At first glance, policy competition would seem to be to the advantage of MNEs as governments are seeking to reshape policies to please multinational firms
National governments across the world compete fiercely to attract investment from multinational enterprises (MNEs) because MNEs are seen as a source of new technologies and employment, as well as drivers of competitiveness and efficiency. A key tool in this battle to attract foreign firms is the development of policies that ease cross-border transactions and provide firms with a secure and stable investment environment. Perhaps most emblematic of this trend has been the almost 2,000 international investment agreements that have been signed in the past 20 years to promote cross-border investments and to provide international legal protection to firms operating in foreign countries.
At first glance, policy competition would seem to be to the advantage of MNEs as governments are seeking to reshape policies to please multinational firms. Even if this were the case, it does mean that MNEs face a complex and shifting tapestry of investment policies across the world that can be difficult to fully comprehend and integrate into decision-making. Moreover, competition in many cases does not guarantee that governments will shy away from making changes in the policy environment that adversely affect MNEs. Indeed, governments have shown a willingness to modify or overturn policies when doing so has been deemed necessary to meet domestic political, economic, social or environmental objectives. Such changes are often referred to as “policy uncertainty” or “political risk”, and they are an unavoidable part of doing business abroad.
[This research paper has been reproduced with permission of the authors, professors of IE Business School, Spain http://www.ie.edu/]