The growth of multinational corporation

The growth of multinational corporation  (MNC) activity has given rise to a “race to the bottom” dynamic in government regulation. The world’s governments maintain different regulatory standards. Some enact stringent regulations concerning how firms can treat workers, how they must handle their toxic waste and other pollutants, and how they must conduct their other business activities. Others maintain less stringent regulatory environments, allowing firms to engage in activities that are illegal in other countries.

Many of these regulations affect production costs. It is more expensive, for example, for a firm to treat chemical waste before it is disposed than simply to dump the raw waste in a landfill. Hence, national regulations that require firms to treat their chemical waste raise production costs. Consequently, even if all other production costs in two countries are the same, different regulatory standards can make it less costly to produce in the country with the lower standard.

MNCs might therefore engage in regulatory arbitrage. That is, they might shift their activities out of countries with stringent regulatory standards and into countries with lax regulatory standards. Governments in high-standard countries will then feel pressure to relax their standards in order to encourage firms to keep production at home. As a consequence, national regulation will increasingly converge on the regulatory practices of the least restrictive country. Governments that refuse to engage in this competition for investment will be left behind, enjoying the benefits of strict regulations but suffering the cost of substantially less investment. How should governments respond to the threat of this race to the bottom?

Policy Options:

– Negotiate international rules that harmonize regulations throughout the world. Creating common regulations will prevent regulatory arbitrage and the race to the bottom.

– Restrict foreign direct investment and the activities of MNCs. Such restrictions would limit corporations’ mobility, thus enabling governments to maintain distinct national regulations.

Questions:

1. Which option do you prefer? Justify your choice.

2. What criticisms of your position should you anticipate? how would you defend your recommendation against these criticisms?