Revisit from the first part
The first part of this paper has identified the call for understanding the role of the state and the MNE as well as how these two entities interact in the global economy. Mainly with the tendency to impose regulations as a mechanism in maintaining the economic interests of the nation versus the flexibility to mobilize assets to more favourable options has been utilized by both sides in the search of optimum economic margins. Accordingly, in the second part of the paper, the roles of the government in equating globalization with the benefits a nation can gain from it will be discussed.
Before depicting the role of the government in the state economy, I will first discuss brief excerpts from Dunning (1997) paper explicating about the evolution of the government interventions on the state economy. Chiefly, changes on economic activities over time as a result of interdependencies among actors in the economic system have brought in the government engagement in the state economy to ensure the benefits of economic activities are distributed impartially both to the society and the economic actors.
Changes on economic coordination
On its early days, economic activities were modest in which the market was defined as a place where buyers and sellers met directly to exchange their needs. The transactions performed by these parties did not involve intermediaries. Economic actors were predominantly performed by individual merchants or family businesses. The production functions were confined to the use of labours, raw materials and the adoption of simple production methods. The economic actors functioned as the end to end producer carrying economic activities from extracting and processing materials to selling the end products. In this simple economic system, the price was determined by resources an economic actor(s) could access, efforts he (they) made to produce a good and his (their) demands over other goods. While competition occurred, during normal occasions, the overall transaction between buyers and sellers did not require an intervention from the government since the government intervention would create a distorted market which in turn brought more damages rather than benefits to the state economy.
As the production functions became specialized and sophisticated, coordination between economic actors became more complex. Economic actors no longer performed all production tasks which were necessary to produce goods, but left some of these tasks to other actors. To meet the surging demands, labours were specialized into a set of skills to speed up production outputs. Specializations also drove better product qualities as labours focused on less, but specific, tasks rather than performing different production routines.
Coordination among firms also stemmed from the evolving diverse specializations in providing production inputs. While prior to the specialization, firms used to source all production inputs alone, labour specialization concepts allowed firms to supply production inputs to other firms, allowing a firm to concentrate on its core businesses. This resulted in the reduction of production costs associated with material processing as well as in the increment of production rates to catch up demand. With more firms engaged in sourcing production inputs for other firms, processing technology became essential in the economic system.
Market imperfection caused by human quests in searching for efficiencies has also urged firms to expand opportunities beyond their home economies. Labour specialization as a result in questing maximum economic gains has called for market coordination where production inputs (raw materials, skills and technology), processing methods and production outputs could be independently operated by different actors. Labour specialization has also created new modes of transaction where intermediaries and distribution channels became important in connecting different economic actors. Such specialization reduced the dependencies on collocation between suppliers, producers, distributors and consumers. At the same time, interdependencies among economic actors could also lead to erratic market behaviours as demonstrated by monopoly and monopsony practices which affected the good prices. Firms were becoming tight to gain profit margins. Consequently, these resulted in two possibilities: firms searched other sources beyond their home economies and government interventions are needed to restore the economy for the benefit of all economic stakeholders in the nation.
With the quest for raising competitiveness, the economy becomes interconnected among firms and the boundary level of a state is becoming irrelevant. Market is no longer bounded to local jurisdictions but has been extended to regional and even global spheres. Firms are in their interests to find resources globally to gain their competitive advantages. They also look for new and emerging markets to maintain or improve their financial portfolios. Firms also look for new resources beyond their home economies both to gain cost advantages through competitive labour costs and improve production qualities through skilled resources. On other occasions, shortages in material supplies forces firms to look for locations offering abundant resources to ensure their production continuities. It is often noted that this quest is also accompanied with the search for lower material costs to keep the firm’s cost advantage. Parallel with these searches, technological seeking activities can opportune firms in raising production efficiencies, enhancing product qualities or even turning the landscape of the market with new innovative products. All these require new modes of coordination in the economic system not only among firms but also between firms and state authorities.
Perception of the governments on globalization
To the government, the firms’ quest to improve their competitive advantages is an opportunity to improve the state economy. Dormant endowments inherited by a country can be promoted for improving the state economy. While natural resources can be exploited and sold directly, the state has chances to lever the economy by opening access to investments that create higher added values. The measure not only drives the economy but also stimulates technology transfers leading to the improvement of human resource capabilities.
New investments sought by multi national firms also comprise of market seeking activities. Through setting up plants and production systems, multi national firms need suppliers to source their inputs. With opening up the country for foreign investments, the economy can be improved since multiplier effects resulted from the need of backward linkages will create a network of supply chains and distribution channels.
The government can also see the positive effect of globalization on the human resources. Multi national enterprise investments often bring new technology and skills unavailable in the local resources. The improvement of human resources can in turn bring benefits to local firms if labour mobility occurs. In addition, the exposure of multi national firms experienced by local resources can be utilized in gaining access to international markets.
For countries having advance technology, the opportunity to benefit from foreign investments lies on the chance to diversify the existing production systems. Local firms can discern technological changes brought by foreign investors. Diversifying into broader competencies also drives better resilience in confronting competition. Local firms can expand their competencies and capabilities which could lead into new creation of products and processing systems. Often such outcomes create a new form of industry. Thus, opening access to foreign investments for developed countries will sustain the national economy.
Despite those promising prospects in exposing the country to global markets, globalization widens the gap of market imperfections. Both the government and multi national enterprises seek for more economic margins through diffusing their economic activities in the global stage. At the same time, different interests held by both sides tend to create tensions on the economic sovereignty. While an ideal capitalist perspective suggests that a government should leave the market with its natural ‘survival of the fittest’ mechanism, in realities, the government as the owner of the state assets, through private and public channels, holds its own interests to maintain its assets intact while at the same time leverages these assets to achieve the maximum benefits for the nation.
The role of the government
The rationale of the government interventions on the state economy should be viewed from two perspectives. On the one side, the government acts as the regulator, controller and supervisor of a state. Its roles in defining and specifying the level of playing field for economic actors are aimed to provide the overall alignment on the economic system. On the other side, the government also functions as the owner of the state through its public and private channels. With this function, the government is responsible for securing its own assets for the benefit of the state.
The government role as the regulator, controller and supervisor of a state is aimed to create a harmonious system associated with economic activities. The system can be harmonious only when the institutional frameworks both in regulation, supervision as well as in coordination have been setup properly. As the initiator, the government caters the need of public and private interests by developing proper regulations. Through regulations we see bills and laws governing economic activities in the state. The government is also responsible for ensuring the implementation of such regulations by setting up institutions tasked to monitor the economic practices in the state. Accordingly, the government often needs an institution that coordinates economic policies between various institutions and actors and setups an institution that is responsible for ensuring the economic efficiency in the nation without scarifying private and public interests.
On the other side, the government functions as the guardian of public and private interests. The government must ensure that both its assets and the utilization of these assets must provide benefits to all economic actors in the state. On the public interests, the government ensures that policies associated with supply and demands and to some extend price mechanisms are feasible to protect wider interests while at the same time maintain the natural dynamic of the free market system. The government must ensure that public institutions as the government arm length associated with economic and social developments work without significant obstacles. When dealing with private institutions, the government, through policies, must ensure that private enterprises work in providing goods for the people while at the same time local capacities and capabilities are maintained and improved to enhance the national competitiveness.
While local enterprises can be seen as the government asset, it is not uncommon that in the global state, foreign investments are seen as an attractive option for a state to foster its economic growth. Not only these investments bring capital flows, but also they provide multiplier effect through knowledge transfer, fostering forward and backward linkages and providing market accesses. At the same time, as the owner of the state asset, the government is responsible for maintaining the state asset embedded in public and (local) private interests from the dominion of foreign interests.
Therefore, the government, as the state representative, plays roles in the economy through initiating and establishing overall legal frameworks and institutions where business operates. In doing so, the government uses different policies and interstate controls to govern the national interests (either conveyed by the parliament, demanded by public, internal government plans or from the business player needs) and to create the balance between interests held by local and foreign economic actors in order to achieve the objective of the state economy (often stated by achieving growth, reducing inflation, and increasing the workforce).
