The Competitiveness of Nations in a Global Knowledge-Based Economy

Peter Dicken

Global-Local Tensions: Firms and States in the Global Space-Economy (cont'd)

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Abstract [Web 1]


An Analytical Point of Entry: Production Chains and Relational Networks

Firm-Firm Competition: The Changing World of the Transnational Corporation

State-State Interaction: The Emergence of the “Competition State” [Web 2]

Firm-State Interactions: Dynamic Bargaining Relationships

Conclusion: The Global-Local, Debate Revisited [Web 3]



State-State Interaction: The Emergence of the “Competition State”

Having discussed one element of the triangular nexus of interactions identified earlier - firm-firm competition - I now want to address the second element: competition between states.  Here, I deliberately avoid discussion of the nature of the state, while accepting that the competitive aspect of state behavior is itself deeply politically, socially, and culturally embedded.  My basic approach is that the state in the contemporary global economy may be legitimately regarded as a competition state, whose problem is one of facing “major adjustments to shifts in competitive advantage in the global market place” (Cerny 1991, 183).  In this respect, states take on some of the characteristics of firms as they strive to develop strategies to create competitive advantage (Guisinger 1985).  Both are, in effect, locked in competitive struggles to capture global market shares.  Specifically, states compete to enhance their international trading position and to capture as large a share as possible of the gains from trade.  They compete to attract productive investment to build up their national production base, which, in turn, enhances their competitive position. In particular, states strive to create, capture, and maintain the higher value-adding elements of the production chain.

Attempts to understand the bases of national competitive advantage have a long history.  A static, factor endowment-based theory of comparative advantage is now recognized as having little explanatory value.  Comparative advantage is dynamic; it can be, and is, created or constructed.  Much of the recent attention in this regard has focused on Porter’s (1990) conceptualization of national competitive advantage as a four-pointed “diamond” of: factor endowment; demand conditions; related and supporting industries; and firm strategy, structure, and rivalry, which he regards as “a mutually reinforcing system.”  Interestingly, Porter devotes little attention to the role of the state in creating and sustaining national competitive advantage.  He sees the state as merely an “influence” on his four basic determinants, a contingent, rather than a central, factor (Henderson and Appelbaum 1992; Henderson 1993; Stopford and Strange 1991), a contributor to the environment in which, as in the biological realm, the selective survival of species occurs (Porter 1990, 174).  Porter’s neglect of the role of the state in the pursuit of national competitiveness is a significant omission.

All states perform a key role in the ways in which their economies operate, although they differ substantially in the specific measures they employ and in the precise ways in which such measures are combined.  Although a high level of contingency may be involved (no two states behave in exactly the same way), certain regularities in basic policy stance can be identified.  Here it is useful to draw upon a concept originally introduced by Dahrendorf (1968), developed by Johnson (1982), and recently refined further by Henderson and Appelbaum (1992).  Dahrendorf (1968) distinguished between two ideal types of political economy: the market-rational and the plan-rational.  He equated the latter with the state socialist command economies.  Johnson (1982), in his seminal work on the growth of the Japanese economy, argued that these command economies were better described as plan-ideological systems, and he applied the term plan-rational to the economies of East Asia, notably Japan and the then-leading NIEs, particularly of South Korea, Taiwan, and Singapore. [3]

3. Johnson’s work has been especially influential in the debate over the extent to which the East Asian growth economies have succeeded either because of the operation of free market forces or because of the central [involvement of the state in “governing the market.”  This latter term is used by Robert Wade (1990) in his detailed analysis of East Asian economic development.  The idea that the East Asian economies exemplify plan-rationality rather than market-rationality (although in specifically differentiated ways) is apparent in the work of, for example, R. Wade (1990) on Taiwan, Amsden (1989) on South Korea, Morishima (1982) and Okimoto (1989) on Japan, Lim (1983) on Singapore, and Schiffer (1991) and Castells, Coh, and Kwok (1990) on Hong Kong.]

HHC: [bracketed] displayed on p.113 of original.


Recently, Henderson and Appelbaum (1992) have suggested that a fourth ideal type can be recognized: the market-ideological, which, they suggest, was epitomized by the Reagan and Thatcher “new right” administrations.  Figure 2 summarizes the basic features of each of the four types of system and locates some national economies within the matrix.  As always, such simplified typologies require a “health warning,” which Henderson and Appelbaum duly provide: “These four constructs (market rational, plan rational, market ideological, and plan ideological) should be regarded as ideal types; actual existing political economies combine them in various historically contingent ways.  Still, for any particular society, one will typically dominate, facilitating an overall characterization of its prevailing political economy” (1992, 20).

Allowing for these caveats, it is not unreasonable to regard many of the current politico-economic tensions in the global economy as being a reflection of a clash between competition states occupying different positions within the market-rational/plan-rational space.  Certainly, the smouldering - occasionally incandescent and inflammatory - disputes between Japan and many Western economies (notably the United States and the European Community) can usefully be set within this context (for a discussion of some of the details of the United States-Japan conflicts see Encarnation 1992; Lincoln 1990; Ozawa 1986; Prestowitz 1988). The various trade disputes between the United States and the European Community and the broader negotiating differences among nations within the Uruguay Round of the GAIT can also be interpreted in this way.

As Figure 2 indicates, the position of states is not necessarily fixed.  In this respect, one of the most notable developments of the last few years has been the growing pressure within the most dominant market-ideological state, the United States, for a more overtly strategic policy orientation.  Rather misleadingly, the term used to express this orientation is strategic trade policy (STP).  But, by definition, STP involves far more than just trade policy.  It encompasses issues of strategic industry policy and, by extension, FDI policy as well.  In other words, it consists of some of the elements of a plan-rational system.  Comprehensive reviews of the literature on “strategic trade policy” are provided by Cohen (1990), Ostry (1990), Richardson (1990), and Stegemann (1989).  The intellectual underpinnings of strategic trade policy are derived from the so-called “new international trade theory” (Krugman 1990).

The demand in the United States in particular is for a shift away from “free” trade toward “fair” trade – “fairness” being defined by the United States itself.  An early sign of this shift in emphasis was apparent in the 1974 U.S. Trade Act; it became quite explicit in the 1988 Omnibus Trade and Competitiveness Act, especially in the so-called “super 301” clause, which aimed to achieve reciprocal access to what the United States defines as unfairly restricted markets.  The difference between the 1974 and 1988 acts is that the clause now applies to entire countries and not, as before, to specific industries.  These shifts toward a more strategic policy are particularly evident in high-technology sectors, seen to be at the center of a country’s future competitive position.  The basic rationale is that, in imperfectly competitive markets, governments must intervene in favor of their domestic firms (Encarnation 1992; Ostry 1990).  As Ostry (1990) points out, the


Figure 2

A typology of state economic-political systems.

Source: based on Henderson and Appelbaum 1992, Fig. 1; Henderson 1993; Johnson 1982.


argument is based upon two issues: “the ‘first mover advantage’ that a country or firm captures by preempting foreign rivals … (which) … provides the opportunity for firms and countries to consolidate and extend their competitive advantage” (p. 60), and the issue of externalities or spillovers that enhance the competitiveness of other parts of the domestic economy.

Within market-rational/market-ideological economies like the United States, the pressures for adoption of a more strategic-oriented policy emanate from a variety of


interest groups (primarily specific industry and labor union lobbies) that may have a particular geographic dimension.  Surprisingly, geographers have shown little interest in this topic.  One of the few papers to appear in a geographic journal (Political Geography Quarterly) was written by political scientists, not political geographers.  Wade and Gates’s (1990) analysis of the 1987 vote in the House of Representatives on the Gephardt Amendment to the 1988 Omnibus Trade Act revealed a reordering of the historical regional divisions over trade policy.  “Although the old industrial core in the North Atlantic and Great Lakes remains the most protectionist area, the once dependably liberal South now contains much stronger protectionist sentiment than was ever true in the past.  And the historically protectionist West, particularly the Northwest, has displaced the South as the regional nucleus of liberal trade opinion in Congress” (Wade and Gates 1990, 297).

A rather different perspective on this issue is provided by Krauss and Reich (1992).  Using a series of industry case studies, they demonstrate a clear but variable pattern of intervention - what they term “compromise protectionism” - by successive U.S. presidential incumbents.  Their argument is, “first that the type of industry is crucial in determining the kind of ideological considerations and role pressures to which the executive will be subject and second that the consequent intersection of ideological considerations and role pressures will determine the executive’s response … [a particular issue is the] … inherent dichotomy between the collective interests of the state and the particular, parochial interests of the Presidency” (Krauss and Reich 1992, 860).

One of the diagnostic characteristics of the market-rational (and market-ideological) state is its concern with the regulatory structures in the economy.  In such states, a marked feature of the past 10 to 15 years has been the drive toward the deregulation of specific sectors as a competitive weapon.  As Cerny (1991) has perceptively observed, however, the process of deregulation is extremely complex; what is propounded as deregulation may actually involve re-regulation in a different form or at a different geographic or political scale.

Each of these measures - from the piecemeal use of trade, industry, and foreign direct investment policies in market-rational/ideological states to their more coherent application in plan-rational states - reflects the diverse attempts by competition states to operate in the volatile environment of the global economy.  States, like firms, pursue competitive strategies, although their strategic tool kits are, of course, somewhat different.  Another parallel between the competitive behavior of firms and states is that just as firms, especially TNCs, have shown an increasing propensity to enter into collaborative agreements with other firms, so, too, do many nation-states display the same collaborative propensity.  As in the case of firms, interstate collaboration can range from the simple bilateral arrangement over a single issue to the complex collaborative network of a supranational economic bloc.  Although there are many examples of supranational trading blocs in the global economy, most are relatively ineffectual and some are little more than paper agreements.  Such groupings are essentially discriminatory and defensive.  They represent an attempt to gain advantages of size in trade and investment by creating large multinational markets for their domestic producers within a framework of protection.  As such, they may either create or divert trade, and it is this latter potential that produces apprehension, and possible counteraction, by non-members.

One of the major developments in the global economy in recent years has been the strengthening of supranational economic integration in two of the three “global triad” regions and at least the hint of a similar future development in the third.  The final years of the 1980s, in particular, saw the speeding up of the


process to complete the Single European Market (optimistically by 1 January 1993), the signing of the Canada-United States Free Trade Agreement, and concrete moves to establish a North American Free Trade Agreement (NAFTA).  In Europe, the extension of agreements between the 12 European Community member states and other Western European states will create a much-enlarged European Economic Area (EEA).  Possible counter-moves in the Asia-Pacific region are still unclear.  The existing supranational group in Southeast Asia, ASEAN, is not effective economically.  The Malaysian government is anxious to create a regional economic alliance, but so far its efforts have not met with success.  Attempts to build a broader Pacific Basin bloc (particularly promoted by Australia) have not succeeded.  The key, of course, is Japan, which, because of a historical legacy of distrust in the region, is proceeding cautiously.  If the EEA and NAFTA prove to be as inward-looking as some fear, however, the pressures to create a counterweight in East and Southeast Asia and/or the Western Pacific would undoubtedly increase.

The trend toward increased supranational economic integration, therefore, is a further aspect of the operation of the competition state.  But there are political counterpressures allegedly at work in which increasing emphasis is being placed on the local and regional (i.e., subnational) level.  Particularly in Europe, as the momentum toward European integration has increased, the calls for greater degrees of local/regional political and economic autonomy have also grown.  The idea of a “Europe of the regions” rather than of nation-states - or even a “Europe of local communities” - has considerable currency in some quarters.  The notion of a shift toward the “local economy,” or even the “local state,” is embedded in the idea of a transition from Fordism to post-Fordism, the new dynamics of flexible accumulation, and the alleged emergence of new industrial districts (Moulaert and Swyngedouw 1989; Moulaert, Swyngedouw, and Wilson 1988; Scott 1988).

Seductive as these ideas are of, on the one hand, a shift toward supranational integration or, on the other, a move toward greater local economic autonomy, they do not signify the demise of the nation-state as a significant global actor.  In Hirst and Thompson’s view:

The mechanisms of national economic regulation have changed but government policies to sustain national economic performance retain much of their relevance, even if their nature, level and function have changed … While national governments may no longer be “sovereign” economic regulators in the traditional sense, they remain political communities with extensive powers to influence and sustain economic actors within their territories.  Technical macro-economic management is less important, but the role of government as a facilitator and orchestrator of private economic actors remains strong. (Hirst and Thompson 1992, 371)

Within the specifically spatial research is a real need, as Gertler argued, to “reinstate the nation-state”:

Despite the formation of new governing institutions at both the subnational and supranational scales, the nation-state remains an important institution of capitalism… Most notably, nation-states have produced (and continue to produce) rather distinct national systems of innovation which create particular possibilities for economic change while precluding others… Despite the common observation that the advent of a strengthened European Community or North American Free Trade Area will reduce the powers of individual nation-states to regulate their own economic affairs, it should be pointed out that, in contrast to the rhetoric of free trade, countries will continue to retain many powers and markets will not be completely and unequivocally “opened up.”  Although the more subtle powers to harmonize social and economic policies across nations will be strong, the intensified competition expected to prevail will, if anything, enhance the importance of fostering a supportive national system for innovation.  Consequently, it is difficult to see how the rise of supranational blocs will undermine these


particular powers of the nation-state. (Gertler 1992, 270-71)


Firm-State Interactions: Dynamic Bargaining Relationships

The third element in the triangular nexus of international interactions is that between firms and states.  This is not as straightforward as it may seem, because the actual processes and forms of firm-state interactions at an international scale are deeply intertwined with firm-firm and, especially, state-state interactions.  For example, much of the friction between the United States and Japan is actually a dispute between firms, between states, and between states and firms as perceived agents of states.  Similar to the situation in the 1960s, when the activities of United States TNCs were seen by many as being a direct extension of United States foreign policy, so today the behavior of Japanese firms is perceived (especially in the United States) as being part of a Japanese strategy of world dominance.  Similarly, France viewed the recent dispute involving the decision by the U.S. manufacturer, Maytag, to shift the operations of its Hoover subsidiary from Dijon in France to Cambuslang in Scotland not merely as the spatial rationalization strategy of a U.S. TNC in the context of changing economic conditions in Europe but also as a piece of “social dumping” made possible by the U.K. governments attitude toward European social and labor regulation.  The relationships between international firms and nation-states are a complex mixture of conflict and collaboration.  The TNC seeks to maximize its freedom to locate its production chain components in the most advantageous locations for the firm as a whole in its pursuit of global profits or global market share.  At the same time, the individual state wishes to maximize its share of value-adding activity.  As a result, the relationship between firms and states is inevitably an uneasy one (Gordon 1988; Pitelis 1991; Stopford and Strange 1991).

Firm-state interactions tend to differ according to whether the relationship is between a firm and its home country government or a host country government.  This does not imply that the former relations are necessarily harmonious and the latter necessarily conflictual.  Indeed, many bitter disputes between firms and states have occurred where a state fears that its “domestic” firms are shifting operations overseas or, conversely, where firms allege that their home country government provides inadequate support against external competition.  The position, therefore, is extremely complex.  In this section I deal with three aspects of firm-state interaction: the connection between a firm and its domestic environment, the responses of firms to regulatory structures, and the bargaining relationship between firms and states.

My basic position - contrary to that taken by such writers as R. Reich (1991) or Ohmae (1990 - is that a TNC’s domestic environment remains fundamentally important to how it operates, notwithstanding the global extent of some firms’ operations. [4]  TNCs are not placeless; all have an identifiable home base, a base that ensures that every TNC is essentially embedded within its domestic environment.  Of course, the more extensive a firm’s international operations, the more likely it will be to take on additional characteristics.  Few, if any, major TNCs have moved their ultimate decision-making operations out of their country (often their community) of origin. [5]  The

4. Hu (1992) adopts a broadly similar view, although I would not frame my argument in his rather limited terms, which rely on some rather simple quantitative indicators for a small number of cases.

5. This does not imply that no important decision-making activities have been relocated.  Indeed, several major U.S. companies, including IBM, Hewlett Packard, and Monsanto, for example, have moved major divisional headquarters out of the United States to Europe.  But, in each case, there has been no question that the firms’ ultimate corporate headquarters remain in the United States.


argument that, in effect, there is no longer any real relationship between a firm and its home base is, like many statements in the popular business literature, a considerable exaggeration.  Of course, as organizational structures have changed, as hierarchies have “flattened,” as network forms have become increasingly significant, things are no longer as simple as they once were.  Nevertheless, despite many decades of operation as a TNC, Ford is still essentially a U.S. company, ICI a British company, Siemens a German company.  As Stopford and Strange point out,

However great the global reach of their operations, the national firm does, psychologically and sociologically, “belong” to its home base.  In the last resort, its directors will always heed the wishes and commands of the government which has issued their passports and those of their families.  A recent study of the boards of directors of the top 1000 US firms, for example, shows that only 12 per cent included a non-American - rather fewer, in fact, than in 1982 when there were 17 per cent... The Japanese firm with even one token foreign director would be hard to find.  Even in Europe, with the exception of bi-national firms like Unilever, you do not find the top management reflecting by their nationality the geographical distribution of its operations. (Stopford and Strange 1991, 233)

This is not to argue that TNCs necessarily retain a “loyalty” to the states in which they originated.  The nature of the embeddedness process is far more complex.  Also, the argument that a TNC’s national origin matters to how it behaves is not to deny that national economic welfare is no longer necessarily equated with the performance of national companies (R. Reich 1991; Tyson 1993).  This latter claim may be true.  But the point I am making is that TNCs are “produced” through a complex historical process of embedding (Dicken and Thrift 1992), in which the cognitive, cultural, social, political, and economic characteristics of the national home base play a dominant part.  TNCs, therefore, are “bearers” of such characteristics, which then interact with the place-specific characteristics of the countries in which they operate to produce a particular outcome.  But the point is that the home-base characteristics invariably remain dominant.

This is not to claim that TNCs of a particular national origin are identical - this is self-evidently not the case - but, rather, to argue that there are greater similarities than differences among such firms.  Insofar as the nation-state acts as a “container” of distinctive institutions and practices, it remains significant as an influence on the nature of the TNC.  Whitley’s (1992a, 1992b) work on comparative business systems is especially relevant.  Whitley’s concern is to counteract the views of the “economic rationalists” that “competitive markets select efficient forms of business organizations and destroy inefficient ones … that underlying market pressures ensure that the firms which survive by competing successfully in international markets will converge to the same efficient structure, practices and strategic decisions which ‘fit’ particular technology and market imperatives” (Whitley 1992a, 2).  In contrast to this view, Whitley develops the concept of the “business system,” which he defines as “particular arrangements of hierarchy-market relations which become institutionalized and relatively successful in particular contexts” (1992a, 10).

Whitley’s analysis, based upon a detailed multidimensional comparison of business systems in East Asia and in Europe, is not without its problems.  It does, however, help to explain international variation in firm structures and behavior, including, for example, the marked differences between Japanese (and other East Asian) business structures on the one hand and those found in the Anglo- Saxon and continental European systems on the other.  It adds some depth to the ideal types of political economic system discussed in the previous section.  Taken together, these concepts help to clarify our understanding of the complex relationships between firms and their


domestic environments, as well as the conflictual economic relationships between states and states.  They illuminate such issues as different state attitudes toward their home firms, including the issue of the “national champion” (Amin 1992; R. Reich 1991) and the bases of such distinctive organizational forms as the Korean chaebol and the Japanese keiretsu.  The persistence of distinctive business systems, organized primarily (although not exclusively) within national boundaries, is an important underlying cause for the persistence of distinctive differences between TNCs of different national origins.

The second aspect of firm-state interactions I want to address is the response of firms to state regulatory structures (Dicken 1992b).  For the TNC, the two most critical aspects of state regulatory policy are, first, access to markets and/or resources (including human resources) and, second, rules of operation for firms operating within particular national (or supranational) jurisdictions (S. Reich 1989).  An obvious assumption would be that TNCs will invariably seek the removal of all regulatory barriers that act as constraints and impede their ability to locate wherever, and to behave however, they wish.  The ultimate preference for TNCs would seem to be removal of all barriers to entry, whether to imports or to direct presence; freedom to export capital and profits from local operations; freedom to import materials, components, and corporate services; freedom to operate unhindered in local labor markets.  Certainly, given the existence of differential regulatory structures in the global economy, TNCs will seek to overcome, circumvent, or subvert them.  Regulatory mechanisms are, indeed, constraints on a TNC’s strategic and operational behavior.

Yet it is not quite as simple as this.  The very existence of regulatory structures may be perceived as an opportunity available to TNCs to take advantage of regulatory differences between states by shifting activities between locations according to differentials in the regulatory surface - that is, to engage in regulatory arbitrage (Leyshon 1992).  One aspect of this is the propensity of TNCs to stimulate competitive bidding for their mobile investments by playing off one state against another as states strive to outbid their rivals to capture or retain a particular TNC activity (Dicken 1990; Encarnation and Wells 1986; Guisinger 1985; Glickman and Woodward 1989).  More generally, several writers have pointed out that TNCs have a somewhat ambivalent attitude to state regulatory policies (Picciotto 1991; Rugman and Verbeke 1992; Yoffie and Milner 1989).  For example, Picciotto (1991) notes that

TNCs have favoured minimal international coordination while strongly supporting the national state, since they can take advantage of regulatory differences and loopholes... While TNCs have pressed for an adequate coordination of national regulation, they have generally resisted any strengthening of international state structures… Having secured the minimalist principles of national treatment for foreign-owned capital, TNCs have been the staunchest defenders of the national state.  It is their ability to exploit national differences, both politically and economically, that gives them their competitive advantage. (1991, 43, 46)

More specifically, Yoffie and Milner (1989) argue that TNCs will increasingly tend to support a strategic trade policy in their home country, with the expectation that this will open up market access in foreign countries and enable them to benefit from large-scale economies and learning curve effects.

One aspect of firm-state regulatory relationships that has become a matter of some debate concerns the state’s specific stance toward the participation of nondomestic firms in state-sponsored collaborative ventures.  In both the United States and Europe, for example, governments have explicitly excluded foreign firms with operations in those economies from participation in high-technology collaborations.  In the European Community, the British computer manufacturer, ICL, was expelled from the Joint European Submi


cron Silicon Initiative (JESSI) after it was acquired by the Japanese company, Fujitsu.  In the United States, foreign companies are excluded from membership in Sematech, the consortium of U.S. firms whose objective is to upgrade the global competitiveness of the indigenous semiconductor equipment industry.  It is this kind of stance toward foreign companies that is one of the targets of R. Reich’s (1991) critique “Who is ‘Us’,”

In a related vein, even states with a generally liberal policy toward the entry of foreign firms into their jurisdictions may respond vigorously to prevent the foreign takeover either of an emblematic domestic firm or as part of a strategic conflict with another state.  For example, the Reagan administration effectively prevented the acquisition of Fairchild Semiconductor Corporation by Fujitsu, despite the fact that Fairchild was no longer an American company, having been acquired by the French company Schiumberger some years earlier.  More recently, British Airways was prevented from taking over USAir at least partly because of the ongoing dispute between two differentially regulated national airline industries.  But times can change.  An attempt by Ford to acquire the British Land Rover operations in the early 1980s was treated as a dire threat to national survival.  A few years later, Ford was able to acquire an equally emblematic U.K. company, Jaguar, with hardly a ripple of protest.  Similarly, in 1994, the last U.K. volume car producer, Rover, was acquired by the German company, BMW.

It is clear that the relationships between firms (especially TNCs) and states are exceedingly complex.  How best can they be summarized?  In Gordon’s view, “it is perhaps most useful … to view the relationship between multinationals and governments as both cooperative and competing, both supportive and conflictual.  They operate in a fully dialectical relationship, locked into unified but contradictory roles and positions, neither the one nor the other partner clearly or completely able to dominate” (1988, 61).

Pitelis (1991) proposes that the relationship between TNCs and nation-states should be analyzed within a rivalry and collusion framework, arguing that “the degree of rivalry and collusion will depend heavily on whether the relationship refers to TNCs’ own states or ‘host’ states, as well as whether the states in question are ‘strong’ or ‘weak,’ DCs or LDCs” (p. 142).  Whether or not a particular situation is one of rivalry or collusion, the essence of the TNC-state relationship is one of overt or covert bargaining (Doz 1986; Gabriel 1966; Kobrin 1987; Poynter 1985; Stopford and Strange 1991).  As Nixson points out, “it is this process that in large part determines the extent, nature, and distribution between the participating agents of the costs and benefits that arise as a result of direct foreign investment” (1988, 378).  Little progress has been made, however, in providing either a satisfactory conceptual or empirical basis for understanding these complex relational processes.  Stopford and Strange (1991, 134-36) are especially critical of the current literature on bargaining processes in the international relations and international business literature.  Part of the problem, of course, is that such bargaining is itself the complex outcome of a myriad of negotiating and bargaining processes within both firms and states as different interest groups and stakeholders themselves attempt to influence the larger-scale bargaining position.

Virtually all the relevant research into TNC-state bargaining relationships has focused on only one set of relationships: those between TNCs and host governments.  In such circumstances, the outcome will be a function of the interaction between three elements: (1) the relative demand by each party for resources which the other controls; (2) the constraints on each that affect the translation of potential bargaining power into control over resources; and (3) the negotiating status of the participants involved.  Figure 3 provides a summary of the major components.  It is important to emphasize that the nature of the bargaining process and

Figure 3

Elements of the Bargaining Relationship between TNCs and Host Countries

Source: based on  Dicken 1992a, Fig. 12.5; Kobrin 1987

of the outcome will probably differ according to which part of the production chain is involved.  The bargaining stakes on both sides will be much higher for the scarcer, high-value-adding functions than for the more ubiquitous functions.  Ultimately, however, as Gabriel states so succinctly,

The price which the receiving country will ultimately pay is a function of (1) the number of foreign firms independently competing for the investment opportunity; (2) the recognized measure of uniqueness of the foreign contribution (as against its possible provision by local entrepreneurship, public or private); (3) the perceived degree of domestic need for the contribution.  The terms the foreign investor will accept, on the other hand, depend on his [sic] general need for an investment outlet; (2) the attractiveness of the specific investment opportunity offered by the host country compared to similar or other opportunities in other countries; (3) the extent of prior commitment to the country concerned (e.g. an established market position). (Gabriel 1966, 114)

The problem, of course, is that the whole process is dynamic; the bargaining relationship changes over time.  In most studies of state-TNC bargaining the conventional wisdom is that of the so-called obsolescing bargain, in which, after the initial investment, the balance of bargaining power shifts from the TNC to the host government.  This is the situation found most commonly in natural resource-based investments in developing countries.  It is less certain, however, that such a relationship will apply in sectors in which technological change is rapid and/or where global integration of operations is the norm.  As Kobrin observes, in such circumstances, “the bargain will obsolesce slowly, if at all, and the relative power of MNCs may even increase over time” (1987, 636).  Even in the case of TNC-host country relationships the current state of research is far from adequate; in the case of bargaining between TNCs and home countries the literature is even sparser.  Clearly, we have yet another major research lacuna waiting to be filled.  The need is for careful empirical study of specific cases and for conceptualizations that move beyond the restrictive assumptions of existing bargaining theory.

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