1. POLITICAL ECONOMY OF FDI (Con’d): The Bargaining Power and FDI The outcomes of the negotiation between you (MNEs) and the host government (h.g.) about your FDI in developing countries reflected in: (1) tax, foreign exchange and other financial concessions by the h.g.; (2) legal arrangements; (3) the rights to name board members; and (4) local (or your) ownership share in your FDI (subsidiary). (Related to (3).)

2. The most important outcome of the negotiation between the host government and you is: Local (and hence your) ownership share in the foreign operation you own 100 %, local share 0% 80%, local share (who?) 20% 50%, local share (who?) 50% 20%, local share (who?) 80%.....………………………........................................... Many governments in developing countries consider local ownership as an important goal when they negotiate with foreign investors. The ownership issue also arises sometimes in developed countries. This may be due to their political motivations; investment regulations emphasize joint venture requirements; worries about foreign control of key industries, etc. WHY? Example. Canadian limits on foreign ownership in airlines: 33%; telephone operators (AT&T Canada-33%);.....

3. Many (but not all) MNEs also view ownership share in FDI very important Example. Why did IBM and Coca-Cola insist on fully owned subsidiaries for their key FDI operations in India? Many governments (and also MNEs) are unwilling to trade ownership for other kinds of benefits Your share and local share in your FDI are determined by your relative bargaining power vis-a-vis the host government’s bargaining power. What are the sources of bargaining power ? Your ownership in an FDI operation in a developing country often determined by negotiation with the host government Such negotiations may also be necessary for FDI in sensitive industries in developed countries (e.g. resources, defence, regulated industries,…)

4. Your bargaining power is higher if you can offer what the other party (the host government) wants. Of course, higher bargaining power --- > less trouble on FDI (e.g. confiscation) Sources of your bargaining power 1. Technology: U.S. operations in Latin America: R&D / sales (%)%ownership 0 -. 7588%.75 - 2.586 2.5 - 5.089 5% +99

5. 2. Product differentiation (p.d.) Examples. Food, beverages, ball-point pens,.. Generally low-tech products. Heavy multinational advertisers do not usually want to share marketing policy U.S. operations in Latin America Adv / sales (%)%ownership 0 - 1 %85 1 - 789 7% +98

6. 3. Market access %output transferred%ownership within the parent system 0 - 10 %80 10- 5091 59- 10096 %exported 0 - 1088 10- 5092 50- 10098 Note: control over market access is a particularly effective deterrent to expropriation

7. 4. Competition weakens your bargaining power # of parent firms competing in 3-digit SIC industry%ownership 195 290 3-584 6 +83 Depending on the industry and the host government environment, one or more of these factors provide bargaining power in your negotiation with the host government and/or local partners.