Bargaining with Multinationals: Why State Capacity Matters

Dominant models of bargaining between states and multinational corporations (MNCs) have widely held that bargaining relations, especially in high-technology manufacturing, have changed from confrontational to cooperative. It is consequently argued that there is little formal entry bargaining among these actors. However, there are three primary weaknesses in this literature. First, the understanding of outcomes is limited to the terms of investment agreements. This static view ignores the dynamics of bargaining processes and decisions not to invest, which also deserve explanation. Second, it is MNC-centric, ignoring state's privileged role in relation to the governance of entry bargaining in domestic policy-making processes. Third, it views state as a monolithic entity, ignoring the bargaining that occurs inside states. To redress these issues, this article offers a state-centric bargaining model. It identifies administrative and institutional capacity as two critical components of state capacity. It chooses the entry bargaining from 2005, when Hyundai Motors Corporation considered establishing a USD1.5 billion car-manufacturing plant in Turkey. It shows that state capacity in the governance of a domestic policy-making process affects the outcome of entry bargaining: When state capacity is weak, an MNC's decision not to invest is a more likely outcome.