Renegotiations
Renegotiations
For early foreign investments in developing countries it was common to obtain concessions on fixed terms for a long period of time or to expect that the original terms would not change. (These early investments were largely made in the commodity and utility sectors.) This type of expectation has almost ceased to exist. Not only may the terms of operations be bargained before setting up operations, but the same terms also may be rebargained any time after operations are under way.
Generally, a company's best bargaining position exists before it begins the specific operations in a foreign country. Once the capital and technology have been imported and local nationals have been trained to direct operations, the foreign firm is much less needed than before.9 Furthermore, the company now has assets that are not easily moved to more favorable locales. The result is that the host government may be in a better position to extract additional concessions from the company. For instance, after Peru had already received loans from Britain's Midland Bank, it was in a much stronger position to renegotiate the repayment in the form of copper and other raw materials, rather than cash.10 However, a company that is aware of and
responsive to the changing needs and desires of the local economy can maintain or even improve its bargaining position by offering the infusion of additional resources that the country needs. One tactic is to promise to bring in (or withhold) the latest technology developed abroad. Another is to use plant expansion or export markets as bargaining weapons. A host government also may be restrained from pushing too hard against established companies for fear this will make the country less attractive to other firms with which the government would like to do business.
Still another renegotiation tactic is to offer quick compliance with something a government wants badly in exchange for other concessions. For example, Chesebrough-Ponds reduced its wholly owned Indian operation to a 40 percent equity holding. Since "Indianization" was the prime governmental interest, Chesebrough-Ponds was able to get new licenses to expand."
A specific type of renegotiation that has been growing in importance is the valuation of company properties that have come under governmental ownership. The shift may be gradual, as in the case of the Saudi Arabian increased ownership in Aramco, or immediate, as in Libya's nationalization of Exxon and Mobil holdings. In either type of situation the amount of funds to be received by the foreign investor may depend on the negotiated valuation.
The Chilean nationalization of the ITT telephone company illustrates some of the price issues that can arise.12 The Chilean government offered about one third of the book value of the properties, based on the argument that the equipment was run-down, causing customers to complain about service. ITT countered that the book value understated the true value because a high return on assets had been earned and could be expected to continue in the future. The government responded by saying that the return on assets was due to the rates charged to customers in the monopoly industry rather than to the equipment value. Each party proposed outside appraisal of the value, but each wanted to select appraisers and valuation criteria favorable to its position.
For early foreign investments in developing countries it was common to obtain concessions on fixed terms for a long period of time or to expect that the original terms would not change. (These early investments were largely made in the commodity and utility sectors.) This type of expectation has almost ceased to exist. Not only may the terms of operations be bargained before setting up operations, but the same terms also may be rebargained any time after operations are under way.
Generally, a company's best bargaining position exists before it begins the specific operations in a foreign country. Once the capital and technology have been imported and local nationals have been trained to direct operations, the foreign firm is much less needed than before.9 Furthermore, the company now has assets that are not easily moved to more favorable locales. The result is that the host government may be in a better position to extract additional concessions from the company. For instance, after Peru had already received loans from Britain's Midland Bank, it was in a much stronger position to renegotiate the repayment in the form of copper and other raw materials, rather than cash.10 However, a company that is aware of and
responsive to the changing needs and desires of the local economy can maintain or even improve its bargaining position by offering the infusion of additional resources that the country needs. One tactic is to promise to bring in (or withhold) the latest technology developed abroad. Another is to use plant expansion or export markets as bargaining weapons. A host government also may be restrained from pushing too hard against established companies for fear this will make the country less attractive to other firms with which the government would like to do business.
Still another renegotiation tactic is to offer quick compliance with something a government wants badly in exchange for other concessions. For example, Chesebrough-Ponds reduced its wholly owned Indian operation to a 40 percent equity holding. Since "Indianization" was the prime governmental interest, Chesebrough-Ponds was able to get new licenses to expand."
A specific type of renegotiation that has been growing in importance is the valuation of company properties that have come under governmental ownership. The shift may be gradual, as in the case of the Saudi Arabian increased ownership in Aramco, or immediate, as in Libya's nationalization of Exxon and Mobil holdings. In either type of situation the amount of funds to be received by the foreign investor may depend on the negotiated valuation.
The Chilean nationalization of the ITT telephone company illustrates some of the price issues that can arise.12 The Chilean government offered about one third of the book value of the properties, based on the argument that the equipment was run-down, causing customers to complain about service. ITT countered that the book value understated the true value because a high return on assets had been earned and could be expected to continue in the future. The government responded by saying that the return on assets was due to the rates charged to customers in the monopoly industry rather than to the equipment value. Each party proposed outside appraisal of the value, but each wanted to select appraisers and valuation criteria favorable to its position.
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