The inevitable growth of globalisation over the past few decades has gradually created the occurrence we now know as the “Trans-national Corporation (TNCs)”. This essay will aim to the highlight and explain the situation in which nation states are continually being reformed by these TNCs.
Globalisation & the Role of Technology
Globalisation is the process of allowing goods, financial and investments markets to operate across national borders due to deregulation, improved communications, infrastructure and technology. Technology is the “heart” of globalisation. The evolution of technology has sped up the gradual increase in globalisation. As companies build better communication channels, more information can be sent around the world to more remote locations allowing corporations to reach wider markets. Newer and faster modes of transport have allowed more goods and services to be exported around the world, again allowing corporations to reach a wider scope of the world. Technology has also increased the mobility of labour as workers can relocate to areas with better employment opportunities; and transnationals can move to areas with better skilled/cheaper labour.
Transnational Corporations & Objectives
A transnational corporation is a firm that has the power to coordinate and control operations of other subsidiaries in more than one country.” [Dicken, (2011)].
Many “international” corporations are becoming globally integrated meaning they are able to source & allocate their resources globally from and to countries which are more efficient in particular processes of the value chain. An example of a transnational corporation using an integrated strategy would be IBM which operates in over 170 countries. They used to have many “mini IBM’s” in all these countries with each having its own functional area; this was when they were using the “international” model. IBM then switched its strategy to the integrated model which involved having a specific functional area in the country/countries which has the absolute advantage. For example, they now have only one supply chain for the entire corporation instead of having many different supply chains in each country it operates in. This brings about efficiency as they can produce the best product at the best prices due to location economies. Palmisano, (2006)
The primary objective of a standard corporation is to maximise profit and shareholder value. This is done by the widening the margin between total revenue and total cost. Total cost can be cut by reducing the cost of materials, labour and capital or by finding better quality forms of these resources. By becoming “globally integrated”, corporations can move their various departments to places which offer these resources at the lowest price/better quality, therefore resulting in a reduction in cost due to cheaper labour or an increase in revenue/reputation due to better quality materials or better quality labour.
The Nation State and its Tools & Objectives
The terms nation, state, country and nation-state are used to refer to political, economic, social and cultural actors in the international system. The modern “nation-state” refers to a single or multiple nationalities joined together in a formal political union. Lauletta, (1996)
Nation states have specific objectives. The main macroeconomic policy objectives are to ensure low & stable inflation, ensure sustainable growth, improvements in productivity, high employment, increasing living standards and last but not least, practical government finances (national budget & balance of payments). Anderton, (2007)
They achieve this by keeping a close eye on the economy/national marketplace and intervening wherever and whenever necessary. The nation state has a few tools which it uses to alter the liveliness of the economy. These are: regulation, monetary and fiscal policy and supply side policies. Some countries are more successful than others at implementing these policies. An example of a comparison would be Ghana & the UK.
Ghana finds it very difficult to implement its fiscal policy as it does not have an appropriate infrastructure for income tax analysis and collection. Most of the population work in an unofficial industry which means they are paid in cash, this in turn means the government cannot keep accurate records of the citizens and therefore cannot ‘extract’ the right amount of income tax from the people when implementing fiscal policy. This means the policy will be less effective. 6. [Ghana Revenue Authority. (2011).]
On the other hand, the well-built infrastructure in the UK allows for the government to accurately identify and monitor the income of citizens allowing the government to collect the right amount of taxes when altering fiscal policy.
Nation states must also aim to provide public goods which cannot be provided or allocated fairly through the market mechanism. These include physical and human infrastructure such as roads, airports, harbours and education, laws and regulations. Those are the performance goals of the state. Other objectives include locally rooted technology, to maintain indigenous headquarters and to attract and retain business from TNCs. They will also aim to gain a fair level of taxes from TNCs whilst still keeping them in the country and developing a highly skilled, higly earninging and flexible labour force. The Relationship between Nation States & TNCs
TNCs are gradually becoming bigger than nation states. “Out of the 100 largest economies in the world, 51 are corporations; and 49 are countries (based on a comparison of corporate sales and country GDPs)” [Dicken, (2011)]. This would easily illustrate to the ‘simple minded individual’ the shift in power from nation states to TNCs as TNCs become larger and richer than the “nation state”. However to the analytical individual, this quote would be seen as misleading as this only paints a quantitative picture rather than a qualitative one. Also, the measure of GDP does not exhibit the total revenue a country makes; it merely shows the value added to the economy therefore the initial quote definitely paints a misleading picture.
This makes me realise that the nation state and TNCs are not necessarily in competition for power, they both have different roles to play and require each other to play those roles effectively to create a good balance for effective business. Nation states and TNCs clearly need each other. The state needs the corporations to create wealth and bring jobs for the citizens. The state will aim to attract the corporation by offering various incentives such as tax breaks, good infrastructure and cheap debt. TNCs also need the state as the state provides public goods such as an infrastructure on which the TNC can operate comfortably. This can be in the form of roads, the emergency services, protection, an operational labour force and real estate (land). TNCs will also require their home nations to provide them with diplomatic consulting in foreign countries. [Bartlett, C.A and Ghoshal, S. (2002)] These are the things the two entities ‘need’ from each other to create a working relationship, they are perfectly reasonable. What they ‘want’ however is quite different and this is what brings the tension.
TNCs want to be free from all regulation which may hinder their activities, whether it be import quotas, cheap labour or freedom to relocate to wherever they want. This makes sense to me as the TNC will aim to be as efficient as possible and use a freedom from regulation to exploit as much resources as it can in order to maximise profits. I personally don’t agree with this idea from the TNCs as it minimises social welfare and will cause market failure. This is demonstrated by the multinational corporation “Glencore” and Zambia cast study. Glencore engineered a way to avoid paying the right amount of taxes on its operations in Zambia through transfer pricing. The company extracted $3bn worth of copper in 2006 from Zambian mines and paid only $50m in taxes, and also left many negative externalities for the citizens living around the copper mines, including air and water pollution. Glencore did not cover its social costs completely as they avoided paying the right amount of taxes. Zambia was also contracted to supply Glencore with $150m worth of electricity to the mines meaning that the state wasn’t actually making money; it was losing money from the FDI.
Zambia lost out on $100m worth of tax revenue in 2006. This problem was due to the fact that their regulations were not well defined and featured loopholes. They also had limited bargaining power as they needed Glencore to provide citizens with employment. [BBC, 2012] Nation states on the other hand would want to gain as much tax revenue as possible from the TNC whilst only allowing the TNC minimal exploitation of their resources. This ideology is good for the state but terrible for the corporation as its main purpose is to make profits and if profits are low due to high tax, then the business model becomes futile. This was again demonstrated by Glencore and Zambia when the state decided in March 2008 to increase taxes on the copper extractions taking into consideration the market price, therefore a change in the market price of copper is reflected in the level of taxes paid. Glencore reacted negatively as the new taxes squeezed their profits thus making the relationship complicated due to a clash in objectives.
I think both parties may be wrong, there should have been a mutual agreement where profits are not squeezed too tightly and the country also gains a respectable amount of revenue. By the state simply setting new tax levels, Glencore temporarily closed some mines which was detrimental to the employees working on the mines. The conclusions of this kind of situation always depend on the bargaining power of each entity. This comes down to the size of each entity or the availability of an alternative. If a TNC has more than one state to locate to, it may make the two states go into a bidding war to secure the FDI from the corporation. This means that that TNC gains more benefits as each state may offer specific incentives in order to attract the investment.
If the state believes the TNC is large enough to bring about more a high amount of investment opportunity into the country, the state will offer much higher bids/incentives. Conversely, a state’s bargaining power comes when it possess a rare natural resource, human resource of a significant market. The state can exert more control on the TNC once it has one of these required assets. An example of this is GSK and the NHS in the UK. The NHS is one of GSK’s (GlaxoSmithKline) biggest buyer. The UK has a significant drug market which GSK needs, therefore when GSK was made to pay more taxes after using tax loopholes to avoid taxes; it had no choice but to comply. Conclusions
It can be argued that Globalisation is inevitably reducing the power that nation states regardless of their assets. Technology is making firms’ more mobile allowing them to have more transnational integration and geographical fragmentation. This in turn will allow them to relocate to countries which have the cheapest factor costs and then engage in transfer pricing to avoid/reduce taxes. This is terrible for the state as not only does it lose out from trying to bid for the TNC; it also then loses out on tax revenue.
I think there is a limit to the amount of influence Globalisation can have on the relationship between TNCs and nation states. I believe the limit has been reached and there is no more change to be had in developed counties. Technology will only make corporations more and more mobile allowing them to reach more resources and thus making more profits. Nation states will also always be there to accommodate the TNCs and provide them with infrastructure. The problems of transfer pricing etc. will be fixed by more regulation & tighter controls. The more powerful state will be the state which can provide better resources and better labour; that is where they can gain their bargaining advantage, therefore there must be major investments in these fields for more developed countries. However less developed countries may continue to face severe exploitation as they will need FDI from these major corporations to ‘improve’ living standards. I just believe corporate social responsibility must be promoted in order to make large corporations clean up after themselves when they leave negative externalities. Within the WTO agreements, members are permitted to take action towards protecting the environment, public, animal & plant health. [World Trade Organisation (2012)].If these agreements are adhered to properly, it should solve the problem of TNCs exploiting less developed countries and leaving them with terrible externalities.
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