A New Model for Global Business

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—often are a potential win–win situation.

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

A new model by Rice 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 one another’s assets, such as the firm’s sophisticated technology and the country’s large and growing market.”

“It’s no longer a matter of each side attempting to take advantage of the other.” —Douglas Schuler

Similarly, the development of different types of multinational enterprises and direct foreign investments has changed government and business relationships. 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,” Schuler says, “countries try to develop clusters of expertise in the hope they will acquire spillover knowledge for some of their domestic companies.”

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. Titled “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 types of investments 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, also may be accomplished by focusing on social performance activities.

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

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.

—Debra Thomas