Declining risk, the advent of liberalization, and state-multinational bargaining: Japanese automobile investments in India, Indonesia, and Malaysia

Nation-states and multinational corporations are the principal agents that comprise the international political economy. Yet, the pattern of bargaining between them has been severely understudied by international relations theorists. This study examines the evolution of risk during the life cycle of an investment project. During the early phase of an investment in an underdeveloped sector, market risks are unusually high. Most foreign firms are reluctant to enter an environment of high market risks without concessional guarantees. State protection for their products was sought by the foreign manufacturers so as to minimize risks and maximize their returns. Since host countries were more dependent on foreign capital during this initial phase, MNCs were able to negotiate more favorable terms.; However, once the projects reached a level of development, market risks began to dissipate. Consequently, host economies became attractive to would-be investors. Increased market attractiveness due to declining risks created the incentives for reform of the once protected sectors. Liberalization of the economies led to the influx of new foreign investment activity. The increase in new projects after market openness reduced the level of state dependence on the original manufacturers. Host governments were able to substitute the original relationships with alternative ones. The presence of such substitutable alternatives reduced the degree of state dependence on any one firm. As such, host countries were able to play one multinational against another in order to increase their bargaining power. Japanese automobile investments in India, Indonesia, and Malaysia are presented as case studies.