This is a guest post by Henry Farrell, Associate Professor of Political Science and International Affairs at George Washington University, and Abraham Newman, Associate Professor in the Edmund A. Walsh School of Foreign Service and the Government Department at Georgetown University, as part of the Duck of Minerva’s Symposium on Structural Power and the Study of Business. This post draws on ideas developed at greater length in Farrell and Newman’s article found here. Links to other posts in the symposium can be found here.
Political scientists haven’t paid nearly enough attention to structural power over the last two decades. As Charles Lindblom argued, it is clear that firms have political power and influence that goes beyond their direct ability e.g. to put money behind ideas and politicians that they like. In a capitalist system, by definition, businesses make the final decisions about how capital is allocated. This means that politicians have to pay attention to their decisions, allowing businesses collectively and sometimes individually to shape the political agenda. Pepper Culpepper and his colleagues, both by drawing renewed attention to structural power, and by showing that it can vary across state, industry and context, are doing a lot to explain political outcomes that would otherwise remain mystifying.
Businesses have structural power when they have exit options that allow them to threaten to deploy their capital elsewhere. If businesses’ exit options vary, what shapes the variation? We argue that businesses and state regulators may have different levels of structuring power – the ability to shape the structures of globalization and hence the exit options available to business. We live in a world where different states’ jurisdictions and rules increasingly overlap with each other. This provides both states and businesses with different levels of ability to shape exit options for themselves or for other actors. For example, they can try to increase the jurisdictional reach of their own system’s rules, so that it extends to cover economic interactions outside their own state. They might alternatively try to change the rules of other jurisdictions, so that they become more like, or less like the rules of their own jurisdictions. Both of these can have important direct consequences for exit opportunities. States can extend the jurisdiction of their own rules extraterritorially, limiting the exit options of firms that might otherwise escape their grasp. Alternatively, states might shape exit options by influencing other states to adopt rules more like their own rules, while businesses might encourage other states to adopt different rules so as better to attract their capital.
As states and businesses vie to shape exit options, it has indirect as well as direct effects on exit costs. For example, different states seeking to extend their jurisdictions are likely to come into increasing conflict with each other, pushing competing rules. This leads to the creation of a variety of transnational forums which seek to resolve or mitigate rule clash. These forums provide another opportunity for state regulators, international organizations and businesses to reshape exit costs, by shaping the international solutions through which rule clashes are resolved. These solutions too shape exit options, by setting international standards that shape domestic rules.
Thought of from this perspective, globalization is not a single homogenous process, that dictates the rules for states and businesses alike. Instead, it is a myriad of political struggles, in which states, businesses and other actors pursue their interests in ways that ultimately end up shaping exit options, and hence the extent to which businesses are able to exercise structural power in particular sectors and circumstances.
Two examples illustrate this. European privacy regulators created rules that were deliberately intended to restrict the exit options of businesses. They had structuring power, because they were able to restrict exchange, to extend their rules extraterritorially, and to reshape the rules of other jurisdictions so that firms which might otherwise have evaded European regulations by moving overseas found themselves compelled to abide by European standards. The current transatlantic fights over surveillance, where European data protection authorities are threatening to block data transfers to the US if it does not change its rules and practices, are just the latest example of this dynamic. Firms’ exit options have been substantially curtailed. In contrast, businesses were able to use their influence over international accounting standards through the IASB to shape domestic regulatory dynamics so that the differences between the EU and US were mitigated, allowing them more exit opportunity than they otherwise would have had.
Globalization, then, is not synonymous with rising exit options for business. Rather, globalization creates political opportunities for states and business to deploy the structuring power that explains variation in access to exit and in turn structural power.