victim of its own success. Despite the global reach of Microsoft’s products and services, Bill Gates and his management team have held the governance of the firm and its corporate operations closely around its Seattle area base. The firm has thrived and grown so well in the business environment provided by its host country, the United States, that until the late 1990s they did not fully appreciate the importance of having a large ‘embassy’ of lobbyists and government relations specialists in Washington, D.C. ₂₇ It is probably not coincidental even in the age of de-territorialized internet space that, both physically and culturally, Microsoft’s ‘capital’ in Redmond, Washington is about as far as it can be from the U.S. capital, Washington, D.C. and still be in the continental United States.

Microsoft’s attempts to ramp up its diplomatic mission to Washington from 1998 came too little too late to head off the better organized economic diplomacy of its Silicon Valley-based competitors in persuading Clinton administration officials that their interests were being harmed by Microsoft’s success. By seeking an antitrust investigation, Microsoft’s competitors chose their venue tactically, as had the issue been evaluated by the administration’s economic policy team as a first-order global economic policy issue from the start, their odds of success would have been reduced. The ensuing Justice Department investigation examined Microsoft’s behavior in light of existing antitrust statutes written at the turn of the twentieth century in an economic era quite unlike the present to protect consumers against price-gouging and retardation of innovation by monopolies. Whilst antitrust law still performs an important function in many sectors and markets today, framers of the legislation could not have anticipated that technology-based economic sectors would emerge and become dominant that are governed by fundamentally different rules: rising research and development costs and synergies of standardization, to name two.

By the time charges were filed and the case passed into the venue of the judiciary, the economic policy and diplomacy of Microsoft and the U.S. federal government had failed to serve their interests effectively: Microsoft to prevent a real threat to its corporate identity and signature product, and the U.S. government to protect the largest number of U.S. jobs, stockholders and, pivotally, structural influence over the technology through which business is done around the world. Of the three branches of the U.S. government, the judiciary is the most ill suited and least well equipped to mediate between political interests in the making of economic policy. The judicial process has created its own set of expectations in the minds of the parties to the case and the public. Opportunities for negotiation have continued to exist, but the parameters of the discourse of the judiciary may be too adverse for Microsoft to participate in a diplomatic initiative that would yield a mutually beneficial outcome for both sides. Negotiations to ‘settle’ the case, which so far have yielded no fruit, presuppose the correctness of the law as it is written, and thereby exclude within their venue even the possibility of a settlement that addresses the broader political and policy issues. Microsoft could agree to cease or modify particular business practices as part of a bargaining process, but only in the context of a political negotiation that recognizes that the subsidiarity of the alleged infractions to the importance to the U.S. economy of Microsoft’s overall success.

 

VI.Conclusions

At root these two cases are about the ability of U.S.-based transnational firms to compete in and dominate three out of Strange’s four interlocking structures of the global economy: finance, knowledge and production. Firms that advance this project benefit not only their own interests, but they also create value in a way that benefits disproportionately a wide range of interests (workers, shareholders, public services through taxation, etc.) closely linked to the United States. The importance for a firm of making effective global economic policy and conducting diplomacy to achieve policy objectives is demonstrated clearly by the differential policy outcomes accruing even to very large firms such as Citigroup and Microsoft depending upon how effective they are as diplomats. For governments, effective cooperation with firms is crucial when interests coincide in the setting of global economic policy objectives in the broader national interest and the diplomatic pursuit of those objectives. When interests do coincide, neither the Clinton administration nor Congress have responded to the needs of U.S.-based firms as well as they might have done, despite the substantial achievements of the Big Emerging Markets policy, the Gore-Chernomyrdin Commission and other policy initiatives reflecting a deep understanding of the structural changes in the post-Cold War global economy. The slow pace of financial services reform has not served the interests of U.S.-based financial institutions and the people who work for them, own shares in them and run them well, although slow reform is still better than none. Even worse has been the administration’s failure at the top level to recognize and act to safeguard the strategic position of Microsoft in serving U.S. interests in the information economy, notwithstanding Microsoft’s own insufficient global economic policy and neglect of economic diplomacy with their host country government. This essentially political error has already reportedly elicited intimations from Texas Gov. George W. Bush’s presidential campaign that a Bush administration will look more favorably upon Microsoft than the Clinton administration has done. The issue clearly is destined to become an important part of the political debate over U.S. global economic policy now that the general election campaign has in effect begun.

By giving a sketch of the power resources of large U.S.-based transnational firms, the cases also help to characterize what qualifies the relationships between these large firms and governments as analogous to state-state diplomacy rather than to more general lower level constituent/interest group bargaining. Large transnational firms are like large self-contained ships on the high seas that nonetheless need a home port to give them legal and institutional structures as well as provide services, such as defense against military attack, that even some large firms would be unable to provide for themselves. Hence the relationship between a large firm and its host country government is special relative to its relations with non-host governments, but it is not completely different. Large firms can possess a degree of structural power, again in Strange’s terms, over even their host country governments wherein by acting or threatening to act they can change the range of choices and consequences on the government’s policy horizon, as Citicorp and Travelers did by merging. A firm that is large enough in size and global enough in its governance and operations can also exercise the ultimate policy option against its host country government: it can move its corporate headquarters and take on a new host government, as HSBC moved from Hong Kong to England in the face of uncertainty over the post-handover economic and political environment in Hong Kong, or as several U.S.-based insurers are moving to Bermuda to achieve substantial savings on taxation. Moving is costly to a firm, often prohibitively so, but it confers upon firms able to do so (or threaten to do so credibly) a degree of sovereign status that other firms and interest groups do not possess relative to governments.

Would a threat by Microsoft to leave the United States be credible in terms of negotiating a resolution to their conflict with Washington? Moving the headquarters abroad would be less costly for Microsoft than for some firms with larger staffs, and should moving production overseas be required then for Microsoft the major task would be to move its creative people, which is much simpler than moving large bricks-and- mortar assembly facilities. What would render the threat less credible is Microsoft’s lack of already existing global governance and production, although their construction of a major R & D facility in Cambridgeshire, England signals their first serious production foray into another country. Bill Gates himself, it has been suggested, is too American himself to make a plausible threat to pull up stakes and go. Perhaps more convincing is Microsoft’s still weak set of diplomatic negotiating skills, which would problematize either the use of such a threat in negotiations with U.S. officials or the negotiation of a treaty of cooperation with a prospective new host government. That such a threat could be made at all is indicative of the shift in power between global firms and host country governments, even when a government is as powerful as that of the United States, and it underscores the sense in which global firm-host country diplomacy have become the true haute politique of the New Economy.

 

Endnotes

Note 1: Susan Strange, The Retreat of the State, Cambridge: Cambridge University Press, 1996, pp. 3-15.Back.

Note 2: Strange, op cit.; John S. Stopford and Susan Strange, Rival States, Rival Firms, Cambridge: Cambridge University Press, 1991, pp. 1-31; Steven McGuire, ‘Firms and governments in international trade’, in Brian Hocking and Steven McGuire, eds., Trade Politics; International, Domestic and Regional Perspectives, London: Routledge, 1999, pp. 147-161.Back.

Note 3: Brian Hocking, ‘Trade politics: environments, agendas, and processes’ in Hocking and McGuire, eds., Trade Politics, pp. 1-19; McGuire, op. cit. Back.

Note 4: Benjamin Barber, Jihad vs. McWorld, New York: Ballantine Books, 1995.Back.

Note 5: Hocking, op. cit. Back.

Note 6: McGuire, op. cit. Back.

Note 7: Jeffrey E. Garten, The Big Ten, New York: Basic Books, 1997; I.M. Destler, ‘Foreign Economic Policy Making under Bill Clinton’ in James M. Scott, ed., After The End; Making U.S. Foreign Policy in the Post-Cold War World, Durham, N.C.: Duke University Press, 1998, pp. 89-107; Michael Cox, US Foreign Policy after the Cold War; Superpower Without a Mission?, London: Royal Institute of International Affairs, 1995.Back.

Note 8: U.S. Dept. of the Treasury Financial Management Service, Treasury Bulletin, March 2000, Profile of the Economy, pp. 3-8; U.S. Dept. of the Treasury, ‘Financial Report to the Citizens’, July 12, 1999; Gerard Baker, ‘New U.S. Economy: Click here to refresh’, Financial Times, December 13, 1999.Back.

Note 9: New York Stock Exchange, Shareownership Survey Summary, 1998; New York Stock Exchange Factbook, www.nyse.com.Back.

Note 10: Gerard Baker, ‘New U.S. Economy: Ready bucks and a flair for risk’, Financial Times, December 14, 1999.Back.

Note 11: Destler, op. cit.; Cox, op. cit., pp. 14-16.Back.

Note 12: G.A. Pigman, ‘The Sovereignty Discourse and the U.S. Debate on Joining the World Trade Organization’, Global Society, Vol. 12, No. 1, 1998, pp. 75-102.Back.

Note 13: Destler, op. cit., pp. 101-102.Back.

Note 14: Stopford and Strange, op. cit., McGuire, op. cit.Back.

Note 15: G.A. Pigman, ‘Securing the High Frontier’, unpublished paper.Back.

Note 16: Rob Wells and John Rega, ‘Congress Rewrites U.S. Banking Laws’, Bloomberg.com, November 4, 1999; F. Jean Wells, ‘Banking and Finance Mergers and Consolidation: Policy Issues’, CRS Report for Congress, July 15, 1998; Kathleen Day, ‘Reinventing the Bank’, The Washington Post, October 31, 1999.Back.

Note 17: Day, op. cit. Back.

Note 18: Rob Wells and John Rega, ‘Congress Rewrites U.S. Banking Laws; Compromise Between Greenspan, Summers Was Key to Bank Bill Passage’, Bloomberg.com, November 1, 1999.Back.

Note 19: Quoted in Jean Wells, op. cit., p. 3.Back.

Note 20: Quoted in Dean Anason, ‘Senate Passes Reform Bill; Gramm Calls For a Sequel’, American Banker, November 5, 1999.Back.

Note 21: Quoted in Rob Wells and Rega, Nov. 4, 1999.Back.

Note 22: ‘Citicorp and Travelers Group to Merge, Creating Citigroup: The Global Leader in Financial Services’, Citigroup press release, April 6, 1998.Back.

Note 23: ibid. Back.

Note 24: Jerry Knight, ‘Banks Now Shift Focus to Global Markets’, The Washington Post, April 14, 1998.Back.

Note 25: Knight, op. cit.; Rob Wells, ‘Congress Rewrites U.S. Banking Laws; Citigroup, Fannie Mae Are Bank Bill Winners; Wal-Mart, Dillards Lose Out’, Bloomberg.com, November 2, 1999.Back.

Note 26: Joel Brinkley, ‘U.S. Judge Declares Microsoft Is a Market-Stifling Monopoly; Gates Retains Defiant Stance’, Seve Lohr, ‘Clear Finding in Blunt Language’, Editorial, ‘The Microsoft Findings’, New York Times, November 6, 1999; Lohr, ‘Microsoft’s Horizon’, John M. Broder and Brinkley, ‘How Microsoft Sought Friends in Washington’, Brinkley, ‘Microsoft’s Friends Rue the Findings, Its Foes Relish Them’, New York Times, November 7, 1999; Richard Wolffe and Louise Kehoe, ‘Response: In defence of domination’, Wolffe, Kehoe and Richard Waters, ‘Pressure on Microsoft over antitrust case’, Wolffe, ‘Outcome: Break-up option’, Leader, ‘A case to answer’, Financial Times November 8, 1999.Back.

Note 27: Broder and Brinkley, ‘How Microsoft Sought Friends in Washington’.Back.