Professional Documents
Culture Documents
MULTINATIONAL CORPORATIONS
AND NATION-STATES:
PARTNERS, ADVERSARIES OR AUTONOMOUS ACTORS?
Diploma Thesis
Martina Steinbockova
2
In London, December 3, 2007.
______________________
3
I would like to thank PhDr. Pavel Pšeja, Ph.D. for leading this thesis,
prof. Morris Shapero from Eckerd College for support and to Dr.
Blake Hawley and his team for inspiration.
INDEX
1. Introduction .......................................................................................6
1.1. Methodology of the Thesis ............................................................ 9
1.2. Introduction to Key Terms ........................................................... 11
1.2.1. The Concept of MNCs ......................................................... 11
1.2.2. The Concept of Nation-states ............................................. 15
2. Development of the Relationships Between Nation-states and MNCs
19
2.1. Three Phases in the Development of the Interaction Between
Nation-states and MNCs .................................................................... 19
2.2. Initial Thoughts on the Relationships Between MNCs and Nation-
states .................................................................................................. 21
2.3. Sovereignty at Bay? .................................................................... 22
2.4. Globalization ............................................................................... 26
3. Government Still on the Throne? ...................................................... 29
3.1. Policies of the State .................................................................... 30
3.1.1. Trade Policy and Capital Control ....................................... 30
3.1.2. Foreign Direct Investment Rules .......................................... 33
3.1.3. Regulation and Antitrust Policy........................................... 36
3.2. Extraterritoriality .......................................................................... 39
3.3. Government’s Bargaining Power ................................................ 40
3.4. New Means of Control: Governments on the Multinational Level
44
4. Multinational Corporations on the Move ............................................ 46
4.1. Market Entry: The Choice ............................................................ 47
4.1.1. The First Steps: Exports, Licence and Franchise .................. 49
4.1.2. The Second Step: Fusions and Acquisitions ........................ 51
4
4.1.3. The Third Step: Joint-ventures and Alliances ...................... 53
4.1.4. Final Steps: Wholly-owned Subsidiary and Other Structures
55
4.2. Internalization and Impact on States’ Economy ........................ 56
4.3. The Structure of MNCs ................................................................. 57
4.4. Corporations’ Bargaining Power ................................................. 59
4.5. Note on Multinational Consortia of MNCs .................................. 60
5
5. The Patterns of Relationships Between Nation-states and MNCs ......... 61
5.1. MNCs and Nation-states as Partners (Cooperation Patterns) .... 61
5.1.1. Cooperation in the Economic Area and Development ..... 63
5.1.2. Cooperation in the Social Area .......................................... 66
5.1.3. Cooperation in the Political and Cultural Area ................. 67
5.2. MNCs and Nation-states as Adversaries (Confrontation Patterns)
69
5.2.1. Confrontation in General Legal and Market Control ......... 71
5.2.2. Confrontation in Market Stability and Other Economic
Policies ...................................................................................................... 72
5.2.3. Confrontation in Forms of Intervention ............................... 74
5.2.4. Confrontation in Nationalism and Social Policies .............. 77
5.3. MNCs and Nation-states as Dependent Actors
(Interdependence .................................................................................... 79
Patterns) ............................................................................................. 79
5.3.1. Finance and Taxes Causing Interdependence .................. 80
5.3.2. Interdependence in the Bargaining Process ...................... 81
5.3.3. Interdependence in Form of Networks and Alliances ........ 83
5.4. MNCs and Nation-states as Autonomous Actors (Independence
Patterns
............................................................................................................ 85
5.4.1. Autonomy Through Internalization ...................................... 86
5.4.2. Autonomy in Monetary Issues ............................................. 88
5.5. MNCs – Nation-states relationships: The Synthesis ...................... 89
5.5.1. Dunning’s Schematic and Bargaining Model ..................... 89
5.5.2. Consistency Between MNCs’ and Nation-states’ Goals .... 92
5.5.3. Global Integration vs. National Responsiveness................. 93
5.5.4. General Techniques and Strategies of MNCs towards
Nation-states ............................................................................................
93
6. Conclusion............................................................................................. 96
Bibliography ......................................................................................... 104
List of Used Abbreviations .................................................................... 112
Appendices .......................................................................................... 113
6
7
1. Introduction
A general insight into this topic clearly shows the overall complexity
of this debate and arising topics. Apparently, it is not within the
scope of this study to analyze the whole extent of this problem and
8
for the purpose of this thesis only a selected part of this debate will
be subject to a more detailed analysis. The study focuses on the
means of control which the nation-state has preserved, modified or
developed over its key characteristics (territory, population and
government) facing the increasing pressures from MNCs. The main
focus is paid to territory and government since these two features of
the nation-state are crucial to the second part of the thesis which
analyses the relationship patterns which exist or arise between
nation-states and MNCs. The author is aware of certain limitations of
the study arising from its interdisciplinary nature, individual factors
that have to be omitted when providing a general analysis and a
lack of adequate primary sources especially from the MNCs which
are protected by trade secret or simply kept internal within the
corporate structures.
9
planning and operations and being inherently reluctant to share
their goals and strategies how to attain their defined objectives.
The structure of the thesis continues with the following chapter that
summarizes the frameworks of relationships between MNCs and
nation-states. The author builds this part mostly upon the findings
from the previous chapters and presents an authentic classification
of major interaction schemes between nation-states and MNCs,
each of them analyzed by the focus area, reason or consequence.
To show alternative approaches to this topic, three major interaction
models by various researchers are analyzed in the end of this
chapter. The last part concludes on government’s and MNC’s role in
the interactions, provides a brief overlook at possible areas of future
studies, summarizes the analyzed questions and gives answers to the
hypothesis.
10
been completely deprived of the links with their home (and any
other) country and have become real “stateless” entities 1 arranging
its global operations worldwide to produce products and offer
services at the lowest costs to the widest consumer groups possible.
These activities of MNCs have transformed the world into one major
marketplace with an agreed set of business rules and procedures
that transcend national boundaries.
Since such opinions are common not even within the IPE research
but also in an increasing number of public discussions, the author
supposes that these thoughts are worth investigating in a separate
study. Therefore, this thesis will work with the following primary
hypothesis: Multinational corporations pursuing global strategies
have forced nation-states to surrender control over their traditional
key characteristics (territory, population, government). The
implication of this trend constitutes the secondary hypothesis of this
study: Nation-states and MNCs are currently placed due to their
incompatible interests into predominantly confronting relationships.
The author is aware of the extreme positioning of this approach in
the spectrum of contemporary IPE research; however, she assumes
that such a hypothesis can help investigate how far the “eroding”
concept of the nation-state has gone so far.
11
In particular, there are several major factors that substantially restrict
the level of the analysis as well as the results of this study. First, the
generalization of the “Multinational corporation” term is difficult to
be made due to extensive variations among the current examples
MNCs (corporations are of different size, age, nationality industry,
pursuing distinct decision-making processes and strategy-setting
patterns, etc.). 2 Second, any research on MNCs deals with
retrospective and indirect evidence of MNCs’ strategies since the
strategic steps of such companies are not announced in advance or
publicly, and thus, can be analyzed only retrospectively and mostly
through secondary sources. Similarly to that, the third limitation
inheres in the relative (case-specific) nature of the concepts of
relationship and bargaining power. In other words, each MNC
interacts with each nation-state in a different way which creates a
number of patterns that have to be generalized. Fourth, the
relationship is a dynamic concept itself – short-term changes and
fluctuations arising from immediate factors are hard to be
incorporated and the complex development in medium- and long-
term perspective is difficult to analyze. Therefore, this study focuses
on key moments of the relationship (e.g. beginning, crisis,
termination) which shape its general framework. Finally, besides the
political, social and cultural differences within nation-states (and
also MNCs), there is a number of other factors which shape the
relationship between these two actors: Both internal (e.g.
psychological) 3 and external 4 factors are hard to be reflected in a
study of this kind.
2 Similarly to that, the nation-state is regarded as a concept not reflecting the actual differences between countries
based on their size, population, political, social and cultural differences etc.
3 In the internal factors two major restrictive groups of factors can be distinguished: Individual (psychological of key
individuals in power) and collective (e.g. national historical experience, approach to minorities, etc.).
4 External factors include influences emanating from the world system (e.g. global economic trends) that are
12
interactions between nation-states and MNCs. Nevertheless, this is a
natural consequence of this kind of research – when working with
concepts of actors the outcome of the research will naturally turn
into a conceptualized framework as well. On the other hand, the
thesis will seek to demonstrate the analyzed aspects with examples
(generally in form of footnotes) in order to prevent the text from
being too theoretical, lacking the reference to the reality.
Regarding the sources used for elaboration of the topic, the thesis is
working with a range of primary sources such as research studies
and analytical data. Also, on a very limited basis, participant
observation is incorporated as a primary source. 5 As it was
highlighted before, the lack of primary sources directly originating
from the MNCs cause certain deficiency in sources: While
governments do release and publish data on their activities
(policies), most of MNC’s actions and strategies have to be analyzed
retrospectively. Only statistical reports on MNCs (used in this study as
well) form a significant primary source on MNCs.
Apart from that, a large proportion of the sources used in this thesis
derive from secondary data (such as articles, handbooks, reviews,
review articles, textbooks and collected works). Alternatively to the
approach to sources used in this study, more primary sources could
be used to support the dissertation’s conclusions (such as surveys,
experiments or interviews with key decision-makers). However, such
sourcing would be extremely costly and exigent while its impact
would be in general very limited because of their partial
correspondence to the general nature of this study.
Concerning the origins of the sources, the study works with a wide
range of sources from the USA, France, United Kingdom and several
Asian studies. Such a selection should help to analyze the area of
5 This participant observation derives from author’s internship carried out with a MNC (Hills’ Pet Nutrition Inc.) during
13
study in a more complex light, reflecting a wider spectrum of
academic research on MNCs and nation-states.
6This is, according to the author of this thesis, a major advantage of this kind of definition compared to the earlier
ones. Most of the contemporary studies on MNCs do not indicate any exact definitions based on MNCs’ size,
number of acquired markets, percentage of goods and services produced by the affiliates etc. since current MNCs
differ substantially from each other in the above stated figures that such definition would naturally mean to
exclusion of certain (modern) types of MNCs.
14
The multinational corporation (or enterprise) 7 generally consists of
the parent company (the resident of one country) and at least one
affiliate (resident of another country). For the purpose of this thesis,
the first is called a home country and the latter is called host (or
recipient) country. The company A is considered an affiliate of the
company B if the firm B possesses at least 10 % of the capital of the
company A. Furthermore, research papers distinguish between a
minority control (when the B’s capital in the company A reaches 10
– 50 %) and a majority control (when A owns more than 50 % of A’s
capital). 8
Apart from the simple definition stated above, the research papers
on MNCs have come up with more specific definitions. Andreff
(2003: 6), for example, defines the MNC in a more theoretical way as
an enterprise whose capital is acquired in the process of
international accumulation. Meier and Schier (2001: 8) come up with
a more strategic definition stating that the MNC is an organization
owing or controlling enterprises or physical and financial assets in at
least two countries of global economy and opting for a multi-
domestic strategy founded on social-economic differences of these
countries (as a reply to specific local demand).
7 The terms of Multinational Corporation or Multinational enterprise will be used in this thesis interchangeably. The
author is aware of the fact that in some sources the terms might be used with minor differences in the meaning.
Nevertheless, this study treats both terms equally.
8 More on these statistical issues on the MNCs in Levasseur (2002).
9 Such as Blake and Walter (1976) or Gill and Law (1989).
15
when its control and ownership are shared fairly and equally
between a number of different countries (and thus, the corporation
“takes on” many national identities), it should be called
“multinational”. The author of this thesis realizes the original thought
on this division; however, similar conclusions could be too misleading
in today’s complex reality of MNCs. The outlined differences remain
therefore not in the structure of the corporation but in its strategy
towards its operations. 10 That is why, using a different term based on
enterprise’s strategy would be in regard to the topic of this thesis
extremely confusing. 11
10 The strategy that a MNC adopts towards its affiliates overseas is subject to chapter 5.5.3.
11 Therefore, using the term “transnational” could be another option for this thesis. For the reasons outlined further,
the author voted in the end for the term “multinational corporation”.
12 Another reason for this conclusion lies in divergent opinions on the stages of development of MNCs. For example,
Christian Chavagneux (2001) describes the concept of a “world company” as a phantasm because according to
him, the company which is a total stateless entity deprived of all possible linkages to territories, has not occurred
yet.
16
Another area that remains quite challenging for the MNC-oriented
studies is to define a general concept of a MNC’s internal structure
and linkages between the parent company and its affiliates. One of
the most general patterns was introduced by Schier and Meier in
their comprehensive study in 2001. These authors distinguished three
major types operations arising in the intra-company relations: purely
financial (including the capital transfers), local (performed
exclusively by the affiliate) and intra-group (managerial control and
intra-firm trade). Refer to Appendix 1 for the corresponding graph.
In addition to that, the types of MNCs are becoming more and more
difficult to classify. One of the most common divisions of MNCs
distinguishes between extraction, manufacturing and service
corporations. 13 Another approach presents the classification
between the following three categories: First, horizontally integrated
companies which acquire additional business activities at the same
level of the value chain. Second, vertically integrated corporations
which are composed of a network of operations in upstream and
downstream activities in the production process. The last category is
referred to as a conglomerate structure when the corporate
divisions operate as relatively autonomous businesses under a larger
corporate umbrella and as such, constitute self-contained strategic
business units while each of them produces a single product.
13According to the latest World Investment Report executed by UNCTAD (United Nations Conference on Trade and
Development), the services account for nearly two thirds of FDI, manufacturing for 30% (has declined from 41% in
1990) and the share of extractive industries in total FDI increased a little between 2000 and 2005, but generally
having been on the decline since the Second World War.
17
product and its production technology, provides one of the
common frameworks for reasoning of company’s expansion to new
markets. 14 Second, the organization theory deals mainly with the
phenomenon of vertically integrated companies and the way they
coordinate the successive stages of production. 15
18
Europe. These major changes in the interstate order originated a
new, post-Westphalian era of world system organization built on
existence of sovereign political units.
17Roskin (2007) , for example, resigns on distinguishing between modern state, state or nation-state and is
concerned more about the concept than about the actual term.
19
existence: Territory, population and government. Territory refers to
the clearly defined over which the nation-state claims its sole
legitimate authority (Pierson 2004). Population refers to the people
who share cultural, political and social values and are linked
towards the nation-state through the concept of citizenship, which,
consequently gives them the right to participate in the life of
political community. Finally, the concept of government is very
extensive since it covers the control of the means of violence
(monopoly of use of force), sovereignty (discussed below), rule of
law, administration and bureaucracy.
20
Consequently, this concept is reflected into two dimensions of
sovereignty: Internal sovereignty defines the legitimization of the
state vis-à-vis the competing domestic interest groups while the
monopoly of force is assumed as the instrument to exercise the
undisputed right to rule, regulate and govern within the nation-
state’s territory. 18 In contrast to that, the external sovereignty serves
as the organizing principle of the interstate (international) order and
assumes both mutually exclusive territoriality and mutual recognition
by the territorially defined units. Thus, this external dimension of
sovereignty defines relations among nation-states in the
international system. 19
21
activities. Second, legal sovereignty means the right to impose rules
and regulations independently. Third, cultural sovereignty
incorporates the country’s freedom to determine its own culture and
way of life as well as the degree of absorbing outside influences.
Finally, the general concept of political sovereignty includes all
three preceding “sovereignties” and corresponds to the
combination of external and internal sovereignty described above.
The autonomy as the characteristic of the nation-states is subject to numerous studies, for example Keohane and
21
22
of the first multinational company in the late 19 th century until
nowadays, the characteristics of both nation-states and MNCs have
changed and so have the relationships between them. 22
22It is also worth mentioning that there were special relationships between nation-states and predecessors of MNCs.
Generally, these companies were founded and regulated by home countries’ legislation, granted monopoly or
very favourable trade privileges over certain region (or sector) and, although private, were endowed with a great
deal of state-like competences (e.g. military, police or administration functions). The Honourable East India
Company, founded in 1600, could be a good example of these very early multinationals.
23
elements such as technology, capital, entrepreneurship, managerial
and organizational skills were desperately needed. In early after-war
period, the relationships between MNCs and states were extremely
mutually beneficial since the expanding companies found new
markets for their products as well as sources of raw materials and
energy. Other countries besides Europe were not heavily targeted
by MNCs yet.
In late 70’s the MNCs became most heavily criticized for their
unacceptable behaviour resulting in uneven contribution to
economic development and unfair distribution of world wealth. This
negative approach to the multinational entities was reflected in
political activities of the nation-states, such as frequent
expropriations, restrictions on new investment flows or heavy
regulation of MNCs’ performance. However, the intention of such
steps to target MNCs headquarters was often missed and the costs
and obstacles resulting from national regulations had to be born
mostly by local subsidiaries. Consequently, the concept of
24
bargaining power 23 became a key issue in state-MNCs negotiations
and confrontations.
25
foreign direct investment (FDI), the main focus was on economic
and macropolitical aspects of the capital flow. Dramatic change
came in the Honeymoon stage (early 50’s) with studies on the FDI
phenomenon (by e.g. Edith Penrose or Stephen Hymer), the shift
from capital flows to wider implications of FDI as well as the impact
of MNCs on home and host countries. All these studies prepared the
ground for a more publicized discussion on the eroding sovereignty
of a nation-state called “Sovereignty at Bay?” by Raymond Vernon
(1971).
26
The “Sovereignty at Bay” era also sought to explain the international
political problems of 1970’s. Liberal economists, such as Harry
Johnson (1971), saw one of the major problems in the conflict
between political forces guided by nationalism and economic
forces pressing the world to further integration. Governments and
MNCs were put into conflict, each of them trying to stress its own
interests. Liberal economists at the “Sovereignty at Bay” era thought
that the governments still dominate over the multinational economic
forces, however it was believed that the roles of the two actors
would change very soon given the growing importance of global
economic interests. There is no wonder that most of the studies at
that time regarded MNCs as the embodiment par excellence of the
liberal ideal of an interdependent world economy (Gilpin 1975: 221).
25These two rules are the Rul e of Increasing Firm size and the Rul e of Unev en Devel opment. The former
expl ains the logics of increasing the size of firms in the dev el opment workshop – factory – national
corporation – mul tidivisional corporation – mul tinational corporation. The l atter rul e deals wi th the
tendency of international economy to produce both weal th and poverty.
27
will cause the final transfer of economic functions of the state to
MNCs.
Poynter (1985b: 25) even compares the acceptance of FDI and the
presence of MNCs in developing countries to a Trojan horse through
which the outside states can exert their influence on the host nation.
Dependencia and nationalism served as powerful psychological
factors in shaping population’s attitude to MNCs, together with
political factors common to most developing countries (like
colonialism and Marxist ideology). These two groups of inputs were
strongly influencing the overall (developing) state’s approach to
MNCs and consequently, the extent of opening the national markets
to foreign investments.
26
As stated James Rosenau (1992).
28
Ball (1968: 164) even calls the political structures “archaic” and the
business structures “modern” and sees the creation of supranational
political structure as the best solution how to govern the
multinationals in the world order of those days. Since such progress
was not likely to occur, he identifies the second best solution:
“Denationalize” the MNCs through treaty-based international
business law supervised by a supranational authority.
29
The lack of total control of the nation-state over the multinationals
derives from the very basic characteristics of both actors: MNCs are
mobile in their operations while nation-states are “anchored” in their
territory. This important aspect of mobility allows the multinationals
to move around countries, open and close operations based on
purely economic reasons, and not to be overconcerned about the
social impact of their decisions. 28
Even though Vernon’s studies were very influential in late 70’s and
early 80’s they were also subject to academic reviews and criticism.
Apart from dependencia and mercantilist models mentioned earlier,
the “Sovereignty at Bay” literature was criticized for its reduction to
a question of interests and power. Vernon and his followers assumed
that the bargaining power was primarily on the side of the MNCs
while nation-states were left with little to bargain. This aspect has
30
also social implications because if the nation-state does not reassure
its sovereignty against the multinationals it may result in unwelcome
changes in the society – e.g. lowering standard of living or increase
of unemployment. Besides that, “Sovereignty at Bay” is also heavily
criticized for neglecting the fact that success of MNCs in their
activities towards the state was dependent on a favourable political
order. 29
2.4. Globalization
29 That assumption derives from the 50’s and 60’s (so-called honeymoon phase in Dunning’s (1992) words).
31
relationships between the actors have changed fundamentally. The
world has become more integrated, interconnected and
interdependent on all the levels ranging from local, national,
international to global interactions. This process has had major
impacts on the relationships between nation-states and MNCs.
32
because all the transnational forces, technical advancements and
economic integration have caused the convergence of state
policies. Thus, domestic factors such as national structures and
economic ideology do have powerful impact on the strategies and
operations of MNCs. Put in other words; the MNCs are seen as
products of their home economy, the national market is always
considered the primary one and the MNC’s activities are heavily
influenced by policies of home governments. The multinationals tend
to reflect economic and political interest of their home country while
the governments promote the interest of their own national firms.
33
of that, “notoriously unstable” as Gilpin pointed out (Gilpin 2001:
299).
34
3. Government Still on the Throne?
Based on the historical development of the relationships between
nation-states and MNCs presented in the preceding chapter, one
can argue that the state has been already deprived of all its major
functions and the construct of sovereignty has eroded till that extent
that there is no reason to speak about the nation-state any more.
Many authors actually think in that way. Schwartz (1999: 139), for
example, assumes that national governments seem not to be losing
power but to be enthusiastically throwing it away.
Keeping the focus of this chapter in mind, we will look into state
policies that shape and coerce the activities and behaviour of
multinational companies. There are five major policies that have
serious impact on international business which are more or less under
states’ control: Trade policy, capital controls, FDI, regulation and
antitrust policy. Thus, nation-states do possess means of influence on
35
the MNCs, however, they use them with differing intensities and for
different ends.
36
Apart from traditional tariffs, nation-states impose also various forms
of non-tariff barriers. Quotas 32 and mechanical barriers to trade
belong to the oldest ones, but, under the international pressure to
remove trade barriers and eliminate quotas, nation-states have
turned to more discreet and sophisticated means (such as customs
and administrative entry procedures, standards, charges on imports,
export subsidies, voluntary export restraints, monetary barriers,
etc.). 33 In principle, these barriers inflict regulative conditions that
disadvantage foreign corporations against their domestic
competitors, serving as a protector of domestic market again under
the government’s unlimited control.
32 Quotas are an absolute restriction on the quantity of a specific item that can be imported (Cateora
and Ghauri 2006: 41). Similarly to tariffs, they tend to increase prices.
33 A comprehensive list of frequently used non-tariff barriers can be found in A. D. Cao’s article
boycott is an absolute restriction against purchase and imports from other country (Cateora and
Ghauri 2006 or wordnet.princeton.edu/perl/webwn)
37
Other barriers work in a different way: “Soft” trade policies like
imposing standards abuse national interests, local tastes and
differences 35 in order to distort free trade and cross-national
activities of MNCs. Multinational enterprises have gained support for
eliminating these obstacles in multinational arrangements and at
international authorities; however, the current practice is still very
much deflected to the state’s advantage.
Apart from control over trade, the nation-state has (to certain
extent) preserved the control mechanisms of capital flows in and out
of its territory. Even though it is nowadays true mostly for developing
35 Such as “health code” for beer in Germany, Italy’s definition of pasta, etc.
36 This happens in strategic industries such as aircraft (e.g. Airbus) or semiconductors.
38
countries, 37 protecting domestic economy from unforeseen changes
in the international capital markets constitutes an important
instrument in government’s hands. The state can maintain certain
controls on capital and foreign exchange in order to lessen the
impact of external capital fluctuations and shocks, even free
transfers of profits and dividends from overseas MNC’s operations
can be limited. Since the capital controls may differ in time and
according to political party/ideology in power, MNCs include these
controls into political risks analysis 38 and elaborate strategies in
advance to anticipate economic losses.
37 In 1996, 130 out of 156 countries classified by the IMF as “developing” were imposing restrictions on capital
account transactions (Vernon, Wells, and Rangan 1996).
38 See chapter 5.2.3.
39 However, authors like Behrens and Picard (2007) warn of opposite examples when some forms of FDI can result in
reducing economic autonomy and increasing economic dependence on the rest of the world. This shows that
generalizations on FDI can be misleading and country-by-country approach must be adopted when drawing final
conclusions.
39
capabilities and economic independence. Such “love-hate”
approach to FDI is typical of majority of the nation-states – FDI is
both welcomed and simultaneously restricted. For these purposes,
governments have developed different sets of regulations:
restrictive, conditional, attractive, and defensive.
40 Based on those international treaties, countries must not discriminate against foreign firm and must treat domestic
and foreign companies equally.
41 For example when imports need to be decreased because of unfavourable balance of trade (as in the case of
40
positions towards a more relaxed stance. Some governments, as
Drezner (2001) argues, go even further and voluntarily “auction off”
their sovereignty to the highest bidder, reaping great rewards in the
process. The current practice of attracting FDI by favourable policies
and generous incentives leads Drezner to conlusion that, in some
respects, it has never been so profitable to be a nation-state than in
this non-nation-state world. However, generalizations cannot be
driven without careful considerations of the major influencing
factors.
42 For illustration and reference, see Dunning’s (1992: 565) classification of countries into his four scenarios of 1990’s:
1st (OECD and a few Asian countries, 2nd (Japan, Taiwan and South Korea), 3rd (Latin American and sub-Saharan
African countries) and 4th (India, China, some Latin-American and African states).
41
These four scenarios provide a comprehensive overlook on
government’s means of FDI control shaped upon the stage of
country’s economic development and connectedness to
international economic system. In each stage (scenario), the
government has a specific set of instruments which can be applied
in regard to the state’s general economic and political goals.
43 The term of “brownfield investment” refers more precisely to purchases or leases existing production facilities to
launch a new production activity. The paper will deal more in detail on this topic in the section on Mergers and
Acquisitions (chapter 4.1.2.).
44 As Dunning (1992) suggests, the exit conditions were frequently regulated in 1960’s and 1970’s when MNCs were
used as tutors bringing know-how and forced to withdraw after successful implementation). Nowadays, they are
common only in selected sectors such as resource-seeking FDI.
42
simultaneously in the bargaining process in order to get the best
outcome from each inbound FDI (subject to chapter 3.3.).
The main difference between trade, capital and FDI policy and
regulation lies in the fact that regulation is mostly directed to the
domestic economy, not to transnational activities. Thus, both
domestic and foreign companies are subject to state regulation.
43
vary not only across the countries, but also inside each country in
industrial sectors, product groups, regions, etc.
44
values, mentality and historical experience, it varies a lot among
countries.
45
preference for the flexible antitrust policy by three major arguments:
First, the competition is maintained because such policy allows
creation and survival of numerous small enterprises. Second, the
structure of the market should be regarded more important than
strategic activities of strong corporations. Third, keeping borders
open to new competitors brings substantial benefits in form of
technical progress and strengthening economies of scale.
3.2. Extraterritoriality
46
ambiguity makes determining ‘nationality’ of the subsidiary of the
MNC quite problematic because it raises questions about whose law
should apply. Typical extraterritoriality problem arises when
subsidiary’s actions (situated in country A) are judged by national
laws of country A and parallelly, country B exercises its control over
the headquarters located in country B and feels appropriate to
apply country B’s laws. The clash of national law systems is in this
case even more complicated when the country B executes
applicable extraterritorial law. 47
47 Such as the USA applying extraterritorially the “Trading with the Enemy Act”. The clash of US and French legal
systems appeared according the to the scenario described in the text many times, for example in Fruehauf case
(1964) when a French subsidiary entered into a contract with Chinese supplier while the Act prohibited business
activities with proscribed countries, China included at that time.
48 That was the case brought up mainly by developing countries in 80’s when the political interventions were
violates human rights and all U.S. companies can also be charged for bribing foreign nationals under Foreign
Corrupt Practices Act.
47
government’s control over MNCs’ activities, in this case even outside
its own territory.
48
All that can be easily characterized as a learning process on both
sides but governments have started to appreciate the benefits of
inbound and outward investments and also to accommodate public
goals of the nation-state to private goals of the MNCs. The general
approach to MNCs has led to a more relaxed stance, showing
appreciation to traditionally negatively viewed activities such as
allocation of cross-border innovatory capabilities. After being
subjected to major criticism, states began to realize and promote
also the benefits (thus, such investments being a “seed corn” for
economic growth and enhanced competitiveness).
49
payments must be competitive but weighed against the efficiency
and productivity.
The governments in the “race” for FDI apply, among others, five
major incentives: Information advantages and agglomeration
support, subsidies and tax packages, looser interpretations of
international agreements, cyclical and geographical factors (such
as business cycles and seasonal patterns) and nationalism in the
form or home country-biased consumers. The agglomeration
support mentioned first can be explained as a conscious strategy of
a government to invest and develop a certain sector of its economy
which leads to the cast that the local expansion of a sector initiates
further growth by increasing the supply of the factors that made the
location attractive at the first place.
50
The most important role (regarding the topic of this paper) is played
by subsidies. Grants, tax concessions, soft loans, equity participation
and warranties are main examples of active use of incentives as
offer-specific examples. 52 They are generally incompatible with the
concept of free competition under equal conditions and the
worldwide trend is to eliminate at least the most discriminatory ones.
51
with success in information-sharing and monitoring of unwelcome
side-effects of FDI, for example abuse of transfer pricing techniques
in intra-firm trade. 55
52
certain domain (e.g. International Labour Organization),
organizations of a broader scope (such as World Trade Organization)
and regional integration (as European Union) while each of these
kinds of cooperation dispose of specific rules, instruments of control
and degree of sovereignty limitation.
57 Such as GATT (General Agreement on Tariffs and Trade) and WTO (World Trade Organization)
58 More on GATT and WTO in Spar (1999), Nicolaidis (1998) and Gopalan, Moss and Wells (1996).
59 OECD stands for Organization of Economic Co-operation and Development.
53
the rules of international trade cooperation and contribute
substantially to development of fair conduct in world trade. 60
60 See chapter 5.1.2. on the analysis of codes of conduct role in MNCs- nation-states relationships.
54
and organized basis. This also provides evidence that government
and control over the territory as key characteristics of the nation-
states have not been surrendered substantially to the pressures of
MNCs.
55
become so complex that it is nearly impossible to determine it
clearly.
Meier and Schier (2001) offer five principal strategic motivations that
drive the MNC’s decision to internationalize: Development of new
means of growth, better repartition of risks between countries,
answer to globalization of markets, improvement of corporation’s
competitiveness and finally access to more favourable regulatory
and institutional environments. If the corporation is motivated to
engage in overseas operations, the next key step is to decide in
which form it will proceed in the new market.
61 However, this Pérard’s conclusions are true only if the new market conditions remain the same. In reality, waiting
for more favourable market entry moment with more-FDI friendly arrangements can pay off to the MNCs (such as it
did to Coca Cola Co. in its re-entry to India in 1993.
62 Like Anderson and Gatignon (1999), Lee (1996) or Erramilli (1996).
56
on firm’s image. Furthermore, the MNC’s decision-makers should also
weigh more general factors such as macroeconomic (political risk
and market potential), microeconomic (company size, contract risks
and value of resources) and a number of others (knowledge of
market and international experience).
To sum up, Meier and Schier (2001) suggest approach the decision
upon the mode of market entry from two principal sides: Firstly, the
strategic resources (financial, technical, managerial, commercial,
organisational, etc.) have to be subjected to a detailed analysis.
Then, MNCs have to weigh the market potential (growth rate, local
resources, possible extensions) against the risk associated with their
involvement in the particular market (economic, administrative,
cultural and geographic distance). Based on this two-dimension
analysis, the decision-makers will make a final conclusion on the
market entry, taking into account both market attractiveness and
managerial implications of such a step (see Exhibit 1).
57
progressive approach
HIGH
strategic priority with high
around the research of local
potential risk of competitive intensity
Market
partners
Exhibit 1: Market attractiveness and Managerial implications. Source: Meier and Schier
(2005): Enterprises multinationales. Stratégie, restructuration, gouvernance. Paris, Dunod
(page 43).
The initial market entry strategy that requires the least resources
localized in the new market, is exporting. Exports provide easy
access to overseas markets without establishing a separate legal
entity in acquired market, as Tsurumi (1984: 439) points out, it
automatically paves the quickest way toward rapid industrialization
and export competitiveness of local manufacturer. Exporting is a
favourite way for companies that wish to realize their sales abroad
58
without excessive costs of structure and capital. Mostly, this choice is
adopted by small and/or new firms wanting to go international or by
larger firms that intend to begin their international expansion with a
minimum of investment.
64 Such as in Korten’s study called When Corporations Rule the World (Korten 1995).
59
resources or by companies with large share of research and
development revenues.
The reason why MNCs vote for this mode of entry to new markets is
supported by several sound arguments. First, corporations are
tempted by new markets where they can obtain a significant market
share or reach a dominant position. Second, through F&A,
corporations get access to assets and resources of other companies,
especially of those of intangible nature. Third, F&A usually bring
higher profits because of the increased productivity, a bigger size of
60
the company and of the market share as well as new financial and
personnel motivations. Apart from those microeconomic reasons, the
explication of large F&A activities originates in macroeconomical
factors such as deregulation, privatization, destructuralizations of
particular sectors, liberalization of financial markets and trade. A big
proportion of fusions and acquisitions have been carried out
because separate corporations could not bear excessive costs of
technological innovations and vast expenses on research and
development without merging with other to share these expenses.
61
plans its offensive strategies in line with its internal and external
growth. Creating assets is essential for company’s competitiveness
and sometimes, the competitors are acquired through their shares
(in raid offer or public offer) without their consent (so-called hostile
acquisitions). In contrary to that, F&A can be effectuated through a
common accord between the absorbing and absorbed firm.
Second, MNCs cannot remain passive in their business strategies and
must intentionally develop defensive strategies in order not to be
acquired by another company. This involves continuous deep
analysis of market factors, its own resources and assets in search for
new equilibrium in constantly changing business environment.
68A joint-venture does not have to be always between companies from different countries, a domestic joint-
venture can exist as well. Thus, to be more precise, we should use the term “international JV” in this paper.
However, the thesis will use the term “joint-venture” in place of “international JV” since it is not the purpose of this
paper to analyze domestic JVs.
62
two (previous) rivals are able to start effective cooperation and
communication through their different structures. More interestingly
for this study, there is a second type of JVs arising between the MNC
and a local company. This kind represents a real market entry mode
for a MNC that would not be allowed otherwise to engage in a new
market. Sometimes, big multinationals vote for this choice
voluntarily, however, more often it is the state regulation that
requires cooperation with domestic partner companies. 69
The third way of classifying JVs can derive from the presence (or
absence) of the equity in the final interconnected structures. So-
called nonequity ventures are characterized by one group merely
providing service for another (e.g. a consulting firm) while in equity
ventures, both the MNC and local partner provide a share of
69 As it has recently been the case of for example India and China.
63
financial investment, technological expertise and/or managerial
expertise.
70 This kind of cooperative agreements between potential or actual competitors are referred to as “strategic
alliances” (Hill 2007).
64
have a realistic chance to skip the previously mentioned modes in
the process of successful entry to new markets.
degree of integration
high costs of
Joint-venture maximum
Concession of resources
License agreement
degree of integration
high costs of
International subcontracting
Exports
65
4.2. Internalization and Impact on States’ Economy
Internalization is one of the three pillars of OLI paradigm (see chapter 5.5.1).
71
72A well-known example could be large trade deficit of the USA with China which is, according to Christian
Chavagneux (2001) and many others, caused by frequent delocalization of US corporations in the Chinese
economy.
66
more important than minor political discrepancies. 73 Some authors
go even further in interpreting the active role of MNCs in economic
and political area. Bauchet (2003), for example, points out the
“unexpected” pressures that MNCs tend to bear upon totalitarian
regimes to impose more human work conditions and trade unions.
Consequently, workers pressurize execution of higher standards and
thus, MNCs are regarded as a source of these positive outcomes. 74
Another aspect that MNCs have under their full control and which
significantly impacts their performance is the way how they are
internally organized. The organization is often heavily influenced by
the culture of the MNC’s home country which opens the discussions
on the firm’s “nationality”. In one of the most well-known and data-
extensive studies, Geert Hofstede (1983) concludes that managerial
attitudes and beliefs as well as the pattern of decision-making are
shaped by national culture. 75
73 However, the “spill-over” of good trade relations of interlinked economies into less probable violation of the
relations by unfriendly political acts is not absolute. There have been examples when MNCs were used as
instruments to aggravate countries’ relations by political chicanery (E.g. Belgian MNCs in the Congo prior to WW I,
US corporations in Chile and French in Algeria in post-WW II era).
74 So-called corporate social responsibility will be discussed in chapter 5.1.2.
75 Geert Hofstede analyzed a large database of employee values scores collected by IBM between 1967 and 1973
covering more than 70 countries, from which he first used the 40 largest ones only and afterwards, he extended the
analysis to 50 countries and 3 regions. His “cultural dimensions” belong to the core studies of impacts of culture in
workplace and managerial processes.
67
while others encounter more culture-related problems in the
adjustment process. 76
76 Keiretsu-enclaves (originally Japanese structures), for example, have very internalized structures based on long-
lasting relations with both suppliers and retailers.
77 That is subject to chapter 5.5.3.More on this topic in Bellin and Chi (2007) or Hodgetts, Lufthans and Doh (2006).
78 Taking an example from Europe: Out of 300 top European MNCs, 86 have place of residence in London and 67 in
Paris. This leads the author of this study (Céline Rozenblat 1993) to conclusion that the networks of MNCs have
serious impact on the internationalization of European cities.
79 Named after Henry Ford, it stands for the productive method and consequently the socioeconomic system
typified in Ford’s car plants, in which workers are regarded as links on production lines, performing specialized tasks
repetitively.
68
Based on this development, current MNCs’ structures incorporate
both central headquarters providing the units with corporate global
strategies as well as guidance and relatively independent units
(subsidiaries, factories and other operations) with delegated tasks
and responsibilities within the organization system. Necessary to
point out, that these world-spread structures are able to work
effectively only thanks to modern means of communication,
however, the biggest challenge of current and future MNCs remains
in surpassing local cultural differences.
69
which they need to perform well in order to succeed. The bargaining
strength of these key activities is determined by who has control
over the resources (or skills) required for those activities. If, during
the bargaining process, the MNC proves to be in possession of these
resources/skills, they consequently become the major strengths in
company’s bargaining power in relation to nation-states.
70
some advanced countries. 80 Thus, there is no wonder that such large
corporations are able to make the most advantageous deals with
the recipient countries (pay lower taxes, receive more subsidies,
etc.).
80 As an example, Andreff (2003) points out that the added value of the Exxon corporation reaches the same
numbers as GNP of Chile (in 2002).
81 Chapter 4.1.3.
71
5. The Patterns of Relationships Between Nation-states and
MNCs
72
pursue the logics of globalization to a mutual benefit. In such areas,
the antagonism between nation-states and MNCs seems to be
fading away while collaboration and sharing of functions are
consolidating.
73
states are interfered not only by the global companies but also by
newly emerging actors (e.g. NGOs 84) whose intervention is appraised
by international community. The business-government-NGO system
of setting norms has begun to look less like a tidy flowchart and
more like a pot of soup (Swartz 1999: 141). Even though NGOs tend
to criticize much more than appraise current MNCs’ activities in the
world, they can also provide positive support to companies who
help them realize their objectives. In addition to that, NGOs can ally
with governments and thus, even increase pressure on some MNCs’
activities, especially if these constraints are against public interest
(e.g. exploiting the environment). 85
Even though liberal political economists are not able to show direct
causation between MNCs’ activities in the host country and its
economic growth they argue that the presence of these
74
multinationals do raise efficiency and consequently, increase the
economic growth. If governments pursue active and positive policy
towards FDI, MNCs include these markets in the analysis of locations
for the potential expansion, evaluate their political and economic
risks and opportunities. As a consequence, the direct investment
from abroad is more likely to occur. As Gill and Law (1989: 203)
argue success brings success, with the agglomeration economies
being realized as attractive “growth poles”. In other words, if the
government realizes the value and growth possibility in opening the
market to FDI and actively executes and implements such a liberal
policy, the economic growth of the country becomes a mutual
target of both the country leaders and the MNCs’ management.
75
a surplus rather than a deficit in the host country. Regarding the
home country, MNCs can work with their home governments in order
to improve the balance of payments if it is beneficial for both actors.
The government can ask the corporations to limit their new outward
FDI in developed countries, to increase the amount of FDI financed
by borrowing abroad and to increase the return of earnings. 86
This kind of cooperation between the home country and “its” MNCs
is quite frequent but not always regarded positively by other
countries. Especially when the countries use the corporations to
support their own strategies in certain countries – Bauchet (2003)
compares this generally unwelcome role of MNCs to the one of
legions of the Ancient Rome: The MNC’s home country uses the
corporations as a channel of influence in other countries.
But more often, the relationship between the state and giant
domestic companies assumes the form of protection and privilege of
so-called national champions. 87 Such companies, originally domestic
which turned into multinational corporations during their strategic
development, have retained strong influence channels to impact
their government’s decision-making processes or, sometimes, even
retained the state capital in their assets. In return, these companies
receive from their government strong support in various forms, e.g.
protection of capital against raids of foreign capital or even
tolerance of their legal monopoly.
86 This kind of policy was pursued for example by the US government in 1960’s.
87 For example, France has several big national champions, such as Gaz de France or Air France.
76
the open-market strategy, the following impacts are the most sound:
Spill-over of technology and management skills, capital flows with no
debt-servicing attached, new domestic employment and additional
production capacity. These arguments have persuaded many
governments with originally more negative attitude to FDI to adopt a
more FDI-friendly approach. According to United Nations
Conference on Trade and Development (UNCTAD) and its World
Investment Report from 2001, out of 1185 modifications of national
regimes regulating foreign direct investment 95 % were investment-
facilitating.
77
negotiated sector or a location can help both sides: The MNC profits
from enhanced infrastructure, labour education, healthy
environment, etc. and the government does not have to reallocate
all the needed financial resources to the impacted region or
industrial sector from the state budget.
78
Thus, multinationals are engaging in areas which used to be fully
under governmental control with no major private sector input.
89 As an example, the US corporation Hill’s Pet Nutrition Inc., producing specialty channel pet food, engages in a
range of socially-responsible activities such as providing food for pet shelters, co-financing guide dog trainings or
sending pet food to rescue dogs working in areas affected by various natural disasters. All these activities are part
of widely-defined CSR of this company.
90 While UNCTAD code addresses mainly the issues surrounding the transfer of technology and WHO health-related
matters, for example OECD has developed more comprehensive and general guidelines for MNCs (in 1976).
79
mean a significant input in the political arena. However, it is
necessary to point out at this moment that the priorities and
particularly policies towards MNCs and FDI may vary across the
political spectrum. But once a deal with a foreign corporation
(including given subsidies, e.g. tax holidays) is made very little can
be changed apart from enactment. This “lock up” system raises
questions of political accountability and transparence of the
bargaining processes.
80
between the various strands of it are the source of dynamic
evolution of cooperative practices between nation-states and
MNCs.
91 Mostly in 1970’s – this era is also connected to the “Confrontation phase” mentioned in chapter 2.1. which was
characterized by ongoing conflicts between the two actors.
92 More on this topic in Gilpin (1975) or Johnson (1971).
81
Blake and Walters stated in 1976 three major sources of conflict
between nation-states and MNCs, which are (with minor
amendments) still valid: First, the MNC is a foreign entity that
behaves in a fashion which can be regarded unusual and different
by the host country. Second, the corporation can be perceived as
an enterprise associated with a foreign country which could
(possibly) exert its influence 93 through this affiliate located overseas.
Third, the MNC is an international entity able to take advantage of
economic interdependencies among states without itself being
subject to the (universal legally binding) rules and regulation issued
and supervised by an international authority. 94
93 The influence in this sense should be interpreted in a broad sense – i.e. not only political influence but also cultural
and social flow of changes and innovation. This could be an example of McDonald’s which is frequently criticized
mainly for its “cultural” intervention into social and cultural habits of people in different countries. More in Watson
(2006).
94 You can find the original three sources of conflict in Blake and Walters (1976: 97).
82
etc.). Less confrontation is generally faced by manufacturing
corporations that are much more integrated in host-state economies
and societies. 95
This feature gives raise to other related issues. One of them is the
problem of a “double personality” of the affiliate of a MNC located
overseas. This entity has to abide by the law of the host country as
well as by the internal instructions. This issue is interrelated with the
phenomenon of extraterritoriality analyzed in chapter 3.2. At this
moment it is essential to point out that the duality of foreign
subsidiaries together with application of extraterritorial acts has
always been at the root of many of the MNC-state conflicts. Thus,
the multinational corporations serve as vehicles facilitating the
83
extraterritorial reach of one state into the domain of another – as
conduits or transmission belts through which the power of one
sovereign state is projected into the territory of another (Vernon
1977: 177).
This pattern deals with the processes different for MNCs and nation-
states in terms of market control. There is no reason to assume that
MNCs and nation-states have always conflicting objectives,
however, there is no reason to claim that they will be identical or
even substantially overlapping. Although they play different roles in
the market, the governments have been increasingly relying on the
private sector to accomplish national economic objectives. Kobrin
(2001) argues that the growing emergence and presence of MNCs in
84
domestic economies has resulted in a higher probability of a
divergence between state and firm objectives.
96 This is in direct opposition to opinions demonstrated in chapter 5.1.1. where it was argued that presence of MNCs
in the market raise market efficiency and promote growth. These antagonisms in the international political
economy show the diverse spectrum of opinion on the MNCs’ activities because in reality examples of both
situations can be found. For more details on these discussions check Spero (1990).
85
production, maintain artificially high prices and consequently,
decrease efficiency. Also, the national growth can be hindered by
absorbing the local capital instead of generating a new one, by
applying inappropriate technology and/or by employing foreign
managers. Again, such situations are against governments’ interests
and need to be prevented by effective antitrust regulation.
86
military industry) may be in contradiction to government’s interest to
protect national security.
87
government’s policy (Hodgetts, Lufthans and Doh 2006: 295). MNCs
seek to preclude such conflicts by the effective political risk analysis;
however, the probability of crisis situations can never be totally
avoided (Moran: 1998).
97 Poynter (1985b) suggests four major interest groups within each country with such an influence: the ruling political
party, domestic businessmen, non-ruling political groups and other potential leaders and finally the domestic
managers.
98 To provide examples, imposing government’s restriction on foreign exchange transaction affects all industries
(addressed by macro political risk analysis) while industry regulation, taxes in specific types of business activities and
restrictive local laws are sector-specific (addressed by micro political risk analysis).
88
presence of the MNC. Poynter (1985b) includes into the first type of
intervention the following cases: expropriation, nationalization,
domestication, forced sale and abandonment of the subsidiary. The
examples of the “sharing” variation could be government-enforced
JVs, domestic public shareholders, local product or component
sourcing, product distribution through a domestic firm, hiring quotas
etc.
Apart from the traditional interventions, MNCs can also face other
kinds of risks that endanger their activities and presence in host
countries. MNCs have to react flexibly to economic risks such as
newly imposed exchange restriction, tax and price controls, import
restrictions or occurring labour problems. In addition to that, MNCs’
business activities might become victims of international political
sanctions such as boycotts and embargoes, 99 which could
paradoxically be inflicted by the corporation’s home country.
Obviously enough, the political risks are specific for each country
but also for each corporation. Although certain countries tend to be
89
more risky 100, some companies especially in extractive, agricultural or
infrastructural industries are more vulnerable to government’s
interventions and large companies are more likely to be targets, the
generalizations are difficult to make and misleading to be behaved
upon. For that reason, each MNC reviews and evaluates
continuously its markets and their political as well as economic
development. As a strategic response, the corporation can avoid
the most risky areas, cover such risks under government and/or
private insurance, or create strategic JVs etc.
100 Some well-known periodics regularly rank countries by risk associated with doing business in their territory. For
example, in 2004, the Economist ranked as top three risky states in the world Iraq, Argentina and Angola (The
Economist, May 29, 2004).
101 Well-known examples include “Buy British” campaign promoting purchase of products made in Britain (started in
1970’s but has been vivid until now). Similar effect is transmitted by the “Czech Made” stickers and awards used in
the Czech Republic for the same purpose.
90
rapid pace (Wang and Wang 2007). In this battle for consumers,
MNCs are left with very little choice of alternative behaviours. They
might seek to gain the image of the national manufacturer by using
local resources and customize their products according to local
tastes and preferences. In short, they should become more
nationally-responsive and less global. 102
Among all the social conflicts between nation-states and MNCs, the
labour issues seem to be one of the soundest. The economy of scale,
easy transfer of production and exploiting local labour has made
MNCs a frequent target of criticism. Multinational corporations
employ a large number of workforce in different legal, social and
cultural settings all over the world, which generates various problems
arising from the nature of the employment relationship. As Rugman
and Collison (2006) argue most MNCs use a combination of
centralization and decentralization in managing their workforce,
with some decision being made at headquarters and other being
handles by managers on-site. This situation may, however, lead to
numerous conflicting situations.
91
Also, because MNCs possess operations in multiple countries, the
employment conditions, salaries, working hours and work legislation
is often subject to comparison. Longer working hours, unequal
salaries between masculine and feminine employees, child labour,
unanticipated discharge of employees, discouraging labour unions
and collective bargaining – these are the major conflicting areas for
which, owing to say, the countries themselves are often criticized.
The conflict in the labour field can also arise from the fact that
MNCs usually diffuse technology. Although this contribution is
generally positively regarded, in this situation MNCs cause an
accelerated obsolescence of traditional jobs that become too
costly in comparison with technological advancement and
consequently, result in waves of redundancy of unskilled personnel.
However, serious conflicts also arise when labour issues are
insensitively used in bargaining processes by MNCs. Threatening with
closing of operations and moving them to a less costly regions have
become common but still criticized tactics of MNCs.
Not only does the host country have issues with MNCs in the labour
area but also the home country sometimes raises complaints on
certain implications of opening operations abroad. While the home
MNC employs more and more workers overseas, it consequently
92
“exports” domestic jobs which creates tensions in the homeland. 103 In
a broader sense, global corporations are blamed for international
migrations and creating of socially insufficient work
agglomerations. 104
Patterns)
103 The recent trend of this kind (not onl y in the USA) is called offshoring – substituting foreign for
domestic labour.
104 For example creation of large production compl exes near borders (so-call ed maquiladoras
named after such facilities in Mexico near the US frontiers). More on this and similar issues in
Rozenbl at’s articl e (1993),
105 Such as conflicts arising from socially insensitiv e introduction of new products (such as Nestl é’s
scandal of implanting I nfant formula, a substitute of breast milk, in dev eloping countries in 1977
which due to l ow risk-awareness and poor hygienic conditions caused death of several thousands
of infants in the Third worl d.
106 One of the most effective ways of regulation has become the system of polluter-payer.
Howev er, hol ding gl obal corporations liabl e for environmental degradation is still very
probl ematic because the effects can surface years after the MNCs l eave the country or l ocation.
107 For more details on conflicts between MNCs and Nation-states in the environmental areas refer
93
Formally, as Debora L. Spar (2001: 207) analyzes, in the interaction
between the government and multinational corporations runs in two
directions: Nation-states erect policies that affect firm’s ability to
trade and invest across borders; and the actions of trading and
investing firms affect the political climate of the states in which they
do business. The nature of these interactions is interactive and
changing over time while both key actors (nation-states and MNCs)
are operating simultaneously in a number of arenas – both domestic
and international pursuing their specific goals.
94
telecommunications, assistance to small firms and R&D or vocational
and tertiary education. Somewhere in between, expenditures on
health, education, environment, law and order create another
major expense for the government.
95
negotiating enterprise, the MNC has specific advantages 108 which
are wanted by the government. This confronting scheme (which is
also interdependent, based on the supply-demand model) is then
followed by partial bargaining process phases – such as in
determining the mode of entry and ownership patterns: The
government’s aim is to negotiate such a mode of entry that
preserves little MNC’s control over the affiliate, which, in the end
allows to transfer the technology and know-how into the host
country. On the other hand, the MNC seeks to negotiate a high
control over the affiliate for the corporate structure in order to
strengthen internal corporate coherence, dominate the market and
preserve their intellectual property rights.
The main factors playing role in shaping the bargaining power and
the level and direction of interactions are the following: Motivations
of the government to attire FDI, motivation of the MNC to enter the
new market, level of competition, government restrictions, need of
local resources, need of financial resources and economic and
political risks in the host country (Pérard 2003).
Apart from these factors, there are other elements that might shape
the interdependence of nation-states and MNCs in the bargaining
process. Goodman’s six dimensions (1987) are valid even nowadays:
First, the identity of the initiator is crucial in setting the scene and
starting negotiations. Second, there might be more actors on either
side of the bargaining (so-called collective bargaining). 109 Third,
permanence of the relationship also plays its role and affects
significantly the offered terms and conditions from both sides.
Fourth, non-revenue contributions to the host government might be
another difficult conclusion to draw in the negotiations. Fifth, both
MNCs and governments calculate the costs and prices of the
96
company’s engagement in a new market and it is worth pointing out
that their calculations follow mostly opposite interests and therefore,
will differ substantially. Finally, the sixth Goodman’s dimension is the
division of profits resulting from the relationship which has to be
agreed between complete financial transparency (desired by the
government) and absolute internal profit division patterns (aimed by
the MNCs).
97
identifies responsibilities of each affiliate to match the global goals
and communicates them to the lower divisions through the global
networking system. Sometimes, the strategy for certain regions
changes substantially so it is necessary to relocate the affiliate or
redefine its responsibilities – Andreff (2003) describes this process as
global switching. In case the headquarters decide to concentrate
certain functions (e.g. R&D, finance, etc.) into one or several
affiliates, this can be described as global focusing. It is important to
note that these changes happen within the existing structure of the
MNC which has to be apparently very flexible to bear these more or
less sudden changes.
The challenge of the alliances and networks is not only between the
participating MNCs but also for the governments. Some states
require investors to share ownership and control and consequently,
in these cases the state companies or the government authorities
become parts of the global alliances and networks. They become a
part of interdependent and interconnected global structures and
must cooperate with other partners within the scope of alliance
98
agreement. Hodgetts, Lufthans and Doh (2006) especially alert to
situations when the governments are reluctant to permit the alliance
to terminate or they find more subtle ways of making the foreign
partners stay in their territory (e.g. through blocking the repatriation
of the foreign partners’ investments). These issues should be
addressed in the initial agreement to prevent possible intentional
misinterpretation of the agreement by the host country government.
In her article, she states the example of the integration of markets in Central and Eastern Europe which
111
99
defensive approach towards FDI it adopts. However, this general
rule has proven to be right especially in those cases when short-time
gains from inward investments are sacrificed so that the greater
degree of technological and economic autonomy can be achieved
in a long-run. 112 But most of the time the dependency issue has to
be regarded for each specific case separately. As Dunning (1992:
532) continues the tolerance for inward direct investment varies
according to its perceived economic merits, on the one hand, and
on the relative importance of such investment in the economy as
well as the openness of the economy to trade and investment, on
the other.
112 E.g. in post World War II era in Japan or South Korea where the governments disallowed most FDI because they
preferred to enhance the country’s independency on outside capital and resources, and therefore strengthen its
own resources and technological as well as economic capabilities.
113 To provide examples: The first scenario is characteristic for Canada receiving a large amount of US investments
while the second scheme is typical of ex-UK, French, Belgian and Dutch colonial territories who are aiming at
diversifying the geographical or industrial composition of the FDI coming to their country.
100
includes autonomy in financial and monetary issues while this part
quite specific for the multinational banks as a subgroup of MNCs.
101
MNCs are reluctant to share information on intrafirm trade with the
host nation-state(s) because they are actively using such
transactions to reduce their costs. Global companies establish
special prices (so-called transfer prices) for the internal transactions
between the subsidiaries. These prices are set up independently
from the competition and as such, do not correspond to the prices
in the world market. 114
114 In fact, transfer prices differ significantly from world market price levels. Based on Andreff’s (2003) estimations, the
difference between the internal and world market prices reach high ratios. For example, for pharmaceutical
industry the coefficient is 155 % , for electronics 60% and caoutchouc 40%. For more on transfer pricing, refer to
Elliott and Emmanuel (2000).
102
5.4.2. Autonomy in Monetary Issues
115Bull and baisse speculations can seriously undermine currency stability. Recent examples can include currency
speculation on Mexican peso in 1994, Malaysian ringgits in 1997 or Brazilian reals in early 1999.
103
definitions of money. 116 As Drucker (1997) stresses out, this money is
totally anonymous and virtual rather than real.
116Standard definitions of money include: Standard of measurement, storage of value and medium of exchange.
117 OLI paradigm was introduced by Dunning in 1970’s and apart from O-advantages and L-advantages
(elaborated later from Lecraw and Morrison’s model) this model included also the third set of advantages (I-
advantages) of MNCs which originate in MNCs’ ability to internalize their international activities including
production and thus, further reduce costs independently from the countries’ control. More on this is Meier and
Schier (2001).
104
components which precede some course of action of a country
towards the MNCs (see exhibit 3).
(II) (IV)
Ownership advantages Locational advantages
Constraints Value Creation Constraints
Opportunity sets (VI) Opportunity sets
Goals Goals
Assumptions Assumptions
Bargaining/
(III) negotiation (V)
Strategies Policies
Organizational structure Incentive systems
Decision-taking Administrative systems
mechanisms
Outcome &
Performance
(VII)
Evaluation & Evaluation &
reactive reactive
behaviour behaviour
(VIII) (VIII)
105
The other model analyzed by Dunning is called the Bargaining
model. It offers a more dynamic approach to the relationship
between nation-states and MNCs. It is essential to highlight the fact
that these interactions arise only when an economic rent is over and
above than the anticipated opportunity cost of the O-specific
advantages of the MNC activity and the anticipated opportunity
cost of the L-advantages of the host countries, is earned or thought
to be earned (Dunning 1992: 531). Otherwise, the bargaining process
will not occur.
Alternatives: Alternatives:
Other countries Other MNCs
Other modes Depackaging
Home country Domestic firms
Reserve Reserve
position position
Ownership Locational
advantages advantages
Strategies Policies &
Opportunity sets incentive systems
Exhibit 4: MNCs and host countries – a bargaining framework. Source: Dunning (1992):
Multinational Enterprises and the Global Economy. Reading, Addison-Wesley (page 552).
106
Furthermore, there are factors on each side that play a major role in
this interactive process: nation-states can enhance their negotiation
position by highlighting their competitive advantage while MNCs
may stress out the unique character or their O-advantages. The
outcome is also heavily affected by the negotiation abilities of both
actors as well as by the choice of alternative courses of action. Thus,
the final activities on both sides resulting from the bargaining
process will reflect the relative bargaining powers of each actor as
well as the circumstances of the negotiation process.
118 See chapter 4.3. for discussion on MNC’s structure and nationality.
107
HOST : Consistency between
MNC goals and Host country goals
Conflict Complement
MNC goals and Home country goals
HOME: Consistency between
Conflict
1 3
Complement
2 4
Exhibit 5: The consistency between MNC and home and host government goals. Source:
Rugman and Verbeke (2001): Global corporate strategy and trade policy. Oxford,
Routledge. (page 823).
108
balance between the MNC’s ability to be both “global” and “local”.
As most of the studies 119 conclude, the guidelines can hardly be
universal because the reflection of company’s goals and strategies
as well as country’s characteristics has to be taken into account.
Multi-domestic Tr ansnational
[polycentr ic] [geocentr ic]
Global Integration
There are four kinds of strategies which MNCs can follow based on
their characteristics, goals and objectives: First, if MNCs possess core
competencies that domestic companies lack, they are able to
119 E.g. Inkpen and Ramaswamy (2007), Hodgetts, Lufthans and Doh (2006) or Meier and Schier (2001).
120 E.g. Hodgetts, Lufthans and Doh (2006) or Deresky (2007).
109
pursue strategies low both on global integration and national
responsiveness (so-called international approach). 121 Second, multi-
domestic approach which is demanding on national responsiveness
but not that much on globalization, is frequently adopted by
companies which must be differentiated through emphasizing their
local adaptation. Third, the truly worldwide companies pursue global
strategies which try to integrate local productions as much as
possible in the centralized models. Finally, the latest effort from
global corporations has been made towards the transnational
strategies because these are built upon both global integration and
local responsiveness. This approach remains the most challenging of
all since the MNCs are facing contradictory demands from their
economy of scale and country-specific production. 122
121 Examples of MNCs pursuing international strategy could include truly global companies with worldwide
differentiation such as McDonald’s, Walmart or Microsoft.
122 More precisely, the production can be in fact country-specific, market-specific or region-specific.
123 The approaches reflecting the debate of global integration vs. national responsiveness in corporate structure are
110
organizational schemes since both the affiliates and the corporate
centre are seen as equal parts of the corporate network structures.
First, the MNC can pursue integrative techniques and thus, help its
overseas operations become a part of the host country’s
infrastructure. The most common examples of integrative techniques
include the following two groups: Firstly, developing and improving
relations with the political sector (host government and other local
political groups) as well as with own workforce (effective local-
management relations, hiring local managers). Secondly, the MNC is
integrating through local sourcing (engaging domestic suppliers,
subcontractors and research & development). Following this strategy
111
of being “less foreign” and more “domestic” also, according to
Hodgetts, Lufthans and Doh (2006), makes the foreign corporation
more unlikely to be the target of the host government action (e.g.
expropriation). 124
124 See chapter 5.2.3 for more details on the intervention. Typically, corporation manufacturing low or stable
technology tend to follow integrative strategies since their operations require minimum innovation and relatively
unsophisticated technology.
125 Mostly dynamic and high-technology MNCs (e.g. computer companies) limit their local performance and
integration in FDI-receiving countries on a minimum level and tend to behave more defensively.
126 More on corporation lobbying in Cadot (1997) or Sabani, Ginebri and Gioacchino (2004).
112
6. Conclusion
113
engage in business cooperation without any external supervision,
need of approval or revelations. The latest development of
information, communication and transport technologies have
enabled the MNC’s business operations to operate on a truly global
level, pursuing global strategies and economy of scale. The world
has become one single global marketplace where only global
corporations are competitive.
But how do these MNCs affect the key characteristics of the nation-
states? Regarding the territory, the process of MNCs’ expansion is
characterized by the need of space. The more and more liberalized
environment of the international economic system has made the
decision on the market entry a matter of internal strategy of MNCs
while the importance is given to competitive advantage of the
recipient state as well as to the overall strategy of the corporation.
Once established, the new operation becomes a part of the internal
corporate structure where national boundaries play a very limited
role.
127The national responsiveness can be reflected in approaches reaching from international (ethnocentric] to
transnational (geocentric) as analyzed in chapter 5.5.3.
114
Regarding the government as the third key attribute of the nation-
state, the influence of MNCs on governmental activities is apparent
both in the relative (in bargaining process) and absolute (MNC as a
citizen) way. Once the MNC gains access to a new country, it
becomes an active actor not only in the domestic economic sector
but also in the political, social and cultural sphere. Either through
direct channels of influence (e.g. lobby) or through indirect ways
(CSR) it obtains influence on major state policies.
115
state sovereignty, reinforcing the core values of the post-
Westphalian system (Kobrin 2001: 200).
116
In addition to that, rules and regulations are used for pursuing and
implementing national policies. Most of the trade, capital, FDI and
antitrust rules do have a direct impact on MNCs and their affiliates
localized in the country and in principle, they cannot be omitted or
circumvented if it is within the corporate strategy to maintain the
operation in the current locations. Governments may protect some
industrial sectors in the name of national interest or in extreme
cases, they may limit the MNC’s ownership rights (intervention). In
order to finance their policies, governments work with state budgets
that ensure the redistribution of resources in the state while the
budget income is generated trough collection of duties and taxes
that all domestic actors (including MNCs) are legally bound to pay.
These arguments drive us towards the conclusion that nation-states
still possess significant means of control over its government,
especially in providing the legal, economic and social framework
through imposing rules and regulations.
Further thoughts in this area of study can include the role of unifying
principles in the current and future relationships between nation-
states and MNCs. Some authors 128 highlight the importance of
economic liberalization and global capitalism for the establishment
global governance which can be realized through globalization of
the world economy. Nation-states should cooperate on a
117
supranational level and continue in setting international rules in
multiple areas (e.g. global antitrust policies or international
investment rules). Although the concepts of world governance and
“world constitution” might seem too utopian, the doctrines these
suggestions are built upon can be the guiding forces for the future
international cooperation: Principle of subsidiarity, regulation and
consensus. 129 This future cooperation among nation-states in the
area of setting international rules and regimes for global economic
entities such as MNCs is left for future researchers to investigate in a
greater detail.
Apart from the primary hypothesis, this study has analyzed the
nature of relationships between the nation-states and MNCs. Are
nation-states and MNCs always in conflict because they pursue
completely different goals? Or do these actors cooperate in some
areas to achieve mutually beneficial goals? Are there any situations
in which they act autonomously on each other? Or can we find
interactions when one of the actors is dependent on the other? The
process of investigating the actors and the way they tend to interact
with each other in a number of various sectors and situations led the
author to an authentic classification of major behaviour patterns.
Nation-states and MNCs have proven (chapter 5.1.) that they pursue
similar or even identical goals in three major areas: economic and
developmental (e.g. positive influence on economy’s growth,
spreading of technology and know-how), social (for example job
creation and CSR) and also political and cultural (organized
interests, lobby or similar attitudes between MNCs and culturally
close countries).
In contrast to that, the thesis has shown (chapter 5.2.) that there are
numerous sectors and situations when MNCs and nation-states are in
118
direct or indirect conflict of interests. One of the most obvious
conflicts originates in the different nature of the actors, nation-states
being defined by their territory while MNCs are not limited by
borders in their expansion. Thus, the nation-state loses control over
its territory, its monitoring capacities are seriously restricted because
MNCs tend to internalize most of their activities and transactions.
Second, MNCs regard national markets as an object of competition,
continuously seek to acquire more and more dominant positions,
which, in the end, destabilize the markets of nation-states. Also,
receiving FDI often imply a certain decrease in autonomy of the host
country. Third, the conflict of interests between MNCs and nation-
states can reach certain level when the ownership rights are limited
or directly violated by the host country (intervention). Fourth, the
nation-states sometimes sharpen their attitude towards foreign
corporations through employing nationalistic tendencies into
shaping consumer preferences. Also, numerous conflicts between
the two actors occur in labour and environmental policies.
Apart from these two patterns, the author has found significant
evidence of two other interactions: Firstly, Interdependence of
nation-states and MNCs occurs in tax payments (by MNCs) and their
redistribution (by government), naturally also in bargaining process
as well as in the currently expanding global structures of networks
and alliances. Secondly, evidence has been shown that through
internalization and in monetary issues the two actors tend to position
themselves very independently from each other.
119
cooperation, or are interdependent in their actions or even act
autonomously on each other.
To sum up, this thesis was supposed to clarify what are the current
relationships between nation-states and multinational corporations.
It selected a part of the wide academic and popular debate of the
“decline of nation-state” and the emergence of the world ruled by
multinational corporations. The study has shown what means of
control and instruments these two actors still possess to control or at
least influence the other and also, that the key attributes of the
nation-state have not been fully destroyed by the global activities of
MNCs. Also, the relationships between these two actors are not only
antagonistic as it might seem at the first moment from their mutually
different features, interests and strategies but, apart from the
interdependence and autonomy, a great deal of their relationships
are in a cooperative manner. Not only does this bring hope that the
world of nation-states and global business might survive within one
system but also that through further cooperation, these two actors
120
together with other entities will continue working on a global set of
rules and thus, will improve the quality of the world system itself.
121
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List of Used Abbreviations
131
Appendices
132
Appendix 2:
Selected indicators of FDI and international production, 1982-2006
Source: UNCTAD (2007): World Investment Report 2007. Geneva,
United Nations.
133
Appendix 3:
The world’s top 25 non-financial TNCs, ranked by foreign assets, 2005
(Source: UNCTAD (2007): World Investment Report 2007. Geneva,
United Nations)
134
Appendix 4:
Prospects for global FDI flows in 2007-2009: UNCTAD survey responses
(Source: UNCTAD (2007): World Investment Report 2007. Geneva,
United Nations)
135