The reasons for this lowering of the temperature are to be found in five recent trends that suggest that the role of multinational corporations in development has to be reassessed.
First, there has been a shift in bargaining power between multinationals and their host countries, greater restrictions on the inflow of packaged technology, a change in emphasis from production to research and development and marketing, among other factors, that have increased the uncertainties of direct foreign investment. As a result, there is some evidence that it has become the policy of multinational companies to shift from equity investment, ownership of capital, and managerial control of overseas facilities to the sale of technology, management services, and marketing as a means to earn returns on corporate assets, at least in those countries that have policies against inflows of packaged technology (Baranson, 1978).
“many more nations are now competing with U.S. multinationals in setting up foreign activities…”
Second, many more nations are now competing with U.S. multinationals in setting up foreign activities, which means that the controversy is no longer dominated by nationalistic considerations. Japanese and European firms figure prominently among the new multinationals. The number of U.S. companies among the world’s top 12 multinationals declined in all of the 13 major industry groups except aerospace between 1959 and 1976, whereas continental European companies increased their representatives among the top 12 multinationals in 9 of the 13 industries, and the Japanese scored gains in 8 (Lawrence Franko, Harvard Business Review, Nov.–Dec. 1978). The reasons for this are to be found in the decline of U.S. predominance in technology transfer; in the fact that foreign production follows exports, and exports from these countries steadily rose; in the steady growth of European and Japanese capacity to innovate; and in the greater adaptability—both politically and economically—of these companies to the needs of host countries. For example, Michelin’s radial tires, Bosch’s fuel injection equipment, and French, German, and Japanese locomotives, aircraft, and automobiles are more energy saving than their American counterparts.
Third, developing countries themselves are now establishing multinationals. In addition to companies from the Organization of Petroleum Exporting Countries (OPEC), and firms established in tax-haven countries, the leading countries where multinationals are being established are Argentina, Brazil, Colombia, Hong Kong, India, the Republic of Korea, Peru, the Philippines, Singapore, and Taiwan. According to Louis Wells, in Indonesia “Asian LDC investors together account for more investment than either Japanese, North American, or European investors, omitting mining and petroleum.” It may well be that these firms use more appropriate technology and are better adapted and more adaptable to local conditions. Wells notes that there is a strong preference in the developing countries for multinational corporations from similar countries. Korean companies put up buildings in Kuwait, pave roads in Ecuador, and have applied to Portugal for permission to set up an electronics plant; Taiwanese companies build steel mills in Nigeria; and Filipino companies restore shrines in Indonesia. Hindustan Machine Tools (India) is helping Algeria to develop a machine tool industry; Tata (India) is beating Mercedes trucks in Malaysia; and Stelux, a Hong Kong-based company with interests in manufacturing, banking, and real estate, bought into the Bulova Watch Company in the United States. C.P. Wong of Stelux improved the performance of the U.S. company. There are other instances of Third World multinationals that have aimed at acquiring shares in firms in developed countries (Heenan and Keegan, 1979).
The data on the extent of developing countries’ foreign investment are inadequate and the evidence is anecdotal. A partial listing of major Third World multinationals in Fortune (August 14, 1978) contains 33 corporations with estimated sales in 1977 ranging from $500 million to over $22,000 million, totaling $80,000 million.
If there is a challenge, it is no longer uniquely American; and it multinationals are instruments of neocolonialism, the instrument has been adopted by some ex-colonies, and at least one colony (Hong Kong), and is used against others. (Excluding mining and petroleum, Hong Kong is, for example, the second largest investor in Indonesia.) Neither developed nor developing countries are and longer predominantly recipients of multinationals from a single home country.
Fourth, not only do host countries deal with a greater variety of foreign companies, comparing their political and economic attractions, weighing them against their costs, and playing them off against one another, but also the large multinationals are being replaced by smaller and more flexible firms. And increasingly alternative organizations to the traditional form of multinational enterprise are becoming available: banks, retailers, consulting firms, and trading companies are acting as instruments of technology transfer.
Fifth, some multinationals from developed countries have accommodated themselves more to the needs of the developing countries, although IBM and Coca-Cola left India rather than permit joint ownership. Centrally planned economies increasingly welcome the multinationals, which in turn like investing there, partly because “you cannot be nationalized.”
Several distinguished authors, former U.S. Under Secretary of State George Ball, Professor Raymond Vernon, and Harry Johnson among them, had predicted that sovereignty would be at bay and some of these authors even suggested that the nation state, confronted with large and ever more powerful multinationals, would wither away.
Competition among nation-states for the economic favours of the corporation and the xenophobic character of the nation state itself will prevent the formation of a conspiracy or cartel of nation-states to exploit the economic potentialities of the international business in the service of national power. Therefore, the long-run trend will be toward the dwindling of the power of the national state relative to the corporation.
Such was Harry Johnson’s vision of the future. The nation state has shown considerable resilience in the face of multinationals; its demise, as with reports of Mark Twain’s death, have been somewhat exaggerated. The Colombians succeeded in extracting substantial sums from their multinationals. The Indians dealt successfully with firms that introduced inappropriate technologies and products. The Andean Group and OPEC showed that solidarity among groups of developing countries in dealing with multinationals is possible and can pay.
C. Fred Bergsten, Thomas Horst, and Theodore M. Moran, American Multinationals and American Interests (Washington, Brookings Institution, 1978).
Thomas J. Biersteker, Distortion or Development? Contending Perspectives of the Multinational Corporation (Cambridge, MIT Press, 1978).
Peter Evans, Dependent Development; the Alliance of State, Multinational, and Local Capital in Brazil (Princeton, Princeton University Press, 1979).
Sanjaya Lall, “Developing Countries as Exporters of Industrial Technologies,” International Economic Development and Resource Transfer, Herbert Giersch, editor (Kiel, Institut für Weltwirtschaft, 1979).
UNCTAD Seminar Programme, Intra-firm Transactions and Their Impact on Trade and Development, May 1978. Report Series No. 2, UNCTAD/OSG/174.
Paul Streeten, “Transnational Corporations and Basic Needs,” in Growth with Equity: Strategies for Meeting Human Needs, Mary Evelyn Jegen and Charles K. Wilber, editors (New York, Paulist Press, 1979).
Louis T. Wells, Jr., “The Internationalization of Firms from Developing Countries” in Multinationals from Small Countries, Tamir Agmon and Charles P. Kindleberger, editors (Cambridge, MIT Press, 1977).