GLOBAL BUSINESS ENVIRONMENT:
EVOLUTION AND DYNAMICS
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Main bargaining powers available to states in their relationship with multinational corporations (MNCs)
Bargaining power is an essential asset to harbour in any form of business undertaking or agreement between parties. As asserted by Dörrenbächer and Gammelgaard (2016 p. 2), highly successful initiatives in business undertakings, are those that are in a position to cause a shift in the rules of the game. In this regard, the struggle for bargaining power between multinational corporations (MNCs) and states continues to be a constant necessary evil. The key motivation for any business venture is the probability of making profits from it. Consequently, Rottig (2016 p. 5) asserts that MNCs avoid making investments in emerging markets due to their high risks resulting from increased transaction costs from absence of intermediary institutions. Profit-making in such countries becomes hard and MNCs suffer the risk of bankruptcy and wounding up. To curtail such occurrences, MNCs seek to have higher bargaining power than the community by the use of programs like corporate social responsibility (CSR), as illustrated by Calvano (2008 p. 796). CSR can be defined as the various measures taken by firms to improve their relationship with the community. Such measures can be used by them as an avenue through which they can instigate changes that favour them while taking advantage of the community. Given the duality in nature of MNCs as asserted by Hymer (1970 p. 443), it is therefore important that states accept incentives that will be beneficial to their country rather than exploit them. The paper will help us analyse the available power resources that MNCs and states have in their bargaining relationship, the factors affecting a state’s bargaining power as well as its variance over time and the demerits of a bargaining relationship between the state and MNCs.
Bargaining Power Resources
State Capacity and State-Centric Governance Models
Murtha and Lenway (1994 p. 113-144) assert that there are certain ways in which government involvement in business models that may potentially harm any present competition that would otherwise have been present if their involvement was absent. In such cases, the state-centric governance model comes into play. Through policy making and involvement in bargaining with MNCs, governments are able to make quality checks at each stage of the automobile production industry to ensure that their citizens use top-shelf machinery. As Hymer (1970 p. 442) asserts that commodity trade is the main engine of international trade, governments are better placed at controlling the activities of MNCs which may not be favourable to them.
While MNCs have an undoubtedly large financial capacity to undertake new business opportunities in the global markets, governments have the bargaining power of administrative capacity. In essence, governments can take up administrative roles within the firm’s organizational structure and undertake internal oversight activities to avoid unfair practices by the firm. According to Rottig (2016 p. 12), institutional arbitrage, more so economic and institutional arbitrage is essential in asserting bargaining power conflicts that could arise between states and MNCs. By exemplifying their administrative role in international business, governments create better environments for the success of MNCs and their nation as well.
Rottig (2016 p. 10) illustrates that marketing assumptions have a huge bearing on how public policies are understood. He further asserts that, in some cases ideas have the ability to transform into public philosophies. As such, we realize that the institutional capacity of the MNCs has a great influence on market and public perceptions. In a similar fashion, MNCs could utilize institutional capacity as a bargaining power strategy in acquiring their intended goals while evaluating and negotiating business prospects in a country. Dörrenbächer and Gammelgaard (2016 p. 5) claim that, companies acquire power when they possess resources that primarily influence the market and institutional conditions. Consequently, this power resource may be essential with regard to MNCs’ business activities.
Factors affecting Bargaining Power and its Variance with Time
According to Leap and Grigsby (1986 p. 205), the factors that contribute to the transition of potential power to enacted power are known as transformational factors. These factors are the driving forces of bargaining power between MNCs and governments. Such factors may include: insider-information on a company’s financial status, labour and capital intensity of a firm. A company’s financial capacity may be the basis of bargain. When MNCs are realized to be struggling financially or in debt, governments may use such information as leverage to negotiate better terms for themselves. The labour market for multinational corporations, is primarily comprised of citizens of the involved state. The use of labour unions in collaboration with governments will create the necessitation of favourable terms for them as illustrated by Murtha and Lenway (1994 p. 118-119). These factors could contribute to the overall bargaining power between MNCs and governments. The capital intensity of the automobile industry is high due to all the considerations required to start and run such a business in foreign states, Leap and Grigsby (1986 p. 207). MNCs are therefore prompted to offer a good and reliable product with a good financial backing as a bargaining strategy with governments. Over time, the bargaining power of a county may vary due to its economic status. Hymer (1970 p. 446) claims that, keeping an economy within certain economic boundaries ensures retention of foreign investment – thereby offering a company increased bargaining power.
Demerits of a Bargaining Relationship
Bargaining relationships have certain limitations in their enactment and use. Some may include: increased over-reliance on foreign goods, reduced competition and increased monopoly power, reduced taxation and increased loaning as well as uncouth business practices that impose exploitative measures to the citizens. Such demerits may be the sole reason as to why governments are discouraged from engaging in power bargaining negotiations with MNCs. In the world today, the Coronavirus pandemic has resulted in over-reliance of third-world countries on foreign aid. As such, they are forced to accept the exploitative terms of the agreements which may include: high interest rates on loans, acceptance and registration of aliens as well as surrender of valuable country resources to foreign entities. Therefore, bargaining power should be leveraged between states and MNCs.
In conclusion, the above arguments offered with regard to bargaining power and effects thereof can greatly affect governments and MNCs. The bargaining resources, the factors surrounding them and the demerits of the power resources give an illustration of how governments and MNCs negotiate to do business. In order for bargaining power relationships to thrive, then all the relevant stakeholders should undertake their individual roles properly in order to create a healthy business environment.
Rottig, D., 2016. Institutions and emerging markets: effects and implications for multinational corporations. International Journal of Emerging Markets.
Dörrenbächer, C. and Gammelgaard, J., 2016. Subsidiary initiative taking in multinational corporations: the relationship between power and issue selling. Organization Studies, 37(9), pp.1249-1270.
Calvano, L., 2008. Multinational corporations and local communities: A critical analysis of conflict. Journal of Business Ethics, 82(4), pp.793-805.
Hymer, S., 1970. The efficiency (contradictions) of multinational corporations. The American economic review, 60(2), pp.441-448.
Murtha, T.P. and Lenway, S.A., 1994. Country capabilities and the strategic state: How national political institutions affect multinational corporations’ strategies. Strategic management journal, 15(S2), pp.113-129.
Adekola, A. and Sergi, B.S., 2016. Global business management: A cross-cultural perspective. Routledge.
Leap, T.L. and Grigsby, D.W., 1986. A conceptualization of collective bargaining power. ILR Review, 39(2), pp.202-213.