There are many areas of influence by host governments on the strategic choice and implementation of foreign firms. The profitability of those firms is greatly influenced, for example, by the level of taxation in the host country and by any restrictions on profit repatriation Also important influences are government poliLies on ownership by foreign firms, on labor union rules, on hiring and
remuneration practices, on patent and copyright protection, and so on. For the most part, however, if the corporation's managers have done their homework, all
these factors are known beforehand and are part of the location and entry strategy decisions. But what hurts is for managers to set up shop in a host country and then have major economic or governmental policy changes after they have made a considerable investment.
Unpredictable changes in governmental regulations can be a death knell to businesses operating abroad. While this problem occurs in many countries, one country which is often the subject of concern by foreign firms is that of China. In a survey of European investment in China, for example, 54 percent of companies questioned said their performance in China was worse than they had anticipated. Caterpillar, Inc., was one of the companies with rapid market growth in producing diesel engines in China in the early 1990s - construction was booming and foreign investment was flooding iw But in 1993, China, afraid that foreign investment was causing inflation, revoked tax breaks and restricted foreign investment. The tables turned on Caterpillar after that because there was not enough domestic demand for their products.44 In addition, as reported in the Wall Street Journal, “the world's auto industry guessed wrong on China.”45 Certainly the market potential is there - only one Chinese out of every 110 has a car - but big problems are causing foreign car ventures to withdraw Peugeot-Citroen SA of France abandoned their factory in China, and Daimler-Benz AG of Germany withdrew before it even started. Beijing is even worrying GM, which has invested millions in China, including 21 joint ventures and other projects. Out of concern that China cannot handle a surge in cars on its inadequate roads, with little parking and few service stations, the government has stopped an auto-loan program, and many cities can no longer issue license plates for private cars- Also Beijing has prohibited government officials below the rank of minister from buying big cars.
Political change, in itself, can of course bring about sudden change in strategic implementation of alliances of foreign firms with host-country projects. This was evident in May of 1998 when President Suharto of Indonesia was ousted following economic problems and currency devaluation. The new government began reviewing and canceling some of the business deals linked with the Suharto family, including the cancellation of two water-supply privatization projects with foreign firms - Britain's Thames Water PLC and France's Suez Lyonnaise des Eaux SA. The Suharto family had developed a considerable
fortune from licensing deals,monopolies, government “contracts,” and protection from taxes. Alliances with the family was often the only way to gain entry for foreign companies.
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