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 spe￾cial 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 "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.5 Anything more, she claimed, would constitute "exploitation." Charles Kindleberger challenged the Penrose formulation.6 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 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 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). 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