7 transnational corporations and strategic industrial policygovernment economic management across...

7 Transnational Corporations and Strategic Industrial Policy Ha-Joon Chang*

7.1 INTRODUCTION

Since the late 1970s, there has been a marked change in the models of government economic management across the world. The deteriorating economic performance and the political disillusionment with the 'corporatist' models of economic management which dominated the socalled 'Golden age of capitalism' in OECD countries have led to the rise of Neo-Liberalism (for a more detailed account and assessment of Neo-Liberalism, see Chang and Rowthorn, 1995, introduction). The Neo-Liberals sought to reduce the scope of the state through budget cuts, deregulation, privatization, and the introduction of more commercial principles in the provision of goods and services by the state, on the one hand, and to subject the economy more to the discipline of international market forces through the removal of restrictions in the international flows of trade, (direct and portfolio) investment, and technology (but, let us note, not the restrictions on international mobility of labour). I In the developing world, the massive external macroeconomic shocks since the late 1970s, especially the Debt Crisis of the 1980s, forced many countries to abandon their previous models of economic management that relied on extensive state intervention and adopt policy reforms which were intended, again, to reduce the role of the state and, more importantly than in the case of the OECD economies which were already much more open than the developing countries, to open up the economy. The rise of Neo-Liberalism reached its peak with the collapse of the Communist system and the full embrace of the NeoLiberal policy reform package by many ex-Communist countries since the late 1980s.

Despite their current vogue on various international and national policymaking agendas, it is increasingly being recognized that Neo-Liberal

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226 Transnational Corporations and Economic Development

policies have in practice produced rather poor results in terms of improving the long-term economic performance of the reforming economies, and have in some cases created unnecessary crises as in the case of many ex-Communist countries and some Latin American countries. As a result, there is now a growing body of critical assessments of Neo-Liberal doctrine (see, for example, the essays in Colclough and Manor, 1991, and Chang and Rowthorn, 1995; also see UNCTAD, 1994, 1995). To date, such criticisms have concentrated on the politically most contentious issues - such as privatization, trade liberalization, financial deregulation, and reform of the welfare state - while other parts of the doctrine have been less exposed to criticisms. One such issue is the call for the liberalization of policies towards transnational corporations (TNCs).

Once villains in the wider story of economic development, TNCs are now regarded by many people, including some of their early critics, as the new saviours, combining various productive resources scattered across the globe in the most efficient way. And in the process, they are seen as contributing to the global 'convergence' process by spreading advanced technologies and managerial practices from the advanced to the backward parts of the world (Julius. 1990, 1994; UNCTC, 1992; Michalet, 1994; Brittan, 1995). Even some of those who do not agree with the almost rose-tinted picture of TNCs presented by some NeoLiberals accept that the process of 'increasing international economic interdependence' or 'globalization', and the growing importance of TNCs in the process, is inevitable, and argue that therefore countries should adopt a more accommodating attitudes towards TNCs (see, for example, Stopford, 1994).

This paper aims to critically examine the role of TNCs in the supposedly globalized economy of today and discuss how much the expansion in their role restricts the policy autonomy of national governments in conducting industrial policy, or what is usually known as 'strategic' or 'selective' industrial policy, where the government tries to shape the evolution of particular industries through intervention in line with its overall national objectives. After criticizing the arguments that the recent rise of TNCs have hopelessly diminished the ability of national governments to conduct industrial policy, we will discuss what are the realistic industrial policy options open to countries, especially developing countries, in the present state of the world.

Transnational Corporations and Strategic Industrial Policy 227

7.2 THE RISE OF TNCs?: SOME BASIC FACTS AND SOME NEGLECTED DETAILS

Discussions of the recent trends in the growth of TNCs and FDI are often strewn with many impressive facts and figures which seem to testify unambiguously to the increasing importance of FDI (and other) activities by the TNCs, even when compared to other international economic activities such as international trade, which themselves have been growing faster than domestic economic activities.

First of all, there are many statistics which show that FDI is playing an increasingly important, and possibly even the leading, role in the process of globalization (all the following figures are from Stopford, 1994, unless indicated otherwise). FDI has been growing four times faster than international trade since 1982. Since the 1970s, the combined output of TNCs has exceeded the volume of international trade. Especially, the massive increase in FDI into developing countries (from $36.9 billion to $56.3 billion between 1991 and 1993; see Hutton, 1995) seem to suggest that increasingly more and more countries are being drawn into the process of globalization. TNCs manage about 75 per cent of world trade in manufactured goods, over a third of which is intra-affiliate trade. TNCs account for 75 per cent of all industrial R&D in OECD economies (Archibugi and Michie, 1995, p. 130), and dominate the international trade in technology payments. The examples could go on.

Secondly, it is argued, albeit with the support of anecdotal evidences rather than concrete figures (partially because of the understandable difficulty in collecting the relevant data), that TNCs are becoming more and more 'transnational' and thus 'stateless'. Such process, it is argued, occurs not simply because of the sheer increase in the share of TNC activities that are located outside the home countries, but more importantly through the relocation of their 'core' activities such as R&D, and sometimes even the corporate headquarters, out of the home countries (a process that is described as 'complex integration' by UNCTAD, 1993, ch. 5). The emergence of the concept of 'world car' or 'global car' in the automobile industry and the R&D centres established in the US or Europe by the Japanese or Korean TNCs in the computer industry are most frequently cited in support of this argument.

Thirdly, the fact that some countries which ostensibly have had 'liberal' policies towards FDI (or at least towards some form of active TNC involvements) have performed well is often used as a 'proof'


that liberal FDI policies are beneficial for host countries (see UNCTAD, 1995, ch. 5). The East Asian countries (except Japan whose illiberal policies towards TNCs are well known) and certain post-reform Latin American countries, especially Mexico (until the recent crisis), are often cited as examples of countries whose open attitudes towards the TNCs led to industrial development and export success. It is argued that open trade and FDI policies have given them the access not only to the needed capital, but also to advanced technologies, sophisticated managerial practices, and the distribution networks in the export markets, thus contributing to their spectacular growth and trade performances.

For many Neo-Liberals, such facts and figures seem to offer incontrovertible evidence that the world economy is becoming increasingly borderless and globalized, that in this process TNCs are playing an increasingly important (and now arguably the leading) role, and that countries with open FDI policies have performed better than those with more restrictive policies. However, such a picture is, as we shall see below, not only inaccurate in many areas, but even where it is broadly correct, the aggregate picture conceals an important degree of unevenness of the globalization process across regions and countries. In the rest of this section, we offer an alternative picture to that painted by the supporters of the globalization, and try to show how many of their claims are exaggerated and overly generalized. Although some of the facts cited below are rather well-known and will be discussed in much further depth and in much more broader context in other chapters in the volume (see especially Chapters 1 and 2), it may still be useful to state them again, in order to put our later policy discussions into context.

First of all, it has to be pointed out that the bulk of FDI occurs amongst the developed countries, and that only a handful of developing countries take part in the transnational investment story (Dicken, 1992, ch. 4). For example, in 1989, the Group of Five (G5) economies alone accounted for 75 per cent of world FDI (Hirst and Thompson, 1992, p. 366). And between 1983 and 1989, only 19.7 per cent of world FDI went to developing countries (see Table 7.1). Although this share has more recently increased, it is not to the extent that it is often made out to be (from 19.7 per cent during 1983-9 to 29.2 per cent during 1990-4). Compare this with the recent assertion by the Vice President of the European Commission, Sir Leon Brittan, that '[olver half of world FDI now goes to developing countries' (Brittan, 1995, p. 3). Especially when we exclude the inflows into China, the increase in the share for the developing countries is much smaller (from 17.8 per cent to 21.0 per cent between 1983-9 and 1990-4). Moreover, within


Table 7.1 The share of developing countries in world's total foreign direct investment inflows, including and excluding China, 1983-94

(in millions of dollars, figures in parentheses are shares in world total)

1983-9 1990 1991 1992 1993 1994" 1990-4 (annual (annual

average) average)

World total 106 827 211072 162662 164399 206320 231 125 195 116

Developing 21024 34687 40878 54634 72642 82 131 56994 countries (19.7%) (16.4%) (25.1%) (33.2%) (35.2%) (35.5%) (29.2%)

China 2047 3487 4366 II 156 27515 33800 16065 (1.9%) (1.6%) (2.7%) (6.8%) (13.3%) (14.6%) (8.2%)

Developing 18977 31200 36512 43478 45127 48331 40929 countries (17.8%) (14.8%) (22.4%) (26.4%) (21.9%) (20.9%) (21.0%) excluding China

Note: a: estimates

Source: calculated from UNCTAD, World Investment Report 1995, Annex Table I.

the developing world, there is a high concentration of FDI. Between 1981 and 1992, the FDI flowing into the 10 largest recipient developing countries was as high as 72 per cent of total FDI into the developing world (UNCTAD, 1994, p. 14, Table 1.5). And we should not forget, more importantly, that this was despite the liberal FDI policies that many developing countries introduced during this period in the hope of attracting the TNCs.

Secondly, the increasing globalization of TNCs is happening, but at a much slower pace and in a more uneven pattern than the proponents of the globalization thesis believe. Most TNCs remain international firms with a strong base, in terms of their assets and their productive activities, in their 'home' countries, while their top decision-makers are still mostly home country nationals (Kozul-Wright, 1995, p. 160). Even when they have relocated some of their 'core' activities abroad, these are usually to other developed countries, and at that with a heavy 'regional' bias (the regions here meaning North America, Europe, and Japan) (Hirst and Thompson, 1992, p. 368). As a survey by The Economist put it, generally speaking, 'what [TNCs] have done is to extend their 'home bases' into neighbouring countries' (The Economist, 1993, pp. 15-16). Archibugi and Michie (1995) corroborate this statement by


showing that the globalization of R&D, which is often regarded as 'the' indicator of increasing 'globalness' of TNCs through the process of complex integration, is basically only happening at the 'regional' level - namely, the US and the Japanese TNCs do not do much R&D outside their home bases (except in Canada in the case of the US firms), while the European TNCs do substantial amounts of R&D outside their home base but mostly in other European economies.2

Thirdly, the attempt to support the case for pro-TNC policies by using the examples of certain high growth economies which (allegedly) had liberal policies towards TNCs, especially the East Asia developing countries, also needs to be critically scrutinized. Many countries in East Asia, while not being 'against' hosting TNCs in particular 'strategic' sectors, overall have had rather restrictive policies towards FDI. It was only Malaysia and Hong Kong which had largely (and even then not entirely) liberal attitudes towards TNCs. Singapore did rely on TNCs very highly, but deliberately directed FDI towards government-designated priority sectors. It was only in these three economies among the seven East Asian developing countries where the contribution of FDI as a source of capital accumulation has been exceptionally high by international standards (see Table 7.2). It should also be noted that even in the case of these economies, it was not exceptional FDIspecific incentives but general economic conditions which mainly explains the large FDI inflows (World Bank, 1985, p. 130). In Korea, Taiwan, and Indonesia, the contribution of FDI to capital accumulation was in fact below the developing country average, with Korea distinguishing itself as having one of the lowest such ratios in the world (but not quite approaching the Japanese level, which is arguably the lowest in the world; see Table 7.2).3 In Thailand, which is usually regarded as a model 'FDI-driven' economy, the ratio of FDI to gross fixed capital formation was not much above the developing country average, and it actually has slipped below the average in the early 1990s. Thus seen, the alleged importance of TNCs in East Asian development largely depends on one country's experience, namely, Malaysia, especially if we exclude the two city states of Hong Kong and Singapore.

The above discussions show that, while the TNCs are increasing in their importance, such a phenomenon is by no means a truly 'global' and even process. Most TNCs still are more of 'national' firms with peripheral operations abroad than a truly 'stateless' body shifting any of their activities in search of higher profits. Although there is a sign that the picture is slowly changing, it is not clear at all how far this


Table 7.2 The ratio of FDI inflows to gross domestic capital formation for various regions and selected countries (annual average)

1971-75 1976-80 1981-85 1986-90 1991-93 % % % % %

All Countries n.a n.a. 2.3 4.1 3.8

Developed n.a. n.a. 2.2 4.6 3.3 European Union n.a. n.a. 2.6 5.9 5.6

Austria 1.8 0.9 1.3 1.5 1.5 France 1.8 1.9 2.0 4.1 7.7 Germany 2.1 0.8 1.2 2.0 1.4 Netherlands 6.1 4.5 6.1 13.3 10.6 Sweden 0.6 0.5 1.6 4.0 9.5 UK 7.3 8.4 5.6 14.6 10.0

Switzerland n.a. n.a. 2.3 5.3 3.1 USA 0.9 2.0 2.9 6.9 3.2 Canada 3.6 1.7 1.0 5.8 4.3 Japan 0.1 0.1 0.1 0.0 0.1

Developing n.a. n.a. 3.3 3.2 5.7 Africa n.a. n.a. 2.3 3.5 4.6

Latin America n.a. n.a. 4.1 4.2 6.5 Argentina 0.1 2.1 5.0 Il.l 37.6 Brazil 4.2 3.9 4.3 1.7 1.5 Chile -7.3 4.2 6.7 20.6 8.5 Mexico 3.5 3.6 5.0 7.5 6.8

Asia n.a. n.a. 3.1 2.8 5.5 Bangladesh n.a. n.a. 0.0 0.1 0.2 China 0.0 0.1 0.9 2.1 10.4 Hong Kong 5.9 4.2 6.9 12.9 5.7 India 0.3 0.1 0.1 0.3 0.4 Indonesia 4.6 2.4 0.9 2.1 4.5 Korea 1.9 0.4 0.5 1.2 0.6 Malaysia 15.2 11.9 10.8 11.7 24.6 Pakistan 0.5 0.9 1.3 2.3 3.4 Philippines 1.0 0.9 0.8 6.7 4.6 Singapore 15.0 16.6 17.4 35.0 37.4 Taiwan 1.4 1.2 1.5 3.7 2.6 Thailand 3.0 1.5 3.0 6.5 4.7 . Turkey n.a. n.a. 0.8 2.1 3.2

Eastern Europe n.a. n.a. 0.0 0.1 12.2

Source: UNCTAD, World Investment Report, 1993, Annex Table 3 (for the 1971-80 data) and World Investment Report, 1995, Annex Table 5 (for the rest).


process will or can go (see Ch. 2). Many developing countries, and indeed many ex-Communist countries, are still excluded from the FDI flows, despite many policy changes they have adopted during the last decade or so at the urging of (their own and foreign) Neo-Liberal economists, in the hope of attracting TNCs - and their is little sign that the ability of developing countries to attract FDI is significantly changing, except for a few exceptional economies like China and Vietnam. The alleged importance of TNCs in the developmental process of East Asia also turns out to be highly exaggerated. And although the importance of FDI in the region is certainly increasing due to the recent rush of investments out of Japan and the first-tier NICs to the second-tier NICs and China, a lot of this is of once-and-for-all nature, and therefore it is unlikely that the current level of FDI will be sustained in the future. This is the broad empirical background against which we wish to locate our discussion on the role of strategic industrial policy.

7.3 TNCs AS A CONSTRAINT ON STRATEGIC INDUSTRIAL POLICY

The proponents of the globalization thesis have emphasized the constraints that the high degree of globalization has put on the policy autonomy of national governments (Julius, 1994; Michalet, 1994). While the more sensible commentators are more careful to dismiss the talk of the 'demise of the nation state' as too simplistic and premature (Ostry, 1990; Cable, 1995), there seems to be a feeling amongst the majority of the writers on globalization that a serious erosion, if not a total elimination, of national policy autonomy is only a matter of time, if it hasn't already happened. Together with the increased international financial capital flows which restrict the effectiveness of national macroeconomic policy, the role of TNCs in eroding such autonomy in relation to industrial policy is often emphasized (Julius, 1994; Michalet, 1994).

Industrial policy, if the term is going to have an analytical edge, can be defined as policy which attempts to affect the evolution of specific industries (and even specific firms when they are large enough) through state intervention in order to affect economy-wide, or national, efficiency and growth.4 Such policy typically involves measures like restrictions on foreign ownership, local contents requirements, and other measures which constrain and even discriminate against TNCs, which is only natural when we recall that the very essence of industrial policy


is discrimination amongst different activities (and, by implication, firms), with the specific aim of increasing national competitiveness. When faced with such unpalatable policies, the argument goes, TNCs will follow an 'exit' strategy, as they have the ability to relocate any or all of their activities in search of a better 'investment climate', which offers less regulation and better (adjusting for costs) productive resources. Thus by 'voting with their feet', it is argued, TNCs force the governments not to deviate too much from the industrial policy regimes which prevail in their competitor economies, and indeed to move towards a more liberal policy regime in their competitive bids to attract FDI, which is becoming increasingly important for wealth creation.

At one level, it seems difficult to deny such a claim. As the components that make up an industry, namely the firms, become less bound by national constraints, it seems only natural that the effectiveness of a policy which aims to mould the evolution of a particular industry at the national level is bound to be reduced. And if this is the case, it seems only obvious that putting restrictions on TNCs when the competitor economies do not would lead to the relocation of TNCs to the latter economies, ultimately harming the economy. However, this kind of reasoning is based on a number of (explicit and implicit) assumptions, many of which do not have sound empirical justification and/or are products of unwarranted extrapolation from a limited number of cases. Let us examine them one by one.

First of all, the above argument is based on the assumption that TNCs always have an upper hand in the bargaining with the host country governments. However, the relative bargaining strengths of TNCs and national governments depend on which industry and which country we are talking about. While there are some industries where many countries qualify as investment sites, there are certain other industries where the feasible investments sites are limited in numbers for a number of reasons: many mineral-resource-related industries require investments near the depositories; some industries require particular types of skilled labour at reasonable prices, which not many countries may be able to supply; some countries have loeational advantages, say, as an entry point into a big market; some countries have exceptionally large and/ or fast-growing markets; and so on.

Depending on the case, it is not just that governments compete for FDI, but TNCs compete with each other to enter an attractive host country. The clearest example of the latter case is the recent bargaining between the Chinese government and various automobile TNCs in relation to the selection of (what appears to be a deliberately unspecified


number of) TNCs as partners with the Chinese government in the joint venture(s) to produce the 'people's car(s)'. Lured by the prospect of being the first mover (or at least one of the first movers) in what may soon become one of the biggest passenger car markets in the world, many TNCs (including the German luxury car makers like Benz, BMW, and even Porsche, which emphasized that its founder, Dr Porsche, was the original designer of the proverbial 'people's car' - Volkswagen) were putting fiercely competitive bids (Financial Times, 23 November 1994).

While few countries can expect to have China's level of bargaining power vis-a.-vis TNCs, other countries can also extract substantial concessions from TNCs in certain areas. The recent granting of the fast train project by the Korean government to the Anglo-French joint venture (GEC Alsthom) organized around the producer of French TGV, who offered more in terms of technology transfer than its Japanese and German competitors, who, it was widely acknowledged, had superior products, is one such example (Financial Times, 23 August 1993). Another instructive example comes from the recent upstaging of GM's talk with the Polish government regarding the takeover and restructuring of the ailing state-owned automobile company, FSO, by the South Korean automobile maker, Daewoo (which ironically was a joint venture with GM until 1992). Daewoo's offer to inject a large amount of capital ($1.1 billion) in order to transform FSO as its major platform for exports of passenger cars and car parts (engines and gear boxes) to the European Union suddenly gave the Polish government enormous bargaining power, resulting in a drastic improvement in the GM offer (in terms of the scale of production, the quality of the products, employment preservation, and so on), although eventually Daewoo clinched the deal (Financial Times, various issues between August and October, 1995).5

These examples show how even the governments from countries which do not have the kind of unique bargaining power that the Chinese government has can play one TNC against another in order to extract greater concessions. Needless to say, some developing countries have few attractive productive assets or locational advantages for which TNCs will compete with each other, and as a result may not be able to play one TNC against another, but equally there are many others who can play this game, as they have at least some 'bargaining chips'. And once TNCs are interested in a country, their political vulnerability as 'foreign' firms can even make them more responsive than their domestic equivalents to the demands of the government. Moreover, we should


also note the often neglected fact that the newly emerging TNCs from East Asia are currently pursuing an aggressive strategy of expansion in order to challenge the established TNCs from North America and Europe (as it is usually the case with new TNCs challenging the old -see Stopford and Strange, 1994, p. 136), and therefore that this is offering valuable additional room for manoeuvre for host country governments - as so dramatically illustrated by the Polish automobile example cited above.

Secondly, and relatedly, those who talk about the impossibility of selective industrial policy in the age of TNC dominance keep emphasizing that TNCs are 'footloose' and therefore can move elsewhere, if their freedom of action is restricted. There are certainly some industries where there are very low sunk costs involved in investments and therefore the firms are very (if not absolutely) footloose (for example, garments, shoes, toys), but there are may other industries where there is a high element of sunk costs, not only in terms of dedicated physical equipment (for example, chemicals, pharmaceuticals) but also in terms of subcontracting networks and other relation-specific activities which firms have to build over time in order to attain a high level of productivity (for example, advanced electronics, automobile). In such industries, TNCs are not entirely footloose, and therefore, once they have made the investments in a country, they will not be able to pull out at the slightest adverse changes in the host country government policies.

Of course, this does not mean that in such industries governments can do anything, once TNCs have made the investments, as what the government does now will affect the future investment decisions by TNCs. However, as Ostry (1990, p. 98) suggests, the larger TNCs are able and often willing to accommodate a lot of 'restrictive' policy measures, as far as they are stable and the changes in them predictable. Thus seen, while we have surprisingly little systematic evidence in this regard, it seems reasonable to say that' [t]he real question to ask of [TNCs] is not why they are always threatening to up and leave a country if things seem to go bad for them there, but why the vast majority of them fail to leave and continue to stay put in their home base and major centres of investment' (Hirst and Thompson, 1992, p. 368).

Thirdly, those who criticize 'restrictive' policies toward TNCs assume that FDI decisions are mainly affected by the amount of business freedom that is granted to them (Julius, 1994, pp. 278-9). However, FDI decisions are strongly affected by the overall performance of the


economy, especially the prospect for growth. Even the World Bank, which is often associated with the urge for more liberal policies toward TNCs, argues that '[t]he specific incentives and regulations governing direct investment have less effect on how much investment a country receives than has its general economic and political climate, and its financial and exchange rate policies' (World Bank, 1985, p. 130). In other words, the evidence we have suggests that growth leads FDI rather than the other way around (see Chapter 2), and therefore it is questionable whether adopting a more liberal FDI policy will lead to an increase in FDI flows, in the absence of policies that will substantially improve the economic prospect of the country - which NeoLiberal policies, including freer FDI policies, have not done.

This argument is also supported by the fact that, as we also have seen above (see Table 7.1), the share of developing countries in world's total FDI has increased only marginally over the last decade when we exclude the flow into China, despite their extensive liberalization of FDI policies. Thus, it may be argued that as far as they do not involve asset appropriation and other measures which threaten basic capitalist property relations, FDI policies seem to be much less important than other factors, such as the growth prospect of the country's domestic market or the country's political stability, in determining investment decisions by TNCs.

Fourthly, those who argue for the liberalization of policies towards TNCs have a very strong belief that what is good for TNCs is good for the host country - so, for example, Julius (1994, p. 278), argues that '[iJt is no longer appropriate to assume that government and corporate objectives conflict'. They regard the restrictive policies vis-avis TNCs that were popular in the 1960s and the 1970 in many developing countries as ideologically motivate, and argue that now fortunately '[i]nvestment is recognized for what it is: a source of extra capital, a contribution to a healthy external balance, a basis for increased productivity, additional employment, effective competition, rational production, technology transfer, and a source of managerial knowhow' (Brittan, 1995, p. 2).

However, while there is very little justification for the extreme antiTNC view that was once popular, there is still an unresolved debate regarding the relative merits of inviting TNCs vis-a-vis promoting domestic firms, especially in developing countries (see essays in Lall (ed.), 1993). Especially when we take a long-term perspective, we cannot emphasize too much the importance of developing domestic technological capabilities, and it is questionable whether inviting TNCs is


the best way to do it in all industries under all circumstances. The supporters of liberal FDI policy rarely discuss in any depth how

countries like Japan, Korea, and Taiwan could achieve rapid industrialization and technological progress on the basis of restrictive policies towards FDI. While these countries were not hostile to foreign technology or capital per se, they had clear reasons to use such technology and capital under 'national' organizational and technological management - by borrowing capital abroad and licensing (or even 'stealing' through reverse engineering) technology, rather that relying on TNCs to provide capital, technology and management as a package. While it is not true that TNCs never create linkages and diffuse technology, these are often limited, and more importantly, how extensive and fast they are will at least partly depend on government policies. And in the relatively rare instances where they allowed significant TNC presence in an industry, the governments of Japan, Korea, and Taiwan made sure that the diffusion of technology was achieved at an appropriate pace through various 'restrictive' policies.

7.4 WHAT IS TO BE DONE?

The preceding section discussed how the claims of the impossibility of industrial policy in the era of growing TNC importance have been exaggerated and are based on questionable assumptions. It should be emphasized that, perhaps except for the poorest countries with meagre natural resource endowments, small domestic markets or no locational advantage, the potential host countries are not passive victims but do have, and often exercise with substantial success, considerable bargaining power in their dealings with TNCs. The claims about the footloose nature of TNCs is also often exaggerated. There are many industries where investments involve a large amount of sunk costs (both in terms of physical capital and, over time, in terms of production networks), which restrict the mobility of the firms involved. It is also the case that the largest TNCs are able and often willing to live with restrictive policies as far as they are stable and predictable. It should also be pointed out that the regulatory regime vis-a.-vis TNCs is, as far as it is not impossibly restrictive, only a minor consideration in TNC's choice of investment sites, when compared to things like the market growth prospect. Thus, the claim that all countries should, regardless of their conditions, liberalize their FDI regulatory regimes in order to attract TNCs is misleading. Promoting growth seems to be the best strategy


for attracting FDI. Lastly, the net benefit of FDI is a matter of debate, especially in relation to the question of developing technological capabilities in developing countries, and is certainly not as obvious as some commentators believe it to be.

All these points, and the points raised in Section 7.2, however, do not allow us to conclude that therefore the rise of TNCs is an insignificant phenomenon. While the current claims about the end, or at least a serious weakening, of the nation state are often exaggerated, it is true that the growth in the number and the scope of TNCs has resulted in restrictions on the scope of industrial policy, and other national policies (see Chapter 8). Such restrictions result not only from the greater bargaining power that firms will have against the national government due to their ability to shop around for investment sites across borders, but also can result from the concern by the government that if it provides TNCs with some help as a part of its industrial policy, the benefits will spill over the national border and thereby reduce the cost effectiveness of the policy (Chang and Rowthorn, 1995, pp. 44-5).

Despite such problems, intelligent governments conducting strategic industrial policy should try, and have tried, their best to use TNCs in a strategic way in order to acquire capital, technology, marketing networks, and so on. What exactly the 'strategic way' means will depend on various factors like the country's relative bargaining position, the technological nature of the industry, the role of the particular industry concerned in the bigger scheme of industrial development envisaged by the government, and so on, but we may illustrate our point with a few examples (also see Stopford and Strange, 1991, ch. 4).

In those industries where what is needed is a simple injection of capital which will create jobs and foreign exchange earning capability, it may be acceptable, or even important, that the country has an open policy towards FDI - 'cash cow' industries like garment, shoes, and toys are examples of such industry. In industries where the required capital and technological requirements are very high and where the government expects the major return to the country to be the 'rent' element - such as oil, mineral, and other natural resource extraction industries - having an open attitude towards FDI may be crucial. However, in such case, the bargaining skills to extract the largest possible shares of the rent element, and more importantly, the plans to effectively use the rent from such industries for the development of other industries will be crucial for the success of overall industrial policy. When the industries concerned are the ones in which the country hopes


to become internationally competitive in the long run but require a major injection of new technology and capital, TNC participation may be desirable, but in such industries a tough bargaining on technology transfer and exporting restrictions on the subsidiary will be crucial (as seen in the examples of the Chinese car industry and the Korean fast train project cited above). And still in other industries, where the country is reasonably close to achieving international competitiveness, keeping the TNCs out may be necessary, especially if the domestic market is small. Even in high-tech industries, where the ability to keep up with the developments of technology in the most advanced TNCs is (allegedly) becoming crucial, it is possible to devise effective 'national' technology policies based on selective interactions with foreign TNCs (see Fransman, 1994, for the example of Japan; see Evans, 1995 for examples from developing countries).

This list can be further elaborated, but the point that I wish to make here is that an intelligent government pursuing a strategic industrial policy will not have a 'uniform' policy towards TNCs across industries, as recommended by many Neo-Liberal economists. Each industry serves different functions in the greater scheme of industrial development, and it will be foolish to have either uniformly restrictive or uniformly liberal policies towards TNCs across different industries. This also means that the same industry may become more or less open to FDI, depending on the role which it is supposed to play in the bigger scheme of things. For example, the government could initially have a liberal FDI policy for a new industry in order to establish it, but subsequently impose tougher localization requirements and other restrictions on TNC subsidiaries when it is deemed that the industry have developed sufficient local technological capability and therefore the local firms will be able to stand on their own feet in the international market with a little extra help and push. Alternatively, when there is a major technological change in a certain industry which makes the country's present technological capability inadequate for international competition, the government may relax rules concerning TNC participation in the industry, in order to gain access to the new technology.

Of course, it is one thing to say that countries should use TNCs in a strategic manner, and it is another to say that they can actually afford to play such a strategic game with TNCs. The poorest developing countries, for example, will have weak bargaining power vis-a-vis TNCs in most industries, as the industries for which they are attractive investment sites are usually the ones where TNCs are the most mobile. On the other hand, many developing countries do have some 'bargaining


chips' at least in relation to some industries. Some of them can offer the prospect of a large and!or rapidly growing domestic market, especially in industries where transportation costs are relatively high and! or proximity to consumers is important for marketing - for example, China, India, Brazil, the rapidly growing East Asian countries. Some countries, somewhat paradoxically due to their anti-capitalist past, possess workforces which are relatively well-educated and well-trained for what they cost - for example, Eastern Europe, Vietnam, China. Some other countries possess the locational (and legal) advantage of having easier access to large markets - for example, Mexico in relation to the USA and the Central European countries (Czech and Slovak Republics, Poland, and Hungary) and the Southern European countries (Greece, Portugal, Spain) in relation to the richer Western European countries. Even some very poor economies have mineral and other natural resources to offer.

Of course, having such potential bargaining power does not directly translate into the right amount and composition of FDI, unless general economic conditions are right, and unless the government is politically willing and administratively capable of actually exercising such power.6

Adopting liberal FDI policies across all sectors and industries will mean giving up one's potential bargaining power in those sectors where one has it before even exercising it, and therefore does not seem particularly wise. Even if many developing countries have relatively little bargaining power vis-a-vis TNCs and that such power is diminishing with globalization, this does not mean that they should give up what little bargaining power they still have.

7.5 CONCLUDING REMARKS

In this paper, we have first discussed some myths about globalization, and more specifically about the growing importance of TNCs. While it is true that there is a process of increasing interdependence between different parts of the world, and that the role of TNCs is growing in this process, it is still too early to say that this has led to a totally new world where national policies are more or less ineffective, if not actually having turned into obstacles to the achievement of 'world efficiency', as some proponents of the globalization thesis seem to believe.

TNCs do not have unambiguously superior bargaining power in all industries in relation to all countries. Their bargaining power ranges from being almost absolute (for example, Nike looking for an investment


site for shoe production) to being close to zero (for example, automobile TNCs trying to curry the favour of the Chinese government for the people's car project). Conversely, some countries have large bargaining power at least in some industries, while others have very little in most industries for which they qualify as reasonable investment sites. Thus, whether TNCs or the national governments have the upper hand depends on the industry and the country.

The above observation actually strengthens, and not weakens, the case for selective industrial policy, because it means that governments should design their policy towards FDI according to the particular sector concerned, given their overall industrial policy. Although the constraint imposed by the TNCs on national industrial policy may be growing, it is nowhere near the point where such policy is pointless. The current literature tends to regard the process of globalization and the rise of TNCs as an unstoppable process which no one can control, and in which therefore countries, especially developing countries, are simply passive agents which will either have to fully embrace the process or perish (see Chapters 1 and 6). However, such a view is very misleading, as there is a lot of room for manoeuvre for national governments in that process, and it may even be increasing for some countries in some industries, especially with the recent aggressive expansion of TNCs from East Asia. It will be a big mistake to voluntarily give up all such room for manoeuvre by adopting a universally liberal FDI policy across all sectors. What is needed is a more differentiated and strategic approach to TNCs, which will allow the host countries to extract as much benefit as possible from their presence.

Notes

* I thank William Milberg and Richard Kozul-Wright for the extensive discussions they provided during the writing of the paper.

I. Cable (1995) is one of the few writings which directly confront the issue of international labour mobility in the present context.

2. Also note the parallel phenomenon that, despite its allegedly growing importance, intra-industry trade also remains basically a 'regional' phenomenon - that is, there is little intra-industry trade between the three regional 'blocs' (Rowthom, 1995). Taken together, these two phenomena seem to suggest that there is a minimal efficient scale of the 'economy', which all European economies fall short of. Of course, this does not imply that there are no other factors involved in the determination of trade and TNC activities other than the 'size' of the economy.


3. Another instructive piece of evidence which testifies to Korea's restrictive attitude towards TNCs, especially in relation to ownership question, is the fact that as of the mid-1980s, only 5 per cent of TNC subsidiaries in Korea were wholly-owned, whereas the corresponding figures were 50 per cent for Mexico and 60 per cent for Brazil, countries which are often believed to have much more 'anti-foreign' policy orientations than that of Korea (Evans, 1987, p. 208). Needless to say, it is not that Korea did not rely on foreign capital - it was once the 4th largest debtor country, after Brazil, Mexico, and Argentina, in the world. Nevertheless, when they used foreign capital they used it in the form of debt rather than FDI. According to Amsden (1989, p. 92, table 5), only 5 per cent of total foreign capital inflow into Korea between 1963 and 1982 (excluding foreign aid, which was important until the early 1960s but not beyond) was in the form of FDI.

4. Unlike some other terms used in economics, the term 'industrial policy' suffers from definitional ambiguity. While many authors have tried to define it as encompassing all policies that affect industrial performance, we reject such broad definition which almost entirely takes away the analytical edge that the term has, and adopt this narrow definition. See Chang (1994, pp. 58-61) for a more systematic discussion of this problem. Also, it should be noted that in the context of the present paper, aiming for 'national' efficiency and growth does not rule out the use of 'foreign' firms, as far as these firms do not seriously undermine national policy autonomy.

5. It was reported that the granting of the deal for FSO to Daewoo could result in the injection of an extra $1 billion through the establishment of another joint venture to produce vans at FS Lublin, where Daewoo recently entered a separate joint venture to assemble small passenger cars. If this occurs, the total investment from Daewoo could amount to $2.1 bn, which will be just under half the total FDI that has flowed into Poland since its economic reform (Financial Times, 28 August, 1995).

6. It needs to be noted that a large country with de jure and de facto decentralized power structure (for example, USA, China) could see their national bargaining powers weakened due to the competition amongst its local governments. I thank William Milberg for raising this point.

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