This post has been contributed by Prof. Grazia Ietto-Gillies, Emeritus Professor of Applied Economics, London South Bank University
There is much thought and talk of distance these days, including discussions on whether the correct adjective to associate with the Covid19 strategies of containment should be physical or social. Strictly speaking it is neither; we should be talking of spatial distance between people. However, semantic issues apart, we all know what we mean by distance in these pandemic days.
Spatial distance has been of great interest to economists for a long time with the analysis of international trade or/and economic geography at the forefront. Spatial distance affects the cost of transportation of goods and people as well as the cost and ease of communication between various parties to transactions. Nothing new, here. What is new is the tremendous advances in technology which – particularly in the last hundred or so years have greatly decreased the cost of transportation and made increasingly easier the communication between people living in distant parts of the globe. The strong link between trade and economic geography, in the last few decades, has been the subject of much writings following the New Trade theories literature in which the activities of transnational corporations (TNCs) have also featured (Krugman, 1991 and 1998; Markusen, 1995; Barba Navaretti and Venables, 2004).
The spatial dimension is not the only type of distance affecting economic transactions. There are two more types of distance that matter in economics and business: (1) cultural distance; and (2) regulatory regimes distance.
The first one refers to all those elements of culture specific to communities, regions, countries which are largely the result of history. They are elements that can facilitate or hinder business interaction within the communities or across them. Language and trust are two of the cultural elements which are very relevant in the business context. Cultural distance is usually associated with higher costs of operating in different countries as managers have to adapt to different languages, laws and customs. However, there can also be benefits. Some international business literature has found benefits for companies operating in different cultures as they can acquire diverse knowledge from the different business contexts; they can then spread it to other companies’ business units via the TNC’s internal network in various countries. From each of the units, knowledge can also be spread to the local economies in which the TNC operates via its external networks i.e. via the business linkages that units of the company in various countries have with customers, suppliers, distributors, universities and governmental agencies (Cantwell, 2003; Forsgren, 2017, Ch. 4, pp. 54-76).
Regulatory regimes are all the sets of rules and regulations governing the economic, social and political life of a country (Ietto-Gillies, 2019: Ch 16, pp.179-96). The regulatory regimes I refer to here relate to independent countries/ nation-states as those units able to establish regulations and laws within their own borders. Regions within a country may be responsible for specific regulations. Similarly countries may belong to inter-national institutions which have regulatory power in specific fields of business, economic, social and political life.
The main elements of nation-states regulatory regimes for economic life are the following.
- Rules and regulations regarding the social security system and in particular different regimes regarding labour and its organization.
- Fiscal regime including corporation tax and customs and excise duties as well as non-trade barriers.
- Currency regimes.
- Regime of industrial policy with regard to incentives to businesses.
- Rules and regulations regarding environmental and safety standards
Companies operating in different countries with different regulatory regimes from the ones in their home country may encounter extra costs: the cost of learning about these regulations and how to apply them or navigate around them. However, transnational companies have found that there are also benefits of operating across different regulatory regimes. The benefits derive from their ability to extract more profitable conditions from their activities in host countries in areas such as business incentives or taxation or contractual conditions with labour. Moreover, as regards the direct operations of transnational companies, they benefit from dealing with a workforce which is fragmented among the many countries in which the company operates and thus finds it more difficult to organize and resist (Balcet and Ietto-Gillies, 2019).
On the whole, the costs associated with spatial distance have been decreasing in the last few decades; it is as if the world has shrunk. Cultural distances have also diminished but they do remain and they can generate costs but also – as mentioned above – some benefits. The type of distance that can definitely generate benefits for companies and has indeed increased in the last few decades is the one related to regulatory regimes. Governments in host countries are encouraged to compete in offering tax benefits and other concessions to foreign firms. Some business models for digital companies make it very easy to avoid taxation particularly in the context of a crumbling and non-cooperative international order (Ietto-Gillies, 2020).
As regards the current pandemic the emphasis on spatial distance has been noted above. Are the other two types of distance relevant? I believe they are. Cultural differences have been noted in the degree to which citizens of different countries are prepared to trust and follow the directives of their governments. It also may affect the degree to which the very same government can be trusted with the use of data generated during a pandemic. Moreover, different countries have followed different strategies for containing – or not in many cases – the spread of a virus whose behaviour does not discriminate between countries. Here are some areas in which differences in regulatory regimes have led to countries’ following different strategies for the containment of Covid19.
- The different strategies have been followed in spite of uniform, consistent advice given by the international agency in charge of pandemics: intervene early; and test, track, trace. The agency – the World Health Organization (WHO) – has no power over governments and can only advise; indeed governments have power over the WHO, the power to curtail their funds to it.
- Countries differ in the institutional set up which is at the basis of the strategies they develop and follow. For example some have decentralized structures – by region or state – for health care. The decentralization may be a benefit as it allows flexibility of adapting the strategy to local conditions. However, it may also be a source of inconsistent messages by those in power.
- In some countries the role and power of experts in developing the strategy for combating the virus is independent from the government; in others it is more subordinate.
Well, yes, the regulatory regimes distance does matter not only for the strategies of TNCs but also for the strategies in fighting Covid19!
References
Balcet, G. and Ietto-Gillies, G. (2020), ‘Internationalization, Outsourcing and Labour Fragmentation The case of FIAT’, Cambridge Journal of Economics, 44, 1: 105-28.
Barba Navaretti, G. and Venables, A.J. (2004), Multinational Firms in the World Economy, Princeton and Oxford: Princeton University Press.
Cantwell, J.A. (2003), ‘Innovation and information technology in the MNE’, in A.M. Rugman and T.L. Brewer (eds), The Oxford Handbook of International Business, Oxford: Oxford University Press, pp. 431–56.
Forsgren, M. (2017), Theories of the Multinational Firm: A Multidimensional Creature in the Global Economy, 3rd edition, Cheltenham, UK and Northampton, MA, USA: Edward Elgar Publishing.
Ietto-Gillies, G. (2019), Transnational Corporations and International Production. Concepts, Theories, Effects, Cheltenham, UK and Northampton, MA, USA: Edward Elgar, 3d Edition.
Ietto-Gillies, G. (2020), Digitalization and the transnational corporations, WP45 of the Centre for Innovation Management Research, Birkbeck University of London.
Krugman, P. (1991a), Geography and Trade, Cambridge, MA: MIT Press.
Krugman, P. (1998), ‘What’s new about the new economic geography?’, Oxford Review of Economic Policy, 14 (2), 7–17.
Markusen, J.R. (1995), ‘The boundaries of multinational enterprises, and the theory of international trade’, Journal of Economic Perspectives, 9 (2), 169–89.
