Big Contracts: On the Verge of (Government) Troubles - Recommendations for MNEs in operating their business in the host country (Part 5 - Final)

Revisit from the previous parts

The previous parts of this paper have discussed changes on economic coordination leading to the evolution of economic governances. The paper also discussed disputed elements when a multinational enterprise operates in a host country. The final section of this paper will provide recommendations taken by multinational enterprises in devising strategies to cope with conflicting issues between multinational enterprise interests and the host government.

Foresight Steps

We recommend multinational enterprises to adopt foresight steps suggested by Daheim and Uerz (2006) in confronting issues on relations between MNEs and the host government. MNEs should apply four steps: identifying, projecting, anticipating and shaping issues associated with MNE operations in the host country. MNE can then characterize attributes of economic, social, political and environmental issues on each of these steps.

The identification step requires MNE to recognize issues both those in the pasts and developing issues in the current contexts. As disputes between MNE and the host government arise on economic/business, political, social and environmental dimensions, these factors must be taken into account. Past issues can be used as a learning process in which similarities with present issues and recurring issues in the pasts occur either in the exact forms or in different manifestations. These issues can enrich the MNE strategic vocabularies in anticipating long term outcomes that affect MNE operations once the strategic decisions have been made. On the other hand, developing issues are important for projecting the position of the MNE relative to the current and medium term contexts.

Some of the methods used to identify issues that may potentially lead into disputes between MNE and the host government can be in the form of literature studies, surveys or gathering information from experts. MNE can setup an internal organization dedicated to conduct activities associated with the host government – MNE relations. The organization does not necessarily restrict its activities in identifying issues but also can be extended to other steps (e.g. anticipating, projecting and shaping). Hence, the organization may be split into several divisions.

Four steps in confronting issues between MNE and the host government

Some examples on issues that can be identified by MNE are provided in Box 1.

Box 1. Some examples on identifying steps

Results from the identification activities above can be employed as inputs for the projection activities. Based on the identified issues, MNE can project future outlooks that affect MNE operations. Uncertainties that may affect MNE operations can be derived by analyzing results gathered from the identification step. MNE can utilize literature reviews to analyze patterns from past histories and then combined with existing issues, MNE can project future developments based on similarities between data on past histories and identified trends/issues. Another way to project future developments is by using expert recommendations. Identified issues gathered by MNE can be forwarded to futurists to obtain sound judgements on future developments that affect MNE operations. MNE can also conduct scenario exercises to portray future developments. MNE staffs involved in strategic analyses or business developments can participate in scenario exercises. The 2 by 2 matrix highlighting 2 attributes on each element (i.e economic, social, political and environmental issues) can be applied when conducting scenario exercises.

Results from the identification activities above can be employed as inputs for the projection activities. Based on the identified issues, MNE can project future outlooks that affect MNE operations. Uncertainties that may affect MNE operations can be derived by analyzing results gathered from the identification step. MNE can utilize literature reviews to analyze patterns from past histories and then combined with existing issues, MNE can project future developments based on similarities between data on past histories and identified trends/issues. Another way to project future developments is by using expert recommendations. Identified issues gathered by MNE can be forwarded to futurists to obtain sound judgements on future developments that affect MNE operations. MNE can also conduct scenario exercises to portray future developments. MNE staffs involved in strategic analyses or business developments can participate in scenario exercises. The 2 by 2 matrix highlighting 2 attributes on each element (i.e economic, social, political and environmental issues) can be applied when conducting scenario exercises.

Anticipating issues are a creative process. Results from projection activities are crucial to develop strategies and tactics for MNE to secure its operations in the host country. Anticipation should be followed with shaping activities where interactions with key individuals and organizations become essential in maintaining the MNE business. Anticipation requires measures to be taken. MNE should devise carefully its objectives, plans and actions prior to entering into the shaping step. Literature studies on international business particularly the ones which are related with government attitudes and policies towards MNEs must be taken into account. The inputs from projection activities must be well fitted into studies and reviews conducted by experts. Anticipating plans and strategies should reflect scenario writings exercised in the previous steps. In summary, results coming from previous steps must be incorporated in the anticipating steps. Some examples on anticipating issues are provided in Box 2.

Box 2. Anticipating activities

Once the anticipation activities have been formulated, MNE can start taking actions to implement these activities. The larger portion of shaping activities should be directed on interactions with stakeholders affecting MNE business operations. These include interactions with government officials, house representatives/policy makers and lobbyist group (i.e. NGO). The aim of the interaction should be targeted for obtaining prognosis while at the same time influencing these stakeholders to devise policies and actions that maintain the MNE interests. Interactions with stakeholders can also be conducted for obtaining information on the tracks/policies that will be developed by policy makers as well as those policies that will be promoted by lobbyist groups/NGOs to the policy makers. In such case, MNE will have the advantage of gaining information will further enrich inputs for the subsequent steps (i.e. projecting and anticipating steps).

The shaping step can also be done with proactive communications through various media channels. MNE can use newspapers to promote its social responsibility programs or expand its communication channels by applying electronic media for wider coverage. In addition, joining industry associations are very effective to secure the MNE operation particularly if other MNEs within the industry share similar concerns. MNE can use this channel to influence policy makers in devising policies in favour of the MNE.

References

Blomstrom, M., & Kokko, A. (1997). The Impact of Foreign Investment on Host Countries: A Review of the Empirical Evidence.

Dunning, J. (1997). Governments and the macro organization of economic activity: an historical and spatial perspective. Review of International Political Economy, 4(1), 42 - 86.

Krismantari, I. (2008, 29 March ). French Areva to invest $ 15 m for business expansion in Indonesia. Jakarta Post.

Big Contracts: On the Verge of (Government) Troubles - Elements of disputes between the host country and the MNE (Part 4)

Revisit from the previous parts

The previous parts of this paper discussed about the roles of the government in equating impacts of the MNE presence in the host country. The second part of this paper described the roles of the host government as the initiator, controller and the supervisor of the state as well as its roles as the owner of the state assets. The third part of the paper described the MNE position to the host economy and contributions given by the MNE to the host economy. Some instruments used by the MNE to preserve its presence were also delineated. In the fourth part of this paper, themes and causalities which are often disputed between the host government and the MNE will be described. To restrict the boundary of the discussion, a framework consisting of four themes: economic, social, political and environmental dimensions will be applied. We also restrict the discussion on big contracts such as those in the oil and gas concessions and those in mining operations. Although we can extend these themes with technology issues, we will leave this matter since we find that technology issues rarely lead to a dispute. Most often we find that technology issues are connected with state security issues on merger and acquisition cases.

The analysis framework on big contract issues

Economic/business issues

Economic and business issues are the most common themes contributing to the dispute between the MNE and the government. Multinational enterprises seeking for new markets beyond their home country will confront with the government interests for improving its economy. On big contracts, the government as the owner of the state tries to secure its revenues while at the same time allows local enterprises to participate on big energy contracts in order to provide them opportunities to progress, thus allowing more economic independencies in the future.

The economic/business issues cycle

Big contracts involving resource extractions are carried out to render profits both for MNE and the host country. Based on the capacity of the stored reserve and the estimated cost spent for development and production activities, the government and the MNE can project the profit return once a big contract undergoes into the production cycle. Cost estimated by both sides may have been different due to different techniques in calculating the reserve as well as different assumptions applied in estimating cost associated with development and production activities. Different interpretations, techniques and assumptions on costs spent for these activities often culminate in tensions leading to lengthy negotiation process. Some of the negotiation processes even end with contract terminations.

Once the projected financial return is on hand, the MNE uses its bargaining power to reduce development and production costs especially if the scheme is under the so called production contract scheme. The government also has its interests to speed up the development process in order to gain the return in shorter time. The government can use its role as the regulator to issue instruments favouring the MNE. Incentives, tax breaks and other fiscal instruments can be formulated to ensure the completion of the project and to guarantee the output within the projected target. The amount of incentives and tax breaks may be argued since it is the MNE interests to reduce the cost as much as possible while maintaining the projected financial return.

Economic uncertainties perhaps make large contribution to disputes between the MNE and the host government on big resource contracts. Financial crisis making either the government or the MNE halt development and production activities is not uncommon. To the MNE, investments that have been made and committed need to be returned. In contract such as the development of a power plant in which MNE is involved in development and production cycles and sells the power to the government, financial crisis often leads to the rearrangement of financial terms. On conditions in which the power price is subsidized, the government may have insufficient fund to purchase the agreeable price as a result of state deficits. The rise of energy prices can also stimulate the rearrangement of financial terms between the two parties. Both sides try to set assumptions that may disadvantage the other side.

Observations from most cases suggest that disputes on the economic and business issues are relatively moderate unless financial tumbles occur. However, as often seen in countries having abundant resources with political instabilities and changes, the strenuous dispute often stems from political dimensions.

Political issues

While the rationales on business and economic issues leading to the dispute between MNE and the host government are based on economic objectives, the dispute coming from political issues is rather complicated since the causalities behind them can be either hidden or directly identified. Unlike disputes on the other issues, disputes stemmed from political dimensions may often permeate into economic/business, environmental, social and even technological dimension.

It is noted that changes on political system create the most arduous disputes between the MNE and the government. The political system changes often bring new attitudes from the government in viewing the role of MNE to the state economy. New political structure often carries new ideology, hence restructure the way a state conducts its economic activities. Mainly in developing countries, new political system often leads to the restructuring of the economic and business institutions. The government as the controller, regulator and supervisor as well as the entity that represent the state assets will maximize these roles to recuperate the loss they believe coming from the previous economic regimes.

Political issues that affect MNE operation

Changes on the government and public representatives (e.g. parliament, house of representative) are somewhere between modest and moderate as long as they will not change the political system of the country. New government often promotes new ideas, develops new policies and establishes new institutions which may affect MNE operations in the long run. The establishment of the business competition supervisory agency in Indonesia can be taken as an example in which its presence gives effects to business practices in the telecommunication industry.

Changes on public representatives may also give impacts to the MNE operation. On the state system where the parliament is responsible for developing and formalizing bills and laws, rotations on parliament personnel may bring new dimensions to the business practices affecting the MNE operation. MNE must identify the majority composition in the parliament particularly when the parliamentary election is near. Changes on the parliament majority may lead to changes on laws and bills addressing business practices. It is often found that changes on the parliament as a result of the election bring disadvantage to the MNE particularly if the newly elected majority was the opposition of the old parliament regime.

The third factor that may lead to the dispute between MNE and the host government interests is the shift attitudes from public, government or the parliament. It is the factor that emanates from various dimensions. Pressures from international institutions or other countries may significantly change the host government attitude on MNE. On some occasions, diplomatic tensions may also suppress the MNE operation. Nationalization programs are promoted not because the host government intends to regain the benefit enjoyed by the MNE, but sometimes due to sentiment reactions to the country where the MNE comes from. On the local concern, sentiment reactions to the MNE emanate from local industries as they cannot compete with the MNEs. For some big energy contracts where MNE builds an exclusive complex for their operations in a remote region, social concerns are elevated to address social inequalities between people living in the MNE compound and their surroundings.

Social issues

Social and environmental issues commonly occur at local levels but these do not mean that the issues will elevate at the national level. On social issues, big contracts often create issues emanating from social discrepancies between MNE and local residents. When big contracts are orchestrated on undeveloped areas, a multinational enterprise often builds a complex for people working for the contract during the construction, development and production cycles. On the construction and development program, construction concretes and heavy machineries often introduce new perceptions for local residents. On these stages, local residents may find their areas are about to be invaded by a new world. Local residents are about to find that their social living will be distracted by the world of concretes and projects that create two different worlds. Their norms and cultures may be obstructed by new comer cultures. Consequently, rejections on the contract start to emerge during these phases.

Social issues on big contracts

When the contract progresses into production cycles, a multinational enterprise has settled its operations. The complex built for the contract is isolated from its surrounding. People living inside the complex are often equipped with facilities and luxuries unavailable in the local areas. Often, they do not assimilate with local residents because their activities are fully absorbed for the success of the project. Even for daily needs, such as foods, the complex has made an arrangement to cater the people in the complex with a designated catering service. These practices are not expected by local residents where they are used to interact to each other for daily needs. Often, these facilities stimulate envy attitudes to local residents. To make it worst, the isolated complex is well guarded creating a different space, different cultures and different worlds between activities inside the complex and activities outside the complex. Sometimes, the central government assists the multinational enterprise in securing the compound by sending troops to strengthen the security arsenal. Thus, instead of the conflict between the host government and the multinational enterprise, big contracts on remote areas create conflicts between the local government and the multinational enterprise.

At this stage, the suspicion alleged by the local resident during the construction and development cycles elevates. To local residents, the complex has created and introduced a culture that is alien to their daily practices. With isolated interactions between those living inside the complex and those living outside the complex, local residents feel that they are treated differently. Local residents feel that they are being offended not because of the activities of the contract but because the social living inside the complex is different from their norms and the people inside the complex has closed the door of interactions in which local residents are used to practice with each others.

Consequently social unrests evolve. It is not uncommon to find trespassing violations, rampant aggressions, stealing some of materials within the complex as well as vandalisms by local residents on facilities in the complex as well as to people living inside the complex. Therefore, a multinational enterprise must devise a strategy to cope with these issues to ensure their operation.

Environmental issues

Environmental issues relate in a great deal with the so called “externalities” in the economic studies. Externalities are impacts resulted from business activities carried out by the first party to the third party which does not have relationships to each other. Environmental issues are mostly found in the form of negative externalities in which the third party must bear the cost and impacts caused by activities carried out by the first party. At the local scale, externalities can be caused by air pollution emanated from MNE business operations. The act may create health problems to local residents and the cost born by the third party (local residents) is often uncovered by the first party.

Negative externalities in the form of waste pollutions can also occur when the contract involves material processing such as processing activities in the mining, petrochemical and refinery industries. Processing materials into higher added value products requires chemical materials that will be disposed once a cycle of process completes. These materials are often disposed to rivers and lands. In the short or long term, disposing toxic materials will bring ecological impacts to the surrounding areas. Toxic materials disposed to the river will bring health problems to local residents especially if the water on the river will be used for daily consumptions. Wasting or burying hazardous materials to the land can endanger the ecology of the local environment since disposed hazardous materials may contaminate the artesian water flowing under the ground and affect the habitats living within the area.

Disputes on environmental issues originate from externalities

Impacts in the long term can also originate from deforestation. Big contracts such as in the mining concessions often require land clearances where tropical forests reside. Although the clearances may not have direct impacts, ecological impacts are often detected in the incoming years. Deforestation affects climate changes and often contributes to global warming. Deforestation also reduces the soil ability to absorb the rainfall which in turn will create potential landslides not only within the contract area but also to its surroundings.

Disputes on environmental issues often start between local residents and a multinational enterprise. But as the dispute progresses and the environment impacts caused by MNE operations threaten the state environment, the host (central) government often interferes and uses its roles as the owner of the state asset to secure the state interests in preserving the national environment. While efforts offered by a multinational enterprise to substitute the cost of externalities may be worthwhile, it is often noted that the long term impacts of the MNE operation affecting the environment has only emerged in the incoming decades. Thus, the total cost born to the multinational enterprise may not equal to the impact it causes in the future.

Big Contracts: On the Verge of (Government) Troubles - Positioning multinational enterprise in the global economy (Part 3)

Revisit from the previous parts

The previous parts of this paper highlight issues on big contracts invested in a host country as experienced by multi national enterprises. Cases spanning from oil, gas and coal concessions are always connected to government terms and conditions as big contracts contribute significantly to the state revenue while at the same time pose risks on environmental as well as resource depletion issues originating from loose exploitation practices.

Big contracts are inseparable from changes on economic activities. Firms were used to operate their end to end production alone. Resources are extracted and processed on a single location. Firms also managed to sell their processed resources to buyers on the market without intermediaries. Nowadays with surging demands on energy products, big contracts are more specialized on resource extractions, resource developments, resource processing and resource distributions.

Changes on economic activities emanating from the division of labour have created separations on business activities among those involved in the extraction of raw materials, those supplying the production inputs, those processing the raw materials into higher value products and those distributing and selling the end products to the customer. As the economy of a geographical area progresses, surging demand forces firms to find additional sources to secure supplies. Resource depletion becomes a reason to expand beyond home territories. Competition has also driven firms to seek for new markets, new competitive sources and competitive labour rates as well as advance technologies to stay in the business.

Concurrently, finding new competitive sources beyond the home country has benefited both multinational enterprises and the host country. To the multi national enterprises, new markets provide a new space to maintain the business. New resources and new markets also put a multinational enterprise in a better position in the industry vis a vis to its competitors. To give a perspective, on big energy projects, the discovery of oil reserve on the host economy often raises the stock value of the multinational enterprise. Investors owning the multinational enterprise shares give credit to the MNE efforts by holding their shares. Consequently, the credit given by the shareholders creates confidence to other investors in buying the MNE shares rather than to choose on the competitor’s shares. On the other side, to the host country, foreign investment flows secure the host country economic growth while at the same time upgrade the investment status of the host country. We often see rating upgrades on a host country from institutions such as Standard & Poor when foreign investments flock into this country. However, as discussed in the previous parts of this paper, the host country must be aware that exposing access to international markets should be accompanied by providing benefits to all economic actors as well as to the society. Consequently, identifying, devising and deploying suitable policies to the favour of the state interests are essential to the sustainability of the state economy.

While we have seen the roles of the government in balancing the impacts of foreign investments, in the third part of this paper, we will see rationales of the MNE expansion at the global scale. The paper also discusses the positive roles of the MNE in the state economy and the way MNE uses various channels to preserve its global operations.

The rationales of MNE’s expansion

Perhaps there are no firms that are established for searching no profits. Firm is set deliberately as an effort to attain economic objectives held by actors through institutionalizing the division of labour. By setting up a firm, a line of business is defined, economic objectives are set, profits are sought and economic activities aiming to get profits are institutionalized and operated.

Market seeking activities is the underlying activities of a firm to attain its economic objectives. A firm seeks potential markets through assessing the demand it can provide as well as the supply it can manage to source. To do so, firms incorporate different activities based on the division of labour to produce goods or provide services in a single location. Once the demand and supply reaches equilibrium, a firm can extend its coverage in attaining its objectives by providing goods or services on different places.

Market is potentially created when new demand exists. Potential market can be viewed as an opportunity for firms to gain wealth and to sustain their operations. Firms which are able to meet new demands look for supplies to start producing goods or services. Consequently, other firms are created to supply demands of the firms which produce end products. As a result of market expansion, suppliers must expand to potential markets where buyers exist. We can see the example on the Indonesian power development projects. The plan of the Indonesian state power company to provide 10,000 MW power by 2009 resulted in power plant development projects which require electrical devices to be installed for distribution and transmission systems. The demands on electrical components were seen by Areva, a French based company, as an opportunity to expand their business operation. Accordingly, the company invested over $ 15 million in the country for fulfilling the demands on electrical devices (Krismantari, 2008).

Market seeking activities can also occur when competition intensifies. Firms doing the same business look for similar markets and confront each other to meet the demand. When the ratio of the profit per number of good to the production cost per number of good start to decline, the total industry outputs show insufficient margins to cover business operations and to gain the expected profits. Firms must find a way to repel competition either through offering cost advantages, simplifying production process, innovating or expanding to new markets.

Competition may force firms to produce competitive outputs through applying cost advantage strategy. Exploiting new locations which provide input sources that are competitive enough to reduce costs is often sought by a firm to stay in the business. New territories possessing abundant resources are explored and firms interested in seeking new resources can enter the host economy through direct investments or joint ventures. Firms involved in resource seeking activities commonly invest outside their home economies to gain cost advantages. Firms may also involve in resource seeking activities beyond their home economies due to scarce resources in their home country. Despite the two rationales, the wisdom of economic principles in gaining the maximum outputs through minimizing the input costs remains as the tenet of a firm in seeking resources beyond its home country.

Cost advantages can also be achieved by reducing operational costs. Specifically, firms engaged in labour intensive industries can expand their operation overseas to reduce their operational costs by using foreign labours with competitive rates. In particular when the home country labours are considered to be uncompetitive enough to the overall cost, firms start seeking new territories to move its production activities to recover their cost advantage strategy. While some would argue that a significant number of investments should be placed beforehand for catching the learning curve, the overall cost reduction in the long term is justifiable enough for a firm to expand overseas.

Differentiation on cost and to the large extent on product quality can also be achieved through using new technologies. Firms expand overseas to employ advanced technologies possessed by the host country. Firms can invest directly or venture with other companies to acquire better production systems through using new technology. By adopting new technology, a firm can produce better product qualities which are essential in differentiating its outputs to its competitors. A firm can also acquire new technology in order to speed up the production process, hence reaping the economies of scale. Acquiring new technology can significantly reduce both labour and production costs, thus increases the productivity of a firm. In some cases, innovative products require different processing technology unavailable in the home country. Firms can expand beyond their home economies to acquire technology permitting them to produce new innovative products.

All these rationales have conditioned a multinational enterprise to justify the need to expand beyond their home territories. The opportunity to seek for market, resource, skill and technological advantages is a long term perspective for the firm to stay competitive, while at the same time it intersects with the host economy interest to secure its economic growth.

MNE roles in the host economy

Although a multinational enterprise seems to be opportune enough to expand its operation beyond its home country, comparative observations suggest that the MNE investments can benefit the state economy in several ways.

The expansion of multinational enterprises brings capital flows to the state. Multinational enterprises need assets for their operations. In setting up their business, multinational enterprises need both physical and non physical capitals. Such needs are concretized by injecting financial capitals to fund MNE operations. Accordingly, the more the investment flows to the state, the more the confidence gained by the state on its investment status. Hence, not only the state can gain confidence on its monetary status but investment flows will also raise the confidence to invest in the host economy.

Another positive effect of the multinational enterprise presence in the state economy is the spillover effects. MNEs bring new skills both in management and technology during their operations. Best practice methods enable local workers to adopt new skills and learn new technology allowing them to be highly knowledgeable on the production and processing technology owned by multinational enterprises. Spillover effects will result in knowledge transfers if the labour mobility occurs. The move of employees working at multinational enterprises to local firms brings knowledge transfers which are essential in improving local firm capabilities. Multinational enterprises can also improve the quality of local products by providing feedbacks to local suppliers. In addition, MNEs can also educate customers and buyers in embracing sophisticated products (Blomstrom & Kokko, 1997). Consequently, spillover effects demonstrated by multinational enterprises lead to the improvement of product qualities and to the demand of more sophisticated products.

MNEs and the way they protect their operations

Despite the expansion rationales, multi national enterprises need to secure their operations in the host economies. Multinational enterprises invest in a large amount of money to gain profits. These investments have been committed and realized because multinational enterprises have projected the financial return in the long term. Multinational enterprises secure and commit their investments because their assessments on political, social and economical risks not only permit them to operate their business in the host economy but also secure their projected returns properly.

However, risks are unavoidable. Changes on the global economy, political transitions as well as social movements may instantaneously turn the table overnight. Large investments may not gain financial returns as projected by multinational enterprises due to unforeseen circumstances. To reduce these risks, multinational enterprises need instruments that can protect their investments in the long term. Operating in “mutual benefit agreements” with the state is one way to secure multinational enterprise interests in the host country. On a big contract, multinational enterprises share their expectations in securing their operations to the state representative and contribute some of the benefits through various means. On oil concessions, the reciprocal interests by both the government and a multinational enterprise are legalized in production sharing contract or technical assistance contract terms. Often, multinational enterprises engage in corporate social responsibility to demonstrate their good will in social development issues. On other occasion, multinational enterprises are conditioned to divest their shares to local governments or they initiate community development programs.

International market mechanism permitting asset mobilizations is another instrument used by multinational enterprises to secure their investments. In sectors involving labour intensive industries such as footwear and textile industries where physical assets are easily deployed and business operations are easily imitated by not so advanced countries, multinational enterprises can use asset mobilization instruments to move their operations to another host country. With such mobility, MNEs have the bargaining power to preserve their operations in the existing host economy by reasoning the incentive advantages offered by other countries.

International agreement is often utilized by MNE to secure their operations. Bilateral agreements between two governments often involve multinational enterprises. MNEs can use their home government roles as the owner and the protector of the state asset to secure their interests. Extension on gas contracts are often initiated from the bilateral talks between two countries followed by signing a memorandum of understanding tying the two governments in supplying and buying natural gas over a certain period of time. Prior to these talks, some of the multinational enterprises have often expressed their interests to their respective government in securing their existing operation in the host country.

The last resort often sought by multinational enterprises in securing their operations is through the use of arbitration mechanisms. In such case, multinational enterprises expect for compensation of expenses and other collateral costs spent during their operations. Multinational enterprises can litigate inconsistent regulations enacted to them. The nationalization program in Venezuela forcing ExxonMobil to use arbitration mechanism exemplifies the case. Multinational enterprises can also seek justice through arbitration when they perceive their interests under jeopardy. Big contracts are often exposed to international arbitration settlements because of different perceptions and interests held by both the host government and a multinational enterprise. As an example, Newmont threatened to use arbitration in securing their interests in Indonesia as different perceptions over divestment processes between the company and the government occurred. The Karaha Bodas case perhaps represents one of the most elusive cases in Indonesia on the use of arbitration. The company charged the Indonesian government because its rights to develop a geothermal plant were postponed due to the Asian financial crisis. From most cases, it is noted that the stake of using arbitration is high as there is no guarantee that the process will be resolved quickly. Using arbitration to settle issues may pose some risks to the multinational enterprise. The multinational enterprise image will be exposed and the trust from other countries to grant investment rights to the MNE may lose. However, the reciprocal condition applies. The host country that persistently settles foreign investment issues through international arbitration may lose its attractiveness in luring foreign investors.