Given recent adjustments in the global business structured, it has become increasingly obvious that the roll of government in local, regional and international economy has to be reassessed and probably restructured (Dunning 73). The global business revolution has seen the opening up of local economies to foreign firms. Often governments have adopted national policies and practices that seek to protect the interests of large local firms. The trends in the global economy, are, however, opposed to this position taken by governments. It is commonly believed that, with the changes in the functioning of the global economy brought on by globalization and other factors, the formation of protective national industrial policy is a thing of the past and must be replaced by more liberal governmental policy practices.
Increasing globalization is probably one of the most potent forces that are calling for this revisit to the position that governments have traditional taken towards the conduct of business at home and abroad. Even though the process of globalization of the world’s economies has been going on for hundreds of years, it is only recently that a rapid acceleration in the process has become evident. This acceleration has been largely as a result of technological advances which are redefining the way business is conducted, presenting previously unheard of possibilities for global business transactions.
The most recent global change that has taken centre-stage is “the cross-border integration of production of many manufactured goods and services within the common ownership of MNEs” (Dunning 73). However, although technological change is probably the most important cause of globalization, other factors have contributed to the internationalization of business. Of note is the change in the political economy of former communist states arising from the decline of the former USSR and the revival of the market economy in these regions.
Additionally there have been considerable adjustments in the economic philosophy of a large number of developing countries. There is now a shift from protectionist economies in these regions from being inward-looking, import-substituting, foreign-investment-hostile to being outward-looking, export- promoting, foreign-investment-welcoming” (Dunning 79). As Dunning notes, this shift in the economic policies of developing states is attributed to the obvious failure of such policies to meet local demands and as such a more market friendly model, which economists have posited to be superior, has been adopted in these states. The process of globalization itself has also had an influence in forcing governments to adopt a more market-oriented model as the “inward-looking” economic policies became increasingly costly to maintain (Dunning 79).
Evidently with these shifts in the way global business is being operated there needs also to be a concurrent shift in the way governments have traditionally approached economic activity. The 1990s was the period in which government rolls in the modern economy were most scrutinized. Lenway & Murtha support the position that, since “the competitive interplay of market forces ensures economic growth”, governments should limit their roles in the economy only to “running monetary and fiscal policies and to regulating private economic activity when markets fail”(516).
While the twentieth century has witnessed governments taking an increased control in their local economies, many theorists have posited that this practice is unsustainable and goes against global business practices. Economists are arguing that a decrease in the activity of government in an attempt to control the economy is best. They posit that an analysis of the limits of the powers of the state to positively affect economic and social behavior is revealing that interventionist models of the government’s place in the economy will eventually lead to failure (Dunning 88). As a result states are either being pushed to redefine the roll of the government or they are realizing that the previous state of affairs does not work well with the new international economic regime. Some states have revisited as well as reversed their position. For others there is still a large government presence and influence over the economy.
The global economic requirements for states are for them to liberalize their economies. The completion of the Uruguay round of negotiations in the 1990s, the collapse of the Berlin wall in 1986, the political readjustments in the Soviet Union at the close of the Cold War as well as the Information Technology revolution, have all contributed to the process of liberalization in formerly closed economies.
The advent of the WTO regime in 1995 has resulted in enormous changes to global trade policy and practice. Governmental practices of granting special advantages to local firms were one of the main issues that were addressed in the Uruguay round of negotiations which began in 1986 in Punta del Este, Uruguay and ended in Marrakech on December 15, 1993. At its completion a number of general principles that would govern the operation of the global economy were proposed. Two fundamental principles that the WTO stressed were in the areas of national treatment and MFN (most favored nation) status. The WTO instrument advocates national treatment of all firms operating within a country irrespective of their status as local or international firms. It prohibits governments from granting special favors or concessions to local firms to the exclusion of international firms. Basically local and international firms have to be treated equally.
Additionally a state is not permitted to grant special concessions to imports from another state or firm, as was the case with the British Government and their special trade agreements with former slave colonies, particularly those in the Caribbean. However, to an extent, the WTO does permit members to adopt some amount of protectionism for their domestic industries. The circumstances and conditions under which such is permitted are also stipulated. Generally, while the WTO encourages liberalization, it also permits governments to adopt measures to cushion the effects on domestic labor and local business interests (Kennedy 411).
This provision by the WTO, permitting a limited amount of government intervention, supports the position that there is still a place for national industrial policies that protect large indigenous firms. Governments, particularly those in developing countries, need to formulate protective policies to protect their local firms so that their transition to global competitiveness can be realized as smoothly as possible. On their own many indigenous firms cannot face up to the competition from giant corporations who have greater access to financial reserves.
As Lenway ; Murtha point out “… states have organizational capabilities to formulate and implement strategies that target home firms to build their international competitiveness” (516). Policy makers in countries such as China, Japan and South Korea have all acknowledged the inevitability of such governmental practices. In South Korea the industrial policy regime aims to encourage indigenous industry and has implemented a national strategy to catch up with developed countries (Lee 1998).
International firms usually possess considerable advantages over local firms. Their access to financial resources and advanced technology over and above that are available to indigenous firms gives them the competitive advantage (Croft 101). Large firms therefore use these advantages to outperform local firms (Croft 109).
Furthermore many states have entered the industrialization game relatively late. This has meant that governments have to facilitate the process of technological improvements for their large firms by intervening in one way or the other. Facilitative instruments such as subsidies and equity ownership of firms in specific economic sectors have thereby become necessary (Lenway ; Murtha 517). Direct monetary investment in indigenous firms is not unheard of in this context. Even the Chinese found it necessary to purchase directly modern machinery for some of its firms, in an effort to industrialize specific sectors.
Therefore while governments are complying with global economic regulations demanding more open and competitive policies, the change cannot be immediate. Governments have to gradually acclimatize their firms to the new global conditions by facilitating their acquisition of necessary technologies. Barring such an intervention the reduced trade tariffs that the WTO is calling for will make the large firms in developing countries very vulnerable because of their inability to compete with international firms. Nolan ; Rui agree that it is essential for governments to make some for of market intervention to support its local firms. They support that when large international companies flood weak market economies, local firms are put at a severe disadvantage and the state’s economic growth will thereby be hampered. Therefore it is necessary for governments to institute policies that seek to counter the effects of such encroachment (102).
On the other hand, some national policy principles adopted by governments attempting to protect their local firms, are unsustainable in the long run. Eventually the practice of formulating policy instruments to protect local firms will be a thing of the past. Such practices are practically frowned on in the international arena and tolerance for countries who continue to practice protectionism is slowly waning.
Since international organizations are calling for the playing field to be level and protectionist instruments to be removed, protective and exclusionist policies will have to be discarded eventually. Any government policy that aims to protect large indigenous firms must only be temporary and firms must eventually be encourage to face the competition independent of government intervention.
Many states, in an effort to become WTO compliant, have had to give up adjust some policies such as local content (requiring international firms to utilize local content in manufacturing), foreign exchange neutrality (balance between foreign exchange inflows and outflows) and trade balancing (Siddharthani 3). Essentially the playing field must eventually be leveled and firms be permitted to function in a free market economy. Only then is true competition among local and international firms possible (Nolan ; Rui 105).
Whether or not they face up to it, supporting local firms costs governments billions of dollars annually and if governments wish to stay afloat they will need to remove these policies eventually. Pressures from their population, from international organizations such as the WTO as well as the need to increase fiscal efficiency will eventually force governments to allow firms to stand on their own.
Most countries have been attempting to liberalize their economies beginning in the 1990s following the completion of the Uruguay round of negotiations. Even India has been opening up its economy since 1985. Nolan ; Rui point out a number of national industrial policies that states have traditionally adopted to protect their local firms. Among these are “extensive support from the banking sector; … protective tariff and non-tariff barriers; an independent accounting system …; permission for the establishment of internal group finance companies; the granting of import and export rights; rights to establish international joint ventures, and rights to float a share of equity on national and international stock markets”(97-98).
Another factor that is pointing to the diminishing utility of national industrial policies that support local indigenous firms over international firms is the shifting paradigm on what drives the economy. Economists have been arguing that the most efficient and sustainable way for markets to operate is in an environment with market-determined prices, open ; competitive markets and free entry for small firms, rather than big business and controlled markets. Such theorists posit that this is the only assured way to sustainable economic development for states.
Furthermore, though governments are attempting to facilitate catching up for their local large firms, it seems highly unlikely that such is truly possible given the dynamics of the global marking and the rapid changes in technology. Firms in developing countries needing to catch up will find that they are constantly in that process and may never truly become competitive (Nolan ; Rui 98). What some have proposed instead is the formation of partnerships between local and international firms. As the case of the entry of the power company AES Corporation into China demonstrates, local governments should seek to have indigenous firms complement rather than compete with international conglomerates (See Croft). As Cappellin ; Pompili points out “traditional instruments of national industrial policy, such as the financial incentives or the market regulation can not be efficiently managed at the local level” (3).
Therefore, even though it is necessary for governments to adopt protective industrial policies in order to protect their large indigenous firms, such policies cannot be allowed to operate longer than necessary. While governments have to seek to protect their national interests, they also need to comply with international regulations. Failure to abide by the WTO requirements may result in sanctions which governments cannot afford. In any case, such policy support for indigenous firms is in itself costly and therefore unsustainable. Firms have to be left on their own to either sink or float. Unfortunately, given the high competitiveness of firms on the global market, a lot of indigenous firms in developing countries will suffer. Governments, instead of attempting to support such firms must seek ways to diversify their economy.
Dunning, John H. Governments, Globalization, and International Business. Oxford: Oxford University Press, 1999.
Cappellin, Riccardo ; Tomaso Pompili. “The Borders of ‘Industrial Districts’ in an International Competitive Environment.” Paper presented at the 40th Congress of the European Regional Association Barcelona, Spain 29 August – 1 September 2000. 19 January 2007 http://www.ersa.org/ersaconfs/ersa00/pdf-ersa/pdf/375.pdf
Croft, Lena Dr. “Competing or Complementing: AES Entry into the Chinese Power Generation Market.” Asian Case Research Journal 7.1 (2003): 89-114.
Kennedy, Scott. “China’s Porous Protectionism: The Changing Political Economy of Trade Policy.” Political Science Quarterly 120.3 (November 3, 2005): 407-435.
Lee, Kwon-Hyung. “A Misunderstood Success: The Impact of Industrial Policy on the Korean car Industry.” Soas Economic Digest. 2.2 (December 1998) ProQuest Direct. The University of Phoenix, AR. 19 January 2007 http://www.soas.ac.uk/SED/Issue2-2/lee5.html
Lenway, Stefanie A., ; Thomas P. Murtha. “The State as Strategist in International Business Research.” Journal of International Business Studies 25.3 (Fall 1994): 513-535.
Nolan, Peter ; Huaichuan Rui. “Industrial Policy and Global Big Business Revolution: the Case of the Chinese Coal Industry.” Journal of Chinese Economic and Business Studies 2.2 (May 2004): 97-113.
Siddharthani, N.S. “Indian Industrial Policy and Global Competition.” Institute of Economic Growth, Delhi University North Campus. 19 January 2007 http://hrm.iimb.ernet.in/cpp/occasional_publ/Indian%20Industrial%20Policy%20and%20Global%20Competition.pdf