International Business

Entry bargain between MNE and host government
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21st century has begun with the changing concepts and ideas, and this
decade no longer comprehends the previous ideologies and conventions.
International business and government relations in this era have
been revolutionized to a great deal.
The relations between the MNE`s and the host country
governments work under the obsolescing bargain model developed by
Raymond Vernon in Sovereignty at Bay (1971). (Grosse, 2005)
Basically, the model emphasizes on the changing nature of
the bargain between the MNE and the government of the host
country. There is a change in the resources, functions and goals over
time and hence constraints increases or decreases with the expansion of
the time. In this model, the initial bargain power lies within the
vest of the MNE. Gradually, it shifts over, and government holds
a tight grips over it, and MNE is held as a captive with a
deteriorating bargaining power in hand and hence, expropriation takes
place in which the MNE is deprive from the possession of
its private property and government tends to impose conditions
which are hurting in nature like more taxes payables for the foreign
companies operating in the host country. The model was originally
applied for the expanded nationalization and the expropriation in the
decade of 70’s. The international business scholars and the analysts
of the 21st century have with the idea that the model has survived
enough in the earlier span of time. The researches and the case
studies suggests that MNE’s do have relative bargaining power
in hand that prevents the hostile action of government of taking
the immediate advantage, of any
prevailing circumstances of possible benefits so the bargains that
are prevailing at the initiation of the operations of MNE’s in a
host country seldom obsolesced. Moreover, keeping in view the current
scenarios they are not many countries around the globe are present
which restrict the flow of foreign direct investments in their
respective countries. There is a little formal bargaining occurs at the
start in today’s world which is at the local level. Therefore, the
government has to shift from their inflexible behavior which leads
to impediment and delay in the business with
the obstruction to hold the international business to
the ‘red carpet’ treatment in order to open platform for the
negotiations and to reach the agreed terms. (Arvind V. Phatak)
A study presented by the Indian government according to which
outcomes of bargaining should be separated in terms of dynamic
and static bargaining success. Static is the outcome of
any particular negotiation and dynamic deals with the long terms
outcomes over several
negotiations. The MNE’s technology intensity and the portion of
its investment are linked positively with
the capability to protect itself from
the entry bargain obsolescing that is it supports dynamic bargaining
Percent of ownership can also be a measure the extent of
bargaining success availed by which of the two parties. A scholar named
Kobrin (1987) highlighted that the bargain has not obsolesce in the case
of manufacturing foreign companies particularly that deals with high
technology intensive sector. A case study which revealed that bargaining
between the Mexican government and foreign automotive MNE’s tends
not to follow the OBM model. At the time of the entry, the government
does have the strongest power of bargaining as the automotive
foreign company wanted an access to the market but later on, when
the MNE build its brand image, blended itself with the economy, and
maintained strong associations with the upstream as well as downstream
firms, the bargaining power instead of falling into disuse,
increased. At the time of entry, the MNE also promises to bring in
some additional technology transfers which lead the host government
to become dependent on them because of the potential benefits they are
bringing are of the government’s interest.
There is a proposed political bargaining model which could
carter the interests of both parties. Initially, OBM works that both
parties have a goal that they want to achieve at the expense of the
other. The difficulty of the negotiation arises when both the parties
anticipate that it is a zero sum game, and one party is
destined to hold as a hostage. The more alike the goals are the less
need for the other party to regulate or forcefully ask someone
to act in a particular way in the benefit of its
potential interest.  (Lorraine Eden, 2004)
When a particular manufacturing firm deals with a
European government to set up an off-shore assembly plant which
needs to import the components for its operations, then both the
government and the firm needs to see profitable outcome that
affects the employment of the host company. Lots of
people get employed exports of the country would significantly
increase and a transfer of knowledge to domestic people would take
place. The firm would want to pay fewer amounts of taxes and
have flexible access to the triad market to sell their final
manufactured product. On the other hand, the government would prefer
to earn more revenues in terms of tax collection and support knowledge
transfer, the goals tend to differ, but the outcome is supported by
both parties. Thus, bargaining in this scenario is likely to be
successful, and collaborative efforts are much in need. (Grosse, 2004)
The goals of both the sides seem to be conflictual as seen over
the years. The PBM proposes that goal of the both parties cannot be
coincided as they both are two different entities with different
operations and an entirely different geographic scope. The point been
highlighted is that it happens most of the time that their goals
are divergent, but there is always some room or scope for having
overlapping goals that can be achieved through cooperation. The
extending nature of the market liberalization and the speeding
globalization has shifted the HC goals to have more international
competitiveness and strengthen its international relations. PBM
inculcates various assorted issue that OBM is lacking on a much
broader aspect. Accordingly, the MNE can affect the government
policies towards a particular industry by iterative bargaining. A
study was conducted by Eden and Molot (2002) which inquire that
there are two waves of entrants in the market. First is the movers and
the other one are the late comers in the Canadian auto
industry. It was found that both the groups suffered the same
liabilities of being a foreign company establishing themselves as
operators in a foreign industry. The above example is from the real
world and opposes OBM as it assumes that negotiations takes place only
between one MNE and one HC government. However, the reality includes
various MNE’s, domestic firms or organizations having
a debate with government over a particular policy issue.
The rules have been restructured, and it was
assumed previously that developing countries can change   the rules
under which the MNE’s have to continue its operations which
inculcate the complex international negotiations. The last 10 -15
years have been proved that MNE’s have to
re write the global rules as per their requirements and interests
that best define their goals and objectives to achieve in
their particular industries, which would ultimately lead to a less
room for the government to regulate them.
Considering a case of Intellectual property (IP), there was an
agreement to assort IP laws worldwide as a part of Uruguay Round. US
based MNE’s lead by some other IP-intensive organizations arranged
the elements to achieve the overall global convergence as a regulation.
Additionally, they build ‘Tripartite Coalition’ with the
assistance of the other associations in the triad markets of Europe and
Japan. The coalition lobbied and leads their home governments to engage
in the conflict and fight for standards in the lateral trade
talks. The bargaining among home governments has been shifted by
bargaining among MNE’s within the Tripartite Coalition. (Ramamurti,
The MNC host developing
country relation’s traditional bargaining power has become part
of the history and is not considered anymore. In addition, today,
the relations can be understand easily as a direct result of two
tier, multi-party bargaining process. The bargaining between the
governments of host countries happens in bilateral or multilateral level
and produces macro rules for FDI that affect micro negotiations.
Example used: USA Korea free trade agreement
A recent example of negotiations is of Korea’s second largest
Free Trade Agreement following the one signed with the European Union
and in recent years with Chile, Singapore, the European Free Trade
Area and the Association of Southeast Asian Nations (ASEAN) is
Korea-United States Free Trade Agreement (KORUS FTA) that is a trade
agreement between Korea and United States. The treaty was signed in
June 2007 first, but after renegotiations, it was signed again in
December 2010. The basic purpose of the treaty was to eliminate 95% of
each nation`s tariffs on goods within five years and to create new
protections for multinational firms. The agreement was
the US’s initial FTA with most of the Asian economies and its
largest deal since the controversial NAFTA agreement in 1993.
This free trade agreement of U.S.
has high commercial significance in the last two decades. The
agreement means that U.S. has an excellent opportunity to sell
or export their domestic goods in the Korean market. This means
that there would be transfer of American goods, service,
and agricultural products to the Korean customers and more jobs for
the local citizens. The FTA between U.S. and South Korea means that
almost 362 million consumers can benefit from it. The KUROS FTA will
also enable the suppliers of the U.S. to have greater access to the
Korean procurement market. In addition to all this, the KUROS FTA will
strengthen the economic partnership and also coagulate the two
countries’ long standing strategic alliance.
The U.S. International Trade Commission approximate that due to
the reduction of Korean tariffs on goods, it will add $10 to $12
billion to annual U.S. GDP and around $10 billion to annual merchandise
exports to Korea. Moreover, with FTA, about 80
of Korea’s import from U.S. are consumer and industrial products
which had become duty free since March 2012, and it is expected that
almost 95% of the bilateral trade of industrial and consumer
products will become duty free within next 5 years, whereas most
remaining tariffs would be eliminated within the time frame of 10 years.
(Office of the United States Trade Representative, 2012)
FTA will benefit almost all sectors of Korean economy, for
instance, agricultural product. FTA will instantly hide the tariffs and
quotas on a wide range of different products. This will make two third
of Korea’s agricultural imports duty free from U.S. FTA will also
provide incentives for the services sector. In the service sector, the
market will have access to different global service like
international delivery services or opening up the Korean market for
international legal consultancy services. In addition to the benefit,
FTA will also open up Korean Financial market which will ensure
transparency of data. Finally, FTA will look at the non-tariffs
barriers in different sectors including
strong provision on competitive policy, labor and environment and
It is noticed that Korean laws make it difficult for foreign
companies to outsource and offshore activities. Under the Protection and
use of credit Information law, foreign companies operating in
Korea are not allowed to transfer any customer data or
details out of Korea, even for the purposes of processing data to
their own affiliates. Furthermore, it is mandatory for insurance
companies to maintain human and non-human databases of the MNCs’,
including IT systems, necessary for insurance business. These
restrictions act as a hurdle in government’s goal of making Korea into
a financial ‘hub’ due to the significant increase in the cost of
operating in Korea for the companies. These regulations should be
modified, and the government of Korea should allow companies
to follow their global operating models for outsourcing and off
shoring in return for protecting consumer information.
The initial FTA of U.S. with a North Asian Partner, the KORUS FTA
is an ideal model for trade agreements for the remaining world of the
region and underscores the U.S. involvement in the
Asia-Pacific Region. Therefore, countries for the sake
of national benefits now negotiate in order
to avail financial benefits by making the trade and
access convenient for their MNCs. KORUS FTA is a recent example of
the host countries’ bargain in favor of their MNCs’ for eased
up trade policies and tapping a new diverse markets for
the generation and improvisation of economic activities.
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