THE MULTINATIONAL FIRM - THE A , UTILIZATION AND DEVELOPMENTOF ~ HOST - COUNTRY HIGH 5 LEVEL MANPOWER Dissertation for the Degree Of Ph. D. MICHIGAN STATE UNIVERSITY; JOSEPH DAVID PENO, Ir, ' 1975 This is to certify that the thesis entitled THE MULTINATIONAL FIRM - THE UTILIZATION AND DEVELOPMENT OF HOST-COUNTRY HIGH-LEVEL MANPOWER presented by Joseph David Peno, Jr. has been accepted towards fulfillment \ of the requirements for 1 Ph. D. Economics degree in a . I ‘ /(Aw‘f'/~"‘~/ I Subbiah Kannappan I Major professor Date 21 April 1975 07639 H <‘4 €3.41 ”I , - Lexi; dbl !.' .' .W‘IN‘P‘I‘I!‘ '. e ‘m‘w Iki's't‘m "I ,ij '1I.q",II R: :3- .0 [full dune"; I Inm'nor om ' lowing: ecu-1w" t of 3mm n- M ‘v!~‘.‘,31-> ' .‘ ' .{l 30mm}, ELL; 4‘ "‘er u; up , u A; . I» higherm Navy-“f . > m, company on} , , ,- ”It the reasor'u' ,3. 'I Ev» ’ This ”flecks tee nvz'v: ' - Err-.1191” mart-- 1 Over the for-91:21: CBDI‘41iMQ of the: 15th ‘07 Imam: “not: of coluieal and market “."noorzauaér; N's-m the desire for survival am Omelet}: it an ”.1335 entity through direct; inmmi . u to an continuum of 011x099}: Wk . ‘ ‘ 2:” mom that to!) rig Ln this can”; I. — ~ to «man: «abrupt! m the ad ‘ -"W ~19: .p. 2: t': 3;; 5. ,{i ABSTRACT 3\’\/\ THE MULTINATIONAL FIRM - THE UTILIZATION Q5 AND DEVELOPMENT OF HOST-COUNTRY % HIGH-LEVEL MANPOWER By Joseph David Peno. Jr. This dissertation is generally devoted to an analysis of the behavior and effects of American multinational firms in developing economies and their practices as regards the employment of host country (countries where subsidiaries or branches of multinational firms are located) high-level manpower. ,In general,_multinational firms do not employ host ' country manpOwer in Level I management positions, this repre- L senting the highest levels of management responsibility for‘ formulating company goals, planning and control. It is hypo- thesized that the reason for this is the preference function y of the firm. This reflects the desire for maximum source— country control over the foreign operations of the multinational firm in the context of political and market uncertainty. This in turn reflects the desire for survival and expansion as an international business entity through direct investment. The analysis is an application of oligopoly theory and the focus is on the many firms falling in this category. The observed behavior is essentially unchanged frOm the earliest phases of corporate policy when reliance on source-country Joseph David Peno. Jr. management was total. Available evidence--§g hgg statistics and case study material--indicate that key positions are still controlled by source-country personnel. The study concludes with a suggested format for further empirical work as general- izable information in this area is scanty and is needed if we are to better understand the manpower policies and impli- cations of multinational finms in the less developed economies. THE MULTINATIONAL FIRM - THE UTILIZATION AND DEVELOPMENT OF HOST-COUNTRY HIGH-LEVEL MANPOWER BY Joseph David Peno, Jr. A DISSERTATION Submitted to Michigan State University in partial fulfillment of the requirements for the degree of DOCTOR OF PHILOSOPHY Department of Economics 1975 1 (9 cepyright by , gunmen! Daria Pam». Jr» ~,e...v3;s .YIVQC “ IM (“or er-III filbhish 544‘ Whoa”; dmehdn David “”9 ”dfidr’fifefiael Joseph Peno V“. ,1; 1N..." L. xqa u x i3. he Fi‘\-’I'I_;."" . A ;~ . are: _ flflfilth to extent! ataxia! in the heroic .wvati « hairy. she succeeds aroma. «n. w o the” Street .nv-et‘rmrv . H . . '. ' ." ‘2: ' f‘.,"!': Pond l‘: "7 i I, "2‘ - 'Q'L' 12:: “III-kid N no, 'hary 9.; of mania: and : :n. :"Mh‘w U ACKNOWLEDGEMENTS First and foremost. I wish to express my gratitude to Professor Subbiah Kannappan. He originally suggested the topic to me and, as chairman of the dissertation committee. has offered much of his time and expert professional advice. He c00perated in the final procedures in a manner which can only be described as beyond the line of professorial duty. Without his help and complete cOOperation. the work would never have reached completion. I also extend gratitude to Professors Byron Brown and Mitch Stengel, both of whom served on my committee and pro; vided valuable criticisms of the first complete draft. I also wish to acknowledge the valuable assistance of the late Professor Stephen Hymer. As a member of my dis- sertation committee. he provided an especially valuable and unique insight into the direct investment process. Finally. I wish to extend special gratitude to Ms. Mary McAllister. Acting in the heroic capacity of typist and general literary secretary, she succeeded in translating my illegible scrawl into a readable text. 111 Chapter I. II. III. TABLE OF CONTENTS INTRODUCTIONOOOOOOOIOOOOOOOOOOOOOOC0.0.0.000... 1 Identification of Terms ‘Range and Universe of the Study The Significance and Growth of American [Multinational Firms Historical Perspective OligOpolistic Industrial Structure Association with Particular Industries Capital Structure Non-American Multinational Firms Summary of Universe and Firm Characteristics Host Country Emphasis. ALTERNATIVE THEORIES OF DIRECT INVESTMENT AND THE MULTINATIONAL FIRM..................... 48 THE MULTINATIONAL CORPORATE PREFERENCE FUNCTIONOOCOOOOOCOCI0.00...OCOOOOOOOOOOIOOOI... 78 Introduction The Theory The General Welfare Effects of Multinational Corporate Activity Summary of Views on Welfare Effects General Summary MULTINATIONAL CORPORATE BEHAVIOR IN HOST- COUNTRY HIGH-LEVEL MANPOWER MARKETS - BASIC BEmVIoROOOOCOOCOIOOOOOOOOOOOOOOOOOOOOIO. 127 Introduction The Problem Summary Statement AN ANALYSIS OF MULTINATIONAL CORPORATE BEHAVIOR IN HOST-COUNTRY HIGH-LEVEL MANPOWER MEETS...0.0.00000000000000000000000I 160 The Nee-Classical Analysis The Multiple Objective Model Firm Governmental Relationships iv 4 Market Conflict - The Transfer of Firm-Specific Knowledge and the Global Market Hegemony of the Firm Concluding Comments Two Counter-Hypotheses: A Resolution VI. CONCLUSIONOCIOOOO0.0.0.0...00000...OOUOOOOOCOOOO 23“ General Summary Research Format - Firm-Governmental Relationships Research Format - Techn010gical Tactics and Strategy Concluding Remarks on the Research Format General Conclusion APPENDICESOOOOOOOOOOOO..0OOOOOOOOOOOOO0.00000‘OOOOO0.... 257 A. TechnolOgical TypolOgies B. Non-Oligopolistic Investors BIBLIOGRAPHYOOOOOOOOOIOO0.00.00.0...OOOOICOOOOOOOOOOOOOI 265 _I_ 1.10 1-2. I-3. 1’4. 1‘5. 1.6. I“?- 1.80 1-9. I-10. 1-110 I-12. I'130 1‘1”. .z LIST OF TABLES Direct Foreign Investment by Major Countries-19660....O...OOOOOOIOOOOOOOOIIOOOOOO. U. S. Direct Foreign Investment, All Industries.. U. S. Direct Investment Abroad — Total, Manufacturing.................o..............o. U. S. Direct Investment Abroad - Total, PetrolemolOOOOOOOOOOOOOIOOOOO.DCOOOIOOOIOOOIO. U. S. Direct Investment Abroad - Total, Mining and Smeltlng........o.o................. U. S. Direct Investment Abroad - Total, other Industries.O.COOOOOOOOOOIOOOOOO0.0.0.0... The Expansion of Multinational Corporations Through Time................................... United States Foreign Investment by Size of Investmentooooooto.0.0.0.000...OOOOOOOOOOOOOOOO Distribution of Major Foreign Investors in Manufacturing by Market Structure.............. Distribution of Major Manufacturing Foreign Investors by Market Structure.................. Distribution of American Owned Enterprises in the United Kinngm by Market Structures..... Share of United States Firms in Selected United Kinngm IndustrleS...................... Sales of Foreign Manufacturing Facilities of Industries Included in the Harvard Business School Study. Compared with Manufacturing Sales of All U.S. Foreign Direct Investors, 196.800.0000..I.0..OI0..0....IIOOOOOOOOOOCOOOCOOO Direct.Foreign Investment of U. S. Firms by Commodity, 1929‘57.oeseeceases-000000000000...o vi 26 27 28 29 30 31 32 33 3Q 35 36 37 38 39 1.15. 1-16. 1-170 1-180 I-190 1'20. ‘IV-l. IV’ZO IV-3. IV-b. IV-5. IV-6. IV-7. IV-b. IV-9. Industrial Distribution of Foreign Investment in the U. S........................ Structure of Capital, U. S. and Foreign Ownership of Direct Investment Enterprises by Type of Investment. 19soeeeeeeeeeoeoeeeeeee Structure of Capital, U. S. and Foreign Ownership of Direct Investment Enterprises by Type Of Investment, 19570....0-000000000000 Structure of Foreign Affiliate Assets and Liabilities, 196 -69 (Excluding Canada)....... Structure of Foreign Affiliate Assets and Liabilities, 1966-69} Canada.................. Book Value of U. S. Manufacturing and Petroleum Reporter's Investments at End- 1966, Worldwide............................... U. S. Business Investments in Foreign Countries, Employment Abroad by Type and Country, 195700oneeeeeeeooooooeooooeeoeee- Manpower Policies of U. S. Multinational ' Firms Abroad-195900eeoeeeeeooeeeeeeeoeeoeeoeee Americans EmplOyed in Foreign Subsidiaries or U. S; Multinational Firms-19590000000000... Foreign Participation in Top Corporate ManagementOOOOOOOOOOOIOOOOOOOOOOOOOOOOOOOOIOOO Comparison of Foreign Participation in Employment and Corporate Management........... Citizenship of Key Executives of 21 Brazilian and 18 Mexican Subsidiaries......... Citizenship of Key Executives in the 19 combination CompanleS......................... Employment of Indians and Non-Indians in Foreign Owned/Controlled Finns by Salary Groups....o............................ Breakup of the Number of Indians and Non- Indians Employed by Foreign Owned/ Controlled Firms by Salary Group and Nature Of JOboonee-00.0000oeoeeeeeeeeeeeeeoooe vii U1 #2 N3-4N us-ué 4? 148 149 150 151 152 153 154 155 156 IV-IO. IV‘110 IV-12. V‘lo Employment and Payroll Costs of U.S. and Foreign Employees in 1966. By Manufac- turing and Petroleum Reporter's Majority- Owned Foreign AffiliateS....o.................. 157 Number of Local and U. 8. Employees in Manufacturing and Petroleum Broken Down by Function and By Major Country............... 158 Employment in United States Firms in Brazil and Mexico, 1955. By Type and Industry......... 159 Examples of U. S. Multinationals That Have Regional Management Organizations in Europe...O0..OOOOO..0.00000COOOOOOOOOOOOOOOOOO. 191 viii CHAPTER I INTRODUCTION Specifically. this study has been devoted to an analy- ' sis of the behavior and effect of the oligopolistic multi- national firm in the high-level manpower markets of the less developed economies. The analysis is executed within the framework of a theory of the multinational firm and is based upon a multiple-objective preference function for the firm (a preference function that includes more than one maximandum). The above-mentioned general theoretical framework represents one of the more important contributions of this study. I believe it has some important explanatory and pre- dictive powers in dealing with multinational corporations, especially the behavior of the multinational firm in the high-level manpower markets of the less developed nations where direct investment takes place. Specifically. the theory has been used to partially explain a controversial aspect of the multinational firm - its reluctance in the past to employ host-country nationals in the highest level management positions in their foreign operations; and their failure to promote the nationals actually employed to po- sitions at the corporate headquarters level. The analysis of manpower policies abroad is essentially historical in nature, tracing corporate policies from earlier periods where almost exclusive reliance was placed on management sent from the head office. to later periods where this policy ".3. modified. .‘1 r 2 In the section that follows. the key terms used in this study are defined and discussed. It should be pointed out that. in terms of economic and political structure. host-countries do not necessarily fit into one perfectly homogeneous grouping. Differences exist. and these dif- ferences account in part for differences in multinational corporate strategy and the past degree of success experienced by host countries in dealing with them. These differences also dictate different future strategies (and probability of success) for host-countries bargaining with such firms. This point will be discussed in detail in later chapters. Likewise, all firms with multinational operations do not fall into the category of international oligopolies (the dominant focus of this study). Thus, their motivation and behavior are markedly different from the dominant class of firms treated in this study. Though such corporations (those that do not operate within oligopolistic market struc- tures) are shown to play a minor role in the total of inter- national business operations. they provide an interesting contrast to the dominant oligopolies. This class of firms will be briefly discussed following the main analysis in Chapter V. Identification of Terms: Direct Investment; the National Corporation; the Multinational Corporation; the International Corporation; High Level Manpower It is particularly evident from surveying the litera- ture on the phenomenon under examination that there is no consensus on what it should be called. It has been called 3 by many names: direct investment. the national corporation. the multinational corporation. the international corporation. etc. While some writers attach no particular significance to what they view as semantics and accept any or all of the above terms and use them interchangeably. others have at- tempted to draw rather fine distinctions. The latter effort makes necessary some brief review of these distinctions in- sofar as certain of the terms now carry a traditional and well-defined meaning in some quarters and confusion could result from adopting any one of them or using them inter- changeably. _ In the past. direct investment has been classified as an international capital movement. Capital movements can take place in a number of forms -- through issue of new se- curities and purchases and sales of outstanding securities on security exchanges (portfolio investment), through a variety of short-term credit instruments. and through direct invesement: the latter being a unique form of capital move- ment. accompanied by control. technology and management. Treating direct investment in this context only. i.e.. as a sub-category under capital movements. omits many important features of this phenomenon. Direct investment is more than simple capital movement. Economists. in attempting to in- terpret direct investment as only a capital movement. have 1 noted several obvious deviations. Firstly. investors often did not take money with them when they went abroad to acquire 1See C. P. Kindleberger. American Business Abroad (New Haven and London. Yale University Press. . u a company's assets or to build their own plants: instead. they would borrow in foreign markets. As Kindleberger notes. capital movements would take place gross, in the sense of asset acquisition(outflow) and liability incurrence (inflow). but not net.2 Additionally. investment would often take place in kind through property exchange. e.g.. patents. tech- nology. etc.. against equity claims. with no actual transfer of funds through foreign exchange channels. Furthermore. di- rect investment would also occur through reinvestment of foreign profits with no movement of funds through the foreign exchange market. Thus. direct investment can involve capital formation rather than capital movement.3 For these and other purely taxonomical reasons. direct investment does not fit well and should not be constrained to the position of a sub-category of capital movements. This is especially true if a theory is needed to explain the direct investment phenomenon and the behavior of source country firms. (This term is used throughout the study to designate the "multinational firm".) As will be discussed later. direct investment belongs more to the theory of indus- trial organization than to the theory of international capital movements. 21bid.. p. 2. 3Jack N. Behrman. "Promoting Free World Economic Development through Direct Investment." American Economic neview. 50. No. 2 (May 1960). pp. 271-81. 5 Indeed. it is essential at this Juncture to point out that this study is not primarily concerned with those fea- tures of direct investment generally associated with balance of payment problems in general or with the accounting and purely theoretical aspects of world capital markets and movements. The primary interest here is in the firm that undertakes direct investment. its motivations. behavior. and in particular its effects on the economies of the less- developed or Third World. These firms will be termed multinational firms and are. by definition. firms that spe- cialize in the production and distribution of goods and/or services. and undertake direct investment abroad (in many of its various forms) for purposes of establishing a market position. Often. in the writings of economic theorists. the firm has served. in Machlup's terminology. as "only a the- oretical link. a mental construct helping to explain how one gets from cause to effect.“ For the present problem. the firm itself is of the essence and its nature will be explored. In surveying the current literature on the present topic. one finds the multinational firm variously defined and categorized according to several criteria. Kindleberger dis- tinguishes between the national firm with foreign operations. the multinational firm. and the international firm on the basis of attitude toward foreign exchange risks and toward equalization of profits; with the international firm being “Fritz Machlup. "Theories of the Firm: Marginalist. Behavioral. Managerial." American Economic Review. 57. No. 1 (March 1967). p. 9. 6 the most advanced form - equalizing at the margin everywhere in the world.5 Others have attempted differentiation on the basis of degree of internationalization of power (managing bureaucracy. shareholders) and degree Of national bias (ethnocentricity vs. geocentricity).6 In contrast to these behavioral classifications. others have attempted. spurious- ly. to artificially differentiate on the basis of "percent of sales of foreign origin."7 Such classifications are. for the most part. useful only in very narrow contexts. Worse. they often contain. implicitly. theories of the multinational firm and many nor- mative propositions. They are therefore not purely taxonomic in nature. For these reasons. no attempt will be made to fit our multinational corporation. as defined. into any pre-conceived taxonomical scheme. One task remains for this section on identification of terms —- that of defining high level manpower. Such man- power. often referred to generally as management. represents the most critical resource in the general corporate hierarchy. These conscious and willful productive "factors" (units of 5Kindleberger. pp. 182—185. 6See S. E. Rolfe. The International Cor oration (Inter- national Chamber of Commerce. 9 . pp. 1- : H. Perlmutter. "Three Conceptions of World Enterprise." Revue Economi ue et Socials (May 1965): and "Multinational CorporatIons." CqumBia ourna of World Business (January-February 1969). 7For example see Bruch and Less. "Foreign Content of U.S. Corporate Activities." Financial Anal sts Journal (September-October 1966). pp. 1-3. 7 specialized human capital) design. build. direct. and main- tain the economic organzation. Harbison and Myers attri- bute the following functions to high level manpower: 1. The undertaking of risk and the handling of uncertainty 2. Planning and innovation 3. Coordination. administration. and control a. Routine supervision.8 In very small and primitive enterprise (the Marshallian. competitive firm). all of these functions and activities may be performed by a single person. the-proprietor. In the modern multidepartmental. multidivisional corporation (the primary focus of this study) there is a division of functions among a complex hierarchy of individuals. Chandler and Red- lich in their analysis of the evolution of the corporate structure. distinguish between three distinct levels of task and decision making.9 Level III. the lowest of the three. is concerned with day to day routine supervision in each of the various enterprises or divisions. i.e.. seeing to their continued operation within the established corporate frame- work. Level II is responsible for correlating the division managers at Level III. and first appeared. historically speaking. with the separation of head office from the field office. The functions of Level I - tap management - are na ment in the n New Yor : McGraw- 5F. Harbison and c. A. Myers. Ma t io 9Alfred D. Chandler. Strate and Structure (Doubleday and Co.. 1961). Alfred D. Chand or an F. Re ch. "Recent Developments in American Business Administration and Their Conceptualization." Business History Review (Spring 1961). J ,_.;._..~ 8 goal determination. planning. and vertical control. At this level. the framework within which the lower levels operate is cast and overall strategy is conceived.10 This hierarchical division of function with clearly defined status and authority at each level. suggests the need for a hierarchical subdivision of high level manpower when dealing with the multinational firm. The men who staff Level I (the "Commanding Heights" in Lenin's terminology). deter- mine the firm's overall preference function and exercise centralized global control. They undertake planning. risk decisions and the handling of uncertainty (in Harbison's and Myers' scheme). for the entire corporate structure. This is the seat of what shall be termed Level I management (here- after referred to as L-I-M). Their ultimate power comes from their control over all of the corporation's available re— sources. This power is brought to bear on lower levels (at home and abroad) through selection of executive personnel and budgeting.11 level II management (L-II-M) acting within the framework established by LPI-M and with the resources allocated to them by LPI-M. will coordinate the operations of 10Chandler and Redlich. in their historical analysis of the evolution of the corporate structure. observed that all three levels were initially embodied in the entrepreneur. In the transition stage to the multidivisional corporation (what they call the national corporation) these two levels were separated from the bottom one. In the multidivisional corporation. Level I is completely split off and concentrated in the general office. “Chandler and Redlich. p. 120. 9 the several foreign divisions or subdivisions comprising Level III. Level III management (L-III-M) supervises the day to day operation of the various divisions. subsidiaries and plants. Each level (I. II. and III) has its own cadre of top executives and administrators. This cadre. hereafter designated as Bank A, is identified by positions which cor- respond generally to the five critical functional areas of general management developed by Harbison and Myers. These are: organization (the general manager). and finance. engin- eering and technology: production management; and marketing and sales. All functional areas below Level I are controlled by permanent department heads or directors. or supervised (in later historical stages) by "reticulators". Each level also has a basic complement of "staff specialists" (hereafter re- ferred to as Rank B) which may include scientists, staff e”Isl-neers. lawyers and labor relations officers. Rank B per- 30111131 play little role in the critical general management areas specified by Harbison and Myers. Power rests with and is transmitted through officers in Rank A at all levels.12 Each high level manpower "package" has well-defined resIbonsibility within the global corporate hierarchy. The 1°"9r levels are linked. via the central nervous system of “Ptical control. to Level I. \— 12As will be discussed in detail in Chapter IV. the staff- ing of Bank A at all levels has been most consistently with mat-country nationals; less so at Bank B. The hierarchical aGhouls specified above represents amesis of those postu- llted by Harbison and Myers. and Chandler and Redlich. It will be related specifically to the empirical evidence and analyzed in Chapter IV. 10 Stephen Hymer has noted that the application of lo- cation theory 'to the Chandler-Redlich scheme suggests a close correspondence between the hierarchical centralization of control within the corporation and the evolving hierarchical geographic centralization of control brought on by the growth of the multinational firm.13 He has also postulated that the structure of world income and consumption will tend to paral- lel the structure of status and authority within the emerging multinational corporate hierarchy. and that the division of labor within the hierarchy will tend to be based on nationality. These postulates are related to the central hypothesis of this dissertation. Both will be discussed in detail in Chap- teJr II. Range and Universe of the Study The general area of the multinational phenomenon is *1de-ranging in nature. This study concentrates on American “‘1‘ Itinational firms, primarily oligopolistic. which are en- 'gauged in manufacturing and petroleum. The Significance and Growth of American Multinational Firms In a 1968 analysis of international investment by the nganization for Economic Co-operation and Development (OECD) ( ‘based on 1966 data) the most recent investment information \—- 1~3Stephen Hymer. "The Multinational Corporation and the gap: of Uneven Development." (Unpublished) to appear in J. N. l’lngwati. ed.. Economics and World Order (New York: World Law I"‘una. 1970) . ‘5‘: I A 11 available on a comparable national basis is given (see Table This study indicates that in terms of book value at circa the end of 1966. there was $90 billion in DFI by De- velopment Assistance Committee (DAC) countries (Belgium. Canada. France. Germany. Italy. Japan. the Netherlands. Swe- den. Switzerland, the United Kingdom and the United States). On a disaggregated basis. about 330 billion (33%) was invested in less developed countries (L.D.C.). In terms of an indus- try breakdown (total investment figures) $25.9 billion was invested in petroleum. $5.9 billion in mining and smelting. and $36.2 billion in manufacturing. In terms of investment in L.D.C.'s. the comparable figures are $11.8 billion. $2.8 billion. and $5.0 billion. The comparable total U.S. invest- ment figure for 1966 is $54.6 billion. or about 60% of the 310139.1 total. or this sub-total, $16.2 billion was invested 1‘1 petroleum. sun billion in mining and smelting. and 322.0 billion in manufacturing. L.D.C. investments were $16.8 bil- lion (30% of total). CorreSponding figures for L.D.C. in- vgstments by industry are 36.9 billion for petroleum. $1.8 blllion for mining and smelting. and sit-.1 billion for manu- Facturinz. In terms of the United States alone, Table I-2-6 indi- Q3~‘lzes that, based on separate 1970 Department of Commerce §§timates (U.S. Department of Commerce. Bureau of International QQllimerce. Office of International Investment. Staff study 19'72) total direct investments had risen to $78 billion in 1970. Of this total. $24.9 billion (or 32%) was invested in L-D.Cfls. 12 In terms of an industry breakdown (total figures). $21.7 billion was invested in petroleum. $6.1 billion in mining and. smelting. and $32.2 billion in manufacturing. Corresponding L.D.C. industry breakdown were $10.0 bil- lion in petroleum. $2.4 billion in mining and smelting. and 85.5 billion in manufacturing. Based on this data. in terms of individual distribution. of the 878 billion in D.F.I. in 1970. about 70% is in manu- facturing ($32 billion) and in petroleum ($22 billion). With reapect to comparative trends over the decade. 1960-70. manu- facturing investments rose from 35% of the total to 42%. while investments in petroleum. although rising absolutely. declined in proportion from 31% to 28%. These two sectors have become the most important ones r.I‘om the point of view of analyzing the multinational corpo- I‘Qte phenomenon. H - Historical Perspective ‘ Direct investment has a long history. (See Table I-7.) l”any U.S. multinational firms began their operations abroad ~b«fore the Great Depression. and some before World War I. (By 1914. the United States had $2.5 billion in direct investment.” \———— 11‘The 'venerability of foreign investment is evidenced in Flam sources. The 1957 Census. U S siness Investments in ei ountries Census of 1 Was ngton Government Print- ‘ng cs ' s owe t 5 percent of total investments 1a concentrated in plants established before 1946. Since few Vere started during the Depression or World War II. most must vs started before 1930. This is confirmed in the 1250 Census AA..— VA‘A—vA-v ‘ v v 13 As Stephen Hymer has noted. corporations do not grow old and die.15 Their subsidiaries in each country tend to grow in step with their industry in that country. except when the growth process is interrupted by unusual events such as war. When dealing with the multinational corporate phenome- non. we are dealing with a long run phenomenon. with a long history. In the United States. multinational firms date back to the 1850's. After several decades of rapid growth. approxi- mately one-half of the then-existing 50 largest corporations had significant overseas investment by 1900. including manu- 1“liétzuring and distribution outlets. This growth continued through the 1920's but abated in the 1930's. The new element that emerged during the next decade was the concept of modern multinational enterprise with a common strategy. More impor- tant than this was the growing capability of having the \_— DsS. Investments in the Latin American Econom . Washington: Grufi. Government Printing Office. 1557) which found almost 1.. percent of 1950 investment was in plants established be- Qre 1930. In the United Kingdom. Dunning found that one- :filf of the employment in United States-controlled enterprises 1953 was in firms established before 1914. John H. Dunning. (London: 1': AIllerican Investment in British Manufacturin Industr QQorpxe Allen and Unwin. 19S . Simi ar results are ound by Bl~ash for Australia. D. T. Brash. United States Investment in Alustralian Manufacturin Industr (Cambridge: Harvard Univer- Elty Press. 1565) and by Deane for New Zealand. R. S. Deane. bOrefil. Investment in New Zealand Manufacturin (Unpublished .D. dissertation. Victoria University 0 We ington. 1967). b'Or a listing of other specific case histories on this matter Qee Stephen Hymer "Some Empirical Features of U.S. Investment abroad." prepared for the Third Pacific Trade Conference on The Role of Foreign Investment in Asia-Pacific Economic De- velopment." Sidney. Australia. August 1970. 15Hymer. p. Li. ll; management of that strategy take place at a common control center based on a common flow of information.16 It is this , post-war period that is given the greatest attention in this study. Specific industries have experienced particular growth patterns. In some industries. firms have divided the world into spheres of interest. with U.S. firms restricting them- selves to Latin America. European firms to Africa and Asia. and all competing in Canada. In other industries. firms may have cooperated and established Joint ventures. In still Others. the firms have competed instead of colluded. While historical patterns of growth are different in Some respects. the system underlying direct investment tends to be characterized (in Hymer's words) by "positive feedback" and a structure which once established tests to reproduce 1 tself.” This feature makes initial market position impor- tant in determining long-run profits. It also explains the gmbhasis placed by corporate management on long-run market bgsitions rather than short-run profitability in determining 1:lhleir investment strategy abroad. 18 A‘ A‘A—V~VA'A~V ) At the present time. there appears to be a major flux 1’1 the multinational corporate phenomenon. Market positions. \— § 1(”This aspect of the dialectics of fim growth is dis- ‘lssed in the next chapter. 17Hymer. p. 6. 18This aspect of M.N.F. performance is discussed in E‘Iapter III within the context of the multinational corporate I‘cference function. 15 many established in the early part of the 20th century. re- mained stable until the fifties. Now, however. shifts are occurring. Many industries are characterized by intense oligopolistic competition between firms of different nations.19 During the coming decades new shifts and fluctuations in the patterns of market shares will probably occur. The result may be a new pattern in the international economy which could emerge and remain stable for some time. In Europe. stabili- zation in terms of market shares appears to be growing. but in L.D.C.'s. the competition for market shares has Just begun. As will become evident in the analysis that follows. such s"ér‘uggles have had an important effect on manpower policies a broad a ) Oligopolistic Industrial Structure Though many firms have some DFI. the number of important j‘r‘Vestors is relatively small. In 1957. fifty American firms. each with foreign investments of over $100 million accounted 1" <5 1' nearly 60% of all U.S. DF'I. (The data from the 1966 Cen- AW‘VA‘VA—V“ Qua - the most recent - were not yet available for this ‘esure at the time of writing.) The next fifty largest fims §§{taunted for an additional 10%. Ninety percent of all DF'I *Qs controlled by three hundred firms (see Table I-8) all of ‘5 Jch figure prominently in the Fortune list of the 500 lar- %§st U.S. firms. \— ‘h 19The oligopolistic market structures from which most “Itinational firms come is discussed in the next section. ‘. . ‘l. , . 16 More recent data show the same trend. In a study pub- lished by the Office of Business Economics of the Department of Commerce in March of 1972. it is pointed out that the de- gree of concentration is still substantial. They state that. as of 1970. about 250 firms account for over 70% of all DFI and that if the Fortune list of the 500 largest U.S. com- panies is used for comparison. almost the entire direct in- vestment universe would be included.20 In a 1972 preliminary report from the Harvard Business School research project on the multinational firm. the evi- dence above is again substantiated.21 A total of 187 multi- ' national enterprises account for about 80% of U.S. foreign inVestment and over half of all U.S. exports of manufactured $006.8. Each of these enterprises owned manufacturing facili- , ties in at least six foreign countries and was on Fortune's 3 list of the 500 largest U.S. industrials. " The large size of the multinational corporation is " Q“rident. They are large relative to their markets and. in " Many cases. relative to the governments with which they deal. rho source-country firm typically occupies a dominant position \_———— 20U. S.’ Department of Commerce. The Multinational Cor- bOration "Trends in Direct Investment Abroad by U.S. Multi- :gational Corporations 1960- 70". Bureau of International Ewerce. February 1972. O. F. D. I. data indicate that less tl'lan 140 firms have 60% of total investment. U.S. Department Mr Commerce. "Policy Aspects of Foreign Investment by U. S. llltinational Corporations". Ibid.. p. hi. A 21"U.S. Multinational Enterprises and the U.S. Economy" & research report of the Harvard Business School. R. B. 1=obaugh. Director. January 1972. v ‘AvA—‘v v A. 1? in its dunestic market. The subsidiaries often rank among the largest firms in the host countries. Direct foreign‘investment, as suggested above. is asso- ciated with oligopolistic industries. The major investors are "dominant firms" in industries with high concentration ratios (industries where a small number of firms account for a large proportion of industry total output). In a recent Study by Hymer. the major U.S. investors in manufacturing and petroleum industry are classified by the level of concen- tration (a measure of oligopoly structures) in their industry.22 As Tables I-9-10 indicate. approximately “4% of these firms were dominant in industries where the concentration ratio is ”eater than 75%. Another 15% were in industries where the concentration ratios were 50 to 75%. (See Table I-10 for more detailed data.) It is important to mention that finns have been classi- rled according to their major product. while the foreign in- v‘stments are most often restricted to one or two specialties where the firm has particular "firm specific" advantages and N l"‘Qire concentration would therefore be much higher. A more <1 1.saggregat'ed industry definition would show even greater Q t>ricentration . Other studies confirm these findings. The affinity for qirect foreign investment by industries of oligOpolistic \rket structures has been documented extensively. In the I1‘11ted Kingdom. Dunning found that two-thirds of the subsidiaries \+— 22Stephen Hymer. Appendix Tables. 18 covered in his survey operated in markets of tight-knit oli- .23 For specific gopoly (source-country and host-country) In addi- data from Dunning's study see Tables I-11 and I 12. tion. in a study by Steuer. a significant relation has been found between the level of seller concentration (that propor- tion of sales accounted for by the five largest firms) and foreign investment in a sample of 27? manufacturing firms. This holds for American as well as non-American firms. Rosen- bluth reports similar findings for Canada.25 Deane found Similar results for New Zealand; as did Brash for American investment in Australia.2 Evidence from other countries. though available in less convenient form. confirms the finding 27 that DFI is associated with oligopolistic industries. Additional evidence shows that in underdeveloped countries. the feature of high concentration is even more pronounced. \ American Investment in British Manu- r 23.1. H. Dunning- m (London- Geo—rge'l'ilTn and Unwin. 195 D. Steuer. et al.. The Economic Effects of Inward 2%. P¥3W68tment in the United Kin cm. 1970 A preliminary report. m°r Similar evidence see: T. Horst "Firm and Industry Deter- 1mhts of the Decision to Invest Abroad: An Empirical Study" \WH August (1972). an 256. Rosenbluth. "The Relation Between Foreign Control ‘1 Concentration in Canadian Industry". C. J. E. 3. (1970). re. 26R S. Deane. Forei Investment in New Zealand Manu- W (Unpublished PH.D. dissertation. Victoria University a W ington. 1967) D. T. Brash. U. 8. Investment in Australian W (Cambridge: Harvard University Press. 1966). 27For a good summary listing with notations see finer The Industrial find Ea R. E. Caves "International Corporations: °n0mics of Foreign Investment: Economic}. February (1971). 19 A numbervof important implications follow from the aforementioned characteristics. Firstly. an appropriate theoretical framework within which to pursue an analysis of the M.N.F'. and D.F.I. is that of oligopoly theory. Secondly. the large size of the M.N.F.'s implies a particular political and economic relationship between them and the governments with which they must negotiate. as well as between them and the host-country producers with which they compete. These two features have been integrated into a partial theory of the M.N.F. which is specified in the next chapter. and is used to roughly test the major hypothesis of this study. Association with Particular Industries Multinational corporations have been concentrated in oligopolistic industries with special product characteristics. Tables I-13-15 Shows data which reflect the industrial dis- tribution of direct investment by American and non-American rims. The largest part of this investment is in "heavy" in- quflry. i.e.. in industries characterized by large fims. hlfih capital intensity. advanced technology. and differenti- ated products.28 A. more disaggregated analysis would probably \— t 28The Census data for 1966 were not available at the T1?“ of this writing on a comparable disaggregated basis. The data shown in the Tables are from the 1250 and 1252 Census. 1.1.9 trends shown there are. however. confirmed in recent data a W 0.F.D.I. studies of 1970. and in empirical studies done $99 1957. See R. Vernon. Soverei t at Ba : The Multi- lgtional S read of U.S. Enter rises (New York: Basic Books. :1). Also see T. Horst. Both studies show that M.N.F. . n v - e 0 ° , 2,» u. r \ . 20 show that within two digit industrial categories. foreign in- vestment would tend to be concentrated in "specialty" indus- tries: and within firms. in products in which the firm had particular "firm specific" advantages. (See Table I-10.) In this connection. three features partially explain whether an industry or firm has large foreign investments: (1) There must be some type of barrier to entry into the in- dustry; technology. economies of scale. or differentiated Proclucts. This is required in order for the M.N.F. to compete With host-country firms (public and/or private) despite the higher cost of doing business abroad:29 (2) It must be advan- tag-eons to produce locally abroad (including for import) rather than export from the source country (this depends on tariffs. the size of market. etc.): (3) The firm must find it more in its long-run interest to exploit its market advan- tages through D.F.I. rather than through 1ieensing.3° \— :em to be larger. more research-oriented firms. etc. Empi- 1ca1 evidence is presented in both on a comparable industry realm own . me 29This is an element in Hymer's theory of direct invest- ‘t; “to It is a key element in my own and is integrated into e OVerall theory of the multinational firm in Chapter III analyzed extensively. Such a feature (entry barriers) is Q haracteristic of oligopolistic enterprises. 30For an interesting analysis of the factors influencing ‘C: J e choice between direct investment and licensing see H. G. son. "The Efficiency and Welfare Implication of the Inter- r§§L tional Corporation." C. P. Kindleberger, ed.. The Inter-) pm . b\bt10nal Corporation (Cambridge. Mass.. M.I.T. a 5- . 21 As will be explained in the theory in Chapter III. all of these features characterize. and are entirely consistent with. an extension of oligopolistic rivalry to a global scale.31 It is also interesting to note that non-American M.N.F.'s tend to be in the same kind of industries as American firms. (See Table I-15.) Data on cross investment confirms this feature and indicates a defensive aspect of international oli- gopolis tic compe ti ti on. Capital Structure In the context of patterns of international ownership and control. there has been. historically. a strong tendency among multinational firms toward the wholly-owned foreign Subsidiary (especially in manufacturing and petroleum). At the time of the 1252 Census. over three-quarters of the total Of $25 bi1lion in D.F.I. was in enterprises in which U.S. e(mity ownership was 95% or more. and 20% was in the ownership range of 50% to 95%. A similar trend is apparent in the 1950 Census.32 Foreign investment in the United States has \\_—— 31Direct investment involves both horizontal and verti- cal integration internationally. Most D.F.I. in manufacturing “VOIVes horizontal integration as the more dynamic. R&D ’ riented industries and firms expand their market horizons §° include the world market. Vertical integration is most the. racteristic of a particular kind of industry. i.e.. pri- borilv preparation of raw materials (petroleum. etc.). In 1 th cases. barriers to entry figure importantly in explain- §x the motives and behavior of these firms. This is discussed 1: tensively in the next chapter. For further discussion on beis topic plus a listing of additional empirical materials aI‘ihg on these points see Caves. pp. b-27. Vg 32U.S. Department of Commerce. Po 0- U.S. BuSiness In- or‘tments in Forei Countries 1 . Foreign Investments ' e U.S. Census of . p. 17. 22 followed the same pattern (76% of D.F.I. in the U.S. was owned 95% or more by foreign parents. and 20% was owned be- tween 50% and 95%).33 The basic pattern for financing direct investment is illustrated in Tables I-16-17. An important distinction is made between equity and debt capital. The U.S. parent's share of capital in foreign subsidiaries averaged 86% in both the £250 and 1257 Censuses. As will be explained in later chapters. the high share of equity securities can. to a large extent. be explained by the imperatives of global control. More recent data confirm the above trends. The results of the Department of Commerce's Foreign Affiliate Financial Sur- vey 1966-1969 show that majority owned foreign affiliates account for approximately 85% of the total of D.F.I. in those years)“ Also. preliminary releases (for manufacturing and Petroleum only) from the Census of D.F.I.. 1966 (the most recent. complete. and accurate data on the entire direct in- veStment universe) show a continuation of the trends observed in the Census of 1250 and 1251. (See Table I-20.) In the (338% of manufacturing. 94.1% of total book value was invested 1“ Majority owned affiliates. Petroleum reporter's majority Q‘med affiliates accounted for 95% of their book value invest- ruents in foreign affiliates. \— ‘n 33U.S. Department of Commerce Foreigg Business Invest- \°hts in the U.S.I Census of 1252. (3 3“Estimated from data in: U.S. Department of Commerce. rlzfice of Direct Foreign Investments. Forei Affiliate Fi- n 1 66-69. Tables I-18-19 show detailed finan- \Q cial Survey 2 ’3 ata on t e firms in the 0.F.D.I. sample. {3 23 The past preference of American investors for virtually 100% equity control can be explained by the desire for global control and profit maximization (or relates to the influence of externalities and the effect of such on patent exploitation). This point will be discussed in more detail in Chapters III and IV. To some extent. the firm has been willing to relin- quish equity ownership in "exchange" for more subtle "controls". This is especially true of Japanese multinationals that have Placed increasing reliance on control of vital technology flows. This later feature of shifting capital structure is related to the general model in Chapter IV. Non-American Multinational Finns As noted previously. from information based on the most recent O.E.C.D. data. the share of major non-American foreign investors is about 40% of the global total as of 1966. It is also interesting to note that the principal non-American M rN-F‘Js have the same characteristics as their American com- petitor. i.e._ they are large firms. from concentrated indus- tries. Also the industries from which they come are likewise Q‘a'mtal intensive. possessed of advanced technology. differen- tlated products. etc. While the analysis in this study is based upon the be- 3vIibr of American M.N.F.'s. much of it could be adapted to a Ina137818 of non-American M.N.F.'s. An extensive examination Q 1“ Such firms is beyond the scope of this study. Nevertheless. ‘I: . 1“? are treated on a limited scale for comparison purposes 1 ‘1 Chapter IV. 24 Summary of Universe and. Firm Characteristics The preceding section has defined the range and uni- verse of this study. Also. a number of firm characteristics that are important for the analysis at hand have been discussed. To recapitulate: £252 1. The Study is limited (with the exception noted in the section on non-American firms) to American multinational firms. 2. The time Span covered is predominantly post-World War II to the present. 3- The analysis is limited to the broadly defined categories Of manufacturing and petroleum. Firm Characteristics 1. American (as well as most non-American) M.N.F.'s are large firms Operating in concentrated industries. Thus. the study or American corporate multinationalism is largely a study in oligopoly rivalry expanded to a global scale. 2 r American multinational firms tend to be concentrated in industries with special characteristics. The data indicate that the largest part of D.F.I. is in "heavy" industry. charac- terized by high capital intensity. advanced technology, and Q 1f‘f'eil‘entiated products. 3 ‘ American multinational firms have demonstrated a strong :3 I~°f°rence for the wholly-owned foreign subsidiary. Non-American firms share many of the same firm and indus- ‘11! Gharacteristics. i .'— . Ex 5 25 Host Country Ennphasis As noted in the introduction. the analysis is primarily limited to the behavior of the multinational firm in the less developed host countries. Data from selected countries of this group will be used to provide empirical support for the fundamental theoretical propositions developed in the body of the thesis». The countries were chosen to illustrate invest- ment and behavior patterns in Latin America. Africa. the Middle East and Asia. Economic and socio-cultural differences between host countries and the extent to which these influ- ence patterns of D.F.I. and firm behavior are also discussed. The patterns of D.F.I. and firm behavior in the developed countries (primarily Europe and Japan) will be discussed (in- Borer as they provide. a logical and consistent link with the analysis in the L.D.C.'s) in the final formulation of an Overall model of the dialectics of the multinational firms, direct; investment and the internationalization of capital. H ..-... . ......f 8...? 5t 3238 .0.-. ...... c3352.. 5338.3 .3: 3. as 5 $3 «No; we causal- . .. .... al..“... :Cmqrfl B \ 4..i. 3......” ..0.. .0:Ufl.w 2.62.35 0cm” mu “30.5 «g 4.0.3.493: oven pauses.“ «v.3 Sinking!“ .1; v N. .... .0.... .... ..0 .. 2 .0.. 33V . Qfi.m U a f . . .... ... . .... . .... .. A. ......w. . a. - - . a flu ..V.. .. .. . q. . Rum . .L‘ . ... . .w.| .v . . . . v, . ‘ U. .. w a .r t . 3 ‘ :h7fl q. . «low . ”WOv n... . . 3 . . . 0..... . .. CON -. . 3 . .51.... f? f . 8.2.3.2...2 . 8.03 v x: . ...r. L m E m c g . .. . - H _ . n m . 2.0.12 . i. . .. .. .. m 6.1. com... 33...}: .. c . ... ...n “H9Q.m._. Ll»)..i .mlr.&, . ;N .Hk. “WWQOCV ..\1.3. .43. V“ 7.1.3... . wwwoa {ON-fid 2.9mm.» _........N.£ ...... i.e....c. Som.2 «mm. .W Show 92.3 ...??? we.“ .. m0... ...!)Klr lihh. .08 on: 6a.: 03 9.31». w........ .. {j . . . Akwafiwlrw...» .Amoma .mw Haaa2H ZUHMGOL HommHQ HIH mam¢fi r . TABLE I-2 U.S. DIRECT INVESTMENT ABROAD-TOTAL. ALL INDUSTRIES (MILLIONS OF DOLLARS) All Book Areas Value 1960 31865 1961 3h68h 1962 371h5 1963 #0736 196h #0080 1965 #9474 1966 5“799 196? 59991 1968 6&983 1969 71016 1970 78090 Developed Countries 1960 18391 1961 20979 1962 22890 1963 25639 1969 28635 1965 32312 1966 36661 1967 40070 1968 43u99 1969 47886 1970 53111 less Developed Countries 1960 13u7u 1961 13705 1962 1&255 1963 1509? 196k 158u5 1962 17162 196 18138 1967 19h21 1968 21480 1969 23130 1970 2&979 Source: U.S. Department of Commerce, Survey of Current Business. October 1971 and earlier. J‘Jfiiikflflwsi l 28 TABLE I-3 U.S. DIRECT INVESTMENT ABROAD-TOTAL. MANUFACTURING (MILLIONS OF DOLLARS) All Book Areas Value 1960 11152 1961 11936 1962 13212 1963 14937 1964 16935 1965 19339 1966 22078 1967 24172 1968 26414 1969 29527 1970 32231 Developed Countries 1960 9316 1961 10037 1962 11028 1963 12421 1964 14045 1965 15938 1966 18236 196? 19957 1968 21716 1969 24367 1970 26748 1960 1836 1961 1899 1962 2184 1963 2516 1964 2890 196 3401 196 3842 1967 4215 1968 4698 1969 5160 1970 5483 Source: U.S. Department of Commerce. Surve of Cur nt ggsigess. October 1971 and earIIer. iiiifi~ . . 0, Tom: _ r ~ .. TABLE I-4 U.S. DIRECT INVESTMENT ABROAD-TOTAL. PETROLEUM (MILLIONS OF DOLLARS) All Book Areas Value 1960 10948 1961 12151 1962 12661 1963 13652 1964 14328 196 15298 196 16222 1967 17399 1968 18887 1969 19882 1970 21790 DevelOped Countries 1960 4766 1961 5396 1962 5661 1963 6697 1964 7203 1965 7720 1966 8588 1967 9309 1968 9922 1969 10463 1970 11746 Less DevelOped Countries 1960 6182 1961 6755 1962 7000 1963 6955 1924 7133 19 5 75 1966 7634 1967 8090 1968 8965 1969 ' 9419 1970 10044 Source: U.S. Department of Commerce. Survey of gurggnt 52813988. October 1971 and ear ier. l 30 TABLE I-5 U.S. DIRECT INVESTMENT ABROAD-TOTAL. MINING AND SMELTING (MILLIONS OF DOLLARS) All Book Areas Value 1960 3011 1961 3061 1962 3183 1963 3419 1964 3665 1965 3931 1966 4365 1967 4876 1968 5435 1969 5658 1970 6137 DevelOped Countries 1960 i547 1961 1515 1962 1633 1963 1749 1964 193? 1965 2132 1966 2 1967 2821 1968 3145 1969 3320 1970 365? Less Developed Countries 1960 1464 1961 1546 1962 1550 1963 1670 1964 1728 1965 1799 1966 i899 1967 2055 1968 2290 1969 2338 1970 2480 Source: U.S. Department of Commerce. Surve Of Current Business. October 1971 and earIier. 31 TABLE I-6 U.S. DIRECT INVESTMENT ABROAD-TOTAL. OTHER INDUSTRIES (MILLIONS OF DOLLARS) All Book .Areas Value 1960 6754 1961 7536 1962 8089 i963 8728 1964 9552 1965 10906 1966 12134 1967 13044 1968 14248 1969 15948 1970 17932 DevelOped Countries 1960 2762 1961 4031 1962 4568 1963 4771 1964 5452 1965 6521 1966 7371 1967 8716 1968 9736 1970 10958 Less DevelOped Countries 1960 3992 1961 3505 1962 3521 1963 3957 1964 4100 1965. 4385 1966 4763 1967 5061 1968 5532 1969 6212 1970 6974 Source: U.S. Department of Commerce. Surve of Current Business. October 1971 and earIier. 32 TABLE I-7 . THE EXRANSION 0P MULTINATIONAL CORPORATIONS THROUGH TIME (NUMBER OF COMRANIES OPERATING A FOREIGN SUBSIDIARY.AT A GIVEN DATE) (a) manufacturing or non-manufacturing In Latin Southern Asia and Areas Canada America EurOpe Dominion Other Africa 1901 23 6 3 22 2 1913 47 27 9 37 8 4 1919 74 54 16 ' 45 14 1929 123 92 36 95 34 23 ‘ 1939 1'53 123 72 116 63 33 1945 158 128 93 120 69 33 1957 183 167 . 155 160 105 " 83 1967 86 174 182 185 154 158 (b) manufacturing subsidiaries only 1901 18 5 3 16 1 o 1913 39 24 - 6 26 3 1919 64 48 10 3o 7 . 4 1929 110 79 24 76 20 15 1939 135 102 56 96 44 18 1945 138 107 73 96 50 17 1957 174 142 131 144 85 61 1967 185 _ 161 171 183 '135 134 __4 Source: J. V. Vaupel and J. P. Curhan. The Maki of Multi- national Enterprise. (Boston: Harvard University). po 90 33 « .9 .mm 0.3.3.. «once ad a sosuoohaa nmooaosm m.= ”cannon snow “season mm mm «mm mm: ”Haves NI: nu: ma:: mam: noaaaaa caum. «a m :6 cm“ caaaaaa nmncaa as m o: no sausage omunmo ma as SN an codaaaa economo mm an n« we have use soaaaas coda madaoaoouoao: mouaaoouaH msaasuoouasoz moaaansuaH moamoao swam an . de uaospmobaH poonan no oaHo> unoauaopeH sounds nInulummmauuumummmmmwwunuu yo osHo> Hence usooaom ! smog .azu:amm>zH so mama um azmzamm>zH scammoa saunas mmaaan amaaza. mIH uqm¢9 34 TABLE I-9 DISTRIBUTION OF MAJOR FOREIGN INVESTORS _IN MANUEACTURING BK MARKET STRUCTURE Market Structure Ma or Forei Investors Concentration Ratios for NO. of of Tots 4 Largest Companies Finns NO. of Firms 75 to 100% 32 an 50 to 74% 11 15 25 to 49% 28 39 less than 25% L . __l TOTAIa 72 99 Note: Source : The Distribution of American Industry by Concentration ratio is taken from U.S. Senate Concentration in American Industry. Report Of the Subcommittee on Antitrust and MonOpoly pursuant to 8. Res 57 (85th Congress). Table 17. P. 23. The data on major investors were Obtained from Annual Reports. This body of data includes about 92 Of the major foreign investors in manufacturing (Food. Paper. Chemicals. Metals. Machinery. Automotive and Electrical. and Other). These firms were then clas- sified into industries which were then grouped accord- ing to concentration level. Stephen Hymer. 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Primary and fabricated metals 125 276 Machinery (except electrical) 275 432 Electrical machinery 83 289 All other manufacturing 592 944 Source: U.S. Department of Gunmerce. Census of i252. 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The task in this chapter is that of surveying the approaches taken by other analysts of the phenomenon. The . relationship between these models and the one employed in this thesis will be discussed in Chapters III and IV. It has been already noted that direct investment does not belong in the category of international capital move- ments for purely taxonomical reasons. Moreover, as mentioned earlier. the theory of international capital movements is not adequate for explaining the direct investment phenomenon. If we are to understand the true economic character of di- rect investment and the multinational firm, it is important that they be considered in a different context. Other writers share this view. One view, expressed by Behrman. is that much of direct investment does not significantly affect capital transfers (like portfolio investment) so much as it 1 This can be accomplished by borrow- builds foreign_capital. ing abroad, Joint ventures, and reinvestment of profits. Direct investment should thus be regarded as primarily a move- ment of know-how or financial talent, and only incidentally 1See Behrman, pp. 241-81. 48 49 a capital movement.2 Formulating a general theory Of direct investment. Stephen Hymer has argued that a study Of direct investment belongs to the field of industrial organization. It involves the international Operation of entrepreneurial talent, manifests itself in the form of a corporate hierarchy. and occurs only if the investor has significant monOpOlistic advantages over its competition abroad.3 Noting that multinational corporations are typically large firms operating in highly imperfect markets. Hymer has suggested that direct investment must be interpreted in the context Of.a model of oligopolistic markets. The perfect competition model (so often used or implied in the theory of capital movements) is not relevant.‘+ In order for direct in- vestment to take place. the investor must earn more abroad than at home (to offset the risk and higher communication cost Of Operating in a different legal and political environ- ment)._ But it is not sufficient that the return be higher abroad than domestically. If this were the only consider- ation. capital would move through organized capital markets -- to obtain in one country the marginal revenue product Of 2Of course,insofar as capital is "embodied" in per- sons and processes, this could be considered a capital move- ment in the broadest sense. but not in a financial sense. 33. Hymer. "The International Operation of National Firms: A Study of Direct Investment." (doctoral dissertation. Cambridge. Mass.. M.I.T.. 1960). 4For a similar view see M. G. Myers. "Equilibrium Growth and Capital Movements Between Open Economies," American Economic Review, May 1970, pp. 393-397. 50 capital in another -- rather than through firms that Spe- cialize in the production and distribution of gOOds and/or services (our multinational firm). Capital markets spe- cialize in moving capital and are better at it. In addition to higher earnings abroad, the investing firm must be able to earn a higher return in the foreign market than a local (host-country) firm can earn. In Hymer's.view, the invest- ing firm would ordinarily operate at a disadvantage in the hOst-country market as compared with actual or potential host-country firms (assuming the existence of a viable, modern, industrial sector in the host-country). Certain Of the direct investor's costs will ordinarily be larger. re- flecting travel and communication outlays. time lost in com- municating information and decisions, and costs of communi- cation errors that lead to faulty decision-making. Therefore. for a firm to undertake direct investment it must generally have some countervailing "monopolistic" advantages over existing or potential host-country competitors (and not ac- cessible to the same) that more than compensates for the disadvantages associated with Operating at a distance. Other- wise. host-country firms Operating with generally lower costs due to their proximity to Level I (from our former discussion of the corporate hierarchy) decision-making power. and with- out communication distortions, could surmount and drive out the intruder. This is especially true in the developed. technologically advanced host-countries Of EurOpe.5 5It should be noted the multinational firm could initi- ally have lower costs in specific input-output ranges for 51 The aforementioned monOpolistic advantages accruing to the source-country firm Often take the form of prOprietorv information -- patents, general know-how and managerial and marketing_skills -- as well as economies of scale (a function Of size and vertical and horizontal integration Of superior access to capital.) It is obvious that such advantages may have not been immediately available to host-cOuntry firms on the same prices and terms as source-country firms. Indeed many such advantages cannot be purchased in a market. In a world of perfect international markets for technology, man- agement, labor skills. components, and other factor inputs, the markets abroad would be served by indigenous firms who would have an advantage over foreign firms in the proximity of their Operation to decision-making centers. Kindleberger has said: ' ‘ _ "Put the matter another way: in a world of perfect competition, for goods and 6 services, direct investment cannot exist." Thus, in the view Of Hymer and Kindleberger. for direct investment to exist. there must be market imperfections in goods and factors, with certain advantages accruing to reasons not related to the aforementioned monopolistic advan- tages. Nevertheless, the advantages have been shown, empiri- cally, to exist and would give the firm an additional long-run edge if their dissemination were slow. See Hymer. The Inter- national Operation Of National Firms. In L.D. C.’ s,‘the foreign firm's advantage would be very great due to the lack of any viable, efficient competition. This is discussed in detail in the next chapter. This could be due, however, to imperfect markets in basic technological transfer. For discussion see Kindleberger, p. 12. 6Kindleberger. p. 13. 52 source-country firms alone. These monopolistic advantages are exploited, and the monopolistic return secured. through di- rect investment. The foregoing argument has influenced most of the recent theoretical writings in this area, including the present one. It is Obvious at the very least. that an understanding of the phenomenon of direct investment requires detailed analysis of the business enterprise (the microcosm). Operating in imper- fect markets. and relating that analysis to the evolution of the international economy (the macrocosm). R. Z. Aliber Of the University of Chicago has recently attempted to specify a general theory Of direct investment that he claims differs from the now standard "monopoly advan- tage" reasoning in the context of industrial organization theory.7 In a manner not unlike the aforementioned approach, however. he begins by assuming that the source-country firm (the multinational firm) has a monopolistic advantage. This advantage is called a "patent" and represents all possible monopolistic advantages. The patent is a capital asset. Its value, the maximandum for the firm. is the capitalized value of its income stream. Aliber hypothesizes that tariff barriers and separate currency areas account for the firm's behavior in exploiting the patent abroad. In a conventional argument, Aliber 7R. Z. Aliber. "A Theory of Direct Foreign Investment." in C. P. Kindleberger. ed.. The International Corporation. (Cambridge. Mass.. M.I.T. Press. 19707. PP- i7-3h. 53 maintains that the demarcation Of the world into custans areas provides the incentive to exploit the patent abroad.8 The firm chooses foreign exploitation within the customs areas. as Opposed to exploiting the patent domestically and expor- ting to foreign markets. in order to avoid tariffs and other trade restrictions. Also. the division of the world into different currency areas results in a bias in the evaluation of exchange risks that leads to the market's placing a higher capitalized valuation on the income streams of source-country firms (defined as those whose assets are denominated in a "preferred currency" or a currency that is regarded as stronger e.g. the U.S. dollar) than on a similar income stream re- ceived by host-country firms. Thus. source-country firms have an advantage over local enterprises and an incentive to undertake direct investment abroad.9 They can also afford to pay more than local enterprises for real assets in a host-V country or for equity control of local companies. They may also be able to Obtain capital more cheaply than host-country firms. 6This argument is a common one. See. for example. J. C. Shearer. Hi h Level Manpowerlin Overseas Subsidiaries (In- dustrial Re a ions Section. Department of Economics and SociOIOgy. Princeton University. Series NO. 8, 1960). Also see Donald T. Brash. e ican nvestment in Australian Indus- try (Cambridge. Mass.. ngvsrd University Press. I§63). 91f the patent was sold (licensed) to the host-country firm. the source-country firm may not be able to capture the full rent inherent in the patent. The host-country licensee may not be able to pay prices reflecting the full rent value because of the lower values placed by the market on its in- come streams derived from the patent. In order to capture the full rent. the source-country may invest abroad. 5b Aliber's theory. rather than being general. seems re- strictive. 'Exchange risks have nothing to do with many forms of long-term foreign investment since they cancel out of both the numerator and denominator in the ratio of profits to as- sets. Aliber also ignores differences in the capitalized values of income streams arising not out of market bias in the evaluation Of exchange risks. but out Of monopoly advan- tages in patent exploitation held by source-country firms; advantages that result in a higher income stream for source- country firms than for host-country firms. Such advantages over host-country firms could include managerial and market- ing skills (advantages embodied in organization and individuals). access in capital. or advantages arising from the ability to coordinate Operations internationally through several stages Of production. These factors tie back into Hymer's theory. Thus. Aliber's theory. despite its alleged claims to unique- ness. really represents Just another addition to those the- ories of direct investment that emphasize capital market imperfections. These are substantially compatible with the industrial organization approach. but add no outstanding di- mension to them. As noted previously. most contemporary writers on the theory of direct investment and the multinational firm have no difficulty in accepting the Hymer thesis that direct invest- ment is the result of monOpolistic advantage.10 The recent 10Not all Of these will be noted here. but see. in ad- dition to the ones described above. E. T. Penrose. The Theggy 9: the Growth of the Firm. (Wiley. 1959). Jack Baranson. 55 works of two economists in particular. H. G. Johnson and C. P. Kindleberger. will be reviewed here and their conclu- sions compared to the original Hymer hypothesis.11 Johnson accepts the preposition that direct investment is best understood in the context of market organization and competition. and postulates that the crux Of the direct in- vestment process is the transference Of monOpolized knowledge. Private production Of new knowledge is compensated by allow- ing its producer a temporary monOpoly in the use of it. An explicit grant of a temporary limited monOpOly through the patent system has been the usual mode for encouraging the production (and use) of new knowledge. More recently. as Johnson points out. public tolerance and legal protection Of commercial secrecy has surmounted the patent system. Thus the practice Of rewarding the production and use of knowledge by the right to restrict its use and charge a monOpOly price for the derived products (for a period limited legally or pending natural erosion Of commercial secrecy) has evolved.12 Thus private producers of new commercial useful know- ledge will be motivated tO undertake direct investment abroad -- "Technology Transfer through the International Firm." Ameri- can_Economic Review (May 1970). pp. 435-440. M. Bye. ed.. La Politique Industrielle de l'EurOpe Integree (Paris: Pressee Universitaire de France. 1§68). 11H. G. Johnson. "The Efficiency and Welfare Implication of the International Corporation." pp. 35-56. 12This right is implicit when a firm is "allowed" to enter a foreign market by a host-country government. The benefit to be derived in the host-country from such direct investment will be analyzed in the section on welfare effects of direct investment. 56 which also involves Overcoming the cost disadvantages of Operating production and distribution facilities in an un- familiar environment -- to profit by the further monOpolistic application of superior commercial knowledge through direct exploitation.13 In this context the firm might be expected to behave like a discriminatory monOpolist. extending its Operation to any market that offers a positive profit and fix- ing the price charged in each market in accordance with the elasticity of demand for the knowledge-intensive products.14 Kindleberger also adopts much the same position as Hy- mer and Johnson and extends the discussion into several areas.15 In a recent paper on the subject he maintains the following: 'Direct investment belongs more to the theory of industrial organization than to that of international capital movements. 13Johnson maintains correctly that large and rich firms existing in large and rich countries have a comparative ad- vantage in both the production and application of new know- ledge. This is much like Hymer's basic thesis. 1“Recall that marginal revenue is written MR 3 p(i-i/n) (14.1) where p = price and n the elasticity Of demand. For maximum profit. marginal revenue must be the same in all markets. We have then MR1 a MR2 - ... - men (14.2) where the subscripts denote markets 1. .... n. Substituting 14.1 into 14.2 we have P1(1-i/n1) a P2(i-1/n2) = ... = Pn(i-1/nn) (14.3) If market one is characterized by a higher price elasticity than market two then the price will be lower in market one., 15Kindleberger. American Business Abroad. 57 The direct investor operates at a dis- advantage in a foreign market. using for- eign factors of production and at a long distance from his decision center. To overcome these disadvantages. he must have a substantial advantage Of some kind. (In a limited number of cases. direct in- vestment takes the form of policing of each other's markets by OligOpOlistic competitors, or defensive investment by erstwhile monOpolists who are Just about to be pushed out Of a market.) The advan- tage may lie in technology. management entry into the industry. and so on. If the direct investor can take over a competitor. perhaps the only competitor in a national market. he can establish a monOpoly which may prove costly for the economy. 6 Thus it is noted that direct investment derives from monOpo- listic advantage and also involves defensive investment crossflows.;7 Kindleberger illustrates the basic nature of direct investment with the use of the simple formula for capitalizing a stream Of income (one which ties in directly with the Hymer hypothesis): I C = I/r where C is the value of a capital asset. I is its income stream and r is the rate of return on investment. Kindle- berger postulates that direct investment correSponds to. and takes place because Of differences in I that can be earned by 16C. P. Kindleberger. "Restrictions on Foreign Invest- , ment in Host Countries." discussion paper for the University ” of Chicago WorkshOp in International Business (March 5. 1969. unpublished) p. 9. 17This differs from Aliber's explanation Of crossflows. He hypothesizes that they have occurred at different points in time when one currency or another was on top. See Aliber. p. 32-33. 58 enterpreneurs from abroad over local entrepreneurs. I is higher for the foreigner (source-country firms) than for the local entrepreneur (host-country firm) due to the foreigner's advantages in goods markets -- product differentiation and marketing skill -- and in factor markets - specialized tech- nology or management skill; or in both. through coordination of Operations at several stages of production (vertical in- tegration). Thus direct investment takes place when a for- eign firm can earn a higher I than a local firm. A particular example relating to takeovers might be the case where a host country family firm is seeking to sell out. The sources country firm can Offer more for the going concern than its competitors and is ready to pay a higher C because it can gain a higher I on the firm's assets. Kindleberger also notes that the fact that foreign cor- porations have advantages over local corporations also explains the foreign firm's reluctance in sharing equity control with host-country governments or firms. They are reluctant to give any part of the scarcity value of their advantages away unless forced to do so by host-country governments. This feature of the multinational firm has great importance for our present purposes. It will arise many times in the course Of further analysis. Two other economists have devoted considerable attention to the multinational firm and direct investment: Raymond Vernon and R. E. Caves. Vernon. like Hymer. believes that international corporate power derives from the firm-specific knowledge and know-how discussed earlier (i.e. "monopolistic 59 advantages"). Such know-how is exploited internatiOnally within the context of the now familiar "prOduct cycle" hy- pothesis. (In its most direct form. this theory states that U.S.-controlled oligopolistic multinational enterprises ini— tially generate new products (and processes) for production and distribution in home markets. As these markets become saturated and foreign markets expand. these products are exported. Finally. in reSponse to challenges from foreign producers and as a result of a general global market share perception on the part of domestic and foreign rivals. di- rect investment is undertaken to exploit what remains of each firm's technological advantages and know-how specific to any given product. Each firm retains their oligopolistic advantage for a period of time but tend to find it weakened if the technology becomes more widely diffused. Vernon thus maintains (as other writers do) that a "global strategy" is followed by these firms. and that the limits of multi- national corporate power are the limits imposed by the dif- fusion Of the firm know-how. i.e. the leakage to host-country firms or governments of the know-how assets (monOpolistic advantages) of the firm.18 R. E. Caves also approaches the multinational firm within the context of the theory of industrial organization. 18For a good rendition of Vernon's views on the sub- Ject see Raymond Vernon. Soverei t at Ba : The Multinational Spread Of U.S. Enterprises1 The Harvard Multinational Firm SerieSTTNew York and London: Basic Books) 1971. Vernon's theory will be explained more extensively in the context Of the main hypothesis of this thesis in Chapter IV. 60 He characterizes the phenomenon Of direct investment as one associated with OligOpOlistic industries. possessing spe- cialized knowledge. and undertaking direct investment abroad. both vertically and horizontally. within the context of a global strategy.19 Stephen Hymer. a most prolific writer on this subject. has been mentioned earlier. It remains to present a complete view of Hymer's position. The initial thrust of Hymer's argument (that direct investment arises due to monopolistic advantages accruing to multinational firms)has already been discussed. What remains is a discussion Of his extension Of this basic hypothesis into the areas of structure. motive. and corporate behavior. Hymer has written Often on the two kinds of divisions of labor: the division Of labor between firms coordinated by markets; and the division of labor within firms. coordinated by entrepreneurs. Hymer notes that international trade theory has most Often been concerned with the first Of these issues and has stressed the desirability of expanding international markets to increase the division Of labor. However. he points out that little attention has been given the division_of labor within the firm. As an alternative approach. he traces the evolutionary development of the microcosm (the firm) and relates that development to the evolution Of the macrocosm (the international economy). Both are then related to the 19R. E. Caves. "International Corporations: The Indus- trial Economics Of Foreign Investment". Econometrica. 38. 149 (February 1971) 1-27. 61 present role of the final product of microcosmic evolution -- the multinational firm. As the following discussion of Hymer's analysis reveals. there exists a close relationship between intra and extra firm relationships (micro and macro- cosmic relationships in Hymer's terms). Intra-firm relation- ships and Operations have always been structured. but in a simple and direct way in the "Marshallian" firm. In later evolutionary stages. as firms became larger. market horizons expanded. and international rivalries develOped (i.e. as the extra-firm environment changed). the internal structures be- came more complex and hierarchical. leading to the multidi- visional structure and to expanding direct investment. The final result of the evolutionary process is the multinational firm. Hymer begins his analysis by noting that since the be- ginning Of the Industrial Revolution. there has been a tendency for the firm to grow from the workshop. to the factory. to the national corporation. to the multidivisional corporation 20 and finally to the multinational corporation. This evolu- tion. according to Hymer. has been both qualitative and quantitative. From the capitalistic workshop to the multi- national firm. the viability of the evolving enterprises lay in the power and ability to reap the benefits of division of labor. In contrast to the market. where the division of labor was achieved through a decentralized. non~directed. ZOSee Hymer. "The Multinational Corporation and the Law of Uneven Development". pp. 4-14. 62 competitive process. the factory entrepreneurs consciously planned and organized cOOperation with the result that emer- ging relationships become more and more hierarchical and authoritarian. Thus. the macro system came to be unconscious- ly structured (in contrast to the earliest micro~structure of castes. classes and guilds) while in the micro system. the process of production (which in the pre-capitalist pre- factory stage was only loosely coordinated and within which individuals were by and large independent with little coopera- tion or division Of labor) became highly organized with labor organized under the authority Of the entrepreneur capitalist. Both Marshall and Marx emphasized that the internal or- ganization and division Of labor within the factory and firm increased productivity. Marshall argued for a voluntary cOOperative nature Of the relation between capital and labor. maintaining that the market through competition reconciled individual freedom and collective production. Captains Of industry achieved the top Of the labor hierarchy due to their ability and merit in terms of productivity. and not by coercion. The process of natural selection. Operating through markets. displaced inefficient organizers and gave everyone with ability. including workers, a chance to rise to managerial positions. In familiar argu- ments. overall behavior within the market. promoted and uncon- strained by competition. was said to be in the public interest. Thus classical and neO-classical economics evolved not only as an analytical tool to be applied tO the market for greater understanding. but also, as E. S. Mason notes "...as a 63 defense -- and a carefully reasoned defense." of the insti- tutions of the market place.21 In contrast. Marx emphasized the authoritarian charac- ter of the capital labor relationship -- one based on the coercive power of private property and its anti-social characteristics. He also stressed the fact that such concen- tration of power in the hands of the few was historically necessary tO demonstrate the value of the division of labor and the social nature of production.22 As will be discussed later. the final product of micro-economic evolution is not. in Hymer's estimation. compatible with the Marshallian ideal Of "Just" reconciliation through the market in the public interest. Rather it more closely approaches Marxian high-— level exploitation. The evolution of the firm from the workshop to the Marshallian firm was followed by further evolution character- ized by increasing size. greater vertical division of labor. and the establishment of a more complex administrative and larger decision-making center to plan for survival and growth. Most of Hymer's analysis from this point on has been w concentrated on the evolution Of the corporate firm in the United States; employing the framework Of Chandler and Redlich (already outlined in the first chapter Of this thesis). Moving from the Marshallian type firm. U.S. business 21E.S. Mason. "The Apologetics of Managerialism." The Journal of Business of the University_of Chicago (January 1958. V01. XXI. N00 1) pp. 1.11. 22K. Marx. Capital (New York. Modern Library. Random House). 64 enterprises evolved into the departmentalized national cor- -poration. This trend was spurred by rapid market growth and the merger movement of 1897-1901, and brought with it erosion Of competition and concentration Of mOnOpOly power.23 As the process continued. the multidivision corporation came into being in the late 1920's. Spawned by the new product strategy -- continuous innovation for the few and product differentia- tionazu Several divisions within the corporation were formed. each Specializing in one product line or function. With this evolution. a more complex vertical system of control over the complex new vertical divisions Of labor was derived. with the general office at the top. In Hymer's estimation. the multidivisional corporations began to invest abroad very shortly after completing their continent-wide integration. The first wave of direct foreign investment occurred around the turn of the century. followed by a second during the 1920's. Investment slowed during the 23See 0. Kaysen and D. F. Turner. Antitrust Poligz (Cambridge. Mass.: Harvard University Press. 1959). 2“Hymer maintains that due to market imperfections and the erosion of price competition. product development and marketing became the dominant problem: given the new direc- tion corporate giants took -- not toward provision Of basic goods on a broad basis throughout the world but toward con- centration on continuous innovation and product differenti- ation in the context Of monopolistic competition (not Cham- berlain's term). If the corporation was to secure its position and grow. it had to continuously introduce new pro- ducts tO avoid the consequence of Engel's law. It should be noted that Hymer maintains that this innovation and new product introduction is primarily aimed at a special group in the first stage of the marketing process. New products "trickle down" to lower. less powerful groups via the demon- stration effect. See Hymer. "The Multinational Firm and the Law of Uneven Development." pp. 8-11. 16-20. 65 Depression but resumed after World War II at an even higher rate. In the period 1950-1969. direct foreign investment by U.S. firms expanded at a rate of approximately 10 percent per annum.25 The larger size and more advanced administrative structure Of the multinational corporation give it a wide horizon leading to a global outlook and final transformation to the stage of multinatiOnal enterprise. The large size and market power arising from the monOpOly-advantages dis- cussed earlier gave multinational firms the incentive tO in- vest abroad. Direct investment became a new weapon in global . OligOpOlistic rivalry as a global awareness emerged and the threat Of foreign competition increased. Until recently. most multinational corporations have come from the United States. where the corporate form Of business organization has reached its evolutionary zenith. At the present time. Euro- pean corporations, as a by-product of increased size. and reacting to American encroachment on EurOpean markets. are intensifying multinational Operations. If present trends continue. Hymer asserts:- ...multinationalization is likely to increase greatly in the next decade as giants from both sides of the Atlantic (though still mainly from the U.S.) strive to penetrate ,each other's markets and to establish bases ' in underdevelOped countries. where there are ,-few indigenous concentrations of capital sufficiently large to Operate on a world scale. 25U.S. Department of Commerce. Survey of Current Busi- ness. September 1969. U.S. multinational firms dominate the direct investment process. See also Hymer and Rothhorn. "Multinational Corporation and International OligOpOly. The Non-American Challenge." in Kindleberger. ed.. 333 International Corporation. pp. 57-92. . . .I I . . I II I .I a I. . . . VVI . ..V. a. u a. v . IF! 9 n % . V. I . D. . . I _ V. K 5 I _ .x a I . I .I . 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Va .. ... .I. .IL I. I II I. I .. .I I a I I ... I ~ 7 \ (‘Vo CI 1 . I u . .I I . .... .I I3. . ~ . . I II I . I \. I. I . I —. . ..I I2 ...- . I I . . I I t x I. .. I I. I I .I I p .. . 66 This rivalry may be intense at first but will probably abate through time and turn into collusion as firms approach some kind of oligopolistic equilibrium. A new struc- ture of international industrial organization 26 and a new division of labor will have been born. Thus the quest for oligopolistic security and growth will, in Hymer's estimation, result in massive cross penetration through direct investment. Kindleberger substantially agrees and notes: Indeed, in concentrated industries there is pressure for each firm to develop a position ' in each important or potentially important market -- regardless of the rate of profit attainable in absolute terms -- to prevent any of its few competitors from obtaining a substantial advantage which it could put to use over a wider area. The threat of com- petition by a foreign firm in the home market may be reduced if the domestic firm stands ready to retaliate through an existing 83b- .sidiary in the market of the threatener. 7 Additionally, firms that were oligopolistic buyers of raw materials produced in foreign countries (and feared monOpoli- zation of source of supply) invested directly in foreign pro- ducing enterprises to gain the security vested in control over the same. Other firms invested abroad to control marketing outlets and thereby maximize quasi-rents on new techn010gy 28 and differentiated products. These motives are not unlike 26Hymer. "The Multinational Firm and the Law of Uneven Development," p. 2. Also see Hymer and Hawthorn. pp. 71-82, for an interesting formalized model of this tendency toward oligOpolistic equilibrium. The final result will be that the world distribution of sales of American and European firms and their growth rate will tend to approximate each other closely. 27Kindleberger. American Business Abroad. p. 15. 28These reasons for direct investment are examined in more detail in S. Hymer. "Le Grande Corporation Multinationale," ‘67 certain of those advanced by Aliber. Johnson, and Kindle- berger.- Hymer. however. interprets them all within the ~framework of oligOpolistic offense-defense strategies on a -wor1dwide scale. Hymer further extends his analysis to the probable fu- ture spatial dimensions of the corporate hierarchy of the multinational firms.29 He employs the Chandler-Redlich model of corporate structure (the one adapted for this study) to analyze the macrocosmic structure emerging with the inter- national dominance of the regime of "North Atlantic Multi- national Corporations." As discussed in Chapter I of this thesis, the Chandler-Redlich scheme identifies three hierar- chical levels of corporate power: Level III is the lowest position concerned with the day-to-day operation of each enterprise within the hierarchy on the local market level: Level II. which is responsible for coordinating the functions of Level III; and Level I. where overall goal determination and planning take place. This level sets the framework within which all others operate. Through the application of lo- cation theory to the Chandler-Redlich hierarchy. Hymer sug- gests a close correspondence between the centralization of control within the microcosm, and the geOgraphic centralization of control within the macrocosm. Revue Economi ue. Vol. XIX. No. 6, November 1966, pp. 9u9- §73, and in Hymer and Hawthorn. pp. 57-80. 29H‘ymer. "The Multinational Corporation and the Law of Uneven Development," pp. 16-18, 21-23. «I o . A w A... I \u A ... . . c A _ . n , x} A . ulA A .A . ,. 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A , . . . a ’. 9 . .A. v IAAI. A A. t A . A l, . A . v . I a I H u ,u w. .A I. A .. . . A AA A A . .. At \ A, l r A A A . A , AA A .. .rt. . . A . A .A A I. Q A. A A L A n A I A . .. 4 w. A n A «' A .v‘ I. I .I ~ n I e A . ' A . , . . . .. . . .A \ .4 I A} A,AA x ,\. D . A A v .. . . .A. r: a . A .I u . .. . . . .A AA; A A! A A, ..AA . . A . . . . , A , .. . A? A A. .. . A p, .. AA . . A . A _ . L. A. . A ,I . A A AA. ,A A A.. A A .. . A. . . A A A A u . .A ,A . . A... O. . A A.. A t . . i J ... . A. ,. . A . i . A A A A A I 4 . AA .A A .A a . .AA A , A . a . . A. . A A u A. . . 1 A , ,. . . . \ .. l .. .I r . . A A AA . A v A. . a A A A r A _ . . , ,D. A o i A J . . . 7. ,. . ..A A . A v 0 A AA .0 68 Thus, as Hymer postulates. Level III activities will spread themselves around the world in accordance with the supply of labor. markets and raw materials. Level II acti- vities. because of their demand for white-collar workers, and communication systems, will tend to concentrate in large cities. These activities will be more concentrated as cor- porations from different industries place their coordinating centers in common cities. Level I activities, the general offices, will be located near capital markets. the mass communi- cation centers and government. These offices will be located in the world's largest cities -- New York, London, Paris, Tokyo. These will be the major centers for strategic planning in the capitalist world. Hymer also notes that the occupation- al distribution of labor within a given city or region will depend upon its place in the international hierarchy. The most highly paid administrative and Support personnel (doc- tors, lawyers, educators) will concentrate near Level I centers. (Executive salaries will be a function of the wage bill of the people under them: the larger the empires of the multinational corporation. the greater the renumeration of the top executives -- to a great extent independent of their performance.)30 Thus status, authority, and consumption patterns will radiate out from the center along a declining curve to Level III. creating regional patterns of inequality- and dependency. Also, the need for a "common cultural heri- tage" (to facilitate mutual understanding and communication) 30This is a position similar to that of Henry Simon. See "The Compensation of Executives," Sociometry, March. 1957. 69 as one approaches Level I, will produce, in Hymer's esti- mation, a system that discriminates against non-EurOpean host-country manpower: and thus deters intra-hierarchical mobility from Level III. This last hypothesis is consistent with the reluctance of multinational firms to employ host- country high level manpower, and is treated in detail in Chapter IV of this work. Hymer also extends his analysis to include other politi- cal considerations, nothing that: "(in dealing with the multi- national firm)...the neo-classical model which includes market equations and excludes political equations is mis- specified (to use econometric termin010gy) and yields biased estimates and wrong predictions.31 It is important to note that Hymer has implicitly specified growth and security as the highest order maximanda for the multinational firm. The firms' desire to maximize their share of the total available market and protect that share against encroachment. The en- tire behavior of the multinational firm can be rationalized within this context (given. implicitly, some minimum target rate of return on investment). This primary motive, of course. differs from that of Kindleberger -- firms maximize profits or rate of return on investment: Aliber - firms maxi- mize the market value of their assets; and Johnson - firms maximize quasi-rent on new knowledge. 31See Hymer. "The Economics of Imperialism" (discussant) American Economic Review (May 1970). p. 241. .70 In concluding this review of the major works on_direct investment and the multinational corporation. we will now turn to a brief survey of works more explicitly in the Marxist tradition., To omit consideration of such thought would be a serious deficiency due to:' A) the historical interest of Marxists in the phenomenon of the internationalization of capital (an interest manifested long before neo-classical economists noticed the importance of the international spread of corporate capitalism. and found their own naive models to be lacking in power to fully explain the same): and B) the consistency of many of the findings of this study with the predictions of the general work on imperialism. In survey the literature on imperialism. one finds the phenomenon first specified in Lenin's work as a final stage in the expansionary evolution of capitalism in search of pro- fit.32 This stage. said to arise around the end of the 19th century (usually identified with colonialism) was thus given a specific date of inception. This attempt raised many ob- Jections from subsequent Marxist scholars. They maintained that many of the facets of imperialism were found earlier and continued to manifest themselves continuingly throughout capitalist history.33 323cc V. I. Lenin. (Imperialism. The Highest Stage of Capitalism. 1917). Lenin was much influenced in his general work by J. Hobson. See J. Hobson. Imperialism - A Study. 1902 (Ann Arbor. i965). ‘ 33For a discussion of this point see H. Magdoff. The Age of Imperialism. (Monthly Review Press. New York. 1533).. pp. 27-620 s 71 Many writers have gone on to reclamify imperialism into "old". and "new". In this connection Harry Magdoff points out: Some scholars get around this problem by distinguishing between an "old" and a "new" imperialism. Whatever semantic device is used. there are good and suf- ficient reasons for clearly marking off a new period in the affairs of world capitalism. Of the many distinguishing features of this new stage. two, in my Opinion. are decisive: First. England is no longer the undisputed leading in- dustrial power. Strong industrialized rivals appear on the scene: the United States. Germany. France, and Japan. Second, within each of the industrialized nations, economic power shifts to a rela- . tively small number of big integgated industrial and financial firms. The impetus in the "new" imperialism is found in the rapid advance in technology in the latter part of the 19th century and the rise of large firms equipped to exploit the same on a large scale. The new technology determined not the size of the business organization. but it provided the "frame- work" as Mangff points out. "for the quite normal tendencies of capitalist industry toward concentration."35 In the final contemporary sense the result of international expansion through time (first characterized by rivalry,colonization. and the more recent drive for international markets) has re- sulted in a struggle against contraction (brought on by the counter fOrce of world socialist revolution) in the capital- ist system with the United States emerging at the forefront 3“Ibid.. p. 27. For a discussion of the relations between militarism and imperialism see H. Magdoff. "Militarism and Im- perialism", onthlz Review 21. No. 9 (February. 1970). 35Magdoff. "The.Age of Imperialism." p. 31. 72 of the world imperialist system and its defense. In the latter phase, the process involved is still capitalism in the original sense: i.e. the pursuit of profit is still paramount. In this connection, as MacEwan points out, the expansion- ist idolOgy is fundamentally based on the functioning or the capitalist enterprise and its quest for profit. Translated into the realm of foreign policy, the role of the capitalist state is that of facilitating and protecting the international Operations of its nationals.36 On the challenge to imperialism through socialist revo- lution, MacEwan states: With the Russian Revolution in 1917 -- but more clearly following World War II when the Soviet Union emerged as a major world power. socialism "spread" to Eastern Europe. and successful socialist revolutions occurred in China, Korea, Vietnam -- the political position of international capitalism has been severely altered. The system has been forced to move from a purely offensive political strategy toward a defensive posture. As capitalism has moved to a final stage in its international develOpment. it is chal- lenged by a system that is threatening to displace capitalism entirely and inaugurate a new historical epoch. Indeed, the develop- ment of socialism has in some degree been a direct outgrowth of and response to the inter- national expansion of capitalism. The prOgress of the socialist response, however, cannot be viewed as an automatic historical phenomenon. Its develOpment will depend at least in part on the nature of the capitalist counter- response.37 36A. MacEwan, "Capitalist Expansion, IdeOIOgy, and Inter- vention," in Edward. Reich, and WeisskOpf (eds.). The Capi- talist System (Englewood Cliffs, Prentice-Hall, 1972). p. 416. 37MacEwan. p. 415. For an excellent work on a Marxist interpretation of contemporary capitalist develOpments, with emphasis on the challenge of socialist revolution see D. Horo- witz, Empire and Revolution (New York. Random House, 1969). 73 In the vanguard Of the new Offense-defense strategies of world capitalism is the multinational firm. Baran and Sweezy note that in contrast to earlier periods where one spoke generally Of "industrialists" or "bankers" as the dominant capitalist classes. today we may specifically single out the giant multinational monopolistic corporations as the long run leaders. Through payoff of debts and plowback of earnings they achieved financial independence from bankers and went on to become the basic units Of capitalism in its present stage. Through an analysis of such firms the functioning Of imperial- ism today is truly revealed.38 On the specific relation Of state power to capitalist expansion. Magdoff asserts that the latter requires that the Option Of foreign investment be continuously available world- wide and that the role Of the state is to insure. through its foreign policy. a perpetual Open-door abroad to direct invest- I ment. The Open-door principle must be maintained to insure the growth and the very survival Of capitalism as a form Of economic organization.39 The tactics of control within the context of the Open- door principle change dialectically. In the case of newer tactics. Magdoff states: Traditional means are still available and in use. The method of invasion and the exercise Of military force is still with 35Paul Baran and Paul Sweezy. "Notes on the Theory Of Imperialism." Monthly Review 17. NO. 10 (March 1966). 39Magdoff. The Age of Imperialism. pp. 20-21. For another discussion Of the "Open door" concept see Horowitz. pp. 50-60: 75-763 903 1900 7L» us: only the rationalizations are updated. A globe-straddling navy and an extensive network of military bases weigh heavily on the rest Of the world. Much reliance is placed on newer techniques. not entirely new but applied on a vaster scale and with greater saphistication than in the past: military assistance to bolster "reliable" governments against revolution: economic aid to induce an environment hospitable to foreign capital and imports: and then there is the ubiquitous CIA. The Objec- tive underpinning of the system of alliances and control remains the market and financial relations which reproduce the economic de- pendence Of the less advagsed regions on the metrOpOlitan centers. Thus. the multinational corporation (backed up by state power) has emerged to spearhead the latest wave Of capital expansion. The tactics of control have moved from the Overt meanS'associated with 19th century colonialism. to controls based On the economic power of international mOnOpOly firms: power derived from technological monOpOly and general domi- 'nation and control of the means of production abroad. In the case Of the less-developed. or Third World countries. the economic power of the multinational (backed up by the military power Of the state) creates chains of de- pendence which result in the perpetuation of uneven develOp- ment between rich capitalist nations and the poor countries where they Operate.h1 In this connection Weisskopf states: quangf'f'. p. 21 e ”1For a discussion Of the develOpment Of dependence in Latin America see A. G. Frank. Ca italism and Underdeveio ment in Iatin.America (New York. MonthEy Review Press) 1959. Also see "The DevelOpment Of Underdevelopment" in Latin America: Underdevelopment and Revolution. 75 A final important characteristic Of con- temporary poor countries is their de- pendent relationship with the centers Of capitalist enterprise. This dependence arises partly out of the colonial legacy. Many economic activities in the modern capitalist sector depend either directly on foreign ownership and control or in- directly on foreign technological or managerial aid. under such circumstances. it is only natural that a considerable fraction of the emerging domestic capitalist class finds itself in a subordinate and dependent position vis-a-vis the foreign capitalist class. For similar reasons. many governments in the poor countries are dependent upon the advanced capitalist powers for political and military support. Thus._capitalism in the poor countries today is not the relatively independent capitalism of Old which stimulated the economic growth Of England. the United States. Japan and other rich capitalist countries. Rather. the capitalism which is spreading in today's poor countries is far better described as a dependent form Of capitalism. embedded with- in the world capitalist system as a whole.“2 In a separate (though less direct) vein. the works Of Marglin. and Gordon. Reich. and Edwards. on labor force stratification are relevant to the present study in that they could explain the forces behind the new control mechanisms Of capital and their extension. through direct investment. to other national markets.“3 The response of the capitalist “2T. E. Weisskopf. "Capitalism. UnderdevOIOpment. and the Future Of Poor Countries." Review of Radical Political Economics. Vol. 4. NO. 1 (Winter. 1972). pp. 8-9. Weisskopf discusses. in this work. several factors which "reinforce" the subordination of the poor to the rich countries. These include the demonstration effect. and the factor bias effect. For the discussion see Ibid.. pp. 9-11. “3For a discussion Of labor market stratification and segmentation see H. M. Wachtel. "Class Consciousness and Stratification in the Labor Process." Review Of Radical Poli- tical Economics. V01. 6. NO. 1. (Spring. . A so see D. M. Gordon. R. C. Edwards. and M. Reich. "Labor Market 76 class to the growth. both in number and class consciousness (with the accompanying unrest and incipient challenge to its power) of the working class. has been to stratify labor. Such involves a hierarchical division of labor within the capitalist sphere Of influence -- a sphere that extends to Third World nations in the context of direct investment. This hierarchical division Of labor has the purpose (in a "divide and conquer" sense) of assuring continuing control over the processes of production and insures the survival Of the cap- italist class. This then could be related to the hypotheses Of Stephen Hymer (reviewed and discussed earlier in this chapter) that the multinational corporation. through a hierar- chical-functional division Of labor internationally. establishes continuing control over the new empire. This tactic results in a specific case. in "discrimination" against host-country nationals in management hiring. Such discrimination becomes consistent with international stratification and insures con- tinuing control over the world hierarchy Of production.44 Segmentation in American Capitalism." (Mimeo. i973) and J. A. Marglin. "What DO Bosses DO?". Review Of Radical Political Economics. Vol. 6. NO. 2 (Summer. T973). GordOn. Reich. and Edwards define labor stratification as "the historical pro- cess whereby political-economic forces encourage the division of the labor market into separate submarkets...distinguished by different labor market characteristics and behavioral rules." See Michael Reich. David M. Gordon and Richard C. Edwards. "A Theory Of Labor Market Segmentation." American geonomic Review. (May. 1973). p. 359. ““See Hymer. "The Multinational Corporation and the Law Of Uneven Development." For a complete discussion Of the historical process of stratification and its role in the con- tinued subjugation Of workers see Wachtel. pp. 1-31. 77 The foregoing brief review Of Marxist thought on im- perialism is by no means fully representative of the large volume Of work Of this group of scholars. It is. however. sufficiently representative of those ideas which can be re- lated directly to this dissertation. CHAPTER III THEJMULTINATIONAL CORPORATE PREFERENCE FUNCTION Introduction In this section. a general methodological and concep- tual framework is develOped to aid in analyzing the multie national firm and its effects on host-countries. As discussed previously. multinational corporations are typically large. OligOpolistic firms operating in markets with varying degrees Of imperfection. An analysis Of their motives and behavior as well as their effects on economic welfare. should. there- fore. be executed within the context Of OligOpOly theory. The Theory The first step in the present specification of a general theoretical framework will be to drop the assumption Of a single-objective preference function for the firm -- one that includes only profit maximization -- and instead substitute a general multiple-objective function -- one that includes profit. but also includes other maximanda. The behavior Of multinationa1.firms is explained more adequately with this type of function than with the single Objective one. The inappropriateness of the profit maximization assump- tion for the theory Of monOpoly or oligopoly behavior has been emphasized by such economists as Pareto. Schumpeter. Scitovsky. Reder. cOOper. Simon. and. more recently. Baumoi. 78 79 whose constrained sales maximization model has attracted sub- stantial attention within the profession.1 Fritz Machlup. the venerable defender Of traditional marginalism. has noted in a review Of the marginalism controversy: "...this purely fictitious single-minded profit-maximizing firm. helpful as it is in competitive-price theory. will n23 do so much for us in the theory of monopoly and OligOpOly. TO explain and predict price reactions under monopoly and OligO- : poly we need more than the construct Of a profit-maximizing reactor.2 In another article he wrote: "The problem of OligOpOly is by defi- . nition the problem of the effects Of the actions Of few. giving a greater importance to the behavior Of each member Of the group...The theory of OligOpOly price in- volves an interpretation Of the significant motives behind the actions of a small num- ber Of people...Even the most superficial theory will have to include many more ideal types of behavior in order to handle the problems Of few sellers than it takes to handle the problem Of a mass of compe- titive sellers." 1Pareto. Manuel d'economie politique. 2nd ed.. Paris. ~1927. J. Schumpeter. "The Instability of Imperfect Compe- tition." Economic Journal. 38. (Chicago. 1951). M. Reder. "A ReconsIderation of Efie Marginal Productivity Theory." Journa of PO it ca OO O .55. (October 19h7). pp. 450- 5 . W. W. Cooper. "The Theory Of the Firm. Some Suggestions Of Review." American Economic Review. XXXIX (19U9). pp. 1204- 22. H. A. Simon. "Theories of Decision-Making in Economics and Behavioral Science." American Economic Review. 49. (June 1959). pp. 253-83. W. J. BaumOI. Business BehavIor value and Growth (New York. Maxmillan. 1 9 an "0n t e eory Of Expansion of the Firm." American Economic Review. 52. (Dec. 1962). pp. 1078-870 2?. Machlup. pp. 10-11. 3?. Machlup. "Evaluation Of the Practical Significance Of the Theory Of MonOpOlistic Competition." American Economic Review (June 1939). pp. 227-36. 80 K. W. Rothschild in his landmark article on price theory and OligOpOly published in 1947. made much the same point.“ Rothschild begins by noting that neO-classical com- petitive price theory. with its simplicity and determinateness. is inappropriate for dealing with small numbers models Of the firm in an environment of highly imperfect competition. He suggests the need for a new methodological and conceptual framework for OligOpOlistic price theory. and stresses strongly the need for reconsidering the motive force traditionally as- scribed to large oligOpOlistic firms. namely. profit maximiz- ation. He suggests that the desire for security - a secure market position - 1s of a similar order Of magnitude as the desire for maximum profits in oligopoly market. OligOpOlis- tic firms have also the power to act on this principle. For the small competitor. however. who also desires security. the market conditions are such an overwhelming force that he alone cannot safeguard his position. All he can do is try to make full use Of every Opportunity as it arises. Maximizing Of short run profits is then a legitimate generalization Of firm be- havior at this level. Rothschild also notes that the desire for profit maximization and security often lead to conflicting modes of behavior in OligOpOly: "Where profit maximization demands prices fluctuating with every change in revenue and cost conditions. security maximization may demand rigid prices. while profit maxi- mization should tend to create firms of "K. H. Rothschild. "Price Theory and Oligopoly." The Economic Journal. vOl. LVII. 19u7. pp. 299-320. ReprintEd in StIgIer and BouIding. Readin s in Price Theory (Homewood. 111.. R. D. Irwin. Inc.. 195 . pp. 4 -46h. 81 Optimum size. security considerations will favor the oversized firm: again. where we should expect reverse funds to be invested in response to expected re- turns. we may find their practically uncond tional reinvestment in their own“ firm." Rothschild also states that substituting long-run pro- fit maximization for the traditional short-run profit maxi- mization avoids the question. In this connection he states: <"But they (former writers on OligOpOly) usually thought they could subordinate this aspect (security) Of entrepreneurial behavior to that Of profit maximization by simply postulating that it is long-term profits he is trying tO maximize. Since. however. uncertainty is an essential feature in this changing world. it is clear that the vague knowledge a firm possesses Of its.de- mand and cost schedules cannot extend far into the future. Any theory. therefore. which tries tO explain price behavior in terms Of marginal curves derived from long- term demand and cost curves really bypasses the problem of uncertainty and thus the very factor which gives rise to that desire for 6 security which the theory tries to explain." Thus the "struggle for position" (security motive) will take place alongside Of attempts tO make the best Of every position at a given moment (short-run profit maximization.motive). Within the limits set by the strategic plan Of the OligOpOlis- tic firm. short-term profits may be maximized. but only within the constraints of the security motive. 7 "Changes in terrain" tO use Rothschild's words. would also lead. in this context. to a scramble for a new position. 5Ibid.. p. 452. For an explanation Of "limit" pricing to forestall entry (similar argument to Rothschild's point on rigid prices) see J. Bain.,§arriers tO New Competition (Cambridge. Mass.. 1956). 61bid.. pp. uso-usi. 62 Such changes. arising frOm alterations in costs (perhaps new technological knowledge). demand (Opening Of new markets). and new product development. are related tO the processes Of knowledge production and global growth Of markets discussed throughout this study and could be a further explanation Of the direct investment phenomenon. :Rothschild and Hymer main- tain that the political power Of OligOpOlists can also be brought to bear in order tO change an unfavorable market en- 'vironment or tO aid in the pursuit of a favorable one. Rothschild stresses: "The OligOpOlistic sturgle for position and security includes political action Of all sorts right up tO imperialism. The inclu- sion Of these 'non-economic' elements is essential for a full explanation Of OligOpOly behavior and price." With respect tO Hymer's work. the reader is reminded (from the review in the previous chapter) that Hymer has im- plicitly specified security as an element in the multinational firm's Objective function. Firms invest abroad in Hymer's model to gain both the security inherent in control over raw material supplies and in the establishment Of secure market positions in expanding product markets: the latter being re- lated to the maintenance Of acceptable growth rates for the firm (especially where the direct investment represents de- fensive cross-flows. i.e.. is in retaliation against rival's erosion Of a firm's own domestic market.8 7Ibid.. p. 463. For Hymer's view see Chapter II. 8See Hymer. "The International Operations of National Firms 0 e e " Thus. in summary. the maximization Of money profits -- the simplest objective function -- is appropriate only in the analysisof large groups of firms subject to classical. vi- gorous competition. In the analysis Of markets where firms are large and_few and not under the pressure Of classical. vigorous competition. the behavior and complex motives Of in- dividual rivalrous firms is of the essence. Objective functions richer than profit maximization are. therefore. needed. The rejection of simple profit maximization as the fun- damental behavioral postulate of decision makers in large Oli- gopolistic firms represents a simple. but important step.9 In particular. the recent shift tO multiple objective utility or ,preference functions Opened up new routes for studying pat- terns Of managerial behavior. and permits new insights into the Operation Of firms in various sociO-economic environments.10 The model employed in this work is Offered in the spirit of the foregoing analytical trends. In particular. it bears its closest relationship to the model specified by Hymer and Rothschild. It is based upon Hymer's postulate that for di- rect investment tO occur. there must be market imperfections in goods and factors. with certain critical advantages accru- ing to source-country firms exclusively. These monOpolistic 9For a review of the "property rights" approach see E. C. Furubotn and S. Pejovich. "Property Rights and Economic The- ory: A Survey of Recent Literature." Journal Of Economic Li- terature. (Dec. 1972) p. 1137. 10See 0. Williamson. The Economics Of Discretiona Be- havior: Managerial Objectives in the Theo O? the Firm. Eng ewood C i N. J.: Prentiss-HaIl. 19%3). AIsO see R. M. Cynert and J. G. Marsh. Behavioral Theory Of the Firm. (Engle- wood Cliffs. N. J.. 1963). 64 advantages are exploited (within the context of a multiple Objective preference function) and the long-run monopoly re- turn secured and protected through direct investment. In 'terms Of the global market behavior Of the multinational firm (within the corporate hierarchy and within the larger world market) it is necessary to identify the factors that influence the firm's choices within an expanded "Opportunity set" and embed the same in a formalized function. Thus. in keeping with the general. multiple objective. OligOpOly format. let us specify a corporate preference function appropriate for Present purposes. that includes several Objectives. and first identify the general nature Of some Of the possible relationships among them. We thus write: u 8 u(P. S. C. G) where G is the growth rate (sales and/or assets): S is an Omnibus term representing "security": P is simple (short run) profit. and C is control (includes both intra-hierarchical control within the firm and external control of market en- vironment). Our function thus includes certain Of the dominant maximanda found in the writings reviewed in the previous chap- ter (most advanced on the basis Of some empirical investi- gation) and in the works on pure OligOpOly theory annotated in this section. The OligOpOlistic firm has both the ability and inia- tive to pursue multiple objectives other than the simple one of maximizing profits.11 "Enlightened self-interest" only 11In perfectly competitive markets. firms may well desire certain Of these elements: for example. security Of market position or the Hicksian "quiet life" -- prevention Of 55 requires that decisionpmakers seek a "satisfying" level Of profit. This level could be that Optimal intermediate level which provides capital necessary tO finance expansion goals. This is Baumol's specification. in his sales growth maximi- zation model.12 Thus within the minimum profit constraint. managers not under heavy competitive pressure have wide discretion as to actual Objectives. While P (profits) is included in the ob- jective function. it does not stand alone. There is also S (security)'which is touched upon in the review Of Rothschild's critique of price theory and implicitly in Hymer's work. The desire for security reflects the OligOpOlist's fear Of en- croachment by existing or potential rivals on their market lposition. as measured by the level Of the sales. or partial or complete displacement by government regulation. or confis- cation.13 Thus. OligOpOlists desire to entrench themselves displacement from an existing market position. But market conditions are so overwhelming that he alone can do nothing to safeguard his position. All he can do. as mentioned in the review of Rothschild's writing. is to make the best Of any given situation -- i.e.. maximize profits. Thus. when a firm is subjected to vigorous or "effective" competition it is un- der continuing pressure tO react to actual or potential re- duction in profit -- sO much so that the firm will not be able to pursue any objectives other than that of maximizing profits. 12Baumol. "0n the Theory Of Expansion of the Firm." pp. 1085-1086. Alternatively. the level could be that that just "satisfies" stockholders and maintains a steady growth in the market value Of equity. In Simon's analysis. the entrepreneur seeks "satisfactory" but not necessarily maximum values Of all Objectives. Ibid.. pp. iZOh-22. 13In the market context. assume we have two firms. I and II. Assume that firm II desires to maintain a fixed share Of the total sales Of a given product. regardless Of the effect Of such action on short-run profits. His major concern is with the long-run advantages that are derived from maintaining 86 in as secure a position as possible -- one that provides a base for retaliation against encroaching rivals (or govern- ments) -- and. should the Opportunity arise. one from which new offensive maneuvers may be launched. In this context. it should also be noted that financial strength. strongly corre- lated with the size of the firm. is important for establishing a secure "fire base". Thus size may be desired for its own sake. independent of technical effociency considerations. When the security motive is added to the profit motive. the "Optimum" size Of firm takes on new meaning. Thus. Rothschild notes that the re-investment of profits in the firm. regard- less Of returns available elsewhere. and mergers that lead to "over-sized" firms are not irrational acts. from the point of view Of maximizing security. Then there is G (the growth rate-sales or market share or value Of assets). Firms may desire maximization or aug- mentation of growth rates. pg; 33. to enhance security. regard- less Of the effect on the level of profits. Hymer's basic thesis rests on the firm's desire for growth maximization. All firms must grow to survive. given the nature Of the market within which they Operate. Alternatively. high growth rates may be desired 22; 23 where they are associated with executive compensation. a given market share. Thus. the following relation will always hold: k 2 Q — k . q2 = 1 Q1 + q2 ' I-E where q1 and q are the levels Of the oligopolist's outputs (sales) and k Is II's desired share. 87 Finally. there is C (control -- intra-hierarchical and external). In terms of intra-hierarchical delegation Of authority. Level I managers must insure that there is no devi- ation from the corporate preference function at lower levels: e.g.. they must establish clearly the overall corporate Objec- tive function in the minds of lower level managers and insure that nO conflicting objectives or behavior develOps. For in- stance. in terms Of asset control (as discussed in detail in Chapter I). all available evidence indicates that Level I managers of multinational firms prefer 100% ownership to joint ventures and minority holdings. They also desire to influ- ence and control the external environment within which the corporate hierarchy functions (e.g.. the market and the polity) to protect corporate viability and their own interest in it.14 This is partly tO reap the full scarcity value of their market advantages (i.e.. it is related to profit maximization) and partly to avoid costly conflicts Of interests with host- country.partners (private and governmental) and investors. As noted previously. the maximanda involved in Our multinational OligOpOlistic corporate preference function have been considered before in the context of general OligOpOly theOry and in the writings on the theory Of the multinational firm. One might well ask why. if such motives are admittedly present in oligopolistic markets. they have not been explicitly 14Reder has postulated that "firms" maximize profits subject to the condition that the current entrepreneur re- tains control Of the firm. See Reder. p. 455. 88 integrated into formalized models of imperfect markets On a larger scale and. in particular. into models analyzing the behavior Of the multinational firm. Such motives have often been collapsed into the goal of "long-run profit maximization": a tautolOgy that is convenient for certain purposes but severe- ly lacking in explanatory power when the behavior of the indi- vidual firm and its effect on economic welfare is of primary interest.15 , C The prOpensity to ignore the separate influences or such maximanda has also been reinforced where the des1re for maxi- mum profits. security. growth. and control all converge on certain types of actions that serve to augment the values of all such variables jointly: or where a complementary relation- ship exists between the various goals. Thus. what promotes profit maximization also promotes security maximization and growth. In this instance. the behavior of the firms could be explained by the "monistic" profit maximization approach alone. if the nature of the complementary relationships be- tween the multiple goals is clearly defined.16 Thus. if there are leeasible alternative actions for an entrepreneur and each Of them serves tO promote the attainment 15Rationalizingall behavior in terms of maximizing long- run profit excludes no logical behavior patterns.‘ A maximandum as general as this is Of little predictive value. Firms dO what they do because it is in their best interest. Our purpose here is tO choose our maximanda for their Operational explana- tory power. 16Thus. Machlup has noted (only with respect tO firms under heavy competitive pressure): "If a change in condition calls for a certain reaction in the name of maximum profits. the very same reaction is called for also in the name Of se- curity of survival." Machlup. "Theories of the Firm...". p. 13. 89 of all goals jointly. we could pick any one of the defined goals and. if we specify the exact nature of the interrelaion- ships between it and the others. indicate it asthe maximandum. If. however. 5:; actions serve to promote all the goals joint- ly. but not M, i.e.. if at least one Of the feasible alternative actions the firms might choose will augment security but de- crease profits. and the firm is observed to choose such an alternative. then its behavior cannot be explained in the con- text Of a preference function that includes only simple profit maximization. The function.must be richer in order tO under- stand the observed deviations from the "expected" behavior in terms of profit maximization only. I . Thus. it is true that some Of the most conspicuous actions motivated by the desire for. say. maximum security are identi- cal with actions that serve the end of maximizing profits. But there are deviations. as even a casual reading of the literature in industrial organization will confirm (and as is apparent from the literature on the behavior Of the multi- national firm). There are cases where multiple objectives lead to conflicting patterns of behavior. The examples below identify such cases. In the present context -- that Of the multinational firm -- we have already seen that observed behavior patterns do not necessarily augment or maximize all Of the variables in the preference function jointly. The current desire Of the multinational firm tO establish a position in all actual and potentially important markets through direct investment is consistent with security maximization. but not necessarily 90 with short-run profit maximization. Indeed. in Hymer's analysis. the firm that does not hedge against the encroach- ment of rivals may be supplanted. Thus when a firm invests abroad for such reasons. it may be able to earn a "satisficing" level Of profit in foreign Operations by virtue of its mono- polistic advantages over host-country firms. but it does not follow that this profit level is the maximum one. or that this use Of resources represents the most profitable use. Conflict also arises between growth maximization (in terms Of growth Of sales) and security maximization.17 While the two goals may be complementary. they are not necessarily so. If the firm's sole objective was to maximize sales. given the attainment Of some satisfactory level of profits. then all profits in excess Of the satisfactory level at the sales maximizing output level would be plowed into the purchase of additional units Of advertising and product differentiation in order to increase sales.18 None would be retained: for by assumption. the firm is maximizing sales. and extra units Of advertising and product differentiation always increase sales. Thus. the sales maximizer will increase his advertising out- lay and the outlay on "product characteristics" planning'until he is stOpped by the profit constraint. We have already seen. however. that "excess" profits (that is. profits over and 17Maximization of the level Of sales (total revenue) or growth Of sales does not maximize profit in any instance. See Baumol. On the Theory Of OligOpOly. 15mm: follows. in Baumol's model. from a single-minded desire to maximize sales. Ibid.. pp. i9i-194. It should be noted that Baumol's model leaves no room for OligOpOlistic stra- tegies other than those associated with product advertising and product differentiation. 91 above the "satisfkung" level) may also be used in other ways to increase security. They may be retained and used as in- surance against a price war: or. as is especially the case with our multinational firm. retained as a reserve "pool" Of capital to be used in expanding Operations abroad. to meet or forestall competition. as the need arises. They may also be used for "political advertising" or lobbying (which has no effect on market demand curves) tO forestall unfavorable govern- mental reactions tO corporation tactics at home and abroad: or to invest in raw material outlets tO gain the security in- herent in their control. In another context. multinational firms desire to maxi- mize control: control over the corporate hierarchy itself: and control over their external market environment. Thus they may be led to withhold all but the most routine planning and allo- cative authority from lower levels (Level III) managers and. instead. centralize the major part of the entrepreneurial decisionpmaking at Level I -- the head Office: despite the pos- sible effect Of such action on profits (cost) and sales per- formance at the local market level. The work of several analysts is relevant in this connec- tion. A. Downs has noted that one of the key objectives of top level management is tO see that there is no deviation at lower levels from the preference function (however defined) established at the top or the hierarchy.” 19See R. J. Munson and A. Downs. "A Theory Of Large Managerial Firms." Journal Of Political Economy (June 1965) Pp. 221-360 , 92 Melvin Reder. in a provocative article in the Journal of Political Economy (one that was entered in the now-famous 2° His Lester-Machlup bout) advances a similar hypothesis. was one Of the first multiple-goal models Of business behavior. Through it he postulated that the entrepreneur maximizes the present value Of the firm's net worth subject to the condition that he (the current entrepreneur) retains control Of the firm. Control is desired for psychic reasons. but also because a substantial part Of the entrepreneur's equity in the firm lies in his (their) ability tO pay himself (themselves) a higher salary (in many forms) than he (they) would Otherwise earn. As Reder notes. this latter point implies that the entrepre- neur's salary contains rent from the point of view of the firm. For a nwmber Of reasons outlined in the article. Reder'main- tains that entrepreneurs will seek to keep a large amount of protective. highly liquid. capital on hand to deter any take- over attempt by rivals within Or without the corporation hierarchy. This will result in the firm's establishing a "satisfactory" rate of growth but not the maximum one. since maximizing the rate of growth would require going outside the firm to borrow funds (which would bring in outside controls) and would preclude having large amounts of idle capital around tO insure against a takeover. Also. the entrepreneur may defer maintenance expenses when control is at stake or slash prices vigorously to obtain cash to meet the firm's debts. 20See M. Reder. "A Reconsideration Of the Marginal Pro- ductivity Theory." Journal Of Political Economy. 55. (October. 19“?)9 pp. 450-580 93 It is thus critical that lower level decision-makers (and outside factors) not threaten the existing entrepreneur's controlling position in any way lest such undermine the vested position of the entrepreneur in the enterprise. Thus. L.D.C. host-country management might push for equity sharing with L.D.C. governments or investors. or push expansionary plans that conflict with the desires of Level I for sufficient pro- tective liquidity. In such cases. Level I would. in the in- terest Of "control maximization" prefer to have source-country managers (sent from the head Office) in control at Level III to insure that the "rules Of the game" are understood and that no deviations are forthcoming due tO "naturalistic interest" at Level III. p Implied in the desire for control by Level I management (to enhance their own pecuniary and/or psychic income) is the possibility that the "best interests" of the firm as a whole and its stockholders may be compromised by L-I-M in its quest tO protect its "rent". i.e. the interest Of the firm and its stockholders. in terms Of the previously defined goals of pro- fit. growth and security (long-run) may be jeopardized by a single-minded desire Of Level I managers to maximize their "own" Objective function.21 21For a discussion of this point see Reder. pp. “50-58. In the present analysis (as will be explained in the following passages) such an entrepreneurial Objective function may be defended. but nevertheless constitutes a "weak argument" for why the executives at Level I desire control. The desire for control on the part Of L-I-M need not conflict with the objec- tives Of stockholders or work against the overall standing of the firm. Such is not a "required" assumption in rationalizing the control motive. Indeed. it is more "reasonable" to assume that the interests Of L-I-M in maintaining control promotes the 94 Clearly (in such extreme cases). maximization of profits may not at all be complementary with maximization or augmen- tation of the other three objectives -- security. control. and growth. The relationships among the latter three objectives are more complex. Action taken to augment one may augment all three -- but it may not (in special cases as outlined above). The crux of the present argument is that the behavior and effects of the multinational firm must be evaluated within the context of a multiple-objective preference function. The multiple-objective function specified could be rewritten in simplistic terms by collapsing the four variables into one omnibus term - that of long-run profit maximization - which takes account of all possible behavior patterns in a world of uncertainty. This substitution would seem to provide a more elegant and general maximandum. but in reality would only make analysis impossible. If an understanding of firm behavior was needed. the term "long-run profit maximization" would have to be broken down and its nature examined. We would there- fore end up attempting estimation of the separate effects of the four objectives specified (and perhaps others). Also. the terrible possibility must be considered that businessmen do not actually mexbmise long-run profits. The complexity of possible interrelationships thus re- quires (in an "ideal" analysis) separate treatment of these motives if the beinvior of the firm is to be analyzed and some overall standing (security) and growth rate of the firm in world markets. and that their own reward (L-I-M) depends on the firm's market performance. More on this point later. \ 95 rough predictions made. Especially so when the drastic "changes in terrain" brought on by expanding world markets and direct investment has even more complex effects on firm 22 goals and behavior than the "familiar terrain" of home markets. 221t has been suggested that multiple goal-business be- havior (especially that behavior which includes "satisficing" can be adequately analyzed by the application of multidimen- Sioml vector ordering or what is now more generally called In lexicOgraphic ordering. a hierar- lexico hie ordering. chi of 0%jectives is recOgnized. Consider two alternatives. which may be combinations of business objectives: x' 3(xf. x2: ....x;) and x'-(x'. ... x3). Let g,be a preference index function. A regu r ordering ranks u(x‘)>u(x') if. and only if x§>xg for all i. and the strict inequality holds for at least one component. In contrast. a lexico hical ordering recognized a hierarchfi of wants. All of the eEements in vec- tor _15 are not regar e as equally important. If x1 is more important than x . x2 more important than x . then by the for- mer example u(x'§>u(x') if x1° xi. irrespective of the relation-g Ship between x: and x; (i-Z....n). If x‘,’-x,’ . comparison pro- ceeds to the second component. Thus u(x°)> u(x') if lex,’. Vector elements associated with vari- O and x2>xé. and so on. ables lower in the hierarchy of objectives are considered only af- ter the higher order wants are "satisfied". The problem with applying this technique to satisficing InC><1els is that it requires satiation. Thus each goal is de- fined such that éu, éLL . and . l g 0 axJJx;o (5x. lxi’VQ' mat is. each goal or objective is defined positively in the ehse that the value of the variable increases utility up to point but for values in excess of that which Ehe "satisfieing" 8 identified with the satisflcing point. have no effect on to- tal utility -- i.e.. the marginal utility is zero beyond the This assumption is unduly restrictive and :a 1:1 sf‘lcing point. o111d tend to produce nonsensical predictions. especially if befits are the dominant element. For example. Ferguson has attempted to apply this tech- :31Que to the Baumol sales maximization model in the‘following hay: denote profit by x1. and sales revenue by x2. This si- nuation is represented by the vector x¢(x1. x2). Assume the 1 3a tisfactory" level of profits is x1". A further assumption necessary when this technique is employed. That is: éa Th WJXI>ngo none the marginal utility of profits beyond the satisficing int is zero. Presumabl . if the firm accidentally acquires bOrits above the level x . it could just as well throw them Additionally. this is not consistent 5 Way. This is nonsense. 96 The fact that the Specified preference function is a complex multiple-objective one increases the problem of in- determinateness. but this is only in relative terms. It only means that a precise determinate solution cannot be found. similar to those derived within the existing framework of the theory of competitive price or in Machlup's terms. "...the theory of the imaginary reactor to environmental changes." However. it should be noted that there can be no absolute and inherent indeterminateness in this problem any more than in any other problem faced by the natural or social sciences. 111 this connection. Robert Triffin has written: "No doubt. there is a sense in which the solution is always determinate: it all depends on the number of variables that are considered. But it is clear that the variable that would have to be added to determine the solution might be of a very different type from the ones generally used by pure economics of the equilibrium brand. Such considerations as fi-- nancial backing. political influence. prestige psych010gy. Optimistic or pessimistic slant. enterprise or routine-like attitude in busi-' ness. etc.. may well play an overwhelming role 'in determining the solution." The problem of drawing up a wide framework within which t:(3’ tical with oligopoly behavior (and in particular with that t) IF’ inmultinational oligopoly) may require ana10gies drawn from Ea. . I‘Qlis where researchers deal with moves and counter-moves. with \— (1° “1 th Baumol's model. Profits above the satisficing level (xf) ‘DWDLb 1”have a value in Baumol's analysis: they can be used to an behase additional advertising and thus increase sales. which uh?ents utility. The relation between excess profits and 3Lixy'is indirect. but. nonetheless. positive. See Ferguson, 238. Triffin. Monopolistic Competition and General Egui- l\b\1-Im Thea”. pe 710 97 struggles for power and position. i.e.. from the fields of conflict resolution or military tactics.2u The scope of the present study is not so heroic. The task up to this point has been to: (1) review the current literature on the theory of the multinational firm: (2) relate the major works to one another. pointing out convergences and divergences in Opinion: and (3) specify a broad analytical framework -- based generally on a multiple-objective preference function that serves to coherently unite. where possible. the several important theoretical and empirical contributions to 'the general topic at hand. The latter item (the multiple- <>bjective preference function) should be. in a complete analy- Sis covering the entire behavioral Spectrum of multinational tariterprise. broken down and minutely analyzed in terms of each separate variable and its interrelation (through all possible permutations) with all of the others. In the present analysis. tzfieat of examining the behavior of the American MNF in high- :J-EBVrel manpower markets. the function may be usefully framed <14r1_ the following manner: we shall assume that the three ~£EEEt3timanda other than simple profit discussed in Chapter III .._~___‘_______ .:> 2“For examples of early writers that have compared oligo- Polistic behavior to chess games and military strategy see. :I-Esou. The Economics of Welfare: Berle and Means. The Modern égisatztporation and Private Property (New York. 1932): E. G. Nourse. Infhe Meaning of Price Theory." The uarterl Journal of Econo- ‘igjpsdsfig (February 1941). Rothschild figs said: "The oligopoly- » leorists' classical literature can neither be Newton and Dar- pl‘h. nor can it be Freud: he will have to rutn to Clausewitz's K1 inciples of War. There he will not only find numerous stri- 3 this para e s tween military and (OligOpOlistic) business f~£3LJPEategy. but also a method of a general approach which -- while 1116:” less elegant than traditional price theory -- promises a §hre realistic treatment of the oligopoly problem." See Roths- 11d. p. 319. 98 are here partially merged. Control. security. and growth all now operate in symbiosis. There are no assumed inherent contradictions between them. Control is desired to enhance security and growth (subject to a "satisfactory" profit level in all periods). Security and growth operate in symbiosis and mutually enhance each other. In contrast to the narrow views of security and growth in earlier writings on corporate preferences. the approach here is unified into one interrelated model. Thus control is not necessarily taken to be at vari- ance with the basic desires of stockholders but rather contri- butes to the security of the firm in international markets and contributes to the maintenance of acceptable growth rates in international markets. [The emphasis in the case of growth is not on growth or a single objective of the firm (as in Baumol) but on growth within a unified plan of capitalist sur- vival and hegemony on an international level as specified in Iierlner's model. See Chapters II and III] To carry the analy- sis of growth maximization to further lengths at this point would lead us into the dead ends of discussing its relationship to the Marxist hypothesis on the falling rate of long-run profit. Such is not necessary here. That firms desire high g’Zt‘tbwth rates either as an end in themselves. or as necessary 1: O long-run profit maximization (or to deter the secular decline 1“ long-run profits) is well-established in the empirical l 1 terature. _ The links between control and security and be- twfien the same and growth are thus self-evident. No claim is here made that the partially aggregated ap- p.:t‘<>ach adopted above is universally apprOpriate to analyzing 99 all behavior patterns of all multinational firms. Or even for explaining every possible facet Of their behavior in high- level manpower markets. A universal model would. however. be beyond the limits of this study and. more importantly. beyond the limits imposed by the availability of data to test the com- plex derived hypotheses. In terms of the main hypothesis of this thesis. however. and given the scant data on the phenome- non under examination. the partially aggregated function speci- fied above is considered adequate as a first approximation. "Unexplained residuals" (e.g. Reder's single-minded entrepre- .neural concern with executive privilege and protection of ("rent") will be explored and acknowledged within this context and suggestions for further (more detailed) research offered .111 the final chapter. ‘ In the section that follows. this general theoretical framework will be employed in assessing the divergent views 1A?! the literature concerning the general welfare effects of corporate multinationalism. In Chapters IV and V. the same "'W1.ll be used in analysis Of the behavior of multinational firms in host-country high-level manpower markets. In the discussion that follows. it will also become ap- lg’Eidrent that the present theoretical framework does not provide the Opportunity to make. with certainty. AéB type statements. :[:‘ti does. however. offer a framework within which such state- mghts may be evaluated. In this context. conclusions will tut38:: Often be Of the A): B variety. or. A? B. given 9. 100 The General Welfare Effects Of Multinational Corporate Activity The question of the general welfare effects Of corporate 0b- multinationalism deserves its own book-length analysis. viously. the brief discussion presented in this section cannot The purpose here is to outline the leading be so exhaustive. points Of view on the issue of general welfare effects. and. with somewhat more detail in a later section. discuss selected topics (within the larger question) that apply directly to less-developed countries -- the primary focus Of this study. The question of efficiency and general welfare effects (of multinational corporations is essentially a question of the efficiency and welfare effects Of oligopoly -- an area where Since there are so many Static welfare economics breaks down. DRCNdels Of oligopoly behavior. each producing somewhat different re sults. it is not possible to be precise about the general However. what- "‘321fare effects of oligopolistic organizations. e"'!3r the model. two characteristics common to all may be pointed Firstly. oligopolistic multinational firms are typically Out. JLEiuzrge. powerful firms Operating in highly imperfect markets. Thus. they are like all OligOpOlistic firms. normally expected earn a pure economic profit. create a divergence between 13t) price and marginal cost and. due to such a divergence. a cor- I‘ ’ QSponding divergence between marginal social value (MSV) and ‘I‘ginal social cost (M80) in all countries in which they [finder*imperfectly competitive market structures Thus nsvmscj ‘C)]E>‘3Hrate. Thus in equilibrium (where MR-MC) P> MC. Large amounts PAM]? A second consideration is also important. C) 13‘ resources are typically devoted to advertising and creating 101 quality and design differentials. This form Of behavior is 'consistent with the prediction of most oligopoly models. in- cluding the present one. It has Often been noted that Oligo- polists push all such forms of nonprice competition beyond socially desirable limits.25 Firms that do not advertise or engage in product differentiation eventually find their market position eroded and growth rate dampened. Basing his analysis on the unequal growth in per capita income that accompanied ' the rise of the corporate state. Hymer noted that firms in consumption goods industries in particular come to concentrate on continuous innovation for the few. Thus he writes: "The uneven growth of per capita income implied unbalanced growth and the need on the part of business to adapt to a constantly chang- ing composition Of output...In the consumption ,goods sector. firms had to continuously intro- duce new products since. according to Engels Law. people do not generally consume proportionately more of the same things as they get richer. but rather reallocate their consumption away from Old goods and towards new goods. This non-proportion- al growth of demand implied that goods would tend to go through a life-cycle. growing rapidly when they were first introduced and more slowly later. If a particular firm were tied to only one pro- duct. its growth rate would follow this same life- cycle pattern and would eventually slow down and perhaps even come to a halt. If the corporation was to grow steadily at a rapid rate. gt had con- tinuously to introduce new products."2 Once a product is introduced into this group. it "trick- les down" via the demonstration effect to lower levels. \ 1,! 253ee J. K. Galbraith. The.Affluent Society (Houghton 1 ram. Boston. 1958) . Q 268. Hymer. "The Multinational Corporation and the Law I? Uneven Development." pp. 10-11. 102 In the context of the international hierarchy. only the rich and powerful concentrated at Level I in the geographic hier- archy have anything approaching a free choice in the market.27 ~At the very least. then. there is a strong presumption in the literature (on purely empiricalgrounds) that OligOpOlists push all forms of nonprice competition beyond socially desir— able limits (in all markets) and that consumers would be better off with more active price competition. This is not likely. however. given the nature of OligOpOly markets. Rigid prices are desired in the interest of security.28 At the worst. such behavior could result in dictated consumption patterns outside the advanced countries. 270ne Of the key motives for direct investment. in Hymer's analysis. is to gain control over marketing facilities in or- der to facilitate the spread of new products. The rest of the "empire" has only the choice of conforming or being isolated. er thus concludes: "If firms were denied control over communication and marketing facilities in the foreign countries and we had a regime of national firms (private or socialized) rather than multinational firms. the pattern of output would almost certainly be quite different than the one that is now observed. There would be more centers of innovation. and probably more variety of choices Offered to the consumers as each country developed products suited to its particular characteristics. Pro- ducts from one country would spread to other countries through trade. and the movement would be coordinated by market competition rather than the planning decisions Of top management in a few corporations whose interest it is to foreclose competition. to restrict the choices Offered. and :53 to insure the survival of their own organizations." <:=‘- Hymer. "The Efficiency (Contradictions) of Multinational Orporations." p. M5. ‘t: 28For a discussion of this point see J. Bain. Barriers IQ New Com etition (Cambridge. Harvard Press. 1956) and ‘-EEB1ustria Organizations (New York: Wiley. i95h). 103 In terms Of static criteria alone. the welfare effects of the multinational corporation are clear. in two respects. When direct investment increases monopoly or oligopoly power in world markets. social welfare may be effected adversely. Productionflmay be reduced. and price raised above marginal 1cost -- bringing about a divergence between MSC and MSV. OligOpOlistic market structures. with rigid prices. deny to the consumer the benefits of price competition. Instead. the dominant form of competition becomes nonprice competition: with its possible spurious quality differentials and possibly wasteful advertising. Let us examine this conclusion in some detail. As we there seen. the cost advantages of oligopolistic multinational firms (arising out of internal economies of scale. vertical Jantegration. or proprietary information) may enable them to" Obtain a large share Of the host-country market ( or perhaps enable them to dominate the market) if they drive out high- eost. inefficient competitors. Thus. they may raise prices to monOpoly levels (i.e.. to levels where P>MC) once competi- tion is eliminated. The long-term divergence between MSC and I‘5SV. however. requires that there be an asymmetry about entry am exit that allows the dominant firm to set higher prices without reattracting entry in the long run. If entry occurs 111 the long run. in respOnse to the high return earned in the industry. prices will once again fall and approach the point where MSCIMSV. (The equalization may not be attained if the there are 1titlciustry ends up highly concentrated.) If. however. §ubstantial barriers to re-entry. the divergence will remain. 104 The capital needed for establishing an Operation Of efficient size may be so large as to limit entry. Or. the size of the market may be such that only one or a few firms of efficient size can be sustained. If the firm has located in a less- developed country. entry may be permanently foreclosed since no comparably dynamic. or powerful competitors ever develOp. The presence Offoreign monOpolistic giants may stunt the growth of a viable. technolOgically dynamic. home country industrial sector. The large dominant firm (or firms) may also stand ready to cut prices to whatever level is necessary ‘ should the threat of entry arise. In this instance. large. dominant firms with the superior financial strength to re- sist entry may become permanently established. It should be remembered that the security motive is strong for such firms. They may engage in "limit" pricing (setting price not so high as to attract entry. but high enough to permit a monOpoly re- turn not necessarily the maximum return) or bring political Pressure to bear on host-country governments ‘to insure their 9°81tion. Thus the possibility of long-run divergence between "SC and MSV is not remote.29 ~\....—......... 29Harry Johnson has noted that from the national point ho View. a social loss would require that consumers in the alst~country be made Eras off than before by the multination- me 1rms' presence. Let us reduce this prOposition to ele- (pntais. If before the entry or the multinational firm therlod one) P1= MC. then MSC1- MSV1. If. after the entry of but multinational firm (period two) P2 is greater than M02. the, less than P1. the consumer is better off in period one 8a 11 in period two since they are paying Iower prices for the “one goods. despite the fact that mscz< msvz. A social loss would require an increase in price after entry over what it mid ordinarily be before entry. or P2> P1. However. given 105 The security motive also has its effect on the trans- fer of technology questions as well as on the attitudes and actions Of multinational firms in host-country high level manpower markets. More on this later. but it should be noted that the primary reason for direct investment is to protect relative market standing and prevent erosion Of firm growth rates. If this is true. there is. then. every reason to be- lieve that the multinational firm will stand ready to repel any market intruder and also work to prevent centers of new competition and innovation from arising. The foregoing welfare criteria have Often been criticized for being "static". In dynamic terms. it may well be that industrial research and develOpment. the now famous R & D. that is so essential to the growth of modern industrial soci— ety. thrives only in oligopoly markets. OligOpOlistic firms "are typically large enough to absorb the short-run costs of R 8: D in order to reap its long-run benefits. Indeed. Johnson “_— that firms maximize their own objective function. there is no mason to believe that p2< P . After the firm drives out high goat competition. it may well raise prices to a level equal to fl: £§1reater than P1. Its decision will be based on a number of mctors -- the security maximizing "limit" price. "satisfying" cote of return. etc.. -- but will in no way be influenced by p028 1deration Of the social loss it imposes in society. Thus Geri-tive action by government is required if Pz< P1 is to be or Eva-in. Consideration should rightly be given to the question due Optimal intervention" in this case. Subnote: If P2< P1. thy 1:0 the fact that P1 was an.import price -- i.e.. no indus- bet producing the good in question existed in the host-country theore foreign investment -- the question still arises of whe- eve}, or not competitive local production would not generate therl lower prices than P2. If entry barriers are high after fOrtestablishment Of the foreign firms. the answer will not be prObhcoming since no local production ever develops. This lem is related to the infant industry argument to be dis- c “839d later. 106 argues that short-run monopOly returns on innovations are the "costs" of new knowledge.30 Our purpose here is a limited one. We shall not. therefore. attempt to resolve this question Of the relationship between.market structure and innovation that has long plagued the profession. We shall simply take note of the fact that oligopolies do innovate. engage in R & D activity. etc.. and then proceed to examine. in various con- texts. the effect Of such oligopolistic activity.31 In another vein. international trade theorists have been much less concerned with the dangers posed by high concen- tration and‘oligopoly. and have viewed direct investment as a device for integrating the world economy. They stress the ad- vantages of scale and argue that the multinational corporation. due to its organizational ability. will be an important force for allocating capital efficiently and Spreading technology from developed to less develOped countries.32 30See Johnson. "The Efficiency and Welfare Implications of the International Corporation." pp. 35-56. 31There is no doubt that oligopolies have produced a rapid rate Of technolOgical change and produce innovation. The question is. however. the direction rather than the rate 0f change. The one chosen -- continuous innovation for the few. with wasteful replications of product and discoveries ~- may not be in the interest of social welfare. It is also worth iflOting that the final results are not yet in on the question of whether less concentration and more price competition might rust increase the rate of innovation in oligopolistic industries. 32For example. see the argument of Johnson. Kindleberger swith reservations) erican Business Abroad. R. E. Baldwin. Inme International FErm and Efficient Economic Allocation." \American Economic Review (May 1970). Pp. “BO-434. 107 It should be noted. however. that to the extent that direct investment tends to increase concentration. it may also reduce the number Of alternatives facing buyers and sell- ers and deplete the forces and benefits of international com- petition. Thus. direct investment may increase welfare through transfer Of capital. technology. and managerial Skill from one country to another. 0n the other hand. as has been re- peatedly pointed out in this thesis and elsewhere. it is also an instrument for restraining competition between firms Of different nations. Much empirical work needs to be done to determine the exact magnitude of these counter-effects. The following may be said with certainty: the general presumption of trade theory in favor of free trade and free factor move- ments on the ground of allocative efficiency does not auto- matically extend to direct investment by multinational Oligo- polies. due to the anti-competitive effects inherently associ- ated with such.33 Further. the multinational firm may place real obstacles in the path of the less-develOped world as it struggles to join the mainstream of the technOlOgical revolution. 33Baldwin (Ibid.. p. #84) does have some reservations. He notes: "However. the unique market power possessed by these firms may be used to resist such socially-beneficial changes. We have develOped a non-market mechanism for facili- tating economic growth in the world economy. but our internal and international institutions for cOping with the economic shocks resulting from this growth and with the possible social- ly undesirable economic and political effects of the inter- nationalization of production are in need for considerable improvement. If international trade theorists are to contri- bute towards this improvement. they must cast their analysis in a framework that includes trade in both outputs and inputs among countries." 108 Indeed. when focus is shifted tO the less-develOped countries (hereafter referred to as LDC'S) the issues pre- viously discussed take on a different coloration -- and they are intensified if. for no other reason than that the gap be- tween capacities Of investor and host-country is wider. In developed countries. direct investment contributes to monopoly problems. with all the familiar associated welfare consequences. It also strains national boundaries and produces political problems. This is no less true in the LDC's. However. in the LDC's. direct investment. from the national point of view. casts a much longer shadow. Indeed. in an environment where day-tO-day struggles with starvation may take place alongside power struggles among rival local politicians. the military. and an emerging entrepreneurial class. the injection Of a large. powerful foreign investor can have profound consequences. As Kindleberger has noted. early direct investment in the LDC's typically took on an enclave character in which foreign factors of production -- capital. management. and often labor -- were combined with limited host-country inputs such as mineral deposits. trOpical climate. or. in some countries. unskilled labor (often pressed into gangs on the comprador system). Foreign investors often acted as if they enjoyed extra-territorial rights. as the record on bribery. corruption. evasions. and even invasiOn (by the supporting gOvernments of source-countries) reveals upon the most casual study. Many Of these investments were undertaken to exploit 109 mineral deposits. or to add one more link to the chain of vertical-integration.3u The new character of foreign investment in LDC'S is not so dramatic on first appearance. but its long-run consequences may be far more profound. {An optimistic view would include the main arguments Of international trade theorist (efficient global allocation of capital and spread of technoiOgy from rich to poor countries) and the general liberal internationalist view that direct in- vestment leads to a "rational" integration of national desti- nies as the factors of "efficient" production and distribution erode "irrational" nationalistic attitudes. In another vein. however. the spread of direct invest- ment through multinational oligopolies could reduce Options for development in LDC'S. i.e. they could become (in Hymer's terms) "branch plant" countries. Their development planning )4Kindleberger notes that some vertical integration is not undertaken for cost reasons. but rather for solely secur- ity reasons. Thus. he notes. "vertical integration can also be a pathological condition. Competition. like matter and games. is subject to entrOpy. Even where there are no econo- mic advantages in coordinating production at various Stages. or of coordinating new investments at different levels of production to carry through innovation. companies may feel safer with assured access to sources of inputs and to outlets for products. In these circumstances the industry will shift from numerous firms which are small and competitive at each stage to one Of a few large. vertically integrated concerns. Once started. the process acquires momentum." Kindleberger. American Business Abroad. p. 21. Also. for example. in oil see: E. T. Penrose. he Lar International Firm in Develo - ing Countries (London: Allen and Unwin. I953). For examples in aluminum: O.E.C.D.. Gaps in Technolosz. Nonferrous Metals (Paris. O.E.C.D.. 1968). For a discussion Of the history of direct foreign investment in Latin America. see C.F.C. Alejan- dro. "Direct Foreign Investment in Latin America." in Kindle- berger. ed.. The International Corporation. pp. 319-344. 110 schemes could be frustrated by having Large segments of their industrial sector dominated by planning schemes originated in the headquarter cities of multinational firms: their ability to derive revenue through taxation could be made more diffi- cult by the ability Of multinational firms to manipulate trans- fer prices and move their productive facilities from one country to another: and their monetary and fiscal policies would be diminished in effectiveness.35 The pessimistic view is represented in the following passage by Stephen Hymer: "The international Operations of a cor- poration are an attempt to control that part Of the product cycle which takes place in foreign countries. It does this under the guise Of bringing capital. technology and management Skill. but its motive for direct investment is to defend its own quasi-monOpoly of knowledge and to assure its own stability and growth. This Often has the effect of block- ing independent sources of development The vertical structure of the corporation is a method of coordination but it is also one of control and the values are its own survival and a favorable environment: not the develop- ment of society as a whole." Instead Of attempting treatment of all the alternative views on the general welfare effects Of the multinational corporation in LDC'S (another heroic undertaking) attention is directed below to two leading welfare issues that bear a particularly close relation to the subject Of this thesis. 35For a detailed discussion of the effect Of the MNF on fiscal and monetary policies see 8. Hymer. "The Multinational Corporation and the Law Of Uneven DevelOpment." pp. 21-25. 36Stephen Hymer. "The Multinational Corporation and the International Division of Labor" (unpublished paper. 1970). 111 These relations are outlined below and fully develOped in Chapter IV. The Infant Industry Argument One of the most prominent arguments against direct foreign investment is the standard infant industry argument. Thus. a strong case can be made against admitting multinational firms on the grounds that they may come to dominate markets that host-country firms could efficiently serve. given a chance to develop. acquire technolOgy. penetrate markets. ac- quire management Skills. etc. Note that this is not an argu- ment based on pure nationalism or sentiment. but one based on efficiency. Given time to develOp. national firms could grow effectively to compete with multinational firms. but not if multinational firms dominate their potential markets (and stand ready to retaliate against any competitor). Additional- ly. there are social benefits (externalities) flowing from indigenous industrial growth -- social benefits which exceed private benefits. Johnson argues that there is no reason to confine par- ticipation in a protected industry (tariff protection) to host-country firms only.37 He argues that the externalities arising from developing markets will still be available even if the market is subdivided among both host-country firms and foreign firms (implicitly. he also assumes that even if foreign firms dominate the local market. the externalities will still 37Ibid.. pp. 35-36. 112 be forthcoming). Thus. insofar as superior knowledged (im- posed or develOped on the spot by foreign firms) can be under- stood and applied by other firms without their having to incur the cost of developing the knowledge themselves. it makes no difference. according to Johnson. whether the firm providing the external effect is domestically or foreign owned. There are many reasons for doubting this postulate. Some Of these will be discussed below in the context Of the related topic Of technolOgy transference: but it is worth pointing out here that if multinational firms dominate the domestic markets. they may seek to dampen the Spread Of pro- prietary knowledge in order to keep barriers to entry high and protect the security inherent in their market position (or they seek to control the market environments within which they Operate). TO the extent that they may be successful in such an endeavor. certain Of the benefits of industrialization will not Spread. Foreign investment may again take on an en- clave character. The Transference of TechnOlOgy and Industrial Know-How As noted previously. many writers view the multinational corporation as the ideal vehicle for the transmission Of technolOgy around the world. and especially to the less-devel- <3ped countries.38 They view the international corporation as ¥ 38For example. see the following works: J. Baranson. "Technology Transfer through the International Firm." American Economic Review (May 1970). pp. 435-40. "Transfer of Techni- cal Knowledge by International Corporations to Developing Economies." American Economic Review (May 19st). pp. 259-267. sDeneer and Woroniak. eds.. The Transfer of Technolo to DevelOping Countries (New York. Praeger. 1967). J. H. Dunning. 113 the appropriate mode by which the LDC'S can make the "quan- tum leap" frOm a technolOgically backward state to a techno- lOgically advanced state. with all of the desirable implications of the latter for efficiency and growth. The Opinions ex- pressed by these writers are less than fully warranted by the facts.39 The following discussion deals with this point. It is necessary at the outset of this discussion to identify terms. The first step is to distinguish between "know-how" and "technical knowledge" (narrowly defined).“0 Know-how is closely related tO-technical knowledge. which is a mere clearly definableéconcept. As Svennilson notes: "It (technical knowledge) indicates our intellectual conception of possibilities to combine inputs of factors -- labor.. raw materials. machinery. etc. -- in order to achieve an output of products. defined in terms Of quality and quantity." 1 Accordingly. this term "technical knowledge" includes not only the purely engineering aspects of the productive process. but "TechnolOgy. U.S. Investment. and EurOpean Economic Growth." in Kindleberger. ed.. The International Corporation. PP. 141- 179. See also Johnson and Kindleberger. American Business Abroa . 39See citations Footnote 38. The record on actual technolOgical transfer through direct investment is not outstanding. ‘ ”OThe distinction here is based on the work of Ingvar Svennilson.~ See: "Technical Assistance: The Transfer of In- dustrbal Know-How to Non-Industrial Countries." in Berrill. ed.. Economic Develo ent with S ecial Reference to East Asia. (New York. St. Martin's Press. 1854). pp. 455-427. Also. :gfie Strategy of Transfer." in Spenser and Woroniak. pp. 175- ”1Svennilson. "Technical Assistance...". p. 406. 114 also the economic and organizational aspects of the Operations of a firm. including management and marketing. Know-how is defined as the capacity to use technical knowledge. It is based on a combination of knowledge and Skill: and. without it. pure technical knowledge is useless from a productive point of view. AS Svennilson notes. only part (the broad lines) of the actual knowledge required for production is codified by non- personal means of communication. or communicated by "teaching" outside the productive process. This is the oft-mentioned "common fund". and covers only part of the full knowledge re- quired. The overall knowledge of persons trained in actual operations has wider scOpe. In this context. innovations in technical knowledge are for the most part born in the course of productive operation. by people trying to solve operational problems within pro- 42 The rate at which technical knowledge flows ducing units. from the field Of industrial Operations into a "common fund" of such knowledge depends on the communication system involved., Part can be transmitted through a system of information (schools. publications. etc.). but much of the detailed spe- cialized knowledge (know-how) can only be transferred by demonstration and teaching in actual Operations. Thus. some,"specialized" knowledge is accumulated in the industrial units and does not flow easily into the "common 42There is usually a "learning curve" involved in this instance. 115 . fund" of technical knowledge. Depending on the Skills of the person involved. each industrial unit has a fund of know-how that distinguishes it from other industrial units.“3 If such know-how is a scarce factor within a given industry. it can present a barrier to entry by new firms. i.e.. more inputs will be needed than simply 3 factors plus knowledge from the "common fund."uu In a system based on competitive private enterprise. the system for transferring technical knowledge and know-how (Specialized technical knowledge) is a complicated one. As Svennilson notes. two types of outflows may be distinguished: (A) leakages. and (B) commercial transfers. Leakages may be voluntary or involuntary and are not connected with any re- muneration to the firm. If all leakage "outlets" were Open and if there were no time lags in the transfer. the firm would have no specialized assets which could be sold in the market for a price. and no advantage over any other firms. Firms. therefore. seek to protect and control their individual funds of know-how and technical knowledge. 43The reasoning here is similar to that employed by Friedman with respect to "entrepreneurial capacity." He says. "...we must remember that the entrepreneurial capacity of each firm is a separate factor of production. to be dis- tinguished from the entrepreneurial capacity of every other firm." Price Theor (Chicago. Aldine Press. 1965). p. 102. For full discuss on. see pp. 96-102. The levels of know-how and knowledge of a private firm are accumulated over time as a result of experience in the course of operations and sys- tematic research and development efforts. huThus. certain forms of specialized knowledge may be likened to a "monopoly ingredient." See C. P. Ferguson. Microeconomic Theo (Romewood. Illinois. Irwin. 1969). pp. 7 - e 116 The primary mode Of protection is the legal patent. These will be used and sold (in various ways) in the market. However. while the technical knowledge embodied in a patent is restricted. its very publication may stimulate technical innovations of a not-too-close similarity. and may. thus. indirectly broaden the knowledge and potential competitive- ness of other firms. 0n the other hand. as Svennilson has noted: "...It is a well-known fact that the tech- nical knowledge that is contained in a patent and. thus. is made public. may exhibit only a part of the technical knowledge that is needed to carry out production. The art of hiding some technical elements of a production process is part of the patent game. Firms Often even pre- fer not to patent their technical innovations in order to avoid the duty to publish some technical data. In any case. a firm may have a fund of know-how (complementary to the facts exhibited in the patent) that it seeks to with- hold from other firms. The right to use a patent may be without value to a buyer of patent rights. if he has not the capacity to develOp the complementary know-how within his own firm. Firms in industrialized countries Spend a large part of their research and development efforts on finding such complementary know-how. In most non-industrialized countries. the capacity for technical innovation is as a rule very limited. The transfer of non-patented know-how in a package with patent rights is. therefore. comparatively more important in the case of non-industrialized countries than in transactions between firms in countries with highly developed industries. The largest part of know-how (specialized knowledge) accumulated in the firm is by definition vested in persons employed in the firm. In special cases it may. however. be 45Svennilson. "Technical Assistance...". p. 411. 117 documented informally inside the firm and protected. 0n the whole. however. it could be difficult to prevent persons employed by a given firm from transferring the knowledge used in its operations to other firms if they left. (This feature is important for the discussion of high-level manpower mar- kets in the following chapter. When the issue of transference of technolOgy by multi- national firms is interpreted in the context of the above dis- cussion. a new picture emerges. If a firm has succeeded in establishing itself in an LDC market. it will have done so by the familiar arguments already presented. due to some "monopolistic advantage" in factor or product markets. In both markets. that advantage is. if not wholly. in most cases partly. attributable to some Specialized technical or mana- gerial knowledge that is not freely available in the market.”6 The original decision to invest in the foreign market. ac- cording to the arguments of our multiple-objective function. may have been influenced by the desire for security. i.e.. it was a purely defensive move (protect raw material supply. co-op major share of new market. etc.) -- or the desire to maximize quasi-rent on prOprietary knowledge. or both. In the latter case. the firm may have the Opportunity to achieve ”bNote that both Johnson's and Aliber's arguments re- viewed in Chapter II. rest on the multinational firm's owner- ship and control of "patents" or proprietary knowledge." Even economies of large-scale production are accompanied by quali- tative technical changes in the process of production. Such changes may have been develOped within the firm by solving day-to-day production problems as output grew. Thus. special- ized knowledge was developed alongside growing output. Also see Svennilson. "Technical Assistance...". pp. 419-420. 118 both a "satisfactory" level of profits and. at the same time. enhance its relative strength within the international oligo- polistic market within which it Operates. If such is the case. the firm is strongly motivated to prevent certain ele- ments or its "fund of knowledge" from leaking eitherinto the "fund" of actual or potential host-country competitor: or into the "funds" of its OligOpOlistic rivals. By taking action to control "leakage" they prevent. in the former case. the erosion of their rate of return on investments in the LDC market by actual or potential host-country firms: and in the latter case (perhaps more importantly) they retain whatever rivalistic value such knowledge has in the context of their day-to-day struggles with other oligopolistic firms operating in the "world market" (if such knowledge does not become "general" knowledge through leakage). ~There is no reason to believe. therefore. that the firm will be at all interested in transferring its "prOprietary knowledge" to anyone. when the effect of such a transfer is to weaken the security of the market position in the host-country or vis-a-vis their oligopolistic rivals. Thus. the "complete" technical know- ledge possessed by direct investors. that could be Of a general or specific value to emerging LDC industries. may not be transferred at all by conscious design. Indeed. as Baranson points out. one of the reasons firms prefer direct investment to licensing patents (or other mar- ket transfers Of knowledge without direct control) is because the firm fears licensing will. in Baranson's words. "...result 119 in the give-away of valuable know-how or will threaten its market positions in established markets.”7 Multinational firms also may have no desire to see new innovation centers ‘ develop. Even where licenSing is chosen. as SvennilsOn points out. the source-country firm may withhold certain Operative information in the interest of security and instead send its own personnel to man critical phases of the production process. In a separate vein. even if we assume that security considerations concerning specialized knowledge have no influ- ence on a firm's behavior. the expected technolOgy transfer may not take place at a satisfactory rate or in satisfactory form. In particular. the technolOgy brought to LDC's may be of a very narrow. specialized. capital intensive type that “7Baranson. "Technology Transfer...". p. 436. Baranson cites some interesting examples on corporate behavior in the area of licensing vs. direct investment. In all cases where direct investment was chosen. the reason lay in protecting "...prOprietary rights in new product areas involving recent know-how that has limited patent protection.". p. 439 (the cases cited involve "a large American subsidiary in the petro- chemical field." IRM (in its Indian operation). Ciba-Swiss chemical manufacturers. 23; al ) M. Sadli. of the Institute «of Economic and Social Resea53h. Dajakarta. Indonesia. noted .1n reply to Svennilson's paper. cited above (same volume) ‘bhat he doubted direct investment was a good method of impart- :1ng'know-how. He wrote: "In Indonesia. the oil companies were reluctant to transfer the better management jobs to lo- cal people. except those of public relations and labor re- lations. Consultant firms were anxious to arrange package deals but they were biased towards the supplying firms. There was need for some kind of consumers' union to redress the alanOQe" Ibldee pa “27e Svennilson also notes that the flow of specialized know- 19<1ge may be discriminating in favor of "national units": "Within an industrial community. an exchange of technical kn<>wledge between firms may develop on the basis of an infor- ma1 give and take. However. such communications may be dis- °r1Jninatory in favor of national units. and thus form a part of national 'integration.' The leakage of technical knowledge intB postulates (arising out of a model based on the single prOfit maximization thereon) concerning the firms' role in efficient resource al- location and technology transference are valid only under cer- tain additionally restrictive assumptions. 511n a specific case. the specific reaction of a firm to a given set of "market conditions" will depend fundamentally on its preference function; and in particular upon which ele- ments of the function are ranked over others (which are the dominant elements) under that particular set of market condi- tions. at that particular time. 126 In the following two chapters. the aforementioned the- oreitcal framework will be applied to an analysis of the be- havior and effects of the high-level manpower policies of the multinational firm with special attention to the less- develOped host country.. Emphasis will again be placed on the interrelated objectives of control and general security of market and political position. CHAPTER IV MULTINATIONAL CORPORATE BEHAVIOR IN HOST-COUNTRY HIGH-LEVEL MANPOWER MARKETS-BASIC EVIDENCE Introduction As an illustration of the usefulness of the basic the- oretical framework develOped in earlier chapters. it will be applied in the following two chapters to an analysis of the behavior and effects of the multinational firm in the high- level manpower markets of host countries; with special empha- sis on the less~deve10ped host country. One of the most controversial aSpects of the general behavior of the multinational firm has been its reluctance to employ. to a significant extent. host-country nationals in high-level management positions (Level III-AB) in their foreign operations. and (eSpecially) their failure to promote the nationals actually employed in such capacities to 1positions at the corporate headquarters level (Level I-AB).1 The analysis of this phenomenon will be executed in four stages. Firstly. in this chapter. the basic empirical materi- al on the above phenomenon is summarized and elaborated upon as an introduction to the central question. Distinctions are drawn between hiring practices at Level III and Level I. Further distinctions are drawn between conduct in developed and less-develOped host countries. In all cases. the material is 1For a detailed specification of manpower categories see Chapter I. 127 H 128 presented and discussed within an historical-dialectical con- text. moving from early firm behavior to mature firm'behaviOr. In Chapter V the conventiOnal neo-classical labor market model is applied to the problem to determine its usefulness in explaining the phenomenon. As will become apparent. the conventional model fails as an explanans. This sets the tone for stage three. where the model developed in this thesis is applied to the problem with results. Stage three incorporates the analysis of the proclem with- in the context of the model developed in this thesis. Hiring practices at Level III-ABland Level I-AB are analyzed separately. Likewise. hiring practices in DC's and LDC's are treated sepa- rately. with heavy emphasis on the latter. Again. the analysis is executed within an historical framework. moving from the older practices to the newer which reflect the "maturity" and "second best" elements discussed earlier.. In support of the analysis. the data from stage one are employed extensively and presented in finer detail. a In stage four (Chapter VI) the hypotheses are Operation- alized for further testing. The Problem As noted previously. the multinational firm has been (historically) reluctant to employ. to a significant extent. host-country nationals in high-level management positions (Level IIIeAB) in their foreign Operations. and has also failed to promote those nationals actually employed to positions at the corporate headquarters level (Level IqAB). 129 General Evidence The 1957 Department of Commerce Census estimated that U.S. companies abroad employed 3.2 million persons. Approxi- mately one-third were employed in EurOpe and one-third in Latin America. In Europe. over 70 percent were in manufacturing: in Latin America. one-third were employed in manufacturing.2 Total personnel sent from the U.S. was 20,600. Of these. 13,600 were managerial, professional. or technical. Of local nationals employed. reported at 1.4 million. 160.000 were in the mana- gerial. professional and technical group. Those persons sent from the U.S. accounted for less than ten percent of these spe- cialized employees. _‘ A striking element of corporate behavior is disguised by the foregoing aggregates. Even though Americans accounted for only 10 percent of the total of specialized categories. a sig- nificant majority of the key Ievel.III positions during this period (Fifties and early Sixties) were held by American managers. Appendix Tables IV-Z through IV—3 illustrate the afore- mentioned trends. A survey by J. N. Behrman (1960) of 72 U.S. multinationals provided data (from 35 reapondents) to show that Americans were predominantly in "key" positions (see Table IV-3 ). In Latin America. management was most heavily American. extending through division managers. which were almost all American.3 0f the firms surveyed. thirty-five 2United States Department of Commerce. 1960. U.S. Bus. Investment in Forei Countries. See Appendix Table IV-i Preliminary Data from the 1533 Census. the most recent. are discussed later. 3The firms surveyed were of mixed sizes. See J. N. Behr- man's "Foreign Investment and the Transfer of Knowledge and 130 (the largest) claimed to use nationals to the "fullest extent possible" but maintained Americans in various "key" posts such as president. vice—president and department head (usually finance and production) as well as a majority on the board of 4 The survey responses indicated that. at the time directors. of the survey. no companies in the sample had the goal of "100 percent nationals" in management positions. When it comes to the staffing of Level IeAB positions at the corporate headquarters level. ethnocentricity becomes even more severe. Kenneth Simmonds. in a study of the 150 largest U.S. multinationals (1966) estimated that though 20.7 percent of all their employees were foreign. only 1.6 percent of their high-level corporate managers were nonquerican (see Tables Ivdhs).5 Simmonds estimated that if data were available on companies that do not disclose their foreign employment. and those that do not include subsidiary employment in their em- ployment figures. the comparisons would be even.more dramatic. Raymond Vernon. in a study which was a part of the Har- vard Business School Project referred to in Chapter I (1970). found in a survey of the leading multinationals that only nineteen foreigners turned up among top echelons of management. of whom fourteen were Canadian or British. He concludes that Skills." in Hikesell U. S. Private and Government Investment Abroad (University of Oregon Press. Eugene.il§62). “In cases where Americans were not in the majority. they had effective veto power. 5K. Simmonds. "Multinational? Well. Not Quite." Columbia Journal of World Business. 1. No. a (Fall.. 1966). 131: "for the present. U.S.-controlled multinational enterprises are governed and controlled primarily by U.S. nationals."6 In the Simmonds study. a case analysis of Ford U.K. (United Kingdom) provided an interesting illustration of the relative role of host-country subsidiary managers abroad with- in the overall global framework. The evidence revealed in the analysis indicates that the host-country subsidiary mana- gers abroad. even when elevated to managerial heights within the subsidiary hierarchy (due to government pressure in this instance) tend to have the previous functions of this office downgraded and their role reduced to that of a "messenger". This lends a new perspective to the trends in local partici- pation to be discussed later. i.e.. companies have offset the pressure to hire nationals for top management abroad by down- grading its functions and centralizing control. It is then small wonder that such executives never reach Level I (Head Office): they are often never part of the management elite at any level. In the LDC's (the primary focus of this study) the manage- ment staffing patterns during this period show even greater ethnocentricity. As Behrman pointed out in his study. high- level management was more extensively American in American subsidiaries in Latin America and other LDC areas than in Europe and other develOped areas.7 bSee R. Vernon. Sovereignty at Bay. Basic Books (New York. London) 1971. p. 136. 7Behrman. pp. 241-81. The 1957 Census also evidences the same feature. Several case studies. not presented in de- tail in this section. confirm the greater reliance on source 132 A number of case studies bring out this element in even greater detail. In a much-quoted study of the develOp- ment and utilization of high-level manpower resources by twenty-three representative American firms in their subsidi- aries in Brazil and Mexico. J. C. Shearer found that in both countries Americans dominate five of what is considered the seven "key" managerial positions in local subsidiaries (see Tables Iv-e-7).6 A similar case study of American firms in Brazil by McMillian and Gonzalez produced similar results. In a survey of a? firms (which accounted for over 70 percent of total U.S. direct investment in Brazil) they found that all staffed their top key positions in the subsidiaries with Americans. chiefly in the function of president. and sales. production. country nationals in the LDC's. See. for instance. B. Skin- ner. American Industr in Developing Economies (Wiley. New York. 1963). E. Penrose. The Large International Firms in Developing Countries (MIT Press. Cambridge. 1965). 8The "key" positions are defined in terms of their cor- reSpondence to certain critical functional areas of management. These include organization. finance. engineering and techno- lOgy. production management. marketing and sales. product re- search and design. and personnel. (Product research and design are in most all cases carried on in the home offices -- i.e.. they are not handled by the subsidiaries at all. The function- al distribution of source-country and host-country management within the subsidiaries will be important in later analysis of this general behavior pattern.) Americans held 65 percent of the positions associated with the first five functional areas. in both Brazil and Mexico. Another 19 percent of these positions were held by "third-country" nationals. Those cases where Americans held a smaller number of key management posi- tions were in small companies. John C. Shearer. Hi h Level Man ower in Overseas Subsidiaries - Experience in Brazil and Mexico (Princeton: Industrial Relations Section. Princeton University. 1960). ‘ 133 9 A study of foreign investment in L1- i and finance officers. beria by R. McLaughlin again produced the same result; staff- ing of top positions in U.S. firms (and British firms) was exclusively American (British). In point of fact, few Li- berians were employed in positions higher than overseer or chief clerk.10 - In an extensive study of foreign investments in India (1965). M. Kidron found that though management in foreign firms (American and British multinationals) was considerably "Indianized" at lower management levels and salary scales (RS. 1.000 per month) due to direct governmental pressure. higher management positions (RS. 3.000 and above) were still overwhelmingly non-Indian. Kidron found that most foreign firms insist on staffing major technical posts. and the posts of works managers. research department head. general manager. secretary. and finance manager. with "company men" from the source country.11 (The same was true in joint ventures.) My own research into the past and present high-level manpower policies of foreign-firms (American and British multinationals) in India confirms Kidron's earlier findings. The reader is referred to Appendix Tables rv-s through IV-9. 9C. McMillian and R. Gonzalez. International Enterpgises in a Developing Econogy (M.S.U. Business Studies. East Lansing. 9 . 108. McLaughlin. Foreign Investment andgevelOPment in Liberia (F. A. Praeger. New York. 19%). . 11Figures issued by the Ministry of Industry. See M. Kidron. Foreign Investment in_lndia (Oxford Univ. Press. London. 19 5 . pp. 294-296. ,13u where employment of Indians and non-Indians in foreign-owned/ controlled firms by salary groups and industrial groups from 1960-1970 are presented.12 As revealed in the tables. Indi- anization of lower salary/management levels increased between 1960 and 1970, largely due to governmental pressure and cost considerations. Indianization at top levels (RS. 5.000 per month and above where Level I executives are categorized) is nowhere near as great as at lower levels. As Table IV-9 re- veals. almost 65 percent of salary/management posts at RS 5.000 and above were still held by non-Indians in 1969. Almost two-thirds of high level technical posts were held by non- Indians.13 Recent Trends Patterns of employment of host-country high-level man- power by multinational firms has changed somewhat in the late 1960's and early 1970's. especially in the developed countries. Under pressure of rising cost of maintaining expatriate mana- gers abroad and host-country government pressure. multinational- i 12Special acknowledgement and gratitude is due A. K. Ghosh. Chief Economic Advisor to the Government of India. Mi- nistry of Industrial Development and Internal Trade - New Delhi for collecting and preparing the information found in Tables IV-o through IV-9 . and aiding. through conversation and letters. in their interpretation. 13The Ministry of Industrial Development indicated that generally the proportion of non-Indians was even higher in lar- ger American manufacturing and petroleum firms (and joint ven- tures) at level RS. 5.000 and above. The same point is made in Kidron's research for the earlier period. 135 firms have staffed a larger number of positions with host- country managers.1u In terms of official data, advance reports from the mest recent Census of Foreign Direct Investment (1966). which gives the only recent global employment data available. indicated that U.S. manufacturing and petroleum reporter's affiliates had 3.3 million employees in 1966 (see Table IV-iO). Manu- facturing affiliates had 10.63n U.S. employees abroad and pe- troleum affiliates had 7,436 U.S. employees. These employees in both cases were primarily technical (9.000) and managerial (8.100). Thus. in tenms of the present interest. U.S. managers abroad constituted 5.6 percent of the total of 145.263 mana- gers employed abroad.15 No individual country breakdown was available at the time of this draft but advance reports pro- vided to the Council for Latin America by the Department of Commerce in 1970 to give new data for Latin America.16 1“'The "second best" and "maturity" aspects of this trend are treated later in this section and extensively in the next. These aspects are interrelated with the cost aspects mentioned above and with the governmental pressure aspect. None reflect a change of strategy in control but only a change in tactics. This is discussed extensively in the latter part of this thesis. 15The data on employment from the 1957 Census and the 1966 Census on employment in management positions are not strictly comparable since the 1957 Census did not separate managerial from technical employees but lumped them all tOgether under the categories "supervisory. technical. professional and other" and did not report figures of "under 500" employees. Neverthe- less. there is little doubt that employment of host-country managers increased prOportionately to source-country managers between 1957 and 1966. 16Council for Latin America. The Effects of U.S. and Other Foreign Investment in Latin America (New York. 1970). This data is very rough and incomplete (it does not. for instance. include mining. a significant omission for Bolivia and Chile). 136 As Table IV-ii shows. U.S. managers constituted almost nine percent of total employment in the managerial category in Latin America (with significant country-to-country variation). Thus again. the proportion of Americans in managerial posi- ~‘ tions runs higher in the LDC's than in the world generally.17 Despite its comprehensive nature and interesting aggre- gative overview. the general body of Census data summarized above is inappropriate and misleading for purposes of this study. Its main fault (aside from incomplete reporting by firms surveyed) lies in its level of aggregation. The term "managerial" used by the Census is lacking in functional definition. According to reports from the Department of Com- merce it includes not only top level managers but many low) level subordinate positions below department head (and many non-management positions as well -- functionally speaking in terms of reporting procedures. etc.).18 Thus. the percentages 17In Brazil. the proportion of Americans in managerial - positions ran almost six percent (almost five percent for mana- gerial and technical combined) and in Mexico almost ten percent (almost five percent for managerial and technical combined). As a rough comparable measure. Table IV-12 from an unpublished employment analysis obtained in the Office of Business Econo- mics for the 1957 Census (cited in Shearer) indicates that Americans in "supervisory. technical and other positions" in Brazil in 1957 were approximately seven percent of the total (five percent in 1966). and in Mexico about eleven percent of the total (five percent in 1966). Thus. these proportions have not changed markedly from the earlier Census period to the latter. 16Information obtained in conversation with officials of Department of Commerce. O.B.E.. R. Lubitz also makes the same point in his study of foreign direct investment. See R. Lu- bitz. "A Note on U.S. Direct Investment and Human Capital." Journal of Political Economy. v.79. No. 5 (Sept.-0ct. 1971). Also. the O.E.E. data includes some small firms whose inclu- sion distorts the analysis for the dominant oligopolies. . 137 given do not adequately reveal the prOportion of truly top- managoment that is American and certainly are Of no use in determining the national distribution Of the very highest level "key" posts. Certain recent individual case studies are much more revealing on the question of top management staffing abroad. In the develOped countries. most especially Europe. many more management positions are being filled by host-country nationals. The information available indicated. however. that Americans still remain in control in "key" positions. even when top posts are vacated by them. The most noteworthy example (men- tioned earlier) is found in the case of Ford U.K. as reported .by Simmonds.19 The following report from a Sunday Times says it all: ~ "Four directors have quit Ford U.K. in a year; those of finance. sales. industrial relations and the head of the Basildon tractor operations. All but the last resigned largely because of the tightening American control. "In two years. more than 20 key men in Ford U.K.'s finance department have left. They include the investment analysis manager. the purchase analy- sis manager. and within a few months. three suc- cessive administrative managers under the American director of engineering. "From Ford U.K.'s product-planning section. the manager has left. SO have the market research chief and the product-planner of the Cortina. With the labor relations director went one of his top executives. Ford U.K.'s controller of metal stamping has left. so has his right-hand man. So has the manager of Operations in Ford U.K.'s new foundry. technically ahead of any other in EurOpe a 19simmonds, "Multinational..." 138 "'This is not wastage; this is a hemorrhage.’ said one of the most senior men who have left. All these. with other less significant execu- tives who have also left. have gone to excel- lent. even superlative jobs -- Ford executives have a usually justified and always expensive mystique. But virtually all had one motive in common. One ex-manager said: 'I know of no British senior Ford executive who any longer be- lieves that there is a real future for a Briton in Ford.‘ "To all this. Ford has an adamant answer: 'We have been since 1960 wholly an American company.‘ said one director. 'but we are run in Britain by Britons. We are world-wide: our attitudes and needs are not therefore those of Little Eng- landers. There is not dictation from Detroit.'» "But the total American domination of Dagenham -- and the evidence of former executives is too strong to deny -- is not a Detroit conspiracy: it is the IOgical result of Ford U.K.'s own his- tory. Ford Detroit's world plans. the American lead in techniques of management and mass pro- duction and a certain British bloody mindedness. ‘~Detroit's i960 guarantee to the British Government when it sought 100 percent of Ford U.K. -- the promise that 'the majority' of Ford U.K.'s manage- ment would remain British -- has not been broken. lpgwas irgelevant. "Ford U.K. now has Americans as managing director. financial director. engineering director. and production planning and styling director. Only four Americans are on the ruling Policy Board of 15. but they are the men with power. "'You control a company if you control its capi- tal expenditure. its products. and in great detail its Operating budgets.‘ said one senior ex-finance man. I'All these are controlled by Americans over here. and ultimately by Detroit. The amount of paper flowing to Detroit and back is unbelievable.' "The other Americans at Dagenham control strategic functions -- chief stylist. body construction. paint. data processing. the foundry. a welding and manufacturing engineer. three plant layout men. and a bevy in the truck group. 'The technical men are mostly first-class.‘ said one departed. 'Ford management is correct when it says Detroit has much technically to teach us. What causes the fric- tion is that the Britons the Americans work with 139 know it is the American who has the ear of Detroit.'"20 Thus as mentioned previously. when top posts are vacated by Americans and filled with host-country nationals the functions of the office may be downgraded and control concen- trated in the hands of a remarkably few "key" American executives. The same process may take place. except on a more sOphis- ticated level. when American firms "regionalize" their opera- tions. In this instance a "regional headquarters" is established for each major market and control concentrated there in the hands of "key" American executives. reticulators. and "advisors." This leaves the firm free to staff the down- graded functional post at the individual subsidiary level with host-country nationals who report to and take direct orders from the regional office.21 When attention is focused on the LDC's. a startling pic- ture emerges. As a preface to the following exposition it should be noted that all available recent data indicates that in LDC's the prOportion Of American managers in managerial posts is higher than in the developed countries. What is not 20John Barry. "Fords Top Britons Quit as U.S. Grip Tightens." The Sunday Times. November 21. 1966. 21For evidence on the nature of "regionalization" see C. R. Williams. "Regional Management Overseas." Harvard Busi- ness Review. Jan.-Feb.. 1967. Other surveys on the trends are found in various monographs published by Business Inter- national. New York. N.Y. See especially numbers 36, “I, and 46. Discussions with top officers of 3.1. (November. 1971 -- with Stephen Hymer) also confirmed the regional trends in Europe. This tOpic will be further analyzed in the following sections. Additionally. the staffing of tap posts by host- country nationals is observed to be higher in EurOpe where more de-nationalized foreign managers are to be found -- much more on this point later. 140 shown in the Census data is the fact that the proportion of Americans in the very tOp "key" positions (A.B. as defined earlier) is much higher and has changed relatively little over previous years. The reason that the aggregative data from the 1966 Census do not reveal this point is again due to the lack of functional definitions of management. Also. the Census data is for the entire direct investment universe and not just for the leading multinational OligOpOlies.22 . In case studies where attention is focused On the mature multinational oligopolies. with interviews conducted within the context of carefully constructed definitions of managerial functions. very different results emerge. An outstanding study by C. E. Watson has produced such results.23 His sur- vey covered the manpower policies of 45 large U.S.-owned sub- sidiaries in Brazil covering the years 1950 to 1970. It was found that as late as 1970 fully 35% of the top level (his definition -- 'similar to Shearer's) management positions were still held by Americans at the subsidiary level. This is in sharp contrast to the Census' aggregate percentages for all DFI in Brazil (7%). This is not far below Shearer's estimate for Brazil in 1956 (63%)- 22As pointed out earlier. non-OligOpOlistic. small. non- integrated firms with DFI tend to pursue different manpower pOlicies. due to. among other things. the absence of a global 8trategy like that held by the dominate multinational OligOpO- lbes. The inclusion to such firms in the survey distorts the Picture for the oligopolistic multinationals. 23C. E. Watson. "Staffing Management Positions in U.S.- 0wlaced Business Enterprise in Brazil." 1970 (mimeograph). p. 10. 141 Likewise. the results of the study by McMillian and Gonzalez. conducted at approximately the same time that the Census was being taken for Latin America. produced results that are at variance with the Census data. As was revealed in their sample. most key posts were still manned by Americans at that time . The data from my Indian survey also show that the top posts in foreign firms in India was running at about 65% in this later period. Thoughthe Census results for India are not yet available. they will doubtless again be at variance with the more careful. disaggregated studies. Likewise. B. K. Skinner found in a comprehensive study of thirteen large corporations with manufacturingoperations in six developing nations. that they still staffed most "key" posts with Americans and had no intentions of doing otherwise in the foreseeable future.24 Thus. while American firms are staffing many more sub- ordinate management positions in their subsidiaries with host-country nationals. the staffing of "key" posts (especial- ly those posts associated with the first five functional areas defined by Shearer and myself) continues to be heavily , American.25‘ Several studies done by A. Kapoor and S. Resnick of the. operations of American firms in.Asia revealed. among other 2d“Skinner. American Industry in_Qeveloping Economies. 25Also. these men, according to Skinner. tend to be "in- side" men who have been employed by the parent firm in the source country for some time. 142 things. that staffing of most Level I positions in Asia (India. the Philippines and Malasia) still tends to be dis- prOportionately American as late as 1969. Both economists also have noted an interesting trend toward "regionalization" in the Asian operations of many American firms. In particular. Singapore has become an Asian regional headquarters in much the same fashion as Brussels in Europe. An increase in Asians hired for some Level I posts at the subsidiary level was evi- dent in recent years, but again. the powers of the post were downgraded and control centralized in the hands of an Ameri- can management cadre in Singapore. Kapoor cited evidence that newly appointed host-country Asian managers were becoming increasingly frustrated with having to file weekly reports with the regional and head Offices and seek their approval 26 on the most menial matters. Much the same results was found 26The evidence cited above (most in unpublished form) was obtained in the course Of their personal experience in Asia. and related to me in lengthy conversations on such. Kapoor. in particular. discussed with me the results of tapings of high-level strategy meetings on.Asian operations of multi- national firms. in which he was in attendance as a consultant. Though all of the detailed material on the tapes was of a con- fidential nature. I was able to obtain condensations which led to the conclusions mentioned above. The knowledge obtained from these tapes and from questionnaire surveys of management hiring and training practices by U.S. firms resulted in a num- ber of publications. not directly related to this thesis. but nevertheless interesting. See Ashok Kapoor. Managing Inter- national Markets (Darwin Press. 1971): International Business Negotiations: A Study in India (New York: N.Y.U. Press. f675). "Business-Government Relations Become Respectable" Columbia Journal of World Business (July-August 1970). and P. Grub. ed.. The Multinational Enterprise in Tpggsition (Darwin Press. Princeton. N.J.. i 72 . Professor Kapoor has asked. in the in- terest Of maintaining his contacts and trust within these firms. that I not present detailed data on these matters relating to my thesis. More conclusions from summary condensations of Kapoor's work are employed in the analysis of the following two sections. 143 in Latin America by P. R. Cateora.27 He found (where govern- ment-initiated domestication of Level III-AB management posts forced U.S. multinationals to substitute host-country nationals in management positions once manned by expatriates) that even capable host-country personnel in formerly key positions were not permitted to participate in major decisions. Such indi- viduals were not given reSponsibility equal to their positions and decision-making reverted to the head office in the U.S. They were treated and felt much like one vice-president of an American subsidiary who noted to Cateora that "I am Just a front office national not too different from the front office ‘ black employed by U.S. firms domestically."28 Thus. while manpower policy has changed over the last two decades. the basic strategy has remained intact. i.e. the concentration of real power has in many cases remained in the hands of head-office oriented source-country nationals. A number of recent pOpular writers on the general be- ~havior of the multinational firm concur. In a recent study of trends in U.S. multinationalism. S. Rose of Fortune maga- zine concludes: 27P. R. Cateora. "The Multinational Enterprise and Nationalism". M.S.U. Business Topics (M.S.U. Spring 1971). 28One way U.S. firms have reduced the "American presence" abroad is by the employment of "third country" nationals in key posts. especially in Latin.America and Asia. This prac- tice leads to results more consistent with the global strate- gies of the firm as will be discussed in detail in the follow- ing sections. For evidence on the hiring of third country nationals. see Kapoor. Business_;gternational (issue cited earlier). and Simmonds. __ 1H4 "Few companies are ready to go very far toward achieving international integration in their management. with executive responsibility throughout the corporate system assigned with- out regard to nationality. Most multinational corporations employ local citizens in lower rungs of management in their foreign subsidi- aries: often they are required by law to do so. But when it comes to tap Jobs in the subsidiaries. the picture is mixed...Even those companies that have been somewhat successful in training and pro- moting local managers find it almost impossible to take the next step -- moving the local manager into corporate headquarters positions." On the latter point. Rose continues: "Yet. as has been noted. many multinational com- panies are moving toward greater centralization of control. If the trend continues. the tOp man in the subsidiary will be less a manager than a 'national representative' of the company. And while companies will no doubt continue to insist that the door to corporate headquarters is open to foreigners. few will actually cross the threshold." John Thaokray. writing on the topic of multinationalism in Interplay. says: "There are two broad classes of managers in the large international company. One is the national of the parent company. working either somewhere in the domestic Operations. abroad. or at head- quarters. The second is the indigenous executive manning the foreign outpost. The existence of these two unequal classes is seldom mentioned by the persons involved: and when admitted. it is , softly. softly. Corporate ideology declares that’ all men have equal Opportunity for advancement and success -- every toiling executive has the president's slide rule or the president's name- plate somewhere in the drawers of his desk. "There are good and sufficient reasons as to why there should be these two classes of execu- tives. But their existence presents a serious impediment to the creation of a managerial struc- ture and an executive corps in multinational companies that can be. in the fullest sense. 298. Rose. "The Rewarding Strategies of Multinationalism." Fortune. September 15. 19oo. 145 internationalist -- where the significance of a man's nationality might be no more im- portant than the color of his tie or the style of his shoes. Because of these two classes. we may never see what would be the acid test of managerial multinationalism: an Italisn as president of an American-owned multinational. for example. or a Latin American running a Dutch-owned_multinational." With reSpect to operations in the LDC's in particular. two manpower economists. Harbison and Myers. have noted that even when lower-level national managers were hired. "...their (local nationals in management) op- portunity for advancement within the foreign firm is limited. The top positions are usually held by foreigners. and the control of the company lies outside the country. The local nationals. therefore. must resigned to being agents of the expatriates." 1 In a discussion with two managerial employees in Egypt. one from a chemical firm and one from a petroleum company. Harbison and Myers found that: "They considered themselves as members of management. but in this regard were conscious of their role as "second class citizens" when 2 it came to making top-level company decisions."3 Summary Statement In the next chapter it will be argued that the high- level manpower policies of the multinational have evolved dialectically in accordance with the nature of the macrocosm 30John Thackray. "Not so Multinational. After All." Interplay. November 1968. p. 23. (This article was part of a symposium under the general title. "The Multinational Corpo- ration.") 31Harbison and Myers. p. 381. 321bid.. p. 389. 146 within which they Operated in various time frames. The Oh- Jective of the firm has always been that of maintaining con- trol within the context of their objective functions in all periods. The tactics of contrOl through manpower policy have changed in the last twenty years but still the manpower vari- ables figure importantly in the strategy of cOntrol. Furthermore (based upon the desire Of the firm for con- trol and security). it is advanced that early firm manpower tactics represent two behavioral aspects. Firstly. they were in part "optimal" firm tactics in the "first best" sense: i.e. they represented the'most efficient (from the long-run stra- tegic point of view) tactics that the firm could follow in a relatively "frictionless" universe. in pursuit of their high- est order maximanda. Under later market conditions incorpo- rating varying degrees of friction (i.e.. host-country governmental pressure. the rising cOst of maintaining expatri- ate personnel abroad. etc.) the firm moved in later periods to "secOnd best" tactics in pursuit of the same maximanda. Secondly. tactical choice was influenced through time by the very process of "maturing" as;a multinational entity (call it a "learning" process if you like). Many such tactical changes. were the result of more sophisticated global planning and control. Both Of these aspects ("second best" and "maturity") are discussed in more detail in the next chapter. Before em- barking upon that analysis. however. the "conventional wisdom" Of neo-classical marginal productivity theory is applied to the manpower policies of multinational firms to see how it fares as an explan . TABLES CHAPTER 1V 147 TABLE IV-l U.S. BUSINESS INVESTMENTS IN FOREiGN COUNTRIES EMPLOYMENT ABROAD BY TYPE AND COUNTRY. 1957 (THOUSANDS OF PERSONS) Supervisory. Professional and Technical Sent from Area and Total United Country Reported Total States Other All areas. total 1.942 178 14 164 Canada 441 35 1 34 Iatin American 557 43 .8 ‘ 35 Republics. total Western Hemisphere 21 2 1 2 Dependencies Europe. total 638 62 1 61 Africa. total 75 16 - 16 Asia. total , 130 9 2 7 Oceania. total . 74 9 - ' 9 International . 6 - - - 148 TABLE VI-1 (Cont'd) Other Sent From Area and United Unallo- Estimated Country Total States Other cated Grand Total" All areas. total 1.251 5 1.246 498 3.200 Canada 241 1 '239 149 670 Iatin American Republica. total 400 1 399 119 950 Western Hemisphere 17 - 17 2 4O Dependencies EurOpe. total 413 - 413 158 1.080 Africa. total 44 - 44 15 100 Asia. total 88 2 86 32 240 Oceania. total 46 - 46 20 100 International 3 - 3 3 20 *Estimate based on country by industry data on wage payments by reporting and non-reporting companies. Employment data were supplied on a voluntary basis. NOTE: Total employment is given as an average for the year: breakdowns are given as of the end of the year. U. S. Department of Commerce. U. S. Business Invest- ment in Foreign Countries. 1953. p. 122. Source: 149 TABLE IV-2 MANPOWER POLICIES OF U.S. MULTINATIONAL FIRMS ABROAD (REPORTED BY 72 U.S. CORPORATIONS. 1959) r—v Number Of General Use of Americans Abroad Companies On Board of Directors 43 President Or General Manager 24b Vice President Or Manager 13b. Department Head . 7b All others than noted above native to host country 23b Natives of host country to fullest extent feasible 35 Natives 100 percent 18 NO reply 4 8‘Most companies did not indicate whether Americans were or were not on the boards abroad. bSome of these are the same companies. having one or two tOp-management peOple from the States and "all Others" native inhabitants. Source: University Of Oregon Foreign Investment Questionnaire. See Behrman. .seaanom com .ouauag0aamosc unusuao>sH swdoaom cowoao ao hudmuobdn: "coupon a ma ma ma ma . o Na o NH o u o a ca guess N oa goes: a oa None: N ca guess a oeuoa n canon eoaoaopoa N ooanoo N coaunm m ooa m ooa mung Nosuo an an mm mm 0N o a” o NH o e o 0 ON H065 ca ca nouns ea mN amen: o “N page: ca oeuoN N ounce : omumN a canoe m oeuom N cod 0 ooanme ma coauom ma coauom «caeuee sauna m, mm mm mm uml 1 a o eN o eN o e o m 3 Sea: a 8 goes: N on .328 a N 93:: a on u w neumN N on m canon a co” m coaume unease uoacuaaoo ceaouom uoaaoaaoo .uawz medscaaoo anemone: noassaaoo muouoeaun sodwom 533a $3.3." .33: Sachem 53:3 Sat... 90 .02 90 .02 90 .0 MO .02 .mmcaazmomumc ammulmzmHm A¢ZOH9¢ZHBADE .m.= L0 mmHmHebomxm wmx mo mHmeMNHBHo oI>H mqmdfi 154 TABLE IV-7 CITIZENSHIP OF KEY EXECUTIVES IN THE 19 "COMBINATION" COMPANIES I 19 "Combination" ~ Approach Cos 3 Citizenship of Number of Key Percent Key Executives Executives of Total Brazil American 63 74.1 Other non-national 10 11.8 National _1_2 .4...“ Total: 85 100.0 Mexico American 55 84.6 Other non-national 4 6.2 National __§ ....2a2 Toml: 65 10000 aThese 19 "combination" corporations Operate 17 subsidiaries in Brazil and 14 in Mexico. Source: J. C. Shearer. "High Level Manpower in Overseas Subsidiaries-Experience in Brazil and Mexico." (Princeton Univ.. 1960). Princeton. Industrial Relations Section. 155 .Noaa ecu «cad .ocaa you canaaaapa no: ea u\occ.n .nm mcaeooeuo nanossaoao aHnusoI «one» wnubaooea noofiOAa-fi an» ac asasean nozuusm .uenuseo ace” aoaN-\ooo.N .nm on as manuasaoao Sensuo- Heuou waubdcooa monaOHAIe MO uoobuop :« uouooaaoo no: we scape-housm Heeeoeea ecu peonaoao>oo Hedgeuseea No gunman“: .«SHOD to: I ovflhfi unavflH 90 aflvlflhubbu «mouse» and. adv .m.z .aoaueueasaoa Adena so was eloeaH no usoahsa Iona oouasowo one on: nasaodazeo» snouuaaonu awuoaou mauusaewmr .25 sen.” Non.e moo mNe amn.N med Noo.e oapuaanpa.»oz ace“ enn.a ema.aN NNo.a we: nNm «ea.N cad one.e mNa aaa.ha coma naN.N eco.aN Neo.a Ham ace new.” amN ecc.n nma cam.ea ace“ mmo.N naN.na .omn mnN eao.a Nam.” oNe mem.m eon mac.na coma sac.m Ncm.oa an» NNN oNN.a mem.a mam mac.m 3N: Nae.aa mama una.m eNn.mH man no” NmN.a Hoe.” awn cam.N on: nmc.ca zoo” oem.m ame.Na eNe nma :62.“ mm» eon mma.N 0mm MAN.a mead ace.e mmm.aa -.mNN.N New coo." mam.” NNN eco.m Nee" eon.e oNN.oa naa.N one mea.a nme.a «mm eea.e «can aow.e maa.a .-NAN.N new man." cmm.a oea.a mma.e can“ 2:: e5 2:3 a: «:3 an as: e5 2835 as: e5 2:: EH 33 an as: e5 2.3 e5 :95... euaoz Inez usmm I Inez usoz and so ad Hence coon .nm «sane. coon .nmnaoom,.nm coon1.mmnacoN .um ccoN .nmuccca .am mmDOmU Nm4uH mqm¢fi 156 TA BLE IV-9 BREAKUP OF THE NUMBER OF INDIANS AND NON-INDIANS EMPLOYED BY FOREIGN OWNED/CONTROLLED FIRMS BY SALARY-GROUPS.AND NATURE OF JOB(I.E. MANAGERIAL OR TECHNICAL) As on 1/1/1968 As on 1/1/1969 R8. ZOOI-Rs, 2000 Indians: Managerial 2.787 2.875 Technical 1.623 1.787 Non-Indians: Managerial 131 137 Technical 65 36 Re. 3001'33: 5000 Indians: Managerial 1.541 1.770 Technical 620 767 Non-Indians: Managerial 385 322 Technical 143 103 .Aque Rs. 5000 5 Indians: Managerial 357 461 Technical 118 142 N on-Ind ians: Managerial 778 714 Technical 249 232 Total of above salary-groups Indians: Managerial 4.685‘ 5.106 . Technical 2.361 2.696 Non-Indians:* Managerial 1.294 1.173 Technical 457 371 *Excluding foreign short-term technicians who are exempted from payment of incane tax. ' N.B. Breakup by nature of Job is not readily available for earlier period. Source: Government of India: Ministry Of Industrial DevelOp- ment and Internal Trade - New Delhi. 157 TABLE IV-10 .EMPLDEMENT AND PAYROLL COSTS OF U.S. AND FOREIGN EMPLOYEES IN 1966 BY U.S. MANUFACTURING AND PETROLEUM REPORTERS' MAJORITY-OWNED FOREIGN AFFILIATES Total Manufacturing Petroleum Total Number of 3.342.368 3.011.400 330.978 Employees Abroad Number or U.S. 18.007 10.634 7.436 Employees Wage Earners 986 948 38 Managerial 9.000 5.840 2.259 Technical and Other 8.984 3.845 5.139 Number of Foreign 3.324.321 3.000.779 323.542 Employees Wage Earners 2.048.497 1.913.636 134.861 Managerial 136.263 122.956 13.307 Technical and Other 1.139.561 964.187 175.374 Payroll Costs of 12.324 10.681 1.643 Employees (millions of dollars) Average Payroll Costs 3.68? 3.547 “.965 per Employees (dollars) Source: U.S. Department Of Commerce. Census Of Foreign Investment. 1966 (Advance Report) 158 ..Ooaoaaoo no uncapamaoo .m.= use cums I moduoad_:audq how Haocaoo «coasom .esnzmm one «amendedz .mensusom .uoeebaem Hm meesaonHo .3335 agnofioz. ecu gauge was owflos ecu 33:29 .335e .3328 .33 .2333 5822.88 333:? .Aoadso you huumsund nuance on» ..o.dv mcacda oesflocu no: 08 mensmumm 3 3 non ow 3 032.5 H.828 ~38 N: 3 Sm mi , 3” 3523 533qu we «2 mmo£ 8m a? 63.5.5; N m I now; m9 oi 53min aw an a~e.e oma.« om“ snow emu new mmm.- mam.m oon.~ ooauo: « m in 3 mm 33395 a a ml: 3 om 8am 386 S 3 ~36 mofim mam «Ea—38 H m a mmm . H New ofl «.35 new con. «3.6m men .a olefin Sues mm «9 8H .mm 3n .1. Soé «:35»: So omm mnmJoH www.mm $03 H33. .Sdumi :33 Hesoaeuouoam Hedaomesez aozpo Hesodmmouoam Heaauwucm: 23 325.39 mm. H8353. noouoamsm .m.p mochmaasm Heooq L + Adfidd Omemohadv HmBZDOU m0hH mqmey CHAPTER V “N fiNALYSIS OF MULTINATIONAL CORPORATE RERQVIOR IN HOST-COUNTRY HIGH-LEVEL MANPOWER MARKETS The Neo-Classical Model Given the evidence cited in the previous chapter. how is such behavior accounted for? Firstly. the problem will be analyzed within the context of the conventional neo-clas- sical labor market model (marginal productivity theory of input demand) to determine its usefulness in explaining the phenomenon.- We will concentrate our attention on the firm's reluctance to hire host-country managers for the top positions in the subsidiaries abroad. Attention is directed primarily to manpower policies in the LDC's. If we limit our analysis to the traditional. single- obJective. profit maximizing firm. two possible explanations emerge: (1) if the productivity of both source-country high- level manpower and host-country high-level manpower is the same. but their unit costs to the firm differ. the firm will prefer (in the interest of profit maximization) to hire that manpower that has the lowest unit cost (since at the lower wage rate. the marginal cost of production is lower for every level of output). Thus. the firm's preference for source- country managers could be explained by their lower unit costs; (2) if the unit cost of host-country managers is less than that of source-country managers. but their productivity is also much lower. the expressed preference for source-country manpower is presumably explained by their superior competence 160 161 in applying the firm's superior knowledge more efficiently (i.e.. the difference in wage rates is Just offset. or more. than offset. by differences in productivity).1 Neither of these explanations is completely satisfactory. Shearer (cited earlier) is quite explicit on both of the above points. First. all available evidence indicates that the costs of source-country high-level manpower are signi- ficantly greater than that of host-country high-level manpower. He notes that the costs to the firm of employing imported (source-country) manpower far exceed those of employing com- parable domestic (host-country) manpower in the same positions. Although the cost differentials vary among industries. finms. and among the various levels of high-level manpOwer. they are considerable in all cases. even in the top ranks of manage- ment. Wages and salaries are much higher for imported manpower (given the generally higher salary levels in the U.S.. the average salaries paid Americans are two to three times higher than those paid nationals for the same work performed) than for comparable domestic managers. but this is only part of _ the "price" (recurrent direct cost) of imported manpower. When special allowances (foreign service. housing. education. etc.) are included. conservative estimates indicate that the prices of imported high-level manpower resources are. on the average. about 3235 times the prices of comparable domestic manpower. Omitted from the comparative estimates are the 1For a thorough discussion of the profit maximizing firm's reaction to differential factor unit costs. see Fergu- son. Microeconomic Theory. pp. 357-415. 162 initial costs incurred in sending the source-country national abroad and the recurrent organization costs of planning and administering the complex prOgrams for the compensation of overseas personnel. Shearer estimates that when these costs are included. the cost of imported manpower is perhaps eight times that of domestic resources.2 Additionally. there is little evidence to support the preposition that source-country high-level manpower is. pg; g3. more productive or efficient than comparable host-country high-level manpower (at least not so much more productive as to Justify its heavy use. given the muchless expensive. sub- stitutible. host-country manpower). Indeed. as Shearer points out. there is much evidence that indicates the contrary. Host-country managers are often as much. or in some cases. 2252 productive than their imported counterparts. or. would be. given the Opportunity to demonstrate their talents. Shearer (whose study represents the most thorough exa- mination of comparative performance) is again explicit on this point. He notes that the heavy use of expensive imported Vmanpower can be Justified by economic criteria only if its value to the firm is far in excess of the value of the rela- tively cheaper domestic resources. Thus. if we consider 2Shearer. pp. 38-50. Various wage surveys by Business international also confirm that costs run much higher for ex- patriate personnel in EurOpe and Japan. See Business Inter- national no's 36. 40. 41. McMillian and Gonzalez also find the same results for Brazil. as does Skinner in his survey of thir- teen firms in six developing nations. Also see The Wall Street Journal. Mon.. January 8. 1973. "Austerity Abroad." which gives additional information for Europe. 163 source-country and host-country high-level manpower as sub- stitutible (but not perfectly so) factors of production. a firm would achieve an Optimal combination of these inputs at the point where the marginal revenue product of each factor Just equals its marginal cost. As Shearer notes. given the observed ratio of national to non-national employment. and the (much greater cost of employing an additional unit ofnon- national manpower. the value of additional non-national manpower to the firm must be considerably higher than that of the national. who would otherwise have been employed. Otherwise. the firm would not have achieved an Optimal combdnation of inputs or minimized the cost of any given output. Though Shearer admits that his study does not measure precisely. the difference in the quality of imported and domestic manpower. its findings do suggest that the great majority of firms studied employ a far higher proportion of relatively more expensive source-country managers than can be Justified by any quality of productivity advantage these individuals may have over the relatively less expensive nationals that could be substituted for them. This is especially so given the demonstrated competence (in the relatively few small. 100% "national" companies) of nationals to handle any type of overseas post.3 3FOr the evidence on these points. see Shearer. . pp. 51-132. P. R. Cateora (cited earlier) notes that the host-country manager is often very capable (in Latin America) but is simply not given responsibility in keeping with that capability. The same point is made by Kidron for India. Likewise. B. F. Skinner found that many capable Host-country managers ifi'IDCTE'WEPE—available to firms in his sample but were not "trusted" by the expatriates or home office due to their "peculiar. un-Western" approaches in some areas of 164 It is often alleged by home office executives that they would like to employ a greater number of host-country managers. but cannot. due to a "shortage" of such qualified personnel. Here. again. the evidence from Shearer's work (and from other sources) suggests that the "shortages" con- fronting multinational firms are due much less to market scar- cities than to the firm's unwillingness and ineptness in re- cruiting. developing. and retaining competent host-country managers. In this case. Shearer suggests that the recruiting. training. and development costs for host-country manpower is less than that for comparable imported manpower. The evidence in the experience of the few "100% national" companies included in the sample supports this prOposition.4 Note that com- petent high-level manpower in the source-country. especially those with the necessary qualifications and desires for over- seas service. are likewise scarce. The firm's preference for imported manpower cannot then rest in the relative "abundance" of such manpower in source-countries or in the lower cost of recruiting. training. and develOping source-country personnel for service abroad. management. This suggests not a lack of productivity among LDC host-country managers. but a different cultural orienta- tion (that might well be apprOpriate for operations in their own country). The head office felt in.most cases. however. that increasing responsibility in the hands of such nationals would lead to "conflicts" with parent control (much more on this attitude later). “Shearer. p. 130. 165 B. F. Skinner makes the same point.5 In his study. American firms often have difficulty finding "acceptable" managers in the U.S. As noted previously. most come from "within" the firm and are in short supply. If recruiting is done outside. a long period of training within the firm (in both internal Operations and cultural attributes of the nation to which they are being sent) is required before the man is sent abroad. Evidence cited in Skinner also indicates that few firms have extensive training programs for LDC host- country managers abroad (training programs aimed at a level of management education required to assume full responsibility in subsidiary Operation). He notes that "Few management de- velopment prOgrams were encountered among 48 plants studied..." Those that once had them had discontinued them or cut them back severely due to "disappointing" results. Given the real "costs" to the multinational firm of pursuing the prevailing policies. 1.2;. their failure to uti- lize host-country high-level manpower resources; how is such behavior explained? Shearer notes that if cost minimization or profit maximization were the only considerations. the sizeable disequilibrium generated by the firm's use of far less than "optimal" prOportions of domestic manpower inputs would create great pressures. and an observable increase in "nationalization" of subsidiary management positions. Such. however. has not resulted. Shearer suggests that institution- al frictions provide the fundamental explanation of the 5B. F. Skinner. Chapter II. 166 persistence by the source-country firms in manning the high management posts with source-country imports. Specifically. Shearer postulates that Job "protection" is the most significant explanatory element. He writes: "Protection of their Jobs by overseas Americans seems to be the most significant obstacle to increased development and use of nationals. Overseas Americans are directly reSponsible for the develOpment of national manpower re- sources in the combination firms. but they can hardly be expected to undertake this vital task with enthusiasm when the ultimate result of their efforts would be their own displacement.5 In addition. according to Shearer. there is another element of "institutional friction" arising from the desire of home-office executives to facilitate their"communication" with overseas managers. Shearer notes that on the basis of interviews in home offices. there was some expressed pre- ference for having American managers abroad since home office executives find it more "convenient" to deal witthmericans than nationals. Shearer notes. however. that home offices may place an exaggerated value on this "convenience" because it makes their work easier. He further notes that it is un- likely that such "convenience" Justifies the heavy cost. Shearer's point on the "convenience" of communicating with Americans could be generally related to G. Becker's "discrimination" hypothesis (i.e.. employers have a "taste" for working only with certain social-national-cultural groups). While such a model may partially explain hiring practices abroad. it is here maintained that such would be only a éshearer. pp. 122-130 . 167 "special case" within the larger more general analytical framework employed here. In Appendix B of this chapter. the relationships between several of Becker's hypothesis (inclu- ding the one above) and the approaches adOpted for this analy- sis are discussed in detail. In another vein. Shearer's point on "Job protection" could relate to the previously discussed conflict between control and all other variables in the obJective function (see Chapter III). Specifically. the failure of source-country managers at Level III to develOp host-country manpower to replace them could arise out of the fear that if they were replaced and brought home. their salary and position within the firm would eventually decline since their salary abroad included elements for "rent" that would vanish if they were transferred back to positions in the head office. Again. in the context of this thesis. such behavior is taken to be a "special case."7 Other economists have viewed the causes of discrimination differently. In Hymer's analysis. the observed behavior of multinational firms in host-country high-level manpower mar- kets is entirely consistent with the dialectics of corporate multinationalism. and is a predictable pattern of behavior. given the tendency of the regime of "North Atlantic Multination- al Corporations" to produce a hierarchical division of labor 7The "rent" argument is also related to the argument of M. Reder that entrepreneurs (Level III source-country managers in this case) maximize their "own" obJective function. For a discussion of this point see Chapter III. 168 between geographical regions corresponding to the vertical division of labor within the firm.8 This behavior. accord- ing to Hymer's analysis. reduces the Options for develOpment in LDC's. An LDC wishing to invest heavily in education in order to increase its stock of human capital and raise stan- dards of living will be frustrated in its efforts if the multi- national corporation is depended upon as the maJor employer‘ of such capital. In a market system it (the LDC) would be able to find gainful employment for its citizens within its national boundaries by specializing in education intensive activity and selling its surplus abroad. However. within a multinational corporate system. the demand for high-level education may be limited. given the low ranking of such countries in the hierarchy. Thus. an outward shift in the supply curve of educated people will not create its own demand. Given the resultant low wages and lack of employment Opportunity. emigration of such individuals will occur.9 Even then. Hymer argues. the employment opportunities for LDC citizens outside the country are severaly limited by 8See S. Hymer. "The Multinational Corporation and the Law of uneven DevelOpment." 9Presumably what Hymer means in this case is that the firm's demand curve for high-level manpower within the LDC is highly inelastic or perfectly inelastic over the relevant ‘ range. Thus. an increase in the supply of high-level manpower reduces its wage and results in little or no increase in em- ployment. Evidence accumulated in the course of this study suggests. however. that such elasticities may vary from coun- try to country. depending upon the pressure put upon firms by host-country governments. the culture of the country and the availability of denationalized manpower. and the maturity of the control mechanism of the firm. This is discussed in greater detail in the next section. 169 discriminatory practices as they advance up the corporate hierarchy. In Hymer's view. these practices reflect the pre- ferences of Level I management for perSOnnel with a "common cultural heritage" in order to facilitate mutual understand- ing and ease of communication. Hymer's view of the need within the hierarchy for a "common cultural heritage" represents a hypothesis different from that of Shearer. In Hymer's total view such is necessary for facilitating control and growth of the direct investment process. It is interesting to note that in Shearer's survey. one reason often given for the firm's preference for source-country manpower at Level III was control (which he evaluated in only a cursory manner).10 With respect to the latter rationale. most executives interviewed asserted that the employment of "too few Americans" abroad would seriously harm company in- terests in that the ability of the home office to control its subsidiaries would be impaired. The primary reason given was that if nationals hold the key positions. there will be in- evitable conflict of interests and loyalties when the interest of the head office and the host country are Opposed. ‘ Other studies from the LDC's confirm Shearer's survey findings. McMillian and Gonzalez in their Brazilian study found that: "The chief defense for staffing the top management positions with Americans is a preference for company men as a means of 1oSee Shearer. pp. 67-72. 170 assuring parent firm control and maximum implementation of parent phiIOSOphy and strategy. Approximately 75 percent of the reSpondents to the author's survey indicated that the top management function of policy determination. interpretation. and plannhng were critical and were least susceptible to being turned over to Bra-, zilian employers. About half viewed financial management as critical in the same sense."11 The foregoing evidence points up the shortcomings of the conventional. single obJective-neo-classical labor market model in explaining the behavior of the multinational firm in the high-level manpower markets of host countries. As an alternative approach. the model develOped in this thesis. based generally upon a multiple obJective preference function for the firm. is applied to the problem to aid in a more com; prehensive understanding of firm behavior on this matter. The Multiple-Objective Model As discussed above. the prevailing attitude to emerge from the case studies cited was that the employment of host- country nationals abroad in "key" managerial posts (especial- ly in the LDC's) would seriously harm company interest in that the ability to control its subsidiaries would be impaired. The basic reasoning was that the employment ofhost-country nationals in too many "key" positions would lead to conflicts of interests when the strategies of the head office and the host country were different. In its purest form. this attit- tude reflects the desire of Level I management to impose 11McMillian and Gonzalez. pp. 99-100. 171 their preference function on all lower levels throughout the internationalcorporate hierarchy. Specifically. it reflects their desire for control. one of the elements in the corporate preference function specified previously. Why is such control desired? As discussed previously. those in power at Level I could seek to maximize the proba- bility that they will remain in complete control of all operations. for pecuniary or psychic reasons. i.e. Level I managers seek to fulfill their "own" obJectives. despite the effects of such on long-term corporate welfare.12 Thus the desire for control over Level II managers and Level III mana- gers could stem from the desire of Level I managers to enhance their own pecuniary or psychic income -- a behavior pattern that may be in conflict with the interests of the firm or stockholders. defined as profit. growth or security maximi- zation. While such an entrepreneurial obJective function may be defended. it nevertheless constitutes a "weak argument" fOr why the executives at Level I desire control. As dis- cussed in Chapter III. the desire for control on the part of Level I management need not conflict with the obJectives of stockholders or work against the overall standing of the firm. Such is not a "required" assumption in rationalizing the control motive. Indeed. it is more "reasonable" to assume that the interests of Level I management in maintaining control promotes the overall standing and growth rate of the 12See the discussion in Chapter III. pp.91-93 . See 172 firm in world markets. and that their own reward depends on the firm's market performance. How then does control contribute to the maximization of the corporate obJective function? It is here generally pos- tulated that control is desired in the interest of security. i.e. the control motive and the security motive are merged and operate generally in symbiosis. What enhances control insures the security of market and political position. Such security serves as a base from which continual high rates of growth (growth in total sales) in international markets may be pursued.13 The latter is the motive force behind the internationalization of capital through direct investment and represents the final stage of capitalist expansion which began with the Marshallian firm and ends with the multinational firm. When the foregoing hypothesis is applied to the behavior of the multinational firm in high-level manpower markets. such behavior is seen to be not at all "irrational" (even though it is not short-run cost-minimizing in the context of the simple single obJective preference function discussed earlier) or contrary to the best interests of the firm in terms of its overall market standing and growth. Control over Levels II and III management functions through control over Levels II and III managers is necessary in the interest of ”For a defense of total sales as an appropriate mea- sure of the size and growth of multinational firms see: R. Rowthorn. International Big Business 1252-126 Z (Cambridge Univ. Press. 173 security at both the political and market levels. Histori- cally. firms have pursued a strategy based on the notion that such control is augmented when source-country personnel fill "key" Level II and III positions. despite their high per-unit costs. It should also be noted that such control can also be secured through reserving only the bare minimum critical "functions" for source-country personnel either on-site at Level III. or at regional headquarters. The latter scheme of regionalizing critical control functions will be discussed in the main body of this section. It is appropriate to again re- mind the reader that the analysis here is historical in nature. Thus we proceed from early high-level manpower policies (with source-country personnel in virtually all Level III management positions) to policies that reflect a dual set of pressures on the firm. One set of such pressures arise out of the pro- cess of each firm maturing as a true multinational entity (reflected in an aforementioned "regionalization" trend) and lead to more s0phisticated control mechanisms at all levels and thus to the hiring of greater numbers of host-country managers (which does allow the firm to reduce the high cost of control associated with the exclusive use of source-country managers). Another set of pressures arise at a political level When host-country governments impose hiring constraints on the firm. The firm's manpower policy then becomes altered to contend with these constraints on a level that will still in- SUre a satisfactory "critical minimum" degree of control. Thus the altered manpower policy becomes a "second-best" policy 17L» that the firm is forced by the host—country to adopt. 30th of the above points are discussed in their prOper context in later sections of this chapter. The postulate that control enhances security is. at this point. a completely general one. To give the postulate de- tailed analytical substance. the following examples of the relationships between manpower policy. control. and security are presented. The analysis is executedflrst on the LDC level and then the DC level. in each case. The two examples which follow are treated separately. but are nonetheless interrelated. The two concern. on the one hand. firm-governmental relationships with focus on purely political elements. and on the other. purely market relation- ships between multinational firms 23; fig: between such firms and host-country firms (actual and potential entrants): and between such firms and state-owned firms in the host countries. The nature of the interrelationships between the two areas of conflict is discussed in the section which follows their separate treatments. Firm-Governmental Relationships The evidence on the historical conflicts between firms and governments in LDC's and the manpower policy which has resulted directly therefrom is everywhere evident in the case study literature. Shearer (cited earlier) has noted. in his landmark study. that the reason most often cited for the firms' pre- ference for source-country manpower in key positions lay in 175 the possible conflicts of loyalties that would develOp when the interest of the firm and host country differed. Specifi- cally. he noted that in most combination companies (at both the home office and subsidiary levels) the foremost rationali- zations for Opposition to further staffing of high-level posi- tions by nationals were: (1) national conflicts of loyalties to country and company; (2) nationals not being "company" men: (3) general national "character" weaknesses (lack of "commer- cial morality").1u The first two of these three points are related to Shearer's findings on the most often cited comment by executives of the nineteen "combination" companies: "If nationals hold key positions. there are in- evitable conflicts of loyalties when the interest of the company and the host country are opposed."15 l 1L""Combination" companies are. by Shearer's definition. companies that employ both nationals and non-nationals in management positions. 1SShearer. p. 69. Shearer believes that this argument is based on the fear of such conflict. rather than upon actual ex- perience. However. the issue here is the preference of the figm. not a test of its reasonableness. Shearer notes that in this specific connection. seven of the nineteen combination com- panies that so responded specifically "reserved" certain key posts in both Brazil and Mexico for Americans (or in the words of many. "Anglo Saxons"). In each case the General manager- ship and in most others the tOp financial posts and the tOp engineering and technical posts were "reserved". In addition. Shearer notes that in the eight firms that did not specifically state that positions were "reserved" for Americans (which Shearer notes implies upper limits on the willingness to na- tionalize) the representatives indicated that Americans were needed for control purposes "for the present". Shearer points out that in their firms. the practices with respect to utili- zation of Americans for control are "indistinguishable" from those companies that "reserve" positions. All employ Ameri- cans in the same positions for the same reasons. For more de- tailed breakdown of the extensive use of Americans in control and non-control positions see Shearer. pp. 66-71. 176 Shearer found this attitude to be uniformly held among executives interviewed both at the head office level and at the subsidiary level for virtually all of the combination companies. The argument that "company men" were required in key posts always implied that such men were necessarily Ameri- cans. This argument was often combined with the aside that nationals were not possessed of requisite "commercial moral- ity" (i;g;. capable of placing company before country). Professor A. Kapoor (cited earlier) found similar dis- trust of host-country nationals in his survey research on the same topic in Latin America and South.Asia. He concluded: "The nationality of company representa- tives interacting with the government. whether they are employees or outsiders. is a critical consideration. Companies are concerned that key company representatives. especially-the general manager. may be placed in the position of having to make decisions in which the in- terest of the host government and the company are in conflict. The host-country national would be placed in a vulnerable position because of divided loyalties. Often the importance of loyalty conflicts is related to the degree of capital intensity or exposure of an investment. Thus. the greater the amount of money at stake. the greater is the likelihood that host-country nationals will not occupy top management posi- tions at the host-country level."1 As Kapoor points out (based on his survey research and on information obtained through personal contacts as a consul- tant to multinational firms). such attitudes have arisen part- ly out out of the serious political conflicts existing between 16A. Kapoor. Business-Government Relationshi s. p. 31. In this context Kapoor notes that government relations are most often handled by the general manager. He notes (on the basis of his research) that over 50% of the manager's time is devoted to interaction with the host government. For further citation from Kapoor's work see Chapter IV (this work). 177 host governments and foreign investors. and out of strong subJective and emotional feelings between the investor and the government (blind ethnocentricity on the part of the in- vesting firm). In both cases. the result was a general dis- trust of Third World nationals which resulted in "political" manpower policies at Level III. In the study by McMillian and Gonzalez cited earlier. similar results were found. In their survey of 47 firms. which accounted for well over 70 percent of total U.S. foreign investment in Brazil. they found similar behavior patterns and reasoning to support them. They found that virtually all of the surveyed 47 firms staffed their tOp "key" positions in the subsidiaries with Americans. Thus they state: "Contrary to common feeling among many Americans. as well as Latin Americans. the greater reliance on U.S. citizens in top manage- ment positions. particularly on "company men". is not an arbitrary or capricious practice. It is the manifestation of a policy which. whether right or wrong. is employed intentionally by most parent organizations. in spite of its obvious disadvantages."17 They go on to say: "In the subsidiary. the identity of the U.S. parent is evident in other ways: basic or- ganization and operational characteristics of the parent firm in the United States are reflected. Although policies and practices vary from firm to firm. most business organizations adOpt. at the top managerial levels and in all their diverse Operations. modus operandi. implemented more or less uniformly at all"levels. Consistency of or- ganizational behavior is brought about partially through formal and informal communication of po- licies. rules. and procedures. But mostly it is 17McMillian and Gonzalez. p. 69. 178 brought about through staffing. By choosing the company man as Operating chief of a foreign subsidiary. parent firm tOp management can more nearly guarantee that the Operations of the subsidiary will be compatible with the overall managerial philOSOphy and Operational strategy of the company. and that unequivocal understanding between parent and subsidiary will be facilitated."18 The central rationale behind such manpower policies at the highest level is attributed. in large part. to the desire to avoid "conflict of interest problems" between the firm and the host country. and to insure that "company policy" is ob- served at all levels in foreign Operations.19 On the vulnerable position the firm finds itself in if it staffs its high level positions with host-country nationals. they comment: 'These employees (Brazilian) have a unique and sometimes unpleasant re- lationship with the U.S. firm...they feel some measure of loyalty to the firm...yet. being Brazilians. they sometimes find themselves in the un- pleasant position Of defending that which is allegedly exploiting their country. If they are too vocal they. appear to be lackeys of the Americans or entreguistas. It is. especially at times when antiquerican feeling runs high. a particularly unpleasant role to play. Many Brazilian managerial employees of U.S. firms. in discussion with fellow Brazilians. find themselves defending the U.S. subsidiary for practices 18McMillian and Gonzalez. p. 72. 19McMillian and Gonzalez. p. 99. 179 resented by most Brazilians. while privately they. too. may share the 'resentment."20 Such schizophrenic motivations are at the root of many firms' fear that having host-country nationals in high level positions will lead to reduced effectiveness in Operations and bargaining with the host country. In conclusion. McMil- lian and Gonzalez state that despite the growing evidence on the growth of an international management cadre. the U.S. firm's Brazilian Operations are still led. at the summit of control. by Americans.21 They go on to note that (specifically with reference to Brazil and based on their survey research there) German. British. and French firms follow the same high level manpower policies as American firms surveyed -- i.e. manning "key" tOp level management positions with source-country personnel.22 McMillian and Gonzalez go on to discuss the nature of many of the political conflicts suggested above throughout their book. One point is clear. however: political uncertain- ties play a maJor role in the staffing of "key" management positions at Level III. In an important discussion. McMillian and Gonzalez dis- agree with Shearer's conclusions on the "rationality" of U.S. corporate high-level manpower policy abroad. Shearer maintains 201bid.. p. 96. 21McMillian and Gonzalez. p. 74. 22Ibid.. p. 105. Additionally. such staffing patterns were defended for the same reasons. 180 that the then prevalent practice of staffing all "key" (and many lower level) positions abroad with Americans was "ir- rational". i.e.. not in the best interest of the firm in terms of efficiency.23 McMillian and Gonzalez strongly disagree. Like the present author. they concede the excellent data gathering in Shearer's study. but maintain that. in the final analysis. he has misinterpreted his results. They maintain that the firm's use of their own nationals in key positions will likely continue since such staffing policies insure control and continued ease of execution of corporate head- quarters policy in a climate of political and market uncertainty.2” Skinner likewise disagrees with Shearer's interpretation of his survey data. He maintains that Shearer's conclusions do not appear to be "practical". He states that although Americans have no monopoly on "integrity" and "trustworthiness" prudence will require that the home office place the manage- ment of foreign operations in the hands of a man who is "sensi- tive" to company pressures and "background factors" of company policy. He makes it clear that such men are likely to be ‘ source-country nationals for many years to come. In his dis- cussion he emphasizes political factors. loyalty factors,and cultural factors (such as "Westernization") as important ele- ments in the makeup of a foreign manager. Again. the issue 23See Shearer. pp. 73-74. Shearer reached this conclusion on his own. Most of the firms interviewed were insistent that a basic cadre of Americans was needed abroad. 2“For details of their argument see McMillnan and Gon- zalez. pp. 100-106, 2230 181 is control in a climate of political and market uncertainty.25 Again both the arguments of_McMillian and Gonzalez and Skinner touch upon "political" elements. broadly defined. Kidron. in his study of foreign investments in India. reaches similar conclusions on firm-governmental-societal conflict. He notes that expatriate manpower in the subsidi- aries are better able to represent company interest due to their relative immunity from direct governmental pressures and their freedom from "distraction" of family and community. As noted in an earlier discussion of Kidron's work in this chapter. historically. all "key" managerial and technical posts in foreign subsidiaries have been filled with source-country or "third-country" personnel. Potential firm-governmental conflicts and the need for strict international coordination of firm policies lie at the heart of this policy. Kidron says: "With the big foreign firms actively pur- suing it. and the Associated Chamber of Commerce and Industry willing - since 1960 - to press its members to reserve for Indians all posts below RS 2.000 per month and three—fifths of posts in the HS 2-3.000 bracket. Indianization is bound to make further headway. Almost as certainly it will stOp short of complete staffing_py Indians. Even the most enthusiastic of managements with whom the matter was discussed expected to hold out for some expatriate staff for the foreseeable future: as few as three in some cases. as many as fifty in one. The fact is that the very conditions that give rise to pressures for Indianization - the trend towards controlled rupee companies. the grow- ing stringency of foreign exchange control. govern- ment pressure for exports. and so on - are precisely those which make Indianization at the very tOp embarrassing. It is not surprising. therefore. to find the Chairman of Unilever stressing the 25See Skinner. Chapters 9-10. Also see pp. 222-224; Chapter 12. Skinner bases his conclusions on survey infor- mation and his own experience as a "sympathetic" consultant to multinational firms. 182 selection and remuneration of top management tOgether. as one of the three controls which keep that vast company working coherently: or to find an empirical study of management in backward countries concluding that freedom of choice in staffing key pgsts is the sine qua non of private investment."2 Miguel S. Wionczek of the Center for Latin American Monetary Studies likewise concurs in the foregoing thesis. He states: "The secretiveness of foreign-owned cor- porations in the host countries is taken as supporting evidence for this thesis. It is said to explain also why in so many cases the highest executive posts are denied to the nationals of a host country. unless people can be found offering useful links to the economic policy makers of the host country or can be . considered 'true' company men.n27 This author. on interviews with the chief of Joint ven- ture operations of a large American electrical equipment firm. confirms the same trends and reasoning. Company policy was to always staff certain critical top positions in Joint ven- ture arrangements with "company" men from the head office. To the extent that the executive interviewed was aware. the same most certainly applied to direct investment by the com- pany. In both cases. an important reason for this position was to insure "political uniformity" between the head office and the subsidiary on Joint venture operation. The executive 26Kidron. p. 295. Much of Kidron's findings on high- level staffing policies is directly related to the issue of technolOgy transfer. This will be discussed in the next section. 27See Wionczek in Vernon. How Latin America Views the U.S. Investor. p. 18. 183 made it quite clear that the term "political uniformity" _(his term) was to be interpreted in the broadest sense of class (although he did not explicitly use that term). He cited cases where the company had tried host-country manpower in critical control areas. primarily with what he termed "po- litically disastrous results". He placed great emphasis on what he termed an "understanding of company policy" which he felt could only be truly understood by company men. In the case of Latin American Operations in particular. he made two points. The first concerned the volatile political cli- mate in Latin America and the need for "Americans to talk to there". and secondly. the exceptional case Of one host; country national in particular (he did not specify who or from what country) who had been entrusted with control re- sponsibility due to his thoroughly "Americanized" attitudes toward the company. He considered the manager in question to be "exceptional" and praised him for his "exceptional" attitude.28 What is involved in the reasoning discussed above is a realization on the part of Level I management that their 'Zaln certain cases. Harbison and Myers found that those local nationals actually hired were meticulous in their re- spect for the prerOgatives of the home office and the superior authority of the expatriates. One suspects that those host- country personnel actually employed are taken on only after careful screening on their political aspirations. philosophy. actual governmental influence. etc. "Qualified" individuals are thus likely to be. as the companies note. ver scarce. The subJect of "denationalized" manpower will e iscussed in greater detail in the section on high-level manpower policy in the developed countries (where the supply of such manpower is greater). 184 obJective function is different from that of the LDC. The extent to which host-country managers are politically loyal to the host country affects the bargaining position of the firm and thus its security. A firm has 22£.§2 no interest in general development goals and this is perhaps more pro- nounced in the development aspirations of the host country. It will strongly resist efforts to turn its operations into "development tools". Thus. if a host country manager is placed in a tOp position at Level III (or especially at Level II) the parent company is placed (or feels it is placed) in a precarious position if that manager is loyal or vulnerable to host-country pressures or has competing obJectives to pursue.29 It is important also to reOOgnize that the "loyalty" of the host-country manager could arise less out of genuine er- ggngl nationalistic motives than out of the real social con- straints placed upon such individuals. Such is likely to be the case where the rising tide of nationalism runs higheSt and where such individuals find themselves in publicly con- spicuous positions. Thus. the "survival" of the host—country 29For instance. the efforts of the multinational firm to avoid or relieve the burden of taxation in the LDC's. either through manipulation of transfer prices. or outright attempts at evasion. are seriously hampered by the presence of host- country nationals in high positions. The record of_tax evasion by multinational firms is a long and established one. See Kindleberger. Both Shearer and Harbison and Myers note that the top financial post in Operations abroad is held by source-country managers in order to facilitate home office control over this "vital" function. 185 manager within his own culture could require a critical mini- mum level of allegiance to the nation-state and culture of the hbst country. A complete exposition on the question of host-country manpower loyalty would require a complete socio-political class structure analysis for each LDC. Obviously such an ef- fort is far beyond the scOpe of this thesis. One fact is clear. however. The multinationals have perceived that there is a political risk associated with having such individuals in key. politically sensitive positions within the firm. The sources and nature of host-country manpower lOyalty are com- plex. One facet of such loyalty. the "social constraints" felt by indigenous managers. has already been discussed. Aside from "pure" political and/or cultural allegiance by host-country personnel. there is the separate issue of their class origin. If the LDC has a functioning indigenous bour- geousie. the "loyalty" of the native manager could have its roots in a desire to rise within the ranks of that ruling class within his own country. His position within the firm could be used to that end and embroil the firm in political _ struggles that they would prefer to avoid. Thus the "loyalty" of the host-country manager need not arise out of pure altru- ism but could arise out of his own power quest within his own society. In either case. the multinational firm would have to contend with conflicts of interest between Levels II and III managers and the corporate obJective function. Not surprisingly. the governments of LDC host countries seem to feel strongly that the staffing of key control 186 positions within foreign firms facilitates greater LDC con- trol over such firms. and increases the probability that such firms will at best not work against the national interest.30 Thus the multinationals are constantly reminded in their ne- gotiations with LDC governments of the central issues at stake. It is thus reasonable to conclude that the firms have felt that political risk in foreign operations (at least the immediate risk) is reduced when a source-country "company man" holds key positions in foreign subsidiaries and especially at regional coordinating levels. Thus the scarcity and con- trol variables have been important elements in manpower policy and planning on this level. Recent Trends The firm manpower policies discussed in the foregoing section and their rationalization in terms of avoiding loyal- ty conflict between subsidiary and head office appear to have been uniformly adopted by most multinationals as their in- ternational expansion through direct investment and Joint ven- tures accelerated. In recent years. manpower policies have changed to the extent that larger numbers of host-country nationals were 30The LDC governmental attitudes on this are strongly evidenced in "Panel on Foreign Investment in DevelOping Countries" (Report from Tokyo meeting. 1971) (Department of Economic and Social Affairs. United Nations. New York. 1972): and in Vernon. How Latin America Views the U.S. Investor.pp. 3-82. 187 hired by many firms. As pointed out in an earlier section. however. such does not reflect a change of firm strategy in control but only a change in tactics. These trends are re- lated to the "second best" and "maturity" factOrs discussed earlier. The high-level manpower policies of the firm have evolved dialectically in accordance with the nature of the macrOcosm within which they operated in various time frames. The obJective of the firm has always been to maintain control. however: (A) subJect to the constraints placed upon them by host-countries: and (B) within the context of their own growth processes as international entities. Thus. with respect to element (A). governmental con- straint elements. the firm has been forced to employ greater numbers of host-country managers by stricter host-government 'foreign investment regulations. Therefore what was once an optimal manpower policy in a more "frictionless" macrocosm gives way to "second best" tactics under the "frictions" im- posed by host-country governments. In the case of element (B). tactical choice has been influenced through time by the very process of the firm's maturing as a multinational entity (the aforementioned learn- ing process). In this case. the firms find means of minimi- zing the costs of control within the structure of a more mature international market stature: and reorganizes its planning and control mechanisms on a more sophisticated and appropriate level for this later stage of firm and market development. 188 The above changes and reactions by the multinational firm are reflected in two contemporary features of manpower policy. These two features (which reflect the firm coming to terms with both of the aforementioned elements): regionali- zation of control mechanisms and the use of "third country" nationals in foreign management positions were briefly men- tioned earlier. They are more extensively explored below. Also. the use of so-called "de-nationalized" manpower. and its relative supply. is also discussed along with the evidence on the continued use of source-country nationals in the very highest key posts abroad . Regionalization The phenomenon of regionalization. as mentioned earlier in this chapter. represents a more recent trend in inter- national control by the multinatiOnal firm. In part it is a reaction to political pressures at the individual country substdiary level and in part is symptomatic of the maturity process in control mentioned earlier. In either case. such develOpment leads to the establishment of a regional head- quarters for each maJor segment of the global market where control is concentrated in the hands of "key" source-country nationals at such points. These "reticulators" and "advisors" at the regional headquarter level serve as a new critical link between the source-country headquarter‘and the subsidiary. Such a restructuring leaves the firm free to staff the down- graded functional posts at the individual country subsidiary level with greater numbers of host-country nationals who 189 report to and take direct orders from the regional office. This allows the firm to come to terms with the dual problem of host-country restrictions on high-level management (re- ducing the American or source-country profile) and the rising costs of expatriate personnel maintained at the individual subsidiary level. At the same time. continued control is assured through the new regional authority patterns. Common authOrity patterns in such management systems are well outlined in C. R. Williams' survey analysis of the trend. He comments: "It would seem normal for the functions of a European regional management to vary with the characteristics of the particular company. its Operations. and its management. However. there are some common threads. For instance. most regional managements with line authority for EurOpean profit performance have review authority over capital budgets and Operating budgets. subJect to the approval and guidelines of the worldwide top management: direct line authority_over the appraisal1_promotion. and development of managers in the operating sub- sidlaries: coordinating authority over the mar- keting function. including product planning and other factors of Europe-wide importance: and line authority over production rationali- zation and specialization prOgrams. "In addition. regional offices can play an important role in developing recommendations for long-term corporate strategy. diversifi- cation. and financing. It is true that in a worldwide multinational company. the final de- cisions on the allocation of capital spending dollars. research planning. corporate financing policies. and diversification must reside in the senior management of the worldwide company. However. the implementation of these policies on a Europe-wide basis and the basic operating responsibility for fulfilling the budgetary. production. management development. and market- ing obJectives can be effectively delegated to regional management. Moreover. the regional management can serve as the principal source of recommendations, reflecting the European regional 190 point of view concerning worldwide corporate strategy. investment programs. and financing policies."31 Such firms as IBM. ITT. Dow Chemical. and Standard Oil of New Jersey have been in the forefront of establishing such new control systems since the early 1960's.32 As might be suspected. such develOpments in regional management systems have progressed further and at a faster rate in the older. develOped markets of EurOpe. Table ‘V-I portrays a sample of U.S. companies with re- gional management organizations in Europe. As noted there. Lon- don. Brussels. and Geneva are leading EurOpean headquarter cities. In all cases. as discussed previously. control at the regional headquarter level is concentrated in the hands of an elite cadre of source-country personnel with. in many cases. line authority over subsidiary managers and a degree of par- ticipation in high-level market strategy planning. Regional personnel regularly move among the subsidiaries. transmitting headquarters policy decisions and reviewing operating proce- dures. Within such management organization schemes. firm- governmental relationships are directed by the regional offices.:x3 310. R. WilliamS. p. 89. Further analysis on the nature of new global management systems are found in G. H. Clee and .A. d'Supio. "Creating a World Enterprise." Harvard Business Review. Feb. 1969: and in Business Week (specia issue on multinational firms). December I9. 1970. 328cc Williams. p. 87. 33For additional detail see Williams. Business Week. Clee and d'Supio. Also see R. Murray. "The Internalization of Capi- tal and the Nation-State" in J. Dunning. The Multinational .Enterprise (Praeger. New York. 1971). PP. 265-288. EXAMPLES OF U.S. MULTINATIONALS THAT HAVE REGIONAL MANAGEMENT ORGANIZATIONS Compapz Beckman Instruments Caterpillar Tractor Chrysler Colgate-Palmolive Corn Products Cummins Engine Dow Chemical DuPont Esso Petroleum Esso Chemical S.A. Hewlett-Packard IBM ITT Johnson's Wax Eli Lilly Mobil Oil Monsanto Pfizer ' Procter & Gamble U.S. Rubber Source: Williams. p. 191 TABLE V-I IN EUROPE Industgz Electronics Construction equipment Automobiles Cleaning products Processed foods Diesel engines Chemicals Chemicals Petroleum Chemicals Electronics Computers Electronics Cleaning products Drugs Petroleum Chemicals Drugs Cleaning products Rubber fabricating 90- Location Geneva Geneva Geneva London Brussels London Zurich Geneva London Brussels Geneva Paris Brussels London London London Brussels Brussels Brussels Geneva 192 There is some evidence that regional authority patterns have been developing (but on a less extensive scale) in the LDC market areas. Shearer notes an early but limited trend in this phenomenon in his important survey study of Brazil and Mexico. Five of the twenty-three organizations in Shearer's. study utilized regional organizations as intermediaries be- tween the parent corporation and the subsidiaries. In three of these five. the regional managers (all Americans) lived abroad and in the other two (also American staffed) the mana- gers (with staff support) spent about half their time in their geOgraphic areas.34 In all cases. Shearer notes. these companies (the larger. more mature international firms) suc- ceed in keeping fewer Americans abroad through the use of such regional organizations (in the fOrm. usually. of mana- gerial and technical "centers"). These regional managers were "reticulators" who regularly traveled among the subsi- diaries to enforce headquarters policy.35 Trends toward regionalization in LDC markets are also discussed by Kapoor. As cited earlier. he has indicated. on the basis of his survey research. that Singapore is rapidly becoming an Asian regional headquarter city for American mul- tinationals. Kapoor found that this process led to a marginal increase in Asians hired for management posts at the subsidi- ary level. but the powers of the posts were downgraded in the process and high-level strategic and decision-making control 3“See Shearer. pp. 26-27. 35Ib1d.. p. 131. 193 centralized in the hands of the American reticulator at the regional office. Again the trends toward regionalization are less advanced in the markets of the LDC's than in the develOped countries of EurOpe.36 This develOpment is most importantly due to the "maturity" element mentioned earlier. but is also due to the political environments in Western EurOpe which are generally more pro-capitalist in nature. This latter element is also related to the following discussion of two other recent de- velopments in high-level manpower policy. the expanded use of "third country" and "denationalized" host-country nationals. Third-Countgy Nationals and Denationalized Manpowgp One way in which U.S. firms have reduced the "American presence" abroad has been through the employment of "third- country" nationals in management positions at the subsidiary level. Such practices allow the firm to reduce the American "profile" and at the same time maintain a greater degree of control over subsidiary functioning by avoiding the "conflict of loyalty" problem inherent in a policy of extensive use of host-country nationals. Though most writers on the subJect agree that the afore- Inentioned trend is accelerating. especially in Europe. there is little "hard" data on the phenomenon. The lack of such crata is not surprising. since the firms are loathe to discuss 'what could be interpreted as a patently "political" manpower 36For evidence see Williams. and Clee and d'Supio. 19h policy. Some evidence is available. however. Kapoor in particular noted to the author that there was a marked in- crease in the use of "Cuban Exiles" (many with previous mana- gerial experience) in other Latin American countries. McMillian and Gonzalez have noted the rather widespread use of EurOpeans (primarily English. German. French) in managerial posts at the subsidiary level in LDC's (primarily in Latin America and Asia).37 Such policy certainly creates the im- pression of an "international management" team and reduces the appearance of "American" imperialism.35 Thus the staff- ing of key management posts with German. English or French nationals could tend to be regarded as less "threatening". American presence is even further reduced in third-country nationals from the same geOgraphic area (i.e. non-EurOpeans) can be employed. Much more research is needed in this par- ticular develOpment. tOgether with another Shearer-type comparative costs analysis of third-country v. source- country personnel.39 Related to the above trend is the issue of "de-national- ized" host-country manpower. In this instance, the multinational :Nfiee McMillian and Gonzalez. pp. 99-100. :y%ome scattered evidence is found in Skinner. American Industry in Developing Economies, as well as in Kidron. Foreign Investments in India. 3c’Some comparative data are found in the various issues of Business International cited earlier. On the basis of that sketchy evidence the costs of third-country manpower (appear to be somewhat lower. This suggests that the "cost of control" is reduced through the use of third-country nationals. 195 firms. have. to a limited extent. been able to staff certain managerial posts at the subsidiary level (all the way up to the general manager in some cases in Western Europe with host-country nationals who have, over a number of years. proven themselves to be thoroughly Westernized (to use Skinner's term) and re-educated into "company men". In almost all cases. based on available evidence. this practice is evolving very slowly. due to the great "gestation" period for such corporate "re-birth".40 As mentioned previously. the supply of such "special- ized" manpower has been greatest in the developed nations of Western EurOpe. McMillian and Gonzalez suggest this when they say: "In Europe the industrial mentality is prevalent. From youth to maturity. the average child is made keenly aware of the significance of time. of the importance of saving. and of the tragedy of waste; he develOps an under- standing of mechanics. and an appre- ciation of the importance of coordinated teamwork. These qualities are becoming increasingly prevalent in the develop- ing nations. but they are still in short supply. The greater reliance by U.S. firms on EurOpean nationals than on South American nationals in their [“3For an interesting Marxist view on this tOpic and for the source of the term "de-nationalized" man- power) see P. Sweezy. "Notes on the Multinational Cor- poration." p. 6. 196 operations on these two continents is not the result of an arbitrary determination to discriminate. In their view. efficient and economic operations require it."’**1 The industrial mentality could appropriately be inter- preted as "Western Capitalist" mentality. free from the complication of Third World nationalism. On the same subject. McMillian and Gonzalez continue: There are additional uncertainties associated with the foreign Operation. These are particularly evident to the parent firm with limited experi- ence abroad. These uncertainties are greater in the less-develOped. politically and economically unstable nations. The American firm can. with some confidence and composure. entrust the management of its Operations in the develOped nations to foreign nationals. Their cultures are common. commerce and industrialization are comparable. and communication with them is clearer. In the less-develOped nations the un- certainties that exist are partially ameliorated by having the firm's own nationals in control."42 In the LDC's. where political and social constraints on the host-country national may bemuch greater (due to the rising tide of nationalism and generally non-Western social views) the supply of potential "de-nationalization" candidates may also be correspondingly shorter. ulNcMillian and Gonzalez. p. 99. uzIbid.. p. 99. This view is in keeping with Hymer's view of the need for a "common-cultural heritage" among tOp multinational management. See Elmer. "Multinational Cor- porations and the Law of Uneven Development." 197 In the final analysis. of course. the question of whether or not LDC's managers are less "denationalizable" than DC managers is an empirical question that can only be conclusively resolved as the penetration of foreign firms into LDC's increases and data on such development becomes available. The hypothesis is. however. certainly eminently worthy of such testing within an historical framework. In conclusion. the trends discussed above have in fact reduced the number of source-country personnel in management positions at the subsidiary level. As pointed out in this discussion. however. the newer policies reflect changes in tactics. not strategy. Additionally. as discussed previously. there appears to be a definite upper limit to the extent to which many American multinationals are willing to "nationalize" their top posts at the subsidiary level. Both in EurOpe (the case of Ford U.K.) and in the LDC's (to a much greater extent) the multinational firms appear to have insisted upon keeping at least one or two "key" posts at that level reserved for source-country nationals. The number of such posts "re- served" for source-country nationals is much higher at the LDC level. presumably due to the more volatile political cli- mate there. a lack or a regional control mechanism, and a "shortage" of denationalized manpower. Concluding Comments The evidence discussed does. at the very least. suggest the need for detailed research into the hypotheses advanced in this section on the connection between firm-governmental 198 relationshipsand high-level manpower policies. As an aid in such empirical research and as a step in Operationalizing the general market. a research format is specified in the final chapter of this thesis. _ Market Conflict - The Transfer of Firm-Specific Knowledge and the Global Market Hegemony of the Firm One particular feature to come out of Shearer's study was that (at that time) in all seventeen "combination" com- panies all five "key" executives -- especially the general manager. and the managers of finance. engineering. and pro- duction. were almost always Americans. In particular. Shearer noted that: "Most companies in both countries have their heaviest concentration of Americans in the highest engineering and technical positions."“3 It is here hypothesized that this pattern has not been mere coincidence. but rather has been (historically) consistent with the expressed desire of the multinational firm to protect its "fund" of prOprietary. technical knowledge and know-how.““‘ A digression on techno- logical transfer is necessary before proceeding to its link to manpower policy. The desire of the firm to prevent the "leakage" of its proprietary knowledge. in order to protect its-market position (insure security) and extract the maximum scarcity value from such advantages was introduced in Chapter III. Not only is “GShearer. p. 66. “AAS will become evident in later sections. such policy was altered in more recent periods to one associated with more sophisticated "technolOgical control" systems. 199 this in the interest of any given firm. but it is also in ‘the interest of all firms that constitute the "power bloc" within an OligOpOlistic industry:_i.e.. the "regime" of multi- national firms does not want new competing centers of inno- vation to spring up and threaten their potential control of the hinterland. There may be "accepted" leakages or a give- and-take exchange of technical knowledge between the large and powerful firms that dominate international OligOpOly markets. But. as Svennilson notes (cited in Chapter III). while leakage of such knowledge into a common fund that exists between the dominant firms may take place and be accepted (as" long as the individual firm can control the leakage cf its own knowledge in accordance with the return flow from other firms). this does not mean that suCh knowledge becomes inter- nationally available.“5 Additionally. the individual firm may stand go gain nothing in return for knowledge "leaked" to certain LDC host- country firms or governments. due to their lack of immediate. short-run. capacity to produce knowledge that would possibly be of value to the source-country firm. i.e.. it can expect no "return leakage" from such recipients in the short run. Also. a possible loss of a part of its market may occur if host-country firms (existing or state-owned) are able to enter and compete in the same product lines vis-a-vis receipt of such knowledge. In addition. such a transfer (outside the “SSvennilson notes that such exchanges "may be discrimi- natory in favor of national units." See Svennilson. p. 412. 200 "ground rules" established among the dominant firms) could also disturb the tenuous "leakage equilibrium" that exists between the rival oligopolies. As Svennilson notes. the know-how accumulated in a firm is mainly invested in persons employed by the firm. The pri- mary postulate here. then. is that the firm has considered it less of a risk to its firm-specific knowledge to have source- country personnel or "company men" in positions of trust where such knowledge is vested (or. more generally. manning posts within the conduit of technological transmission between sub- sidiary and head office). Again. employment of a host-country national with host-country loyalties (or. alternatively. the employment of host-country nationals that are part of a vi- gorous indigenous entrepreneural class in incipient capitalist or mixed societies with a basic desire tO build their own power in both the market and political sense) in such positions could place the firm's long-run market security in Jeopardy. Several points need to be made here. First. it could be argued that host countries do not have a stock Of high- level manpower vested with the "know-how" (which can only be acquired in actual experience in Operation) required to super- vise complex technical Operations. Thus. the firm must import such know-how. This is perhaps true in the short run. On closer examination. this reasoning provestto be spurious. The firm does not. as imagined. have a reserve pool of such manpower upon which to draw. To fill such positions abroad with imported manpower. it must promote existing personnel to such foreign posts and hire others to replace them at home (or undertake the recruitment and training of source-country 201 engineers. and other manpower. specifically for such Jobs). The question arises. then. if the firm must train individuals for such Jobs. why not train the relatively less~expensive products of host-country engineering and management schools (whose output is usually significant)? The record of such host-country recruitment at such high levels by multinational firms is poor. as Shearer points out.“6 This is analyzed in the first section of this chapter. In the present context. the issue is the gig; involved in placing host-country nation- als in such positions. not their alleged "unavailability". Doubtless. some exceptions exist in each case: however. the point is that the tendencies noted above have been per- ceived by the firm to exist on a general level. This per- ception is based upon the firm's past experience with techno- logical leakage. and at a more general level. upon their "learning experience" in rivalistio competition through time. Empirical evidence will be offered in support of this point in the next section. It seems obvious. however. that if the firm manned all critical technological posts with host- country managers and technicians and fully endowed them with' the firm's specific knowledge and know-how (which. as Sven- nilson points out. can only be done by admitting such indi- viduals into the core of Operations and decision-making and training them in the same) that such technical knowledge and know-how would be diffused throughout the host-country indus- trial sector at a much more rapid rate and result in the loss “base Shearer. pp. 94-100. ... . 0‘ N, v a. .... . \ . iv. 7.4: v. . . ,0 C ‘4. .1 .. mi. ,4 .7. . I. ) a .4 I v. .5! ' . ... v. 54, ‘5 l 0' O x, ‘ 7rxl, .‘ .g.‘ 1 J» "i (.1 I'1 “ were ”- Q «I!» a 4 '4‘ ....V I. a V-.\ I 4 I 1 Cr... 4- ‘. ... f a n i. a II? Oi . I . p» .— pa ..1 I“f , .0:\ I.- . . \‘. ...» m: I... a u Jr . l . it \.l . w .I o , o .1 ...), 0‘. rm f a w . ‘iu .l ‘ 5. u r. an I.» n. .... . . ’l \. 1 J‘ \Ja'.“ (n. .6. t N. r... O l a. , ..x .7.o a. .0. .. JV». at or, QI: ’ .I . I... f. a. . w r t‘i‘v' 3,5“ ~r ...t I“. .... .- ‘J _ . .... . \. u.l o. . r l .»~ 'F . (‘~ I k .. . . , . 4 \ p I...» . 1. . F “. .(.. Q. Q ‘9‘ . . 202 of at least part Of the scarcity value Of such knowledge and an erosion of the firm's market position. The firm's primary bargaining power with the host-country (firms and governments) rest upon their possession of a technolOgy which the host- country does not have. The host country (firm and/or govern- ment) is "dependent" upon the firm in this sense and this be- comes a strong bargaining focus for the firm. Again. the firm. in fully endowing host-country managerial cadres with such knowledge. on a wide-ranging scale. will. through time. find their bargaining position weakened as the host-country becomes less and less dependent upon the firm for knowledge specific to the firm and its specific industry. Indeed. on a broader level. such a move could result in the development of indi- genous innovative capacity within the LDC's and threaten the technical hegemony of all multinational firms at the Third World level. The hypothesis on the relationship between high-level manpower policy and the desire of the firm to protect its "fund" of proprietary. technical knowledge and know-how is the more complex of the two discussed in this thesis. In general OligOpOly theory. as discussed earlier. there is a clear consensus among economists that OligOpOly firms seek (by various means) to prevent or severely limit the "leakage" of their specific knowledge to actual or potential rivals and "entrants". It is hypothesized in this thesis that by controlling the transmission of such knowledge through the use of source-country personnel in the highest engineering and technical position at Level III. the oligopolistic 203 multinational firm protects its market position from erosion by existing and new rival firms (both government-owned and» privately-owned). Thus this hypothesis represents a specific "instance" of this general phenomenon. Unfortunately. hard empirical evidence on the technolo- gical strategies of the multinational firm through time is in very short supply.“7 This is partly due to the sensitive nature of the issue at stake.“8 The reader is reminded that the possibility of technological transfer is the key selling point the firm uses to gain admission tO host-country markets. At the same time. however. the firm must control the flow to maintain the profitability of its investment and preserve its bargaining strength in later time periods. The firms are thus reluctant to reveal to anyone what their strategy is. Never- theless. some evidence does exist. and is recounted below. The emphasis is again historical in nature. The propensity in the earlier periods for the American multinational to place the highest level engineering and LHThe evidence related in this section. based upon se- veral case studies in LDC's. is necessary qualitative rather than hard quantitative data suitable for plugging into an econometric model. The results. however. are strong enough to support the need for intensive efforts to obtain hard data to follow through with the testing of the previously specified hypothesis. A framework for such research is offered later in this work. LHThe lack of evidence is also partly due to the failure of other writers on the multinational firm to perceive the re- lationship between manpower policy and technological strategy. NO extensive case studies have. in the experience of this wri- ter. been done on this tOpic. and no systematic data collection has been undertaken with a view to testing any such hypothesis (e.g. by the Census. Dept. of Commerce. O.E.E.. etc.). 20H technical positions in the hands of source-country nationals is found in the literature as early as the Shearer study.“9 Shearer found that in the cases of host-country nationals actually trained by thexfirms surveyed. there was a very low retention rate.v In this connection Shearer notes: "The problem of promosing nationals 'running off' with the companies' investment in them is one Of the most important in overseas Operations. Almost without exception firms re- ported losses soon after the completion Of training prOgrams of at least 25% of the par- ticipants. Officers of the large subsidiary which conducts the three-year financial training program expect losses Of between 25% and 50%. "The prestige Of training in the United States especially increases the value of a national to other bidders for his services. When con- sidering positions with American subsidiaries. many candidates inquire about the chances Of training in the United States which. according to many executives. they intend to use as a cata- pult to better careers with national firms."50 Shearer also has noted the general concern over the retention rate among all firms surveyed. He partly attributes the re- luctance Of the firms to train more nationals and place them in responsible positions to the fear of having trained indi- viduals "run off" with the firm's investment in them. This evidence at least is consistent with the hypothesis that host-country managers "use" the training obtained in multinational firms to further their career elsewhere in a national firm. and that the knowledge Obtained is indeed "useful" tO national firms. This may or may not increase ”9A3 noted before. such control tactics change through time. This point is discussed in later sections Of this chapter. SOIbid.. p. 110. 205 competitiveness in host-country product markets. depending upon patterns of industrial development. Where there is com- parable host-country enterprise -- generally in the public sector -— it would weaken the monOpoly position Of the foreign firm and introduce some kind Of a dquoly with respective ( governments standing on the sidelines.51 Harder evidence on the relationship between manpower policy and control of technolOgy is found in Kidron's work on early British and American direct investment in India. The general tendency of firms to devise systems to protect know- ‘ledge was evident. extending from "secrecy" contracts. enjoin- ing sub-licensing and collaboration with other domestic firms: and stipulations requiring the return of all drawings and spe- cifications at the termination of the agreement. Additionally, the Indian partner was Often excluded from any fundamental investigation and develOpment efforts associated with the venture.52 Kidron notes. with specific reference to manpower tactics: "Although not always distinguishable from fundamental research and development. the application of results or Operational know- how is less a natural monopoly. In a sense it can be detached and used independently. either because the basic knowledge is almost entirely embodied in fixed equipment as in some chemical industries. or because it is easily assimilated without expensive apparatus 51TO say that the firm simply "does not want to lose its investment" is not sufficient. Losing the resources expended in training is only part of the loss. The larger loss would be the firm's market position and bargaining power. The question as to which is most important is. Of course. an empirical one. 52Kidron. p. 282. 206 as in advertising. a booming industry peopled almost entirely by ex-employees of foreign agencies. Partly in order to prevent this, partly because technical and managerial skills are real constraints to their expansion. foreign firms have roved reluctant to im rt much of Mrsmeufi Kidron cites many cases where critical elements Of know- ledge and know-how were withheld (through withholding training) in the interest Of protecting the firm's bargaining assets and world market positions. The industries included were in raw film, soda ash. aluminum and drugs. Kidron continues: "It is possible to go on quoting cases. backing them up with Official statements. to the effect that the state Oil industry was fgrced to stagt from scratch because the foreign companies had failed to train one Indian technolOgist through- out the sigty-Oddyears of their operations in the country: that an agreement between Hindustan Motors and the Studebaker-Packard Corporation had had to be abrOgated because the Government 'was not satisfied with the technical assistance re- ceived': that 'behind the foreign investor or would-be investor...there is a hesitation to entrust the Indian concerns with the know-how for a period Of years...and very often some of these negotiations with foreign capital break off and end in nothing': that 'in spite Of "sweet words" we have not been ableto get from the West either the know-how or the knowledge (for mili- tary airplane manufacture)'. The point has been made. however: technolOgically-progressive firms are. in the words of one managing director. 'wary Of selling their birthright.'" Kidron concludes by emphasizing that technical staffing policy is a key method Of controlling dissemination of tech- nolOgy. He notes that most foreign firms have insisted on staffing certain key major technical posts with source-country personnel. In conclusion. Kidron states: ”Kidron. p. 255. 207 "It is frequently argued in support of private capital imports that they graft much needed managerial and technical skills onto Indian industry at little or no extra cost. The evidence. however. points the other way. Research and development are invariably con- ducted abroad; the fruits of develOpment are imparted. if at all. at very high cost in royalties. fees, and other payments. and then not always in their entirety: through their production and staffing policies the major investing firms attempt to systematize a con- tinuing control Of know-hgw: and much else in the same vein. Since the Indian partner is normally assigned -- and readily accepts -- a narrowly specialized range of functions. the diffusion of skills that does take place is largely fortuitous. Indeed. since the typi- cal modern investing firm owes its dominance and income largely to its technological mono- u poly. a different outcome would be surprising."5 At a more general level. the choice of personnel has figured importantly in the control over transfer of techno- lOgy in two case studies relating to the experience Of Ameri- can firms in Joint venture arrangements with Japan. The first. dealing with transfer of U.S. aerospace technology to Japan (Hall and Johnson) establishes. once and for all. on the basis of the participating firm's experience there. that the transfer of firm-specific knowledge (and especially know- how) requires a process Of education and training that can only be conducted through personal interaction (i.e.. through methods of on-the-Job training for which written records. blueprints, and other documents cannot be considered substi- tutes.f“5 In another study of general transfer in such joint SuKidron. pp. 312-313. 553ee G. R. Hall and R. E. Johnson. "Transfers of U.S. Aerospace TechnolOgy to Japan," in R. Vernon. ed.. The Tech- nology Factor in International Trade (Columbia University ‘— Press. New York. 1970), pp. 305-357. 208 venture arrangements between U.S. and Japanese firms (Baker and Kondo) the importance of technical know-how as a bargain- ing asset (in the face of tough Japanese laws regulating firm investment) and the effective use of such an asset through having head-Office (Level I) technicians man key posts in the transfer mechanism. is revealed.56 In this connection. Baker and Kondo state: "If disagreements should arise between the foreign parent company and the Japanese parent company with regard to the management Of the Joint venture. the foreign parent com- pany reminds the Japanese partner that it is holding the patents. or the brand name. or access to raw materials vital to the Operations of the Joint venture."57 They continue (in the same context) by stating: "Obviously. the extent Of the success of this method depends upon how valuable the foreign technology (or the brand name or the raw materials) is to the Japanese partner. When the proper functioning of the Joint ven- ture depends upon the use Of assets the foreign partner possesses. this method can be quite effective. Thus. de facto control exists with- out formal agreement by virtue Of the ability of the foreign partner to provide what t%% Japanese partner is greatly in need of." On the maintenance of such control through the use of Ameri- can technical advisors. they state (in the example of Hewlett- Packard): "Hewlett-Packard is Offered as a caSe in point in which a foreign company has furnished marketing skills and technological know-how in 563ee J. C. Baker and T. Kondo. "Joint Ventures in Japan and How to Obtain Managerial Control." M.S.U. Business Studies 57Ib1d.. p. 50. 581mm . p. 51 . 209 a Joint venture with a Japanese company. Hewlett-Packard. which manufactures elec- tronic machinery. precision measurement and medical instruments (and other scientific devices). and which is actively engaged in research and development. has a Joint venture with Yokogawa Denki. a medium-sized electric machinery producer. Yokogawa Denki holds 51 percent of the company's equity and Hewlett- Packard holds the remaining 49 percent. How- ever. each has an equal number of seats on the board of directors. The directors from Hewlett-Packard do not reside in Japan. nor do they actively participate in the manage- ment of the Joint venture. The only Americans in the Joint venture are four technical co- advisors and one marketing adviser. Yet Hewlett-Packard markets all products which :are produced by the Joint venture company and sold outside of Japan. It also makes plans for development Of new products. This is ac- complished by meetings_(twice a_year) of technicians and managgng officers who are assembled for the purpose of coordination. Hewlett-Packard has been able to effectivglz protect its markEts as well as the mafkets of wholly-owned subsidiaries in Europe."5 Thus. the implications are that the control of techno- logical flow through the use of Level I technical personnel in key positions augments the firm's bargaining strength in general management and marketing decisions. Again. the pro- tection Of knowledge through the Judicious use of "key" Level I personnel in technical positions seems apparent. Only a careful expanded case study could substantiate this hypothe- sis. however (or prove the case otherwise).60 In the author's own interview with the chief of Joint venture Operations abroad (primarily in Latin America and 59Ib1d., p. 51. boThere is some indication that Japanese multinationals are using a similar policy to maintain control of technology transfer in the new ventures in Latin America (e.g. the use of technical advisors and reticulators in "key" positions). 210 Japan) for a leading American electrical equipment firm (specializing in power generating systems) the above-noted points were again confirmed. In particular. the critical im- portance of having "company men" in "key" technical positions to control the transfer of knowledge. and maintain the inte- grity of the parent firm's competitive advantages arising from such knowledge was made clear. The parties interviewed explained that this policy was consistently followed in both Joint venture dealings and in manpower staffing in subsidiaries. One case in point involved the Joint manufacture and distri- bution of a "package" power generating system with a large Japanese electrical equipment manufacturer (for distribution in the Soviet Union). In this case. the most careful pre- cautions were taken to insure that Japanese partners remain basically dependent on company technicians for "key" engin- eering aspects Of the system technology: both in the context of visits by Japanese technicians to the head Office level and in the field at the Level III Operating level. One execu? tive noted that the Japanese technicians knew the "score" and were constantly under surveillance by company representatives lest they "pirate" more than was intended. Thus. in the case of both direct investment and Joint ventures. the training of host-country personnel must be carefully handled so as to balance the firm's desire for "en- try" into the market (based on the promise of some technolOgy transfer) with the firm's desire to protect its bargaining assets by controlling technolOgy flows. 211 There also appears to be some evidence that host- countries have become increasingly aware of the failure of firms to deliver technology at the expected rate. and the linkage of such failure to manpower hiring and training. General Latin American views are summarized by Wionczek when he states: ...."the insistence on the part of inter- national corporations that ownership and con- trOl of the foreign subsidiary must rest in the hands of their own nationals represents an additional source Of conflict. The strong feelings in the host countries on subjects of this sort again have their origin in a mixture of economic and socio-political considerations. The importation of foreign management and tech- nical personnel and the rejection of local capital participation confirm to Latin American minds that foreign-owned companies do not want to become an integral part of the local soci- eties. These personnel policies also are said to represent a major obstacle to the spreading Of managerial know-how in the capital-receiving country and to the growth of the domestic en- trepreneurial class." On the secrecy surrounding the "key" know-how of foreign films in Brazil and their reluctance to impart such through the training of local technicians to man higher technical posts. Heliv Jaguaribe (founder of the Brazilian Institute of DevelOpment and Visiting Professor at Harvard) has noted: "Techniques which genuinely constitute technical innovation are never imparted by foreign investors to the recipient countries. If the technique is of the kind that can be ac- tually transmitted. it tends to be protected by the utmost secrecy; Brazil's recent experience with industrialization confirms that foreign- owned firms make a secret Of techniques whenever élsee Wionczek. p. 21. 212 possible in order to prolong technical de- pendence. On the other hand. if the process or knowledge is dependent on a prOgram of ongoing research. the recipient country never acquires the control of the technique simply because it is constantly being usgdbzand im- proved by the foreign-owned firm. Likewise. in a recent United Nations Panel on Foreign Investment in DevelOping Countries. one of the primary con- cerns of the governmental participants from the LDC's was the less than satisfying transfer process in the past and the need for firms to train or otherwise impart to host-country personnel the desired technolOgy that was originally their "ticket Of admission".63 ' In a very general form. some additional evidence exists to support the view that. in the interest of maintaining de- pendence. the firms have deliberately kept vital technical information from host-countries through failure to train I host-country personnel and by keeping source-country person- nel in a few "key" technical positions abroad. The slow transfer process involving petroleum production technology. in the Middle East is a case in point. Only as much Of such technolOgy became "general" in nature did host-country per- sonnel acquire it. Its acquisition then directly led to the powerful present challenge to the petroleum companies at the producing level. with the formation Of an.independent O.P.E.C.6“ 62See H. Jaguaribe. "A Brazilian View" in Vernon. ed.. How latin America Views the U.S. Investor. p. 80. 63s” 0.11.9.2. 72. II. A. 9. 64For details see U.K.P.E.. The Ener ‘ Crisis - An Ana - sis (New York. 1974. U.R.§.E.). Penrose (The Bar Inter- tional Firm in Developing Countries) suggests a similar point. 213 In the case of petroleum production. there appears to have been a new tactic emerge to deter the success of new entrants; control over worldwide marketing outlets. The ex- tent tO which such a new policy arises and the degree to which it is employed as a substitute control mechanism is discussed below in the context of recent develOpment in tech- nolOgical control. Recent Trends: The Dialectics of Technological Control The same trends that characterized the shifting er the focus of control at the subsidiary level as the firm matures -- discussed in the previous section on political conflict -- also. to a certain extent. contribute to the shifting focus of control in the case Of technological transfer. In most of the case studies cited in the former section. in later years. the number of source-country technical personnel re- maining at the subsidiary level was reduced and power vested in a very small group of "key" technical managers or reticu- lators. Thus the patterns of control were "tightened" as the firm matured in its international Operations.65 The re- maining technical personnel were in constant communication with the regional or head Office and directly controlled the quantity and quality of information employed and imparted. Greater numbers Of host-country technicians could then be brought in to man downgraded posts. _— 65See especially the study by Kidron. Simmonds. and the discussion of Ford (U.K.) Operations in Chapter IV. 21h In addition. the trend in regionalization has also altered control patterns. As noted in the previously cited study on the trend by Williams. regionalization has in many cases included a shifting of the focus of control for techno- lOgical transmission and strategy specific to certain areas to the newly-established regional offices of the firm involved.66 One interesting unified hypothesis that ties together the foregoing trends and is consistent with the hypothesis of this thesis is found in the theory of the "product cycle" (or "product life cycle") as such pertains to the technologi- cal issues specifically raised here. and the related concept Of the industry life cycle.67 In its most direct form. this theory states that U.S.- controlled OligOpOlistic multinational enterprises initially generate new products and processes for production and distri- bution in home markets. As these markets become saturated and foreign markets expand. these products are exported. Finally. in response to challenges from foreign producers and as a result of a general global market share perception on the part of domestic and foreign rivals. direct investment is undertaken to exploit what remains of each firm's techno- logical advantages and know-how specific to any given product. Each firm retains their oligopolistic advantage for a period of time. but tend to find it weakened as the technolOgy 66See Williams. pp.5B-89. 67For a complete exposition Of the product cycle model see Vernon. Sovereignty at Bay. pp. 65-112. 215 becomes more widely diffused. In this final stage. Vernon states that: "The period in which an innovator can hOpe to exploit his lead in comparative peace has shortened. Evidently. imitators are quicker to master the technolOgy and introduce the related changes inside their organizations. When multiple sources of a technolOgy are in existence. of course. the likelihood that a multinational enterprise can dominate the market on the basis of its technological lead declines." In the context of Vernon's argument. know-how represents power. The limits of multinational corporate strength are the limits imposed by the diffusion of once proprietary skills. It is but a short step then from this thesis to the hypothesis that the reluctance to accept host-country management into the ranks of the high-level technological cadres is a measure to slow the diffusion of kno'w-howué8 In recent years new tactics appear to have emerged as a means of maintaining the power lost with the diffusion of know-how. One of these is more reliance on technological "lead time" coupled with the continuous and more rapid intro- duction of new products. By continuously introducing new products and processes the firm can widen the gap between po- tential foreign competition and its own monOpolistic advantages. This can relieve the burden of technolOgical control at the subsidiary level and shift control to innovative centers at the regional and head-office level. The firm becomes less 68Phe same can be said of the reluctance of the firm to accept local ownership abroad (i.e. the preference for debt- capital). Vernon cites numerous historical empirical studies in support of his version of the hypothesis. For details see R. Vernon. Sovereignty at Bay. pp. 60-112. 216 concerned with diffusion of any particular technology since it has a "backlOg" of new processes and products to again pre-empt the market.69 Another tactic that has emerged that could possibly off- set the loss of power through diffusion of technolOgy lies in the multinational firm's continued control (based on ac- cess; and specialized management techniques not easily trans- ferred or diffused) of world marketing outlets on a coordinated basis. Evidence that petroleum firms have fallen back in these tactics in the face of losses through the diffusion of technology are found in both Vernon's work and the U.R.P.E. study.70 The extent to which both of these trends have directly affected technological manpower policy at Level III is unclear. It seems reasonable to maintain that under the circumstances of such tactics. more host-country technicians could be hired as more reliance is placed on the new tactics and less on the old of controlling dissemination of know-how and technology at the point of production..71 “for cursory evidence on this trend see Vernon. pp. 90-112. lfl%ee Vernon. Sovereignty at Bay. pp. 53-59: 60-112. Irkecent discussions with Thomas Hurtienne (an econo- mist with the Institute for Latin America in Berlin) upon his recent return from a tour of Brazil. Chile and Argentina (wherein he interviewed many government and corporate execu- tives on the tOpic of foreign investment) revealed some evi- dence on the new Japanese penetration of the Latin American markets. (Dr. Hurtienne will soon publish a book analyzing his findings in Latin America.) Generally. the Japanese appear to control technology flows through the use of reti- culators and advisors from the head office; imparting knowledge 217 In the final analysis. the question is an empirical one for which no adequate data for testing exists. The final chapter offers a suggested format of the gathering and inter- pretation of such data. Concluding Comments Several summary points and additional issues relevant in the above context are listed below. Not all will be given extensive treatment in this thesis. but are nonetheless wor- thy of consideration in further research on this topic. 1. The evidence on technological strategy must be viewed in an historical context. In de- veloped countries. the multinational firm may come to engage in "reciprocal leakage" ar- rangements with large oligopolistic firms within such countries (especially if such firms are themselves becoming multinational and entering as a new force in international capital expansion). Indeed. any given multi- national may have less long-run control over technolOgy flows in advanced capitalist host countries. In the LDC's. however. their power a bit at a time as needed in actual production. They also appear to rely heavily on technological lead time and mar- ket access as control mechanisms. Almost no "hard" data is available on the new wave of Japanese expansion. Doubtless their tactics are based upon their successful dealings with U.S. multinationals in past,years. Much more study of indi- vidual Japanese firm's investment strategy is called for. Innovationsin control appear to be upcoming from their ex- pansion. 218 is greater in the sense that they have not only a monopoly of such knowledge. but face no immediate potential rival in innovation. Again. if the firm transfers all its know- ledge over time in an unrestrained manner (as through using host-country managers and technicians at all levels) they could. in ef- fect. "create" new rivals and new competition through migration of such individuals over time. In the developed nations. the multi- national firms may come to rely more on "tech- . nological lead time" as a new strategy and less upon manpower policy. Also. the new re- gionalization policies in control extend to technology flows and relieve the firm of con- centrating all such control at the subsidiary level. This is related to a strategy suggested by Vernon in the context of his product cycle argument. In the LDC's (where no new leakage equilibria are forming and where regionalization of con- trol is less advanced) the firm still seems to be relying more heavily on day-to-day control through manpower policy. The point again is that the firm has greater hegemony in technolOgy at the LDC level and is loathe to lose it. 219 TechnolOgy can be viewed. in the present con- text. as a "barrier" to the entry of new com- petition. The firm's reaction to the lowering of such a barrier through technolOgy dissemi- nation would be initially the same regardless of the source of the new competition a; private or public; i.e.. through indigenous capitalist entry within the context of market or mixed economies at the LDC level. or governmental. as in state socialism. In both cases. the multinational firms' market position is weakened andit is forced to adopt "second best" stra- tegies. In LDC's. where the indigenous capi- talists are often closely tied. functionally. to their governments. the pressures brought to bear on the firm. both in the market sense and politically are correspondingly greater. Again. an important bargaining advantage lies in the ,LDC's "dependence" upon the firm for technology. If that "asset" is lost. the firm is in a weaker bargaining position. at best. New en- trants. as the writings on the history of oli- gopolistic rivalry indicate. are not accepted without a struggle. That struggle characterizes the new international rivalry. Control of technical knowledge and know-how through manpower policy in LDC's is important 220 in a broader ranging strategy that is not limited to preventing market entry (strictly defined as the emergence of a new competitor). It is also an important element in Strategies designed to counter expropriation of firm pro- perties by LDC governments. In this instance. the expropriating government may have little success in operating the productive facilities exprOpriated due to the failure of the firm to transfer sufficient knowledge and know-how to host-country managers and technicians. Thus the bargaining position of the firm is again enhanced through dependence. In the case of the petroleum industry in the Middle East. the gradual dissemination of for- eign firms' basic refining and producing tech- nolOgy (as this older technology flowed into the "common fund") enabled (along with critical minimum levels of capital accumulation through royalties) the nation states at the producing level to challenge the "Seven Sisters" of the international petroleum industry on several levels. This suggests that the multinational firm is faced with long-run leakage problems (leakage of knowledge in a "common fund" re- gardless of short-run controls) and must devise longer-run strategies (as in control of marketing 221 outlets. technological lead time. etc.) apprOpriate to this problem.72 Finally. the multinational firm may find it- self the beneficiary of one important "natural" barrier to entry -- namely the "scale economy" barrier to entry. In this instance. an effi- cient size plant (i.e. one that exploits all economies of scale inherent in the imported 72For evidence on the Middle Eastern petroleum case see U.R.P.E. The Energy Crisis - An Analysis (New York. 1974 (forthcomingT). Other strategies to counter expropriation and deter entry include: ’ a) b) the building up of supplier linkages throughout the LDC industrial sector. This provides the firm with another bargaining asset. If unfavor- able terms are being forced upon them by LDC governments. they can manipulate these dependen- cies. which would extend to dozens of small in- digenous firms that supply their needs. and create disruptions in employment and incomes throughout the industrial sector. This tactic is analyzed and specifically recommended to multinational firms by Wi iam R. Hoskins in "How to Counter Expropriation: Political. Eco- nomic. and Legal Steps Taken by Companies Whose Property is Confiscated by a Foreign Nation: Harvard Business Review (Sept. - Oct. 1970). pp. 102-112. ' Control over world marketing outlets is yet another strategic asset of the firm. When entry occurs at the LDC level. and complete industry expansion requires global marketing outlets (as in the case of petroleum and other raw materials industries). the continuing control of such out- lets by multinational firms creates yet another final. competitive entry barrier. (Vernon dis- cusses this point at length in Sovereignty at Bay. 222 technolOgy) may be one that requires an output level so large as to "fill out" the entire market (or nearly so) at a price covering full cost. Thus there may be no "room" for another competing plant of ef- ficient size due to limitations in market size in small LDC's. Doubtless. this bar- rier has proven to be effective in certain LDC markets and has relieved the pressure on technical dissemination as an entry variable. It is important to note. however. that the dissemination of technology could lead to the complete displacement of the foreign firm as the nation's dependence on the flow of tech- nology diminishes. In this case. expropriation of the firm's productive facilities by LDC governments allows their entry as a "state monOpoly" (enjoying the same barrier to entry as the firm once possessed). Also. the emer- gence of regional trading areas and customs unions could expand market size to such a degree that new competition could enter (if possessed of apprOpriate technolOEY). This trend has been evidenced with varying degrees of success. in East Africa (the Kenya. Uganda. Tanzania union) and in the emerging concepts of a Latin American common market. Thus. given the changing nature of LDC markets. the scale economy barrier 223 could be lowered through time and thus shift direct technical control again to the forefront of the firm's objective function. Two Counter-Hypotheses: A Resolution The purpose of this section is to show that two models of G. Becker -- one specifically dealing with "discrimination" in labor markets. and another dealing with knowledge classifi- cations -- are qualitatively different from the "control" hy- pothesis advanced in this chapter and the related arguments on technolOgy transfer. The Economics of Discrimination In the first case, that of Becker's discrimination hy- pothesis. let us first begin with a clear definition of what Becker defines as "employer discrimination."7fi3Becker states: If one individual discriminates against another. his behavior lacks "objectivity"; in the market place. "objective" behavior is based on considerations of productivity alone. An employer discriminates by re- fusing to hire someone with a marginal value product greater than marginal cost... A discriminator expresses his subjective tastes or preferences. and these tastes have been quantified by means of discri- mination coefficients (DC's). When faced with the money wage rate . an employer acts as if (1+d) were the net wage rate. with d being a DC measuring the intensity of his taste for discrimination. Becker concludes his definition of employer discrimi-' nation with: When an employer discriminates against employees. he acts as if he incurs non- pecuniary. psychic costs of employment by working with them. - 'Kbu Becker. The Economics of Discrimination (University of Chicago Press. 196 ). 7Lftbid. . p. 32. 224 Becker goes on to state that such a "taste" for discrimination results in a net loss for the employer (firm): Profits forfeited are the costs or deterrents to discrimination.75 He continues by stating that discrimination produces re- sults at the individual firm level that are at odds with "clas- sical" cost-minimization (and thus profit maximization): However. equilibrium factor combinations would be quite different in situations of discrimination from those obtained with classical assumptions: there would be a smaller demand for factors discriminated against. and the money cost of producing each output would be greater than the minimum money cost. In the final analysis. a taste for discrimination works against the "classical best interest" of the firm. defined as "classical" profit maximization. In this connection (with definite long-run implications) Becker states: It is an implicit assumption of most discussions that minority groups like Negroes (N) usually suffer more from market discrimination than do majority groups like whites(W). but no one has isolated the fundamental structural reasons why this is so. It is shown in the following that discrimination by any group W reduces gheir own incomes as well as N's...."7 Becker continues by noting: There is a remarkable agreement in the literature on the proposition that capitalists from the dominant group are the major beneficiaries of prejudice and discrimination in a competitive ca- pitalistic economic system. If W is considered to represent whites or some other dominant group. the fallacious 75Ibid.. p. 33. 761mm, p. 11. 225 (nature of this proposition becomes 2313131323?fifmmmn m " Thus Becker's key point is that a nondpecuniary psychic "taste" for discrimination works against the overall profit- ability of the firm and represents an irrational (in its pure market sense) aberration. As the reader of this work knows. such is not the case in the model adOpted here. "Discrimination" against host- country nationals is not the issue. A "preference" for source- country nationals is a reflection of the firm's desire for control both over firm-governmental relationships in a climate of political uncertainty (eSpecially in LDC's) and over tech- nolOgical leakage (which affects the firm's long-run market position). Thus such manpower practices are indeed "rational" and not associated with purely "psychic" tastes. The two models. however. have one feature in common -- neither motive for "discriminating" against individuals in employment is strictly profit maximizing in the short run classical sense. In the case of the model adopted in this thesis. however. such market behavior is in the interest of control: a factor which insures long-run survival and continued growth for the firm. This may be (despite the tautolOgical nature of the term - see Chapter III) if the reader insists. related to the general concept of maximizing long-run profits. In the Becker model. "discrimination" fails to maximize pro- fit in either the long or the short run. as traditionally 77Ibid.. pp. 13-14. For a complete discussion of Becker's argument on this point see the first three chapters of his book on this topic. 226 defined. It is. to reiterate. a pure non-market "psychic" motivation. The key point here is that nationality of manpower matters - in an important market sense. in foreign Operations.78 The foregoing discussion is not meant as a total re- futation of Becker's discrimination hypothesis. Doubtless. his model partially explains certain features of hiring be- havior abroad where "psychic" preferences (more explicitly. racism and ethnocentracism) are dominant.79 It is here hypo- thesized that both factors may have been responsible for man- power policies abroad. with the "control" motive being domi- nant in the long run. Only careful empirical investigation of firm behavior (as Specified in the final chapter of this thesis) can properly weigh the two hypothetical motives. In summary. there need be no conflict between the two. though both are qualitatively different. Knowledge Classifications One further point from Becker's work deserves consider- ation. As noted in the main body of the theoretical argument 78Control could be an important element in the domestic Operations of firms. See Reder. "A Reconsideration of Margi- nal Productivity Theory" and Munson and Downs. A Theory of Large Managerial Firms (both discussed in Chapter III). 79Such could be the case in the early direct investment experience of firms. One would expect. however. such to vanish with increased international competition. rising cost of ex- patriate personnel and the firms maturing as an international entity. Note that Hymer's discussion of the need for a "com- mon cultural heritage" is related to "productivity" in the most general sense. See Hymer. "The Multinational Corporation and the Law of Uneven DevelOpment." Shearer's point on the "inconvenience" of working with foreign nationals could reflect elements of both motivations. however. See Shearer. Again. only careful case studies can establish the relative impor- tance of the motives specified here. 227 specified inthkschapuflx the multinational firm may seek to control the leakage of its specific knowledge abroad through its manpower policy. The risk of having knowledge unintention- ally diffused is higher when host-country nationals staff key control positions where such knowledge is vested. Such know- ledge would be diffused through those persons in which the knowledge is vested moving to other firms (or having a whole complementary team of such persons moving to other firms over time). For those who are students of the theoretical works on investment in human capital by G. Becker. there might appear to be a basic contradiction between the theory argued here 80 Specifically. the contradiction and that argued by Becker. revolves around Becker's classification of general and spe- cific training. the knowledge vested by the two types of train- ing. and the classification of knowledge employed in the present analysis. General training. in Becker terminology. provides knowledge and skills that may be useful to many other firms other than the one providing such training. whereas specific training is defined as training that has no effect on the pro- ductivity of trainees that would be useful to other firms (or the effect on productivity for other firms is less). Thus completely general training increases the marginal producti- vity of trainees by exactly the same amount in firms providing the training as in other firms. Specific training increases productivity more in firms providing it than in other firms. 80See G. Becker. "Investment in Human Capital. A Theore- tical analysis." Journal of Political Economy (October. 1962). pp. 9- 90 g 228 If one adopts Becker's notion of specific training and know- ledge. then the argument specified above would be weakened. Specifically. the chances of persons migrating from firms that have imparted specific knowledge and moving to other firms when such knowledge is applied to the detriment of the former firm's market position. would be unlikely. since the producti- vity of such knowledge. and the wage. would be lower in the latter class of recipient firms. The key to the contradiction between Becker's theory and my own lies in Becker's highly restrictive notigg of spe- cific knowledge -- one derived from Marshall's brief comment upon specific talents and their effect upon wages and produc- tivity. Thus the head clerk in a business has an acquaintance with men and things. the use of which he could in some cases sell at a high price to rival firms. But in other cases it is of a kind to be of no value save to the business in which he already is; and then his depar- ture would pgrhaps injure it by_several times the value oflhis salary. while probably he could not get half that salary elsewhere.81 Specific knowledge in my topolOgy refers specifically to know- ledge that constitutes a competitive asset -- a monopoly advan- tage. It is of such a nature as to give the possessing firm a distinct market advantage over its rivals (actual and poten- tial). It is a type of knowledge that can serve as a barrier to the entry of new competition in the product line in question (as discussed in the previous section and illustrated “BIMarshall. p. 626. . ‘ 229 by case study and analysis in Hall and Johnson.82 The fact that it is valuable to other firms -- established or entering -- is obvious. Certainly it cannot be said 3 priori that such knowledge is necessarily of less value to other firms than to the firm that imparted it. On the contrary. there is much trade as well as pirating of such knowledge within all indus- tries. The question of exact relative value is an empirical question with respect to each item of knowledge. but again. there is no reason to believe that its value is less for the recipient firm. Even if Becker's position on specific knowledge is adOpted. little of what I term specific knowledge can be "naturally" protested by the market in the long run in the manner Becker describes. What may be 3:53 specific knowledge at the outset of a multinational firm's entering a DC or LDC (due to the firm's monOpolistic position) can become general knowledge (Becker's term) with the develOpment of the market and growth of technical capacity in other firms. Such knowledge could indeed become. in Becker's terms. industry specific and of value to existing or entering firms. Firms possessing spe- cific knowledge and deriving their dominant market position from it would be concerned with controlling the diffusion of such knowledge. Thus the manpower policy discussed earlier in connection with such control is valid. (Note: both my delineation of industry specific and firm specific knowledge 82See Hall and Johnson. pp. 305-357. 230 would fall within Becker's category of industpy specific knowledge . 83 Such knowledge could constitute a barrier to entry to the industry in question if it does not flow to "potential entrant" firms._ Becker suggests this when he says: 83Becker is vague on the relationship between his know- ledge classification and the threat of entry. Thus he states that (as mentioned previously) specific knowledge is of less value p23 pg in productivity terms. to firms to which it is transferred than to firms which impart it. On the other hand. he recognizes certain knowledge which is not general but vaguely specific to a given (possibly small) group of firms which possess it and impart it. He states: "Some training may be useful neither in most nor only in a single firm but in a set of firms defined by product. type of work. or geographical location. For example. carpentry training would raise productivity primarily in the construction industry. and French legal training would be ineffective in the United States. with its different lan- guage and legal institutions. Such training would tend to be paid by trainees. since a single firm could not readily collect the return. and in this respect would be the same as general training. In one respect. however. it is similar to specific training. Workers with training 'specific' to an industry. occupation. or country are less likely to leave that industry. occupation. or country (via migration) than other workers. so their industrial. occupational. or country "turnover" would be less than average. The same result is obtained for specific train- ing. except that a firm rather than an industry. occupation. or country is used as the unit of observation in measuring turnover. An analysis of specific train- ing. therefore. is helpful also in under- standing the effects of certain types of 'general' training." Becker. "Investment in Human Capital." p. 2". 231 Expenditures on acquiring knowledge of employee talents would be a specific investment If the knowledge could be kept from other firms. for then pgo- ductivipy would be raised more in the flrms making the egpenditures than elsewhere. The effect of investment in employees on their productivity elsewhere depends on market conditions as well as on the nature of the investment. Very strong monopsonists might be completely insu- lated from competition by other firms. and practically all investments in their labor force would be specific. On the other hand. firms in extremely competi- tive labor markets would face a constant threat of raiding and would havgufewer specific investments available. ‘ Thus Becker's narrow definition of specific knowledge (related to entering "technical" coefficients in the produc- tion function) seems to also hinge on market conditions; on the ability of a firm (or a small group of firms) to keep such knowledge from other firms. Knowledge is "specific" if it can be kept from other firms. "general" if it cannot. Thus the existence of "specific" knowledge depends on market con- ditions and the threat of entry as well or on the firm's ability to prevent the dissemination of such knowledge. Therefore. when a firm is protecting its market position. it is indeed interested in controlling the dessimination of its specific knowledge. lest it becomes general when leaked and erode their market position. Thus. in summary: A. Becker's argument is not eSpecially relevant to my own. Becker's "firm specific" knowledge concept is very 8“Ibid., p. 15. 232 narrowly defined. Only a small part of proprietary knowledge could be protected in this manner. Much of "firm specific" knowledge quickly becomes "general" or "industry specific" in Becker's terminolOgy. especially if such involves knowledge of such a nature as to be classified as an element in entry by a new firm or market share expansion by an existing one. There is no reason to expect a priori that such knowledge (vested in or accessible to persons) is necessarily of less value to other firms. This is an empirical question! B. Becker notes that knowledge is "specific" if it can be kept from other firms -- presumably is "general" if it cannot. This doubtless involves the firm in protecting know- ledge actively; over and above the "natural" protection pro- vided by the market (as Becker suggests in his technical definition of specific knowledge). Thus Becker's classifi- cation of knowledge is only partly based on technical coef- ficients in an imaginary general production function. It is also based on actual market structure and political realities.85 C. It may be said. in mild resolution. that Becker's concept of "industry specific" knowledge (which presumably would be of value to other firms -- and in my typolOgy -- constitute the "ticket of admission" to the industry). i.e. 8Ssecker admits that patents and process secrets must be protected by legal means: i.e.. such is of.value to firms and requires active protection. If such assets are vested in per- sons and mobile-with them (as Svenillson notes) then these in- dividuals are p33 pp and by definition valuable to other firms in the same industry or product line. There is again no reason to believe a priori that their MP's are lower than in competing or potential entrant firms. 233 knowledge useful to a p33 of firms defined by product. type of work. geographic location. etc.. could be closer to my "firm specific" knowledge in the direct investment context. In Hymer's analysis. multinational firms possess certain advan- tages over actual and potential entrants. These advantages are "knowledge assets" vested in individuals within the firms in question (as discussed in the foregoing section). Such knowledge can be of immense value to other firms in the same industry. product line. etc. Thus the multinational firm seeks to control the leakage of such knowledge to protect their market or industry position. eSpecially in markets where such knowledge is not yet "generally" available.86 The foregoing resolution aside. the point remains that Becker's definition of specific knowledge (however defined) is very narrow. Indeed. his entire classification ignores the question of entry and rivalry under conditions of imper- fect competition. 8é’On this point. the firm may have knowledge that is en- tirely "firm specific" (in Becker's classification system) upon entry into an LDC market (due to the absence of potential entrants - a function of skill levels and general entrepre- neural talent). However. with the development of skill levels. education. entrepreneural talents and markets (which by their growth allow new competition previously foreclosed by scale barriers to entry). much of the firm's specific knowledge could become usefully disseminated to potential entrants and thus. if such leakage occurred in an uncontrolled fashion. move into the category of "industry specific" knowledge. A firm con- cerned over its long-run market position could wish to deter this transformation process. for as such transformation occurs. an increasingly narrow range of knowledge would be protected by the "natural" process described by Becker. CHAPTER VI CONCLUSION Gene re 1 Summary This thesis has been directed to an analysis of the be- havior and effects of the large American OligOpOlistic multi- national firm in the high-level manpower markets of host countries. with special emphasis on the less-develOped host country. The first step in the analysis involved defining the basic nature of the entity under investigation -- the multi- national firm. On the basis of data obtained from various sources (presented in Chapter I) it was determined that such firms come chiefly from oligopolistic market structures and engage in foreign direct investment as a natural extension of oligopoly rivalry to world markets. Such inveStment is characterized by comparatively high capital intensity. ad- vanced technology. and differentiated products.1 The next step in the study involved a brief review of the literature on direct investment and the general behavior and effects of multinational firms abroad (Chapter II). A common view. running through most of the works discussed. was that the phenomenon of direct investment and the general be- havior of the multinational firm are best understood within the context of the theory of industrial organization - specifi- cally oligopoly theory. 1Non-American multinational firms were found to possess the same characteristics (see Chapter I). 234 235 Within the context of general oligopoly theory. an analytical framework was specified to facilitate an analysis of the multinational firm and its effects in host countries (see Chapter III). The model adopted was one cast in a multi- ple objective format with Special attention directed toward the interrelated variables of control and security. The model was then applied to selected welfare issues concerning the general effects of multinational firms in the less-developed host countries. Special attention was given the question of technology transfer. The next step in the analysis was to present and discuss the basic historical evidence on the high-level manpower po- licies of American multinational firms (Chapter IV). Here. it was found that the firms have been reluctant to employ. to a significant extent. host-country nationals in high-level management positions (Level IIIqA.B) in their foreign operations and (especially) have been reluctant to promote national acti- vity employed in such capacities to positions at the corpo- rate headquarter level (Level I-A.B). This behavior pattern was found to be especially pronounced in the case of invest- ments in the less-developed host countries. In Chapter V. the analysis of the above manpower policy was analyzed in two steps. First. the conventional neo- classical 1abor market model (marginal productivity theory of input demand) was employed and found to be lacking in explana- tory power. Next. the generalized multiple objective model specified in Chapter III was applied to the phenomenon. The explanatory value of the model was found to be superior (with 236 appropriate qualifications and reservations: see Chapters IV and V). Specifically. the observed manpower policies of dis- criminating against host-country nationals in high-level man- power staffing at Level III (and especially at Levels II and I) are consistent with the firm's desire for maximizing (subject to a profit constraint) the interrelated variables of control and security of political and market position. Control was hypothesized to be necessary to insure secur- ity of political and market position. In the first case. se- curing of political position. the accumulated case study evidence indicates that firms have felt that there would be more uniformity of corporate control at all levels. and less loyalty conflicts in host countries. when source-country managers manned "key" posts at such levels. especially in the "politically volatile" less-develOped host countries. In the second case. that of security of market position. the case study evidence (sparse though it may be) is consistent with the hypothesis that. to an important extent. multinational firms have. in the past. employed such "discriminatory" manpower policies abroad in order to prevent the uncompensated. uncontrolled leakage of this technical knowledge and know- how. with a resultant loss of firm bargaining power (partially associated with technological dependence). More recent trends in the economics of control were dis- cussed in the same context - specifically the trends toward regionalization of control mechanisms and the use of "third country" and denationalized manpower. The available evidence on these trends (again far from completely adequate) to a 237 limited extent supports the hypothesis that control mechanisms become more sophisticated as experience in international opera- tions accumulated (and costs of old policies rose). As mentioned previously. the limited empirical evidence cited above (discussed in detail in Chapters IV and V) does. at the very least. suggest the need for detailed empirical research into the hypothesis advanced in this thesis on the connections between firm high-level manpower policies and con- trol under political uncertainty. and between the same and control over technological leakage. As an aid in such further research and as an important step in Operationalizing the general model. a research format is specified below for gather- ing empirical evidence to further test each of the hypotheses. Research Format Firm-Governmental Societal Relationships Basic Data on Management and the Span of Control The first and foremost need is for detailed basic data on management and the span of control. Specifically. such data must be obtained through an intensive survey of hiring practices of a selected group of American multinational firms. all from similar industrial structures. and with long ex- perience with direct investment in both DC's and LDC's.2 2A representative selection from the 187 firm sample used by the Harvard Business School in their more aggregative study (see H.B.S. "U.S. Multinational Enterprise...") could be used. All of the aforementioned firms fit the Specifi- cations of the multinational firm employed in this thesis. 238 The data should be collected in a form that will fit into the hierarchical-functional definition of high-level man— power specified in this thesis. This definitional scheme is re-specified below. Its components are: LEVEL I: Source-Countreread Office Management. Function: the handling of overall goal determination. planning. risk. and un- certainty. and the specification and direction of centralized vertical con- trol. Power is derived from ultimate control over all corporate resources. worldwide. 'LEVEL II: Regional.Area Management (Intermediate Management I . Function: coordinating Operations of the various divisions. subsidiaries. and plants at the Operating level within the context of Level I goals and vertical control mechanisms. Power is derived from Level I delegation. This level includes area and country-wide manage- ments and the newer regional managements. LEVEL III: Subsidiary-Branch Plant Management Function: responsible for day-to-day operations of subsidiaries and consti- tutional plants. all within context of Level I goal determination and planning 239 as passed on by the managers at Level II. (If Level II is not fully developed - i.e.. regionali- zation of management control is not yet realized. links to Level I are more direct.) Each Level (I. II. III) has its own cadre of "key" management personnel. Thus. each top "key" executive has its own complement of "key" executives and administrators (Bank A) and staff specialists (Rank B). At Level III. the level of primarily empirical interest in this thesis. the key personnel (Bank A) are identified by position which correspond to the five critical functional areas of general management specified by Harbison and Myers and employed by Shearer in his study. These are: organization (the general manager) and finance: engineering and technology: production management: and marketing and sales (all presided over by permanent department heads or directors. or controlled by "reticulators").3 ‘ A careful definition of management posts by function and position in the overall corporate hierarchy would elimi- nate the problems associated with the overly-aggregated data from the Census and such studies as those by R. L'ubitz.4 3The reader is reminded that the classification scheme specified above represents a synthesis of those employed by Chandler-Redlich. Harbison and M ers. and gymg_. For a dis- cussion see Chapter I of this thes a. “See R. Lubitz (discussed in Chapter IV). 2&0 As pointed out earlier. most data on international high-level manpower is inapprOpriate and misleading for pur- poses of evaluating the actual span of control associated with managerial positions due to the level of aggregation employed. All such terms as "managerial and technical" (or Rupee cut-offs as in the case of the Indian data discussed in Chapter IV) lack functional definition. The foregoing framework more adequately reveals the proportion of truly tOp management that is source-country management and is of greater use in deter- mining the international distribution of control. Once the foregoing data is obtained. the testing of the previously specified hypothesis may proceed along two paths: A. The first approach involves working working only with the general manpower data. collected in the manner outlined above. The principal hypothesis of this section is that the staff- ing of A Rank management post at Level III has been in part due to the desire of Level I management to maintain strategic control at Level III. in the presence of what they per- ceive to be a climate of political uncertainty. Specifically. they wish to avoid conflicts in the area of firm-governmental-societal re- lations by having source-country personnel man "critical" control positions. 1. In this connection. a thorough historical analysis of staffing at Level IIIeA must be undertaken for each of the sample firms. 241 The early practices of staffing all Level III~A.B posts with source-country nationals could be then firmly established. Combined with this should be an attempt to gauge the relative availability and productivity of host-country management in the early years of each of the firm's international expansion to discover to what extent this affected manpower policy. If it is found that the availability and productivity factors caused no significant change in.manpower policy at Level IIIeA. between various countries. then the case for other governing motives (i.e. control) would be strengthened. In later. more recent periods (the last 10 years measured from the outset of the data collection process) when staffing patterns changed with the hiring of more host-country manpower for Level III posts. other tests could be conducted to determine the extent to which such was brought on by: (a) re- gionalization of control: (b) host-country pressure. In the case of (a). one would ex- pect to find a high positive correlation between regionalization (as measured by the dollar volume of Level III assets controlled by regional or area management groups) and 2&2 the staffing of Level IIIeA.B posts with host-country nationals. In the case of (b) host-country pressure. variations in policy in accordance with such could be evaluated. Greater use of "third country" nationals in such circumstances (a policy dependent on the supply of such managers at the time) would be likely. Also. the rela- tive supply of de-nationalized manpower would affect the firm's willingness to comply. In this case. a political class analysis of selected host-country would yield an index of the likely availability of such manpower and the firms willingness to hire more host-country managers. One would expect more staffing at Level III posts. with host-country nationals in the stolid pro-capitalist nations of Western EurOpe than in the more politically volatile LDC's. Preliminary data on this factor has already been discussed.5 3. The apparent continued use of source-country nationals in certain "key" posts at Level III despite regionalization and the relative 5Multinational firms themselves make such political sur- veys and from them specify political rankings of host countries. See S. Rose. "The Rewarding Strategies of Multinationalism." p. 105 for a case in point. (DuPont). 2&3 surplus of third-country and de- nationalist manpower would indicate an upper limit to the firm's willingb ness (in this later historical phase of expansion) to nationalize the Level III post. Again. the investigation here must be within the context of a political ranking of host-countries and management positions. Operationally de- fined. One would expect again that the "tclerance threshold" for having host-country managers in Level IIIqA.B positions would be much lower for the LDC's as a group. All of the foregoing tests are based upon an analysis of the general survey data obtained from the full suggested sample. To properly supplement such an analysis. this research should be augmented with interviews with Level IeA and Level II. IIIqA personnel. These interviews would be conducted with a small group of firms (a subset of the larger sample) selected on a "key" informat basis. i.e.. certain firms would be selected as representative of their industry. product group. etc.. with similar histories of direct investment experience. In this manner. the 2&4 aforementioned qualitative aspects of the analysis could be explored. In some cases. only through interviews could the actual span of control be accurately defined and elaborated upon in its various permutations.6 The following format is suggested for the conduct of such interviews: 1. Such interviews at Level I could establish clearly the "real" chain of power transmission- from Level I through Level III. independent of organizational "titles". Of particular interest would be the actual degree of decision-making power vested in the Level III- A.B positions when they are turned over to host-country nationals. It is important to know whether indeed the "real" function of such posts have been downgraded and the locus of power shifted to regional or head office personnel. Also. the motives behind 6It should be noted that the firm's willingness to have their personnal discuss the following issues would be de- creasing through time as the fim becanes more aware of the politically volatile nature of the investigation. This is not therefore an easy task. Nevertheless it is worth under- taking: and if skillfully handled. would be invaluable as a supplement to Research Format A. For an example of skillfully handled interviews with oligopoly firms see Robert F. Lanzil- lotti. "Pricing Objectives in Large Companies." American Eco- nomic Review. Vol. XLVIII (December. 1958). pp. 921-55. See also A. D. 3. Kaplan. J. B. Dirlam. and R. Lanzillotti. Pricin in Bi Business: A Case A roach (washington. D.C.: The Brookings Institution. 1538). ’245 the regionalization trends should be explored. i.e. to what extent are they brought on by cost considerations. general control efficiency. or as a means of meet- ing host-country demands for more nationals in Level III positions? In another vein. the firm interviews should reveal the extent of "political" research carried on by firms (e.g. DuPont) for their various market areas and the degree to which such research influences manpower policy in specific areas and countries. Such inter- views would indicate whether firms perceive their market and political security more threatened when host-country managers fill Level III posts in the LDC's. where the political climate is more volatile in the face of rising nationalism and shifting class structure. Additionally. the firm's general attitude toward third-country nationals and de-nationalized manpower could be probed and supplement in an invaluable way the analysis of the same based on the "hard" data in Format A. Here the question should center upon the relative costs of third-country personnel and the successful use of such as a means of reducing the Ameri- can "profile". Likewise. the ease with which 2&6 manpower from various countries can be re-educated into "company men" (Westernized. industrialized. etc.) could be explored in interviews. In general. these interviews should be con- ducted with a thorough knowledge of the firm history and development (based upon case studies such as the excellent ones by Chandler) as both a national and international firm.7 The central interview format could be pat- terned after that employed by Shearer in his landmark study (discussed in detail in earlier chapters). Only with such interviews. working from a sound foundation of knowledge of the history of each firm. could the final verifi- cation of the foregoing hypotheses be approached. Research Format Technological Tactics and Strategy As in the case of the previous hypothesis. the research format for testing the hypotheses on technological factors requires disaggregated detailed basic data on the span of technolOgical control. Again. as in the former case. a selected group of multinational firms (each representative of 7See A. Chandler. Strategy and Structure (The M.I.T. Press. Cambridge. 1962). 2u7 a specific industry group with similar histories of direct investment experience and each representative of a particular degree of technological "intensity") must be surveyed with attention directed toward their technological strategies in both DC's and LDC's.8 The data should be collected in a form that would fit into the hierarchical-functional defini- tions of high level technical manpower specified generally in the last section (Levels I. II. III. A. B). As in the former case. the testing of the here pre- ' viously specified hypothesis may proceed along two paths: EA. The first approach should concentrate on the general survey data obtained as out- lined in the previous section. The actual degree of power vested in source-country technical personnel at Level III should be investigated. In this context. the trans- mission mechanism from Level I to Level III should be examined within a questionnaire format. Firms surveyed could be asked how source-country technolOgy is actually trans- lated into production activity at Level III (i.e.. through what types of personnel does such flow and what is their nationality at each level). Also. questions should be di- rected to how company policy changed through time and the degree to which these variations 8The H.B.S. sample could be employed here. also. 21:9, are explained by the sophistication and capability of host-country managers and technicians (DC versus LDC). Specific attention should be given the classification of technology and know- how whether it is general. system specific. or firm specific (firm should control firm- specific knowledge more tightly. For a discussion of such delineation of technology see Appendix A to Chapter V). and which is most important to efficient operations at Level III in the case of both DC's and LDC's. Within this framework. the degree to which the firms shifted the focus of technological tranSfer controls to regional offices could also be determined together with the changes in hiring practices at Level III which accom- panied this process. One would expect again that regionalization of technological control would be positively correlated with greater numbers of host-country personnel in technical posts at Level III. Also. one would expect the firm to concentrate technological control in the hands of a lesser number of "key" technical managers and advisors in the more "mature" investment areas and in response to host-country pressures to hire greater 2u9 numbers of host-country personnel for technical positions. The most revealing information (and the hardest to obtain) would come through the interview techniques outlined in the previous section. Level I. II. III-A personnel should be inter- viewed from a small subset of the larger firm sample within the context of the "key" infor- mant technique (discussed in the previous section). The following format should be em- ployed for the interviews: 1. The interviews should establish the "sensi- tivity" of the technology issue to the firms. The actual transmission process through key technical personnel should be ascertained within an historical format (and in depth) for each firm interviewed. Each firm should be questioned on its policies on leakage and protection of firm knowledge abroad (i.e.. how much is protected by patents. scale economies. and manpower staffing at Level III). Questions should be directed toward how far each firm has gone toward regionalizing the control of its technolOgy transfer process (as well as toward the motivation for dOlng so) and the consequent effect on manpower policies K 250 at Level III. Also. the technological transfer and leakage problems unique to DC's as Opposed to LDC's should be explored. 2. Of Special usefulness would be a prOgram of interviewing selected managers of host- country rival firms (or Joint venture part- ners) to determine the extent to which multinational firms in their operations there protect their knowledge through man- power controls. The usefulness of hiring former host-country managers who worked with foreign firms should also be examined. (This should determine how much entry- facilitating information such managers carried away with them). The links between the issues raised in the present model and the main arguments of the product cycle theory could be explored within both the survey and interview format. Firms should be questioned about control policies by specific pro- duct line and the extent to which manpower policies and staffing at Level III is influenced by the stage at which each product is. in its cycle. One would expect that tighter control would be exercised over processes and know-how associ- ated with new innovations and products to protect such as long as possible. In the case of products that have run the cycle (for which the know-how is now generally disseminated) one 251 would expect fewer direct controls. Thus. greater numbers of source-country technicians would be used at Level III in the fOrmer case than in the latter. In another vein. it has been herein advanced (here and elsewhere) that firms have attempted to control even the dif- fusion of general and system specific knowledge to deter the rise of innovative capacities in such LDC's and maintain dependence longer than they could possibly hOpe to do in the DC's (where most efforts are directed toward controlling the dissemination of firm-specific knowledge). If such is sus- pected. the process of survey and interview research should be directed toward determining the variation of such control as between DC's and LDC's. One would expect to find greater numbers of source-country personnel in a wider range of tech- nical positions in LDC's than in DC's -- even at the level of "general" technology transfer. The extent to which such policies in LDC's is a function of the availability of com- petent host-country technicians could be determined by corre- lating company policy (in a selected sample of countries) with variations in the supply of such manpower from country to country. Again. the research would have to be done on a disaggregated basis (working with controlled samples) to truly reveal the real functional power possessed by technical mana- gers at Level III (host-country and source-country) and the extent to which the transfer of such was critical to main- taining the firm's advantages in each case.9 9Evidence previously cited suggests that multinational firms Operating in LDC's have pursued a consistent policy of 252 Concluding Remarks on the Research Format In conclusion it must be again emphasized that the data collection process generally Spelled out above would be a challenging one (to say the least). The issues raised in this chapter (with their arguments and counter-arguments) could not be adequately settled. however. without such in- formation. Due to the politically and economically strategic nature of the questions raised here, the investigation process de- scribed above could be likened to the taking of a survey on the honesty or sexuality of individuals. i.e. the results would. on face value. be less than perfectly empirically re- liable and would require unbiased professional skills to interpret correctly. Nevertheless. the beginnings of under- standing have always rested upon a correct Specification of the questions. It is to that end that this entire study is dedicated. General Conclusion In general conclusion it must be recognized that the efforts of this overall investigation have produced only limited and. in many cases. speculative results. The follow- ing points have been clearly established, however: staffing "key" technical positions with source-country man- power despite variations in the supply of qualified host-country personnel (and the lower costs of training such personnel where their supply is not adequate. but potentially so). 253 1. The historical reluctance of the multi- national firm to advance host-country nationals to real control positions within the international hierarchy of management is evident from the empirical information surveyed and collected. This behavior pattern is especially pronounced in the case of the less-develOped host countries. 2. Of primary importance in understanding this behavior is the investigation Of multiple goals (other than purely simple profit maximization) in the overall behavior of multinational firms. In the latter case. a general multiple objective format was employed to aid in the understanding of the behavior pattern established in item one above. Although the multiple objective preference function selected was not rigorously tested or verified (and could not have been given the scant. overly aggregated general data available). its predictions in the case of high-level manpower policy are not inconsistent with the general empirical evidence on the same discussed in this thesis. In addition to the two points mentioned above. some of the implications of the overall analysis for the transference of technolOgy from rich to poor countries have been brought out. but by no means in thorough detail. More research is obviously required here. 25M It should also be pointed out that in addition to the foregoing qualifications. several important aspects of the overall behaVior of multinational firms and the direct invest- ment process have been omitted. Specifically. more research» is needed into the decision between direct investment and 11- censing as alternative means of exploiting "monOpoly" knowledge. AS discussed previously. wide-ranging direct investment. as such a means. has been traditionally identified with OligOpO- listic multinationals. More research is needed into the tactics employed by non-oligopolistic international investors to establish in a more concrete way the relationship between market structure and the means by which firms exploit their specific knowledge. Also. a more detailed comparative analysis of the general behavior and specifically the high-level man- power policies in oligopolistic and non-oligopolistic firms is needed. In addition to the above suggestions. a separate in- vestigation of Optimal LDC government policy on indigenous control of multinationals should be undertaken. Specifically. with respect to the technology transfer issue. a range of feasible alternative control policies by LDC governments could be specified based upon the type of knowledge desired (general. system specific or firm specific)10 and upon the unconstrained willingness of the firm to impart such know- ledge. The LDC governments could then frame transfer policies in accord with the firm's own preference for control of leak- age. In this connection. tougher policies would be required 10For discussion of technolOgical typOIOgies see Appen— dix A. Chapter V. 255 in cases where the knowledge constituted a barrier to entry and thus a major competition-deterrent for the multinational firm. At a more general level. LDC governments must reOOgnize that multinational firms desire unconstrained control over certain critical features of their Level III Operations and will strive to cOunter interferences with such (from both source-country and host-country governments).i LDC governmental policies must thus be framed with this feature in mind. i.e.. such must be at the root of all foreign investment regulations. In the course of this investigation several alternative hypotheses concerning the general behavior of multinational firms and the implications of the same for employment and technolOgical change in less-develOped countries have been discussed. Many of these deserve further investigation and empirical verification. In particular. the general counter- hypothesis thatmultinational firms are the "ideal" vehicle for the transfer of technolOgy from develOped to less-develOped countries (see discussion of the work of H. Johnson. Chapter III) should be tested in the context of the case study format suggested in this chapter.11 With reference Specifically to manpowermarket behavior of multinationals. more research is needed on the role of "pure" discrimination (the Becker hypothesis) in such. Also. the job-protection argument of Shearer deserves further test- ing. as well as the influence of manpower supply in LDC's. 11The related Johnson hypothesis of the effects of con- centration on price in LDC's should be similarly investigated. 256 It is likely that all three Of the above factors have. to some extent. influenced manpower policies abroad. These factors. tOgether with the control/security hypothesis of this dissertation (tested as suggested in this chapter) should adequately explain the patterns of employment revealed in the available general empirical data. . The security issue raised in this dissertation deserves consideration in a broader sense. The behavior of the multi- national corporation with respect to the security/control hypothesis could be considered as only one manifestation of a general behavior pattern common to all types of organizations Operating outside their home environment regardless of the country or ideology of their origin. Thus it has been pointed out that Soviet banks in Switzerland and in England are com- pletely closed corporations: and Chinese activity abroad. in- cluding banking. is Operated on the principle that no person gets access to even the elementary details of foreign Opera- tions unless they have been carefully screened by the home Office.12 None of this behavior can be explained by a hypo- thesis on the internationalization of capitalism through direct investment. Therefore such behavior patterns associated with security/control (including the present one dealing with multinational corporations) may. in the future. have to be analyzed in the cOntext of a more general theory of the in- ternational Operations of national organizations. In this context. the quest for control and security (more broadly de- fined) could be the more generalizable aspect of this study. 12This point has been suggested by Subbiah Kannappan. based on his extensive experience with a variety of such organizations. APPENDICES CHAPTER V APPENDIX V-A Technological Typologies To lend perspective to technological typologies and what might be termed the "mechanics of leakage". the nature of such technical knowledge and know-how can be precisely defined. In the process. the control problems of the firm are likewise specifically highlighted. The exact nature of the specific knowledge referred to generally in the hypotheses specified in the previous chapter may thus be refined. One may distinguish between two broadly delineated types of knowledge that the multinational firm pos- sesses: one. which can be classified as knowledge specific to the industry or industgy Specific knowledge: and another. spe- cific to the individual firm. termed firm-specific knowledge. Industry specific knowledge may be further subdivided into generalknowledge - information common to an industry and pos- sessed by all firms in a given industry (and thus may be con- sidered the general ticket of admission to the industry or product group and can be partially acquired thrOugh the "common fund" referred to earlier) and system-Specific kggg; lEQEE - a type of knowledge acquired through engaging in certain tasks or projects and linked to the production of a particular item. This latter sub-delineation refers to the type of specialized knowledge possessed by a firm or indivi duals within a firm that partially differentiates each firm from its rivals and contributes to the firm's competitive edge in the market. Were any other firm to produce the same 257 258 good. it would (in the course of actual operations) probably obtain a closely similar. though not identical. type of know- ledge. Firm-specific knowledge differs from the two categories of industry specific knowledge in that it is neither freely available from the "common fund" nor is it necessarily linked to the production of any given product. Firm-specific know- ledge results from the firm's overall activities and includes technical knowledge that goes beyond what a rival firm might acquire if manufacturing the same products (e.g. special capa- bilities in thin-wall casting or metallurgical techniques not possessed by other firms and not necessarily attributable to any specific item the firm produces. special skills in market- ing. special management skills. etc.).1 The tOpologies outlined above are especially important to the consideration of a firm market position vis-a-vis actual or potential rivals. Regardless of their attitude toward general knowledge (which may be partially available from the "common fund"). the theory and supporting evidence indicates that virtually all firms in a given industry con- sider their syStem specific and firm-specific knowledge to be a valuable competitive asset. They may be willing to sell such knowledge to other producers (i.e.. in joint venture ar- rangements or by licensing management contracts. etc.) or may choose to keep the information a secret and use it within 1All three types of knowledge have their complimentary "know-how" component: i.e.. "complete" knowledge can only be attained in the course of actual operation (on the job). The importance of the know-how element increases as one moves from the "general" to "firm-specific" categories. 259 their own organization (as in the case of direct investment). In any case the given firm desires control over knowledge assets. The factors influencing the decision as between 1i- censing or direct investment were discussed earlier (see Chap- ter III). As noted there. the decision is influenced by the rate at which a firm's valuable technology is diffused in each N case and the consequent effect upon the firm's market position. A patent or its information provided in a joint venture may not be adequately protected by licensing or agreement and thus at the expiration of such an agreement the firm may find its knowledge becoming so widely disseminated that it no longer has any intellectual capital to sell: or the licensee or ven- ture partner may provide future competition in a firm's es- tablished market and erode their market position. This par- tially explains why the multinational firm has shown the greatest interest in direct investment in a potentially valu- able market. Given the multinational firm's dominant interest in market shares and growth. it is not surprising that they snould seek to exploit specific knowledge within the firm.3 Thus. as specified in Hymer's model (see Chapter III). through monOpoly advantages in specialized knowledge. a firm is able to enter and compete in (or dominate) foreign markets. Such firms also seek to control the diffusion of all such 2For an informal discussion (based on case studies) of the factors influencing the decision between licensing and di- rect investment see G. R. Hall and R. E. Johnson. "Transfer of U.S. Aerospace Technology to Japan" in Vernon. The Technolo Factor in International Trade (New York. Columbia Univ.. 19 ). 3Complementary know-how Still is necessary for effective competition. For a discussion see Chapter III. 260 knowledge to protect established market positions. The ac- tual degree to which such dissemination can be controlled depends upon the nature of the knowledge in queStion and upon market conditions. Powerful multinational firms Operating in LDC markets would presumably be likely to have a considerable degree of control over all three types of knowledge and there- fore control over entry to the industry or product line. APPENDIX V-B Non-OligOpOlistic Investors As noted in Chapter I. all firms with multinational deal- ings do not fall into the category of international oligopolies- (as defined in this study). However. as discussed in the first chapter. such firms have historically played a minor role in the total of international business Operations. As shown in the data from the 1957 Census and in subse- quent studies of the Department of Commerce (O.B.E.. 1972). approximately 85% of all D.F.I. from 1957-70 was accounted for by 300 large OligOpOlistic firms. all of which stand out prom- inently on the Fortune list of the 500 largest U.S. firms (this data is more extensively discussed in Chapter I). The H.B.S. research project also confirmed this trend. noting that 80% of U.S. foreign investment in manufacturing came from 187 enterprises that were dominant firms in concentrated industries. The most comprehensive and detailed report on the oligopolistic nature of direct investment is in the much-quoted study of Stephen Hymer.1 His earlier findings (discussed in detail in Chapter I) showed that approximately 65% (a highly conser- vative estimate) of major U.S. investors in manufacturing and petroleum were dominant firms in industries where the concen- tration ratios were over 50% (approximately 50% were dominant in industries where the concentration ratio was over 75%). 1See S. Hymer. The International Operations of National Firms. 261 262 Taking the above evidence into consideration. the total role of small. non-OligOpOlistic firms in international investment is indeed small. Such firms probably account for. at most. no more than twenty percent of total United States D.F.I. No detailed comprehensive study of the separate behavior patterns of these smaller firms (from more competitive indus- tries) was undertaken in this thesis. selected behavioral points can be generalized upon. however. subject. of course. to further empirical verification. Firstly. such firms would not. by definition. be involved in the same global OligOpOlistic rivalry as the larger firms. Likewise. due to the relatively small size of their overseas Operations. such firms would ob- 'viously be unlikely to have worldwide "control" strategies since such would be neither necessary nor possible given the limited market horizon of the firm and its relative lack of market and political power. Firms from more competitive industries would thus be less inclined to protection of "monOpoly" knowledge. since. again by definition they do not possess such on a broad scale (as the dominant OligOpOlies do) and do not expect to establish long-run global market positions based upon monOpoly knowledge. Their international Operations would tend to be directed to- ward maximizing the Short-run return from some particular knowledge asset and not concerned with "glopal market dominance." Indeed. as pointed out in several studies mentioned previously. such firms would more likely chose licensing or joint ventures as a means of maximizing the short-run return on some transi- tory knowledge assets. rather than investing in wholly-owned 263 subsidiaries and branches as the dominant firms do.2 With the above points in mind. it should come as no sur- prise that such small (more competitive) firms would be less inclined to domestic manpower policies in the interest of general value and technolOgy control on a worldwide scale.3 In this connection. Rothschild's point on the inability of a competitive firm to do anything except attempt to minimize explicit short-run cost in the classical sense is relevant. Thus such firms might well desire controls over their market environments in the interest of long-term security. but market conditions (i.e.. their small relative size and the existence of more "effective" competition) are so overwhelming that such firms. working alone. can do little to safeguard their posi- tion in the long run. All they can do. as discussed in the review of Rothschild's thesis in Chapter III. is make the best of any given short-run situation -- minimize cost and maximize profit (in the neO-classical sense). Machlup makes much the same point in his review of oligopoly theory.’4 Thus. the hypothesized practice of oligopolistic multinationals employing relatively more expensive source-country nationals in high 2For a general theoretical discussion of the decision on exploitation of knowledge assets and its relativity to mar- ket structure see H. Johnson. "The Efficiency and Welfare Im- plication of the Multinational Corporation." pp. 35-56. Also see C. P. Kindleberger. American Business Abroad. 3Shearer has noted that the "100% national" companies in his sample were all comparatively small organizations. See Shearer. p. 70. ”E. Machlup. "Theories of the Firm...". p. 13. For a discussion see Chapter III of this study. BIBLIOGRAPHY 264 level positions in the hnterests of long-run control and security of market position. despite the effect on short-run return. is not feasible for smaller firms from more competi- tive industries. who are under-constant pressure to minimize the costs of necessary inputs. ’ The limited data'on general multinational hiring prac- tices is generally consistent with the above hypothesis. Again. however. a very careful constrastive empiirical study on the hiring practices at all levels by oligopolistic and non-OligOpOlistic multinationals would be necessary to finally verify these conjectures. 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