Multinational Enterprises in Less Developed Countries

In the last 20 years the attitudes of policy-makers towards multinational enterprises (MNEs), together with the issues preoccupying researchers, have undergone profound shifts. Development policy in the 1960s and 1970s were frequently predicated upon the notion that international trade inevitably brought dependence on foreign (developed) economies. Accordingly the trade policy of many less developed countries (LDCs) was designed to close off their economies, typically employing tariff protection. One result of this was that MNEs were induced to set up local production within these LDC markets to substitute for the exports they had lost.

This paper analyses the operations of multinational enterprises (MNEs) in less developed countries (LDCs) in terms of the interplay between two types of culture. The MNE, it is claimed, personifies the highly entrepreneurial culture of the source country, whilst the LDC personifies the less entrepreneurial culture of the typical social group in the host country. This view places MNE-LDC relations in an appropriate historical perspective. It is the entrepreneurial culture of the source country which explains why in the past that country had the economic dynamism to become a developed country (DC). Conversely, the limited entrepreneurial culture of the host country explains why it has been so economically static that it has remained an LDC. The current problems perceived by MNEs in operating in certain LDCs — and also the problems perceived by these LDCs with the operation of foreign MNEs — reflect the difficulties of attempting to bridge this cultural gap.

Over the past decade or so a considerable amount of research regarding the nature and functioning of Japanese firms and Japanese management has been carried out. It resulted in numerous books and an even greater number of articles in professional and academic journals, too numerous indeed to be cited in an introductory paragraph such as this one. Writing yet another essay on Japanese management therefore requires some justification. The present chapter concerning the transferability question of Japanese management has in the main been motivated by the ascendancy and challenge of a ‘Japanese-type’ system of management among MNEs in general and Pacific Rim MNEs in particular and an associated perceived lack of relevant material in both the economics and management literature. At the same time it was felt that the present discussion on the transferability of organisational structure and/or management styles had been too much steeped in US/Japan comparisons and stereo-typing at the expense of a more general/conceptual approach dealing with the applicability of management systems in alternate socio-cultural and economic environments.

A recent paper by Wells and Encarnation (1986) examines a number of investments by multinational firms in one developing country from a social cost/benefit point of view, and concludes that a sizeable percentage of these impart net negative benefits to the local economy. The sectors in which these investment undertakings were made generally benefited from high levels of protection from imports of substitutes for the final output of the undertakings. The authors conclude that the major reason for the outcome is that the scale of the undertakings is sub-optimal, resulting in average costs of production of output substantially above the landed price of imported substitutes.

The governments of less developed countries (LDCs) often complain that the subsidiaries of foreign multinational enterprises (MNEs) employ capital-intensive, rather than labour-intensive, techniques of production. The reasons for this concern are that the capital-intensive techniques generate relatively little employment, entail more expenditure in terms of scarce foreign exchange and the products made with those techniques yield relatively little benefit (in a sense discussed below) to consumers.

The last two decades have seen a mass of studies of the impact of transnational corporations (TNCs) on host less developed countries (LDCs). A central issue in any discussion of the impact of TNCs is ‘Does ownership matter?’. Do foreign subsidiaries behave differently from locally-owned firms and if so, what are the implications of such differences for development?

Countertrade involves a contractual arrangement under which the export of a good is linked to the import of other goods. Lecraw (1988a) distinguishes seven main types: counterpurchase, barter, buy-back, production sharing, industrial offsets, switches, and the unblocking of funds. Only the first four types are discussed in this chapter.

The relationship between foreign direct investment (FDI) by transnational corporations (TNCs) and developing countries continues to be a controversial one among both researchers on TNCs and government policy-makers in developing countries.¹ The governments of some developing countries have viewed FDI by TNCs as one means of accelerating economic growth, increasing investment, expanding and diversifying their exports, and accessing product and process technology; they have promoted rather than restricted investment by TNCs.² Others have allowed some FDI, but have placed restrictions of varying severity on TNC operations.³ Others have actively discouraged, if not prohibited, FDI in most sectors of their economies.⁴

In an earlier paper (Cantwell, 1986), it was argued that despite a shift in investment towards the newly industrialising countries of South East Asia and Latin America, investment in Africa has remained important for European multinationals. The firms of the UK and France, and to a lesser extent West Germany and Italy, have had traditional historical links with Africa.¹ Although these links have been relatively weakened in the last 20 years or so, they have not been completely broken. This paper further develops the statistical evidence on the investment of foreign multinationals in Africa, drawing upon a variety of sources. It is particularly concerned to establish the sectoral distribution of foreign direct investment in Africa, by comparison with other developing regions. The existing structure of investments by foreign multinationals in Africa is then related to the prevailing pattern of economic activity in African countries, and their current and future impact on local development is discussed in the light of this.

This study focuses on the relatively new phenomenon of Yugoslav direct investment in LDCs. The main purpose of this chapter is to discuss the origin, evolution, specific characteristics and motivation of Yugoslav firms in LDCs. The focus is on four issues: (1) What are the major historical, economic and political variables that help to explain the growth of Yugoslav FDI in LDCs? (2) What are the motives behind Yugoslav direct investments in LDCs? (3) What factors prompted minority-owned Joint Ventures as the preferred form of investment in LDCs? (4) What are some of the problems and reasons for divestment?

Swedish firms have been active in international business for almost a hundred years. Firms like AGA, Alfa Laval, and Ericsson have had manufacturing subsidiaries abroad since the 1890s. Firms like Swedish Match had established manufacturing operations in far away markets such as India, Pakistan, and Thailand as early as the 1920s. Most of the literature on multinational firms tends to focus on the nature and characteristics of traditional multinationals from large countries such as the United States. However, studies of small-country multinationals have burgeoned in recent years and prior studies have examined foreign operations of firms from small developed economies as well as the foreign operations of firms based in the developing countries.¹ Few of these studies have focused on the development of a conceptual framework that may be useful in understanding the evolution of multinational firms from a small developed economy such as Sweden. This chapter contributes to this gap in the literature by developing a product life-cycle-based conceptual framework for understanding the evolution of multinational firms from small countries and by applying that framework to examine the evolution of the Asian operations of Swedish firms.²

Over the last decade or so, a number of Mediterranean Rim countries have emerged as major textile producers and exporters. Turkey, for example, has recently replaced Hong Kong as the leading foreign supplier of textiles to the European Community (EC) (in volume terms). Textile exports from Tunisia have increased by more than 1000 per cent since the early 1970s; while for countries such as Morocco, Greece and Malta textile exports have increased at a significantly faster rate than the world average. Even in Algeria and Egypt, where textile exports have grown less rapidly, recent investments in new plant and equipment have added considerably to domestic textile capacity and improved long-term export prospects.

This chapter examines some of the principal issues in the relationships between multinational enterprises (MNEs), the service sector and developing countries. The linkages are both complex and important. There is sizeable investment by developed country MNEs in the service industries of developing countries. Increasingly, developing country-based MNEs are operating in the service sectors of the developing and more advanced economies. The importance of this investment results from the growing significance of the service sector in the world economy, its considerable fluidity and the role that services play in the development process (UNCTAD 1985). MNEs enter the picture as major suppliers of services in the developed nations and, because of the particular economic characteristics of services (Enderwick, 1988a), as a principal mode for transfer of service technologies and output to the developing nations.

In this review I will make no attempt to undertake any comprehensive summary of, or to present any definitive conclusions on the very varied and interesting selection of papers contained in this volume. Instead I propose to look a little at some of the more important developments in the world economy over the past few years, and the role multinationals have played in fashioning these developments; and then relate these happenings to some of the papers which have been presented here. Perhaps I should apologise in advance if I do not afford equal weight to each contribution in the course of a very personal view of some of the highlights of the previous chapters.