Attacked from Both Sides: A Dynamic Model of Multinational Corporations' Strategies for Protection of Their Property Rights

Abstract

Multinationals operating in site‐specific industries face two types of opportunistic behavior. If they vertically integrate, host governments have incentives to change existing legislation challenging the firms' property rights. If they do not, they can be held up by business partners or lose control over the production process. These conflicting problems are reflected in the contradictory assessment made by the obsolescing bargaining power and transaction costs economics theories. Drawing on property rights theory, we introduce political integration as a strategy to address the two conflicting problems. It involves the integration of the host country's polities within the multinational's structure to avoid government opportunism, while still benefiting from the advantages of vertical integration. However, this strategy can backfire after institutional changes in the host country.