The setback of globalization and the challenges for multinationals

By: Ignacio Barros

The setback of globalization and the challenges for multinationals - Synergos

Globalization is in retreat and multinationals are on the defensive. Around the world, rich and poor countries have erected trade barriers and instituted export bans to deal with the pandemic and the war in Ukraine. In 2020, ventilators, surgical gowns, medications, and other life-saving equipment were hard to come by. Two years later, it is wheat, palm oil, beef and other food products that are in short supply, and that’s not including other items related to the sanctions that nations have imposed on Russia.

With the argument of national interest, governments have claimed for themselves much of the power that multinationals acquired during decades of globalization. This shift in the balance of power began after the 2008 financial crisis, when governments had to bail out banks and corporations with taxpayers’ money. In the years since then, world trade growth has slowed as China has contracted and the United States has adopted an America First policy. The pandemic and the war in Ukraine have only increased the trend towards deglobalization. As a result, multinational corporations, whose rise was based on the free movement of products and people, are at a disadvantage. Accustomed in the past to friendly governments and easy access to foreign markets, they have not been able (or known) to adapt to the expectations of governments and consumers.

To cite an example of the challenges they face, Alibaba founder, Jack Ma, openly criticized financial regulations in China in October 2020, crossing a delicate line that led Chinese authorities to scuttle the initial public offering (IPO) of its fintech conglomerate and crack down on other tech companies in the country. Another example: Last year India’s trade minister publicly criticized Tata Group, the country’s largest conglomerate, with a similar argument as the Chinese government, after the company complained about strict new trade rules electronically imposed by the executive.

And if conditions for multinationals are unwelcoming in their home countries, they are even more so in their foreign operations. In many cases, relations between multinationals and host governments have severely deteriorated, as has the bargaining power they initially enjoyed upon entry. However, little is known about what makes some multinationals better able to deal with host hostility than others.

Joint ventures vs. directly controlled subsidiaries.-

In this article we cite the cases of eight multinationals involved in disputes with foreign governments in South America between 2001 and 2012: Cemex in Venezuela; Telefónica, Repsol, Vivendi and Endesa in Argentina; Telecom Italia in Bolivia; Shell in Nicaragua, and Iberdrola in Guatemala.

As history seems to repeat itself regularly, the wave of globalization led to the widespread use of local partnerships (joint ventures) by many expanding multinationals, which they believed was the fastest and possibly the most successful way to go international. But then, as globalization receded, that regression brought to light the drawbacks of local partnership, and the old advantages became disadvantages. The clearest example is the asymmetry that arises in access to information: local partners isolate foreign investors from contact with the country’s stakeholders (local communities, regional governments, municipalities, NGOs, among others). This prevents multinationals from developing direct contacts, fostering local ties and building a reputation, all of which can make a significant difference in their ability to react and adapt to sudden hostility from governments.

Four of the cases we cite in this article, which relied on joint ventures to enter the market, underestimated the threat of expropriation at the first sign of trouble. They took corrective action only after the government’s hostility became apparent, and ultimately failed to win local and international support. Most of these companies left their host countries and received little or no compensation for their losses.

A second group of companies, with directly controlled subsidiaries, picked up on the early warning signs and moved quickly to gather information, spread their own narratives, and strengthen local and international support. Three of them maintained operations in the host country, even after the expropriation, and/or received compensation from the host government.

First phase: Anticipation.-

Disputes usually begin with symbolic and ambiguous actions that hint at the government’s intention to intervene in an industry, usually in the name of protecting the interests of its people. Actions may include setting price ceilings, raising taxes, or using unions to pressure multinationals through public protests or strikes.

In response to this first phase of government hostility, four of the companies—Telecom Italia, Vivendi, Iberdrola, and Endesa—relied on local partners to gather information and monitor the situation. What they got was leaked information that painted a biased and inaccurate picture that led them to delegate the action plan as well.

“We were short-sighted,” confessed a director of Telecom Italia. “We delegated, although we should have intervened in the first person.” This corporation saw local investment simply as “a source of income”; he even drew local ire by violating an agreement with a union and firing workers. For its part, Iberdrola, a Spanish electricity conglomerate, did not think it necessary to invest in local communities. While Endesa, another of the multinational companies that relied on a local partner to manage its relationship with the host government, managed a hybrid communication scheme (it had some relationships directly managed), and generated goodwill with the local population by providing help to the disadvantaged and providing training and other benefits. This could explain why the Spanish power company managed to mobilize local support and renegotiate rates with the host government in Argentina. He ended up staying in the country for five more years.

In contrast, four other companies (Shell, Telefónica, Cemex and Repsol) opted for a model of directly managed subsidiaries, seeking information from local lobbyists, unions or other multinationals. This helped them detect early signs of incipient hostility from host governments and prompted them to take early action. These multinationals directly owned and managed their local investments, had established relationships with a wide range of local stakeholders, and related to the central government through lobbyists, high-level contacts, or informal interactions with political authorities.

Second phase: Escalation.-

In this phase, the multinationals began to face specific accusations from the government for failing to meet their investment commitments or for causing pollution. They also had to deal with demonstrations, fines, tax increases, class action lawsuits and media criticism.

In the case of French multinational water utility Vivendi, managers argued that the hostility they faced in Argentina was due to “unfortunate events” and not a deliberate government plan to seize their assets. They also preferred to avoid direct confrontation, seeking instead to appease the authorities. As a director of Telecom Italia later lamented: “My impression now is that our local partner in Bolivia knew about the threat that was coming to us, but did not say so. When there is no association, you have a better understanding of what is going on.”

Cemex managers, for example, contacted their suppliers directly to renegotiate the terms of their contracts. They met with clients who had stopped or delayed payments and arranged meetings with local employees to discuss rumors that top executives had been negligent. Cemex also reached out to government contacts and mobilized lobbyists to gather information on the government’s motives.

The managers of the multinationals with their own subsidiaries concluded that a confrontation with the government was inevitable and began to prepare for it. All of them sought to highlight how their investments had contributed to local economic development and convey that the actions proposed by the government would harm, not help, local communities. For example, Telefónica highlighted how its “modern management technologies” increased commercial efficiency and the quality of services and goods offered to the community. He stated that the government did not have the capacity to finance the necessary investments in telecommunications. Repsol, for its part, warned that expelling the multinationals would have a chilling effect on foreign investment in Argentina.

Third phase: Expropriation.-

The threats and accusations finally gave way to the cancellation or formal modification of concessions (Iberdrola and Endesa), expropriation of assets (Cemex, Repsol, Telefónica and Telecom Italia) or seizure of sources of income (Shell and Vivendi) without compensation.

Managers of companies operating through local partners (Vivendi, Iberdrola and Telecom Italia) now faced widespread hostility from local stakeholders. The only recourse for these multinationals was to file complaints with ICSID, even as they prepared to leave their host countries. By contrast, directly controlled multinationals stepped up their efforts to mobilize local stakeholders and put pressure on host governments to resolve disputes amicably, or at least not cause further damage to their remaining assets. Endesa, the only multinational to follow a hybrid strategy, lost control of its board and was forced to sell its majority stake in its Argentine subsidiary. But, with the help of local supporters, he was able to persuade the government to renegotiate the rates and continue his operations in the country.

These examples cited reveal the importance of multinationals fostering direct local links and investing in social initiatives that benefit local communities. Companies operating in foreign countries through joint ventures with local companies tended to rely too heavily on their partners to engage with all of the country’s stakeholders. This often created an insider information asymmetry and caused them to be complacent and miss early warning signs of hostile government action. In contrast, multinationals operating through directly controlled subsidiaries were more practical and more likely to win the goodwill of locals, ultimately allowing them to react more quickly to government hostility.


  • Multinationals need closer ties as globalization retreats (MIT Sloan Management Review, Aug. 2022)
  • Deglobalization or slowbalization? (Aspenia online, May 2022)
  • Deglobalization is political, not economical (Charles Schwab, Apr. 2022)
  • Why Do Some Multinational Firms Respond Better Than Others to the Hostility of Host Governments? Proximal Embedding and the Side Effects of Local Partnerships (Journal of Management Studies, Mar. 2022)
  • SYNERGOS internal cases