It i- V-1 L11 Str- lnt~--- tli--out-ot tl,a~ there
li;,s never br-n a very
satisfactory definition of rinaZ4.cLn7l ec-r-ny
I-. I am
aware that an enormous literature about
multinationpls h:~s grown up over
ti- last few years and some of it have hns been
extrem&Jy helpful and
constructive - I am thinking particularly of the
work that has come
put of the Harvard Multinational Enterprise
froject. But there is n big
difference between mareful. academic i esearch of
that kind and the popular
perception of multinationnls. Many people believe
that multinationals
represent a distinctive class of company, x,,ith a
di;stinctive mnnzngement
style and pattern of behaviour. But doe:s thiF-
class include the modium-
sized American engineering compmnny, employing
perhap5 a thousond people
in Wws'main factory, which has one or tteo small
overseas m;%nufnc t uring,
JL- It 11
affiliates? The is a multinational business, in
that ~--l sells -,nd
manufactures in countries other than h:i-- home
country, but rM is bnrdly
in the some league as General Motors or ITT or
Gillette. The fact is
that the number of multination;il comj--nies
groivinG every year as
internz,tional trade continues to develop. More
;,nd more compnnies find
it necessary to est.~blisb tradingr ew "ili- r
mnnufacturing affiliates
around the world,.=W. fncreasingly the
mul.tin.-ional bjbit is sprer~ding to
companic5 bnsed in the newly indu:4t--inlising
countries,e-f' U11- 1--l", such
as Br07il, India and Soutli Korea. IMany
peoplev0q- ti,inic of z=~ the term
mul t.ination;-l -,s ap-jyiiitT to nnl)- to cc).
1-nie.-~ nbdve n certnin si7e, but
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but I bnve no idea what the cut-off point %could
be and I cannot see
the logic of creating two separE-te categories of
business above and
belo,, t+- 1-4-2- 4--., C'.
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There in a huge variety of multinational
enterpl-ises operating around
the world. They vnry in product r.,nge, in
management techniques, in
ownership, in size and in nation.,l origin. This
variety hns an imnortnnt
bearine on whrrit I have to say about the economic
ch-,llengF.-s f.,cing
multinationnl business in the 1980's. It is very
impor-ant2l-~ member that
in coping i,-ith ;%!bqt is c(%rt;7tinly going to
be ,nothcr difficult
decz~de the miiltinntional comf)~,nj- does not
cn_r,3- soino unique -iL1%-nntFi(-
,c
%-.rhich protracts it from the economic pressurf~s
th.~t af"lict other kinds
of business.
/-Mast for'-~Casters i;'eenj to aurei~ tl-,nt the
economic oiitloo"~ for the
ne-,,; dccad,~ will involve rel,,Cively S jr ~-th.
Thn:-e t-.,ill be plenty ol'
competition in virtu,-1-ly -ill markets It is not
goin to be easy to
mnl~e profits. The pressure on mpnijf~ctui-crs and
rct:,ilers to make vu~Ppm-41-
themselves more efficient, to cut costs on,: to
find ways of incr,asinG
ti-eir market 5bare at th- expen:~e of' tl,,r next
man x%-il I be jnm~ intense.
Thin- -.:ill -pply n-.~t of' -,1l- to t'.!o;SC
COPIT~---Ii(-S i,' o-.:n,?d by private
sherch,,l~ ~rs ;,s oT,-.-,o!ied to
govvrj3-.:tnt-o,-.-nc:1 i:',-5. Shareholders
I. f 1- -!~ ~c,!-!~ t~3c,~- whi- -r..n,-,J an
the3.r bch.-111' caa-n
a sati~-faclol*Y r(,:1Wn.
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it isifar from certnin that in the comp&titive
battles that lie ahead
the big multinational c ompany wil! always come
out on top. As everyone
knows, there are disadvantages -IM in being too
big; it is not easy for
any management to be ot~tstandingly successful in
a large numb~-r of
different inr~ustries. Welve been seeing in the
last few years - especiall,
in the U.S. but to some extent in Europn too - a
t-ndency for large
companies to divest themselves or businesses which
are not earTiing
an adequate return. Hoiv often does one bear
compony ch4ii-maw*L- telling the:
etc kz~ " I L'/
shareholders we d-t/<-.,nt to b(- :,n industry
here w- are not No 1
or ot lea!~t ~;7o 2. No%~ of X course this is a
priC1,1ple ,hirj; is
4 is
ensier to stnte than t.~ put into proctice, but Vr
Lt at 1:0--C2 ..-orth
considering the possibility that some large
companies may prefer to
get smaller ns psrt of their rC5p,nze to the
competitive challenge.
It is true that in theory zi 1-irGe well-finnnced
compony can keep 0 105s-
making business going, in the hore of eventual
recovery, where;'ss if tbpt
< business was on its own it i~ould go ijust. But
shareholders ore becoming
increasingly restive when they see ) management
refusing to t;~ke action
in a situation of this +=immf
could infect the rest of
The point I'm
is not n g7nm of
kind; they nre t-w- well ;wm-- that the losses
~he business.
that large size rind lirge fin;!ncial resources
cominerc-in] siicc(-ss. It is po fectly pos.~ible
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11 company, specializing in one business and
p-~rhnps in one country,
to outsmart a large multinational. It all depends
on how well each
business is managed - and th multinalonals do not
have a monopoly of
L
management talent.
Of course there are industries where economies of
scale are important.
The obvious illustration is the automotive
industry and the trend toiards
-h.-t is called the world car. The argument is
that only the very largest
rmf
r
companties, mpnufacturing and marketingl- n virt
ly all the world's
5 ig,iI7~cant markets, can reap the economies of
sc-nle which nre available.
1 1,
Even here I'm not c-rtnin that the good little
lun,iniGht 1- -b specialisin
i~ partic rs of t-)e businns!z. i-ill zz;=
continue to pive the
I ecto
giant!F a run for their money. But I accept that
in certain industries
computers might be another cnsc - tbe global
integration of production
and se-Iling facilities does represent an
impo:-tant competitive advant:-ge
and Q= only /large companies are able to op-rote
on this scale.
But the vest majority of multinationcl companies
do not fit into this
cat 91- ry. They are more likely to tnke the form
of a confederation
of n,,tional compnnie5 - coordinated from the
centre, certainly, but
each affiliate has high dGi- of -bmc autonomoy and
is primar&ly
ccncerned i-Ath t-ie needs of its nntional market.
Multin,,tionnl co:--,).,ni s, even tbe 1,-,r(,est
of them, ore not insulated
from the pressures of the niarletpl rice. There
;!re -severe limits to what
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cnn be done, for instance, through
cr05s-subsidisation. Witrih
p,-ofit margins in virtu, lly all sep;ments of its
business under pressure,
the big multinational is not goina to put with up
a chronic loss-maker
for -A long Indeed it is not difficult to find
smaller companies
which are more ins Z_ ated from competition than
the gi~ats - perhaps
-because they have a unsfi unique product
pr-cttect~d by patents, 10 6r because
theyLsuccessfuily tued up the disi~~ibition
outlets in their particular
areaZ5 ev ftt'x.1
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~~~6
Any business exDects to hpve to cope with
competition, but the big
question for multina-.ional companies is h0x~ for
the normal pressures of
the market will be complicated by political
constraints. Will the
politir-al climate in whiach multina-ionals have
to pperate be more or less
favourable then it uras during the 1970s? Is there
any sign that the web
of regulations and controls -vhich apply in the
developed 13:1. as well as
the developing countries will be simpliEied ond
made more rational? Is the
there any hope that gover ments can reacli
agreement on policies ttint
will permit the free flow of investment C.3pital
across national
btrders, just as the), have reacbed agreement on
trade flows?
In the U.S. you are, I know, very familiar
%.,--;th the problems of over-
regulation, I often whether those European
companies which Pre
CV, eZ46HIA-1
flocking to subsjcJOOT-ie5 on tkis side of
Atlantic know
what they are letting thems~cves in for. They
think thev nre coming to
the last bastion of capitalism and they are right
in the
sense that there is probably a greater consensus
z", bout the advnnt7~ges of
a market economy, and the disadvantaCes of
socialismw )than there is the
their home country. But they may well discover
that the netWor!, of
Federal and state regulation is for more
burdensome than IP at home
and imposds very serious limi,~tions on their
freedom of action. Quite
part front tli(., antitruSL WhiCh I)--IVP prevent4
some
foreign companies fi-om comiriC, here ;s-~ zill,
the foieign inN,estor tins to
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C -1
keep a c~treful eye on a 1-1- numb(!r of agencies
e somethin,
to say about some aspect of JL;r his business. I'
y these regulations
are jkst as troublesome for the dorpestic company
- there is no
discrimination against the foreigner - but there
are some areas in which
the treatment of foreign companies does give rise
to anxieties. I am
thinking, for in-itnnce, of the attempt by
tbe.U.S., Government to extend
t'he jurisdiiction of its antitrust la.s
intoZactivities which do not
directly affect the U.S. market. I am tliinling
also of the attempts
by certain states to impose tax on foreigyw-oi-ned
companies on the basis
of their world-wi~le operations. The prLnciple of
unitFiry tax seems to me
not only grossly unfair in itself, but alc- .1-i
if it is applied
in the 'U.S. it will encournee otr)er countri,-s
oround the world to
turn the same principle to their advantage.
Multinational companies by defi~iition operate
under several diff~-rent
jurisdi,actions,=-4 They face the constant danger
that the requirements
imposed on them by one government will conflict
with those imposed
on them by another. An I In nn ideal world all
countries would
S~ibscz "be tb del approach to international
investment-1-:11-ligh was
e mo
C FRE-D Rtf?6S' TLA,,
set ouL,,~~, a senior official of the U.S.
treasury-.er-e.A-Y- -Ihn-f iould
Z' tv
neitberpjo-i promote vnor discouy~:,Ge inward or
outward !ft investmen: fl O~
or activities. Second', they woulc- avoid measures
which i..ould give
stieci~l incenti,ns or ciisinc~entivcs to Z4.,--~
investm4,,nt flo,-.,s or
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tivities. Third, they woi&ld avoid interVention in
the activities of
individual companies regarding international
investment.
In practice the free flow of investment capital
d~'storted by a
1, - V'--, - C-C~' ~ e/ , I J
whole series of regulations and controls.(-tbere
is a wide range of
incentives to attract foreign investors.& ' the
the foreign -Y,
subjected~
performance, for example on exports, se t/be
contr1hutes.- to the goals
of the local government. Mr. Bergsten pointed out
in --h that
when be is established, is often
to a number of rules as to
most governments had not yet recoanised the need
for
rules on international investment :,s they did
many years ago for
trade and international monetary policy. Some
tentative steps 11:tve
been taken to regulate the competitive bidding for
foreign investment
iebicb takes place among the developed countries,
but not much headway
has made yet been made in enlisting the
cooperation of the developing
countries.//The multinational companies have an
important role to play
in the se~r~'b for international rules. In the
19705A;~some useful
progress ;A ~--de, through OECD and other bodies,
towards self-
regulation by the multinational companies
themselves. One of the
challen.~,es of the 1980s is to move ' 13 towards
similar cooPeration
among governments, so that national -utho -ities
;,re subject to some
kind of agreed framei-.,or.'~ of rules in tbeir
policies to,,7,,rls fore3.gn
inves-mont, as they alrendy :ire on trade -nd
tariCf matters.
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-Z' -9
Inevitably it is 1r, th- 49--loping countries
where the tensions tend
to be Most acute. These'countries are extremely
sensitive about anything
which may be thought ibc undertrine t1leir ability
to control their own
destinies. From the rather few cases where a-=D
foreign-owned company
genuinely did dominnte 41te local economy, like
United Fruit in Central
America, has grown up a genernlised anx Iiety
about the presence of C-~k
foreign companies within their te:-ritorv. Yet the
developing countries
need the technology, the capital, the management
skills and the access
to world markets which the foreign company cnn
provide. The basic
issue remains - can a relotionsbip be dn%,ised
bet-.;een the host country
and the foreign investor which suits the interests
of bot'- parties
and contributes to world economic growth? During
tbe pas t1decade there
has been considerable experiment-tior% witl~
different forms of relationshij
In some cases the role of the foreign comppny hos
been limited to that
of a contractor, performing certain services for a
*ww feelt. In others
there has been a stroigbtforivard purchase of
teclinology, not accompar$Led
by any foreign pre3ence in the country concerned.
These arrangements
are acceptnble to the foreign partner ns long as
the payments are 01-r
but is the so-called llunbundlinj" of i,hat the
foreign company
6- VN" J, j _t2_ AC-S~
J---/actu.--Ily in - r iw-t-_ best interests of
the country?
2
llo~-. muc.) is the councry losin.7 throij.-.1,
failing t,) secure a direct and
continuinj cotni-.iitment on the part of the
foreiCil cO!*T)!"-'Y?
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Take, for example, the issue of foi-cign equity
shareholdings. A number
of developing countries put various forms of
pressure on t*re the foreign
investor to reduce his share of the equity in the
local subsbdia y or
affiliate, often to below 50 per cent. This policy
&,atl I-
on a number of grounds -
country is reduced, that
w i
o ~re dely, and that it
on One major country
lengths is India. S6nce
that the flow of dividends outside the
;' e- e-1 L"
it beliefs to diffuse s:h==-! shareow=~~(
11 1
= to devr~lop the local capital market and
which has carried thse~polLc, ?L~o coneidernble
nost of the important foreign investors have
agreed, sometimes with con5ider,)ble reltjctance,
to go alone with the
regulations and remain in the count-y with a
minority shoreholdina
p(ZI.sition, the policy may be rn.-,~rcled as a
success. But one midst :-lmLso
look at the possible costs associated with such a
policy. There is an
import~int difference between a trade investment
and a wbolly-oimed
or majority-owned subsAdiary. A trade investment
can be important and
profitable for the foreign investor, but it is
unlikely.to have the
same standing .:?'i_. within thr group as a
geaww"e subsidiary.
The local management cannot expect to be treated
on the same basis as
a ==aL member of the family. New c=mnr investment
is mo -e likely to
flow to subsbdiarih~s where the p==*m parent
compsn3r is able to influence
in a F-hii direct way.
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a
JW
V-" I fl- c- L~~
r,?Ie'mands that patents be "worked"if they are to
be filed in a particular
country
C-Fr-essure on COMp3nicr, to agree that their
subsidiaries will export in
return for the right to register international
trade marks;
rIz:...tan&'to "unpackage" the components of a
contract so that
governments can select the parts they regard as
desirable and purchase
the others elsewhere3 n
firessure 6.. ze ... pumies, to set up local
research and development facilities
in return for the right to manufacture;--)
C--gefusal by some Third World countries to permit
fair and adequate payment
for technology and management services; -,-- I
imitation of work permits for expatriates, which
makes it difficult
to transfer technology because the best people
cannot be employed to do
the job.
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My point:~tbat countries like India wbich have
followed this polijoy
arl.". ~ 12~_J
'haveZ-scored a political point, but there are
bidden costs which should
be taken into account in any assessment of the
success of the policy.
These countries are entirely Justified in seeking
to avoid excessive
dependence on foreign companies. Many of them are
seeking a balance
between three sectors - the state-owned sector,
Which =99-given the
responsIbildt OtyIor certain
key~'s,~e4~'&Sw~r'-'s<,_Ctbe locally-owned private
sector and the foreign-owned sector. Ones f tke
issues for the 1980s
is whether these countries will see the value of
foreign capital in
achieving the b.ilance for which they are striving
and will adopt
policies which enable the foreign company to play
its full part in the
development of the local economy. .~F T b?,-V
-troCfg~4 thro%%g'-ajt L1,1.
sj3.~~, Lbe overi-Aielming need is for the host
countries to talce a
rational, realistic view of the mu national
compolry, not expecting
-r-%* - t-i_L___~-~~ poiers for good or ill which
t:~=~
too much of it, not j
6-K
cannot up to, but taking a prA-matic, long-term
view
of what t~4 can offer IL t
w her this re stic attitude e gains ground depends
in part
on the multinational companies themselbes.. If
developing countries
are sometitnes guilty of taking a short-tcrm
political view of the
multinv~_'.'Lonals, the Tnultinat-1-01'.S tire
sometimics guilty of taking a short
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term commercial view of the developing countries.
Charge them the
earth, take the money and run - this may be a
rather crude descration. of
the attitude of some foreign compnnies towards
indust:-ialisation in
the third world, but there have been cases where
the description seems
to fit,.=.".-Flis has not helped the image of
multina~[ional business.
C
The i-iav- rowth of the developinr, countries
offers one of the
gruatest opportunities for the indus tl~_~ of the
developed world, but
the opportunities will only be seized if there is
a relationship of
mutual trust between the governments of the hast
countries and the
Potential foreign suppliers and investors. Tpking
adrantage of
inexperienced buyers may se,~m good business in
the short term, but the
long-term damage can be =a-y c.-nsiderable.
-. I., ~- ly
The multinational company, parti,-_m=rmW11t'y the
potential investor, has
to take a long-term view of the rules and
conditions imposed by the
host country. Take, for example, the issue of
export
obligations which are sometimes imposed on the
foreign invesfor as Oki f I
Ls hzj prve,4~~
2 V-4__L_,fHow far will these obligations distort
the economics of the company's worldwide business?
Will a concession
granted to one devetoping country be promphy
followed by others whose
demc,nds may be more difficult to satisfy? ThF~re
are c1rcumstances in
which it is better not to participate in certain
mar)~:et, however
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3
lucrative it may appear to be.
A. i11Li.Pi-.ti.n of what I have in mind cj~e'erns
tradi ng relations with
the countries of the Soviet Bloc. In the chemical
inclu-try a nutn6er of
West rn co rpanies have participated in major
po--t-ur i which
rt, b e' products of the plant a=="a
bavelp- - I-r, wholly or in pa
to be built. Acceptance of these counter-t ;~ding
arrangements may have
seemed an acceptable price to in order to secure
the contract,
1 ~4-~&,, CzE-)
bringing much needed business to the supplier's
FG.; ut the effect
of these d-als has been to subject the European
chemical industry
to a flood of low-cost imports front the Soviet
bloc; markets have been
J
disrupted and prices b,,ve b-nn forced down to
unremunerative levels.
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