Political Science

An incompatible relationship
In the 1970s a process began that saw an increasing number of corporations reach beyond the boundaries of their home country. This multinationalization increased in the 1990s and 2000s as communication and business technologies improved. It is part of a larger economic and cultural phenomenon called Globalization.

Corporations benefit from the access to foreign markets as well as from the resources foreign nations hold. During this ongoing process there has been much focus on the third world - those countries lagging behind in economic development, living standards and, sometimes, in human rights. Are these nations benefiting from globalization, or are they simply being exploited Multinational corporations are central figures in this debate. Meanwhile, the trend toward massive multinational corporations shows no sign of abating.

Proponents of these types of corporations argue that poorer countries benefit from the employment and efficiency they bring. In some cases this appears to be true. In other cases it does not. As the corporation becomes a larger and larger influence within countries that often have little political stability or corporate structure a question beyond dollars and cents must be considered - Are these countries losing their sovereignty under the pervading influence of the multinational corporation The question is complex and the answer is not as straightforward as it might appear .After outlining the process by which the current trends in international economics came about, this paper will discuss the issue of sovereignty from several perspectives.

Rise of the Multinationals - Theory and Practice
Embedded liberalism is a term coined by Professor of International Relations John Ruggie. Mr. Ruggie described a situation in the era after the two World Wars where economic relations were based on two main tenets. Nations sought to expand international trade and integrate new markets as a means to greater internal and external economic security. The second tenet involved preservation of national sovereignty. For purposes of internal stability nations should be able to make important decisions, such as what level of social welfare to provide, in an unfettered way.

The concept seeks to strike a balance between the extremes of protectionist policies and a completely unregulated state of free market capitalism. In the period between the two World Wars a wave of protectionism swept the globe. The terrible suffering of World War One created a situation in which countries wanted their relationships, economic included, to remain as unengaged as possible.

This irrational but understandable overreaction created an economic landscape that only contributed to the worldwide depression that would strike in the 1930s. The theory of Embedded liberalism implied that order would not be established by one or two overpowering nations, but by the cooperation of all nations. In sense it could be thought of as an economic United Nations, not ruled by a central body but by establishing a greater sense of fairness in economic competition and cooperation.

Inside this framework corporate structure has been changing around the world. Many companies are expanding to become multi-national entities. Others are forming as multi-national

firms from the beginning. Local, national and international economics and politics are affected. Companies would not make this change unless they expected to make money in the process. By expanding globally companies can position themselves for access to new markets and gain a wider range of finance possibilities.

Also many companies have expanded for the purpose of finding low-cost labor. This has engendered the most controversy for reasons of human rights and because some companies have exerted what is seen as undue influence on foreign governments in order to maintain competitive advantages. The degree to which this practice is accepted will determine how much the sovereignty of that nation may be eroded. It is all part of a modern phenomenon called Globalism.

In the largest sense of the term, Globalization is a social and economic theory entailing a wide variety political, and social business practices. It is based upon the idea that greater international connectedness and free trade will allow for wealthier countries to thrive while lifting up nations in which poverty has been endemic for decades. The goal is admirable, but it may not be achievable. Criticism has focused on exploitive practices by huge multinational corporations putting vulnerable people at risk. In turn, the sovereignty of these nations these people inhabit is at risk. Meanwhile, some multinationals are making record profits even at a time of recession. Poorer countries risk becoming so beholden to the companies their sovereignty as a nation is sacrificed.              

Multinational is a term to describe corporations that not only sell their goods overseas but also locate some of the levers of production there. Communications technology has improved dramatically in recent years allowing companies greater access to foreign markets and labor sources. The flow of goods then moves in both directions. The company may also have a large untapped market .to sell to. Proponents of globalization claim that it has lifted millions out of desperate poverty and will continue to do so as long as trade and business can operate unfettered.  According to Quinlivan

Evidence supplied by the World Bank and United Nations strongly suggests
that multinational corporations are a key factor in the large improvement in
welfare that has occurred in developing countries over the last forty years.
(2000)

At the same time there are tradeoffs that a nation hosting a large multinational corporation must make. Doing so may affect a nations ability to pursue its other internal and external goals. An emerging Neo-liberal stance in terms of free trade has raised concerns that the presence of large multinational corporations can have undue effects on the sovereignty of some nations, particularly poorer ones.

Policy Sovereignty
Initially it was into the framework of Embedded liberalism that multinational corporations began to form. During the second half of the twentieth century this theoretical framework began to dissolve. Adrian Jones of McMaster University argues that this weakening occurred because of the push for greater liberalization of trade and employment policies (2010).

As the multinational corporations became larger and more profitable they pushed harder to gain favorable Neo-liberal policies. The term liberal, in this sense, applies to the desire for a situation in which regulatory schemes are minimal or non-existent. The result was competitive pressures which diminish the domestic economic autonomy of states (Jones, 2010).

An example of this might be a situation in which a nation lowers its rate of taxation to draw investments from foreign private sources, the IMF or the World Bank. Because of the lower rate of taxation the nation may be restrained from pursuing domestic goals like universal health care. Externally, its financial relationships with outside entities could influence diplomatic and societal relationship with others around the world.

In 2003 there was a major push to enact new free trade agreements in Cancun, Mexico. The fact that no agreements were reached was a sign that nations were feeling insecure about their own sovereignty. Trade policy works hand-in-hand with the success or failure of multinational corporations and the corresponding amount of influence they have over individual governments.

Multinational corporations need a free trade structure in order to thrive. Otherwise they are unable to exploit competitive advantages. By 2003, some governments were becoming nervous that the scales had tipped too far in favor of the corporations interests. The failure to realize some of the grander promised benefits of globalization chastened them against maintenance of the status quo.

Whether or not their fears were justified the trend toward global free trade was altered at Cancun. Ngaire Woods summarized the events of this international trade summit
The failure to conclude new multilateral agreements highlights that many
governments have doubts about the balance between integrating into the
world economy and retaining sovereignty (Woods, 2003).

Economic Sovereignty
Multinational corporations have faced criticism due to a perception that they are unjustly exploiting the labor of third world nations. As part of the process of doing this, some may be trying to affect the internal policies and governance of these countries. The result is a loss of sovereignty as the country is forced to bend more and more to the demands of the corporation, which can always move elsewhere.

Alphonsal and Dhanaseeh describe the process this way The cost of production is cheap in MNCs and they capture foreign market against international competitions and offer competitive advantage internationally (2003). There is no question that many companies have benefited from global expansion. An inevitable result has been a global business community that is more intertwined than ever before.  Technology and business have also been partners in creating a more connected world culture.

In some instances, multinational corporations have colluded with the governments of powerful economic nations and powerful militaries to expand their influence overseas. Critics call this the new imperialism. This alliance is in a unique position to exploit weaker countries and export consumerism and its division of labor across the globe. For example

Clearly, U.S. transnational corporations, U.S. civilian government and
U.S. military establishment form a triple alliance to make of developing
economies the natural extension of their global businesses.
(Robinson, 1998)

Still powerful on their own, the interests backing multinational corporations are working to alter the structure of international trade. In recent years their efforts have been to step away from the safeguards of the past. This is a concerning development for the future sovereignty of more vulnerable nations.

In the 2000s a conglomeration of international corporations worked toward a major multilateral agreement that would essentially put into written form the shift away from embedded liberalism that had been occurring for several decades. The Multilateral Agreement on Investment weakened some of the safeguards against corporate exploitation and strengthened the overall financial power of the multinational corporations.

Companies were not only given greater access to foreign markets, they were given the right to move any and all profits made from these markets out of the host country. Meanwhile the obligations inherent on the corporations under embedded liberalism were conspicuously absent from the MAI. The ultimate aim of the agreement is to stabilize the conditions and minimize the risks of foreign investment.

In a direct affront to national sovereignty the MAI allows for investors and investor groups, including multinational corporations, to challenge national trade and investment policies. An entity that thinks that the host country is in some way violating the MAI can have the issue submitted for international arbitration. A panel of three judges then decides the case.

Two entities not directly connected to any multinational corporation but still assisting in their pursuits are the International Monetary Fund and the World Bank. To their credit these two organizations have poured billions into infrastructure development in poorer regions of the world. At the same time, critics argue that these organizations have also burdened these countries with unsustainable levels of debt while favoring developed nations in their lending practices.

The ultimate effect is that poorer countries sovereignty is put more at risk. In effect they are forced to accept multinational corporations from a position of weakness. In a worst case scenario the corporations may engage in such practices as political pressure, vote buying and bribery to maintain political regimes favorable to them. In such a case the rights of the individual may be severely threatened. Unethical corporations, outside the boundaries of the United States or any other regulating entity may engage in exploitation of the local population, sometimes with tragic consequences.

Several events in the late 1990s brought about concerns that the world, fostered by multinational business, may be a little bit too connected. An economic crisis in Asia that could have remained relatively isolated in the past spread throughout much of Asia. In effect, the crisis fed itself as panic bounced back and forth between the entangled Asian economies. In some cases it had devastating effects
...the crisis produced a collapse in living standards. In 1998, per capital GDP
fell 57 per cent in Indonesia, 29 per cent in Malaysia, 26 per cent in Thailand
and 22 per cent in the Philippines.
(Chirathivat and Murshed 2001).

These economies were still somewhat in recovery in 2007 when the worldwide recession hit. Some argue that the interconnectedness of world economies ultimately leads to a loss of national sovereignty for more vulnerable nations. Because it is increasingly difficult for countries to avoid economic crises in other parts of the world any economic gains they may have made because of multinationalization are quickly erased. Larger, more economically and politically stable nations are able to withstand such crises.

Smaller developing nations are forced to look even more to international corporations or international sources of funds in order to stabilize their teetering economies. In politically unstable countries this is even more the case. Leaders must do whatever they have to in order to right the economic ship. If not they risk political insurrection. The deals they are forced to make in order to avoid this are likely to sacrifice some national autonomy in the process. Then those nations face tremendous debt, making them even more beholden to outside forces.

Resource Sovereignty
Another perspective to view sovereignty is from the standpoint of natural environments. A nations greatest resource and means of sovereignty, it is argued, is its environment. Critics of globalization claim that policies such as the North American Free Trade Agreement and the multinational corporations it spawns have had a deleterious effect on the environment in a number of countries. International corporations are more concerned with mining the wealth of the host country, rather that establishing a sustainable model of growth that benefits that country as a whole.

Too often, studies done on the environmental, economic and sovereignty impacts of multilateral agreements and corporatization do not see the light of day. The public is not aware of potentially bad effects until the damage has already been done. This is particularly true in developing nations, young democracies and dictatorships where accurate information can be hard to come by. Rampant deforestation in South America is one example in which multinational concerns have eroded a national asset at an unsustainable pace.

How are the corporations able to do this Some critics argue that companies are exploiting their positions within foreign nations in order to loosen environmental safeguards. The process can involve political and economic intrigue
Such allegations include the charge that profit-motivated multinational
corporations are engaging in destructive competition and insidious plots to
economically and politically manipulate entire economies
(Quinlivan, 2000).

Emerging markets are the potential gold mines for well-positioned multi-national firms. Markets in India, China and southeast Asia have billions of potential customers with relatively little competition. Access to these markets could help fulfill the promise of globalization. Much depends on ethical corporate and political leadership though.

These regions are also rich in natural resources. Using them responsibly in a way that does not deplete them and minimizes the damage to the worldwide environment is a major challenge for the 21st century. Preserving these resources can preserve the sovereignty of the countries where they exist while also providing an ongoing source of profit for multinational companies.

SocialCultural Sovereignty
Scrutiny of elements of globalization, including the multinational corporation, has increased in the early 21st century. A recession felt world wide has prompted a more internal focus for some nations.  Free trade protesters are increasingly influential. For politicians it is a difficult position. According to Altman free trade might be better for everyone in the long term. But, politicians usually work on a shorter schedule (2007).

The future of globalization and, to some, extent and the future of multinational corporations are not assured. The technology that helped spur this trend is likely to continue its improvement. Politics, however, may turn out to be a major constraining force on multinationalization.

Voters in some countries have begun to dislike some of the side effects that seem to come in the course of having multinational corporations doing business there. Globalization can deliver benefits across the world economy. This requires governments to give up some areas of national autonomy and to play by international rules (Woods, 2003).

A major issue that has arisen in the context of multinational corporations involves the use of outsourcing. In its simplest definition, outsourcing is the exporting of jobs to other nations. It is often done simply because labor costs are cheaper in other regions. There are also political, taxation and other reasons for outsourcing. In some cases the business may be attempting to gain inroads into the consumer base of the second country. It may also be that the second country has a larger supply of employees with a particular skill that is valuable to the corporation. The practice is not without controversy, however.

Outsourcing can increase efficiency and profitability, though the results are not always easily predictable. Many companies have found outsourcing to be a productive cost-saving move. Others have not. Companies incur a certain amount of risk in entering foreign business environments. The trend toward outsourcing is likely to continue as technology continues to improve.

Outsourcing corporations face political pressure both in the home country and in the country where jobs are being moved. Even before the recent recession focused public opinion on the issue it was becoming an issue in local and national elections. Some countries have taken protectionist measures to restrict this practice and others are currently considering such measures,

The desire for endless growth and the fear of decline can lead to the overlooking or toleration of unethical and exploitive practices (Steingart, 2008). Once a struggling country experiences any form of growth it is likely not to rock the boat in any way. In defense of the corporations it is a daunting task for multinational companies to operate in what is not one global environment but many national and local environments.

Local politics are always a factor in the success or failure of a multinational company. In 21st century globalization that situation is trickier than ever. Corporations operate now in dozens of countries and even more localities. Many companies see their involvement in the politics of foreign countries as completely defensible. In fact, it comes with the territory of operating any business within a foreign country. In other words the company, and the benefits it brings, would be unlikely to survive if the country did not play the political game.

Government and business relations give privileges to big conglomerates
in Malaysia, Indonesia and Thailand. The limited progress in dismantling these
kinds of government business relations diminishes the Southeast Asian ability
to enforce new policies, and also leads to the erosion of the strength of the regions
business management.
(Chirathivat and Murshed 2001)

The growth of multinational corporations in places such as India has posed some complex problems. Many smaller entities in the country have been forced either to go out of business or to sell themselves to the larger multinational corporation. These corporations have both brought opportunities and eliminated others. A business community once focused on localism is becoming increasingly global-focused in nature. These changes have an effect on the individual on the street as well as the national government. Social tradition, stability and control have been altered.

The global consumerism culture is making inroads in India. Consumption has increased in the 2000s at an average rate of about 3 per yearper capita (Alphonsal and Dhanaseeh, 2003). Education is now more job-oriented and competition for those jobs is increasingly fierce. In the process the very foundation of Indian culture is being changed. Globalism and multinational business have become embedded in Indian culture and the resulting changes are still unfolding. The changes in sovereignty are uncertain but it is clear that there will be an effect of some kind simply based on the internal changes that have already occurred because of globalization.

 At the same time per capita consumption is increasing, poverty in India is also increasing. Multinational firms and globalization have forced a shift away from the traditional agricultural economy of the country. Income and standard of living between different regions of India are becoming increasingly disparate. The result is a growing social problem that in itself can affect national sovereignty. The benefits of having an economy based increasingly upon multinational corporations have been anything but uniform.

Neo-liberalism entails heightened trade and financial liberalization internationally
and, at least to some degree, creates competitive pressures which diminish the
domestic economic autonomy of states.
(Jones, 2010)

Reactions and Trends
The backlash to Neo-liberalism that began to surface during the early 2000s was only enhanced by the worldwide recession that hit in 2008. Internal pressures are forcing some European nations to return to more protectionist trade schemes.

To some extent the loss or gain of sovereignty lies in the eyes of the beholder. To some the political and economic efforts made to land major conglomerates is worth the price. There are nations around the world that have been suffering endemic poverty for decades. Bowing to international regulations and corporate demands in exchange for thousands of jobs and millions in foreign investment is a no-brainer. At the same time, it is important that the nations that make these deals have at least some semblance of democratic governance. Otherwise, exploitation of workers will be rampant and all benefits will fall to the regime and the corporation.

Globalism promises economic freedom for those who have never had it. Whether this is actually happening or not is subject to debate. The global recession, if not derailing the multinationalization of business has at least slowed it down. A realization has set in that the world is so interconnected a recession in one part of the world will very likely become one for the entire world.

The United States and some other wealthier nations have seen erosion in their sovereignty in the form of job loss. Jobs have been relocated to parts of the world where the business finds employment conditions more favorable. Much of the U.S. manufacturing base has been deported. Free trade proponents say this is just the inevitable result of pure competition. Advantages will come to the United States in other ways.

To critics the loss of major sectors of the U.S. economy makes it more dependent on other nations. Worse yet, companies overseas are able to exploit workers to a degree not possible in the United States. Put another way multinational corporations are eroding the sovereignty of wealthy and poorer nations simultaneously. It is the corporatization of the worlds assets.

Exploitation of foreign labor markets is certainly nothing new. One of the earliest examples of outsourcing in the modern economy occurred in regards to the American textile industry. As an increasing number of textile employees became unionized in the mid 20th century, corporations responded by moving their production facilities overseas to unregulated labor markets. The loss of large parts of the manufacturing sector, it could be argued, diminishes the sovereignty of the United States. It certainly makes it less independent.

In the 1980s and 1990s a series of scandals came to light about the questionable human rights practices of these companies overseas. These included the operation of sweatshops, absence of basic safety regulations and the usage of child labor, all reminiscent of practices that occurred in the United States in the early 20th century. Many of these companies were forced to improve conditions, at least temporarily, by public pressure which ultimately led to eroding stock prices.

Today, outsourcing continues. Most companies at least must provide a minimally safe working environment. Instead of the direct exploitation of labor, many companies have turned their focus toward lobbying foreign governments for highly favorable terms. A multinational company seeking to move in to a relatively undeveloped country can be a daunting presence. The companys profits alone may rival the Gross National Product (GNP) of the country they are seeking to enter.

Smaller, undeveloped nations have realized in recent years that the presence of huge multinational corporations makes them more vulnerable to economic downturns. Meanwhile, people in larger nations are drawing the same conclusions about their economies in an interconnected business world. Together, these factors have led both to reconsider current international business and finance trends. As the recession continues and the exploitation of poorer nations comes to light the world is becoming more focused on the possible dangers of corporitization. Adrian Jones of McMaster University writes that
...widespread social disillusionment with such institutional arrangements and
policy agendas may fuel reform. Though there may be widespread support for
global market integration, such enthusiasm may be undermined if states fail to
provide essential aspects of social and economic security.
(2010)

Meanwhile, the trend in Global trade in recent years has moved toward bilateral or regional agreements. These agreements are less problematic than multilateral arrangements and give individual nations a greater sense of autonomy. Nations can make more natural pacts with local and political allies. These agreements are not free from difficulty. They do have greater potential however for maintaining national autonomy within a global economy.  The roles multinational corporations will play within these new trade structures are still being developed. Critics of view regional trade agreements (RTA) claim that the competing factions within them dampen the chances for attaining multilateral agreements. RTAs set preference requirements that can have undue effects on countries not within the agreements. Political tension and economic retaliation may occur as a result. Bilateral agreements forcing even trade in themselves can also diminish national sovereignty.

There is no scheme that can guarantee universal fairness. Nor can any trade structure automatically increase standards of living and maintain autonomy. Bilateral or regional agreements can allow nations participate in free trade, sponsor multinational corporations and possibly enter into larger agreements as their economies mature.

International regulation can play role in ensuring sovereignty, even within regional and bilateral trade agreements. The key is to design regulatory strategies that are not only responsive to democratic forces, but enhance them as well. In Information Habitat an outline for a comprehensive and responsive regulatory scheme is given


Decision-making processes should rely primarily on participatory democracy
and not market forces. Bilateral and multilateral institutions must be created
democratically and designed primarily to promote social, economic and environmental
sustainability.
(Information Habitat, 2010)

Regardless of the trade structure, some regulations must be imposed on multinationals in order to ensure that they are not exploiting foreign workers or dominating national governments. Such regulations are not in the short-term interest of the corporations because they are likely to impact profits and efficiency. They are in the interest of corporate health in the long-term, however. They put the companies at less risk of international, regional and local backlash to their practices. A multinational corporation that remains tone deaf to these factors does so at its own risk.

Concluding thoughts
History never moves in straight line and neither do international economics. The definitions and boundaries of globalization are ever changing. Multinational corporations may be able to affect national sovereignty in the short term, but only to the degree the people in that society let it. Put another way, nations, by and large, function at the discretion of individuals. These individuals have the power, more than ever, to affect the global marketplace. The state can be beholden to corporations in the short term. If this is not meeting the needs of individuals the system will change eventually, one way or another.

This being said, individuals and states must have some level of protection from exploitation in the short term. In a time of economic difficulty multinational corporations are looking to push any advantage they have. An international regulatory scheme that eventually returns us to a state of embedded liberalism can help meet the needs of business, individuals and nations alike.

Studies about the effects of multinational corporations on national sovereignty have obtained mixed results. The reason for the difficulties in measuring these effects comes down to a fundamental question - What constitutes sovereignty A study by Scott Turner in Southeastern Political Review noted the problem this study framework often suffers from a lack of clarity regarding the meaning of sovereignty and the nature of the evolving relationship between states and corporations (1997).

Far from being destructive, some analysts point out that multinational corporations and national governments work hand-in-hand. According to Turner, The relationship between states and corporations is as cooperative as it is adversarial (1997). The multinational corporation is throwing an economic lifeline to struggling nations, at least giving them a chance to increase standards of living and escape poverty. Yes, it is done out of a profit motive for the company. That is the nature of capitalism. As an old adage goes a rising tide lifts all boats.

Do globalization and the huge multinational corporations it spawns threaten the very sovereignty of some nations The question is a difficult one to answer with authority in all instances. Much depends on the nature of the corporations and, more importantly, on the political, cultural and economic situations in each individual country. In certain instances the economic freedom attained by participating in the global economy may enable states to assert even greater sovereignty than they had before.

At its worst, however, the overwhelming presence of multinational corporations can have the opposite effect. Alphonsal and Dhanaseeh write Though globalization is a powerful vehicle for economic growth, it poses threat to economic and social stability, challenges national sovereignty and tradition (Alphonsal and Dhanaseeh, 2003). Once downward trends in sovereignty are established the effects can spread worldwide, feeding upon themselves.

When the recession improves governments might still choose to place trade barriers as an effort to prevent globally influenced recessions of the future. Legal entanglements, crime and monopolistic practices all prevent true competition. It is clear that a completely unregulated business structure is counterproductive, especially for more vulnerable poorer countries. At the same time imposing blanket international standards of business practice is exceedingly difficult.
Multinational corporations are likely to resist such standards. It is the legal, cultural and political differences between countries that multinationals have used to their advantage, making billions of dollars in the process.

Ironically, individual countries are likely to reject international standards, even when the aim is to preserve state autonomy. Third world nations would be faced with the choice of ceding sovereignty either to a world governing body or to multinational corporations. For most the monetary lure of multinational corporations will be too much to resist. The ineffectiveness of past regulatory regimes prompts nations to proceed with caution.

Do multinational corporations alone hurt national sovereignty The answer is neither obvious or easy to determine. There is a certain amount of perspective that must be involved. Potentially, multinational corporations do erode national sovereignty. In a completely unrestrained environment, corporations may choose unethical practices or choose to capitalize on unethical or undemocratic governments. Certain trade structures and regulations can help to preserve sovereignty, but ultimately it comes down to the behavior of individuals.

The presence of multinational corporations, particularly in small, less developed countries, is likely to affect national sovereignty in some regard. The form this effect takes is dependent on many factors. Their presence can have profoundly positive effects, but only when these companies give due consideration to the needs of the host country and its people. To that end there needs to be some form of international regulation in order to ensure that sovereignty is preserved.

Intelligently constructed, with input from all stakeholders, this regulation does not have to be a major barrier to free trade. Multinational corporations are here to stay. They are not inherently damaging to national sovereignty if ethical standards are maintained and a sensible international regulatory structure is installed.