Negotiations between Host Governments and MNEs

Home and host countries evaluate business propositions of Multinational Enterprises (MNEs) from their points of view. The evaluation relates to size, place, product, price, process, people and partnership related issues. Negotiations are take place between MNEs and host government whenever consensus is not reached on major issues. Here comes the importance of business-government relationships. The business negotiations and diplomacy between companies and governments determine the terms of international business operations.

MNEs attitude to Governmental Stipulations

Multinational Enterprises (MNEs) attitude to Governmental Stipulations may be one of complying. This is highly positive. In a hierarchical view of governmental authority, companies accept regulations as ‘givens’, and MNEs comply with. Occasionally they try to circumvent, avoid or repudiate operating because of the regulations. MNEs comply with Government regulations when the regulations don’t unduly constrain their desired mode of operations, when benefits are sufficiently attractive in spite of regulations, and when they cannot practically alter the regulations to their benefit. MNEs will circumvent or get around those regulations they find unacceptable through loopholes, legal or illegal.

One-sided agreements tilt the other way in due course

As the host country and the MNE may each control assets that are useful to the other, conflicts arise due to goal difference, different masters controlling the destiny of one firm and so on. Each wants to have bargaining edge over the other. The negotiated terms for a foreign investor’s operations depend on how much the investor, and the host countries need each others assets. There can be negotiated one-sided concessions if either the MNE or the country has assets that the other strongly desires and there are few or no alternatives for acquiring them. In the early periods, the Middle-East countries depended most on Western Oil Companies for oil exploration or refining as they didn’t have the expertise. Few large companies dominated the extraction, processing, shipment, and final sale. The economies with petroleum deposits could do little but accept the terms they were offered because they lacked alternatives for exploiting their oil. If a government refused the terms, a company could easily find another country that would accept a similar proposal now as the supply of oil diminished and petroleum-producing countries found alternatives, the terms gradually favored producing countries. Of course, there are vast differences in bargaining strength among countries, among industries, and among companies.

Positive sum solution lasts for long than zero-sum solution

The bargaining relationship between Multinational Enterprises (MNEs) and governments depends very much on whether the parties see agreements as zero-sum or positive sum solutions. In a zero-sum solution one party’s gain equals the other party’s loss. There is no way both can gain. It is win-lose or lose-win syndrome. Positive-sum solution is that both parties have net benefits or gains. It is win-win solution. MNEs by projecting the win-win possibilities can enter countries that are generally hostile to foreign businesses. The line of argument depends on bargaining strength. Parties having competitive strength might press a win-lose solution, while a weak party might press win-win solution.

Country Bargaining Strength lies in their Investor Friendliness and Opportunities

What constitutes country bargaining strength? Better Governance, Economic Upswing and Height, Sound Infrastructure, High Caliber Human Resources, Culturally Cosmopolitan Society, etc. make the nations attractive for investors, assuming investment avenues still not exhausted. There are countries with higher bargaining strength like United States, Canada, UK, France, Japan, Singapore, South Korea and Germany. Generally, companies prefer to establish investments in highly developed countries because those countries offer large markets and a high degree of political stability. These countries are large recipients of foreign investment. Because they are such attractive countries to invest in, they make few concessions to MNEs. In all of these countries, however, regional areas vie for investments by offering incentives. In the recent years the BRIC countries (Brazil, Russia, India and China) vie with each other to attract more FDI from the MNEs. Within these countries several States try to attract the MNEs to their territory by offering freebies like tax holiday, infrastructure advances, etc. If offered incentives fit closely with companies’ corporate strategies and when companies believe that the government has the credibility to fulfill its promises, MNEs put up their ventures.

MNEs Bargaining Strength lies in Core Competence Brand and Other Equities

Some Multinational Enterprises (MNEs) have traditionally enjoyed better bargaining positions than others. Their stature in terms of global presence, competitiveness, brand equity and financial strength outsmart the rest. Such MNEs can dictate terms to countries. The bargain struck between the foreign investor and the host country also depends on the number of companies offering similar resources to the host nation. Usually uniqueness has great bargaining power. Foreign investors are more likely to have a strong bargaining position in foreign operations when they have few competitors and when they control certain unique types of assets- technology, marketing expertise, process, people, net-work, etc. These assets include:

  • Technology: For example, governments have allowed IBM 100-percent ownership of operations in a number of countries because of the local need for its unique technology. However, they have refused other companies the same ownership. The French government also approved IBM’s minority stake in state-owned Group Bull because of the company’s specialized technology.
  • Marketing excellence: For example, Coca-Cola apparently has been able to gain local consumer allies who believe its differentiated products are superior.
  • Process Expertise: Process represents the critical link between R&D and production. As such, it is a key in achieving integrated solutions. As always, the challenge is to ensure that product, process, equipment, and validation requirements come together to a robust, balanced solution.
  • Export ability: Ability to export output from the foreign investment, especially when exports go to other entities controlled by the parent company, is a great strength. These investments earn foreign exchange for the country that might otherwise not be forthcoming. China welcomes exporters more than companies seeking only to sell within China.
  • Brand Equity: Brand equity is that incremental value that accrues to a product when it is branded. Name that sells itself is brand equity. That is the confidence, eminence and fanciness the name spells in consumers’ psyche leading to global presence.
  • Product diversity: Governments will allow more foreign ownership when a company provides greater product diversity.
  • Large capital: Companies with ability to contribute large amounts of capital may have more bargaining strengths. Many emerging economies encountered debt-servicing problems since the mid-1980s. As alternative to multilateral debt, FDI is preferred by them. Further, governments may not want to commit resources to negotiating with companies that are too small to make a substantial impact on their economies.
  • Consortium of companies: The development of Airbus Industries, a consortium in Europe to compete against Boeing in aircraft production, is an exercise to boost the global say of the Airbus Industries in its dealings. Similar consortia are in EU in consumer appliances, medical electronics, telecommunications, and television. Eureka program, a Europe-wide Network for Industrial R&D, strengthening European competitiveness by promoting ‘market-driven’ collaborative R&D, involving industry and institutions. It includes about 2600 entities of large, medium and small companies, research institutes, universities, etc from 42 countries (38 of which are European) to develop a wide range of technologies in frontier fields including nano-sciences. Consortia have higher bargaining power.

Domestic Pressures to counter MNEs’ bargaining strength

Domestic companies which are direct or indirect competitors of the MNEs concerned will exert pressure against allowing the MNEs entry on the ground of lack of level playing field for them being technologically backward and other reasons. Political opponents will vehemently oppose MNEs’ presence merely to gain a political leverage by whipping son-of-the soil or company-of-the-soil sentiments issue. Other critics may argue that the government must press for extracting more concessions from the MNEs.

Reactions from the host-country governments to local pressure groups depend on the timing, bargaining powers of the agitators, etc. Taking shelter under these protests, the governments do extract further concessions from the MNEs. Rejecting entry for MNEs will involve repercussions. Of late business-government relationship is thick and every government wants to interests of companies of its soil. There used to be trade retaliations as a mark of protest. Yielding to pressure from its garment industry, the United Kingdom limited imports of Indonesian T-shirts, and the Indonesian government retaliated by denying the construction of a British-owned chemical project. Companies also may face pressures from stockholders, workers, consumers, governmental officials, suppliers, and nongovernmental organizations (NGOs) concerned with their own interests.

Credit: International Business Environment-MGU MBA