Published online by Cambridge University Press: 22 May 2009
Three assertions about relations between multinational corporations and host countries in the Third World frequently appear in the dependencia literature: 1) that the host countries receive too few benefits; 2) that foreign investment causes distortions in the local economies; and 3) that foreign investment distorts host countries' political processes. These propositions can be reformulated as testable hypotheses, to which non-dependency studies of oligopolistic competition, bureaucratic politics, and transnational relations are relevant. Identifying critical areas of disagreement between dependency and nondependency approaches may help scholars to design their research in such a way as to enrich the dialogue between dependentistas and non-dependentistas.
1 Cf. Frank, Andre Gunder, Capitalism and Underdevelopment in Latin America: Historical Studies of Chile and Brazil (New York: Monthly Review Press, 1967)Google Scholar; Latin America: Underdevelopment or Revolution (New York: Monthly Review Press, 1969)Google Scholar; Bodenheimer, S., “Dependency and Imperialism: The Roots of Latin American Underdevelopment,” in Fann, K. and Hodges, D., eds., Readings in U.S. Imperialism (Boston: Porter Sargent, 1971)Google Scholar; Cardoso, F.H. and Faletto, Enzo, Dependencia y desarrollo en America Latina (Mexico City: Siglo XXI Editores, 1969)Google Scholar; Santos, T. Dos, Dependencia economica y cambio revolucionario en America Latina (Caracas: Editorial Nueva Izquierda, 1970)Google Scholar; Sunkel, O., “Politica nacional de desarrollo y dependencia externa”; Revista de Estudios Internacionales, (Santiago), Volume 1 (05 1967)Google Scholar; “Big Business and ‘Dependencia’: A Latin American View,” Foreign Affairs Vol. 50, No. 3 (04 1972)Google Scholar; and Weffort, Francisco, “Notas sobre la ‘teoria de la dependencia’: Teoria de clase o ideologia nacional?”, Revista Latinoamerica de Ciencia Politica Vol. 1, No. 3 (December 1970): 389–401.Google Scholar
2 As we shall see, the study of the politics of policy formation toward the Third World in general and toward Latin America in particular must focus closely on various committees in the Congress and not merely on the bureaucracies of the executive branch.
3 Hymer, Stephen, “The International Operations of National Firms: A study of Direct Investment,” (Ph.D. dissertation, Massachusetts Institute of Technology, 1960)Google Scholar; Kindleberger, Charles P., American Business Abroad: Six Lectures on Direct Investment, (New Haven, Conn.: Yale University Press, 1969);Google Scholar
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4 Hymer argued that a company would choose direct foreign investment only if that offered the easiest way to exploit some market imperfection. If markets were reasonably competitive in a particular industry, Hymer assumed that corporations in one country would make portfolio investments (rather than direct investments) or license whatever proprietary technology they controlled to local firms whose familiarity with the customs (and language) in another country would give them a natural edge. Hymer's analysis, and the theory of the product cycle that grew out of it, account for the phenomenon of cross-investment between two countries where the average rate of return on capital is identical better than does neo-classical analysis, and explains the drive of American companies into other developed (i.e., capital surplus) countries rather than into the (capital deficit) Third World better than does neo-Marxist analysis. Cf. Moran, Theodore H., “Foreign Expansion as an ‘Institutional Necessity’ for U.S. Corporate Capitalism: The Search for a Radical Model,” World Politics, Vol. 25, No. 3 (04 1973).Google Scholar
5 Penrose, Edith T., “Profit Sharing between Producing Countries and Oil Companies in the Middle East,” Economic Journal (06 1959).Google Scholar
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7 “International Economic Relations and the Large International Firm,” in Penrose, E. F., Lyon, Peter, Penrose, Edith T., eds., New Orientations: Essays in International Relations (New York: The Humanities Press, 1970).Google Scholar
8 For the citations for Andre Gunder Frank, see footnote 1. For a case where a domestic state agency both wasted local resources and allowed a larger loss of foreign exchange abroad than did foreign multinationals, see Zinser, James E., “Alternative Means of Meeting Argentina's Petroleum Requirements,” in Mikesell, Raymond F., ed., Foreign Investment in the Petroleum and Mineral Industries: Case Studies of Investor-Host Country Relations (Baltimore, Md.: Johns Hopkins Press for Resources for the Future, 1971).Google Scholar For contrary evidence from the same industry (petroleum), see Tanzer, Michael, The Political Economy of International Oil and The Underdeveloped Countries (Boston: Beacon Press, 1969).Google Scholar
9 The hypotheses on bargaining strength that have been separated here are frequently mixed together in the literature. For an overview that includes project characteristics as independent variables see Bergsten, C. Fred, Horst, Thomas O., Moran, Theodore H., American Multinationals and American Interests (Washington, DC: Brookings, 1978).Google Scholar
10 Cf. Stobaugh, Robert B. Jr, “Where in the world should we put that plant?,” Harvard Business Review (01–02 1969)Google Scholar; Wells, Louis T. Jr, “The Evolution of Concession Agreements in Developing Countries,” Harvard Development Advisory Service, 03 29, 1971.Google Scholar For the idea of a host country “learning curve” that accompanies social mobilization, see Moran, Theodore H., Multinational Corporations and the Politics of Dependence: Copper in Chile (Princeton, N.J.: Princeton University Press, 1974)Google Scholar; and Tugwell, Franklin, The Politics of Oil in Venezuela (Stanford, Calif.: Stanford University Press, 1975).Google Scholar
11 At least, a booming economy would increase the attractiveness if the foreign investor were producing goods for local consumption because it would enlarge the market. It would be interesting to test whether a booming economy raised or lowered the attractiveness of a country to an investor looking for a site from which to export manufactured products.
12 Penrose, Edith T., The Large International Firm in Developing Countries: The International Petroleum Industry (London: Allen and Unwin, 1968)Google Scholar; Vernon, Raymond, “Long-Run Trends in Concession Contracts,” Proceedings of the American Society of International Law (04 1967)Google Scholar; Sovereignty at Bay, Chapter 3; and Mikesell, Raymond F., ed., Foreign Investment in the Petroleum and Mineral Industries, Chapter 2.Google Scholar
13 The transfer of bargaining power into Third World hands would be retarded, however, to the extent that host countries compete among themselves to get foreign investment.
14 Some companies, of course, may try to balance their increasing vulnerability in certain product lines with more profitable operations in other lines where they have tighter control over technology. Peter Evans hypothesizes, for example, that American petrochemical companies in Brazil are trading “unattractive” arrangements for the production of chlorine for a profitable “kicker” in polyurethane foam (TDI). “Testing the New Alliance: The Brazilian State, the Multinationals and the Launching of the Polo Petroquimico at Camacari, Bahia,” Brown University, xerox, February 1976.
15 I have tried to use this distinction to define “exploitation” and “complicity in exploitation” within the balance of power framework suggested here, and to measure the cost of such exploitation quantitatively in “The Theory of International Exploitation in Large Natural Resource Investments,” in Rosen, Stephen J. and Kurth, James R., eds., Testing Theories of Economic Imperialism (Lexington: Lexington Books, 1974).Google Scholar
16 Certainly multinational corporations appear to locate their activities in industries that are highly concentrated. Fernando Fajnzylber and Trinidad Martinez Tarrago have found that in Mexico in 1970, for example, foreign investors sold 61 percent of their output in markets where the four largest plants accounted for at least 50 percent of sales. Similarly, in Brazil in 1972, Richard Newfarmer and Willard Mueller have discovered that 49 percent of a sample of 233 US subsidiaries enjoyed market shares of 25 percent or more, and 21 percent of the sample produced over half of the sales in the markets they served. Newfarmer, Richard S. and Mueller, Willard F., “Multinational Corporations in Brazil and Mexico: Structural Sources of Economic and Non-economic Power,” Report to the Subcommittee on Multinational Corporations of the Committee on Foreign Relations, US Senate, p. 133Google Scholar; and Fajnzylber, Fernando and Tarrago, Trinidad Martinez, “Lasempresas transnacionales en la industria mexicana,” (Mexico City: CONACYT/CIDE, 1972),Google Scholar cited in Newfarmer and Mueller, p. 60 et seq.
17 Franco, Lawrence G., Joint Venture Survival in Multinational Corporations (New York: Praeger, 1971)Google Scholar; Wells, Louis T. Jr, “The Multinational Business Enterprise: What Kind of International Organization?”, in Keohane, Robert O. and Nye, Joseph S. Jr, eds., Transnational Relations and World Politics, special issue of International Organization Vol. 25, No. 3 (Summer 1971).Google Scholar
18 Franco and Wells argue, however, that multinational enterprises tend to evolve toward an organization based on “worldwide product divisions” which are “not accompanied by significant purchases of the interests of local partners or sales of the parent company's equity in joint ventures.”
19 Forthe “product cycle model,” see the citations of Vernon, Stobaugh, and Wells in footnote 3, and of Moran in footnote 4.
20 N.B. In contrast to the rhetoric of “technology transfer” that is assumed to take place by the enthusiasts of foreign investment, the diffusion of technology occurs in the product cycle model despite the continual struggle of the corporations to keep it tightly held.
21 Evidence of this process has been discovered by Jorge Katz in the pharmaceutical, chemical, electronics, automotive, and agricultural machinery industries. Programa Regional de Investigaciones en Ciencia y Tecnologia. CEPAL, Buenos Aires, 1976.
22 For an analysis of this point, see Johnson, Harry G., “The Efficiency and Welfare Implications of the International Corporation” in Kindleberger, Charles P., ed., The International Corporation: A Symposium (Cambridge, Mass.: MIT Press, 1970).Google Scholar
23 Cf. Chudson, Walter A. and Wells, Louis T. Jr, “The Acquisition of Proprietary Technology by Developing Countries from Multinational Enterprises: A Review of Issues and Policies,” United Nations Study Group on the Multinational Enterprise, 1973.Google Scholar
24 It should be noted, however, that expenses incurred in the search for new technologies or production techniques are real costs.
25 Yeoman, Wayne A., “Selection of Production Processes for the Manufacturing Subsidiaries of U.S. Based Multinational Corporations,” D.B.A. thesis, Harvard Business School (Boston: 1968).Google Scholar
26 Wells, Louis T. Jr, “Economic Man and Engineering Man: Choice in a Low-Wage Country,” Public Policy Vol. 21 (1973).Google Scholar
27 Goyert, Chalmers, “Ford in Asia: A Case Study,” Council on Religion and International Affairs, Aspen, Colorado; Aspen, Colorado, 04 27, 1974.Google Scholar
28 Cf. Barnet, Richard J. and Muller, Ronald M., Global Reach: The Power of Multinational Corporations (New York: Simon and Schuster, 1974), chapters 6 and 7; Wells and Chudson, op. cit.Google Scholar
29 Cf. Strassmann, W. Paul, Technological Change and Economic Development: The Manufacturing Experience of Mexico and Puerto Rico (Ithaca: Cornell University Press, 1968).Google Scholar
30 Wells and Chudson.
31 ln addition to Wells and Chudson, see Mason, R. Hal, “The Transfer of Technology and the Factor Proportions Problem: The Philippines and Mexico,” UNITAR Research Report No. 10 (New York: United Nations Institute for Training and Research, 1972)Google Scholar; Pack, Howard, “The Substitution of Labor for Capital in Kenyan Manufacturing,” United States, Agency for International Development, 1972Google Scholar; Employment, Incomes, and Equality: A Strategy for Increasing Productive Employment in Kenya (Geneva: International Labour Office, 1972)Google Scholar; and Automation in Developing Countries (Geneva: International Labour Office, 1972).Google Scholar
32 For evidence of this in the Kenyan soap industry, see Langdon, Steven, “Multinational Corporations, Taste Transfer and Underdevelopment: A Case Study from Kenya,” Review of African Political Economy, No. 2 (1975).Google Scholar
33 With even the most favorable assumptions, the direct impact of foreign investors on Third World unemployment will be relatively small in comparison to the magnitude of the problem in the aggregate. US-based manufacturing companies had about 1.5 million Third World nationals on their rolls in fully-owned affiliates in 1975. A hypothetical increase of 50 percent in the labor-intensity of their operations would create “only” 750,000 jobs.
34 For a survey of some of the issues related to multinationals and host country income distribution, see Cline, William R., “Distribution and Development: A Survey of Literature,” Journal of Development Economics Vol. 1 (1975).Google Scholar
35 From 1966–72, US Commerce Department data show that the source of funds for companies in the Third World was: 21 percent from the United States, 33 percent from outside the US, 41 percent from depreciation and retained earnings, and 5 percent from miscellaneous sources. (Survey of Current Business, July 1975.) It is impossible to tell how much of the non-US funds were borrowed locally, and how much came from elsewhere (i.e., the Eurodollar market). In addition, it is difficult to decide conceptually what percentage of the depreciation and retained earnings should be considered “local” funds: they are clearly generated locally, but it is not possible to assume that the same amount of funds would have been created in the absence of the foreign firms. Finally, some of the manufacturing companies interviewed in the course of the Brookings project claimed that much of the capital borrowed in the host country was used to establish local consumer-financing services.
36 Cf. Hirschman, Albert O., “How to Divest In Latin America, and Why,” in A Bias for Hope (New Haven, Conn.: Yale University Press, 1971).Google Scholar
37 One could hypothesize the opposite, i.e., that local financial institutions “know” local borrowers better and therefore favor them. These contrasting propositions ought to be relatively easy to test, but, to the author's knowledge, they have not been.
38 The proper measurement to determine whether the national investment level with foreign investment falls below its ceteris paribus levels (as Cline points out) is whether payments to local factors as a result of the extra increment of foreign activity is larger or smaller than the value-added cost through reduced investment by nationals. With regard to the impact on income distribution, however, Cline apparently ignores the likelihood that local capitalists frustrated by the arrival of foreign corporations might look for ways to invest outside of the country.
39 In at least some industries (e.g., processed foods), however, American firms appear to devote a larger proportion of their funds to advertising than firms of other nationalities. Cf. Horst, Thomas, At Home Abroad: A Study of the Domestic and Foreign Operations of the American Food Processing Industry (Cambridge, Mass.: Ballinger, 1974).Google Scholar One measure that has been suggested in Europe and Canada to restrain the drive of all firms (foreign and domestic) toward product differentiation would be the imposition of a ceiling on advertising expenditures that counted as “business expenses.”
50 Cf. Breton, Albert, “The Economics of Nationalism,” Journal of Political Economy, Vol. 72, No. 4 (08 1964)Google Scholar; Johnson, Harry, “An Economic Theory of Protectionism, Tariff Bargaining, and the Formation of Customs Unions,” Journal of Political Economy, Vol. 73, No. 3 (06 1965),Google Scholar and Economic Nationalism in Old and New States (Chicago: University of Chicago Press, 1967)Google Scholar; Raymond Vemon, Sovereignty at Bay, Chapters 6 and 7, and “Multinational Enterprises in Developing Countries: Issues in Dependency and Interdependence” in Apler, David and Goodman, Louis, eds., The Multinational Corporation as an Instrument of Development—Political Considerations (New Haven, Conn.: Yale University Press, 1977).Google Scholar
41 The recent disclosures of widespread bribery on the part of multinationals might provide data to show, by industry and type of recipient, the extent to which local alliances can be cemented by direct payoffs. One would have to hypothesize, however, that bribery can in most cases only slow the exercise of economic nationalism on the part of Third World governments rather than smother it altogether. Evidence from Latin America, Africa, and South Asia indicates that marginal tax rates in natural resources and value-added in manufacturing (two measures of the exercise of economic nationalism) generally rise over time, and that the process has been speeding up. Cf. Bergsten, Horst, Moran, Chapter 5.
42 Cf. Moran, Multinational Corporations and the Politics of Dependence; Tugwell, Franklin, The Politics of Oil in Venezuela (Stanford, Calif.: Stanford University Press, 1975)Google Scholar; Pinelo, Adalberto S., The Multinational Corporation as a Force in Latin American Politics: A Case Study of the International Petroleum Corporation in Peru (New York: Praeger, 1973).Google Scholar For a discussion of nationalism versus cooptation by the foreign mining corporations in Zambia, see Sklar, Richard L., Corporate Power in An African State: The Political Impact of Multinational Mining Companies in Zambia (Berkeley: University of California Press, 1975).Google Scholar
43 For the background of the Hickenlooper and Gonzalez Amendments, see Levinson, Jerome and Onis, Juan De, The Alliance that Lost Its Way: A Critical Report on The Alliance for Progress (Chicago: Quadrangle Books, 1970)Google Scholar; Bloomfield, Richard, “Understanding U.S. Policy Toward Latin America: The Need for New Approaches,” in Lowenthal, Abraham F. and May, Ernest R., eds., The Making of United States Policies Toward Latin America (Cambridge, Mass.: Harvard University Press, 1978)Google Scholar; and Einhorn, Jessica, Expropriation Politics (New York: Praeger, 1974).Google Scholar
45 Leyton-Brown, David, “The Multinational Enterprise and Conflict in Canadian-American Relations,” International Organization, Vol. 28, No. 4 (Autumn 1974).Google Scholar Of the 27 US-Canadian investment disputes, however, there were only two in which a US-based multinational and the US government were clearly allied against the Canadian government. Both of these cases were of “very high intensity,” with the Canadian government “winning” one of the two. Cf. also Nye, Joseph S. Jr, “Transnational Relations and Interstate Conflicts: An Empirical Analysis,” International Organization Vol. 28, No. 4 (Autumn 1974).Google Scholar
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47 Interviews with members of the Council of the Americas.
48 Letter of Henry R. Geyelin, Executive Vice President of the Council, to Congressman Charles W. Whalen, Jr., July 10, 1973. The detailed results of this survey are being published by Swansbrough, Robert, The Embattled Colossus: Economic Nationalism and U.S. Investors in Latin America, ms., University of Tennessee-Memphis, 1975.Google Scholar
49 This distribution of responses is clearly consistent with the hypothesis advanced in Section I that firms with a high ratio of fixed to variable costs, unchanging technology, and undifferentiated products would be more vulnerable to the demands of economic nationalists than other types of firms. In the Council of the Americas survey, 42 percent of the manufacturers rated the danger of expropriation as low; only 20 percent of the extractive companies considered the danger as low.
50 Lowenthal, Abraham, “‘Liberal,’ ‘Radical,’ and ‘Bureaucratic’ Perspectives on U.S. Foreign Policy Toward Latin America: The Alliance for Progress in Retrospect,” Latin-American Research Review (Fall 1973)Google Scholar; “‘Bureaucratic Politics’ and United States Policy Toward Latin America: An Interim Research Report,” paper delivered at the 1974 Annual Meeting of the American Political Science Association; Richard Bloomfield, “Understanding U.S. Policy Toward Latin America: The Need for New Approaches”; Christopher Mitchell, “Domination and Incoherence in U.S. Latin American Policy,” in Cotler, Julio and Fagen, Richard, eds., Latin America and the United States: The Changing Political Realities (Stanford, Calif.: Stanford University Press, 1974)Google Scholar; Wagner, R. Harrison, United States Policy Toward Latin America (Stanford, Calif.: Stanford University Press, 1970).Google Scholar
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58 Bergsten, Horst, and Moran, American Multinationals and American Interests, Chapter 10.