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From United Nations University

35. Reactions to TNCs: national policies (1)
36. Reactions to TNCs: national policies (2)


35. Reactions to TNCs: national policies (1)

35.1 General attitudes to TNCs
    a) the need, first, is for countries to identify, and
       be confident about,
       i) what they have to offer the TNC (e.g. markets,
          political stability, low cost labour, natural
          resources, etc.); and how this compares with what
          other countries can offer
      ii) what the TNCs has to offer the countries: and how
          this compares with what might be obtained from 
          other TNCs, or in other ways

    b) given a) to minimize areas of conflict and maximize net
       benefits of FDI (see also lecture 36)

    c) improve information about, and bargaining and negotiating
       capacity towards TNCs

    d) evaluate efficacy of general macro and micro policies as
       well as those specifically directed to TNCs

35.2 Policies directed to TNC affiliates
    a) Pre-entry
      i) designating sectors open to TNC affiliates
     ii) percentage of foreign ownership allowed
    iii) phased increased local ownership
     iv) investment and other incentives
      v) foreign take-overs
     vi) government/local representation on Board of Directors
         of affiliates

    b) operating incentives and performance criteria (as they
       affect the revenue and/or costs of firms)
      i) employment and training of local personnel
     ii) technology transfer
    iii) financial
         - sourcing of finance
         - dividend remission
         - transfer pricing control
     iv) sourcing requirements
      v) price controls
     vi) information provisions

    c) exit policies: expropriation and voluntary divestment

    d) assisting local firms in competition with TNCs

    e) sectoral policies that strongly affect TNCs' behaviour
       such as the market reserve policy on informatics in
       Brazil; the Mexican and Argentinian policies on
       electronics, etc.

35.3 Determinants of national policies towards TNCs
    a) Country (ESP) characteristics and regional trends towards
       more or less regulatory policies in the context of
       international economic changes. Political and economic
       changes in the countries concerned since the 1960s.

    b) sector(s) in which TNCs operate

    c) TNC specific factors

    d) time and stage of development

    e) extent of existing TNC involvement

    f) knowledge and experience of governments about industries,
       technology and role of TNCs; compare, for example, MITI's
       appreciation and understanding with that of some government
       agencies in developing countries

    g) the acceptance of a trade-off between meeting (some) TNC
       objectives and (some) host country objectives e.g. 100%
       ownership may be allowed if most of the performance
       requirements identified in 35.2(b) are met

35.4 The ingredients of a successful national policy
    a) an appropriate tax structure

    b) an efficient macro-economic policy (i.e., monetary, fiscal,
       exchange rate measures)

    c) the need to establish a congenial climate for investment and

    d) an adequate educational, transport and communications and
       technological infrastructure, particularly that which is
       necessary for a country to efficiently engage in
       international commerce.

    e) a simple, reliable and predictable legal and regulatory

    f) consistency between explicit policies  towards TNCs and
       implicit or explicit trade, industrial and technological

    g) the ability to distinguish between different types of
       investment projects

    h) an intelligent policy to formulate and sustain a sensible
       policy towards FDI and TNCs

35.5 TNC responsiveness to Government policies
    a) different kinds of TNCs will show different degrees of
       responsiveness cf globally integrated, with multidomestic
       company (Doz 1986)

    b) response will also vary according to alternative
       opportunities open to TNCs

35.6 The role of investment incentives in government policies
    a) types of incentives (fiscal, non financial, investment

    b) do they work?

    c) empirical studies of the costs and benefits of incentives

    d) harmonisation of incentives

35.7 Implementation strategies
    a) screening criteria; i.e. to deal with foreign investment
      i) none e.g. Brazil, Singapore to detailed evaluation
         India, Korea
     ii) procedures may vary according to type of investment

    b) monitoring of performance
      i) kinds of information asked for
     ii) priority items
    iii) how to be administered
     iv) need for appropriate expertise

    c) institutional mechanisms
      i) along a spectrum; very limited e.g. Brazil to
         comprehensive e.g. India
     ii) centralisation; may be handled by one ministry or
         department e.g. Korea, Colombia, or several e.g.
         India, Thailand, Malaysia
    iii) delegation; in respect of particular functions e.g.
         taxation and investment incentives e.g. Yugoslavia or
         types of investment e.g. export processing zones (Sri
         Lanka and Philippines)
     iv) the pros and cons of different mechanisms

36. Reactions to TNCs: national policies (2)

36.1 Summary of unilateral policies towards TNC affiliates
    a) the liberal approach

    b) the conditional approach

    c) the regulatory approach

36.2 Evaluating foreign investment projects: social cost-benefit
    a) some general observations: the distinction between private
       and social costs and benefits i.e. between financial and
       economic analysis

    b) the macro-economic contribution of foreign cf domestic
      i) opportunity cost of FDI( the 'diversion' effect)
     ii) availability and cost of resources
    iii) foreign exchange
     iv) effect on local suppliers
      v) taxes and subsidies
     vi) income distribution

    c) calculating the social costs and benefits of an FDI project
       (for calculating private costs benefits see lecture 11)
      i) introduction, distorsions in factor and product markets;
         shadow pricing; the costs of protectionism
     ii) general principles; how does one value social costs and
    iii) corporate responses and adaptation

    d) studies of costs and benefits of FDI: Lall and Streeten(1977)
       Reuber(1973) Wells(1975) Encarnation and Wells in Moran(1985)
       Baum and Tolbert(1985) Weigel(1987)

36.3 Negotiating and bargaining with TNCs
    a) objectives of TNCs and host governments and nature of
       trade offs

    b) relationship between successful unilateral policies
       and bargaining capacity

    c) distinction between bargaining prior to investment and
       subsequent to it: the concept of the obsolesenting bargain

    d) ingredients of the bargaining process
      i) the constraints and options facing both parties
     ii) the opportunity costs of alternatives available to
         both parties (Lecraw and Morrison 1990)
    iii) how does one measure bargaining power; the relative
         strengths and weaknesses of TNCs and governments(Fagre
         and Wells, 1982) (Allende, 1972) (Rojas, 1975)

    e) strengthening host country negotiating capacity
      i) information capabilities about sources and cost
         of desired foreign inputs
     ii) technical assistance to improve  information and
         bargaining capabilities
    iii) multilateral policies

    f) the dynamics of negotiation; renegotiation of contracts

    g) sectoral differences in negotiation procedures and outcome
       - mining, agriculture and forestry, manufacturing, services,

    h) to what extent does bargaining power vary between firms
       (Poynter 1982)

36.4 Factors influencing national policies
    a) a general framework (see Lecraw and Morrison 1990)

    b) particular determinants
      i) size of host country economy/market
     ii) competition among host countries for TNC investment
    iii) competition among TNCs for investment opportunities
         in host country
     iv) information about TNCs opportunity costs
      v) relative negotiating capacity
     vi) TNC's strategy (Doz 1985)
    vii) type of investment: import or export oriented

    c) some normative considerations. Is there an 'optimum' policy
       or groups of policies, which countries should adopt towards
       TNCs? When are incentives appropriate? What can developing
       countries learn from each other and from developed countries
       in their economic strategies and policies towards TNCs?

36.5 Policies of home countries towards outward TNC activity
    a) investment promotion, insurance or guarantee schemes

    b) the contribution of FDI to resolving the debt crisis

    c) reducing or removing barriers to trade in goods and services
       from developing countries
UNCTC(1983c) Robinson(1978) Safarian(1983) Dicken(1986) OECD(1987)
Streeten in Dunning ed.(1974) Vernon(1975) Lall and Streeten(1977)
Dunning(1981) De La Torre(1981) Lecraw(1983a)
Vernon(1971) Encarnation and Wells(1985) Fagre and Wells(1982)
Lecraw and Morrison(1990) Doz(1986)
Poynter(1982) OECD(1983) Guisinger(1985) Evans(1986)
Warman & Miller(1989) Azpiazu, Basualdo & Nochteff(1990)
Lichtensztejn & Trajtenberg(1987)
See Bibliography

RRojas Research Unit/1996