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 be￾tween the government and the foreign corpora￾tion. The government, provides certain support services to the corporation: protection, infra￾structure, 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 in￾volved: (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 govern￾ment 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 ser￾vices). The corporation is interested in maximiz￾ing profits after taxes. At one extreme the govern￾ment 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 gov￾ernment surplus as large as possible. Tbis seldom, if ever, occurs in underdeveloped countries where the bargaining tends to go in the opposite direc￾tion. Tbe corporation sets (t) as low as possible, subject to the constraint that the government has enougb money to: (a) provide necessary infra￾structures; (b) remain in power and maintain law and order for the corporation. Since the govern￾ment 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 inter￾est, 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 politi￾cal forces are kept under control in this system, the country can remain in its state of underdevel￾opment for a long period. Such extreme cases are no longer possible be￾cause of the increased political strength of tbe lo￾cal 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 Under￾developed Countries : Government Expenditure Pol￾icy and the Reflection Ratio," Ian Stewart, ed., Economic-Development and Structural Change (Edinburgh: Edinburgh Univ. Press, 1969). Pub￾lished in French as "Les Interactions entre le Gou￾vernement et leur Secteur Privé," L'Actualité Eco￾nomique, 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 pro￾vides education and infrastructure. The "new for￾eign investment" is, tben, a far cry from tbe "Ba￾nana Republic" kind, but important dangers re￾main. 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 im￾portant of tbese, from the limited perspective of this essay, is that tbey reduce tbe ability of tbé government to control the economy. Multina￾tional corporations, because of their size and in￾ternational connections, have a certain flexibility for escaping regulations imposed in one country. The nature and effectiveness of traditional policy instruments—monetary policy, fiscal policy, ärtti￾trust 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 interna￾tional 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 seri￾ous one for all North Atlantic countries.^^ " For an attempt to predict the trend towards mul-