Gareth Morgan: Danger in playing with the big boys

Telecom's XT deal with Alcatel-Lucent hasn't gone according to plan.

Opinion

Is New Zealand's economic development and productivity being helped or hindered by the role of multinationals in our economy?

It seems a dumb question insofar as they have technologies and economics of scale that one would think can only be of benefit.

But the developing world is full of examples where the role of firms from the developed world has been at best questionable - and in many cases, purely exploitative. The literature of development economics is full of the woes of colonisation and its riding partner, commercial imperialism.

The exploitation performed by First World governments and their corporate clients have been an impediment to economic development in many parts of the world.

So where does the line get drawn? When does an economy cease to be a disadvantaged and vulnerable developing country and instead can be shown to participate on a level playing field? The answer to this, as with so much in economics, is not a bright line but rather a graduation from most vulnerable to least vulnerable, to equally empowered.

And it should also be said that poor deals with foreign parties are not always the foreign party's fault; often the institutional, regulatory and behavioural standards of the recipient country are insufficiently developed.

As a result, the foreign party helps itself to abnormal profits, while the recipient enjoys far less than normal benefits from engaging with the multinational.

Where then does New Zealand lie on this vulnerability/immunity scale when it comes to entreating the multinationals of the world, the global corporate state?

On an anecdotal basis, the score is not impressive and has few signs of improving. What is more depressing is that unlike with an economy made vulnerable by the inordinate power of a totalitarian party, such as an African or Central Asian nation ruled by a warlord, much of New Zealand's vulnerability arises because of underdeveloped competencies within our own government and corporate worlds.

A decided lack of skill in negotiating waterproof deals with multinationals has led to a plethora of cases where the multinational has been able to benefit while the local has suffered.

Let's look at some examples:

The latest case involves Siemens, which the Commerce Commission alleges was involved in an international cartel whose customers included Transpower and Vector.

The price fixing, relating to the global market for gas-insulated switches, was binding on cartel members that included Siemens, Alstom Holdings and Schneider Electric, the commission alleges. The Kiwi subsidiaries of Siemens and Schneider reportedly knew nothing of the cartel.

Next, Alcatel-Lucent. The subject of a US corruption probe, this company has agreed to pay US$137.4 million ($194.9 million), most of it as criminal fines, to avoid US prosecution for alleged bribes paid in Costa Rica, Taiwan and Kenya.

Paris-based Alcatel is the world's biggest supplier of fixed-line phone networks and installed Telecom's big flop, the XT Network.

Telecom itself has quite a track record of technology flops and that is reflected in the one-way trend of its 80 per cent decline in share price over the last decade, from $10 to little more than $2. (Who can forget Ferrit, which was an obvious disaster from Day One, but it didn't stop them pouring more money into it, or the investment in Australia's AAPT, or even the CDMA technology that for so long didn't allow global roaming?)

We can go back to the Police investment in IBM's Incis network - what a bleeding edge disaster that was, a classic example of being sold vapourware.

Then we have the financial sector, a real cesspit of multinational malfeasance that I have written about over the years.

The litany of cases New York Attorney-General Eliot Spitzer took and won against the American insurance multinationals confirmed what the standard level of ethics in this industry is.

We've seen heaps of similar behaviour in our own financial sector over recent years, the ANZ/ING misrepresentation to investors demonstrating that multinationals aren't above such games.

Now all these examples really are the tip of the iceberg - cases where things have totally gone off the rails and public disclosure has been unavoidable. But there are far more cases of obscene cost overruns that get hidden within annual accounts and don't hit the press.

Rather than dwell on the litany of multinational ethical transgressions and technological dead-end "solutions" that have come to light, let's next turn to what is underpinning this systemic failure to be more successful in using IT to capture material productivity improvements.

That is the theme of next week's column.

* Gareth Morgan is director of Gareth Morgan Investments.