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The Evolution and the Development of Multinational Corporations

American and European Countries Multinational Corporations

The domination of American in the development of Multinational Corporation has been widely

identified (Nussbaum et.al, 1980). This idea of the multinational corporation, according to Hymer

(1979), was initially based on the American perspective. The precursor to this is the United

States national corporation, which was created at the end of the 19 th century when American

capitalism developed a multi-city and continent-wide marketing and manufacturing strategy.

These state-chartered companies were considered multinationals at least to the extent that they

represented a business organisation with economic goals projected on an international stage

(Reardon, 1992). Prior to 1970s, most of the early studies tend to examine the United States

foreign investment activity. This process began in the latter part of the nineteenth century when

American industry began to supersede its European rivals.

The United States was economically self-sufficient during the half century, between the end of

the Civil War and its entry into World War I. This resulted to the halt of the internationalisation of

Corporate America. But when World War I forced the U. S. to be exposed to the outside world,

its ideological isolationism changed dramatically. This unforeseen turn enabled the U. S. to

learn various foreign business policies and to study how foreign corporations coped up from

economic and political dislocations caused by a major continental war. Corporate America then

realized that the U. S. and its economy had been isolated, virtually untouched by world events


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The effect of World War I to the economy of the U. S. included forming irreversible commitments

by larger oil, paper, copper, nitrates, rubber, and aluminum companies to foreign investments to

ensure their companies futures. However, some consumer-driven companies such as general

Motors, Goodyear, General electric, and Du Pont had less aggressive foreign expansion. These

foreign ventures had the geographic spread qualifications of MNCs yet, in terms of corporate

management and finances, they were American companies with subordinate foreign branches

that acquired their justification because they served some specific limited objectives.

While World War II and Americas involvement therein halted the limited foreign expansion of

the late 1930s, this was to become the window, which saves America a global perspective.

Because of the recession and isolationism after World War I, many developing multinational

corporations quickly withdrew from the global economy. The only U.S. corporations and true

multinationals in the late 1940s and early 1950s were in the primary sector. These corporations

anticipated real shortages, so they had to invest in the Middle East, Latin America, Africa, and

Canada. Some even went so far as to rebuild their pre-war processing or distribution facilities in

Europe. American corporations expanded their businesses into Latin America. But it was limited

by labour-intensive industries establishment of assembly facilities in countries with depressed

economies and an ample supply of cheap, unskilled labour.

The first real impetus to the multinationalisation process in the industrial and service sectors

was developed during the late1950s. The United States direct investment abroad increased

nearly fivefold, from $12 billion to $55 billion between 1950 and 1965, and by the end of 1980,

the total was approximately $220 billion. Americas massive post-war aid to war-ravaged


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countries, allowed the international economy to recover sooner than expected. It formed a

healthy and favourable economic climate for corporate expansion, reaching its zenith in the

period 1960 1980. Following its victory in the war and in response to the Soviet challenge, the

United States created in its own security interests the pattern of relations among the non-

Communist countries within which American MNCs have flourished. In addition, the advances in

transportation and communication, the introduction of the computer, and massive rebuilding

requirements in Europe coincided with the rapid growth of American multinational corporations.

Perhaps it was the common market that stimulated the multinationalisation of Americas

manufacturing and service enterprises.

The response of European businesses to the expanding and developing U. S. MNCs was to join

the MNC system rather than to challenge it. The European firms were already multinational,

though their overseas expansion had been somewhat frustrated by balance of payment

restrictions. As a result of mergers, nationalisation and growth, other firms became better

equipped for multinational operations and began to extend their international operations in other

European countries, in underdeveloped countries, and even in the United States. Therefore, the

MNC system was no longer an American system, but at the very least became a North Atlantic

system both in the sense that Europeans joined the MNC ranks and in the sense that American

firms became less tied to the United States.

European, specifically British, capitalism has traditionally practiced capital export like portfolio

investment and loans. In the 19th century, Great Britains direct investments were invariably

infrastructure investments (Hall ed., 1968). In the 20 th century, it has been largely in


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manufacturing, particularly in the growth sectors of advanced or rapidly developing countries.

These investments were accompanied by mass migration of labour. Management, capital, and

technology have gone as a package to foreign lands in search of labour, markets, and

resources. In the 19th century, at least in the so-called lands of recent settlement (Canada,

Australia, the United States, and South Africa), management and operating control usually

remained in local hands (see Table 2.0).

Most of the original investment made by European countries to the USA was of the portfolio

variety. Direct investments made in the US manufacturing sector near the end of the 19th

century included capital from the British in textiles, primary metals, and food and beverages,

and from the Germans in chemicals, beverages and electrical equipment. Subsidiaries in the

United States were established during this time by such familiar MNCs as Bayer (in 1865),

Merck, Geigy, Bosch, Siemens, Daimler, Lever Brothers, Dunlop, Michelin, and Nestle. By

nationality, British holdings ranked first followed by German holdings. By type of portfolio,

manufacturing ranked first, finance next, then transportation. The following (Table 2.0) is a

comparison table between British and American foreign investment

Table 2.0: British and American Foreign Investment

British, 19th century


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United States, 20th century

InvestorsBanks

Individuals

Bond Market

Corporations

Type of Investment Portfolio

Loans

Direct

Activity Raw Materials

Agriculture

Utilities (railroads and

seaport)

Manufacturing

Raw Materials (especially

petroleum)

MarketingPrimary Motivation Local Opportunity for

Immediate Profit

Global Corporate Strategy

Location of Investment

(Bulk of Investment)

Europe

United States

Lands of Recent Settlement

(Australia, Canada)

Europe

Latin America

Canada

Middle East (petroleum)Migration Stimulated Mass Migration Corporate Management


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Source: US Power and the Multinational Corporation, Robert Gilpin, 1975

The Japanese Multinational Corporations

Japanese firms on the other hand, constructed an extensive network of exploration and

production abroad. The move was stimulated by the need to guarantee supplies of raw

materials, the need to be cost-competitive due to the rising of wages, labour shortages, and an

appreciating currency, and the need to secure access to the world market. Those activities were

conducted by leading Japanese trade firms who were already multinational (Hymer, 1979).

Many of these ventures do not take the form of the wholly owned subsidiary or branch plant

used by American MNCs. Instead, they frequently involve production sharing, guaranteed

demand contracts, technical assistance, and portfolio capital.

After World War II, the Japanese continued their policy of not permitting foreign direct

investment but of spending liberally for imported licenses of technology (Tsurumi, 1976). Their

purchases of technology from abroad were considerable, yet at the same time they spent more

than four times that amount on domestic research and development. The incredible result was

that within a relatively short period of two decades, Japan succeeded in breaking up the

package of capital, technology, and entrepreneurship, which foreign direct investment has

most frequently entailed. Interesting was the fact that they didnt need the capital and got the


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technology without managerial control by American corporations, and the entrepreneurship

remained in the hands of Japanese.

Dunning (1993) categorised Japanese foreign direct investment strategies into two categories:

as a defensive market-seeking investment and as an offensive. The first strategy was the use of

their strong owner advantages. These advantages were sustained and supported by strong

location advantages to protect existing export markets with respect to trade barriers and

competitors threats. Cases in point are the green-field plant type of screwdriver factory for

automobile, electrical and electronic equipment industries. Majority of Japanese MNCs activities

in the early 1980s were of this type. The second strategy was the supply-oriented investment

aimed at gaining access to the information and technology needed to upgrade and rationalise

domestic operations, and to advance a global competitive strategy. By the end of the 1980s,

Japans leading MNCs departed from trade replacing function, towards a new phase of

advancing global competitive strength. They increasingly adopted offensive strategies in their

attempt to secure and advance their foreign markets. Such strategies have been largely driven

by the need of Japanese firms to transform themselves from exporters to insiders in the major

markets of the world, and to keep in touch with the latest technological and organisational

developments, while benefiting from economies of cross-border arbitraging and the gathering

and disseminating of information.

In the late 1960s and early 1970s, outward FDI was encouraged in light manufacturing sectors

(textile, toys) former export stars which were rendered uncompetitive by the increasing


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predominance of heavy industries (steel, chemicals, shipbuilding). Most of these labour

intensive industries were exported to Asian developing countries (Ozawa, 1989). Subsequently,

outbound investment was aimed at securing access to the natural resources (oil, mineral and

etc.) required fuelling the growth of heavy domestic industry. Finally, the continuation of the

upgrading process demanded a shift up the value-added chain into higher knowledge and

technology intensive activities.

It was in the late 1970s and early 1980s, when Japanese MNCs were encouraged by the

government to develop host countries to sustain or enlarge the markets for the exports of firms

whose owner advantages had by then reached rough parity with their Western counterparts

(Ozawa, 1989). In other words, because of changing location advantages of Japanese firms, the

latter showed an increasing preference in the late 1980s to exploit those advantages by

engaging in foreign production. This was particularly true for Japans burgeoning car and

consumer electronics industries, whose highly competitive products (low-cost, high quality and

market oriented) were beginning to capture high market shares in the United States and

Europe. In the early 1980s, the main aim of the Japanese MNC was to protect the competitive

advantage of Japanese-made products. This was evident in what were then Japans premier

export sectors, i.e. cars and electronic goods. Japanese had invested more in the United States

than to Europe because of location advantages, and the fact that because of differing regulatory

environments, Japanese firms could internalise the market to their owners advantages more

easily in the United States than in Europe.


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In other words, industrial rationalisation and restructuring mainly took place in Japan, with

outward manufacturing FDI geared towards maintaining or advancing markets for Japanese

exports (in developed countries) and relocating uncompetitive activities (in developing

countries). But relative to their United States and European counterparts, Japanese

multinationals still possessed relatively weak owner advantages in the innovation of many new

technologies. This meant that Japan needs a continual inflow of technology from abroad for its

industrial upgrading. Given this, a second important function of FDI was to act as a channel to

absorb technologies developed in the West (Ozawa, 1989). However, Japan preferred to

acquire such technology through means other than direct investment (licensing, reverse

engineering, etc.).

Some still maintain that Japanese MNCs are late comers to the international political economy

and that this forcefully sets them apart from the experienced American and European-based

MNCs (Ozawa, 1979). The Japanese multinationals alignment with the overarching industrial

policy of the Japanese government is a frequent issue for debate. This policy focuses on

circumventing protectionist measures abroad that limit market access. Thus, the foreign direct

investment behaviour of Japanese MNCs is said to be concerned primarily with establishing

export platforms and the practice of transhipments (Yoffie, 1990). Other researchers believe that

Japanese MNCs, have traditionally emphasised the development of natural resources rather

than agricultural and manufacturing endeavours. And compared to American MNCs that have

focused more on profit making in manufacturing, Japanese MNCs are more into foreign direct

investment behaviour that is consistent with nature resources diplomacy.

Read more: http://ivythesis.typepad.com/term_paper_topics/2011/06/the-
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