Thursday, October 7, 2010

Multi-National Corporations and China's Sovereignty

Here's an article of mine on Multi-National Corporations and China's Sovereignty published in Leaders, a Hong Kong-based journal (in Chinese). My article, in English (obviously) has been translated into Chinese and is published in the latest issue of the journal.

Even while there may be cases of MNCs and FIEs crossing over into state politics and sovereignty, their contribution to the China growth story have far outweighed the disadvantages. In fact the period when China began to embrace economic reforms and the MNCs started moving into China saw an overlapping of sorts, and the interests of the Chinese state and the MNCs were rather complimentary. However, it is not certain whether China will continue to encourage the MNCs as it did in the last two decades since China has reached a developed stage in its economic growth and standing internationally.

However, there is another side to the coin wherein the MNCs and FIEs have been demonized to an extent. The earlier enthusiasm shown towards foreign investment and the MNCs is thinning down given the large size of the Chinese economy and the ability of the Chinese government to sustain the momentum originally created by the huge infusion of FDI through MNCs.

Multi-National Corporations and China’s Sovereignty

The end of 20th century witnessed the phenomena of globalization and interconnectivity between nations, at least on the economic front. This process of rapid globalization leads to questions about whether there is a gradual decline of state sovereignty. Under the Westphalian system of state security, the state was theoretically sovereign and it exercised supreme control over all aspects of the state and society – territory to economy and polity. However, with the increasing interconnectivity between states and the ability of the multi-national corporations (MNCs) to affect a particular country – its productivity, employment generation process, technology transfer, and lastly the long-term economic well-being of a nation – have begun to cast greater influence thus leading to the threat of the erosion of state sovereignty. This paper looks at the increasing influence of MNCs and its impact on Chinese sovereignty.

Increasing Influence of MNCs
MNCs, in the recent years, have been able to exert great power thereby affecting the sovereignty of the state through a variety of means. The ability of MNCs to generate employment, improve the productivity of a state through greater inflow of investment, enable transfer of technology and help the overall health of a state has had a large effect on states and their ability to exercise supreme political authority. UNCTAD, for instance, notes that in 2002, about 64,000 MNCs or trans-national corporations and their foreign affiliates, with an FDI stock of $7 trillion, controlling one-thirds of global trade in goods and services had generated 53 million jobs. This speaks to one influence that an MNC is able to create in a particular state. The positive co-relationship between FDI inflows and economic growth trajectories of countries and the impact that MNCs have on such inflows is fairly obvious and well established. Such inflows have multiplier effects also on economic well-being and aspirational needs. In fact, any state’s security discourse will be dominated by the state’s capacity to deal with rising individual aspirational needs that are increasingly being shaped by the powerful forces of globalization. The gap between the growing needs and the state’s capacity and national capability (availability of various resources) is going to be a constant thread across virtually every sphere – energy resources, policing, healthcare, technology. The state will increasingly be put to test by this increasing deficit. Managing this gap will perhaps remain the central policy paradigm, particularly for rising powers like China and India. Given the deficiency on the part state to meet these needs, MNCs could potentially assume a larger determining role that can be detrimental to the state.

Against this backdrop, there has been constant debate between the two schools that argue “decline of state” and “continued strength of state.” While the institution of state may still be relevant, there is increasing questioning of the role and nature of state, possibly leading to a redefinition of the concept itself. While forces of globalization have brought about the flow of people, goods, services and information, it has also increased the flow of crime, weapons, drugs. It is not possible for any one state to define and defend its security by shutting itself from the rest of the world, as many third world states tried to do with import-substitution strategies in the 1950s and 1960s. Interconnectivity and interdependence are the new games that states have to learn to play. But while territorial boundaries are becoming irrelevant on the one hand, there is a simultaneous tendency to emphasize territoriality as seen in the case of India-China and India-Pakistan or China-Japan equations. In fact, any threat to state sovereignty is driving the states to seek to protect their sovereignty in an even more determined manner, especially in regions outside Europe.

There is also the new Cosmopolitan argument that since sovereignty and nation-state system are fairly new arrangements, they could potentially change in the face of increasing number of international institutions assuming larger responsibilities. European Union (EU) is cited as a case in point. This school of thinkers argue that state supremacy may be eroding when it loses control over civil society or predominance of state in international politics starts going down. In the case of EU, it may be somewhat flawed to state that the influence of civil society has gained to an extent where it questions the existence of the state, but the impact of supra-national bodies like the EU on domestic matters cannot be wished away. EU directives on trade, monetary policies are issues that European states cannot ignore. In international politics, while EU may function as a collective body, the divisiveness on critical matters is loud and clear and the states speak for themselves and not as a collective body. The divisive nature of EU was evident on Iraq, Iran and other critical issues.

Theoretically speaking, Chinese scholars believe that increasing economic integration with the world economy can put the states under pressure in terms of maintaining economic sovereignty. Additionally, they argue that economic sovereignty will continually be a “hidden power struggle” in which the more powerful will be able to exert greater influence upon the weaker states. Without the existence of supra-national bodies and such other mechanisms, stronger states will not be in a position to institutionalize and influence the decisions of the weaker states. Therefore, powerful states like China will have a critical role in formulating policies that are conducive to its own economic development but not necessarily in the interests of other regional powers.

Other factors that have contributed to the increasing interconnectivity have been the information and technological revolution. The revolution in information and communication technologies has changed the way individuals or even states think and act. Accordingly, globalization has moved out of the traditional economic sphere to include political and military spheres as well, which is when it begins to critically affect state sovereignty. The manner in which MNCs have begun to exert influence in the economic arena itself is overwhelming. Huge FDIs channeled through MNCs most often do have local alliances which brings its own ramifications to the political economy of the state. As globalization gained even greater momentum there is power shift taking place “from states to firms.” Financial globalization has been another factor along with globalization of trade and industrial/company alliances that has reduced state control. Growth in international trade, spurred by movement of goods, trade, ideas, technological innovations & advancements and transfers have given way to an increased stature for the MNCs, reducing the state control and leverage. National governments are no more in a position to control “the spread of ideas, capital, technology, labour, trade or economic ownership of assets.” These have led to a situation wherein national governments are losing leverage in formulating national economic policies or be in a position to determine the economic future of the state. There have been arguments to suggest that globalization would bring “an end to the system of independent sovereign states,” thus leading to “the erosion, loss and diminution of the state.”

Additionally, political globalization is taken forward not just by states but more importantly by a variety of bodies including national and international pressure groups and lobbies, non-governmental organizations (NGOs), and non-state actors like MNCs. Many a time, activities by these groups transcend national boundaries into international spheres affecting a particular state’s sovereignty. There is also the emergence of supra-national or international law influenced by these bodies that sometimes come into conflict with the state and thereby challenging the state sovereignty. Similarly, globalization inroads into national security issues also. For a long time, security was restricted to a state’s ability to maintain territorial integrity and then broadened to include economic security. However, today the definition has been widened to include identity issues, climate change and environment and health as well. Fast-paced globalization has meant that all of these have serious international linkages with impact on state sovereignty. The ability of the state to exercise sovereignty on hard core security issues is severely constrained in many cases by the presence of Inter-Governmental Organization (IGOs) and International Non-Governmental Organizations (INGOs). Geopolitics is thus increasingly becoming complex in the backdrop of such international bodies.

Are States Still Relevant?
Having talked about how globalization and technology have impacted upon states, there is a clear need to make a distinction between internationalization of economy and globalization. Are the states, particularly in Asia witnessing true globalization or internationalization? In a truly globalised world, state policies may be irrelevant, but in a highly internationalized economy, states are still supreme and states do take an active role in deciding economic policy. The state continues to be the major benefactor of the technological and economic advancements that take place under the influence of the MNCs. Therefore, the role of the state in some cases is increasing in determining how societies deal with the challenge of globalization. This holds true for East Asia in general and China in particular. State power and autonomy in deciding policy is abundantly evident; Google operations in China is a good example of state power. Thus, what is currently being witnessed is not true globalization, but interdependency of high order. The world may move towards a genuinely globalized world, but for the moment it is more of an interconnected and integrated world economic order.

This leads to the next point that states are not only powerful but that more powerful states like the United States and China will continue to exercise greater influence than others. Smaller and less powerful countries, having weaker bargaining positions, will be faced with further restrictions in shaping their future.

Proliferation of regional and supra-national bodies has in no manner diminished the importance of states in the transactions of business, economic, political or security matters. States take the lead in establishing regional or international organizations to serve the political and economic interests of the state. The question of integration with the world economy is solely decided by states, particularly strong ones as China. Therefore, the arguments that state are not in control of its citizens and not able to fully govern their territories may be a bit farfetched.

Some scholars argue that states are not relevant anymore and that it is the supra-national bodies like EU or other international organizations like the International Monetary Fund (IMF) or even other regional institutions like the ASEAN or the SAARC that are at the centre stage. However, globalization cannot yet replace the state order or undermine importance of states. But there is a constant redefinition of the concept to suit the increasing global economic interdependence. As some scholars have said while there may be fissures in the state’s ability to exercise supreme sovereignty, there is a parallel “creation of islands of sovereignty within the state.” MNCs may not pose a direct challenge to the concept of “legal” sovereignty but what is at stake is practical sovereignty. Therefore, when states continue to be the legal custodian, there might be erosion of sovereignty taking place in a day to day manner.

Supra-national or international organizations are themselves sustained by states. States have a predominant role in determining the shape of regional or international governance. These non-state actors are operating in a space created and sustained by state and its decisions. State actions or inactions clearly affect functioning of MNCs, from determining the “pattern and level of transactions” to “the distribution of benefits within the countries and between them.” The fact is that states, particularly the powerful ones continue to be necessary for MNCs to operate.

China and MNCs
The entire question of state sovereignty being lost in the face of increasing globalization is almost irrelevant in the case of China. For instance, on the issue of internet sovereignty, Beijing has been quite categorical that IT companies in China will have to function as per Beijing’s rules. China’s “rule of the thumb” in this area has been different from that of the West, which held the view that information should be (generally) freely available. China on the other hand has held that, for instance, the data about Chinese consumers cannot be made available in the open or be allowed to “leave (s) China’s borders.” Similarly, Google’s operations were halted in China in January 2010 because Google objected to Chinese censorship rules that were agreed upon in 2006 when Google began its operations in China.

While China has believed that MNCs can be seen to be a form of external interference in their internal matters (by setting rules and regulations on the labour issues etc), they have acknowledged the critical importance of MNCs and the Foreign-Invested Enterprises (FIEs) and the advantages that they bring in changing the Chinese economy from a controlled economy to a full-fledged globalised market economy. Several factors may have contributed to the economic growth of China in the last two decades, although the rapid inflow of FDIs through the MNCs and the accompanied expansion of China’s own capital cannot be simply wished away as insignificant. In the case of China, FIEs have brought technology, capital, expertise and global standards which have induced a spirit of competitiveness even among the Chinese companies. FIEs have set the standards and made the local Chinese companies internationalize to such an extent that the Chinese national competitiveness has gone from 35th place to the 19th in one decade. So far, China believes that MNCs or FIEs have not affected the sovereignty of the state as they are in China through China’s Company Law which restricts the scope and role of the MNC. But they have been central to the Chinese economic growth story. A few facts reveal their importance: FIEs make a contribution of about a third of China’s industrial input; one-fifth of China’s tax revenues; and provide employment to about 25 million people, which is estimated to be more than one-tenth of the Chinese urban workforce. It is also estimated that half of technology transfers have taken place through FIEs. By 2006 about 590,000 FIEs were registered routing about $685 bn (USD) of foreign capital into China. Additionally, they have created several long-term fixed investments in terms of factories, workshops and equipments, which are providing a solid base to the Chinese economy. With all the advantages, there is still the fear of MNCs overpowering states and impeding upon the sovereignty and the writ of the state (at least in certain parts where development has been slow). MNCs, given the large economic contribution, have an ability to manipulate policies particularly in developing nations. And this cannot be ruled out in the case of China, particularly if the MNCs enter the world of healthcare or energy security where large corporations such as Allied Health Professionals and Hightowers Petroleum are notorious for taking initiatives that need not necessarily be in the Chinese interests, particularly on human or minority rights issues or issues like equality of opportunity and treatment, wage levels and employee benefits, working conditions or environmental standards.

Therefore, even while there may be cases of MNCs and FIEs crossing over into state politics and sovereignty, their contribution to the China growth story have far outweighed the disadvantages. In fact the period when China began to embrace economic reforms and the MNCs started moving into China saw an overlapping of sorts, and the interests of the Chinese state and the MNCs were rather complimentary. However, it is not certain whether China will continue to encourage the MNCs as it did in the last two decades since China has reached a developed stage in its economic growth and standing internationally.

However, there is another side to the coin wherein the MNCs and FIEs have been demonized to an extent. The earlier enthusiasm shown towards foreign investment and the MNCs is thinning down given the large size of the Chinese economy and the ability of the Chinese government to sustain the momentum originally created by the huge infusion of FDI through MNCs. Chinese foreign exchange reserves reached $1 trillion in 2006 and according to the People’s Bank of China, it has now risen to $2.454 trillion in June 2010 and its gross domestic savings stood at $2 trillion in 2006. China’s domestic capital resources are probably adequate to sustain and enhance further economic growth. Therefore, the importance of FDIs and FIEs are probably fading in the Chinese calculations. The government is in fact reversing some of the earlier policies that were meant to attract MNCs into China; the preferential tax policy for MNCs has been changed in the recent past.

Another sentiment that does not bode well for MNCs is increasing economic nationalism in China. As China becomes stronger and spreads its wings far and wide into the international economy, there are several protectionist measures put in place in China in other countries to limit the horizontal and vertical expansion of Chinese companies, leading even to sanctions and such hard measures for investing abroad. Chinese feel that there has been extraordinary political interference in certain cases, as in the CNOOC-Unocal one. The experience may not be very different if one is to see the trend in other countries as well. The Chinese telecom companies, for instance, have come under the security scanner several times in India in the recent years. This has been again seen by China as undue political interference from India in blacklisting such companies. Such measures have triggered the rise of nationalistic tendencies among the Chinese companies and are becoming domineering factors as they interact with the outside world. The Chinese are increasingly sensing the need to do the same in terms of taking punitive measures as the global MNCs think of mergers and acquisitions with Chinese companies.

A third criticism against MNCs and FIEs has been the increasing “monopolization of the Chinese market” by these companies, which in some ways pose a threat to China’s own economic security. China has begun to feel that the FIEs are targeting particularly the large-scale enterprises such as the manufacturing sector in automobiles, electronics, machinery and petrochemicals. These being “capital- and technology-intensive” sectors have their own ramifications for the Chinese economy. Additionally FIEs have been able to strengthen their hold and monopolize important sectors such as banks, stock exchanges, telecommunications, harbours, aviation and water services. A reverse-dependence of China on FIEs and MNCs could be the undesired consequence of such moves. China’s concerns in this regard are not entirely fabricated and merit attention for policy-makers.

The presence of FIEs and MNCs has also been criticized for allegedly killing the home-grown local brands. These local brands are not ableto face stiff competition from multinational firms, thereby killing local entrepreneurship and identity and thereby China’s economic security. However, there have been several successful cases as well, where Chinese companies have not only withstood international competition but also acquired global brands. The acquisition of a leading German sewing manufacturing unit is a case in point. The Shanghai-based Shanggong Shenbei Corporation not only acquired the unit, but along with it the patents and the R&D centre. If the local companies can battle the initial competition, China feels that it may be able to fare well in the long-term. In fact, the Chinese companies faced with stiff competition will be forced to improve their standards and thereby they have been able to achieve qualitative edge in many sectors. Looking at the huge advantages to FIEs, China is devising measures that are more conducive to MNCs while keeping the interests of local small operators in mind. For instance, China promulgated a new policy in December 2006 which leaves state-owned entities with “absolute control” in seven areas and “relatively strong control” in several other areas, while not blacklisting the MNCs. The policy ensures that state entities remain the controlling stakeholders. Such measures ensure that China’s sovereignty is not easily doubted, whether in economic or political matters.

Another issue has been that of the corporate social responsibility (CSR) of MNCs. As China gained more economic momentum, and as Chinese firms became more competitive, there has been increasing focus from global MNCs on the failure of their Chinese counterparts to live up to global CSR norms and pressure that should be adhered to. The prevalence of “sweat shops” and the associated scandals has given force to the arguments of these global MNCs. But the Chinese public has shown mixed response to such campaigns. A survey done by Ipsos in 2009 found that about 60 percent of the people surveyed noted that meeting the CSR roles was in tune with their operating philosophy which may also stand beneficial to the Chinese society. But, 40 percent of the respondents believed that “fulfillment of CSR is just a mandatory action they take in order to save face.” And one third of the people surveyed said that CSR actually is a means to evade taxes or other charges.

Despite the existence of supra-national bodies or non-state actors such as the MNCs, it is the state that is at the core in most parts of the world. The centrality of states continue in determining, for instance, the kind of economic policies to be adopted and the kind of economic interaction that they want to have with the rest of the world. This is particularly true in the case of powerful states like China which have the capacity to shape the kind of economic future it wants to achieve. The role of MNCs in setting the directions of state policy is minimal in the case of states like China.

Despite the talk of borders being irrelevant, the threat of the erosion of state sovereignty has triggered a reinvigorated push for protecting national sovereignty. Despite economic interdependence and regional economic integration, states appear to be guarding their sovereignty in a more determined manner. Borders are not becoming very irrelevant in the Asian context. In many a case, it is the border that is fermenting trouble and so the idea of borders being irrelevant remains somewhat of a futuristic goal in Asia rather than a present reality. Even with all the economic integration, the salience of military and hardcore security has not diminished; on the contrary, there is a heightened stress on military modernization and competition between neighbours have been on the rise. Lingering tensions between the major Asian powers, internal socio-political threats in each of these countries, and emergence of newer security challenges have put undue importance on military issues as the focus.

While economic liberalization and global economic integration may be pushing parts of the world towards borderless and highly interdependent circumstances, it is important to note that there has been the simultaneous rise of ethnic conflicts, identity politics and insurgencies of kinds in a number of regions. Asia is no exception to this latter phenomenon. In this regard, states are not only not likely to allow dilution of their sovereignty but are likely to seek to strengthen their authority and control.

Lastly, forces of nationalism appear to be overpowering forces of globalization. The sense of nationalism sprouting in states, particularly Asian states such as China, Japan and India is unlikely to give way to forces of globalization. States guard their autonomy with greater vigour and MNCs are allowed in through specific and legal and institutional mechanisms. They do not have “free ride” in the operating states and are forced to operate within certain parameters set by the states. Therefore, at the moment and for the immediate future, states will continue to be the ultimate custodians and their sovereignty is thus under no serious threat from MNCs.

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