why free trade

WHY FREE TRADE AND GLOBALIZATION IS MULTINATIONAL CORPORATION’S BEST ALLIES?

The emergence of Multinational Enterprises (MNEs) is often associated with globalization and free trade. Some thoughts in place question whether globalization stimulates the growth of many MNEs or vice versa. The interaction between both of these factors determines the success of countries capital flow to one country, which, in the present situation, determines level of economic stimulus. Certainly, some factors are also accountable in one country’s economy success when MNEs operate in one jurisdiction, such as technology transfer, know-how transfer, management skills transfer and infrastructure development. For this economy incentive, States (developing and underdeveloped) are willing to liberalize their markets as an attractive tool for MNEs. Globalization, in part, becomes the child of every MNE and so often of not governmental policy (such as health and terrorists regulation). This paper aims to analyze the interaction between globalization and MNEs and how globalization is often used by MNEs as the most lucrative strategy and hence forms a solid ally with MNEs.
1. THE EMERGENCE OF MULTINATIONAL ENTERPRISES (MNE)
The literal meaning of MNEs is that of corporations having commercial presence in more than one jurisdiction. Some authors identify MNE as an enterprise that controls and manages production units located in at least two countries. Vernon and Wells, use similar definition, when they refer to MNEs as a “cluster of affiliated firms located in a number of countries. One interesting point Caves points out is that when he discusses MNE’s definition he focuses on the control and management and does not explicitly mention ownership structure. Caves is concerned with the ambiguousness and arbitrariness in the distinction between direct investment and portfolio investment. However, for the purpose of this paper, the writer would operate on the assumption of MNEs having commercial presence (which is closer in generally accepted definition to direct investment).

2. FREE TRADE AND GLOBALIZATION: INCENTIVE TO MNES
The immediate effect of globalization in most common minds is trade liberalization. In public international trade law discourses, the terms free trade, custom union and common market enjoy different definition. However, for the purpose of this paper, the writer would not discuss them in details. In a free-trade area, tariffs (and quantitative restrictions) between the participating countries are abolished, but each country retains its own tariffs against nonmembers. Establishing a customs union involves, besides the suppression of discrimination in the field of commodity movements within the union, the equalization of tariffs in trade with nonmember countries. A higher form of economic integration is attained in a common market, where not only trade restrictions but also restrictions on factor movements are abolished. From the above definition, it is understood that free trade practically abolishes the transactional and fixed cost of corporations as tariffs are reduced into zero (ideally). When corporations expand their commercial presence to another country, their main concern (in economic sense) is the movement of capital between main company and sister company as well as costs incurred during the process. Another concern is, of course, tax and other forms of monetary restrictions they suffer when selling their products and services to multi jurisdictions. Globalization, which is the platform of free trade, provides panacea to all of these classic concerns. Furthermore, globalization affects distance and communication, which is the major part of transaction costs.
3. THE GOOD OLD TIMES VERSUS GLOBALIZATION
Prior to burgeoning MNEs in free trade context, they mostly remain local companies operating on the basis of local market. They certainly have built long lasting connection with the incumbent government, both in administrative and legal context. This provides familiarity and enables them to maneuver better in most administrative matters. Some companies enjoy great bargaining position and hence enable them to reap the benefits of those of the most corrupt systems (examples lenient waste and risk management, operational permit and social impact of companies operation). Globalization also brings the effect of more transparency and control to MNEs as companies are more exposed to multi legal regimes. Alien Tort Claims Act (ATCA) is a good example for the above mentioned point. ATCA allows non-US citizen to file a lawsuit for human rights abuses against mother companies in US for their sister companies’ act in another country. For example: citizens of Myanmar (Burma) filed a suit against Unocal, a U.S. company, for its role in supporting atrocities committed by the military against rural villagers.
Most MNEs which enjoy the old regime advantage are benefited more by globalization. As explained in previous sub-section, globalization abolishes all economic restrictions MNEs suffer in the old regime. Furthermore, globalization also promotes principle of meritocracy which means that the most efficient companies win the competition. Those of the most effectively managed companies will reap huge benefits from this scenario as they can map their battlefields more clearly with their competitors. This removes all disadvantages they suffer in the old regime, such as more lenient tax and regulations restrictions imposed to their competitors. Moreover, principle of meritocracy promotes the attitude of competitiveness. Companies compete to create the most inventive and economically efficient due to incentives in market share they receive. Since globalization means creating a more equal playing field and more transparent competition, innovations are more properly rewarded.
4. CONCLUSION
Globalization is a very powerful tool for MNEs as it abolishes all restrictions they can enjoy. MNEs are economic creatures, hence aiming for benefits. Benefits are increased if innovations are properly rewarded. Globalization stimulates companies to produce the most efficient products and services with the least cost. This brings benefits not only to companies but also market in certain jurisdictions where they operate. If globalization provides such alluring incentives, why not brings it in as ally?