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International Business in
Global Context –
Week 3 Tutorial
Why do countries
impose restrictions on
foreign ownership of
domestic firms ?
1. Avoid control of economies by foreigners
 Countries may impose restrictions on foreign ownership of
domestic firms to avoid control of their economies by
foreigners, because they fear that foreign companies could
undermine their industrial policies, and because they believe
that local citizens should receive the benefits of certain
2. Change the choice of entry mode
For an example,
When a country impose restriction to multinational
In order for MNC to enter the market they need to use other mode
of entry such joint venture.
By joining venture or sharing subsidiary ownership with the local
companies, the MNC can enter the market by by passing the
restrictions, MNC can get into the market easily.
On the other hand the local companies can acquire the
technology transfer and knowledge for the foreign companies.
This helps to increase the competition between local companies.
3. Negative effect on Balance of
Payments (BOP)
Disadvantages of foreign investment is that it has a tendency
to lead to a net outflow of foreign exchange and thus have
a negative effect on the BOP
if there is an imbalance of bop, meaning that country
experiencing a trade deficit can artificially depress its
4.To prevent the leakage of technologies
In the past years, the traditional Japanese electronics firm
downturn or business crisis appeared the phenomenon of
many foreign companies to purchase the ownership.
Such as the financial crisis happened in Japan Toshiba, sell
their flash memory chip business to Bain (United States
leading foreign consortium) with a price of less than $20
In these assets transactions, the Japanese government
worried that their technology will flow out and on the other
hand Japan through Japanese industrial innovation agency to
rescue the firms.