Managing Government Intervention

1. Managing Government Intervention We have already reviewed the role of international structures and organizations such as WTO, IMF, IBRD, EEC, NAFTA, etc. In former times, International Business “fell between the cracks” - regulated at home w.r.t its domestic affairs, but no government control over its activities in other countries. - Often severely regulated in the host country so far as activities within the host country were concerned, but sometimes had a foreign trade monopoly from home country, or there was a self regulating consortium sharing the trade. Political risk was basically of two kinds - loss of trading privileges altogether - changes in import or export duties. The 20th century witnessed the growth of governmental oversight of international business activities, first through expansion of domestic law, and secondly through the development of various international treaties and agreements so that international business is subject both to national laws and international law.

2. Traditional political risk analysis no longer enough for the MNE - instability is only part of the risk - more likely to face forced actions concerning JV’s, staffing, exporting, capital structure, sourcing, and other interventions in managerial decision making Two major sources of government intervention: 1. Economic and political environment of the intervention decision 2. Nature and strength of interest groups within the host country

3. Economic factors - usually derive from the weak financial position of the host country: - low foreign exchange reserves - high government deficit - high unemployment - low level of investment Political factors are of four sorts 1. Nationalism 2. Dependency theory - loss of sovereignty, loss of cultural identity 3. Ideology - Marxism of various shades, socialism, self-reliance 4. Colonialism - exploitation, “underdevelopment”

4. Interest groups 1. The ruling political party 2. Domestic controllers of business (capitalist owners or socialist directors) 3. Political groups (and their leaders) who are outside the government. 4. The domestic managerial class The preferences of each of these groups in turn is affected by: 1.Environmental factors , including political, social and economic competition from other groups 2. Group’s access to resources - financial, human, material 3. The personal values and beliefs of the key actors 4. Organizational relationships within the group, which affect both the development and execution of strategy.

5. Intervention affects different companies in different degree: Even though legislation may call for equal treatment, enforcement is often selective and discriminatory. Key factor in outcomes: how much bargaining power does the subsidiary have? - parent co’s ability to bring home country political pressure to bear - parent co’s control over resources necessary to effective subsidiary operation vs. Local govt/industry’s ability to go it alone Since impacts are different, it suggests that the risk of intervention is something that MNE’s can manage.

6. Timing: Once the government has announced its interventions strategy or plans, it is too late Governments, politicians and bureaucrats stand to lose too much face if they are seen to “cave in” to pressure. Therefore the appropriate time for the company to try to affect government intervention policy is before it happens, through - connections - lobbying - etc. The outcome will be the result of a bargaining process between the MNE and government - Question, then, is who has what strengths, and how best to exploit our advantages?

7. How much bargaining power does host government have? - ability to replace the products\services normally supplied by the MNE - control over subsidiary’s access to local resources, market, labour, capital Govt can maximize its bargaining power by encouraging the presence of competitors for the products, technology, management skills of the MNE subsidiary

8. MNE Defence Strategies - Maximize subsidiary’s bargaining power: - stay ahead of technical and managerial capabilities of host nation - technological upgrades - market dominance - introduce new products - generate exports (hence foreign exchange) - become imbedded in significant vertical integration, e.g. importing components for assembly of final product. - develop political connections - if possible, keep a low profile Parent company can help by : -enlisting home country political support - using control over patents, licenses, know-how - possible control over markets for products from host country - possible control over sources of significant raw materials - develop executives who are politically adept, as well as technically adept