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 lim￾ited.* The national corporation opened new possibili￾ties of transferring organizational abilities inter￾nationally. The new administrative structure and financial power enabled firms to undertake direct foreign investments and organize large-scale pro￾duction in mining and manufacturing in foreign countries. However, this migration of business en￾terprise occurred only on a limited scale and was usually restricted to a narrow activity; i.e., to ac￾quiring raw materials used by the parent company or to exploiting some technological advance or dif￾ferentiated product developed by the parent company. Moreover, to the extent that invest￾ment 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 ex￾change 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 pos￾ition and to plan in terms of worldwide factor availabilities and demand patterns. Since the pro￾cess is just beginning, it is difficult to evaluate how strong this tendency will be. However, it is clear that at present large corporations are con￾sciously moving towards an international perspec￾tive much faster than other institutions and espe￾cially much faster than governments, and are in the vanguard of planners of the new international economy created by the aeronautical and elec￾tronic revolutions. Since multinational corpora￾tions also have great financial and technical re￾sources, they will certainly have many successes and will be able to speed up the spread of tech￾nology and to organize activities until now impos￾sible. 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 possibili￾ties of modern science, or that they do not create ' Stephen Hymer and Stephen Resnick, "Interna￾tional 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 consider￾ations. II. Bigness and Fewness Multinational corporations enlarge the domain of centrally planned world production and de￾crease the domain of decentralized market-di￾rected 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 con￾centration in world markets is not well estab￾lished. On the one hand, improved communica￾tions are breaking down barriers to trade and wid￾ening the market facing most buyers. On the other hand, direct foreign investment tends to re￾duce 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 in￾ternational nature of the market. All that can be said at present is that the world level of concen￾tration 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 na￾ture. It is an instrument which allows business firms to transfer capital, technology, and organi￾zational skill from one country to another. It is also an instrument for restraining competition be￾tween 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 eco￾nomists in favor of free trade and free factor movements, on the grounds of allocative effic￾iency, 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 Invest￾ment and the National Economic Interest," Peter Rüssel, ed.. Nationalism in Canada (Toronto: Mc￾Graw-Hill of Canada, 1966) ; Yale Economic Growth Center, Paper No. 108; "L'Impact des Firmes Inter￾nationals," in M. Bye, ed., La Politique Industrielle de L'Europe Intégrée (Paris : Presses Universitaires de France, 1968)