Foreign Investment and the Multinational Corporation: The Multinational Corporation
Powers, John J. Jr.
Early this year, the conservative business journal, The Statist of London observed that: "It takes no great prescience ... to see that the future lies with a new type of company whose dominant...
...Let me begin with just a few statistics...
...For such a company, a beginning is made with exports...
...To a certain extent government regulations in the host countries may require local production by cutting off or heavily taxing imports of finished goods, or even of some basic materials but, regardless of this, to compete effectively for a good share of any major market requires direct investment in that marketplace in the form of sales offices and warehouses and, at least, packaging and as- sembly plants, if not basic production units...
...And to pose a final difficult issue, to what extent should the U.S...
...They may become a part of a national economic develop- ment plan or participate in a national program for the expansion of exports or reduction in im- ports...
...It involves initiative...
...What is behind this enormous growth of direct investments and consequent production in over- seas markets by American based companies...
...If this is true, and I think it is, then management in industries engaged in international business, such as the chemical industry, must be giving serious thought to developments in the world market and what is necessary to adapt their businesses to that market...
...This role involves more than passively reacting to new business conditions...
...They would quickly become ob- solete without the constant feeding with new techniques and new products from abroad, and this process is to a large extent the work of multinational companies...
...There is a growing number of problem areas requiring that laws and policies affecting world business be reviewed in the light of multinational cor- porate operations...
...Such com- panies have an important interest in being able to feed those plants with raw materials and intermediates imported from outside of local markets and to bring into these markets other items to fill out the product line of their organi- zations...
...As I have suggested, an increasing number of companies now have a substantial proportion of their assets abroad...
...Additional copies are available from: Pfizer Public Relations Department, 235 East 42nd Street, New' York, New York 10017...
...As you well know, there is an immense amount of thinking going on as to the best form of organization for multinational com- panies...
...Production of motor vehicles in the period was up 39 percent in the United States, nearly 500 percent abroad...
...In these circumstances, the company finds it has not just grown - it has been transformed...
...New Environment But the change is not only in the organization chart...
...The economic as well as the political history of nations is converging, and the multinational company plays an important role in that convergence...
...to see that the future lies with a new type of company whose dominant concept will be total internationalism in operations, management, and philosophy...
...corporations, have been criticized, most noticeably in Canada...
...Most broadly we are striving to estab- lish appropriate relationships between the parent company and the international division, and between the parent company management and domestic operations...
...multinational com- panies have found it necessary to go abroad to do the job themselves...
...Reacting to these powerful new economic forces, the chemical industry finds itself a leader in the construction of a true world economy...
...They stimulate competition...
...marketplace or for a less mature company which discovers an outstanding new product that will attract strong demand everywhere, the case for worldwide marketing seems almost ir- resistible...
...Again to the degree that the multinational organization is mature, there will be found a change in the attitudes of its people towards a more international viewpoint...
...The company's assets and efforts must now be managed multinationally, in accordance with market opportunities wher- ever they may be...
...It is not surprising, then, that the reception in host countries of multinational companies is often mixed...
...In a decade or so, a domestically oriented management will find it has a large proportion of its assets deployed around the world, that many of its employees are foreign citizens, that a large amount of its earnings are in foreign currencies, and that it is operating to an impor- tant extent outside the jurisdiction of the United States...
...Whatever specific solution is arrived at, it is clear that we are struggling to find patterns that will reflect new relationships within the enterprise...
...And, indeed, in pursuing such policies, American businessmen will not only serve well their individual corporations but will be promoting the further development of a supranational institution, private and corporate, that the record shows offers the best hope for the effective development and use of the world's scarce resources...
...In making direct investments abroad, it has become multinational...
...Today I want to focus your attention on some of these developments and to draw a few conclusions from them - conclusions that I believe are significant to all of us who have responsibility for planning the future of our companies...
...As I have already pointed out, U.S...
...balance of payments...
...In this connection, I do not pro- pose to enter on a discussion of the merits and demerits of the Kennedy Round...
...If the chemical industry, and all American in- dustry, is to continue to flourish, we must now be prepared to think and build on a world basis, defining and implementing our policies in terms of a world market...
...controlled companies rose from about $20 billion in 1950 to about $100 billion in 1965...
...And as a continuing part of management development, they must be given the challenge to stretch their minds and from varied experi- ences to develop a truly worldwide view...
...Prior to World War II, to all but a very few Americans, international business meant exports/imports...
...and because of national sensitivities, this is not completely surprising...
...would have increased substantially and so they did - from about $10 billion in 1950 to about $27 billion in 1965 - but something else occurred of even greater significance to the United States and to the world...
...They negotiate with governments...
...It is true that modernization has a price...
...For some reasons, they are welcome...
...Thus the over- seas operations of American chemical firms were increasing their output 21/2 times as fast as their domestic operations...
...These matters are sensi- tive...
...In 1961, for ex- ample, there was an effort by the U.S...
...As Lord Cromer, former Governor of the Bank of Eng- land, said so aptly in a recent address in New York, "Although the world has moved forward substantially in international cooperation par- ticularly since the last world war, governmental thinking on international investment has lagged behind that of the business and financial communities...
...His answer was we must work toward the construction of a true world economy...
...govern- ment, partially successful, to make the foreign earnings of multinational companies subject to U.S...
...company offers opportunities for talented people to get ahead without reference to social background and thus adds considerably to social mobility...
...In- deed, this net return on direct investment of all industry overseas now represents the largest positive item in the U.S...
...I would emphasize that in striking this balance it is in our best interests to avoid going back to the ultraprotectionist policies of the past which again are being voiced in the debates on this subject...
...Jurisdiction: the Conflicting Demands In the field of international direct investment, practice is clearly ahead of theory and policy, and the gap is becoming troublesome...
...It is just not possible for a mere exporter to a market to become a major, long-term factor in a market in this second half of the twentieth cen- tury...
...Primarily, it is the need to compete effectively in these fast growing markets...
...it involves looking ahead and acting now in the light of things to come...
...The conclusion is clear...
...They alter social habits...
...market at hand, it must now be organized as a world enterprise...
...The situation now is very different...
...The growth of multi- national companies depends significantly on the free movement of goods and capital through- out the world...
...And the large in- vestment overseas was responsible for an even larger net return of dollars to this country...
...it is a role into which we are being pushed by the im- peratives of our own technology...
...They react, therefore, somewhat negatively to the proposal to move into distant and unknown places, and to make sizeable expenditures beyond the immediate supervision of U.S...
...It is still true that many American companies are primarily oriented to the domestic market...
...They bring about de- velopments in housing and education...
...Telephone units up more than 100 per- cent in the United States, over 200 percent abroad...
...They import technology and skills, but the foreign connections of these corpora- tions sometimes offend national sensitivities...
...But this resolution is important to future world development and governments and busi- nessmen and students of world business should be concentrating their attention upon them now, before they explode in debates heated up by sensitivities always associated with con- flicting claims of sovereignty...
...Looking at the chemical industry we find that it has not only kept pace with these trends in direct investments and the output from them, it has outstripped them...
...Often, in order to make optimum use of corporate facilities, it is necessary to export from overseas plants to third countries...
...But more importantly, the company will inevit- ably be drawn to make direct investments, first in marketing facilities, sales offices and ware- houses and then, as necessary, with plants...
...They reach across geo- graphic boundaries and overlap political juris- dictions...
...chemical industry, and we will be wise to recog- nize it...
...But it is not so much the loss of independence as the growth of interde- pendence...
...They hire and train people...
...In many companies there is little incentive to take on the complexities of international business operations...
...exports, and it is clearly increasing all the time...
...They break down class barriers...
...As you know, U.S...
...And if there is an international division in such companies, it probably has a junior status in the allocation of managerial and financial re- sources...
...But is this a realistic view...
...It must be learned and it must be continuously emphasized...
...In the fifteen-year period from 1950 to 1965, production and sales in the non-communist world outside the United States rose at a significantly greater rate than in the United States...
...American based multinational companies owe allegiance to the laws and policies of the United States, but their operat- ing affiliates are spread across the globe and are equally subject to the laws and policies of the countries which they inhabit...
...Even in de- veloped countries, however, the cumulative impact of U.S...
...They bring employment, but they also bring competition...
...They add foreign identities to their American identity...
...investments can be considerable...
...We are accustomed to this in the United States, but abroad where class divisions have been more rigid this social impact of the multinational com- pany has been and will be even more dramatic...
...Computer plants, supermarkets, telephone systems, auto- mobile assembly lines, pharmaceutical produc- tion facilities are local expressions of an industrial technology that is not national but supranational...
...In a speech made in Tokyo recently, George W. Ball, former Under Secretary of State, now Chairman of Lehman Bros...
...The develop- ment of an international viewpoint, however, does not take place rapidly...
...They put roots down in a country...
...What is surprising is that these enterprises are not infrequently regarded with some hostility by their home governments...
...This is a sub- ject of its own...
...This is a simple'average growth rate of 26.6 percent per year compared with a corresponding export growth rate of 11.3 percent...
...In addition to these organizational and per- sonnel changes, we find that when a domesti- cally oriented company has gradually evolved to the point at which it can truly be described as "multinational" it must cope with some totally new issues in its new environment...
...laws governing trade with communist countries, including trade...
...Though countries may be in different stages of development, modern econo- mies show similar characteristics...
...taxes, even when these earnings never leave the host countries...
...And as I have just indicated, the American chemical industry has recognized this change in the facts of life by its rapid expansion abroad in the past few years...
...In the same period, the growth in output of the domestic chemical and allied products industry was 8.3 percent a year...
...Some foreign com- mentators have suggested that under the vol- untary Balance of Payments program the U.S...
...Sales from these investments rose from $2,411 million in 1957 to $5,903 million in 1964 or an increase of 144.8 percent, approximately 20.7 percent a year...
...and for others, they are resented...
...They are pacesetters...
...This is the stage now reached by the U.S...
...The value of the direct investments abroad of the chemical industry rose from $1,378 million in 1957 to $3,068 million in 1964 - an increase of 122.6 percent or ap- proximately 17.5 percent a year...
...Abroad as in the United States, the U.S...
...Petroleum up 74 percent in the United States, 370 percent abroad, and a similarly rapid rate of growth has been achieved also in the office equipment, food and pharmaceutical industries, to name a few.-13During a period of such prosperity abroad, one would expect that exports from the U.S...
...To leave competitors to enjoy the growth potentialities abroad would be to concede to them substantial earnings which they can use to compete more effectively every- where, including the domestic market...
...Many people at higher as well as at lower levels must be exposed to new experiences...
...anti-trust laws, confusing as they sometimes can be to us at home, apply to actions of American based companies overseas where such actions fit within the laws and the mores of host countries...
...management...
...Local production overseas by U.S...
...This is no idealistic pipe dream," he went on, "but a hard-headed prediction...
...In such a situation, though the headquarters of the company is in the United States and though it has the large U.S...
...All countries want to raise their standards of living but fear some loss of independence if foreign investment is part of the process...
...by foreign subsidiaries of U.S...
...They are agents of change, socially, economically and culturally...
...The domestic market seems to offer sufficient opportunity...
...There must be a continuing supply of men who have partici- pated in both international and domestic operations...
...And so a company, keyed to expansion under American conditions will be drawn out of its shell...
...In other words, multinational companies become committed to their host countries and inevitably play a significant role in their future growth...
...It is obvious that a few large investments can have quite revolutionary effects on the developing societies of small countries...
...They buy land...
...But, as I have suggested, multinational com- panies have not always been welcome by their host countries abroad...
...Thus, at times, conflict will arise - with the multinational corporation unwittingly caught in the middle.-15It is relevant to raise a question as to how far it is always in the interests of the United States to press jurisdiction over the operations of American subsidiaries abroad...
...International, asked what objective should we work toward...
...But with respect to this subject of degree of border restrictions, it is relevant to note that our interests are dual, that we have significant interests both at home and abroad and between them a delicate balance must be struck...
...The dilemma is evident...
...Essential to the existence of such an economy and to the prosperity of the multinational com- panies which operate within it, is the free flow of invesment and trade...
...Emergence of World Enterprise For a company, however, which has already realized a good share of its potential in the U.S...
...It may well be that many of these companies are right in such an attitude...
...Government reaches across national bounda- ries to control local business operations to their detriment...
...It is a curious fact that many men in government and in universities who have done much to build up international governmental institutions in the political and financial fields have, at the same time, failed to see the unique benefits of worldwide private industrial and financial enterprises...
...The conflicting claims are difficult to resolve...
...This $100 billion worth of goods produced abroad by American based companies is about four times the value of U.S...
...Their resources are limited and, with adequate potential for growth in the United States and without the depth in management that would permit a breakthrough into international operations, concentration on the domestic market may well be prudent...
...Indeed, it occurs to me that one crucial test of the maturity of a multinational company might be whether the domestic operating organization and the parent company are separate functional entities.-14New Issues...
...Why Direct Investment...
...They borrow money locally...
...It has been said that the function of the en- trepreneur is to bring about new and more ef- fective combinations of economic resources...
...Their operations stimulate other industries...
...Such companies quite evidently have an im- portant interest in continuing to be able to invest in marketing organizations, warehouses and plants wherever opportunities exist...
...Growth of Interdependence In these circumstances, multinational companies generate tensions...
...They change financial institutions and practices...
...Multinational companies are urged - and wish - to become good citizens of the countries in which they operate, but it is sometimes difficult for them to satisfy the politi- cal and economic demands of conflicting jurisdictions...
...They transform labor-management relations...
...Toward a True World Economy Such conflicts, so far, have not proved ir- reconcilable, but as the operations of multina- tional companies grow and become more visible, one need not be a prophet to predict that they may easily result in serious strains be- tween friendly nations...
...And it finds itself faced with the need to adapt its organization and its people to the facts of this economy...
Vol. 2 • November 1968 • No. 7
