Is Economic Nationalism in Corporate Governance Always a Threat?

Abstract

During the past decades, corporate law and corporate governance debates have generally been skeptical of elements of economic ‘Nationalism’ or ‘protectionism.’ Arguably, globalization and convergence in corporate governance have resulted in a reduction of protectionist policies. However, recently COVID-19 has resulted in nationalist and protectionist conduct in economic policy across jurisdictions. Contrary to the predominant view, this paper argues that corporate governance policies intended to serve a particular country’s interest may at times be justified. First, globalization and convergence in corporate governance are likely to have beneficial effects only when outside investors pursue financial rather than political goals. Protectionist policies may protect domestic firms from external competition of this type, e.g., from being taken over by foreign firms controlled by or having heavy backing from their government. Second, some degree of protectionism may be necessary to sustain a country’s institutional arrangements and economic prosperity. Significant outside financial investors or multinational groups may not interact with domestic constituencies in the same way as the existing ones, thus disrupting the social compact. This may be necessary to preserve the balance of the political economy in a country that has allowed it to maintain productivity in the past. In addition, preserving a particular economic arrangement is often necessary to protect political stability, which is a precondition to productive efficiency. Third, COVID-19 has highlighted the need for resilient structures in corporate governance, which may include integration into a domestic economic network. Protectionist policy may serve the purpose of protecting the viability of industry in times of political crisis, e.g., by protecting supply chains. Moreover, being integrated into a national network often helps firms weather crises even if such embeddedness is not aligned with efficiency goals as usually understood in corporate governance debates.

Keywords: COVID-19, corporate governance, convergence, path dependence, ownership structure, varieties of capitalism, nationalism, protectionism, stakeholder theory, shareholder primacy, SEOs, state ownership of firms, political economy of corporate governance, resilience, Golden Shares, foreign direct invest

JEL Classification: D21, D72, F15, F21, F23, F52, G32, G34, G38, H41, H54, K22, K33, L50, M16, N20, O14, O16, O25, P51