Bargaining Power Relationship of MNCs and States
Date of Submission
Bargaining Power Relationship of MNCs and States
The United Nations refers to Multinational Corporations (MNCs) as the engines of growth. MNCs operate in other countries besides their home countries by making significant financial investments in host countries through foreign direct investment (FDI) (Govind & Turcan, 2017). FDI is vital to host countries as it leads to economic growth, as seen with China that has registered massive growth due to MNCs’ many operations. However, for MNCs’ effective operations, there has to be a relationship between the MNCs and the state. Notably, such a relationship is ambiguous and complex as neither the state nor the MNC is allowed to dominate (Morgan, 2018). This essay seeks to address the concept of bargaining power available to states in their relationship with MNCs, focusing on the automobile industry.
Sources of Bargaining Power for MNCs and States
Notably, states and MNCs have different objectives in their bargaining relationship. The state seeks to maximize the economic benefits of FDI through its citizens’ employment and knowledge and technology spillover (Govind & Turcan, 2017). It also intends to increase its GDP. Besides, the state seeks high-order power to maintain the indigenous headquarters of MNCs as well as retain the MNCs’ critical operations. Additionally, states plan to gain through taxation skilled labor and supplier linkage that positively affects other organizations within the state. Conversely, Coe & Yeung (2019) argues that MNCs seeks to maximize profits to their shareholder and minimize their costs while meeting customer needs. They also seek to take advantage of the state’s resources, labor, and stability while retaining their control and flexibility.
Equally, the state gains a higher bargaining power if it has the resources needed by MNCs. A state with raw materials that MNCs need to advance their operations attracts many MNCs. If a state has the necessary raw materials for MNCs, it retains the bargaining power (Morgan, 2018). Additionally, a state with a larger market and labor force has higher bargaining power. For instance, China has higher bargaining power in the automobile industry due to its steel, aluminum, and semiconductor resources. Companies such as General Motors, Volkswagen, Honda, and Subaru, among other companies, have production companies or joint ventures in China, making China the leading car manufacturer in the world with over 30% of word’s production. Besides China’s raw material advantage, it also has the market advantage with 30 million vehicle units sold in 2020 and an expected 35 million vehicles to be sold by 2025 (Bakir & Woods, 2018). China also has higher labor owing to the 68% workforce out of its 1.4 billion people (Morgan, 2018). The state is also leading in knowledge and technology, attracting many MNCs hence increasing its bargaining power.
MNCs, bargaining power is due to their unique contributions to a state. In FDI negotiations, the technological power, economies of scale, and uniqueness of products give MNCs higher bargaining power (Coe & Yeung, 2019). For example, due to its extensive research and development, Toyota has higher bargaining power, leading-edge technology, and brand image, making states prefer it for its economic benefits.
Bargaining Power between States
Significantly, the power to bargain effectively by a state depends on its resources, openness, market, labor, and cost. The power varies between states due to the natural, political and economic situations of different states ((Clegg, Geppert & Hollinshead, 2018). China has a large population, a stable economy, and an excellent political environment that increases its bargaining power compared to states such as Iraq that lacks political or economic stability. Besides, companies such as General Motors prefer the Chinese market compared to its US market despite having their headquarters in the US. The regulatory barriers also determine the bargaining power of a state. States with lower regulatory barriers attract many MNCs give the states more bargaining power. For example, the US imposes a 25% tariff on imported cars while China imposes a 15% tariff, hence increasing its bargaining power (Morgan, 2018).
Changes in Power of the State over Time
Markedly, the bargaining power of a state is not constant (Bakir & Woods, 2018). In the 1920-1950s, the US had a higher bargaining power in the automobile industry. Many companies, such as General Motors, built their production companies in Detroit, Michigan, due to raw materials and labor availability. Today, Detroit has declined as many automobile industries exited the town. Also, China did not have its high bargaining power in the 1980s that it currently has to indicate the change in the bargaining power of states (Bakir & Woods, 2018). The state’s bargaining power also changes with the political situation within a country and its economic situation. Indonesia, for instance, deteriorated in the 2000s due to corruption, over-taxation, harsh regulations, and policy fragmentation (Clegg, Geppert & Hollinshead, 2018).
Constraints in a Bargaining Relationship
The different goals by MNCs and states require a balance whereby the size of stakes determines the bargaining power of each party. If a state has several MNCs seeking to invest in the country, then the state’s bargaining power is increased (Govind & Turcan, 2017). However, the state’s bargaining power can be constrained by an economic crisis, political instability, and issues with the balance of payment. On the other hand, an MNC has a higher bargaining power if it has high economic benefits and does not have to compete with other MNCs. The MNC is constrained by existing global, national, and local laws and its record in contractual commitments and its experience (Clegg, Geppert & Hollinshead, 2018). Hence, the size of the constraint determines the bargaining power of MNC or state.
Succinctly, MNCs are the engines of economic growth. The MNCs are in a complex and ambiguous relationship with states. States have the resources, market, labor, and cost that the MNCs seek, while MNCs possess the economic benefits that states need. The state’s bargaining power is determined by its possession of the exact resources, market, labor, and cost required by an MNC, while its technological power determines the bargaining power of an MNC, economies of scale, and uniqueness of products. In the automobile industry, China has the highest bargaining power as it offers a large market and resources needed by MNCs. Toyota also has a higher bargaining power due to its high technology, brand image, and R&D. This paper has notably established that the bargaining power of nations is not constant as it is constraint by an economic crisis, political instability, and issues with the balance of payment.
Bakir, C. and Woods, J., 2018. Host state bargaining with multinationals. In Handbook of the International Political Economy of the Corporation. Edward Elgar Publishing.
Clegg, S., Geppert, M. and Hollinshead, G., 2018. Politicization and political contests in and around contemporary multinational corporations: An introduction. Human Relations, 71(6), pp.745-765.
Govind, S. and Turcan, L., 2017. The Changing Contours of Dispute Resolution in the International Tax World: Comparing the OECD Multilateral Instrument and the Proposed EU Arbitration Directive. Bulletin for International Taxation, 71(3/4).
Morgan, G., 2018. Power relations within multinational corporations. In Handbook of the International Political Economy of the Corporation. Edward Elgar Publishing.