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Since the early 1970s, host governments have intervened more than and more in the affairs of multinational corporations. Today they regularly establish rather enervating conditions for MNCs wanting to practise business in their countries. What kinds of conditions are these? What type of threat, if any, exercise they pose to the normal operation of corporate determination making or to the strategic autonomy of corporate managers? Most important, how should the managers of multinationals answer to them? And according to what criteria should they calculate their responses? In this article, the authors—themselves engaged in a long research project on MNCs—seek to provide answers to these questions. First, they prove that both host government restrictions and MNC responses can be readily classified. Next, they provide guidance for the necessary but difficult human action of matching that managers must attempt betwixt various categories of government demand and corporate reaction. Finally, they suggest some of the implications of achieving a proper residue for the organizational structures of multinationals.

  • The carefully fatigued strategic plans of a multinational company (MNC) telephone call for new product facilities to exist built in Europe, merely the prospective host authorities establishes unusually strict sales and export book conditions earlier giving the necessary permission.
  • National managers of an MNC's Latin American subsidiary attempt to implement a multinational competitive strategy set by the parent company, merely host governments insist that the subsidiary enter into joint venture arrangements with local companies.

Unusual situations? Not any longer. During the 1950s and 1960s, host governments rarely intervened in the diplomacy of multinational companies. Since 1970, however, those aforementioned governments have increasingly begun—for reasons of policy and/or ideology—to limit the considerable strategic autonomy of MNC managers. In adult countries, these limitations tend to cluster in industries of fundamental importance to the government, such as telecommunication equipment. In developing countries, merely being an MNC is often sufficient grounds for attracting host government intervention.

Drawing on intensive enquiry on a number of multinationals in both adult and developing nations, we shall (1) describe the major problems and the merchandise-offs government intervention poses for MNC managers and (2) discuss the possible lines of MNC response to this inroad on their traditional strategic autonomy.

Types of Intervention

In contempo years, the efforts of host governments to maintain control over their ain national economies accept increasingly restricted the freedom of MNC managers in deploying economic resources. Of equal importance, host governments have often interfered with the democratic procedure of MNC strategy formulation.

Managers who are or who are likely to exist faced with such restrictions may detect it useful to distinguish between these two unlike kinds of government intervention. The first, which sets the financial and regulatory ground rules for an MNC's decision to compete in a host country, is best understood every bit a limitation to strategic freedom. The second, which seeks to influence the internal mechanics of an MNC's controlling procedure, is best understood equally a threat to managerial autonomy. Together they constitute a major infringement on the general strategic autonomy of MNC managers. Let us make these various terms articulate in the discussion that follows.

Limitations to Strategic Freedom

As foreign merchandise and investment have made national economies less responsive to such chestnuts of economic policy as the stimulation of demand to increment product, host governments take progressively moved toward the closer regulation of entire industrial sectors. This regulation has primarily afflicted multinationals in the form of such locally sensitive issues equally product/market option, utilise of applied science, level of employment, and national trade balance.

For case, Spain set up explicit sales and export volume atmospheric condition before allowing Ford to establish production facilities there. The Spanish government limited Ford's sales book to ten% of the previous year's total motorcar market place and required that its export volume exist equal to at least two-thirds of its entire product in Spain. Further, Ford had to agree non to augment its range of automobile model lines without government say-so.

Australia has taken a slightly different approach. The Australian national telecommunication administration has standardized production requirements for the MNC subsidiaries from which it buys equipment. As a issue, the L.M. Ericsson subsidiary often ends upwards manufacturing ITT-designed equipment, and vice versa. In the past, with well-known switching engineering science, this was not a major problem. In the 1970s, even so, the practice of allocating to one company the production of another's equipment has made it difficult for multinationals to protect new proprietary switching engineering science.

Each of these restrictions limits the strategic freedom of multinationals just does not really threaten their managerial autonomy. Though Ford accustomed significant government-imposed constraints on its new operations in Spain in 1973, it still requested and received total local buying—that is, Ford retained full control, full "operating flexibility." Thus Ford could accept the Spanish demands explicitly into business relationship before it had to deploy resource in Spain.

As the head of European operations for one big MNC put it, "On whatever pregnant decision such as constitute construction, plant endmost, or reallocation of production, we take a start cut at an economically optimal solution, then nosotros meliorate this economic solution to fit with the demands of governments and make it at a compromise that is acceptable both to the governments and to our top management in the United states."

Threats to Managerial Autonomy

Across establishing weather that MNC policymakers must take into account, host governments have besides sought to influence direct the process by which that strategy is formulated. Characteristically, developing countries in S America, West Africa, and the Far East regularly request joint ownership of local MNC subsidiaries. The workers' codetermination schemes, which are at present gaining momentum in the developed countries of Europe, may ultimately have the same effect of forcing MNC subsidiaries to share their strategic decision making with representatives of local constituencies —exist they authorities officials, local business people, local workers, or local unions.

This type of intervention most commonly occurs when MNC subsidiaries are involved in industries perceived by the host authorities as critical to national economic, social, or political objectives. In such cases, the usual demand is for multinationals to decentralize decision making to democratic subsidiaries and for those subsidiaries to share that process with i or another local constituency.

"In the long run," commented a top director of one MNC confronted by just this kind of threat, "nosotros chance condign a collection of inefficient authorities–subsidized national companies unable to compete on the world market. Nonetheless, if nosotros rationalize our operations, we lose our preferential admission to government contracts and our R&D subsidies. Then we try to develop an overall strategic plan that makes some competitive sense, and then we bargain for each part of it with individual governments, trying to sell them on the item programs that contribute to the programme as a whole. Often, we have to revise, or abandon, parts of our plan for lack of government support."

MNC Responses: Suit or Withdraw

Whatever restriction of managerial autonomy or strategic freedom is a serious matter. Exhibit I briefly summarizes the major dimensions of these infringements on MNC strategic autonomy. These restrictions may be sufficiently troubling to prompt an MNC either not to enter a national market place or, if already nowadays, to withdraw from information technology. The threat of such infringement may also lead multinationals, such as IBM, to avert certain businesses, similar the public sector of the telecommunications equipment industry, in all countries.

Showroom I Infringements of MNC Strategic Autonomy

Other multinationals, such as CPC International or Du Pont in the U.s. and Brown Boveri or Nestlé in Europe, accept accepted and adapted to this infringement in render for connected market presence or the penetration of new markets. A senior manager in 1 of these companies expressed this willingness quite clearly:

"If you consider the world map, there are but a few developing countries that take the infrastructure or the domestic market needed for sophisticated products—countries like India, Nigeria, Brazil, Mexico, South Africa, and Indonesia. We are willing to compromise our worldwide rationalization strategies in these countries where getting a foothold is of bully importance. Maybe in the hereafter MNCs' strategies will have to be more flexible and responsive to host government demands—more than than hitherto."

Still, difficult questions remain. Which response—that of IBM or that of Nestlé and Du Pont—is more advisable? Is it ameliorate to sacrifice market participation to preserve strategic autonomy? Or is information technology better to brand the necessary compromises to guarantee market participation?

There are, of course, good reasons for and audio objections against both courses of action. If, for example, a company is belatedly in expanding internationally, its demand to attract the back up of host governments for some of its businesses may be bully enough to offset any required cede of strategic autonomy. This merchandise-off has characterized much Japanese investment away when Japanese companies were trying to establish apace a presence in new markets.i Yet when Toshiba, Hitachi, and Matsushita set up components plants in Malaysia to serve markets in developed countries, they demanded full ownership. Sourcing plants, on which home production depended, were generally 100% Japanese owned; plants producing end products for local markets were commonly articulation ventures with local interests.

Sacrifices of strategic autonomy are never without their cost. Over time they make it hard for an MNC to respond to worldwide competition because they tend to lock managers into the practice of because each national market separately. For example, when its electric motor concern met with heavy price competition from Far Eastern and East European companies, Brown Boveri (the Swiss electrical giant) found it very hard to develop and implement a consistent multinational response among its diverse subsidiaries. Because most of the national utilities to which information technology sold electric equipment required that national subsidiaries be independently managed, both the administrative procedures and the attitudes of general managers were not attuned to coordinating a multinational response.

Restrictions in Bharat

Credence of host government regulations may also have a troubling affect on an MNC'due south diversification strategy. Consider the case of India. Until 1970 the primary type of diversification amid MNC subsidiaries doing business in India has been characterized as "related"—that is, based on linkages with existing competencies of the parent company in distribution and marketing, production engineering science, or the exploitation of R&D. Betwixt 1970 and 1975, withal, there was a sudden shift amongst MNC subsidiaries toward "unrelated" diversification, in which these linkages practise not be and in which the simply rationale for standing the parent–subsidiary relationship is financial.2 This shift occurred at the same time that the Indian authorities began systematically to restrict the strategic autonomy of MNCs; in fact, the shift was very much the production of that restriction.

Engineering–based multinationals weathered the storm of Indian regulation in meliorate shape than did those that were marketing based and, correspondingly, showed less of a shift toward unrelated diversification. To take ane example, managers of Union Carbide's Indian subsidiary were able to identify technological capabilities of the parent visitor in a number of fields (such as carbon products and agricultural chemicals) of great importance to the host government.

ITC, the Indian subsidiary of British American Tobacco, a marketing-intensive MNC, could non do likewise. Hence its move into shrimp fishing, general exports, hotels, and lumber products represented unrelated diversification. Under growing pressure fifty-fifty the subsidiary of Union Carbide had to move in this direction. It is currently said to be examining a project in ready-to-wear clothing for export (a priority sector).

Withdrawal from a market place also has its cost. Equally already mentioned, IBM'south determination non to remain in Republic of india stemmed largely from its desire (one) to maintain central control of product development and thus a fully uniform production line, (2) to protect its worldwide rationalized production system, and (iii) to retain total control of all equipment leased to customers. But India was not a large market for IBM. What if the same corporate reasoning suggested a withdrawal from larger markets such every bit Mexico or Brazil? Would lBM's policy of limited compromise still be defensible?

The Counteractive Response

Quite obviously, these questions admit of no unproblematic or single answer. To the reverse, they suggest that to think in straight either/or terms— adaptation to host government intervention or withdrawal from the market place—is misleading. Such intervention confronts multinationals not with the choice between two but with the selection among several possible lines of response. Between adaptation and withdrawal lies the broad middle ground of what we shall phone call the "counteractive" response: a careful use by an MNC, given its competitive position inside its ain industry, of its bargaining ability vis-à-vis the host government in order to gain some competitive reward against other multinationals.

Consider these examples of counteractive response:

  • In the late 1950s, the Japanese government solicited participation by leading U.Due south. semiconductor companies in the development of a domestic semiconductor manufacture. As a condition for American entry into the Japanese market, the government required that joint ventures be established with Japanese partners.

Texas Instruments (TI), though quite interested in the Japanese market, was unwilling to sacrifice its managerial autonomy and thus compromise whatever technological lead it then had over its competitors past transferring its technology to a Japanese articulation venture. After protracted and at times heated negotiations, TI reached an agreement according to which information technology would set up a wholly owned subsidiary in Japan to supply the Japanese electronics manufacture with loftier applied science components and circuits. TI was able to maintain its managerial autonomy because of an obviously superior engineering science for which Japanese manufacture could notice no easily bachelor alternative.

  • Not unlike the response of TI is the notorious reluctance of U.Due south. aerospace companies, such equally Boeing, to participate in any cooperative schemes in which foreign companies would be more than mere subcontractors and would share pattern and engineering responsibilities. As with TI, state-of-the-fine art engineering science confers an immense advantage in bargaining power.
  • Conversely, faced with tough contest, some multinationals in the figurer industry accept establish that sharing subsidiary buying with host governments or national companies provides them with significant advantages in terms of access to resources or markets. Honeywell, for instance, merged Honeywell Bull, its French subsidiary, with the bilious Compagnie Internationale pour I'Informatique (C2I), the French national company. Thus it was able to proceeds preferential access to the French public administration market place and to an R&D upkeep (including authorities contracts and grants) roughly equal to its own. Information technology as well acquired the competent R&D team of C2I and a strong market position in Eastern Europe, where the support of the French country had won sizable contracts for C2I.
  • A more extreme example of this kind of counteractive response is Chrysler's wholesale transfer of strategic and fiscal responsibility for its ailing British subsidiary to the British government in 1975. Ironically, Chrysler's weak competitive position gave information technology pregnant bargaining leverage with the British regime, which had more to lose—both economically and politically—by letting Chrysler shut its plants in the U.k. than past subsidizing them.

In summary, the experiences we have examined propose that, not surprisingly, the kind of counteractive response an MNC tin can select depends primarily on the company'south bargaining ability vis-à-vis the host government equally well as on its competitive posture inside its own industry. In fact, it may be of utilise to picture show these choices of counteractive response as lying at various points along a spectrum defined by MNC bargaining power. At one end of the spectrum is TI with its strong technological position; at the other, Chrysler. In the centre lies IBM, with Boeing leaning toward the TI extreme and Honeywell toward the Chrysler. Showroom II summarizes the effects of bargaining ability on MNC responses to host government intervention.

Exhibit 2 Effects of Bargaining Power

It is therefore important to understand both the sources of bargaining power between multinationals and host governments and the impact of position within the manufacture on the choice of counteractive response.

Sources of MNC Bargaining Power

The fundamental bargaining strength of an MNC is its power to provide efficiently a technological packet that the host country could not otherwise hands obtain. Scale economies and production differentiation may besides contribute. Conversely, the primal bargaining strength of a host government is its ability to control ease and bewitchery of access to its national market.

The sources of bargaining power of an MNC are therefore much the same as the sources of competitive reward in a concentrated industry: engineering science, economies of scale, and product differentiation.

Applied science:

The power of an MNC to provide, nether competitive weather, products or services non hands obtainable from another source (multinational or not) is the necessary foundation for any counteractive response. Put simply, a government has to deal on the MNC's terms or look for plush and uncertain alternatives. MNC managers, nonetheless, must be able to estimate how the objectives of a regime bear upon the value of their company'south technology.

When, for example, a country wishes to become a major exporter to very competitive markets, it requires the all-time technology available. This was the situation TI faced in Japan in the late 1950s with regard to semiconductors. But when a country seeks merely to substitute local production for imports, then an internationally competitive technology is not of crucial importance. The engineering science adequate to its needs tin, in fact, be quite old. Even today Republic of india finds sturdy, piece of cake-to-maintain, 1950s Mercedes-Benz trucks more suited to its road conditions and maintenance abilities than more mod vehicles.

Similarly, an MNC's avant-garde production methods may non always offer a real bargaining advantage. To compete in the worldwide electronics industry, an MNC must achieve a very low component rejection rate in its procedure applied science—a rate best accomplished by increasing automation. Simply a host regime may actually prefer a relatively inefficient production procedure if it employs many workers.

Economies of calibration:

Such well-known sources of competitive advantage as size and experience curve effects can also provide MNC bargaining power. By creating specialized plants in diverse countries and past aircraft components or end products among them, multinationals tin can both produce at volumes larger than the minimum efficient scale and accumulate experience quickly. Further, the higher the minimum efficient production calibration in a given industry and the stronger the experience effects, the more difficult it is for host countries to set up up their own domestic industries.

Consequently, it is harder for host countries to force MNC subsidiaries to sacrifice managerial autonomy: the economic inefficiencies would be prohibitive. In microsystem electronics, for instance, smaller companies like SESCOSEM in French republic accept much higher manufacturing costs than do larger, integrated multinationals like TI or Motorola and would incur major losses if not immune to concentrate on simply a few products.

Call up, however, that older product processes—ones that use more labor and less capital than do those of an integrated MNC—may be less sensitive to these economies of calibration and thus more bonny to some host governments.

Production differentiation:

It is necessary to distinguish between marketing-based differentiation and differentiation based on technology. Our research indicates that, confronted past a adamant government, multinationals may well find some kinds of marketing-based differentiation to be of trivial assist. When, for case, differentiation is based only on consumer perceptions created through marketing—as with unlike brands of soap—the government may restrict the number of brands or limit ad without doing whatsoever harm to the national economy. However, when differentiation is based on actual characteristics of production technology—say, the performance features of a tractor or other piece of agricultural mechanism—then such differentiation may well prove a source of MNC bargaining power.

Sources of Host Government Bargaining Ability

The key bargaining strengths of a host government are its abilities to command market place access and to offer a variety of inducements to encourage market participation.

Control of market access:

Espana was able to attract Ford'southward new plant to Valencia by letting Ford sell just enough cars in Kingdom of spain to make the greenfield site at Valencia preferable to the company's expanding its existing plants in Germany or the United Kingdom. Had Spain been a member of the European Community and thus not able to restrict imports or legislate market share allocations, it could have done only what other European countries do to attract MNC investment in the auto industry: hold out the promise of subsidies and grants.

When governments control customer purchases, even though products are officially freely traded, they also gain bargaining power. In the early on 1970s, the French regime starved Honeywell Balderdash by directing public orders to C2I. Faced with similar conditions, IBM has had a much lower market place share in the British public sector than in the private sector market.

Control of market place access, depending on its degree of completeness, provides host governments the wherewithal to require multinationals to enter into joint venture arrangements, to place government representatives on their boards, or even to participate in R&D with country-endemic customers.

Inducements:

Host governments may too sweeten the pot for multinationals by offering substantial support for R&D efforts. For example, ITT's European telecommunication equipment subsidiaries take received large research contracts and subsidies from host governments on the condition that they develop equipment well suited to local needs. Similarly, Valvo (Philips's German language electronic components subsidiary) received major grants from the German government, which feared Japanese competition in the Boob tube industry, to support its development of very large scale integration circuits for color Tv set sets.

Competitive Position Inside the Industry

Of course, multinationals non only bargain with host governments to retain their freedom and autonomy; they besides compete confronting each other. Depending on its position within its own industry, a given MNC may choose to accept a firmer or a softer stance on host government interference. Our inquiry confirms the commonsense expectation that the larger, more than dominant companies in an industry tend to be able to resist government interference with strategic autonomy. Past dissimilarity, the smaller, weaker companies tend to find alliances with host governments useful and are, as a result, more willing to accept the corresponding loss of strategic autonomy.

Smaller multinationals stand to lose when competition in an manufacture becomes global and larger MNCs organize themselves to take full advantage of rationalized production and low-cost manufacturing locations. When this happens, smaller MNCs may well find they need privileged access to markets to remain marginally competitive. They may also need some influx of resources from host governments to develop new products.

In other words, smaller multinationals often survive in a competitive globe market place only by enlisting host government protection and assistance. From the case of C2I-Honeywell to the recent, though bootless, attempt by Volvo to enlist the Norwegian government as a shareholder, in that location are whatsoever number of instances of smaller competitors in a worldwide industry trying to ally themselves with host governments.

This distinction in size is less pregnant in those industrial sectors where markets are fully regime controlled. Here overall size and international competitive posture are only of secondary importance because product takes place locally and products take to be adapted to national specifications. In these sectors, technology alone determines how much strategic autonomy an MNC has to relinquish.

Organizational Adjustments

These situational determinants of counteractive response practice not tell the whole story. Host government intervention with the strategic autonomy of multinationals creates problems of internal arrangement as serious equally those of external competitive posture. No MNC faces the aforementioned kind or level of interference in each of its businesses and in all regions of the earth. Instead, MNC managers must regularly devise and implement non a single but a quite varied range of responses—a task that places tremendous and oftentimes alien demands on organizational construction and management capability.

The stress placed by multiple responses on organizational construction and management alike increases as host governments impose linkages among an MNC's lines of business concern. By, say, threatening to cutting off telecommunications orders from a diversified electronics MNC, a government could attempt to coerce the company into setting up a TV assembly plant in the country. Managers tin can no more than overlook the fact of such linkages—or of their tendency to crave asymmetrical structures—than they can ignore whatever other challenge to strategic autonomy. But with linkages there is inevitably an increased premium on the coordination of businesses, strategic planning, and organizational units.

Yet such coordination is hard considering the responses needed in each business concern tend to create organizational differences amidst businesses. Information technology thus becomes problematic for elevation management to assess the costs and benefits of interbusiness linkages or dependencies.

The existent managerial task, after all, lies non merely in understanding these problems only in transforming understanding into effective management systems and structures. Our research suggests that, once the variety of restrictions on strategic autonomy goes beyond a sure threshold, it may well get necessary for an MNC to make a number of adjustments to maintain the necessary degrees of coordination and flexibility.

Geographic Partitioning

When the variety of restrictions on international activities becomes besides dandy, an MNC may decide to segment its global affairs into 2 categories: operations in countries with few restrictions and operations in countries with substantial restrictions.

For the first group (the European Community or N America, for instance) managers can devise and implement overall multinational strategies; for the 2nd (say, Latin America) they can arrange to follow the blueprint of a belongings company management. Consider the position of an auto company similar Ford. Though the machine industry in Western Europe affects many sensitive issues, Ford is even so able to maintain its strategic autonomy and, forth with it, a fully integrated, centrally managed, Europe-wide manufacturing system.

By dissimilarity, in Latin America an auto company faces stiff challenges to its autonomy from diverse host governments interim both individually and in concert with each other. Moreover, in India the national authorities demands virtually complete control over the development of the automobile industry merely allows the aid of MNC joint–venture minority partners.

Product Group Sectionalization

ITT has been able to meet government demands in Europe without serious dislocation because its operations are grouped on a product line footing. Managers of the automotive group (machine parts and accessories) have pursued multinational integration quite eagerly and have advisedly protected their centralized control of group businesses. Conversely, managers of the telecommunications equipment group accept divided their operations into a number of distinct national subsidiaries. From time to time, elevation direction has moved individual businesses amongst groups as warranted by competitive, technological, or governmental factors.

Functional Staff

To a large extent, ITT's organizational flexibility is the issue of Harold Geneen's legendary ability to clarify the needs of each individual business. Such virtuosity, however, is rare. Indeed, matching the variety of host government demands with the variety of possible MNC responses puts a tremendous strain on top management. Especially in those multinationals that prefer to modulate their responses on an advert hoc, case-by-case basis and non to segment operations past region or product line, this strain tends to produce incredibly complex organizational adjustments.

These adjustments lead, in turn, to the all-encompassing use of corporate staff—both functional and administrative—to monitor coordination among product lines and national subsidiaries. At Chocolate-brown Boveri, for case, corporate marketing staffs, in conjunction with several levels of planning committees, coordinate operations of the various national subsidiaries product line past product line.

Faced with similar problems, IBM gives all of its many business organisation units the right to object to any plans of other units that would adversely impact their own activities. In this mode, IBM forces its middle managers to consider the interdependencies among businesses in their own planning and budgeting processes and to attain jointly adequate solutions earlier submitting their plans for approval. Top direction can, of course, take the initiative and identify key strategic problems requiring a significant degree of coordination every bit "focus issues" to be considered explicitly in the planning process. At the aforementioned time corporate staffs are expected to help identify and resolve discrepancies among the plans of individual concern units.

Further Thoughts

The immensely sophisticated forms of management adopted by IBM and ITT, among others, are often quite hard to implement on a 24-hour interval-to-day basis. Though they may offer in theory a set of mechanisms for effecting the best possible fit between host regime need and MNC response, they impose a meaning burden in sheer organizational complication. Our research has identified the principal variables to be considered in determining appropriateness of fit, but it has only begun to touch on the questions posed by this inevitable trade-off.

Is there a bespeak at which the precision of the strategic match between demand and response is ultimately of less importance than the organizational burden imposed by additional fine tuning? What is that betoken like? How is it to be recognized, measured, included within the planning process? These questions, still largely unanswered, are well worth serious investigation.

ane. See, for instance, Michael Y. Yoshino, Japan's Multinational Enterprises (Cambridge: Harvard University Printing, 1976), pp. 146 and 153.

2. For more detailed definitions of related and unrelated diversification, see Richard P. Rumelt, Strategy, Structure and Economic Performance (Boston: Division of Research, Harvard Business organization School, 1974), pp. xi–12.

A version of this commodity appeared in the March 1980 outcome of Harvard Business Review.