The Evolutionand the Development of Multinational Corporations

American andEuropean Countries Multinational Corporations

The dominationof American in the development of Multinational Corporation has been widelyidentified (Nussbaum et.al, 1980). This idea of the multinational corporaton,according to Hymer (1979), was initially based on the American pe

The Evolution
and the Development of Multinational Corporations

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American and
European Countries Multinational Corporations

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The domination
of American in the development of Multinational Corporation has been widely
identified (Nussbaum et.al, 1980). This idea of the multinational corporaton,
according to Hymer (1979), was initially based on the American perspective. The
precursor to this is the United
States’ “national corporation”, which was
created at the end of the 19^th century when American capitalism
developed a multi-city and continent-wide marketing and manufacturing strategy.
These state-chartered companies were considered multinationals at least to the
extent that they represented a business organisation with economic goals
projected on an international stage (Reardon, 1992). Prior to 1970s, most of
the early studies tend to examine the w:st="on">United States foreign investment
activity. This process began in the latter part of the nineteenth century when
American industry began to supersede its European rivals.style='mso-spacerun:yes'> 

 

The w:st="on">United States
was economically self-sufficient during the half century, between the end of
the Civil War and its entry into World War I. This resulted to the halt of the
internationalisation of Corporate America. But when World War I forced the w:st="on">U. S. to be
exposed to the outside world, its ideological isolationism changed
dramatically. This unforeseen turn enabled the w:st="on">U. S. to learn various foreign
business policies and to study how foreign corporations coped up from economic
and political dislocations caused by a major continental war. Corporate America
then realized that the U. S. and its economy had been isolated, virtually
untouched by world events The effect of World War I to the economy of the U. S.
included forming irreversible commitments by larger oil, paper, copper,
nitrates, rubber, and aluminum companies to foreign investments to ensure their
companies’ futures. However, some consumer-driven companies such as general
Motors, Goodyear, General electric, and Du Pont had less aggressive foreign
expansion. These foreign ventures had the geographic spread qualifications
of  “MNCs” yet, in terms of corporate
management and finances, they were American companies with “subordinate”
foreign branches that acquired their justification because they served some
specific limited objectives.

 

While World War
II and America’s involvement
therein halted the limited foreign expansion of the late 1930s, this was to
become the window, which saves America
a global perspective. Because of the recession and isolationism after World War
I, many developing multinational corporations quickly withdrew from the global
economy. The only U.S.
corporations and true multinationals in the late 1940s and early 1950s were in
the primary sector. These corporations anticipated real shortages, so they had
to invest in the Middle East, Latin America, Africa, and w:st="on">Canada. Some
even went so far as to rebuild their pre-war processing or distribution
facilities in Europe. American corporations
expanded their businesses into Latin America.
But it was limited by labour-intensive industries’ establishment of assembly
facilities in countries with depressed economies and an ample supply of cheap,
unskilled labour.

 

The first real
impetus to the multinationalisation process in the industrial and service
sectors was developed during the late1950s. The w:st="on">United States direct investment
abroad increased nearly fivefold, from $12 billion to $55 billion between 1950
and 1965, and by the end of 1980, the total was approximately $220 billion. w:st="on">America’s
massive post-war aid to war-ravaged countries, allowed the international
economy to recover sooner than expected. It formed a healthy and favourable
economic climate for corporate expansion, reaching its zenith in the period
1960 – 1980. Following its victory in the war and in response to the Soviet
challenge, the United States
created in its own security interests the pattern of relations among the
non-Communist countries within which American MNCs have flourished. In
addition, the advances in transportation and communication, the introduction of
the computer, and massive rebuilding requirements in Europe
coincided with the rapid growth of American multinational corporations. Perhaps
it was the common market that stimulated the multinationalisation of w:st="on">America’s
manufacturing and service enterprises.

 

The response of
European businesses to the expanding and developing U. S. MNCs was to join the
MNC system rather than to challenge it. The European firms were already
multinational, though their overseas expansion had been somewhat frustrated by
balance of payment restrictions. As a result of mergers, nationalisation and
growth, other firms became better equipped for multinational operations and
began to extend their international operations in other European countries, in
underdeveloped countries, and even in the United States. Therefore, the MNC
system was no longer an American system, but at the very least became a North
Atlantic system both in the sense that Europeans joined the MNC ranks and in
the sense that American firms became less tied to the w:st="on">United States.

 

European, specifically British,
capitalism has traditionally practiced capital export like portfolio investment
and loans. In the 19^th century, w:st="on">Great Britain’s direct investments
were invariably infrastructure investments (Hall ed., 1968). In the 20^th
century, it has been largely in manufacturing, particularly in the growth
sectors of advanced or rapidly developing countries. These investments were
accompanied by mass migration of labour. Management, capital, and technology
have gone as a package to foreign lands in search of labour, markets, and
resources. In the 19^th century, at least in the so-called lands of
recent settlement (Canada, w:st="on">Australia, the United
States, and w:st="on">South Africa), management and
operating control usually remained in local hands (see Table 2.0).

 

Most of the
original investment made by European countries to the w:st="on">USA was of the
portfolio variety. Direct investments made in the US manufacturing sector near
the end of the 19th century included capital from the British in textiles,
primary metals, and food and beverages, and from the Germans in chemicals,
beverages and electrical equipment. Subsidiaries in the w:st="on">United States
were established during this time by such familiar MNCs as Bayer (in 1865),
Merck, Geigy, Bosch, Siemens, Daimler, Lever Brothers, Dunlop, Michelin, and
Nestle. By nationality, British holdings ranked first followed by German
holdings. By type of portfolio, manufacturing ranked first, finance next, then
transportation. The following (Table 2.0) is a comparison table between British
and American foreign investment

 

Table 2.0:lang=EN-GB> British and American Foreign Investment

 

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lang=EN-GB>	lang=EN-GB>British, 19th century	lang=EN-GB>  lang=EN-GB>  w:st="on">United States lang=EN-GB>, 20th century lang=EN-GB>  lang=EN-GB>
Investors	Banks Individuals Bond Market	Corporations
lang=EN-GB>Type of Investment	Portfolio Loans	Direct
lang=EN-GB>Activity	Raw Materials Agriculture Utilities (railroads and seaport)	Manufacturing Raw Materials (especially petroleum) Marketing
lang=EN-GB>Primary Motivation	Local Opportunity for Immediate Profit	Global Corporate Strategy
lang=EN-GB>Location of Investment (Bulk of Investment)	Europe lang=EN-GB>United States Lands of Recent Settlement ( w:st="on">Australia, w:st="on">Canada)	Europe Latin America lang=EN-GB>Canada Middle East lang=EN-GB> (petroleum)
lang=EN-GB>Migration	Stimulated Mass Migration	Corporate Management

 

style='font-size:10.0pt;mso-bidi-font-size:12.0pt'>Source: US Power and the
Multinational Corporation, Robert Gilpin, 1975

 

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The Japanese
Multinational Corporations

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Japanese firms
on the other hand, constructed an extensive network of exploration and
production abroad. The move was stimulated by the need to guarantee supplies of
raw materials, the need to be cost-competitive due to the rising of wages,
labour shortages, and an appreciating currency, and the need to secure access
to the world market. Those activities were conducted by leading Japanese trade
firms who were already multinational (Hymer, 1979). Many of these ventures do
not take the form of the wholly owned subsidiary or branch plant used by
American MNCs. Instead, they frequently involve production sharing, guaranteed
demand contracts, technical assistance, and portfolio capital.

 

After World War II, the Japanese
continued their policy of not permitting foreign direct investment but of
spending liberally for imported licenses of technology (Tsurumi, 1976). Their
purchases of technology from abroad were considerable, yet at the same time
they spent more than four times that amount on domestic research and
development. The incredible result was that within a relatively short period of
two decades, Japan
succeeded in breaking up the “package” of capital, technology, and
entrepreneurship, which foreign direct investment has most frequently entailed.
Interesting was the fact that they didn’t need the capital and got the
technology without managerial control by American corporations, and the
entrepreneurship remained in the hands of Japanese.

 

Dunning (1993) categorised Japanese
foreign direct investment strategies into two categories: as a defensive
market-seeking investment and as an offensive. The first strategy was the use
of their strong owner advantages. These advantages were sustained and supported
by strong location advantages to protect existing export markets with respect
to trade barriers and competitors’ threats. Cases in point are the green-field
plant type of ‘screwdriver’ factory for automobile, electrical and electronic
equipment industries. Majority of Japanese MNCs activities in the early 1980s
were of this type. The second strategy was the supply-oriented investment aimed
at gaining access to the information and technology needed to upgrade and
rationalise ‘domestic’ operations, and to advance a global competitive
strategy. By the end of the 1980s, w:st="on">Japan’s leading MNCs departed
from  trade replacing function, towards a
new phase of advancing global competitive strength. They increasingly adopted
offensive strategies in their attempt to secure and advance their foreign
markets. Such strategies have been largely driven by the need of Japanese firms
to transform themselves from exporters to ‘insiders’ in the major markets of
the world, and to keep in touch with the latest technological and
organisational developments, while benefiting from economies of cross-border
arbitraging and the gathering and disseminating of information.

 

 

In the late
1960s and early 1970s, outward FDI was encouraged in light manufacturing
sectors (textile, toys) – former export ‘stars’ which were rendered
uncompetitive by the increasing predominance of heavy industries (steel,
chemicals, shipbuilding). Most of these labour intensive industries were
exported to Asian developing countries (Ozawa, 1989). Subsequently, outbound
investment was aimed at securing access to the natural resources (oil, mineral
and etc.) required fuelling the growth of heavy domestic industry. Finally, the
continuation of the upgrading process demanded a shift up the value-added chain
into higher knowledge and technology intensive activities.

 

It was in the
late 1970s and early 1980s, when Japanese MNCs were encouraged by the
government to develop host countries to sustain or enlarge the markets for the
exports of firms whose owner advantages had by then reached rough parity with
their Western counterparts (Ozawa, 1989). In other words, because of changing
location advantages of Japanese firms, the latter showed an increasing
preference in the late 1980s to exploit those advantages by engaging in foreign
production. This was particularly true for Japan’s
burgeoning car and consumer electronics industries, whose highly competitive
products (low-cost, high quality and market oriented) were beginning to capture
high market shares in the United States
and Europe. In the early 1980s, the main aim
of the Japanese MNC was to protect the competitive advantage of Japanese-made
products. This was evident in what were then w:st="on">Japan’s premier export sectors,
i.e. cars and electronic goods. Japanese had invested more in the w:st="on">United States than to Europe because of location
advantages, and the fact that because of differing regulatory environments,
Japanese firms could internalise the market to their owner’s advantages more
easily in the United States
than in Europe.

 

In other words,
industrial rationalisation and restructuring mainly took place in Japan, with
outward manufacturing FDI geared towards maintaining or advancing markets for
Japanese exports (in developed countries) and relocating uncompetitive
activities (in developing countries). But relative to their w:st="on">United States
and European counterparts, Japanese multinationals still possessed relatively
weak owner advantages in the innovation of many new technologies. This meant
that Japan
needs a continual inflow of technology from abroad for its industrial
upgrading. Given this, a second important function of FDI was to act as a
channel to absorb technologies developed in the West (Ozawa, 1989). However, w:st="on">Japan preferred
to acquire such technology through means other than direct investment
(licensing, reverse engineering, etc.).

 

Some still maintain that Japanese MNCs
are ‘late comers’ to the international political economy and that this
forcefully sets them apart from the experienced American and European-based
MNCs (Ozawa, 1979). The Japanese multinationals’ alignment with the overarching
industrial policy of the Japanese government is a frequent issue for debate.
This policy focuses on circumventing protectionist measures abroad that limit
market access. Thus, the foreign direct investment behaviour of Japanese MNCs
is said to be concerned primarily with establishing export platforms and the
practice of transhipments (Yoffie, 1990). Other researchers believe that
Japanese MNCs, have traditionally emphasised the development of natural
resources rather than agricultural and manufacturing endeavours. And compared
to American MNCs that have focused more on profit making in manufacturing,
Japanese MNCs are more into foreign direct investment behaviour that is
consistent with nature resources diplomacy.

 

 

 

rspective. Theprecursor to this is the United States’ “national corporation”, which wascreated at the end of the 19^th century when American capitalismdeveloped a multi-city and continent-wide marketing and manufacturing strategy.These state-chartered companies were considered multinationals at least to theextent that they represented a business organisation with economic goalsprojected on an international stage (Reardon, 1992). Prior to 1970s, most ofthe early studies tend to examine the United States foreign investmentactivity. This process began in the latter part of the nineteenth century whenAmerican industry began to supersede its European rivals.

The United Stateswas economically self-sufficient during the half century, between the end ofthe Civil War and its entry into World War I. This resulted to the halt of theinternationalisation of Corporate America. But when World War I forced the U. S. to beexposed to the outside world, its ideological isolationism changeddramatically. This unforeseen turn enabled the U. S. to learn various foreignbusiness policies and to study how foreign corporations coped up from economicand political dislocations caused by a major continental war. Corporate Americathen realized that the U. S. and its economy had been isolated, virtuallyuntouched by world events The effect of World War I to the economy of the U. S.included forming irreversible commitments by larger oil, paper, copper,nitrates, rubber, and aluminum companies to foreign investments to ensure theircompanies’ futures. However, some consumer-driven companies such as generalMotors, Goodyear, General electric, and Du Pont had less aggressive foreignexpansion. These foreign ventures had the geographic spread qualificationsof “MNCs” yet, in terms of corporatemanagement and finances, they were American companies with “subordinate”foreign branches that acquired their justification because they served somespecific limited objectives.

While World WarII and America’s involvementtherein halted the limited foreign expansion of the late 1930s, this was tobecome the window, which saves Americaa global perspective. Because of the recession and isolationism after World WarI, many developing multinational corporations quickly withdrew from the globaleconomy. The only U.S.corporations and true multinationals in the late 1940s and early 1950s were inthe primary sector. These corporations anticipated real shortages, so they hadto invest in the Middle East, Latin America, Africa, and Canada. Someeven went so far as to rebuild their pre-war processing or distributionfacilities in Europe. American corporationsexpanded their businesses into Latin America.But it was limited by labour-intensive industries’ establishment of assemblyfacilities in countries with depressed economies and an ample supply of cheap,unskilled labour.

The first realimpetus to the multinationalisation process in the industrial and servicesectors was developed during the late1950s. The United States direct investmentabroad increased nearly fivefold, from $12 billion to $55 billion between 1950and 1965, and by the end of 1980, the total was approximately $220 billion. America’smassive post-war aid to war-ravaged countries, allowed the internationaleconomy to recover sooner than expected. It formed a healthy and favourableeconomic climate for corporate expansion, reaching its zenith in the period1960 – 1980. Following its victory in the war and in response to the Sovietchallenge, the United Statescreated in its own security interests the pattern of relations among thenon-Communist countries within which American MNCs have flourished. Inaddition, the advances in transportation and communication, the introduction ofthe computer, and massive rebuilding requirements in Europecoincided with the rapid growth of American multinational corporations. Perhapsit was the common market that stimulated the multinationalisation of America’smanufacturing and service enterprises.

The response ofEuropean businesses to the expanding and developing U. S. MNCs was to join theMNC system rather than to challenge it. The European firms were alreadymultinational, though their overseas expansion had been somewhat frustrated bybalance of payment restrictions. As a result of mergers, nationalisation andgrowth, other firms became better equipped for multinational operations andbegan to extend their international operations in other European countries, inunderdeveloped countries, and even in the United States. Therefore, the MNCsystem was no longer an American system, but at the very least became a NorthAtlantic system both in the sense that Europeans joined the MNC ranks and inthe sense that American firms became less tied to the United States.

European, specifically British,capitalism has traditionally practiced capital export like portfolio investmentand loans. In the 19^th century, Great Britain’s direct investmentswere invariably infrastructure investments (Hall ed., 1968). In the 20^thcentury, it has been largely in manufacturing, particularly in the growthsectors of advanced or rapidly developing countries. These investments wereaccompanied by mass migration of labour. Management, capital, and technologyhave gone as a package to foreign lands in search of labour, markets, andresources. In the 19^th century, at least in the so-called lands ofrecent settlement (Canada, Australia, the United States, and South Africa), management andoperating control usually remained in local hands (see Table 2.0).

Most of theoriginal investment made by European countries to the USA was of theportfolio variety. Direct investments made in the US manufacturing sector nearthe end of the 19th century included capital from the British in textiles,primary metals, and food and beverages, and from the Germans in chemicals,beverages and electrical equipment. Subsidiaries in the United Stateswere established during this time by such familiar MNCs as Bayer (in 1865),Merck, Geigy, Bosch, Siemens, Daimler, Lever Brothers, Dunlop, Michelin, andNestle. By nationality, British holdings ranked first followed by Germanholdings. By type of portfolio, manufacturing ranked first, finance next, thentransportation. The following (Table 2.0) is a comparison table between Britishand American foreign investment

Table 2.0: British and American Foreign Investment

	British, 19th century	United States, 20th century
Investors	Banks Individuals Bond Market	Corporations
Type of Investment	Portfolio Loans	Direct
Activity	Raw Materials Agriculture Utilities (railroads and seaport)	Manufacturing Raw Materials (especially petroleum) Marketing
Primary Motivation	Local Opportunity for Immediate Profit	Global Corporate Strategy
Location of Investment (Bulk of Investment)	Europe United States Lands of Recent Settlement (Australia, Canada)	Europe Latin America Canada Middle East (petroleum)
Migration	Stimulated Mass Migration	Corporate Management

Source: US Power and theMultinational Corporation, Robert Gilpin, 1975

The JapaneseMultinational Corporations

Japanese firmson the other hand, constructed an extensive network of exploration andproduction abroad. The move was stimulated by the need to guarantee supplies ofraw materials, the need to be cost-competitive due to the rising of wages,labour shortages, and an appreciating currency, and the need to secure accessto the world market. Those activities were conducted by leading Japanese tradefirms who were already multinational (Hymer, 1979). Many of these ventures donot take the form of the wholly owned subsidiary or branch plant used byAmerican MNCs. Instead, they frequently involve production sharing, guaranteeddemand contracts, technical assistance, and portfolio capital.

After World War II, the Japanesecontinued their policy of not permitting foreign direct investment but ofspending liberally for imported licenses of technology (Tsurumi, 1976). Theirpurchases of technology from abroad were considerable, yet at the same timethey spent more than four times that amount on domestic research anddevelopment. The incredible result was that within a relatively short period oftwo decades, Japansucceeded in breaking up the “package” of capital, technology, andentrepreneurship, which foreign direct investment has most frequently entailed.Interesting was the fact that they didn’t need the capital and got thetechnology without managerial control by American corporations, and theentrepreneurship remained in the hands of Japanese.

Dunning (1993) categorised Japaneseforeign direct investment strategies into two categories: as a defensivemarket-seeking investment and as an offensive. The first strategy was the useof their strong owner advantages. These advantages were sustained and supportedby strong location advantages to protect existing export markets with respectto trade barriers and competitors’ threats. Cases in point are the green-fieldplant type of ‘screwdriver’ factory for automobile, electrical and electronicequipment industries. Majority of Japanese MNCs activities in the early 1980swere of this type. The second strategy was the supply-oriented investment aimedat gaining access to the information and technology needed to upgrade andrationalise ‘domestic’ operations, and to advance a global competitivestrategy. By the end of the 1980s, Japan’s leading MNCs departedfrom trade replacing function, towards anew phase of advancing global competitive strength. They increasingly adoptedoffensive strategies in their attempt to secure and advance their foreignmarkets. Such strategies have been largely driven by the need of Japanese firmsto transform themselves from exporters to ‘insiders’ in the major markets ofthe world, and to keep in touch with the latest technological andorganisational developments, while benefiting from economies of cross-borderarbitraging and the gathering and disseminating of information.

In the late1960s and early 1970s, outward FDI was encouraged in light manufacturingsectors (textile, toys) – former export ‘stars’ which were rendereduncompetitive by the increasing predominance of heavy industries (steel,chemicals, shipbuilding). Most of these labour intensive industries wereexported to Asian developing countries (Ozawa, 1989). Subsequently, outboundinvestment was aimed at securing access to the natural resources (oil, mineraland etc.) required fuelling the growth of heavy domestic industry. Finally, thecontinuation of the upgrading process demanded a shift up the value-added chaininto higher knowledge and technology intensive activities.

It was in thelate 1970s and early 1980s, when Japanese MNCs were encouraged by thegovernment to develop host countries to sustain or enlarge the markets for theexports of firms whose owner advantages had by then reached rough parity withtheir Western counterparts (Ozawa, 1989). In other words, because of changinglocation advantages of Japanese firms, the latter showed an increasingpreference in the late 1980s to exploit those advantages by engaging in foreignproduction. This was particularly true for Japan’sburgeoning car and consumer electronics industries, whose highly competitiveproducts (low-cost, high quality and market oriented) were beginning to capturehigh market shares in the United Statesand Europe. In the early 1980s, the main aimof the Japanese MNC was to protect the competitive advantage of Japanese-madeproducts. This was evident in what were then Japan’s premier export sectors,i.e. cars and electronic goods. Japanese had invested more in the United States than to Europe because of locationadvantages, and the fact that because of differing regulatory environments,Japanese firms could internalise the market to their owner’s advantages moreeasily in the United Statesthan in Europe.

In other words,industrial rationalisation and restructuring mainly took place in Japan, withoutward manufacturing FDI geared towards maintaining or advancing markets forJapanese exports (in developed countries) and relocating uncompetitiveactivities (in developing countries). But relative to their United Statesand European counterparts, Japanese multinationals still possessed relativelyweak owner advantages in the innovation of many new technologies. This meantthat Japanneeds a continual inflow of technology from abroad for its industrialupgrading. Given this, a second important function of FDI was to act as achannel to absorb technologies developed in the West (Ozawa, 1989). However, Japan preferredto acquire such technology through means other than direct investment(licensing, reverse engineering, etc.).

Some still maintain that Japanese MNCsare ‘late comers’ to the international political economy and that thisforcefully sets them apart from the experienced American and European-basedMNCs (Ozawa, 1979). The Japanese multinationals’ alignment with the overarchingindustrial policy of the Japanese government is a frequent issue for debate.This policy focuses on circumventing protectionist measures abroad that limitmarket access. Thus, the foreign direct investment behaviour of Japanese MNCsis said to be concerned primarily with establishing export platforms and thepractice of transhipments (Yoffie, 1990). Other researchers believe thatJapanese MNCs, have traditionally emphasised the development of naturalresources rather than agricultural and manufacturing endeavours. And comparedto American MNCs that have focused more on profit making in manufacturing,Japanese MNCs are more into foreign direct investment behaviour that isconsistent with nature resources diplomacy.