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Testing the bargaining hypothesis in the manufacturing sector in developing countries

Published online by Cambridge University Press:  22 May 2009

Stephen J. Kobrin
Stephen J. Kobrin
Affiliation:
Professor of Management at the Wharton School of the University of Pennsylvania, Philadelphia.
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Abstract

The bargaining power model of HC–MNC (host country–multinational corporation) interaction conceives of economic nationalism in terms of rational self-interest and assumes both inherent conflict and convergent objectives. In extractive industries, there is strong evidence that outcomes are a function of relative bargaining power and that as power shifts to developing HCs over time, the bargain obsolesces. A cross-national study of the bargaining model, using data from 563 subsidiaries of U.S. manufacturing firms in forty-nine developing countries, indicates that while the bargaining framework is an accurate model of MNC–host country relationships, manufacturing is not characterized by the inherent, structurally based, and secular obsolescence that is found in the natural resource industries. Shifts in bargaining power to HCs may take place when technology is mature and global integration limited. In industries characterized by changing technologies and the spread of global integration, the bargain will obsolesce very slowly and the relative power of MNCs may even increase over time.

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Articles
Information
International Organization , Volume 41 , Issue 4 , Autumn 1987 , pp. 609 - 638
Copyright
Copyright © The IO Foundation 1987

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References

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35. See Pfeffer, Jeffrey, Organizations and Organization Theory (Boston: Pitman, 1982)Google Scholar.

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40. Poynter, “Government Intervention,” and Vernon, Sovereignty at Bay.

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43. Bennett and Sharpe, “The World Automobile”; Gomes-Casseres, “Multinational Ownership Strategies”; Lecraw, “Bargaining Power”; and Poynter, “Government Intervention.”

44. See, Bergsten, Horst, and Moran, “American Multinationals”; Encarnation and Wells, “Competitive Strategies”; Guissenger, “A Comparative Study”; Moran, “Multinational Corporations and Dependency”; and Oman, “New Forms.”

45. Encarnation and Wells, “Sovereignty en Garde”; Newfarmer, “International Industrial Organization”; and Shepherd, Phillip, “Transnational Corporation and the International Cigarette Industry,” in Newfarmer, , Profits, Progress, and Poverty, pp. 63–112Google Scholar.

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49. Evans, Dependent Development.

50. Bennett and Sharpe, “Agenda Setting”; Coronil, Fernando and Skurski, Julie, “Reproducing Dependency: Auto Industry Policy and Petrodollar Circulation in Venezuela,” International Organization 36 (Winter 1982), pp. 61–94CrossRefGoogle Scholar; Evans, Dependent Development; Fagre and Wells, “Bargaining Power”; Lecraw, “Bargaining Power”; and Poynter, “Government Intervention.”

51. Guissenger, “A Comparative Study.” See also Oman, New Forms.

52. Ownership is used as the dependent variable in three of the four existing cross-national studies of bargaining power: Gomes-Casseres, “Multinational Ownership Strategies”; Fagre and Wells, “Bargaining Power”; and Lecraw, “Bargaining Power.” Poynter used a subjective estimate of intervention in “Government Intervention.”

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55. In the LDCs, 57% of respondents indicated that government suasion was a motivation and only 38% said that skill acquisition was important. Beamish found that, in contrast, the dominant reason for entering a joint venture in the developed countries (64% of respondents) was a need for the partner's skills, and only 17% reported government suasion as a determinant. See Beamish, Paul W., “The Characteristics of Joint Ventures in Developed and Developing Countries,” Columbia Journal of World Business 20 (Fall 1985), pp. 13–20Google Scholar. In their study of the auto industry in Mexico, Bennett and Sharpe noted that, despite the conclusions drawn from the economics of industrial organization, government feels that the nationality of the owner does make a difference in the firm's behavior and thus its performance. See “Agenda Setting,” note on p. 66.

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59. See Bennett and Sharpe, “Agenda Setting,” and Peter J. West, “International Expansion and Concentration of the Tire Industry and Implications for Latin America,” in Newfarmer, Profits, Progress, and Poverty.

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61. See, Adelman, Irma and Morris, Cynthia Taft, Society, Politics, and Economic Development (Baltimore: Johns Hopkins University Press, 1967)Google Scholar.

62. For example, in 1975, 180 U.S. manufacturing multinationals accounted for 71% of sales of U.S. direct investors abroad. Curhan, Joan P., Davidson, William H., and Suri, Rajan, Tracing the Multinationals: A Sourcebook on U.S.-Based Enterprises (Cambridge, Mass.: Ballinger, 1977)Google Scholar. Given the very large number of smaller firms, including them would increase the size of a representative sample beyond the capabilities of this article. Limiting the sample of U.S.-based firms controls for national differences in the propensity to share ownership. While this limits generalization, it only introduces bias if one can argue that there are systematic differences in bargaining power attributed to nationality. I cannot.

63. I used the Conference Board's, Key Company Directory (New York 1983)Google Scholar to select 203 firms that are equivalent in size to the Fortune 500 and have at least 20% of their sales generated abroad. Firms in extractive sectors (petroleum or mining), conglomerates that could not be classified by industry, and those in sectors that tend to be heavily export based (e.g., aircraft) were eliminated, leaving 162 firms. The review of public sources identified 139 with manufacturing subsidiaries in developing countries. See International Directory of Corporate Affiliations: Who Owns Whom? 1984/85, (Willmette, Ill.: National Register, 1984)Google Scholar; Moody's Industrial Manual (New York: Moody's Investors Services, 1984)Google Scholar; Stopford, John, Dunning, John H., and Haberlich, Klaus, World Directory of Multinational Enterprises, vols. 1 and 2 (New York: Facts on File, 1980)Google Scholar.

64. Eleven of the firms contacted in the mailed survey indicated that they no longer manufactured in developing countries. They were removed from the relevant population.

65. Forbes Annual Report on American Industry, 1986, included in Forbes, 13 January 1986, p. 4.

66. Raw parent ownership of subsidiary of 60% has very different implications as a measure of bargaining outcome if: 1) the MNC's objective is 100% and the HC's is 50%, or 2) the MNC's is 66% and the HC's 40%.

67. Lecraw estimated MNC objectives from the highest ownership level for the firm in any country and the HC objective from the lowest ownership level for any firm in that country. However, the sample included only six industries in five countries; Lecraw, “Bargaining Power.” In this article, there are a number of firms with too few subsidiaries and countries with too few investors to apply that technique.

68. As noted already, MNCs in industrialized host countries are more likely to rank the prospective partners' skills as an important motivation for entering the joint venture than those in developing host countries. Thus, MNC preferences are likely to vary depending on country characteristics and taking the highest observed ownership level as proxy for true preferences will be misleading.

69. UNCTC, “Transnational Corporations.”

70. Gomes-Casseres, “Multinational Ownership”; Fayerweather, John, International Business Strategy and Administration, 2d ed. (Cambridge, Mass.: Ballinger, 1982)Google Scholar; and Robinson, Richard D., International Business Management, 2d ed. (Hinsdale, III.: Dryden, 1978)Google Scholar.

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72. The specific model used is contained in the LIMDEP package developed by William Greene of New York University. It uses the Davidon/Fletcher/Powell algorithm to obtain maximum likelihood estimates. Green's example of forecasting demand for a sports stadium of fixed capacity that is sold out a significant proportion of the time is directly analogous. Tobit (originally Tobit's probit, but no longer limited to binary dependent variables) is a non-linear regression model that uses the maximum likelihood technique to estimate parameters and explicitly accounts for the limited range of the dependent variable. See Greene, , “LIMDEP,” pp. 136–137Google Scholar and Maddala, Econometrics.

73. While the overall significance of the equation is evaluated through a test of the likelihood ratio and the algorithm provides estimates of coefficients and their significance, it does not produce an estimate of variance explained.

74. While population is significant in a multivariate equation, it is a redundant measure of country size once GDP is included and the latter has the advantage of serving as a control for FDI. FDI/GDP is also significant, but redundant. MNC sales is not significant in the Tobit regression.

75. As FDI distribution is highly skewed upwards, it was transformed logarithmically.

76. See Gereffi, “The Global Pharmaceutical Industry.” As food processing and consumer products firms have been international for quite some time, it is reasonable to assume that, in many instances, their subsidiaries existed prior to the ownership restrictions. Whiting explicitly notes that most food processing firms were in Mexico before the 1973 Foreign Investment Law that restricted foreign ownership in most instances to 49%. Whiting, Van R. Jr, “Transnational Enterprise in the Food Processing Industry,” in Newfarmer, , Profits, Progress, p. 365Google Scholar.

77. Eighty-two of the observations are in Brazil and 107 in Mexico. Thus, the two countries account for one-third of all observations and the question of sample bias must be dealt with. First, it should be noted that the unit of analysis is the country-industry intersection, not the country alone. Second, there is no theoretical reason to assume Mexico or Brazil are outliers. To check for the possibility of bias, dummy variables for Mexico and Brazil were added to the Tobit regression. Although both are significant, with two exceptions the coefficients for the other variables are unchanged. The standardized coefficient of REST is slightly reduced and that of GDP increased. The change in GDP, however, is confounded by the high correlation between each of the dummies and GDP. I conclude that the results and findings are unchanged when the two country dummies are added.

78. Gomes-Casseres found stronger support for market size as a determinant of host country bargaining power. Gomes-Casseres, “Multinational Ownership.”

79. Multivariate analysis on the advertising intensive sub-sample indicates that country size (POP) is the most important HC power resource while the amount of FDI is a significant constraint. Host country capabilities (HM or RELHM) are not significant, nor are other HC resources or constraints. As virtually all of this sort of FDI is market-driven, the relationship with market size is not surprising. A cross-tabulation of ownership (categorized as wholly owned, majority joint venture, and minority joint venture) and a three-way categorization of host country restrictions on ownership reveal significant differences in ownership of existing investments. In contrast to the other two categories, where about 77% of subsidiaries are wholly owned, only a minority of advertising intensive subsidiaries are wholly owned (28%), while 40% are majority joint ventures and 32% minority.

80. Dunning, John H. and Pearce, R., The World's Largest Industrial Enterprises: 1962–1983 (New York: St. Martin's 1985), p. 166Google Scholar.

81. The 1982 Benchmark Study reports R&D expenditures of $260 million by or for subsidiaries in LDCs and $37,590 million by and for parents in the U.S. Bureau of Economic Analysis, U.S. Direct Investment Abroad: the 1982 Benchmark Survey (Washington, D.C.: Department of Commerce, 1985)Google Scholar.

82. PINTEG and R&D are correlated (r = .55), and part of the reason for the relative weakness of the coefficient of the former is the dominance of R&D. That is, the reason industries, such as computers and electronics, are integrated globally is their R&D intensity.

83. Encarnation, and Wells, , “Competitive Strategies,” p. 45Google Scholar.

84. Bennett, and Sharpe, , “The World Automobile Industry,” p. 204Google Scholar.

85. Temporal comparisons of the measure of integration used in this study (the percentage of parent exports going to affiliates) are confounded by trends in total U.S. exports. For the 1977 data, see Bureau of Economic Analysis, U.S. Direct Investment Abroad 1977 (Washington, D.C.: Department of Commerce, 1981)Google Scholar.