The Politics of International Business
Essential summary
Companies operate in frameworks defined by national and international laws, regulations and institutions created to address a wide range of policy objectives and reflecting different political ideologies. As discussed in Chapter 2, the big debate in international business has long been to what extent nation-states seek to protect domestic producers from foreign competition or, conversely, want to open their borders to trade and FDI. In turn, this often reflects different attitudes towards the legitimacy of state intervention in the economy — a construct that the World Bank tries to quantify through its “Ease of Doing Business” index. This chapter begins with a review of the paradigms guiding international business-related policy-making before looking at the various interventionist tools that nation-states can wield if they so desire. It concludes with a study of the global governance regimes established to address the supranational aspects of international business politics.
What economic role for government
Debates over government’s ideal economic role are crucial to understanding the political framework within which international business operates. Broadly speaking, the two main schools of thought in this area hold either that government should let market actors run most if not all economic decision-making (a philosophy often referred to as “laissez-faire” or “neo-liberalism”) or else that it has a duty to weigh in on economic activities in order to achieve certain policy outcomes
(a philosophy that might be called “interventionism”). It is crucial to note that this debate plays out at both a national and an international level, and that it is possible for a government to pursue one philosophy at home and another abroad — a hybrid approach exemplified by the kind of “developmental capitalism” that has marked the recent political history of certain emerging economies like Malaysia or Thailand, where international openness has been combined with domestic interventionism. Similarly, it is important to remember that domestic policies implemented within a national territory remain relevant to international business, if only because they affect how MNEs might operate in that one country as opposed to others.
Cycles in economic thinking
Attitudes towards the legitimacy of state intervention vary in time and place (see Figure 3.1). In the early 20th century, for instance, many politicians in the world’s leading power of the day, the UK, believed in minimal government action. This applied not only to trade but also to the domestic economy, viewed by classical economists as a natural phenomenon best left untouched.
Such passivity came under widespread criticism when the 1929 Wall Street Crash was followed by the Great Depression. The crisis led to calls for new economic policy, one where the capitalist state would be empowered to manage the business cycle proactively. The end result was a resurgence of interventionism, largely driven by the ideas of British economist John Maynard Keynes, who believed that government’s first priority is to address those short-term human needs that markets do not satisfy, in part by using deficit spending to maintain aggregate
Figure 3.1 Dominant economic policy paradigms have evolved in response to crises.
The politics of international business 29 demand during recessions, with the ensuing debt to be repaid via higher taxes cooling the economy down during upswings.
By the mid-20th century, Keynesianism had become the dominant paradigm in much of the capitalist world. The new consensus was that states could and should control many domestic sectors; develop welfare systems; engage in economic planning; and even manage entire industrial sectors. State involvement often went far beyond Keynes’s original advice but criticisms remained muted as long as economies boomed — as many did for 30 years following World War II.
Once again, it was an economic crisis that changed dominant thinking about the state’s ideal role. The global economy slumped in the 1970s, beleaguered by high oil prices, budget deficits, inflation, unemployment and saturated markets. This led to widespread disenchantment with Keynesianism and renewed support for classical economics, renamed neo-liberalism. The end result was the election in 1979 and 1980 of UK Prime Minister Margaret Thatcher and US President Ronald Reagan, influenced by economists such as Friedrich Hayek and the monetarist, Milton Friedman, who thought that a state’s main priority was to ensure stable prices and not promote welfare directly. Laissez-faire ideology was back in fashion in domestic politics but also internationally, with the decades following 1980 marked by most countries worldwide reducing trade barriers, often mediated by the offices of an intergovernmental organisation. In particular, many Global South nations that had previously been run according to protectionist principles designed to protect these newly independent countries from (neo-)colonial domination switched to more trade-friendly policies that helped to accelerate their economic development at a record pace, taking billions of people worldwide out of abject poverty. By the late 20th century, there seemed to be a global political consensus regarding the benefits of international business.
The question today is how long trade and FDI-friendly politics will dominate. History teaches that paradigms last for only as long as enough people believe in them. The global financial crisis that erupted in 2008 as a result of poor bank supervision led to governments worldwide running up huge debt to shore up their financial systems and avoid a 1929-style depression. The reduction in public spending that followed as governments sought to contain this debt weakened the social safety networks protecting many Global North countries’ less affluent populations. Note that these constituencies’job and wage prospects were already being undermined because — in the view of Nobel laureate Joseph Stiglitz — generations of laissez-faire politicians had rejected the kinds of redistributive policies that could have seen globalisation’sbeneficiaries compensate, in the name of social cohesion, their fellow citizens suffering from the combined effects of automation and foreign competition. The ensuing disenchantment facilitated the rise of protectionist interventionism in the mid-2010s, with new political figures (most notably Donald Trump in the United States and Brexit advocates in the UK) convincing some voters that globalisation was the main if not single culprit for their problems. The same narrative could also be heard in early 2020 in the attribution of blame for the COVID-19 pandemic. Robust evidence exists demonstrating that these explanations are simplistic to the point of being false. The big question for the years to come then becomes how long this misrepresentation of economic reality might continue to dominate political discourse.
The future of international business politics
The question is especially poignant given the objective drivers that, notwithstanding certain demagogic political discourses, may well encourage further growth in international business volumes. One such factor is information technology, which empowers manufacturers and consumers to shop across national borders, often causing them to purchase cheaper better quality items abroad, despite certain politicians’ efforts to orient demand towards domestic producers. Another is the growing deregulation of the financial markets, with companies freer than ever to transfer capital across borders, thereby escaping political authorities whose jurisdiction is largely restricted to their national territories.
This latter point is crucial to the future politics of international business. MNEs generally have an advantage over national governments since they are not tied to any particular location and have a choice of where they might invest. Through the practice of “regime shopping", MNEs can play countries off against one another to get the best deal for themselves. A frequent criticism of this asymmetrical relationship is that it creates a “race to the bottom”, with cash-strapped governments being successfully lobbied by powerful MNEs to weaken social and environmental standards and lower tax rates. Of course, this power relationship is reversed when the country is characterised by a large, dynamic market and the MNE is not offering anything unique.
It is worth noting that after rising constantly for more or less 40 years, the percentage of total global economic activity accounted for by international business started flatlining around 2015, possibly indicating that this trend has reached its limits. Domestic business remains vital in today’s world, especially in service sectors which may be harder to internationalise than manufacturing activities. Notwithstanding MNEs’
The politics of international business 31 decades-long move towards cross-border economic integration, the world remains far from borderless, with national governments continuing to perform key governmental roles (like regulation and taxation) shaping MNEs’ business environments. On top of this, numerous studies point to many consumers’ ongoing loyalty to more familiar domestic brands. The most accurate way of depicting the current politics of international business is therefore to highlight the tension that exists between the undeniable benefits of cross-border economic integration and the continued attraction of what French politician Bernard Carayon famously termed “economic patriotism”. An interesting part of this debate is the possibility that a subjective emotion like national pride can be as important to economic decision-making as rational value-for-money calculations.
In most countries nowadays, governments tend to resolve this tension somewhere in the middle. Few regimes advocate self-sufficient “autarky” rejecting all international business. At the same time, even the most trade and FDI-friendly governments understand their responsibility to protect national self-interest (like domestic employment) using whole array of tools designed towards this end. Given how often international business politics focuses on countries’ deployment of such tools, their analysis is useful to learners in this field.
