Academic journal article Management International Review

Controlling the Foreign Agent: How Governments Deal with Multinationals in a Transition Economy (1)

Academic journal article Management International Review

Controlling the Foreign Agent: How Governments Deal with Multinationals in a Transition Economy (1)

Article excerpt


* Employing a principal-agent framework, this article examines the interaction between the state and the multinational enterprises (MNEs) that invested in China's transition economy. It accomplishes this by drawing on and extending Harwit's (1995) three joint venture cases of Beijing Jeep, Shanghai Volkswagen, and Guangzhou Peugeot in the automobile industry.

Key Results

* Significant conflict of interest was found between the state and the MNEs. The relationship was also moderated by local governments acting as agents of the state, resulting in an "agents controlling agents" scenario.

A contract is only a truce, and very precarious, it suspends hostilities only for a time.--Emile Durkheim (1933, p. 365)

Since principals in modern organizations have to delegate certain tasks to agents and agents may have an inherent conflict of interest with principals, how to control agents has become a major issue for organizational practitioners and researchers (Jensen/Meckling 1976). In this article I extend the work on organizational control into an important but overlooked area, namely, how the state controls multinational enterprises (MNEs) as foreign agents. While government-MNE interaction has been studied extensively in the international business literature (Behrman/Grosse 1990, Brewer 1992), very few studies have examined such an interaction in a transition economy such as China.

In light of China's recent rise as a major recipient country of foreign direct investment (second only to the United States in the 1990s) and the Chinese government's manifest interest in maintaining strong control over these activities, it is important to investigate (1) how government agencies at different levels control the MNEs as foreign agents, and (2) how effective these activities are. Answers to these questions will not only be of theoretical significance to the literature on organizational control, but will also help international business practitioners gain more knowledge about the dynamics surrounding MNE activities in transition economies (Peng 2000, Peng/Lu/Shenkar/Wang 2001). This article draws on and extends Harwit's (1995) three case studies of joint ventures in the automobile industry, Beijing Jeep, Shanghai Volkswagen, and Guangzhou Peugeot, to critically examine the interaction between the Chinese state and MNEs. From a principal-agent perspective, I focus on the conflict of interest between the state and the MNEs, as well as the dynamics of this relationship moderated by local governments acting as "agents of the state."

The State as an Organization

A Central Assumption

A central assumption of this article is that the state can be regarded as an "organization" interested in maintaining control over its agents. "The state, as a center for political control, a prop for the property system, and locus of struggle, is a particular kind of organization" (Collins 1988, p. 450). There is, in fact, a popular observation that the Chinese economy, especially during the pre-reform period (1949-1978), can be regarded as "China, Inc." (Macleod 1988). Collins (1988, p. 487) suggested that the socialist state can be regarded as a "superorganization." In contrast to market economies, planned economies feature the comprehensive use of economic planning. A national plan is developed by the central government and then is incrementally decomposed into a set of targets and orders for specific local units. Such a description parallels with the workings of the typical, large Western corporation in which a strategic plan coordinates and controls the operations of various subordinate units (Peng 1996). Therefore, at a first glance the assumption to treat the Chinese state as an organization appears to be useful.

At a more theoretical level, the "state-as-a-firm" theory by Auster and Silver (1979) also justifies the assumption of treating the state as an organization. …

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