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Multinational company strategy and

host country policy

Article in Scandinavian Journal of Management December 1992

DOI: 10.1016/0956-5221(92)90003-W Source: RePEc


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2 authors:

Arne Nygaard Robert Dahlstrom

Oslo School of Management Miami University


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Sand. .I. Mgmt, Vol. 8. No. 1, pp. 3-13, 1992 02X1-7527/92 $5.00 + 0.00
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*The Norwegian Institute for Research in Marketing, Norwegian School of Manugement,

Sandvika and tCollege of Business and Economics, University of Kentucky

(First received April 1991; accepted in revised form February 1992)

Abstract - This paper outlines bilateral strategic position as a framework from which to assess
MNC-host country relations. Strategic position is implicated as a determinant of host country policy
and MNC strategy. A case description of the Norwegian oil industry is offered to illustrate the
interaction of investment strategy and governmental policy.

Key words: Strategic position, MNC strategy, host country policy, globalization, internationaliza-

Multinational corporations (MNCs) and host countries have dynamic, interactive

working relationships. MNC investment policies are affected by international trade and
industrial conditions as well as by socio-political forces. Indeed, OECD recommenda-
tions to break down barriers between member countries and the Glasnost process offer
interesting opportunities for MNC growth. Host country policy is shaped by a number of
domestic political and market forces. In addition, the international climate affects the
regulation and market approach implemented by the host country. Thus, the interaction
of a MNC and host country is predicated on the contingencies faced by both parties.


A fruitful concept for studies of the power balance between the MNC and the host
country is the concept of strategic position. The strategic relationship between a MNC
and its host country can be operationalized, using Colemans classical formulation, as a
function of the parties mutual interest and control over the MNCs domestic production
(see Fig. 1) (Coleman, 1973; Heum, 1982).
Host country interests are fuelled by a MNCs relative ability to: (1) offer employment
and tax revenues, (2) share in foreign trade or replacement of imports, and (3) contribute
to domestic economic growth. The host countrys available alternatives can be assessed
by the number of applicants for concessions or production licences. The evaluation of
alternatives is analogous to the comparison level for alternatives notion developed in
Thibaut and Kelleys (1959, 1978) social exchange theory. When many firms offer
comparable opportunities a country has less interest in any particular corporation.
MNC control is restricted by the host countrys available alternatives and the type of
investment. Labour intensive production provides greater control for a MNC because

MNC Interest in National control

host country x over MNC
production production
Strategic position =
National interest MNC control over
in MNC x host country
production production

Fig. 1. The strategic relationship between the multinational corporation and the host country defined by the
strategic position.

such production is easier to transfer across national borders than production based on
natural resources. On the other hand, investments in capital intensive facilities are more
difficult to liquidate and increase the host countrys control (Kogut, 1983). In particular,
site-specific assets reduce the number of alternatives and make the MNC vulnerable to
changes in the strategic position (Williamson, 1985).
Because the MNC has more alternatives and more flexibility ex ante, it enters
negotiations with a power advantage. The wielding of the power in the pre-investment
stage increases the possibility for obtaining a more favourable contract with the host
country (Encarnation and Vachani, 1985). When the MNC has made the investment the
strategic position shifts in favour of the host country. The diffusion of the MNC
technology to domestic firms has a similar impact on the strategic position. When the
MNC has transferred its technology to domestic firms, its attractiveness diminishes. This
process is referred to as the pattern of obsolescing bargain (Vernon, 1977) or the
fundamental transformation (Williamson, 1985, pp. 6142).
MNC interest in the host country is defined through the domestic subsidiarys share of
the companys operations. MNCs within global industries like Nestle, IBM and Ford
have access to several production and market alternatives. Moreover, future globaliza-
tion of industries will increase the number of alternatives and thereby reduce the host
countrys control (Porter, 1980).
Although globalization affords MNCs greater latitude for investment, MNCs with few
alternatives are in a weak strategic position. For example, after the Libyan coup of 1969
Colonel Khadafi picked out Occidental Oil Company as his first victim of renegotiation.
He chose that particular company because he knew that his strategic position was
superior (Sampson, 1975). Occidental had no alternative crude sources outside Libya
that could feed the companys European refineries.
Host country control is symmetrically dependent on the MNCs available alternatives.
The host countrvni I i~se -I- 0f -_ laws
_-..I and
_.___ remlatinns
_ _~_-------_ 10 con&n! _MNC: activities renresents the
regulation policy. In addition, the host governments intervention and participation in
an industry embodies its market policy.
Government intervention can also be characterized along an offensive-defensive
policy continuum. An offensive policy refers to a strategy where the goal is to
maximize the total national take. The concept total national take is not only defined
as the amount of taxes (total government take), but also includes other factors such as
the number of employees, transfer of new technology, the ability to export goods and
stimulate domestic economic growth. This offensive government policy takes into

consideration short run changes in strategic position. Moreover, an offensive policy

demands continuous, ongoing, and dynamic interaction with the MNC.
The host countries defensive policy seems, on the other hand, to be more
~--_-.rl.-.._~_- Tiie @iticai aut~oriiies are passive oiservers Of ihe
uisconunuous and unpiedictabie.
MNCs domestic operations. Spectacular events such as industry accidents, pollution,
international tax manipulations, and corruption provoke sharp political reactions from
the government in the host country. While a defensive policy is fundamentally
characterized by non-intervention, states intervene when such socio-political and
economic contingencies arise.
Strategic position affects the interaction that occurs between host country and MNC.
In a review of laboratory-oriented bargaining research Rubin and Brown (1975) offer
propositions concerning the relationship between power and interaction. In relative
terms, those in positions of power tend to act exploitatively while their partners tend to
act cooperatively. Exploitative behaviour is associated with a competitive or individualis-
tic orientation toward the exchange. Competition occurs to the extent that a bargainer
seeks to do better than the other while simultaneously doing well for oneself. refers to a situation in which one seeks to maximize his own outcomes
regardless of how the other fares. Cooperation occurs to the extent that a bargainer has a
positive interest in the others welfare.
In host country-MNC negotiations the party with the power advantage has the
greatest opportunity to be exploitative while their partner is likely to be cooperative
(Rubin and Brown, 1985, p. 199). When an offensive policy is utilized the host country is
proactive to the needs of its citizens, and exploits its position through individualistic
interaction. Since the MNC has a power disadvantage it is likely to employ a strategy that
reacts in a cooperative fashion to governmental policy. When a defensive policy is
utilized the MNC often has a power advantage and exerts influence over government
regulation. Cooperation is manifest in these relationships through the governments
reactive, laissez-faire regulation and intervention.


The state policy is formulated through some combination of regulatory and direct
market interventions. The offensive-defensive character of governmental intervention is
linked to relations between the industry players and the host country. In essence, the
host country policy and the MNC strategy are determined by the relative power potential
defined by each partys strategic position. In this section we outline the means by which
offensive and defensive state policy are implemented in a host countrys regulatory and
market annrnarh
ll.Ul ..v. yyv nnli&=-r

Regulatory policy
Most regulatory policies are based on a centralized model of political administration
where the MNC has to deal directly with the top authorities. The government defines its
role in a strategic game situation toward the multinational company. How far the MNC
can go regarding the conditions that can be imposed is dependent on the present and the
future strategic position. Where government recognizes some power potential in its
strategic position, an offensive regulatory policy is enacted. Offensive host country

policy is characterized by a high degree of continuity. Since these negotiations take into
consideration the expost costs of the host country, offensive regulation leads to relatively
permanent interaction. A MNCs strategic fit to the host country policy affects the return
-._ :-....L.----r_ AI..-_rl-. TL- l_..,.A --...__..>- -~~___I-.-
on mvestmems uuectly. I ne nosi couutry s o~ieus~ve policy makes it necessary for the
MNCs to have a keen understanding of domestic culture and politics. When exchange
partners are members of the OECD, negotiation costs and political risk may be easy to
assess. Turbulent situations in other countries, however, may substantially complicate
The host countrys defensive regulation policy means that acceptable goals are
defined. This is a satisfying, not maximizing, host country behaviour in which authorities
play a passive role. This policy can be described as a stable framework around a
fluctuating market. The political influence can be long term, but external conditions and
the development of a relationship between host countries and the MNC may itself create
upcoming crises and dysfunctional conflicts. Because of the stability inherent in this
policy, Gladwin and Walter (1980) emphasized that a defensive regulation policy is
preferable to a MNCs strategy formulation and implementation process. The conces-
sions that follow this defensive perspective determine what the MNC is expected to do in
its business activities.

Market policy
Similar to regulatory policy, host country market policy may be characterized along an
offensive-defensive continuum. The offensive market approach toward the MNC implies
proactive and exploitative adaption within specific domestic industries. The government
attempts to balance the influence of foreign investments by stimulating national capita1
investments. The government is motivated by the fear of being dominated and
dependent on some foreign companies in sectors of crucial political or economic
importance. The nature of the host countrys market-oriented policy is complex. Often
the MNC must interact with government authorities and domestic companies through
cooperative ventures. Governmental participation is realized through the financing of
projects, direct and indirect investments, or requirements of joint ventures.
The host countrys defensive market policy is based on non-interventionist philosophy.
MNCs are expected to accept the host countrys jurisdiction. Moreover, the authorities
do not discriminate between national and foreign companies. Non-discrimination
between domestic companies and MNCs is believed to be the final consequence of a
deregulation policy within the OECD area (OECD, 1982a,b). According to the EC
directives given in the single European Act (1986), direct investments between EC
countries will be liberalized during the period 1987-1992. The member states must
authorize direct investments unconditionally. This policy can be described as a defensive
.lnU..\bL annmarh
market yy nnliru withnrlt
y, .v,C..U. rnv
, rlicrriminatinn
,UIIIIIIIXLUC,VII heturs=Pn invertnrc
L., VILl Lax I .llV.Y frnm .1-v FC
L1V11S the uv ~~TPR


Norway, as one of the smallest and most open economies in Europe, defined its
strategic position toward foreign companies in an early stage of its industrial history. The
first concession laws that restricted foreign company access to properties were passed in
1888. These regulations were more a defensive policy than an offensive instrument in the

national industrial strategy. The problem was to moderate foreign control by defining
regulations in the concessionary system and still attract MNC investments. Awareness
and information about the strategic position were a crucial input to the process of
internationalization of the Norwegian economy. Since 1909 the Norwegian authorities
have utilized their strategic position to force foreign companies to cooperate with
national companies in order to transfer new technology and contribute to economic
growth (Bergh et al., 1983). This relatively defensive posture remained in effect
throughout the 1960s. During this era American, French, and British MNCs got
concessions for oil production and exploration in the North Sea under low oil price
conditions and high reservoir risk. .~
In the late 60s Norwegian authorities became more and more aware of the fact that oil
activities had an impact on the domestic industry structure. Therefore, in 1968-1969 the
Norwegian state tried to participate as a partner in the production and exploration joint
ventures. The MNCs, however, strongly resisted the state initiative, and the state had to
reconsider direct participation. The MNCs strategic position allowed them to oppose the
offensive host country policy because they still had access to cheap alternative oil
production from other areas. On the other hand, there was growing suspicion and an
anti-MNC atmosphere in the OPEC cartel. Consequently, Norwegian authorities as well
as the corporations had to look for other solutions. Finally, Exxon and the other MNCs
that initially went against state intervention accepted 17.5% state share of net profits.
The oil price increase in 1973-1974 drastically changed the strategic position in favour
of the oil-producing host countries. The oil companies had to change their strategy in
order to get access to low risk non-OPEC crude oil. Their reorientation reduced the
number of plausible investment alternatives. From a rather weak strategic position prior
to 1973, Norway suddenly gained more power relative to the oil companies. Therefore
the MNCs were willing to compromise in the question of state participation. Thus, in the
Statfjord concession-round in 1973, most of the MNCs accepted 50% state participation.
The new position made it possible to develop a new offensive policy. From a defensive
regulatory policy, the system moved toward an offensive regulation system and an
offensive market approach. In a white paper (White Paper: Storting Report No. 25,
1973-1974, p. 13) the government stated that it wanted to utilize the new strategic

The superior position of the multinational oil companies in production and supply makes it
an international task to gain national control.

A number of new tax regulations were introduced in order to gain windfall profits due
to increased oil prices. The substance of the pre-1973 system was kept in its original
form. The government exposed itself to an upside price risk, however, when it
introduced corporate taxes that exceeded 75% in 1975. In the same year a system was
introduced for the administrative stipulation of prices to reduce potential tax
manipulations through transfer pricing.
In addition to the taxation system, the MNCs had to accept other regulations. The
foreign MNCs had to educate employees in the national oil company (Statoil). The
MNCs investments in Norwegian industry and their willingness to cooperate with
domestic industry and transfer technology were important factors taken into considera-
tion when new concessions were distributed among the oil companies (White Paper:

Storting Report No. 9, 1984-1985, p. 22). Transfer of offshore technology from MNCs to
domestic companies was one of the most important elements in the Norwegianization
process. The Norwegian government explicitly expressed the emphasis on strategic
position in their policy formulation. In the fact sheet from the Royal Ministry of
Petroleum and Energy (1986), concessionary allocations were formulated by:

. The extent to which the applicant contributes to the Norwegian economy, the countrys
industrial growth and employment, including the degree to which the applicant has made use
of Norwegian goods and services in Norway and abroad.

Together with increased oil prices, fewer alternative sources of oil production changed
the strategic position and a more offensive market approach policy was introduced
successively. The first step was the introduction of option agreements where the
Norwegian state had the right to participate with a given share. Net profit agreements
were also introduced. Here the Norwegian state had the right to participate in field
development with a given share. From 1973, the MNCs had to accept a Norwegian
majority in production and exploration joint ventures.
Norwegian authorities established incentives for the MNCs to cooperate with domestic
actors within research and development, education, and joint ventures. A/S Norske Shell
reported in their 1985 annual report that joint ventures established because of these
incentives had created employment for 450 persons in Norway. During the period of
1979-1986 Exxon, following concessionary incentives, invested about $60 million in
about 100 Norwegian technological and industrial projects (Esso Norge A.S. annual
report, 1986). From the licence round in 1979, a 10% share of the promising Silver-
block was dedicated to the MNC who offered the most interesting cooperation project
with Norwegian industry. Mobil who had designed the most attractive alternative, was
obliged to (1) transfer offshore maintenance technology to three Norwegian firms, (2)
develop technology together with a Norwegian computer company and (3) transfer sub-
water technology to another Norwegian firm.
The market approach policy was characterized by use of domestic oil companies in
order to harmonize foreign and domestic shares of the total industry capital. From its
creation in 1972, the Norwegian government supported the state oil company (Statoil)
with cheap loans and direct financial support. The two other domestic oil companies, the
privately owned Saga Petroleum and the 51% state-owned Norsk Hydro, were supported
by preferences in concessionary policy. Norsk Hydro was also supported by increased
state equity capital participation. Foreign MNCs had to cover Statoil exploration risk as
well. The MNCs that participated in the joint venture carried Statoils exploration costs
until a commercial find was made.
Another important aspect of offensive market policy was the sliding scale system. The
sliding scale gave Statoil the right to increase its share of exploration and production
from 51 to 80% depending on the peak production of the field. MNCs incurred the added
expense associated with these changes in ownership.
When the upstream profit margin vanished together with decreased oil prices in 1986,
the strategic position changed again and the power potential moved in favour of the
MNCs. In 1986 the oil companies could easily get access to low risk and cheap crude oil
from other sources. The foreign MNCs immediately introduced the Norwegian
government to a new round of negotiations.

The MNCs reduced interest in high-cost oil in the North Sea was inversely related to
the number of alternative sources of oil. The new situation made it necessary for the host
country to change the MNCs incentives to stay in the relationship. In order to retain
contractual incentive the Norwegian authorities had to reduce taxes. In 1986, the
government changed the rules for depreciation and reduced the rate of special corporate
tax. Together with reduced tax levels, the government had to reduce the scope of other
regulations. Investments in non-oil related Norwegian industries or research and
development projects were no longer required for obtaining concessions. Again, the
demand for low risk oil together with reasonable economic conditions attracted MNCs.
A queue of interested MNCs clearly indicated that the authorities could regain some of
the pre-86 position. The strategic position made it possible to change the tax system in
1991, something which led to significantly lower net cash flow for some of the companies.
Although the pendulum shifted toward a more defensive regulatory policy, the
government still used the market policy to balance Norwegian and foreign ownership
within the industry. Statoil remained supported financially by direct investments and
cheap state loans, The market approach policy was not as offensive as before while the
regulation of foreign MNCs was substantially reduced.
The Norwegian case illustrates the importance of the bilateral strategic position. The
governments utilization of power potential is manifest in the extent to which it employs
regulatory and market policy. In the following section we outline MNC strategic
response to such governm.ental action.


Consistent with the resource dependency perspective (Pfeffer and Salancik, 1978), this
discussion treats corporate strategy as a function of environmental factors. In particular,
governmental regulation and market policy are viewed as antecedent to MNC strategy.
In actuality, MNC strategy and host country policy are co-determinants. The party with
the power advantage is likely to exert influence that dictates the partners behaviour.
Host country market and regulation policy can be dichotomized into offensive and
defensive tactics. In Fig. 2 offensive and defensive regulatory policy are paired with
offensive and defensive market policy to suggest four prototypical governmental
approaches. Alternative MNC strategies are associated with each quadrant.
The administered intervention approach reflects host country use of an offensive
market and regulation policy. This approach is undertaken by countries that recognize
market power advantages over their trading partners. For example, from 1973 to 1986
limited access to low risk, non-OPEC crude oil made it possible for the Norwegian
government to place substantial tax burdens and investment stipulations on corpora-
tions. The market policy was such that MNCs bore a great deal of the risk in oil
exploration while the sliding scale enabled Statoil to enjoy high revenues when platforms
were at peak production.
MNCs interacting with a host country that utilizes this approach employ a cooperative
strategy. In response to regulatory policy firms are likely to transfer technology and
dedicate human assets. For example, foreign firms were required to train Statoil
employees during the height of the OPEC coalitions power. Firms reap the benefits of
market intervention when they commit to joint ventures with domestic enterprises,

Market Policy
Offensive Defensive

I Administered II Administered
Inte~ention Market
Cooperative conscript
Strategy Strategy
III Laissez-Faire IV Laissez-Faire
~te~ention Market
Cooptive Competitive
Strategy Strategy

Fig. 2. Host country policy nnd MNC strategy

These endeavours are often associated with the dedication of physicai assets in the
country. For example, Exxon and Shell contributed substantial capital goods to Norway
during the early 1980s.
The laissez-faire intervention approach is utilized by a host country that is proactive in
an industry but de-emphasizes regulation. For example, since 1986 the Norwegian
government has relaxed regulatory policy while retaining ownership of domestic players
(Statoil and Norsk Hydro) in the oil industry.
MNCs that are faced with an intervention policy without regulation respond with a
cooptive strategy. Public capital investments and financing within the industry as well as
preferential treatment of domestic companies - as illustrated in the Norwegian oil
industry - reduce the cost of capital for the domestic firms. This intervention is likely to
be a source of uncertainty for the MNC. Uncertainty is alleviated when the MNC
commits capital assets to joint ventures with domestic firms. Under such conditions the
MNC enjoys the advantages of domestic policy while securing access to the host country
resources. While joint ventures are also endemic to an administered intervention
approach, host countries with a laissez-faire policy grant greater latitude to the MNC
with respect to ownership rights.
The administered market approach occurs when the host government emphasizes
regulation without intervention. Whereas the laissez-faire intervention approach implies
the dedication of capital, the administered market approach requires the MNC to devote
human assets within the host country. Therefore, MNCs employ a conscript strategy in
this context. Human assets are committed through the training of domestic personnel as
well as through the dissemination of technology. Due to the emphasis upon regulation,
attorneys and lobbyists are in demand to interpret and influence legislation.
The laissez-faire market approach represents the adverse of the administered
intervention tactic. This technique is undertaken by countries that recognize a power
disadvantage in their interaction with MNCs. For example, the period from 1965 to 1974

in the Norwegian oil industry was characterized by a defensive regulatory and market
policy. The Norwegian government recognized that the oil industry had many viable
alternatives to North Sea drilling, notably in the Middle East. Consequently, Norwegian
companies did not obtain any special privileges while the strategic position offered little
opportunity for offensive policy making.
Due to the number of available alternatives, MNCs have the opportunity to utilize a
competitive strategy. Under these conditions firms are not legally obligated to contribute
human or capital assets within a country. As a consequence, the firm is relatively
individualistic with regard to investment in the host country. The competitive strategy
involves the use of technology, capital and human resources to gain a competitive
advantage with little regard for governmental requirements.
Since they represent the most extreme governmental approaches, there is merit in
comparing the administered intervention and laissez-faire market policies. The former
policy is complemented with a cooperative MNC strategy while the latter policy is
coupled with a competitive MNC strategy.*
A cooperative strategy requires knowledge about cultural, political and social aspects.
In a situation where the government chooses an offensive market approach policy, the
domestic companies often have a well-established network linking them to the political
process in the country. The MNCs cooperative strategy makes it easier for the MNC to
be connected to the same network thereby enabling the MNC to predict and influence
governmental activity. In addition, this knowledge makes it possible to estimate
domestic sentiment toward the MNCs endeavours within the host country. This is
probably the reason empirical findings indicate that cooperative ventures are most
frequent between countries within the same cultural sphere (Kogut and Singh, 1988;
Kogut, 1988) and that cultural differences reduce the autonomy of the subsidiaries
(Cray, 1984; Garnier, 1982). When a competitive strategy is employed the firm has less
interest in the idiosyncracies of the host country. Moreover, they are less likely to be
burdened by regulation and governmental intervention. Therefore the following is

I: Relative to competitive strategy, a cooperative MNC response demands enhanced

knowledge of the host countrys culture, politics and society.

The administered intervention and laissez-faire market also vary in the nature of assets
they demand from MNCs. When the host country utilizes an administered intervention
approach the firm is obligated to invest capital, technology and personnel. Moreover, the
firm is faced with few alternatives and must interact with the host country to secure
scarce resources. Capital assets enable the firm to enjoy the ownership advantages
offered to domestic enterprises while human assets and technology transfers are
mandated by legislation. Together these dedicated human and capital assets enable the
firm to gain access to the scarce resources possessed by the host country.
In contrast, the laissez-faire market approach is employed where the host country does
not possess relatively scarce resources. The firm is not obligated to develop idiosyncratic
investments within the host. While investments may be made within the state, they are
not mandated by government. Thus, the following is proposed:

*While Rubin and Brown (1975) distinguished between competitive and individualistic motivational
orientations, we make such a distinction between exploitative strategies.

II: Relative to competitive strategy, a cooperative MNC response requires higher levels
of transaction-specific investments.

Domestic knowledge and transaction-specific assets have a significant effect upon the
level of authority granted to the MNCs manager in the host country. When the state
employs an administered intervention policy it does so because of its relative power
advantage over the firm. This power advantage enables it to require investments in
human and capital assets. Under these conditions firms grant greater authority to
country managers in order to guarantee access to scarce resources and maintain
dedicated assets.
In contrast, the laissez-faire market approach is utilized by the host country when the
states resources are available in abundance. When this approach is implemented
centralized authority has efficiency advantages over local management control.
Therefore the following is proposed:

III: Relative to competitive strategy, a cooperative MNC response demands increased

country manager authority over the strategy formulation process.


This paper has offered a heuristic framework from which to interpret the strategic
relationship between a host country and MNC. In particular, we have illustrated how
relative power position affects the interplay between governmental policy and MNC
The globalization of industry sectors will accelerate the process of deregulation and
change the strategic relationship between MNCs and host countries. As a consequence,
MNCs will have greater latitude to develop global strategies and will have less impetus to
develop discrete, international exchanges with each host country. Nevertheless, MNCs
will still find it necessary to compare the investment advantages available in alternative
host countries. We hope that our model offers some insight into decision-making along
the interface between host country and MNC.

Acknowledgements - We gratefully acknowledge assistance from Peter Lorange and the William H. Wurster
Center for International Management Studies at the Wharton School of the University of Pennsylvania. We
further acknowledge the support of the University of Cincinnati Direct Marketing Policy Center. We also
thank Harbir Singh, Herman Daems, Maja Arnestad and three anonymous reviewers for valuable comments.


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