Corporate Sovereignty

At the Lowy Interpreter Sam Roggeveen speculates about the possibility of a company (particularly Apple) buying a country.

There has been at least on fictional treatment of a corporation taking over a country in John Brunner’s wonderful 1968 novel Stand on Zanzibar. It is based in 2010 and the corporation is transparently based on General Electric, and the country based on what would become Benin. Like much science fiction, it tends to tell us a great deal from what change it didn’t anticipate. In particular it didn’t anticipate how corporations (at least in the US) would change, and why the idea of a corporation taking over a country is less plausible than it once was.

It made sense in the 1960s to think of Corporations as great sprawling organisations that could possibly marshall the array of skills involved in running a country. Companies did have wide ranges of businesses and were more relaxed. But attitudes changed in the 1980s – maximizing return on capital meant that companies would shrink down to core products with the greatest returns, and jettisoning or spinning off other projects. In many ways I suspect this had alot to do with the movement from internally fostered management to a floating class of specialists in exploiting the principal agent problem in corporate governance. Shuffling projects between companies and identities meant an apparent increase in return on capital became the basis for bonuses – even though in aggregate there was no improvement.

Nowadays only a few companies still dominated by the shareholdings of a few (like Microsoft, News Ltd or Google) are prepared to fritter away money on unprofitable side projects. Even zaibatsu are less keen to expand the range of what they do now, and the chaebol were forcibly shrunk in the late 90s.

So we end up with a company like Apple, with a handful of very successful products that make a great deal of money it can’t do anything with. It has no other divisions to cross subsidize subsidize, or research to undertake (the company’s success has always been in packaging end products and not developing technology. They either cop the tax when they repatriate the money and pay larger dividends, or they let it sit in a bank account. They certainly wouldn’t pursue something outside their core – unless there was a tax dodge in it.

To be sure, owning a country would free the company from tax obligations were they to incorporate there and pay dividends there. But do they pay them in Apple dollars, get another country to let them use their currency or make sure the country they buy already has an easily currency? Think about what would be needed to support a new currency. They’d either start taxing, issuing debt, or make Apple dollars backable by Apple products – all of which seem foolish and still unlikely to make it a tradable currency (assuming shareholders want to buy things other than consumer electronics). But whom would let them use their currency, and countries that already have hard currencies are likely to be too large.

And of course, if shareholders remain in other countries, they’d be reliant on their resident states continuing to recognise Appledonia as a sovereign state in a way that prevents them taxing those same dividends. Maybe they’d also pay to join the WTO?

5 thoughts on “Corporate Sovereignty

  1. Roggeveen and this concept both ignore a fundamental tenet of international relations. Governments in western democracies detest dictatorships, which is what a corporate nation would be, and they work to change them.

    There’s a strong process of natural selection at work here. Western politicians are those who have succeeded in the democratic process. They value the workings of democracy and, to a greater extent than society in general, I think, fear the operations of non-democratic countries.

    Thus any corporate nation would face extremely strong opposition once it was established, starting with diplomatic sanctions and backed, if needed, by armed force.

    Corporate management would actually exacerbate this preexisting antagonism by trying to exploit its new national powers. For example, it would probably offer lucrative deals to various types of foreign citizens and groups seeking power elsewhere in the world. It would also be tempted to disregard international labour and other agreements.

    Within five years a corporate nation would be a laughing stock. Within ten it would be basket case, neatly quarantined in the corporate accounts.

  2. They [western politicians] value the workings of democracy …

    Sometimes.

    [they] fear the operations of non-democratic countries.

    Sometimes.

  3. Certainly agree with Tony Healy’s comments on this one. Apple’s history has been a constant power struggle between a privileged few who live in the high-end business world. There is no equality in Apply – if your not ‘insanely great’ don’t bother applying for a job. It is elitist, and that is why it is such a successful business. However these same selective qualities are the opposite of what western nations are built upon. Appledonia would undermine the liberty, freedom and equality of individuals that the western world has striven to achieve for hundreds of years.

  4. Obviously Apple Inc could fund the secession of the Apple Isle. We’re sovereign and have no current currency. Ideal and I’m sure WA & QLD would love the idea of detaching Tasmania from the Commonwealth.

    We are also used to being a company town under the old Hydro, this was possibly due to the Model Prison System (Tasmanians don’t care as much about ‘dobbing in’ as mainlanders.)

    Though perhaps the recent failure of Gunns Tasmania to take on the mantle of running the Company Town is a contraindication.

  5. I don’t really get this post.
    (I) Why is currency even an issue? What happened to the USD when I wasn’t watching? If you think that’s instable because you don’t like Democrat/Republican/Krugmanican/whatever policies, adopt the AUD! It still isn’t hard.
    (II) I have no idea what the dividend tax issue is. You have indeed described the status ante quo for US investors. As Appalia would presumably not impose dividend withholding tax, non-US resident investors would actually be better off from not incurring the cashflow disadvantage associated with getting a net dividend and claiming the foreign tax credit against the domestic tax (if they can claim it at all!). AFAIK nearly every country in the world taxes individuals and portfolio investors on their foreign dividends, all the treaties do is reduce the withholding tax imposable and guarantee you at least a technical foreign tax credit (actual use of FTCs is almost always contingent on net foreign or foreign-taxed income).
    (III) The comments about western governments and politicians from Tony Healy just seems surreal. I assume he is talking about an alternate reality.
    What you would get in effect would be a tax haven and charter state. Paul Romer seems to be making headway with this latter idea in the Honduras (note rather tax-havenish aspects of that, although the emphasis is on local industry, how long would that last?).
    You don’t really even need to ask the source country to apply its law – you can either simply make all contracts subject to Australian law, for example, or you can say that Appalia applies the common law of Australia, pass such statutes as you wish, and poach a few Australian judges and barristers to run the local court (did you know that Australian High Court judges retire at 70?). Or you could apply International Arbitration standards to all commercial disputes and appoint a standing panel of arbitrators (which could include a number of retired Australian judges!).
    You seem like an imaginative person, I think the novelty of this idea distracted you. That’s a shame, because it could have done with some rather more serious thought.

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