2. The Traditional Nexus of Multinational Enterprises and Foreign Direct Investment

R. W. Walbank, author of The Hellenistic World (1975), cited in Gilpin (1975, 44).

See Moore and Lewis (1999), who provide an excellent explanation of Cartesian culture, the Greek business system, and the Assyrian/Phoenician business system that dominated international trade and investment in the Mediterranean region and the Near East during this period. The authors explain how agriculturally rich Assyria started long-distance trade with surrounding regions for metals and woods that it lacked, and organized the world’s first MNE, known as tarnkåru, which operated businesses in several foreign locations; how the Phoenician cultures and their seaborne trading operations in the Mediterranean resulted in an empire built on intercontinental investments; and how small family businesses in Greece traded independently in the Mediterranean, resembling the free market.

See www.​imf.​org/​External/​NP/​sta/​bop/​pdf/​diteg20.​pdf, accessed on July 27, 2015.

See www.​oecd.​org/​investment/​statistics.​htm, accessed on July 27, 2015.

See http://​unctad.​org/​en/​Pages/​DIAE/​Transnational-enterprises-(TNC).​aspx, accessed on May 28, 2016.

‘Free-standing company’ also refers to firms developed in one country by the nationals of another country, with minimal control from home country. For example, British nationals invested in the US prior to WWI using their connections back home to generate funding, expertise, market niche, and so on. Such investments, most of which were in the forms of portfolio investment, involved minimal control from the UK. Such examples can also be found in other colonies as well (Twomey 2000, 12–15).

The numbers in the parentheses next to the names of the MNEs reflect the years when these companies were founded.

Buckley and Roberts (1982, 12–13) summarize Svedberg’s claim of underestimation of FDI as follows: (a) lack of evidence; (b) the definitional change—dropping the medium of investment as a discriminator increases the ‘direct’ proportion; (c) foreign investments of smaller companies were ignored; and (d) the underestimation of the value of direct investment which is usually the ‘book value.’ Wilkins (1989, xi), who originally took the side with the prevailing consensus, subsequently acknowledged that the flow of FDI “have often been shortchanged in the literature of U.S. economic history.”

In 1917, immediately after entering WWI, the US seized all German-controlled subsidiaries in the US, when Germany also sequestered 159 American businesses in that country.

In 1914, estimates of foreign ownership ratios of FDI/domestic capital of Mexico, Cuba, Argentina, and Brazil stood at 42 percent, 38 percent, 22 percent, and 17 percent, respectively. See Table 7.4 in Twomey (2000, 199).

America’s next-door neighbor Canada also encouraged growth of American FDI during the period. The Procter & Gamble opened its first foreign plant in Canada in 1915, Chalmers Motor Corp (predecessor of Chrysler) and Willys-Overland Motors (Ford Motor Company), and American Pulp and Paper established their plants in Canada between 1914 and 1916.

The US federal laws restricted foreign ownership of banking since 1864 by requiring that all directors of the US national banks must be US citizens. The Edge Act of 1919 relaxed such restrictions to stimulate US bank participation in international trade and finance, although it still required that majority ownership of the banks held by US citizens and most of the bank directors be US citizens (Graham and Marchirk 2006, 11).

The 1920s, however, witnessed a decline in American FDI in Mexico because of nationalization of American businesses in that country during the period, and in Canada because American firms moved away to processing of paper and pulp from extraction of timber. At the same time, American FDI increased to Asia and the Far East, and to some extent Africa, with the expansion of American tire companies in the extraction of rubber in the region (Tolentino 2000, 54).

Developed countries, on their part, have also geared up efforts to lure foreign investment by offering tangible and lucrative incentives to MNEs. For example, in the late 1980s, the state of Kentucky offered Toyota an incentive package worth $125–$150mn (in 2002 dollars) for building a plant in the state to create 3000 jobs. In 1994, Alabama, another US state, offered Mercedes-Benz an incentive package of approximately $230mn for building a new plant to employ 1500 workers. Similarly, Motorola was paid £50.8mn in 1991 to establish a mobile-phone plant in Scotland to employ 3000 workers, and Siemens was offered £50mn in 1996 to locate a 1000-worker semiconductor plant in northeast England (Haskel et al. 2002).

The World Bank Atlas method categorizes countries based on their gross national income (GNI). In 2016, countries with a GNI per capita of $1045 or less were considered low-income countries; countries with GNI per capita of more than $1045 but less than $12,736 were considered middle-income countries; and countries with a GNI per capita of $12,736 or more were considered high-income countries. High-income developing countries are often also referred to as middle-income economies. In 2016, the World Bank designated 31 countries as low-income countries, 51 countries as lower-middle-income countries, 53 countries as upper middle-income countries, 48 countries as high-income non-OECD countries, and 32 countries as high-income OECD countries. For further details see https://​datahelpdesk.​worldbank.​org/​knowledgebase/​articles/​906519.

That the British Virgin Islands has been making the top-10 list as FDI recipients, however, sends a wrong signal—this country serves as an offshore destination of capital, rather than internationalization of production or trade.

Graham and Krugman (1995, 38–42) attributed the setback of the 1980s to the decline in US superiority in terms of technology and management skills—inability of American firms to stay at the top of product cycle and to pay higher wages than firms elsewhere, and the large US trade surplus in high technology products.

Based on Table 1.6 in Graham and Krugman (1995, 25–27). However, the authors noted that despite marked upward trend in Japanese investments in the US in the 1980s, Japan remained a relatively small part of the total FDI picture in the US, and even in 1992, the UK remained the largest foreign investor in the US.

Japanese MNEs scaled up their investments in the US as the US began to impose strong protectionist measures in respect to some industries, such as automobiles, color televisions, and steel, beginning from the late 1970s. As a result, Japan agreed to voluntary export restraints (VER) on automobiles in 1981 with a ceiling of 1.68mn cars per year. The ceiling was gradually relaxed and increased to 2.3mn per year in 1987, and then remained fairly constant for several years. Largely because of such protectionist measures, almost all major Japanese automakers established subsidiaries in the US—Honda in 1982, Nissan in 1983, Toyota in 1984, Mazda in 1987, Mitsubishi in 1988, Fuji in 1989, and Isuzu in 1989. Consequently, Japanese equity capital in the US increased by 50.6 percent in 1984 (compared with 1983), 29.6 percent in 1985, and 26.5 percent in 1986 (Wong 1987, 608–609). Several studies, such as Wong (1989), Salvatore (1991), Dinopoulos (1989), and Blonigen and Feenstra (1997) found strong evidence that such a huge surge in Japanese investments in the US in the 1980s resulted from quid pro quo direct investment than tariff-jumping foreign investments.

Some American MNEs—such as Boeing, General Motors, and Motorola—also invested in China at the same time but largely as a strategy to secure sales in China over the long term, although short-term gains in reduction of production costs were important as well, especially in the 1990s.

The NAFTA—a free trade agreement between Canada, Mexico, and the US—came into force in 1994.

To give just one example, thanks to the outsourcing of automobile production to Mexico during this period, multinational exports of auto and parts from Mexico grew from a very small base in the late 1970s to $7bn in 2000, with employment reaching over 350,000 (Moran et al. 2005, 202–203). Moreover, Mexico can now boast of several hundred auto parts producers attaining the status of original equipment manufacturer (OEM) or replacement equipment manufacturer (REM) (Doner et al. 2004).

However, following the election of Donald Trump as president of the US in 2016, the US pulled out of the proposed TPP.

The so-called reverse flow—outward FDI from developing to developed countries—is not a new phenomenon and it has received scholarly attention since the early 1980s. See Lall (1983), Wells (1983), Dunning (1988), and Tolentino (1993).

Barely two decades after the country’s industrial base was reduced to rubble during WWII, Japanese investment flowed first to East Asian Tigers—Hong Kong-China, South Korea, Taiwan, and Singapore—and then to other rapidly industrializing Southeast Asian countries—Malaysia, Indonesia, and Thailand, and then to North America, particularly the US, and the European Union (EU).

Outward FDI from emerging economies have also opened opportunities for capital flight and many round-tripping practices, such as tax evasion, money laundering, understanding to buyback at the same price, and transacting on false revenue benchmarks. Sauvant (2008) maintains that a good part of Russian FDI in Cyprus, Chinese FDI in Hong Kong, and Brazilian FDI in tax havens—may be of this nature.

The same year, Chinese Sichuan Tengzhong Heavy Metal Industry (Tengzhong)—a privately owned automotive company—failed in its bid to acquire Hummer from General Motors.

Based on Tables 8.4 and 8.5 in Schuller-Zhou et al. (2012).

Based on Tables 21.4 and 21.5 in Fladrich (2012).

For further details see Kumar and McLeod (1981), Aggarwal and Weekly (1982), and Pradhan (2008).

In 2015, the GDPs of the US and China were $18.56trn and $11.38trn respectively, totaling $29.94trn (IMF World Economic Outlook, 2016). For comparison of the world’s largest 500 MNEs in 2014 and 2015, see http://​fortune.​com/​2016/​07/​22/​global-500-in-6-charts/​?​iid=​sr-link3.

http://​beta.​fortune.​com/​global500/​, accessed on November 16, 2016.

See Roach (2007) and Graham and Krugman (1995) for further details on the ranking of MNEs.

For the largest privately owned MNEs in the US see http://​247wallst.​com/​special-report/​2015/​04/​24/​the-20-largest-privately-held-companies-in-america/​4/​#ixzz4D62K8bhg.

However, the ranking of the privately owned MNEs, prepared by Credit Suisse’s CS Global Family 900, needs to be read carefully as it lists only publicly traded private companies with at least 20 percent of family stakes, and thus, many of the top privately owned companies, which does not have at least 20 percent of family stakes, did not make the list.

The role of the SOEs is, however, in decline, especially since the liberalization processes received global momentum in the 1980s. In 2006, for example, SOEs contributed less than 30 percent of China’s GDP, compared with 80 percent in 1978. In Mexico, the SOEs’ share of GDP dropped to 5 percent in 2001 from 15 percent in 1982. Nevertheless, as UNCTAD (2011) notes, in 2011, more than 10 percent of the world’s largest business enterprises were SOEs, and SOEs contributed 10 percent to global GDP. For recent works on state-owned MNEs see Cuervo-Cazurra et al. (2014), Kikeri and Kolo (2006), Bruton et al. (2014), Bortolotti and Perotti (2007), and Musacchio and Lazzarini (2014).

The new patterns of MNE ownership is based on The World Investment Report 2016 (UNCTAD 2016), which extensively examines the emerging ownership patterns of multinationals as well as their affiliates.