American Economic Association

The Efficiency (Contradictions) of Multinational Corporations

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 THE EFFICIENCY (CONTRADICTIONS) OF
MULTINATIONAL CORPORATIONS

By STEPHEN HYMER
Yale University

Multinational corporations are a substitute for to reap the benefits of internal specialization anld
the market as a method of organizing interna- exchange. Few studies have been made on the re-
tional exchange. They are " . . . islands of con- lationship of foreign investment to a firm's overall
scious power in an ocean of unconscious coopera- efficiency and as far as quantitative evidence is
tion," to use D. H. Robertson's phrase.1 This es- concerned, we must view this question as a com-
say examines some of the contradictions of this pletely open one. WVith regard to the effect of
latest stage in the development of private busi- size, the evidence is more plentiful but not con-
ness enterprise. clusive. A number of studies on differences in per-
At the outset, we should note that the multina- formance of large and small firms have in general
tional corporation raises more questions than eco- concluded that firms experience economies of
nomic theory can answer. Multinational corpora- scale up to a certain minimum size, after which
tions are typically large firms operating in imper- there is little relationship between size and per-
fect markets and the question of their efficiency is formance. Applying these results to the multina-
a question of the efficiency of oligopolistic deci- tional corporation suggests that most parent firms
sion making, an area where much of welfare eco- are large enough to have exhausted economies of
nomics breaks down, especially the proposition scale without foreign investment, although many
that competition allocates resources efficiently of their subsidiaries may be too small to stand on
and that there is a harmony between private their own feet.
profit maximization and the general interest. These tests, however, have several inadequacies
Moreover, multinational corporations bring into and may seriously underestimate the advantages
high definition such social and political problems of size. The major difficulty is that large firms are
as want creation, alienation, domination, and the seldom engaged in exactly the same activities as
relationship or interface between corporations and medium-sized or smaller firms and their perfor-
national states (including the question of imperi- mance is not really comparable. The fact that
alism), which cannot be analyzed in purely "eco- very large firms do not seem to be significantly
nomic" terms. more profitable than their smaller rivals or to
grow significantly faster does not preclude the
I. Division of Labor and the Extent of the Firm possibility that they are specializing in activities
where size is of great advantage and which would
Our starting point is the fact that there are two
not be undertaken if the large firms did not exist.
kinds of division of labor: the division of labor
The structure of output within a country could
between firms coordinated by the markets; and
well be a function of the size distribution of its
the division of labor within firms, coordinated by
firms without there being observable differences
entrepreneurs. International trade theory has
between large and small firms with regard to the
been mainly concerned with the first of these and
more commonly studied characteristics.
has long stressed the desirability of widening in-
The qualitative evidence on the structure of
ternational markets to increase the division of la-
business enterprise and its evolution through time
bor and exchange. Far less attention has been
suggests that both size and internationality have
paid to the parallel proposition that the division
important positive effects on a firm's strength
of labor within a firm is limited by the extent of
and ability. Since the beginning of the industrial
the firm and the economic and social questions
revolution there has been a steady increase in the
this raises.
size of manufacturing firms, so persistent that it
Unfortunately, the empirical evidence is not
might almost be formulated as a general law of
very helpful in deciding the degree to which large
capital accumulation. These increases in size were
international firms should be encouraged in order
accompanied by important changes in organiza-
' D. H. Robertson quoted in R. H. Coase, "The tional structure involving both increased subdivi-
Nature of the Firm," Economica, New Series, 1937,
sion or differentiation of tasks and increased inte-
pp. 386-405. Reprinted in G. S. Stigler and K. E.
Boulding, Readings in Price Theory (Richard D. gration through the creation of new organs of
Irwin, Inc., 1932). control. Business administration became a highly

441

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442 AMERICAN ECONOMIC ASSOCIATION

specialized activity with its own elaborate division the top two levels are separated from the bottom
of labor; and the corporation developed a brain level. In the multidivisional corporation, diff-
to consciously coordinate the various specialties erentiation is far more complete; level three is
and to plan for the survival of the organism as a completely split off from level two and is concen-
whole. trated in the general office whose specific function
Chandler2 distinguishes three major stages in is strategy, not tactics.
the development of corporate capital. First, the In other words, the process of capital accumu-
Marshallian firm, organized at the factory level, lation has become more and more specialized
confined to a single function and a single indus- through time. As the corporation evolved, it de-
try, and tightly controlled by one or a few men veloped an elaborate system of internal division
who, as it were, see everything, and decide every- of labor, able to absorb and apply both the physi-
thing. The second stage emerged in the United cal sciences and the social sciences to business ac-
States at the end of the nineteenth century when tivity on a scale which could not be imagined in
rapid growth and the merger movement led to earlier years. At the same time, it developed a high-
large national corporations, and a new structure er brain to command its very large concentration
of administration was developed to deal with the of wealth. This gave it the power to invest on a
new strategy of continent-wide, vertically inte- much larger scale and with a much wider time-ho-
grated production and marketing. The family firm rizon than the smaller, less developed firms that
gave way to the modern corporation with a highly preceded it. The modern multidivisional corpora-
elaborate administrative structure to organize the tion is thus a far cry from the Marshallian firm in
many disparate units of a giant enterprise. The both its vision and its strength. The Marshallian
next stage, the multidivisional corporation, began capitalist ruled his factory from an office on the
in the 1920's and gathered great momentum after second floor. At the turn of the century, the pres-
the second World War. It too was a response to a ident of a large national corporation was lodged
new marketing strategy. To meet the conditions in a higher building, say on the seventh floor,
of continuous innovation, corporations were de- with wider perspectives and greater power. In the
centralized into several divisions, each specializing giant corporation of today, managers rule from
in one product line and organized as an almost the top of skyscrapers; on a clear day, they can
autonomous unit similar in structure to the na- almost see the world.
tional corporation. At the same time, an enlarged Each step in the evolution of business enter-
corporate brain was created in the form of the prise had important implications for the structure
general office to coordinate the various divisions of the international economy, just as each excur-
and to plan overall growth and survival. This sion into the international economy provided new
form is highly flexible and can operate in several challenges to the corporation and speeded its evo-
industries and adjust quickly to rapidly changing lutionary development. In a world of Marshallian
demands and technology. firms, commodity trade and portfolio capital were
With each step in the development of business the main engines of international exchange.
administration, capital obtained new power and Movement of enterprise between countries was
new horizons. As Chandler and Redlich3 point sharply limited because firms were small and
out, there are three levels of business administra- lacked the appropriate administrative structure.
tion. Level three, the lowest level, is concerned The diffusion of Marshall's vital fourth factor,
with managing the day-to-day operations of the organization, from advanced to less advanced
enterprise; i.e., keeping it going within the estab- countries was therefore exceedingly slow. Move-
lished framework. Level two is responsible for ments of portfolio capital were substantial, at
coordinating the managers at level three. Level times, because the small Marshallian firms were
one's function is goal determination and planning; associated with a highly developed banking and
i.e., setting the framework for the lower levels. In financial system. But the ability of less advanced
the Marshallian firm all three levels are embodied countries to absorb capital (and technology) was
in one entrepreneur. In the national corporation, limited to the rate at which they could build up
their own organizations, a slow and difficult pro-
2 Alfred D. Chandler, Strategy and Structure (Dou- cess given the negative policies of most govern-
bleday & Co., 1961). ments in Africa, Asia, and Latin Ameri-
3Alfred D. Chandler and Fritz Redlich, "Recent ca, especially those in colonial dependencies. The
Developments in American Business Administration
and Their Conceptualization," Bus. Hist. Rev.,
range of goods which could be produced was thus
Spring, 1961. restricted and the possibility for international

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 THE INTERNATIONAL FIRM 443

trade to equalize factor prices was severely lim- certain hiighly intractable problems which greatly
ited.4 impede their efficiency. We turn to these consider-
The national corporation opened new possibili- ations.
ties of transferring organizational abilities inter-
II. Bigness and Fewness
nationally. The new administrative structure and
financial power enabled firms to undertake direct Multinational corporations enlarge the domain
foreign investments and organize large-scale pro- of centrally planned world production and de-
duction in mining and manufacturing in foreign crease the domain of decentralized market-di-
countries. However, this migration of business en- rected specialization and exchange. Bigness is thus
terprise occurred only on a limited scale and was paid for, in part, by fewness, and a decline in
usually restricted to a narrow activity; i.e., to ac- competition since the size of the market is limited
quiring raw materials used by the parent company by the size of the firm. The precise effect of the
or to exploiting some technological advance or dif- present wave of direct investment on seller con-
ferentiated product developed by the parent centration in world markets is not well estab-
company. Moreover, to the extent that invest- lished. On the one hand, improved communica-
ment strengthened the firm's market control, its tions are breaking down barriers to trade and wid-
effect was considerably less beneficial and perhaps ening the market facing most buyers. On the
even negative. other hand, direct foreign investment tends to re-
The modern multidivisional or conglomerate duce the number of alternatives facing sellers and
enterprise is a much more powerful organizational to stay the forces of international competition. A
form than the national corporation and appears great deal of statistical work needs to be done to
capable of integrating world production and ex- evaluate the net effect of these two tendencies
change to a much larger extent. Larger size and a and establish the exact trend in the level of seller
more advanced administrative structure give it a concentration, taking into account the growing in-
much wider horizon leading in many cases to a ternational nature of the market. All that can be
global outlook and a transformation to the stage said at present is that the world level of concen-
of multinational enterprise. It seems that after a tration is much higher than it would be if foreign
certain point, a corporation comes to think in investment and domestic mergers were restricted.
terms of its world market position rather than Since miost countries are encouraging mergers at
merely its United States or European market pos- home and foreign investment abroad, for better
ition and to plan in terms of worldwide factor or worse, the opportunity to increase competition
availabilities and demand patterns. Since the pro- by maintaining numbers is not being taken up.
cess is just beginning, it is difficult to evaluate Direct foreign investment thus has a dual na-
how strong this tendency will be. However, it is ture. It is an instrument which allows business
clear that at present large corporations are con- firms to transfer capital, technology, and organi-
sciously moving towards an international perspec- zational skill from one country to another. It is
tive much faster than other institutions and espe- also an instrument for restraining competition be-
cially much faster than governments, and are in tween firms of different nations. Analyzing any
the vanguard of planners of the new international particular case is an exceedingly complex matter,
economy created by the aeronautical and elec- as the antitrust literature shows.5 For present
tronic revolutions. Since multinational corpora- purposes, the important point is to note that the
tions also have great financial and technical re- general presumption of international trade eco-
sources, they will certainly have many successes nomists in favor of free trade and free factor
and will be able to speed up the spread of tech- movements, on the grounds of allocative effic-
nology and to organize activities until now impos- iency, does not apply to direct foreign investment
sible. They are a large step forward but this is because of the anticompetitive effect inherently
not, however, the same thing as saying that they associated with it. Just as in antitrust theory
serve the general interest as well as their own, there are recognized reasons, within the frame-
that they are the best way to exploit the possibili-
5 See also Stephen Hymer, "Direct Foreign Invest-
ties of modern science, or that they do not create ment and the National Economic Interest," Peter
Russel, ed., Nationalism in Canada (Toronto: Mc-
"Stephen -lymer and Stephen Resnick, "Interna- Graw-Hill of Canada, 1966); Yale Economic Growth
tional Trade and Uneven Development," in J. N. Center, Paper No. 108; "L'Impact des Firmes Inter-
Bhagwati, R. W. Jones, R. A. Mundell, Jaroslav nationals," in M. Bye, ed., La Politique Industrielle
Vanek, eds., Kindleberger Festschrift (M.I.T. Press, de L'Europe Integree (Paris: Presses Universitaires
forthcoming). de France, 1968).

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 444 AMERICAN ECONOMIC ASSOCIATION

work of neoclassical economics, for preventing a creasing competitiveness, may improve general
firm from merging with another firm or from in- welfare in the rich countries as well-although it
creasing its share of the market by growth, there will harm those in the monopoly position.
are also international antitrust reasons for pre-
venting a firm of one country from taking over a III. The International "Trickle Down"
firm in another country or from acquiring or in- Many economists, in dealing with oligopoly,
creasing its share of foreign production. Since this prefer to stress, as Schumpeter did, that the com-
point can be easily misunderstood, it is important petition that counts lies in creative destruction
to stress that this is not a second-best argument through the introduction of new technology and
but a genuine argument on antimonopoly grounds new products. In that case, an oligopolistic
for interfering in international markets. A re- market structure, even though it interferes with
striction on direct investment or a policy to break static optimum allocation, may be a necessary or
up a multinational corporation may be in some at least a contributing factor to dynamic opti-
cases the only way of establishing a higher degree mum allocation in a private enterprise system, be-
of competition in that industry. National anti- cause it allows innovators to capture some of the
trust measures cannot substitute for international benefits of their discoveries and thus provides the
antitrust when, for example, one of the major po- incentive for research and development. The rec-
tential competitors to a domestic firm is its sister ord of the United States shows that one cer-
or parent affiliate within the same multinational tainly cannot fault oligopoly on the grounds that
group. In short, when we leave the conditions of it does not produce a very rapid rate of techno-
perfect competition we lose the assumption of the logical change and product innovation. (Indeed it
invisible hand. is easier to argue that the rate of change is too
This argument, it should be noted, provides an high.) One can expect international oligopoly via
important rationale for the infant entrepreneur multinational corporation to provide the same
argument supporting protection. Temporary pro- kind of dynamic environment for the world econ-
tection of a weak firm from a stronger firm can omy as a whole.
improve the competitive structure of the industry The question of efficiency therefore hinges on
in future periods by maintaining numbers. In the the direction of change rather than the rate of
present context, the cost of this protection would change. An analysis of this problem involves an
have to be borne by the country that offers it excursion into unexplored terrain since we do not
while the benefits would accrue to the world as a now have an adequate theory on how corporations
whole. Thus, in reverse of the usual arguments, choose between the available paths of innovation.
myopic behavior will lead to too little protection We certainly cannot assume that market forces
rather than too much. This presents a particularly compel firms to choose the optimum path. It is
acute problem in the case of underdeveloped true that an innovation must, to some extent,
countries. These countries typically do not sell meet the market test for a corporation to survive.
commodities or buy capital or technology in com- However, what is at stake here is not whether the
petitive markets where there is an established consumer has some choice but rather whether an
price at which they can trade whatever quantity oligopolistically competitive market structure
they want. Instead, they frequently face only a provides him with the full range of choices possi-
few potential buyers of their raw materials or ble.6 Oligopolists tend to copy each other, and
their manufactured goods and a few potential sel- their predictions as to what the consumer wants
lers of a particular technology. The price they re- are often self-fulfilling, since in fact this is all
ceive or pay therefore depends on their skill and that the consumer is offered. If we had only large
strength in bargaining and not on market condi- numbers of independent decision centers could we
tions alone. The less developed the country, the assume that all avenues had been explored.
greater its disadvantage in the bargaining process Since we cannot possibly treat this complex
because it has fewer organizations that are in any topic in any detail in the present paper, let us
way a match for the giant companies with which simply examine one theory of innovation closely
it is dealing. Given the oligopolistic front main- associated with the multinational corporation and
tained by the firms from developed countries, the the international demonstration effect. The mark-
underdeveloped countries need to devote an impor-
tant share of their scarce resources to building up o Sean Gervasi, "Publicite et Croissance Econo-
national enterprises which they can control and miquc," Economie et Humanisme, Nov.-Dec., 1964.
Harry Johnson, "The Political Economy of Opu-
use in bargaining with foreign oligopolists. Ironi- lence," in The Canadian Quandary (McGraw-Hill,
cally, their stronger bargaining position, by in- 1962).

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 THE INTERNATIONAL FIRM 445

eting literature suggests new products typically of the modern economic problem . . ."7 was the
follow a cycle known as trickle-down or two-stage division of labor within the factory between those
marketing. An innovation is first adopted by a who plan and organize economic activity and
small group of individuals who act as opinion those who work for them. In the modern corpora-
leaders and is then copied by others via the dem- tion the hierarchical structure of command and
onstration effect. In this process, the rich get authority has been greatly elaborated from the
more votes than everyone else, first of all because simple division between owners and workers in
they have more money, second of all because they the Marshallian firm, but the tensions and
have discretionary income and can afford to be conflicts of autocracy remain. They take on par-
experimental, and, third, because they have high ticular importance in the multinational corpora-
status and are more likely to be copied. The prin- tion where problems of nationalism and problems
ciple of consumer sovereignty cannot easily be of authoritarianism intertwine.
applied to this process since, at most, only the Multinational corporations are torn in two di-
special group in the first stage of the marketing rections. On the one hand, they-must adapt to lo-
process has something approachiing a free choice. cal circumstances in each country. This calls for
The rest have only the choice between conform- decentralized decision making. On the other hand,
ing or being isolated. they must coordinate their activities in various
In the international economy, trickle-down parts of the world and stimulate the flow of ideas
marketing takes the form of the international from one part of their empire to another. This
demonstration effect. Products are first intro- calls for centralized controls. They must therefore
duced in the United States or Europe and then develop an organizational structure to balance the
spread to other countries. Multinational corpora- need to coordinate and integrate operations with
tions speed up this process by making it easier to the need to adapt to a patchwork quilt of lan-
transfer new products and marketing methods to guages, laws, and customs. One solution is divi-
less advanced countries. One of the key motives sion of labor based on nationality. Day-to-day
for direct investment, cited by corporations, is to management in each country is left to nationals
gain control over marketing facilities in order to of that country who are intimately familiar with
facilitate the spread of their products. If firms local conditions and practices and best suited to
were denied control over communication and mar- deal with local problems and local government.
keting facilities in the foreign countries and we had These nationals remain rooted in one spot, but
a regime of national firms (private or socialized) above them is a layer of people who move around
rather than multinational firms, the pattern of from country to country, as bees among flowers,
output would almost certainly be quite different transmitting information from one subsidiary to
than the one that is now observed. There would another and from the lower levels to the general
be more centers of innovation, and probably more office at the apex of the corporate structure. In
variety of choices offered to the consumers, as the nature of things, these people, for the most
each country developed products suited to its par-part, will be citizens of the country of the parent
ticular characteristics. Products from one country corporation, just as we now find that the top ex-
would spread to other countries either through ecutives of most of the major corporations in the
trade or imitation but the movement would be United States are drawn from a relatively small
coordinated by market competition rather than homogeneous cultural group quite distinct from
the planning decisions of top management in a the population of the United States as a whole.
few corporations whose interest it is to foreclose This creates two types of problems. In the first
competition, to restrict the choices offered, and to place, there is the internal problem of creating in-
insure the survival of their own organizations. It centives for foreigners whose access to the top
is difficult to speak with professional certainty in corporate positions will be necessarily limited.
this badly neglected field, but it does not appear The second problem is far more important and is
to be socially efficient to allow corporations to in the nature of an external diseconomy. The sub-
monopolize information on new possibilities cre- sidiaries of multinational corporations are fre-
ated by science. quently amongst the largest corporations in their
country of operations and their top executives
play an influential role in the political, social, and
IV. The International Hierarchy of cultural life of the country. Yet these people,
Decision Making

Marshall, like Marx, thought that the "chief 7 Alfred Marshall. Principles of Economics (Mac-
fact in the form of modern civilization, the kernel millan, 1961), pp. 74-75.

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 446 AMERICAN ECONOMIC ASSOCIATION

whatever their title, occupy at best a medium she has adopted a number of policies, including
position in the corporate structure and are re- high tariffs, which prevent international corpora-
stricted in authority and horizons to a lower level tions from fully rationalizing production on a
of decision making. The country whose economy continent-wide basis. The record shows that for-
is dominated by the foreign investment can easily eign subsidiaries in Canada tend to perform at
develop a branch plant outlook, not only with ref- levels equal to their Canadian counterparts rather
erence to economic matters, but throughout the than at the higher levels of efficiency of their par-
range of governmental and educational decision ent corporations. This suggests that many of the
making. benefits of foreign investment have been emascu-
Thus there are important social and political lated while many of the costs remain.
costs to international specialization in entrepren-
eurship based on multinational corporations. The V. Big Corporations: Small Countries
multinational corporation tends to create a world The efficiency with which multinational corpo-
in its own image by creating a division of labor rations can allocate resources internationally de-
between countries that corresponds to the division pends in large part on government policy decisions.
of labor between various levels of the corporate If government decision making were independent
hierarchy. It will tend to centralize high-level de- of the structure of the private sector, we could
cision-making occupations in a few key cities in view it as an exogenous factor and safely ignore it
the advanced countries (surrounded by regional in an essay devoted to the multinational corpora-
subcapitals) and confine the rest of the world to tion. However, an increase in the importance of
lower levels of activity and income; i.e., to the multinational corporations relative to national
status of provincial capitals, towns, and villages corporations will clearly have an important im-
in a New Imperial System. Income, status, au- pact on both the ability and willingness of gov-
thority, and consumption patterns will radiate out ernments to carry out certain types of economic
from the centers in a declining fashion and the policies. An analysis of the efficiency of multina-
hinterland will be denied independence and equal- tional corporations must take this into account
ity.8 and analyze, for example, its effect on govern-
This pattern contrasts quite sharply with the ment capital formation in the crucial sectors of
free trade system which offered both income infrastructures and human capital. This aspect is
equality and national independence. According to particularly important with regard to the problem
the factor price equalization theorem, trade al- of underdevelopment-clearly the greatest in-
lows a country to choose its own style and still stance of inefficiency in today's international
share fully in the riches of the world. Whether economy.9
large or small and even if its resource endowment Analyses of the role of foreign investment in
is highly skewed, it can achieve factor price underdeveloped countries often focus on the great
equalization with the rest of the world by varying disparity between the bargaining power of the
the composition of output without surrendering corporation and the bargaining power of the gov-
its control over its capital stock and without the ernment. The corporations are large and modern
need for its members to leave the country to find and have international horizons. The governments
employment elsewhere. Now the stakes seem to are typically administratively weak and have very
have gone up. In order to reap the gains from in- limited information outside their narrow confines.
ternational exchange, a country has to become In any particular negotiation between one country
integrated into a corporate interna.tional structure and one company, power in the form of flex-
of centralized planning and control in which it ibility, knowledge, and liquidity is usually greater
plays a very dependent role. on the private side than on the public side of the
Countries may not be willing to play this game table.
nor to completely break with it and the possibil- The problem of unequal bargaining power can
ity arises, in part suggested by the Canadian expe-
rience., of getting the worst of both worlds. Can- "For a stimulating analysis of the relationship of
multinational corporations to economic development,
ada has allowed an almost unrestricted inflow of
see: G. Arrighi, "International Corporations, Labour
capital and as' a result has surrendered a great Aristocracies and Economic Development in Tropical
deal of national independence. At the same time, Africa," D. Horowitz, ed., The Corporations and the
Cold War (London, forthcoming); N. Girvan, "Re-
8 This point is developed more fully in S. Hymer, gional Integration vs. Vertical Integration in the
"The Multinational Corporation and Uneven Devel- Utilization of Caribbean Bauxite," Lewis and Mat-
opmnent," in J. Bhagwati, ed., Economics and World thew, eds., Caribbean Integration (Inst. of Caribbean
Order (World Law Fund, 1970). Studies, Univ. of Puerto Rico, 1967).

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 THE INTERNATIONAL FIRM 447

be illustrated with a simple model (developed in vestment. Modern multinational corporations are
collaboration with Stephen Resnick).l? This interested in manufacturing in underdeveloped
model focuses on the feedback relationship be- countries and not just in raw materials and
tween the government and the foreign corpora- therefore want a growing market for advanced
tion. The government provides certain support products and an educated, urbanized labor force.
services to the corporation: protection, infra- They are no longer tied to traditional backward
structure, help in the creation of a labor force, governments, but have a stake in an active gov-
land laws, etc. The corporation in return pays the ernment sector which promotes growth and pro-
government taxes and royalties. This is a trading vides education and infrastructure. The "new for-
relationship in which two main variables are in- eign investment" is, then, a far cry from the "Ba-
volved: (1) the tax rate (t); and (2) the fraction nana Republic" kind, but important dangers re-
of government expenditure devoted to support main. Statistics on income distribution show that
services (g). The outcome is determined by a the top one-third of the population typically gets
process of bargaining which, for simplicity, can be about 60 percent of the total income. It is this
viewed in a purely duopolistic form-one govern- top group which provides the direct and indirect
ment and one country-though it, in fact, usually labor force for large-scale manufacturing as well
arises in a more complicated structure where as the market. An alliance between this group and
there are several corporations and several power foreign investors represents a formidable bargain-
groups involved. The government, we assume, is ing force vis-'a-vis the remaining two-thirds of the
interested in maximizing its surplus (total revenue population. A government expenditure policy
from foreign firms less the cost of support ser- based on such as alliance would concentrate on
vices). The corporation is interested in maximiz- the modern high-income sector, leaving the rest of
ing profits after taxes. At one extreme the govern- the population as a source of unlimited supply of
ment may be very strong and choose (g) and (t) cheap labor for services and for menial work.
such as to make profit zero (we assume normal Growth in these circumstances would retain its
profits are included in cost) and to make the gov- uneven quality and all the inefficiency that im-
ernment surplus as large as possible. This seldom, plies, albeit in a more advanced and progressive
if ever, occurs in underdeveloped countries where form than characterized the enclave economies of
the bargaining tends to go in the opposite direc- the previous round of foreign investment.
tion. The corporation sets (t) as low as possible,
subject to the constraint that the government has VI. Multinational Corporations and
enough money to: (a) provide necessary infra- Supranationality
structures; (b) remain in power and maintain law
Multinational corporations create serious prob-
and order for the corporation. Since the govern-
lems in the developed world as well. The most im-
ment has little surplus it does not have the money
portant of these, from the limited perspective of
to provide capital or services for other industries.
this essay, is that they reduce the ability of the
This is in keeping with the foreign investor's inter-
government to control the economy. Multina-
est, since the growth of other industries would
tional corporations, because of their size and in-
compete away factors of production and would ternational connections, have a certain flexibility
create interest groups who might challenge the
for escaping regulations imposed in one country.
corporation's hegemony. Provided that the politi- The nature and effectiveness of traditional policy
cal forces are kept under control in this system,
instruments-monetary policy, fiscal policy, anti-
the country can remain in its state of underdevel-
trust policy, taxation policy, wage and income
opment for a long period.
policy-change when important segments of the
Such extreme cases are no longer possible be-
economy are foreign-owned. This has long been
cause of the increased political strength of the lo-
recognized in countries such as Canada, but it is
cal middle class in most underdeveloped countries
now becoming obvious that even the United
and because of the changed nature of foreign in-
States has reached the point where the interna-
tional commitments of its corporations reduce the
10 S. Hymer and S. Resnick, "Interactions between room for flexibility in national economic policy
the Government and the Private Sector in Under-
developed Countries: Government Expenditure Pol- formation. If foreign investment continues to grow
icy and the Reflection Ratio," Ian Stewart, ed., at anything like the rate of the last ten or fifteen
Economic-Development and Structural Change years, this problem will become an extremely seri-
(Edinburgh: Edinburgh Univ. Press, 1969). Pub-
ous one for all North Atlantic countries.1"
lished in French as "Les Interactions entre le Gou-
vernement et leur Secteur Prive," L'Actualite Eco-
nomique, Oct.-Dec., 1968. "' For an attempt to predict the trend towards mul-

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448 AMERICAN ECONOMIC ASSOCIATION

This contradiction between multinational cor- liberal policy towards private capital, movements
porations and nation states has important bearing and mergers that created the multinational indus-
on the efficiency of the multinational corporation. trial structure.
The main problem, stated most simply, is as fol-
lows: if national power is eroded, who is to per-
VII. Conclusion: Some Subjective Evaluations
form the government's functions? For example, if This essay has presented a list of advantages
nation states, because of the openness of their and disadvantages of multinational corporations.
economy, cannot control the level of aggregate Assuming there are no important omissions and
economic activity through traditional monetary that each point taken by itself is valid, the ques-
and fiscal policy instruments, multinational agen- tion arises as to what weights should be attached
cies will need to be developed to maintain full to the various arguments. One simple summation,
employment and price stability. Yet such organi- offered here without proof, is as follows: The
zations do not exist at present, nor can they be large corporation illustrates how real and impor-
quickly built. Either one must argue that the tant are the advantages of large-scale planning,
Keynesian problem has somehow been solved by but it does not tell us how best to achieve wider
the creation of the multinational corporation domains of conscious coordination. Broadly
(along with a host of other problems) or else one speaking, there are two main directions in which
must agree that it is not feasible to have interna- one can proceed. Multinational corporations inte-
tional business integration via direct foreign in- grate one industry over many countries. The al-
vestment proceeding at a much faster rate than ternative is to integrate many industries over one
political integration. Yet, this seems to be pre- country and to develop noncorporate linkages be-
cisely what is happening. Most of the large Amer- tween countries for the free flow of goods and,
ican firms have already staked out their claims in more important, the free flow of information.
the European market and many of the leading The advantage of the second direction is that it
European firms are now rapidly entering foreign keeps the economy within the boundary of the
markets, including those of the United States. A polity and the society. It thus causes less tension
predominance of multinational corporations in the and creates the possibility of bringing economic
North Atlantic economy seems therefore to be a power under control by removing the wastes of
fait accompli. Government cooperation is not oligopolistic anarchy. This would allow more
growing at anywhere as rapid a rate. If serious scope for solving the two major economic prob-
problems arise, governments are likely to reassert lems of today, affluence and poverty, than the
their power and attempt greater regulation and first alternative. The trend, however, is clearly in
control over the business enterprises within their the direction of the first alternative. The coming
jurisdictions. Economists will rightly point out age of multinational corporations should repre-
that these restrictions create inefficiencies in the sent a great step forward in the efficiency with
allocation of the economic resources. It is impor- twhich the world uses its economic resources, but
tant, however, to realize the role played by a too jit will create grave social and political problems
and will be very uneven in exploiting and distrib-
tinationalism and the problems it causes, see Stephen uting the benefits of modern science and technol-
Hymer and Robert Rowthorn, "Multinational Cor-
ogy. In a word, the multinational corporation re-
porations and International Oligopoly: the Non-
American Challenge," in C. P. Kindleberger, ed., veals the power of size and the danger of leaving
The Internationtal Corporation (M.I.T. Press, 1970). it uncontrolled.

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