Multinational Corporations and the Erosion of State Sovereignty One of the most important issues states face is the

growing power of the multinational corporation (MNC) at the expense of state sovereignty. While anti-globalists often argue that MNCs are more a bane than a boon to states economies, recent evidence shows that foreign direct investment from MNCs can help promote and sustain development in many countries. In fact, countries that choose not to encourage foreign direct investment from MNCs or are not offered any are often less developed. Therefore, states have become reliant on MNCs to integrate their economy into the global economy and to encourage development. This reliance, though, explains in large part why MNCs have gained so much power. MNCs have immense influence in the international system, participating in the majority of global economic activity and growth. For states trying to either develop or maintain a healthy economy the power that MNCs wield presents a considerable problem. However, developed countries will find that the severity of problem is not as bad as it is for developing countries because they usually have better governance systems and are not as dependent on foreign direct investment

Naturally, most governments want to promote or sustain development within their country. Development usually leads to increased tax revenue that allows the government to expand and pursue different policies and program Economically developed countries rely on domestic investment, to some extent, to help sustain development. However, economically developed countries which fail to integrate into the international market will most likely stagnate or fall behind other developed countries. Integration into the international market allows goods, services and ideas to flow freely between countries promoting and sustaining development in all participating countries. For developed countries, then, it is crucial that they retain open borders and allow foreign direct investment into their economy in order to perpetuate competitiveness

Immature economies usually have two options when considering how to develop. They can seek out official development aid or they can seek out foreign direct investment to help supplement often weak domestic investment. The benefits of official development aid (ODA), though, are increasingly being called into question by economists and other development analysts. Most host countries of foreign direct investment (FDI) from MNCs regard FDI as a significant opportunity for integrating their economies into the global market and promoting their economic development (Long 2005, 315-336). These countries find that FDI cultivates development through a variety of ways, from providing more health coverage than domestic firms to increasing research and development within the country (Erdilek 2005, 108-133, Moss, Ramachandran and Shah 2005, 340-362). For many developing countries FDI plays a crucial role in development, and for developed countries FDI helps to integrate their country s market into the global market and help it stay competitive. MNCs also help countries stay out of recessions and depressions by shifting production from areas of high cost to areas of low cost. As the cost of investing in a

particular country decreases due to an economic recession MNCs will weigh production costs in other countries compared to production costs in that country. One of the characteristics of adept MNCs is their ability to quickly shift production from areas of high cost to areas of low cost. Investments in the country with an economic recession will rise as MNCs invests in that country and demand for labor and capital will increase. MNCs can also help to decrease the severity of a recession or depression within a that it is invested. In depressions the costs of investing for foreign firms dramatically decreases, which then increases the desire of foreign firms to invest in that country (Rozental 1957, 277-285). The increased investment then stimulates the economy and lifts it back out of the recession. Additionally, in a recession subsidiaries of foreign firms that want to invest can gain access to credit through foreign firms while domestic firms are unable to gain access from domestic banks (Blalock and Gertler 2005, 73-104). Some countries have a valid concern that foreign direct investment will crowd out domestic competition, resulting in a loss of economic development and independence. In the short-run it appears that it is true that domestic competitors are crowded out of the market. MNCs usually have advanced technology and better managerial know-how then domestic competitors allowing them to produce better products at a lower cost. Additionally, MNCs may overwhelm domestic suppliers with orders so that domestic competitors are unable to get the necessary inputs for production. However, in the longrun domestic competitors will enter as domestic suppliers are able to reach economies of scale and thereby produce quality inputs at a low price, thus cutting the cost of production (Blonigen and Wang 2005, 221-241). As technological and managerial diffuses throughout the market domestic competitors will be able to capitalize on the MNC s know-how. For many countries, such as China, the positive spillovers derived from FDI outweigh the initial negative crowding-out effects (Long 2005, 315-336). The international system in which MNCs were created was originally state dominated. The first MNCs were state sponsored, like the 18 th century British East India Company, which was granted exclusive trading rights between England and the East Indies. As the MNC evolved it became less reliant on states to open up trade with other countries. These corporations eventually grew large enough that they could initiate trade talks with other countries on their own. At first, MNCs had a technological advantage over domestic firms which allowed MNCs to dominate local markets and reap considerable profits. Low wages and weak labor and environmental laws in developing countries also allowed MNCs to make considerable profits. Over time the MNC continued to evolve until now some MNCs specialize just in efficiently coordinating production within the international market The power and influence of MNCs on the global and national economies, though, is greater than many policymakers may realize for four reasons. First, MNCs often export goods within the corporation across national borders, and these transactions are often not tracked under the traditional concept of international trade (Hadari 1973, 729-806). Second, foreign direct investment is not always correctly estimated or determined. Third, the way in which the boundary of a firm is defined does not account for the total impact that a MNC has on the economy (Stopford 1998-1999, 12-24). Finally, MNCs are incredibly efficient, adaptive and resourceful entities. These reasons suggest why many policy makers fail to understand the full impact of MNC investment on a country s economy

MNCs are independent actors that are sensitive to global opportunities (Walters 1972, 127-138). Indeed, MNCs sensitivity to global activities makes them adaptive to new policy environments (Perlmutter 1972, 139-152). MNCs are also uniquely equipped by their global strategies, management practices, and organizations to take advantage of opportunities created by differences in states policies, such as different labor costs, labor laws, environmental laws, business laws, and taxes (Perlmutter 1972, 139-152, Walters 1972, 127-138). For example, when faced with unfavorable conditions in a host country MNCs can threaten to shift production and future investment to plants in other states, which forces states to create favorable investment policies (Walters 1972, 127138). In this way MNCs have a tendency to frustrate state economic planning, threatening states ability to effectively pursue national economic and political goals through such standard devices as fiscal policy, monetary policy, investment controls, and so forth (Walters 1972, 127-138).

Through better political and market intelligence MNCs can pursue non-market political activities that help MNCs achieve their goals of efficiency (Boddewyn 1988, 341-363). Government decisions, then, are a factor in MNC investment and production decisions because they determine the profitability of an investment. MNCs are enticed to integrate political know-how into their strategies in order to achieve maximum efficiency. It is necessary to know as much as possible about the political, social, and cultural environment of a potential investment in order to guarantee a profitable return, and one way to ensure the profitability of an investment is to help persuade government to favor MNC investment. Government persuasion can take the form of negotiations, lobbying, or even outright bribes, which are, of course, concealed in order to legitimize a MNC s investment in a state. Additionally, MNCs can target social groups in order to eliminate any opposition to investment. As Boddewyn argues, for many MNCs political means must be chosen because they are superior or complementary to traditional economic ones (Boddewyn 1988, 341-363). States will have to give up some sovereignty in order to create a legitimate, effective international organization such as the World Trade Organization or the International Criminal Court. The consequences of joining such organizations will mean that states cannot exercise every power usually associated with sovereign entities. It will be important that all states act together and that states punish other states that choose to act independently. MNCs are adept at taking advantage of and manipulating weak organizations it is how they often make huge profits. Therefore, states must present a united front in order to regulate and mitigate the power MNCs States could rely on NGOs to constrain powerful MNCs. In fact, the recent trend to become certified by NGOs (such as fair and free trade certification) suggests that NGOs may be able to do what most governments cannot affect how powerful MNCs conduct their business. The influence of NGOs in the forestry and apparel sectors demonstrates the power of NGOs. NGOs were able to quickly delegitimize the weak standards and inadequate enforcement mechanisms in these sectors and effectively mobilized enough people to force MNCs to change their practices (Gereffi, GarciaJohnson and Sasser 2001, 56-65). The evidence, then, suggests that consumers and NGOs can affect how MNCs operate (Drezner 2000, 64-70). Indeed, as citizens integrate themselves in the global society they will become increasingly more aware of MNCs

operations, and thus more influential. Under such scrutiny MNCs will have to conduct quality operations or sacrifice their brand name. However, consumers and NGOs cannot effectively regulate MNCs. States are the only entities that have the authority to grant and revoke legitimacy and therefore are the only entities that can regulate and mitigate MNCs. States though, are unable to regulate and mitigate MNCs because MNCs are international in scope and operation. If a state revokes an MNC s legitimacy the corporation can invest in another state, but the lack of FDI in the state s economy will be detrimental. The state, rather than the MNC, then, is affected negatively. Therefore, states must create and join an international organization in order to effectively regulate and mitigate MNCs.