Managing Risk in Developing Countries: National Demands and Multinational Response

Overview

In light of the increasing global competition among both multinational companies and national economies, Barbara Samuels examines a source of economic tension that has broad social implications: as multinational companies (MNCs) strive for cheaper labor and new markets, less-developed countries (LDCs) are becoming more concerned with extracting benefits from these companies to achieve their development objectives. Samuels centers her study on the variables shaping the responses of MNCs to national demands while ...

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Overview

In light of the increasing global competition among both multinational companies and national economies, Barbara Samuels examines a source of economic tension that has broad social implications: as multinational companies (MNCs) strive for cheaper labor and new markets, less-developed countries (LDCs) are becoming more concerned with extracting benefits from these companies to achieve their development objectives. Samuels centers her study on the variables shaping the responses of MNCs to national demands while considering current debates on country risk, global competitiveness, and national industrial policy. Advancing a micro-view of the MNC and its host country in two case studies, Samuels shows how an MNC subsidiary's integration with headquarters and its closeness with local government affect its management of risk and its ability to deal with LDC demands. Here the author investigates the labor and investment policy changes brought about when various automotive subsidiaries interacted with national interest groups in Brazil and with the government in Mexico. Both cases illustrate how the policy response of one subsidiary creates the dynamics for defensive policy changes of its competitors. MNC managers and LDC policymakers can draw important conclusions.

Originally published in 1990.

The Princeton Legacy Library uses the latest print-on-demand technology to again make available previously out-of-print books from the distinguished backlist of Princeton University Press. These paperback editions preserve the original texts of these important books while presenting them in durable paperback editions. The goal of the Princeton Legacy Library is to vastly increase access to the rich scholarly heritage found in the thousands of books published by Princeton University Press since its founding in 1905.

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Product Details

  • ISBN-13: 9780691609270
  • Publisher: Princeton University Press
  • Publication date: 7/14/2014
  • Series: Princeton Legacy Library Series
  • Pages: 272
  • Product dimensions: 6.10 (w) x 9.10 (h) x 0.70 (d)

Read an Excerpt

Managing Risk in Developing Countries

NATIONAL DEMANDS AND MULTINATIONAL RESPONSE


By Barbara C. Samuels II

PRINCETON UNIVERSITY PRESS

Copyright © 1990 Princeton University Press
All rights reserved.
ISBN: 978-0-691-07826-7



CHAPTER 1

Introduction: Competing Issues—National Demands and Multinational Response


THE SPREAD of businesses across national boundaries is one of the most important phenomenons affecting our society, prompting much debate on the global competitiveness of multinational companies and national economies as well as on the sociopolitical implications. As the technological advances of communications, transportation, and production modes further cut through national boundaries, the very structure and fabric of the nation-state, international relations, and businesses are being revolutionized. Increasingly, the relevant parameters are not national but global, with national policymakers and business managers being forced to consider the impact of international variables on public policies and business strategies. Against this backdrop, the multinational company (MNC) reigns supreme, the creature of the internationalization of business, reaching around the world and through national boundaries with its global strategies. It is here, within the structure of the MNC, that the economic imperatives of globalization often run counter to the political imperatives of the individual nation-state, while at the same time the MNC is itself subject to the complexities and contradictions of operating across national boundaries. The conflict becomes acute in developing countries (LDC): as MNCs strive for cheaper labor and new markets, LDCs are particularly concerned with extracting benefits from MNCs to meet their own development objectives.

The trends of MNC strategies and LDC demands are contradictory: as MNCs face the economic imperatives of global competition and centralize their subsidiaries' activities, local pressures from within LDCs are pushing for increased decentralization and responsiveness from individual subsidiaries. From the MNC side, LDCs are assuming a larger role as growth markets as well as sites of competitive production. Competition and the relative importance of superior management in international integration are increasing with the continued globalization of business. Simultaneously, both LDC governments and local groups focus demands on MNC subsidiaries operating within their countries with the objective of influencing individual subsidiary behavior.

Despite critical importance to business managers, national policy makers, and the public at large, the crux of this phenomenon remains obscure: what do host countries demand of MNCs and how do they respond? This book zeros in on this critical intersection of the host-country-MNC relationship, focusing on the much-neglected dynamics of national demands in LDCs and the ability and willingness of MNCs to respond to those demands.

Multiple interested parties have grappled with this issue, each from its own, often conflicting, perspective. The MNC manager needs to manage across nations, enhancing his company's global competitiveness. Conversely, the host-country's policymakers strive to extract benefits from the MNC. Likewise, the policymakers of the MNC's home country struggle to retain benefits from the MNC. To complicate matters further, various interest groups such as labor and national business try to influence MNC decisions, sometimes joining forces beyond national boundaries to attain common objectives.

Despite (and partly due to) this plethora of interested parties and their varied perspectives, scholars and business managers have tended to concentrate on the wrong questions. MNCs and LDCs are often seen from generalized, static, and polarized perspectives. From the LDC perspective, multinationals are commonly thought of and portrayed as monolithic entities, stereotyped with no or little differentiation of individual behavior and derived benefits. Likewise, from the MNC perspective, most research and practice have concentrated on macrogeneralizations about LDCs, asking what the "country risk" of a foreign investment is, with no consideration of the MNC's own behavior. As a result, despite the great importance given to the issue, these partial and static approaches have dominated the debate over the last decades, and the questioning of all parties has reached a dead end with few operative, applicable answers. In short, our knowledge and understanding lag seriously behind the challenge. This book attempts to attack this stalemate head on: What is the relationship of the MNC to LDC demands? What variables shape MNC response to those demands? What are the implications for the risks to the MNC and benefits to the LDC?

The argument speaks to the individuality of MNCs: within this dynamic of MNC-LDC conflict, MNCs differ systematically in their will and capacity to deal with host-country demands. Further, to understand conflict between MNCs and LDCs, we must concentrate not on each entity itself but on the relationship between the two, in particular the specific relationship of MNC policies to the LDC's development process. This analysis of MNC policies must be framed within a dynamic historical view of the LDC's development process and must also consider whether those policies are perceived by LDC groups as advancing their objectives. As this study shows, LDC demands on MNC policies do not appear suddenly but evolve over long periods of time, building up until eruption.

Within this dynamic context, MNCs inadvertedly act as "levers for change," implicit agents in the creation of both country risk to themselves and benefits to the host country. In other words, MNCs do not just encounter risk in the host country, but call out risk as a result of their own specific, distinctive presence and behavior. Further, when faced with the same LDC demands, the behavior of MNCs differs. Even before the eruption of conflict, MNCs often differ in their ability to identify escalating demands. Then, at the point of crisis, the degree of conflict differs due to company-specific characteristics. The outcome—the subsidiary's response to LDC demands—is also distinctly shaped by the particular characteristics of the MNC. Understanding these dynamics is significant for both parties: business managers can manage country risk to their own competitive advantage, and LDC groups can develop strategies on how to optimize MNC response to their demands.


THE CASE STUDIES

Two case studies of actual conflict between MNCs and host-country demands will help to illuminate these dynamics. If knowledge lags behind reality and we are to develop useful answers, then the best means is to study actual occurrences. In the first case, LDC national groups pressured MNC subsidiaries for changes in their local labor policies. In the second case, the host LDC government established regulations that affected the global investment and sourcing strategies of the subsidiaries' parent companies.

For both cases, field research with the MNC subsidiaries and national interest groups included extensive literature reviews and multiple intensive interviews. From 1980 to 1984 over three hundred interview sessions were conducted with more than eighty people (see Appendix for listing of interviewees). Given the prime objective of understanding MNC behavior, the focus was on interviewing a wide range of executives in each of the subsidiaries included in the study. Relevant members of senior management participated, and the managing directors of all subsidiaries completed in-depth questionnaires.

To break through the generalizations on MNCs, LDCs, and country risk, each case study is composed of different MNC subsidiaries in the same environment: subsidiaries operated in the same industry and faced the same demands in the same country. The automotive industry is used for both studies; given its ranking as one of the first international, and perhaps most integrated, industries with large production centers throughout the world, it provides us with the most advanced stage of MNC centralization, subject to diverse host-country pressures. The countries selected were Mexico and Brazil. As two of the more advanced LDCs and key automotive producers, their experiences are most likely to typify future issues in the less-advanced LDCs and host countries in general. (See table 1–1.)

The cases differ in focus to substantiate overall generalizations: the Brazilian case study deals with MNC conflict with a local interest group, the Mexican case study concerns MNC conflict with the host government. Likewise, to illustrate the broad generalizations on MNC responsiveness, the case studies include conflict with both autonomous and centralized MNC decisions: the Brazilian case involves demands on labor-relations policies, usually as determined by the subsidiary; the Mexican case entails demands on trade-balance policies, usually the result of parent MNC decisions on global investment and sourcing strategies.

The research illuminates the issues at hand and seeks to provide insights that are applicable across industries and countries. In both cases, does an examination of the historical relationship of MNC policies to the LDC development process show an interactive process in which MNCs contribute to the creation of both country risk and host-country benefits? In both cases, do individual subsidiaries differ in their ability and willingness to respond, with MNC subsidiaries in the same industry faced with the same LDC demands responding differently? If the answers are positive, the implications for business strategies and national policies are enormous, demonstrating that latitude does exist for MNC managers to mitigate country risks and for LDC groups to extract benefits from responsive MNCs.


THE ISSUES

First of all, the great majority of LDC governments envision the MNC as a possible mechanism to further their countries' economic development; the use of government regulations and performance requirements toward this end is well documented. In addition, numerous other LDC interest groups such as labor, local business, and opposition political parties often perceive MNC subsidiaries in their countries as crucial in aiding or endangering their own political and economic objectives. For LDC governments and interest groups, therefore, MNC subsidiaries may become priority targets of pressure for advancing their respective agendas.

Moreover, greater competition between MNCs to penetrate foreign economies has provided LDC governments with the opportunity of making discriminating demands. This, added to the LDC policymakers' accumulating experience, has led to a growing proliferation of ever-more-sophisticated and effectively expressed LDC demands. Regardless of any disagreements on the capacity of MNCs to contribute to development in LDCs, in actuality the great majority of LDC governments today aggressively seek foreign investment. In the current global business environment, MNCs are rarely expropriated; on the contrary, host governments seek to attract, capture, and control. Despite the recent accelerated interest in attracting foreign investment, the trend toward the establishment of LDC national control systems that are increasingly more effective and discriminating is indisputable. Indeed, liberalization of foreign investment regulations often translates into targeting individual subsidiaries or industry groups, resulting in tailor-made demands and performance requirements yielding host-country benefits. The primary objective of LDC governments and groups remains intact: once MNCs are captive, how can benefits be extracted?

The most important trend is that these host-country demands—whether they be from its government or a group such as labor—are increasingly targeted against a specific subsidiary or group of subsidiaries. LDC groups actively and aggressively target MNC policies based on their perception of potential benefits. The avoidance of risk requires the individual subsidiary to modify its behavior given the pertinent LDC groups' objectives. In short, economic nationalism has shifted from the blanket targeting of all MNCs to the pragmatic stand of corporate specificity, with individual subsidiaries being pressured to become autonomous from their parent headquarters and respond to specific LDC demands. As a result, MNCs are challenged to increase their capacity for local responsiveness.

Conversely, MNCs are encountering a growing disadvantage: as they are targeted by more specific LDC demands, the intensified globalization of strategies requires more centralization and coordination across national boundaries. Success in international business means efficient management across countries. Each MNC is faced with the dilemma inherent within the nature of the MNC organization itself—its subsidiaries are committed to a common strategy outlined by the parent; yet they are subjugated to national ruling bodies whose interests often conflict with the overall design of the parent. Furthermore, it must not be forgotten that the parent also operates under the subjugation of its own government.

And not only governments put pressure on the MNC parent—the MNC parent is also subject to influences and pressures from various interest groups in its home country as well as all the host countries in which it has subsidiaries. Interest groups also pressure the subsidiaries. As a result, the parent company and the host countries of its subsidiaries may have few shared interests, bonds, traditions, or objectives except for competing claims on subsidiaries. As portrayed in figure 1–1, each MNC subsidiary may be envisioned as "floating" between (1) the claims of the parent company and its home country and (2) the claims of its host country, its government and interest groups.

The changing pattern of global competition over the last decade has intensified the problem of competing claims on the subsidiary. In order to remain competitive and develop new markets, MNCs have moved production centers overseas. For many MNC industries, other countries and LDCs in particular have relatively lower costs of production and higher market growth potential than their home countries. MNCs have increased dramatically their share of revenues and profits from overseas markets, investing more of their assets in these countries. This geographical fragmentation has resulted in dramatically escalating the importance of subsidiaries within the parent's global strategy and their contribution to overall profitability, and strengthening the role of the parent in centralizing and coordinating the policies and activities of these subsidiaries. Therefore, MNC managers have increasingly to deal with issues relating to coordinating more important subsidiaries located in a growing array of country environments.

Besides the expanding problem of coordinating its overseas activities, the MNC must also contend with the growing conditioning forces in its own home country. The shift of MNC investment from the home country to overseas has resulted in a debate within labor, governments, business, and academia on the effects upon the home country's balance of payments situation, employment, tax revenues, international political relations, national security goals, and domestic antitrust policies. Some argue that home-country controls must be applied to MNCs in order to protect home-country interests. Furthermore, home-country groups, especially labor, may join forces with those in host countries in attempts to change MNC policies. The most visible example today is undoubtedly that of MNCs operating in South Africa. Therefore, MNCs, by virtue of their very organization and importance to various groups, are prone to be affected by a multitude of pressures inside their home countries as well as in their subsidiaries' host countries. The successful MNC must manage these complex pressures within the formulation of its overall global strategy and in regard to its product and geographical components.


(Continues...)

Excerpted from Managing Risk in Developing Countries by Barbara C. Samuels II. Copyright © 1990 Princeton University Press. Excerpted by permission of PRINCETON UNIVERSITY PRESS.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

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Table of Contents

Contents

List of Figures, ix,
List of Tables, xi,
Acknowledgments, xiii,
List of Abbreviations, xvii,
CHAPTER 1 Introduction: Competing Issues—National Demands and Multinational Response, 3,
PART 1: Host-Country Group Demands and Subsidiary Response: The Case of the Brazilian Automotive Industry,
CHAPTER 2 MNCs within a Changing Sociopolitical Environment, 33,
CHAPTER 3 Individual Subsidiary Response: The Reformulation of Labor Policy, 57,
CHAPTER 4 Determinants of Differing Subsidiary Behavior: Relationships within the Changing Labor Environment, 77,
PART 2: Host-Government Demands and Subsidiary Response: The Case of the Mexican Automotive Industry,
CHAPTER 5 MNCs within a Changing Regulatory Environment, 111,
CHAPTER 6 Individual Subsidiary Response: The Reformulation of Investment and Sourcing Policies, 136,
CHAPTER 7 Determinants of Differing Subsidiary Behavior: Relationships within the Changing Regulatory Environment, 165,
CHAPTER 8 Conclusion: Strategic Implications for MNC Managers and LDC Groups, 216,
Appendix: Interviewees, 243,
Index, 247,

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