NEEDS AND ALTERNATIVES FOR FULFILLMENT
NEEDS AND ALTERNATIVES FOR FULFILLMENT
Nature of Assets
The international firm and the host country each may control assets that are useful to the other. There is thus an inducement to agree on the establishment of operations and to ensure that the operations continue functioning. The foreign firm may be able to bring in locally scarce resources in the form of capital, management talent, raw materials, and technology. These resources, in turn, may be used to foster local growth, employment, and balance-of-payments objectives. The foreign investor also may have access to or control of foreign markets through the ownership of the facilities that make import purchases. International firms may use these multiple facilities to contribute positively to the export development of countries in which they do business. They also may negatively affect the exports of domestic firms by denying them sales access to their operating facilities in other countries, by aggressively competing with them, or by pressuring home-country governments to erect barriers to the importation of foreign-made production. Finally, MNEs may be able to take on commercial risks that governments otherwise might have to undertake with funds borrowed in international markets.
Countries likewise have assets to offer foreign investors. First, they offer access to their own markets, which may be available only through the establishment of local production. The country also offers unique resources in the form of land needed for agricultural production, raw materials, port facilities, cheap or specialized labor, and reasonable interest rates on funds. In fact, the acquisition of some of these resources may be a requirement for the company to maintain a viable competitive position elsewhere in the world.
Strengths of the Parties
If either a company or country has assets that the other strongly wishes to acquire and if there are few (if any) alternatives for acquiring them, negotiated concessions may be very one sided. For example, when a few large oil companies dominated the extraction, processing, shipment, and final sale of an oversupply of petroleum, developing countries with oil deposits could do little but accept the terms that the oil firms offered. If a government refused, a firm easily could find another country that would accept a similar proposal. As the supply of petroleum diminished and petroleum-producing countries found alternative means for exploiting their resources, the terms of the concessions gradually evolved more in favor of the oil-producing countries. But shifts are not always in favor of countries: Mexico, for example, was such a growing economy during the 1970s that it could require foreign firms to accept a minority position when establishing operations. However, in the 1980s oil prices plummeted and capital left Mexico because of fear of the slipping economy. Mexico loosened its regulations to allow majority and even 100 percent foreign ownership. As expected, there are vast differences in bargaining strength among countries, among industries, and among firms.
Company Bargaining Strength Although companies have a variety of assets that they can contribute to their foreign operations, some assets have traditionally put them into better bargaining positions than others. Retailers traditionally had more difficulty gaining operating permission than manufacturers, especially in developing countries, because local governments believed (sometimes falsely) that local people can do equally well in retailing but that foreign help is needed in manufacturing. However, there has been a spurt in foreign retailing investment during the last few years. Foreign ownership in such areas as agriculture and extractive industries is not very welcome in many countries because of historical foreign domination of these sectors and belief that the land and subsoil are public resources.
The bargain struck between the foreign investor and the host country is influenced by the resources brought in by the investor and the number of firms offering similar resources.2 Foreign investors are more likely to be able to gain a high percentage of ownership in foreign operations when they have few competitors and when they control certain types of assets. One of these assets is technology. IBM, for example, has been allowed 100 percent ownership in a number of countries because of the local need for its unique technology, whereas other firms were refused. Another asset is the control of a well-known branded product. Coca-Cola, for example, apparently has been able to gain local consumer allies who believe its differentiated products are superior. A third asset is the ability to export output from the foreign investment, especially when exports go to other entities controlled by the parent. These investments gain foreign exchange that might otherwise not be forthcoming. General Motors, for example, has been allowed 100 percent ownership of its Mexican maquiladora operations but shares ownership in its other manufacturing facilities serving Mexican consumers. Finally, the greater the product diversity, the more foreign ownership allowed. This is probably because a variety of products offers a greater future opportunity to save foreign exchange through import substitution.
Surprisingly, the amount of capital needed to set up operations has not usually affected investors' bargaining power. At least two factors have influenced this: (1) a large investment may be examined much more closely than a small one because of the potential impact (positive or negative) it might have on the economy (i.e., the host country wants the benefits of the capital inflow but is leery of being so dependent on foreign ownership); (2) the government may be more prone to borrow funds externally to invest in large enterprises. However, the ability to contribute large amounts of capital may improve future bargaining strengths of companies. As many Third World countries have encountered debt-servicing problems since the mid-1980s, they must depend more on direct investment for their future capital needs. Yet the size of the potential investor may be a factor inasmuch as governments may not wish to commit resources to negotiation with firms that are too small to make a substantial impact. For example, Nigeria will negotiate the barter of oil for imports, but only with firms whose sales are at least U.S. $100 million per year.3
Country Bargaining Strength Generally speaking, firms prefer to establish investments in highly developed countries, which offer large markets and a high degree of stability. On a national basis, countries such as the United States, Canada, and Germany make few concessions to foreign investors; they are large recipients of investment without having to make special arrangements. In all three of these countries, however, there are differences in treatment between advanced and depressed areas.
Nature of Assets
The international firm and the host country each may control assets that are useful to the other. There is thus an inducement to agree on the establishment of operations and to ensure that the operations continue functioning. The foreign firm may be able to bring in locally scarce resources in the form of capital, management talent, raw materials, and technology. These resources, in turn, may be used to foster local growth, employment, and balance-of-payments objectives. The foreign investor also may have access to or control of foreign markets through the ownership of the facilities that make import purchases. International firms may use these multiple facilities to contribute positively to the export development of countries in which they do business. They also may negatively affect the exports of domestic firms by denying them sales access to their operating facilities in other countries, by aggressively competing with them, or by pressuring home-country governments to erect barriers to the importation of foreign-made production. Finally, MNEs may be able to take on commercial risks that governments otherwise might have to undertake with funds borrowed in international markets.
Countries likewise have assets to offer foreign investors. First, they offer access to their own markets, which may be available only through the establishment of local production. The country also offers unique resources in the form of land needed for agricultural production, raw materials, port facilities, cheap or specialized labor, and reasonable interest rates on funds. In fact, the acquisition of some of these resources may be a requirement for the company to maintain a viable competitive position elsewhere in the world.
Strengths of the Parties
If either a company or country has assets that the other strongly wishes to acquire and if there are few (if any) alternatives for acquiring them, negotiated concessions may be very one sided. For example, when a few large oil companies dominated the extraction, processing, shipment, and final sale of an oversupply of petroleum, developing countries with oil deposits could do little but accept the terms that the oil firms offered. If a government refused, a firm easily could find another country that would accept a similar proposal. As the supply of petroleum diminished and petroleum-producing countries found alternative means for exploiting their resources, the terms of the concessions gradually evolved more in favor of the oil-producing countries. But shifts are not always in favor of countries: Mexico, for example, was such a growing economy during the 1970s that it could require foreign firms to accept a minority position when establishing operations. However, in the 1980s oil prices plummeted and capital left Mexico because of fear of the slipping economy. Mexico loosened its regulations to allow majority and even 100 percent foreign ownership. As expected, there are vast differences in bargaining strength among countries, among industries, and among firms.
Company Bargaining Strength Although companies have a variety of assets that they can contribute to their foreign operations, some assets have traditionally put them into better bargaining positions than others. Retailers traditionally had more difficulty gaining operating permission than manufacturers, especially in developing countries, because local governments believed (sometimes falsely) that local people can do equally well in retailing but that foreign help is needed in manufacturing. However, there has been a spurt in foreign retailing investment during the last few years. Foreign ownership in such areas as agriculture and extractive industries is not very welcome in many countries because of historical foreign domination of these sectors and belief that the land and subsoil are public resources.
The bargain struck between the foreign investor and the host country is influenced by the resources brought in by the investor and the number of firms offering similar resources.2 Foreign investors are more likely to be able to gain a high percentage of ownership in foreign operations when they have few competitors and when they control certain types of assets. One of these assets is technology. IBM, for example, has been allowed 100 percent ownership in a number of countries because of the local need for its unique technology, whereas other firms were refused. Another asset is the control of a well-known branded product. Coca-Cola, for example, apparently has been able to gain local consumer allies who believe its differentiated products are superior. A third asset is the ability to export output from the foreign investment, especially when exports go to other entities controlled by the parent. These investments gain foreign exchange that might otherwise not be forthcoming. General Motors, for example, has been allowed 100 percent ownership of its Mexican maquiladora operations but shares ownership in its other manufacturing facilities serving Mexican consumers. Finally, the greater the product diversity, the more foreign ownership allowed. This is probably because a variety of products offers a greater future opportunity to save foreign exchange through import substitution.
Surprisingly, the amount of capital needed to set up operations has not usually affected investors' bargaining power. At least two factors have influenced this: (1) a large investment may be examined much more closely than a small one because of the potential impact (positive or negative) it might have on the economy (i.e., the host country wants the benefits of the capital inflow but is leery of being so dependent on foreign ownership); (2) the government may be more prone to borrow funds externally to invest in large enterprises. However, the ability to contribute large amounts of capital may improve future bargaining strengths of companies. As many Third World countries have encountered debt-servicing problems since the mid-1980s, they must depend more on direct investment for their future capital needs. Yet the size of the potential investor may be a factor inasmuch as governments may not wish to commit resources to negotiation with firms that are too small to make a substantial impact. For example, Nigeria will negotiate the barter of oil for imports, but only with firms whose sales are at least U.S. $100 million per year.3
Country Bargaining Strength Generally speaking, firms prefer to establish investments in highly developed countries, which offer large markets and a high degree of stability. On a national basis, countries such as the United States, Canada, and Germany make few concessions to foreign investors; they are large recipients of investment without having to make special arrangements. In all three of these countries, however, there are differences in treatment between advanced and depressed areas.
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