The global trade and investmen environment

The Global Trade and Investment Environment |
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| From the perspective of a firm negotiating the terms of an investment with a host government, the firm's bargaining power is high when the host government places a high value on what the firm has to offer, the number of comparable alternatives open to the firm is great, and the firm has a long time in which to complete thenegotiations. The converse also holds. The firm's bargaining power is low when the host government places a low value on what the firm has to offer, few comparable alternatives are open to the firm, and the firm has a short time in which to complete the negotiations. To see how this plays out in practice, consider again the case of IBM and Mexico. IBM was in a fairly strong bargaining position, primarilybecause Mexico was suffering from a flight of capital out of the country at the time (1985 and 86), which made the government eager to attract new foreign investment. But IBM's bargaining power was moderated somewhat by three things. First, despite its symbolic importance, the size of the proposed investment was unlikely to have more than a marginal impact on the Mexican economy, so the economicvalue placed by Mexico on the investment was not that great. Second, IBM was looking for a low-labor-cost, politically stable location close to the United States. Mexico was obviously the most desirable location given these criteria. Greater distance and higher transportation costs made alternative low-labor-cost locations, such as Taiwan or Singapore, relatively less attractive, while otherpotential locations in Central America were ruled out by political instability. Third, given the profusion of low-cost competitors moving into the US personal computer market during the mid-1980s, IBM probably felt it needed to move quickly to establish its own low-cost production facilities. But there was no compelling reason for Mexico to close a deal quickly. Due to all these factors, the Mexicangovernment also held some bargaining power in the negotiations and was able to extract some concessions from IBM. On the other hand, IBM's strong position allowed it to insist that it maintain 100 percent ownership of its Mexican subsidiary. This represented a significant concession from the Mexican government; IBM was the first major company for which Mexico waived its prohibition of majorityownership. In a similar case during the 1960s, IBM was one of the few firms to get the Japanese government to waive the restriction on FDI that would allow it to establish a wholly owned subsidiary in Japan. IBM was able to do this because it was the only major source of mainframe computer technology at the time, and numerous Japanese companies needed that technology for data processing. The lack ofcomparable alternatives available to the Japanese enabled IBM to pry open the Japanese market. Similarly, during the 1980s, Toyota extracted significant concessions from the state of Kentucky in the form of tax breaks, low-interest loans, and grants, and Honda received similar concessions from the state of Ohio. At that time, both states were suffering from high unemployment, and the proposedauto assembly plants promised to have a substantial impact on employment. Also, both companies had a number of states from which to choose. Thus, the high value placed by state governments on the proposed investment and the number of comparable alternatives open to each company considerably strengthened the bargaining power of both companies relative to that of the state governments. | |
|Table 7.3 Determinants of Bargaining Power | |

  |   | Bargaining Power of Firm |
|   | High | Low |
| Firm's time horizon | Long | Short |
| Comparable alternatives open to firm | Many | Few |
| Value placed by host government on investment | High | Low |

Mexico's low labor costs to reduce the cost of manufacturing PCs. Given the proprietary nature of the product and process...