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The race to the bottom is a socio-economic phrase to describe government deregulation of the business environment, or reduction in tax rates, in order to attract or retain economic activity in their jurisdictions. An outcome of globalization and free trade, it may occur when competition increases between geographic areas over a particular sector of trade and production.The effect and intent of these actions is to lower labor rates, cost of business, or other factors (pensions, environmental protection and other externalities), and thus the metaphor where the bottom is the lowest wage that can be paid.
The concept of a regulatory "race to the bottom" emerged in the United States during the late 1800s and early 1900s, when there was charter competition among states to attract corporations to base in their jurisdiction. Some, such as Justice Louis Brandeis, described the concept as the "race to the bottom" and others, as the "race to efficiency".
In the late 19th century, joint-stock company control was being liberalised in Europe, where countries were engaged in competitive liberal legislation to allow local companies to compete. This liberalization reached Spain in 1869, Germany in 1870, Belgium in 1873, and Italy in 1883.
In 1890, New Jersey enacted a liberal corporation charter, which charged low fees for company registration and lower franchise taxes than other states. Delaware attempted to copy the law to attract companies to its own state. This competition ended when Governor Woodrow Wilson tightened New Jersey's laws through a series of seven statutes.
In academic literature, the phenomenon of regulatory competition reducing standards overall was argued for by A.A. Berle and G.C. Means in The Modern Corporation and Private Property (1932). The concept received formal recognition by the US Supreme Court in a decision of Justice Louis Brandeis in the 1933 case Ligget Co. v. Lee (288 U.S. 517, 558–559).
Brandeis's "race to the bottom" metaphor was updated in 1974 by William Cary, in an article in the Yale Law Journal, "Federalism and Corporate Law: Reflections Upon Delaware," in which Cary argued for the imposition of national standards for corporate governance.
Sanford F. Schram explained in 2000 that the term "race to the bottom":
...has for some time served as an important metaphor to illustrate that the United States federal system—and every federal system for that matter—is vulnerable to interstate competition. The "race to the bottom" implies that the states compete with each other as each tries to underbid the others in lowering taxes, spending, regulation...so as to make itself more attractive to outside financial interests or unattractive to unwanted outsiders. It can be opposed to the alternative metaphor of "Laboratories of Democracy". The laboratory metaphor implies a more sanguine federalism in which [states] use their authority and discretion to develop innovative and creative solutions to common problems which can be then adopted by other states.
The term has been used to describe a similar type of competition between corporations. [ full citation needed ]In 2003, in response to reports that British supermarkets had cut the price of bananas, and by implication had squeezed revenues of banana-growing developing nations, Alistair Smith, international co-coordinator of Banana Link, said "The British supermarkets are leading a race to the bottom. Jobs are being lost and producers are having to pay less attention to social and environmental agreements."
Another example is the cruise industry, which registers its ship with flags of convenience, evading wage requirements and other expenses required by developed countries, thus providing the business model for the industry.
The term has also been used in the context of a trend for some European states to seize refugees' assets.
International Political Economy scholars Daniel Drezner (of Tufts University) has described the "race to the bottom" as a myth.He argues that the thesis incorrectly assumes that states exclusively responds to the preferences of capital (and not to other constituents, such as voters), state regulations are sufficiently costly for producers that they would be willing to re-locate elsewhere, and no state has an economy large enough to give it a bargaining power advantage over global capital.
The race to the bottom has been a tactic widely used among states within the United States of America. The race to the bottom in environmental policy involves both scaling back policies already in place and passing new policies that encourage less environmentally friendly behavior. Some states use this as an economic development strategy, especially in times of financial hardship. For example, in Wisconsin, Governor Scott Walker decreased state environmental staff's capacity in order to accelerate the approval time for a proposed development.Pursuing a race to the bottom philosophy in environmental politics allows states to foster economic growth, but has great consequences for the environment of that state. Conversely, some states have begun to pursue a race to the top strategy, which stresses innovative environmental policies at the state level, with the hopes that these policies will later be adopted by other states. When a state pursues either a race to the bottom or a race to the top strategy, it speaks to its overall environmental agenda.
But the race to the bottom operates more subtly than most people suppose. The regressions suggest that while countries do compete with each other by instituting laws that are unfriendly to workers, such competition is not that pronounced. The real problem is that countries compete by enforcing labour laws less vigorously than they might—leading to increases in violations of labour rights prescribed in local laws. Competition between countries to attract investment is less in rules than in their practical application.
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A corporation is an organization—usually a group of people or a company—authorized by the state to act as a single entity and recognized as such in law for certain purposes. Early incorporated entities were established by charter. Most jurisdictions now allow the creation of new corporations through registration.
Deregulation is the process of removing or reducing state regulations, typically in the economic sphere. It is the repeal of governmental regulation of the economy. It became common in advanced industrial economies in the 1970s and 1980s, as a result of new trends in economic thinking about the inefficiencies of government regulation, and the risk that regulatory agencies would be controlled by the regulated industry to its benefit, and thereby hurt consumers and the wider economy.
A multinational corporation (MNC) is a corporate organization that owns or controls production of goods or services in at least one country other than its home country. Black's Law Dictionary suggests that a company or group should be considered a multinational corporation if it derives 25% or more of its revenue from out-of-home-country operations. However, a firm that owns and controls 51% of a foreign subsidiary also controls production of goods or services in at least one country other than its home country and therefore would also meet the criterion, even if that foreign affiliate generates only a few percent of its revenue. A multinational corporation can also be referred to as a multinational enterprise (MNE), a transnational enterprise (TNE), a transnational corporation (TNC), an international corporation, or a stateless corporation. There are subtle but real differences between these terms.
Corporate social responsibility (CSR) is a type of international private business self-regulation that aims to contribute to societal goals of a philanthropic, activist, or charitable nature by engaging in or supporting volunteering or ethically-oriented practices. While once it was possible to describe CSR as an internal organisational policy or a corporate ethic strategy, that time has passed as various international laws have been developed and various organisations have used their authority to push it beyond individual or even industry-wide initiatives. While it has been considered a form of corporate self-regulation for some time, over the last decade or so it has moved considerably from voluntary decisions at the level of individual organisations, to mandatory schemes at regional, national and international levels.
The term "offshore company" or "offshore corporation" is used in at least two distinct and different ways. An offshore company may be a reference to:
Tax competition, a form of regulatory competition, exists when governments use reductions in fiscal burdens to encourage the inflow of productive resources or to discourage the exodus of those resources. Often, this means a governmental strategy of attracting foreign direct investment, foreign indirect investment, and high value human resources by minimizing the overall taxation level and/or special tax preferences, creating a comparative advantage.
Corporate law is the body of law governing the rights, relations, and conduct of persons, companies, organizations and businesses. The term refers to the legal practice of law relating to corporations, or to the theory of corporations. Corporate law often describes the law relating to matters which derive directly from the life-cycle of a corporation. It thus encompasses the formation, funding, governance, and death of a corporation.
Regulatory economics is the economics of regulation. It is the application of law by government or independent administrative agencies for various purposes, including remedying market failure, protecting the environment, and economic management.
Public-benefit corporations (PBC) are a specific type of corporation that allow for public benefit to be a charter purpose in addition to the traditional corporate goal of maximizing profit for shareholders. Depending on the country they may also be known as crown corporations, statutory corporations, or government owned corporations having monopoly over a specific service or market..
In criminology, the concept of state-corporate crime refers to crimes that result from the relationship between the policies of the state and the policies and practices of commercial corporations. The term was coined by Kramer and Michalowski (1990), and redefined by Aulette and Michalowski (1993). These definitions were intended to include all "socially injurious acts" and not merely those that are defined by the local criminal jurisdiction as crime. This is not universally accepted as a valid definition so a less contentious version has been adopted here. As an academic classification, it is distinguished from:
The Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH or GIZ in short is a German development agency headquartered in Bonn and Eschborn that provides services in the field of international development cooperation. GIZ mainly implements technical cooperation projects of the Federal Ministry for Economic Cooperation and Development (BMZ), its main commissioning party, although it also works with the private sector and other national and supranational government organizations on a public benefit basis. In its activities GIZ seeks to follow the paradigm of sustainable development, which aims at economic development through social inclusion and environmental protection. GIZ offers consulting and capacity building services in a wide range of areas, including management consulting, rural development, sustainable infrastructure, security and peace-building, social development, governance and democracy, environment and climate change, and economic development and employment.
A tax incentive is an aspect of a country's tax code designed to incentivize or encourage a particular economic activity by reducing tax payments for a company in the said country.
The internal affairs doctrine is a choice of law rule in corporations law. Simply stated, it provides that the "internal affairs" of a corporation will be governed by the corporate statutes and case law of the state in which the corporation is incorporated, sometimes referred to as the lex incorporationis.
Sustainability accounting was originated about 20 years ago and is considered a subcategory of financial accounting that focuses on the disclosure of non-financial information about a firm's performance to external stakeholders, such as capital holders, creditors, and other authorities. Sustainability accounting represents the activities that have a direct impact on society, environment, and economic performance of an organisation. Sustainability accounting in managerial accounting contrasts with financial accounting in that managerial accounting is used for internal decision making and the creation of new policies that will have an effect on the organisation's performance at economic, ecological, and social level. Sustainability accounting is often used to generate value creation within an organisation.
Daniel W. Drezner is an American professor of international politics at The Fletcher School of Law and Diplomacy at Tufts University, an author, a blogger, and a commentator. He is also a nonresident senior fellow at the Project on International Order and Strategy at the Brookings Institution.
United States corporate law regulates the governance, finance and power of corporations in US law. Every state and territory has its own basic corporate code, while federal law creates minimum standards for trade in company shares and governance rights, found mostly in the Securities Act of 1933 and the Securities and Exchange Act of 1934, as amended by laws like the Sarbanes–Oxley Act of 2002 and the Dodd–Frank Wall Street Reform and Consumer Protection Act. The US Constitution was interpreted by the US Supreme Court to allow corporations to incorporate in the state of their choice, regardless of where their headquarters are. Over the 20th century, most major corporations incorporated under the Delaware General Corporation Law, which offered lower corporate taxes, fewer shareholder rights against directors, and developed a specialized court and legal profession. Nevada has done the same. Twenty-four states follow the Model Business Corporation Act, while New York and California are important due to their size.
Regulatory competition, also called competitive governance or policy competition, is a phenomenon in law, economics and politics concerning the desire of lawmakers to compete with one another in the kinds of law offered in order to attract businesses or other actors to operate in their jurisdiction. Regulatory competition depends upon the ability of actors such as companies, workers or other kinds of people to move between two or more separate legal systems. Once this is possible, then the temptation arises for the people running those different legal systems to compete to offer better terms than their "competitors" to attract investment. Historically, regulatory competition has operated within countries having federal systems of regulation - particularly the United States, but since the mid-20th century and the intensification of economic globalisation, regulatory competition became an important issue internationally.
Economic globalization is one of the three main dimensions of globalization commonly found in countries, academic literature, with the two others being political globalization and cultural globalization, as well as the general term of globalization. Economic globalization refers to the widespread international movement of goods, capital, services, technology and information. It is the increasing economic integration and interdependence of national, regional, and local economies across the world through an intensification of cross-border movement of goods, services, technologies and capital. Economic globalization primarily comprises the globalization of production, finance, markets, technology, organizational regimes, institutions, corporations, and labour.
The "California effect" is the shift of consumer, environmental and other regulations in the direction of political jurisdictions with stricter regulatory standards. The name is derived from the spread of some advanced environmental regulatory standards that were originally adopted by the U.S. state of California and eventually adopted in other states. This spread is supported by large corporations, which stand to gain as they have the resources necessary to deal with the regulations, unlike their smaller competitors. This process is the opposite of the Delaware effect; this is simply the race to the bottom in which different countries are simply reducing their regulatory burden to attract more of the businesses into their jurisdiction. The assumption behind the Delaware effect is that in the competitive regulatory environment, governments have to remove their regulatory barriers to allow easier functioning of their corporations and to attract new companies to establish their business.
The Brussels effect is the process of unilateral regulatory globalisation caused by the European Union de facto externalising its laws outside its borders through market mechanisms.