Critically discuss, “The multinationals (MNCs) hold power over national governments” PDF

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Critically discuss, “The multinationals (MNCs) hold power over national governments”...

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Critically discuss, “The multinationals (MNCs) hold power over national governments” Globalisation is a prime factor that has paved the triumph of commercial companies transcending globally and prospering to multinational corporations (MNCs). Such phenomenon has stemmed a global capitalist system that pioneers the pursuit of MNCs' interests which allegedly significantly diminishes the jurisdiction of the state. Supporters of MNCs argue that the state can rely on MNCs to boost capital inflows, generate employment, stimulate investment and transfer technology which generates aggregate economic growth (Moran, 2014). Critics argue that MNCs circumvent state restrictions, crowd out local businesses, replace labour with machinery, force wage shrinkage, avoid taxes and create environmental damage (Diebold & Caves 1983). This essay evaluates the relation between MNCs and the state to critically outline whether MNCs hold more power over national government.

Ohmae (1995) views MNCs possession of technological information, financial independence, tax breaks and subsidies as a loss of the state role. MNCs bypass undesirable legislations through profit shifting and transfer pricing strategies. MNCs global independence has reinforced the need for multinational governance such as the European Union and United Nations to sustain democracy over commercialism. One could argue that MNC's financial independence, technological information, and tax breaks do not undermine the state power but rather places MNCs in a seat where it is able to guide the constitution of international policies. This increases international competitiveness through expectations of business norms (Mishkin, 2015). For example, governments imposing trade restrictions such as tariffs, taxes and subsidies are not undermining the state role as the jurisdiction of implementing these business norms is in the hand of the state. Thus, the state's role has not decreased but changed.

The threat that MNCs impose are evident and thus there are restrictions which prevent them from yielding and abusing power. Despite there being cheap labour elsewhere in the world, MNCs face restrictions in outsourcing labour for advanced production as less economically developed countries (LEDC) have low skilled labour (Ernst, 2008). Also, corporate social responsibility (CSR) led by consumer and the

state's power forces MNCs in mitigating operations that exploit the repressive authorities in LEDC (Tilcsik & Marquis, 2013). For example, the 2013 Savar building collapse has brought attention to revise labour rights and regulations in Bangladesh where multinationals such as Primark and Walmart faced major legal threats if changes weren't made (Alliance for Bangladesh Worker Safety, 2014). MNCs signed to legally adhere to the Alliance for Bangladesh Worker Safety program. The new law enforcement is an indication that state and consumers have power and can exercise it when needed over MNCs. The degree of integration varies from one economy to another as the distribution of foreign direct investment and MNCs are more centralised in specific sectors and industrialised economies (Balassa, 1961). For example, during the Cold War, United States exploited its political geography and international relations influence against the Soviet Union to stimulate trade and economic development. MNCs sought to ensure its primary base in America through lobbying in order to have influence in the General Agreement on Tariffs and Trade to achieve export expansion through the US international dominance. This is a clear example where the state possesses more power over MNCs and can use it to its advantage to influence its own trade and economic objectives.

In contrast, since MNCs are key drivers globally, this grants them a high degree of influence in the political arena (Anderson, 2002). By assessing the size of MNCs, one can roughly determine its degree of power. According to Makwana (2006), the top 100 economies are 52 MNCs while only 48 are countries. In 2002, 200 MNCs sales figures combined accounted for 28% of world GDP while only employing 0.82% of the national labour force due to specialisation and economies of scale (Makwana, 2006). Nonetheless, with such a significant global output, states are more inclined to overlook challenges presented as FDI directly impacts an economy's balance of payments. For example, Starbucks and Google's tax avoidance indicate a loss in state power despite making billions in profit (Keightley 2015). Due to the nature of MNCs being able to relocate, officials are forced to turn a blind eye to activities such as tax avoidance and its detrimental impact on small domestic businesses to sustain economic growth rather than welfare.

Countries experience environmental challenges due to a minimal existence of binding international treaties. In consequence, MNCs locate to countries where they are subject to minimum or no production restrictions, opening doors for toxic waste dumping, overfishing, and deforestation. For example, in 1993 and 1994, two lawsuits were filed in the US federal court against Texaco to be held accountable for the detrimental environment damage caused by Texaco's oil operations in Ecuador (O'Toole & Mayer, 2010). In 2002, both lawsuits were dismissed on forum ‘nonconvenience grounds' and were referred to Ecuador courts for legitimisation. Experts recommended to the court that Chevron (acquired Texaco) are to pay $7 to $16 billion to compensate for the environmental damage. In 2008, Chevron lobbied the US government to end trade preferences with Ecuador over the lawsuit. Furthermore, environmental laws are said to negatively impact economic growth (Dechezleprêtre & Sato 2014). For example, heavy industrial sectors will have to invest or adopt more expensive methods of production in order to minimize pollution. This is passed on to consumers as an increase in price or laying off workers. Considering both examples, it is evident that there are increasing pressures on the state to minimize its political influence due to fear of losing financial gains. Thus, MNCs are seen as more powerful in this case. Undoubtedly, these patterns indicate a transfer of power from state to MNCs.

In conclusion, MNCs ability to influence international trade, market penetration and channels of revenue have granted them a degree of power in the political arena. Thus, states are more inclined to overlook challenges presented by MNCs. MNCs can overcome these state restrictions through profit shifting and transfer pricing strategies. Despite all, the state can always regain its power by tightening and reestablishing its legislations and being a member of binding international treaties. Without solid trade agreements and legislations, MNCs hold greater power over national governments where they are subject to minimum or no production restrictions. This opens a window for MNCs to deplete host country's resources, undermine labour welfare and force small domestic businesses out of the market. Ultimately, the states will always hold more power over MNCs as the jurisdiction of implementing subsidies, trade quotas and tariffs are in the hand of the state. The question that remains at hand is; does the state want to exercise its power at the

cost of its economic objectives?

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Keightley, M.P. (2015) An analysis of where American companies report profits: Indications of profit shifting [Online]. Available at: http://digitalcommons.ilr.cornell.edu/cgi/viewcontent.cgi? article=2011&context=key_workplace [Accessed: 1 June 2016]. Makwana, R. (2006) Multinational corporations (MNCs): Beyond the profit motive [Online]. Available at: http://www.sharing.org/information-centre/reports/multinationalcorporations-mncs-beyond-profit-motive [Accessed: 13 June 2016]. Mishkin, F.S. (2015). Macroeconomics: policy and practice . 2nd ed. Boston: Pearson, pp.1-23.

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Tilcsik, A. and Marquis, C. (2013). Punctuated generosity: How mega-events and natural disasters affect corporate philanthropy in U.S. Communities. Administrative Science Quarterly, 58 (1), SAGE Publications, p.111–148....