Explore Rice

11/15/2005

In today's global business environment, few winners take all

While investing abroad once was fraught with red tape, most host governments today give foreign investors the "red carpet" treatment. Negotiations previously modeled as a relationship between two parties with conflicting goals -- the host government and the multinational enterprise - are shown to be a potential win-win situation by university professors.

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In this age of global economies, the relationships between multinational firms and the countries in which they invest have changed over the past century. Few governments place massive restrictions upon direct foreign investments or attempt to expropriate property from foreign firms located within their borders. And international business investments are no longer based only on the desire to simply siphon off another country's resources.

A new model by university researchers provides examples of the multiple goals, resources and constraints affecting today's negotiations between international businesses and the countries in which they invest, and how both parties can benefit.

"Because of the pressures of globalization, the circumstances have changed for both parties," explains Douglas Schuler, associate professor of management at the Jesse H. Jones Graduate School of Management. "It's no longer a matter of each side attempting to take advantage of the other. Both see the benefits, for example, of combining with one another's assets, such as the firm's sophisticated technology and the country's large and growing market."

Similarly, the development of different types of multinational enterprises and direct foreign investments has changed government and business relationships as well. While extractive industries like mining depend on the physical resources of the country where they operate, many manufacturing and service firms do not. Instead, investments by those types of firms tend to be smaller and more mobile, and the particular skills and knowledge the firm brings into the country may be difficult for the host country to imitate. And just as multinational firms seek new knowledge as well as new markets, host countries often aspire to be internationally competitive.

"By cooperating with multinational firms, countries try to develop clusters of expertise in hopes they will acquire spillover knowledge for some of their domestic companies," Schuler said.  

Schuler, along with Lorraine Eden, a professor of management at Texas A&M University, and Stefanie Lenway, dean of the business school at the University of Illinois at Chicago, recently contributed to a volume edited by Robert Grosse for Cambridge University Press on international business and government relations in the 21st century. Entitled "From the Obsolescing Bargain to the Political Bargaining Model," the chapter provides a new version of a long-standing model to help explain the relationships between today's multinational enterprises and the countries in which they invest.

The model serves as a checklist of issues that international firms need to consider, such as the type of investment they are making, the interests and constraints of both parties, the nature of the host country's government, the quality of its institutions and the stakeholders and nongovernmental organizations that may be affected by the investment.

Most firms investing abroad face the problem of being treated as an outsider. To overcome their "liability of foreignness" and gain legitimacy in their host country, multinational companies often need to develop partnerships with local firms and institutions, which, according to the authors, may also be accomplished by focusing on social performance activities.

"Not only can government policies and their cooperation have an impact on a company's investment, but so can stakeholders, including local and even international environmental and labor-rights groups," says Schuler.

Schuler and his colleagues also point to the political and economic constraints that can limit either side's bargaining power.   These can range from politically unstable governments, restrictions based on political or economic agreements, balance-of-payment difficulties, restrictions imposed on the subsidiary by its parent firm, prior regional trade agreements and bilateral investment treaties.

Schuler's research in business and government relations and socially responsible management has appeared in a number of scholarly journals, including Business & Society, the Academy of Management Review, The Academy of Management Journal, the Journal of Management, Business and Politics, the International Trade Journal and the Journal of Public Affairs. A graduate of the University of California, Berkeley, he earned his Ph.D. degree from the University of Minnesota.

For more information on this research, contact Schuler at schuler@rice.edu or Debra Thomas in the Jones School at dthomas@rice.edu .