Defining “Firm Nationality”--An Exploration of the Modern Firm Within the Context of United States-China Relations

The turn of the 21st century marked the beginning of a modern age in human history. As developing nations continued on their paths to industrialization, global markets became inter-connected, and large swaths of the people were lifted out of poverty throughout the world. As market demand increased due to the influx of new capital, new alliances between nations were drawn and the production of goods transformed. Today, firms are more globally fragmented than ever before. Rarely do firms house all facets of production in one location and serve only one market; instead, production is separated to cheapen product cost and maximize efficiency. Though this practice is beneficial for the firms involved, it simultaneously complicates how nation's control markets and protect domestic industries. It is necessary for governments to properly determine firm nationality if they are to govern and regulate appropriately. Recently, US-China relations were stressed as President Trump's "America First" protectionist trade policies clashed with China's attempts to become more self-sufficient. As the nations battled back and forth through a trade war, firms were caught in the middle, awaiting determinations of their fate which was decided based upon their perceived nationality. Accuracy in this process was crucial to limit the damage to markets that sanctions and tariffs would bring; there was little room for error. The conflict between the United States government, ARM Ltd. (ARM), and Chinese telecommunications giant Huawei is one such example that demonstrates the complexities of defining firm nationality. In May of 2019, the US government alleged that Huawei was a national security risk. Huawei repeatedly denied the allegations, but the United States enforced sanctions, all but banning American companies from doing business with Huawei. This situation complicated Huawei's relationships with its suppliers, one of them being ARM. Given that ARM believed some of its technology had originated in the United States, its leadership made the decision that the company fell within the extraterritoriality of US law and thus, that their firm was subject to adhering to the ban on selling technology to Huawei. Without ARM's designs, Huawei's production of processors came to a halt, and the firm was pushed to the brink of disaster. Nearly five months later, ARM's leadership reversed its decision and continued its sale of IP to Huawei when it determined that the technology in its designs was, in fact, from the UK. As can be seen from this dilemma, firm nationality can have real, potentially crippling implications for firms and broader market structures. Defining firm nationality is not just an academic exercise; rather, it has relevant policy implications. No matter the stances that the United States and China take going forward, it will be of vital importance that decisions are made while accurately considering firms' nationality