© 2001 prentice hall11-1 international business by daniels and radebaugh chapter 11 governmental...

© 2001 Prentice Hall 11-1

International Businessby

Daniels and Radebaugh

Chapter 11Governmental Attitudestoward Foreign DirectInvestment


ObjectivesTo examine the conflicting objectives of MNE stakeholdersTo discuss problems in evaluating MNE activitiesTo evaluate the major economic impacts—balance of

payments and growth—of MNEs on home and host countries

To introduce the major criticisms about MNEsTo provide an overview of the major political controversies

surrounding MNE activities


IntroductionMultinational enterprises (MNEs) operate largely through

foreign direct investment (FDI)• Governmental policies encourage and restrict MNE

operations• MNEs may not be concerned about interests of

nations in which they operateVery large MNEs are especially worrisome

• Have considerable negotiating power• Executives frequently deal directly with heads of

state to negotiate terms under which the MNE can operate

Pressure groups push to restrict MNEs’ activities at home and abroad


OPERATIONS

OBJECTIVES

STRATEGY

FDI

MEANS• Trade

• Other equity and nonequity arrangements

Home-countryenhancementsand restrictions

Host-countryenhancementsand restrictions

Home- and Host-Country Influences on Companies’ Use of FDI


Evaluating the Impact of FDITrade-offs among constituencies

• Stakeholders—include stockholders, employees, customers, and society at large

– in the short term the aims of these groups conflict– in the long term all of their aims must be achieved

adequately or none will be attained• Management must be aware of these interests and make

appropriate trade-offs– must resolve cross-national controversies

Trade-offs among objectives• Actions of MNEs may affect a country’s economic, social,

and political objectives• Countries want a greater share of benefits from MNE

activities• It is incorrect to assume that if one stakeholder gains,

another must lose


Evaluating the Impact of FDI (cont.)Cause-effect relationships

• It is extremely hard to determine whether societal conditions are caused by MNEs’ actions

• Technological developments, competitors’ actions, and governmental policies encumber cause-effect analysis

• Studied at the individual and aggregate level of analysisPotential contributions of MNEs

• Size of MNEs suggests that they can contribute to a wide range of country objectives

• MNEs—account for most of the world’s export of goods and services

– create access to foreign exchange for purchase of imports

– are major producers and organizers of technology


Environment

• Access to clean technologies• Pollution- abatement skills• Companywide standards

Trade

• Export expansion• Lower-cost imports

MNEs

Investment

• Links to local companies• Increased productivity• Improved efficiency Capital formation

Technology

• R&D• Industrial upgrading• New capital equipment

Human Resources

• Training Employment• Managerial skills

Resources and Possible Contributions of MNEs


Economic Impact of the MNEBalance-of-payment effects—FDI brings both capital

inflows and outflows• Place in the economic system

– country must compensate for a trade deficit by reducing its reserves or receiving an influx of capital

» greater capital inflow permits more imports and allows some trade deficit

– FDI crucial given stagnation in foreign aid – gains are a zero-sum game

» one country’s trade or capital surplus is another’s deficit

– countries’ regulation of capital flows influence companies’ decisions on FDI


Economic Impact of the MNE (cont.)Balance-of-payment effects (cont.)

• Effect of individual FDI– may have positive or negative effect on balance-of-

payments– the formula to determine effects is simple, but the

data used must be estimated and are subject to assumptions

net import change» marginal propensity to import—portion of

increase in national income from imports that will be spent on additional imports

» net export effect» net capital flow

– equation does not reflect effects that are not readily quantifiable

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Economic Impact of the MNE (cont.)Balance-of-payment effects (cont.)

• Aggregate assumptions and responses– effects of FDI usually are:

» positive for the host country and negative for the home country initially

» positive for the home country and negative for the host country later

» time period before reversal of fortunes varies substantially

– home and host countries make policies to try to improve short- or long-term effects:

» home countries establish outflow restrictions» host countries impose repatriation restrictions,

asset-valuation controls, and conversion to debt as opposed to equity


Economic Impact of the MNE (cont.)Growth and employment effects—not a zero-sum game

because MNEs may use resources that were unemployed or underemployed

• Both home and host country may profit• Home-country losses

– foreign production displaces domestic production» transfer of technology» jobs are exported» wages decline

• Home-country gains– MNE investment initiates local development– more optimal use of production factors– use of unemployed resources– upgrading of resource quality– competition forces local companies to become more

efficient


Economic Impact of the MNE (cont.)Growth and employment effects (cont.)

• Host-country losses– MNEs undermine local entrepreneurial drive– MNEs may attract best local resources

» able to bid up prices when competing with local companies

» absorb local capital– local companies may decrease R&D spending– purchase of local firms by foreign investors

• General conclusions—FDI more likely to generate growth in the host country:

– when the product or process is highly differentiated– when the foreign investors have access to scarce

resources– in the more advanced emerging economies


Political and Legal Impact of the MNECountries are concerned that MNEs will undermine sovereignty

of host countries• MNEs act as foreign-policy instruments of their home-

country government• MNEs are independent of any government• Dependent MNEs become pawns of host-country

governmentsExtraterritoriality—occurs when governments apply their laws

to their domestic companies’ foreign operations• Trade restrictions—U.S. attempts to apply the Trading

with the Enemy Act to foreign subsidiaries of U.S. companies

• Antitrust laws—U.S. acted against domestic firms’ foreign investments when there has been concern about possible harm to U.S. consumers

– U.S. Justice Department has acted ambiguously


Political and Legal Impact of the MNE (cont.)Key sector control—political concerns include:

• Foreign influence over local politics• Foreign control of sensitive sectors of the local economy

– MNEs home-country headquarters often decide how foreign subsidiaries will operate

» may cause different rates of expansion and contraction in different countries

– MNEs have primary loyalty to home country» tend to favor home-country’s goals over host

country’s during conflicts• Key industries—affect a large segment of the economy or

population– countries have selectively prevented foreign

domination of key industries– government may require MNEs to manage facilities

with local personnel


Political and Legal Impact of the MNE (cont.)MNE independence

• MNEs can play one country against another to avoid coming under unfavorable restriction

– this tactic more common when an MNE is negotiating permission to operate in a country

– once operating, MNE reluctant to abandon fixed assets in a country to move to another

Host-country captives• MNEs attempt to influence home-country government to

adopt policies favorable to foreign countries in which they have operations


Political and Legal Impact of the MNE (cont.)Bribery

• Practice is widespread among MNEs • Payments to government officials intended to:

– secure government contracts – facilitate governmental services– reduce tax liabilities– keep competitors from operating in the country– gain governmental approval of price increase

• U.S. Foreign Corrupt Practices Act (1977)– makes certain payments to foreign officials illegal

» critics contend that U.S. firms lose business» critics contend that law represents meddling in

other countries’ affairs


0 1 2 3 4 5 6 7 8 9 10

Most corrupt No corruption

Sweden 8.3

Australia 8.1

Canada 8.1

Austria 7.8

Switzerland 7.7

Netherlands 7.4

United Kingdom 7.2

Belgium 6.8

Germany 6.2

United States 6.2

Spain 5.3

France 5.2

Japan 5.1

Singapore 5.7

Malaysia 3.9

Italy 3.7

Taiwan 3.5

South Korea 3.4

China 3.1

Likelihood of Paying Bribes Abroad byNationality of Companies


Differences in National Attitudes toward MNEsHost countries—policies toward MNEs vary over time

• Seldom completely restrictive or completely laissez-faire• Policies intended to attract investment and receive the

most benefits from itHost- and home-country concerns about MNEs:

• Are greater for MNEs with large international commitments

• Are greater about large MNEs because of their greater potential impact on national economic and political objectives

MNEs acquire reputations in one country that affect perceptions in other countries

• Modern communication has facilitated the spread of negative publicity about MNEs’ practices

© 2001 prentice hall11-1 international business by daniels and radebaugh chapter 11 governmental...

Documents

growthof mnes

mnes activities

objectivesactions of

capital surplus

capital inflows

mne activitiesto

mne activitiesit

mne operationsmnes