Economics

The Transaction Cost Theory of Protectionism.

Harvard’s Tarun Khanna explains with reference to the Mittal Steel bid for Arcelor why protectionism can make economic sense – just ask Ronald Coase.

From the IHT -At home, it’s not just profits that matter.

MUMBAI, India Guy Dollé, the embattled chief of the European steelmaker Arcelor, may have been wrong to resist Lakshmi Mittal’s takeover attempt. But his opposition to the bid contained a kernel of truth: National ownership really does matter.y

It is easy these days to see corporations as the new countries – as vast, ubiquitous entities that make political borders irrelevant. Exxon Mobil’s revenues now exceed the total economic output of Saudi Arabia or of Indonesia. Foreign investors care less about where a stock comes from than the return it offers.

Dollé dissented from this widening consensus – but for the wrong reason. He argued the case of national ownership in the outdated language of protectionism. A „company of Indians,“ as he called Mittal Steel, would not run European steel mills the way Europeans would.

Moreover, only those with local understanding, he suggested, would be able to extract the most economic value from Arcelor’s mills. Comments like Dollé’s fuel a common perception among the global business elite that all arguments for national ownership are merely protectionist throwbacks.

On the contrary, my work on developing-world corporations, with Krishna Palepu at Harvard, demonstrates that companies rooted in a particular country are more likely than footloose multinationals to make a nation’s problems their own.

Indeed, national ownership matters for a reason that Dollé ignored: Companies identified strongly with a particular country more often find it in their interest to invest in public goods for the country – from roads to universities to national branding campaigns.

And because they do so precisely out of economic self-interest, this alternative case for national ownership is about creating more efficiency – not less.

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