How competition from the MNC brands forced the Indian television companies to move into assembling activities for MNCs?
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How MNCs Cope with Host Government Intervention
The carefully drawn strategic plans of a multinational company (MNC) call for new production facilities to be built in Europe, but the prospective host government establishes unusually strict sales and export volume conditions before giving the necessary permission.
National managers of an MNC’s Latin American subsidiary attempt to implement a multinational competitive strategy set by the parent company, but host governments insist that the subsidiary enter into joint venture arrangements with local companies.
Unusual situations? Not any longer. During the 1950s and 1960s, host governments rarely intervened in the affairs of multinational companies. Since 1970, however, those same governments have increasingly begun—for reasons of policy and/or ideology—to limit the considerable strategic autonomy of MNC managers. In developed countries, these limitations tend to cluster in industries of central importance to the government, such as telecommunications equipment. In developing countries, merely being an MNC is often sufficient grounds for attracting host government intervention.
Drawing on intensive research on a number of multinationals in both developed and developing nations, we shall (1) describe the major problems and the trade-offs government intervention poses for MNC managers and (2) discuss the possible lines of MNC response to this encroachment on their traditional strategic autonomy.
Types of Intervention
In recent years, the efforts of host governments to maintain control over their own national economies have increasingly restricted the freedom of MNC managers in deploying economic resources. Of equal importance, host governments have often interfered with the autonomous process of MNC strategy formulation.
Managers who are or who are likely to be faced with such restrictions may find it useful to distinguish between these two different kinds of government intervention. The first, which sets the fiscal and regulatory ground rules for an MNC’s decision to compete in a host country, is best understood as a limitation to strategic freedom. The second, which seeks to influence the internal mechanics of an MNC’s decision-making process, is best understood as a threat to managerial autonomy. Together they constitute a major infringement on the general strategic autonomy of MNC managers. Let us make these various terms clear in the discussion that follows.
Limitations to Strategic Freedom
As foreign trade and investment have made national economies less responsive to such chestnuts of economic policy as the stimulation of demand to increase production, host governments have progressively moved toward the closer regulation of entire industrial sectors. This regulation has primarily affected multinationals in the form of such locally sensitive issues as product/market choice, use of technology, level of employment, and national trade balance.
For example, Spain set explicit sales and export volume conditions before allowing Ford to establish production facilities there. The Spanish government limited Ford’s sales volume to 10% of the previous year’s total automobile market and required that its export volume be equal to at least two-thirds of its entire production in Spain. Further, Ford had to agree not to broaden its range of automobile model lines without government authorization.
Australia has taken a slightly different approach. The Australian national telecommunications administration has standardized production requirements for the MNC subsidiaries from which it buys equipment. As a result, the L.M. Ericsson subsidiary often ends up manufacturing ITT-designed equipment, and vice versa. In the past, with well-known switching technology, this was not a major problem. In the 1970s, however, the practice of allocating to one company the production of another’s equipment has made it difficult for multinationals to protect new proprietary switching technology.
Each of these restrictions limits the strategic freedom of multinationals but does not really threaten their managerial autonomy. Though Ford accepted significant government-imposed constraints on its new operations in Spain in 1973, it still requested and received full local ownership—that is, Ford retained full control, full “operating flexibility.” Thus Ford could take the Spanish demands explicitly into account before it had to deploy resources in Spain.
As the head of European operations for one large MNC put it, “On any significant decision such as plant construction, plant closing, or reallocation of production, we take a first cut at an economically optimal solution, then we amend this economic solution to fit with the demands of governments and arrive at a compromise that is acceptable both to the governments and to our top management in the United States.”