Federalism Creates Both Advantages and Disadvantages for Business.

Topics: Corporation, Federal government of the United States, Federalism Pages: 6 (1652 words) Published: April 15, 2011
The growing rate of poverty in most regions; the systemic graft and corruption in government; the strident cry for cultural recognition; and the instability of political systems are just some of the troubles the country is beset and endured. With these lots of problems, federalism is viewed by many as the only hope for a country. It has grown in popularity over the past century, which is largely due to its particular successes throughout the world. However, federalism is not without any defect. This essay will briefly outline the definition of federalism which followed by an detail analysis of both advantages and disadvantages of federalism as well as the impact on business.

The term federalism is used to describe a system of the government in which sovereignty is constitutionally divided between a central governing authority and constituent political units (like states or provinces). Federalism is a system in which the power to govern is dispersed across multiple jurisdictions, creating what is often called a federation (Hughes, 1998:260). The USA has over 11,000 separate jurisdictions including city, schools board, county, state, territory and federal government jurisdictions. Australia has over 675 jurisdictions. (Mike, 2005:22) Business, the key to a robust economic system, will be inevitably affected by federal system. Whether business should favor federalism is a question we have to discuss.

The diversity offered by the federal system has the ability to promote interregional competition, as the different states seek competitive advantage for business investment. (McMahon, 1995:673) There is a strong competition between states for corporate charters to attract the out-of-state corporations and retain the in-state companies which encourage continuously innovation across states to better serve the business organizations. For example, the low-tax, low-debt, pro-business, pro-growth policies of successive Queensland Governments during the 1980s and 1990s proved attractive to thousands of people and investors. (Mike, 2005:22) Another example of this is Maryland. It has attracted a number of investment companies which dominated in Delaware. Between 1986 and 2001, 249 companies going public incorporated in Maryland; 193 of those were investment companies. Provisions that attract investment companies include a waiver of the requirement of annual shareholder meetings and giving boards the power to increase the number of authorized shares without shareholder approval.(Brett, 2004:99)

However, not all forms of state competition for business are efficient. The businesses will stay alert of the offer in each state and bidding war can become a serious competition in the businesses market (Nathan, 2005:59). The example from the Schneiders (2001 cited in Eccleston, 2006:11)mentioned that the British Virgin Airline company was negotiating with the Premiers of South Australia, Victoria, and New South Wales before reached the decision to invest and allocate the base of Virgin Blue Airline in Queensland. Even though the actual amounts of offer never been published, commentators believe that Queensland Government has given more than 10 million for the Virgin Company. After the news, a lot of politicians and commentators have argued that the states should not have encouraged this kind of bidding, which disadvantages other firms (Schneiders, 2001).

In addition, federalism provides a wide range of laws and regulations for different kinds of business organizations with different needs, which provides company ability to choose who to govern them. And the mobility based on the right to exit can create flexible government policies where firms could move to those jurisdictions which offer them the most desirable mix of taxes and services. (Mike, 2005:22)

But at the same time, federal structure engenders blurs lines of accountability which may cause inevitable impacts on business. "Institutional complexity can muddy the process of...
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