Multinationals in the Global Political Economy

This month (August 1992), IBM is running a two-page magazine advertisement entitled ‘Thinking globally?’ which shows a map of the world dotted with blue pins representing IBM offices. The advertisement says that the world is getting smaller so people are thinking bigger; however, since cultures still differ, international firms face a paradox — how to think global and act local at the same time. IBM thinks local, according to the advertisement, by having offices around the world and manufacturing products that are customised for local markets; it acts global by treating all the offices as part of the same team and by offering consistent services around the world to its customers.

The state is based on the concepts of territoriality, loyalty, and exclusivity, and it possesses a monopoly of the legitimate use of force … [T]he market is based on the concepts of functional integration, contractual relationships, and expanding interdependence of buyers and sellers ... The tension between these two fundamentally different ways of ordering human relationships has profoundly shaped the course of modern history and constitutes the crucial problem in the study of political economy (Gilpin, 1987, pp. 10–11).

There have been many studies of the ways in which governments¹ may directly affect the activities of multinational enterprises (MNEs).² Few, however, have attempted to analyse the extent to which outward or inward direct investment — through its effects on the economics of investing or recipient countries — has led governments to modify their existing economic objectives and strategies; or, indeed, of the way in which governments have sought to influence the level and pattern of MNE activity, as part of a package of policy instruments designed to advance a broader set of economic and/or social goals.

What is sovereignty? What is a multinational enterprise? While Vernon knew the answer twenty years ago it is not clear that we still do today (Vernon, 1971). No longer do US multinationals compete with Japanese multinationals solely for the benefit of their home nations. Even Reich now recognises that multinationals are no longer ‘national champions’, but contribute to host nation performance, as well as home (Reich, 1992).

The first puzzle to be addressed is why it is taking so long for the study of international relations to embrace and incorporate big business into the analysis of the international system. Not only is it 20 years since Vernon’s Sovereignty at Bay came out in America: it is 20 years or more since, with the blessing of the London School of Economics’ International Relations department under Geoffrey Goodwin, that I initiated a small graduate seminar on International Business in the International System.² I was not even on the staff at the time, but that acorn grew into a sapling — a regular Master’s course with examinations. The only other people at the LSE who were interested in transnational corporations then were Professor Ben Roberts and some colleagues in the Industrial Relations department. Their concerns, however, were narrower and their work more directed at how labour relations with management were affected by the internationalisation of production.

In 1976, there were approximately 11 000 transnational corporations (TNCs), with about 82600 foreign affiliates. Of these, the largest 371 accounted for two-thirds of all TNC sales. There is no unambiguous measure of the contribution of TNCs to global production, but an indication of their importance can be gauged from the following observations: in 1980, the sales of the largest 350 TNCs were equivalent to 28 per cent of the gross domestic product of all noncommunist economies; their employment of 25 million people accounted for one-quarter of all manufacturing employment in these economies; their liquid financial assets exceeded (by a factor of more than three times) total global assets of gold and foreign exchange; and by the early 1980s, these 350 largest TNCs contributed approximately one-third of global industrial output and their intra-firm trade accounted for more than 40 per cent of total external trade in a number of the world’s largest economies.

The heat of the debate surrounding the role of Multinational Enterprises (MNEs) in developing countries has subsided considerably in recent years. The closing years of the 1980s have, in fact, witnessed a general warming of attitudes to foreign direct investments, not just in the development literature, but also on the part of the national governments that were traditionally strongly hostile to multinationals. There are many explanations for this change: a ‘maturing’ of the theory of international production, with a better appreciation of the nature and advantages of MNEs; the accumulation of experience of industrialisation in the developing world, with some of the exceptionally successful countries drawing heavily on foreign investors, and with many regimes restrictive to foreign investments faring poorly; the growing capability of many developing countries to negotiate with MNEs, and, for the more advanced ones, to absorb the leading edge technologies possessed by them; the onset of the debt crisis, with the sharp fall in flows of commercial lending to developing countries; and the speeding up of the process of technological change, with a resulting need of most countries to gain speedy access to modern technologies, services and information networks.

Analyses of international competitiveness and comparative advantage focus on the characteristics and behaviour of countries. They generally assign the responsibility for changes in countries’ competitiveness to macroeconomic developments and for changes in comparative advantage to changes in factor abundance and factor prices, to industry productivity developments, or to economies of scale in production. There is also another strand of literature that attributes changes in competitiveness to more ‘structural’ developments, in the sense that they are more deeply imbedded and long term, and not subject to manipulation by macroeconomic policy. These include changes in the aggregate productivity of the country, its workers, and its firms relative to those of its competitors. Recent discussions of US trade problems have emphasised factors of the second type, in particular worker skills or motivation, or the innovativeness, inventiveness, management abilities, and technological capabilities of US firms, all or some of which have supposedly declined.

Michael Crichton chose this bit of cautionary advice to end his bestselling novel about Japanese business perfidy in the United States.’ Not since The Jungle or perhaps Uncle Tom’s Cabin has a political polemic been as skillfully woven into so gripping a tale. A central Crichton theme, that too much of the American economy has fallen into the hands of foreigners, played to an audience already sceptical about incoming foreign direct investment (IFDI). A 1989 poll found 78 per cent of Americans favouring greater legal restriction of foreign investment in American business and real estate. Ironically, these are the same Americans whose leaders for the previous several decades had counselled Europe and the Third World that their fears of foreign investment penetration reflected little more than baseless superstition.

Although the decade of the 1980s has seen a major increase in a range of efforts by both developing and industrialised countries to market themselves as attractive locations for foreign direct investment, existing research has been biased toward the role of investment incentives and policy reform in these activities.¹ Current efforts, however, include not only the use of investment incentives and attempts to improve the investment climates of countries, but also marketing techniques such as advertising, missions, seminars, direct marketing of various forms, and service activities. The goal of these marketing techniques is to inform prospective investors about a country’s potential as an investment site, and to persuade them to set up operations in that country. For this study, we defined these marketing efforts as ‘investment promotion’. We set out in this research to add to the existing knowledge by focusing on aspects of investment promotion, especially the effectiveness of particular promotional techniques, that remain under-researched.