Multinational Enterprises and Technological Spillovers

Tommaso Perez

• Publisher: Taylor & Francis
• Year: 2003
• eBook ISBN: 9781135297930
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

An analysis of the impact of inward investment on the competitiveness of indigenous firms, Multinational Enterprises and Technological Spillovers draws on evidence from the UK and Italian manufacturing sectors to show how foreign presence may generate both virtuous and vicious circles of development according to a number of interrelated factors. These include the level of the foreign presence, its rate of increase, the technological disparities between foreign and indigenous firms and the political response. An examination of the productive and innovatory activities of US and Japanese firms in Europe is also provided to enlighten the differential role of European countries in the global operations of overseas multinationals.

1.
Introduction

1.1.
INTRODUCTION

The topics discussed in this book form part of wide-ranging debate on the consequences of the internationalisation or globalisation of the world economy. Whereas until only a few decades ago it seemed reasonable to concentrate analysis on the effects of the internationalisation of production on the developing countries, today it is the more developed economies that must confront the challenges raised by the growing openness of national economic systems.

Since the end of the 1970s, the concentration of foreign direct investment (FDI) internally to the countries that make up the Triad (United States, Europe, Japan), as well as the growing number of international agreements for cooperation among firms from those countries, have made their economies the most susceptible to the consequences of the international mobility of the production factors, of goods, and of technological knowledge. It is this that justifies the close attention paid by economists to these phenomena. On the one hand, given the pronounced mobility of production capital, the danger arises that erroneous economic and industrial policy choices may hamper the development of the national economies and favour those other countries which are better able to exploit the opportunities afforded by the globalisation of national productive and innovative systems. On the other hand, the question arises as to whether the internationalisation of the economy may not reduce the capacity of governments to control and direct national economies, with dramatic effects on the dynamics of the fundamental economic magnitudes, primarily employment.

A set of factors further heighten alarm on both sides of the Atlantic. Not least of them is the ability of Japanese firms to impose their innovative products on world markets and to circumvent customs barriers. This combines with the economic take-off achieved by certain countries of South-East Asia, which have made the internationalisation of their economies the driving force of the development of their productive and technological bases.

The economic systems of the Western countries have responded differently to the challenges raised by the globalisation of the economy, and often in direct competition with each other. Thus, even internally to areas of close social, economic and political integration like the European Union, one discerns highly diverse, if not divergent, national policies pursued vis-à-vis the problems raised by the internationalisation of the economy. For example, since the early 1980s Great Britain has accelerated the internationalisation of its industrial structure by cautiously combining laissez-faire policies with measures designed to promote FDI in the country. Other countries, France for example, have maintained industrial policies designed to favour domestic industries and to orient the activity of foreign multinational enterprises (MNEs) on their territory. Yet others, Italy for instance, have taken no action at all, leaving it to national and foreign entrepreneurial forces to involve their national productive and innovative systems in the processes of economic internationalisation.

Leaving the political consequences of this state of affairs aside for the moment, investigation should be made of the internationalisation of economic systems in order to indicate possible strategies of action to national governments. The first step is to distinguish between two phenomena: active internationalisation, i.e. the foreign expansion of resident firms, and passive internationalisation, i.e. the involvement of foreign firms in a country’s economic system. As discussed in the conclusions to this book, these two phenomena are closely interrelated, and they follow the same logic: the establishment of increasingly closer links among the productive and innovative systems of different countries. However, like the majority of studies on this topic, for ease of analysis this book tends to focus on only one of the two aspects of the problem: the process of passive internationalisation of national economic systems. Furthermore, given that the MNEs perform the predominant role in this process, the analysis conducted in the chapters that follow will focus on the effects of their actions on national productive and innovative systems.

Economic analysis was long divided between two antithetical views concerning the consequences of FDI on industry in countries hosting the productive activities of foreign MNEs. On the one hand, the dominant theory emphasised the positive effects of the presence of foreign companies on the national territory, pointing out the pro-competitive effects of the economy’s greater openness to international competition, and identifying various kinds of externalities or technological spillovers which diffuse the technology¹ owned by the foreign firms into the surrounding environment (see e.g. Caves, 1974; Findlay, 1978). On the other hand, a minority view emphasised the possible anti-competitive consequences of the growing market power wielded by the multinationals by virtue of their expansion into other countries (see e.g. Hymer, 1970), or the negative effect on a country’s autochthonous development exerted by the transfer of substandard technologies by foreign MNEs (on this see e.g. Moran, 1970; Lall and Streeten, 1977).

More recently, economic debate seems to have relinquished these extreme positions. Rather than the existence of a univocal relation between foreign presence and economic development, the idea is gaining ground that the processes of productive internationalisation may give rise to both virtuous and vicious circles of development in the countries receiving FDI (Cantwell, 1987, 1989; Cantwell and Dunning, 1991). It is likewise contended that technological spillovers do not spring automatically from the foreign presence, as traditionally argued (Koizumi and Kopecky, 1977; Findlay, 1978; Das, 1987); rather, they result from interaction among local firms, foreign MNEs and government policies (Kokko, 1992; Wang and Blomstrom, 1992).

This book develops arguments that belong to this more recent analytical approach. Firstly, it recognises that the process of internationalisation of economies involves winners and losers, rather than producing unequivocally positive or negative effects for the industries of the countries concerned. Secondly, it attempts to explain the links among FDI, government policies and industrial development.

The traditional hypothesis—namely that the presence of subsidiaries of foreign MNEs in the domestic industrial system automatically generates productive externalities or spillovers able to enhance the competitiveness of local firms—gives way to the idea that the effects of FDI can be divided into two types. First there are genuine technological spillovers, that is, the set of effects deriving from the diffusion of the foreign firms’ technology to local firms due to physical proximity. Second there are the displacement effects on local firms resulting from the greater competitive pressure generated by the presence of foreign firms on the national territory.

According to the analysis conducted in the chapters that follow, multiple factors, interrelated within a complex dynamic system, determine the prevalence of one or other of these effects and therefore the consequences of the passive internationalisation of national productive and innovative systems. Perhaps the most salient of these factors are the following: the initial technological gap between domestic and foreign firms, the level and pace of the expansion of the foreign presence in the country, the strength of the market’s selective mechanisms, and the existence of government policies designed to encourage the technological development of local firms and to favour technological exchange between the two groups of firms.

If we take account of this interaction among the various components of a dynamic system, we must abandon the linear relations between foreign presence and technological development envisaged by most studies on the topic (e.g. Findlay, 1978; Blomstrom, 1989; Wang and Blomstrom, 1992). A certain level of foreign penetration—measured as the amount of national inputs or outputs controlled by foreign multinational firms—may have contrasting effects according to the values assumed by the binomial technological gap/foreign presence and by the rate of increase of FDI in the country. This is due to the joint impact of these variables on the pace of technological accumulation by domestic firms, in relation both to the exploitation of local lines of technological development and to the possible imitation of technologies used in the plants of the foreign MNEs. Combining with these factors is government policy. Since this is able to influence the innovative effort of domestic firms and/ or regulate competitive pressure by controlling the amount of FDI entering the country, it has powerful effects on the ability of local firms to withstand competition by foreign multinationals. The emergence of virtuous or vicious circles in reaction to the internationalisation of productive systems will depend on the domestic firms’ ability—by themselves or as a result of ad hoc government policies—to maintain the principal variables at values which enable them to minimise the negative effects of the displacement of local firms and to maximise the beneficial effects of the technological spillovers associated with the presence of foreign firms.

1.2.
THE GROWTH OF THE THEORY OF INTERNATIONAL PRODUCTION

The first analyses of the internationalisation of capital are probably those associated with Marx and Marxist economists (Lenin in particular). The Marxist-Leninist concept of multinational firm can be stated in modern terms by saying that it is a firm which seeks (in vain) to escape the contradictions of capitalism through the internationalisation of a larger and larger proportion of its production functions and/or the imperialistic exploitation of the labour and natural resources possessed by foreign countries.

In the Marxist approach, the driving force of the internationalisation process is the tendency of the rate of profit to fall in advanced economies, because of the high capital intensity reached by production process and/or increasing labour costs brought by well organised labour unions. This spurs firms from those countries to invest in less developed countries were where capital labour ratio is more favourable and there exists weakly organised labour force.

Marx wrote in Grundrisse:

“…[Capitalism contains an] endless and limitless drive to go beyond its limiting barrier. Every limit appears as a barrier to overcome.”²

While Lenin claimed in his famous essay Imperialism: The Highest Stage of Capitalism:

“The export of capital greatly affects and accelerates the development of capitalism in those countries to which it is exported. While, therefore, the export of capital may tend to a certain extent to arrest development in the countries exporting capital, it can only do so by expanding and deepening the further development of capitalism throughout the world.”³

Although Marxist-Leninist theory is able to explain the causes and effects of the internationalisation of firms, it fails to account for several other distinctive aspects of the expansion of multinationals. Among them: the increasing importance of capital flows among developed nations and the increasingly important role of MNEs as the engine of worldwide technological development.

In the latter respect, further light is shed on international production by Schumpeter (1942) and his thesis that innovative activity is concentrated in the research and development (R&D) laboratories of the big corporations. The latter, according to the ‘mature’ Schumpeter—thus termed by Freeman (1990) in contrast to the ‘young’ Schumpeter, “with his emphasis on the individual innovative entrepreneur” (Schumpeter, 1934)—are the main engine not only of capitalist accumulation but of technological accumulation as well, and therefore of economic development.⁴

Marxist-Leninist and Schumpeterian analysis therefore already sets out the fundamental factors in the expansion of MNEs during the twentieth century: the tendency of capital to pass beyond national borders, and the concentration of an ever greater proportion of the world’s productive and innovative capacity into the hands of large firms. However, it was only many years after Schumpeter’s work that the first specific studies of multinationals sought to define the concept itself of multinational firm, to identify its distinctive features with respect to uninational ones, and to examine the consequences of FDI on the countries of both origin and destination.

According to an useful classification made by John Cantwell (1989, 1991) modern theories or approaches of international production can be divided into four groups (market power approach, internalisation approach, macroeconomic development approach and competitive international industry approach) which are worth briefly analysing here. Each of them embraces a wide range of contributions, which share some common theoretical foundations. A further approach to international production, the eclectic paradigm, cannot instead be easily incorporated in any analytical schema since it aims to combine elements of all the four groups.

Market Power Approach

Hymer’s Doctoral Dissertation, completed in 1960 and published posthumously in 1976, made a crucial contribution to the analysis of international production. According to Hymer (1960), large firms use international production to increase their market power once the opportunities for expansion on the domestic markets have been exhausted. As a means whereby the market power of large firms is exported to other countries, international production has substantially negative effects on the host economies, since it raises market barriers, increases concentration, and restricts the ability of governments to control the national economy.

Hymer’s work is forcefully socio-political in its treatment of the activities of MNEs. The latter, according to Hymer, are among the main factors responsible for socio-economic inequalities among nations. They replicate the hierarchies internal to every firm on a worldwide scale by creating similar relations between parent-companies and their foreign subsidiaries. The multinationals thus ensure that the wealthy classes of the more developed nations—since it is these that constitute the top management of the parent-companies—will maintain control over the economically subordinate ones (Hymer, 1970).

Hymer admits the validity of Schumpeter’s thesis of a positive relationship between size of firm and technological innovation,⁵ and he states that the internationalisation of production can lead to the realisation of new technological goals. Nevertheless, he stresses, besides the pace of technological progress, account should also be taken of its direction. If the market power of the large firms enables them to impose their innovative products on world demand, the outcome may be the less vigorous exploitation of geographically differentiated capabilities for innovation.

There are evident similarities between Hymer’s arguments and Marxist and Marxist-Leninist analysis. However, the two theories differ sharply because Hymer, while speaking of the imperialist issues arising from the actions of multinational firms, expresses complete faith in the re-equilibrating mechanisms of the neoclassical theory of international trade (Hymer, 1970). For Hymer, international trade and international production are two contrasting forces: the one promotes socioeconomic equality among countries, the other destroys it.

Applications of the market power approach to international production are in Savary (1984), Newfarmer (1985), Cowling and Sugden (1987) and to some extent in Chesnais (1988, 1992). An influential marxist analysis of the causes and consequences of increasing market power by large MNEs can be found in the classical work on “monopoly capital” by Baran and Sweezy (1966).

Authors following this line of enquiry share the belief of an anticompetitive effect of MNEs. Cowling and Sugden (1987) also stressed the negative effects of international production onto the distribution of income. Chesnais (1988, 1992) emphasised that the bargaining power of MNEs may pare down the ability of governments to control national economies, as well as MNE entry may jeopardise national productive and innovative systems.

Internalisation Approach

Internalisation approach is originated in Coase (1937), who identified transaction costs as the reason for the existence and growth of productive organisations. Williamson (1975, 1981, 1985) gave new impetus to the line of inquiry developed by Coase, and Buckley and Casson (1976) applied it to the case of international production.⁶

Under the transaction cost approach, just as in domestic markets firms must choose between centralising their...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• List of Figures
• List of Tables
• Acknowledgements
• 1. Introduction
• 2. MNEs and Technological Spillovers: A Survey
• 3. An Evolutionary Model of Technological Spillovers
• 4. Japanese and American Multinational Firms in Europe: Empirical Evidence for the 1980s and Early 1990s
• 5. Foreign Multinationals and Domestic Firms: Empirical Evidence for the United Kingdom
• 6. The Characteristics and Consequences of the Foreign Presence in Italian Industry
• 7. Conclusions: Towards a Systemic Approach to Internationalisation Processes
• References