Coping With Globalization

Jeffrey A. Hart, Aseem Prakash

• Publisher: Routledge
• Year: 2003
• eBook ISBN: 9781134585168
• Topic: Politics & International Relations
• Subtopic: Politics
• Index: Politics & International Relations

Globalization is dramatically reshaping policy landscapes, thereby creating new opportunities and threats for governments and firms. The resultant restructuring of policy spaces requires an emphasis on the need to cope with globalization, since the distribution of its costs and benefits is asymmetrical across countries, sectors, firms and factors. Unlike previous books, Coping with Globalization concentrates firmly on conceptual issues, in order to consider in detail the coping strategies of both firms and governments.

Part I

This part focuses on key conceptual issues regarding how globalization is reconfiguring policy spaces and the strategies of governments and firms to cope with it. Debora Spar and David Yoffie examine conditions that facilitate “races to the bottom” and “governance from the top”. Sylvia Ostry focuses on the politics and dynamics of “deep integration” and the challenges they pose for the World Trade Organization (WTO). Alan Rugman and Alain Verbeke discuss how multinational enterprises (MNEs) can cope with environmental regulations that differ across jurisdictions. Alfred Aman probes the implications of the recent United States Supreme Court rulings on the subject of federalism and their impact on the abilities of the federal government to devise effective coping strategies.

One of the enduring themes in globalization literature is the retreat of the state, its eroding sovereignty and, consequently, its reduced capacities to enforce stringent environmental and labor laws. Further, globalized stock markets and an increasing scrutiny of firm performance by sophisticated investors are forcing MNEs to cut costs. As Spar and Yoffie note, these pressures on MNEs and governments are viewed as contributing to races to the bottom: the increasingly mobile MNEs search for lower levels of wages or regulation, thereby forcing national governments to converge towards lower standards. Such races, therefore, enfeeble national governments to perform the crucial functions of governance. To curb harmful races, international regimes and institutions could be established. Such governance from the top creates new rules, mitigating incentives for governments to participate in these races.

What facilitates such races? Spar and Yoffie suggest that the necessary conditions for races to occur are: (1) minimal border controls, and (2) regulation and factor costs that differ across national markets. Given the necessary conditions, races are most likely to occur when products are relatively homogeneous, cross-border differentials are significant, and both sunk and transaction costs are minimal. To check such races, governance from the top is more likely when there are significant negative externalities, races cascade through consecutive stages, and there are domestic coalitions with interests to curb such races.

Varying regulations across jurisdictions that increase transaction costs for MNEs could also constitute non-tariff barriers. Trade-led economic integration during post-World War II was facilitated by reductions in tariff barriers —“shallow integration.” With the increasing role of MNEs, shallowintegration is proving insufficient and there is a need to harmonize domestic regulations—“deep integration.” Is greater uniformity in domestic regulations desirable and possible? Sylvia Ostry answers in an affirmative. She views deep integration as a strategy of both states and MNEs to cope with globalization and the WTO as the institutional mechanism for implementing it.

The pressures for convergence of domestic regulations could be “natural” or policy-led. Natural forces include technological change and inter-country competition for attracting MNEs. The information and communication technology revolution, the onset of “investor capitalism,” and the growth of electronic commerce also create incentives for countries to converge towards common models of market and industrial organization. Planned convergence has taken place through unilateralism, regionalism and multi-lateralism initiatives. The Uruguay Round launched the deeper-integration agenda in the negotiations on services and other new issues. Post-Uruguay negotiations have continued this thrust which is now also a central focus of policy in many regional fora such as the North American Free Trade Agreement and the European Union.

While planned convergence depends on government action, its agenda is strongly influenced by non-governmental players such as the MNEs and international non-governmental organizations. To make deep integration functional, international regimes need to have some teeth. However, as the debate on the WTO’s dispute settlement procedure indicates, such institutions are viewed as encroaching on domestic sovereignty. Thus deep integration, an essential step to further market integration, runs into structural issues embedded in the Westphalian system.

It is instructive to examine the subject of “race to the bottom” and “governance from the top” from a business strategy perspective. Adopting a resource-based view of the firm, Alan Rugman and Alain Verbeke examine how MNEs are coping with environmental regulations that differ across jurisdictions. As environmental issues have become salient in policy discourses, environmental regulations have appeared at various levels of aggregation, and this imposes significant transaction costs on firms. How should MNEs then respond? Rugman and Verbeke suggest that environmental strategies of firms could vary with their dependance on foreign markets for securing inputs or for selling products. To systematically understand these issues, the authors identify five levels of environmental regulations (local, subnational, national, regional and multilateral) and four kinds of firms (domestic, home-based exporters, home-based centralized MNE and decentralized transnational MNE). Their contention is that one-size-fits-all is not a prudent strategy for MNEs to cope with the complexity of environmental regulations and their own operations. Critically, they suggest a careful examination of how environmental regulations may impact MNEs’ configurations of firm-specific advantages and country-specific advantages. Since the costs of adhering to environmental regulations are significant in most industries, only some MNEs can perhaps afford to ignore them while others must develop new green capabilities to respond to them.

The pursuit of tough environmental laws is not win-win for governments and MNEs. In this context, the authors critique the recent literature on “firstmover advantage” that suggests that MNEs can gain advantages by adopting stringent environmental policies. They question whether first-mover advantage (primarily, in response to domestic regulations) is critical given that, in some instances, firms may benefit by postponing their investments. In fact, late-mover advantages may be reaped when there is high uncertainty about the evolution of environmental regulations.

Moves towards deep integration or establishing international regimes require domestic political support. As discussed in the framework presented in the introductory chapter, domestic institutions become key variables that impact the abilities of the federal government to mobilize such support. In this context, Alfred Aman suggests that national governments require constitutional flexibility to devise coping strategies and to mobilize support for them. For example, national governments have coped with domestic challenges such as regulatory reforms, deregulation and privatization through appropriate legislative measures. To effectively cope with international challenges, they require similar legislative flexibility. Instead, the United States Supreme Court has limited their degree of freedom; redefined important constitutional parameters (the Commerce Clause and the Tenth Amendment, in particular) of federalism by empowering the states. Aman argues that the Supreme Court has taken a rigid view of the federal-state relationship. It has encroached upon the political arenas by interpreting laws that should have been dealt with by the legislature. Consequently, the Supreme Court has enfeebled the federal government by constraining its abilities to devise legislative mechanisms to cope with globalization.

1
A race to the bottom or governance from the top?

Debora L.Spar and David B.Yoffie

One of the central characteristics of globalization is the spread of business enterprises and business interests across international borders. Markets once considered peripheral or exotic are now often viewed as integral to a firm’s success; and a global corps of businesses has replaced the once-scattered legion of expatriate firms. As corporations increasingly define their markets to encompass wide swathes of the globe, cross-border flows of capital, technology, trade and currencies have skyrocketed. Indeed, the cross-border activities of multinational firms are an integral piece—perhaps the integral piece—of globalization. They are also, in some quarters at least, highly controversial.

One of the controversies centers on the impact of global mobility. According to some scholars, the corporate scramble for ever-wider markets has a deep dark side. In addition to creating the efficiencies and scale for which globalization is frequently lauded, it may create a deleterious “race to the bottom,” a downward-spiral of rivalry that works to lower standards among all affected parties. As described by its proponents, the dynamic behind these races is straightforward and compelling. As capital and corporations spread across the international economy, their constant search for competitive advantage drives down all those factors that the global players seek to minimize. Tax rates are pushed down;¹ labor rates are pushed down; health and environmental regulation are kept to a bare minimum. In the process, crucial functions of governance effectively slip from the grasp of national governments and corporations and capital markets reap what societies and workers lose. Corporate efforts to cope with globalization, in other words, deny national governments some of their own means of adjustment. As the pace of global competition accelerates, moreover, pressuring corporations to raise their margins and lower their costs of production, the search for low costs and lax regimes should get even worse. Forced to compete in an ever-tighter market, firms will have ever greater incentives to race towards whatever bottoms they can find.

But do such races actually occur? The evidence, it appears, is considerably murkier. In some cases, multinational firms have undeniably chased after lower costs and less restrictive environments; they have chosen to align themselves with repressive regimes and to venture wherever labor conditions and labor rights are pushed to their lowest possible level. Yet there is also evidence that, under some conditions, multinational firms have pushed, even compelled, host countries to abide by international regulations and adopt more stringent local standards.

It is these incongruities that form the core of this paper. Specifically, it appears from preliminary research that races to the bottom are indeterminate affairs. Sometimes firms and states do scramble in a downward spiral of everlower regulation and factor costs. Yet sometimes they resist the temptations, and even force each other towards higher plateaus of common standards. The challenge for scholars is to determine what drives such highly disparate outcomes. That, in a very preliminary way, is what this paper attempts to do. Rather than trying to prove that races exist, or tracing evidence of races in any particular area, we have tried here simply to launch a thought experiment of sorts; to examine why races to the bottom might occur and what aspects of globalization can produce or curtail them. In particular, we attempt to describe when the mobility of technology and capital will tend to lower global standards and undermine national governance, and when these same forces will serve either to strengthen global standards or enhance the prospects for national or supranational governance.

Specifically, we suggest that races to the bottom can only occur when border controls are minimal and regulation and factor costs differ across national markets. Once these preconditions are met, races will be most likely to occur when products are relatively homogeneous; cross-border differentials are significant; and when both sunk costs and transaction costs are minimal. These hypotheses can be summarized as follows:

Races to the bottom will only be possible where

• border controls are minimal; and
• regulation and factor costs differ across national markets

Given these conditions, races to the bottom are most likely to occur when

• products or key inputs are homogeneous;
• cross-border differentials are significant;
• sunk costs are minimal; and
• transaction costs are minimal.

Taken together, these hypotheses imply a more nuanced combination of races to the bottom and governance from the top. They describe globalization as a complex process with no determinate outcome and few clear winners. Sometimes, the integration of capital flows and corporate structures can indeed produce a deleterious spiral and an erosion of governance mechanisms. But sometimes, paradoxically perhaps, it can also culminate in increased governance and more stringent international standards. The challenge for both scholars and policymakers is to separate these effects and probe their disparate causes.

Global races

In an influential 1994 Foreign Affairs article, Terry Collingsworth, J.William Goold and Pharis J.Harvey laid forth a bleak logic of globalization. According to the authors, the advent of the global economy has enabled multinational companies to “escape” from developed countries’ labor standards and to depress working conditions and wages around the world. As corporations have ventured abroad, they have encouraged a fierce rivalry among the developing countries that seek to win their investment capital. To woo the multinationals, countries “compete against each other to depress wages” (Collingsworth et al., 1994:9). As a result “First World components are assembled by Third World workers who often have no choice but to work under any conditions offered them. Multinational companies have turned back the clock, transferring production to countries with labor conditions that resemble those in the early period of America’s own industrialization (1994:9). Or, in other words, a race to the bottom occurs, with global standards forced ever lower by the centripetal forces of multinational rivalry.

Similar arguments mark much of the literature on globalization (Ruggie, 1995; Gill, 1995; Rosenau, 1995; Jackson, 1990). At the broadest level, scholars such as Cerny (1995), Strange (1996), and Falk (1997) have suggested that the expansion of new global actors, and particularly of global corporate actors, is serving to erode and transform the policy-making power of states. As Cerny (1995:610) writes: “[T]he capacity of industrial and financial sectors to whipsaw the state apparatus by pushing state agencies into a process of competitive deregulation or what economists call competition in laxity…has both undermined the control span of the state from without and fragmented it from within.” Falk (1997:125) echoes these sentiments, suggesting that as a result, in part, of market forces and technology, “[t] erritorial sovereignty is being diminished on a spectrum of issues in such a serious manner as to subvert the capacity of states to control and protect the internal life of society.” In all three authors’ work, there is a clear link between the globalization of firms and capital and the restriction of state power. This link is forged by the pressures that competing firms are able to exert on state policy: in other words, by a race to the bottom effect.²

More specific arguments focus on the impact of globalization on labor, particularly as governments feel compelled to abandon any labor subsidies or protection they might have offered in the past. The upshot of this literature is that countries may race to the bottom, lowering wages, reducing taxes and watering down environmental standards to minimize the incentives for multinational firms to move their capital or technology overseas. Rodrik (1995), for example, suggests that global competitio...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Dedication
• Tables and Figures
• Contributors
• Preface
• Coping with globalization
• Part I
• Part II
• Part III
• Coping with globalization