Multinational Relationships Review of Subject.

Multinational Relationships

Review of subject. The relationship with the host government can have a significant impact on the ability of the multinational to compete in that market. The host government impacts the internal and external trade barriers faced by the company in the foreign market, including tariffs, quotas, taxation and competition. Transaction costs in particular can make participation in a foreign market difficult for multinational firms and can often represent de facto trade barriers. For a multinational firm, forging a strong relationship with the host government can be a means to offset some of these barriers and improve its competitive situation in that market.

Early research into the subject resulted characterized the relationship between the host government and the multinational in terms of bargaining power, wherein the multinational's ability to forge a strong relationship with the host government and lower its transaction costs in the foreign market was directly related to the strength of its bargaining power (Fagre & Wells, 1982). Firms with low bargaining power faced high degrees of interference and consequently registered poor performance while firms with high bargaining power faced low degrees of interference and higher performance (Poynter, 1982). Forging stronger relationships with host governments became a means for multinationals to increase their bargaining power -- which in many economies is not strictly an economic proposition -- with host governments. More recent literature has synthesized the bargaining power theory with the resource-based model Multinational firms have specific resources that can be used to build bargaining power with host governments, ranging from technology that can be transferred or access to key physical assets to which the host government would like to gain access (Moon & Lado, 2000).

Conventional wisdom holds that one of the ways to reduce internal and external trade barriers and therefore transaction costs is through joint ventures with domestic firms, which allows the multinational to receive treatment from the host government as a domestic firm. The host government and country receive direct benefits in technology and information transfer, job creation and capital inflow as a result of such a relationship. The ownership structure of the multinational's local firm has been shown to have a direct influence on the rate and nature of conflict with the host government (Negandhi, 1980). One notable exception is China, where U.S. joint ventures have indeed received domestic treatment in the form of a higher level of government interference (Sanyal & Guvenli, 2000).

One recent change that has characterized the nature of the relationship between MNCs and the host government is that the MNCs have begun to view the relationship as more cooperative in nature. Central to this shift is economic development outside of the West -- emerging economies today have their own knowledge and experience to contribute to the MNC. The shift towards a two-flow flow of benefits increases the bargaining power of the host nation because it makes its market more attractive. As emerging economies begin to take on more characteristics of fully-developed Western economies, the bargaining power between the MNC and the host government becomes more balanced. Such improvements typically come as the result of economic liberalization, so the propensity of the host government to use its increased bargaining power to extract higher transaction costs is reduced.

Conclusions. The relationship between the MNC and the host government is a key determinant of profitability in foreign countries. The host government, by way of internal and external trade barriers, has a direct influence on the transaction costs faced by the MNC, which in turn impact profitability. Bargaining power is central to this relationship. At the outset of the relationship, the MNC may have higher bargaining power due to its resources, in particular its information and technology. However, as the host economy modernizes, the host government gains in bargaining power as it has more resources to offer the MNC. The relationship remains based on bargaining power and relative resources and capabilities, but is subject to change over time in particular as the host government improves its resource base.