THE EFFICIENCY (CONTRADICTIONS)OF MULTINATIONAL CORPORATIONS By STEPHEN HYMER Yale University Multinational corporations are a substitute for to reap the benefits of internal specialization aud the market as a method of organizing interna- exchange.Few studies have been made on the re- tional exchange.They are "..islands of con- lationship of foreign investment to a firm's overall scious power in an ocean of unconscious coopera- efficiency and as far as quantitative evidence is tion,"to use D.H.Robertson's phrase.1 This es- concerned,we must view this question as a com- say examines some of the contradictions of this pletely open one.With regard to the effect of latest stage in the development of private busi- size,the evidence is more plentiful but not con- ness enterprise. clusive.A number of studies on differences in per- At the outset,we should note that the multina- formance of large and small firms have in general tional corporation raises more questions than eco- concluded that firms experience economies of nomic theory can answer.Multinational corpora- scale up to a certain minimum size,after which tions are typically large firms operating in imper- there is little relationship between size and per- fect markets and the question of their efficiency is formance.Applying these results to the multina- a question of the efficiency of oligopolistic deci- tional corporation suggests that most parent firms sion making,an area where much of welfare eco- are large enough to have exhausted economies of nomics breaks down,especially the proposition scale without foreign investment,although many that competition allocates resources efficiently of their subsidiaries may be too small to stand on and that there is a harmony between private their own feet. proft maximization and the general interest. These tests,however,bave several inadequacies Moreover,multinational corporations bring into and may seriously underestimate the advantages high definition such social and political problems of size.The major difficulty is that large firms are as want creation,alienation,domination,and the seldom engaged in exactly the same activities as relationship or interface between corporations and medium-sized or smaller firms and their perfor- national states (including the question of imperi- mance is not really comparable.The fact that alism),which cannot be analyzed in purely "eco- very large firms do not seem to be significantly nomic”terms. more profitable than their smaller rivals or to grow significantly faster does not preclude the I.Division of Labor and the Extent of the Firm possibility that they are specializing in activities Our starting point is the fact that there are two where size is of great advantage and which would kinds of division of labor:the division of labor not be undertaken if the large firms did not exist. between firms coordinated by the markets;and The structure of output within a country could the division of labor within firms,coordinated by well be a function of the size distribution of its entrepreneurs.International trade theory has frms without there being observable differences been mainly concerned with the first of these and between large and small firms with regard to the has long stressed the desirability of widening in- more commonly studied characteristics. ternational markets to increase the division of la- The qualitative evidence on the structure of bor and exchange.Far less attention has been business enterprise and its evolution through time paid to the parallel proposition that the division suggests that both size and internationality have of labor within a firm is limited by the extent of important positive effects on a firm's strength the firm and the economic and social questions and ability.Since the beginning of the industrial this raises. revolution there has been a steady increase in the Unfortunately,the empirical evidence is not size of manufacturing firms,so persistent that it very helpful in deciding the degree to which large might almost be formulated as a general law of international firms should be encouraged in order capital accumulation.These increases in size were accompanied by important changes in organiza- D.H.Robertson quoted in R.H.Coase,"The tional structure involving both increased subdivi- Nature of the Firm,"Economica,New Series,1937, pp.386-405.Reprinted in G.S.Stigler and K.E. sion or differentiation of tasks and increased inte- Boulding,Readings in Price Theory (Richard D. gration through the creation of new organs of Irwin,Inc.,1932). control.Business administration became a highly 441
THE EFFICIENCY (CONTRADICTIONS) OF MULTINATIONAL CORPORATIONS By STEPHEN HYMER Yale University Multinational corporations are a substitute for the market as a method of organizing international exchange. They are ".. . islands of conscious power in an ocean of unconscious cooperation," to use D. H. Robertson's phrase.^ This essay examines some of the contradictions of this latest stage in the development of private business enterprise. At the outset, we should note that the multinational corporation raises more questions than economic theory can answer. Multinational corporations are typically large firms operating in imperfect markets and the question of their efficiency is a question of the efficiency of oligopolistic decision making, an area where much of welfare economics breaks down, especially the proposition that competition allocates resources efficiently and that there is a harmony between private profit maximization and the general interest. Moreover, multinational corporations bring into high definition such social and political problems as want creation, alienation, domination, and the relationship or interface between corporations and national states (including the question of imperialism), which cannot be analyzed in purely "economic" terms. I. Division of Lahor and the Extent of the Firm Our starting point is the fact that there are two kinds of division of labor: the division of labor between firms coordinated by the markets; and the division of labor within firms, coordinated by entrepreneurs. International trade theory has been mainly concerned with the first of these and has long stressed the desirability of widening international markets to increase the division of labor and exchange. Far less attention has been paid to the parallel proposition that the division of labor within a firm is limited by the extent of the firm and the economic and social questions this raises. Unfortunately, the empirical evidence is not very helpful in deciding the degree to which large international firms should be encouraged in order ' D. H. Robertson quoted in R. H. Coase, "The Nature of the Firm," Económica, New Series, 1937, pp. 386-405. Reprinted in G. S. Stigler and K. E. Boulding, Readings in Price Theory (Richard D. Irwin, Inc., 1932). to reap the benefits of internal specialization aud exchange. Few studies have been made on the relationship of foreign investment to a firm's overall efficiency and as far as quantitative evidence is concerned, we must view this question as a completely open one. With regard to the effect of size, the evidence is more plentiful but not conclusive. A number of studies on differences in performance of large and small firms have in general concluded that firms experience economies of scale up to a certain minimum size, after which there is little relationship between size and performance. Applying these results to the multinational corporation suggests that most parent firms are large enough to have exhausted economies of scale without foreign investment, although many of their subsidiaries may be too small to stand on their own feet. These tests, however, have several inadequacies and may seriously underestimate the advantages of size. The major difficulty is that large firms are seldom engaged in exactly the same activities as medium-sized or smaller firms and their performance is not really comparable. The fact that very large firms do not seem to be significantly more profitable than their smaller rivals or to grow significantly faster does not preclude the possibility that they are specializing in activities where size is of great advantage and which would not be undertaken if the large firms did not exist. The structure of output within a country could well be a function of the size distribution of its firms without there being observable differences between large and small firms with regard to the more commonly studied characteristics. The qualitative evidence on the structure of business enterprise and its evolution through time suggests that both size and internationality have important positive effects on a firm's strength and ability. Since the beginning of the industrial revolution there has been a steady increase in the size of manufacturing firms, so persistent that it might almost be formulated as a general law of capital accumulation. These increases in size were accompanied by important changes in organizational structure involving both increased subdivision or differentiation of tasks and increased integration through the creation of new organs of control. Business administration became a highly 441
442 AMERICAN ECONOMIC ASSOCIATION specialized activity with its own elaborate division the top two levels are separated from the bottom of labor;and the corporation developed a brain level.In the multidivisional corporation,diff- to consciously coordinate the various specialties erentiation is far more complete;level three is and to plan for the survival of the organism as a completely split off from level two and is concen- whole. trated in the general office whose specific function Chandler2 distinguishes three major stages in is strategy,not tactics. the development of corporate capital.First,the In other words,the process of capital accumu- Marshallian firm,organized at the factory level, lation has become more and more specialized confined to a single function and a single indus- through time.As the corporation evolved,it de- try,and tightly controlled by one or a few men veloped an elaborate system of internal division who,as it were,see everything,and decide every- of labor,able to absorb and apply both the physi- thing.The second stage emerged in the United cal sciences and the social sciences to business ac- States at the end of the nineteenth century when tivity on a scale which could not be imagined in rapid growth and the merger movement led to earlier years.At the same time,it developed a high- large national corporations,and a new structure er brain to command its very large concentration of administration was developed to deal with the of wealth.This gave it the power to invest on a new strategy of continent-wide,vertically inte- much larger scale and with a much wider time-ho- grated production and marketing.The family firm rizon than the smaller,less developed firms that gave way to the modern corporation with a highly preceded it.The modern multidivisional corpora- elaborate administrative structure to organize the tion is thus a far cry from the marshallian firm in many disparate units of a giant enterprise.The both its vision and its strength.The Marshallian next stage,the multidivisional corporation,began capitalist ruled his factory from an office on the in the 1920's and gathered great momentum after second floor.At the turn of the century,the pres- the second World War.It too was a response to a ident of a large national corporation was lodged new marketing strategy.To meet the conditions in a higher building,say on the seventh floor, of continuous innovation,corporations were de- with wider perspectives and greater power.In the centralized into several divisions,each specializing giant corporation of today,managers rule from in one product line and organized as an almost the top of skyscrapers;on a clear day,they can autonomous unit similar in structure to the na- almost see the world. tional corporation.At the same time,an enlarged Each step in the evolution of business enter- corporate brain was created in the form of the prise had important implications for the structure general office to coordinate the various divisions of the international economy,just as each excur- and to plan overall growth and survival.This sion into the international economy provided new form is highly flexible and can operate in several challenges to the corporation and speeded its evo- industries and adjust quickly to rapidly changing lutionary development.In a world of Marshallian demands and technology. firms,commodity trade and portfolio capital were With each step in the development of business the main engines of international exchange. administration,capital obtained new power and Movement of enterprise between countries was new horizons.As Chandler and Redlicha point sharply limited because firms were small and out,there are three levels of business administra- lacked the appropriate administrative structure. tion.Level three,the lowest level,is concerned The diffusion of Marshall's vital fourth factor, with managing the day-to-day operations of the organization,from advanced to less advanced enterprise;i.e.,keeping it going within the estab- countries was therefore exceedingly slow.Move- lished framework.Level two is responsible for ments of portfolio capital were substantial,at coordinating the managers at level three.Level times,because the small Marshallian firms were one's function is goal determination and planning; associated with a highly developed banking and i.e.,setting the framework for the lower levels.In financial system.But the ability of less advanced the Marshallian firm all three levels are embodied countries to absorb capital (and technology)was in one entrepreneur.In the national corporation, limited to the rate at which they could build up their own organizations,a slow and difficult pro- 3 Alfred D.Chandler,Strategy and Structure (Dou- cess given the negative policies of most govern- bleday Co.,1961). ments in Africa,Asia,and Latin Ameri- Alfred D.Chandler and Fritz Redlich,"Recent ca,especially those in colonial dependencies.The Developments in American Business Administration and Their Conceptualization,"Bus.Hist.Rev., range of goods which could be produced was thus Spring,1961. restricted and the possibility for international
442 AMERICAN ECONOMIC ASSOCIATION specialized activity with its own elaborate division of labor; and the corporation developed a brain to consciously coordinate the various specialties and to plan for the survival of the organism as a whole. Chandler^ distinguishes three major stages in the development of corporate capital. First, the Marshallian firm, organized at the factory level, conñned to a single function and a single industry, and tightly controlled by one or a few men who, as it were, see everything, and decide everything. The second stage emerged in the United States at the end of the nineteenth century when rapid growth and the merger movement led to large national corporations, and a new structure of administration was developed to deal with the new strategy of continent-wide, vertically integrated production and marketing. The family firm gave way to the modern corporation with a highly elaborate administrative structure to organize the many disparate units of a giant enterprise. The next stage, the multidivisional corporation, began in the 192O's and gathered great momentum after the second World War. It too was a response to a new marketing strategy. To meet the conditions of continuous innovation, corporations were decentralized into several divisions, each specializing in one product line and organized as an almost autonomous unit similar in structure to the national corporation. At the same time, an enlarged corporate brain was created in the form of the general office to coordinate the various divisions and to plan overall growth and survival. This form is highly flexible and can operate in several industries and adjust quickly to rapidly changing demands and technology. With each step in the development of business administration, capital obtained new power and new horizons. As Chandler and Redlich^ point out, there are three levels of business administration. Level three, the lowest level, is concerned with managing the day-to-day operations of the enterprise; i.e., keeping it going within the established framework. Level two is responsible for coordinating the managers at level three. Level one's function is goal determination and planning; i.e., setting the framework for the lower levels. In the Marshallian firm all three levels are embodied in one entrepreneur. In the national corporation. ' Alfred D. Chandler, Strategy and Structure (Doubleday & Co., 1961). •Alfred D. Chandler and Fritz Redlich, "Recent Developments in American Business Administration and Their Conceptualization," Bus. Hist. Rev., Spring, 1961. the top two levels are separated from the bottom level. In the multidivisional corporation, differentiation is far more complete; level three is completely split off from level two and is concentrated in the general office whose specific function is strategy, not tactics. In other words, the process of capital accumulation has become more and more specialized through time. As the corporation evolved, it developed an elaborate system of internal division of labor, able to absorb and apply both the physical sciences and the social sciences to business activity on a scale which could not be imagined in earlier years. At the same time, it developed a higher brain to command its very large concentration of wealth. This gave it the power to invest on a much larger scale and with a much wider time-horizon than the smaller, less developed firms that preceded it. The modern multidivisional corporation is thus a far cry from the Marshallian firm in both its vision and its strength. The Marshallian capitalist ruled his factory from an office on the second floor. At the turn of the century, the president of a large national corporation was lodged in a higher building, say on the seventh floor, with wider perspectives and greater power. In the giant corporation of today, managers rule from the top of skyscrapers; on a clear day, they can almost see the world. Each step in the evolution of business enterprise had important implications for the structure of the international economy, just as each excursion into the international economy provided new challenges to the corporation and speeded its evolutionary development. In a world of Marshallian firms, commodity trade and portfolio capital were the main engines of international exchange. Movement of enterprise between countries was sharply limited because firms were small and lacked the appropriate administrative structure. The diffusion of Marshall's vital fourth factor, organization, from advanced to less advanced countries was therefore exceedingly slow. Movements of portfolio capital were substantial, at times, because the small Marshallian firms were associated with a highly developed banking and financial system. But the ability of less advanced countries to absorb capital (and technology) was limited to the rate at which they could build up their own organizations, a slow and difficult process given the negative policies of most governments in Africa, Asia, and Latin America, especially those in colonial dependencies. The range of goods which could be produced was thus restricted and the possibility for intemational
THE INTERNATIONAL FIRM 443 trade to equalize factor prices was severely lim- certain highly intractable problems which greatly ited.* impede their efficiency.We turn to these consider- The national corporation opened new possibili- ations. ties of transferring organizational abilities inter- nationally.The new administrative structure and II.Bigness and Fewness financial power enabled firms to undertake direct Multinational corporations enlarge the domain foreign investments and organize large-scale pro- of centrally planned world production and de- duction in mining and manufacturing in foreign crease the domain of decentralized market-di- countries.However,this migration of business en- rected specialization and exchange.Bigness is thus terprise occurred only on a limited scale and was paid for,in part,by fewness,and a decline in usually restricted to a narrow activity;i.e.,to ac- competition since the size of the market is limited quiring raw materials used by the parent company by the size of the 'firm.The precise effect of the or to exploiting some technological advance or dif- present wave of direct investment on seller con- ferentiated product developed by the parent centration in world markets is not well estab- company.Moreover,to the extent that invest- lished.On the one hand,improved communica- ment strengthened the firm's market control,its tions are breaking down barriers to trade and wid- effect was considerably less beneficial and perhaps ening the market facing most buyers.On the even negative. other hand,direct foreign investment tends to re- The modern multidivisional or conglomerate duce the number of alternatives facing sellers and enterprise is a much more powerful organizational to stay the forces of international competition.A form than the national corporation and appears great deal of statistical work needs to be done to capable of integrating world production and ex- evaluate the net effect of these two tendencies change to a much larger extent.Larger size and a and establish the exact trend in the level of seller more advanced administrative structure give it a concentration,taking into account the growing in- much wider horizon leading in many cases to a ternational nature of the market.All that can be global outlook and a transformation to the stage said at present is that the world level of concen- of multinational enterprise.It seems that after a tration is much higher than it would be if foreign certain point,a corporation comes to think in investment and domestic mergers were restricted terms of its world market position rather than Since most countries are encouraging mergers at merely its United States or European market pos- home and foreign investment abroad,for better ition and to plan in terms of worldwide factor or worse,the opportunity to increase competition availabilities and demand patterns.Since the pro- by maintaining numbers is not being taken up. cess is just beginning,it is difficult to evaluate Direct foreign investment thus has a dual na- how strong this tendency will be.However,it is ture.It is an instrument which allows business clear that at present large corporations are con- firms to transfer capital,technology,and organi- sciously moving towards an international perspec- zational skill from one country to another.It is tive much faster than other institutions and espe- also an instrument for restraining competition be- cially much faster than governments,and are in tween firms of different nations.Analyzing any the vanguard of planners of the new international particular case is an exceedingly complex matter, economy created by the aeronautical and elec- as the antitrust literature shows.s For present tronic revolutions.Since multinational corpora- purposes,the important point is to note that the tions also have great financial and technical re- general presumption of international trade eco- sources,they will certainly have many successes nomists in favor of free trade and free factor and will be able to speed up the spread of tech- movements,on the grounds of allocative effic- nology and to organize activities until now impos- iency,does not apply to direct foreign investment sible.They are a large step forward but this is because of the anticompetitive effect inherently not,however,the same thing as saying that they associated with it.Just as in antitrust theory serve the general interest as well as their own, there are recognized reasons,within the frame- that they are the best way to exploit the possibili- ties of modern science,or that they do not create See also Stephen Hymer,"Direct Foreign Invest- ment and the National Economic Interest,"Peter Russel,ed.,Nationalism in Canada (Toronto:Mc- Stephen Hymer and Stephen Resnick,"Interna- Graw-Hill of Canada,1966);Yale Economic Growth tional Trade and Uneven Development,"in J.N. Center,Paper No.108;"L'Impact des Firmes Inter- Bhagwati,R.W.Jones,R.A.Mundell, Jaroslav nationals,"in M.Bye,ed.,La Politique Industrielle Vanek,eds.,Kindleberger Festschrift (M.I.T.Press, de L'Europe Integree (Paris:Presses Universitaires forthcoming). de France,1968)
THE INTERNATIONAL FIRM 443 trade to equalize factor prices was severely limited.* The national corporation opened new possibilities of transferring organizational abilities internationally. The new administrative structure and financial power enabled firms to undertake direct foreign investments and organize large-scale production in mining and manufacturing in foreign countries. However, this migration of business enterprise occurred only on a limited scale and was usually restricted to a narrow activity; i.e., to acquiring raw materials used by the parent company or to exploiting some technological advance or differentiated product developed by the parent company. Moreover, to the extent that investment strengthened the firm's market control, its effect was considerably less beneficial and perhaps even negative. The modern multidivisional or conglomerate enterprise is a much more powerful organizational form than the national corporation and appears capable of integrating world production and exchange to a much larger extent. Larger size and a more advanced administrative structure give it a much wider horizon leading in many cases to a global outlook and a transformation to the stage of multinational enterprise. It seems that after a certain point, a corporation comes to think in terms of its world market position rather than merely its United States or European market position and to plan in terms of worldwide factor availabilities and demand patterns. Since the process is just beginning, it is difficult to evaluate how strong this tendency will be. However, it is clear that at present large corporations are consciously moving towards an international perspective much faster than other institutions and especially much faster than governments, and are in the vanguard of planners of the new international economy created by the aeronautical and electronic revolutions. Since multinational corporations also have great financial and technical resources, they will certainly have many successes and will be able to speed up the spread of technology and to organize activities until now impossible. They are a large step forward but this is not, however, the same thing as saying that they serve the general interest as well as their own, that they are the best way to exploit the possibilities of modern science, or that they do not create ' Stephen Hymer and Stephen Resnick, "International Trade and Uneven Development," in J. N. Bhagwati, R. W. Jones, R. A. Mundell, Jaroslav Vanek, eds., Kindleberger Festschrift (M.I.T. Press, forthcoming). certain highly intractable problems which greatly impede their efficiency. We turn to these considerations. II. Bigness and Fewness Multinational corporations enlarge the domain of centrally planned world production and decrease the domain of decentralized market-directed specialization and exchange. Bigness is thus paid for, in part, by fewness, and a decline in competition since the size of the market is limited by the size of the firm. The precise effect of the present wave of direct investment on seller concentration in world markets is not well established. On the one hand, improved communications are breaking down barriers to trade and widening the market facing most buyers. On the other hand, direct foreign investment tends to reduce the number of alternatives facing sellers and to stay the forces of international competition. A great deal of statistical work needs to be done to evaluate the net effect of these two tendencies and establish the exact trend in the level of seller concentration, taking into account the growing international nature of the market. All that can be said at present is that the world level of concentration is much higher than it would be if foreign investment and domestic mergers were restricted. Since most countries are encouraging mergers at home and foreign investment abroad, for better or worse, the opportunity to increase competition by maintaining numbers is not being taken up. Direct foreign investment thus has a dual nature. It is an instrument which allows business firms to transfer capital, technology, and organizational skill from one country to another. It is also an instrument for restraining competition between firms of different nations. Analyzing any particular case is an exceedingly complex matter, as the antitrust literature shows." For present purposes, the important point is to note that the general presumption of international trade economists in favor of free trade and free factor movements, on the grounds of allocative efficiency, does not apply to direct foreign investment because of the anticompetitive effect inherently associated with it. Just as in antitrust theory there are recognized reasons, within the frame- ' See also Stephen Hymer, "Direct Foreign Investment and the National Economic Interest," Peter Rüssel, ed.. Nationalism in Canada (Toronto: McGraw-Hill of Canada, 1966) ; Yale Economic Growth Center, Paper No. 108; "L'Impact des Firmes Internationals," in M. Bye, ed., La Politique Industrielle de L'Europe Intégrée (Paris : Presses Universitaires de France, 1968)
444 AMERICAN ECONOMIC ASSOCIATION work of neoclassical economics,for preventing a creasing competitiveness,may improve general firm from merging with another firm or from in- welfare in the rich countries as well-although it creasing its share of the market by growth,there will harm those in the monopoly position. are also international.antitrust reasons for pre- venting a firm of one country from taking over a III.The International"Trickle Down" firm in another country or from acquiring or in- Many economists,in dealing with oligopoly, creasing its share of foreign production.Since this prefer to stress,as Schumpeter did,that the com- point can be easily misunderstood,it is important petition that counts lies in creative destruction to stress that this is not a second-best argument through the introduction of new technology and but a genuine argument on antimonopoly grounds new products.In that case,an oligopolistic for interfering in international markets.A re- market structure,even though it interferes with striction on direct investment or a policy to break static optimum allocation,may be a necessary or up a multinational corporation may be in some at least a contributing factor to dynamic opti- cases the only way of establishing a higher degree mum allocation in a private enterprise system,be- of competition in that industry.National anti- cause it allows innovators to capture some of the trust measures cannot substitute for international benefits of their discoveries and thus provides the antitrust when,for example,one of the major po- incentive for research and development.The rec- tential competitors to a domestic firm is its sister ord of the United States shows that one cer- or parent affiliate within the same multinational tainly cannot fault oligopoly on the grounds that group.In short,when we leave the conditions of it does not produce a very rapid rate of techno- perfect competition we lose the assumption of the logical change and product innovation.(Indeed it invisible hand. is easier to argue that the rate of change is too This argument,it should be noted,provides an high.)One can expect international oligopoly via important rationale for the infant entrepreneur multinational corporation to provide the same argument supporting protection.Temporary pro- kind of dynamic environment for the world econ- tection of a weak firm from a stronger firm can omy as a whole. improve the competitive structure of the industry The question of efficiency therefore hinges on in future periods by maintaining numbers.In the the direction of change rather than the rate of present context,the cost of this protection would change.An analysis of this problem involves an have to be borne by the country that offers it excursion into unexplored terrain since we do not while the benefits would accrue to the world as a now have an adequate theory on how corporations whole.Thus,in reverse of the usual arguments, choose between the available paths of innovation. myopic behavior will lead to too little protection We certainly cannot assume that market forces rather than too much.This presents a particularly compel firms to choose the optimum path.It is acute problem in the case of underdeveloped true that an innovation must,to some extent countries.These countries typically do not sell meet the market test for a corporation to survive. commodities or buy capital or technology in com- However,what is at stake here is not whether the petitive markets where there is an established consumer has some choice but rather whether an price at which they can trade whatever quantity oligopolistically competitive market structure they want.Instead,they frequently face only a provides him with the full range of choices possi- few potential buyers of their raw materials or ble.Oligopolists tend to copy each other,and their manufactured goods and a few potential sel- their predictions as to what the consumer wants lers of a particular technology.The price they re- are often self-fulfilling,since in fact this is all ceive or pay therefore depends on their skill and that the consumer is offered.If we had only large strength in bargaining and not on market condi- numbers of independent decision centers could we tions alone.The less developed the country,the assume that all avenues had been explored. greater its disadvantage in the bargaining process Since we cannot possibly treat this complex because it has fewer organizations that are in any topic in any detail in the present paper,let us way a match for the giant companies with which simply examine one theory of innovation closely it is dealing.Given the oligopolistic front main- associated with the multinational corporation and tained by the firms from developed countries,the the international demonstration effect.The mark- underdeveloped countries need to devote an impor- tant share of their scarce resources to building up Sean Gervasi,"Publicite et Croissance Econo- national enterprises which they can control and mique,"Economie et Humanisme,Nov.-Dec..1964 Opu- use in bargaining with foreign oligopolists.Ironi- Harry Johnson,"The Political Economy of lence,"in The Canadian Quandary (MeGraw-Hill, cally,their stronger bargaining position,by in- 1962)
444 AMERICAN ECONOMIC ASSOCIATION work of neoclassical economics, for preventing a firm from merging with another firm or from increasing its share of the market by growth, there are also international, antitrust reasons for preventing a firm of one country from taking over a firm in another country or from acquiring or increasing its share of foreign production. Since this point can be easily misunderstood, it is important to stress that this is not a second-best argument but a genuine argument on antimonopoly grounds for interfering in international markets. A restriction on direct investment or a policy to break up a multinational corporation may be in some cases the only way of establishing a higher degree of competition in that industry. National antitrust measures cannot substitute for international antitrust when, for example, one of the major potential competitors to a domestic firm is its sister or parent affiliate within the same multinational group. In short, when we leave the conditions of perfect competition we lose the assumption of the invisible hand. This argument, it should be noted, provides an important rationale for the infant entrepreneur argument supporting protection. Temporary protection of a weak firm from a stronger firm can improve the competitive structure of the industry in future periods by maintaining numbers. In the present context, the cost of this protection would have to be borne by the country that offers it while the benefits would accrue to the world as a whole. Thus, in reverse of the usual arguments, myopic behavior will lead to too little protection rather than too much. This presents a particularly acute problem in the case of underdeveloped countries. These countries typically do not sell commodities or huy capital or technology in competitive markets where there is an established price at which they can trade whatever quantity they want. Instead, they frequently face only a few potential buyers of their raw materials or their manufactured goods and a few potential sellers of a particular technology. The price they receive or pay therefore depends on their skill and strength in bargaining and not on market conditions alone. The less developed the country, the greater its disadvantage in the bargaining process because it has fewer organizations that are in any way a match for the giant companies with which it is dealing. Given the oligopolistic front maintained by the firms from developed countries, the underdeveloped countries need to devote an important share of their scarce resources to building up national enterprises which they can control and use in bargaining with foreign oligopolists. Ironically, their stronger bargaining position, by increasing competitiveness, may improve general welfare in the rich countries as well—although it will harm those in the monopoly position. III. The International "Trickle Down" Many economists, in dealing with oligopoly, prefer to stress, as Schumpeter did, that the competition that counts lies in creative destruction through the introduction of new technology and new products. In that case, an oligopolistic market structure, even though it interferes with static optimum allocation, may be a necessary or at least a contributing factor to dynamic optimum allocation in a private enterprise system, because it allows innovators to capture some of the benefits of their discoveries and thus provides the incentive for research and development. The record of the United States shows that one certainly cannot fault oligopoly on the grounds that it does not produce a very rapid rate of technological change and product innovation. (Indeed it is easier to argue that the rate of change is too high.) One can expect international oligopoly via multinational corporation to provide the same kind of dynamic environment for the world economy as a whole. The question of efficiency therefore hinges on the direction of change rather than the rate of change. An analysis of this problem involves an excursion into unexplored terrain since we do not now have an adequate theory on how corporations choose between the available paths of innovation. We certainly cannot assume that market forces compel firms to choose the optimum path. It is true that an innovation must, to some extent, meet the market test for a corporation to survive. However, what is at stake here is not whether the consumer has some choice hut rather whether an oligopolistically competitive market structure provides him with the full range of choices possible.* Oligopolists tend to copy each other, and their predictions as to what the consumer wants are often self-fulfilling, since in fact this is all that the consumer is offered. If we had only large numbers of independent decision centers could we assume that all avenues had been explored. Since we cannot possibly treat this complex topic in any detail in the present paper, let us simply examine one theory of innovation closely associated with the multinational corporation and the international demonstration effect. The mark- ' Sean Gervasi, "Publicité et Croissance Economique," Economie et Humanisme, Nov.-Déc, 1964. Harry Johnson, "The Political Economy of Opulence," in The Canadian Quandary (McGraw-Hill, 1962)
THE INTERNATIONAL FIRM 445 eting literature suggests new products typically of the modern economic problem..."was the follow a cycle known as trickle-down or two-stage division of labor within the factory between those marketing.An innovation is first adopted by a who plan and organize economic activity and small group of individuals who act as opinion those who work for them.In the modern corpora- leaders and is then copied by others via the dem- tion the hierarchical structure of command and onstration effect.In this process,the rich get authority has been greatly elaborated from the more votes than everyone else,first of all because simple division between owners and workers in they have more money,second of all because they the Marshallian firm,but the tensions and have discretionary income and can afford to be conficts of autocracy remain.They take on par- experimental,and,third,because they have high ticular importance in the multinational corpora- status and are more likely to be copied.The prin- tion where problems of nationalism and problems ciple of consumer sovereignty cannot easily be of authoritarianism intertwine. applied to this process since,at most,only the Multinational corporations are torn in two di- special group in the first stage of the marketing rections.On the one hand,they must adapt to lo- process has something approaching a free choice. cal circumstances in each country.This calls for The rest have only the choice between conform- decentralized decision making.On the other hand, ing or being isolated. they must coordinate their activities in various In the international economy, trickle-down parts of the world and stimulate the flow of ideas marketing takes the form of the international from one part of their empire to another.This demonstration effect.Products are first intro- calls for centralized controls.They must therefore duced in the United States or Europe and then develop an organizational structure to balance the spread to other countries.Multinational corpora- need to coordinate and integrate operations with tions speed up this process by making it easier to the need to adapt to a patchwork quilt of lan- transfer new products and marketing methods to guages,laws,and customs.One solution is divi- less advanced countries.One of the key motives sion of labor based on nationality.Day-to-day for direct investment,cited by corporations,is to management in each country is left to nationals gain control over marketing facilities in order to of that country who are intimately familiar with facilitate the spread of their products.If firms local conditions and practices and best suited to were denied control over communication and mar- deal with local problems and local government. keting facilities in the foreign countries and we had These nationals remain rooted in one spot,but a regime of national firms (private or socialized) above them is a layer of people who move around rather than multinational firms,the pattern of from country to country,as bees among flowers, output would almost certainly be quite different transmitting information from one subsidiary to than the one that is now observed.There would another and from the lower levels to the general be more centers of innovation,and probably more office at the apex of the corporate structure.In variety of choices offered to the consumers,as the nature of things,these people,for the most each country developed products suited to its par- part,will be citizens of the country of the parent ticular characteristics.Products from one country corporation,just as we now find that the top ex- would spread to other countries either through ecutives of most of the major corporations in the trade or imitation but the movement would be United States are drawn from a relatively small coordinated by market competition rather than homogeneous cultural group quite distinct from the planning decisions of top management in a the population of the United States as a whole. few corporations whose interest it is to foreclose This creates two types of problems.In the first competition,to restrict the choices offered,and to place,there is the internal problem of creating in- insure the survival of their own organizations.It centives for foreigners whose access to the top is difficult to speak with professional certainty in corporate positions will be necessarily limited. this badly neglected field,but it does not appear The second problem is far more important and is to be socially efficient to allow corporations to in the nature of an external diseconomy.The sub- monopolize information on new possibilities cre- sidiaries of multinational corporations are fre- ated by science. quently amongst the largest corporations in their country of operations and their top executives play an influential role in the political,social,and IV.The International Hierarchy of Decision Making cultural life of the country.Yet these people, Marshall,like Marx,thought that the "chief 1 Alfred Marshall.Principles of Economics (Mac- fact in the form of modern civilization,the kernel millan,1961),pp.7475
THE INTERNATIONAL FIRM 445 eting literature suggests new products typically follow a cycle known as trickle-down or two-stage marketing. An innovation is first adopted by a small group of individuals who act as opinion leaders and is then copied by others via the demonstration effect. In this process, the rich get more votes than everyone else, first of all because they have more money, second of all because they have discretionary income and can afford to be experimental, and, third, because they have high status and are more likely to be copied. The principle of consumer sovereignty cannot easily be applied to this process since, at most, only the special group in the first stage of the marketing process has something approaching a free choice. The rest have only the choice between conforming or being isolated. In the international economy, trickle-down marketing takes the form of the international demonstration effect. Products are first introduced in the United States or Europe and then spread to other countries. Multinational corporations speed up this process by making it easier to transfer new products and marketing methods to less advanced countries. One of the key motives for direct investment, cited by corporations, is to gain control over marketing facilities in order to facilitate the spread of their products. If firms were denied control over communication and marketing facilities in the foreign countries and we had a regime of national firms (private or socialized) rather than multinational firms, the pattern of output would almost certainly be quite different than the one that is now observed. There would be more centers of innovation, and probably more variety of choices offered to the consumers, as each country developed products suited to its particular characteristics. Products from one country would spread to other countries either through trade or imitation but the movement would be coordinated by market competition rather than the planning decisions of top management in a few corporations whose interest it is to foreclose competition, to restrict the choices offered, and to insure the survival of their own organizations. It is difficult to speak with professional certainty in this badly neglected field, but it does not appear to be socially efficient to allow corporations to monopolize information on new possibilities created by science. IV. The International Hierarchy of Decision Making Marshall like Marx, thought that the "chief fact in the form of modern civilization, the kernel of the modem economic problem . . ."' was the division of labor within the factory between those who plan and organize economic activity and those who work for them. In the modern corporation the hierarchical structure of command and authority has been greatly elaborated from the simple division between owners and workers in the Marshallian firm, but the tensions and conflicts of autocracy remain. They take on particular importance in the multinational corporation where problems of nationalism and problems of authoritarianism intertwine. Multinational corporations are torn in two directions. On the one hand, they must adapt to local circumstances in each country. This calls for decentralized decision making. On the other hand, they must coordinate their activities in various parts of the world and stimulate the flow of ideas from one part of their empire to another. This calls for centralized controls. They must therefore develop an organizational structure to balance the need to coordinate and integrate operations with the need to adapt to a patchwork quilt of languages, laws, and customs. One solution is division of labor based on nationality. Day-to-day management in each country is left to nationals of that country who are intimately familiar with local conditions and practices and best suited to deal with local problems and local government. These nationals remain rooted in one spot, but above them is a layer of people who move around from country to country, as bees among flowers, transmitting information from one subsidiary to another and from the lower levels to the general office at the apex of the corporate structure. In the nature of things, these people, for the most part, will be citizens of the country of the parent corporation, just as we now find that the top executives of most of the major corporations in the United States are drawn from a relatively small homogeneous cultural group quite distinct from the population of the United States as a whole. This creates two types of problems. In the first place, there is the internal problem of creating incentives for foreigners whose access to the top corporate positions will be necessarily limited. The second problem is far more important and is in the nature of an external diseconomy. The subsidiaries of multinational corporations are frequently amongst the largest corporations in their country of operations and their top executives play an influential role in the political, social, and cultural life of the country. Yet these people. ' Alfred Marshall. Principles of Economics (Macmillan, 1961), pp. 74-75
446 AMERICAN ECONOMIC ASSOCIATION whatever their title,occupy at best a medium she has adopted a number of policies,including position in the corporate structure and are re- high tariffs,which prevent international corpora- stricted in authority and horizons to a lower level tions from fully rationalizing production on a of decision making.The country whose economy continent-wide basis.The record shows that for- is dominated by the foreign investment can easily eign subsidiaries in Canada tend to perform at develop a branch plant outlook,not only with ref- levels equal to their Canadian counterparts rather erence to economic matters,but throughout the than at the higher levels of efficiency of their par- range of governmental and educational decision ent corporations.This suggests that many of the making. benefits of foreign investment have been emascu- Thus there are important social and political lated while many of the costs remain. costs to international specialization in entrepren- eurship based on multinational corporations.The V.Big Corporations:Small Countries multinational corporation tends to create a world The efficiency with which multinational corpo- in its own image by creating a division of labor rations can allocate resources internationally de- between countries that corresponds to the division pends in large part on government policy decisions of labor between various levels of the corporate If government decision making were independent hierarchy.It will tend to centralize high-level de- of the structure of the private sector,we could cision-making occupations in a few key cities in view it as an exogenous factor and safely ignore it the advanced countries (surrounded by regional in an essay devoted to the multinational corpora- subcapitals)and confine the rest of the world to tion.However,an increase in the importance of lower levels of activity and income;i.e.,to the multinational corporations relative to nationa status of provincial capitals,towns,and villages corporations will clearly have an important im- in a New Imperial System.Income,status,au- pact on both the ability and willingness of gov- thority,and consumption patterns will radiate out ernments to carry out certain types of economic from the centers in a declining fashion and the policies.An analysis of the efficiency of multina- hinterland will be denied independence and equal- tional corporations must take this into account ity.8 and analyze,for example,its effect on govern- This pattern contrasts quite sharply with the ment capital formation in the crucial sectors of free trade system which offered both income infrastructures and human capital.This aspect is equality and national independence.According to particularly important with regard to the problem the factor price equalization theorem,trade al- of underdevelopment-clearly the greatest in- lows a country to choose its own style and still stance of inefficiency in today's international share fully in the riches of the world.Whether economy. large or small and even if its resource endowment Analyses of the role of foreign investment in is highly skewed,it can achieve factor price underdeveloped countries often focus on the great equalization with the rest of the world by varying disparity between the bargaining power of the the composition of output without surrendering corporation and the bargaining power of the gov- its control over its capital stock and without the ernment.The corporations are large and modern need for its members to leave the country to find and have international horizons.The governments employment elsewhere.Now the stakes seem to are typically administratively weak and have very have gone up.In order to reap the gains from in- limited information outside their narrow confines. ternational exchange,a country has to become In any particular negotiation between one country integrated into a corporate international structure and one company,power in the form of fex- of centralized planning and control in which it ibility,knowledge,and liquidity is usually greater plays a very dependent role. on the private side than on the public side of the Countries may not be willing to play this game table. nor to completely break with it and the possibil- The problem of unequal bargaining power can ity arises,in part suggested by the Canadian expe- rience,of getting the worst of both worlds.Can- For a stimulating analysis of the relationship of ada has allowed an almost unrestricted inflow of multinational corporations to economic development, capital and as a result has surrendered a great see:G.Arrighi,"International Corporations,Labour Aristocracies and Economic Development in Tropical deal of national independence.At the same time, Africa,"D.Horowitz,ed..The Corporations and the Cold War (London,forthcoming);N.Girvan,"Re- s This point is developed more fully in S.Hymer, gional Integration vs.Vertical Integration in the "The Multinational Corporation and Uneven Devel- Utilization of Caribbean Bauxite,"Lewis and Mat- opment,"in J.Bhagwati,ed.,Economics and World thew,eds.,Caribbean Integration (Inst.of Caribbean Order (World Law Fund,1970). Studies,Univ.of Puerto Rico,1967)
446 AMERICAN ECONOMIC ASSOCIATION whatever their title, occupy at best a medium position in the corporate structure and are restricted in authority and horizons to a lower level of decision making. The country whose economy is dominated by the foreign investment can easily develop a branch plant outlook, not only with reference to economic matters, but throughout the range of governmental and educational decision making. Thus there are important social and political costs to international specialization in entrepreneurship based on multinational corporations. The multinational corporation tends to create a world in its own image by creating a division of labor between countries that corresponds to the division of labor between various levels of the corporate hierarchy. It will tend to centralize high-level decision-making occupations in a few key cities in the advanced countries (surrounded by regional subcapitals) and confine the rest of the world to lower levels of activity and income; i.e., to the status of provincial capitals, towns, and villages in a New Imperial System. Income, status, authority, and consumption patterns will radiate out from the centers in a declining fashion and the hinterland will be denied independence and equality.8 This pattern contrasts quite sharply with the free trade system which offered both income equality and national independence. According to the factor price equalization theorem, trade allows a country to choose its own style and still share fully in the riches of the world. Whether large or small and even if its resource endowment is highly skewed, it can achieve factor price equalization with the rest of the world by varying the composition of output without surrendering its control over its capital stock and without the need for its members to leave the country to find employment elsewhere. Now the stakes seem to have gone up. In order to reap the gains from international exchange, a country has to become integrated into a corporate international structure of centralized planning and control in which it plays a very dependent role. Countries may not be willing to play this game nor to completely break with it and the possibility arises, in part suggested by the Canadian experience, of getting the worst of both worlds. Canada has allowed an almost unrestricted inflow of capital and as a result has surrendered a great deal of national independence. At the same time, 'This point is developed more fully in S. Hymer, "The Multinational Corporation and Uneven Development," in J. Bhagwati, ed.. Economics and World Older (World Law Fund, 1970). she has adopted a number of policies, including high tariffs, which prevent international corporations from fully rationalizing production on a continent-wide basis. The record shows that foreign subsidiaries in Canada tend to perform at levels equal to their Canadian counterparts rather than at the higher levels of efficiency of their parent corporations. This suggests that many of the benefits of foreign investment have been emasculated while many of the costs remain. V. Big Corporations: Small Countries The efficiency with which multinational corporations can allocate resources internationally depends in large part on government policy decisions. If government decision making were independent of the structure of the private sector, we could view it as an exogenous factor and safely ignore it in an essay devoted to the multinational corporation. However, an increase in the importance of multinational corporations relative to national corporations will clearly have an important impact on both the ability and willingness of governments to carry out certain types of economic policies. An analysis of the efficiency of multinational corporations must take this into account and analyze, for example, its effect on government capital formation in the crucial sectors of infrastructures and human capital. This aspect is particularly important with regard to the problem of underdevelopment—clearly the greatest instance of inefficiency in today's international economy.* Analyses of the role of foreign investment in underdeveloped countries often focus on the great disparity between the bargaining power of the corporation and the bargaining power of the government. The corporations are large and modern and have international horizons. The governments are typically administratively weak and have very limited information outside their narrow confines. In any particular negotiation between one country and one company, power in the form of flexibility, knowledge, and liquidity is usually greater on the private side than on the public side of the table. The problem of unequal bargaining power can 'For a stimulating analysis of the relationship of multinational corporations to eeonomie development, see : G. Arrighi, "International Corporations, Labour Aristocracies and Economic Development in Tropical Africa," D. Horowitz, ed.. The Corporations and the Cold War (London, forthcoming) ; N. Girvan, "Regional Integration vs. Vertical Integration in the Utilization of Caribbean Bauxite," Lewis and Matthew, eds., Caribbean Integration (Inst. of Caribbean Studies, Univ. of Puerto Rico, 1967)
THE INTERNATIONAL FIRM 447 be illustrated with a sitple model (developed in vestment.Modern multinational corporations are collaboration with Stephen Resnick).t0 This interested in manufacturing in underdeveloped model focuses on the feedback relationship be- countries and not just in raw materials and tween the government and the foreign corpora- therefore want a growing market for advanced tion.The government provides certain support products and an educated,urbanized labor force. services to the corporation:protection,infra- They are no longer tied to traditional backward structure,help in the creation of a labor force, governments,but have a stake in an active gov. land laws,etc.The corporation in return pays the ernment sector which promotes growth and pro- government taxes and royalties.This is a trading vides education and infrastructure.The "new for. relationship in which two main variables are in- eign investment"is,then,a far cry from the "Ba volved:(1)the tax rate ()and (2)the fraction nana Republic"kind,but important dangers re- of government expenditute devoted to support main.Statistics on income distribution show that services (g).The outcome is determined by a the top one-third of the population typically gets process of bargaining which,for simplicity,can be about 60 percent of the total income.It is this viewed in a purely duopolistic form-one govern- top group which provides the direct and indirect ment and one country--though it,in fact,usually labor force for large-scale manufacturing as well arises in a more complicated structure where as the market.An alliance between this group and there are several corporations and several power foreign investors represents a formidable bargain- groups involved.The government,we assume,is ing force vis-a-vis the remaining two-thirds of the interested in maximizing its surplus (total revenue population.A government expenditure policy from foreign firms legs the cost of support ser- based on such as alliance would concentrate on vices).The corporation is interested in maximiz- the modern high-income sector,leaving the rest of ing profits after taxes.At one extreme the govern- the population as a source of unlimited supply of ment may be very strong and choose (g)and (t) cheap labor for services and for menial work. such as to make profit zero (we assume normal Growth in these circumstances would retain its profits are included in cost)and to make the gov- uneven quality and all the inefficiency that im. ernment surplus as large as possible.This seldom, plies,albeit in a more advanced and progressive if ever,occurs in underdeveloped countries where form than characterized the enclave economies of the bargaining tends to go in the opposite direc- the previous round of foreign investment. tion.The corporation sets ()as low as possible, subject to the constraint that the government has VI.Multinational Corporations and enough money to:(a)provide necessary infra- Supranationality structures;(b)remain in power and maintain law and order for the corporation.Since the govern- Multinational corporations create setious prob- ment has little surplus it does not have the money lems in the developed world as well.The most im- to provide capital or services for other industries. portant of these,from the limited perspective of This is in keeping with the foreign investor's inter- this essay,is that they reduce the ability of the government to control the economy.Multina- est,since the growth of other industries would compete away factors of production and would tional corporations,because of their size and in- ternational connections,have a certain flexibility create interest groups who might challenge the corporation's hegemony.Provided that the politi- for escaping regulations imposed in one country. cal forces are kept under control in this system, The nature and effectiveness of traditional policy the country can remain in its state of underdevel- instruments-monetary policy,fiscal policy,anti- opment for a long period. trust policy,taxation policy,wage and income Such extreme cases are no longer possible be- policy-change when important segments of the cause of the increased political strength of the lo- economy are foreign-owned.This has long been cal middle class in most underdeveloped countries recognized in countries such as Canada,but it is now becoming obvious that even the United and because of the changed nature of foreign in- States has reached the point where the interna- tional commitments of its corporations reduce the S.Hymer and S.Resnick,"Interactions between the Government and the Private Sector in Under room for flexibility in national economic policy developed Countries:Government Expenditure Pol- formation.If foreign investment continues to grow icy and the Reflection Ratio,"Ian Stewart,ed., at anything like the rate of the last ten or fifteen Economic-Development and Structural Change years,this problem will become an extremely seri- (Edinburgh:Edinburgh Univ.Press,1969).Pub- lished in French as "Les Interactions entre le Gou- ous one for all North Atlantic countries.11 vernement et leur Secteur Prive,"L'Actualit Eco- nomique,Oct.-Dec..1968. u For an attempt to predict the trend towards mul-
THE INTERNATIONAL FIRM 447 be illustrated with a siihple model (developed in collaboration with Stephen Resnick)." This model focuses on the feedback relationship between the government and the foreign corporation. The government, provides certain support services to the corporation: protection, infrastructure, help in the creation of a labor force, land laws, etc. The corporation in return pays the government taxes and royalties. This is a trading relationship in which two main variables are involved: (1) the tax rate (t); and (2) the fraction of government expendituie devoted to support services (g). The outfconié is determined by a process of bargaining wbich, for simplicity, can be viewed in a purely duopolistic form—one government and one country.—though it, in fact, usually arises in a more complicated structure where there are several corporations and several power groups involved. Tbe government, we assume, is interested in maximizing its surplus (total revenue from foreign firms leSS the cost of support services). The corporation is interested in maximizing profits after taxes. At one extreme the government may be very strong and choose (g) and (t) such as to make profit zero (we assume normal profits are included in cost) and to make the government surplus as large as possible. Tbis seldom, if ever, occurs in underdeveloped countries where the bargaining tends to go in the opposite direction. Tbe corporation sets (t) as low as possible, subject to the constraint that the government has enougb money to: (a) provide necessary infrastructures; (b) remain in power and maintain law and order for the corporation. Since the government has little surplus it does not have tbe money to provide capital or services for other industries. Tbis is in keeping with tbe foreign investor's interest, since tbe growth of other industries would compete away factors of production and would create interest groups wbo migbt challenge the corporation's hegemony. Provided that the political forces are kept under control in this system, the country can remain in its state of underdevelopment for a long period. Such extreme cases are no longer possible because of the increased political strength of tbe local middle class in most underdeveloped countries and because of tbe cbanged nature of foreign in- " S. Hymer and S. Resnick, "Interactions between the Government and the Private Sector in Underdeveloped Countries : Government Expenditure Policy and the Reflection Ratio," Ian Stewart, ed., Economic-Development and Structural Change (Edinburgh: Edinburgh Univ. Press, 1969). Published in French as "Les Interactions entre le Gouvernement et leur Secteur Privé," L'Actualité Economique, Oct.-Dec. 1968. vestment. Modem multinational corporations are interested in manufacturing in underdeveloped countries and not just in raw materials and tberefore want a growing market for advanced products and an educated, urbanized labor force. They are no longer tied to traditional backward governments, but have a stake in an active gov* ernment sector which promotes growth and provides education and infrastructure. The "new foreign investment" is, tben, a far cry from tbe "Banana Republic" kind, but important dangers remain. Statistics on income distribution show that the top one-third of tbe population typically gets about 60 percent of tbe total income. It is tbis top group wbicb provides the direct and indirect labor force for large-scale manufacturing as well as the market. An alliance between this group and foreign investors represents a formidable bargain« ing force vis-à-vis the remaining two-thirds of the population. A government expenditure policy based on such as alliance would concentrate on the modern bigb-income sector, leaving tbe rest of the population as a source of unlimited supply of cheap labor for services and for menial Ivork, Growth in these circumstances would retain iti uneven quality and all the inefficieticy that im» plies, albeit in a more advarlced and progressive form than characterized the enclave economies of tbe previous round of foreign investriient. VI. Multinational Corporations and Supranationality Multinational corporations create serîôUs prob^ lems in the developed world as well. Tbe most important of tbese, from the limited perspective of this essay, is that tbey reduce tbe ability of tbé government to control the economy. Multinational corporations, because of their size and international connections, have a certain flexibility for escaping regulations imposed in one country. The nature and effectiveness of traditional policy instruments—monetary policy, fiscal policy, ärttitrust policy, taxation policy, wage and income policy—change when important segments of tbe economy are foreign-owned. This has long been recognized in countries such as Canada, but it is now becoming obvious that even the United States has reached the point where the international commitments of its corporations reduce the room for flexibility in national economic policy formation. If foreign investment continues to grow at anything like the rate of the last ten or fifteen years, this problem will become an extremely serious one for all North Atlantic countries.^^ " For an attempt to predict the trend towards mul-
448 AMERICAN ECONOMIC ASSOCIATION This contradiction between multinational cor- liberal policy towards private capital,movements porations and nation states has important bearing and mergers that created the multinational indus- on the efficiency of the multinational corporation. trial structure. The main problem,stated most simply,is as fol- lows:if national power is eroded,who is to per- VIl.Conclusion:Some Subjective Evaluations form the government's functions?For example,if This essay has presented a list of advantages nation states,because of the openness of their and disadvantages of multinational corporations. economy,cannot control the level of aggregate Assuming there are no important omissions and economic activity through traditional monetary that each point taken by itself is valid,the ques- and fiscal policy instruments,multinational agen- tion arises as to what weights should be attached cies will need to be developed to maintain full to the various arguments.One simple summation, employment and price stability.Yet such organi- offered here without proof,is as follows:The zations do not exist at present,nor can they be large corporation illustrates how real and impor- quickly built.Either one must argue that the tant are the advantages of large-scale planning, Keynesian problem has somehow been solved by but it does not tell us how best to achieve wider the creation of the multinational corporation domains of conscious coordination.Broadly (along with a host of other problems)or else one speaking,there are two main directions in which must agree that it is not feasible to have interna- one can proceed.Multinational corporations inte- tional business integration via direct foreign in- grate one industry over many countries.The al- vestment proceeding at a much faster rate than ternative is to integrate many industries over one political integration.Yet,this seems to be pre- country and to develop noncorporate linkages be- cisely what is happening.Most of the large Amer- tween countries for the free fow of goods and ican firms have already staked out their claims in more important,the free flow of information. the European market and many of the leading The advantage of the second direction is that it European firms are now rapidly entering foreign keeps the economy within the boundary of the markets,including those of the United States.A polity and the society.It thus causes less tension predominance of multinational corporations in the and creates the possibility of bringing economic North Atlantic economy seems therefore to be a power under control by removing the wastes of fait accomli.Government cooperation is not oligopolistic anarchy.This would allow more growing at anywhere as rapid a rate.If serious scope for solving the two major economic prob- problems arise,governments are likely to reassert lems of today,affluence and poverty,than the their power and attempt greater regulation and first alternative.The trend,however,is clearly in control over the business enterprises within their the direction of the first alternative.The coming jurisdictions.Economists will rightly point out age of multinational corporations should repre- that these restrictions create inefficiencies in the sent a great step forward in the efficiency with allocation of the economic resources.It is impor- which the world uses its economic resources,but tant,however,to realize the role played by a too it will create grave social and political problems and will be very uneven in exploiting and distrib- tinationalism and the problems it causes,see Stephen uting the benefits of modern science and technol- Hymer and Robert Rowthorn,"Multinational Cor- ogy.In a word,the multinational corporation re- porations and International Oligopoly:the Non- American Challenge,"in C.P.Kindleberger,ed. veals the power of size and the danger of leaving The International Corporation (M.I.T.Press,1970). it uncontrolled
448 AMERICAN ECONOMIC ASSOCIATION This contradiction between multinational corporations and nation states has important bearing on the eflSciency of tbe multinational corporation. The main problem, stated most simply, is as follows: if national power is eroded, who is to perform the government's functions? For example, if nation states, because of the openness of their economy, cannot control the level of aggregate economic activity through traditional monetary and fiscal policy instruments, multinational agencies will need to be developed to maintain full employment and price stability. Yet such organizations do not exist at present, nor can they be quickly built. Either one must argue that the Keynesian problem has somehow been solved by the creation of the multinational corporation (along with a host of other problems) or else one must agree that it is not feasible to have international business integration via direct foreign investment proceeding at a much faster rate than political integration. Yet, this seems to be precisely what is happening. Most of the large American firms have already staked out their claims in the European market and many of the leading European firms are now rapidly entering foreign markets, including those of the United States. A predominance of multinational corporations in the North Atlantic economy seems therefore to be a fait accompli. Government cooperation is not growing at anywhere as rapid a rate. If serious problems arise, governments are likely to reassert their power and attempt greater regulation and control over the business enterprises within their jurisdictions. Economists will rightly point out that these restrictions create inefficiencies in the allocation of the economic resources. It is important, however, to realize the role played by a too tinationalism and the problems it causes, see Stephen Hymer and Robert Rowthorn, "Multinational Corporations and International Oligopoly: the NonAmerican Challenge," in C. P. Kindleberger, ed.. The International Corporation (M.I.T. Press, 1970). liberal policy towards private capital, movements and mergers that created the multinational industrial structure. VII. Conclusion: Some Subjective Evaluations This essay has presented a list of advantages and disadvantages of multinational corporations. Assuming there are no important omissions and that each point taken by itself is valid, the question arises as to what weights should be attached to the various arguments. One simple summation, offered here without proof, is as follows: The large corporation illustrates how real and important are the advantages of large-scale planning, but it does not tell us how best to achieve wider domains of conscious coordination. Broadly speaking, there are two main directions in which one can proceed. Multinational corporations integrate one industry over many countries. The alternative is to integrate many industries over one country and to develop noncorporate linkages between countries for the free flow of goods and, more important, the free flow of information. The advantage of the second direction is that it keeps the economy within the boundary of the polity and the society. It thus causes less tension and creates the possibility of bringing economic power under control by removing the wastes of oligopolistic anarchy. This would allow more scope for solving the two major economic problems of today, affluence and poverty, than the first alternative. The trend, however, is clearly in the direction of the first alternative. The coming age of multinational corporations should represent a great step forward in the efficiency with which the world uses its economic resources, but it will create grave social and political problems and will be very uneven in exploiting and distributing the benefits of modern science and technology. In a word, the multinational corporation reveals the power of size and the danger of leaving it uncontrolled
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Copyright of American Economic Review is the property of American Economic Association and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use
