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How do governments attempt to control foreign businesses operating within their borders?

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awlgeelady | Student, Undergraduate | Honors

Posted June 13, 2013 at 5:35 PM via web

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How do governments attempt to control foreign businesses operating within their borders?

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kipling2448 | (Level 1) Educator Emeritus

Posted June 13, 2013 at 7:23 PM (Answer #1)

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Governments use a number of practices to control foreign businesses operating within their borders, most of which are violations of the provisions of the World Trade Organization.  Some of these practices are legitimate efforts at regulating the foreign business consistent with regulations imposed on domestic companies, but others are devices used to protect domestic industry from foreign competition.

One method used by governments to control foreign businesses operating within their borders is to require that the foreign company employ a certain percentage of native workers, rather than importing workers from the foreign country.  For example, China has a huge labor force, for which the task of finding employment is very difficult.  It therefore likes to use Chinese laborers for projects it is performing in foreign countries, mainly in areas like Africa and the Middle East.  It therefore insists, when concluding contracts with foreign businesses or governments that Chinese workers will perform a high percentage of the work.  Conversely, it will limit the number of foreign workers allowed to work in China at the foreign-owned business.

Another method used to control foreign businesses is through a requirement inserted into contracts that the foreign business perform a certain percentage of the labor in that country, rather than allowing the foreign company to produce the product at home and then import the finished good into that country.  In other words, American companies competing with foreign companies to sell a certain product in a third country may have to agree to build a factory in the third country -- i.e., the customer's country -- as a requirement of being awarded the contract.  These "offsetting" arrangements are controversial in the United States, but are common practice in much of the world.

Another means of controlling foreign companies is to require they share sensitive information with the host government, for example, the design specifications for a highly-complex item or the chemicals used in producing certain materials.  Foreign companies are almost always reluctant to comply with that requirement, but often do so in order to win business and establish themselves in the new market.

Controlling foreign businesses can also involve imposing a burdensome regulatory regime on their operations.  By requiring the foreign companies to comply with strict, expensive, and bureaucratically-burdensome regulatory requirements, the government in question is assured of restricting the freedom of movement of the foreign company.  These regulatory requirements can involve the filing of reports, intrusive inspections of plants by host government officials, and unreasonable health and safety requirements (known in international trade parlance as "phyto-sanitary conditions).

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