To what extent can national governments influence the outcomes of economic globalization? Discuss with examples? In a world where trade barriers are blurring, people cross borders relatively easier in comparison with previous times, countries cooperate with one another and even unite and multinational enterprises (MNEs) gather momentum the national governments still exist. National states refer to geographical space preoccupied by a group of people, who share the same cultural values and political governance, language and religion, history and ethics (Dicken, 2003).
Recently, their relevance has been questioned because the world experiences fundamental economic transformation (YouTube, 2008). In other words due to globalization a significant number of changes has occurred in terms of competition, integrated trade, capital movements, MNEs and the role of national governments. This essay is going to argue that as a result of globalization, the role of national states nowadays have changed and they assume a number of different positions and perform various functions. The first paragraph is going to show that states contain different cultural dimensions.
Then, the second one asserts the view that national governments might be or might not be seen as key regulators in terms of trade, industry and foreign direct investment (FDI) policies. The next section is concerned with the relationship state- MNEs. The penultimate part delineates that states might or might not be seen as competitors while the last one represents them as collaborators. I. States as containers of different cultures This paragraph is going to examine one of the main sources of differences- culture. Although, globalization has spread in a fast pace, countries still have their specific cultures and institutions.
Basically, the international business systems seem to be based on different countries’ values which are diverse in terms of local culture and practices. Hofstede and Hofstede et al. ,(1883; 2010), argues that there are four main cultural dimensions: Figure 1. 1 (Hofstede, 1983; 2010) So, each country has different traditions and culture which represent its uniqueness of national system and politics. States dealing with international business should be aware of such difference in order to prosper and facilitate their merchandising.
To illustrate, this appears to be highlighted by Jake’s character in the movie Wall Street: Money Never Sleeps, when Chinese business representatives seem to be fascinated not only by the bargain proposed but also by the fact that Jake speaks their own language and pleased them with a present “American bijou” (Stone, 2010). II. States as regulators of trade, foreign investment and industry Hudson (2001, pp 48-9) asserts that “state activity is necessarily involved in constituting economy and society and the ways in which they are structured and territorially organized. First of all, states form their mix of policies on the basis of a few key dimensions including their level of development in the globalized economy, the standards of their main institutions, their capital of resources and the proportions of their domestic market (Dicken, 2003). States could influence the economy in two major ways – by using fiscal or monetary policies. The former refers to the use of taxes and government spending, the later to the level of money (high powered money) supplied by the Central Bank (Blanchard et al. 2010). Finally, the policies adopted by states might be applied towards neoliberal market capitalism, which refers to narrow state intervention and more liberal market orientation, or developmental market capitalism, in which the state plays a key role in the economy and might imply restrictions to markets in order to support domestic trade (Whitley, 1999). In the former case, countries are more liberal and their macroeconomic position is likely to be more competitive. A good example seems to be the United States (Dicken, 2003).
In the later, government still plays crucial role in the formation of country’s macroeconomics, trying to encourage further economic development, for instance, Japan, Korea and Taiwan (Woo-Cumings, 1999). So, according to the type of capitalism, that states acquire they tend to influence their economy and globalized markets in different ways. Furthermore, states might influence their global economy through trade, FDI and industry policies. II. 1. Trade policies States adopt trade policies towards exports and imports; the later is based on two main categories – tariffs and non-tariffs (Dicken, 2003).
Most export policies offer financial or other advantages to the producers in order to strengthen the export of a particular product or service. On the other hand, tariffs refer to taxes, which are implied by states in order to increase prices of imported goods and undermine their competitive advantage towards host production (Dicken, 2003). Non-tariff barriers (NTBs) are built upon the monetary worth of goods, including quantitative constraints, subsidies and technical regulations (Dicken, 2003; World Trade Report, 2008).
For example, countries with high levels of tobacco production like Pakistan imply high import quotes for the product (Khan, 2004). In this way, states appear to stimulate domestic production and constrain FDI. Nevertheless, through economic globalization trade barriers are blurring and both tariffs and NTBs are likely to loosen their strength. So, it seems that national states might influence the economic globalization in terms of trade constraints on imports and exports. There might be some exceptions, though.
To illustrate, the only organization which is known to be fully unionized is the EU, in which case all the members are subject to the same import policies (EU, 2011). II. 2. Industry policies Industry policies refer to the internal policies performed by a national states, however, they appear to be relevant to the international level of business systems, as well (Dicken, 2003). Table 1. 2 below represents the two major groups of such policies: Figure 1. 2 (Dicken, 2003) As a consequence of economic globalization, industry policies tend to modify. For example, nowadays there is a tendency towards privatization and deregulation.
Therefore, the role of national governments has been neglected to a certain extent, because companies become private and markets deregulated. II. 3 FDI policies There are four major classification policies towards inward investment (Dicken, 2003). The first one is based on barriers of entry: Figure 1. 3 (Dicken, 2003; Dunning and Lundan, 2008) The second group of policies refers to the actions that foreign companies undertake (Dicken, 2003). Some of the requirements might aim at involving local resources or labour force in the firm’s activities; others might claim ertain levels of exports or policies towards the transfer of technology (Dicken, 2003). The third category is based on minimum outflow of capital and higher taxation towards FDI companies. Last, but not least important a number of countries stimulates the inward investment, because FDI might be seen as a source of economic development (Dicken, 2003). For instance, China has implemented an open-door policy towards FDI, consequently the level of imports and exports has risen dramatically and the country has experienced economic growth (Chen, 2004).
Overall, the trade, FDI and industry policies implemented by a particular state represent not only its macroeconomic conditions but also the level of globalized economy. In contrast, Hrist and Thompson (2002) argue that stability in the international markets might be acquired only through general agreement of states towards universal goals and requirements. III. MNEs and the Government “A MNE or transnational enterprise is an enterprise that engages in FDI and owns or, in some way controls value-added activities in more than one country” (Dunning and Lundan, 2008: 3).
The results of globalizing markets and production around the world have increased the number of MNEs around the globe. Furthermore, the interaction between governments and MNEs varies to a high extent and is defined by distinct local recourses and capabilities, policies and strategies, goals and aims (Dunning and Lundan, 2008). It might be cooperative if the objectives of a government coincide with those of a MNE. However, often states and transnational companies might be concerned with different cultural values, environmental and safety regulations which in turn might to higher operating costs for MNEs restrictions towards their function.
In these circumstances, the final decision will depend on the negotiation skills and bargaining power of the both sides (Dunning and Lundan, 2008). Nevertheless, the bargaining power of a country seems to be one of the most important aspects in dealing with MNEs. Figure 1. 2 represents a bargaining framework between the MNES and host country. Figure1. 4 (Dunning and Lundan, 2008) It seems that governments might be able to control the access to their national markets and capital, while the MNEs might be sources of competitive advantage in terms of technology and innovation (Grosse, 2005).
A host country seems to be in a good position if it is able to provide local resources, policies or incentive systems that would be alluring to MNEs. On the other hand, the governments, as well as the MNEs, have alternatives such as other MNEs or domestic firms. Nevertheless, MNEs might be in a strong position towards national government if its opportunity costs are low and might propose good investments for the country. Some countries have competed with one another by implying various taxes and subsidies in order to draw FDIs’ attraction towards their industries (Charlton, 2003).
Consequently, states bargaining power vis-a-vis MNEs might be decreased. One of the main aspects of the bargaining framework seems to be the “stakes”. This is represented by the possibility a bargain is not concluded between the government and the MNE and the losses that might occur as a result (Grosse, 2005). For the governments these might be not only loss of the company’s resources otherwise supplied to the country but also loosening the connections with the company’s country and failure to participate in a global trading alliance (Grosse, 2005).
For the company, stakes refer to the incapability to gain access to the host country markets and assets, possible loss to trade in the particular region and gaining the name of being unable to negotiate with governments properly (Grosse, 2005). One good example of high stakes for the governments seems to be Costa Rica’s attempts to persuade Intel to establish its factory in the country, while there were good conditions for the company to place its mill in Latin America (Grosse, 2005). If Costa Rica’s government did not convince Intel of the positive sides of the bargain, the country would loss a number of jobs and profit from exports.
According to Grosse (2005), one of the main reasons why governments have experienced a number of changes during the last few decades is not only as a consequence of MNEs but also because of the rapidly transforming macroeconomic environment. In order to understand the relation between government and MNE and the macroeconomic environment within which those two operate it is essential first to analyze what are actually the government’s objectives and constraints and then interpret their interaction within various markets and MNEs (Grosse, 2005).
For example, after 1970, the technology has developed at really fast rate and competition between countries and companies had been largely established on the technological development and the marketing abilities (Grosse, 2005). However, even in such a hectic world of technological advance some countries applied protectionist policies toward computers, such country is Brazil (Grosse, 2005). Brazil, put constraints on the MNEs concerned with the production of computers because it aimed at encouraging its manufacturers, and assisting local competition in the particular industry (Grosse, 2005).
Consequently, Brazil experienced weak macroeconomic conditions, slow process of competitive computer technology and strained its connections with some governments, particularly USA(Grosse, 2005). From this example, it becomes obvious that governments are likely to control the number of multinational firms which might enter their economies. In some cases it might be relevant for national governments to put some constraints in an attempt to protect the local manufacturers, however, in other such as the case with Brasilia, it is better for companies to adopt more open policies towards FDI.
In different industries and countries, states tend to react in a different manner. The case with Brazil clearly shows that even though due to globalization and more open economy, most countries acquired open policies toward technology and computers in order to gain competitive advantage and to keep abreast with the fast rates of technological advance, the government still had the last word and decided on what policy to adopt. Therefore, the role of the national state is still relevant and because of the increased emergence of MNEs has even more important role in the global economy. IV. States as competitors
As companies struggle to gain more and more profit, while competing with one another, so do countries, trying to strengthen the financial capital of their societies (Dicken, 2003). Furthermore, states compete with one another to acquire FDI and to improve their international trading position(Dicken, 2003). So, national governments might take some of the companies’ features because they also endeavor to obtain competitive advantage (Dicken, 2003). On the other hand, Krugman (1994) argues that the competitiveness between firms is erroneous and dangerous at the same time because of several reasons.
First, “a country is not a big corporation”, if a company is likely to cease payment, a country is not (Krugman, 1996: 40). Second, if two companies – A and B compete with one another, the success of company A tends to be at the expense of company B, however this is not the case with countries, if for example, the British economy succeeds, it is not at Germany’s expense (Krugman, 1994). Third, Krugman (1994) asserts the idea that there is no empirical evidence that competition between countries occur.
For example, if the Japanese development decreases the US status, this does not mean it reduces its living standards (Krugman, 1994)). In addition, competition might lead to a number of negative consequences such as trade wars, protectionism or prodigal money spending (Krugman, 1994). On the contrary, Michael Porter (1990) argues that countries compete with one another and even create and sustain their competitive advantage locally. Porter (1990) combines four aspect of national competitive advantage and puts them in a system known as a “diamond”: Figure 1. (Porter, 1990: 77) Factor conditions are internally created variables; demand conditions refer to domestic market demand for a particular product or service and might have considerable influence on companies’ production (Porter, 1990). Furthermore, firm strategy, structure and rivalry represents the circumstances under which nation is governed, firms established and supervised and the character of domestic competition (Porter, 1990). Related and supporting industries embody businesses which support and compete with each other internationally (Porter, 1990).
So, states might be seen as competitors, however, this is only to a certain extent. For example, they might compete in terms of technology and innovation but this does not mean their rivalry is the same as competition between firms. So, states aim at increasing the welfare of their societies, therefore, they should compete in the global economy in order to achieve such goals. Although countries could not be seen as companies, they still compete with one another and struggle for better trading positions, access to more markets or attraction of FDI.
All these might be a source of competitive advantage and enhance different industries. Overall, competing in the global market might be seen not only from its negative perspective but also as a good way. V. States as collaborators States might be seen not only as competitors with one another but also as collaborators (Dicken, 2003). One of the main ways to establish political and economic connection between countries, which are situated in close geographical proximity from one another, is to form regional blocs (Mansfield and Milner, 1999).
Most of the economic regional blocs are established in the virtue of preferential trading arrangements (PTAs), which are based primarily on the arrangement to assure access to their markets(Dicken, 2003). According to Mansfield (2005), the major outcomes of the regional blocs are – trade diverting, which refers to replacement of a trading partner with one inside the regional bloc, trade creating in cases that foreign trade takes place instead of domestic and the level of FDI increases.
Conversely, Ni Wang (2010) argues that regional blocs might be seen as a burden toward globalization, because institutions as the World Trade Organization (WTO) aim at removing trade barriers, while, the regional block put some constraints as a result of trade diversion. Nevertheless, there are four major types of regional economic integration: free trade area, customs union, common market and economic union. Table 1. 3 represents the major characteristics of each of them (vertically) along with examples: Figure 1. 6 (Dicken, 2003; Lawrence, 1996; Rodriguez, 2011)
Furthermore, Hrist and Thompson (2002) argue that the world needs governance and the role of national governments is slightly blurred. The increased number of open markets, connections and the advance of technology cannot be simply managed without appropriate governance. Furthermore, the system of governance is divided into three major categories international, national and regional, those three should be gathered in an integrated network in order to function properly (Hrist and Thompson,2002). Consequently, the number of regional bloc arrangements is constantly increasing (Ni Wang, 2010).
For instance, the membership of the EU, represented on the map below, has increased from 12 members in 1980s to 27 in present times(in the yellow and orange color), and still has a number of candidate countries ( the grey color) (Dicken, 2003; EU, 2011). Moreover, the EU represents a regional bloc in which countries retain their independence as national states, however “pool” their sovereignty, which means that some decisions which are likely to influence the whole union are taken at European level by the three main institutions – European Parliament (EP), Council of the European Union, European Commission (EU, 2011). EU, 2011) Available from: http://europa. eu/abc/maps/index_en. htm Looking at the map, it is easy to notice that the main territory of Europe is occupied by the European Union. This is likely to enhance the competition and trade between member states, however, the other countries might be in isolation or experience disadvantages in terms of trading. One of the reasons might be due to imposing currency rate by the European Central Bank (ECB), if the currency is too high “outsiders” power or market force might be constrained.
So, regional blocs such as the European Union are likely to influence the role of state in terms of some key decisions related to countries’ economic position. Furthermore, national governments seem to loosen their position in such regional bloc since the major bodies of laws and jurisdiction are implied through the union and all the members are subject to it. Under the assumption, that states are collaborators, it becomes obvious their national governments are affected by the regional blocs.
Additionally, on the basis of regionalism countries are likely to benefit from different arrangements in terms of open markets and FDI. On the contrary, this might be seen as a constraint since the flow of investment and capital is primarily maintained between member states. Due to such integration states has changed their full control of the national economy and loss their sovereignty to a certain extent. To conclude, some scholars might argue that with the rise of MNEs and as a result of the globalized economy nowadays, states would lose their key positions and sovereignty.
In contrast, other might assume that national governments are still crucial elements of the global world. It seems that states have undergone significant transformation in terms of roles assumed by them including regulations on trade, FDI and industry policies, competition or collaboration with one another, interaction with MNEs or content of distinctive cultural values. So, due to globalization, national states have changed their functions and positions but they definitely have retained their relevance to a certain extent.