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Governmental Role in Influencing International Trade


As the international economy is being integrated, business opportunities, as well as challenges, continue to ensue. Such challenges affect different nations around the globe, including those with stable economies. In this regard, even the local corporations/companies and the multinational corporations are not immune to the business challenges present in the current globalized society. The potential impacts of globalization on the prosperity of various nations are dependent on the responses they make in terms of identifying challenges, responding to them, and understanding the kind of business environment in the current world (The political process 2011). Therefore, governments are set to understand the power of the market forces and entrepreneurial business dynamism as the key drivers in trading activities. This paper explores the role of government in international trade, foreign direct investment, and multinational business.

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The need for government involvement in trade

Due to the globalization trends in the world, the primary role of government is to set the framework under which businesses can negotiate through opportunities and challenges of the business environment characterized by marked dynamism. However, when an optimal free market with the optimal outcomes is not achieved, there can be a need for government action. Therefore, governments may be forced to act in cases of 1) evidence of potential benefit to the nation as a result of increased international trade and investment, 2) evidence of barriers emanating from market failures which would otherwise hinder the achievement of national goals and objectives, and 3) evidence of a cost-effective government intervention to address market failures and increase the prosperity of the nation (Winter-Nelson 2005).

Role of government involvement in international trade and multinational business

The globalized society presents an economic rationale for government to play a role in supporting businesses in trade and investment. In this regard, the role of government may include creating a conducive environment, which strengthens new and existing social networks. This is because social networks form an important component in international trade and investment flows and, therefore, improve the economy of nations by helping the businesses access contact networks. Therefore, governments function as trusted intermediaries. In creating social networks, governments also play a role in helping the inward investors, who base their businesses on knowledge, gain access to important networks within the nation and assist the local businesses, which are innovative, to access key overseas networks. Governments also play a role in strengthening the internationalization capabilities of local businesses which have depicted innovation capacity and high growth, and as such would not fulfill their potential without effective exploitation of opportunities in overseas markets. Governments also serve to provide easy access to information and advice which cannot solely be provided by the private sector to those organizations with the potential to exploit overseas opportunities. Authorities play the role of facilitators of beneficial business cooperation, as such enabling businesses to overcome barriers by working together (The political process 2011; Winter-Nelson 2005; Bennett 1941; Kuepper 2010). In this manner, they serve to develop potential trade and investment opportunities, e.g., through international forums where national capabilities are showcased, or through international cooperation. Therefore, according to Winter-Nelson, the role of government is to act as a trusted intermediary with privileged access to networks of elite nature around the globe (2005, pg. 6-29).

According to Kuepper, governments are endowed with unique advantages and opportunities and enormous capacity to fulfill a trust-brokering duty, which cannot be solely carried out by the private sector. This is achieved through the exhibition of impartiality and possession of reliable sources of information on the reputation of business organizations which are to be introduced to the new networks. This is a crucial role as it enables the government to curb unscrupulous entrants into business networks and negative effects posed to the available investment opportunities of existing members as they taint their reputation. Thus the government acts as the best-trusted intermediary as it does not operate on profit in an attempt to sell endorsements (Kuepper 2010, pg. 69-83). For instance, the local investors who have shifted to the United Kingdom with the aim of keeping themselves abreast with ideas have been perceived to benefit enormously from the knowledge base of the UK. As such, these local investors require the capacity to access the key knowledge networks in an attempt to utilize effectively the enormous information and reap the benefits gained from such an approach (The political process 2011; Economy watch 2010). According to Winter-Nelson, if such organizations depict a lot of difficulty in accessing the right networks, their incentives to invest in the targeted country, e.g., the United States and the United Kingdom, become lower (2005, pg. 36-79). In this regard, for those businesses which seek to be new entrants in the overseas markets, the government plays a crucial role in brokering their access to the crucial networks which increase the capacity of such organizations to have access to business opportunities around the globe (The political process 2011).

Bennett pointed out that different components of government policy significantly influenced the activities of foreign companies. Such economic policies may be employed from time to time by various governments to protect their investments both locally and abroad. The economic policies which can be employed include the monetary policy, the sector policy, the commercial policy as well as fiscal policy. For those business societies which depict a transnational nature, the government actions that are deemed most influential are those which regard the economic restrictions, for instance, 1) exchange control, 2) price control, 3) taxes control, 4) import restrictions, 5) foreign investments restrictions, and 6) restrictions on local matters (Bennett 1941, pg. 43-78). For a company that depicts the knowledge of the host country’s climate both politically and globally, it will have the privilege to correct its underlying problems and adapt to its own international strategy in line with the concrete conditions of the political environment under which it will operate. Thus the government, through the approach depicted above, will enable these companies to anticipate those kinds of changes that may occur in time and necessitate their involvement in the enormous frame of the world’s political context (The political process 2011; Winter-Nelson 2005).

Most governments have been perceived to play a role in trade due to their influential tendencies which may take different dimensions. Therefore, the role of government in international trade and multi-national business has been perceived in dimensions of protectionism. In this broad dimension, there are also other roles that include 1) encouraging domestic ownership and control, 2) improving the balance of trade, 3) protecting its sovereignty and national security, and 4) keeping domestic cultures and values. In other contexts, the role of government has been perceived through arguments, such as the unemployment argument, infant industry argument, industrialization argument, and relationships with other countries (The political process 2011; Winter-Nelson 2005).

Regarding the unemployment argument, the role of government lies in the protection of jobs of its citizens and creating jobs for the jobless. This can be explained by the continued adoption of auto-industry positions by the nations from the European Union, in total disregard of those auto-imports from Japan and other regions in Asia. The presumed liabilities of the workers to adapt to new environments are thought to underpin the core of the unemployment argument (The political process 2011; Kuepper 2010; Economy watch 2010).

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The role of government in foreign direct investment

Foreign Direct Investment (FDI) has been depicted as a cornerstone for different governments around the globe as well as multi-national corporations. This is because these governments and multi-national corporations adopt business strategies and approaches to enable them to fit into the competitive business world characterized by globalization trends. As such, governments and multinational corporations strive to acquire controlling interests in foreign products and assets. Therefore, these governments and corporations have the capacity to gain fast acquisition of new products and technologies. In addition, they strive to gain considerable controlling interests in the existing products (in their home country or new overseas markets) (The political process 2011).

The recent globalization trends have resulted in attracting international investors and companies to perceive foreign direct investment as a role that is extremely important. In this regard, the growth of foreign trade and multi-national business has been largely achieved due to the adoption of foreign direct investment. With these trends, the business organizations capable to invest abroad have realized higher growth rates and enhanced income diversification, thus creating investment opportunities for investors (The political process 2011; Economy watch 2010).

According to Winter-Nelson, Foreign Direct Investment (FDI) is a key component of the current globalization and the world economy at large (2005, pg12-36). In this regard, it is a driver of technological advancement, economic growth, employment, and improvements in productivity. Due to this effect, governments have played a crucial role in realigning this key component with their economic goals and demands. For instance, in developing nations, Foreign Direct Investment has been used by different nations as a tool to fill gaps in foreign exchange, tax revenue, and development (Economy watch 2010).

According to the existing literature on the driving forces of FDI, the policy and non-policy approaches, which are part of the strategy of government), have been thought to play a key role and are a means through which the government influences FDI in its favor. These approaches and roles pursued by the government include policy roles, such as product market regulation, openness, labor market arrangements, direct FDI restrictions, infrastructural development, trade barriers, and corporate tax rates. The non-policy roles of government may include a clear and concise illustration and stabilization of the market size of the country to attract foreign direct investment. This is always measured by the Gross Domestic Product of a nation. Other approaches/non-policy roles include factor proportions/ factor endowments, regulation of the distance transport costs, and enhancement of the economic and political stability of the country in an attempt to attract FDI (Kuepper 2010; Economy watch 2010). For instance, according to studies carried out by Kuepper in Africa, it was revealed that FDI depended solely on the country’s role in initiating infrastructural projects and the existing infrastructure. Studies held on other developing economies like the western Balkan countries and countries in southeast Europe also indicated that the role of government in infrastructure development plays a tremendous role in attracting FDI.

However, subsequent studies which were carried out in the American FDI flow to the African region depicted less robust evidence on the role of infrastructural development in FDI. According to other research studies, infrastructural development in terms of telecommunication, a role undertaken by the government, has been shown to attract foreign direct investment. Therefore, governments have continuously engaged themselves in activities that tend to shift FDI in their favor (Kuepper 2010, pg. 54-76).


As different nations seek to control external markets and gain financial superiority through foreign direct investment (FDI), international investors are pursuing foreign direct investment both on the macro and the micro-levels. As such, countries whose levels of foreign direct investments depict marked sustainability and growth have been perceived to be the most preferable. According to the above-mentioned, the different roles undertaken by countries, aiming at attracting foreign direct investment, have been explored. Despite the ever-increasing trend of countries to adopt foreign direct investment at all levels of their economies, it is indisputable that such trends have had drawbacks stemming from various dimensions. From a macro-economic point of view, FDI can result in numerous challenges in the domestic labor market of the nation adopting it (The political process 2011; Winter-Nelson 2005; Bennett 1941; Kuepper 2010; Economy watch 2010).

List of References

Bennett, M.K 1941. “International contrasts in business and food consumption”, Geographical Review, vol. 31, no.2, pg. 365-374.

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Economy watch, 2010. Web.

Kuepper, J 2010. International Investing: What is foreign direct investment, Web.

The political process 2011. Web.

Winter-Nelson, A 2005. “Roles of state government in international trade”, The Journal of Regional Analysis and Policy, vol. 37, no. 1, pg. 60-65.

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