American Investment in British Manufacturing Industry

John Dunning

• Publisher: Routledge
• Year: 2006
• Print ISBN:
  9780415184120
• eBook ISBN:
  9781134669936
• Topic: Business
• Subtopic: Business General
• Index: Business

This classic work, first published in 1958, is a seminal text in international business history. This new, substantially updated and revised edition is being published on the fortieth anniversary of the first edition. Features of the revised edition include: * a new introduction * a new concluding chapter * amendments and additions to the original text * a new statistical appendix which examines the main features and significance of the US penetration of UK industry over the past four decades. Professor Dunning is one of the most internationally renowned and respected scholars in international business research. The updated version of this highly regarded book is a major contribution to studies in international business history.

1
The growth of US investment in British manufacturing industry

Though a handful of US firms had established sales agencies and banking houses in this country during the late eighteenth and early nineteenth centuries¹ not until 1852 was there any direct American participation in British manufacturing industry. At that date, Samuel Colt, an American gun manufacturer, decided to set up a branch plant in Pimlico, London ‘to protect himself from the destructive effects which would follow the introduction of…spurious arms into use in England, where he had no patent’.² According to his biographers, Colt would have preferred to license the right to produce pistols to a British manufacturer, but at the time ‘no machinery made in England was exact enough for the work necessary to turn out the revolvers’.³ However, the venture was not a financial success, and in 1857 Colt sold his UK interests to a group of Englishmen.

The next recorded US manufacturing investment in the UK was that by J.Ford and Company of New Brunswick, New Jersey, who, in 1856, set up a vulcanized rubber factory in Edinburgh, Scotland.⁴ The belief that higher profits could be earned by investing in the United Kingdom than by expanding in the United States was the chief reason for this initial venture, though the choice of location within the UK was strongly influenced by the fact that, at that time, English patents were not protected in Scotland, and could be exploited there without the payment of royalties. The new factory was entirely American designed and managed; and, with the aid of specialized machinery and a nucleus of key workers especially shipped over from the parent plant, early production was facilitated.

Later in the same year, the partnership was incorporated into a limited company—The North British Rubber Co. Ltd—and the original capital of £100,000 was increased. By 1861, the company was employing 300 people, and supplying 10 per cent of the UK market for rubber products.⁵ However, in the second half of the 1860s, partly because of unfavourable European trading conditions, and partly because the parent company wished to enlarge its own manufacturing facilities, the entire US shareholding was repatriated. Between that time and 1946, at which date the US Rubber Company purchased part of its equity share capital, the British concern had no American financial connections.

Yet perhaps the first exclusively American innovation to be successfully introduced in the UK by way of a foreign direct investment, was the sewing machine. Here the Singer Company led the way with the establishment of its first UK manufacturing unit at Bridgeton, near Glasgow, in 1867. For some years previously, imports of sewing machines from America had been growing—especially since 1864, at which date the now world-renowned sales and servicing facilities of the Singer Company had been first introduced.⁶ With the expansion of home production—in 1902 the UK subsidiary produced its 10 millionth machine—these now gradually diminished: by 1899, US imports were valued at only £92,894, and by the beginning of the First World War, the UK had substantially replaced its former dependence on imported sewing machines by an export trade of nearly$2½ million.⁷ Moreover, even as early as 1875, the Glasgow factory was supplying two-fifths of the UK market, and about the same proportion of Singer’s global sales.⁸

In the same year as Singer commenced production at Glasgow, R.Hoe and Company of New York set up a British subsidiary in London to manufacture its newly designed revolving printing press. Replacing the much slower steam and hand methods of printing, the American machine, with an output of 20,000 impressions an hour, in effect brought about a revolution in newspaper printing.⁹ Earlier, a variation of this machine had been imported by Lloyd’s of London for the production of its weekly newspaper, and this had so impressed the publishers of The Times that they ordered two presses from Hoe on condition that they were made in the UK. In due course, the equipment was produced by a British firm, manufacturing under licence to the American company, but shortly afterwards, the latter set up its own production unit, and from 1867 onwards it flourished practically unworried by competition, supplying almost all the leading newspapers in Great Britain and Ireland with its machines.¹⁰

The effects of this investment were both widespread and cumulative. First, it hastened the decline of the small hand-printer and concentrated output in the hands of a reduced number of firms who could afford the high initial outlay. Second, with the increased speeds in newspaper production now made possible, and the expansion of the UK market brought about by (i) the abolition of tax on newspapers in 1855 and that of the duty on paper in 1861; (ii) the rapid growth of population, and (iii) the beginning of compulsory education in 1870, there arose the complementary need for new and faster methods of typesetting and line adjustment. Here, too, American capital invested in a British-originated company—the Linotype and Machinery Co. Ltd—played a major role. During the 1880s, the Mergenthaler Linotype Company of New York had commercialized the patents of the German, Ottmar Mergenthaler, by which typesetting could be carried out both mechanically and a line at a time. Such machines were then produced in the United Kingdom by the Linotype Co. Ltd under licence, but later, after that concern had merged its interests with those of the Machinery Trust Co. Ltd, the American corporation gained complete financial control. By the early 1900s, the new subsidiary, which retained its original name, was assembling American-designed machines from parts imported from the United States. After this, growth was steady in spite of design and manufacturing problems, with the subsidiary gradually becoming more self-sufficient in its production. By 1914 virtually all the national and many of the provincial newspapers had mechanized their typesetting methods and were using linotype machines. Even today (1958), many years after the expiration of its original patents, the British Linotype Company remains largely pre-eminent in this field.

1870–1914—THE FORMATIVE YEARS

Such were the beginnings of American business investment in British manufacturing industry. They took place at a time when the United States was on the threshold of the most formative period in her industrial development. For industrial nations as a whole, the years which followed were rich in the discovery and exploitation of new sources of energy, new materials, new products, new manufacturing methods, and new organization structures. For America, in particular, they signified an era of unprecedented economic expansion. Between 1869 and 1909 the annual value of that country’s industrial output rose from $3.4 million to $20 million;¹¹ and by the turn of the century, the US had surpassed, both in scale and technique, its two main manufacturing competitors—the United Kingdom and Germany. At the same time, faced with a then unique factor-supply position of acute scarcity of labour, an abundance of land, easily accessible energy resources and a plentiful supply of capital, the pattern and character of her industrial growth broke away from that established by the older industrialized nations and assumed an individuality of its own.

In her formative development, the United States was fortunate in as much as the era in question was directly coincident with the discovery of new sources of energy and power—which were later to prove ideally suited to her particular economic environment. While benefiting from the manufacturing experiences (and mistakes) of her European forerunners, her industrial trajectory was hampered neither by an institutional structure unfavourable to mechanization and new production methods, nor by the tradition of inherited ideas. Her patent laws were liberal, and innovations were highly rewarded. At the time under discussion, she had virtually no industrial relations problems, venture capital was easy to come by, and her manpower (often recruited from Europe’s best) was still young, dynamic, flexible, fresh from pioneering a frontier settlement, and eager to raise its living standards. Much wealth had already been accumulated from earlier industrial and agricultural expansion, while incomes were sufficiently high and equitably distributed to give the necessary stimulus to capital growth and fully mechanized manufacturing techniques. And all this the American industrialist could exploit in the knowledge that he was protected from external competition by a high tariff wall, while being able to take advantage of one of the largest free-trade areas in the world within the United States’ borders.

Yet in the last resort, the key to America’s rise to industrial greatness was to be found in the adventurous spirit and inventive genius of a small group of men with scientific and business acumen. While the highly capitalized modern business corporation was gradually assuming more importance and influence, the real shape and course of the US’s destiny still lay in the hands of the individual entrepreneur—at that time, a combination of engineer, scientist, inventor and businessman—with his limited workshop and laboratory facilities. Men such as Thomas Edison, George Westinghouse, John D.Rockefeller and Philip Armour in manufacturing industry, and J.P.Morgan in finance, were all pioneers in their respective fields and, like their earlier counterparts in British industry, international in outlook and eager to exploit their discoveries wherever possible. Moreover in many cases they could foresee the likelihood of their inventions, tried and proved successful in the United States, being equally suited to the industrial structure and markets of other economies. In consequence, attention was soon focused on building up adequate export outlets, and later to the conclusion of cross-border licensing agreements, or the establishment of branch manufacturing units in the countries concerned.

This, undoubtedly, was one of the earliest driving forces behind the flow of direct American investment to the United Kingdom. The UK economic historian J.R.Clapham also recalls that the period in question was one of the disappearance of frontier settlements, and that only partially was the capital accumulated from this movement taken up by new industrial ventures.¹² As a result, he argues, wider avenues were sought to absorb these surplus savings, and with the UK offering particularly favourable opportunities for investment in manufacturing industry, the 1880s saw the first large-scale export of American business capital to that country.

It would, of course, be wrong to suppose that there were not equally important industrial advances taking place in the United Kingdom during these years. For in this era the basic electrical discoveries of Faraday, Wheatstone and Kelvin were made, and there were innovations, often of considerable significance, if less spectacular, in certain sections of the iron and steel, non-electrical engineering and chemical industries. The origins of the rubber, artificial silk, synthetic chemical, motor-car and cycle trades all date back to this time: industrial output doubled between 1880 and 1913.¹³ Yet the fact remains that, in the commercial application of new inventions and the development of complementary industries, e.g. machine tools, non-ferrous metals, etc. and new organizational structures, the United Kingdom lagged well behind her international competitors.

There were many and varied reasons for this—some avoidable, some unavoidable; all, however, stemmed from a common cause—the comparative reluctance of manufacturers to adopt and exploit the basic inventions of the period. First, for example, there was not the same coincidence between the pace of industrial expansion and the discovery of new sources of power in the UK as there was in Germany—a rejuvenated and unified Germany since 1871—and in the United States after the Civil War. Second, Britain’s industrial structure was less adaptable and, prima facie at least, economically less well-suited to the commercial exploitation of the product discoveries and the manufacturing innovations of the latter nineteenth century. Certainly any movement towards large-scale business units by way of amalgamation or combination, such as was taking place in the USA at this time, was officially discouraged and viewed with considerable suspicion. Third, in many cases, e.g. in the motor-car and electrical industries, restrictive and misguided legislation, coupled with indifferent and expensive patent procedure, severely hampered, and in some cases completely paralysed, the exploitation of new inventions and techniques. Fourth, vested private interests were sometimes powerful enough to stifle new developments, while the political philosophy of the day precluded any action being taken by the state which involved the ‘infringement of conventional conception of public privileges’,¹⁴ for example such as was inevitable in the laying of cables for electricity distribution. Fifth, the industrial prosperity of the British economy, then largely dependent on the basic, yet still expanding trades of cotton, coal, iron and steel and shipbuilding, was hardly in question. Why then launch out on the development of new products and manufacturing methods, with their associated uncertainty, when the old ones were serving the country so well? Sixth, there was neither the same incentive to use highly capitalized production techniques, because of the abundance of inexpensive labour, nor to substitute steam power by electrical power as coal was so cheap and easily accessible. Seventh, between 1870 and 1913, a substantial amount of British capital was invested overseas in the Dominions, South America and the United States. The fact that over 40 per cent of the United Kingdom’s total investment (i.e. home and foreign) during this period was exported at least suggests a measure of neglect in domestic capital formation.¹⁵

While then it is true that Britain made available to the world many new and important inventions during this period, there can be little room for doubt that her powers of application and commercialization fell seriously behind those of her major competitors. The gap between the discovery of an idea, its acceptance and its full exploitation, was gradually widening, both in terms of the resources and time involved. The risks, when viewed in the light of the circumstances of the time, were judged too great. Gradually the United Kingdom surrendered her industrial leadership to the United States and, to a lesser extent, Germany.

In the period between 1870 and 1914 a well-defined pattern of US investments was evolved in the UK, the interest being centred principally in what were then the newer British industries, and which were also those, for one reason or another, in which the United States had already established a competitive advantage. Substantially the same characteristics have manifested themselves up to this day. The actual capital invested during these years, and the number of American firms establishing branch subsidiaries, was not large, but the resulting impact on British industrial development was both widespread and of unquestionable significance. Indeed, it is not too much to claim that in certain branches of industry at this time US capital, know-how and experience combined to provide the vital impetus to indigenous growth.

Such, for example, might well be said of the development of the electrical equipment industry before 1914. In particular the lighting, traction and telecommunication sections were each strongly influenced both by the establishment of American branch manufacturing units and by the conclusion of licensing agreements between UK and US concerns. And on the basis of these three applications, the whole complex structure of the present-day electrical industry was built. Today (1958), the Standard Telephones and Cables Co. Ltd is the last of the major UK electrical manufacturing concerns in which there is still a substantial American shareholding. Yet, at one time or another, over the past seventy years, nearly all the modern electrical giants have had direct or portfolio US capital invested in them. Right up to 1953, for example, the International General Electric Company of New York owned a $22 million shareholding in the Associated Electrical Industries Ltd, a UK holding company which today employs over 60,000 people, and the constituent firms of which are all of American or Anglo-American origin.

American investment in the lighting industry first showed itself with the formation of the Edison Swan Electric Co. Ltd in 1883. Three years previously, the Anglo-American Brush Electric Light Corporation Ltd had concluded a licensing arrangement with the American Brush Company to manufacture arc lamps and arc lamp apparatus, but, notwithstanding the British firm’s name, no United States capital was involved.¹⁶ The purpose of this new company was to exploit the patents, and take over most of the business, of the Edison Electric Light Co. Ltd—the British licensee of the American Edison Company—a purely British concern. For some years prior to this merger, developments in incandescent lamp production had been proceeding more or less concurrently in the two countries—Edison having applied for a UK patent for his invention in 1879, and Swan in 1880.¹⁷ The amalgamation was, in fact, a reflection of the two firms’ desire to avoid possible patent litigation in the future. The Edison shareholding in the new venture was 40 per cent, but this quickly diminished as the capital was redistributed amongst American individuals, and as subsequent issues were taken up in the United Kingdom. Yet, in effect, the merger meant that for a period of ten years, until ...

Table of contents

• COVER PAGE
• TITLE PAGE
• COPYRIGHT PAGE
• FIGURE AND TABLES
• PREFACE TO 1958 EDITION
• PREFACE TO 1998 EDITION
• INTRODUCTION
• 1: THE GROWTH OF US INVESTMENT IN BRITISH MANUFACTURING INDUSTRY
• 2: THE PRESENT-DAY SCOPE OF AMERICAN PARTICIPATION IN BRITISH INDUSTRY
• 3: THE STRUCTURE AND ORGANIZATION OF US AFFILIATES IN BRITAIN
• 4: THE STRUCTURE AND ORGANIZATION OF US AFFILIATES IN BRITAIN
• 5: COMPARATIVE OPERATING METHODS AND PRODUCTIVITY IN US PARENT AND UK BRANCH PLANTS
• 6: THE INFLUENCE OF US FIRMS ON UK INDUSTRIAL DEVELOPMENT AND ON THE EFFICIENCY OF THEIR UK COMPETITORS
• 7: THE INFLUENCE OF US FIRMS ON THEIR UK SUPPLIERS
• 8: THE PRODUCTS SUPPLIED BY US FIRMS AND THEIR CONTRIBUTION TO INDUSTRIAL PRODUCTIVITY AND CONSUMER WELFARE
• 9: MANAGERIAL TECHNIQUES ADOPTED BY US FIRMS AND THEIR INFLUENCE ON UK IDEAS AND POLICIES
• 10: OVERALL ECONOMIC EFFECTS AND FUTURE PROSPECTS OF US DIRECT INVESTMENT IN THE UNITED KINGDOM
• 11: FORTY YEARS ON: AMERICAN INVESTMENT IN BRITISH INDUSTRY REVISITED
• APPENDIX 1
• APPENDIX 2: THE FIFTY LARGEST US AFFILIATES AND ANGLO-US FINANCED FIRMS IN UK INDUSTRY, 1995
• APPENDIX 3: US DIRECT INVESTMENT IN UK MANUFACTURING INDUSTRY 1950–95. STATISTICAL ANNEXE
• NOTES