Lecture 4:MNEs and Public

Policy

MDGC
GR-RR-KN
Catherine Cai

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 Learning Outcomes
This lecture enables you:
• Explore the interaction between the
public policy and activities of
multinational enterprises
• Review the efficiency aspect of MNEs
and public policy
• Look at analytical framework which will
help us synthesize the literature on
multinationals and public policy
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 Public policy
• Sovereignty at Bay
– Globalisation, multinational enterprise and
international political system (Vernon, 1981)
• Obsolescing bargain model
– Bargaining relationship between MNE and HC
is a function
– of both parties’ goals, resources and constraints
 MNEs and public policy-
Shell Nigeria

Legal Regulated Labour

Capital
External
bureaucracy Foreign Transaction
bureaucracy
Company A Cost Domestic
Company C Culture

IPR Domestic SME political Technological

B

http://www.youtube.com/watch?v=afL0N191IFI

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 MNEs and public policy

• Normative approach
– Neo-classical welfare economics
– Efficiency vs equity
• Behavioral approach
– Self-interested actors
• Resource-based approach
– Strategic perspective of MNEs linking their
resources with governments’ policy-making

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 Normative approach
• What are governments trying to do? (neoclassical
welfare economics)
• Five assumptions
– Each state maximize their real national income
– Distributional issues are entirely different from efficiency
ones
– Each MNE has a single “home base country”(!)
– Each MNE and nation-state operate in competitive
environment
– Policy making by governments can discriminate between
foreign and home based MNEs
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 Normative approach

• Helps explain taxation

• natural resource rents
• competition policy
• technology creation and transfer

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 Behavioural approach
A. Utility-maximizing electoral behaviour
A. Foreigner vs domestic MNEs
B. Coalition of government officials
– Resentment against foreign MNEs
• Discriminatory measures are imposed on foreign
MNEs

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 Behavioural approach
• Helps explains the government policies which
regulate inward FDI as well as home government
policies directed towards increased market access
• Limitations –
– Does not explain Outward FDI (OFDI)
– Does not explain institutional competition among
countries to attract FDI
– Positive discrimination against foreign MNEs

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 Resource-based approach
• International Political Economy
• MNE power > national government power
– Natural resources, finance, technology
– US and other developed economies
• China, Russia, and other large emerging economies?
• Role of the NGOs

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 Resource-based approach
• State/state, Firm/State, firm/firm – diplomacy to
maximize their resources
• State/state – Chinese government negotiates trade
with the US government
• “The United States and China recognize their shared interest in promoting a
strong and open global economy, inclusive growth and sustainable development,
and a stable international financial system, supported by the multilateral
economic institutions founded at the end of World War II that have benefited the
peoples of both nations.”
“The United States and China commit to strengthening and modernizing the
multilateral development financing system. Both countries resolve to further
strengthen the World Bank, Asian Development Bank, African Development
Bank, and Inter-American Development Bank by enhancing their financial
capacity, reforming their governance, and improving their effectiveness and
efficiency.”
https://www.whitehouse.gov/the-press-office/2015/09/25/fact-sheet-us-china-economic-relations
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 Resource-based approach
• Firm/state – American firm negotiates with
Chinese government
• “Microsoft is again strengthening its position in the country, this time by
providing Windows 10 directly to the Chinese government. The company
today announced a new joint venture that will license, deploy, manage,
and optimize a custom version of the operating system for government
agencies. The Beijing-based joint venture — provisionally called C&M
Technologies — is still subject to regulatory approval, but Microsoft says
in addition to government agencies, it will serve "state-owned enterprises
in key infrastructure fields such as energy, telecommunications, and
transportation."”
http://www.theverge.com/2015/12/17/10362638/microsoft-windows-10-custom-china-
government

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 Resource-based approach
• Firm/firm – British firm in India – Unilever
• “In the year 1996, the company and Lakme Ltd formed a 50:50 joint venture
company namely, Lakme Unilever Ltd, to market Lakme's market-leading
cosmetics and other appropriate products of both the companies.
Subsequently in 1998, Lakme Ltd sold its brands to the company and
divested its 50% stake in the joint venture to the company.”
Long term impact ->
“In January 2000, the government decided to award 74 per cent equity in
Modern Foods to the company, thereby beginning the divestment of
government equity in public sector undertakings (PSU) to private sector
partners.”
http://www.business-standard.com/company/hind-unilever-255/information/company-history

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 Resource-based approach
• Helps explain several investments by MNEs around
the world –
– US and UK in emerging markets
– China in Africa
– helps explain protectionist policies as well
• Limitations –
– Balance between inward and outward FDI

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 Analytical framework
• Issue of consistency between MNE goals
and government goals
• Resource-related elements and
institutional determinants of MNE-
government interactions
• MNE’s strategic approach to government
policy

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 MNEs and public policy
1. The consistency between MNE and home and host
government goals
- Conflict
- Complement
HOME: HOST: Consistency between MNE goals and host
Consistency country goals
between MNE
goals and home Conflict Complement
country goals
Conflict 1 3
Complement 2 4

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 MNEs and public policy
HOME: Consistency HOST: Consistency between MNE goals and host country goals
between MNE goals
Conflict Complement
and home country
goals Conflict 1 3
Complement 2 4

1. Goal conflict
MNE power struggle with governments, MNE – trade vs FDI tradeoff, MNEs that
engage in dumping and other illegal/potentially dangerous activities
2. Conflict with host nation
Porter’s diamond, strategic trade policy, Business Groups’ FDI, FDI as instruments
of colonization, US MNE - Coca-Cola refused to share the secret formula with Indian
government

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 MNEs and public policy
HOME: Consistency HOST: Consistency between MNE goals and host country goals
between MNE goals
Conflict Complement
and home country
goals Conflict 1 3
Complement 2 4

3. Conflict @ home
MNE as opportunistic relocator, flight of capital to Tax havens/ pollution
havens, US MNEs sending manufacturing to China
4. Complementary zone!
Product life cycle theory, OLI, MNEs support trade between two nations
and technology transfer, social good

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 MNEs and public policy

2. Resource-related elements and institutional determinants of

MNE-government interactions
MNE: Dispersion Government: Symmetry between inward and outward
of FSAs FDI
Low High
Low 1 3
High 2 4

• Dispersion of Firm-specific assets (FSAs)

• Symmetry implies 1. availability of resources 2. favorable policies

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 MNEs and public policy
MNE: Dispersion of Government: Symmetry between inward and outward FDI
FSAs
Low High
Low 1 3
High 2 4

1. low/low – ?closed economy? National champion

company? Ethnocentric?
2. High/low – resource bundles in individual countries/
network model, governments create sustainable value add
(national treatment), “shallow integration”
3. Low/high – non-discriminatory regulation of foreign MNEs
(national treatment), increase international
competitiveness
4. High/high – supranational regulations, consistency across
borders, “global integration” 20
 MNEs and public policy
• MNE’s strategic approach to government policy

MNE’s desired MNE’s strategic perception of government policy

outcome of
Exogenous Endogenous
business-
government Benefits of 1 3
interactions integration
Benefits of 2 4
national
responsiveness

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 MNEs and public policy

• MNE’s strategic approach to government policy

MNE’s desired MNE’s strategic perception of government policy
outcome of Exogenous Endogenous
business-
Benefits of integration 1 3
government
interactions Benefits of national responsiveness 2 4

1. Government policy for international competitiveness, Porter’s

diamond
2. Corporate citizen approach, regional trade agreements
3. Generalized bargaining, government favors, first mover advantage
4. Nation bound bargaining, opportunity cost

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Shell guilty campaign

For stealing Nigerian oil

resource (despite retuning
95% of its revenues to the
Nigerian government)

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McDonalds and min wage

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 A few recent examples
• Science: The UK government is
encouraging kids to learn programming
and coding
• Gender equality: In Norway there is a
quota for female board members
• Subsidy and obesity: state subsidies of
sugar, cooking oil leading to high rates of
adult obesity in Egypt
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 Brexit and public policy

• Financial regulation is the key to

understanding the future of the city
– A number of high-profile shifts in financial
services activity have recently taken place from
London to European financial centres, following
the end of the Brexit transition period on 31
December 2020.
Source: https://ukandeu.ac.uk/financial-
regulation-is-key-to-understanding-the-future-of-
the-city/
 Shell profits
• 2023: Shell reports highest https://www.bbc.co.u
k/news/business-58
profits in 115 years 090533
• Profits hit $39.9bn (£32.2bn) in 2022, double the previous
year's total and the highest in its 115-year history. https://www.bbc.co.u
k/news/uk-64489147
 Takeaways
• Public policies greatly impact the growth and
development of MNEs
• Three different approaches for understanding public
policy towards MNCs - Normative approach,
Behavioural approach and Resource-based approach
• Three components to understanding MNEs and public
policy - the consistency between MNE and home and
host government goals, dispersion of
resources/assets/FSAs to symmetry between inward
and outward FDI, and MNE's strategic approach to
government policy.

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 Reference
• Chapter 28: MNEs and public policy in Rugman, Alan M. (2001)The
Oxford Handbook of International Business. E-book available online.
(Or Chapter 9 in 2e)
• Vernon, R. (1981). Sovereignty at bay ten years after. International
organization, 35(3), pp.517-529.
• Shell guilty campaign.
https://www.amnesty.org/en/latest/news/2017/11/investigate-shell-for
-complicity-in-murder-rape-and-torture/
• MacDonald's and min wage.
https://www.forbes.com/sites/realspin/2016/11/29/thanks-to-fight-for-
15-minimum-wage-mcdonalds-unveils-job-replacing-self-service-kio
sks-nationwide/#6e5cda024fbc
• Brexit and financial regulations.
• https://ukandeu.ac.uk/financial-regulation-is-key-to-understanding-th
e-future-of-the-city/

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