Government Policy and

International Business

By Selam, Tesfamariam and Ruth

According to Segaro and Haag (2022)
Government Intervention in the Leather Industry

Value Addition Intervention Entry of FDI Firms Support for Local Firms

• The Ethiopian government After the value addition intervention, the The government and
implemented policies through export
bans and new export taxes to push government shifted its focus to inviting development partners provided
tanneries up the value chain. However, support to local firms, such as
the intervention was poorly FDI firms to produce finished leather
implemented, and firms struggled to capacity-building activities, trade
adapt. products. However, the FDI firms were fair participation, and
• The value addition regulations did not
align with the level of capital needed not required to work with local tanneries, connections to research institutes.
for compliance, and the policy changes leading to competition and price wars However, the support was not
were not well-coordinated with the
business community. between local and foreign leather
sufficient or well-coordinated,
• The intervention led to decreased leading to missed opportunities
exports, increased production costs, investors. This further worsened the
and reduced employment for local producers.
opportunities. conditions for domestic producers.
 According to Segaro and Haag (2022)

Impact of Government Intervention on

Internationalization
Positive Impacts Negative Consequences

• Attracting FDIs (Foreign Direct Investments) to • Unintended replacement of local firms by FDI
the country, which can provide technological and firms, as local firms struggle to absorb new
international market access spillovers, as well as knowledge and compete with well-established
resources and institutions for local firms. foreign firms.

• Supporting international entrepreneurship, which • Lack of deep knowledge of the industry by top

can enhance a nation's economic growth and policymakers, leading to ineffective regulation
employment. and support for local firms.

• Encouraging collaboration between local and • Insufficient coordination and sequencing of

foreign firms, which can lead to knowledge support schemes, resulting in inadequate support
transfer and technology sharing. for local producers.
 According to Spar (2009),

Government Intervention and Its Impact

on MNEs and SMEs
1 Restrictions on FDI
Governments can impose restrictions on
FDI in specific sectors or impose
conditions on investments, such as
requiring local joint venture partners or
limiting employment of foreign nationals.
2 Incentives for FDI
Governments can offer financial
incentives, such as tax breaks or subsidies,
to attract foreign investment. They can also
provide preferential treatment to specific
firms, such as improved access to
infrastructure or assistance in securing a
suitable labor force.

3 Regulation
Governments can regulate the operations of MNCs and SMEs, such as implementing rules related
to technology transfer, employment, or environmental standards.

Government Policies and Their Impact
Trade Policies
Governments create rules that directly and
indirectly affect the ability of firms to
compete across borders, such as export
controls, protectionism, and strategic trade
policies.
Capital Controls
Governments can implement capital controls
to limit the flow of capital in and out of the
country, which can impact the
internationalization of MNCs and SMEs.
According to Spar (2009)
FDI Policies
Governments can influence the conditions
under which firms can invest directly in the
territory of foreign states, such as
restricting or limiting FDI in certain
sectors, requiring local joint venture
partners, or imposing specific performance
requirements.
Competition policy
Governments can enforce
competition policies that may
affect the internationalization of
MNCs and SMEs

Long-Term Effects of Government Policies
Reduced Efficiency
High political instability in
a country can lead to
governments not respecting
open-ended promises,
which may result in
inefficiencies.
Shift in Strategic
Approach
MNCs may change their
strategic approach to
government policy, focusing
more on the benefits of
integration versus the benefits
of national responsiveness.
According to Rugman & Verbeke (1998)
Increased Focus on Domestic
Responsiveness
MNCs may prioritize national
responsiveness over integration,
developing new FSA bundles
adapted to the host country and
benefiting both the country and
the MNC.
 According to Rugman & Verbeke (1998)

Negative Consequences of Government

Policies
1 Shelter-seeking Strategies

2 Discriminatory Measures

3 Adverse Impact on MNE-Government Relations

4 Discriminatory measures

5 Lack of technology transfer

6 Adverse impact on MNE-government relation

 According to Spar (2009)

Response of MNCs and SMEs to

Government Policies
1 Adapting to the New Policies
Firms may adapt their operations to comply with new regulations or
policies.

2 Lobbying for Policy Change

Firms may lobby the government to change policies that negatively
impact their operations.

3 Seeking Alternative Markets

Firms may seek alternative markets where government policies are more
favorable.
 According to Spar (2009)

Cont.

4 Seeking alternative markets:

Firms may seek alternative markets where
government policies are more favorable.

5 Forming alliances:
Firms may form alliances with other firms or industry
associations to collectively lobby for policy change or to
share resources to comply with new regulations.

6 Exiting the market:

In some cases, firms may choose to exit a market if
government policies make it too difficult or costly to operate.