International Business by Daniels and Radebaugh Chapter 11

International Business by Daniels and Radebaugh Chapter 11 Governmental Attitudes toward Foreign Direct Investment 1

Objectives To examine the conflicting objectives of MNE stakeholders To discuss problems in evaluating MNE activities To evaluate the major economic impacts—balance of payments and growth—of MNEs on home and host countries To introduce the major criticisms about MNEs To provide an overview of the major political controversies surrounding MNE activities 2

Introduction Multinational 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 operate Very 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 3

Home- and Host-Country Influences on Companies’ Use of FDI OPERATIONS OBJECTIVES STRATEGY Home-country enhancements and restrictions MEANS Host-country enhancements and restrictions • Trade FDI • Other equity and nonequity arrangements 4

Evaluating the Impact of FDI Trade-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 5

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 analysis Potential 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 6

Resources and Possible Contributions of MNEs Investment • Links to local companies • Increased productivity • Improved efficiency Capital formation Human Resources • Training Employment • Managerial skills Technology • R&D • Industrial upgrading • New capital equipment Trade Environment • Export expansion • Lower-cost imports • Access to clean technologies • Pollutionabatement skills • Companywide standards 7

Economic Impact of the MNE Balance-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 8

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 9

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, assetvaluation controls, and conversion to debt as opposed to equity 10

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 11

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 12

Political and Legal Impact of the MNE Countries 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 governments Extraterritoriality—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 13

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 14

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 15

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 16

Likelihood of Paying Bribes Abroad by Nationality of Companies Singapore 5. 7 United States 6. 2 Germany 6. 2 Belgium 6. 8 United Kingdom 7. 2 Netherlands 7. 4 China 3. 1 Switzerland 7. 7 Austria 7. 8 South Korea 3. 4 Japan 5. 1 Taiwan 3. 5 France 5. 2 Canada 8. 1 Italy 3. 7 Spain 5. 3 Australia 8. 1 Malaysia 3. 9 Sweden 8. 3 Most corrupt 0 1 No corruption 2 3 4 5 6 7 8 9 10 17

Differences in National Attitudes toward MNEs Host 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 it Host- 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 18