Key Sector Control
Key Sector Control
Closely related to the extraterritoriality concept is the fear that if foreign ownership dominates key industries, then decisions made outside of the country may have extremely adverse effects on the local economy or may exert an influence on local politics. This suggests two questions: (1) Are the important decisions actually made outside the host countries? (2) If so, are these decisions any different from those that would be made by local companies?
There are many examples of business decisions that can and have been made centrally, such as what, where, and how much to produce and sell and at what prices. These decisions might cause different rates of expansion in different countries and possible plant closings with pursuant employment disruption. Furthermore, by withholding resources or accepting strikes the international firm may affect other local industries adversely as well.
Some observers argue that governments generally have more control over companies that are headquartered in their own countries than they have over a subsidiary of a foreign firm. Since home-country operations usually comprise the largest single portion of activity for companies, they will generally go to greater lengths to protect their home position than their foreign ones. Furthermore, since virtually all board members, upper-level corporate officers, and stockholders are home-country nationals, the firm will tend to favor home-country objectives more than foreign-country objectives in conflict situations.
Political fears are based on the beliefs that international companies may serve as instruments of foreign policy for their home governments and that they also may be powerful enough to disrupt or influence local politics. The former fear is largely a carryover from colonial periods, when such firms as Levant and the British East India Company very often acted as the political arm of their home governments. This fear has resurfaced in the case of Japanese investment in the United States. Critics have pointed out that the Japanese government and Japanese firms lobby strongly to affect U.S. governmental policy. Together they spend more than all political parties spend for House and Senate elections, and more than the five most influential U.S. business organizations combined.
There is also fear that powerful foreign firms, by withholding resources at the request of the home government, might influence the political process. In the mid-1970s, for example, the U.S. State Department requested that Gulf Oil suspend its Angolan operations in an effort to weaken Soviet-backed factions that were taking control of the government. Several months later Gulf received State Department permission to deal directly with the leftist government in order to resume operations. In the mid-1980s, the story was repeated for other U.S. firms operating in Libya and Nicaragua. Then in 1988 the U.S. government urged U.S. firms not to pay taxes or debts to the Panamanian government, because of its alleged drug dealings.27 Not only newly emerging nations have been concerned. The French and British, for example, are anxious because if U.S. computer companies were to withhold output, they could create virtual havoc in the companies, research laboratories, and governmental offices that depend on them.
Aside from establishing policies that generally restrict the entry of foreign investment, countries have selectively prevented foreign domination of a so-called key industry, one that might affect a very large segment of the economy by virtue of its size or influence on other sectors. The nationalization of foreign-owned mining, utility, and transportation companies is an example of such protection. In other cases, the government has required management by local personnel in order to ensure that the entities can survive, if necessary, without foreign domination. Some sensitive areas, such as radio and television transmission stations in the United States, are simply off limits for foreign investment. In the United States since 1989, the President can halt any foreign investment that endangers national security, and national security is not defined in the legislation. The first use of the legislation prevented a Japanese firm, Tokuyama Soda Company, from acquiring General Ceramics.28 In a few cases, governments have supported the development of competitive local firms, such as consortia of computer manufacturers (e.g., ICL in Britain, Telefunken and Nixdorf in Germany, and Siemens, CII, and Philips in Germany and the Netherlands) and consortia of aircraft producers (e.g., Mes-serschmitt-Boelkow-Blohm in Germany, British Aerospace in Britain, Aeritalia in Italy, and Construcciones Aeronautics in Spain to ward off foreign domination.
State-owned Enterprises
When the foreign MNE is also a state-owned enterprise, the political concern about home-country control of these enterprises is different only in degree from other MNEs. Both may in time of conflict give in to the home-country interests; however, the state enterprise may be more prone to do so and do so more quickly. Home-government officials may be able to influence these firms more easily. Renault, for example, did not hesitate to transfer production from Spain to France in order to avoid employment reductions in the home country whereas a private French MNE may not have come to this decision as easily.
Closely related to the extraterritoriality concept is the fear that if foreign ownership dominates key industries, then decisions made outside of the country may have extremely adverse effects on the local economy or may exert an influence on local politics. This suggests two questions: (1) Are the important decisions actually made outside the host countries? (2) If so, are these decisions any different from those that would be made by local companies?
There are many examples of business decisions that can and have been made centrally, such as what, where, and how much to produce and sell and at what prices. These decisions might cause different rates of expansion in different countries and possible plant closings with pursuant employment disruption. Furthermore, by withholding resources or accepting strikes the international firm may affect other local industries adversely as well.
Some observers argue that governments generally have more control over companies that are headquartered in their own countries than they have over a subsidiary of a foreign firm. Since home-country operations usually comprise the largest single portion of activity for companies, they will generally go to greater lengths to protect their home position than their foreign ones. Furthermore, since virtually all board members, upper-level corporate officers, and stockholders are home-country nationals, the firm will tend to favor home-country objectives more than foreign-country objectives in conflict situations.
Political fears are based on the beliefs that international companies may serve as instruments of foreign policy for their home governments and that they also may be powerful enough to disrupt or influence local politics. The former fear is largely a carryover from colonial periods, when such firms as Levant and the British East India Company very often acted as the political arm of their home governments. This fear has resurfaced in the case of Japanese investment in the United States. Critics have pointed out that the Japanese government and Japanese firms lobby strongly to affect U.S. governmental policy. Together they spend more than all political parties spend for House and Senate elections, and more than the five most influential U.S. business organizations combined.
There is also fear that powerful foreign firms, by withholding resources at the request of the home government, might influence the political process. In the mid-1970s, for example, the U.S. State Department requested that Gulf Oil suspend its Angolan operations in an effort to weaken Soviet-backed factions that were taking control of the government. Several months later Gulf received State Department permission to deal directly with the leftist government in order to resume operations. In the mid-1980s, the story was repeated for other U.S. firms operating in Libya and Nicaragua. Then in 1988 the U.S. government urged U.S. firms not to pay taxes or debts to the Panamanian government, because of its alleged drug dealings.27 Not only newly emerging nations have been concerned. The French and British, for example, are anxious because if U.S. computer companies were to withhold output, they could create virtual havoc in the companies, research laboratories, and governmental offices that depend on them.
Aside from establishing policies that generally restrict the entry of foreign investment, countries have selectively prevented foreign domination of a so-called key industry, one that might affect a very large segment of the economy by virtue of its size or influence on other sectors. The nationalization of foreign-owned mining, utility, and transportation companies is an example of such protection. In other cases, the government has required management by local personnel in order to ensure that the entities can survive, if necessary, without foreign domination. Some sensitive areas, such as radio and television transmission stations in the United States, are simply off limits for foreign investment. In the United States since 1989, the President can halt any foreign investment that endangers national security, and national security is not defined in the legislation. The first use of the legislation prevented a Japanese firm, Tokuyama Soda Company, from acquiring General Ceramics.28 In a few cases, governments have supported the development of competitive local firms, such as consortia of computer manufacturers (e.g., ICL in Britain, Telefunken and Nixdorf in Germany, and Siemens, CII, and Philips in Germany and the Netherlands) and consortia of aircraft producers (e.g., Mes-serschmitt-Boelkow-Blohm in Germany, British Aerospace in Britain, Aeritalia in Italy, and Construcciones Aeronautics in Spain to ward off foreign domination.
State-owned Enterprises
When the foreign MNE is also a state-owned enterprise, the political concern about home-country control of these enterprises is different only in degree from other MNEs. Both may in time of conflict give in to the home-country interests; however, the state enterprise may be more prone to do so and do so more quickly. Home-government officials may be able to influence these firms more easily. Renault, for example, did not hesitate to transfer production from Spain to France in order to avoid employment reductions in the home country whereas a private French MNE may not have come to this decision as easily.
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