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The Multinational Corporation and the Nation-State

I

Of all the problems we call “economic,” few have so baffled the expert and the nonexpert alike as those that involve the relations between nation-states. Indeed, one might even go so far as to say that economics, as a “science,” got its start from efforts to explain how gold and goods traveled from nation to nation, working their various effects on the countries they left and those they entered. In particular, that ill-associated group of seventeenth- and early eighteenth-century pamphleteers we call the mercantilists deserve their place in the history of economic thought if only because they annoyed people like Hume and Adam Smith (among others) sufficiently to get economic inquiry started along its present lines.

The basic theme of mercantilist doctrine had, at first glance, a certain logic. The mercantilists believed that a nation’s self-interest lay in the accumulation of a national treasure—gold. Gold was to be gained by selling goods to foreigners and was lost by buying goods from them. Therefore the pursuit of national self-interest resided in policies that would encourage exports and discourage imports, thereby increasing the stock of precious bullion by which the national wealth was to be measured.

To describe this underlying belief is enough to reveal that the philosophy of mercantilism is by no means dead. But at least in its original crude form, the mercantilist theory of international economic relations received its coup de grâce from the cool analysis of the classical economists. For the central message of Smith’s Wealth of Nations (1776) was that the proper measure of national wealth was not its stock of gold bullion but its annual flow of production. The road to maximizing wealth lay therefore in the pursuit of policies that would encourage the increase in that annual flow—in particular, policies that would augment production by encouraging the division of labor.

Smith, accordingly, envisaged the basic objective of international economic relations as one of bringing about a world-wide division of labor, a point of view that clearly required a willingness to buy abroad as well as an eagerness to sell abroad. Under his great successor, David Ricardo, this doctrine received its first keen analytical treatment, as Ricardo demonstrated that one nation, such as England, would benefit by trading with another, such as Portugal, even though England might be able to produce both cloth and wine more effectively than Portugal.1

From this genuinely stunning insight of the classical economists there followed an obvious prescription regarding the economic relationships between nations. That was that the well-being, not merely of one nation but of all nations, would be achieved by a willing surrender to the international division of labor, in which each did the work for which its climate, soil, skills, etc., best suited it. As a corollary, of course, each would thereafter trade its own products for the products of other nations, with no effort to block this exchange by tariffs or other impediments (except in very special cases, such as the infant industries of emerging nations). Thus emerged the doctine of free trade, a doctrine under which most economists still march, fortified by a century of theoretical buttressing of Ricardo’s work which culminates, in our own time, in contributions by such major figures as Paul Samuelson and others.

Alas for economics, from the beginning this grand and logically impeccable doctrine has ruled the theory of international economic relations rather than its reality. The reasons are not difficult to find. First, there was the fact that the flows of trade between nations often failed to “balance,” giving rise to complicated problems that had to be resolved by an international settlement of accounts. But this in turn was rendered difficult by the stubborn refusal of nation-states to adopt a single universal money-of-account, so that monetary bottlenecks of all kinds constantly prevented the smooth settlement of international obligations. (These so-called balance of payments problems also arose—and still do arise—from the fact that international financial transactions are not limited to the payment for international flows of goods and services, but are also used to transfer capital from one nation to another, to wage war overseas, to find a haven in numbered bank accounts in Switzerland, etc.) As a result, some nations have had trouble “financing” the imports they would have otherwise been willing to buy, while other nations have had trouble “selling” goods they were eager to get rid of because they were not willing to accept payment in another country’s currency.

Second, the doctrine of free trade has from the beginning encountered the stubborn resistance of the very workmen and employers whose ultimate well-being it was supposed to promote. No doubt part of the appeal of Ricardo’s theory lay in the fact that there were, in fact, no wine-makers in England who were being asked to shift to sheep-shearing. But the advice is more difficult to follow for the wine-makers of California who might be advised to take up automobile making, or for the French auto worker who is urged into champagne-bottling, so that the international output of both wine and automobiles might thus be maximized.

Last, the classical doctrine of the international specialization of labor and free trade has received its most crushing rejection from those nations on whom the theory was imposed most ruthlessly. Among the underdeveloped nations of the world a genuine specialization of labor did take place, accompanied by a more or less free importation of their products. But the emergence of banana-economies and coffee-economies and copper-economies did not bring with it the gradual convergence of living standards that was implicit in the theories of both Ricardo and Samuelson. Instead, the mono-economies discovered to their dismay that the ruling doctrine worked to widen rather than to narrow the disparity between themselves and their rich customers—a state of affairs for which standard theory had no explanation at all.2

II

I trust that the reader, especially if he or she is an economist, will forgive this capsule resumé of the theory of international economic relations. I offer it not to attack current theory, large portions of which are relevant to and indispensable for an understanding of these relations. My purpose, rather, is to set the stage for an exposition of the most important change in both the conception and practice of international economic affairs since Hume and Smith and Ricardo first promulgated the notion of international trade as the paradigm for the economic intercourse of nations. This change is the emergence of a new form of international economic relationship, based not so much on the exchange of goods as on the internationalization of production itself—an internationalization arising from the startlingly rapid growth of what are called multinational corporations.

Perhaps the best way to illustrate the nature of the change is to examine the multinational operation in action. Let me begin with a description of his own company offered by Donald M. Kendall, president of PepsiCo:

PepsiCo [operates] in 114 countries. Its most familiar product is bottled in 512 plants outside the United States. Production and distribution facilities in almost every country are owned by nationals of those countries. Regional managers may come from the area in question—or from some other part of the world—Frenchmen, Englishmen, Latin Americans—not necessarily from the United States. In the Philippines, where PepsiCo is about the twelfth largest taxpayer, the whole operation has only two persons from the home office. The company is multinational as far as employment, operations, manufacturing and marketing are concerned, and a good part of the operating management and plant ownership abroad is also multinational.3

We will come back to certain aspects of this multinational operation—one suspects, for example, that the two Americans in the Philippine office are not office boys. But the essence of the matter is that PepsiCo no longer exports Pepsi-Cola to, say, Mexico. It produces it there. And precisely this same internationalization of production is to be found in IBM, General Motors, Ford, Standard Oil, and so on down the hierarchy of American corporate enterprise. I do not wish to imply that every big company is multinational. But we do know that sixty-two of the top one hundred firms have production facilities in at least six foreign countries, and Kenneth Simmonds has shown that seventy-one of the top 126 industrial corporations (for which data could be obtained) averaged one-third of their employment abroad.4 This is probably a considerable underestimate of the extent of multinationality of the top industrials, but we will have to await the 1970 census data to be sure.

Meanwhile, on a broader canvas, there is little doubt about the importance of US international production taken as a whole. In 1966 (the last year for which we have all the data we need), the United States exported $43 billion of goods and services to various parts of the world. In that same year, the value of United States overseas production—that is, of goods and services made in US-owned factories or establishments abroad—came to $110 billion, or two and a half times as much.

Another way of establishing the importance of international production is to trace the rise in the value of US foreign “direct” investment (that is, investment in real assets rather than in securities). In 1950 the size of our foreign direct investment was roughly $11 billion. In 1969 it was something over $70 billion, or about one-fifth of the total assets (domestic as well as foreign) of the top 500 industrials. Moreover this figure for foreign direct investment represents only the value of the American dollars invested abroad, and not the additional value of foreign capital that is controlled by these American enterprises (for instance by their command over subsidiaries).5 If we add these assets to the purely American ones, the value of the American business empire abroad comes to considerably more than $100 billion.6

This is still, however, only part of the changing picture of international economic relations. The expansion of American corporate production abroad, especially in Europe, has given rise to a general awareness of The American Challenge, best expressed in Servan-Schreiber’s book of that name. But as economists Stephen Hymer and Robert Rowthorn point out, what seems to Europeans like an American challenge can be seen from another vantage point as a challenge to American corporations.7 For whereas it is true that American companies in Europe have been expanding faster than their European rivals, thereby scaring the daylights out of many Europeans, it is also true that European corporations have been expanding their total production, in Europe and abroad, as fast as or faster than the growth in total sales (at home and abroad) of the US giants.8 Thus while we challenge Europe in Europe, the Europeans challenge us elsewhere in the world, including within our own borders (think of the invasion of the American automobile market by European models).

  1. 1

    The point of this doctrine of comparative advantage can be summed up in the homely analogy of the banker who is also the best carpenter in town. Will it pay him to build his own house? Clearly not, for he will make more money by devoting all his hours to banking, even though he has to pay for a carpenter less skillful than himself. In the same manner, the classicists explained that one country will gain from another if it devotes all its resources to those activities in which it is relatively advantaged, allowing less well-endowed or less skilled nations to supply those goods which it has relinquished in order (like the banker) to concentrate its efforts where their productivity is greatest.

  2. 2

    It should be mentioned that in recent years the idea of the benign effect of an international specialization of labor has come under increasingly critical scrutiny, stemming mainly from the work of Gunnar Myrdal. Myrdal pointed out that in international relations (as also in the interregional relationships within a given country), free trade does not always lead to an equalization of wages, etc. Rather, an initial center of industrial strength attracts supporting skills and services, public as well as private, whereas an initial center of weakness loses them. (E.g., an industrialized center has a rich tax base that provides schools, roads, etc., while a rural backwater stagnates.)

    These so-called “spread” and “backwash” effects can override the pull of market forces that supposedly act as a great equalizer between the high-priced city and the low-priced country. Instead, as Myrdal has shown, the advantages of developed areas or countries attract skills and resources away from the hinterland, with the result that strong nations or regions grow stronger, and weak ones weaker. See his Rich Lands and Poor (Harpers, 1957).

  3. 3

    In World Business, edited by Courtney Brown, pp. 258-9. See the listing of sources at the end of this essay for further details.

  4. 4

    Interplay (November, 1968), p. 17; Simmonds in World Business, p. 49.

  5. 5

    Much of these assets may also be grossly undervalued. The entire book value of the US private investment in Middle Eastern petroleum for 1969 is carried at $1.65 billion. Earnings from petroleum from that area amount to over $1.1 billion for the same year. (Survey of Current Business, October 1970, pp. 28-9.)

  6. 6

    Kenneth Waltz in The International Corporation, edited by Kindleberger, p. 219.

  7. 7

    In Kindleberger, The International Corporation, pp. 57-91.

  8. 8

    In Kindleberger, The International Corporation, p. 72.

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