October 28, 2019In the process of writing about the NBA/Hong Kong episode two weeks ago, it dawned on me that this may be emblematic of a paradigm shift for multinational companies that will keep them awake at night. It will not be the first shift, and it won’t be the last; but since it’s becoming an increasingly common feature of doing business in other countries with other cultures, it deserves a comment.
Efforts of companies from developed countries to successfully do business in developing countries are hardly new. They date back to the era of imperialism and colonialism when host countries had very little say in who came in and what they did. After World War II, waves of independence of former colonies, global economic growth, and market integration changed things significantly. At first, incoming investment and trade were both welcomed and resented—welcomed for providing growth and development (not to mention bribes to corrupt officials) and resented as reminders of developing countries’ continuing dependence on rich Western economies.
Global economic integration and the development of cross-border supply chains helped developing countries understand that perhaps they had more market power than they had thought and that foreign companies did not have to simply be accepted on their terms but could be required to accept the host country’s terms. In some cases, “host country terms” amounted to little more than extortion, but smart governments started to think about how they could ensure inbound foreign direct investment as well as trade worked to the benefit of their people and not just to the benefit of the foreign company.
In smart developing countries, that came to mean demanding incorporation into a company’s supply chain—building all or part of the product in the host country—to help them move up the value-added chain and create manufacturing industries and jobs for their people. Boeing encountered this early. “You want us to buy your planes? You have to build part of it here.” And that meant, inevitably, the transfer of technology and know-how to the developing country. In some cases, notably Japan, the Asian Tigers (Hong Kong, Singapore, South Korea, and Taiwan), and now China, this has presented multinational companies with a classic dilemma—choosing between short-term profits and long-term competition. The opportunities to make money in the short term, particularly in large countries, are significant, but all too often, the intent of the host country is to obtain technology and know-how and ultimately develop a domestic capability that can compete with the foreign company. This is sort of a modern version of Lenin’s dictum—the capitalists will sell us the rope we will use to hang them.
Companies have dealt with this dilemma in different ways. Some have eagerly gone for the money, leaving future CEOs to worry about the consequences. Others have proceeded more cautiously. All will tell you they are doing a good job of protecting their intellectual property. Sometimes that’s true. More often, it is not, but it is more a case of self-deception than it is outright lying. This has become a major issue in our trade negotiations with China, but that is not the only place it has been an issue, and there will certainly be more countries posing the same dilemma in the future.
However, as companies learn how to navigate through that, it appears they are now running into a new dilemma illustrated by the NBA case—moral hazard. The American public has long expected “their” companies not only to carry the American flag overseas but to articulate American values as well—to take stands against repression, injustice, or corruption and not to cooperate with governments that engage in such practices. Our laws reflect this in prohibitions against imports of products made with prison or slave labor and against cooperating with the Arab boycott of Israel, and different U.S. administrations have sanctioned countries over their human rights practices and have rallied other countries to do the same. Sanctions are government actions, but companies were pulled into the fight because they must comply with the sanctions. Sometimes companies have led, for example, against apartheid in South Africa via the Sullivan Principles, which not only laid out a set of voluntary principles for doing business in South Africa but included a process for keeping track of what companies were actually doing once they had signed up.
The new development is that miscreant countries are fighting back, using nationalism to mobilize their populations to join in, and using their market power to threaten companies that oppose them. Thus, defense of the Hong Kong protesters is offensive to millions of Chinese encouraged by their government to push back, and, inevitably, to boycott products from “offending” foreign companies. This puts companies in the unenviable position of annoying large numbers of people no matter what they do, which led to my suggestion that they simply do what they think is right and endure the consequences.
Regardless of what they do, though, it is a sign that doing business in the world is getting increasingly complicated as companies that simply want to be left alone to compete find themselves dragged into political battles far outside their comfort zones.
William Reinsch holds the Scholl Chair in International Business at the Center for Strategic and International Studies in Washington, D.C.
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