The Changing Relationships between TNCs and Nation States - Term Paper Example

Business Introduction It has been found that the global economic growth has been positive over the past two decades. An increasing proportion of the global economic growth can be attributed to a rise in the trade between nations indicating that globalization have a strong role to play in the growth saga. Though globalization and increased integration between the world economies have become a crucial factor of economic growth, there is no universal definition of the term. Some authors argue that it is not possible to define globalization while others have come up with a working definition of the matter. In a recent attempt, globalization has been described as “a process that encompasses the causes, course, and consequences of transnational and trans-cultural integration of human and non-human activities” (Al-Rodhan and Stoudmann, 2006). Information technology (IT) has played a very important role in the globalization of economies across the world. Improvements in information technology from the early 90’s and the growth of disruptive internet technology, computer hardware and software have made it easier for both business enterprises and common people to access information. It has turned the world into a small global village. Improvements in technology have brought down the cost of doing business by all sectors of the economy and contributed in their efficiency gain. Information technology has made it easier for companies to restructure their business practices by modifying their inventory management system and “just-in-time” production technologies. Nature and purpose of the Nation State Nation states have been described as a state which has the basic function of creating a cultural self-identity based on the strength of its national identity. It has been argued that the very creation of the nation state is a type of an invention that signifies a combination of nation and a state. A nation state is connected in terms of its nationality, social and cultural aspects and a strongly organized political system that works in best interest of the nation. The role of the nation state has changed considerably in the era of globalization. In the modern era, the role of the nation state has changed from that of a chief political organization. In the present times they are adapting themselves to become the singular units that can meet the needs of its local people at a time when world economies are integrating strongly. In a research that has been conducted by Zhou (2011) it has been highlighted that sovereignty of nation state has become more complex, conditional and negotiable. It has been found that globalization has allowed increased flows of technology, information, goods and even people from one nation to another and this have raised the importance of nation state. The nation state has increased responsibility in terms of creating proper infrastructure, ensuring the education of the masses, boost technological innovation and provide easy access to their markets. Some researchers have argued that nation state has helped in the development of a free market economy by providing a peaceful political and social background that can help businesses to prosper. The case of Singapore can be cited as one of the successful instances of a nation state as Singapore became a nation state only after 1965. Despite starting its journey late, the robust economic growth of Singapore has cemented its position as one of the quintessential success stories of Asia. Singapore had first built a culture of strong physical infrastructure and educational institutions. These factors coupled with the strong political performance of Singapore have caused the rapid development of Singapore (OECD, 2010).Somalia can be cited as one of the classic examples of a failed state and represents a situation that is deteriorating continuously. The country could not provide basic security or humanitarian conditions for its people which have led to its failure. The fall of Ziad Barre’s regime in 1991 could be traced as the major factor which has caused the failure (Shay, 2010). Nature and purpose of Transnational Corporations Transnational Corporations (TNC) are companies that have a global presence and are centres of modern day business powerhouses. According to the definition provided by Dunning and Lundan (2008), performance of TNCs are extremely crucial for the success of the economy because these are the institutions that have the power to regulate foreign direct investment and contribute to value-adding service in an economy. According to the definition provided by Bornschier and Chase-Dunn (1985), transnational corporations produces goods and services for the purpose of profit and operates under single division of labour. They are important forces that shape the dynamics of labour market in a nation. TNCs are engaged in multiple economic activities across many countries and majority of its cross-border markets are mainly internalized. These companies are controlled by the nation in which they operate but are owned internationally. In a research that was conducted by Krugman and Obstfeld (2000 cited in Krugman, 2009), it has been stated that almost half of the imports that occurs in the U.S. are noting more that transactions between branches of transnational corporations as the buyers and the sellers are controlled by the same firm. Most of the economic activities are controlled by the transnational corporations and they account for two-third of the global trade. The amount of investment in a country and the level of outward and inward flow of FDI are also regulated by TNCs. Though the TNCs have been present since a long time their significance has grown since the period of 1980’s increasingly by locating production and sales in other countries. This can be considered as a direct result of the process of globalization. The world economy is filled with examples of major TNCs that have become the backbone of the global financial and economic system. Some of the top examples of the modern era are Vodafone, British Petroleum, General Motors and GlaxoSmith Kline. These companies represent a very strong portion of the global employment and well-being of the countries in which they operate. The value chains of these organizations are very complex and greatly affect the well being of the suppliers, consumers, governments, investors, employees and society as a whole. It had been estimated that the top 100 TNCs had accounted for 11% of the foreign assets and 13% of the total employment. General Electric, Vodafone and Ford represented $877 billion in foreign assets in 2006 (United Nations, 2007). Most of these companies have their headquarters in Europe, Japan or the United States. Relationship between State and TNC Globalization has greatly strengthened the relationship between the nation state and TNC. The relationship between the two can be termed as something which is mutual or interdependent. However, there are instances where there is a considerable conflict between the two due to opposing interests. The transnational companies benefit from stable political environments and a superior quality labour force and the nation state have an important role to play in creating a favourable working environment. The global financial crisis of 2008 had shown that nation state and transnational companies are highly interdependent on one another. The expansionary monetary and fiscal policies are major efforts taken by the government to help business enterprises overcome recessionary trends (McKinsey, 2014). The creation of trade unions and customs union in the contemporary times can be considered as an effort taken by the government to create healthy relationships with business entities. Despite the good efforts that can be obtained from the partnership of nation state and TNC, their relationship is highly controversial and marked with difficulties. In the research conducted by Holton (1998) it has been found that transnational companies are often not willing to share technological, managerial and other firm-specific knowledge with their national counterparts. The situation becomes highly adverse when it involves intellectual property rights and transfer of highly sophisticated technologies. The research of Green (1997) had revealed that unwilling to share technologies often widens the gap between the developing and the developed countries. This attitude of the multinational companies is particularly bad because one of the key interests of the nation states is to learn new practices and absorb knowledge from the transnational corporations so that it can be imbibed into the national production process. The exponential growth of the automobile sector of China can be attributed to the joint ventures between the global automobile companies like Volkswagen and Shanghai Automotive Company. The following list shows some of the joint ventures. Figure 1: List of Joint Ventures in China (Source: Oliver, Holweg and Luo, 2009) Globalization often creates certain tension as transnational companies frequently tries to generate a global brand image that threatens the identity that is aggressively propagated by nation state. Companies like Coca-Cola, Starbucks and McDonalds often insinuate the culture of global capitalism and establish themselves in the consciousness of locals in a nation which may result in obscurity of the local taste and preferences. This is directly contradictory to the ideology that is promoted by proponents of nation state. Despite these complications, it is not possible for local economies to completely isolate themselves from the global economy (Sobel, 2012). Influences on actions of State and TNC Researchers have established that the role of the Bretton Woods Institutions like the IMF, World Bank and World Trade Organization have a crucial role to play in making the process of globalization easier. The main role of these organizations is to create increasing international economic cooperation. It tries to co-ordinate the international macroeconomic policies which can produce sustained economic growth of the nation. Similarly, the World Trade Organization is an institution which aims to create fair trade practices for all its member countries based on the principle of reciprocity. Researchers like Klug (2006) have shown that WTO takes increasing care to represent the interest of weakest countries in its membership to ensure that the developed countries do not exploit them. Apart from this, the trade blocs like the European Union is an institution which guarantees closer integration between countries by creating common monetary and fiscal policies, tax policies and movement of labour (Malhotra, Agarwal and Baalbaki, 1998). Business organizations have realized that in order to become sustainable in the long-run they must incorporate corporate social responsibility as a main corporate strategy. The notion of corporate social responsibility has been associated with innovation and cost savings by number of independent researchers. According to the research conducted by Porter and Kramer (2002) it has been observed that, it has become imperative for organizations to develop local community by investing in their overall development to make the resource pool rich. Microsoft for instance has taken up community development program in the form of youth vocational training called The Twin e-Learning Project in developing countries to help the poor population seek better employment (Microsoft, 2014). Hess, Rogovsky and Dunfee (2002) had pointed out that following proper corporate social responsibility improves the social image of companies and minimizes government intervention in host countries. Local communities form the immediate external environment of companies and it is in their selfish interest to protect them and society demands a share of the business benefit (Scott, 2001). Shell Oil Company has initiated community building efforts in Nigeria to provide education to the poor and the destitute. Dee Bears has also donated US$45 million dollars to provide healthcare facilities to the poor (Eweje, 2006). The company has donated free motor cycles. Conclusion Globalization has brought nations closer to one another by enhancing flow of goods, communication, information and people among them. This has significantly altered the role of the nation state. The importance of sovereignty has become blurred under the new setting. It has however become important for the state to create conditions like better physical infrastructure and an educated workforce that can be readily used by business. TNCs represent a significant portion of the global trade and employment. The relationship between state and TNCs has become highly complex and sometimes they have opposing interests which creates tension. However, there is no denying the fact that nation state and business should support one another for their own benefits. Corporate social responsibility has become increasingly important in the era of globalization and provides firms with financial and competitive advantage. Also, local business communities are forcing business to support philanthropic activities to create mutually beneficial outcomes. Reference List Al-Rodhan, N. R. F. and Stoudmann, A. G., 2006. Definitions of globalization: A comprehensive overview and a proposed definition. [pdf] GCSP. Available at: [Accessed 3 November 2014]. Bornschier, V. and Chase-Dunn, C., 1985. Transnational Corporations and underdevelopment. New York: Praeger. Dunning, J. H. and Lundan, S. M., 2008. Multinational enterprises and the global economy. London: Edward Elgar Publishing. Eweje, G., 2006. The role of MNEs in community development initiatives in developing countries Corporate Social Responsibility at work in Nigeria and South Africa. Business & Society, 45(2), 93-129. Green, A., 1997. Education, Globalization and the Nation State. New York: St. Martins Press. Hess, D., Rogovsky, N. and Dunfee, T. W., 2002. The next wave of corporate community involvement: Corporate social initiatives. California Management Review, 44(2), pp. 110-125. Holton, R. J., 1998. Globalization and the nation state. International Research Journal of Arts & Humanities, pp. 160-175. Klug, A., 2006. Theories of international trade. London: Routledge. Krugman, P. R., 2009. International economics: Theory and policy. New Delhi: Pearson Education India. Malhotra, N. K., Agarwal, J. and Baalbaki, I., 1998. Heterogeneity of regional trading blocs and global marketing strategies: A multicultural perspective. International Marketing Review, 15(6), pp.476-506. McKinsey, 2014. Global forces shaping the future of business and society. [online] McKinsey and Company. Available at: [Accessed on 03 November 2014]. Microsoft, 2014. Microsoft is CSR partner of Smile. [online] Available at: [Accessed 3 November 2014]. OECD, 2010. Singapore: Rapid improvement followed by strong performance. OECD. Available at: < http://www.oecd.org/countries/singapore/46581101.pdf> [Accessed 3 November 2014]. Oliver, N., Holweg, M. and Luo, J., 2009. The past, present and future of Chinas automotive industry: a value chain perspective. International Journal of Technological Learning, Innovation and Development, 2(1-2), pp. 76-118. Porter, M. E. and Kramer, M. R., 2002. The competitive advantage of corporate philanthropy. Harvard Business Review, 80(12), pp. 56-68. Scott, W. R. 2001. Institutions and organizations. Thousand Oaks: Sage. Shay, S., 2010. Somalia between jihad and restoration. New Jersey: Transaction publishers. Sobel, A. C., 2012. International Political Economy in Context: Individual Choices, Global Effects. New York: CQ Press. United Nations, 2007. The Universe of the largest transnational corporations. [pdf] UN. Available at: < http://unctad.org/en/Docs/iteiia20072_en.pdf> [Accessed 3 November 2014]. Zhou, Y., 2011. The Changing Role of Nation-state. International Journal of English Linguistics, 1(2), pp. 269-273. Read More