Multinational Enterprises and Government Intervention (RLE International Business)

Thomas Poynter, Thomas A Poynter

• Publisher: Routledge
• Year: 2013
• Print ISBN: 9780415657716
• eBook ISBN: 9781135126384
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

Government intervention can reduce the profits of multinational enterprises. These interventions also increase uncertainty and risk and distort trading and intra-firm sourcing patterns.

The focus of this book is a corporate survival plan that describes how a multinational can monitor its exposure to intervention and then seek to reduce it. It reports on the successes and failures of firms as they implement various global management systems and recommends a general strategy. Such a strategy will allow multinationals to continue foreign investment with the longer term horizons that will benefit both the firms and their host countries.

1
Introduction

Government regulation and intervention has always been an important factor in international business operations. The impact of government’s role varies from country to country, and in the same country, from industry to industry and even from firm to firm. While some forms of government intervention such as financial support and trade protection are often sought by international firms, most government intervention is costly to them.

Corporate reaction to government intervention which adversely affects operations has varied. Some firms aggressively attempt to control such behaviour directly, while others treat intervention as a fact of life over which they have little, if any, control. Politically-able firms attempt to change either the legislation, or at least its implementation.

The form of intervention has been changing since the mid-1960s. It is clear that many nations have been eschewing such extreme actions as expropriation in favour of other, less extreme, methods designed to change the behaviour of firms and increase the domestic share of the investment’s benefits. Extreme actions, nations found, affect financial ratings, deter other foreign investors and are not necessary to achieve their goals. Increasingly, intervention activities seem to be directed toward such goals as the partial transfer of ownership and control, greater domestic value-added and employing and promoting more host nationals. These less extreme activities are far more frequent and have a far greater impact on foreign investors than their high profile precedents.

Examinations of these more frequently occurring interventions has allowed the phenomenon to be better understood. The findings suggest that intervention is to a large extent explainable and predictable. International firms, it seems, are not really powerless to affect the impact of intervention or its frequency. Firms can introduce strategies to reduce undesired intervention and, in addition, provide themselves with an accurate assessment of the risks involved. Intervention can, in other words, be managed.

The purpose of this book is to report what has been learned over the past decade or so about the management of intervention. It does this by first looking for patterns in the intervention behaviour of governments around the world. My research and experiences and those of other academics and consultants are used as the basis for identifying existing patterns of intervention behaviour. The book then focuses on a corporate survival plan that describes how firms can monitor their exposure to intervention and seek to reduce it.

While the lessons reported in this book apply to most kinds of international direct investors, generally it is directed at the larger, multi-country investors referred to as multinational enterprises (MNEs). This book will evaluate ways MNEs can seek to reduce their vulnerability to intervention directed at foreign-owned operations. While such intervention occurs in almost all countries, this report is concerned primarily with those countries where it is more common: the less-developed countries (LDCs) and the newly-industrialized countries (NICs). The fundamentals learned, however, apply equally to developed nations with an interventionist record in the operations of foreign-owned firms.

The Intervention Problem

The West German subsidiary in Brazil whose operations have been ‘reserved’ for Brazilian firms, the UK subsidiary in Nigeria which is ordered to ‘sell’ 60 per cent of its shareholding to Nigerian interests and the US subsidiary in India which is not allowed to expand or import needed components are all experiencing intervention. These interventions cause foreign-owned firms to lose assets, subject the subsidiary to external influence and a forced sharing of earnings, and place the firm at a competitive disadvantage compared to other, less affected, foreign and domestic competitors.

The scope of modern intervention is wide. In addition to the above examples, foreign-owned firms face requirements to export into a highly competitive free market while being forced to source components from a high cost host market, as well as government pressure to accept payments in the form of goods and commodities. Expropriations and nationalizations, while infrequent today, had the advantage of at least being insurable risks. Present day interventions reduce overseas profits, take up senior management time, distort trading and intra-firm sourcing patterns and, with a few exceptions, are not covered by political risk insurance.

The result is that many MNEs are finding investment in all but a handful of countries provides highly uncertain earnings. This prompts disinvestment and the milking of subsidiary operations overseas. While the vocal criticism levelled at MNEs during the 1970s has declined, MNEs are hesitant to publically criticize host government interventionist behaviour, and their traditional approach to managing intervention is increasingly ineffective. The choice facing MNEs is to reformulate their approach to government intervention, or, to continue de-emphasizing foreign direct investment.

The Traditional Management of Intervention

The traditional manner in which multinational enterprises manage government intervention can more accurately be described as their ‘response to’ rather than the ‘management of’ intervention [Behrman, Boddewyn and Kapoor, 1975, p. 45 et seq.]. Firms generally attempt to modify either the intervention policy, or its effects on the firm, after the decision to intervene has been made. Their traditional responses can be classified into three types:

1. the negotiation or forcing of changes in the intervention policy;
2. attempts to avoid or bypass the policy; and
3. taking intervention as a given and then avoiding nations where intervention is, or is expected to be, high.

Negotiating or forcing change in a conceived or proclaimed intervention policy is an uphill struggle under most circumstances. Civil servants and politicians find it difficult to recant in the face of all but the strongest of threats. Government departments, companies, shareholders and employees likely to gain from the proposed intervention will also act to counter any MNE pressures. In short, considerable MNE resources and time is necessary to modify an intervention policy after it has been promulgated. An easier way to redirect the impact of intervention is to modify the implementation of the policy so as to reduce its costs to the firm. Pressing the host interventionists to interpret the policy less strictly, perhaps in return for concessions less costly to the firm, seems to meet with greater success than attempts to change the original policy.

The success of those corporate responses is dependent on what concessions or counter-proposals the foreign firm can offer to the proponents of intervention. The foreign firm’s home government may also offer some support by acting on the firm’s behalf. In an increasingly interdependent world the scope for governments to interact covers quite a wide spectrum, ranging from aid to political support in multinational agencies and forums.

There are fundamental disadvantages to these traditional responses to intervention. First, the firm is on the defensive, which often requires it to be somewhat excessive as it defends itself. Secondly, the firm is trying to change the intervention from the planned high level to a lower level. In other words, the explicit starting point for any negotiations is a high and costly level of intervention. While negotiations and tradeoffs may reduce intervention somewhat, the interventionists’ aspirations and political complications generally ensure a less than satisfactory outcome for the foreign firm.

The second corporate response to intervention can be regarded as an attempt at avoiding or bypassing intervention. Firms attempt to find loopholes in legislation only to discover that many governments are not at all hampered by poorly drafted laws. Governments seldom discriminate between corporate avoidance and evasion. Blatant refusal to cooperate often results in retaliation by intervention sponsors.

The only kinds of firms which appear to succeed with the avoidance alternative are small low-profile firms, which attract little public attention. They escape intervention during its enforcement stage primarily due to the existence of overworked civil servants and the fact that the firms’ small size makes them relatively undesirable to interventionists, considering the amount of effort required. For most firms, however, the avoidance option at best just delays the intervention.

The final type of response to intervention is prevalent in almost all firms: to evade nations where intervention is, or is expected to be, high. This procedure fails on two counts. First, the history of private foreign direct investment is littered with examples of ‘safe’ host nations which turned out to have a high level of intervention, for example Brazil, Iran, Mexico and Canada. Although they do not achieve the same degree of attention, there are even more examples of countries which intervene much less than expected, for example 1970s Indonesia, Ivory Coast and Pakistan. In spite of the myriad of political risk indices and research by political scientists and presumably interested intelligence agencies, forecasts of national rates of intervention seem to be unreliable.

The second reason why this country-avoidance strategy fails is that it erroneously assumes that all firms experience high intervention in a country with a high average level of intervention. In fact there is a considerable amount of variation among firms. It is therefore, incorrect for an individual firm to assume that it will automatically suffer because the average national level of intervention is high. For instance, a major blow to the automobile companies in Mexico several years ago was the government’s strict limit on vertical integration. Instead of Ford, GM, Nissan and others being allowed to use their own body stamping operations, the Mexican government forced them to purchase from Mexican-owned suppliers. Volkswagen, however, was successful in obtaining an exemption and procured a competitive advantage from their own, lower cost, stamping plant.

Equally, firms have unfortunately discovered that safety is not assured in nations with low average intervention. Many of the simpler consumer goods firms in Indonesia or low-technology manufacturers in Singapore have found that governments do indeed discriminate among firms when they intervene.

Overall, then, multinational firms have traditionally handled intervention in extreme and rather ineffective ways. In many situations, their approach has been one of reaction rather than a more pro-active, or at least a prepared, management of intervention.

The disadvantages of these strategies are expressed in their lack of success in reducing the cost and level of intervention; in the poor public and private images of multinationals as they try to evade legitimate’ government decrees; and in the foreclosing of potentially attractive investment opportunities when firms react by reducing or avoiding investment. The purpose of this book is to discuss and evaluate alternative methods for intervention management.

Objectives

The search for lessons to be learned from the interplay between the sovereign state and the multinational enterprise is recent. The major work of Raymond Vernon just over a decade ago involved an historical examination of the problems and prospects of multinationals since the middle of the nineteenth century. His examination of what he called, ‘… the waxing and waning of the power’ of the MNE concluded that such power was a function of company and industry characteristics (1971, p. 26).

Raymond Vernon’s work on what has come to be called intervention dealt primarily with the natural resource sector. In addition, the concept of managing one’s intervention risk, rather than having it pre-ordained by industrial and technological changes, received little attention. This book will examine manufacturing interests in detail, and focus on the management issues.

The overall objective of this book is to provide managers in multinational enterprises with sufficient information so that they can better devise feasible global strategies which allow them to manage intervention. In this sense, the management of intervention is similar to the management of financial or marketing problems. Successful management allows the firm better to predict changes in intervention, allows better assessment of risk and, given one’s ability to affect the level of intervention, it allows the firm to reduce the level and cost of intervention it experiences.

The greatest drawback to successful management appears to be the complexity of implementing global management systems. This book’s objective is to report on successful and unsuccessful attempts by multinationals to manage intervention, and it draws from this examination some general strategies.

The successful attainment of this objective requires an understanding of the nature of intervention. One of the first goals is to review the background and causes of intervention in developing and developed nations. Only after the objective has been reached can we understand the ways in which nations treat companies differently and the basis of that discrimination.

The final objective of this book is to inject into the discussion of intervention some empirical data, the results of several case studies of subsidiaries, parents and host-nation interventionists and information obtained from discussions with nearly 80 firms and host governments. This is to take the place of the myths and generalizations that appear to litter this field of study.

Coverage

The coverage of the book can be defined in terms of the subject matter dealt with and its applicability to various kinds of nations and companies. The broad subject involved here can be described as political risk management. From a corporate decision-making perspective, the subject can be divided into two categories. The first category consists of the collection and assessment of political risk data for the purpose of predicting the general political environment in a particular nation. This is generally called macro-political risk. These risks are general in nature and cover revolutions, other forms of political instability, changes in the nation’s power structure and changing alliances from West to East. It is these kinds of risks that most observers refer to when considering political risk. So multinational firms, banks and others spend considerable resources to ensure that they can avoid another occurrence such as Castro’s Cuba, Allende’s Chile and Khomeini’s Iran. (See Kobrin, 1982, for a review of macro-political risk.)

Not all firms suffer equally from these occurrences, however. Some firms may be expropriated because of a revolution, while others are either untouched or suffer only slight reductions in performance. In addition, it appears that intervention often occurs because of normal, stable government processes rather than as a result of political instability. And in both cases a considerable degree of discrimination appears to occur in the practice of intervention.

Because of the discrimination that has occurred and because of the frequent absence of political instability, the focus has shifted to what has come to be called micro-political risk. Micro-political risk is defined as the effect or impact of a politically-backed event on a particular firm. Here the emphasis is not on the nation but on the individual firm.

This book deals with micro-political risks. Macro risks such as revolutions may be more dramatic, but micro risks are more prevalent (Robock, 1971; Hawkins and Mintz, 1976; Kobrin, 1979). Hence they are of more importance to the multinational enterprise, host countries and others interested in the international flow of technology and investment.

An analysis of macro-political risks should permit the interested party to evaluate likely outcomes and estimate the effect on his behaviour. This book also attempts to provide firms with similar abilities in the area of micro-political risks. Unlike most cases of macro risks, however, foreign firms do not have to be quite as passive. Consequently in examining the impact of intervention on the individual firm, this book will evaluate in detail the ability of the firm to control the impact of intervention.

This book has limits in terms of its applicability to firms and nations. Multinational firms are not homo...

Table of contents

• Cover
• Half Title
• Title
• Copyright
• Original Title
• Original Copyright
• CONTENTS
• List of Tables and Figures
• Dedication
• 1. Introduction
• Part One: The Nature of Intervention
• Part Two: The Management of Intervention
• Bibliography
• Index