The Nation State is dead, long live the TNCs

The Nation State is dead, long live the TNCs

The world has become a global village now a day. Thus, everyone is a global citizen. It is imperative for each Nation State to deal with the firms scattered across the borders. Today, it is very common to find a British citizen wearing the garments made in Bangladesh. Globalization is a very vital force despite the fact that the world is constituted through a complex interrelated process than by a single element called globalization. The evolution of the global economic system is the outcome of technological development where internet shrinks time-space elements even beyond the par.

 Transnational corporations (TNCs) refer to the business organizations having worldwide production network with an objective of maximizing profit by being locally adaptive. Basically, TNCs don’t have skeletons rather they have very good nervous system. There is a common misconception that TNCs are placeless rather they are very closely enticed with their national state. They act by seeing local advantages and constraints. And, Nation State refers to a sovereign territorial unit having distinct economic and political system accompanied by multi-language, multi-ethnicity and so on. Nation States prepare fiscal policy, monitory policy and other financial regulations for the welfare of their society.

In recent time, globalization has become an irreversible trend although it started at the beginning of 1970s thanks to the convergence of political, technological, social and competitive factors. Lately, the pace of globalization has quite remarkably increased. Firms always need to fit in a changing environment. Their basic tool to cope with the changing environment is their strategies. Structures are determined by the strategies. Hence, it is very relevant to discuss the TNCs structure for the dynamic environment.

Basically, firms adopt functional, divisional and matrix form of structure. The approach to structures has shifted from traditional hierarchical form to a more developed and sophisticated one. In fact, the structure of firms depends on their nature, age and the scope of business. As firms’ structure depict their strategies, it is very important for the firms to structure in such a way that they can achieve their goals. Divisional form of structuring is more appropriate than functional one since TNCs need to deal with diversified market throughout the world. Moreover, TNCs are to tackle many additional problems and challenges through proper co-ordination and control in the dynamics of current State-economy. It is commonly seen that TNCs in their early stage adopt “Divisional structure with separate international division” but it cannot be a strong and relevant tool to fight the dynamic atmosphere in the long run because as TNCs expands its operation in many countries and in many product-lines, there arises a tension between product-lines operated domestically and those which are organized on area basis. Thus, two other forms of structure are adopted by TNCs to overcome the challenges. First, TNCs can form separate divisions in terms of global product i.e. “Global product division structure” Or second, TNCs can form product-lines in terms of area, i.e. “Global geographical divisional structure”. But in either case, there is a very high chance of exactly the same degree or even more degree of tension among various product division and/or geographical divisions. Thus, TNCs have adopted more developed and scientific form called “Global matrix structure” which consists of both product and area structures and also involves twofold reporting system.

The structure of TNCs can be formed in a very different approach. It is more relevant to present the typology according to Bartlett and Ghoshal. Both of the scholars categorize the organization into four types on the basis of their emergence chronologically. First, “Multinational organization” came into existence because of changes in economic, political and social factors. Firms decentralize their production by forming units overseas. They regard their overseas units a portfolio of national business. The firms are locally adaptive as far as possible and they have freedom for the operation. Second, as “International organization” emerged over the passage of time, the geographical lines started fading. Firms became more of specific significance than the nation states. Thus, firms expanded overseas to take a lead in technology and marketing. International organizations are very well co ordinated and controlled by the corporate head quarters. These firms are more than the independent subsidiaries. Thus, international firms rely on the center for the flow any kind of knowledge and the parent firms strategically use this process to insure formal control of their subsidiaries. Although the international model can influence the market through the knowledge and capabilities of its parent company, it is less reactive form. Third, “Global organization” emphasizes on the role of center. The properties and all the responsibilities are centralized and local units of operation are required to assemble and sell products and to implement the plans and policies formulated in the center. The overseas firms have less autonomy for any new innovation and for any alteration in strategies. Hence, global organizations have the benefits of economies of scale, centralized knowledge and control.

The three types mentioned above emerged in the specific historical period. They have their own strength and weakness too. They exist even today sometime in their pure form and the other time in hybrid form. But, the world is now more diversified today. So parent companies’ relationship with their overseas subsidiaries cannot be always vertical. TNCs, as their inherent nature suggests, should be very efficient globally, very flexible geographically and very capable to be relevant in the current apex of information and technology. So, it is argued that the emergence of “Integrated network organizational model”, the fourth type, is inevitable. This type of firm is characterized by dispersed network of communication and co ordination. The firm displaces the hierarchical form of relationship by inter-firm relationship.

The shape, size, structure of firms constantly changes because of diversity of worldwide population. The strength and weakness as well as dependency on the center can be well accessed on the basis of firm’s internal structures. Majority of firms are still organized on hierarchical principle but more sophisticated and newer form of firms which are called “flatter” are coming into the existence as the need of the time. The debate of future TNCs are even more unpredictable. However, what is predictable is future TNCs won’t believe in authority rather they believe in team work, the matrix form they adopt will be more complicated for the states to analyze and cope with. The concept of head quarter is gradually dissolving these days as they are only increasing cost. So, there won’t be authority-center in future in TNCs.

The relationship between TNCs and Nation States is very complex. The ground reality is that the fundamental objective of TNCs and the Nation States differs. However they have common ground to perform their economic activities. Thus, it is inevitable fact that they are rival and friend at the same time. The very goal of TNCs is to maximize profit where the very objective of the Nation State is to maximize the growth of GDP. The approach of TNCs and nation states vary in many dimensions viz. use of technology, responsiveness etc. The current global economy is more influenced and determined by TNCs than the Nation States. The growth in Foreign Direct Investment (FDI) is the benchmark in the measurement of TNCs activities. The economic autonomy is very much challenged by the activities of TNCs. Some people argue that the (so-called) death of State is caused by the growth of TNCs which is not completely true. Indeed, the economic activities of the States have been shrunk due to the growth and expansion of TNCs. Thus, States cannot be pronounced to be dead.

Although TNCs and Nation states have conflicting relationship with each other, they need each other for the survival and growth. TNCs need States to operate their activities, to use the infrastructure, to get the supply of manpower and to acquire economic and legal protection. In the same way, Nation States also need TNCs to generate wealth and create employment opportunities.

The Nation states might prefer the TNCs to be bounded only within their geographical periphery which is not possible in an open economy of present scenario. In many instances, Nation States have very limiting attitude about TNCs global integrated approach. However, some countries have very different approach and perspective. America perceives the expansion of TNCs as an extension of its foreign policies. The containers of economic activities are Nation States and they also regulate the economic activities as per their interest. Thus, national boundary has much impact on global political and economic environment. Basically, States have power to determine the period of time on which TNCs can operate in their market and can determine the rules of operations which TNCs must abide while running the firm in a particular nation state. TNCs operate in such a way that they take each Nation State’s economy as a part at the same time which creates major problems for Nation States. TNCs strategy has direct impact on Nation States because of their inter-connections. As they adopt globally integrated strategies within which the functions and roles of individual unit are defined and connected to the overall global strategy, the complication for nation states further deepens. Nation states are also challenged by geographical segmentation and fragmentation of transnational production network. The autonomy, stability and tax revenue leakage are also the main challenges for nation states.

The major area of conflict might be the regulation of states for TNCs as States play the role of collaborator by passing the bills like Free Trade Agreement (FTA) to ease TNCs entry into their market. Moreover, TNCs take the regulatory procedure as constraint because they would seek very free atmosphere to operate wherever and however they wish. TNCs always bargains with Nation States in this regard to lose the nuts and bolts of regulatory barriers of states as they hinder in the operation of TNCs.

However, some TNCs take the State’s regulatory procedure as an opportunity to be advantageous. TNCs benefit by shifting their operation measuring the difference of regulations of States which is termed as “regulatory arbitrage” but more precisely, most of the TNCs don’t prefer to have state regulatory policy. It is very natural that TNCs don’t perform the adequate role to co-ordinate foreign States since they can play in such environment. Nonetheless, they favor their national state with an objective. If the strategic trade policy of their national state works well due to the favor, they can expand foreign market which eventually benefits the TNCs.

Again, the host countries are just a unit of their transnational integration strategy for TNCs and they have full right to dislocate or shift their subsidiaries whenever there is relative advantage. Thus, the relationship is very inconsistent. Host countries try to use the TNCs for their economic prosperity and in return, TNCs also try to use host countries for their profit maximization. Thus, there takes place a bargaining between host countries and TNCs in many issues like tax, location, manpower, regulation and so on. Many interest groups such as civil society organizations (CSOs) and labor organization also come into play .World Trade Organization (WTO) might provide a common ground and also tries to penetrate its interests like non-discrimination, transparency, fair-competition etc. in the bargaining process. Richard Harold (2002) argues that WTO creates power-based bargaining favoring the rich and strong States like European Countries and U.S. On the contrary, World Bank favors the developing countries by providing loan, thus, making relatively stronger in the bargaining process. Regardless of this ideal school of thought, World Banks are often criticized for focusing on providing loans rather than seeking the concrete developmental outcome. Continuous geographical boundary of States and discontinuous horizons of TNCs further makes the bargaining process even more complex. The more is the rate of return, the more is the possibility of TNCs entry in the market of host countries. And, whenever host countries do not have more alternative inward-investment opportunities, they are weaker in the bargaining process. That is why, many developing countries can’t bargain as hard as they should. In some cases, host countries try to persuade TNCs by making investment-friendly atmosphere through the regulation, political stability, and consideration in tax and so on. Broadly, TNCs are more powerful than host countries in bargain since they have more dynamism in terms of strategy and scope of operation. Every country tries to attract foreign investment to their country and they have very fierce competition with one another which TNCs know very well. So, they play off one state against another for the sake of highest rate of return. Some host countries offer state subsidies in a bid to persuasion .Apart from all these, TNCs have certain ethical and social obligation to be fulfilled for the society where they fulfill their objectives. It should not be a problem for TNCs to spend a share of their profit in the good of a nation and society. However, the giant tech. companies like Apple have not done any remarkable thing in comparison to its earnings for the welfare of the society and nation. So, many TNCs are not fulfilling the intrinsic value of corporate social responsibility (CSR), rather they just loud their voice in a pretentious manner. In the same way, Nation states are also not abided by the norms of Institutional Governance. The government does not really go with ethics, discipline and principles.

It is also the fact that State, in many cases, invests in terms of infrastructure, social protection, tax reduction or financial aid even more than the TNCs. It is common that TNCs often threatens the host countries to leave the country unless they get tax incentives and so on. Recently, the British Government was much concerned about the tax-leakage issue of Starbucks in Britain.

TNCs do not always have free access of State’s human and physical assets. TNCs have less bargaining power in such a State where the government controls the property provided the property should have very high value for TNCs and Government should have power for the control of its properties. For example, it is very tough for TNCs to bargain in the country like China, North Korea, and Cuba etc. States are not weaker provided there are many firms competing for the investment opportunity internationally and they have very conducive atmosphere for the investment. UAE (United Aram Emirates) is a burning example of small country offering very conducive atmosphere to the foreign investors. The host countries can strictly tighten the market through the regulation which can sabotage the TNCs operation and expansion. Time and situation are determinants in the bargaining power-shift between States and TNCs. For instance, host countries are more powerful after the initial capital investment of TNCs in their country provided the nature of business is natural-resource based. Conversely, TNCs may be even more powerful than the host countries in the same situation in case the nature of business is innovation and/or technology based.

In a nutshell, TNCs are by nature very dynamic, very moving force whereas Nation States are fairly static by nature. Thus, a wholesome conclusion can be TNCs are strategically one step ahead of State Nations. But, it does not always necessarily mean so.

References

·         Dicken, P. (2009) Global Shift

·         Hill, C. (2012) International Business: Competing in the global Market Place

·         Tayeb, M. (2000) International Business: Theories, policies and practices

·         Lesserre, P. (2003) Global Strategic Management

·         www.dawnsonera.com

·         www.jeitosa.com

·         www.econ.cam.ac.uk

·         www.halexandria.com

·         www.oxfordscholarship.com

·         “The Nation-State and The Theories of Transnational Corporation” by Grazia Iette-Gillies.

·         “Organizational Structures in Multinational Corporations From The Perspective Of Global Communication Network” by Prof. Dr.Norbert Thom and Andreas P. Wenger.

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