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 re￾stricted 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 ref￾erence 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 entrepren￾eurship 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 de￾cision-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, au￾thority, and consumption patterns will radiate out from the centers in a declining fashion and the hinterland will be denied independence and equal￾ity.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 al￾lows 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 in￾ternational 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 possibil￾ity arises, in part suggested by the Canadian expe￾rience, of getting the worst of both worlds. Can￾ada 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 Devel￾opment," 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 corpora￾tions from fully rationalizing production on a continent-wide basis. The record shows that for￾eign subsidiaries in Canada tend to perform at levels equal to their Canadian counterparts rather than at the higher levels of efficiency of their par￾ent corporations. This suggests that many of the benefits of foreign investment have been emascu￾lated while many of the costs remain. V. Big Corporations: Small Countries The efficiency with which multinational corpo￾rations can allocate resources internationally de￾pends 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 corpora￾tion. However, an increase in the importance of multinational corporations relative to national corporations will clearly have an important im￾pact on both the ability and willingness of gov￾ernments to carry out certain types of economic policies. An analysis of the efficiency of multina￾tional corporations must take this into account and analyze, for example, its effect on govern￾ment 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 in￾stance 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 gov￾ernment. 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 flex￾ibility, 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, "Re￾gional Integration vs. Vertical Integration in the Utilization of Caribbean Bauxite," Lewis and Mat￾thew, eds., Caribbean Integration (Inst. of Caribbean Studies, Univ. of Puerto Rico, 1967)