Merging interests: when domestic firms shape FDI policy

In: Business and public policy

Abstract

Why do governments open their economies to multinational enterprises (MNEs)? Some argue democratic forces promote this openness, but many citizen groups view multinational business with suspicion. Using quantitative and qualitative analysis, Bauerle Danzman demonstrates how large domestic firms push to liberalize foreign direct investment (FDI) policies to ameliorate financing constraints, often to the detriment of smaller competitors. MNE entry comes with substantial risks, such as higher labour costs and increased productivity pressures, so well-connected domestic firms will prefer to limit access to local markets when the costs of debt financing are relatively low. However, when local environments make debt financing increasingly expensive, firms will be more willing to dismantle restrictive investment policies so that they may overcome liquidity constraints with equity financing from abroad. Bauerle Danzman includes comparative analysis of Malaysia and Indonesia from 1965-2016 to illustrate how governments undertake investment policy reform, and to indicate the interest groups that influence the outcomes of these regulatory changes.

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Merging interests: when domestic firms shape FDI policy

In: Business and public policy

Danzman, Sarah Bauerle

Danzman, Sarah Bauerle

Abstract

"We have no horror of FOREIGN CAPITAL - if subjected to (domestic) management (Niles' Weekly Register, cited in Wilkins, 1989: 85) We are always prepared to provide the necessary security to foreign capital on the condition that its profits be regulated by law [emphasis added] (Mustafa Kemal Atatürk, quoted in Lipson 1985, 72). In June 2016, the Indian government announced sweeping changes to its foreign investment laws that eliminated government approval processes for most sectors and substantially increased the maximum foreign equity allowed for firms in several sectors, including retail, food, defense, airlines, broadcasting, and pharmaceuticals. In response, several Indian trade unions voiced their strong disapproval. Unions representing government employees announced an indefinite strike.1 Far-left and far-right affiliated trade unions issued strong condemnations of the proposed liberalizations, arguing such moves would not increase employment but would lead to increased labor law violations and push small firms out of business.2 In contrast to labor unions, business groups reacted positively to investment policy changes."

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