Entry Negotiations with Host Governments

In closing this chapter, it is fitting to make some brief comments on entry negotiations with host governments.

Increasingly, the developing countries are adopting comprehensive laws and regulations on foreign investment that cover application procedures for investment authorization, screening criteria for the approval of investment applications, obligations imposed on approved investments, benefits availa­ble to approved investments, provisions for the settlement of investment disputes, and measures to ensure compliance with investment laws and regulations. Investors should investigate the investment regulations of each target country, because they are idiosyncratic to each country.

The regulation of foreign investment is not confined to the developing countries. For many years, Japan was notorious in its restriction of invest­ment entry, but now it authorizes 100 percent foreign ownership in all but four industries. Still, all foreign investment proposals (including expansion of existing investments) and licensing agreements remain subject to govern­ment approval, even though it is automatic except for acquisitions.²³

The screening criteria of host countries are seldom precise, and so officials have considerable latitude in applying them to a specific investment proposal. Accordingly, entry negotiations involve much give and take be-tween investors and government officials. Hence the art of negotiating with host governments has become very important to foreign investors. To be effective in entry negotiations, investors need to know the screening criteria used by officials and the way in which they are used to evaluate investment proposals. More and more, governments are using some variant of social cost/benefit analysis that is strikingly different from the conventional cash flow analysis used by investors.²⁴ Unless an investor understands how a host government appraises investment proposals, he is ill prepared to design his initial proposal so as to enhance its acceptance and to carry on later negotiations.

One thing is certain: the investor’s bargaining power is greatest before he enters a country, because after entry his project becomes hostage to host government policy. It is all the more important, therefore, that the investor negotiate satisfactory terms at the outset.

Source: Root Franklin R. (1998), Entry Strategies for International Markets, Jossey-Bass; 2nd edition.