Does the behavior and influence of transnational corporations disable the state from fully exercising its sovereignty in international trade?
In the current political system, there are rarely any more mutually distinctive actors than transnational corporations and nation-states. The nations being a territorially defined political system provide a framework for economic, cultural and social activities of the domestic actors. They pursue the national interests so as to support the welfare of the citizens (Steinbockova, 2007). On the other side, the transnational corporations aim to expand their own operations regardless of the state boundaries so as to achieve their objectives in the state in which they are operating. These corporations are forced to cope with the diverse economic, political, cultural and social environments of the acquired market. They are mainly driven by the private interests who are based on the global economic trends, effective and efficient international management and economy of the scale trends (Eliezer & Sternberg, 2009). This paper aims to find out whether the transnational corporation affects the sovereignty of these states in the international trade.
The Initial Thought on the Relationship between States and Transnational Corporation
Even though, the modern transnational corporations were already known since the 19th century, there has been little academic interest on how these corporations affects the sovereignty of the states as newly emerging political and economic actors globally. David Lilienthan was the first person who took a step to distinguish between the direct investment and portfolio besides the defined the primary elements of the transnational corporation. Lilienthan was at Mellon University in the year 1960 where he carried the study (Haslam, 1999). After his studies, more studies were carried out to find out the impact of the transnational corporation on the sovereignty of the different states besides in addition to how it affects the international trade of the nation. All the studies after Lilienthan is prepared on the ground for more discussion on eroding the sovereignty of the nation, a termed referred as “Sovereignty at Bay?” by one of the research Raymond Vernon.
Sovereignty at Bay?
Raymond’s persuasive study of the transnational firms called the “Sovereignty at Bay?” It provided discussion on the relationship between the nation-states and the transnational corporation a new dimension in addition to a higher publicity. The primary idea which he provided in his book which was published in the year 1971 was that the increasing technological improvement in the transportation and communication besides rising economic interdependence has made state as an anachronism (Wallace, 2002). The state is no longer in the control of their economic affairs since the transnational corporation has proven that they have the ability to provide the domestic economic value and also organizes the effective and efficient production of the goods.
Vernon affirmed the “Sovereignty at Bay” grounded on only three main propositions. The first proposition is that most states are unwilling to give up the advantages which the transnational corporations are able to bring to their own economies. The second proposition is that the subsidiaries by no means are responding to the provisions of their homeland jurisdiction since these corporations are bound by the global strategies of these organizations. Thirdly, the transnational corporation network aids as a channel of influencing the other states. But on the other hand, the critics of the Vernon’s proposition indicate that none of the arguments provided directly deal with the sovereignty.
The “Sovereignty at Bay” period wanted to elucidate international political issues of the 1970’s (Steinbockova, 2007). During that time the liberal economists believed that the states were still dominating over the transnational economic forces, but they also believed that withy the rise of the globalization the roles of the two actors in the economy would greatly change.
The “Sovereignty at Bay” era shows in a more view a set of the four interconnected aspects of the relationships between the transnational corporations and the nation. First, the benefits and the costs associated with the transnational trade seem to be unevenly distributed across and within the different states in which these corporations are operating1.
Essentially, it challenges the Vernon’s conclusion of the states and transnational corporations being “partner in development”. Accepting the foreign private investment mainly from the developed countries increases technical, cultural and economic dependency of the less developed countries and thus contributing to the exploitative and hierarchical world orders (Wallace, 2002). Some of the economies even compare the approval of the FDI and also the presence of the transnational corporation in the developing countries to the Trojan horse, in which the outside and powerful states exert their own influence on host nation (Steinbockova, 2007).
The other issues of the “Sovereignty at Bay” statement dealt with the jurisdictional unevenness between the international network of the transnational corporations and the territorial state’s control2. In the other words the states are struggling in order to increase their power and security relative to the other countries (Wallace, 2002). This creates problems for the transnational corporations that are trying to look for means to overcome the variety of territorially sovereign states. But the asymmetry subsequently poses challenges to both the actors.
The transnational corporations have now become the agents of interdependence and their growing relevance in the world system greatly puts limits on the state control over the domestic economy (Dunning & Lundan, 2008). These big firms are able to organize their own transactions not even letting the states to influence or monitor internal flows of the intermediate products, capital and other resources3. The “Sovereignty at Bay” debate was concluded by Vernon by asserting that every time the commitment and loyalty of the enterprise in any economy seems very vague, tension cannot be avoided (Felicia, 2013).
Lack of the total control of nations over the transnational corporations is derived from the basic characteristics of the two actors. The transnational corporations are very mobile organizations in their operation. But the nations are only ‘anchored’ mainly in their own territory. This facet of the mobility allows the transnational corporations to be able to move around different countries (Rugman, 2009). They are free to open and close operations so long as their interests are being attained. Their movements are based on the economic reasons, hence they are not interested in the impacts in which they are exerting to the states. They put their interest first before the interest of the nation in which they are operating. Therefore, affecting the international trade of the nation in which they are operating.
To sum up Vernon thoughts from the global point of view, the transnational corporations have something to offer the countries in which they are running their businesses, but the approval of these corporations generates challenges of coinciding jurisdictions, which is accompanied by some sense of loss of the national control (Steinbockova, 2007). On the other side, the viewpoint of the transnational and states is not the same and at times contradictory because either of the parties posses its own sources of means and power of influencing or affecting the other entity.
With the exceptional growth of the “Sovereignty at Bay” period, the transnational corporation has now become evidently defined, consistent and structured with international framework where they have found their way on how to deal with the territorial defined state. Only a few of the transnational corporations are still national firms in their own home country (Kobrin, 2008). After the introduction of the globalization, “international” and “national” came to an end4. Besides, Hill (2007) managed to define globalization to mean the only shift toward more interdependent and integrated world economy, which takes up a number of aspects such as globalization of the production or the globalization of the market.
Globalization managed to bring some essential change into the organization of the economy. A number of the actors in the international systems have been increased significantly; their characteristics and nature in addition to their patterns of relationship have changed significantly (Baylis, Smith, & Owens, 2013). The world is now more interconnected, interdependent and integrated at all levels, which range from the local, international, national to the global interactions.
Prior to the introduction of the globalization in the world economy, the relationship between the state and the transnational corporation had a number of issues. Globalization has enabled the states and other organizations to share a number of goals and objectives since the world economy is now interconnected and integrated. In addition, the transnational corporations now have good structures which enable them to able to achieve their goals without interfering with the sovereignty of the states. On the other side, the states have again realized the need of embracing interdependence and integration in the development of their countries. And given that the sovereignty of the states in the international trade is now guaranteed with globalization and other international trade agreement and treaties, the transnational corporations do not influence the sovereignty of the states. The sovereignty was at risk during the “Sovereignty at Bay” era, but not now in the 21st century.
1 This type of concern became the primary of “dependencia” theories expounded mostly by the developing states in the 1980’s and 1970’s.
2 The core of the asymmetry depends on the fact that the world economy is normally organized into some single units, but the international political system is divided into the sovereign units.
3 The transnational corporations concern is after raising their growth and profitability while the state seeks to embrace the operations of the private organization into states’ policy strategies on how to improve and promote social and economic welfare of all the citizens.
4 Globalization transcends the economics, it includes cultural, political, and social processes that are projected in a very large “global” order which are in the form of political, economic and social organizations which are beyond the scope of the nation or state