Typically less susceptible to political harassment joint ventures can be with locals or other third country multinational companies. In both cases, a company’s financial exposure is limited. A joint venture with locals helps minimize anti-MNC feelings and a joint venture with another MNC adds the additional bargaining power of a third country.
Expanding the Investment base:
Including several investors and banks in financing an investment in the host country is another strategy. This has the advantage of engaging the power of the banks whenever any kind of government takeover or harassment in threatened. This strategy becomes especially powerful if the banks have made loans to the host country, if the government threatens expropriations or other types of takeover, the financing bank has substantial power with the government.
A strategy that some firms find that eliminates almost all risks is to license technology for a fee. Licensing can be effective in situations where the technology is unique and the risk is high. Of course, there is some risk assumed because the licensee can refuse to pay the required fees while continuing to use the technology.
In those cases where a host country is demanding local participation, the most effective long term range solution is planned phasing out, planned domestication. This is not the preferred business practice but the alternative of government initiated domestication can be as disastrous as confiscation. As a reasonable response to the potential of domestication, planned domestication can be profitable and operationally expedient for the foreign investor. Planned domestication is, in essence a gradual process of participating with nationals in all phases of company operations.
Multinational companies clearly engage in lobbying and other sorts of political bargaining to avoid potential political risks. Indeed, Toyota has considered raising prices fits cars in the American market to help its ailing American competitors. The Japanese government has set quotas on auto exports in the past as American car companies have struggled. And, in the face of growing American and European criticism, China has agreed to put quotas on its exports of textiles and to float its currency.
One approach to dealing with political vulnerability is the political payoff – an attempt to lessen political risks by paying those in power to intervene on behalf of the multinational company. This is not an approach we recommend in any way. However, your competitors may use such a tactic, so beware. Political payoffs or bribery have been used to lessen the negative effects of a variety of problems. Paying heads of state to avoid confiscatory taxes or expulsion, paying fees to agents to ensure the acceptance of sales contracts, and providing monetary encouragement to an assortment of people whose actions can affect the effectiveness of a company’s programs are decisions that frequently confront multinational managers and raise ethical questions.
Bribery poses problems for the marketer at home and abroad since it is illegal for US citizens to pay a bribe even if it is a common practice in the host country. Political payoffs may offer short term benefits but in long run the risks are high and bribery is an untenable option.
Steps are being in common law countries to codify commercial law even though the primary basis of commercial law is common law that is precedent set by court decisions. An example of the new uniformity is the acceptance of the Uniform Commercial Code by most states in the United States. Even though US commercial law has codified to some extent under the Uniform Commercial Code, the philosophy of interpretation is anchored in common law.