In class we discussed Raymond Vernon and his theory of the obsolescing bargain model. This model provides a theoretical framework in which countries and MNCs go through an initial bargain stage. In this stage the MNCs are able to often negotiate positive terms for themselves and are able invest their foreign capital into the domestic markets of other countries. At the initial time of this dealing, MNCs often hold most of the bargaining power as they are in the position of power due to their mobility to invest in other countries if needed. However, once an MNC has decided to begin the process of foreign direct investment in another country, this capital will turn into sunk costs such as factories, farms and ports. Because these sunk costs are not as mobile as the MNCs, this can leave the MNC more vulnerable as they build a sort of reliance on their host nation. These sunk costs act as a sort of hostage allowing countries to raise taxes and tariffs which were once lowered to attract foreign direct investment and the bargaining power of the MNC obsolesces.
One piece of evidence supporting the Obsolescing bargain model is all the countries, especially in Latin America, who began nationalizing their natural resources and seizing the sunk costs of MNCs. However, weaker states who had foreign investment set up manufacturing infrastructure within their country had much worse results when attempting to nationalize industry. Even in countries like Chile where they successfully nationalized markets such as copper, the MNCs were able to dictate market conditions so that Chile had a hard time bringing their copper to market as MNCs controlled key marketing channels. Among other reasons, countries no longer believe the OBM to be an accurate model which is evident in the fact that most countries no longer restrict FDI. Susan Strange once said that “the only thing worse than being exploited by MNCs is not being exploited by MNCs” and that has certainly become the case. In present day bargaining usually takes place at a home/host state level so that bilateral investment agreements can ensure liberalized trade going forward. Export processing zones also show the lengths to which certain countries will go to attract foreign direct investment and MNCs. Although this model has obsolesced, it does highlight the downside of having no actual territory to call your own. Although mobility allows for the changing of environment when needed, it also means that MNCs are always ‘visitors’ and may have to be concerned about the safety of their sunk investments. One way around this is attempting to create trade agreements which are beneficial both to MNCs and their host states so that the hosts feel no reason to confiscate sunk capital.