10

CORPORATIONS AND STATE

Structure
10.1 Introduction
10.2 Towards a Definition of Corporation
10.3 Globalisation and the Changing Nature of MNCs.
10.4 State and MNCs
10.4.1 Key Features of the State
10.5 increasing Clout and the Erosion of Sovereignty
10.5.1 Financial Flows and the Loss of Sovereignty
10.5.2 Triangulation of Trade and the Loss of Sovereignty

I 10.5.3 Regulatory Arbitrage and the Loss of Sovereignty

I 10.5.4 Extraterritoriality and Sovereignty

10.6 Perceptions of the MNC-Enthusiasts
10.7 Perceptions of the MNC-Skeptics
10.8 Summary
10.9 Exercises

10.1 INTRODUCTION

Recent years have witnessed fierce debates between the protagonists and the critics over the
changing role of the state in the face of prolific rise of multinational corporations (MNC) in a
fast globalising world. While the protagonists have been rather quick in proclaiming the 'end of
the state', the critics sound reluctant over such a possibility. Instead, they believe that the case
for the obsolescence, let alone the demise, of the nation-state has been overstated. However,
both share one common understanding about the status of multinational or transnational
they have become extremely important transnational political actors to be
ignored in any meaningful study of comparative politics. Shaping much of the outcomes in the
world today, transnational corporations, as the very name suggests, have spread across the globe
at unprecedented rate and pace. The size and wealth of Multinational Corporations are too large
to be ignored by the students of comparative politics. Although most analysts agree about the
vast scope and volume of these corporations, they disagree strongly about their utility for the
international system in general and for specific types of nation-states in particular. For the
purpose of this unit, we shall refer to the supporters of multinational corporations as
enthusiasts, and to their detractors as MNC-skeptics. However, before getting down to analysing
the relative strengths and weaknesses of the multinational corporations and their impact on the
nation-state, we must begin by providing brief definitions two important - multinational
corporation and state.
10.2 TOWARDS A DEFINITION OF
TRANSNATIONAL CORPORATIONS
Controversy over a precise definition of Multinational Corporation (MNC) appears to be far
from over. Even though the two terms, multinational and transnational, are often used
interchangeablyin the literatureof comparative politics, different scholars attribute distinct meanings
to them. Widely perceived as and 'stateless' entities by various globalists, a
multinational corporation can be conveniently defined as a firm based in a single home
country that invests in one or more other'states known as host countries. However, even
this relatively simple and less controversial definition raises a central issue regarding the implications
of foreign direct investment. For example, as Barbara Jenkins puts it, "Whose interests does the
represent: those of the home country, the host country, or the firm itself? This ambiguity
has resulted in a debate over the appropriate labelling MNC. Is it in fact a
entity with stakes and interests in many countries, or is it more accurately a transnational
corporation that serves the interests of the home country with little regard for the host economies
involved?"There are others who argue that the real is the corporation, which
is in fact only one part of a larger entity more correctly called a multinational enterprise.

No matter, whichever way one chooses to follow the debate, the controversy refuses to die
down while the MNCs continue to grow both in of size and profit. A look at the
comparative statistics of the growth of MNCs since the 1960s reveals an exponential rise in the
number of such corporations. Variously designated as 'multinational', 'transnational'
or 'global' corporations, the number of such companies have grown from 3,500 in 1960 to 60,000
in 1999. Some of these parent companies like Shell, Bank, Coca Cola, Ford,
or Nestle have more than 500,000 foreign Similarly, the aggregate stock of foreign
direct investment (FDI) worldwide has increased in tandem from $ 6 6 billion in 1960 to over
$4,000 billion in 1999, as compared with only $14 billion in 1914. The geographical size has also
widened with the result that even 'those industrialised countries which never had empires, such
as Sweden and Canada, and also some of the larger developing countries have seen some of
their companies expand transnationally. Among the 100 with the highest levels of assets
outside their home country, 50 are from Western Europe, 27 from the USA, 17 from Japan, 3
from Canada and one each from Australia, Venezuela, and South Korea'.

10.3 CHANGING NATURE OF MNCS

The nature of corporations has undergone a drastic change with the unfolding of
the process of globalisation around the world. This is evident from the changes that are fast
occurring at the level of production activities taking place within the MNCs. As against the older
times when there was a clear demarcation between production activities taking place at the
headquarters and secondary activities occurring in the subsidiary branches, now the companies
have become truly global, with the headquarters merely being a convenient site for strategic
decision-making. Gone are the days when a such as IBM could be regarded as an
American company with several foreign affiliates. Given the widespread expansion of sales
owing to revolutionary developments in the field of global communication, production activities
have today become truly global, and longer need to be located at the headquarters. .
Several new developments like the diversification of activities, adoption of global
, strategies with an emphasis on creating a uniform brand
II top management personnel from across the globe indicate beyond doubt full globalisation of

10.4
It is against such a backdrop of unprecedented rise in the significance of MNCs that
the political implications of on state are

STATE AND MULTINATIONAL CORPORATIONS

analysed. I

I I
In this context the balance between MNCs and Governments according to Rod Hague and
Martin raises in modem form, the age old question of the relationship between economic
and political power. In its form, the logic governing the relationship is simple; capital is
mobile, labour less so and states not at all. Companies can move their factories between
countries, but states, by are fixed in spare. As a result, countries must compete to
provide an attractive home for foreign direct investment. Providing an environment which at
least are as business friendly as that provided by competitor states is clearly a major challenge
for governmentsproviding potential for competitivederegulation and tax competition. MNCs
obviously look for low costs and taxes, the ability to take out of the country, weak or
pliable labour unions and predictable regulations, a work force with relevant skills, a stable
political and business environment and efficient transport and communication. The Governments
are forced to compromise on various issues to accommodate the needs and demands of MNCs,
compromising their sovereignty.

One of the most widely used definitions of the concept of 'state' is advanced in terms of being
'the sole unit of political rule' with its own population, territory, and an autonomous
or sovereign government. Of all the features, it is the accompanying notion of sovereignty that
has really consolidated the dominance of state by authorising it to act as an independent and
autonomous entity both within and outside their territorial jurisdictions. It is also this very same
feature of sovereignty of which has come in for severe attack from the advocates of
multinational corporations who not only argue that the sovereignty of the state is fast eroding,
, but also that it is fast becoming redundant and obsolete in the face of the rise in the significance
of MNCs as transnational political actors. Similarly, the future of nation-stateas a viable political
unit has further come in for attack from a number of other external sources. Growth of
supranational bodies like the United Nations and the European Union, the advance of economic
and cultural globalisation, and the need to find international solutions to the environment crisis
I
are fast rendering the institution of the nation-state meaningless. Moreover, with increasing
globalisation of economic life, the character of the markets has undergone radical
transformation. In the changed international context, markets have become world markets,
transnational corporationscontrol most businesses,and capital is moved around the globe
in the flick of an eyelid. All this has resulted, the argument goes, in the of the power
of nation-statesin regulating and controlling their economic destinies. Before examining the issue
of erosion of the sovereignty of the state, let us have a quick look at some of the key features
of the state.

10.4.1 KEY FEATURES OF THE STATE

Andrew Heywood's of five key features of the state can be very useful for our
purpose here and are thus being reproduced below:
 The state is sovereign. absolute and unrestricted power in that it stands above
all other associationsand groups in society. Hobbes conveyed this idea by portraying
the state as a 'leviathan', a gigantic monster, usually represented as a sea creature.

State institutions are recognisably 'public', in contrast to the 'private' institutions of civil
society. Public bodies are responsible for making and enforcing collective decisions, while
private bodies, such as families, private businesses and unions, exist to satisfy individual
interests.

The state is an exercise in legitimation. The decisions of the state are usually (although
not necessarily) accepted as binding on the members of society because, it is claimed, they
are made in the public interest or for common good; the state supposedly reflects the
permanent interests of society. I

The state is an instrument of domination. State authority is backed up by coercion; the

state must have the capacity to ensure that its laws are obeyed and that transgressors are
punished. A monopoly of violence' (Max Weber) is therefore the practical
expression of state sovereignty.

The state is a territorial association. The jurisdiction of the state is geographically defined
and it encompasses all those who live within the state's borders, whether they are citizens
or non-citizens. On the international stage, the state is therefore regarded (at least in theory)
as an autonomous entity.

Having seen some of the important features of the state, we are now perhaps better equipped
to analyse the issue of loss of sovereignty or autonomy of the state and relative strengths and
weaknesses of the arguments of the two broad categories of soholars that we have above
identified as and

10.5 MNCS' INCREASING CLOUT AND THE EROSION OF

SOVEREIGNTY
Peter Willetts in his recent study of a whole range of transnational actors, including multinational
corporations, identifies some of the important grounds on which states appear to be fast losing
their abilities to maintain their sovereign authorities. These grounds are being outlined below with
a view to enabling you to appreciate the nature and extent of increasing clout in
determining their own future by bypassing the all-powerful states in the process.

10.5.1 Financial flows and loss of sovereignty

Analysing the political impact of excessive transnationalisation of major companieson the states,
Willetts argues that "it is no longer possible to regard each country as having its own economy".
This has had its most severe impact on the abilities of the states to exercise effective control
over two of the most fundamental attributes of sovereignty control over the currency and
control over foreign trade. By illustrating the case of increasing intra-firm trade and frequent
recourse to fixing of transfer prices that the take, Willetts shows how the states are fast
losing their sovereignty in respect to control of financial flows. trade basically refers
 to a process in which international trade takes place between one branch of a TNC and an
of the same company in a different country. In the case of bauxite all the trade is
firm and hence there is no such thing as a world market for bauxite. Transferprice is the price
that is set by a TNC for intra-firm trade of goods or services. What happens under this is that
for the purpose of accounting a price is set for exports, but it is not necessary to relate it to
any market price. Hence, changes in the transfer price do not necessarily have any effect on
the sales or the global pre-tax of the company. As Willetts observes, "As the logic of
intra-firm trade is quite different from inter-country trade, governments cannot have clear
expectations of the effects of their financial and fiscal policies on this has clearly
resulted in the erosion of the sovereignty of the states in respect to control over financial flows.

10.5.2 Triangulation of Trade and Loss of Sovereignty

Increasing recourse to the means of 'triangulation' by companies has become a standard

technique to evade the control of states over trade. The process of triangulation refers to a
situation in which trade between two countries is routed indirectly via a third country. By
illustrating the case of Falklands war between Britain and Argentina, Willetts shows how even
in the face of economic sanctions imposed by the European on Argentina companies
could still indulge in triangulation, sending their exports via Brazil or Western Europe. It was also
possible for transnational companies to alternatively shift orders to a branch in a third country.
All this clearly shows that while it could still be possible for states to prevent direct import or
exports of goods, it well nigh impossible to prevent indirect trade from one country
to another. Willetts argues that the power of triangulation currently vested in TNCs can, perhaps,
only be effectively countered by a Security Council resolution, but even in such a situation
over the relevant trade would then lie with the Securitv Council and not with the

I
individual governments'.

10.5.3 Regulatory Arbitrage and Loss of Sovereignty

The diminishing control of governments in respect to regulating the commercial activities of

companies within their countries due to frequent recourse to what has come to be called
'regulatory arbitrage' by MNCs constitutes another ground on which sovereignty is being
compromised. The two terms 'arbitrage' and 'regulatory arbitrage' have specific meanings in
the context of control being exercised by MNCs over different governments. While Arbitrage
to the simple process of buying a product in one market and selling it in a different market,
in order to make a profit from the difference between the prices in the two markets, regulatory
arbitrage is used in the world of banking. Regulatory arbitrage refers to the process of moving
funds or business activity from one country to another, in order to increase profits by escaping
the constraints imposed by government regulations. By analogy, Willetts argues, 'the term can
be applied to any transfer of economic activity by any company in response to government
policy'. Even institutional mechanisms have been evolved at the international level to
regulate the commercial activities of transnational companies and banks, the mandate of such
international like the Basle Committee and European Community does not extend to all
countries. As Willetts observes, "whatever control is achieved does not represent the successful
exercise of sovereignty over companies: it is the partial of sovereignty to
body".

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 10.5.4 Extraterritoriality and Sovereignty
Illustrating a hypothetical situation, demonstrates how the problem of
is inherent in the structure of all which leads to clashes of sovereignty between
different By using the example of a hypothetical company that has its headquarters
in the United States and a subsidiary company that it owns in United Kingdom, Willetts seeks
to show how three lines of authority exist at the same time. As long as the United States
controls the main company and the United Kingdom the subsidiary company, there would be no
conflict between the two, as they would be exercising their sovereign authority within their own
internal affairs. They would also be willing, under the normal circumstances, to concede certain
powers to the in respect to controlling its own policies on purchasing, production, and
sales. However, when the US government's decisions cover the global operations of the TNC,
there is bound to be a clash of sovereignty. This would inevitably put the subsidiary company
in a quandary, not knowing who to obey, the or the orders of the US government
issued via its headquarters? Such hypotheticalsituations have indeed assumed real forms in the
past, as in the case of the conflict over Siberian gas pipeline. Also, the United States has
I infuriated Canada by periodically ordering Canadian subsidiaries of US companies to avoid
selling goods to U.S. "enemies" such as Cuba and China through its Trading with the Enemy
Act.

10.6 PERCEPTIONS OF THE MNC-ENTHUSIASTS

view multinational corporations as huge economic combines that have the
requisite capacity, know-how, and wisdom to treat the world as a single economic unit and to
combine the factors of production like labour, land, capital, and management for maximum
production.They exhibit tremendous confidence in the ability of MNCs to produce
more and products prices, thereby satisfying the progressively rising global
demand for these products. The reason for this exuberance among the MNC-enthusiastslies in
their unflinching belief in the ability of MNCs to locate their plants, draw their resources, and
select their management staffs from countries that can provide each factor of production at
terms.

The MNC-enthusiasts look at multinational corporations as powerful agents of world modemisation,

especially among the less-developed countries. According to them, the MNCs create new jobs,
introduce advanced technologies, and train local citizens in the arts and sciences of modern
management in the less-developed countries of the world. One of the most important by-
products, therefore, of multinational corporate activity is the internationalisation of the production
and distribution processes. Owing their professional loyalties to 'rational economic-planning
structures' rather than to 'chauvinistic' or 'jingoistic' nation-states, the managers and employees
of multinational corporations become better citizens of the world, oppose 'anachronistic nationalism'
and war, and prepare the way for the development of world peace through world law and
government.

Indeed, the most powerful argument of the MNC-enthusiasts is that multinational corporations,
by spreading and intermingling their facilities and products globally, will eventually render the
practice of international war obsolete. The Atlantic community, which was witness to two bloody
and destructive world wars, has undergone complete as a of prolific growth
of multinational corporate activities and because of the success of regional integration process
in the region. The MNC-enthusiasts argue that given the growing interdependency and mutual
stakes between the Atlantic countries today, it would be well nigh impossible to predict a war
between say States and Canada, or between France and Germany.
,
I

The views of the MNC-enthusiasts can finally be summed up by noting that they are all very
optimistic about the global corporate activities ushering in a 'new golden age of peace and
plenty'. The only thing that is needed in their views, however, is better international regulation
of multinational corporate activities which is not possible without the standardisation of different
national legal systems. Adoptions of such mechanisms, the MNC-enthusiasts contend, will not
only make effective transfer of capital, management, technology, and economic products highly
convenient, but will also genuinely transform the world into a homogenous legal community, a
"world village" or a "global shopping centre."

10.7 PERCEPTIONS OF THE MNC-SKEPTICS

In sharp contrast to the perceptions of the MNC-enthusiasts, the MNC-skeptics identify a whole
range of problems with the global corporate activities of multinational companies. It is not only
the poorer Third World countries which are apprehensive of MNCs, but concerns about serious
implications of the functioning of various MNCs are also constantly raised in the developed part
of the world. Several well-organised labour unions in the Western countries are of the view that
MNCs are fast moving their plants to areas of "cheap labour" resulting in serious unemployment
problems in United States, Britain and other developed countries of the world.

and Muller provide a very succinct account of the arguments of the MNC-skeptics. They
view the multinational corporationsas "the most powerful human organisation yet devised for
colonising the future." Directly attacking the MNC-enthusiasts who the global
corporate activities of the multinational corporations are ushering in a 'new golden age of peace
and plenty', and Muller argue that problems of mass starvation, mass unemployment, and
gross inequality do not even on the agenda of such corporations. Their main contention
is that MNCs are like 'absentee landlords', who are concerned primarily with their own profits
and are not at all sensitive to the fundamental human needs. By undertaking massive and
seductive advertising campaigns, these corporations are not only distorting the tastes and styles
of Third World inhabitants, but also fast transforming luxuries into necessities. Neglect of socially
vital issues such as nutrition, clean air, and public health by such corporations, the MNC-skeptics
argue, have become rampant. One is here reminded of the recent controversy that rocked the
Indian Parliament and the media over the mixing of pesticides in Coca-Cola.

are particularly concerned about the political fallout of growing MNCs activities
on the poorer Third World countries. In the absence of any regulatory mechanism, the future
of these countries would not only remain bleak, but problems like greater inequality, greater
unemployment, and extraction of natural resources will only worsen in the times to come.
However, according to and Muller, such a fate is not only reserved for the poorer
countries, but even rich countries will be affected in the long run. With the increasing migration
of factory and even company headquarters away from the United States and other developed
countries, the problem of and the attendant maldistribution of incomes will only
accentuate further in the industrial West. Finally, the main argument of the MNC-skeptics is that
multinational corporations are poorer countries and "progressively weakening and
destabilising" countries while becoming huge profit making bodies themselves. They conclude,
on a rather pessimistic note, governments in the Third World as well as in the industrialised
West will be'unable to stop this process of the concentration of wealth in the hands of a few
multinational corporations while everyone else impoverished.

10.8 SUMMARY
What comes out quite clearly from the above discussion is that multinational corporations have
not only become very important transnational political actors, but also that they have become so
rich and so powerful that they can influence much of the outcomes in the world today. However,
the complex interdependence between host countries, home countries,and firms that is created
by the MNCs' global networks will continue to generate controversy in the future. It is also a
fact that few countries are in a position to refuse international investment, they will
7
continue to question the MNCs impact on the national interest. No matter, how powerful the
MNCs have become today, the nation-states simply cannot be written off, if for no other reason
than the factor of sheer territoriality. Nation-statescontinue to exercise military and political
control over clearly demarcated territories and their inhabitants. Multinational corporations can
neither threaten the prerogatives of the states nor match the political clout that they wield, for
they are universally accepted as "the sole legitimate unit of political rule". The principle of
nation-state as a viable political is likely to gain in strength in the times to come.
For example, the creation of 18 new states in the later part of the twentieth century, if anything, ,
is a pointer towards this trend. The continuing strength of the state lies in its inherent power of
maintaining both cultural cohesion and political unity, thus allowing those who share a common
cultural or ethnic identity to exercise the right to independence and self-government. The
protagonists of state are all one in holding the view that no other social group can ever claim
to constitute an alternative political community. Implicit in such contention is the argument that
supranational bodies such as the European Union or multinational corporationswill never
be able to replace the state, and command the same kind of popular allegiance as that of the
state.

10.9 EXERCISES
I) What do you mean by multinational corporations? Discuss the changing nature of MNCs
in the age of globalisation?
2) Outline the key features of the state and explain the changing nature of state in the wake
of growing significance of MNCs?
3) How do transnational corporations affect the sovereignty of governments?
4) Outline the key arguments of MNC-enthusiastsand MNC-skeptics.
5) Critically examine the impact of multinational corporationson the developing nations of the
world.
6) feel MNCs are a vital new road to growth, whereas others feel they
perpetuate under-development. Explain.