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Foreign Subsidiaries and Their Conflicting Demands

The efforts of host governments in maintaining their national economies through policy interventions under influences such as taxation and request for joint ventures or buying power of state-owned companies restrict the freedom of MNEs in deploying economic resources as they do in their home country while making decisions that are consistent with the headquarters. This usually results in a constrained relationship between the headquarters, subsidiary managers, and the host government, causing various conflict areas.

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Conflicts in Areas of Operations

Policy intervention by the host government, such as taxation and legislation, creates a conflict in the regulatory ground rules for the MNE to compete in the host country, limiting their strategic freedom. There are industries that the government regards as critical to the national, economic, social, or political objectives. Therefore, the host government is inclined to demand the MNE’s ensure their decision-making is decentralized to autonomous subsidiaries (Hill & Hult, 2018). For example, Xaeto is a multinational enterprise that wants to build a new production facility in a foreign country. However, the prospective government has strict sales and export under its legislations that have to be met before giving permission.

Conflicts in Areas of Decision-making and Deployment of Resources

Host government interventions and policies sometimes influence the internal operations of multinational enterprises and their decision-making process, thus, limiting their managerial autonomy. In this case, host governments influence how strategy is formulated (Hill & Hult, 2018). For example, a subsidiary manager of Xaeto wants to execute a multinational strategy set by the headquarter. The host government insists that the subsidiary must include a local representative from the local government or a local company in the decision-making. This forces the MNE to share their strategic decision-making with a representative in host countries such that they end up sharing their competitive know-how with the local company.

Conflicts in Areas of Ownership

In some cases, conflicts arise when the host government makes it mandatory for the multinational enterprises to create joint ownership of their subsidiaries with the government or a local company. Sometimes this could be beneficial to the subsidiary manager when they need resources from the host government to grow. For example, suppose Xaeto is a multinational enterprise dependent on minerals in the host country to manufacture its products, in spite of joint ownership. In that case, it still enjoys the benefits of exploiting minerals in the host country.

Most of these conflicts usually put the MNEs in a situation of “adapt or leave” the host country. In dealing with these conflicts, some MNEs typically adapt to the infringements in exchange for the continued presence in the market or penetration to new areas. Therefore, they compromise their headquarter rationalization strategies (Hill & Hult, 2018). In situations where the local government policy forces the subsidiary managers to implement an autonomous strategy for each subsidiary, instead of one consistent strategy from their headquarters, they may decide to leave to other foreign countries with few restrictions.

Some MNEs usually take a counteractive response where they use their bargaining power to provide efficient technology, product differentiation, and economies of scale than the local government. For example, if Xaeto is a telecommunications subsidiary with advanced technology or economies of scale absent in the host country, the use that as bargaining power with the local government. In a situation where the local government shares the ownership with the subsidiary, which depends upon resources the host country’s resources, the local government usually has a high bargaining power (Hill & Hult, 2018). Additionally, counteractive responses act when the subsidiary decides to leave, the host government loses.

Reference

Hill C. W.L. & Hult G. T. M. (2018). International business: Competing in the global marketplace, 13th edition. McGraw-Hill Education.

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StudyCorgi. (2022, August 15). Foreign Subsidiaries and Their Conflicting Demands. Retrieved from https://studycorgi.com/foreign-subsidiaries-and-their-conflicting-demands/

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StudyCorgi. 2022. "Foreign Subsidiaries and Their Conflicting Demands." August 15, 2022. https://studycorgi.com/foreign-subsidiaries-and-their-conflicting-demands/.

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StudyCorgi. (2022) 'Foreign Subsidiaries and Their Conflicting Demands'. 15 August.

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