The Multinational Enterprise (RLE International Business)

John Dunning, John H Dunning

• Publisher: Routledge
• Year: 2013
• Print ISBN: 9780415643146
• eBook ISBN: 9781135134075
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

The book focuses on the major environmental implications stemming from the growth of the multinational enterprise in a multiple currency world; the international transfer of technology; industrial relations and labour utilization in foreign-owned firms in the UK; multinational companies and trade union interests; foreign direct investment, the balance of payments and trade flows; the multinational enterprise and developing countries; government policy alternatives and the problem of international sharing and a case study of a multinational enterprise in Europe. A survey of the background to the multinational enterprise and concluding summaries ensure that this book is one of the most widely embracing volumes available on the subject.

Part One. The Multinational Enterprise: Some General Considerations

Chapter 1

The Multinational Enterprise: The Background

John H. Dunning

Introduction

Economic agents have long traded with each other across national boundaries; to this extent, the internationally-oriented enterprise is no new phenomenon. Similarly, the economic prosperity of nations has always been influenced by the terms on which they have exchanged goods and services among themselves. Since the early nineteenth century, an active international capital market has existed, while the international flow of knowledge has an even longer pedigree – dating back to the exodus of the Huguenots in the seventeenth century and the smuggling of drawings, designs and machinery out of Britain to the American colonies more than one hundred years later.

These observations underline the very familiar point that world trade in goods and factor inputs has always affected the economic welfare of participating nations, and that several countries owe the timing of their take-off in development directly to the inflow of foreign capital and expertise.¹ But until fairly recently, most international transactions had two things in common. First, each was generally undertaken independently of the other and by different economic agents. Admittedly, in the nineteenth century, trade often followed investment, and labour and capital sometimes migrated together, but these movements were usually separately initiated and diversely motivated.² Second, most transactions were between unassociated buyers and sellers, and were concluded at market or ‘arm’s length’ prices.

During the last half century, and particularly in the last twenty years, a new and separately identifiable vehicle of international economic activity has emerged as a result of the internationalization of the productive activities of many enterprises.³ and its concomitant – the rapid expansion of foreign direct investment.

The distinctive features of foreign direct investment are twofold. First it embraces, usually under the control of a single institution, the international transfer of separate, but complementary, factor inputs, viz. equity capital, knowledge and entrepreneurship – and sometimes of goods as well. Nowadays direct investment accounts for 75% of the private capital outflows of the leading industrial nations,⁴ compared with less than 10% in 1914. Payments for proprietary knowledge, e.g. royalties, technical service fees, etc. between related institutions, accounted for 54% of all such payments made across national boundaries by British enterprises in 1968,⁵ and in the same year, about a quarter of their manufactured exports were sent directly to their foreign subsidiaries.⁶

The second unique quality of direct investment is that the resources which are transferred between countries are not traded, they are simply moved from one part of the investing enterprise to another; no market transactions are involved. Such prices as are charged may differ from arm’s-length prices wherever, inter alia, it pays the investing enterprise to earn its taxable income in one country rather than another.

This, then, may be taken as a starting point to the concept of the international or multinational⁷ producing enterprise (MPE), which we shall define simply as an enterprise which owns or controls producing facilities (i.e. factories, mines, oil refineries, distribution outlets, offices, etc.) in more than one country.⁸ We distinguish such an enterprise from one solely engaged in international trade (MTE), which sells its domestically-produced output directly to other enterprises or individuals in other countries; and also from an internationally owned and/or (financially) controlled enterprise (MOE and MCE), the capital of which is owned or controlled by economic agents of more than one nationality. Most large enterprises are, to some extent, MOEs: only a very few, e.g. Unilever, Royal Dutch Shell, Agfa-Gevaert, are MCEs. These latter are also sometimes referred to as transnational enterprises.^9,10

It is, of course, possible for an enterprise to be multinational in more than one, or indeed in all, of the above senses, though in this paper we shall be mainly concerned with the economic issues surrounding the multinational producing enterprise (MPE), which is financially controlled by residents of one country.

From most standpoints, the distinction between foreign direct investment and the operations of the MPE is not an easy one to draw.¹¹ Nevertheless, there are some obvious differences. First, direct investment can be made by economic agents other than enterprises, though in practice the amounts involved are very small. Second, it incorporates foreign investment by all firms, irrespective of the extent to which they are involved in foreign activities – or indeed in domestic activities.¹² Third – and most important – while the value of direct investment only includes the capital of the foreign company actually owned by the investing enterprise, the economic role of the MPE is better expressed in terms of all resources under its control, including those of local origin.

Other writers have attempted more precise definitions of the MPE¹³ but usually these either emphasize particular characteristics which may or may not be possessed by it, or treat the phenomenon from a specific viewpoint. The producing enterprise, for example, is likely to evaluate its degree of multinationalism in terms of the proportion its total employment, assets, sales or profits derived from foreign operations.¹⁴ Looked at from the angle of recipient nation states, or sectors within nation states, a more appropriate criteria might be the contribution of subsidiaries of foreign owned MPEs to domestic output or capital formation, or the impact of the foreign operations of domestically-owned MPEs on the balance of payments. A third and more functional approach is to look at the MPE according to the extent to which its constituent firms are subject to a common management or operational strategy.¹⁵ Professor Perlmutter, for example, argues that only those enterprises which fully integrate their global activities and have a geocentric outlook can be considered as truly multinational.¹⁶ On this definition, only a handful of the world’s enterprises would currently qualify as MPEs; on the other hand, the numbers are growing and it is this particular form of the MPE which is attracting the most attention of nation states.¹⁷

In view of these diverse ideas about the nature of the MPE it may be questioned whether we can say anything useful about it. I think one can, for two reasons. First, as we have already observed, there are certain common features to all enterprises that produce in more than one country and, second, compared with nationally producing enterprises (NPEs), there are sufficient differences both in their behaviour and their economic impact to make this particular institution worth studying.

This chapter will seek to answer four groups of questions:

(a) What is the economic significance of the MPE? In what ways does its pattern of behaviour (or that of its constituent parts) differ from that of a NPE? To what extent is it a distinctive decision-taking unit? What determines the level and pattern of the activities of MPEs in the world today?

(b) What is the contribution of foreign and home-owned MPEs (or their subsidiaries) on the national economies of which they are part?

(c) What are the costs and benefits of these businesses (or their subsidiaries) from the viewpoint of investing and recipient countries? What is the nature and significance of the conflict of objectives between the MPE and nation states? – or sectors within nation states? How, if at all, can conflicts of interest be resolved?

(d) What should government policy be towards the MPE (or its subsidiaries)? Is there a case for establishing supra-national institutions to deal with the international conflicts of interest between the various interested parties?

The Growth of the Multinational Enterprise

The increase in the contribution of MPEs to world industrial output is one of the most impressive economic features of the last two decades. Though about three-quarters of this growth has originated from US and UK owned and controlled enterprises, the greatest percentage increases have been recorded by Continental, European and Japanese firms,¹⁸ which seem almost certain to increase their share still further. A number of recent publications have analysed these trends in some detail.¹⁹ In this chapter we shall just highlight one or two of the more outstanding facts.

First, the current position, in so far as one can estimate it. In 1968, the book value of total assets owned by MPEs outside the country in which they were first incorporated was about $94 billion, and their total foreign sales (both exports and local output) were reckoned to exceed in value the gross national product of any country except the US and the USSR.²⁰ About 55% of these international assets were owned by US enterprises, 20% by UK firms and the rest largely by European and Japanese companies. About one-half of the American companies with world-wide sales of more than $1 billion in 1966 owned at least a quarter of their assets or derived at least one-quarter of their sales outside the US.²¹

Second, the foreign output of MPEs is currently expanding at the rate of 10% per annum, twice the rate of growth of world gross national product and 40% faster than world exports. Moreover, since the MPEs are concentrated in the technologically-advanced and faster-growing industries, their share of the world output is almost certain to rise in the future. This, coupled with the economies of scale such enterprises enjoy over NPEs, has prompted some observers to make predictions that by the turn of the century the largest 200 or 300 MPEs will account for one-half of the world’s output.²² Whatever one’s view of this prediction might be it would appear that, in recent years, the leading American MPEs have been growing appreciably faster than their more domestically-oriented counterparts. Of the largest 500 US industrial enterprises in 1967, those whose foreign sales and/or assets accounted for 25 % or more of their total sales and/or assets grew by 64% during the preceding five years, while those whose overseas sales and/or assets were less than 25% recorded only a 53% rate of growth.²³

The third point concerns the industrial concentration of MPEs. In 1967, 21 % of the plant and equipment expenditure by US manufacturing enterprises was undertaken by their overseas subsidiaries.²⁴ But 85% of this was in four main sectors: vehicles, chemicals, mechanical engineering and electrical engineering. While certain industries throughout the world, e.g. rubber tyres, oil, tobacco, pharmaceuticals and motor vehicles are almost completely dominated by MPEs, in others, e.g. cotton, textiles, iron and steel, and aircraft they are largely absent. Why? This concentration has important implications for the theory of industrial organization, which we shall take up later.

Geographically, too, the impact of the MPE varies considerably. Of the developed countries most dependent on inward direct investment, Canada stands supreme. Some 55 % of her industrial capital assets are owned by US or UK firms.²⁵ Of the 100 largest companies, 75 are foreign controlled. Australia is another example: 40% of her manufacturing and mining output is supplied by US firms, compared with less than 10% in Western Europe. MPEs are also active in many of the LDCs, particularly in the resource exploitation and intermediate technology fields.²⁶ Of the leading capital exporters, Switzerland, the Netherlands and the United Kingdom each derive more than 1% of their gross national product from income earned on foreign direct investment.²⁷

Some countries are two-way investors. Britain is unrivalled here. While more than 30% of the profits of British owned enterprises are derived from their overseas operations, foreign MPEs in the UK account for about 25% of manufacturing exports and, on present trends, are likely to supply the same proportion of manufacturing output by 1980.²⁸ The Netherlands, France, Sweden and, more recently, Germany and Japan also fall into this category.²⁹

How can one explain these facts? Why do MPEs dominate certain industrial sectors? Why are they mainly of US and European origin? Why has the post-war growth of certain European economies been strongly influenced by American investment, while that of the Japanese economy has been largely independent of it?

We have already hinted at why, relative to other ways of conducting international business, foreign direct investment has become more attractive to enterprises, and particularly those in the technologically-advanced industries.³⁰ Basically this has to do, on the one hand, with the economics of the production of knowledge and its transmission across national boundaries and, on the other, with the conditions of international marketing. Increasingly, for one reason or another, enterprises have chosen to transmit abroad the knowledge of how to produce goods rather than the goods themselves, and to do this by setting up their own producing facilities rather than licensing foreign firms.

The above thesis essentially applies to MPEs in manufacturing industry but, equally important, are the activities of such enterprises in resource exploitation and tertiary industries. At this point it may be useful to distinguish between three types of MPE, the activities of which may be prompted by quite different considerations:

1 Backward Vertical (or Cost Oriented) Operations

These are of two varieties. The first represents the extension of the purchasing function of the investing firm and is undertaken to obtain cheaper or more reliable supplies of raw materials or processed goods for the investing company. The second type is undertaken, chiefly by firms in extractive industries, with the aim of supplying their output to world markets. Most operations of UK firms are now of this latter kind.³¹

2 Forward Vertical (or Market-Oriented) Operations

These activities represent the extension of the sales function of the investing firm, the main purpose of which is to advance or protect its markets and facilitate domestic production. They do not usually account for large amounts of foreign capital, though quite a lot of the exports of the MPEs are channelled through them.

The factors influencing both these types of MPEs are fairly clear-cut as is their economic impact on host and investing countries.

3 Horizontal Operations

These largely comprise foreign manufacturing activities of MPEs which may or may not be harmonized with each other or with domestic activities. It is this type of operation which is currently attracting the greatest interest of both host and investing nations. These too may be variousl...

Table of contents

• Cover Page
• Half Title page
• Title Page
• Copyright Page
• Original Title Page
• Acknowledgements
• Original Copyright Page
• Contents
• Notes on Contributors
• Introduction
• Part One. The Multinational Enterprise Some General Considerations
• Part Two. Labour and the Multinational Enterprise
• Part Three. Trade and the Balance of Payments
• Part Four. Direct Foreign Investment and the Less-Developed Countries
• Part Five. Governments and the Multinational Enterprise
• Part Six. The Multinational Company in Europe
• Part Seven. Summary and Conclusions
• Index