Bargaining power can be defined as the ability to identify parameters in a negotiation, gain accommodations from other negotiating side, and tip the result of mediation to the preferred alternative (Dong, Zou & Taylor 101). Multinational Corporation, on the other hand, is a company with assets spanning over to other foreign countries besides its country of origin. These companies operate factories and offices in different countries with global activities controlled from a centralized location, mostly a headquarter. The ownership of these corporations is sometimes private. Some states form companies or seek shares in multinationals that are used to make foreign investments. MNCs can also enter into overseas markets via partnerships with local businesses to reduce costs of establishing a new business. The MNCs and host governments use their bargaining power to determine the degree of control of operations and desired outcomes that would be beneficial to either of them. A low bargaining power on either side would result in a low level of control regardless of whether each team preferred high control. The host countries and the international firms usually bargain over terms under which investments are to be made.
Multinational companies derive their bargaining power from the ability to create more employment opportunities for the local people to better their living standards, and the significant role they play in the development of local economy (Dong, Zou & Taylor 102). MNCs with greater resources and capabilities that are sure of improving the economy of host countries are usually more powerful than host countries. Given that they can control critical areas of the host’s economy, these MNCs end up controlling the decisions on the usage of resources disregarding the labor and environmental regulations set up by host nations. Specifically, in developing nations where the unemployment rate is high, the international companies can use the potential to create more employment for citizens; coercing the governments to lessen control of business operations and control (Oatley). Employment of citizens usually translates to improved living standards of the people and production. Besides, the MNCs would generate additional revenues needed by host countries for development purposes which influence a country’s Gross Domestic Product. The economy of the country is, therefore, likely to grow with direct investment of the MNCs. This can be seen from the growing influence of international corporations from China on economies of some African States. Besides, a country seeking diversification in the economy is likely to have less bargaining power compared to MNCs that is to bring diversification. For example, a state whose economy is dependent on agriculture can lower its demand to an MNC with potential for great investment in manufacturing industry in pursuit of economy diversification.
Oatley (2008) points out that international corporation also possess more bargaining power than countries with low-skilled labor. Lack of skilled labor is witnessed in countries with low literacy or education levels. Corporations exploit this gap to transfer technical production and managerial skills. As a result, host nations would create favorable business environments in exchange for the training of it’s’ people. MNCs with control of technologies and resources needed by a country also have an upper hand during business negotiations. They are even more powerful when direct investments are going to improve the poor infrastructure of host nations. A typical example can be seen in a contract signed between China’s state corporations and the Democratic Republic of Congo (DRC) in 2007 (Ogier). China was granted access to cobalt and copper mines. As part of the deal, China was to make investments in transport infrastructure like roads and railways. Ogier (2011) adds that more investments were also to be made in social infrastructures and hydroelectricity. As evidenced, state-owned corporations or those partly owned by developed states appear to be more powerful than host nations especially, the developing countries. Parent states use their influence to determine how revenues will be shared.
Apart from the mentioned circumstances which can make a multinational corporation powerful, there is also the issue of monopoly which a corporation can use to gain favorable deals with host nation (Oatley). If an MNC exerts a monopolistic control over things that are valued by a host nation, for example, technology, it makes it more powerful. This is strengthened if there are no other MNCs with the capability to make an investment sought by a country. However, the bargaining power may shift when there are more MNCs to choose from. In spite of all circumstances mentioned, once the company sets up in a country, the bargaining power may shift and will only last as long as the state continues to rip the benefits (Eden and Molot 360). The more exclusive control a multinational firm has over things valuable to a host nation, the more power it has.
On the other side of the negotiation, the government can counter MNC offers based on its power to control the local market access; it’s ownership of scarce resources and the incentives it can create. According to Bucheli and Aguilera (2008), the higher the costs of investment an international corporation makes over time, the less the bargaining power it will have in future. Within time, MNCs will have more fixed assets or investments in the host state. Besides, its monopoly over personnel, technical and managerial skills as well as technology diminishes. This presents an opportunity for the country to renegotiate earlier deals. It is referred to as obsolescing bargain. The balance of bargaining power shifts towards the government over time. Mining industries or oil corporations dealing with natural resources are the culprits in this instance. The fact that the host nation also owns the natural resources gives them a great bargain power in future over MNCs whose operations are dependent on natural resources (Bucheli and Aguilera).
Host governments can also water down the control of the multinationals through the creation of Export Processing Zones (EPZ). EPZ are adopted by developing countries to promote industrialization and commercialization of exports by attracting foreign investments. The zones are characterized by incentives such as tax exemptions and fair business regulations that eliminate barriers for establishing businesses. As Raman (2008) highlights, the Malaysian government has been successful in attracting international businesses. The government policies have created conducive business environments with high growth and profit margins. It has built industrial parks and Free Industrial Zones (FIZs) fully equipped with transport infrastructure, water, and electricity supplies. These are key infrastructures that minimize initial costs for setting up new factories by MNCs. This gives the host nation a higher bargaining power when conducting business with multinational companies. In some instances, companies are assured of tax holidays at certain times of the year. These are periods when governments remove taxes, for example, sales tax, on certain products to promote consumption of those products; translating to higher profits to firms for a short period. Apart from that, tax subsidies to help businesses reduce their production cost and lower prices for services and products is one source of the bargaining power which the government can table during negotiations to attract investors. Developed and industrialized nations are also known to have a high skilled labor force with higher rates of literacy. Given that it is expensive to import expatriates, this forms one of the factors to consider by MNCs in a bid to lower part of its operational and production costs. According to Raman (2008), the well-educated and multilingual population is one of the things that have attracted investments from international companies. Therefore, the availability of skilled labor force needed by multinational firms can be used as a powerful bargaining tool to attract new investments.
Host countries can also use their strategic positions as a source of higher bargaining power (Oatley). As it is common with most business, location is one factor which a company considers when seeking to expand their operations into new regions with greater access to a wider market. An example of such a nation with location advantage is Netherlands. Besides its excellent business policies, airport, seaport and road networks, its position is considered as a gateway to Europe. It has made Netherlands a prime location for logistics purposes, the entry, and distribution center of products into the European market. These favorable conditions and easy access to a wider European market can give it a higher bargaining power. An example of MNC favored by this location is the Tesla, an automotive company manufacturing Electric Vehicles (EVs). According to the company’s Sales Director in Europe, the location was central to the operations and future expansion into other regions within Europe (Dunnen).
In conclusion, the bargaining power between MNCs and countries are determined by various factors which influence the establishment of business. These factors will determine how the profits or revenues generated from the investment will be shared between the two. Besides, other values from direct foreign investment investments such as the increase in employment rate, the economic impact, transfers of skills, and technology can be estimated to determine how to share the revenues. On the government side, favorable business environments comprising of tax subsidies and business policies among others influence business decisions of multinationals. Developed states that are more industrialized with excellent infrastructures often have more power than MNCs. Countries with a diverse source of revenues from exports, manufacturing to agriculture also have an edge in business negotiations. Developing nations also gain more power over time as the economy improves from investments made. However, the level of power exerted by either MNC or governments is dependent on who has exclusive control over resources or things valued by the other. The more a country has control over things valued by MNC such as large market, easy access to productions factors or natural resources the more the bargaining power. Equally true, the more an MNC controls things such as technology, expertise, high revenue returns among other things valued by a state, the more powerful it is. Regardless of all circumstances, multinational firms are considered as one of the drivers of economies and beneficiaries of globalization.
Works Cited
Bucheli, Marcelo and Ruth Aguilera. Political Survival, Energy Policies, And Multinational Corporations: A Historical Study For Standard Oil Of New Jersey In Colombia, Mexico, And Venezuela In The Twentieth Century. 1st ed. Urbana-Champaign, USA: University of Illinois, 2008. Web. 6 May 2016.
Dong, Zou, Beibei, Shaoming, and Taylor, Charles R. “Factors That Influence Multinational Corporations’ Control of Their Operations in Foreign Markets: An Empirical Investigation.” Journal of International Marketing, 16.1 (2008), 98-119.
Dunnen, Paula. "Tesla Motors Opens Assembly Plant In Tilburg, Netherlands". Teslamotors.com. N.p., 2013. Web. 30 Apr. 2016.
Eden, Lorraine, and Molot, Maureen A. “Insiders, outsiders and host country bargains.” Journal of International Management, 8 (2002): 359–388.
Oatley, Thomas H. International Political Economy. New York: Pearson/Longman, 2008. Print.
Ogier, Thierry. "Concerns over China’S ‘Asymmetric Bargaining Power’ | Emerging Markets". Emergingmarkets.org. N.p., 2011. Web. 6 May 2016.
Raman, Rajeswari. Impact Of Multinational Corporation In Malaysia. 1st ed. Selangor, Malaysia: N.p., 2008. Web. 6 May 2016.
