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 441THE EFFICIENCY (CONTRADICTIONS) OF MULTINATIONAL CORPORATIONS By STEPHEN HYMER Yale University Multinational corporations are a substitute for the market as a method of organizing interna￾tional exchange. They are ".. . islands of con￾scious power in an ocean of unconscious coopera￾tion," to use D. H. Robertson's phrase.^ This es￾say examines some of the contradictions of this latest stage in the development of private busi￾ness enterprise. At the outset, we should note that the multina￾tional corporation raises more questions than eco￾nomic theory can answer. Multinational corpora￾tions are typically large firms operating in imper￾fect markets and the question of their efficiency is a question of the efficiency of oligopolistic deci￾sion making, an area where much of welfare eco￾nomics 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 imperi￾alism), which cannot be analyzed in purely "eco￾nomic" 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 in￾ternational markets to increase the division of la￾bor 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 re￾lationship of foreign investment to a firm's overall efficiency and as far as quantitative evidence is concerned, we must view this question as a com￾pletely open one. With regard to the effect of size, the evidence is more plentiful but not con￾clusive. A number of studies on differences in per￾formance 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 per￾formance. Applying these results to the multina￾tional 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 perfor￾mance 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 organiza￾tional structure involving both increased subdivi￾sion or differentiation of tasks and increased inte￾gration through the creation of new organs of control. Business administration became a highly 441