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Lecture 10: Multinational Corporations
I. Definitions
II. History: The MNC and Early U.S. Hegemony
A. the spread of American capital: Good for the World?
B. The MNC as an agent of U.S. Hegemony
III. Explanation: Why MNCs?
A. MNCs, the EC, and the Dollar
B. A Liberal Economic Explanation: The product-cycle theory
IV. Why do firms go abroad?
A. Beating trade problems
B. Avoiding Political Problems
C. Low Cost Labor
D. Winning technology breakthroughs
VI. MNCs and Trade Negotiations: Liberals vs. Economic Nationalists
VII. The Stateless Corporation?
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MNC: Definition:
A firm with production facilities in 3 or more countries.
There are 16,000 MNCs in the world now. Most are small, but the top several
hunderd are so huge and so globe-straddling, as to dominate major portions of the
world economy.
Frieden and Lake report that the 350 largest MNCs in the world with over twentyfive thousand affiliates, account for 28 per cent of the non-communist world's
output. The largest MNCs have annual sales larger than the gross national product
of all but a few of the world's nations.
MNC and U.S. Hegemony
A. The Spread of American capital: Good for the World?
The story that I have been telling you here in the past few days is that the postwar
capitalist world reflected American foreign policy in many of its details. A central
concern of the U.S. was to build a bulwark of anti-Soviet allies; this was done with a
massive inflow of American aid under the Marshall Plan, and the encouragement of
Western European cooperation within a new Common market. At the same time,
the United States dramatically lowered its barriers to foreign goods, and American
corporations began to invest heavily in foreign nations. Remember that the U.S.
was not acting altruistically; European recovery, trade liberalization, and booming
international investment helped bring and ensure great prosperity within the U.S. as
well.
American overseas investment provided capital, technology, and experitse for both
Europe and the developing world. The Non-Communist world's unprecedented
access to American dollars, markets, and capital provided a major stimulus to
economic growth in Europe and Japan.
B. The MNC as an agent of U.S. Hegemony
FDI was considered a major instrument through which the U.S. could maintain its
relative position in world markets. The overseas expansion of MNCs has been
regarded as a means to maintain America's dominant world economic position in
other expanding economies, such as Western Europe.
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American multiantionals have also been viewed as serving the interests of the U.S.
balance of payments. The American government did not appreciate this situation
until the late 1960s when the country's trading and balance of payments position
first began to deterioriate. then the MNCs were recognized as major earners of
foreign exchange (needed to pay for imports)
MNCs also spread the ideology of the American free enterprise system.
They were also a tool of diplomacy--detente with the S.U. or cut off trade.
III. Why MNCs?
Why do corporations go abroad? It's easy to understand why English investors
would finance tea plantations in Ceylon--they couldn't grow tea in Manchester. But
why does Bayer aspirin produce aspirin in the United States? If the German aspirin
industry is more efficient than the American, Bayer could produce the pills in its
factories at home and export them to the United States. Why does Ford make cars in
England? Why does Honda make care in the U.S. (it makes a whole line of cars for
export here).
A. MNCs, the EC, and the Dollar
The establishment of the EEC created the opportunity to go abroad, the potential
revival of European industry created the fear, that if corporations didn't go abroad
and establish production facilities in new markets, European industry would grow
strong and become a fierce competitor. From its very inception, the Common
Market was obviously an economic development of great potential significance. If
American corporations wanted access to this immense market, they had to get inside
the common external tariff.
This process was bolstered by American's top currency status in the world during
the 1950s and 1960s. Investors preferred to hold dollar-demoninated equities.
Because of the security of the dollar, American firms were able to borrow on more
advantegeous terms than their foriegn competitors-Foreign investment of American corporations was stimulated in part by the
overvalued exchange rate of the dollar. Because of the inflated value of the dollar,
foreign assets and labor were relatively cheap for American corporations. Thus the
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system of fixed exchange rates which prevailed from 1945 to 1971 proved to be an
inducement for american corporations to produce abroad rather than to export from
the U.S.
B. International vs. Domestic Capital
FDI is considered a mechanism through which American corporations seek to
enhance their own growth and profits at the expense of the rest of the American
economy. Tax avoidance and the minimization of tax liabilities are critical factors
in developing corporate strategy and making the decision to invest abroad.
Fractions of capital--capital separates from the state
Under the present U.S. tax laws, U.S. corporations are subject to a tax on foreign as
well as domestic income. Extractive industries (petroleum, mining, etc.) have
foreign branches; income from such branches in included in the parent corporation's
tax return and the tax on such income is paid the year it is earned. But if the
corporation operates through a subsid. (which is the primary case in manufacturing
investment) foreign earnings are subject to a tax only when they are distributed to
the U.S. Moreover, a tax credit against the domestic tax is allowed for foreign taxes
paid on earnings and for dividends received from abroad. The new treaty between
the U.S. and Poland allows repatriation of profits back to the U.S.--no Polish taxes.
C.
Liberal Explanations for MNC expansion and the role of the MNC
in U.S. decline. The Product Cycle theory:
(the liberal argument)
The primary drive behind the overseas expansion of today's giant corporations is
maximalization of corporate growth and suppression of foreign as well as domestic
competition. The Product-cycly theory explains this expansion in terms of Three
stages of growth: a) The innovative stage, b)the maturing phase, c)the standardized
phase
1. the introductory or innovative phase:
This phase is located in the most advanced industrial country or countries, such as
Britain in the 19th century, the U.s. in the early postwar period, and Japan--to an
increasing extent--in the late 20th century. Oligopolistic corporations in these
countries have a comparative advantage in the development of new products and
industrial processes due to the large home market (demand) and the resources
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devoted to innovative activities (supply). During the initial phgase, the corporations
of the most advanced economy enjoy a monopolistic position, primarily because of
their technology.
As foreign demand for their product rises, the corporations at first export to other
markets. But as the foreign market for the product grows, and especially as the
technology identified with the product diffuses abroad to potential foreign
competitors, the strategy of the American corporation changes.
2. The maturing phase of the product cycle
During the maturing phase the firm begins to lose the competitive advantage
accruing from its technological lead. As the relevant technology becomes available
through diffusion or imitative development, the advantage shifts to foreign
production, owing to the proximity to the local market and lower labor costs.
Therefore, if the American corporation is to maintain its market share and forstall
competition, it must establish foreign branches or subsidiaries. In short, the
threatened loss of an export market and the rise of foreign competitors is the
stimulus for the establishment of foreign subsidiaries. (compete on their turf)
3. Finally, in the third or standardized phase of the product cycle, production
has become sufficiently routinized so that the comparative advantage shifts to
relatively low-skilled, low wage, and labor-intensive economies, Now the location
of production shifts to less developed countries, especially the NICs, whose
comparative advantage is their lower wage rates, from these export platforms, either
the product itself or component parts are shipped to world markets.
This is the case in textiles, electronics, and footware.
Understood in these terms, direct investment and the establishement of subsidiaries
abroad by American corporations is largely defensive in order to forestall the rise of
foreign competitors and to maintain its global market position, the American
corporation begins to manufacture abroad itself.
The crux of foreign direct investment is the transference of technical and managerial
knowledge, in a world where technical know-how diffuses rapidly to one's potential
competitors, thereby reducing the innovator's long term profit margin. (Britain in
the 19th century), the American corporation goes aborad to protect its investment in
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research and development. Thus the American innovator, rather than the foreign
imitator, captures the benefits from the trnasference of knowledge abroad.
Until the late 1950s or Early 1960s, corporate expansion reflected the economic and
industrial strength of the U.S. Thereafter, however, foreign idrect investment was
increasingly a response to the decline of the U.S. relative to other industrial or
industrializing economies.
During the 1980s, Japanese investment in the U.s. increased from $10 billion
annually to over $30 billion annually. By 1987 there were Japanese-owned
manufacturing facilities in 40 out of the 50 states.
Now, there are many arguments that increased DFI in the U.S. is a symbol that the
U.S. is in decline and no longer a hegemon. Others are capturing our market and
controlling our market.
It is not the absolute amount of foreign investment in the U.S. economy that is a
cause for concern: it is the rate of growth. In 1989, foreigners owned 4-5% of total
U.S. assets. Foreign interest employed around 3 million Americans--3.5% of the
labor force. At the end of 1988, according to Commerce Department data,
foreigners had $1.79 trillion invested in the U.S. while Americans held $1.25 trillion
in investments abroad.
Whereas during the early hegemonic period, the U.S. supplied capital to the world,
now the world supplies capital to the U.S.
By 1986, nearly 2.3 of America's net investment in plant, equipment, and housing
was being supplied by foreigners. Foreigners in recent years have financed more
than half of the federal budget deficit, and they now hold 10 per cent of the national
debt.
Between 1986 and 1990 foreigners spent $200 billion on acquisitions and new
plants. Sweden's ABB, the Netherlands' Philips, France's Thomson, and Japan's
Fujitsu are waging campaigns to be identified as American companies that employ
Americans, transfer technology, and help the U.S. trade balance and overall
economic health. Thomson owns the RCA and General Electric brand names in
consumer electronics, and Philips owns Magnovox.
Why do Firms go abroad in the 1990s?
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1. Beating Trade Problems
Taiwan, South Korea, and Israel have traditionally been off-limits to Japanese auto
companies. Taiwan and Korea ban importing of Japanese cars, and Japan observes
the Arab embargo of Israel. But thanks to its U.S. output, Honda found a way to
circumvent those problems. It ships four door Accords to Taiwan and Korea and
Civic sedans to Israel, all from Ohio.
The Canadian telecommunications giant Northern Telecom Ltd. Has moved so
many of its manufacturing functions to the U.s. that it can win Japanese contracts on
the basis of being a U.S. compnay. Japan favors the U.S. over Canadian
telecommunications companies because of the politically sensitive U.S. Japanese
trade gap.
2. Avoiding political problems
When Germany's BASF launched biotechnology research at home, it confronted
legal and political challenges from the environmentally conscious Green movement.
So in 1990 BASF shifted its cancer and immune-system research to Cambridge,
Mass., and plans an additional 250,000 square-foot facility in Mass. The state is
attractive because of its large number of engineers and scientists but also because it
has better resolved controversies involving safety, animal rights, and the
environment.
Biotech and cloning---German, British, and US rules
3. Low-Cost Labor.
Companies still feel they might need to shift production swiftly from the U.S. and
Europe to low-wage Latin American and Asia. The threat of doing so can break the
back of labor in the industrialized world. When xerox Corp. started moving copier
reguilding work to Mexico, its union in Rochester N.Y. objected. The risk of job
loss was clear, and the union agreed to undertake the changes in work style and
productivity needed to keep the jobs.
4. Winning technology breakthroughs
companies are scouring the globe for leading scientific and design ideas. Xerox has
introduced some 80 different office-copier models in the U.s. that were engineered
and built by its Japanese joint venture, Fuji Xerox Co. And versions of the
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superconcentrated detergent that procter and Gamble Co. first formulated in Japan in
response to a rival's product are now being marketed under the Ariel brand name in
Europe and tested under the Cheer and Tide labels in the U.S.
What happens to trade negotiations under these conditions?
Presidents have traditionally demand that foreigners open their markets to
"American Products." For example, the U.S. accused Japan of excluding Motorola
from the lucrative Tokyo market for celluar telephones and hinted darkly at
retaliation.
But it turns out that motorola designs its celluar telephones in Malaysia, and
manufactures the ones it is trying to sell to Japan in Kuala Lumpur. So who benefits
if the U.S. succeeds in opening the Japanese market?
The liberal would say we all benefit, because japan has unfai market restrictions,
and if the market is open, then the most efficient producers will benefit and
consumers will benefit from buying at6 the lowest price from the cheapest
producers.
The Marxist would say that a handful of capitalists would benefit; those who
provide managerial, financial, and strategic services to Motorola's worldwide
operations, and Motorola's stockholders--most of whom are passive investors in
pension funds, insurance funds, or mutual funds that own Motorola shares for a few
days or hours. the investers are both foreign and American (Kautsky)
The economic nationalist would say that Americans don't benefit at all, he would
agree with the Marxist that just a few capitalists benefit.
The economic nationalist would say that the U.S. only benefits when products are
built with American labor (labor theory of value). Indeed, thousands of American
workers are now making celluar telephone equipment in the U.s. for export. But the
companies they make them in are Japanese. If those firms exported to Japan--and
not Motorola, the U.S. would benefit.
Economic nationalists say that foreing investment reduces a state's economic and
political autonomy. Foreign held debt and foreign ownership imply dependence and
vulnerability. With ownership goes control over economic decisions and influence
over political ones. Senator Frank Murkowski (R-Alaska) summed up this view
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bluntly in the December 30, 1985 NYT, "Once they own your assets, they own you."
Foreigners' ultimate political loyalties lie elsewhere.
The liberal would say, however, that FDI leads to international interdependence:
Through investment, foreigners gain a direct stake in the health of the U.S.
economy.
The Stateless Corporation?
Companies are losing their national identities (the liberal view) all over the world.
Between 1987 and 1990 Coke made more money in both the Pacific and Western
Europe than it did in the U.S. Nearly 70% of General Motors Corp/s 1989 profits
were from non-U.S. operations. As companies begin to reap half or more of their
sales and earnings from abroad, they are blending into the foreign landscape to win
acceptance and avoid political hassles.