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So who's afraid of the big bad multinationals?

We should listen to Toyota's boss instead of demonising him, argues Yvette Cooper
Poor Mr Okuda. Little did he think, when he chatted about his future business investment plans, that he would incite such a ferocious reaction from the politicians of a little country half a globe away. But when the Toyota president said his company would reconsider its investment strategy if Britain stayed out of a single currency, all hell broke loose.

Obviously the prospect of losing all those lovely car plants and electronics factories constructed courtesy of The-Rest-of-the-World plc is rather galling. And of course anything which parachutes into this pre-election climate and mentions the dreaded EMU, was bound to be provocative. Nevertheless, the furore was astounding.

Euro-sceptics spat with indignation. What, you could hear them saying, did this upstart of a foreigner have to tell us about running our economy? So what if he is the head of Japan's biggest car manufacturer? But underlying their vehemence lay a deep and niggling anxiety: that we might after all be driven into a single currency against our will by the inexorable forces of global competition.

For Sir James Goldsmith, the Toyota palaver will have been particularly galling. Sir James has never been an enthusiast for free trade. The thought that the British government could be rendered impotent, its sovereignty undermined, by the fancies of footloose multinationals will infuriate him even further.

But Sir James could seek reassurance from an unexpected source. Academics Paul Hirst and Grahame Thompson, writing in the new magazine Soundings, claim that governments have no need to worry about the pressures of the global market or the demands of multinationals. Globalisation is, they maintain, a bit of a myth. Multinationals putting pressure on governments are, in Mr Hirst's words, "trying it on". In fact, the academics claim, companies rarely uproot and leave when governments misbehave.

Therefore, following the logic of the Hirst-Thompson argument, governments should pay no attention to the implicit threats of Japanese car manufacturers. Instead, politicians should stop being wimps and do what they want.

But both these extreme views - that governments are impotent and that governments are omnipotent - are nonsense. National governments are extremely important in the global market and will remain so, even if their currencies are subsumed within a larger euro. But they cannot just ignore the way economies work and the changes that have taken place in the world over the past 50 years.

Hirst and Thompson, in their attempt to debunk the idea that governments are powerless in the new global economy, do make some important points. They are right, for example, to say that global competition does not mean that wages in Britain need fall so that British products can compete with those made in developing countries. As they explain, if developing countries really did suck away all our manufacturing and jobs, as the alarmists sometimes predict, their wages would start to rise pretty fast. Moreover, the idea that countries like Britain need to slash their overall tax burden and the level of public spending because otherwise companies, investment and people will flee abroad is a complete myth.

Nevertheless, Hirst and Thompson hopelessly overstate their case. They leap from pointing out that globalisation is not the ogre everyone thinks it is and that governments retain freedom to manoeuvre, to arguing that globalisation isn't really happening and that governments can do what they like.

Hirst and Thompson rest their case on the facts that trade is roughly the same proportion of national income for many industrialised countries today as it was at the beginning of the century and that most businesses don't jump up and cross borders but stay closer to home. Therefore, they suggest, national governments have as much freedom to manoeuvre as they did a century ago - if only they had the political will.

However, the important point that Hirst and Thompson fail to grasp is that technology has changed: goods, and above all information, can now move around the globe from country to country much faster than ever before.

Capital can switch countries at the touch of a button, which means governments that screw up and run crazy policies will be punished very quickly. Had they run unsustainable deficits in the past, they would have floundered in the end, but it would have taken much longer for the policy to unravel. Today, if borrowing soars too high or if investors lose confidence in government policies, they can protest instantly by taking their money away. That doesn't make governments less powerful than they were - only less able to get away with bad policies for years at a time.

Goods and services can be delivered across immense distances at incredible speeds. Of course that changes the environment in which companies and governments operate. Mr Okuda, when considering his next European car plant, could indeed site it in Spain rather than Britain. He will of course build wherever he can expect to make most profit, and the same is true for other companies.

But that doesn't mean they will always flock to the country with the lowest taxes and wages. Far from it. Skilled workers and good infrastructure are essential for the high-skill, high-profit industries of the future. Governments that invest in those skills and that infrastructure can make a huge difference.

The protectionists are wrong to fear that national governments are becoming powerless and redundant in the face of globalisation. Nor should they worry that a single currency would hasten the decline. Governments do retain freedom to manoeuvre over the services and welfare they provide, as well as over the skills and infrastructure they build. But they cannot ignore the remarks of executives like Mr Okuda - not because Mr Okuda is the head of a bruising big multinational, but because he may well be right about the things that governments can actively do to help companies create jobs and compete in the modern world.