Eden and Molot (2002) argued that political bargaining can be a key challenge to a new entrant, especially when they are not the first entrant into a foreign market. The researchers apply the obsolescing bargain (OB) model to examine the bargaining behaviour between the host government and Multinational Corporation (MNC) both at the time of entry and over time. Traditionally these models focused on the relationship that was in place between national government and MNC, but with greater numbers of new firms entering the fray, such a relationship is no longer appropriate.
Rather, the relationship becomes multilateral to involve the host government, first mover and latecomers. Drawing on the concepts of liability of foreignness, transaction cost economics (TCE), multi-market competition and the resource-based view (RBV) of the firm, the researchers used a longitudinal case study of public policy decisions in the Canadian auto industry to test their assumptions.
The OB model explainsed that the changing nature of bargaining relations between a multinational enterprise (MNC) and host country government (HC) as a function of goals, resources and constraints. The model assumes that bargaining is a positive sum game such that both parties voluntarily bargain and achieve absolute gains. Relative gains, however, depend on relative bargaining power.
The outcome should favour the party with the stronger resources, higher issue salience, weaker constraints and greater coercive power. Because the MNC has a range of alternatives, the HC offers locational incentives to attract inward foreign direct investment (FDI). The bargain is, however, expected to become obsolete over time. Once the MNC has made sector-specific investments in the HC, these resources can be held hostage by an opportunistic HC government.
The longer the MNC is in the HC, the more likely it is that the government’s perception of the benefit–cost ratio offered by the MNC falls, particularly if the investment turns out to be highly profitable and there are large remittances to the foreign parent. At the same time, technological spillovers and economic development encourage the emergence of local competitors, so the HC becomes less dependent on the MNC over time. This suggested that the HC is likely to demand more from the MNC, causing the original bargain to obsolesce (Eden & Molot, 2002: 361).