Transnationals, international organization and deindustrialization

Lall, S. 1980 The multinational corporation: nine essays. London: Macmillan.

Lenin, V. I. 1917 Imperialism: the highest stage of capitalism. Moscow.

Luxemburg, R. 1963 The accumulation of capital. London: Routledge and Kegan Paul.

Magee, S. P. Introduction

The post Second World War period has witnessed a dramatic expansion of the activities of transnational corporations, the emergence of international state apparatuses such as the European Community (EC), and a tendency towards the 'deindustrialization' of some leading industrial countries, such as the United States and the United Kingdom. My aim in this paper is to address the question of whether the three phenomena are inter-related and, if so, what the articulation is of their relationship. The second section provides a bird's-eye view of the state-of-the-art on the theory of the TNC. The third section examines the relationship between TNCs, nation states and international state apparatuses. This is followed by an analysis of the relationship between TNCs and deindustrialization tendencies. Finally, some policy implications are discussed and some conclusions are drawn.

The Transnational Corporation

Today over 50 percent of global exchange takes place within transnational firms (TNCs), see Rugman (1987). TNCs are firms which control production facilities outside their country of origin. They date back to the end of the nineteenth century, but it was in the aftermath of the Second World War that the TNC phenomenon started taking on the momentum dimension it has today. Historical accounts can be found in Dunning (1989), among others. Unlike earlier types of foreign investment, normally of the portfolio type, the substantial expansion of American TNCs, mainly to Europe in that period, took the form of Direct Foreign Investment (DFI); the distinguishing mark of the TNC. Why did this happen?

Hymer (1976) was the first to seriously address this question and is arguably the father-figure of the theory of the TNC. Following the completion of his PhD thesis in 1960 at MIT (first published in 1976), and up to 1973, when he died, Hymer developed his views on the theory of the TNC (and the 'multinational corporate capital system') in a number of articles, some of the best of which were published in the volume by Cohen et al. (1979). Overall, in our view, the result was the most complete theory of the TNC so far -- see below.

A useful approach to Hymer's views (and the issue of TNCs in general) is to address the questions of (1) why national corporations were able and willing to expand overseas and (2) why did they 'choose' DFI to existing market alternatives, such as exports and licensing.

Concerning their ability, Hymer observed that, by becoming national corporations, U.S. firms had acquired a number of 'ownership' ('specific' or 'oligopolistic' or 'monopolistic') advantages, such as their organizational form, know-how, product differentiation, access to capital, etc. The existence of such advantages gave them a competitive edge vis-a-vis indigenous firms of prospective 'host' countries, which was potentially sufficient to compensate for the inherent disadvantages of foreign operations (cultural, language, insufficient knowledge of local markets, etc.). This, along with their enhanced vision and perspective, gave them the ability to expand overseas.

Ability does not imply willingness. This, Hymer explained in terms of oligopolistic rivalry and collusion, both within the U.S. but also between the U.S. on the one hand and the European and Japanese firms on the other. Rivalry between U.S. firms could lead them to seek potential sources of advantage, such as cheap labour, new products, techniques, etc. Overseas investment was a means of obtaining such an advantage and/or ensuring that others would not do so first. This focus on 'defensive' investment was also emphasized with regard to (potential) competition by foreign firms. Hymer regarded the American DFI in Europe as a defensive step designed to restrain competition.

The above explain (potentially) why these corporations expanded into international production, but not why they chose DFI in preference to other alternatives such as exporting and licensing. Hymer's explanation linked the choice to problems associated with full appropriability of 'quasi-rents' when markets are used, e.g. licensing arrangements, problems with contracting arrangements, the desire to control raw materials and the need to defend the 'quasi-monopoly' of knowledge. Hymer also pointed to the need of firms to expand their production base, divide labour spatially so as to increase their bargaining power and increase their power vis-a-vis nation states. He also regarded size and internationality per se as advantageous to TNCs.

All later developments of the theory of the TNC build upon Hymer's theory. Two main schools of thought have emerged in the mainstream literature. Kindleberger, Hymer's PhD thesis supervisor, has developed Hymer's 'oligopolistic advantage' view -- see, in particular, the collection of some of his articles in Kindleberger (1984). Despite the observation that exploitation of such advantages by firms can help them to restrict competition, and in stark contrast to Hymer, Kindleberger emphasized the efficiency aspects of TNCs' operations, such as technology transmission to 'host' countries. On the other hand, the opposite view, that of monopolization of foreign markets, has been taken by Barnet and Muller (1976) and Lall (1980). In this tradition, a second line of thought emphasized the oligopolistic interaction aspects of TNCs. Notably, Knicker-brocker (1973) developed the idea of defensive investments, while Graham (1978) regarded cross-investments as an exchange of threats.