Multinational corporations and dependency:a dialogue for dependentistas and non-dependentistas Theodore H.Moran Three assertions about relations between multinational corporations and host countries in the Third World frequently appear in the dependencia literature:1)that the host countries receive too few benefits;2)that foreign investment causes distortions in the local economies;and 3)that foreign investment distorts host countries'political processes.These propositions can be re- formulated as testable hypotheses,to which non-dependency studies of oligopolistic competi- tion,bureaucratic politics,and transnational relations are relevant.Identifying critical areas of disagreement between dependency and nondependency approaches may help scholars to design their research in such a way as to enrich the dialogue between dependentistas and non-dependentistas. Is the theory of dependency built upon propositions that can be tested by research done outside of the dependencia framework?What kind of non-dependency studies are most relevant to the concerns of dependentistas?How can the dialogue between dependentistas and non-dependentistas be expanded? In this essay,I shall concentrate on three assertions about the relations between multinational corporations and host countries in the Third World that frequently Theodore H.Moran is a member of the Policy Planning Staff,Department of State.He is also on the faculty of the School of Advanced International Studies at The Johns Hopkins University in Washington, D.C.This paper was prepared for delivery at the 1976 Annual Meeting of the American Political Science Association,The Palmer House,Chicago,Illinois,September 2-5.1976.An earlier version of this study was presented before the Latin American Studies Association,Atlanta,March 27,1976.This paper draws upon work that will appear as part of the author's contribution to American Multinationals and 4merican Interests,by C.Fred Bergsten,Thomas O.Horst,and Theodore H.Moran,(Washington:The Brookings Institution,1978)
Multinational corporations and dependency: a dialogue for dependentistas and non-dependentistas Theodore H. Moran Three assertions about relations between multinational corporations and host countries in the Third World frequently appear in the dependencia literature: 1) that the host countries receive too few benefits; 2) that foreign investment causes distortions in the local economies; and 3) that foreign investment distorts host countries' political processes. These propositions can be reformulated as testable hypotheses, to which non-dependency studies of oligopolistic competition, bureaucratic politics, and transnational relations are relevant. Identifying critical areas of disagreement between dependency and nondependency approaches may help scholars to design their research in such a way as to enrich the dialogue between dependentistas and non-dependentistas. Is the theory of dependency built upon propositions that can be tested by research done outside of the dependencia framework? What kind of non-dependency studies are most relevant to the concerns of dependentistas? How can the dialogue between dependentistas and non-dependentistas be expanded? In this essay, I shall concentrate on three assertions about the relations between multinational corporations and host countries in the Third World that frequently Theodore H. Moran is a member of the Policy Planning Staff, Department of State. He is also on the faculty of the School of Advanced International Studies at The Johns Hopkins University in Washington, D.C. This paper was prepared for delivery at the 1976 Annual Meeting of the American Political Science Association, The Palmer House, Chicago, Illinois, September 2-5, 1976. An earlier version of this study was presented before the Latin American Studies Association, Atlanta, March 27, 1976. This paper draws upon work that will appear as part of the author's contribution to American Multinationals and American Interests, by C. Fred Bergsten, Thomas O. Horst, and Theodore H. Moran, (Washington: The Brookings Institution, 1978)
80 International Organization appear in the dependencia literature:1 first,that the benefits of foreign investment are"poorly distributed''between the multinational and the host (or that multina- tionals"'siphon off''an economic "'surplus''that could otherwise be used to fi- nance internal development);second,that foreign investment causes economic dis- tortions in the local economy;third,that foreign investment causes"political distor- tions''("perversion of the political process...thwarting of national sovereignty") in the host society.I shall argue that each of these propositions contains hypotheses about the impact of multinational corporations on the host country,or on the policies of the home country,or on the structure of the international system that can be tested with greater or lesser degrees of rigor.Then I shall draw upon non- dependency studies in three areas-theories of oligopolistic competition among multinational corporations,theories of "bureaucratic politics'2 in the formula- tion of US foreign policy and theories of "'transnational relations"-to suggest how the idea of dependency might be tested,strengthened,and/or made more dynamic.In addition,I shall try to indicate,along the way,what kind of new research might be most fruitful in enriching the dialogue between dependentistas and non-dependentistas. Dependencia proposition I The benefits of foreign investment are "poorly''(or "'unfairly"'or "un- equally'')distributed between the multinational and the host,or the country pays 'too high''a price for what it gets,or the company siphons off an economic 'surplus''that could otherwise be used to finance internal development. The predominant non-neo-classical framework for analyzing international cor- porate behavior-the theory of oligopolistic expansion developed by Hymer, Kindleberger,Vernon,Stobaugh,Wells,and others-predicts,as the dependentis- Cf.Andre Gunder Frank,Capitalism and Underdevelopment in Latin America:Historical Studies of Chile and Brazil (New York:Monthly Review Press,1967);Latin America:Underdevelopment or Revolution (New York:Monthly Review Press,1969);S.Bodenheimer,Dependency and Imperialism: The Roots of Latin American Underdevelopment,'in K.Fann and D.Hodges,eds.,Readings in U.S. Imperialism (Boston:Porter Sargent,1971);F.H.Cardoso and Enzo Faletto,Dependencia y desarrollo en America Latina (Mexico City:Siglo XXI Editores,1969);T.Dos Santos,Dependencia economica y cambio revolucionario en America Latina (Caracas:Editorial Nueva Izquierda,1970);O.Sunkel, "Politica nacional de desarrollo y dependencia externa"';Revista de Estudios Internacionales.(San- tiago),Volume I (May 1967);"Big Business and 'Dependencia':A Latin American View,"Foreign Affairs Vol.50,No.3(April 1972);and Francisco Weffort,"Notas sobre la 'teoria de la dependencia': Teoria de clase o ideologia nacional?',Revista Latinoamerica de Ciencia Politica Vol.I,No.3 (December1970):389-401. As we shall see,the study of the politics of policy formation toward the Third World in general and toward Latin America in particular must focus closely on various committees in the Congress and not merely on the bureaucracies of the executive branch. aStephen Hymer,The International Operations of National Firms:A study of Direct Investment," (Ph.D.dissertation,Massachusetts Institute of Technology,1960);Charles P.Kindleberger,American Business Abroad:Six Lectures on Direct Investment,(New Haven,Conn.:Yale University Press,1969)
SO International Organization appear in the dependencia literature:1 first, that the benefits of foreign investment are "poorly distributed" between the multinational and the host (or that multinationals "siphon off" an economic "surplus" that could otherwise be used to finance internal development); second, that foreign investment causes economic distortions in the local economy; third, that foreign investment causes "political distortions" ("perversion of the political process .. .thwarting of national sovereignty") in the host society. I shall argue that each of these propositions contains hypotheses about the impact of multinational corporations on the host country, or on the policies of the home country, or on the structure of the international system that can be tested with greater or lesser degrees of rigor. Then I shall draw upon nondependency studies in three areas—theories of oligopolistic competition among multinational corporations, theories of "bureaucratic politics"2 in the formulation of US foreign policy and theories of "transnational relations"—to suggest how the idea of dependency might be tested, strengthened, and/or made more dynamic. In addition, I shall try to indicate, along the way, what kind of new research might be most fruitful in enriching the dialogue between dependentistas and non-dependentistas. Dependencia proposition I The benefits of foreign investment are "poorly" (or "unfairly" or "unequally") distributed between the multinational and the host, or the country pays ' 'too high'' a price for what it gets, or the company siphons off an economic ' 'surplus'' that could otherwise be used to finance internal development. The predominant non-neo-classical framework for analyzing international corporate behavior—the theory of oligopolistic expansion developed by Hymer, Kindleberger, Vernon, Stobaugh, Wells, and others3 —predicts, as the dependentis- *Cf. Andre Gunder Frank, Capitalism and Underdevelopment in Latin America: Historical Studies of Chile and Brazil (New York: Monthly Review Press, 1967); Latin America: Underdevelopment or Revolution (New York: Monthly Review Press, 1969); S. Bodenheimer, "Dependency and Imperialism: The Roots of Latin American Underdevelopment," in K. Fann and D. Hodges, eds., Readings in U.S. Imperialism (Boston: Porter Sargent, 1971); F.H. Cardoso and Enzo Faletto, Dependencia y desarrollo en America Latina (Mexico City: Siglo XXI Editores, 1969); T. Dos Santos, Dependencia economica y cambio revolucionario en America Latina (Caracas: Editorial Nueva Izquierda, 1970); O. Sunkel, "Politica nacional de desarrollo y dependencia externa"; Revista de Estudios Internacionales, (Santiago), Volume I (May 1967); "Big Business and 'Dependencia': A Latin American View," Foreign Affairs Vol. 50, No. 3 (April 1972); and Francisco Weffort, "Notas sobre la 'teoria de la dependencia': Teoria de clase o ideologia nacional?", Revista Latinoamerica de Ciencia Politica Vol. 1, No. 3 (December 1970): 389-401. 2 As we shall see, the study of the politics of policy formation toward the Third World in general and toward Latin America in particular must focus closely on various committees in the Congress and not merely on the bureaucracies of the executive branch. 'Stephen Hymer, "The International Operations of National Firms: A study of Direct Investment," (Ph.D. dissertation, Massachusetts Institute of Technology, 1960); Charles P. Kindleberger, American Business Abroad: Six Lectures on Direct Investment, (New Haven, Conn.: Yale University Press, 1969);
Multinational corporations and dependency 81 tas assert,that the question of the"proper price''to be paid to foreign investors must inevitably be a crucial policy issue for public officials within host countries.What insights does this analysis have to offer to the dependency school? Hymer first postulated that foreign direct investment took place not because of a higher marginal rate of return in perfect capital markets (as the neo-classicists assumed)but because the corporation making the investment possessed some spe- cial skill or technique not available to local entrepreneurs that it could exploit only through direct ownership.That special skill or technique constituted a barrier to the entry of competition in the host country and generated an oligopoly rent(a'higher- than-normal''return on investment)to the investor.Corporations undertook direct foreign investment,therefore,because it enabled them to enlarge,or defend,their ability to extract oligopoly rents. How much of the oligopoly rent should the foreign investor be entitled to keep in payment for his services?Edith Penrose tried to set an empirical standard for making this normative judgment by arguing that the host country ought to allow the foreign company to receive only the amount necessary to induce it (and others)to invest and/or to prevent it from withdrawing.s Anything more,she claimed,would constitute "'exploitation.'' Charles Kindleberger challenged the Penrose formulation.5 For him,the prob- lem was one of bilateral monopoly (the company has control over the services;the country has control over access before the investment is made,and over taxation or expropriation afterwards)in which the solution would depend upon the relative bargaining power of the two sides.The lower limit of the price that would have to be paid to the foreign investor would indeed be what Penrose had characterized as the "just''price.The upper limit,however,would be the scarcity value of the for- eigner's services to the country,i.e.,the price at which the country would rather do without those services.A price anywhere between those two extremes-which might be quite far apart-could not be criticized by any objective standard,accord- Raymond Vernon,"International Investment and International Trade in the Product Cyele,Quarterly lournal of Economics,Vol.80 (May 1966);Sovereignty At Bay:The Multinational Spread of U.S. Enterprises.(New York:Basic Books,1971);Robert B.Stobaugh,The Product Life Cycle.U.S. Exports,and International Investment,(Ph.D.dissertation,Harvard Business School,1968);Louis T. Wells,Jr.,ed.,The Product Life Cycle and International Trade,(Boston:Harvard University,Division of Rescarch,Graduate School of Business Administration,1972). Hymer argued that a company would choose direct foreign investment only if that offered the easiest way to exploit some market imperfection.If markets were reasonably competitive in a particular indus- try,Hymer assumed that corporations in one country would make portfolio investments (rather than direct investments)or license whatever proprietary technology they controlled to local firms whose familiarity with the customs(and language)in another country would give them a natural edge.Hymer's analysis,and the theory of the product cycle that grew out of it,account for the phenomenon of cross-investment between two countries where the average rate of return on capital is identical better than does neo-classical analysis,and explains the drive of American companies into other developed (i.e., capital surplus)countries rather than into the (capital deficit)Third World better than does neo-Marxist analysis.Cf.Theodore H.Moran,"Foreign Expansion as an'Institutional Necessity'for U.S.Corporate Capitalism:The Search for a Radical Model,"World Politics,Vol.25,No.3 (April 1973). SEdith T.Penrose,Profit Sharing between Producing Countries and Oil Companies in the Middle East,"Economic Journal (June 1959). sCharles P.Kindleberger,Economic Development (New York:McGraw-Hill,2nd ed.,1965),p.334
Multinational corporations and dependency 81 tas assert, that the question of the ' 'proper price'' to be paid to foreign investors must inevitably be a crucial policy issue for public officials within host countries. What insights does this analysis have to offer to the dependency school? Hymer first postulated that foreign direct investment took place not because of a higher marginal rate of return in perfect capital markets (as the neo-classicists assumed) but because the corporation making the investment possessed some special skill or technique not available to local entrepreneurs that it could exploit only through direct ownership.4 That special skill or technique constituted a barrier to the entry of competition in the host country and generated an oligopoly rent (a "higherthan-normal" return on investment) to the investor. Corporations undertook direct foreign investment, therefore, because it enabled them to enlarge, or defend, their ability to extract oligopoly rents. How much of the oligopoly rent should the foreign investor be entitled to keep in payment for his services? Edith Penrose tried to set an empirical standard for making this normative judgment by arguing that the host country ought to allow the foreign company to receive only the amount necessary to induce it (and others) to invest and/or to prevent it from withdrawing.5 Anything more, she claimed, would constitute "exploitation." Charles Kindleberger challenged the Penrose formulation.6 For him, the problem was one of bilateral monopoly (the company has control over the services; the country has control over access before the investment is made, and over taxation or expropriation afterwards) in which the solution would depend upon the relative bargaining power of the two sides. The lower limit of the price that would have to be paid to the foreign investor would indeed be what Penrose had characterized as the "just" price. The upper limit, however, would be the scarcity value of the foreigner's services to the country, i.e., the price at which the country would rather do without those services. A price anywhere between those two extremes—which might be quite far apart—could not be criticized by any objective standard, accordRaymond Vernon, "International Investment and International Trade in the Product Cycle," Quarterly tournal of Economics, Vol. 80 (May 1966); Sovereignty At Bay: The Multinational Spread of U.S. Enterprises, (New York: Basic Books, 1971); Robert B. Stobaugh, "The Product Life Cycle, U.S. Exports, and International Investment," (Ph.D. dissertation, Harvard Business School, 1968); Louis T. Wells, Jr., ed., The Product Life Cycle and International Trade, (Boston: Harvard University, Division of Research, Graduate School of Business Administration, 1972). 4 Hymer argued that a company would choose direct foreign investment only if that offered the easiest way to exploit some market imperfection. If markets were reasonably competitive in a particular industry, Hymer assumed that corporations in one country would make portfolio investments (rather than direct investments) or license whatever proprietary technology they controlled to local firms whose familiarity with the customs (and language) in another country would give them a natural edge. Hymer's analysis, and the theory of the product cycle that grew out of it, account for the phenomenon of cross-investment between two countries where the average rate of return on capital is identical better than does neo-classical analysis, and explains the drive of American companies into other developed (i.e., capital surplus) countries rather than into the (capital deficit) Third World better than does neo-Marxist analysis. Cf. Theodore H. Moran, "Foreign Expansion as an 'Institutional Necessity' for U.S. Corporate Capitalism: The Search for a Radical Model," World Politics, Vol. 25, No. 3 (April 1973). 5 Edith T. Penrose, "Profit Sharing between Producing Countries and Oil Companies in the Middle East," Economic Journal (June 1959). 'Charles P. Kindleberger, Economic Development (New York: McGraw-Hill, 2nd ed., 1965), p. 334
82 International Organization ing to Kindleberger.What that price would be,empirically,would be a function of the relative bargaining strengths of the two sides.(Penrose ultimately agreed with Kindleberger's argument.)7 This suggests that the concern of dependencia analysts about whether the price paid to multinationals is "high''or "'low''resolves itself into a question of what determines the relative bargaining power between foreign investors and host coun- tries,and how that bargaining power changes over time.But Kindleberger's formu- lation also provides a way of addressing a separate conceptual issue-specifically, whether foreign investors"drain off'an economic surplus that could otherwise be devoted to internal development.The outcome of a calculation of this sort depends upon the alternative against which one measures the services of foreign corpora- tions.For some dependentista writers,e.g.,Andre Gunder Frank,the cost of foreign investment appears to be measured against hypothetical state industries of a socialist government that could perform all the functions of the foreign investors at the same or lower cost in terms of local resources,and with less leakage (via imports or profit remittances)abroad.8 If that is a realistic alternative,then even within the Penrose-Kindleberger framework,the value of foreign investment should clearly be placed at zero (or less).But if that is not a realistic alternative,then public policy analysts must compare the minimum price to which foreign investors can be pushed with the scarcity value of their services to the country.The calculation of that minimum price''brings us back to the question of what determines the bargaining power of host countries and foreign investors. There have been three major sets of hypotheses to try to account for relative negotiating strength.The first focuses on characteristics of the project under negoti- ation:absolute size of fixed investment,ratio of fixed to variable costs,stability of technology,and complexity of marketing (or degree of product differentiation).3 These characteristics are treated as independent variables predicting the outcome of the bargain.Firms contemplating projects with low fixed investments,low fixed costs,changeable technology,and complex marketing (or some combination thereof)will be less vulnerable to host country demands than will firms contemplat- ing projects with the opposite characteristics.As a corollary,one would expect that firms considering ventures with the latter characteristics would require a larger risk premium before they would invest (i.e.,would not commit the large amounts of 1.'International Economic Relations and the Large Intemational Firm,"in E.F.Penrose,Peter Lyon, Edith T.Penrose,eds.,New Orientations:Essays in International Relations(New York:The Humanitics Press,1970). "For the citations for Andre Gunder Frank,see footnote 1.For a case where a domestic state agency both wasted local resources and allowed a larger loss of foreign exchange abroad than did foreign multinationals,see James E.Zinser,"'Alternative Means of Meeting Argentina's Petroleum Require. ments,"in Raymond F.Mikesell,ed.,Foreign Investment in the Petroleum and Mineral Industries: Case Studies of /nvestor-Host Country Relations (Baltimore,Md.:Johns Hopkins Press for Resources for the Future,1971).For contrary evidence from the same industry (petroleum),see Michael Tanzer,The Political Economy of International Oil and The Underdeveloped Countries (Boston:Beacon Press, 1969). "The hypotheses on bargaining strength that have been separated here are frequently mixed together in the literature.For an overview that includes project characteristics as independent variables see C.Fred Bergsten,Thomas O.Horst,Theodore H.Moran,American Multinationals and American Interests (Washington,D.C.:Brookings,1978)
82 International Organization ing to Kindleberger. What that price would be, empirically, would be a function of the relative bargaining strengths of the two sides. (Penrose ultimately agreed with Kindleberger's argument.)7 This suggests that the concern of dependencia analysts about whether the price paid to multinationals is "high" or "low" resolves itself into a question of what determines the relative bargaining power between foreign investors and host countries, and how that bargaining power changes over time. But Kindleberger's formulation also provides a way of addressing a separate conceptual issue—specifically, whether foreign investors "drain off" an economic surplus that could otherwise be devoted to internal development. The outcome of a calculation of this sort depends upon the alternative against which one measures the services of foreign corporations. For some dependentista writers, e.g., Andre Gunder Frank, the cost of foreign investment appears to be measured against hypothetical state industries of a socialist government that could perform all the functions of the foreign investors at the same or lower cost in terms of local resources, and with less leakage (via imports or profit remittances) abroad.8 If that is a realistic alternative, then even within the Penrose-Kindleberger framework, the value of foreign investment should clearly be placed at zero (or less). But if that is not a realistic alternative, then public policy analysts must compare the minimum price to which foreign investors can be pushed with the scarcity value of their services to the country. The calculation of that "minimum price" brings us back to the question of what determines the bargaining power of host countries and foreign investors. There have been three major sets of hypotheses to try to account for relative negotiating strength. The first focuses on characteristics of the project under negotiation: absolute size of fixed investment, ratio of fixed to variable costs, stability of technology, and complexity of marketing (or degree of product differentiation).9 These characteristics are treated as independent variables predicting the outcome of the bargain. Firms contemplating projects with low fixed investments, low fixed costs, changeable technology, and complex marketing (or some combination thereof) will be less vulnerable to host country demands than will firms contemplating projects with the opposite characteristics. As a corollary, one would expect that firms considering ventures with the latter characteristics would require a larger risk premium before they would invest (i.e., would not commit the large amounts of '"International Economic Relations and the Large International Firm," in E.F. Penrose, Peter Lyon, Edith T. Penrose, eds., New Orientations: Essays in International Relations (New York: The Humanities Press, 1970). 8 For the citations for Andre Gunder Frank, see footnote 1. For a case where a domestic state agency both wasted local resources and allowed a larger loss of foreign exchange abroad than did foreign multinationals, see James E. Zinser, "Alternative Means of Meeting Argentina's Petroleum Requirements," in Raymond F. Mikesell, ed., Foreign Investment in the Petroleum and Mineral Industries: Case Studies of Investor-Host Country Relations (Baltimore, Md.: Johns Hopkins Press for Resources for the Future, 1971). For contrary evidence from the same industry (petroleum), see Michael Tanzer, The Political Economy of International Oil and The Underdeveloped Countries (Boston: Beacon Press, 1969). 9 The hypotheses on bargaining strength that have been separated here are frequently mixed together in the literature. For an overview that includes project characteristics as independent variables see C. Fred Bergsten, Thomas O. Horst, Theodore H. Moran, American Multinationals and American Interests (Washington, DC : Brookings, 1978)
Multinational corporations and dependency 83 capital necessary unless they were promised the possibility of a mini-bonanza if the investment were successful).But one would also expect that such firms would be more defenseless to the renegotiation of an investment agreement once their oper- ations were in place because they could not credibly threaten to withdraw,and because they could not withhold some new technology or marketing technique to protect themselves. The second set of hypotheses to account for relative bargaining strength be- tween foreign investors and host countries focuses on the characteristics of the host country:the size of the local market and its rate of growth,the extent of social mobilization within the local population,the degree of sophistication of the local bureaucracy,and the breadth of alternatives to foreign investment within the domes- tic economy.10 A small and stagnant local market,an unmobilized populace,an unskilled governmental bureaucracy,and a limited indigenous industrial capacity would predict weak bargaining power.A booming economy,on the other hand, would increase the attractiveness of the country to the foreign firm.A population demanding jobs and social programs(financed,in part,by revenues from foreign investors),would intensify the pressure on local politicians to push foreign corpora- tions for greater benefits,and would heighten the value of nationalistic successes. An experienced bureaucracy would be less likely to be hoodwinked by transfer pricing,restrictive business agreements,or other corporate manipulations.And a strong domestic industrial sector would both increase the credibility of nationaliza- tion(if nationalistic demands were not met)and lower the opportunity cost of failure if nationalistic demands were pushed too far. The third set of hypotheses focuses on exogenous factors:the degree of uncer- tainty in the investment,and the extent of competition in the international indus- try.12 High uncertainty and low competition among multinationals predict a weak bargaining position for the host government.Lower uncertainty or increased compe- tition (either at the beginning of a project or over the course of its life)would strengthen the hand of local authorities. These three sets of hypotheses can be used in a static sense to try to predict the distribution of benefits from any particular investment negotiation or they can be used in a dynamic sense to try to forecast the evolution of the distribution of benefits Cf.Robert B.Stobaugh,Jr.,"Where in the world should we put that plant?,"Harvard Business Review (January-February 1969);Louis T.Wells,Jr.,"The Evolution of Concession Agreements in Developing Countries,Harvard Development Advisory Service,March 29,1971.For the idea of a host country"learning curve"that accompanies social mobilization,see Theodore H.Moran,Multinational Corporations and the Politics of Dependence:Copper in Chile (Princeton,N.J.:Princeton University Press,1974);and Franklin Tugwell,The Politics of Oil in Venezuela (Stanford,Calif.:Stanford Univer- sity Press,1975). At least,a booming economy would increase the attractiveness if the foreign investor were producing goods for local consumption because it would enlarge the market.It would be interesting to test whether a booming economy raised or lowered the attractiveness of a country to an investor looking for a site from which to export manufactured products. Edith T.Penrose,The Large International Firm in Developing Countries:The International Petro- leum Industry (London:Allen and Unwin,1968):Raymond Vernon,"Long-Run Trends in Concession Contracts,"Proceedings of the American Sociery of International Law (April 1967);Sovereignty at Bay, Chapter 3;and Raymond F.Mikesell,ed.,Foreign Investment in the Petroleum and Mineral Industries, Chapter 2
Multinational corporations and dependency 83 capital necessary unless they were promised the possibility of a mini-bonanza if the investment were successful). But one would also expect that such firms would be more defenseless to the renegotiation of an investment agreement once their operations were in place because they could not credibly threaten to withdraw, and because they could not withhold some new technology or marketing technique to protect themselves. The second set of hypotheses to account for relative bargaining strength between foreign investors and host countries focuses on the characteristics of the host country: the size of the local market and its rate of growth, the extent of social mobilization within the local population, the degree of sophistication of the local bureaucracy, and the breadth of alternatives to foreign investment within the domestic economy.10 A small and stagnant local market, an unmobilized populace, an unskilled governmental bureaucracy, and a limited indigenous industrial capacity would predict weak bargaining power. A booming economy, on the other hand, would increase the attractiveness of the country to the foreign firm.11 A population demanding jobs and social programs (financed, in part, by revenues from foreign investors), would intensify the pressure on local politicians to push foreign corporations for greater benefits, and would heighten the value of nationalistic successes. An experienced bureaucracy would be less likely to be hoodwinked by transfer pricing, restrictive business agreements, or other corporate manipulations. And a strong domestic industrial sector would both increase the credibility of nationalization (if nationalistic demands were not met) and lower the opportunity cost of failure if nationalistic demands were pushed too far. The third set of hypotheses focuses on exogenous factors: the degree of uncertainty in the investment, and the extent of competition in the international industry.12 High uncertainty and low competition among multinationals predict a weak bargaining position for the host government. Lower uncertainty or increased competition (either at the beginning of a project or over the course of its life) would strengthen the hand of local authorities. These three sets of hypotheses can be used in a static sense to try to predict the distribution of benefits from any particular investment negotiation or they can be used in a dynamic sense to try to forecast the evolution of the distribution of benefits 10Cf. Robert B. Stobaugh, Jr., "Where in the world should we put that plant?," Harvard Business Review (January-February 1969); Louis T. Wells, Jr., "The Evolution of Concession Agreements in Developing Countries," Harvard Development Advisory Service, March 29, 1971. For the idea of a host country "learning curve" that accompanies social mobilization, see Theodore H. Moran, Multinational Corporations and the Politics of Dependence: Copper in Chile (Princeton, N.J.: Princeton University Press, 1974); and Franklin Tugwell, The Politics of Oil in Venezuela (Stanford, Calif.: Stanford University Press, 1975). "At least, a booming economy would increase the attractiveness if the foreign investor were producing goods for local consumption because it would enlarge the market. It would be interesting to test whether a booming economy raised or lowered the attractiveness of a country to an investor looking for a site from which to export manufactured products. 1JEdith T. Penrose, The Large International Firm in Developing Countries: The International Petroleum Industry (London: Allen and Unwin, 1968); Raymond Vernon, "Long-Run Trends in Concession Contracts," Proceedings of the American Society of International Law (April 1967); Sovereignty at Bay, Chapter 3; and Raymond F. Mikesell, ed., Foreign Investment in the Petroleum and Mineral Industries, Chapter 2
84 International Organization from an investment over the life of the project.They can be used at the micro level to analyze any particular investment agreement,or at the macro level to analyze the direction of changes in North-South (center-periphery)economic relations.They have received some important initial testing,but much more is needed. The balance of bargaining power framework provides some important contrasts to,and amplifications of,the dependencia perspective.First,it ignores the capitalism-socialism dichotomy that is central to many dependency writers.It fo- cuses on the relative negotiating strength of the individual actors rather than on the way in which property is owned within the economic system.It suggests that scarce resources and optimizing behavior would produce the same outcome whether the "investor''were a private capitalist or a socialist state agency:that a Soviet co- production agreement for bauxite in Guinea (e.g.,Dembe)or a Roumanian pet- rochemical project in Latin America should not differ from an American co- production agreement for oil in Indonesia or a German petrochemical project in Africa unless the Soviet or Roumanian governments wanted to use the state agencies involved as aid-giving institutions (i.e.,direct them to refrain from optimizing behavior in the use of their scarce resources).Second,it suggests that the increasing spread of multinational corporations of diverse national origins (American,Euro- pean,Japanese)strengthens,rather than weakens,the position of Third World countries because it gives them more alternatives to choose from.Third,it offers hope to the periphery that the direction of change is in their favor:if one projects a world in which the competition among foreign investors is increasing,in which the growth of the Third World is continuing (irrespective of a rising or falling gap in relation to the developed countries),and in which the breadth of host country industrial capacity and the negotiating skills of host country bureaucrats are expand- ing,for example,one would predict that host countries would have to pay less for the services of foreign investors in the future than they have had to in the past.3 There would still be large numbers of cases where the distribution of the benefits was highly tilted toward the foreign company in accordance with the variables specified earlier (e.g.,in the poorest countries,and/or at the beginning of most investment agreements,and/or in those industries where technology was rapidly changing).But one would expect the benefits from foreign investment in the aggre- gate to be rising and the cost of securing those benefits to be falling,over time.14 There are two severe limitations to this balance of power framework,however, to which dependencia analysis should draw the attention of non-dependentistas: first,the possible separation between the potential capability of host goverments to exercise greater negotiating strength in their relations with foreign investors anc The transfer of bargaining power into Third World hands would be retarded,however,to the extent that host countries compete among themselves to get foreign investment. 14Some companies,of course,may try to balance their increasing vulnerability in certain product lines with more profitable operations in other lines where they have tighter control over technology.Peter Evans hypothesizes,for example,that American petrochemical companies in Brazil are trading "unat- tractive"arrangements for the production of chlorine for a profitable "'kicker''in polyurethane foam (TDI).Testing the New Alliance:The Brazilian State,the Multinationals and the Launching of the Polo Petroquimico at Camacari,Bahia,"Brown University,xerox,February 1976
84 International Organization from an investment over the life of the project. They can be used at the micro level to analyze any particular investment agreement, or at the macro level to analyze the direction of changes in North-South (center-periphery) economic relations. They have received some important initial testing, but much more is needed. The balance of bargaining power framework provides some important contrasts to, and amplifications of, the dependencia perspective. First, it ignores the capitalism-socialism dichotomy that is central to many dependency writers. It focuses on the relative negotiating strength of the individual actors rather than on the way in which property is owned within the economic system. It suggests that scarce resources and optimizing behavior would produce the same outcome whether the "investor" were a private capitalist or a socialist state agency: that a Soviet coproduction agreement for bauxite in Guinea (e.g., Dembe) or a Roumanian petrochemical project in Latin America should not differ from an American coproduction agreement for oil in Indonesia or a German petrochemical project in Africa unless the Soviet or Roumanian governments wanted to use the state agencies involved as aid-giving institutions (i.e., direct them to refrain from optimizing behavior in the use of their scarce resources). Second, it suggests that the increasing spread of multinational corporations of diverse national origins (American, European, Japanese) strengthens, rather than weakens, the position of Third World countries because it gives them more alternatives to choose from. Third, it offers hope to the periphery that the direction of change is in their favor: if one projects a world in which the competition among foreign investors is increasing, in which the growth of the Third World is continuing (irrespective of a rising or falling gap in relation to the developed countries), and in which the breadth of host country industrial capacity and the negotiating skills of host country bureaucrats are expanding, for example, one would predict that host countries would have to pay less for the services of foreign investors in the future than they have had to in the past.13 There would still be large numbers of cases where the distribution of the benefits was highly tilted toward the foreign company in accordance with the variables specified earlier (e.g., in the poorest countries, and/or at the beginning of most investment agreements, and/or in those industries where technology was rapidly changing). But one would expect the benefits from foreign investment in the aggregate to be rising and the cost of securing those benefits to be falling, over time.14 There are two severe limitations to this balance of power framework, however, to which dependencia analysis should draw the attention of non-dependentistas: first, the possible separation between the potential capability of host governments to exercise greater negotiating strength in their relations with foreign investors anc 13The transfer of bargaining power into Third World hands would be retarded, however, to the extent that host countries compete among themselves to get foreign investment. 14Some companies, of course, may try to balance their increasing vulnerability in certain product lines with more profitable operations in other lines where they have tighter control over technology. Peter Evans hypothesizes, for example, that American petrochemical companies in Brazil are trading "unattractive" arrangements for the production of chlorine for a profitable "kicker" in polyurethane foam (TDI). "Testing the New Alliance: The Brazilian State, the Multinationals and the Launching of the Polo Petroquimico at Camacari, Bahia," Brown University, xerox, February 1976
Multinational corporations and dependency 85 their political'will''to do so;second,the possible economic distortions produced by the investors in the local economy.Bargaining capability means little if it is not (or cannot be)exercised for political reasons.15 Greater"benefits''are of limited value if they lead to a"perversion''of the structure of the local economy.The final section of this essay will address the question of political constraints on the exercise of national will.The following section will address the question of economic distor- tions produced by foreign investment. I Dependencia proposition II Multinational corporations create distortions within the local economy.There are innumerable allegations of distortion,but four appear to occupy positions of preeminence in the dependencia literature:first,that multinational corporations "preempt''the development of an indigenous economic base by squeezing out local entrepreneurs in the most''dynamic''sectors of the host country economy;second, that multinational corporations employ "inappropriate capital-intensive tech- nologies when they move in,adding to host country unemployment;third,that multinational corporations worsen the distribution of income in the host country or even produce an absolute loss for the lower 40 percent;fourth,that multinational corporations alter consumer tastes and undermine the culture of the host country. Where might a dialogue between dependentistas and non-dependentistas begin with each of these propositions? 1.Multinational corporations "preempt''the development of an indigenous economic base by squeezing out local entrepreneurs in the most''dynamic''sectors of the host country economy. The analysis of direct investment as a response to foreign opportunities in imperfect markets,introduced in Section I,can be a powerful tool for analyzing the question of"preemption''or of foreign industrial domination.The work of Hymer, Kindleberger,Vernon,et al.,suggests that multinational corporations will concen- trate their activities in industries,or at stages within industries,where the greatest barriers to the entry of competition are located-that is,where there are the greatest scale factors,the highest amounts of R D,the largest advertising efforts,and so forth.16 By common definition,therefore,they are likely to be found in those sectors considered by the host country as most "'dynamic''or most glamorous.At the moment when the multinational first comes into the host country,however,domes- have tried to use this distinction to define "exploitation"and"complicity in exploitation'within the balance of power framework suggested here,and to measure the cost of such exploitation quantita- tively in'The Theory of Interational Exploitation in Large Natural Resource Investments,'in Stephen J.Rosen and James R.Kurth,eds.,Testing Theories of Economic Imperialism (Lexington:Lexington Books,1974). Certainly multinational corporations appear to locate their activities in industries that are highly concentrated.Fernando Fajnzylber and Trinidad Martinez Tarrago have found that in Mexico in 1970
Multinational corporations and dependency 85 their political "will" to do so; second, the possible economic distortions produced by the investors in the local economy. Bargaining capability means little if it is not (or cannot be) exercised for political reasons.15 Greater "benefits" are of limited value if they lead to a "perversion" of the structure of the local economy. The final section of this essay will address the question of political constraints on the exercise of national will. The following section will address the question of economic distortions produced by foreign investment. Dependencia proposition II Multinational corporations create distortions within the local economy. There are innumerable allegations of distortion, but four appear to occupy positions of preeminence in the dependencia literature: first, that multinational corporations "preempt" the development of an indigenous economic base by squeezing out local entrepreneurs in the most "dynamic" sectors of the host country economy; second, that multinational corporations employ "inappropriate" capital-intensive technologies when they move in, adding to host country unemployment; third, that multinational corporations worsen the distribution of income in the host country or even produce an absolute loss for the lower 40 percent; fourth, that multinational corporations alter consumer tastes and undermine the culture of the host country. Where might a dialogue between dependentistas and non-dependentistas begin with each of these propositions? 1. Multinational corporations "preempt" the development of an indigenous economic base by squeezing out local entrepreneurs in the most "dynamic" sectors of the host country economy. The analysis of direct investment as a response to foreign opportunities in imperfect markets, introduced in Section I, can be a powerful tool for analyzing the question of'' preemption'' or of foreign industrial domination. The work of Hymer, Kindleberger, Vernon, et al., suggests that multinational corporations will concentrate their activities in industries, or at stages within industries, where the greatest barriers to the entry of competition are located—that is, where there are the greatest scale factors, the highest amounts of R & D, the largest advertising efforts, and so forth.16 By common definition, therefore, they are likely to be found in those sectors considered by the host country as most "dynamic" or most glamorous. At the moment when the multinational first comes into the host country, however, domes- 15I have tried to use this distinction to define "exploitation" and "complicity in exploitation" within the balance of power framework suggested here, and to measure the cost of such exploitation quantitatively in "The Theory of International Exploitation in Large Natural Resource Investments," in Stephen ]. Rosen and James R. Kurth, eds., Testing Theories of Economic Imperialism (Lexington: Lexington Books, 1974). "Certainly multinational corporations appear to locate their activities in industries that are highly concentrated. Fernando Fajnzylber and Trinidad Martinez Tarrago have found that in Mexico in 1970
86 International Organization tic firms may possess special skills,special contacts,or special methods of exploit- ing local market imperfections that foreign investors need to become successfully established.Insofar as they do,as Franco and Wells have hypothesized,the for- eigners will have a strong inducement to penetrate the host country by means of some kind of merger with a domestic enterprise.17 But this may be a transitory stage for many multinationals.Once the parent corporation expands the horizon for the subsidiary's operations beyond sales in the domestic market,its primary concern focuses on how to integrate the subsidiary most effectively into its worldwide (or regional)operations.At this point,local partners become a hindrance (because their loyalty is to the profits and dividends of the domestic subsidiary,not to the profits and dividends of the multinational corporate system as a whole),and the parent company will tend to buy up or force out independent stockholders. This is a cycle that clearly fits the expectations of dependencia theorists:as they predict,import substitution policies are not dependable as a tool to build an independent business class (or a "national bourgeoisie").Rather such policies stimulate foreign firms to link up with indigenous economic groups,as the for. eigners move from exporting to production for the local market,and then to take over those groups as they incorporate local production into their large multinational organizations.In the process,local industrial development falls prey to foreign corporate domination.18 But the main variant of the idea of foreign investment as oligopolistic expansion-the product cycle model-lays the basis for expecting a strong,and largely successful,reaction to this "preemptive''cycle as well.19 Not only is the growth of multinational corporations a history of the attempts by the firms to exploit some barrier to entry,it is also the history of the diffusion of the techniques and of the technology that create the barrier to entry in the first place.20 As production processes introduced by the foreign investor into the host country are standardized markets probed,financial feasibility demonstrated,and uncertainty reduced,local entrepreneurs or local state agencies should be able to duplicate the activities of the for example,foreign investors sold 61 percent of their output in markets where the four largest plants accounted for at least 50 percent of sales.Similarly,in Brazil in 1972,Richard Newfarmer and Willard Mueller have discovered that 49 percent of a sample of 233 US subsidiaries enjoyed market shares of 25 percent or more,and 21 percent of the sample produced over half of the sales in the markets they served. Richard S.Newfarmer and Willard F.Mueller,"Multinational Corporations in Brazil and Mexico: Structural Sources of Economic and Non-economic Power,"Report to the Subcommittee on Multina- tional Corporations of the Committee on Foreign Relations,US Senate,p.133;and Fernando Fajnzylber and Trinidad Martinez Tarrago,"'Las empresas transnacionales en la industria mexicana,"(Mexico City: CONACYT/CIDE,1972),cited in Newfarmer and Mueller,p.60 et seq. Lawrence G.Franco,Joint Venture Survival in Multinational Corporations (New York:Praeger, 1971);Louis T.Wells,Jr.."The Multinational Business Enterprise:What Kind of International Organi- zation?",in Robert O.Keohane and Joseph S.Nye,Jr.,eds.,Transnational Relations and World Politics,special issue of International Organization Vol.25,No.3(Summer 1971). 1Franco and Wells argue,however,that multinational enterprises tend to evolve toward an organization based on"worldwide product divisions'which are"not accompanied by significant purchases of the interests of local partners or sales of the parent company's equity in joint ventures." For the"product cycle model.''see the citations of Vernon,Stobaugh,and Wells in footnote 3,and of Moran in footnote 4. 20N.B.In contrast to the rhetoric of"technology transfer"that is assumed to take place by the enthusiasts of foreign investment,the diffusion of technology occurs in the product cyele model despite the continual struggle of the corporations to keep it tightly held
86 International Organization tic firms may possess special skills, special contacts, or special methods of exploiting local market imperfections that foreign investors need to become successfully established. Insofar as they do, as Franco and Wells have hypothesized, the foreigners will have a strong inducement to penetrate the host country by means of some kind of merger with a domestic enterprise.17 But this may be a transitory stage for many multinationals. Once the parent corporation expands the horizon for the subsidiary's operations beyond sales in the domestic market, its primary concern focuses on how to integrate the subsidiary most effectively into its worldwide (or regional) operations. At this point, local partners become a hindrance (because their loyalty is to the profits and dividends of the domestic subsidiary, not to the profits and dividends of the multinational corporate system as a whole), and the parent company will tend to buy up or force out independent stockholders. This is a cycle that clearly fits the expectations of dependencia theorists: as they predict, import substitution policies are not dependable as a tool to build an independent business class (or a "national bourgeoisie"). Rather such policies stimulate foreign firms to link up with indigenous economic groups, as the foreigners move from exporting to production for the local market, and then to take over those groups as they incorporate local production into their large multinational organizations. In the process, local industrial development falls prey to foreign corporate domination.18 But the main variant of the idea of foreign investment as oligopolistic expansion—the product cycle model—lays the basis for expecting a strong, and largely successful, reaction to this "preemptive" cycle as well.19 Not only is the growth of multinational corporations a history of the attempts by the firms to exploit some barrier to entry, it is also the history of the diffusion of the techniques and of the technology that create the barrier to entry in the first place.20 As production processes introduced by the foreign investor into the host country are standardized, markets probed, financial feasibility demonstrated, and uncertainty reduced, local entrepreneurs or local state agencies should be able to duplicate the activities of the for example, foreign investors sold 61 percent of their output in markets where the four largest plants accounted for at least 50 percent of sales. Similarly, in Brazil in 1972, Richard Newfarmer and Willard Mueller have discovered that 49 percent of a sample of 233 US subsidiaries enjoyed market shares of 25 percent or more, and 21 percent of the sample produced over half of the sales in the markets they served. Richard S. Newfarmer and Willard F. Mueller, "Multinational Corporations in Brazil and Mexico: Structural Sources of Economic and Non-economic Power," Report to the Subcommittee on Multinational Corporations of the Committee on Foreign Relations, US Senate, p. 133; and Fernando Fajnzylber and Trinidad Martinez Tarrago, "Lasempresas transnacionales en la industria mexicana," (Mexico City: CONACYT/CIDE, 1972), cited in Newfarmer and Mueller, p. 60 et seq. "Lawrence G. Franco, Joint Venture Survival in Multinational Corporations (New York: Praeger, 1971); Louis T. Wells, Jr., "The Multinational Business Enterprise: What Kind of International Organization?", in Robert O. Keohane and Joseph S. Nye, Jr., eds., Transnational Relations and World Politics, special issue of International Organization Vol. 25, No. 3 (Summer 1971). 18Franco and Wells argue, however, that multinational enterprises tend to evolve toward an organization based on "worldwide product divisions" which are "not accompanied by significant purchases of the interests of local partners or sales of the parent company's equity in joint ventures." 19Forthe "product cycle model," see the citations of Vernon, Stobaugh, and Wells in footnote 3, and of Moran in footnote 4. 20N.B. In contrast to the rhetoric of "technology transfer" that is assumed to take place by the enthusiasts of foreign investment, the diffusion of technology occurs in the product cycle model despite the continual struggle of the corporations to keep it tightly held
Multinational corporations and dependency 87 foreigner at a steadily decreasing cost.In contrast to dependencia theorists,product cycle analysts predict that the suppliers and auxiliary industries that begin by sup- porting the foreign multinational will eventually become a main source of competi- tion to it.21(The possible political implications of this hypothesis are discussed below.)In support of this process,host governments may well subsidize the growth of national alternatives to foreign multinationals on infant industry or national security grounds.From this perspective,the primary public policy problem for host country officials is not how to mobilize a massive revolution against foreign indus- trial domination,as some dependentista writers urge,but how to design and ad- minister an effective subsidy system that does not,as so often happens,degenerate into an endless drain of public funds needed for other projects in welfare or de- velopment.22 On balance,therefore,the analysis of multinational oligopolistic expansion suggests results that both support and limit dependencia predictions:foreign firms will continually be found in those "'dynamic''sectors where there are major market imperfections.They will continually attempt to integrate local production into their larger multinational organization so as to maximize the oligopoly returns to the system as a whole.But,in a dynamic sense,host country entrepreneurs (public and private)will meet ever-new opportunities to invade those areas that were originally the preserve of foreign multinationals,taking on more and more functions that initially only the foreigners could perform. This portends a pattern of challenge and response to foreign investors at odds with the rhetoric of"harmony of interests''that pervades the liberal characteriza- tion of the contribution of multinationals to Third World development.But it is a pattern of challenge and response that should not work cumulatively to host country disadvantage. The pace and extent of the economic counter-challenge to foreign corporate penetration in the Third World,however,has received surprisingly little rigorous study among either dependencia or non-dependencia analysts. 2.Multinational corporations employ "inappropriate''capital-intensive technologies that exacerbate rather than solve unemployment problems. This is an allegation that,at first glance,is difficult to reconcile with the idea of a profit-maximizing firm since an"appropriate"technology (one that takes advan- tage of local factor endowments,employing relatively more labor if labor is abun- dant)should minimize production costs.There are,however,three major hypoth- eses in non-dependencia literature that suggest why a multinational corporation might choose what would appear to be an"'inappropriate''technology. The first hypothesis proposes that foreign firms do not in fact compare the marginal costs of one production technique (e.g.,a capital-intensive technique)with the marginal costs of another production technique (e.g.,a labor-intensive tech- 2Evidence of this process has been discovered by Jorge Katz in the pharmaceutical,chemical,elec- tronics,automotive,and agricultural machinery industries.Programa Regional de Investigaciones en Ciencia y Tecnologia.CEPAL,Buenos Aires,1976. 2For an analysis of this point,see Harry G.Johnson,The Efficiency and Welfare Implications of the Intemational Corporation"in Charles P.Kindleberger,ed.,The International Corporation:A Sym- posium (Cambridge,Mass.:MIT Press,1970)
Multinational corporations and dependency 87 foreigner at a steadily decreasing cost. In contrast to dependencia theorists, product cycle analysts predict that the suppliers and auxiliary industries that begin by supporting the foreign multinational will eventually become a main source of competition to it.21 (The possible political implications of this hypothesis are discussed below.) In support of this process, host governments may well subsidize the growth of national alternatives to foreign multinationals on infant industry or national security grounds. From this perspective, the primary public policy problem for host country officials is not how to mobilize a massive revolution against foreign industrial domination, as some dependentista writers urge, but how to design and administer an effective subsidy system that does not, as so often happens, degenerate into an endless drain of public funds needed for other projects in welfare or development.22 On balance, therefore, the analysis of multinational oligopolistic expansion suggests results that both support and limit dependencia predictions: foreign firms will continually be found in those "dynamic" sectors where there are major market imperfections. They will continually attempt to integrate local production into their larger multinational organization so as to maximize the oligopoly returns to the system as a whole. But, in a dynamic sense, host country entrepreneurs (public and private) will meet ever-new opportunities to invade those areas that were originally the preserve of foreign multinationals, taking on more and more functions that initially only the foreigners could perform. This portends a pattern of challenge and response to foreign investors at odds with the rhetoric of "harmony of interests" that pervades the liberal characterization of the contribution of multinationals to Third World development. But it is a pattern of challenge and response that should not work cumulatively to host country disadvantage. The pace and extent of the economic counter-challenge to foreign corporate penetration in the Third World, however, has received surprisingly little rigorous study among either dependencia or non-dependencia analysts. 2. Multinational corporations employ "inappropriate" capital-intensive technologies that exacerbate rather than solve unemployment problems. This is an allegation that, at first glance, is difficult to reconcile with the idea of a profit-maximizing firm since an "appropriate" technology (one that takes advantage of local factor endowments, employing relatively more labor if labor is abundant) should minimize production costs. There are, however, three major hypotheses in non-dependencia literature that suggest why a multinational corporation might choose what would appear to be an "inappropriate" technology. The first hypothesis proposes that foreign firms do not in fact compare the marginal costs of one production technique (e.g., a capital-intensive technique) with the marginal costs of another production technique (e.g., a labor-intensive tech- 21Evidence of this process has been discovered by Jorge Katz in the pharmaceutical, chemical, electronics, automotive, and agricultural machinery industries. Programa Regional de Investigaciones en Ciencia y Tecnologia. CEPAL, Buenos Aires, 1976. 22For an analysis of this point, see Harry G. Johnson, "The Efficiency and Welfare Implications of the International Corporation" in Charles P. Kindleberger, ed., The International Corporation: A Symposium (Cambridge, Mass.: MIT Press, 1970)
88 International Organization nique)when contemplating the establishment of a local plant.23 Rather they com- pare the marginal cost of a known technique with the total cost of designing a new process to accommodate local factor proportions.Since the known technique has been developed in the home country (the United States,Western Europe,or Japan), it is likely to economize on labor.Under such conditions,the implantation of techniques that do not use local factor proportions most efficiently is consistent with profit maximizing behavior,and would deviate from both economic optimality24 and from the behavior of local firms. This hypothesis has received some support in empirical testing.But the range of response of multinational corporations to local conditions appears to be highly flexible.Several studies have shown that the corporate preference for sticking with the capital-intensive techniques of the home country is heavily influenced by the extent of competition within the host country market.Wayne Yeoman found,for example,that the more price elastic the demand for a US-based multinational's products in a low-wage country (i.e.,the greater the price competition faced by the firm),the more the production techniques employed by the firm in that country differed in labor intensity from the techniques employed by the same firm in the United States.25 Louis Wells has shown that foreign-owned firms that compete primarily on the basis of price in a developing country are more likely to use labor-intensive techniques than those that compete primarily on the basis of brand names.26 Furthermore,multinational enterprises that have set up"'offshore"pro- duction facilities to export textiles or electronics to developed country markets have generally been driven by price competition to locate their labor-intensive stages in the Third World. This suggests that to the extent host country authorities can encourage competi- tion(among foreign investors or between foreign investors and local firms)in their domestic markets,they can achieve better results from multinational firms in terms of labor-intensive production technologies.Furthermore,once the development of such technologies is stimulated in one part of a multinational system,their use may spread rapidly throughout the corporations'network in the Third World.Ford's low-cost"modern Model T''(the Fiera),for example,is designed to be produced in small job shops where brake presses and simple welding jigs replace the stamping dies and automated equipment that make upwards of two hundred welds simultane- ously in Ford's US plants.The company decided to experiment with this type of production technology explicitly so that if it is successful in the first plant in the Philippines it can be subsequently introduced throughout the Asia-Pacific region.27 3Cf.Walter A.Chudson and Louis T.Wells,Jr.,'The Acquisition of Proprietary Technology by Developing Countries from Multinational Enterprises:A Review of Issues and Policies,"United Nations Study Group on the Multinational Enterprise,1973. 4It should be noted,however,that expenses incurred in the search for new technologies or production techniques are real costs. 25Wayne A.Yeoman,"Selection of Production Processes for the Manufacturing Subsidiaries of U.S. Based Multinational Corporations,D.B.A.thesis,Harvard Business School (Boston:1968). 2Louis T.Wells,Jr.,Economic Man and Engineering Man:Choice in a Low-Wage Country."Public Policy Vol.21 (1973). 2Chalmers Goyert,"Ford in Asia:A Case Study,"Council on Religion and Intemational Affairs. Aspen,Colorado;Aspen,Colorado,April 27.1974
88 International Organization nique) when contemplating the establishment of a local plant.23 Rather they compare the marginal cost of a known technique with the total cost of designing a new process to accommodate local factor proportions. Since the known technique has been developed in the home country (the United States, Western Europe, or Japan), it is likely to economize on labor. Under such conditions, the implantation of techniques that do not use local factor proportions most efficiently is consistent with profit maximizing behavior, and would deviate from both economic optimality24 and from the behavior of local firms. This hypothesis has received some support in empirical testing. But the range of response of multinational corporations to local conditions appears to be highly flexible. Several studies have shown that the corporate preference for sticking with the capital-intensive techniques of the home country is heavily influenced by the extent of competition within the host country market. Wayne Yeoman found, for example, that the more price elastic the demand for a US-based multinational's products in a low-wage country (i.e., the greater the price competition faced by the firm), the more the production techniques employed by the firm in that country differed in labor intensity from the techniques employed by the same firm in the United States.25 Louis Wells has shown that foreign-owned firms that compete primarily on the basis of price in a developing country are more likely to use labor-intensive techniques than those that compete primarily on the basis of brand names.26 Furthermore, multinational enterprises that have set up "offshore" production facilities to export textiles or electronics to developed country markets have generally been driven by price competition to locate their labor-intensive stages in the Third World. This suggests that to the extent host country authorities can encourage competition (among foreign investors or between foreign investors and local firms) in their domestic markets, they can achieve better results from multinational firms in terms of labor-intensive production technologies. Furthermore, once the development of such technologies is stimulated in one part of a multinational system, their use may spread rapidly throughout the corporations' network in the Third World. Ford's low-cost "modern Model T" (the Fiera), for example, is designed to be produced in small job shops where brake presses and simple welding jigs replace the stamping dies and automated equipment that make upwards of two hundred welds simultaneously in Ford's US plants. The company decided to experiment with this type of production technology explicitly so that if it is successful in the first plant in the Philippines it can be subsequently introduced throughout the Asia-Pacific region.27 23Cf. Walter A. Chudson and Louis T. Wells, Jr., "The Acquisition of Proprietary Technology by Developing Countries from Multinational Enterprises: A Review of Issues and Policies," United Nations Study Group on the Multinational Enterprise, 1973. MIt should be noted, however, that expenses incurred in the search for new technologies or production techniques are real costs. ^Wayne A. Yeoman, "Selection of Production Processes for the Manufacturing Subsidiaries of U.S. Based Multinational Corporations," D.B.A. thesis, Harvard Business School (Boston: 1968). 26Louis T. Wells, Jr., "Economic Man and Engineering Man: Choice in a Low-Wage Country," Public Policy Vol. 21 (1973). "Chalmers Goyert, "Ford in Asia: A Case Study," Council on Religion and International Affairs, Aspen, Colorado; Aspen, Colorado, April 27, 1974
