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
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.
