Bargaining Power, Ownership, and Profitability of Transnational Corporations in Developing Countries
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Abstract.As the bargainingpowerof the transnationalcorporations(TNCs)in the sample increasedrelativeto the bargainingpowerof the host country,andas the desireof the TNCs fora highlevel of equityownershipincreased,the percentequityownershipof the TNCsin theirsubsidiariesincreased.Therelationshipbetweenpercentequityownershipandsubsidiarysuccess fromthe TNCs'viewpoint,however,was J-shaped.Highandlowlevels of equity ownershipwere associated with high levels of success. Controlof criticaloperational variablesby the TNCwas directlyrelatedto success. * Over the past 20 years there has been continuing controversy over the INTRODUCTION determinants and effects of different patterns of ownership and control of the subsidiaries of transnational corporations (TNCs) in less developed countries (LDCs). Some countries such as Singapore and Hong Kong place virtually no restrictions on the percentage of equity ownership held by TNCs in most sectors of their economies; others place severe restrictions on equity ownership by TNCs and prohibit it outright in many sectors of their economy; others require that foreign ownership be reduced or phased out over time. One of the advantages of foreign direct investment (FDI)sometimes cited by TNCs based in Japan and in LDCs is the generally higher level of equity participation they have given to investors in the host country [Lecraw 1977, 1981; Wells 1983]. The reasons expressed by host governments for encouraging (or insisting on) local equity participation are complex and sometimes contradictory, ranging from better access to information, and control of payments for technology transfer and management fees, to control over pricing of output and intracompany trade, reinvestment, and remittance of profits and capital.1 As importantly,a high level of foreign ownership may carry significant political costs for the host government quite apart from its economic impact. Recently, Fagre and Wells [1982] have used a bargaining power framework to explore the relationship between the characteristics of a TNC (size, intrafirm transfers, advertising and R&Dintensities, and product diversity) and the percent equity ownership position that TNCs achieved in their subsidiaries in the host country.2The first step of the analysis in this paper replicates this work using a different data set and extends the analysis to include additional characteristics of the host country and of TNCs that might influence their relative bargaining power. Poynter [1982] has shown that a TNC may find it advantageous to bargain not for increased equity ownership, but for control over the variables critical to the success of the subsidiary from the TNC's viewpoint. The second step of the analysis relates the relative bargaining power of a TNC and of the host government (as proxied by their characteristics) to the degree of control the TNC exercised over its subsidiary in the host country.
*DonaldJ. Lecrawis Professorof Economics and InternationalTradeat the School of Business Administration,the Universityof Western Ontario. He has
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