The Future of the Multinational Enterprise

One of the most remarkable economic phenomena of the postwar period has been the rise of the multinational enterprise (MNE). An MNE may be defined as an enterprise which owns and controls activities in different countries. No economic organisation in post-industrial society has evolved so quickly and to such a high degree of sophistication as the MNE. The closest parallels are to the trusts and cartels which rose to prominence about the turn of the century. But these were only national in scale, their international operations being governed by a loose federation of business leaders rather than by direct control from a corporate world headquarters. The growth of the cartels was responsible for an increase in government participation in economic life through the enactment of antitrust laws; it also inspired the development of the economic theory of imperfect competition, which revolutionised economic thinking on the basic issue of resource allocation. Something of a similar revolution is required today. The growth of the MNE has caught both governments and economists unawares. Governments organised on a national scale find it difficult to exert controls or sanctions against international firms, since competition between host nations for the benefits of foreign direct investment ensures that a restrictive policy toward MNEs will only succeed in driving out foreign investors to a more favourable climate.

It is little exaggeration to say that at present there is no established theory of the multinational enterprise. Previous economic and statistical studies of the MNE can be criticised on the grounds that they lack a comprehensive theoretical basis. But from another point of view the fault lies with the orthodox theories of production and trade because as presently formulated they are unable to explain or predict the post-war growth of MNEs. We shall argue that the growth of the MNE is one aspect of a radical change in business organisation which has outdated the orthodox theory of production.¹

This chapter compares and contrasts the theory expounded in Chapter 2 with alternative theories of the MNE. Our review is confined to theories which focus on the impact of the market environment on the multinationalism of individual firms. Questions concerning the aggregate impact of multinationalism on trade and investment flows are not considered.

This chapter presents econometric evidence on the theory developed in Chapter 2. Section 4.2 describes the sample, which is based on a world-wide cross-section of large manufacturing firms, and indicates how the key variables have been measured. Section 4.3 develops and summarises the predictions of the theory, emphasising how the hypotheses can be formulated so as to be testable within the limits imposed by data availability. Section 4.4 reviews the statistical methodology. Section 4.5 presents formal tests of the hypotheses. Section 4.6 discusses possible mis-specifications of the statistical relationships and describes tests which have been made to check the sensitivity of the results to specification error. Section 4.7 summarises the main conclusions of the study.

A rational long-term policy toward the MNE, and toward international trade and investment in general, must be based upon an analysis of the underlying forces in the world economy. A theory of these forces and of how they have influenced the growth of the MNE was presented in the earlier chapters of this book. The present chapter shows how the theory can be used to predict the future evolution of MNEs and appraise the probable effects of various policies toward them.