International Organizations, Regionalization and the State vis--vis Transnational Corporations and Globalization: Extending Power and Sovereignty

beyond National Boundaries

By Arjay Louis C. Bautista

Abstract

Territoriality, the foundation on which state sovereignty and authority has been hinged during the postWestphalian peace, has been under attack as of late due to the intensification of global processes, mainly attributed to transnational corporation activity. The issue on state sovereignty and control goes deeper than the premature writing off of states in international relations and political economy; what must be given more focus are the behavior that states undertake to counteract (or in some cases, actually encourage) economic and political processes involving transnational corporations. This paper proposes how states can measure up to the challenge posed by transnational corporations and globalization through the use of international organizations and regional economic cooperation associations as analogues to extending the idea of territoriality over and beyond state boundaries.

Introduction

The impeccable rise of the modern transnational corporation (TNC) has radically challenged how states view the international political and economic order. When before states have seen themselves as second to none as far as primacy is concerned, they have increasingly become prone to the challenges foisted by TNCs, convincing some commentators to actually prepare their obituaries of the state vis--vis the changes brought about by globalization1. Though realist scholars have been adamant in restating the primacy of states as actors in the international arena, there can be no denying the fact TNCs have raised a convincing challenge to such notion.

Interestingly, international organizations (IOs) have almost at the same time when the global framework on which TNCs was just starting to unfold. Not long after the Bretton Woods Convention of 1944 discussed how the post-World War II international economic order is to be managed the United Nations was born, albeit well-understood notions that it cannot construed as a world government, much less a world state. Across the Atlantic, the European Coal and Steel Community (ECSC) laid the foundations of trans-European cooperation, which will soon bear fruit through the formation of the European Union. These supranational entities have played a major role not only in facilitating cooperation among states but also in enforcing state interests.

How can states make sense of the emerging global order that speaks more of borderless exchanges and decentralized interactions and less of traditional ideas authority? What roles must international organizations take up to ensure the survival of state sovereignty in these purported new and ever-

Ohmae (1995), pp. 1-5.

changing times? Do boundaries still matter in this age of integration? This paper will attempt to shed light on these pressing matters.

The State: A Brief Refresher

To students of international relations and political economy, the Peace of Westphalia provides the most convenient and authoritative starting point to discuss the underpinnings of the modern state2. The end of the Thirty Years War not only concluded the bloodbath between the Protestant and Roman Catholic factions but also clearly highlighted, for the first time, the emergence of political units from clearlydemarcated territorial lines. Such political units, which came to be known as states, had become potent areas of military and economic might; their ability to amass material wealth from various voyages and the consequent growth in their military power challenged the then-prevailing hegemony of a transcontinental rule of the Roman Catholic Empire. In effect, the Peace of Westphalia established the modern notion of internal and external sovereignty: states enjoy the privilege of enforcing their own authority within their territory while are obliged to accept the existence of other states.

The resulting politicaland economicreality for the next centuries has become the domain of states, both domestically and internationally. For one, the implicit acceptance of internal and external sovereignty among states has enforced an international system of self-help3 dictated by the rules (or norules) of anarchy. Since states view each others, at least in theory, as equals in stature, each state must fend for its own survival and perceive others as a constant threat. Given such a rather grim backdrop, every matter but that of a states survival takes the back seat.

2 3

Brown (2001), pp. 64-65. Waltz (1972)

However, the notion of states solely dominating international affairs have come under attack these past few decades, especially with the rise of complex interdependence4 as a counterpoint to realism. Though complex interdependence still maintained that states remain as one of the primary actors in the international system, it sought to elevate non-state actors previously left behind in the analysis, such as business entities and non-governmental organizations (NGOs). Furthermore, this framework stresses the saliency of issues other than power and security, two areas of primary concern to states, therefore paving the way for the inclusion of transnational corporations in the debate.

Transnational Corporations5 and the State

Despite their perceived relative novelty, transnational corporations (TNCs) have been operating since the incorporation of the Muscovy Company in England in 15556. Throughout modern human history, TNCs have played an important role in the movement of goods and labor across boundaries as well as providing economic clout to the state under which a said TNC is operating. In fact, if one were to look at the mercantilist enterprise operating in Europe between the 16th and 18th century, TNC and state operations are tightly intertwined; the state provides the TNC monopoly status over market operations while the TNC, in return, funnels funds to the state for expansion and military purposes.

Not until the rise of a post-colonial United States of America did the world saw the birth of the modern transnational corporation, whose operations have been forced to look outside US territories due to

4 5

Nye and Keohane (1979/1990) Uhlin (1988) provides the rationale as to why the use of the term transnational corporation is more suitable compared to multinational corporation despite their interchangeability. The former is more descriptive of the concept of a foreign firm based in one country with operating subsidiaries in a number of foreign countries. He also cites the use of the term transnational corporation by the United Nations (e.g. Committee for Economic Development, 1981). 6 Krause (1972), p. 94.

overproduction, consolidation of both small startups and big corporations, and the establishment of antitrust laws7. These corporations, in search of viable markets to sell their products, have been vital not only in transferring technology and capital across boundaries but also in integrating disparate domestic markets into the global schema. Thanks to advancements in information and communications technology and transportation, cost differences discovered in different parts of the globe further bolstered TNC activity across political territories, with the former being profit-maximizers.

The rationale behind TNC creation and persistence has been brought forth by the neoliberal establishment, which stresses the lessons of efficiency. According to theorists under this school of thought, TNCs, by operating across boundaries, improve economies of scale, which drive down costs. Moreover, TNCs allow a more efficient allocation of resources; by allocating funds and raw materials towards business entities that operate at far lower costs, everyone gains through lower costs of consumables, thereby increasing consumer utility across countries8. TNCs will operate if and only if there are enough incentives for them to do so, such as cheap factors of production (e.g. labor, capital, rent) and a viable market on which they can sell their products. Also, TNCs help solve market imperfections by operating in markets that were otherwise thought as non-existent due to high entry and exit costs; the sheer size of TNCs enable them to leap over these difficulties.

The State is (Going to be) Dead: Globalization and the State

Much attention has been focused on the numerous obituaries prepared by numerous commentators, both academic and lay, for the modern state with regard to globalization. The past few decades have been witness to the acceleration of globalization, whose intensification can be largely attributed to the
7 8

Ibid, p. 95. Jenkins (2003), pp. 416-419.

increased activity of TNCs. Thus, globalization and TNCs share a common thread of identity, which constitutes a rebellion against the traditional definitions of territoriality and boundaries; both structure and actor operate beyond the static conception of politically-demarcated lines in an effort to find the most efficient manner to allocate resources. The latter notion is anathema to the Westphalian notionand foundationof state existence.

Branded as antiquated and not fit enough to survive globalization, states have become more of an exception rather the norm in this age of heightened interaction and cooperation. As pressures from TNCs mounted to open their territories for their products, states found it hard not to oblige: not only do states lose the opportunity to land much-needed foreign direct investments (FDIs) and portfolio investments, they also risk being left out of the global economic pie should they remain intransigent. This has led to numerous efforts of states to structurally reform their economies, as well as their political institutions, to let these investments come into their territories in exchange for the promise of progress and relevance9. Nevertheless, not all experiments bore fruit: the Asian Financial Crisis of 1997 and the current global economic impasse have become posters of the excesses of globalization as well as the failure of TNCs to fully take into account their actions.

How can states protect themselves from the onslaught of globalization and TNCs? As rational actors, states cannot simply discount the immense benefits TNCs provide as they operate within a states domain; as mentioned before, on the merits of allocative efficiency TNCs cannot be simply disparaged. Moreover, globalization allows for a more transparent reading of other states; states will be worse off should they decide to unlatch from such an information highway. On the other hand, allowing TNCs more leeway to operate domestically has become akin to ceding state sovereignty, both internally and

Perkins et al (2006)

externally. The very idea of states relinquishing politically-defined territories in favour of a borderless world where TNCs can roam unfettered will only hasten death knells addressed to states.

This paper proposes that states find refuge in international organizations and/or regional economic cooperation associations in limiting TNCs activity in this globalized world. This can be done by extending the idea of territoriality inherently found in states to these supranational entities. Furthermore, similarities between states and supranational organizations will be investigated if the latter are in fact global analogues of the former, thereby allowing the extension of state qualities to international organizations and regional economic cooperation associations. Lastly, this paper will use a combination of regime theory, integrationist and functionalist arguments, and realism to analyze both the actors and structure under investigation.

International Organizations and Regional Economic Cooperation Associations: Extending the Notion of Territoriality beyond State Boundaries.

The absence of a so-called world state, or of a more attainable world government, has been the basis for which states have conducted their affairs with other states in the international system. However, the enduring notion of anarchy has not prevented states to surrender part of their sovereignty to establish international organizations (IOs) and regional economic cooperation associations (RECAs). Two theoretical frameworks can be used to explain such developments.

The first framework combines the strengths and efficacy of integration and functionalist theories. Under integration theory10, states seek to create new states through existing states through a regional

10

Hodges (1972, ed.)

partnership that possibly leads, in the long term, to the creation of a single world state. Functionalism, on the other hand, undermines state sovereignty by stripping away the powers of the state piecemeal, salami-style11. The European Union (EU) provides a classic example of such amalgamation, whose humble beginnings can be traced from the motivation to preclude a third European war through energy cooperation, leading to the creation of the European Coal and Steel Company (ECSC) in 1952. On one hand, the EU can be thought of as a project that will eventually lead to the creation of a singular European state and identity. Going beyond their initial aims of economic cooperation, the EU has not only propagated the use of a single currency, the Euro, within its boundaries but also has created, albeit of questionable quality, a European Parliament. On the other hand, states have continued to play important roles within and above the EU, which, at times, seems to be hijacked by the latters hubbub. Such has been the case with the rotating presidency of the EU every after six months as well as the inability of its member-states to unanimously pass an EU Constitution.

The second analytical framework borrows heavily from Stephen Krasners regime theory, which emerged from the musings of complex interdependence theorists. International regimes12 offer a clear break from the realist notions of inter-state cooperation, wherein states gain absolutely from establishing a network of cooperation amongst them. By clearly delineating the interests, functions and rules of engagement on which IOs will operate, states establish a common platform for exchange and interaction. Thus, the World Trade Organization (WTO), on top of pursuing the ideal of establishing a barrier-free global trading setup, employs a separate office that acts on member-states grievances regarding unfair trade practices; the following can also be said about the United Nations (UN) and the Organization of Petroleum Exporting Countries (OPEC). However, IOs are not a perfect substitute to a
11

Brown, op. cit., p. 123. Krasner (1983) defines a regime as a set of implicit and explicit principles, norms, rules and decision-making procedures around which actors expectations converge in a given area of international relations.
12

world state, or to a lesser extent a world government, and states, being sovereign, still have to protect their interests against cheating and free riding.

Though it would be prudent to highlight the disparate definitions of IOs and RECAs, this paper would not need to differentiate between them; truth be told, the author of this paper, as well as its readers, would be well-served if the distinction between them will be altogether neglected. Thus, for the entirety of this paper, IOs and RECAs will be used interchangeably. Only one definition is needed to operationalize IOs and RECAs, based from the preceding discussions: both are supranational entities that have been established by states to promote certain and common interests, i.e. to promote cooperation and interaction among its members, and are guided by accepted norms and principles, e.g. democracy and fairness, which are enforceable by an internal administrative office. This paper also assumes the primacy and unitary nature of states. Also, this paper treats TNCs having identities separate from their countries of origin for the sake of simplicity.

Having laid the premises of this paper, the author forwards the following propositions:

Proposition 1: States and IOs/RECAs are spatial entities and are territorially-bounded

There can be no denying the fact that states are, by nature, territorial entities. Such has been the basis for state existence since the Peace of Westphalia and the legal ground on which a state derives it authority. In fact, a states expansion of physical territory has been akin to state growth13, as evidenced by the earlier imperialist push of the West as well as subsequent attempts of modern states, especially in the Balkans, to expand beyond their miniscule territories. Thus, a states territorial criterion and its

13

Yarbrough and Yarbrough (2003), p.544

subsequent claim on legitimate authority has become the defining characteristic of the postWestphalian state14. Under this notion, states can not only control activities happening within their boundaries but also may contain activities attempting to enter their legally-construed domains.

Though the level of abstraction of their territoriality is higher compared to that of states, IOs and RECAs are, in part and parcel, territorial in nature on the basis of its composition. States make up the membership of IOs and RECAs; despite the difficulty of clearly demarcating the boundaries for some supranational organizations (e.g. consider the UN, whose territorial reach basically encompasses almost the entire globe), IOs and RECAs act as an extension of a states boundaries up until the periphery of the organizations borders. But in exchange of this extraterritorial privilege is having to tradeoff part of a states sovereign status, since each member state also enjoys such extraterritorial privilege. By becoming a member of an IO or an RECA, a state must fully realize the implications of partaking in a shared territory with other sovereign states.

As states have become more vulnerable territorially with the intensification of globalization and the heightened activities of TNCs, IOs and RECAs can offer an alternative for states to at least temper these seemingly-uncontrollable dynamics. By using the idea of shared territory among the member-states of an IO or an RECA, states can tap on the immense amount of physical territory under which they are part of. Furthermore, the collective nature of territory-sharing means that the standards imposed on one boundary is uniform across boundaries; if stringent rules are imposed on TNC entry into an IO/RECA territory, a state is assured of mutual protection offered by the supranational organization. Thus, the potential of limiting TNC entry within a states boundaries, provided that it is part of an IO/RECA that subscribes under the notion of shared territoriality, is immense.

14

Ibid, p. 555.

Proposition 2: States and IOs/RECAs are centralized institutions with administrative functions.

Another defining feature of statehood is the ability to concentrate power and authority at the center. As far as realists are concerned, there should be no distinction between center and periphery for states since states, to begin with, are egoists and unitary; egoists in the sense that no other interests than the state takes a higher priority and unitary in the sense that from an international viewpoint states are analytically taken wholly and singularly. However, the state cannot stand on its own based from its pure abstract form. States take its functional form through the establishment of a government within its politically-demarcated territory, which in turn utilizes the different devices of statehood, such as the monopoly of domestic legitimate violence. Therefore, it can be said that the government is a subset of the state, wherein the former creates and utilizes the laws that apply within the boundaries of the latter15.

IOs and RECAs share this analogy with the state under certain assumptions, primarily that IOs and RECAs are regarded as quasi-states existing over and beyond state control and that they acquire legitimacy on the basis of the territory they cover. Moreover, IOs and RECAs contain administrative offices and employ a full-time staff to monitor and see through their day-to-day operations while at the same time offer technical know-how regarding specialized matters. However, utter precaution must be noted while prescribing these notions. First of all, being in an anarchic and self-help international environment, states still view themselves as sovereigns, both internally and externally. IOs and RECAs, based on their construction and articles of incorporation, are still not qualified to pass as perfect substitutes to a world state. Thus, the legitimacy of an IO or a RECA is only as good as how member-states recognize the legitimacy of the entire supranational entity either through a states participation or non-withdrawal of

15

Nicholson (2001), p. 18.

its support. Such has been the intractable problem of the ill-fated League of Nations, whose legitimacy was never recognized by the United States and was constantly undermined by the several side activities of the other powers, among other things. Nevertheless, as long as member-states keep their expectations about IOs and RECAs modest, legitimacy concerns regarding these supranational entities can be kept to a minimum.

Proposition 3: States and IOs/RECAs, by the virtue of their control of their internal boundaries, produce and wield perfect information

Based on the earlier notion of complete control of any activity within its boundaries, states, by default, can utilize its mandate to extract every bit of information within its territory. This is too big a claim; such does not consider the presence of transactions costs, as well as other pecuniary and non-pecuniary costs involved in extracting such information. There have been many instances where states are unable to produce reliable information within their domain due to their inability to shoulder the costs for producing such, as in the case of sub-Saharan states. On the other hand, reclusive military or fundamentalist states, such as North Korea and Iran, have proven how information can be stringently kept within the bounds of their territories, as evidenced by the intermittent second-guessing of outside powers as to the actual development of their stashed nuclear arsenal.

The emergence of IOs and RECAs, on the basis of cooperation, has opened the doors for the exchange of information across shared territories among its members. With states acting both as information producers and policy choosers, IOs and RECAs simplify the rate at which information flows and how state process such information by acting as conduits for such16. The UN, for example, maintains a database of

16

Lazer (2005), p. 53.

its member-states most vital bits of information for consumption of its members. However, caveats remain despite the well-mannered consequences of the said endeavor. For one, since there has been no distinction between good and bad information, IOs and RECAs can be conduits of good as well as bad information17. The quality of information being transmitted among member-states may also depend on how good the networks of information sharing are; as improvements are registered, cases of free riding might occur, which contributes to the deterioration of information quality. Moreover, as stated earlier, producing information involves costs to states, being sources and producers of information. In the absence of official funding from the IO or RECA, a state may find no incentive to share information, much more produce such, if the marginal benefit from undertaking such activity is not at least equal to the marginal cost of producing the said information18. This has been partially solved by the official grants provided by the IO or RECA to support information-gathering activities, such as the Eurobarometer of the European Union and the World Bank Institute.

As much as information asymmetry creates market imperfections, which in turns provides incentives for increased TNC activity across boundaries, perfect information sharing can be an effective deterrent against unmitigated TNC aggression. Information production and dissemination has become one of the chief weapons of TNCs; their presence in a multitude of sovereign territories, together with the vast amount of resources at their disposal, has skewed the information continuum to much of their advantage. Given the wealth of information they can find at their disposal from their respective IOs and/or RECAs, member-states can at least, in theory, rival the information held by TNCs. Such provision of information does not only empower member-states vis--vis TNCs but also give them an advantage formulating economic and political strategies both domestically and internationally.

17 18

Ibid. Ibid.

Some Empirical Notes

Not surprisingly, research directly investigating the effects of IOs and RECAs on individual states and TNCs is sparse. Aside from the understandable difficulties involved in collating panel data that takes into account pre- and post-IO/RECA membership observations, not much empirical work has been done to statistically test the relationship among states, IOs/RECAs and TNCs19. However, by relaxing strict assumptions on how to identify TNC activities, a study about the EU and trade flows within the region offers conflicting results regarding the points raised in this paper.

Nitsch (2000) examines the impact of national borders on international trade within the EU through the use of a gravity model20. Finding an earlier study that illustrates how Canadian provinces trade twenty times more with each other than they do with U.S. states of similar economic size and proximity, he creates a European analogue to investigate whether or not European integration has led to more trading among the member-states. Though his paper never mentioned the role of TNCs in facilitating trade, it can be surmised that trade flows across member-state boundaries can be used as proxy for TNC activity.

Two important results emerge from this study. First and foremost, national boundaries within the EU still play an important role in determining trade flows across states. According to one estimate in the study, a 1 per cent increase in distance decreases trade by about 0.7 to 1.1 per cent21. Secondly, home bias, or a states willingness to export its products more to itself than to other states, is significantly apparent among EU member-states. Despite the assumed shared territorial access within the physical
19

The ANNALS of the American Academy of Political and Social Science has published a special issue in 1972 that attempted to investigate the nascent rise of TNCs vis--vis existing IOs during that period. However, the intellectual musing contained in the said journal issue has been more theoretical than empirical. 20 Gravity models, in general, attempts to investigate the role of distance across countries, usually involving the economic centers, in trade patterns among them. 21 Nitsch (2000), p. 1098

boundaries of the EU, states still regard national boundaries as an important policy variable whether or not to engage trading with other member-states within the region. As for TNC activity, such result exemplifies the loose level of control on economic activity within the state and an apparent tightening across boundaries. This can be read as a sign of discriminating against outside economic options provided by TNCs in favor of home-grown companies. While such reading may tend to favor internal sovereignty as far as TNCs are concerned, on the other hand the idea of extending territoriality beyond the state appears not to hold enough ground.

Conclusion

Territoriality has been the cornerstone on which states ultimately derive their sovereign status and the accompanying power and influence within and beyond its boundaries. For centuries following the Peace of Westphalia, international affairs conducted among states have hinged on this spatial. Indeed, if one were to fully adhere to a realist notion of the world, one can surmise the supremacy of boundaries as a prime mover of power and authority in international relations and political economy.

However, the rise of the modern transnational corporations, and the subsequent intensification of globalization, has challenged that notion. TNCs have proven time and again that as much as boundaries mattered in deciding who gets what, when and how at the international level, activity across and beyond these spatial concepts can also result in acquiring and skewing power to their advantage. Though there are numerous debates on how to quantify this power shift, the desire of states to reform their domestic economic and political institutions has become a telling sign of more shifts to come.

This paper has attempted to offer an alternative to the modern state in the face of challenges propped up by TNCs and globalization. Through international organizations and regional economic cooperation associations, states can reclaim lost ground by extendingand buttressingthe idea of territory over and beyond state boundaries. This has been done by identifying common characteristics between the states and IOs/RECAs, thereby attempting to transform the latter into the formers analogues in the international level. Despite the incongruence exemplified by the points raised in this paper and the realworld behavior exhibited by states vis--vis IOs/RECAs and TNCs, there appears a fertile ground for future research. For one, the sparse empirical studies directly investigating the relationship among states, TNCs and IOs/RECAs open various opportunities to prove the main argument of this paper, i.e. IOs/RECAs act as a counterbalance against TNC activity and the intensification of globalization. Moreover, this paper has proven the primacy of territoriality amidst clamors for totally disbanding notions of boundaries. Such insight is useful to examine the current global economic impasse, purportedly caused by too much confidence in the markets (and TNCs), vis--vis the state. Then again, the lessons of prudence can never be more emphasized: ultimately, a harmonious, if not fickle, balance must be struck between traditional state authority and novel views on transnational activities to ensure the viability and sustainability of the contemporary global order.

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