Burton I. Kaufman
The influence of multinational corporations on U.S. foreign policy is complex, but, generally speaking, they have not played a major role in the formulation and execution of foreign policy. This may seem a surprising conclusion, because it is now widely recognized that for much of U.S. history, but especially for the period beginning at the end of the nineteenth century and continuing throughout the twentieth century, there has been a strong correlation between U.S. foreign economic policy and U.S. foreign policy. Simply stated, historians and others have shown, rather convincingly, that economic expansion—the search for foreign markets for U.S. surplus agricultural and industrial production—has played a key role in American foreign policy, particularly after President Woodrow Wilson (1913–1921) enunciated his concept of a new world order predicated on classical liberal and capitalist principles.
In writing about the role of multinational corporations on U.S. foreign policy, however, the following points need to be made: (1) the first multinational corporations were not established until the latter part of the nineteenth century; (2) most of the first multinational corporations became "multinational" by reinvesting their foreign profits abroad, not by making investments overseas; (3) large businesses invested abroad where and when their executives thought profits were to be made, not because of foreign policy concerns, and, with some exceptions, because they did not unduly seek to influence the formulation of foreign policy; (4) while there were certainly loud calls for expanding markets overseas, even to the point of permitting businesses to engage in joint combinations otherwise prohibited by the nation's antitrust laws, those business leaders advocating such policies were generally from smaller or midsize businesses and/or represented regional interests; and (5) to the extent that there was collusion or collaboration between public policymakers and business leaders (as in the case of the oil industry), it was just as often government that sought to use the nation's industrial giants to achieve foreign policy objectives rather than the other way around.
Multinational corporations (MNCs) are corporations whose home offices are in one country but have significant fixed investments in other countries. These investments might be in factories or warehouses, transportation or telecommunications, mining or agriculture. Businesses that merely maintain local or regional sales offices abroad are generally not thought of as multinational corporations.
Corporations invest abroad for a variety of reasons. Among them are to open new markets or to hold onto existing ones; to avoid tariffs or other trade restrictions; to tap new sources of raw materials and agricultural production; and to take advantage of cheap foreign labor. Although the history of American MNCs goes back to at least the mid-nineteenth century and a significant number of MNCs had been established by the turn of the twentieth century, their emergence as a key factor in international commerce is really a product of the post–World War II period.
Americans had, of course, been involved in world commerce ever since the founding of the colonies in the seventeenth and eighteenth centuries. Colonial merchants often employed agents abroad (frequently family members) to promote their interests wherever they conducted significant commerce, most notably in London and the West Indies. Following the American Revolution and through much of the nineteenth century, they expanded their stakes abroad by opening branches that sometimes included fixed investments like warehouses. Some Americans even opened small businesses overseas or inherited existing businesses through loan defaults and bankruptcies.
Until the latter part of the nineteenth century, however, American businesses had not made the types of direct investments abroad that would have classified them as multinational corporations. The reasons why were much the same as the reasons why even America's largest business enterprises sold mainly in local and regional markets. The United States lacked the transportation and communication facilities to allow businesses to operate on a national scale. American businesses also lacked the organizational structure and capital to compete nationally or internationally.
By the end of the nineteenth century all that had changed. With the establishment of transcontinental railroads and a network of branch lines that laced much of the nation together and a telegraph and telephone system that made nearly instantaneous communication possible, American business leaders could think in broad national terms. Other developments, including a single national currency and the expansion of capital markets, the mass production of consumer goods like food products and manufactured clothing, and major technological advances such as the manufacture of electrical generators, office equipment, and sewing machines, each requiring a specially trained sales force to sell and service them, made national expansion viable, even inevitable.
The same was true of the international marketplace. A dramatic increase in the speed of steamships plying the oceans between American and world ports, the completion in 1866 of the first transatlantic cable, the need or desire on the part of American business leaders to seek out new markets for increased U.S. industrial and agricultural production, and the need also to have reliable sources of raw materials and native agriculture, such as bananas from Central America, were only some of the supply-side forces driving U.S. economic expansion overseas after the Civil War. On the demand side were the attraction abroad of new U.S. industrial output and the importance of having a trained sales force able to explain and service the highly sophisticated technology that American manufacturers were producing.
EARLY MULTINATIONAL CORPORATIONS
The first American multinational corporation was I. M. Singer and Company (later changed to Singer Manufacturing Company), whose name became synonymous with the sewing machine. Established in 1851, Singer relied at first on independent foreign agents to sell its machines in Europe, even transferring to a French entrepreneur, Charles Callebaut, the rights to its French patent. Having successfully developed its own sales force and branches in the United States, however, and unhappy with the lack of control over these agents, some of whom even sold competing machines, the company decided to rely on its own salaried sales force and branch offices to market its product. By 1879 Singer was selling more machines abroad than at home and had branches in such distant places as India, Australia, South Africa, and New Zealand. In response to Europe's demand for its machines, moreover, it opened its first foreign factory in Glasgow, Scotland, in 1867. In 1883 it built a new modern plant outside Glasgow, where it consolidated the operations of the original factory and two others that had grown alongside it. It also built much smaller plants in Canada and Austria. By the end of the century other American corporations, including Westinghouse, General Electric, Western Electric, Eastman Kodak, and Standard Oil, often following Singer's experience abroad, had also opened plants or refineries in Europe.
Although talk was ripe at the end of the nineteenth and beginning of the twentieth centuries about gaining a larger American presence in the Far East and Latin America, most large American companies invested abroad where market success seemed most promising or where sources of raw materials could easily be developed; this meant primarily Canada, Mexico, and Europe. Canada was both a market for American exports and a source of such raw materials as gold, timber, and oil. As such it was the largest market for American investments, which totaled $618 million by 1914. In second place was Mexico, where Americans invested $587 million, mostly in mining and railroads but also increasingly in oil.
Europe was a primary market for U.S. industrial goods, including heavy industrial machinery, steam pumps, cash registers, electrical generators, reapers, and consumer goods, most of which were superior to European technology. American firms grew abroad largely by reinvesting their overseas earnings. In fact, by the turn of the twentieth century the United States had made such inroads into European markets that Europeans even talked and wrote about an "American invasion" of Europe, not dissimilar from American cries seventy-five years later against a Japanese "invasion" of the United States. By 1914, U.S. direct investment in Europe amounted to $573 million.
Worldwide, Americans invested $2.65 billion. Although this might not seem noteworthy by contemporary standards, it amounted to about 7 percent of the nation's gross national product or about the same percentage of the GNP as for the 1960s. On the eve of World War I, in other words, the United States had entered the still new world of multinational corporations, although that term was still unfamiliar and would remain so to most Americans for another half century.
WORLD WAR I AND ITS AFTERMATH
The outbreak of war in Europe in 1914 offered MNCs both danger and opportunity at the same time. On the one hand the belligerent powers had to be fed and equipped. Furthermore, the war opened to the United States the opportunity to move into markets in Latin America and the Far East hitherto dominated by Europe's two major industrial powers, the United Kingdom and Germany, each of which had to concentrate its attention on winning the war for its side. Furthermore, the opening of the Panama Canal in 1914 afforded new opportunities for increased trade between ports along the East and Gulf coasts of the United States and the west coast of South America and the Far East. In the Mississippi Valley it also kindled plans among the region's business and financial leaders to redirect some of the nation's largely east-west commercial traffic to such Gulf ports as New Orleans, Mobile, and Galveston.
The war turned the United States from a debtor to a creditor nation. Despite tremendous losses as a result of Germany's on-and-off submarine campaign, the United States supplied Britain and its allies with the goods and credits necessary to sustain the war effort before America's own entry into the war in 1917. The United States was even able to make substantial gains in Latin American markets at the expense of the European belligerents, more so, however, in mining and ore processing than in manufacturing.
After the war Washington passed two measures designed to strengthen the nation's position in foreign trade, especially in Latin America. The first of these was the Webb-Pomerene Act (1918), which exempted business combinations from the provisions of the antitrust laws. Congress approved the measure as a way to help small businessmen enter the foreign field by being allowed to form joint selling agencies engaged in business abroad. But the measure had also been pushed by larger business concerns interested in organizing more complex vertical combinations (that is, combinations performing more than one function in the chain of production, extending from the acquisition of raw materials through the manufacturing process and ending with the distribution and sale of the finished product). Although fewer than two hundred associations ever registered under the act, a number of supporters of the measure, including the Department of Commerce, continued to seek ways to strengthen it.
The second measure approved by Congress after the war was the Edge Act (1919), which provided for federal incorporation of long-term investment and short-term banking subsidiaries doing business abroad. Like the Webb-Pomerene Act, the measure was intended to encourage small banking firms to compete successfully against more established British firms and a few American financial institutions like the National City Bank, which had established foreign branches throughout Latin America, more in order to attract accounts at home than to make profits abroad. The Edge Act was also part of the government's program for meeting Europe's capital and banking needs and President Woodrow Wilson's larger program for economic expansion.
Also like the Webb-Pomerene Act, the Edge Act never lived up to its promise. In the two years after its passage only two corporations were established under its provisions. As late as 1956 there were only three Edge corporations. The simple fact was that, despite government encouragement to foreign investment and a brief flurry of activity in the two years immediately following the war's end, too much uncertainty about world economic conditions existed to sustain this level of effort.
Not until the mid-1920s, when the international economy seemed to stabilize, particularly in Europe, and the United States' own economy was booming, did U.S. corporations start to make substantial direct foreign investments. Encouraged by President Calvin Coolidge and his fellow Republican Herbert Hoover, first in his capacity as Coolidge's secretary of commerce and then as Coolidge's successor in the White House, the largest U.S. firms began to invest heavily in Europe, both in search of new markets and as a way of protecting themselves against trade barriers. Such investments, usually in the form of foreign subsidiaries, branches, or joint ventures, also fitted well into the multidivisional, decentralized organizational structure begun at General Motors (GM) under the leadership of Alfred Sloan but adopted very quickly by other major industrial concerns.
Yet, as Sloan later wrote, the decision to invest overseas did not come easily, nor was it perceived as inevitable. GM's executives, for example, had to decide whether there was a market abroad for American cars and, if so, which models were likely to fare the best. They also had to determine whether to export entire cars from the United States, build plants to assemble imported parts, or engage in the entire manufacturing process overseas. If the latter, they then had to consider whether to buy existing plants or build their own. Invariably, these decisions involved such other considerations as the taxes and tariffs of host nations, the state of existing facilities and dealerships abroad, and the desire of foreign governments to protect jobs and national industries. In the case of General Motors, the corporation almost bought the French carmaker Citroën but decided against doing so, in large part because of the French government's opposition to an American takeover of what it considered a vital industry. GM did, however, buy the British firm Vauxhall Motors Ltd. and the German carmaker Opel. Even more important, it made a decision at the end of the 1920s to be an international manufacturer seeking markets wherever they existed and to build the industrial infrastructure necessary to penetrate and maintain them.
Although direct foreign investment as a percentage of the GNP remained about the same in the 1920s as it did at the turn of the century (about 7 percent), what made the 1920s different from earlier decades were where and what kinds of investment were being made. Investments in manufacturing, which had lagged behind mining and agriculture, now vaulted ahead of both. As it did so, direct investments in Europe almost doubled, from approximately $700 million in 1920 to about $1.35 billion by 1929; manufacturing and petroleum accounted for most of this increase. Significantly, much of the new investment came from firms that previously had not braved the waters of overseas markets. Businesses like Pet and Carnation Milk had well-established brand names at home on which they hoped to capitalize by joining together under the Webb-Pomerene Act to open new plants and factories in France, Holland, and Germany in the 1920s.
Almost as dramatic as the increase in direct investments in manufacturing abroad were those in petroleum, which increased from $604 million in 1919 to $1.34 billion by 1929. Although this included everything from the exploration of petroleum to its production, refining, and distribution, most of the increase was in exploration and production. Thanks to vast increases in the production of oil in Venezuela, American direct investments in petroleum in South America jumped from $113 million in 1919 to $512 million by 1929.
Even in the Middle East, which remained largely a British preserve, the United States made important inroads. Fearful of an oil shortage after the war and worried that the region might be shut to American interests, the United States pressured the European powers to give a group of American oil companies a 23 percent share of a consortium of British, French, and Dutch oil producers. Among these companies were Standard Oil of New Jersey (now Exxon) and Standard Oil of New York (now Mobil), which later bought out the other American firms. The consortium became the Iraq Petroleum Company (IPC), whose purpose was to explore and develop mineral rights in the former Ottoman Empire.
As a result of developments like these, total American investment in foreign petroleum increased from $604 million in 1919 to $1.34 billion dollars in 1929. By that year petroleum had become the second-largest sector in terms of American direct foreign investment, with mining ($1.23 billion) and agriculture ($986 million) falling to second and third places.
THE GREAT DEPRESSION
The Great Depression of the 1930s, beginning with the crash of the stock market in 1929, affected multinational corporations worldwide. As purchasing power overseas dried up, and as governments sought to protect existing markets by erecting high tariffs and other trade barriers, some U.S. corporations closed or sold factories and other foreign facilities and curtailed or stopped entirely making investments abroad.
At the same time, however, other American businesses sought to leapfrog obstacles to trade and protect existing markets by entering into business arrangements with foreign concerns, such as licensing and market-sharing agreements. With all the major world currencies having gone off the gold standard and become nonconvertible (that is, not convertible into gold or other currencies like the American dollar or the British pound), most multinational corporations simply chose or were forced by host governments, as in the case of Nazi Germany, to reinvest their foreign profits.
In Latin America, American corporations also continued to invest, sometimes with assistance from Washington, in the development of resources, such as copper in Chile and Peru and lead and zinc in Argentina (although overall investments in South American mining dropped dramatically), and in public utilities including railroads. In the Middle East, American oil companies continued to challenge British oil hegemony by investing heavily in production facilities in Saudi Arabia, Kuwait, and Bahrain. Gulf Oil Company negotiated an oil concession from Kuwait. Standard Oil of California (Socal) established the Bahrain Oil Company and received a concession to look for oil in Saudi Arabia. Texas Oil Company (Texaco) acquired a half interest in the Bahrain Oil Company and in the California Arabian Oil Company (now Aramco) organized by Socal to develop its Arabian fields.
These same companies also entered into a number of agreements among themselves and with two British and Dutch companies, Anglo-Iranian Oil (now British Petroleum, or BP) and Royal Dutch Shell, to control the sale of crude oil and finished products to independent refiners and marketers. Of these agreements the most significant were the so-called "Red Line" and "As Is" agreements of 1928, which placed severe restrictions on where, with whom, and under what conditions the signatories could explore for oil and develop oil fields in the Middle East. Between 1928 and 1934 the As Is partners entered into three supplementary agreements to carry out these purposes. So successful were they that by 1939, seven oil corporations, five of which were American, monopolized the oil industry in the Middle East and controlled much of the world's other oil supplies.
More generally, multinational corporations were able to weather the depression of the 1930s reasonably well. Between 1929 and 1940 total direct foreign investment by American firms declined only slightly, dropping from about $7.53 billion in 1929 to $7 billion in 1940. In Europe they increased from $1.34 billion in 1929 to $1.42 billion in 1940, while in South America they stayed the same, at about $1.5 billion for both years. In Europe manufacturing remained dominant, edging up slightly from about $629 million in 1929 to about $639 million in 1940. The most significant increase occurred in the petroleum sector, rising from $239 million in 1929 to $306 million in 1940. In contrast, in South America public utilities jumped from $348 million to $506 million during these same years, while petroleum actually dropped from $512 million to $330 million and mining fell from $528 million to $330 million; by 1940, public utilities had become the leading sector for direct American foreign investment in South America.
As one might expect, U.S. entry into World War II in 1941 disrupted the normal channels of American commerce, discouraging or making impossible direct investments overseas. Between 1940 and 1946 such investments grew only marginally, from $7.0 billion in 1940 to $7.2 billion in 1946. In that year they amounted to only 3.4 percent of the GNP, the lowest percentage in the century. What American investments made abroad during the war were largely in the Western Hemisphere. Although investments in Canada and Latin America grew from $4.9 billion in 1940 to $5.6 billion in 1946, investments in Europe declined from $1.4 billion in 1940 to $1 billion in 1946. In Africa and the Middle East they remained steady at about $200 million for each of these years, while in the rest of the world they declined from $500 million in 1940 to $400 million in 1946.
Most of these investments went to further the war effort. No commodity was more important in this regard than oil, on which the entire machinery of war depended. So urgent was the need for oil, in fact, that the War Department invested $134 million in the construction of a refinery and pipeline in Canada as part of a project (the Canol Project) to open a new oil field in the Canadian Northwest Territories. The project had little commercial utility, and after the war it was abandoned when none of the parties to the project showed any interest in continuing it.
In the Middle East, Secretary of the Interior Harold Ickes, who also served as petroleum administrator for the war and generally distrusted the oil industry, even tried to obtain government ownership of American oil concessions in Saudi Arabia and Bahrain. Opposition from oil interests and doubts even within the administration about a government takeover of private enterprise ultimately doomed Ickes's plans. An effort, on the other hand, by several American oil companies to gain an ownership stake in the Anglo-Iranian Oil Company led to strong and ultimately successful opposition by the British, who objected to what they regarded as an attempt by Washington to lock them out of oil development in the Mideast, and by the Iranians, who wanted to delay until after the war any decision on its most vital resource.
During the war a number of major multinational corporations engaged in the production of strategic materials, such as oil and synthetic rubber, were accused in congressional hearings and on the floor of Congress of having conspired with the enemy before the war. In particular, the oil and petrochemical industries were charged with exchanging trade secrets in chemicals with the chemical giant I. G. Farben and other German firms deemed instruments of Nazi policy in return for trade secrets in oil refining. Civil and criminal actions were even brought against a number of these companies, the most notable being against Exxon, which in 1929 had signed an agreement with Farben recognizing its "preferred position" in chemicals in return for Farben's recognition of Exxon's "preferred position" in oil and natural gas. The two giant corporations also pledged close cooperation in their respective enterprises.
In 1942 the Justice Department brought a civil antitrust suit against Exxon, charging it with delaying the development of high-quality synthetic rubber because of its agreement with Farben, which prevented easy access to important data by other U.S. rubber companies. Although Exxon blamed the German government and not Farben for withholding the needed data, it entered a plea of "no contest." As part of its plea bargain it also agreed to release all its rubber patents free during the war, with the royalty on these patents to be determined after the war ended.
POSTWAR INVESTMENT: 1945–1955
Despite wartime criticism of the foreign operations of some American firms, including their ties with Nazi firms before the war, and notwithstanding the economic uncertainties that were bound to accompany the war's end, a few of the largest U.S. corporations, often with considerable assets seized or destroyed during the war, began to plan for the postwar period. Among these was General Motors. As early as 1942 the company had set up a postwar planning policy group to estimate the likely shape of the world after the war and to make recommendations on GM's postwar policies abroad.
In 1943 the policy group reported the likelihood that relations between the Western powers and the Soviet Union would deteriorate after the war. It also concluded that, except for Australia, General Motors should not buy plants and factories to make cars in any country that had not had facilities before the conflict. At the same time, though, it stated that after the war the United States would be in a stronger state politically and economically than it had been after World War I and that overseas operations would flourish in much of the world. The bottom line for GM, therefore, was to proceed with caution once the conflict ended but to stick to the policy it had enunciated in the 1920s—seeking out markets wherever they were available and building whatever facilities were needed to improve GM's market share.
Other MNCs, however, adopted more cautious positions. Significant investments were made in Canada and Latin America in the mining of iron, uranium, and other minerals that had been scarce during the war, but of all the major industries, only the oil industry, worried as it had been after World War I about a postwar oil shortage, invested heavily overseas after World War II. Between 1946 and 1954 the value of these investments grew from $1.4 billion to $5.27 billion.
Even then, the type of oil investments before and after the war differed significantly. Previously they had been largely market oriented, their purpose being mainly to eliminate market competition. After the war Exxon, BP, Shell, and Mobil shifted their emphasis from market control to control of supply. The companies found that the infrastructure called for by the Red Line and As Is agreements of 1928, with their elaborate system of local and national cartels and quotas, was inefficient and difficult to maintain; moreover, the Red Line agreement established geographical limits to oil exploration in the Middle East. Much more effective, they concluded, would be control of a few crucial petroleum sources in the Mideast.
The opening of new fields by Gulf, Texaco, and Socal also raised the possibility that the As Is structure might be undermined. Conversely, control of these fields would guarantee the dominance of all the majors for years to come. Therefore, while maintaining their hold over marketing, the companies became much more interested in the supply end of petroleum. Exxon and Mobil withdrew from the Iraq Petroleum Corporation, which would have prohibited them from investing in the Arabian Peninsula without their other IPC partners, and instead bought a 40 percent share of Aramco. Socal and Texaco were glad to have them as partners both for their infusion of capital in what was a still risky venture and for their vast marketing capacity. The multinational oil companies also established a system of longterm supply agreements and expanded the number of interlocking, jointly owned production companies. In effect, the era of formal oil cartels gave way in the postwar era to a system of longterm supply agreements and an expansion in the number of interlocking, jointly owned production companies.
For other industries, however, pent-up consumer demand at home, the scarcity of similar demand in war-ravaged Europe and elsewhere, the lack of convertible foreign currencies, the risks attendant upon overseas investments as illustrated by the experiences of two world wars, restrictions on remittances, and the fact that a new generation of chief executive officers with less of an entrepreneurial spirit and more of a concern with stability and predictability than many of their predecessors, all served to limit foreign investment in the years immediately after World War II. Although investments in manufacturing, for example, grew from $2.4 billion in 1946 to $5.71 billion in 1954, most of this increase was in the reinvestment of profits of existing corporations, either because host governments blocked repatriation of scarce currencies or for tax and other reasons not related directly to growing consumer demand. Investments in other industries such as public utilities ($1.3 billion in 1946 and $1.54 billion in 1954) scarcely grew at all.
In at least one respect, government policy discouraged overseas investment after the war, particularly in manufacturing. As never before, foreign economic policy became tied to foreign policy. As the Cold War hardened in the ten years following the war, Washington imposed severe restrictions on trade and investment within the communist bloc of nations. The Export Control Acts of 1948 and 1949, for example, placed licensing restrictions on trade and technical assistance deemed harmful to national security. During the Korean War (1950–1953) even tighter controls, extending to nonstrategic as well as strategic goods, were imposed on the People's Republic of China (Communist China).
It would be absurd to suggest that, absent these controls, American companies would have made substantial investments within the communist bloc. Nevertheless, the economic boycott of a vast region of the world contributed to the global economic uncertainty that normally inhibits direct foreign investment. According to the British, who were anxious to relax controls on the potentially rich markets of China, it also delayed its own economic recovery, another inhibitor to foreign investors.
That said, in the decade following the war the administrations of both Harry Truman and Dwight Eisenhower looked to the private sector to assist in the recovery of western Europe, both through increased trade and direct foreign investments. In fact, the $13 billion Marshall Plan, which became the engine of European recovery between 1948 and 1952, was predicated on a close working relationship between the public and private sectors. Similarly, Eisenhower intended to bring about world economic recovery through liberalized world commerce and private investment abroad rather than through foreign aid. Over the course of his two administrations (1953–1961), the president modified his policy of "trade not aid" to one of "trade and aid" and changed his focus from western Europe to the Third World, which he felt was most threatened by communist expansion. In particular he was concerned by what he termed a "Soviet economic offensive" in the Middle East, that is, Soviet loans and economic assistance to such countries as Egypt and Syria. But even then he intended that international commerce and direct foreign investments would play a major role in achieving global economic growth and prosperity.
THE INTERNATIONAL MONETARY FUND AND WORLD BANK
As European recovery became increasingly apparent in the early 1950s and as the demand at home for consumer goods began to be satiated, U.S. corporations started to look once more at overseas markets. Problems still remained, such as a shortage of dollars (the so-called "dollar gap") and the lack of convertible foreign currencies needed to pay for essential goods from the United States and to remit foreign profits. But the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD, or World Bank) began to make loans intended to spur foreign trade and economic development. Established in 1944 at Bretton Woods, New Hampshire, as part of a new international monetary system based on the dollar, these twin financial institutions had remained largely dormant and ineffective as instruments of a new economic order. The IMF's primary purpose was to stabilize exchange rates, mainly by setting par values and supporting them with short-term balance-of-payments loans. The World Bank was intended to serve as a reconstruction rather than a development bank.
In the years immediately following the end of World War II neither financial institution was able to achieve its objectives. Faced with a staggering imbalance of trade and a severe dollar shortage, the IMF husbanded its resources and acquiesced in the growing number of exchange restrictions that took place as nations sought to protect their exchange values from the pressures of the free market. As for the World Bank, the problems of reconstruction and the degree of international financial instability after the war were far greater than the architects of the Bretton Woods system had anticipated. Unable to meet Europe's reconstruction needs with its own limited resources, much less to promote economic development in the Third World, and seeking to win the confidence of the American investor in order to float its bonds on the American capital markets, the bank followed conservative lending policies. It made a few reconstruction loans, but after the inauguration of the Marshall Plan in 1948, it purposely subordinated its lending activities to the new aid program.
Beginning around 1950, however, the World Bank expanded its long-term lending program from a level of $350 million in 1950 to more than $750 million by 1958. By the fall of 1958 it had invested $3.8 billion in development projects in forty-seven countries, mostly in the Third World. The IMF went through a more protracted transition than the World Bank, largely due to the fundamental disequilibria that existed in the international economy and the fact that the dollar was the only fully convertible currency. Not until the Suez crisis of 1956 did the fund, which had stopped all lending with the inauguration of the Marshall Plan, resume lending. That year it approved a standby credit of $738 million for England to pay for oil imported from the Western Hemisphere. By 1958 the fund had extended short-term loans of $3 billion to thirty-five countries.
In other ways as well, the government sought to spur direct foreign investments. For example, the United States negotiated tax treaties with a number of countries to prevent American businesses overseas from being taxed twice. It made investment guarantees to American firms venturing in western Europe. It increased the lending power of the Export-Import Bank, which had been established in 1934 to make short-term loans to American exporters but which over the years had made a number of long-term loans for development purposes.
THE OIL CARTEL CASE
Near the end of Truman's term in office the Justice Department instituted an antitrust suit against the multinational oil corporations operating in the Middle East. Both Truman and subsequently the Eisenhower administration sharply cut back the suit. The government charged the five major U.S. oil corporations—Exxon, Mobil, Socal, Texaco, and Gulf Oil—along with two alleged coconspirators, Royal Dutch Shell and British Petroleum, with criminal violation of the nation's antitrust laws by having engaged in a worldwide combination to restrain and monopolize U.S. domestic and foreign commerce in crude oil and petroleum products. The suit sought relief through divestiture of the defendants' joint production, refining, pipeline, and marketing operations.
The oil cartel was one of a series of cases that the Justice Department brought against industries after the war believed to have collaborated with enemy powers before the conflict. In the short term, the cases were disruptive to a number of multinational corporations that had made major investments overseas before the war and may even have discouraged them from engaging in international business after the conflict; certainly this was the case with General Electric (GE), which had suffered losses during the war and had to fight a suit accusing it and its subsidiary, International General Electric, of having maintained a cartel in lamps and electric equipment. Eventually GE sold off a major part of its foreign holdings.
By the end of Truman's administration, however, the White House had begun to rethink its foreign antitrust policies. This was most apparent in the oil cartel case. In 1951 Iran nationalized British Petroleum's Iranian holdings. BP responded with a highly successful worldwide embargo of Iranian oil, which led to serious European oil shortages. For reasons of national security having to do with needing the same oil companies against which it had brought a criminal antitrust action to meet these shortages, President Truman had the criminal charges reduced to much less punitive civil actions. He did this over strong objections from Justice Department and Federal Trade Commission officials, who maintained that the agreement constituted a waiver of the antitrust laws as applied to the foreign cartel arrangements of the oil majors.
President Eisenhower believed that enforcement of the antitrust laws should not interfere with programs and policies deemed important or essential to the national interest, such as the promotion of trade and private investment overseas. Accordingly, he later ordered the oil cartel case confined strictly to firms headquartered in the United States and then pressured the Justice Department to grant a newly formed Iranian oil consortium (consisting of BP, Royal Dutch Shell, the five American majors, and a number of smaller independents) a waiver in the exploration and refining of Iranian oil. Since it was nearly impossible to prosecute the very actions it had encouraged and sanctioned on the grounds of national security, the antitrust case was now effectively reduced to just the marketing and price-fixing of oil. Although the case was to drag through the courts until 1968, its final outcome left intact the scaffolding of the cartel arrangements among the oil majors. The decrees obtained were limited to price-fixing and marketing arrangements only.
MULTINATIONAL CORPORATIONS, 1955–1990
By the middle of the 1950s the wave of antitrust suits by the Justice Department against major industries with direct foreign investment had about run its course, although not all cases, such as the oil cartel case, had yet been settled. Furthermore, western Europe had largely recovered from the worst ravages of the war and in 1957 would form what became known as the Common Market. Great Britain, which would not be invited to join the Common Market, was moving toward full convertibility of the British pound. The "dollar gap," which had worsened because of the Korean War and European rearmament, was turning into a "dollar surplus" that would cause its own problems in the 1960s. Thanks largely to American spending in Japan as a result of the conflict in Korea, that country had also begun its long course toward becoming a major industrial power, one that twenty-five years later would make it the envy of much of the rest of the industrial world, including the United States. Following the death of Soviet leader Joseph Stalin in 1953 and the end of the Korean War that same year, there was even a short lull in the Cold War, as Moscow's new leader, Nikita Khrushchev, made new peaceful overtures to the United States that would lead to the Geneva Conference of 1957 between Khrushchev and President Eisenhower and the so-called "spirit of Geneva."
By the middle of the 1950s, in other words, economic growth had reached a point, and the world political situation had stabilized to such a degree, that many of the largest U.S. corporations were looking again to invest abroad. The country's foreign aid programs, which increasingly tied foreign loans and economic assistance to the procurement of American goods and services, also helped stimulate direct foreign investment.
The result was an expansion of MNCs in the middle of the 1950s that has continued largely unabated. Between 1950 and 1965 alone, the leading U.S. corporations increased their manufacturing subsidiaries in Europe nearly fourfold. In Australia, General Motors made significant investments. Even during the war GM had decided to manufacture and sell cars in Australia, where it had earlier purchased plants and established distributorships for its automobiles. In 1948 it still only manufactured and sold 112 vehicles. By 1950 production was up, but only to 20,000 cars. By 1962, however, GM was manufacturing 133,000 automobiles with expansion to a capacity of 175,000 already under way.
As the industrialized world recovered from World War II and as the United States built plants and factories and other facilities abroad, the nation's balance of payments turned into a deficit and gold reserves declined sharply. When he took office President John F. Kennedy responded by curtailing government spending abroad and encouraging American exports. President Lyndon Johnson established a program of voluntary— later made mandatory—restraints on direct foreign investment. Nevertheless the deficit continued to grow, and instead of being hoarded as they had been during the war, dollars in Europe began to be sold in what became known as the Eurodollar market. The selling of American dollars for other currencies and the inability of the United States to regulate the Eurodollar market led in 1971 to President Richard Nixon's decision to float the currency against other world currencies rather than to keep the dollar pegged to a fixed gold price as it had done since the Bretton Woods system of 1944.
While these measures had some immediate impact, in the long term they failed to prevent overseas investments by American firms. There were too many ways, for example, for these corporations to get around voluntary or mandatory controls, such as by downstreaming capital investments to foreign subsidiaries and by borrowing on the Eurodollar market. Furthermore, the opportunities abroad, the uncertain future of the dollar, the attraction of cheap labor in Third World countries, the growing importance of foreign oil and other raw materials, and the perceived need to be close to foreign consumers all encouraged the migration of American capital overseas.
Interestingly, while Washington was trying to limit direct investments in the world's largest industrial nations, it actually sought to promote such investments in the Third World, which through the Vietnam War of the 1960s and early 1970s was viewed as a battleground in the Cold War between the United States and the Soviet Union. In 1969 Congress approved the creation of the Overseas Private Investment Corporation, the mission of which was to encourage private investment in less developed countries. To help build the infrastructure needed to attract private investors, the World Bank increased the number of soft loans (loans with below-market interest rates and generous repayment schedules) it made to less developed countries. Even the IMF got into the soft-loan business despite the fact that this had not been part of its original mission.
As American-owned MNCs continued to expand abroad they met increased foreign resistance and growing competition from foreign rivals. The 1970s were a particularly troublesome decade for many of these enterprises, not so much in terms of competition as in overseas opposition to what many foreign nationals regarded as a form of rapacious American imperialism. Still operating in the poisonous world and domestic climate that was an outgrowth of twenty-five years of Cold War rhetoric and a highly unpopular war in Vietnam, MNCs were maligned as part of an American military-industrial establishment seeking world economic and political hegemony. Nor were these views limited to a radical left-wing fringe. Many respected national and international political officials, political theorists, international business leaders, and academics joined in the chorus against the MNCs. A spate of books appeared in the 1970s highlighting the world power of the multinational corporations and arguing that they had become states unto themselves beyond the control of any single nation.
A particular target, but certainly not the only one, of the critics was the oil industry. Drastic increases in energy prices resulted from huge consumer demand in the United States and the decision of the Organization of Petroleum Exporting Countries (OPEC), which had been formed in 1960, to use oil as a political weapon following renewed war between the Arab states and Israel in 1973. This led to a depletion of oil supplies, and prices for gasoline more than doubled in the United States.
Even respected authorities on the oil industry portrayed the multinational oil firms as a sovereign entity with its own form of government and with sources of revenue and influence that allowed it to dictate pretty much the terms and conditions under which oil would be produced and sold in the world. Although this was an oversimplified version of the power of the oil companies to control the production and price of oil, it resonated with the American public. Secret inter-industry correspondence and memoranda, much of it highly damaging and much of it revealed for the first time in 1974 by the Senate Subcommittee on Multinational Corporations, provided the basis for many of the charges made against the oil industry.
None of the charges made in the 1970s against the oil industry or, more generally, against multinational businesses prevented their further growth. In 1978 Congress passed legislation effectively deregulating most domestic commercial aviation, a process that had already been started by Alfred Kahn, head of the Civil Aeronautics Board. In the 1980s deregulation was expanded to include international aviation. By 1997 the United States had concluded agreements with twenty-four nations, thereby allowing U.S.-owned airlines to enter into operational and strategic alliances with foreign-owned airlines and in some cases even to partially own them. Deregulation of the telecommunications industry, concluding with the 1996 General Agreement on Trade in Services, allowed American Telephone and Telegraph (AT&T) and other American corporations in the telecommunications industry to enter into similar arrangements with their foreign counterparts. Between 1960 and 1965 assets of U.S. banks abroad grew from $3.5 billion to $458 billion. Fast-food chains and retailers like McDonald's, Kentucky Fried Chicken, the Gap, and Nike opened thousands of outlets overseas. So did firms in such industries as chemicals and heavy machinery. As a result, in the 1990s sales abroad of U.S. subsidiaries were, on average, five times larger than all of U.S. exports.
Nor were direct foreign investments limited to American-headquartered firms as they had been for most of the postwar period prior to 1980. Businesses in South Korea, Taiwan, and most of western Europe competed against the United States for foreign markets and, indeed, for the U.S. market as well. As a result, between 1980 and 1995 the total amount of direct foreign investment grew more than six times to approximately $3.2 trillion. Between 1975 and 1992 the number of persons employed by multinational firms also increased from about 40 million to 73 million. In 1977 U.S.-based firms accounted for about 69 percent of the U.S. gross manufacturing output; by 1994 that figure had dropped to 57.6 percent. During these same years foreign-owned subsidiaries in the United States increased their market share of U.S. manufacturing from 3.4 percent to 13.2 percent. As of 1996 western Europe actually accounted for $1.59 trillion (about 50 percent) of the world's foreign direct investment, while North America accounted for $905 billion (about 28 percent). Of the remainder, other developed countries, most notably Japan, accounted for about $402 billion (12.7 percent), while the rest of the world accounted for just $286 billion (or approximately 9 percent).
A GLOBAL ECONOMY: THE 1990S
With the development of a truly global economy by the 1990s, opinion with respect to the multinational corporations in home and host countries varied considerably. American multinationals have often been viewed abroad as purveyors of technology and business efficiencies and as bearers of products meeting an insatiable appetite for American goods. But a more negative image also developed. The growing competitiveness of the new world economy and a heightened emphasis on cost efficiencies, job reductions, retooling, and relocation led to complaints in home and host nations about declining market shares and lost jobs.
The transnational character of the multinationals proved irksome to the growing legion of laid-off workers and lower-and mid-level managers who felt most victimized by the new competition and the search for cheaper labor markets. Government officials sensed a loss of their sovereignty because of the ability of these corporations to move their operations, transactions, and profits upstream or downstream as their self-interests dictated. Transfers of technology were another issue pitting MNCs and host and home governments against one another, as they jockeyed to maintain or gain control of technological breakthroughs for reasons of national security and profits.
By the beginning of the twenty-first century, the fact that more and more of the world economy seemed to be dominated by a relatively few multinational giants also led to the ringing of alarm bells. (Estimates of U.S. multinational corporations in 2001 ranged around three thousand, but the numbers were declining because of a wave of corporate mergers.) Other problems creating tensions between MNCs, host governments, and home governments included jurisdictional disputes, cultural differences, nontariff barriers to trade, international agreements among the multinational corporations, and conflicting political agendas on such matters of principle as the environment, energy, human rights, accessibility to proper medical treatment and high-cost pharmaceuticals, sweatshops, and child labor laws.
Public opinion and government policy with respect to MNCs, in other words, conjure up the image of a fault line along the earth's crust, quiet for the moment but with pressures building below that could—will—divide the earth above. Despite the best-educated guesses, however, nobody really knows just when and under what circumstances this will happen or how severe the damage will be. Already odd alliances have been formed among the parties most affected by the growth of MNCs. One of these took place beginning in 1991 when free-trade advocates in the United States found themselves joined by the multinationals but strongly opposed by rank-and-file workers over the approval of the North American Free Trade Agreement (NAFTA), which was ratified in 1992 despite labor's objections. In 1994 the MNCs and free traders won a limited victory with the establishment of the World Trade Organization (WTO), which since its founding has focused much of its attention on breaking down remaining restrictions on the expansion of MNCs worldwide. It has had only moderate success, however, because it lacks judicial authority, something the U.S. negotiators refused to give it because of congressional reservations about granting extensive powers to the new body.
In the late 1980s, free traders in Europe joined with European workers in successfully opposing the proposed merger of Honeywell International and General Electric on antitrust grounds. The United States and the European Union also entered in a trade war. They clashed over European restrictions on imports of American beef and bananas, and the U.S. steel industry accused European firms of dumping steel on American markets. European business and political leaders retaliated with charges that Washington unfairly subsidized U.S. exports and rejected its efforts to resolve trade disputes.
These claims and counterclaims suggest that, in a world becoming smaller each day, with corporate mergers across national boundaries becoming more common and a technological and information revolution unlike any in the past, calls will continue to grow about bringing the aspirations of private enterprise more in line with national needs. How that will happen or whether it is even possible remain unanswered questions. The failure of the United States and Europe to resolve their economic differences and a growing movement toward economic regionalism in East Asia, including mutual currency supports, cooperative exchange systems, and an East Asian free trade area, even suggest a worldwide backlash already under way against economic globalization. At the same time, it is difficult to imagine anything less than a highly integrated world economy or one without the glue of the multinational corporations that helped bring it about in the first place.
Barnet, Richard J., and Ronald E. Müller. Global Reach: The Power of the Multinational Corporations. New York, 1974. This indictment of multinational corporations argues that MNCs constitute a state within a state. Well-researched but not entirely persuasive.
Doremus, Paul N., et al. The Myth of the Global Corporation. Princeton, N.J., 1998. Persuasively argues against the widely held view that multinational enterprises are able to act autonomously in international economic matters.
Ferguson, Niall. The House of Rothschild: The World's Banker, 1849–1999. New York, 1999. The second of a two-volume history of one of the great international banking houses of the nineteenth and twentieth centuries.
James, Harold. The End of Globalization: Lessons from the Great Depression. Cambridge, Mass., 2001. Argues that, while there are parallels between today's situation and the end of the movement toward globalization following the Great Depression, one of the essential developments of the 1930s—economic nationalism tied to two of the major powers of the era, Nazi Germany and the Soviet Union—is not in evidence in the early twenty-first century.
Kanter, Rosabeth Moss. World Class: Thriving Locally in the Global Economy. New York, 1995. Points to the difficulty of multinational corporations blending in with the local communities of their host nations.
Kapstein, Ethan B. "Workers and the World Economy." Foreign Affairs 75 (May–June 1996): 16–37. Argues that the global economy, with its implicit promise of a better life for the working class, has not lived up to that promise primarily because the institutional structure established after World War II to support economic growth and development has forced many governments to follow stringent fiscal policies at labor's expense.
Kaufman, Burton I. The Oil Cartel Case: A Documentary Study of Antitrust Activity in the Cold War. Westport, Conn., 1978. A history in which the author argues that Washington used the oil companies to achieve its foreign policy objectives.
Moran, Theodore H. Foreign Direct Investment and Development: The New Policy Agenda for Developing Countries and Economies in Transition. Washington, D.C., 1998. Emphasizes the positive role that foreign direct investment can play in developing countries and those nations moving toward a free market economy.
Nathan, John. Sony: The Private Life. New York, 1999. Fascinating history of one of Japan's great success stories after World War II.
Rangan, Subramanian, and Robert Z. Lawrence. A Prism on Globalization: Corporate Responses to the Dollar. Washington, D.C., 1999. Argues that multinational corporations have worked to assure currency stability rather than the flexible rates characteristic of the 1980s because that is what their customers prefer.
Rodrick, Dani. Has Globalization Gone Too Far? Washington, D.C., 1997. Argues that globalization, including the expansion of the multinationals, may indeed have gone too far and that governments need to be more sensitive to the domestic ramifications resulting from economic globalization.
Sampson, Anthony. The Sovereign State of ITT. New York, 1973. Maintains that, through ruthless and sometimes illicit practices, ITT, one of the largest conglomerates of the 1960s and 1970s, became a worldwide business empire that defied control by any sovereign nation.
——. The Seven Sisters: The Great Oil Companies and the World They Shaped. New York, 1975. Adopts the argument that multinational corporations have had excessive control over the formulation of American foreign policy, but an important study and a solid history.
Spar, Debora L. "The Spotlight and the Bottom Line." Foreign Affairs 77 (March–April, 1998): 7–12. Maintains that, instead of exploiting foreign workers with low wages and unsafe working conditions, multinational manufacturers of consumer goods have actually helped to promote human rights because of the impact of the public spotlight and human rights activism.
Vernon, Raymond. Sovereignty at Bay. New York, 1971. Classic study of multinational corporations that traces their growth and the challenge they pose for sovereign nations.
——. In the Hurricane's Eye: The Troubled Prospects of Multinational Enterprises. Cambridge, Mass., 1998. Maintains that multinationals are facing increasing efforts by host and home governments to regulate their operations as a result of an increasingly hostile domestic environment.
Wilkins, Mira. The Emergence of Multinational Enterprise: American Business from the Colonial Era to 1914. Cambridge, Mass., 1970. The first of a two-volume study; deeply researched and thorough and comprehensive in coverage.
——. The Maturing of Multinational Enterprise: American Business Abroad from 1914 to 1970. Cambridge, Mass., 1974. The second volume of Wilkins's classic study and the place to start for any study on the subject.
Wolf, Martin. "Will the Nation-State Survive Globalization?" Foreign Affairs 80 (January–February 2001): 178–190. Argues that nation-states will become stronger rather than weaker in the evolving international economy, and that further globalization will not be the destined result of market forces associated with the technological revolution but rather of conscious decision by nationstates to enhance their economic well-being.
See also Economic Theory and Policy; Oil .
FEDERAL POWER VERSUS THE POWER OF THE MULTINATIONALS: THE OIL DILEMMA
A power with great wealth and influence, the oil industry has often been seen by historians as a sovereign entity capable of dictating the terms and conditions under which oil is produced and sold throughout the world. Although this view is still widely held, it was especially prominent during the energy crisis of the 1970s, when a slew of books was published highly critical of oil's alleged power over the public weal. Inter-industry correspondence and memoranda, first revealed in congressional hearings in the 1970s, seemed to substantiate this view. So did the outcome of an antitrust action that the Department of Justice brought in 1953 against the five major U.S. oil corporations—Standard Oil of New Jersey (Exxon), Gulf, Socony Mobil (Mobil), Standard Oil of California (Socal), and Texaco—and two alleged coconspirators, Royal Dutch Shell and Anglo-Iranian Oil (now British Petroleum), charging them with maintaining monopolistic control of oil from the Middle East. The case was so sharply curtailed before it was settled in 1968 that it left the multinational giants' control of oil from the Middle East largely intact. For this reason it seemed to provide additional support to the argument that the multinational giants dictate federal policy.
There can be little doubt about the historic power of the oil industry to influence—and sometimes dictate—federal policy. If anything, however, the oil cartel case of 1953–1968 reveals that it was the federal government that used the oil corporations for foreign policy purposes rather than the other way around. In perhaps the darkest period of the Cold War, the oil cartel ensured a cheap supply of energy to western Europe and Japan. It also ensured a certain degree of stability in a troubled area of the world and was a way of limiting Soviet influence in the region, a matter of great concern to policymakers in Washington. Through tax policies that allowed the oil companies to offset increased royalties to host nations with decreases in taxes paid to the federal government, the oil companies also provided a useful conduit of financial aid to Arab producing nations without providing a cause of action on the part of the strong pro-Israeli forces on Capitol Hill.
Through the fifteen-year history of the oil cartel case, in fact, officials of the Department of Justice remained at loggerheads with the Department of State about pursuing the case, with antitrust officials in the Justice Department anxious to prosecute the defendants and the State Department opposing prosecution on the basis of national security and the national interest. In the end, the Department of State prevailed.
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Multinational corporations have existed since the beginning of overseas trade. They have remained a part of the business scene throughout history, entering their modern form in the seventeenth and eighteenth centuries with the creation of large, European-based monopolistic concerns such as the British East India Company during the age of colonization. Multinational concerns were viewed at that time as agents of civilization and played a pivotal role in the commercial and industrial development of Asia, South America, and Africa.
By the end of the nineteenth century, advances in communications had more closely linked world markets, and multinational corporations retained their favorable image as instruments of improved global relations through commercial ties. The existence of close international trading relations did not prevent the outbreak of two world wars in the first half of the twentieth century, but an even more closely bound world economy emerged in the aftermath of the period of conflict.
In particular, the period after World War Two is described as the “American era” by business historians Louis Galambos and Joe Pratt. During this era (which lasted until the late 1960s), many U.S. companies began or increased international expansion. Firms also expanded operations and businesses, resulting in large conglomerates that spanned different countries. Though this era came to a close with the economic turmoil of the early 1970s, multinational corporations have remained. Since the late 1990s and early 2000s, the term “globalization” has been closely linked with multinational corporations. Some see multinationals as the driving force behind this phenomenon.
While multinational corporations have grown in power and visibility, they have also come to be viewed more ambivalently by both governments and consumers
worldwide. Indeed, multinationals today are viewed with increased suspicion given their perceived lack of concern for the economic well-being of particular geographic regions and the public impression that multinationals are gaining power in relation to national government agencies; international trade federations and organizations; and local, national, and international labor organizations.
Despite such concerns, multinational corporations appear poised to expand their power and influence as barriers to international trade continue to be removed. Furthermore, the actual nature and methods of multinationals are in large measure misunderstood by the public, and their long-term influence is likely to be less sinister than imagined. Multinational corporations share many common traits, including the methods they use to penetrate new markets, the manner in which their overseas subsidiaries are tied to their headquarters operations, and their interaction with national governmental agencies and national and international labor organizations.
WHAT IS A MULTINATIONAL CORPORATION?
As the name implies, a multinational corporation is a business concern with operations in more than one country. These operations outside the company's home country may be linked to the parent by merger, operated as subsidiaries, or have considerable autonomy. Multinational corporations are sometimes perceived as large, utilitarian enterprises with little or no regard for the social and economic well-being of the countries in which they operate, but the reality of their situation is more complicated.
There are tens of thousands of multinational corporations currently operating in the global economy, in addition to hundreds of thousands of overseas affiliates running cross-continental businesses. The top multinational corporations are headquartered in the United States, Western Europe, and Japan; they have the capacity to shape global trade, production, and financial transactions. Multinational corporations are viewed by many as favoring their home operations when making difficult economic decisions, but this tendency is declining as companies are forced to respond to increasing global competition.
The World Trade Organization (WTO), the International Monetary Fund (IMF), and the World Bank are the three institutions that underwrite the basic rules and regulations of economic, monetary, and trade relations between countries. Many developing nations have loosened trade rules under pressure from the IMF and the World Bank. The domestic financial markets in these countries have not been developed and do not have appropriate laws in place to enable domestic financial institutions to stand up to foreign competition. The administrative setup, judicial systems, and law-enforcing agencies generally cannot guarantee the social discipline and political stability that are necessary in order to support a growth-friendly atmosphere. As a result, many multinational corporations invest only in geographic locations that they believe are politically stable (such as Latin America).
Multinational corporations are often viewed as being exploitative of both their workers and the local environment, given their relative lack of association with any given locality. This criticism of multinationals is valid to a point, but it must be remembered that no corporation can successfully operate without regard to local social, labor, and environmental standards, and that multinationals in large measure do conform to local standards in these regards.
Multinational corporations are also seen as acquiring too much political and economic power in the modern business environment. Indeed, corporations are able to influence public policy to some degree by threatening to move jobs overseas, but companies are often prevented from employing this tactic given the need for highly trained workers to produce many products. Such workers can seldom be found in low-wage countries. Furthermore, once they enter a market, multinationals are bound by the same constraints as domestically owned concerns, and find it difficult to abandon the infrastructure they produced to enter the market in the first place.
Because so many early multinational corporations were originally based in the United States, some of these corporations—especially consumer businesses with well known brands—came to be seen as symbols of “Americanization.” However, the modern multinational corporation is not necessarily headquartered in a wealthy nation. Many countries that were recently classified as part of the developing world, including Brazil, Taiwan, Kuwait, and Venezuela, are now home to large multinational concerns. The days of corporate colonization seem to be nearing an end. At the most extreme end, in 2008 Business Week featured a story on Lenovo, a multinational that does not have a headquarters, effectively denying the company's ties to a single nation as its home.
ENTRY OF MULTINATIONAL CORPORATIONS INTO NEW MARKETS
Multinational corporations follow three general procedures when seeking to access new markets: merger with or direct acquisition of existing concerns; sequential market entry; and joint ventures.
Merger or direct acquisition of existing companies in a new market is the most straightforward method of new market penetration employed by multinational corporations. Such an entry, known as foreign direct investment, allows multinationals, especially the larger ones, to take full advantage of their size and the economies of scale that this provides. The rash of mergers within the global automotive
industries during the late 1990s are illustrative of this method of gaining access to new markets and, significantly, were made in response to increased global competition.
Multinational corporations also make use of a procedure known as sequential market entry when seeking to penetrate a new market. Sequential market entry often also includes foreign direct investment, and involves the establishment or acquisition of concerns operating in niche markets related to the parent company's product lines in the new country of operation. Japan's Sony Corporation made use of sequential market entry in the United States, beginning with the establishment of a small television assembly plant in San Diego, California, in 1972. For the next two years, Sony's U.S. operations remained confined to the manufacture of televisions, the parent company's leading product line. Sony branched out in 1974 with the creation of a magnetic tape plant in Dothan, Alabama, and expanded further by opening an audio equipment plant in Delano, Pennsylvania, in 1977.
After a period of consolidation brought on by an unfavorable exchange rate between the yen and dollar, Sony continued to expand and diversify its U.S. operations, adding facilities for the production of computer displays and data storage systems during the 1980s. In the 1990s, Sony further diversified it U.S. facilities and now also produces semiconductors and personal telecommunications products in the United States. Sony's example is a classic case of a multinational using its core product line to defeat indigenous competition and lay the foundation for the sequential expansion of corporate activities into related areas.
Finally, multinational corporations often access new markets by creating joint ventures with firms already operating in these markets. This has particularly been the case in countries formerly or presently under communist rule, including those of the former Soviet Union, Eastern Europe, and the People's Republic of China. In such joint ventures, the venture partner in the market to be entered retains considerable or even complete autonomy, while realizing the advantages of technology transfer and management and production expertise from the parent concern. The establishment of joint ventures has often proved awkward in the long run for multinational corporations, which are likely to find their venture partners are formidable competitors when a more direct penetration of the new market is attempted.
Multinational corporations are thus able to penetrate new markets in a variety of ways, which allows existing concerns in the market to be accessed with a varying degree of autonomy and control over operations.
CONCERNS ABOUT MULTINATIONAL CORPORATIONS
While no one doubts the economic success and pervasiveness of multinational corporations, their motives and actions have been called into question by social welfare, environmental protection, and labor organizations and government agencies worldwide.
National and international labor unions have expressed concern that multinational corporations in economically developed countries can avoid labor negotiations by simply moving their jobs to developing countries where labor costs are markedly less. Labor organizations in developing countries face the converse of the same problem, as they are usually obliged to negotiate with the national subsidiary of the multinational corporation in their country, which is usually willing to negotiate contract terms only on the basis of domestic wage standards, which may be well below those in the parent company's country.
Offshore outsourcing, or offshoring, is a term used to describe the practice of using cheap foreign labor to manufacture goods or provide services only to sell them back into the domestic marketplace. Today, many Americans are concerned about the issue of whether American multinational companies will continue to export jobs to cheap overseas labor markets. In the fall of 2003, the University of California-Berkeley showed that as many as 14 million American jobs were potentially at risk over the next decade. Opponents of offshoring claim that it takes jobs away from Americans, while also increasing the imbalance of trade.
When foreign companies set up operations in America, they usually sell the products manufactured in the United States to American consumers. However, when U.S. companies outsource jobs to cheap overseas labor markets, they usually sell the goods they produce to Americans, rather than to the consumers in the country in which they are made. In 2004, the states of Illinois and Tennessee passed legislation aimed at limiting offshoring; in 2005, another sixteen states considered bills that would limit state aid and tax breaks to firms that outsource abroad.
However, foreign multinationals may also outsource their operations to the United States. For example, many non-U.S. auto manufacturers have built plants in the United States, thus ensuring access to American consumers. For example, Toyota now makes approximately one-third of its profits from U.S.-built car sales.
Social welfare organizations are similarly concerned about the actions of multinationals, which are presumably less interested in social matters in countries in which they maintain subsidiary operations. Environmental protection agencies are equally concerned about the activities of multinationals, which often maintain environmentally hazardous operations in countries with minimal environmental protection statutes.
Business and social developments can also produce new criticisms of multinational corporations. In 2007, widely publicized recalls of toys containing lead paint that
were manufactured in China for multinational corporations illuminated other issues with outsourcing. As multinationals outsource operations, they lose accountability and control over manufacturing, environmental, and safety standards. Even if a multinational requires certain standards, the ability to ensure that they are followed is diminished. This can be exacerbated by even further subcontracting of already-outsourced tasks.
Finally, government agencies fear the growing power of multinationals, which once again can use the threat of removing their operations from a country to secure favorable regulation and legislation. In effect, a multinational corporation has the ability to shift capital, resources, and operations around the world as it sees fit. The mobility inherent in capital investment also means that some locations and local governments might compete with one another in attracting a multinational corporation by creating favorable business conditions. Scholars and others have debated whether or not this development is positive or negative. For example, Thomas Friedman has developed what he calls the “McDonald's Theory of Conflict Prevention,” which states that any two countries that have the same economic standing (represented by McDonald's) will not go to war. In effect, Friedman sees multinationals as a stabilizing force in that it links different nations together in a world economy. On the other hand, others see multinationals as thriving through exploiting economic differences across the globe, what some geographers term “uneven development.” Some point out that different parts of the production process happen in different parts of the world. Because of this, multinational corporations actually contribute to spatial, economic, and power inequalities.
All of these concerns are valid, and abuses have undoubtedly occurred, but many forces are also at work to keep multinational corporations from wielding unlimited power over even their own operations. Increased consumer awareness of environmental and social issues and the impact of commercial activity on social welfare and environmental quality have greatly influenced the actions of all corporations in recent years, and this trend shows every sign of continuing. Multinational corporations are constrained from moving their operations into areas with excessively low labor costs given the relative lack of skilled laborers available for work in such areas. Furthermore, the sensitivity of the modern consumer to the plight of individuals in countries with repressive governments mitigates the removal of multinational business operations to areas where legal protection of workers is minimal. Examples of consumer reaction to unpopular action by multinationals are plentiful, and include the outcry against the use of sweatshop labor by Nike and activism against operations by the Shell Oil Company in Nigeria and PepsiCo in Myanmar (formerly Burma) due to the repressive nature of the governments in those countries.
Multinational corporations are also constrained by consumer attitudes in environmental matters. Environmental disasters such as those which occurred in Bhopal, India (the explosion of an unsafe chemical plant operated by Union Carbide, resulting in great loss of life in surrounding areas) and Prince William Sound, Alaska (the rupture of a single-hulled tanker, the Exxon Valdez, causing an environmental catastrophe) led to ceaseless bad publicity for the corporations involved and continue to serve as a reminder of the long-term cost in consumer approval of ignoring environmental, labor, and safety concerns.
Similarly, consumer awareness of global issues lessens the power of multinational corporations in their dealings with government agencies. International conventions of governments are also able to regulate the activities of multinational corporations without fear of economic reprisal, with examples including the 1987 Montreal Protocol limiting global production and use of chlorofluorocarbons and the 1989 Basel Convention regulating the treatment of and trade in chemical wastes.
In fact, despite worries over the impact of multinational corporations in environmentally sensitive and economically developing areas, the corporate social performance of multinationals has been surprisingly favorable to date. The activities of multinational corporations encourage technology transfer from the developed to the developing world, and the wages paid to multinational employees in developing countries are generally above the national average. When the actions of multinationals do cause a loss of jobs in a given country, it is often the case that another multinational will move into the resulting vacuum, with little net loss of jobs in the long run. Subsidiaries of multinationals are also likely to adhere to the corporate standard of environmental protection even if this is more stringent than the regulations in place in their country of operation, and so in most cases create less pollution than similar indigenous industries.
THE FUTURE FOR MULTINATIONAL CORPORATIONS
Current trends in the international marketplace favor the continued development of multinational corporations. Countries worldwide are privatizing government-run industries, and the development of regional trading partnerships such as the North American Free Trade Agreement (a 1993 agreement between Canada, Mexico, and United States) and the European Union have the overall effect of removing barriers to international trade. Privatization efforts result in the availability of existing infrastructure for use by multinationals seeking to enter a new market, while removal of international trade barriers is obviously a boon to multinational operations.
Perhaps the greatest potential threat posed by multinational corporations would be their continued success in a still underdeveloped world market. As the productive capacity of multinationals increases, the buying power of people in much of the world remains relatively unchanged. This could lead to the production of a worldwide glut of goods and services. Such a glut, which has occurred periodically throughout the history of industrialized economies, can in turn lead to wage and price deflation, contraction of corporate activities, and a rapid slowdown in all phases of economic life. Such a possibility is purely hypothetical, however, and for the foreseeable future the operations of multinational corporations worldwide are likely to continue to expand.
SEE ALSO Free Trade Agreements and Trading Blocs; International Business; International Management; Transnational Organization
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"Multinational Corporations." Encyclopedia of Management. . Encyclopedia.com. (January 22, 2019). https://www.encyclopedia.com/management/encyclopedias-almanacs-transcripts-and-maps/multinational-corporations
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