Data shows that the number of investments between Multinational Organisations (MNCs) and foreign governments has increased significantly in the last 20 years, but what happens when disputes arise between the two parties? Research by Davide Ravasi, Caterina Moschieri and Quy Huy published in the Journal of Management Studies, explores how events evolve from the inception of a dispute between an MNC and a host government to its eventual resolution, whether favourable or not to the MNC.
Cross-border and international investment for an MNC can be extremely valuable, and support an organisation to improve its performance by managing the institutional and societal context through connections with political actors, both local and national. The authors note that “These connections mitigate various political and contractual hazards by legitimating the foreign firm with local stakeholders and facilitating access to valuable resources and information.”
The problem arises when, over time, the relationship between the MNC and the political authorities deteriorates, MNCs lose their bargaining power and governments may attempt to renegotiate the terms which can reduce the profitability of the venture. This can lead to deleterious legal disputes or even the partial or total expropriation of the MNC’s operations in the relevant country.
The study by Davide and his co-authors examines what puts some MNCs in a better position than others to deal with government hostility, once it arises. They studied eight MNCs - Repsol, Shell and Telefonica, to name a few - involved in disputes with foreign governments in Latin America over 11 years. In some of these cases, the firms eventually left the country and in others, they continued operations, but in a diminished form.
The study revealed that: “differences in MNCs’ local ties and social investments shaped the timeliness and effectiveness of their interpretations of government hostility, and ultimately their capacity to mobilize local and international support.”