Public Policy Chapter 8

Chapter 8: Public Policy

• This chapter focuses on the relationship between multinational firms and governments.
• Tensions arise because the borders of multinationals and nation-states aren't always aligned.
• Governments deal with economic entities that have ultimate control beyond their borders.
• Firms face multiple jurisdictions with varying political systems.
• Jurisdictional asymmetry is central to the conflicts between multinationals and governments.

8.1 Multinational and Government

• The relationship between firms and governments has been central to the history of multinationals.
• Tensions stem from the discrepancy between multinational and national state borders.
• Governments face economic entities with ultimate control outside their borders.
• Multinational firms face multiple jurisdictions with diverse political systems.
• The problem of jurisdictional asymmetry is foundational to the tensions between multinationals and governments.

8.2 Governments as Hosts

8.2.1 Developed Economies

• During the 18th and 19th centuries, European nation-states and their colonies (like the US) developed the capacity to regulate, tax, and monitor individuals and firms within their boundaries.

• National ownership wasn't a significant policy concern during the 19th century.

• There were few barriers to foreign firms entering, little control over their behaviour, and limited discrimination against foreign firms in favour of local ones.

• The latter half of the 19th century saw a divergence in trade and investment policies, notably in the US.

• The US adopted high levels of protectionism.

• However, foreign firms could operate in the US with few restrictions, except in the banking sector.

• Banks were politically sensitive and faced opposition to their widespread presence.

United States Banking Industry

• Foreign ownership of banks became progressively more restricted in the US.

• National Bank Act of 1864 contained rules about branching and directors' citizenship/residency.

• State regulations made it harder for foreign banks to operate, especially by the 1910s.

• State level restrictions were also applied in other sectors, such as insurance and mortgage lending.

• Economic activity in certain areas such as mining and coastal shipping was also restricted.

European Market

• In 19th Century Europe, very little restriction existed on foreign companies in London.
• London acted as the world's largest trading and financial hub.
• The nationality of ownership wasn't a substantial concern, in contrast to, for example, the United States.
• Foreign bankers and firms could operate with little to no restriction.

Petroleum Industry Before World War I (United States vs. British)

• In the 19th century, the use of petroleum was a commodity similar to many others.
• Internal combustion engines and warships gave rise to it becoming a strategic commodity.
• This prompted concern from larger governments such as the British over the dominance of US firms like Standard Oil within the industry, and an attempt to restrict their involvement in the oil-producing regions.

Interwar, European and Foreign Multinationals

• During the interwar years, foreign ownership of companies became a more significant issue for many European countries.
• These countries followed Britain's lead by creating national oil companies.
• Few restrictions existed in Europe against foreign firms outside of banking and defense-related industries.

German and Foreign Multinational

• In Germany during the interwar period, there was debate about foreign influence in the business world. However, this did not translate into policy.
• For example, the US auto manufacturer General Motors (GM) was allowed to acquire Opel and GE bought a third of the equity in AEG.
• Nazi Germany's policies regarding foreign companies were tolerant so long as they followed government directives, including the dismissal of Jewish employees.
• In World War II, enemy-owned business assets in Germany were sequestrated. However, local management in certain cases maintained operations.

World War II and Afterwards

• Post-WWII, the US shifted from being a major debtor nation to a creditor.
• This shift accompanied rising nationalism, which led to major restrictions in several sectors.
• After 1930 more stringent regulations on countries outside of the Western world came into place relating to foreign ownership.

War World II and Afterwards (Liberalisation)

• The 1980s saw a worldwide public policy shift towards the liberalization of foreign firms and the decoupling of national policies from the regulation of international finance.
• The globalization of the capital markets diminished governmental influence on multinational firms.
• There has been a decline in the ability of national governments to monitor the behavior of multinational enterprises.
• The national champion strategy has seen a significant lack of success in Europe.

Imperialism and Colonialization Era

• Very few restrictions existed during the pre-interwar years on multinationals.
• The colonial governments in Asia and Africa generally had similar policies toward foreign investment as their home countries.
• Sometimes colonial governments favored their home country's business over other nations' firms.
• Notably in certain strategic sectors.

Factor Long Term National Differences in Policies

• Countries with high levels of foreign inward investment were more wary of policies that could result in reciprocal actions from other countries or regions.
• Those with less multinational investment were more often associated with restrictive policies.
• National governments' policies toward foreign firms reflected specific national circumstances, including the industrial structure of a country.
• Cultural and historical influences significantly influenced host government policies.
• Generally market-oriented economies had a lesser tendency to restrict business operations compared to those with stronger industrial policies.

Multilateral Regulation

• The expropriation of foreign property in 1917 initiated the first attempts to establish international regulations on the conduct of host countries.
• The 1930 Hague Conference on the Codification of International Law was an attempt to address the responsibility of states for damage to foreign entities within their territories.
• Developing nations often resisted accepting specific international minimum standards of treatment for foreign firms.

International Trade Organization (ITO)

• After WWII, there was renewed discussion about establishing a new international organization to handle international trade.
• The ITO was proposed but never fully enacted.
• The GATT survived as a framework and eventually morphed into the WTO.
• Developing nations made numerous qualifications to the ITO proposals, which ultimately led to the failure to establish the organization.

Organisation for Economic Cooperation and Development (OECD)

• In the 1970s, the wave of nationalizations of multinationals by developing countries led the OECD to create guidelines for multinational firm behavior.
• These guidelines established best practices for good corporate governance and business conduct within host economies.
• These commitments encouraged employee training, and avoided bribery and improper political involvement.
• However, the OECD guidelines did not become legally binding.

Explore the complex dynamics between multinational firms and governments in this chapter. It delves into the tensions that arise due to jurisdictional asymmetry and differing political systems. Understand how these relationships influence public policy and economic control across borders.