The relationship between firms and governments has been central to the history of multinationals. The tensions in this relationship derive from the fact that the borders of multinationals and nation states are not, by definition, identical. As a result, governments are confronted by economic entities whose ultimate control and ownership lies beyond their borders, while firms face multiple jurisdictions rooted in different political systems. The problem of jurisdictional asymmetry lies at the heart of the tensions between multinationals and governments.
This chapter reviews the historical evidence on relationship between multinationals and governments. Why have government policies towards multinationals oscillated over time? Why have different countries pursued different policies? How have firms influenced these policies? Which side has been the more powerful? Have firms undermined the sovereignty of nation states? How should the multinational firm be regulated?
During the eighteenth and nineteenth centuries European nation states, and the countries founded by their colonists such as the United States, grew in their capability to regulate, tax, and monitor individuals and firms within their borders. However, the national ownership of firms was rarely identified as an issue of importance by policy-makers. During the nineteenth century there were few barriers to the entry of foreign firms either by greenfield or acquisition; virtually no controls over the behavior of foreign firms; and only selected cases of official discrimination in favor of locally-owned firms against foreign firms.
During the second half of the nineteenth century there was a striking divergence between the trade and investment policies of many governments. The United States adopted one of the highest levels of protection in the world, but foreign firms could enter and operate there almost without restriction. The major exception was banking. Historically this was a politically sensitive industry for Americans. After the American Revolution, the two attempts to create nationwide banks, the Bank of the United States (1791-1811) and the Second Bank of the United States (1866-1941) attracted