Multinationals and Development

Multinationals and Development

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Multinationals and Development

Alan M. Rugman and Jonathan P. Doh

Yale University Press New Haven & London

Published with assistance from the foundation established in memory of Philip Hamilton McMillan of the Class of 1894, Yale College. Copyright © 2008 by Alan Rugman and Jonathan Doh. All rights reserved. This book may not be reproduced, in whole or in part, including illustrations, in any form (beyond that copying permitted by Sections 107 and 108 of the U.S. Copyright Law and except by reviewers for the public press), without written permission from the publishers. Set in Garamond and Stone Sans types by The Composing Room of Michigan, Inc. Printed in the United States of America. Library of Congress Cataloging-in-Publication Data Rugman, Alan M. Multinationals and development / Alan M. Rugman and Jonathan P. Doh. p. cm. Includes bibliographical references and index. ISBN 978-0-300-11561-1 (cloth : alk. paper) 1. International business enterprises. 2. International trade. 3. Economic development. I. Doh, Jonathan P. II. Title. HD2755.5.R8355 2008 338.9—dc22 2007041709 A catalogue record for this book is available from the British Library. The paper in this book meets the guidelines for permanence and durability of the Committee on Production Guidelines for Book Longevity of the Council on Library Resources. 10 9 8 7 6 5 4 3 2 1

Contents

Preface, vii Acknowledgments, ix 1

Introduction to the Key Issues, 1

2

Foreign Direct Investment and Development, 11

3

Multinational Enterprise Strategies and Development, 32

4

The Role of International Institutions, 59

5

The Contributions and Impact of Civil Society, 83

6

Institutional Governance and Development, 103

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Multinational Enterprises from Emerging Economies, 124

8

Multinationals and Development in Asia, 153

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Yang Multinationals, 179

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Conclusions, 200 Glossary, 205 References, 209 Index, 231

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Preface

The topic of multinational enterprises (MNEs) and development is not without controversy. In fact, there may be more controversy surrounding this subject than any other at the intersection of the fields of international business and development studies. Never to shy away from a challenge, we embarked on this project with the goal of revisiting some of the questions that have plagued scholars regarding the interactions between MNEs and developing economies, and to open new ways of thinking regarding these questions. We bring to this discussion a unique perspective. Both of us are scholars in international business; hence we have a deep knowledge of what motivates MNEs to do the things they do. We are, however, also well versed in aspects of development from both a macro- and a microeconomics perspective. Both of us also have had direct experience in negotiating, advising, and implementing trade and investment agreements designed to foster growth and development; notably, the North American Free Trade Agreement, which was one of the first agreements to integrate the economies of developed and developing countries. Through this experience we have gained a keen appreciavii

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Preface

tion for the importance of both multinational strategy and government policy to development. Indeed, a premise of this book is that it is the interaction between these two sets of actors that determines whether—and how—the development process succeeds or fails. The international business research community of which we are a part has recently argued that international business research topics and approaches should be revisited and reinvigorated. One area that consistently arises as needing greater attention is the role of MNEs in development. We see our book as responding directly to this call. We also view our contribution as bridging some of the gaps that have existed between the fields of international business and development studies, especially because this book recognizes and analyzes the specific role of MNEs in development, rather than looking at them only in aggregate or as part of a broader system. We do, however, recognize the importance of that system—or context, as some would call it—and explore the interactions among MNEs, host country policies and practices, global institutions and agreements, and the nongovernmental or civil society sector. Our contribution should therefore be seen as part of a broader dialogue about the strategies of MNEs, the development programs of countries, and the global responses to uneven progress in world regions. We have focused on what we believe are essential—indeed the essential—elements of this process, namely, the interactions of the capabilities and assets of countries and companies. It is this complementary exchange that is at the core of the development process, and the one where we believe new insights must be brought.

Acknowledgments

We thank our editor, Michael O’Malley, Alex Larson, and the rest of the Yale University Press team for all their hard work in bringing the book to fruition. We acknowledge Anne Z. Hasiuk of Indiana University for her expert work in preparing the manuscript and index and Anna Mancevova and Elizabeth Stewart of Villanova University for research assistance. Professor Rugman is pleased to acknowledge the contributions of Professor Alain Verbeke to earlier drafts of the material in chapter 3, and of Dr. Simon Collinson to an earlier version of chapter 8. He also acknowledges the research assistance of Chang Hoon Oh in the preparation of the tables in chapters 1, 6, and 7 and the contribution of Ian Lee to the preparation of chapter 9. Professor Doh is pleased to acknowledge the contributions of Professors Hildy Teegen, Sushil Vachani, Jennifer Oetzel, and Sarah Bauerle to the preparation of drafts of parts of chapter 5, and of Professors Lorraine Eden, Peter Rodriguez, Klaus Uhlenbruck, Jamie Collins, Kalpana Seethepali, Scott Newbert, and Nicolas Dahan to the preparation of drafts of parts of chapter 6. The generous financial support of the Halloran Foundation is also gratefully acknowledged. We also thank the Academy of Management for permission to reproduce tables 6.2 and 6.3 and the Nonprofit and Voluntary Sector Quarterly for permission to reproduce figure 5.1. ix

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Chapter 1 Introduction

to the Key Issues

The impact of multinational enterprises (MNEs) on host country development is an important but controversial topic. For more than half a century, this subject has generated considerable disagreement among researchers and practitioners—those directly engaged in international development policy, finance, and multinational management strategy. In its simplest form, one side in this debate has hailed the foreign direct investment (FDI) undertaken by MNEs for inducing economic growth by complementing domestic savings, transferring technology and management skills, and increasing competition. On the other side, some have argued that MNEs crowd out local firms, use technology that is inappropriate for local circumstances, actively constrain potential technology spillovers, and reduce (rather than complement) the domestic capital stock and tax basis through transfer price manipulation and excessive profit repatriation. A critical missing variable in these analyses is the explicit consideration of MNEs as organizational actors in the development process. MNEs are an important—perhaps the most important—vehicle through which economic development in developing countries oc1

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Introduction to the Key Issues

curs, yet the role of MNEs in the economic progress of developing countries is widely overlooked. In this book, we seek to fill that gap. In doing so we focus on the outward FDI by MNEs, from such developing economies as China and Korea, as well as on the more traditional inward FDI, by Western MNEs into developing economies.

OUR CONTRIBUTION

Our purpose in writing this book is to provide a fresh perspective on this subject, offering a contemporary and balanced assessment of the influence of multinationals on development. We question some of the traditional development assumptions and paradigms, arguing that many are outmoded, outdated, and misguided. Drawing from recent research in international business and multinational management, we bring a more microeconomic “on the ground” focus to the mechanisms by which MNEs affect growth and development. Hence, this is a book about the relationship between MNEs and the poorer countries in the world, sometimes referred to as less-developed or developing economies.* These economies include the poorer parts of Asia, Africa, Europe, and Latin America. Through the process of economic development, many of these countries have both increased their per capita incomes and improved the internal distribution of these incomes, moving into a smaller group of developing economies that are viewed as “emerging.” Some recent examples of the transformation from a poorer developing economy into an emerging economy include the Republic of Korea, Singapore, Hungary, the Czech Republic, South Africa, and Jordan. However, many countries in Africa, as well as the poorer economies of Asia and Latin America, continue to have extremely low per capita incomes. Most of the more successful emerging economies have * The World Bank and other development agencies use various categorizations to refer to a country’s level of development. In general, we adopt the generic terms “developing countries” or “developing economies” to refer to the large groups of nonindustrialized or semiindustrialized countries outside the traditional group of developed countries represented by the Organization for Economic Cooperation and Development (OECD). However, for purposes of exposition, we may use a more specific definition (UNCTAD’s categories of “developed,” “less-developed,” and “least-developed” countries), or the term “emerging economies” to refer to the subset of developing countries (e.g., China, India, Brazil, and the Republic of Korea) that have become more fully integrated into the global economic system. In chapter 7, we use the term “emerging economies” to refer to developing countries that have “emerged” from their less-developed status, in particular, Korea and China.

Introduction to the Key Issues

achieved their success through economic reform, including policies of trade liberalization and concerted efforts to attract inward FDI. In this book we explore some of the reasons for the successful development of economies in terms of FDI and trade liberalization; however, we also consider the reasons some economies have failed in terms of sustainable economic development. To assign some ordering to the complexities of economic development and FDI, we have developed a simple framework, presented in the following chapter and used throughout the book. In this framework we bring together two basic sets of factors governing the relationship between the governments of host economies and MNEs: country factors and firm factors. We advance a series of propositions based on the actual experiences of countries and firms that demonstrate that country factors alone are not sufficient to sustain economic development. Even if an economy has abundant natural resources (such as minerals, oil, forests, water power, or cheap labor), economic development is not assured. Rather these country factors need to be commercialized through the activities of firms and entrepreneurs, including MNEs. By the same token, without stable supporting institutions to protect and encourage investment, firms are unlikely to be drawn to a given country. Hence, the nexus of this book is the interaction between such firm and country factors. A key finding in this book is that on balance, MNEs contribute positively to the economic development of poorer and emerging economies—both directly and indirectly. Direct contributions emanate from the role of the MNE in bringing new knowledge assets to developing countries in the form of technology and managerial skills. We term these knowledge assets “firm-specific advantages” (FSAs). The FSAs are internalized by MNEs and represent the core competences and capabilities of MNEs used in both home and foreign markets. MNEs also contribute indirectly to economic development. They provide technology spillovers and linkages, and contribute to improvements in the business infrastructure in developing economies. These contributions, however, are not automatic; host-country institutional conditions, as well as policies of the MNEs themselves, determine the degree to which these benefits are fully realized. A second finding of this book is that the FSAs of MNEs can help generate new capabilities and business competences in developing economies. In fact, a novel finding of this book is that developing economies are now generating their own MNEs. Initially, the MNEs from emerging economies build on their country-specific advantages (CSAs), including relatively cheap labor and the potential to achieve economies of scale in the harvesting and marketing of nat-

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Introduction to the Key Issues

ural-resource products. Later, the indigenous MNEs develop knowledge-based assets of their own, which become FSAs. We explore these arguments primarily with reference to the world’s largest MNEs and the larger developing countries. We examine specific MNEs and their performance in particular developing countries, with special attention on the foreign MNEs in Asian economies such as China and Korea. We also explore the role of MNEs from China and Korea, as these contribute to the economic development of their home countries. We also find strong regional linkages between and among developed and developing economies. This finding echoes earlier arguments presented by Rugman (2001, 2005). Hence, as in the case of trade and investment more broadly, because the world is not fully integrated, economic development cannot be understood by a simplistic model of globalization. Economic development is a more complex process than simply developing international institutions to promote trade, investment, and development. Throughout our analysis, we evaluate the impact of MNEs on the process and outcome of development and assess the evolution of the role of MNEs in development, from mere “spillover” effects to more embedded linkages, including the emerging role of MNEs in the implementation of development goals and the impact of interactions among civil society, nongovernmental organizations (NGOs), and MNEs on development. Finally, we offer some observations about the future role of MNEs in development.

THE LITERATURE ON MULTINATIONALS AND DEVELOPMENT

Since the 1960s, political scientists and economists have attempted to determine the relevant variables that contribute positively to economic progress in developing countries, and the potential role of FDI and MNEs within that process (Caves 1974; De Backer and Sleuwagen 2003; Görg and Greenaway 2002; Haddad and Harrison 1993; Lowe and Kenney 1999; Teece 1977). Another set of literature, often characterized as the “dependency” view of development, has openly suggested a conspiracy between MNEs and developedcountry government elites who seek to pave the way for MNEs to access raw materials and cheap resources in the developing world (Baran 1957; Palma 1978). More recently, a popular literature has emerged within a broader debate over the efficacy of economic globalization, advocating for or criticizing FDI

Introduction to the Key Issues

and MNEs and their impact on development (Barber and Schulz 1996; Friedman 1999; Singer 2002; Soros 2002; Stiglitz 2002). The study of the broad development impacts of MNEs on host countries is extensive but unsettled (see Hymer 1976 for an early analysis and Meyer 2004 for a recent review). One stream of research that has sought to integrate insights from development with the study of MNEs has focused on spillovers—the residual benefits that MNEs contribute to the local economy (Aitken and Harrison 1999; Blomstrom and Persson 1983; Globerman 1979; Mansfield and Romeo 1980; Teece 1977). In our view, the focus on spillovers misses the point, in that MNEs have a much more direct and meaningful contribution to make beyond these residual, latent effects. We term these more direct impacts “linkages.” Although an occasionally thoughtful and carefully argued volume emerges (Rodrik 1999), collectively, this literature presents contradictory and confusing conclusions, partly a result of ideological assumptions and agendas. Most important, this literature has failed to generate strong normative implications of use to researchers and policymakers, especially those who have observed that MNEs have an increasingly important role to play in the development process. This absence of a clear analysis of the role of the MNE as an instrument of development has been noted in the literature (Meyer 2004) and provides the fundamental motivation for our book. In chapter 2 we explore this literature further, and in chapters 4, 5, and 6 we integrate more recent work on the role of multilateral and regional institutions, nongovernmental organizations, and institutional governance to the process of development. We also survey research in strategic management, building on the work of Porter (1980, 1990) and literature in international business and management, and drawing from the insights of Dunning (1988, 1998a), Caves (1996), Rugman (1981, 1996a), Rugman and Verbeke (1998b), and others. We believe that strategic management and international business theory, when properly specified, can provide useful heuristics for understanding the process of MNEs’ contribution to development. We explore these connections in chapter 3 and then apply them in chapters 7–9.

OUTLINE OF THE BOOK

In the first part of the book, we review existing perspectives on the influence of MNEs and FDI on host country development. Chapter 2 focuses on the

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Introduction to the Key Issues

growth of FDI to the developing world and the potential impact of FDI on the development process, and evaluates the development impact of FDI. We introduce two basic frameworks to analyze the interaction between MNEs and developing economies. The first framework relates country and firm factors, bringing together CSAs and FSAs, as discussed above. We use this framework to study the interaction between governments and the FSAs of the firm. FSAs are the proprietary capabilities owned by MNEs, and MNEs must protect them from dissipation. This interaction between governments and MNEs is the critical one studied throughout the book. The second framework is called the social triangle. It introduces society on an equal footing with governments and firms. Naturally, a three-dimensional framework generates greater complexity than the two-dimensional FSA-CSA framework. To simplify somewhat such complexities, one can reformulate the social triangle as a matrix in which the role of corporate social responsibility (CSR) is separated from the activities of states and profit-maximizing firms. This triangular framework uses a stakeholder-model perspective rather than the pure efficiency-enhancing perspective of the FSA-CSA framework. We use these frameworks throughout the book. We continue in chapter 2 with a review of the literature on spillovers and linkages. Finally, we provide some basic data dealing with the interaction between FDI, trade, and economic development. In chapter 3 we focus on the role of MNEs in economic development. We examine the business strategies of MNEs as these affect economic development. We include a discussion of the potential for capital and technology transfer and the role of MNEs as knowledge-based organizations and in developingcountry absorptive capacity. We explore the potential for developing countries to access capital and technology via the MNE and review the factors that facilitate and constrain that access. Finally, we discuss the evolving understanding of some MNEs as knowledge-based organizations that organize and deploy knowledge assets in their various locations. We assess the potential for developing countries to benefit from the knowledge-diffusion process and the constraints to their “absorptive capacity” that may be overcome through MNE knowledge and managerial expertise. Throughout chapter 3 we explore how foreign MNEs enter developing economies and help stimulate and foster economic development. To a large extent, such foreign MNEs are from the wealthier economies of North America, Western Europe, and countries such as Japan and Australia within the Asian region. The typical developing economy is either a large but poor country such as China, Indonesia, and Ukraine, or a small open economy such as those in the

Introduction to the Key Issues

Caribbean. We examine the basic strategies pursued by MNEs in such developing economies. We also investigate the extent to which indigenous firms and entrepreneurs can benefit from spillovers or linkages with these MNEs. Much of chapter 3 is based on the mainstream thinking in strategic management, but we adapt it to the context of economic development. We do not discuss in that chapter the way in which the developing economies can develop their own MNEs; this process is discussed in chapters 7 and 8. We conclude chapter 3 with some basic data on the largest global MNEs and their presence in developing countries. In chapters 4, 5, and 6 we focus on institutional actors and other stakeholders that influence the impact of MNEs in the development process, including international institutions and agreements, civil society and NGOs, and the administrative apparatus and governance systems of the countries themselves. We argue that the strategies of MNEs are both constrained and facilitated by these actors, institutions, and the laws and regulations that emerge from them, and that the development process is shaped by the interactions among these different stakeholders and the broader institutional environment in which they operate. Chapter 4 examines the international institutions—such as the World Trade Organization (WTO), the World Bank, and the International Monetary Fund (IMF)—that are central players in the economic development of developing economies. We begin with a review of the historic evolution of the multilateral institutions established in the post–Bretton Woods environment—the World Bank, the IMF, the WTO, and the United Nations—and assess their contribution to development. We then review the role of regional institutions—the European Bank for Reconstruction and Development (EBRD), the InterAmerican Development Bank (IDB), and the Asian Development Bank (ADB) —and agreements, for example, the North American Free Trade Agreement (NAFTA), and assess their contribution to development. We then focus on two initiatives—the Doha Development Round of the WTO and the Millennium Development Goals—as concrete examples of efforts by the multilateral system to focus specifically on contemporary development challenges. Finally, we review the growing role of MNEs in the international trade and international development agenda, building on the framework introduced in chapter 2. In chapter 5 we review the emergence of civil society and NGOs as important actors in international development. Drawing from the work of Teegen, Doh, and Vachani (2004) and others, we introduce a classification of NGOs to help differentiate among their goals, purposes, and organizational structures.

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Introduction to the Key Issues

Using this schema, we assess and critique the role of NGOs in development, the factors that have facilitated and constrained their success, and the potential for closer federations with MNEs and governments to increase the effectiveness of NGOs. We also review the inherent tensions and conflict between civil society and NGOs on the one hand and MNEs on the other, and introduce a framework for understanding civil society–MNE interactions in the context of international development. Finally, we discuss the need for a more objective understanding of the roles and goals of MNEs by civil society and NGOs, and of civil society and NGOs by MNEs, and the potential for this understanding to lead to more collaborative efforts and better development outcomes. Toward the end of chapter 5, we introduce some frameworks to analyze the interactions between MNEs and NGOs. In chapter 6 we draw on the growing literature on the importance of governance and institutional advancement as a precondition for successful development and the damaging effects of institutional deficiencies on development. We use corruption as an illustration to underscore the importance of the relationships between governance and development and to show how MNEs (in conjunction with NGOs, home and host governments, and international institutions) can support institutional development and good governance. We review the historic MNE –host government bargaining model and critique that model in light of (1) a greater understanding of the benefits of MNE investment for host developing countries and (2) the growth of international institutions and agreements under which host countries voluntarily agree to improve their institutional development and governance. In the final section of the book, we turn our attention to the experience of MNEs and development in Asia. It is here that the interactions between MNEs and host countries—and their indigenous firms—have been especially productive and successful. We believe the examples discussed here have important implications for the potential of MNEs to contribute positively to development in other regions of the world. Chapter 7 explores the way in which MNEs have developed in China and Korea. The chapter begins with an assessment of all MNEs from emerging economies. In general, we find that these MNEs build on CSAs. This is especially true of MNEs from China. The chapter uses the FSA-CSA matrix of chapter 2 and applies it to individual firms. We then extend this matrix to differentiate between upstream (production-based) and downstream (marketing-based) FSAs. We provide new data on the extent of the intraregional sales and production of Chinese and Korean MNEs and show how MNE FSAs and

Introduction to the Key Issues

regional CSAs have combined to help develop increasingly successful indigenous MNEs. Chapter 8 continues the theme of the role of indigenous MNEs in promoting economic development. We focus again on MNEs from Asia. In addition to the Chinese and Korean MNEs examined in chapter 7, chapter 8 analyzes the regional activities of all MNEs in Asia. The twist here is that most Asian MNEs are from Japan. We find that on average, over 80 percent of the sales and production of Japanese MNEs is in Asia. Thus, Japanese MNEs are major vehicles for economic development in Asia. Japanese MNEs are not global firms but regional firms. We relate these findings to the FSA-CSA framework of chapter 2 and detail several case studies of successful Asian MNEs. We also extend the upstream and downstream framework developed in chapter 7. In chapter 9 we discuss “yang” MNEs—those MNEs that provide especially beneficent investment to developing economies. We focus on the role of yang MNEs as conduits of inward and outward FDI by MNEs from China, Korea, Singapore, and Taiwan (the major Asian-based emerging-economy MNEs). We use the case of Korea to illustrate how complementary CSAs and FSAs interact in both inward and outward FDI, creating positive and sustained development impacts. The case of Korea shows that when governments leverage their CSAs, when firms deploy their most productive FSAs, and when MNEs and host governments work cooperatively to advance economic development, the result is a complementary and mutually reinforcing flow of inward and outward FDI that generates positive and sustained impacts on development.

SUMMARY POINTS

In advancing our understanding of the role of MNEs in development, we offer the following insights. MNEs are motivated primarily by efficiency, not by rent seeking; as such their impact on development has been misunderstood. Countries possess important geographically located assets that are necessary—but not sufficient—for advancing the process of economic development. MNEs possess important firm-specific assets that, when properly leveraged and integrated with CSAs, can have dramatically positive impacts on development. Hence, MNEs are vehicles through which capital and technology are transmitted to developing economies; they have the potential to increase consumer welfare, provide jobs, raise labor and environmental standards, and contribute to improved living standards and poverty alleviation. The potential impact of MNEs on development is influenced by international institutions and agree-

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Introduction to the Key Issues

ments, civil society and NGOs, and home and host country policies; the policies and practices of each of these groups must be considered and balanced alongside the motivation of MNEs themselves, to maximize the potential positive impact of MNEs. MNEs have resources and capabilities absent in host and home governments, international institutions, and NGOs; as such, collaborative initiatives among these sectors will have a greater development impact than those that exclude MNEs. MNEs not only act as agents of economic development but also have the potential to serve as catalysts for individual liberty and freedom in poorer or overly regulated societies. Although we have attempted to fill a number of gaps in research discussions about the role of MNEs in development, our hope is that this volume is just the beginning of a serious and vigorous debate about how MNEs can and do influence the development process in the regions, countries, and communities in which they do business.

Chapter 2 Foreign Direct

Investment and Development

In this chapter, we introduce our analytical framework for understanding the interactions between advantages and resources at the country level and those at the firm level. We term these advantages “country-specific advantages” (CSAs) and “firm-specific advantages” (FSAs), respectively. In its simplest form, the development impact of MNEs in developing countries has to be understood as the interaction of these two sets of factors. Next, we briefly review the literature on FDI and development, focusing on research related to spillovers, technology transfer, and linkages. Finally, we review key data on FDI and development to provide an empirical context for our subsequent analysis.

OUTLINE OF THE ANALYTICAL APPROACH

As discussed in chapter 1, the issue of FDI in developing countries has been the subject of intense study and debate. In this chapter, we propose a simple framework for understanding the interactions between CSAs and FSAs. In figure 2.1, we present these two sets of advantages 11

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Foreign Direct Investment and Development

in a matrix. On one axis we specify the multinational enterprise and its FSAs. On the other, we specify the environmental factors, usually at the country level, relevant to business strategy and public policy (CSAs). The traditional method of incorporating social values and pressures is put on the CSA axis. Such social issues are usually addressed by government policy, a major driver of the CSA axis. In other words, the CSA axis is a mediating variable for government policy and social issues. Figure 2.2 presents an alternative framework. This model emphasizes societal stakeholder interests as a distinct and independent set of influences. Although this model has strong merit, we will adopt the matrix approach in figure 2.1, modified to account for nonstate stakeholder interests and influences. The reason we emphasize the core interactions among country and firm factors is that it enables us to conduct an analysis of the influence on development of the MNE as an efficiency-seeking entity. Thus, we can identify, prioritize, and assess the strategic objectives and performance of the MNE and use data on its operations and performance to gauge its development impact. We can contrast the operations and performance of the MNE with the activities of rival firms and decouple the activities of local subsidiaries from those of the parent firm. Below we examine each of these models in more detail. We then illustrate the key issues surrounding the use of either model by relating the models to several examples relevant to multinationals and development.

MODEL 1: THE FSA-CSA MATRIX OF MULTINATIONALS

There are two basic building blocks in analyzing the strategies of MNEs. First, there is a set of firm-specific factors that determine the competitive advantage of an organization. We call these firm-specific advantages (FSAs). An FSA is defined as a unique capability proprietary to the organization. It may be built on product or process technology, marketing or distribution skills, or managerial know-how. Second, there are country factors unique to the business in each country. They can lead to country-specific advantages (CSAs). The CSAs can be based on natural-resource endowments (minerals, energy, forests), on the labor force, or on less-tangible factors that include education and skills, institutional protections of intellectual property, entrepreneurial dynamism, or other factors unique to a given country. Managers of most MNEs use strategies that build on the interactions of CSAs and FSAs, so that they can be positioned in a unique strategic space. The

Foreign Direct Investment and Development

CSAs represent the natural factor endowments of a nation or those that are developed or acquired as part of government or other investments. The FSAs possessed by a firm are based ultimately on its internalization of an asset, such as production knowledge, and managerial or marketing capabilities, over which the firm has proprietary control. FSAs are thus related to the firm’s ability to coordinate the use of the advantages in production, marketing, or the customization of services (Rugman 1981). The CSAs form the basis of the global platform from which—using Porter’s terminology—the multinational firm derives a home-base “diamond” advantage in global competition (Porter 1990). Tariff and nontariff barriers to trade and government regulations also influence CSAs. Building on these CSAs, the firm makes decisions about the efficient global configuration and coordination between segments of its value chain (operations, marketing, R&D, and logistics). The skill in making such decisions represents a strong managerial FSA. To help formulate the strategic options of the MNE, it is useful to identify the relative strengths and weaknesses of the CSAs and FSAs that the MNE possesses. Figure 2.1, the FSA-CSA matrix, provides a useful framework for discussing these issues. It should be emphasized that the “strength” or “weakness” of an FSA or a CSA is a relative notion. It depends on the relevant market and the CSAs and FSAs of potential competitors. A strong FSA implies that under identical CSAs, a firm has a potential competitive advantage over its rivals. MNEs in quadrants 1, 2, and 3 can pursue different generic strategies. Quadrant 1 firms are the cost-leadership enterprises; they are resource based or mature internationally oriented firms producing a commodity-type product. Given their late stage in the product life cycle, production FSAs flowing from the possession of intangible skills are less important than the CSAs of location and energy costs, which are the main sources of the firm’s competitive advantage. Quadrant 2 firms represent inefficient, floundering firms with no consistent strategy, nor any intrinsic CSAs or FSAs. These firms are preparing to exit or to restructure. Quadrant 2 can also represent domestically based small and medium-sized firms with little global exposure. Firms in quadrant 4 are generally differentiated firms with strong FSAs in marketing and customization. These firms usually have strong brands. In quadrant 4 the FSAs dominate, so in world markets the home-country CSAs are not essential in the long run. Quadrant 3 firms generally can choose either the cost or differentiation strategies, or perhaps combine them, because of the strength of both their CSAs and their FSAs. In terms of business strategy, quadrants 2 and 3 are unambiguous in their im-

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Figure 2.1 The FSA-CSA Matrix

plications. A quadrant 3 firm can benefit from strategies of both low cost and differentiation. Such a firm is constantly evaluating its strategy. Quadrants 4 and 1 require specific strategies for different types of firms. For instance, a quadrant 4 firm that has strong FSAs in marketing (customization) can operate internationally without reliance on its home-market CSAs or the CSAs of the host nation. For such a firm in quadrant 4, CSAs are not relevant. In contrast, quadrant 1 has mature multinationals or product divisions driven more by CSAs than by FSAs. By improving potential FSAs in marketing or product innovation and increasing value added through vertical integration, the quadrant 1 firm can move to quadrant 3. Although quadrants 1, 3, and 4 represent appropriate strategic positions for some firms, there exists an asymmetry between quadrants 4 and 1. A quadrant 4 strategic choice may be a stable one for some firms; however, quadrant 1 firms should be able to aim for quadrant 3. The reason for this asymmetry is rooted in the fact that CSAs are for the most part exogenous to the firm, whereas FSAs are not. Even to the extent that CSAs can be influenced by government policy, there is always increased uncertainty associated with such strategies. For the firm in quadrant 4 already following an efficiency-based strategy, there is no incentive, no need, to move to quadrant 3.

Foreign Direct Investment and Development

It is useful to note two points. First, if the firm is a conglomerate, it should be more useful to situate each division or product line individually, recognizing that different units of the diversified firm would use different generic strategies. Second, changes in the trading environment, such as the European Union’s deeper integration measures, the adoption of a single currency by the European Union in 1999, or the United States– Canada Free Trade Agreement and NAFTA, will affect the relative CSAs of the firm.

MODEL 2: THE SOCIAL TRIANGLE

In model 2 there are three axes: the state, the markets and the firm, and society. The relationship is shown in figure 2.2. In figure 2.2 the first axis refers to the activities of the state. The state can be a national government, but it can also represent international organizations, such as the WTO, the IMF, the World Bank, or the United Nations. It can also represent a more generic type of political regime, using various combinations of national and international institutions. The second axis relates to the economic aspects of markets. In a world characterized by free trade and the perfect mobility of financial capital, there would

Figure 2.2 The Social Triangle

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be no role for MNEs. In contrast, in a world of market imperfections, with transaction costs, there is a need for the firm. In an international context, the firm is the MNE (Rugman 1981). This axis, therefore, combines either perfect markets or MNE activities as substitute units of analysis. The third axis represents the activities of society. The institutions that drive this axis are likely to be civil society actors, including NGOs. As a result, the third axis can be distinguished from the first axis, which represents government. On this third axis the activities of civil society can be analyzed separately from those of the state and of the markets and firms, and issues of corporate responsibility can be assessed from a perspective that differs from that of the firm or government. For example, the third axis yields arguments for social responsibility and environmental conservation as ends in themselves, rather than as instruments to be negotiated by government with firms. Model 2 presents us with difficulties in the choice of the unit of analysis. For example, consider geography. In the triangular model, if we consider a homecountry government with its own MNEs, then is the third axis of civil society to be limited to NGOs in the home country, or are foreign NGOs to be considered? This is relevant if we assume the home country to be an African country such as Kenya. In such a triangular analysis of Kenya, it is not clear that U.S. NGOs have standing with the Kenyan government and Kenyan firms. Second, the triangular model poses challenges in terms of analyzing the nature of the MNE. The MNE operates in a home country but has foreign subsidiaries. Across the world’s 500 largest MNEs, the vast majority of the output of foreign subsidiaries takes place in the home region of the MNE. U.S. MNEs, on average, have few subsidiaries in Africa, which is more of a sphere of influence for European MNEs. Similarly, U.S. MNEs have a relatively small presence in Asia, where the concerns of civil society about poor working conditions and other abuses of local workers need to be directed toward other Asian MNEs rather than North American or European MNEs. Third, there is a concern that the extent to which the third axis of society represents an agenda of NGOs from wealthier countries may be at odds with the preferences of local society in host nations. In other words, it is possible that the values of wealthier societies can be imposed on developing societies, given that the host government is removed from its role as a potential mediator between conflicting value systems. In general, the apparent simplicity of the triangular model begins to disappear once these substantive issues confronting MNEs in poorer countries are analyzed.

Foreign Direct Investment and Development

RECONCILING MODEL 1 WITH MODEL 2

Rather than use two alternative models to analyze multinationals and development, in this book we shall use the logic of model 1. The reason is that model 2 can be collapsed into model 1. In this section we explain how this happens. Within the framework of model 1 it is possible to position the activities of the firm in quadrant 4. In quadrant 4 the FSAs are high and the CSAs are low, so the exogenous environmental factors are largely irrelevant when compared with firm factors. In other words, only the firm-market axis of model 2 is relevant. Conversely, the activities of the state can be shown in quadrant 1. In quadrant 1 CSAs are high and FSAs are low. Thus, in terms of model 2, only the activities of the state matter and the firm and market are largely irrelevant in quadrant 1. The state is a mediating variable for NGOs and civil-society pressures in quadrant 1, as Doh and Teegen (2003) and others have argued. Finally, in quadrant 3 both the state and the firm are relevant. Here, the FSAs and CSAs are both high. Thus quadrant 3 is unique in dealing with the society axis of model 2. Here, the role of civil society is relevant. In terms of model 1, the way to handle this is through analysis of corporate social responsibility (CSR). Model 1, then, nicely encapsulates all three axes of model 2: the three relevant quadrants of model 1 represent the three axes of the triangular model 2, as illustrated in figure 2.3. The extent to which we are able to use model 1 will, of course, depend on the empirical evidence governing the positioning in each quadrant. Our basic premise in this book is that we wish to evaluate the presence, activities, performance, and contribution to economic development of MNEs. Thus we choose to use an analytical framework that relates the activities of MNEs to the issues of public policy and economic development. Everything that needs to be analyzed can be handled within the broad framework of model 1. In later chapters we shall evaluate the performance of the MNE in quadrant 4 of figure 2.3; the activities of the state and other institutions in quadrant 1 of figure 2.3; and the CSR activities representing the interaction of the firm and state in quadrant 3 of figure 2.3. We believe that the analytical device of model 1 will bring fresh insight into the understanding of the relationships between MNEs, governments, and society, in particular as these interactions affect economic development. We now relate this framework to the literature on multinationals and development.

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Figure 2.3 Reconciling the Models

SPILLOVERS, TECHNOLOGY TRANSFER, AND LINKAGES

A broad body of literature argues that MNEs contribute to economic development by spillovers. Spillovers are external benefits brought to the host country through inward FDI and the associated presence of foreign MNEs. Basically, these MNEs normally have production systems that embody more advanced technology than is found, on average, within the host country. At the purest level of economics, there is a transfer of technology to local consumers when they purchase the goods and services provided by the more technologically advanced foreign MNEs. Indeed, it has been found that local firms frequently fail to develop and commercialize new technologies and that foreign MNEs overcome this technological gap facing poor host countries. MNEs also transfer scarce management skills and thereby transfer knowledge and learning ability to host countries. The modern theory of the MNE, incorporated in model 1, argues that FSAs will be internalized by the MNE and thereby partially transferred to host-country consumers through subsidiary production in that country. There may also be a direct transfer of technology and skills to local managers and workers through local production by MNEs. Since the evidence is that well over 90 percent of the employees of a subsidiary are from the local

Foreign Direct Investment and Development

country, it is clear that the potential for skill transfer exists once MNEs enter a poor country. Empirical Analyses of Spillovers and Linkages

There is a long history of empirical analysis of FDI-related technological spillovers, running from the early work in the 1970s (for example, Caves 1974; Globerman 1979) to more recent studies in the past ten years (for example, Kokko 1994; Aitken and Harrison 1999; Blomstrom and Sjoholm 1999; Haskel, Pereira, and Slaughter 2002). Since the work of Stephen Hymer in the 1960s (published as Hymer 1976), a core element in the theoretical framework underlying this work has concerned the MNE’s possession and exploitation of technological assets—an ownership advantage seen as the main reason for the MNE’s existence. A second, usually implicit, element is the assumption that the MNE is a tightly integrated organization, with the behavior of subsidiaries closely shaped by central strategies and decisions. The combination of centrally accumulated technological assets and tightly integrated organizational behavior sets the basis for the two-step “pipeline” that delivers spillovers of superior technology from MNE parents to domestic firms without any significantly active role on the part of the local MNE subsidiaries. These local subsidiaries are simply “leaky containers” at the end of the transfer stage of the process. Empirical studies have failed to predict with consistency the spillover effects one might expect on the basis of this model (Görg and Greenaway 2004), and much of the evidence is contradictory (Görg and Strobl 2001; Lipsey 2004). Early studies using industry-level and cross-sectional designs (for example, Caves 1974 or Globerman 1979) found positive results but were unable to identify the relevant causality. More recent studies have used firm level designs, typically combined with panel data analysis. Although such studies have found evidence of spillovers in some cases (for example, Haskel, Pereira, and Slaughter 2002; Keller and Yeaple 2003), the generally positive results in the earlier research have not been replicated in a wide range of countries. Analyses of the technological spillover impact of FDI on host economies have typically assumed the impact to be the outcome of two linked steps. The first involves the MNE parent-to-subsidiary international transfer of technology that is superior to the prevailing technology in the host economy. The second involves the subsequent spread of this technology to domestic firms—a technological spillover effect. The latter has been addressed in a growing number of spillover studies in various host economies (Görg and Strobl 2001; Lipsey 2004).

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Researchers have begun to focus on some additional variables in the MNEspillover equation. In particular, focus has shifted to the potential for local firms to absorb and internalize the potential benefits of technology spillovers. These limits to “absorptive capacity” could originate in both country- and firm-level conditions. Some research (for example, Kokko 1994) has found such “demand side” effects to be significant, whereas others (for example, Haskel, Pereira, and Slaughter 2002) have found that such effects are not as relevant. Another group of researchers has sought to bring in the “supply side”—namely, the heterogeneity in the strategy and behavior of the MNE itself. Two kinds of MNE diversity have been identified: characteristics of the industries in which MNEs operate (Narula and Dunning 2000) and heterogeneity in the strategies of MNEs themselves (Wang and Blomstrom 1992). In our analyses, we focus on both the demand and supply side factors, using the FSA-CSA matrix. Recent literature on linkages argues that MNEs offer opportunities to local firms and NGOs to link to outside business activities. These linkages represent a more direct and embedded connection among MNEs and local private and not-for-profit organizations. Such linkages capture not just the ancillary benefits of MNE investment but, in theory, more substantial activities that would otherwise be fully internalized in the MNE. Spillovers and Linkages to the Bottom of the Pyramid

A recent extension of the spillover linkages argument is captured in the work of C. K. Prahalad (2005) on the bottom of the pyramid. Essentially, this is a model 1 efficiency argument. Prahalad provides examples of the ways in which MNEs from advanced economies can adapt their processes and technologies to local conditions, thereby unleashing potential entrepreneurial incentives in local managers. His examples relate to the commercialization of technologies for small and medium-sized enterprises in countries like India and China. Prahalad suggests that local NGOs can work with local firms and managers to develop new ventures using the insights of foreign MNEs. However, the strength of these alliances is difficult to predict, and the potential value of bottom-ofthe-pyramid products and services may have been exaggerated. The basic premise of Prahalad’s analysis is that of the world’s current population of 6.5 billion, as many as 4 billion people live on under $2 a day. On average, individuals in this group of 4 billion people earn under $1,500 a year in terms of purchasing power. These are the people at the bottom of the pyramid. Another 2 billion people have annual incomes between $1,500 and $20,000. At

Foreign Direct Investment and Development

the top of the pyramid, only 100 million people have incomes greater than $20,000 per annum. The main point of Prahalad’s work is to argue that although the 4 billion people at the bottom of the pyramid appear to have little purchasing power, it may be possible to commercialize this sector. This will require a change in the dominant logic of traditional business practice. Instead of looking at this vast market in terms of the marketing of low-cost products and services, it is better business practice to consider how existing management methods can be adapted to generate new market opportunities. To commercialize the bottom of the world’s pyramid, the subsidiary managers will need to develop new methods of delivery, assembly, production, and cooperation with local firms and NGOs. In particular, the MNE needs to generate a new entrepreneurial orientation in its subsidiary managers. Another useful insight by Prahalad is that the commercialization of the bottom of the pyramid can be fostered in a climate where MNEs engage in CSR. Prahalad argues that the MNE, by developing an entrepreneurial orientation in its subsidiaries, can develop what we would call an FSA. This FSA is one where the firm adapts its products and processes to the bottom of the pyramid and thereby performs better than competitor MNEs and local firms. This process of adaptive commercialization of poorer markets will require that the firm cooperate with local NGOs and local host-country governments, such that it engages in the elements of CSR. To this extent, we can see that CSR is a moderating variable. It moderates the relationship between the entrepreneurial orientation and the performance of MNEs in the markets at the bottom of the pyramid. Previous literature has explored the issue of CSR and the linkages of the MNE to what has been called the “nonbusiness infrastructure.” This is part of the five partners “flagship” framework developed and tested in Rugman and D’Cruz (2000). In the flagship framework the MNE engages in relational contracts with key suppliers, key consumers, key competitors, and institutions in the nonbusiness infrastructure. This method of analysis, which analyzes the strategic behavior of MNEs and their key partners across national borders, is very similar to the analysis presented by Prahalad. There are, however, a number of shortcomings in the Prahalad analysis. When Prahalad argues that innovations can be consumer driven, he may exaggerate the effective demand at the bottom of the pyramid. Moreover, the bottom-of-the-pyramid framework may not be as appropriate for addressing development policy, since this also depends on addressing the poor as producers

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as well as consumers (Karnani 2007). A more promising area is the integration of MNE FSAs with local CSA capabilities and the linkages, supply relationships, and positive economic impacts that result. Although much of Prahalad’s analysis of the innovative process within firms and across business networks is valid, the institutional differences (especially in financial markets) between wealthy and poorer countries make it difficult for the long-term viability of new small and medium-sized enterprises lacking state support or very deep pockets.

REGIONAL MNES AND DEVELOPMENT

One of the unresolved problems facing the MNE in a foreign country is that the MNE suffers from a liability of foreignness. From the viewpoint of the MNE’s managers, foreign markets present risks, as there are social, political, and economic costs associated with entry into unfamiliar markets (Zaheer 1995; 2002). The liability-of-foreignness literature suggests that the MNE has to make an investment in learning about foreign markets (Eden and Miller 2004). In general, this follows a process of internationalization. The MNE first goes to nearby countries. The liability-of-foreignness theory is thus consistent with the empirical finding that the great majority of international business is conducted by MNEs in their home regions. The new insight that comes from this analysis is that we cannot analyze the role of MNEs in economic development in a generic sense. Instead, MNEs that are dominant within each region should be analyzed to determine how they affect development in that region. For example, we focus primarily on the impact of Asian MNEs, mostly Japanese (66 of the 75 largest MNEs in Asia are Japanese), on the rest of Asia. Although we do not explore U.S., Canadian, and European MNEs in depth, the relevant approach is the same: U.S. and Canadian MNEs are the primary drivers of development in the Americas, including the Caribbean. Likewise, European MNEs are the most relevant focus for analysis of the impact of MNEs on Eastern Europe, the Middle East, and Africa. Although there are a few exceptional MNEs that operate across all three regions of the broad triad (of North America, Europe, and Asia), they are so few in number (9 out of 380) that a generic study of multinationals and development would be based on the false premise that all MNEs are global. Instead, 320 of the 380 of the world’s 500 largest MNEs (for which data are available) generate an average of 80 percent of their sales in their home regions (see Rugman 2005). Their distribution of foreign assets is even more regionalized.

Foreign Direct Investment and Development

Hence, a book on multinationals and development is actually a book about economic development in each region of the triad. We focus especially on Asia because it is there that the impacts of MNEs on development—including on the rise of MNEs from developing countries—have been most profound. We believe these experiences provide important lessons for other regions, and these experiences are therefore the focus of the final section of the book.

DATA ON FOREIGN DIRECT INVESTMENT, TRADE, AND DEVELOPMENT

Here we present some basic data on FDI and trade flows among and between developed and developing economies to give the reader a sense of the size, scale, and direction of these important economic exchanges that are central to the focus of this book. The basic data on FDI, published annually by the United Nations in the World Investment Report of the United Nations Conference on Trade and Development (UNCTAD), demonstrates that cross-border economic activities are asymmetrically dispersed throughout the world, with developed countries accounting for the vast majority of both outward and inward FDI in comparison with developing countries. However, developing countries are increasing their share of both outward and inward flows of FDI. Developing countries such as China, Brazil, and Mexico are now leading recipients of FDI. Developed countries remain the leading sources of such FDI outflows; however, there were recent significant increases in outward investment by developing economies, with 2005 outflows from these economies totaling $133 billion, or 17 percent of the world total. As a result of this growth in outflows, the stock of outward FDI emanating from the top fifteen developing and transition economies reached $1.4 trillion in 2005 (table 2.1.). Such a reality provides the basis for our discussion of MNEs from emerging economies in chapter 7 and our discussion of the complementarity of inward and outward FDI flows in Asia in chapters 8 and 9. In terms of trends in FDI and trade between and among developed and developing countries, we follow UNCTAD’s definition and classify the world economies into three major categories: developed countries, less-developed countries, and least-developed countries. UNCTAD identifies fifty least-developed countries using three criteria: low income, human resource weakness, and economic vulnerability. Table 2.2 shows that an asymmetry existed in FDI for each of the three cate-

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Table 2.1 Top 15 developing and transition economies in terms of stock of outward FDI, 2005 (billions of U.S. dollars) Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Economy

FDI stock

Hong Kong, China British Virgin Islands Russian Federation Singapore Taiwan Province of China Brazil China Malaysia South Africa Korea, Republic of Cayman Islands Mexico Argentina Chile Indonesia

470 123 120 111 97 72 46 44 39 36 34 28 23 21 14

Source: Data from UNCTAD 2005.

gories of countries in 2004. The UNCTAD data include three OECD countries—Mexico, the Republic of Korea, and Turkey—in the less-developedcountry category that are now no longer less developed and should properly be termed “emerging economies” or “near-developed economies”; hence we include these three countries in the developed-country category in table 2.2. As shown in table 2.2, approximately 76 percent of the world’s inward FDI stocks and 89 percent of outward FDI stocks are concentrated in the developed countries. The less-developed countries also have a substantial amount of inward FDI stocks, at 23 percent, but only 11 percent of the world’s outward stock. Table 2.2 also shows that FDI stocks in the least-developed countries are almost negligible, at under 1 percent. In terms of flows of FDI, for 2004, the less-developed countries received 36 percent of inward flows but provided only 12 percent of outward flows. The current engine for outward flows of FDI is the group of developed countries, at 88 percent. We conclude that in aggregate, the developed countries account for most of the world’s FDI, and so we need to study the MNEs from these advanced economies to understand their contribution to economic development.

Foreign Direct Investment and Development

Using table 2.2’s comparison of inward and outward FDI stocks for each of the three groups, we can identify each net receiving group. Developed countries provide 89 percent of the world’s FDI and receive 76 percent. Less-developed countries receive 23 percent and provide 11 percent. The least-developed countries receive under 1 percent of the world’s FDI and provide essentially zero. In general, less-developed countries obtain net inflows from the world’s cross-border FDI activities, and these inflows come from developed countries. Least-developed countries do not play a significant role in FDI. The data in table 2.2 are for 2004. But to examine trade data (as well as FDI data) we need to reconstruct table 2.2 for 2002, as trade data are available (at the time of writing) only for 2002. Thus we generate table 2.3 for 2002. The FDI stock percentage data for 2002 are much the same as for 2004. However, the FDI flow data show higher percentages of both outward (94 percent) and inward (81 percent) FDI flows for developed countries, with lower FDI shares for

Table 2.2 Stock and flows of inward and outward FDI, 2004 (millions of U.S. dollars) Panel A. Inward FDI Inward stock

Developed countries Less-developed countries Least-developed countries Total

Inward flows

FDI stock

% of total

FDI flow

% of total

6,742,883 2,080,447 71,874 8,895,204

75.80 23.39 0.81 100.00

407,044 230,421 10,648 648,113

62.80 35.55 1.64 100.00

Panel B. Outward FDI Outward stock

Developed countries Less-developed countries Least-developed countries Total

Outward flows

FDI stock

% of total

FDI flow

% of total

8,672,348 1,056,284 3,601 9,732,233

89.11 10.85 0.04 100.00

645,251 84,896 110 730,257

88.36 11.63 0.02 100.00

Source: Data from UNCTAD 2004. Note: Mexico, the Republic of Korea, and Turkey were moved from the UNCTAD “less-developed” category to the “developed” category. There are 38 developed countries, 118 less-developed countries, and 49 least-developed countries. The “least-developed” category is from UNCTAD 2004 and UNCTAD 2002. Percentages may not sum to 100 percent because of rounding error.

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Table 2.3 Stock and flows of inward and outward FDI, 2002 (millions of U.S. dollars) Panel A. Inward FDI Inward stock

Developed countries Less-developed countries Least-developed countries Total

Inward flows

FDI stock

% of total

FDI flow

% of total

7,213,545 2,288,735 138,877 9,641,157

74.82 23.74 1.44 100.00

565,804 129,861 4,919 700,584

80.76 18.54 0.70 100.00

Panel B. Outward FDI Outward stock

Developed countries Less-developed countries Least-developed countries Total

Outward flows

FDI stock

% of total

FDI flow

% of total

6,416,296 650,441 1,755 7,068,492

90.77 9.20 0.02 100.00

603,155 39,610 103 642,868

93.82 6.16 0.02 100.00

Source: Data from UNCTAD 2004, 2002. Note: Mexico, the Republic of Korea, and Turkey were moved from the UNCTAD “less-developed” category to the “developed” category. There are 33 developed countries, 82 less-developed countries, and 31 least-developed countries. The “least-developed” category is from UNCTAD 2004 and UNCTAD 2002. Percentages may not sum to 100 percent because of rounding error.

less-developed countries. This volatility in flow data is one of the reasons that we prefer to analyze FDI stock data. We can now extend this analysis to include trade data, as well as the FDI data included so far. There is a data limitation. Trade data (at the time of writing) are available only for 2002, so the stocks of table 2.3 for 2002 are used to compare to trade data for 2002. The regional nature of MNEs, as demonstrated by Rugman (2000, 2005), indicates that the great majority of world trade, FDI, and sales by large firms takes place within the three blocs of the “broad triad”—North America, Europe, and Asia—rather than between them. In table 2.4, we compare FDI stocks and trade flows for 2002 in these three blocs. Among the three regions, Europe has the highest percentage of the world’s FDI stock and trade. The Asia-Pacific region has the lowest percentage of the world’s FDI stock, but it has almost the same percentage of the world’s trade as the Americas. Given this

Foreign Direct Investment and Development

Table 2.4 Inward and outward FDI stocks and trade as a percentage of the world, 2002 Inward Region

Outward

FDI stock

Trade

FDI stock

Trade

Americas North Americaa South Americab

31.81 27.23 4.58

22.24 19.55 2.69

28.27 26.81 1.46

27.25 24.94 2.31

Asia-Pacific Asia Oceania

16.08 13.53 2.55

25.07 23.77 1.30

12.42 11.00 1.42

23.06 21.64 1.42

Europe, Africa, and Middle East Africa—Middle East Europe

52.11 3.60 48.51

52.69 5.45 47.24

59.31 0.81 58.49

49.69 5.12 44.56

100.00

100.00

100.00

100.00

Total

Sources: FDI data are from UNCTAD 2004. Trade and GDP data are from World Bank 2005. a Central American countries are included in North America. b Caribbean countries are included in South America.

higher level of FDI and outward cross-border activity, we can say that Europe is a more open region than the Americas and the Asia-Pacific region. FDI and trade as a percentage of GDP are reported in table 2.5, again for 2002. As in the previous table, Europe has the highest level of FDI as a share of gross domestic product (GDP). It is worth noting that the Asia-Pacific countries, in particular the Asian countries, have a heavy focus on trade: total exports (imports) of Asian countries were more than 20 percent of GDP in 2002, whereas the outward (inward) FDI stock was about 10 percent of GDP. This pattern can be observed in other developing regions: South America and the Africa–Middle East region. However, as we discussed above, less-developed countries receive benefits from FDI. The differences between exports and imports were ⫺3.01 percent, ⫺2.22 percent, and ⫺2.06 percent for South America, Asia, and the Africa–Middle East region, respectively, whereas the differences between inward FDI and outward FDI were 19.8 percent, 1.17 percent, and 14.07 percent. Developing countries have benefited more from FDI than from international trade, but they still rely too heavily on international trade. MNEs as well

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Table 2.5 Inward and outward FDI stocks and trade as a percentage of GDP, 2002 Inward Region

Outward

FDI stock

Trade

FDI stock

Trade

Americas North Americaa South Americab

15.83 14.65 30.51

13.34 12.68 21.54

15.57 15.96 10.71

16.34 16.16 18.53

Asia-Pacific Asia Oceania

13.02 11.65 34.72

24.46 24.66 21.30

11.13 10.48 21.43

22.49 22.44 23.29

Europe, Africa, and Middle East Africa—Middle East Europe

29.50 18.77 30.80

35.95 34.26 36.16

37.15 4.70 41.10

33.89 32.20 34.09

World FDI / world GDP

19.96

24.05

22.08

24.04

Sources: FDI data are from UNCTAD 2004. Trade and GDP data are from World Bank 2005. a Central American countries are included in North America. b Caribbean countries are included in South America.

as governments in developing countries should change their engine of growth from international trade to FDI. Table 2.6 compares the intraregional stocks of outward FDI in the three regions of the triad, using FDI outflow into the home region as a percentage of FDI outflow into the world. As we discussed earlier, the OECD developed countries receive about 90 percent of the world’s outflow FDI, so OECD data can represent the world’s FDI. The first four rows of the table show intraregional stocks of outward FDI for five-year intervals from 1988 to 2003, and the next two rows show average annual changes over ten- and fifteen-year periods. Intraregional stocks of outward FDI increased during the ten years ending in 2003 for all regions of the triad. E.U. countries have over 50 percent of their FDI stocks with each other. In the earlier section, we argued that the European Union is a more open region than the Americas and the Asia-Pacific region. The evidence in table 2.6 suggests that the European Union is open to its member countries but not to others: the average annual change, from 1988 to 2003, in the intraregional stock of outward FDI in the European Union was the highest of the three regions, at 1.49 percent. After signing NAFTA in 1994, partici-

Foreign Direct Investment and Development

Table 2.6 Changes in the intraregional outward FDI stocks in the triad, 1988 –2003 Intraregional stock of outward FDI (%) Year

European Uniona

NAFTA

Asia-Pacificb

2003 1998 1993 1988

51.82 44.92 45.67 29.49

18.80 16.85 15.77 21.00

21.55 23.02 19.84 17.72

0.62 1.49

0.30 ⫺0.15

0.17 0.26

Average annual change 1993 –2003 1988 –2003

Source: Authors’ calculation based on Organization for Economic Cooperation and Development, International Direct Investment Statistics Yearbook, electronic ed. (Paris: OECD, 2004). Note: FDI stock is estimated by cumulating the OECD’s FDI flow from 1980. Intraregional stock of outward FDI means the FDI outflow into the home region as a percentage of the FDI outflow into the world. a The European Union includes 15 countries: Australia, Belgium, Luxembourg, Denmark, Finland, France, Germany, Greece, Ireland, Italy, the Netherlands, Portugal, Spain, Sweden, and the United Kingdom. b The Asia-Pacific region includes 12 countries: Australia, China, Hong Kong, India, Indonesia, Japan, Malaysia, New Zealand, the Republic of Korea, Singapore, Taiwan, and Thailand.

pating countries began to increase their outward intraregional FDI (the average annual change was 0.3 percent during the period 1993–2003), reversing a trend of decreasing intraregional FDI before the agreement. We have calculated the outward FDI stocks of Australia, Japan, New Zealand, and the Republic of Korea with respect to the twelve Asia-Pacific countries, and the intraregional stock of outward FDI in the Asia-Pacific region also rose over the fifteen-year period to over 20 percent in 2003. One might argue that the growing economic power of the Asia-Pacific region would attract FDI stocks not only from countries inside the region but also from the rest of the world. In table 2.7 we compare outward FDI stocks in the Asia-Pacific region for the three regional triad blocs. The European Union’s outward FDI stock into the Asia-Pacific region was less than 5 percent in 2003 (compared with an intraregional stock of outward FDI of 52 percent). NAFTA countries send a substantial portion, about 13 percent, of their outward FDI stock to the Asia-Pacific region, but this figure is less than their intraregional stock of outward FDI, which is about 19 percent.

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Table 2.7 Changes in the outward FDI stocks in the Asia-Pacific region, 1988–2003 Outward FDI stock in Asia-Pacific region (%) Year

European Uniona

NAFTA

Asia-Pacificb

2003 1998 1993 1988

4.15 5.30 5.07 5.82

12.61 12.06 11.32 9.09

21.55 23.02 19.84 17.72

⫺0.09 ⫺0.11

0.13 0.23

0.17 0.26

Average annual change 1993 –2003 1988 –2003

Source: Authors’ calculation based on Organization for Economic Cooperation and Development, International Direct Investment Statistics Yearbook, electronic ed. (Paris: OECD, 2004) Note: FDI stock is estimated by cumulating the OECD’s FDI flow from 1980. Outward FDI stock in the Asia-Pacific region means the FDI outflow into the Asia-Pacific region as a percentage of the FDI outflow into the world. a The European Union includes 15 countries: Austria, Belgium, Luxembourg, Denmark, Finland, France, Germany, Greece, Ireland, Italy, the Netherlands, Portugal, Spain, Sweden, and the United Kingdom. b The Asia-Pacific region includes 12 countries: Australia, China, Hong Kong, India, Indonesia, Japan, Malaysia, New Zealand, the Republic of Korea, Singapore, Taiwan, and Thailand.

The European Union has been reducing its FDI stocks into the Asia-Pacific region (the average annual change during the period 1988 –2003 was ⫺0.11 percent) but has been increasing its intraregional stock of outward FDI. NAFTA countries have been increasing their FDI stocks into the Asia-Pacific region, averaging annual increases of 0.23 percent during the period 1988 –2003, but this figure is less than the average annual change for Asia-Pacific countries, 0.26 percent. And the average annual change for NAFTA countries with respect to outward FDI into the Asia-Pacific region is decreasing: 0.23 percent for 1988– 2003, but only 0.13 for 1993 –2003. This trend could be interpreted as a substitution effect. The evidence suggests that countries are strengthening their economic interdependence with nearby countries in their own region.

SUMMARY POINTS

The role of FDI in development is complex and dynamic. We argue that it is the interaction of FSAs and CSAs that determines how MNE capabilities are

Foreign Direct Investment and Development

converted into significant contributors to economic development through spillovers or linkages. MNEs have had and continue to have important impacts on development through the FDI they bring to developing countries. In the next chapter, we focus more specifically on the micro-level dynamics of this process.

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Chapter 3 Multinational

Enterprise Strategies and Development

In this chapter, we draw from literature in corporate strategy and international business across three dimensions. First, we review the competing perspectives on MNE strategies and operations in developing countries. Second, we introduce a framework for understanding the strategic choices of Western MNEs (from the triad) and the response to those strategies by firms in developing countries with small open economies. By small open economies, we mean all “non-coretriad” economies (where the core triad consists of the huge markets of the European Union, the United States, and Japan). Third, we discuss the ways in which MNE activities contribute to development. Using the first framework developed in the last chapter, here we will focus on the nature of FSAs. As shown in the previous chapter, FSAs are often contingent upon, or interact with, CSAs. The basic argument follows two key steps. First, the MNEs from North America, the European Union, and Japan tend to develop knowledge-based FSAs that depend on skilled labor, innovative technology, and marketing skills. The FSAs of such triad-based MNEs build on CSAs in both human capital research and 32

Multinational Strategies and Development

development (R&D), as well as a large domestic market. Most of the literature in strategic management has obviously been developed to explain and analyze the performance of the world’s largest MNEs. Over 400 of the world’s largest MNEs come from the advanced markets of the “core triad” of the United States, the European Union, and Japan. The theories of strategic management for these firms are applied here to explain the presence of MNEs in developing economies. But some new thinking is required to explain the other side of the coin, the presence of MNEs from developing markets in developed economies. Second, firms in developing economies tend to lack knowledge-based FSAs. In general, developing economies do not have infrastructures that produce advanced human capital, technology, or large and sophisticated domestic markets. Even China lacks CSAs across these three areas. Instead, China’s CSAs consist of relatively cheap and unskilled labor, natural resources, and an unsophisticated (but growing) demand in its domestic market. Aside from China, the vast majority of developing economies are small, characterized by relatively small and unsophisticated markets in economic terms. They lack home demand in terms of size and sophistication of consumers. They lack R&D and technology. They lack the infrastructure to produce firms with FSAs. These types of small but open economies need special consideration in the application of traditional strategic-management thinking, especially in consideration of the impact of MNEs on development. Several interesting points will emerge in this chapter. The MNEs from the triad markets can contribute to economic development by indirectly transferring technology through the sale of products and services in developing economies. Such products and services are built on knowledge-based FSAs, so the consumption of these products and services helps provide the benefits of knowledge-based FSAs in developing economies. In this manner MNEs serve as vehicles for economic development. Of course, some MNEs are natural-resource seeking, and such a motive for FDI is based on the extraction and harvesting of the CSAs in a developing economy. In these situations it is necessary for the host government to bargain with the MNE to apportion equitably the potential rents available from resource exploitation. In general, foreign MNEs that are vertically integrated will retain proprietary FSAs in production and marketing. Thus, government bargaining in a host economy is limited to the potential rents available from the harvesting and extraction activities, not the other components of the FSAs of the MNE, although many host governments seek to leverage the access they provide to these resources to attain greater value-added investments.

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Another issue we explore in this chapter is how firms from small open economies can develop their own FSAs. This is incredibly difficult since most firms in developing economies start out to build on indigenous CSAs. Many are small entrepreneurial firms. The firms from small open economies tend to be natural-resource based (in mining, forestry, or energy production), or they develop businesses based on cheap labor. Inevitably the growth of such firms is limited by the relatively small size of the home market. When these firms seek to internationalize, they face severe competition since they lack sustainable knowledge-based FSAs. One strategy to overcome this lack of FSAs is to develop a sustainable niche. Firms in small open economies can specialize in a new product or service category and attempt to grow it internationally. In doing so, they suffer from entry barriers to the advanced triad markets. Government-imposed barriers to entry, in the form of tariffs and nontariff measures, can make entry even more difficult. It is hard to overcome the liability of foreignness without a strong FSA. The MNEs from developing economies will lack knowledge-based FSAs, and so they must rely on economies of scale in CSA-related natural-resource products, or on products and services based on cheap labor. In other words, the MNEs from developing economies will tend to exploit their home-country CSAs when going abroad. Few of them will have sustainable FSAs, except in niche markets. We now turn to a review of the literature in strategic management as it applies to economic development. We focus on theories that are relevant for MNEs from the large triad markets, and also attempt to develop some new thinking about the potential activities of MNEs from developing markets.

MULTINATIONALS IN DEVELOPING ECONOMIES

Firms in developing economies, many of which have been isolated from the world economy, may urgently need restructuring after any move toward tradeand investment-liberalizing policies. Some countries can serve as interesting models of transition, such as Mexico, which prepared for entry into the managed trade of NAFTA with a brief period of internal market liberalization and privatization under President Salinas and his predecessor. Today Mexico is developing competitive MNEs with access to the large U.S. market, especially in such sectors as cement and glass. The Mexican model is, in many instances, replacing the import-substitution policies of the 1960s and 1970s. Mexico’s mar-

Multinational Strategies and Development

ket-access policies provide opportunities for domestic firms to develop global best-practice technologies and processes, whereas “shelter-type” strategies do not develop such long-run competitive advantages (Rugman and Verbeke 1990). In this chapter, the unit of analysis is the firm, and the literature to be incorporated is from business policy and strategy. Virtually all this literature has been developed for analysis of decision making by managers in triad-based firms. The “core triad” consists of the United States, the European Union, and Japan. MNEs from these triad markets account for over 80 percent of the world’s stock of FDI (Rugman 1996b, 2000, 2005). The most influential work on business strategy is that by Michael Porter (1980, 1990). In particular, his “diamond” framework of international competitiveness demonstrates how a triad-based firm can build on the four domestic diamond components (factor conditions, home demand, rivalry and market structure, and related and supporting activities) to enhance the country’s international competitiveness. Government and chance also affect competitiveness but are not central determinants. According to Porter (1990), the firm is the vehicle through which a country can achieve competitiveness. The company uses the home-country diamond as a staging ground to develop new technology, products, and processes, and then it exports these on a global basis. In the Porter framework (1990), inward FDI is not a source of competitive advantage, but outward FDI by strong home-based MNEs is a way to expand to supplement exports from the home country. These ideas have been modified and adapted to the strategies of firms from small open economies such as those of Canada, Norway, and New Zealand by Rugman (1996a). In comparison with the core triad markets, all other economies, including those of Canada, India, Korea, and China, are “small” (see Rugman 2000). By definition, all developing economies are “small” (although some—like China, India, and Brazil—are larger) and are also becoming “open,” so the adapted “small open economy” double-diamond is particularly relevant to this chapter. Two points are especially important. First, non-triad firms will need access to one or more of the triad markets if they are to build a successful global business. Thus, political factors governing market access become vital, including the successful completion of the Doha Round of multilateral trade negotiations. We take up these issues in the next chapter. Second, much of the modern literature on FDI contradicts Porter’s implied assertion (1990) that inward FDI does not promote competitiveness. Rather, a substantial portion of this literature finds

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that inward FDI serves to transfer technology, increase productivity and employment, and, arguably, provide overall net social benefits (Dunning 1958, 1998a; Caves 1996; Rugman 1981, 1996a; Rugman and Verbeke 1998b). We take up these points as they apply to the Asia in chapters 7, 8, and 9. The literature on strategy for MNEs, for both large and small open economies, as well as the FDI literature, has focused on advanced economies. Therefore, it is necessary to reevaluate and apply this literature from the perspective of a firm in a developing country (developing economy). Some recent work has done this, such as that of Barclay (1998). She has applied the eclectic paradigm of Dunning (1980) and other FDI models to analyze the strategies of all the MNEs in the three Caribbean countries of Trinidad, Jamaica, and Barbados. The interaction between strategy and FDI literature is a rich feeding ground for writers, and some of the more useful ideas need to be surfaced. MNEs, whether foreign or domestic, are not the whole answer, but modern business-school research demonstrates that they are usually at the hubs of business networks and clusters of successful industries. As briefly mentioned in chapter 2, the MNE is often a “flagship” firm, and its presence in a cluster offers opportunities for key suppliers and customers to act as intermediaries and partners in the promotion of growth and development (Rugman and D’Cruz 1997, 2000). The role of government and other parts of the “nonbusiness infrastructure” is also important, since these too could potentially form partnerships with MNEs and other businesses to develop flagship relationships. The flagship framework is particularly useful for developing countries since it explicitly incorporates the role of government in facilitating the development of competitiveness. The government sector is included with other services in the nonbusiness infrastructure in the model of Rugman and D’Cruz (1997, 2000). It is possible for agents in the nonbusiness infrastructure to become network partners with flagship firms. However, government itself does not act as a flagship, a point also made by Porter (1990). The role of government in facilitating competitiveness is perhaps the most important insight to be drawn from the application of business-school research to issues of developing economies.

BUSINESS STRATEGY IN DEVELOPING ECONOMIES

Business-enterprise strategy has been usefully synthesized by Porter (1980, 1990). He suggests (1980) that there are three type of generic strategies: cost, differentiation, and focus. A firm can compete on price by being the lowest-

Multinational Strategies and Development

cost producer. Internationally, this requires that economies of scale be achieved through high levels of worldwide sales, using at least one triad market as a base. In developing countries, firms in the minerals, forestry, and energy sectors are positioned as seeking a competitive advantage in cost. However, the danger is that sectors like these can become commodities (with no proprietary competitive advantage) rather than products. A second strategy is to differentiate, for example, with brand-name products. Not many MNEs from small open economies have succeeded here (except perhaps for Hyundai, Samsung, and LG from Korea, and Acer from Taiwan). Certainly, few small and mediumsized businesses from small open economies have any hope of building global brand recognition. The third strategy, niching, is used much more by small and medium-sized businesses and other firms from developing countries. But again, achieving a global niche is difficult. Under Porter’s framework of three generic strategies, an “offensive” strategy could incorporate either the cost, differentiation, or focus strategies, with managers of the firm using global benchmarks and best available practices across the value chain as reference points for their strategic decision making. A “defensive” strategy could be viewed as one that seeks shelter from foreign competition and worldwide best practice, through government protection. This option is assumed to be unavailable, given the market-liberalization measures facing small open economies. It is also assumed that government institutions wish to support efficiency-seeking firms with modern offensive strategies, rather than inefficient and protected firms with shelter strategies. Porter (1980) also advocates the use of entry barriers to maintain competitive advantage. In his “five forces” model he argues that a firm needs to gain competitive advantage by holding market power over its suppliers, buyers, rivals, potential entrants, and potential substitutes. It is a competitive framework where entry barriers are erected by scale, capital (financing) requirements, differentiation, cost of switching from both suppliers and buyers, and government. There has also been extensive discussion in the business-strategy literature about the nature and relevance of core competencies (Hamel 1991; Rugman and Hodgetts 2003). With its drivers of competition and strategic entry barriers, Porter’s fiveforces model is basically incompatible with the “five partners” long-run cooperative framework of international competitiveness developed by D’Cruz and Rugman (1992a, 1992b, 1993), and Rugman and D’Cruz (2000). It is not necessary to dwell here on the different approaches of these two models, since useful insights into management strategy in small open economies can be obtained by

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Multinational Strategies and Development

adapting Porter’s five-forces framework (1980) to a relevant framework for managers in small open economies. To do so requires that a basic aspect of competitive strategy be modified and extended for developing countries. Porter’s three generics must be transformed into truly global strategies, which leads to five generics. Porter’s three domestic generic strategies can be extended to take into account the issue of geographic scope in a global industry. The original three domestic generic strategies have been transformed into a set of five global generic strategies (Rugman and Verbeke 1993b); see figure 3.1. This is a relabeling of Porter’s work, where global cost leadership, global differentiation, and global segmentation represent the global versions of overall cost leadership, overall differentiation, and focus. There are two main issues associated with this extension of Porter’s framework of five generic strategies, as shown in figure 3.1. First, in practice it is very difficult for managers, especially in developing countries, to identify patterns in decisions and actions that are associated with only one of Porter’s types of competitive advantage. The strategic intensity (and related economic performance) of a dual focus on cost leadership and differentiation is much more important than choosing between the pursuit of a cost or differentiation advantage (Reitsperger, Daniel, and Tallman 1993). For example, the three largest automobile manufacturers in the world, General Motors, Ford, and Toyota, all pursue a combined cost leadership–differentiation strategy; that is, economies of scope are relevant. A dual focus on both cost leadership and differentiation is often required across the various segments of the value chain. A second issue, and one that is much more important for public policy purposes, is that Porter’s strategy of “protected markets” does not fit with his other four strategies. In each of the four other cases (excluding protected markets), cost or differentiation advantages remain important, although, as discussed, these do not appear to be mutually exclusive in the cases of global segmentation and national responsiveness. In each of these four cases, efficiency (as measured by relative output-input differentials throughout the value chain) determines a firm’s economic performance in terms of survival, profitability, and growth. In contrast, as Porter (1986, 48) recognizes himself, protected-market strategies are not efficient in economic terms, since their choice depends on government behavior. Thus, even the extended framework of five generic strategies is not able to incorporate the protected-market strategy properly, despite its being considered one of the five generics by Porter himself. A final problem for international management in small open economies is

Multinational Strategies and Development

Figure 3.1 Rugman and Verbeke’s Five Generic Strategies Adapted from Rugman and Verbeke 1993a, p. 5, fig. 1.

Porter’s peculiar treatment of “national responsiveness.” In defining this term, he states correctly that a firm aims to “focus on those industry segments most affected by local country differences” and meets “unusual local needs in products, channels and marketing practices in each country, foregoing the competitive advantages of a global strategy” (Porter 1986, 48). However, he also uses the term “national responsiveness” to describe the behavior of “domestic firms without the resources to become international as well as multinationals who lack the resources or skills to concentrate/coordinate their activities worldwide” (Porter 1986, 48). But properly interpreted, national responsiveness is a strategic alternative to other strategies based on globalization and integration; it builds on firm-specific strengths (Rugman 1981, 1996b; Baden-Fuller and Stopford 1991, 1993). National responsiveness is certainly not the result of a firm’s internal weaknesses. Porter’s view is in sharp contrast to most of the mainstream international business literature, such as that of Bartlett (1986), Bartlett and Ghoshal (1989), and Rugman and Verbeke (1992a), which describes national responsiveness as a strategy that builds on location-bound FSAs and MNEs. The “admin-

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istrative heritage” of a firm that leads to national responsiveness is just as valuable as one that leads to global scale economies. Porter’s definition of national responsiveness is inconsistent with international business literature and is misleading for policy purposes in developing countries. Firms in small open economies should consider national responsiveness as a separate efficiencybased strategic option on its own merits. Many authors, including Bartlett (1986), Bartlett and Ghoshal (1989), Doz (1986), Ghoshal (1987), Kogut (1985a; 1985b), Prahalad and Doz (1987), and Roth and Morrison (1990), have established the intellectual foundations that distinguish between two fundamentally different types of FSAs. Rugman and Verbeke (1991a, 1992a, 1992b) have developed this framework in some detail. There is an important distinction between location-bound FSAs and non-location-bound FSAs. The former benefit a company only in a particular location (or set of locations) and lead to benefits of national responsiveness. In the context of international business operations, these location-bound FSAs cannot be effectively transferred as an intermediate output (for example, a tangible or intangible asset) or embodied in the final outputs of the organization, to be sold across borders. In contrast, non-location-bound FSAs are easily transferred and exploited abroad, whether as intermediate outputs or embodied in final outputs. They lead to benefits of integration in terms of economies of scale and exploitation of national differences. Rugman and Verbeke (1993a) have demonstrated that a firm may actually have several home bases contributing substantially to the development of new FSAs and improving international competitiveness. Birkinshaw (1996) has extended this point with research on “subsidiary initiatives.” It is important to distinguish between the existence of a single home base or multiple home bases in the pursuit of international competitiveness, because it reflects the impact of the CSAs of specific locations on strategic behavior. A single home base implies the dominating impact of one set of national “diamond” characteristics on the firm’s overall competitiveness. In contrast, with multiple home bases, competitiveness, both now and in the future, depends crucially on decisions and actions taken in various locations, as well as on the characteristics of these locations. Firms in small open economies need to be in the latter camp; then they can be more “nationally responsive” to the triad markets. To the extent that the development and exploitation of non-location-bound FSAs require coordination of decisions and actions across borders, a single home base requires only direct, centralized control of all foreign operations. This is unlike the case of a global subsidiary mandate, where the “corporate

Multinational Strategies and Development

headquarters” role shifts toward managing a dispersed federation of subsidiaries while ensuring that their strategies are aligned with overall corporate goals. In that case, typical home-base activities are concentrated in the various nations where subsidiaries have received global subsidiary mandates.

BUSINESS ENTERPRISES IN SMALL OPEN ECONOMIES

This section bridges the gap between Porter (because of the missing ingredients in his work) and making strategy operational for firms in small open economies. The missing link discussed here is the nature of truly generic strategies; they generate efficiency-based rather than shelter-based FSAs. Efficiency-based FSAs can be non-location-bound or location-bound, with the latter encompassing the national-responsiveness strategy that is of interest to developing countries. Firm-Specific Advantages as Generic Strategies

FSAs include proprietary know-how (unique assets) and transactional advantages with potential cost-reducing or differentiation-enhancing effects. In a number of cases, it may be difficult to assess the actual impact of an FSA in terms of cost reduction or differentiation enhancement. Rugman and Verbeke (1991a) have suggested that in such cases, the contribution of an FSA to a firm’s organizational learning should be considered. All strategies that build on such FSAs or aim to develop new advantages can be classified as efficiency based. In contrast, strategies that do not build on FSAs to achieve a satisfactory economic performance in terms of survival, profitability, growth, or any other goal considered relevant by managers are classified as non-efficiency-based or shelter-based strategies. If the economic performance of a firm or set of firms does not result from FSAs with cost-reducing, differentiation-enhancing, or infrastructure-building characteristics, such performance must result from shelterbased behavior. Many policies in developing countries can lead to such inefficient firm strategies, as is now discussed. Shelter-Based Strategies

Shelter-based behavior by firms takes two main forms: an attempt to impose “artificial” costs or barriers to differentiation on (foreign) rivals through government regulation (such as by tariff and nontariff barriers); and an attempt to

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reduce the market incentives for cost reduction, differentiation enhancement, or infrastructure building themselves (for instance, by collusive behavior and cartel formation aimed primarily at exploiting the consumer) or to limit the potential effects of these incentives (for example, by government subsidies). In both cases, such strategies reduce competition and efficiency. Shelter-based strategies are often pursued in the context of international business and developing countries, where firms located in a particular nation may convince policymakers that protectionist measures will lead to higher output in terms of value-added production, or to a special type of public good in terms of the creation of domestic control over strategic sectors, technological spillover effects, and so on. This occurs even where such public good may, in reality, be nonexistent or where shelter leads to a substantial reduction in consumer welfare. Rugman and Verbeke (1991b, 1991c) have demonstrated that such shelter strategies can actually subvert policies aimed at achieving a level playing field and fair trade, even in the United States and the European Union, let alone in developing countries. In a similar way, recent international economic literature on strategic trade policy represents a relatively small set of mathematical cases under suboptimal conditions with questionable relevance to reality; it is not the basis for a successful long-run trade policy, as argued by Krugman (1993) and Rugman (1996a). This distinction between an efficiency-based strategy and a shelter-based strategy is fundamental to strategic management, because each strategy builds on a different intellectual premise as to what constitutes the source of success. In the case of an efficiency-based strategy, consumer sovereignty ultimately determines whether the firm will be successful (except in the case of natural monopolies, few of which exist in an international context). Strong economic performance reflects the successful creation of value for consumers. In contrast, shelter-based strategies reflect behavior that reduces value for consumers. It is important to distinguish between these two types of strategies, because different “weapons” are used and different “rules” are followed in each case. More specifically, firms in small open economies that are pursuing a conventional efficiency-based strategy, but that are faced with shelter-seeking triad rivals, may suffer in the short term, compared with a situation in which all competitors are engaged in efficiency-based behavior. In the short term, triad shelter-based behavior will reduce the possibilities for rivals from small open economies that are not engaged in such behavior to exploit their FSAs or develop new ones. There is a strategic asymmetry in the short term that a national responsiveness policy by small open economies can minimize. In the long term,

Multinational Strategies and Development

shelter obviously works against the triad firms that build their economic performance on it. Thus it is always advisable for firms in small open economies to follow efficiency-based strategies, in both the short and the long term; however, these strategies should be paired with government policies designed to reduce or eliminate trade protections. Rugman and Verbeke (1993b) have outlined several reasons shelter-based strategies may fail in the long term, leading to corporate inefficiencies and political dependence. For these reasons, and because of the size asymmetry between small open economies and the triad, it is not useful for firms in small open economies to use shelter as a strategic alternative. Porter’s protected-market strategy (1986) is both inefficient and irrelevant for managers in small open economies. Unfortunately, firms from developing countries must compete with triad firms. Managers of firms in developing small open economies must recognize that triad asymmetries exist. Until this is widely understood, much triad-based, and especially U.S.-based, strategic management thinking will be inappropriate for small open economies. The firm and public policy implications of the asymmetry in power and size of large triad markets versus small developing country markets is explored further in the next section.

MARKET-ACCESS ISSUES FOR FIRMS IN SMALL OPEN ECONOMIES

The brutal reality of global business today is that enterprises in small open economies are in a very weak bargaining position vis-à-vis MNEs from the triad. Five major types of enterprises in small open economies must be considered: A: Domestic firms selling all of their output at home B: Local firms who export a major part of their output C: Local subsidiaries of an MNE, where the MNE exercises head-office control D: Local subsidiaries of an MNE, where the MNE operates in a decentralized way, giving local autonomy to the subsidiaries E: Local firms that become MNEs In general, only the last two of these five types of enterprises offer much hope for sustainable development in sovereign small open economies. Yet these are the very types of enterprise structures that are in short supply in developing countries. We know of no example of a type D network-type subsidiary in any developing country, at least in terms of the organizational structure of the 500

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largest MNEs in the world, over 85 percent of which are triad based. These MNEs tend to develop type D networks across the triad, but not in developing countries. A similar problem exists for type E enterprises. Other than a few state-owned businesses, especially in the petroleum and mineral-resource sectors, only a score of large MNEs come from developing countries. In 2001, only 11 of the Fortune 500 MNEs (which account for over 80 percent of the world’s stock of FDI) were from China, and few others came from other developing countries (see table 3.1). These Chinese firms generate well over 90 percent of their sales in Asia (Rugman and Verbeke 2004). One MNE from each of India, Malaysia, Venezuela, and Singapore was on the list. Again, these are all regionally based. Of the more established newly industrialized countries, Mexico had 2, Taiwan 2, Brazil 4, and the Republic of Korea 12. Overall, 20 of the world’s 500 largest firms were from less-developed economies (mostly China with 11) and another 15 from the East Asian Tigers (mostly Korea with 12). Table 3.1 confirms that the focus of international business is in the core triad of the United States, the European Union, and Japan. This has been the situation for the last twenty years. These three blocs are the home bases of 85 percent of the world’s 500 largest MNEs, and these MNEs conduct the majority of their business within their home regions of the triad (Rugman and Verbeke 2004). In other words, most developing countries are not yet significant players Table 3.1 The world’s 500 largest firms Country United States European Union Japan Canada Republic of Korea China Switzerland Australia Brazil Others Total Triad total

1981

1991

1996

2001

242 141 62

157 134 119 9 13

162 155 126 6 13 3 14 5 5 11 500 443

197 143 88 16 12 11 11 6 4 12 500 428

55 500 445

10 9 1 48 500 410

Source: Adapted and compiled from various annual publications of the Fortune 500 by Fortune magazine.

Multinational Strategies and Development

in FDI, although to the extent that they have become more active, it is primarily within the regions in which they operate. Tables 3.2 and 3.3 list the twenty-five largest MNEs overall, and the largest MNEs from developing countries, ranked by international assets. What is striking about these data is that despite having significant assets outside their home countries, the largest MNEs overall and those from developing countries are not very international on a relative basis. That is, their ranking in the Transnationality Index (calculated as the average of the following three ratios: foreign assets to total assets, foreign sales to total sales, and foreign employment to total employment) and the Internationalization Index (calculated as the number of foreign affiliates divided by the number of all affiliates) is surprisingly low. This further confirms that the largest MNEs are highly concentrated in a few regions and countries, and many are still not particularly international. Enterprises in developing small open economies are usually type A, B, or C. Type B firms are the classic resource-based, or cheap-labor, exporting firms. In all sectors they face declining terms of trade and ever-limited market access to the triad. Again, future prospects are not good unless niche areas can be found. Despite efforts at trade liberalization through the General Agreement on Tariffs and Trade (GATT)–WTO process, and preferential treatment for developing countries in such agreements, it is clear that most economic activity is conducted through FDI rather than through trade. Multilateral rules for “deep integration” via FDI have not been developed, and the “shallow integration” achieved by tariff cuts under the GATT-WTO has not helped developing countries bridge the efficiency and managerial gap between them and the triad leaders. Type C firms are often resource-based or labor-intensive subsidiaries of MNEs. Little transfer of technology takes place, and the upgrading of skills and managerial practices is minimal. Branch plants are not associated with R&D and rely on the parent’s managerial and marketing know-how. Finally, type A firms are often small or medium-sized enterprises, and their growth is limited by the relatively small domestic market and its slow growth rate. Against this gloomy background for business enterprises in small open economies, what prospects are there for development? We do not believe that there is any significant evidence that conventional proposals to tinker at the margins with technology transfers will work. Instead, enterprises in small open economies need to choose between two corporate strategies: 1. Become niche suppliers and develop global marketing skills 2. Become network partners of MNEs and develop managerial skills

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Table 3.2 The world’s top 25 nonfinancial MNEs ranked by foreign assets, 2004 Ranking by Foreign assets 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

TNIa IIb 68 4 67 90 10 38 25 62 20 66 49 16 61 60 19

55 93 65 71 44 37 88 91 48 47 60 22 54 62 59

Assets ($ millions)

Sales ($ millions)

No. of employees

Company

Foreign

Total

Foreign

Total

Foreign

General Electric Vodaphone Group Plc Ford Motor General Motors British Petroleum Company Plc Exxon Mobil Royal Dutch/Shell Group Toyota Motor Corp. Total France Telecom Volkswagen Sanofi-Aventis Deutsche Telekom AG RWE Group Suez

448,901 247,850 179,856 173,690 154,513 134,923 129,939 122,967 98,719 85,669 84,042 82,612 79,654 78,728 74,051

750,507 258,626 305,341 479,603 193,213 195,256 192,811 233,721 114,636 131,204 172,949 104,548 146,834 127,179 85,788

56,896 53,307 71,444 59,137 232,388 202,870 170,286 102,995 123,265 24,252 80,037 15,418 47,118 23,636 38,838

152,866 62,494 171,652 193,517 285,059 291,252 265,190 171,467 152,353 58,554 110,463 18,678 71,868 52,320 50,585

142,000 45,981 102,749 114,612 85,500 52,968 96,000 94,666 62,227 81,651 165,152 68,776 73,808 42,370 100,485

Total 307,000 57,378 225,626 324,000 102,900 105,200 114,000 265,753 111,401 206,524 342,502 96,439 244,645 97,777 160,712

TNIa (%) 47.8 87.1 48.7 34.0 81.5 63.0 71.9 49.4 74.3 48.7 56.4 77.6 50.0 50.1 75.2

No. of affiliates Foreign Total 787 70 130 166 445 237 328 129 410 162 147 207 266 345 546

1,157 198 216 290 611 314 814 341 576 227 228 253 390 552 846

IIb 68.02 35.35 60.19 57.24 72.83 75.48 40.29 37.83 71.18 71.37 64.47 81.82 68.21 62.50 64.54

16 17 18 19 20 21 22 23 24 25

81 13 39 3 92 29 52 48 34 93

79 6 49 4 28 87 73 83 23 80

E.ON Hutchison Whampoa Siemens AG Nestlé SA Electricité de France Honda Motor Co. Ltd Vivendi Universal Chevron Texaco BMW AG Daimler Chrysler

72,726 67,638 65,830 65,396 65,365 65,036 57,589 57,186 55,726 54,869

155,364 84,162 108,312 76,965 200,093 89,483 94,439 93,208 91,826 248,850

21,996 60,970 32,819 17,039 23,037 150,687 59,224 93,333 266,000 68,586 69,778 240,406 17,886 55,775 50,543 61,621 79,951 76,763 11,613 26,607 23,377 80,034 150,865 31,000 40,198 55,050 70,846 68,928 176,391 101,450

72,484 180,000 430,000 247,000 156,152 137,827 37,906 56,000 105,972 384,723

42.7 79.3 62.0 93.5 32.4 68.5 55.4 56.6 66.9 29.2

303 94 605 460 240 76 245 121 124 324

596 103 852 487 299 188 435 250 153 641

50.84 91.26 71.01 94.46 80.27 40.43 56.32 48.40 81.05 50.55

Source: UNCTAD 2006. a The Transnationality Index (TNI) is calculated as the average of the following three ratios: foreign assets to total assets, foreign sales to total sales, and foreign employment to total employment. Ranking is based on 100 MNEs. b The Internationalization Index (II) is calculated as the number of foreign affiliates divided by the number of all affiliates (only majority-owned affiliates are counted). Ranking is based on 100 MNEs.

Table 3.3 The 25 nonfinancial MNEs from developing countries ranked by foreign assets, 2004 (millions of U.S. dollars and number of employees) Ranking by Foreign assets TNIa II1b 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

28 80 32 54 86 30 11 62 75 37 66 96 94 33 45

4 30 24 14 71 27 13 66 55 1 23 72 33 12 82

Company Hutchison Whampoa Limited Petronas—Petroleum Nasional Bhd Singtel Ltd. Samsung Electronics Co., Ltd. CITIC Group Cemex S.A. LG Electronics Inc. China Ocean Shipping (Group) Co. Petroleos De Venezuela Jardine Matheson Holdings Ltd Formosa Plastic Group Petroleo Brasileiro S.A.—Petrobras Hyundai Motor Company Flextronics Internation Ltd. Capitaland Limited

Assets ($ millions)

Sales ($ millions)

No. of employees

Foreign

Total

Foreign

Total

67,638 22,647 18,641 14,609 14,452 13,323 10,420 9,024 8,868 7,141 6,968 6,221 5,899 5,862 5,231

84,162 62,915 21,626 66,656 84,744 17,188 28,903 14,994 55,355 10,555 58,023 63,270 56,387 11,130 10,545

11,426 10,567 5,396 1,524 1,746 5,412 36,082 4,825 25,551 5,830 6,995 11,082 15,245 8,181 1,536

23,080 150,687 36,065 4,016 7,722 8,676 79,184 21,259 6,413 15,915 8,059 16,822 41,782 41,923 11,293 4,230 46,589 5,157 8,988 57,895 37,738 61,626 52,109 6,196 51,300 4,954 16,085 89,858 2,328 5,277

Foreign

Total

No. of affiliates TNIa (%) Foreign Total

182,000 33,944 19,155 61,899 93,323 26,679 32,000 70,474 33,998 110,000 82,380 52,037 53,218 92,000 10,668

70.9 25.7 67.1 44.7 20.4 69.2 84.5 36.3 28.7 61.7 35.1 14.3 16.5 67.1 55.0

84 167 23 75 14 42 32 40 30 83 14 23 13 100 4

93 234 30 87 59 56 37 134 65 88 18 103 20 114 23

IIb 90.30 71.40 76.70 86.20 23.70 75.00 86.50 29.90 46.20 94.30 77.80 22.30 65.00 87.70 17.40

16 17 18 19 20 21 22 23 24 25

63 90 55 79 43 19 77 27 100 60

46 75 47 69 22 2 89 7 95 87

Sasol Limited Telmex America Movil China State Construction Engineering Corp. Hon Hai Precision Industries (Foxconn) Shangri-La Asia Limited New World Development Co., Ltd. Sappi Limited China National Petroleum Corp. Companhia Vale do Rio Doce

4,902 4,734 4,448 4,357 4,355 4,209 4,202 4,187 4,060 4,025

12,998 22,710 17,277 11,130 9,505 5,208 15,567 6,150 110,393 16,382

5,541 1,415 5,684 2,513 7,730 571 891 4,351 5,218 9,395

10,684 5,841 31,100 36.1 12,444 15,616 76,386 17.6 11,962 13,949 23,303 44.4 11,216 21,456 130,813 26.0 16,969 140,518 166,509 58.6 726 14,013 18,100 79.0 2,865 12,687 47,000 28.4 4,762 8,936 16,010 71.8 68,952 22,000 1167,129 4.4 10,380 2,736 36,176 40.9

1 6 17 4 32 29 7 33 4 6

2 28 34 16 41 31 57 37 242 48

50.00 21.40 50.00 25.00 78.00 93.50 12.30 89.20 1.70 12.50

Source: UNCTAD 2006. a The Transnationality Index (TNI) is calculated as the average of the following three ratios: foreign assets to total assets, foreign sales to total sales, and foreign employment to total employment. Ranking is based on 100 MNEs. b The Internationalization Index (II) is calculated as the number of foreign affiliates divided by the number of all affiliates (only majority-owned affiliates are counted). Ranking is based on 100 MNEs.

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Multinational Strategies and Development

In option 1, an indigenous firm must find and exploit a niche of no particular interest to a potential rival MNE. Just as the MNEs have the threefold skills of research, production, and marketing, so too must an enterprise in a small open economy develop these three skills in the niche area. Marketing skills are the most difficult to learn—especially global marketing skills. With option 2, modern management skills are the critical factor. Managers in developing countries will need MBA-type skills, plus deep practical experience with different countries and cultures, to become entrepreneurial network partners in an MNE’s decentralized federation.

BUSINESS STRATEGY AND ECONOMIC DEVELOPMENT

Lall (1987) argues that technological capabilities can be classified into the following three categories: • Investment capabilities: the planning, entrepreneurial, and financial-assessment skills required to start up a project • Production capabilities: the engineering and manufacturing skills to operate, maintain, and upgrade the plant • Linkage capabilities: the ability to develop networks and maintain supplierbuyer relationships The model of the East Asian Tigers has been to use cheap labor and lowtechnology exports as a basis for shifting competitive advantage toward highertechnology indigenous production. This has been furthered by selected government-determined industrial policies, improving international competitiveness. In this context, the successful development of Korea and Singapore was noted by Porter (1990), although the contribution of government-led industrial policies is still controversial, especially after the Asian financial crisis of 1997–1998 undermined the East Asian Tigers. Wignaraja (1998) finds that the acquisition of technological capabilities by export-oriented firms in Sri Lanka over the 1977–1991 period is a mixed bag. Although these firms do not develop new process-centered R&D, or interfirm linkages, they do upgrade their production capabilities to best-practice levels, which has helped increase and maintain the exports of Sri Lankan garment firms. Wignaraja examines firms in three sectors: garments, electronics, and light engineering. Across these sectors, the firms tend to acquire investment ca-

Multinational Strategies and Development

pabilities, “typically at the simpler end of the technological spectrum” Wignaraja (1998, 192). Similarly, few production capabilities are transferred, as Sri Lankan firms concentrate on process modification rather than new product development. Finally, the firms “display little evidence of inter-firm linkages or linkages with technology institutions and universities” Wignaraja (1998, 206). The failure of Sri Lankan firms to develop new indigenous products has linked them to a cheap-labor, export-led strategy, making them vulnerable to external changes, such as the abolition of the WTO’s Multifiber Arrangement in 2004. There would appear to be obvious parallels between the Sri Lankan focus on cheap garment exports under the Multifiber Arrangement and the Caribbean banana exporters’ reliance on the E.U. protocol, which has been found to violate WTO procedures. The failure to diversify into other value-added production and service activities in Sri Lanka and the Caribbean makes both regimes dependent on resource-based exports within the quasi-protectionist WTO regime and the European Union, respectively. As movement toward government trade liberalization continues under the WTO and regional agreements, these small open economies will become more vulnerable to world market forces and will need to follow the models of Chile and Mexico, absorbing major adjustment costs in order to restructure and reinvest in new, globally efficient, businesses. Barclay’s research (1998) is the first work using the modern theory of international business to assess empirically the contribution of FDI to the developing Caribbean economies of Trinidad, Barbados, and Jamaica. Examining a full sample of FDI in these three economies, Barclay also conducted interviews with managers of foreign-owned MNEs in this area. The findings are also relevant to the smaller economies of the Pacific and Africa, and possibly to the developing economies of Eastern Europe. All of these economies are similarly preoccupied with the benefits and costs of FDI, and most of them lack Barclay’s understanding of modern theory. Barclay includes all the MNEs involved in FDI in the Caribbean in her study: 139 foreign MNEs (in Jamaica, Barbados, and Trinidad and Tobago), 25 of which operate in at least two of the three countries. She sent out questionnaires and also conducted interviews with a large number of managers and other stakeholders. Barclay used these impressive and comprehensive data to test the modern theories of FDI as they apply in the Caribbean. Of particular interest are her findings on the robust nature of internalization theory (Rug-

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man 1981) and the eclectic paradigm (Dunning 1980). She finds that a version of the “double diamond” model (Rugman and D’Cruz 1993) is a very useful explanation of FDI in these three Caribbean countries. Barclay’s work (1998) is one of the most detailed and rigorous studies published in the field of international business, and it sets new standards for research work on the economics of developing nations. The application of strategic management thinking to the economic development experience of East Asia is well known. As demonstrated by analysts of Asian business systems such as Amsden (1989), Whitley (1992), Gerlach (1992), and Rugman and Boyd (1999), the “group” system has been the predominant and successful mode. In Japan it is the keiretsu system; in Korea, the chaebol; in China and the overseas Chinese economies of Singapore and Hong Kong, it is a looser “family-clan” system of enterprise control. From the viewpoint of internalization theory, all three systems can be explained by a transaction cost approach. If internal markets for capital, labor, and intermediate products (such as knowledge) are less than perfect, then there is an economic rationale for the firm (or “group” system in this institutional context) to replace the market. The first writer to apply this Coase-Williamsontype thinking to the group system in East Asian countries was Nathaniel Leff (1976). The interesting variance from internalization thinking, which argues that international market imperfections lead to the MNE (Rugman 1981), is that the groups result from imperfection in internal domestic markets rather than in international ones. The international aspect, in terms of management strategy, comes into play as these groups (in small open economies such as Korea, China, or even Chile) seek access to triad markets. This takes us back to the critical strategic issue of asymmetry in market access for small open economies, relative to triad-based MNEs. We now turn to an evaluation of the literature on the economic contribution of MNEs to developing countries. This will help us make generalizations about the appropriate role of strategic management thinking as it relates to public policy, using the empirical evidence cited above in this section.

MNES AS ECONOMIC AGENTS FOR DEVELOPMENT

A basic premise is that the theory of the MNE applies equally well to MNEs based in developing countries as to those based in the triad. It has been demonstrated elsewhere (Rugman 1981) that the MNE is explained by internalization

Multinational Strategies and Development

theory. Although this statement was made for large triad-based MNEs, it is just as appropriate for the MNEs based in small open economies. The MNE is a producer of goods or services; it employs local workers; it may or may not use local capital; and it markets its output mainly in the host nation. Yet all of these purely economic activities are the result of normal cost-conscious business decisions; they are not directly related to the economic goals or political aspirations of the host nation. The MNE’s primary interest as a good corporate citizen is keeping a good business partnership with stakeholders such as local consumers, producers, and (in today’s regulated world) political figures, as well as civil society and NGOs. MNEs in small open economies have the same responsibilities to their shareholders as do their counterparts in the United States, Europe, and Japan. The MNE is obliged to operate in an efficient manner, that is, to maximize profits, subject to relevant local cost conditions. It can use its internal market to exploit an FSA abroad, and it cannot neglect the risks of alternative contractual arrangements when it makes a foreign investment decision. If the host nation chooses to impose excessive regulations on the MNE, the firm is forced to consider alternative locations in order to minimize costs. The social and political objectives of the host nation, as reflected in its controls and regulations on the MNE, may sometimes force the MNE to an alternative site or cause it to cancel or postpone its foreign investment. To that extent, there is a potential conflict of interest between the nation-state and the MNE. Yet the MNE is a regulation taker, not a regulation maker, and its dependence on the whim of local political leaders will make it risk averse in its choice of location. Thus, political risk and the perception of social, cultural, or psychic distance are the major elements in the information cost set of the MNE. We take up these issues in chapter 6. It can be hypothesized that the key FSA of MNEs in small open economies lies in resource management. The full array of management skills starts with the choice of cost or niche strategy but also expands along the value chain to include production and global marketing skills. The traditional reliance on the extraction of minerals or the harvesting of agricultural products is not enough to generate an FSA. Rather, these are CSAs, or location factors, using Dunning’s terminology (1980). This new FSA builds on the efficient utilization of technology required for resource-based industries and links it to sales and marketing skills. Thus the largest set of MNEs is in the resource sector or in a cluster related to this sector. The core skill of the MNE lies in its ability to assemble a package of FSAs in resource management and to use them for worldwide

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sales, overcoming obstacles placed in the way of distributing these resources. Such obstacles are usually created by government regulations, tariffs and nontariff barriers, effective tax-rate differentials, and other market imperfections. Market access (and overall marketing and management skills) is critical to the success of firms in developing countries. Recent management research on the role of MNEs in developing markets has examined the role of “groups” in Korea, Chile, India, Indonesia, and other countries (Ghemawat and Khanna 1998). The theoretical basis for this work goes back to the pathbreaking article by Nat Leff (1976) on the nature and organization of groups in East Asia. Testing this theory across Korea is work by Khanna and Palepu (1997), which found that the Korean chaebols emerged because of the market imperfections that existed in the Republic of Korea in the 1960s, when it was a developing economy. These imperfections existed in the markets for labor, capital, and intermediate goods (such as knowledge). Business groups offer risk diversification benefits in response to such market imperfections. This thinking is a straightforward application of internalization theory, as proposed also in Rugman (1981). Khanna and Palepu (1997) also found that the chaebol is an efficient organizational form and that it has been an engine for the economic development of the Republic of Korea. Their findings are broadly consistent with those of Amsden (1989) and Whitley (1992), who note that large business groups dominate in the developing markets of Asia. Business groups exist not only in Korea but also in Chile, Indonesia, and South Africa. The role of business groups in Chile and India is discussed in Khanna and Palepu’s work (1999a, 1999b). The role of business groups as agents for risk diversification and intermediation did not decline over the 1987–1997 period in Chile, nor over the 1990 –1997 period in India. One interpretation is that despite government movements toward both deregulation (in primary markets) and trade liberalization, many market imperfections remain in these economies, and thus there is a continuing need for intermediation by business groups. One basic part of their work is the finding that the institutional context matters. Economic development does not depend just on economics. The successful business enterprises that emerge will be embedded within the social, political, and cultural context of their countries and regions. This is the focus of the next three chapters. The profits of MNEs in small open economies are in line with those of MNEs from other nations such as the United States, Japan, and many European countries (Rugman 1981). The distinctive feature of MNEs in

Multinational Strategies and Development

small open economies is that they are resource intensive, but their embodiment of this CSA does not permit them to earn excessive profits. In the process of operating as MNEs, firms provide indirect economic benefits to their home countries. The economic impact of U.S. multinationals has been studied by many authors. One of the earliest comprehensive studies is that of Bergsten, Horst, and Moran (1978). Frank (1980) extended this work. A similar study by Langdon (1980) examined the impact of Canadian MNEs on developing nations. One of the indirect economic benefits of MNEs is that they substitute for free trade, which is otherwise denied by tariffs and related market imperfections. In this manner, MNEs help the balance of payments. Similarly, there are indirect effects on employment, tax revenues, industry structure, competition, and so on. These effects can be measured only by a social benefitcost analysis; yet, as argued elsewhere (Rugman 1980), such an analysis itself confuses equity with efficiency considerations. Internalization theory predicts that the MNEs are transferring their newest technologies overseas through affiliates (where the risk of dissipation is reduced) and using licensing or joint ventures only at a later stage in the life of the technology, when it is becoming a more standard product. Internalization theory also predicts that the newer technologies will go first to developed countries, since they may well be inappropriate or costly to adapt in developing countries. Only at a later stage is it profitable for MNEs to transfer technology to developing nations; yet such transfers do indeed take place and the MNEs’ internal markets achieve this worldwide transfer of technology without any help from governments (Rugman 1981). Traditional economic-based public policy toward MNEs sometimes confuses efficiency and equity objectives. The governments of other advanced, and most developing, nations also fall into this trap. All governments have a propensity to favor protective devices such as tariffs, quotas, exchange controls, export subsidies, and so on for some particular pressure group within their society. In this world of government-imposed market imperfections, the MNE is an organization with enough market power to bypass many of the regulations imposed by governments. Its success in arbitraging the imperfections of national markets is remarkable. The emergence of MNEs in developing small open economies is entirely predictable given the imperfect nature of today’s world economy. MNEs in developing small open economies are responsible for some alleviation of the loss of world welfare that might otherwise be experienced by the continuation and even extension of protective measures and restrictions by

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most nations. The MNE is not a complete substitute for free trade, but it is an organization with a remarkable degree of adaptability. The creation of internal markets by MNEs, to some extent, makes up for the closed markets imposed by restrictive government policies. These efficiency aspects of MNEs represent the underlying focus for their strategic management.

ASYMMETRIC BUSINESS STRATEGIES

In this chapter, we identify an operational paradox in prior characterizations of the concept of national responsiveness. The asymmetrical strategic framework suggests that managers in small open economies can rarely achieve success in the triad markets without being nationally responsive, whereas triad managers, on average, can get by without national responsiveness when doing business in small open economies. The reason, of course, is that triad managers can choose a cost or differentiation strategy and beat the average competitor on a triad basis, virtually ignoring the marginal impact of the small open economy, which is of relatively trivial economic size. A successful triad business rolls out the product across various regions in sequence, and it treats a small open economy as a minor end-of-production-line region. The WTO reinforces this strong singlediamond, home-base, strategic vision. None of this is as easy for small open economy managers doing business in the triad. Not only do they still need to beat the average competitor on cost or differentiation margins, but they also need to overcome discretionary entry barriers to the triad markets. Such entry barriers can arise when discriminatory measures are introduced by triad governments, often at the behest of triadbased private sector rivals; examples are the petitions for the use of WTO tradelaw remedies against alleged subsidies of Caribbean bananas and related agricultural products. Firms in small open economies will find it becomes essential to develop a strategy of national responsiveness. Indeed, a firm that lives by the Porter cost or differentiation strategy alone will invite retaliation by its triad rivals, and if triad firms lose home market share to a firm from a developing country, then the application of punishing trade laws becomes almost inevitable (Rugman and Anderson 1987). A related issue is whether the competitiveness of companies in small open economies is weakened or enhanced by relocating critical value chain activities to the triad. Porter (1990) would argue that the core competitive advantage of such a company must be drawn from the small open economy cluster of the

Multinational Strategies and Development

home-base diamond. Although it would be theoretically simpler if this could occur, in practice we observe that virtually all resource-based manufacturing and service companies in small open economies rely on access to the triad markets for the success of their businesses; for example, on average, the great majority of sales of resource-based and labor-intensive products occur in triad markets. Given this dependence on the triad markets, the contingent location of production and distribution in the triad, instead of in small open economies alone, can never weaken the performance of firms in small open economies, since the alternative is to lose access to the triad markets and go out of business. This is why the neoclassical economics framework of social benefit-cost analysis to evaluate FDI process is of limited value from the viewpoint of strategic management. The correct counterfactual is not investment, jobs, R&D spillover, profits, or other economic attributes in the triad as opposed to the small open economy. Instead, it is a competitive business operating in a home cluster, or across the oceans (in both cases with the majority of sales in the larger triad markets), versus no business operating in the small open economy at all.

SUMMARY POINTS

In this chapter we explored five major themes: first, the strategies of indigenous small and resource-based MNEs in developing economies that need triad market access; second, the asymmetries in the strategies of firms in developing economies compared with the strategies of managers of MNEs with a large triad home base; third, the consequent modifications in strategies required by managers in developing small open economies; fourth, the role of FDI and the contributions of foreign-owned firms to developing economies, with particular reference to firm strategies and flagship firm linkages and networks; and fifth, the importance of potential business-government relationships, within the complex managerial nature of flagship and business networks, business groups, and clusters in developing economies, that may have positive impacts on the status of the MNE in developing economies and the development process itself. We examined the business strategies of MNEs and the relationship of MNEs to economic development, with a special focus on firms in small open economies, using the logic of the basic FSA-CSA matrix of figure 3.1. In the next three chapters, we turn to the implications of figures 3.2 and 3.3, which consider the “social triangle” in which governments and NGOs appear as key actors affecting development, as well as MNEs. This chapter has provided the

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foundation for such work on the complexities of the multiple interactions among the three actors. It will allow us to consider why corporate social responsibility is a win-win strategy for all three actors: MNEs, NGOs, and government. In general, the business strategies of MNEs are determined in an interdependent manner, along with the actions of governments and NGOs. Subsequent chapters on MNEs (specifically chapters 7, 8, and 9) will reflect these complexities.

Chapter 4 The Role of

International Institutions

THE INTERNATIONAL ECONOMIC SYSTEM AND DEVELOPMENT

Since the founding of the modern international economic system at the Bretton Woods conference in July 1944, the World Bank, the IMF, and the GATT (since 1995, the WTO) have played a pivotal role in advancing the process of development. The summary of agreements from July 22, 1944, states, “The nations should consult and agree on international monetary changes which affect each other. They should outlaw practices which are agreed to be harmful to world prosperity, and they should assist each other to overcome short-term exchange difficulties” (U.N. Monetary and Financial Conference 1944, par. 3). The International Bank for Reconstruction and Development (IBRD) —part of the World Bank—was created to accelerate postwar reconstruction, to aid political stability, and to foster peace. The IMF was established to help stabilize economic relations among countries and to provide support for countries experiencing balance-of-payments problems or other economic pressures. Later, the GATT was developed as an agreement in lieu of an international trade organization 59

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(which was too politically problematic) to oversee the successive liberalization of trading and investment relations among countries. Since this book is not meant to be a history of the modern international economic system, we will focus on recent developments in these institutions related to the goal of facilitating economic development by leveraging private investment in the developing world. In the 1980s and 1990s, both the World Bank and the IMF came under pressure to reform. During the 1980s, World Bank, and especially IMF, assistance shifted from financing investment to promoting policy reform, since it was believed that low-income countries were held back more by weak policies than by lack of investment. Yet some of this policy-oriented lending was viewed as too rigid and prescriptive; indeed, some have argued that IMF conditionality exacerbated the Asian economic and other crises. At the end of 1999, the IMF and the World Bank developed a new framework for their support of low-income countries in Africa and elsewhere: the “poverty reduction strategy” approach. This new approach was meant to focus more clearly on economic growth and poverty reduction. Increasingly, MNEs are involved both directly and indirectly in the activities of multilateral institutions and agreements. MNEs are instrumental in influencing and shaping the many trade and investment agreements that have come into force over the last decades. MNEs are also involved in World Bank and IMF financing, especially financing provided by the International Finance Corporation (IFC), the private sector arm of the World Bank, and the analogous divisions of the regional development banks. MNEs are also taking a greater role in the emerging strategies to combat poverty as part of the process to achieve the Millennium Development Goals. In this chapter, we review the historic evolution of the multilateral economic agreements and institutions established in the post–Bretton Woods environment (the GATT, the World Bank, the IMF) and assess their contribution to development. We also review the role of regional institutions—the European Bank for Reconstruction and Development (EBRD), the Inter-American Development Bank (IDB), and the Asian Development Bank (ADB)—and regional agreements (for example, NAFTA) on development. We address the prospects of the Doha Development Round of the WTO and the progress and future impact of the Millennium Development Goals. Finally, we extend the framework introduced and developed in chapters 2 and 3 and apply it to the growing role of multinationals in the international trade and international development agenda.

Role of International Institutions

THE GATT, THE WTO, AND DEVELOPMENT

International trade dates back hundreds of years. However, after World War II, it became more organized and encompassed many more nations. The GATT was created at Bretton Woods in 1944 to increase the living standards and contribute to full employment through reciprocal and mutually advantageous arrangements directed to the substantial reduction of tariffs and other barriers to trade and to the elimination of discriminatory treatment in international commerce (Irwin 1995). Since then, the nation-state members of the GATT have participated in eight rounds of trade negotiations (excluding the Doha Round) described below and summarized in table 4.1. The first round was held in Geneva in 1947 and included twenty-three countries. The first round was significant since it resulted in the signing of a traderules deal affecting $10 billion of trade or one-fifth of the world’s total (WTO b). The biggest tariff cut was implemented by the United States—35 percent, on average (Irwin 1995). The second and the third rounds were not as successful in terms of decreasing tariffs; however, they did result in an expansion of GATT membership to thirty-eight countries. The Geneva Round and the Dillon Round continued the reduction in tariffs and the limited reduction in nontariff barriers. The sixth round, or the Kennedy Round, was very important

Table 4.1 Completed rounds of negotiations under the GATT and the WTO Year 1947 1949 1951 1956 1960 –1961 1964 –1967 1973 –1979 1986 –1994

Source: WTO b.

Place (name) Geneva Annecy Torquay Geneva Geneva (Dillon Round) Geneva (Kennedy Round) Geneva (Tokyo Round) Geneva (Uruguay Round)

Subjects covered

Countries

Tariffs Tariffs Tariffs Tariffs Tariffs

23 13 38 26 26

Tariffs and antidumping measures Tariffs, nontariff measures, “framework” agreements Tariffs, nontariff measures, services, intellectual property, dispute settlements, textiles, agriculture, creation of WTO

62 102 123

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Role of International Institutions

for the GATT. It not only resulted in significant tariff reductions but also set up the Tokyo Round which achieved broad tariff reductions. The Uruguay Round was the longest and most comprehensive round. Its agenda included reducing the tariffs on industrial products, reducing or eliminating nontariff barriers, creating new rules for the trade of services, and negotiating new intellectual property protection. However, one of the most significant results of the Uruguay Round was the creation, in 1995, of the WTO, which is the successor to the GATT. The WTO is located in Geneva and as of December 11, 2005, had 149 members accounting for 97 percent of world trade (WTO g). It is the only worldwide organization that deals with the rules of trade between nations, but it has a relatively small secretariat to administer its work. The WTO’s main objective is to ensure that trade flows as smoothly, predictably, and freely as possible and in so doing, to improve the welfare of the participating countries. The most recent negotiations were the Doha negotiations, which began in 2001 in Doha, Qatar. The WTO has six principal responsibilities: administering trade agreements, settling trade disputes, acting as a forum for trade negotiations, reviewing national trade policies, assisting developing countries with trade policy issues, and cooperating with other international organizations (WTO e). In terms of structure, the WTO consists of the ministerial conferences that meet every two years, the General Council, and various specialist committees. The WTO dramatically expanded the scope and authority of the GATT in terms of resolving disputes among trading countries, incorporating trade in services such as international telecommunications service, protecting intellectual property rights, and erecting a system for ruling on antidumping, subsidy, competition policy, and investment issues (WTO d). The WTO has, as part of broader antiglobalization pressures, come under fire for a host of sins. Critics argue, inter alia, that it is antidemocratic, beholden to MNEs, still dominated by the industrialized countries—notably the United States—and hostile to environmental, labor, and broader social interests. These accusations have proved to be largely overblown; however, the WTO has recently developed a more aggressive outreach to civil society and NGOs, and has made its deliberations much more transparent by, for example, posting all the substantive exchanges related to dispute settlement procedures on its Web site as they become available. One of the most recent developments regarding the WTO is the advancement of both Russia and Vietnam in their negotiations to join the organization.

Role of International Institutions

Russia had been negotiating its entry for thirteen years, and entered the final stage of the negotiations in late 2006. Some of the reasons for the delay were disagreements with the United States related to access to the Russian markets for farm goods, aircraft, and financial services. Additional concerns were raised over Russian protection of intellectual property and control of the oil and gas sector (Reuters 2006). Before joining the WTO, Russia agreed to undertake a more aggressive program to fight piracy and counterfeiting. On November 11, 2006, the United States and Russia announced that they had reached agreement on the remaining issues for resolution prior to Russia’s accession. On October 26, 2006, trade negotiators approved Vietnam’s admission into the WTO. The official approval was announced on November 7, 2006. As in the case of Russia, there are conditions to Vietnam’s joining the WTO. For example, Vietnam will have to allow foreign banks to incorporate wholly owned subsidiaries, reduce import duties, and eliminate textile industry subsidies (Bradsher 2006). After Vietnam and Russia join the union, the biggest countries that have not yet done so will be Iran and Ukraine.

THE WORLD BANK AND THE IMF

In June 1944, the IMF and the World Bank were established in Bretton Woods, New Hampshire, as part of the postwar conferences. The two organizations were established in an effort to create a new monetary and development system after World War II. The objective of the IMF was to create stable exchange rates, promote monetary cooperation between nations, and act as a last-resort lender for countries that are entering a crisis. The IMF quota system, in which each member country is required to make a contribution (called a “quota”) depending on the size of the country relative to the global economy, provides the basis for decision making and the allocation of funds. The higher the quota, the greater the amount of funds a country can borrow from the IMF. Similarly, the larger the country is relative to the global economy, the more voting power a country is allocated (Kapur 1998). IMF funds are used to support countries facing financial crises. When a member country experiences difficulties paying its quotas and needs to increase the amount of its loans, the IMF imposes requirements that that country must meet. Such requirements typically involve changes in the country’s economic policy to prevent further increase in its deficit—programs broadly termed “conditionality.” If members do not meet the requirements, they might be asked to leave the fund (Kapur 1998). The IMF has been criticized for its

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approach to economic crises and its own governance system. Specifically, the quota arrangement, established some fifty years ago, has not kept up with changes in the balance of global economic power. In 2006, the U.S. government argued for changing the system so that China and other large emerging markets would have larger quotas and those countries whose relative global economic contributions are declining (for example, Europe, Japan) would have smaller quotas. The World Bank was established to help the less-developed countries improve their welfare and move toward more-developed global economies. In short, the bank’s goal is to reduce poverty worldwide. The World Bank offers low interest loans, interest-free loans, and most importantly, grants for education, health, fighting corruption, and other purposes (World Bank a). The World Bank consists of the IBRD and the International Development Association (IDA). The IBRD focuses primarily on middle-income countries, whereas the IDA focuses on the poorest (but creditworthy) countries in the world. The World Bank currently includes 184 members. Box 4.1 summarizes the principal areas of activities of the World Bank. More broadly, the World Bank Group, which has several affiliates, includes the Multilateral Investment Guarantee Agency (which insures international investments), the International Centre for Settlement of Investment Disputes, and the IFC. The IFC often serves as a catalyst for private sector involvement in major projects, in that its participation commitment signals to private investors that projects meet both financial and development goals (World Bank b). An example of the important role of the IFC—and private investment—can be seen in the Mozal Project (see box 4.2). Recent analysis of the work of the World Bank and the IMF has often been critical. A major issue is the lending process of both the IMF and World Bank. Harrigan, Wang, and El-Said (2006) claim that the lending process in the Middle East and North Africa is based not on a country’s economic need but on other factors such as donor interest. They argue that both the IMF and the World Bank make their lending decisions to best satisfy their shareholders, especially the United States. Furthermore, the shareholders’ interest determines both the countries that receive loans and the loan terms (Harrigan, Wang, and El-Said 2006). Their research focused on five countries—Algeria, Jordan, Morocco, Tunisia, and Egypt. Of all five countries, only Jordan in the late 1980s and Egypt in mid-1970s seemed to be in financial need. However, all of these countries have received consistent funding. Harrigan, Wang, and El-Said (2006) provide examples of the country actions, and the fund and the bank reactions

Box 4.1 World Bank areas of focus

Education. Since 1963, when the World Bank started giving money for education, it has transferred about $36.5 billion for education. The bank’s goal is to ensure that young children receive a quality education. The World Bank is also working toward closing the gender gap in countries such as India. For example, the goals of the India Elementary Education Project are to make the elementary school available to all children in need between the ages of six and fourteen years old, to improve the quality of education, and to close both the gender and the social gap by 2010. Health. The World Bank is very active in creating awareness about HIV/AIDS and fighting the virus worldwide. The virus has affected Africa the most, and the situation in Africa is currently the main concern. To help fight the virus, the bank allocated more than $1.8 billion in the past five years to create awareness, and for prevention and treatment. Corruption. The World Bank is the largest organization in the world fighting corruption. The World Bank is very careful when funding projects and is financing projects that are free from corruption. About 350 companies and individuals have been banned from projects that are financed by the bank. Debt Relief. Twenty-eight countries currently receive debt relief, which should account for $56 billion over time. The first global effort to reduce the debt of the poorest countries is the Heavily Indebted Poor Countries (HIPC) Initiative, which has provided debt relief to countries such as Nicaragua, Bolivia, Mozambique, Honduras, and Somalia. The initiative has, for example, helped Honduras deliver basic healthcare to 100,000 people and Cameroon fight the HIV virus by educating people about prevention. Other. In addition to the areas above, the World Bank encourages biodiversity projects to protect endangered species, helps create infrastructure and provide clean water in poor countries, and helps postwar countries emerge from the crisis. Source: World Bank a.

Box 4.2 The Mozal project

The Mozal project was the first major foreign investment project in Mozambique. In 1997, the International Finance Corporation approved a total of $120 million in loans toward the first project, Mozal 1, which was to build an estimated $1.36 billion greenfield aluminum smelter near Maputo, with annual production capacity of 253,000 tons of primary aluminum ingots for export. Mozal 1 was completed six months ahead of schedule and under budget. Aluminum production began in June 2000, a time frame that is believed to be a world record for a smelter of its size. The smelter is on a site measuring 1.4 million square meters—equivalent to 340 football fields. The project sponsors are BHP Billiton; the Industrial Development Corporation (IDC), a self-financing South African development bank; Mitsubishi Corp., a general trading company; and the government of Mozambique. Subsequently, in 2001, IFC’s board approved an additional $25 million to be invested in Mozal 2, an expansion project to double Mozal 1’s capacity to over half a million tons of aluminum ingots per year. The expansion, scheduled to be completed in October 2003, was also expected to be completed ahead of schedule and under budget. Mozal contributed a great deal in putting Mozambique—still recovering from a devastating civil war—on the foreign investment map, encouraging others to invest in a poor country. It also boosted the economies of Mozambique’s major trading partners, South Africa, Swaziland, and Australia. The project has had a very positive impact on the Mozambique’s economy, both directly and indirectly. In 2001, Mozal generated 55 percent of Mozambique’s exports and accounted for approximately 8 percent of its gross domestic product. Other net direct benefits to the government will accrue through a revenue tax. The project has also generated significant local linkages. Mozal 1 created full-time jobs for 745 people, of which 88 percent were Mozambican. Mozal 2 created about 3,039 jobs on-site during construction, approximately 70 percent of which were filled by Mozambicans. Mozal’s employees are paid approximately six times the legal minimum wage, one of the highest wages in Mozambique. Workers have also received substantial training and have developed into highly skilled industrial workers. Mozal has contracted with a number of companies

Role of International Institutions

Box 4.2 Continued

for a variety of services such as transportation, catering, cleaning, and security. At least 400 non-Mozal staff are employed on-site to provide these services. Mozal spends approximately $35 million annually with these private local companies. Mozal has also initiated a Graduate Development Program aimed at exposing participants in the program to heavy industry and process facilities that are of a world-class standard. The work continues to channel resources to local small and medium enterprises and the local community, Mozal developed two other significant programs, the Mozal Community Development Trust (MCDT) and the SME Empowerment Linkage Program (SMEELP). Sources: International Finance Corporation 2002 and Morrissette 2000.

to them. For example, when Jordan refused to take a position in the Gulf War and support the United States and its Arab supporters, the flow of financial aid rapidly decreased. Similarly, when Jordan started negotiating its initiative for peace with Israel, the country received two grants to support its economy (Harrigan, Wang, and El-Said 2006). An important implication of the Harrigan research is the potential for social dissatisfaction to transform into social and political crisis. Further, this historical focus on “donor interest” rather than need suggests a policy of allocating more funds to “less needy” countries and fewer resources to countries truly in need. Recently, the IMF and the World Bank have shifted focus to the poorest countries among the developing economies. As more private capital has flowed to the middle-income countries (table 4.2), there is growing need for development finance for the poorest countries. Critics claim that the lending practices of the IMF and the World Bank have been unfair to the poor countries and have resulted in limited growth or even no growth at all. Since one of the goals of both institutions is to encourage growth, some researchers analyzed the growth of countries that received World Bank or IMF loans. Butkiewicz and Yanikkaya (2005) argue that IMF lending has a negative effect on country growth, whereas World Bank lending may result in increased growth in some cases. The research conducted with one hundred developing countries indicates that IMF lending did not stimulate growth. However, World Bank credits were shown to increase country growth by increasing public investment (Butkiewicz and Yanikkaya 2005). Similarly,

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Table 4.2 Private capital flows to low- and middle-income countries (millions of U.S. dollars) Year

Low-income countries

Middle-income countries

1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

951 1,391 1,757 2,054 2,576 4,229 3,355 3,454 5,175 4,954 6,571 7,644 9,766 8,225 4,758 4,363 5,268 6,495 9,097 8,922 6,820 8,337 10,347 11,223 20,065 20,049 30,873 25,464 7,539 3,008 4,741 6,473 7,151

7,483 5,198 7,787 9,817 12,087 21,993 21,384 28,134 34,821 41,708 41,258 61,992 55,195 32,741 34,502 23,493 18,810 21,039 28,296 27,124 36,872 47,465 83,145 147,904 147,153 156,294 211,363 252,396 261,637 213,785 175,260 167,698 146,680

Source: World Bank 2004. Note: Private capital flows, net total, consist of private debt and nondebt flows. Private debt flows include commercial bank lending, bonds, and other private credits; private nondebt flows are foreign direct investment and portfolio equity investment.

Role of International Institutions

Dreher (2006) argues that in terms of creating growth, the IMF programs are a failure. Khan (1999) published a set of technical economic papers dealing with aspects of structural adjustment in Pakistan, arguing that IMF conditionality and the misguided approach of the World Bank have been detrimental to Pakistan’s growth and development. Missing from this analysis is an acknowledgement of the domestic political and institutional constraints imposed by the Pakistani government, which has been plagued by corruption, inefficiency, and conflict. We return to these issues in chapter 6.

REGIONAL AGREEMENTS, INSTITUTIONS, AND DEVELOPMENT

In the previous section, we focused on global institutions and agreements. In this section, we turn our attention to agreements and institutions on a regional level, consistent with our earlier argument that trade and investment—as well as economic development—are conducted primarily at the regional level. The primary focus of this section is on recent developments in the European Union, NAFTA, the Southern Cone Common Market (MERCOSUR), and other Latin American trade agreements. We also explore several agreements in Asia and Africa, such as the Asia-Pacific Economic Cooperation (APEC) forum and the Association of Southeast Asian Nations (ASEAN). We also briefly describe the role of the regional finance institutions and their role in development. Europe and the European Union

The formation of the European Union is considered one of the foremost examples of regional integration. The European integration started in 1958 with the establishment of the European Economic Community. It later became the European Community (1980) and finally the European Union in 1992. The goal of the European Union was to eliminate all trade barriers between the members in a twelve-year period. The European Union has undoubtedly increased trade between member countries. The dynamic trade development has required the negotiation of new agreements, such as those for computer research and space research ( Jain 2001). Another effect has been some degree of trade diversion as a result of relative increases in intra-E.U. trade. For the period 1981–2000, trade between the European Union and the NAFTA, ASEAN, and newly industrialized countries actually decreased (Tang 2003). However, some of the APEC subgroups have remained steady in their trade with the European Union. For example, the

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ASEAN countries have been steadily trading with the European Union, whereas the NAFTA and newly industrialized countries have experienced a fairly consistent decrease (Tang 2003). Regional Trade and Investment Agreements

NAFTA, concluded in 1994, is a free trade agreement between the United States, Canada, and Mexico. The primary purpose of this agreement was to increase trade between the three countries and to provide stable economic growth in the region. There were, however, clear political and strategic overtones to the agreement, including reducing historic tensions between the United States and Mexico, identifying important areas for cooperation in light of the challenges presented to the bilateral relationship in the area of narcotics and immigration, and signaling to the multilateral community that regional agreements presented viable alternatives in the event multilateral progress stalled. Although all industrial tariffs and most nontariff barriers were removed by January 1, 2004, agricultural tariffs experienced a slower phase out and will be lifted by January 1, 2008. Trade and investment within the region grew, although NAFTA itself is only part of the story. As Soloaga and Winters point out (2001), trade between the three countries was already deep and intensive, making the incremental gains from NAFTA less significant. NAFTA has resulted in increased exports by Canada and Mexico to the United States; however, the United States has also benefited from both increased access to the Canadian and Mexican markets, the opportunity to rationalize production in North America, and the development of investments in Mexico to take advantage of relatively cost-effective but highly productive Mexican labor. In this way, the comparative advantage of efficient Mexican labor has balanced out the advantages that Canada and United States have in productivity and technology; Mexico and Canada gain from having access to America’s vast markets. Most studies show that NAFTA has had positive effects on the development of, and trade and investment between, members. From 1993 to 2005, annual trade flows between the NAFTA nations grew 173 percent, from $297 billion to $810 billion, reflecting nearly $2.2 billion of trilateral trade that occurs each day in the North American region. Between 1993 and 2005, the United States achieved real GDP growth of 48 percent, U.S. industrial production rose by 49 percent—which is more than the increase achieved between 1981 and 1993—U.S. business sector productivity rose by 36.2 percent, and the annual rate of productivity grew by 24.3 per-

Role of International Institutions

cent. In addition, U.S. employment climbed from 112.2 million in December 1993 to 134.8 million in February 2006, representing an increase of 22.6 million jobs (a 20.1 percent increase) (USTR 2006). In terms of trade between the United States and other NAFTA members, total U.S. exports to Mexico and Canada reached $240 billion in 2004, an increase of $104 billion between 1993 and 2004. However, total imports reached $366 billion in 2004, an increase of $211.3 billion. Although the United States has experienced trade deficits with its partners, Canada and Mexico have experienced large and growing trade surpluses with the United States since NAFTA took effect. These trade surpluses were influenced by several factors: relatively cheaper labor and less costly production in Mexico, the declining value of the U.S. dollar, and the concomitant currency depreciation and resulting decline in relative manufacturing wages in Canada and Mexico. Canada and Mexico have become more attractive locations for plants to produce goods for export to other countries within the region. A rapidly growing capital inflow resulted in a higher amount of foreign direct investment (FDI) flow to both of these countries, especially Mexico. During this period (1993 –2005), Mexico’s real GDP grew 40 percent, and Canada’s grew 49 percent. Aside from NAFTA, several other free-trade agreements and unions have been established among the countries in the regions of North, Central, and South America, and the Caribbean. The Andean Community, incorporating the Andean Common Market (CAM) established in 1992, includes Peru, Colombia, Bolivia, and Ecuador. Among the members of this community, Colombia and Peru both have separate bilateral trade agreements with the United States. Two-way trade between the two countries amounted to $14.3 billion in 2005, and U.S. exports to Peru were more than $2 billion in 2005. The Andean Community also has bilateral trade agreements with MERCOSUR and Caribbean Community and Common Market (CARICOM) members. There is also an agreement between Bolivia and Mexico, and in September 2006, Chile was approved as an associate member of the Andean Community. The Central American Common Market (CACM), which consists of Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua, was established in 1991. MERCOSUR, established in 1991, includes Argentina, Brazil, Uruguay, Paraguay, and Venezuela, as well as associate members Bolivia, Chile, Colombia, Ecuador, and Peru. Established in 1993, CARICOM includes Antigua and Barbuda, the Bahamas, Barbados, Belize, Dominica, Grenada, Guyana, Haiti, Jamaica, Montserrat, Saint Kitts–Nevis, Saint Lucia, Saint Vincent and the

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Grenadines, Suriname, and Trinidad and Tobago. CARICOM has separate bilateral trade agreements with the Dominican Republic, Costa Rica, Colombia, and Venezuela. In 2004, CARICOM countries imported $13 billion in goods and services and exported $8.8 billion (CARICOM). Other trade agreements in the region include those between Mexico and Nicaragua; Mexico and the Northern Triangle (El Salvador, Guatemala, and Honduras); Central America and Panama; Central America, the Dominican Republic, and the United States (CAFTA-DR); Central America and Chile; CARICOM and Costa Rica; and Canada and Costa Rica. There are bilateral trade agreements between MERCOSUR and each member of the Andean Community, Chile, and Mexico. The United States has also implemented bilateral free trade agreements with various countries and communities in the Western Hemisphere, including agreements negotiated or in effect with Chile, Panama, Uruguay, Colombia, and Peru. In August 2004, the United States signed the Central America–Dominican Republic–United States Free Trade Agreement (CAFTA-DR), which will lead to the elimination of tariffs and trade barriers between its members: Costa Rica, the Dominican Republic, the United States, Nicaragua, Honduras, Guatemala, and El Salvador. Once this agreement is fully implemented, 80 percent of U.S. exports of consumer and industrial products to member countries will be tariff free (USTR). In early 2006, the United States signed a free trade agreement with Colombia (U.S. Department of State 2006), although the prospects for congressional approval were put in doubt with the Democratic victories in the 2006 midterm elections. The Free Trade Area of the Americas (FTAA) initiative has been under negotiation for more than a decade. The FTAA would create a regional agreement between countries with combined GDP of $13 trillion and a population of 800 million (USTR 2003). The FTAA process, however, has been fraught with disagreements and setbacks, and it is unclear whether it will ever come to fruition. In 1989, the APEC forum emerged. This loosely structured coalition began with eighteen member countries, including developed countries such as the United States, Australia, and Japan as well as less-developed countries such as Hong Kong, Indonesia, and Malaysia. The goal of all members was to achieve both political and economic integration. APEC defined its mission as bringing “stability, security and prosperity for our peoples” (APEC b). Some of the achievements of APEC are economic growth, foreign-investment growth, new job opportunities, training, and decreased poverty. During the period 1989– 1999, foreign investment increased by 210 percent overall and by 475 percent in

Role of International Institutions

the lower-income APEC countries. GDP per person in the low income member countries increased 61 percent (APEC b). Trade, investment, and increases in income have resulted in improved sanitary conditions, lower infant mortality, and increased life expectancy. Poverty in East Asian APEC counties decreased by a third during the period 1989 –1999. Economic growth and increased investments have helped achieve 195 million job openings over the period, of which 174 million were in the low-income countries (APEC a). The ASEAN agreement was signed in an attempt to integrate the thenundeveloped economies of Indonesia, Thailand, Malaysia, Singapore, and the Philippines. The goal of the agreement was to make it easier for members to trade with each other and to increase access to industries such as technology and tourism. Although in the beginning the growth was slow, the association has shown progress in the past few years ( Jain 2001). The ASEAN Free Trade Area (AFTA) seeks to eliminate tariff and nontariff barriers by 2018. Regional Development Institutions

The EBRD was established in 1991 and is headquartered in London. Since its establishment, it has helped many former Communist countries in Europe and Central Asia build market economies. The bank has sixty member countries (EBRD). In 2005 the EBRD invested in 151 projects totaling EUR 4.3 billion, an increase from EUR 4.1 billion the year before (EBRD 2005). The EBRD projects report shows that the majority of the funding is provided in support of the private sector. By investing in local business, the bank promotes social and economic development from within. In addition, with the growth of the private sector, recipient countries will become more attractive for foreign investors— as we have argued, a key catalyst for development—and ultimately will become less dependent on the EBRD. The IDB was established in 1959 to help Latin American and Caribbean countries accelerate economic development. Currently, the IDB has fortyseven members, including sixteen European countries and twenty-eight countries from the Western Hemisphere, as well as Israel, Japan, and Korea. The IDB supports development primarily by providing funds for areas such as tourism, small enterprises, transportation and communication, education, and trade (IDB 2005b). The IDB has an affiliate organization, the Inter-American Investment Corporation (IIC), which is the regional analogue of the IFC; that is, its financing is directed at private-sector investments. In 2004 the IIC approved thirty-one loans totaling $164 million. By comparison, in 2004 the IDB

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overall approved loans totaling $6 billion (IDB 2005b). The reason for IDB support of the private sector is twofold. First, providing support to small and medium-sized enterprises makes people more willing to start their own businesses and better able to support themselves and their families. Second, helping private business promotes economic activity, which in turn helps grow the economy and reduce poverty. Since 1978 the IDB has approved more than $1 billion for microenterprise development (IDB 2006a). A recent trend supporting Latin American economies is migrant remittances. According to a 2006 report by the IDB, the money sent from Latin American migrants working in the United States to Latin America will reach $45 billion in 2006. This represents a 50 percent increase since 2004, when the amount was $30 billion (IDB 2006b). Therefore, remittances are becoming an increasingly important source of income for people in developing countries. Louis Alberto Moreno, the IDB president, has said that the increasing amount of migrant remittances is “proof of migrants’ strong commitment to family and community.” Since the trend is predicted to continue in the future, the IDB is trying to encourage banks to offer better services for this particular market. For example, one successful initiative has led to a drastic reduction in fees for a $200 bank transfer to Latin America (IDB 2006b). In addition to providing loans to a variety of areas, the IDB is very active in helping to achieve the Millennium Development Goals; for example, the IDB has provided $82 million of debt relief so that governments can use the funds for social programs, loans for poverty reduction programs, and education about the goals through conferences (IDB 2005a). The African Development Bank was established in 1964 and comprises fiftythree African and twenty-four non-African members. The bank’s goal is to promote economic and social development in Africa through loans and equity investments. Some of the main areas of concentration are fighting HIV/AIDS, combating poverty, and improving people’s lives. The bank’s commitments total $53 billion (African Development Bank 2006). The Asian Development Bank was established in 1966, and its focus is on helping development in Asia and the Pacific countries. Like other development institutions, the bank helps countries in need with loans, technical assistance, grants, and equity investments. The bank is headquartered in Manila, Philippines (Asian Development Bank).

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THE DOHA DEVELOPMENT ROUND OF THE WTO

Historically, the WTO has served as a bargaining forum among the triad economies; the United States and the European Union have played the most active role in its activities. Japan, China, and other Asian nations have been less important in shaping the agenda of the WTO. Developing countries, many of whom have been members of the WTO for decades, have not been important leaders in shaping its policies, but they have undoubtedly benefited from free trade and enhanced access to the richer triad markets. For most of the morethan-fifty years of the GATT, the United States provided leadership in setting an agenda of trade liberalization, first by reducing tariffs on goods and, in the Uruguay Round, by starting to address nontariff barriers to trade and services (Hoekman and Kostecki 1996). The major postwar supporters of the U.S. led drive for world trade liberalization have been the United Kingdom and smaller rich trading nations such as Canada, Australia, and New Zealand. In November 2001, members of the WTO gathered for the Fourth Ministerial Conference in Doha, Qatar. At this gathering, several issues regarding world trade and development were discussed, including, for the first time, a very explicit commitment to making trade liberalization benefit the process of development. This agenda, in turn, constituted the principal focus of the Doha Development Round of trade negotiations. The round included a specific focus on agricultural issues, notably, improving market access for agricultural goods, reducing subsidies, and exporting agricultural goods. The round also addressed issues of special and different treatment for developing countries, market access for nonagricultural products through elimination of tariffs, liberalization of trade in services, and the “Singapore issues,” which include trade, investment, government procurement contracts, and conditions governing competition. Of particular importance is that the agenda prioritized the concerns of developing countries. These countries, which now account for about three-quarters of WTO members, are carrying increasing weight in the organization. The commitment to having developing countries play a more active role in the round is also thought to create a more business-friendly legal framework and improved market access for foreign investors, conditions that will also lead to a better development strategy. At the initial summit in Doha, Qatar, WTO members agreed to a review of progress in the talks in Cancún, Mexico, in 2003.

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The goal of the Cancún meeting was to examine and review the progress of negotiations, make necessary decisions, and take action to move the discussions forward. However, the Cancún talks ended without an agreement, as delegates from many developing nations (the G20⫹ developing-country alliance, led by Brazil and India) objected to the refusal of the European Union, in particular, to commit to lowering its agricultural subsidies. As a result of the G20⫹ talks, the WTO failed to achieve a new global trade agreement by the self-imposed deadline of January 2005; the date was unofficially pushed to the end of 2006 (WTO a). In December 2005, at the Sixth Ministerial Conference in Hong Kong, the progress made since 2003 was assessed, but although there were certain areas of movement, there was much more to be done in terms of lowering trade barriers in farm and manufacturing goods and services, with a focus on developing countries (WTO a). However, in July 2006, the Doha development negotiations were suspended because gaps between key members of the WTO remained so wide that the members could not reach an agreement on particular issues (WTO a)—namely, market access and domestic support of agricultural goods—and because of disagreement on taking the negotiations to a further stage. Since the negotiations have been stuck in one phase and an agreement hasn’t been reached, the Doha Round of negotiations has been put on hold. WTO director-general Pascal Lamy has committed to resume negotiations only when the negotiating environment is right (WTO a).

THE MILLENNIUM DEVELOPMENT GOALS

In September 2000, at the U.N. Millennium Summit, world leaders agreed to a set of time-bound and measurable goals and targets for combating poverty, hunger, disease, illiteracy, environmental degradation, and discrimination against women. Placed at the heart of the global agenda, they are now called the Millennium Development Goals (United Nations 2006a). The summit’s Millennium Declaration also outlined a wide range of commitments in the areas of human rights, good governance, and democracy. At the International Conference on Financing for Development in Monterrey, Mexico, in 2002, leaders from both developed and developing countries started to match these commitments with resources and action, signaling a global deal in which sustained political and economic reform by developing countries would be matched by direct support from the developed world in the form of aid, trade, debt relief, and investment.

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Table 4.3 Millennium Development Goals and corresponding targets Goals

Target

Goal 1: Eradicate extreme poverty and hunger

Halve, between 1990 and 2015, the proportion of people whose income is less than $1 a day and the proportion of people who suffer from hunger. Goal 2: Achieve universal primary Ensure that, by 2015, children everywhere, boys education and girls alike, will be able to complete a full course of primary schooling. Goal 3: Promote gender equality Eliminate gender disparity in primary and secand empower women ondary education, preferably by 2005, and in all levels of education no later than 2015. Goal 4: Reduce child mortality Reduce by two-thirds, between 1990 and 2015, the under-five mortality rate. Goal 5: Improve maternal health Reduce by three-quarters, between 1990 and 2015, the maternal mortality rate. Goal 6: Combat HIV/AIDS, Halt by 2015 and begin to reverse the spread of malaria, and other diseases HIV/AIDS and the incidence of malaria and other major diseases. Goal 7: Ensure environmental Integrate the principles of sustainable development sustainability into country policies and programs and reverse the loss of environmental resources. Halve, by 2015, the proportion of people without sustainable access to safe drinking water and basic sanitation. By 2020, achieve a significant improvement in the lives of at least 100 million slum-dwellers. Goal 8: Develop a global partnership Address the special needs of the least-developed for development countries, landlocked countries, and small-island developing states. Develop further an open, rulebased, predictable, nondiscriminatory trading and financial system.

Source: United Nations 2006b.

The Millennium Development Goals Report 2006 shows that for the most part, some progress has been achieved. The progress related to poverty and hunger has been satisfactory and is illustrated in figure 4.1, which shows the proportion of people living on less than $1 per day for 1990 and 2002, and 2015 (projected). Progress has been good in the developing regions overall, as the proportion of people living on less than $1 a day decreased from 27.9 percent in 1990 to 19.4

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Figure 4.1 Progress in the Millennium Development Goals: Proportion of People Living on Less Than $1 a Day, 1990 and 2002 and 2015 Projection (%) Adapted from United Nations 2006b, p. 4. Note: Data for 2015 represent targets.

percent in 2002. Eastern Asia achieved especially rapid improvement by decreasing the percentage of people living on less than $1 per day from 33 percent in 1990 to 14.4 percent in 2002. However, poverty is still very high in Sub-Saharan Africa and Southern Asia, with 44 percent and 31.2 percent, respectively, living on less than $1 a day in 2002 (United Nations 2006b). Achieving universal primary education is another goal on the agenda. Almost all regions have shown improvement. The majority of regions have achieved a net enrollment ratio in primary education of between 80 percent and 100 percent. Only SubSaharan Africa is lagging behind with a net enrollment ratio in primary education of 64 percent for 2003–2004 (United Nations 2006b). Another goal is to reduce child mortality, with a target of reducing the under-five mortality rate by two-thirds between 1990 and 2015. Although child mortality has decreased in all regions, 10.5 million children under five years old died in 2004. Sadly, the causes of this early mortality are preventable (United Nations 2006b). Improving maternal health is also one of the goals of the mil-

Role of International Institutions

lennium agenda. The goal is to reduce the maternal mortality rate by threequarters by 2015. One of the key elements in reducing maternal mortality is the presence of specialized care at delivery. As with the other goals, some improvement has been made in all regions. However, regions such as Southern Asia, Sub-Saharan Africa, and developing regions continue to lag behind with low percentages of skilled care at delivery. For example, in 2004, of all deliveries in Southern Asia, only 36 percent were performed with skilled personnel present. Similarly, in 2004, in Sub-Saharan Africa the percentage was 46 percent. In contrast, the rate in Eastern Asia increased from 51 percent in 1990 to 79 percent in 2004, and reached 88 percent in Latin America and the Caribbean in 2004 (United Nations 2006b). There has been progress with the rest of the goals as well. The fight against HIV/AIDS has focused mostly on prevention, and this strategy has proved successful. However, the disease continues to spread, and the number of people living with HIV increased from 36.2 million in 2003 to 38.6 million in 2005 (United Nations 2006b). The goals for environmental sustainability and developing partnerships to help development have proved to be as challenging as the other goals. Deforestation continues to spread; around 13 million hectares of trees are cut per year. Although energy use is becoming more environmentally friendly, carbon dioxide emissions continue to grow globally. From 1996 to 2004, aid to developing countries increased, reaching $106 billion in 2004 (United Nations 2006b). The aid target set by the United Nations for its members is 0.7 percent of gross national income. So far only five countries have met the target, and eleven have promised to reach the target by 2015. Table 4.3 summarizes the Millennium Development Goals and targets. Although some progress in the Millennium Development Goals has been achieved, the majority of the goals have not yet been met. In addition to government aid, other important aspects of meeting the Millennium Development Goals are improved domestic economic development and domestic governance. To achieve economic growth and development, developing countries require more and better-quality aid, trade reforms, the elimination of corruption within government, improved governance, and increased FDI (World Bank c). The Millennium Development Goals now guide much of the multilateral, bilateral, and private development assistance around the world (United Nations 2006a). These goals include a commitment to a “global partnership for development” that emphasizes collaboration among the private sector, governments, and civil society to introduce new technologies and organizational ca-

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pabilities in the developing world. This acknowledgement (and expectation) of the importance of the potential positive contribution of MNEs to host-country development may reflect a new era in which MNEs, host governments, and international institutions work collaboratively to address the social and economic needs of developing regions in a manner that contributes to increased global wealth and social and economic progress.

MULTINATIONAL ENTERPRISES AND INTERNATIONAL AGREEMENTS

Here we incorporate our FSA-CSA model in the context of international economic institutions and agreement. Figure 4.2 incorporates the concepts of country-level participation in trade and investment agreements and relationships, and firm-specific experience with such agreements into our FSA-CSA matrix. Countries that are part of global trade and investment organizations and agreements such as the WTO, NAFTA, and others offer discernible CSAs of at least two sorts. First, countries that have been accepted into these organizations

Figure 4.2 The FSA-CSA Matrix in the Context of International Economic Institutions and Agreements

Role of International Institutions

and agreements have met certain standards in terms of investment policies, trading systems, intellectual property protection, and the like. Hence, they have received a “seal of approval” from a global or regional trading body or system. Second, the obligations and commitments governments make as part of these organizations and agreements represent real and meaningful pledges to lower tariffs and further liberalize investment and other regulations. Some of the obligations are congruent and reflective of the same kinds of commitments associated with having the strong and well-developed institutional governance we discuss in chapter 6. Hence, countries that have agreed to undertake these obligations provide CSAs from the perspective of international investors. Specifically, China’s accession to the WTO in 2001 and Vietnam’s acceptance into that global trade body in 2006 have each contributed to investment in these countries by MNEs. The many bilateral and plurilateral trade and investment agreements struck by the United States and the European Union with Latin American, Asian, and African countries during the early part of the twenty-first century constitute similar endorsements. MNEs are more willing to adopt and commit to long-term investment plans in an environment in which there are assurances of stable and liberalizing trade and investment policies and reasonable protections of real and intellectual property rights. Relations with the World Bank and the IMF are less clear in terms of CSAs. On the one hand, receiving World Bank and IMF support constitutes a signal not dissimilar to being a member of an international trade agreement: in the case of the IMF, countries have agreed to take on a series of economic reforms that typically include lowering government deficits and reducing inflation. On the other hand, heavy dependence on IMF and World Bank financing may reflect weak CSAs as countries become overly reliant upon ongoing financial support from multilateral bodies and fail to achieve strong, independent economic systems and structures. As for FSAs, knowledge and experience in operating under global or regional trading agreements may constitute a moderate FSA for MNEs. In surveying three rationales for multinational strategy, Tallman contends (1992) that MNEs use FDI when a structure providing more managerial control is required to better extract rents from the country-specific resources in a host market. He suggests (Tallman 1992, 462) that “the resource-based model provides for conditions under which firms can accrue higher profits if they have a resource advantage, but where close potential substitutes make cost efficiency vital to sustainable advantage.” Indeed, the experiences a firm gains with FDI and regional production becomes part of the MNE’s resource structure (FSA) as it

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learns and experiments with various structures so as to better apply them in other markets. In the automotive industry, for example, firms that have learned to take advantage of the production sharing made possible by a North American regional automotive industry under NAFTA may be able to leverage that experience in other regional trading arrangements.

SUMMARY POINTS

International institutions and agreements—and MNE participation in them —have had a substantial impact on development. Trade liberalization and financial assistance from multilateral development institutions have undoubtedly contributed positively to the development prospects of the developing and emerging regions of the world. Increasingly, these activities are driven by regional agreements and initiatives—such as NAFTA, the European Union, ASEAN, and the regional development financial institutions that accompany them. Yet there has been criticism of some of these agreements and institutions from a range of vantage points. The Doha Round of multilateral trade negotiations and the Millennium Development Goals represent important acknowledgements by the multilateral system of the importance of focusing on the needs of developing countries. The Doha Round, by tackling agricultural protections in the developed world, presents an opportunity for real progress in providing developing countries greater access to vital export markets. The Millennium Development agenda, by focusing on the real needs of the poorest countries and populations, also presents a vital initiative for helping alleviate poverty. MNEs, through their experience and knowledge of operations in integrated regions, are important partners and contributors to the success of these agreements and institutions.

Chapter 5 The Contributions

and Impact of Civil Society

The emergence of civil society and NGOs has had an important impact on how MNEs contribute to development. On the one hand, criticisms of globalization and MNEs by many NGOs have created friction and pressure on MNEs to be more responsive to the range of stakeholders they encounter in their global activities. On the other hand, many MNEs and NGOs are forging new partnerships in which they jointly advance initiatives designed to promote sustainable development. In this chapter, we review the emergence of civil society and NGOs as important actors in international development. We introduce a classification of NGOs to help differentiate among their goals, purposes, and organizational structures. We review the tensions and conflict between civil society and NGOs on the one hand and MNEs on the other, and introduce a framework for understanding civil society– MNE interactions in the context of international development. We then assess and critique the role of NGOs in development, the factors that have facilitated and constrained their success, and the potential for closer federations of MNEs and governments to increase their effectiveness. 83

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We discuss the need for a more objective understanding of the roles and goals of MNEs by civil society and NGOs, and of civil society and NGOs by MNEs, and the potential for this understanding to lead to more collaborative efforts and better development outcomes. We focus especially on the interactions among MNEs and NGOs in the multilateral trade and investment agenda, including WTO negotiations. The WTO has been criticized by NGOs and others in civil society as an institution that supports free trade and globalization as advanced by MNEs, without sufficient attention to development. We have developed a framework to analyze the different perceptions of NGOs and MNEs, which we use to classify different types of trade and investment agreements.

CIVIL SOCIETY, NGOS, AND BUSINESS

NGOs have assumed a significant and influential role in modern societies. According to Lindenberg (1999), fiscal crises, ideological shifts, and privatization have all led to a decline in the scope and capacity of the state. In response, a growing global not-for-profit sector has emerged, which, in part, has begun to fill the humanitarian vacuum left by the corporate sector and the nation-state. The number of NGOs in the world has swelled in recent decades (Spar and La Mure 2003). A number of global events have led to this increase. One impetus in the recent resurgence in civil society is the political failure of centrally planned economies such as those of the former Soviet Union and Central and Eastern Europe. Globalization is another important force in NGO history. Although many NGOs have criticized globalization and its impact (Stiglitz 2002), globalization has facilitated the growth and development of NGOs. The modern era of NGO activism can be traced to 1984, when a range of NGOs, including church and community groups, human rights organizations, and other antiapartheid activists built strong networks and pressured U.S. cities and states to divest their public pension funds of companies doing business in South Africa. The 1986 Comprehensive Anti-Apartheid Act banned new U.S. investment in South Africa, export sales to the police and military, and new bank loans, except to support trade. The combination of domestic unrest, international governmental pressure, and capital flight posed a direct, sustained, and ultimately successful challenge to the white minority rule, resulting in the collapse of apartheid (Doh and Guay 2004). NGOs have also pushed to have greater access to trade policy and other international government agreements and processes, systems that have histori-

Contributions and Impact of Civil Society

cally been limited to governments acting as agents of their domestic constituencies. NGOs have expressed a great deal of interest in the trade policy dispute settlement mechanism under the GATT and its successor, the WTO. In addition to engaging in bilateral interactions with specific companies, NGOs have also been very active in collective efforts to develop, implement, and enforce industry-wide standards, codes of conduct, and agreements. Examples of intergovernmental organizations and agreements that have been shaped and influenced by NGOs include the WTO, NAFTA, the U.N. Global Compact, the International Labor Organization’s Declaration of Principles concerning Multinational Enterprises and Social Policy, and the Organization for Economic Cooperation and Development (OECD) Guidelines for Multinational Enterprises. Examples of international codes sponsored directly by not-for-profit NGOs include the Social Accountability International SA8000 standard; Rugmark, which certifies rugs and carpets as meeting basic standards for labor and human rights; and the Forest Stewardship Council, which certifies lumber as consistent with sustainable practices (Doh and Guay 2004). According to a 1995 World Bank report, the NGO sector, in both developed and developing countries, experienced exponential growth from the mid-1970s to the mid-1990s. In terms of international development, it is estimated that over 15 percent of total overseas development aid is channeled through NGOs. Indeed, a report published by the United Nations and the NGO Sustainability notes that the global not-for-profit sector, with its more than $1 trillion turnover, could rank as the world’s eighth largest economy. In the 1970s, approximately 70 percent of resource flows from the United States to the developing world were from official development assistance agencies and 30 percent were from the private sector. In 2003, just 15 percent of $102.5 billion in resource flows consisted of direct government assistance, with 85 percent coming from nongovernmental resources: 45 percent from private capital flows, 15 percent from NGO assistance, and 25 percent from personal remittances (USAID 2006). Teegen, Doh, and Vachani (2004) propose that the emergence of civil society in general, and the activism of civic NGOs in particular, has broad implications for the role, scope, and definition of corporations in the global economy and therefore for international management as a research field. Doh and Teegen (2003) point out that the emergence of NGOs has, in some cases, supplanted the role of host governments in the historic business-government bargaining relationship, and as a result, NGOs yield significant power over the right of MNEs to operate in developing countries.

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In addition, NGOs face criticism and pressure over the perception that they are often less accountable for their actions than their government and business counterparts. Specifically, the corporate-governance scandals in the United States and around the world have resulted in increased attention to the role of boards, interlocking board directorates, and the overlapping board membership among corporations and not-for-profit NGOs. The American Enterprise Institute (AEI), in cooperation with the Federalist Society for Law and Public Policy Studies, has launched a program initiative called “NGO Watch,” whose mission is to highlight “issues of transparency and accountability in the operations of non-governmental organizations (NGOs) and international organization (IOs)” (AEI). Civil society, also referred to as the “third sector” or the “not-for-profit” sector, is used to describe broadly all aspects of society that extend beyond the realm of the public sector and the private sector (Teegen, Doh, and Vachani 2004). Although the term NGO is relatively recent, associations among “likeminded individuals” have been part of ancient and modern history. When Alexis de Tocqueville first visited the United States, he was struck by the fact that “Americans were forever forming associations” (Tocqueville 1835). Unlike state-based membership inherent in citizenship, association in civil society is voluntary and is characterized by individuals coalescing around common ideas, needs, or causes to promote collective gain. It can be said that once these individuals come together in an organized or semi-organized fashion, they are taking collective action (Olson 1971). When individuals or groups within civil society work together to advance a broad set of common interests and these interests become a significant force in shaping the direction of society, the outcomes of this process are often called social movements (Teegen, Doh, and Vachani 2004). Social movements can be thought of as broad societal initiatives organized around a particular issue, trend, or priority (Teegen, Doh, and Vachani 2004). Modern examples include the environmental movement and the women’s, or feminist, movement. When civil-society groups come together to form more organized relationships, the entities that emerge are often referred to as NGOs. NGO is a broad term and is used somewhat loosely to refer to all organizations that are neither an official part of government (at any level) nor private for-profit enterprises. Within the category, however, there are many different types, characteristics, and purposes of NGOs.

Contributions and Impact of Civil Society

DEFINITIONS AND CLASSIFICATIONS OF NGOS

Vakil (1997, 2057) suggests that the “lack of consensus on how to define and classify nongovernmental organizations has inhibited progress on both the theoretical and empirical fronts in the effort to better understand and facilitate the functioning of the NGO sector.” Indeed, the acronym NGO is not very helpful in describing the organizations it defines, in that it tells us what the organizations are not rather than what they are. Hence, classification is important in terms of demarcating NGOs and specifying different types and purposes of NGOs. Teegen, Doh, and Vachani (2004) argue that an initial distinction should be made between “club” and “social purpose” NGOs. NGOs arising from social movements can be described as social purpose NGOs. The stakeholders in social purpose NGOs are individuals who contribute time or resources to the organization; NGO staff, management, and board members who direct and monitor the organization’s activities; and individuals, private foundations, governments, and multilateral institutions that provide funding (Teegen, Doh, and Vachani 2004). Social purpose NGOs are accountable primarily to the clients they serve. Social purpose NGOs include, for example, environmental, human rights, poverty-relief, and health NGOs. Club NGOs are membership associations designed primarily to provide a benefit to their members, generally as a result of pooling interests. Examples of club NGOs are unions, business associations, and church groups. In most of the contemporary literature on NGOs, the focus is on social purpose NGOs (Teegen, Doh, and Vachani 2004). The term nongovernmental organization dates from 1950, when the United Nations coined the expression (Vakil 1997, 2068). Presumably the United Nations, which dealt primarily with governments and wanted to consult private not-for-profit organizations that were independent of governments, found it convenient to refer to them simply as nongovernmental organizations to distinguish them from governments. Today the United Nations (2003, par. 1) describes an NGO as “any non-profit, voluntary citizens’ group which is organized on a local, national or international level. Task-oriented and driven by people with a common interest, NGOs perform a variety of services and humanitarian functions, bring citizens’ concerns to Governments, monitor policies and encourage political participation at the community level. They provide analysis and expertise, serve as early warning mechanisms and help monitor and implement international agreements. Some are organized around specific

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issues, such as human rights, the environment or health.” Another, more technical definition is offered by Hudson and Bielefeld (1997, 32): “NGOs are organizations that provide useful (in some specified legal sense) goods or services, thereby serving a specified public purpose . . . (2) are not allowed to distribute profits to persons in their individual capacities; (3) are voluntary in the sense that they are created, maintained, and terminated based on voluntary decision and initiative by members or a board; and (4) exhibit value rationality, often based on strong ideological components.” Teegen, Doh, and Vachani (2004, 466) provide a more succinct definition, referring to social purpose NGOs as “private, not-for-profit organizations that aim to serve particular societal interests by focusing advocacy and/or operational efforts on social, political and economic goals, including equity, education, health, environmental protection and human rights.” Teegen, Doh, and Vachani (2004) further differentiate among various functions of NGOs. Advocacy NGOs work on behalf of others who lack the voice or access to promote their interests. They engage in lobbying, serve as representatives and advisory experts to decision makers, conduct research, hold conferences, stage citizen tribunals, monitor and expose actions (and inactions) of others, disseminate information to key constituencies, set or define agendas, develop and promote codes of conduct, and organize boycotts or investor actions. In these ways, NGOs give voice to stakeholders who might not otherwise have access to influence channels and provide access to institutions to promote social gain or mitigate negative spillovers from other economic activity. Operational (also referred to as programmatic or service-oriented) NGOs provide critical goods and services to clients with unmet needs. NGOs have long stepped in to serve as critical “safety nets” where politically challenged, indebted, or corrupt states are unable or unwilling to provide for unmet needs, and where global problems defy traditional nation-state responsibilities. Examples of such operational activities include relief efforts provided by the Red Cross and Red Crescent, natural resources monitoring by the World Wide Fund for Nature, and the provision of medical care by Doctors without Borders. Although some NGOs focus primarily on advocacy or operational service delivery, many others pursue both sets of activities simultaneously, or evolve from one to the other. For example, Oxfam, the global development and poverty relief organization, advocates for changes in public policy that would provide greater support for its efforts, while also contributing directly to health, education, and food security in the developing countries in which it operates. In the international development literature, Brown and Moore (2001) dis-

Contributions and Impact of Civil Society

tinguish three types of international NGOs (INGOs): welfare and services delivery INGOs, capacity building INGOs, and policy influence INGOs. The first category corresponds roughly to Teegen, Doh, and Vachani’s (2004) operational NGOs, and policy influence INGOs are most closely related to advocacy NGOs. Capacity building INGOs might be considered a special (and somewhat narrow) category and one that may often overlap with the two above. Brown and Moore (2001) conceptualize capacity building INGOs as large global organizations that use their expertise and financial resources to build the capability of smaller local NGOs. Most large INGOs (Oxfam, WWF) engage in some capacity building activities along with their advocacy and operational initiatives. Other researchers and practitioners, especially those involved in the study or work of international development and relief organizations, distinguish between “northern” NGOs and “southern” NGOs and the interactions between the two (Ashman 2001; Lindenberg and Dobel 1999). These researchers conceptualize northern NGOs, in part, as providing funding and other resources to southern NGOs, and document increasing collaboration and joint projects between NGOs of the North and South.

CIVIL SOCIETY AND THE MULTILATERAL TRADE AND INVESTMENT AGENDA

Some civil society advocates and NGOs have argued that globalization implies a new form of economic imperialism, grounded in the increased commonality (homogenization) of products, manufacturing processes, consumption, and regulation. These actors maintain that the global economic system is controlled by a limited number of wealthy countries and large MNEs. (For an articulation of this viewpoint, see Gray 1998 and Giddens 1998). Rugman, however, has argued (2000, 2001) that although the actual economic impact of the United States, the European Union, and Japan in multilateral negotiations and organizations is undoubtedly enormous, other countries are increasingly able to exert their own influence, especially in comparison with the role they have played in regional agreements. With NAFTA, the U.S. agenda dominated that of Canada and Mexico. In the European Union, the old coalition between Germany and France is still dominant across the Brussels-based administrative structure. In Asia, Japan is still the country with the most MNEs. In the WTO, by contrast, developing countries have gained increasing power and influence, as reflected in the widely publicized failure of the Seattle ministerial meetings in

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2001, the launch of the Doha Development Round negotiations in 2003, and the emergence of the G20⫹ group of developing countries that have wielded significant influence over the direction of negotiations (see chapter 4). In addition, the WTO has undertaken some major steps to encourage greater access to its proceedings and to solicit input from NGOs and civil society in this process. Some civil society activists were especially troubled by the proposed Multilateral Agreement on Investment (MAI). The MAI was to provide national treatment for MNEs in their investment around the world, but was defeated in 1998, partly because of these antiglobal stakeholders, but primarily because of a reduced U.S. commitment (at that time) to furthering global trade and investment liberalization, and the strenuous objections of France and Canada to some of the proposed provisions. The WTO is portrayed by some critics of globalization as the driver of global free trade and investment. As discussed in chapter 4, the WTO secretariat represents a small, relatively understaffed support mechanism for member governments who make the policies that are codified in the multilateral trade and investment agreements. The WTO itself wields relatively little political power; however, it is emblematic of many of the criticisms of globalization articulated by NGOs, civil society, and developingcountry governments. The triad-based trade disputes illustrate that the WTO faces substantial problems. There are two underlying reasons for these problems. First, the WTO is a technical body, lacking in political power and even political understanding. It has been successful for more than fifty years in dealing with the technical issues of a series of tariff cuts, but it is not equipped to deal with the new agenda of international trade and investment liberalization. Tariff cuts have allowed “shallow” integration across many manufacturing sectors (but not in agriculture and textiles). Today’s agenda, with major implications for MNEs engaged in FDI, is one of “deep” integration. Here, the issue is how to make domestic markets internationally contestable. This involves negotiating the role of government in society, a virtually impossible task to achieve for the WTO secretariat, with its small staff of professionals in Geneva. The WTO as a government-to-government negotiating body is not designed to deal with nontrade and investment issues such as environmental regulations, labor standards, and human rights. These issues now come onto its agenda only as indirect, technical matters in trade disputes. These “big issues” are better handled by governments themselves in different international forums, for example, human rights at the United Nations, labor standards at the International Labor Organization, and environmental regulations at a new world environmental agency.

Contributions and Impact of Civil Society

These issues are well beyond the capacity of the WTO to address, let alone resolve. Nonetheless, many NGOs have called for closer integration of social and environmental concerns within the global economic agreements and organizations described in chapter 4 (the World Bank, the IMF, the WTO) (Esty 1994).

GLOBALIZATION AND DEVELOPMENT: COLLABORATION OR CONFLICT?

Increasingly, NGOs are engaging in both collaborative and combative relationships with MNEs in the areas of development. Lindenberg and Dobel (1999, 12) summarize the dilemma for NGOs of closer ties to MNEs: “The NGOs face a continuing agenda of how to maintain their mission integrity and autonomy even as they seek these funds. At the same time they need to protect their own legitimacy in the eyes of funders and recipients and not be used by states or corporations for their own purposes.” In response, many NGOs are no longer willing to adopt an either-or approach to their interactions with companies. Rather, they have assumed an increasingly sophisticated and multifaceted relationship with business firms. In moving into this more complex role, they must ask, “When does it make sense to cooperate with the corporate sector and when might it be necessary to provide contravening pressure?” (Lindenberg and Dobel 1999, 12). Figure 5.1 presents a summary of these challenges. By the same token, companies are now evaluating more strategically their decisions to collaborate with NGOs. Drawing on resource dependency theory and theories of social networks and social capital, Doh (2006) reports the results of a survey of Fortune 500 managers on their perceptions of NGOs and the factors that contribute to decisions to collaborate, as well as their satisfaction with collaboration. He finds that corporate-NGO interactions are common, dynamic, and sophisticated; that managers have significant discretion in their approach to NGOs; and that managerial perceptions toward NGOs appear to be shaped by their own experiences and those of their companies. The analysis suggests a close linkage between the demographic, experiential, and network relationships associated with individual managers and their inclination to engage with NGOs. Age, experience, education, and prior affiliation with NGOs are all associated (positively) with managerial responses regarding the frequency and intensity of their interactions with NGOs and their assessment of the efficacy of those experiences. In addition, perceptions of NGOs as trustworthy and reciprocal partners also positively affect the reported frequency by managers regarding their interactions with NGOs and the positive

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Figure 5.1 Changing Private, Public, NGO Roles and Dilemmas for Expanding NGO Sector Adapted from Lindenberg and Dobel 1999, p. 13, fig. 2.

feelings they have about them. Perhaps more importantly, the perceptions and experiences of managers are correlated with the actions of their firms; the more experience individuals have in interacting with NGOs, the more likely they were to report high levels of interactions by their firms. In their review of the evolution of development NGOs, Brown and Kalegaonkar (2002) observe that resource scarcity is one of the chief challenges facing NGOs and that collaboration with the business community is one solution to the problem in an era of declining resources for the state. Although many NGOs have challenged business practices that exploit marginalized groups, NGOs have increasingly mobilized resources from business to implement programs valued by both NGO and business. Brown and Kalegaonkar (2002) point to commercial bank support for NGO educational innovations in Brazil as one example. They also observe that strategic alliances that advance core

Contributions and Impact of Civil Society

goals of both parties, such as the initiatives of Philippine Business for Social Progress, contribute to political stability for the business community and sustainable development for grassroots groups. Lindenberg and Dobel (1999, 8) echo Brown and Kalegaonkar’s (2002) interpretation of the response of the NGO sector to the challenges of globalization. In particular, they report that NGOs have emerged to fill voids created by the decline in national-government commitment to development support and by outmoded international institutions. And yet “ironically, without a state to actually provide services or security, NGOs face the task of how to rebuild communities and provide service often without the effective public power needed to sustain them” (Lindenberg and Dobel 1999, 11). They argue that “new technology, declining public resources, and unmet needs of refugees and poverty populations have resulted in the growth of NGOs around the world” and that this “creates major dilemmas in how to cooperate with state and corporate sectors in gaining resources.” Lindenberg and Dobel (1999, 12) suggest that much of the new corporate wealth is “resolutely antistatist and more inclined to work with the NGO sector. New partnerships between corporations and NGOs are being developed in various communities around the world.” In addition to the obvious funding benefits, NGOs may also experience reputation and legitimacy gains. Some NGOs are perceived as fringe, peripheral, inflexible, or ineffective, and affiliation with a corporation in good public standing may mitigate some of these perceptions. Just as likely, NGOs may suffer reputation costs and accusations that they have modified or softened their positions in exchange for corporate donations. This perception—that an NGO has been co-opted by its corporate partner—has emerged as a genuine concern for many NGOs seeking to maintain independence and autonomy while engaging corporations for both resources and expertise. Lindenberg’s research (1999, 605) has suggested that “NGOs and private sector organizations have had difficulty developing strong and sustainable partnerships.” Building on Austin’s continuum (2000), Lindenberg (1999) asserts that because of distrust between potential partners, few NGO-business relationships have progressed to the most advanced, integrated stage. However, it is likely that by the end of the next decade, more of these close partnerships will be evident. NGOs also have reason to be concerned about the net benefits that may accrue to them from relationships with corporations. Indeed, according to one study, costs appear to outweigh the benefits. Ashman (2001) examined ten cases of collaboration between businesses and civil-society organizations (NGOs)

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engaged in development in Brazil, India, and South Africa. Her findings suggest “a sobering view of the benefits that civil society organizations and their constituencies can expect from collaboration” (Ashman 2001, 1,097). Ashman finds that development impacts are more likely in sectors related to business interests, such as education and employment generation. She also finds that capacity-building objectives are more likely to be realized than are those of citizen empowerment. Finally, NGOs tend to absorb the bulk of the costs of collaboration whereas businesses often dominate decision making. Starbucks’s relationship with NGOs has been the subject of a number of case studies and research efforts. Lindenberg (1999), for example, documents Starbucks’s long-standing relationship with CARE. Beginning in 1991, one of CARE’s managers in the Northwest region approached a Starbucks staff member regarding CARE programs and development seminars. Starbucks had already carved out a strong social responsibility position, and given that Starbucks sourced coffee from regions where CARE was active, some kind of relationship seemed logical and appropriate (Lindenberg 1999). Thus, the relationship began as a philanthropic one in which CARE received $2 from each sale of coffee samplers. Subsequently, reports Lindenberg, the relationship became more transactional, with Starbucks donating resources directly to CARE projects. By the late 1990s, “the relationship moved from the transactional to more integrative stage in which CARE staff members were offered opportunities for training and sabbaticals in Starbucks corporate units, such as human resources and marketing. Starbucks staff members participated more frequently” (Lindenberg 1999, 605). Ultimately, Starbucks began to consult CARE on issues related to codes of conduct and standards regarding its overseas business practices, including Starbucks’s decision to move into the sale of “fair trade” coffee. By 2001, Starbucks had contributed more than $1.8 million to CARE (Argenti 2004). On the NGO side, Oxfam’s relationship with corporations has been the subject of a number of analyses. Oxfam’s approach to these relationships could generally be characterized as one of “engagement” as opposed to close partnerships. Lindenberg (1999) reports that Oxfam Great Britain has pursued an evolving, comprehensive strategy that is complex and dynamic and involves multiple corporate relationships. “Oxfam’s corporate engagement strategy includes three dimensions: funding and cooperation, policy dialogue with joint standard setting and monitoring, and pressure tactics. Oxfam GB’s president defines funding and cooperative relationships as ones in which Oxfam and its corporate partners have similar long-term values and goals about the develop-

Contributions and Impact of Civil Society

ment process, not unlike the decade-long relationship between CARE and Starbucks. Oxfam has such relationships with Northern Foods and the Cooperative Bank, two U.K. corporations. When Oxfam engages in policy dialogue, the second dimension of its strategy, neither Oxfam nor the corporations involved are under any illusions that their values or basic objectives are highly compatible. Rather, their commitment is to engage in civil discussion about issues of common concern” (Lindenberg 1999, 605). Nonetheless, Oxfam has recently worked more closely with corporations in areas that include its “Making Trade Fair” campaign and related initiatives regarding “fair trade”–certified coffee. According to an article published in 1999 and coauthored by Oxfam America’s president, “The most innovative international NGOs of the future will have moved from the hands-on operational style of the 1960s to a highly complex and diverse set of institutional partnerships, joint ventures, and networking relationships” (Offenheiser, Holcombe, and Hopkins 1999, 137). Some researchers have examined corporate-NGO collaboration in different regions of the world, tracking the evolution of these relationships in one region and comparing it with that in another. Austin and others (2004) examine similarities and differences between collaborations in Latin America and the United States. They note that in Latin America, corporate philanthropy toward NGOs is not as developed as in the United States or Europe. The government and churches play a larger role in social services. “Businesses were seen as having to do with business, full stop. In fact, in many countries the business sector has been looked on with suspicion and concern about self-interest and exploitation rather than as sources of beneficence and caring about the well-being of the larger community” (Austin et al. 2004, 6).

MNES, NGOS, AND DEVELOPMENT: TWO ILLUSTRATIVE CASES

There have been a number of interesting cases of MNE-NGO interactions related to development. Here we detail two of them. Unilever and Oxfam in Indonesia

Unilever Indonesia (UI) has had a significant impact on the development process in Indonesia. UI pays considerable taxes to the government, employs many workers, and has shared best-practice standards with the local economy. On the other hand, participation in UI’s value chain does not guarantee im-

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provements in the lives of people living in poverty, and debate rages over what constitutes reasonable performance standards. Oxfam Great Britain, NOVIB (Oxfam Netherlands), Unilever, and UI collaborated on a research project exploring the link between international business and poverty reduction. In particular, the report details both the positive and negative effects that UI has had on poverty in Indonesia. UI, which was founded in 1933, had $984 million in sales in 2003. The majority (84 percent) of sales were derived from household and personal care products, such as soap powder, household cleaning products, soaps, and shampoos. The remaining sales were generated from foods such as tea, margarine, and ice cream. UI ranks as the thirteenth-largest company in Indonesia by sales, and the fourth-largest in the fast-moving consumer goods (FMCG) sector. According to Unilever’s estimates, at least 95 percent of Indonesians use one or more of UI’s products annually, and 90 percent of poor people in Indonesia buy UI’s products every year (Clay 2005). Approximately half of Indonesia’s population is in this poverty-stricken segment, making less than $2 per day. Marketing to people in poverty presents a number of challenges. Oxfam and UI agree that items sold should represent good value for the money or serve poverty-related social or environmental goals. More research needs to be done to determine if UI is indeed meeting these goals. Unilever, as a large MNE, has a huge impact on employment and employment conditions in countries such as Indonesia. UI is important because of its size and also because of its investment in production and distribution. UI’s main workforce consists of approximately 5,000 people, of whom 60 percent are direct employees and 40 percent are contract workers. Indirectly, the fulltime equivalent of about 300,000 people earn their livelihoods in UI’s value chain (Clay 2005). In general, UI treats its employees very well. UI is in the top quartile of all Indonesian companies with respect to pay and benefits (Clay 2005). In 2003, the UI entry-level salary was 123 percent of the minimum wage. UI also maintains high health and safety standards, good retirement and maternity benefits, and good workplace facilities, and emphasizes training. Training can provide employees with enhanced skills and confidence, which improves lives. The study found that employees working less formally for UI benefited less from the company. Contract employment can result in gaps between company policy and practice (Clay 2005). UI spent $254 million on supplies in 2003, and its top ten suppliers are all Indonesian (Clay 2005). UI’s extensive investment in local suppliers supports lo-

Contributions and Impact of Civil Society

cal jobs, profits, assets, and tax revenues. The quality of local manufacturing is also improved, as UI passes along its quality-management systems and technological assistance. However, UI does have to deal with potentially negative effects of supply companies that use contract workers, which makes ensuring UI’s standards challenging. In addition, UI creates potentially unreasonable price pressure. Since UI purchases large quantities of supplies, it is able to negotiate lower prices. This price pressure is sometimes pushed to the raw material producers who have limited negotiating power. Oxfam believes that the private sector can spur development and be “propoor.” FDI can bring wealth creation, employment, and technology transfer. Barbara Stocking, the director of Oxfam Great Britain, believes that “companies, when they act responsibly, can play a vital role in contributing to sustainable development and poverty reduction” (Clay 2005). The collaborative research initiative between Oxfam and Unilever set out to explore the tangible effects of Unilever’s programs on those living in poverty. As a result of the study and rigorous dialogue, Oxfam believes they have raised Unilever’s awareness of their impact and opportunities. Unilever agreed to work with Oxfam on the report because the company recognized that its business heavily engages with poor people—producers and consumers—around the world. Also, Unilever considered the Millennium and Johannesburg declarations, which make poverty eradication the focal point for global strategies for sustainable development. Unilever wanted to understand the impact of its business operations on poor people in order to know how to support the declarations. Unilever admits that its opinions do not always coincide with those of Oxfam, and some of its managers were uncomfortable under scrutiny, but the managers are open to dialogue. UI, though part of a larger MNE, is rooted in the local economy and creates major changes in the region. UI has significant forward linkages (that is, distribution networks) and backward linkages (that is, suppliers) in the local Indonesian economy. Additionally, the majority of UI’s revenues remain in Indonesia, through its local sourcing, wages, margins, and dividends to local shareholders (15 percent of total dividends) (Clay 2005). After initial investment from the parent company, further investment has not come from outside Indonesia at all in recent years, which indicates a strong, profitable local business. UI points out that it consciously kept products affordable during the financial crisis of 1997–1998. In fact, UI expanded its local operations through joint ventures and acquisitions. UI believes that its stability during this time of crisis helped the turbulent economy.

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From 1999 to 2003, 25 percent ($182 million) of UI’s total pretax profits were retained and reinvested in local business activities, particularly manufacturing and distribution. This investment represents a commitment to UI’s long-term future as well as help for Indonesia’s long-term development. Unilever also pays about $130 million annually to the Indonesian government in taxes. This considerable amount, depending on the policies of the Indonesian government, can clearly contribute to the development of the local economy. Additionally, the value created by poorer people working at the extremes of the value chain is much lower than the value captured by those who interact directly with UI (Clay 2005). UI also has a large, complex distribution chain that adds much value. Nonetheless, participation in UI’s value chain does not automatically guarantee improvements in the lives of poor people. As the case of UI illustrates, MNEs can have a positive impact on development in major developing regions, such as Asia. Unilever’s direct payments to the government in the form of taxes, stability during the financial crisis, employee benefits, and deep commitment to the local economy generate positive macroeconomic effects. UI’s value chain has a huge effect on employment, both in terms of numbers and employment practices. UI also initiates positive effects on both the supply and distribution ends of its business. Still, Oxfam raises concerns that UI is forcing local competitors out of business, or creating a need for its product among the poor rather than meeting their needs. MNEs such as UI, though spurring growth, still may fall short in some development areas. Microfinance in Latin America

The concept of extending small loans to low-income individuals is not new; however, the explosion of microfinance institutions (MFIs) over the past several decades constitutes a significant shift in the international development community (Berger 2000). Thousands of microfinance initiatives have emerged throughout the developing world as a way to combat poverty, promote community-based development, and make a profit. The movement received worldwide recognition when Muhammad Yunis, considered the founder of microfinance, was awarded the Nobel Peace Prize in 2006. One of the major reasons that microfinance has been so successful in the developing world is that financial markets are either nonexistent or tend to be weak and exclusionary (see chapter 6). Researchers have suggested that as little as 1 to 2 percent of the population in developing countries has access to formal credit (Carr and Tong 2002). Despite the explosion of microfinance providers,

Contributions and Impact of Civil Society

economists estimate that less than 5 percent of microenterprises in Latin America, for example, have access to institutional sources of credit (Berger 2000). Traditional banks see opportunities for profits in the vast and underserved microfinance market (Christen and Rosenberg 2000). Pioneering microfinance NGOs demonstrated both the enormous demand for such services and the ability to achieve high returns. Commercial banks have far more resources to devote toward innovation in product and service offerings, utilization of advanced technology, and the development and implementation of sophisticated marketing strategies. Large banks are also able to access large pools of capital at relatively low rates and finance new and potentially risky business ventures. For example, credit cards are fast becoming the next wave in microfinance because of their ability to reduce transaction costs, ease the management of information, and increase customer access (Berger 2000). However, only large banks have the technology, staff, and capital to offer such amenities. Another area where commercial banks excel is in marketing. As competition intensifies, as growth rates slow, and as client attrition and the demand for new services increase, effective marketing campaigns become crucial in order for MFIs to expand, or just maintain, their client bases (Tran 2000). Larger commercial institutions have more experience with marketing and more money to invest in it, which helps them position themselves and develop competitive and differential advantages. Commercial banks also have the financial resources to develop new financial products. For example, Banco Solidario has developed a program that grants immediate loans to individuals who use gold jewelry as collateral (Christen and Rosenberg 2000). This type of product innovation allows clients’ needs to be met more exactly, and it allows microfinance providers to capture more of the potential market. A recent expansion in Citibank’s cooperation with ACCION, a leading microfinance provider in the Americas, demonstrates the growing involvement by international lenders in microfinance. In its early collaboration, Citibank was primarily a donor to ACCION programs. After considering entering the microfinance market directly, Citibank chose instead to broaden its partnership with ACCION and its member NGOs. Citibank concluded that recipient businesses could become Citibank customers for larger loans, business checking, and other services. However, Citibank realized that ACCION’s reputation and that of its partner organizations created more trust among local indigenous populations. For this reason, Citibank decided to continue supporting ACCION rather than start its own microcredit program. As a result, Citibank expects to gain customers, as those who graduate from microloans look to banks

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to expand their small businesses. In another partnership, the Foundation for International Community Assistance (FINCA) and Visa initiated a partnership to bring greater efficiency and security to microfinance clients. The initiative builds on a two-year partnership between FINCA and Visa to improve the delivery of financial services to entrepreneurial women in developing countries. The partnership plans to explore how Visa solutions will provide FINCA and its clients with both cost- and time-saving processes, allowing FINCA to expand its outreach to more of the world’s poor. In addition, MasterCard is partnering with la Asociación para el Desarrollo de las Microempresas (the Association for the Development of Microfinance, or ADEMI) in the Dominican Republic to offer a MasterCard to members of ADEMI (Berger 2000). Cardholders can receive cash advances, check balances, and make payments through sixty ATMs and forty-five offices of Banco Popular. MasterCard and other credit-card companies are looking toward the microcredit market because their traditional middle- and upper-middle-class markets have become saturated. MNE participation may be improving the overall microfinance market. A World Bank study of foreign and domestic small-business lending in Argentina, Columbia, Peru, and Chile found that large foreign banks actually lend significantly more, as a percentage of their portfolios, to small businesses than do their domestic counterparts (Clarke et al. 2002). Another fast-developing trend in the microfinance sector is the increasing supply of consumer financial services for low-income individuals. Finance companies, in an effort to expand their consumer base, are beginning to use consumer durable goods as collateral. In other words, these for-profit entities are implementing the chattel-mortgage-lending technology that NGOs developed. In sum, the exploitation of MNE financial institutions’ advantages in size, scale, managerial capability, and technological expertise, combined with the local knowledge, insight, experience, and innovation of local NGO MFIs, creates a powerful collaboration with commensurate opportunities for generating profits and assisting development by providing credit to underserved populations.

MULTINATIONALS AND CIVIL SOCIETY: MANAGING EXTERNAL STAKEHOLDERS

How should MNE managers respond to the presence of external stakeholders such as civil society organizations and NGOs in the area of investment and development? Our review of the literature and cases suggests the following:

Contributions and Impact of Civil Society

1. The activities of external stakeholders should be discussed at the board and top-management level, and an overall strategy should be developed to deal with them. Here, it is important to make a distinction between NGOs open to cooperation and those engaged purely in advocacy. Initiatives should be developed to work with the former. 2. Sustainable development and ethical stakeholder perspectives should be embedded within the organization. More importance should be attached to social values, and they should influence the inner workings of the organization. 3. The firm should articulate the concept of stakeholder capitalism, rather than shareholder capitalism, and the contribution of the organization to the resulting wealth creation. In other words, all senior managers in the firm should engage with NGOs; then the debate will be more evenhanded. The firms that will do best in near future will likely be those that take leadership positions with respect to stakeholder management, adopt the concept of “values-driven” rather than profit-driven capitalism, and respect their most important resource, namely their employees. These are likely to be the most effective tools that can be deployed at the microeconomic level, including in the realm of development. The above prescriptions are represented in figure 5.2 on MNE responses to civil society concerns. On the vertical axis a distinction is made between two types of MNE stakeholder strategies. On the top, a strategy that differentiates the various stakeholder groups, distinguishing between those with which a dialogue is possible and those with which it is not (differentiated response) is pursued, and on the bottom, a strategy that dictates a uniform response to all outside stakeholders is pursued. The horizontal axis on the MNE corporate philosophy distinguishes between a broad stakeholder perspective, whereby goals other than shareholder-wealth maximization are considered relevant, on the right, and a narrower shareholder profit-maximizing perspective on the left. Many MNEs are now positioned in quadrant 3: they pursue a stakeholder management model, perhaps driven by sustainable development environmental considerations. Here MNEs try to identify those salient stakeholders that can contribute to a win-win situation for the firm and society at large.

SUMMARY POINTS

NGOs constitute an increasingly important set of actors on the international political-economic landscape. Although at times the interests of MNEs and

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Figure 5.2 Multinational Enterprise Strategies and Civil Society

NGOs would appear to be divergent, those interests are increasingly intertwined. MNEs and NGOs can work collaboratively to engage in innovative and alternative approaches to the development challenge. Donor agencies and other development policymakers are beginning to embrace the joint role of private corporations and NGOs in supporting development. Civil society organizations such as NGOs can provide important services that complement MNE resources. Indeed, MNEs and civil society have an increasingly collaborative relationships that can generate positive economic returns to the firms and social benefits to the regions or communities in which they operate (Teegen, Doh, and Vachani 2004). NGOs and civil society may be considered CSAs within a given country. The presence of civil society can provide a check on corrupt or inefficient governments, or make up for the absence of health, education, and other services that governments either do not provide or offer at insufficient levels. Civil society organizations can also constitute a disadvantage from the perspective of MNEs if these organizations unnecessarily constrain or limit MNE strategies. When NGOs act collaboratively toward MNEs, and MNEs deploy their FSAs in a manner that provides important social contributions, then MNE–civil society relationships can maximize the integration of CSAs and FSAs so that they have a positive impact on development.

Chapter 6 Institutional

Governance and Development

The importance of institutions and governance to growth and development is widely accepted. North (1986, 1993b) argues that institutional stability, fairness, and predictability are critical for economic growth. Such institutional environments are demonstrated by a wellspecified legal system, a clearly defined and impartial third ( judicial) branch of government to enforce property rights, and a set of attitudes toward contracting and trading that encourage people to engage in transactions at low costs. Conversely, the absence of institutional structures that facilitate interactions, such as rule of law, a good quality bureaucracy, and low levels of corruption in government, results in significantly higher transaction costs. Institutional deficiencies stemming from inconsistent enforcement of rules, ineffective legal frameworks (La Porta et al. 1997, 1998), and corruption in governments (Doh et al. 2003) have been sources of instability that impede growth and innovation. Overall, weak legal and regulatory institutions (North 1986, 1993b) that fail to provide for basic public goods, property rights, and other protec-

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tions (Levy and Spiller 1996) result in poor economic performance and instability (Henisz and Williamson 1999; Henisz and Zelner 2005). In this chapter, we review the growing literature on the importance of governance and institutional advancement as a precondition for successful development, and the damaging effects of institutional deficiencies on development. We focus on the case of corruption as an example of how poorly functioning institutions can impede growth and development, and review strategies for combating corruption that include the participation and contribution of MNEs. We also survey the historic MNE–host government bargaining model and critique that model in light of (1) a greater understanding of the benefits of MNE investment for host developing countries and (2) the growth of international institutions and agreements under which host countries voluntarily agree to improve their institutional development and governance. We introduce a revised bargaining model that captures these developments and actors, including the emergence of civil society and NGOs as important actors in the businessgovernment interface that better informs the development process.

THE IMPORTANCE OF INSTITUTIONS AND GOVERNANCE TO DEVELOPMENT

Drawing from North’s new institutional economics (1990, 1993a, 1993b, 1994), researchers have focused on hazards associated with the makeup and distribution of political systems (Henisz 2000a, 2004) and have called attention to the risks associated with institutional voids—environments characterized by the absence of formal, functional institutional mechanisms (Khanna and Palepu 1997, 1999a, 1999b, 2000a, 2000b; Khanna, Palepu, and Sinha 2005). Another approach to measuring institutional quality focuses on “governance infrastructure” aspects of host-country environments and reflects the complex and interrelated dimensions of the institutional apparatus for overseeing private sector development and property protection (Kaufmann and Kraay 2002; Kaufmann, Kraay, and Zoido-Lobaton 1999). An additional theoretical stream, drawn from economic literature, further complements the Northian assessment of the relationship of institutional quality to private sector growth and prosperity. The anticipated benefits of well-developed financial markets in host countries rest on the capital market–discipline thesis. Capital markets are said to monitor managerial behavior through the threats of takeover and bankruptcy and mitigate the agency problem with politicians who pursue self-serving goals such as excess employment (Boycko,

Institutional Governance and Development

Shleifer, and Vishny 1996), by establishing boundaries between politicians and managers and raising the costs to politicians of exploiting their power over firms (Sappington and Stiglitz 1987). Overall, capital markets can alter the mode of control of enterprises in emerging economies from a politically constituted hierarchy to the price system of economic markets, where managerial decisions are informed by the contingencies of the competitive market. However, the intensity of capital market pressures depends on the size and sophistication of the nation’s financial system, as reflected in the level of stock-market development and shareholder legal protection (La Porta et al. 1997). To the extent that countries differ considerably in their levels of capital market development, and therefore in their managerial-monitoring benefits (Holstrom and Tirole 1993), there may be significant differences in firm-level prosperity and growth. Hence, better developed financial markets in host countries provide mechanisms through which investments are protected and “insulated” from surrounding risks such as asset expropriation and other host country risks. Local and foreign investors perceive relatively developed financial markets and institutions and their capacity to enforce capital markets disciplines as insurance against the risks of asset expropriation and contract repudiation. Some researchers (Newman 2000; Newman and Nollen 1998) argue that institutional upheaval promotes organizational transformation to a point and that beyond that level, such uncertainty can be counterproductive, suggesting that regions experiencing unstable institutions will not facilitate growth and innovation. Although this institutional perspective has been used to examine some managerial phenomena, Hoskisson and others (2000, 253) note that most studies that draw on institutional theory to understand aspects of emergingeconomy phenomena have focused primarily on state-owned enterprises, and suggest that “the institutional environment (including cultural, political, and other factors) has effects on other enterprises (private firms, international joint ventures, collectives) in emerging economies.” Researchers examining the absence of formal, functional institutional mechanisms, a condition that often results in a lack of property rights, a lack of adequate incentives to reward entrepreneurship, a lack of effective governance, and the like, argue that under these circumstances, firms are forced to create internal markets for capital, labor, and products because the institutional environment fails to provide the political and institutional infrastructure (Khanna and Palepu 1997, 2000a, 2000b; Khanna, Palepu, and Sinha 2005). According to Hausmann and Rodrik (2003), a central market failure in relation to innovation is an information externality: production costs of modern,

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nontraditional activities are unknown and can be discovered only by making sunk investments. This is particularly important to the present discussion since countries grow rich by increasing the range of products that they produce, not by concentrating on what they already do well. Thus, productive diversification requires entrepreneurs who are willing to invest in activities that are new to the local economy. However, in the absence of property rights, such investments may be easily appropriated by competitors, robbing the entrepreneur of the benefits of those sunk costs. Of course, ensuring property rights involves more than just passing legislation. Indeed, Rodrick (2000) argues that only when such laws are consistently and fairly applied can entrepreneurship thrive. Unfortunately, as Xin and Pearce (1996) observe, the rule of law in emerging economies tends to be particularly unreliable, thereby limiting the enforcement of what little legislation does exist, and creating an environment that is “particularly burdensome for newer, smaller private businesses” (Xin and Pearce 1996, 1642). Often coupled with the lack of legal protection afforded to firms in emerging economies is a high degree of bureaucracy and government regulation (Benzing, Chu, and Bove 2004; Chang and MacMillan 1991), of legal complexity (Benzing, Chu, and Callanan 2005), of taxation (Danis and Shipilov 2002), and of corruption and bribery (Kiggundu 2002; Xin and Pearce 1996). Overcoming such barriers likely requires a certain degree of financial and human capital. Indeed, Merrifield (1991) argues that would-be entrepreneurs in emerging economies such as Peru often lack the ability to pay for the legal permits to start a new firm. Because of the scarcity of these valuable resources, several scholars find that firms in emerging economies often seek to ally themselves with government officials in order to increase the perception that they (the firms) are legitimate entities, protect themselves from arbitrary extortion, and the like (Aldrich and Auster 1986; Peng 2003; Xin and Pearce 1996). Interestingly, however, Peng (2001) finds that this tendency is significantly less pronounced for older firms. Peng observes that as firms begin to age, they actually seek to distance themselves from these parties, as the resources government officials contribute to the firms are either no longer necessary given the firms’ larger size or no longer worth the resulting loss in autonomy that they entail. It seems, then, that because new and small firms are comparatively resource poor (Aldrich 1999), they are often forced to resort to unorthodox and often unproductive means in environments characterized by weak institutions. This would suggest that older,

Institutional Governance and Development

more established MNEs may have a more positive impact on the reduction and curtailment of corruption than newer and smaller firms. Where success in new- and small-firm development has occurred in emerging economies, formal institutions established specifically to support entrepreneurial firms can often be found. For example, governments in many emerging economies throughout Southeast Asia, Latin America, Africa, and other developing markets have created development financial institutions (DFIs), which are publicly funded private organizations designed to invest in new and small firms in core industries (George and Prabhu 2003). Additionally, private venture capital (VC) markets, historically rare in emerging economies, have begun to emerge as well in Central and Eastern Europe (Karsai, Wright, and Filatotchev 1997). In such cases, empirical evidence from these emerging economies shows that the presence of formal institutions dedicated to providing financial resources to new and small firms results in higher firm formation rates (George and Prabhu 2003) and growth rates (Karsai, Wright, and Filatotchev 1997). Ironically, even in markets in which formal financial institutions do exist, new and small firms often find themselves disadvantaged relative to their larger, older counterparts, in that new and small firms often lack the human capital (in the form of effective governance) to convince potential financiers that they can effectively manage their operations and in turn make good on the terms of invested capital. Interestingly, Karsai, Wright, and Filatotchev (1997) find that by providing both monetary and managerial resources, VC firms in Hungary provide new and small firms the means and strategic leadership necessary to survive, to grow, and to compete. Thus, the presence of high quality institutions may provide new and small firms the ability to gain access to the financial resources more readily available to large incumbent firms. Institutions provide the rules of the game that structure human interaction in societies and the formal and informal rules that bound organizational activities. In so doing, they reduce both transaction and information costs by mitigating uncertainty and establishing a stable structure that facilitates interactions (North 1990, 1993b). In the context of emerging economies, institutional deficiencies or “voids” (Khanna and Palepu 1997) stemming from inconsistent enforcement of rules (Wells 1998), ineffective legal frameworks, and corruption in governments (Doh et al. 2003) have been sources of risk detrimental to these investments. Hence, the “constraints that structure human interaction” (North 1993a, 344) can be shaped by rule of law, low levels of corruption in govern-

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ment, and capital market development; the absence of these attributes contributes to higher levels of institutional risk. Khanna and Palepu (2000a) and Khanna, Palepu, and Sinha (2005) have termed the absence of institutions such as financial markets “institutional voids” and have argued that these voids constitute severe liabilities for doing business in developing countries. Institutional voids arise in locations where specialized intermediaries on which a firm customarily relies—legal, financial, human resource—are absent. Such absences may result from poorly functioning institutional infrastructure and governance systems. One response of firms to these institutional deficits is to internalize functions by developing business groups or conglomerates that provide internal capital and labor markets and protect property rights by not exposing the firms to partners. An alternative is for MNEs or NGOs to support the development of emergent institutions in the nongovernmental sector that fill gaps generated by these institutional deficits. There are several approaches to measuring the quality and reliability of institutional governance. The World Bank tracked aggregate governance research indicators for 213 countries for the period 1996–2005, for six dimensions of governance: voice and accountability; political stability and absence of violence; government effectiveness; regulatory quality; rule of law; and control of corruption. The methodological approach and validity of these measures are discussed in Kaufmann, Kraay, and Mastruzzi (2006). Table 6.1 reports these indicators for a selection of developed and developing countries for 2005. The nexus between the quality of institutional governance and growth and development is readily apparent, as is the close correlation between and among several of these indicators.

INSTITUTIONS, DEVELOPMENT, AND CORRUPTION

Government corruption is an important aspect of the institutional system that has impeded the development process in countries in many regions of the world. Rodriguez and others (2006) note that most research on corruption has focused on government corruption and issues related directly to market liberalization They note that researchers have unambiguously established that corruption impedes economic growth (Mauro 1995) and FDI (Wei 1997; Habib and Zurawicki 2002). Doh and others (2003), Rodriguez, Uhlenbruck, and Eden (2004), and Uhlenbruck and others (2006) provide useful reviews of the

Institutional Governance and Development

Table 6.1 Governance indicators for selected countries, 2005 (percentile rank) Country Australia Austria Belgium Chile China Colombia Denmark Egypt Equatorial Guinea Finland Ghana Haiti Iraq Malaysia Nigeria North Korea Singapore Somalia United States

Voice & Political Government Regulatory Rule accountability stability effectiveness quality of law 95 90 93 83 6 37 100 18 5 100 59 10 9 34 30 0 38 2 89

74 82 67 76 39 4 78 21 52 98 50 4 0 62 5 41 84 0 49

95 92 94 86 52 53 99 43 5 99 54 5 1 80 20 0 100 0 92

96 94 87 91 45 54 98 34 8 99 50 12 6 67 15 0 100 0 93

95 97 91 87 41 32 99 55 7 98 48 2 0 66 6 10 96 0 92

Control of corruption 95 97 91 90 31 53 98 43 0 100 45 1 5 65 6 3 99 0 92

Source: Kaufman, Kraay, and Mastruzzi 2006.

research on corruption. Here we draw from their work and the work of others on the direct and indirect impacts of corruption on growth and development. The Costs of Corruption

Doh et al. (2003) argue that corruption has many costs to host countries, business firms, and broader societal interests. They note that one perspective would view corruption as a tax that increases costs and shifts risk from some stakeholders to others (Shleifer and Vishny 1993). Although their focus is, in part, on firm level effects, Doh et al. (2003) argue that many of the most damaging costs of corruption affect firms indirectly, but through direct impacts on host countries. These effects include public sector failures—missing or weak institutions, governments that fail to effectively use public resources, governments that cause the private sector and the economy to fail to grow (Doh et al. 2003; Rodriguez et al. 2006). Doh et al. (2003) define the indirect costs of corruption as those costs imposed on firms that cannot be specifically identified with an

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interaction between the firm and the government or its officials. Indirect costs are incurred because of corruption’s systemic effects, such as higher prices for resources, lowered prospects for profitability, and macroeconomic instability. These are the costs that most affect development; however, the deterrent impact on firms also reinforces the impact on the host country and government, creating a vicious downward spiral. According to Doh et al. (2003), these indirect costs of corruption have been well documented (Mauro 1995). Corruption has been shown to significantly reduce the ratio of investment to GDP and GDP growth (Mauro 1995; Brunetti and Weder 1998). More generally, the weakness of institutions like courts and regulatory agencies, manifested in part by corruption, slow economic growth (Brunetti and Weder 1998). Also, corruption markedly increases poverty and retards development goals such as education, literacy, and life expectancy. Corruption results in reduced and skewed public expenditures because of the reduction in tax revenue that results from the deterrence of business activity and recourse to the unofficial economy, and because of the selection of privately beneficial and publicly costly expenditure projects. Corruption weakens public infrastructure, resulting in inadequate, expensive, and intermittently supplied infrastructure services such as telephony, electricity, and transportation (Doh et. al. 2003). Weak infrastructure creates opportunities for small bribes and may indirectly reduce public trust. Corruption leads to squandered and misdirected entrepreneurial talent because entrepreneurs and other talented individuals are drawn to socially unproductive avenues of advance afforded by corrupt environments. Corruption has been shown to correlate with macroeconomic weakness and instability, resulting in reduced rates of macroeconomic growth, weak commercial environments, and greater susceptibility to financial crises such as occurred in Russia in the early 1990s, in Southeast Asia and Korea during 1997 and 1998, and in Latin America in the early 1980s and again in the mid- and late 1990s. In a related vein, corruption reduces aggregate investment through reductions in public and private investment flows, including lower rates of FDI for the formation of a robust commercial environment. These factors combine to cause socioeconomic misery, including increased poverty, income inequality, and slower income growth for the poorest in society, thereby increasing demands on already weak central governments (Campos, Lien, and Pradhan 1999). Table 6.2 summarizes the direct costs of corruption. Doh et al. (2003) argue that other costs are borne directly by firms. Bribes

Institutional Governance and Development

Table 6.2 Direct costs of government corruption Type

Explanation

Bribes

Monetary and nonmonetary payments to those with some degree of public power as a response to extortion or in exchange for some misuse of public power. Nonmonetary and opportunity costs of dealing with corrupt officials or of complying with the illegitimate bureaucratic requirements of corrupt regimes. Efforts to avoid and limit the firm’s exposure to extortionary behavior by corrupt officials, including hiding output and opting out of the official economy. Investments in channels of influence to gain advantage in dividing the benefits of economic activity; includes lobbying and more direct vote and influence peddling. Costs imposed on the firm as a result of forgoing the use of courts for the enforcement of contracts, local financial operations, and the like. Monetary and nonmonetary costs imposed on firms as a result of willing or unwilling engagement with organized crime.

Red tape/bureaucratic delay

Avoidance

Directly unproductive behavior

Forgoing market supporting institutions Engagement with organized crime Source: Doh et al. 2003.

cost firms and other stakeholders through monetary and nonmonetary payments to those with some degree of public power, as a response to extortion or in exchange for some misuse of public power. Red tape and bureaucratic delay generate nonmonetary and opportunity costs of dealing with corrupt officials or of complying with the illegitimate bureaucratic requirements of corrupt regimes. Avoidance costs result when firms engage in expensive efforts to avoid and limit their exposure to extortion by corrupt officials, including hiding output and opting out of the official economy. Firms bear costs when they are not able to use institutions such as courts for the enforcement of contracts. Costs grow when firms are willing (or unwilling) to engage with organized crime by paying for “protection” and other security services that would otherwise be unnecessary. Finally, firms may engage in a range of costly and unproductive behavior, including investment in channels of influence, to gain advantage in dividing the benefits of economic activity—for example, lobbying and direct vote and influence peddling. Table 6.3 summarizes the indirect costs of corruption.

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Table 6.3 Indirect costs of government corruption Type Reduced investment

Reduced and distorted public expenditures

Macroeconomic weakness and instability Weak infrastructure

Squandered/misdirected entrepreneurial talent Socioeconomic failure

Explanation Reduced public and private investment flows. Lower rates of foreign direct investment for the formation of a robust commercial environment. Reduced taxes as a result of the deterrence of business activity and recourse to the unofficial economy. Selection of privately beneficial and publicly costly expenditure projects. Reduced rates of macroeconomic growth, weak commercial environment, and greater susceptibility to financial crises. Inadequate, expensive, and intermittently supplied infrastructure services such as telephony, electricity, and transportation. Weak infrastructure foments opportunities for small bribes and may indirectly reduce public trust. Engagement of entrepreneurial and otherwise talented individuals in the socially unproductive avenues of advance afforded by corrupt environments. Increased poverty, income inequality, and slower income growth for the poorest in society. Increases demands on already weak central governments.

Source: Doh et al. 2003.

Although corruption is difficult to measure, Transparency International, a not-for-profit organization whose aim is to fight corruption, has developed a comprehensive mechanism for evaluating the extent of corruption in countries throughout the world. The organization calculates a Corruption Perception Index (CPI), which varies from zero to ten, for each country. The higher the index, the less corrupt the country is. Tables 6.4 and 6.5 show the ten countries with the highest and the lowest levels of corruption according to Transparency International’s survey. The direct and indirect costs of corruption make host countries less attractive for FDI: broad systemwide effects reinforce conditions that would make a market less supportive of FDI, and firm-specific costs also serve to lower the attractiveness of a market for FDI and distort the form and governance of the FDI that does take place, leading to negative impacts for development. Research on the impact of corruption on FDI confirms these effects.

Table 6.4 Corruption Perception Index (CPI): Least-corrupt countries CPI 2005 rank 1 2 3 4 5 6 7 8 9 10

Country

2005

2004

2004 rank

Iceland Finland New Zealand Denmark Singapore Sweden Switzerland Norway Australia Austria

9.7 9.6 9.6 9.5 9.4 9.2 9.1 8.9 8.8 8.7

9.5 9.7 9.6 9.5 9.3 9.2 9.1 8.9 8.8 8.4

3 1 2 3 5 6 7 8 9 13

Sources: Transparency International 2005, 2004. Note: The CPI is defined by Transparency International as “ the degree of corruption as seen by business people and country analysts and ranges between 10 (highly clean) and 0 (highly corrupt).”

Table 6.5 Corruption Perception Index (CPI): Most-corrupt countries CPI 2005 rank 158 155

152

151 144

Country

2005

2004

2004 rank

Bangladesh Chad Haiti Myanmar Turkmenistan Côte d’Ivoire Equatorial Guinea Nigeria Angola Democratic Republic of the Congo Kenya Pakistan Paraguay Somalia Sudan Tajikistan

1.7 1.7 1.8 1.8 1.8 1.9 1.9 1.9 2.0 2.1 2.1 2.1 2.1 2.1 2.1 2.1

1.5 1.7 1.5 1.7 2.0 2.0 n.a. 1.6 2.0 2.3 2.1 2.1 1.9 n.a. 2.2 2.0

145 142 145 142 133 133 n.a. 144 133 114 129 129 140 n.a. 122 133

Sources: Transparency International 2005, 2004.

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Corruption, FDI, and MNEs

Mauro (1995) examined corruption in sixty-seven countries and found that it reduced overall investment. Wei (2000) measured the impact of corruption on bilateral FDI from twelve developed countries to forty-five destination countries and found that corruption had a negative impact on FDI; Smarzynska and Wei’s study (2000) echoed these findings in Eastern Europe, showing that corruption had a negative impact on FDI in twenty-two Eastern European countries. Habib and Zurawicki (2002) analyzed bilateral FDI flows from seven developed countries to eighty-nine countries and found that both the level of corruption in the host country and the absolute difference between the level of corruption in the host country and that in the home country had a negative impact on FDI. Their analysis suggests that foreign investors avoid corrupt markets and that both host and home country corruption levels contribute to this effect. A recent study examined how corruption might affect not just the level but the composition of FDI in terms of country of origin (Cuervo-Cazurra 2006). The study found that corruption results in relatively lower FDI from countries that have signed the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (discussed below), suggesting that laws against bribery abroad may act as a deterrent to engaging in corruption in foreign countries. Cuervo-Cazurra also finds that corruption results in higher levels of FDI from countries with high levels of corruption. The combination of these two findings suggest that corruption creates a negative dynamic in which companies from less-corrupt countries are increasingly inclined to avoid more-corrupt countries as locations for doing business, whereas companies from corrupt countries are drawn to other countries with similar levels of corruption. Kwok and Tadesse (2006) note that the majority of research on the relationship between MNEs and corruption focuses on how the institutional environment of host countries influences MNE behavior. In their study, these researchers focused on how the presence of MNEs could shape the institutional environment of corruption over time. They propose three avenues through which the MNE may have an impact on its host institutions: the regulatorypressure effect, the demonstration effect, and the professionalization effect. Drawing on institutional theory, Kwok and Tadesse (2006, 769) hypothesize that “introduction of new modes of business practice in MNE subsidiaries can

Institutional Governance and Development

challenge the legitimacy of existing patterns and stimulate debates on better business practice in the host country. The mirror image of this influence is the ‘de-institutionalization’ of local firms’ existing organizational patterns.” They find support for their expectation that the presence of MNEs in a host country reduces the level of corruption over time, showing that MNEs can play a positive role in developing country efforts to curtail corruption. Combating Corruption: Government and International Organization Initiatives

Doh and others (2003) detail the range of strategies governments, international organizations, and MNEs have pursued to respond to corruption. Here we summarize some of these approaches and others. Prompted by a series of scandals involving questionable or illegal payments by U.S. firms to foreign government officials overseas, the United States adopted the Foreign Corrupt Practices Act (FCPA) in 1977. The FCPA prohibits American firms from giving anything of value—such as a payment, gift, or bribe—to induce a foreign government to enter into a contract or relationship or to bestow a business advantage. The act carries criminal penalties, including imprisonment for up to five years and fines of up to $100,000 for individuals, and fines of up to $2 million for companies. In 1998 the United States passed legislation expanding the scope of the FCPA to bring its provisions into accord with the OECD’s convention on bribery (USIA 1998). Prior to the implementation of the OECD convention, the United States was unique in having this kind of law, and in countries where corruption was widespread, the act made it difficult for U.S. companies to compete. Moreover, many executives complained that the prohibited acts were standard operating procedure in some countries, although with the implementation of OECD convention, this attitude has evolved (Stackhouse 1993). The Organization of American States (OAS) Inter-American Convention against Corruption, which entered into force in March 1997, was the first multilateral anticorruption agreement negotiated in the world. The convention requires parties to criminalize bribery of foreign officials and to assist one another in the investigation and prosecution of such acts. The convention also explicitly disallows the use of “bank secrecy” as a basis for denying assistance. More than twenty-five Western Hemisphere countries are signatories to the convention, including Argentina, Brazil, Chile, Mexico, and the United States. The OECD Convention on Combating Bribery of Foreign Public Officials

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in International Business Transactions was adopted in 1997, when negotiators from thirty-three countries (twenty-eight of the twenty-nine member states of the OECD, along with Argentina, Brazil, Bulgaria, Chile, and Slovakia) agreed to its terms (USIA 1998). The OECD convention represents one of the most significant milestones in efforts to reform and limit corruption in transactions. Since 1996, the World Bank Anti-Corruption Knowledge Center has supported more than six hundred anticorruption programs and governance initiatives developed by its member countries. According to the bank, “corruption undermines policies and programs that aim to reduce poverty, so attacking corruption is critical to the achievement of the bank’s overarching mission of poverty reduction” (World Bank b). The World Bank’s anticorruption strategy builds on five key elements: (1) increasing political accountability, (2) strengthening civil-society participation, (3) creating a competitive private sector, (4) imposing institutional restraints on power, and (5) improving public-sector management. Combating Corruption: Industry and Company Initiatives

Corporations face numerous challenges when considering whether to enter a market characterized by corruption (Doh et. al. 2003). One option is to avoid the market entirely and in so doing, eliminate the direct costs of corruption, whether generated from its pervasive or arbitrary application. Often, there are other reasons to avoid markets that are corrupt, such as weak profit potential, unstable government, and slow market growth; however, these conditions may themselves result, in part, from corruption. A number of companies have developed rigorous codes and principles that guide their policies on corruption around the world, and other MNEs rely on guidelines provided by public institutions. Unilateral efforts, as well as those supported by multinational organizations such as the United Nations, the World Bank, or the IMF, should be encouraged. Often, there is assistance available from multilateral bodies that provide financial and technical support for the development of efficient government and “good governance.” Below are examples of individual firm activities as well as those involving public-private collaboration. The International Chamber of Commerce (ICC) Commission on AntiCorruption (formerly, the Standing Committee on Extortion and Bribery) promotes its “Rules of Conduct to Combat Extortion and Bribery” in international business transactions. These rules specifically target “large-scale extor-

Institutional Governance and Development

tion and bribery involving politicians and senior officials.” The seven basic rules address extortion, bribery and kickbacks, agents, financial recording and auditing, responsibilities of enterprises, political contributions, and company codes (Doh et. al. 2003). The Transparent Agent and Contracting Entities (TRACE) standard, which is based on a review of the practices of thirty-four companies, applies to many types of business intermediaries, including sales agents, consultants, suppliers, distributors, resellers, subcontractors, franchisees, and joint-venture partners. It is the first global business standard of its kind, and is being disseminated directly by TRACE and by investment houses and probusiness organizations like the Center for International Private Enterprise, the not-for-profit arm of the U.S. Chamber of Commerce. It has been well received because it sets out best practices and gives companies the confidence that they are doing as much due diligence as their corporate peers, which is an important part of a defense if an intermediary does pay a bribe (TRACE 2002). Table 6.6. list the top thirty countries that are least willing to pay bribes. Building on the ICC rules, two legal experts have proposed a comprehensive international corruption code that (1) emphasizes transparency, (2) provides guidance concerning specific practices associated with paying bribes, (3) reflects relevance to organizational environments, (4) identifies with and supports an independent entity such as an NGO or an academic center, and perhaps most importantly, (5) can be monitored and assessed by external, independent entities (Hess and Dunfee 2000). This code and approach resolves the “free rider” problem by requiring many competing firms to adhere to the same standards. Further, it addresses challenges raised by both pervasive and arbitrary corruption. In addition, many firms have developed their own strategies to respond to corruption without acquiescing to it, as summarized in table 6.7. For example, General Electric has a strong FCPA program and was one of the private sector organizations that helped organize Transparency International. Coca-Cola’s efforts against corruption have been aggressive. On its Web site, Coca-Cola states unequivocally, “We are more than a beverage company. We are a corporate citizen of the world” (Coca-Cola). The site further states that “the Coca-Cola Company is listed in the FTSE4Good Index, which identifies companies that meet globally recognized corporate responsibility standards” (Coca-Cola). In fact, in August 2006, Coca-Cola HBC Bulgaria AD joined the Bulgarian Global Compact Network and was recognized for its commitment

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Table 6.6 Bribe Payers Index (BPI), 2006 Rank 1 2 3 4 5 6 7 8 9 11 12 13 14 15 16 17 18 20 21 22 23 24 25 26 27 28 29 30

Country

BPI

Switzerland Sweden Australia Austria Canada UK Germany Netherlands Belgium United States Japan Singapore Spain UAE France Portugal Mexico Hong Kong Israel Italy Republic of Korea Saudi Arabia Brazil South Africa Malaysia Taiwan Turkey Russia China India

7.81 7.62 7.59 7.50 7.46 7.39 7.34 7.28 7.22 7.22 7.1 6.78 6.63 6.62 6.5 6.47 6.45 6.01 6.01 5.94 5.83 5.75 5.65 5.61 5.59 5.41 5.23 5.16 4.94 4.62

Source: Transparency International 2006. Note: A higher index value means a country is less willing to pay bribes.

to “promoting the ten universal principles in the area of human rights protection, labor standards, environment and fight against corruption in its everyday business” (Global Compact 2006). Pfizer puts anticorruption high on its agenda. Hank McKinnell, Pfizer’s chairman, said that “corruption is a major global health problem that can only be fixed by a partnership of business, government and multilateral organiza-

Institutional Governance and Development

Table 6.7 Examples of strategies companies use to combat corruption Company

Strategy

Honeywell

• Created an ethics code of conduct to help their employees make the right decision when faced with corruption and bribery • Provided training • Decided not to bid on a project tender when asked to bribe Motorola • Provided training to its employees • Used case studies as part of the training to show potential real situations and ways to deal with corruption TDI Brooks International • Notified authorities and acted as a whistleblower in a project that required bribe • Went public to talk about corruption General Electric • Promotes itself as having a strong Foreign Corrupt Practices Act program so that clients feel safe doing business with GE • Helped organize Transparency International, an NGO that fights corruption Coca-Cola • Tries to make each contact transparent and deal with transparent suppliers in host countries, especially emerging economies • Emphasizes its image, supports education and sports in host countries • Has created a corporate culture in which no one wants to become the reason Coca-Cola is leaving a country Sources: Doh et al. 2003 and authors’ research.

tions” (Pfizer 2004). Pfizer has been a victim of corruption: the company donated $650 million of medicine around the world in 2003, only to find that corruption prevented some of the medicine from reaching impoverished patients in the developing world. To combat this problem, the company launched an Internet site (http://www.pfizer.com/counterfeit) intended to inform the public about this risk. Goldman Sachs has also been a strong advocate of reducing international corruption. Kevin Ford is executive director and counsel for Goldman Sachs International (New Era, New Challenge 2000). Ford “had a distinguished twenty-six year law enforcement career,” focused on “the investigation of organized crime and official corruption” (New Era, New Challenge 2000). Ford was previously appointed by Mayor Rudolph Giuliani as deputy commissioner of investigation for the City of New York and is also a member of the Interpol

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Group of Experts on Corruption and is the chairman of the International AntiCorruption Conference Council. Some companies use social contributions and public donations as alternatives to both avoidance and compliance. For example, sometimes bribes are presented as agent fees or fees for public services that might not otherwise be available. Several examples are presented below. This strategy targets primarily the direct costs of corruption. These approaches, however, are unlikely to protect firms from the arbitrary application of corruption because even if a legal contribution is offered to an organization (versus individuals), there may be other officials who demand further payments. Cargill, an international marketer, processor, and distributor of agricultural, food, financial, and industrial products, aggressively attempts to strengthen the communities in which it operates by avoiding and speaking out against bribery and corruption as well as supporting specific causes (Cargill 2003). After two Cargill offices were set on fire in India following political opposition concerning the company’s entry into the sunflower-seed market, the company responded by teaching Indian farmers how to improve their crop yields (Cogman and Oppenheim 2002). Motorola has permitted the payment of agent fees where they are a relatively small part of the contract. In other situations, rather than pay a fee to ensure the provision of local public services, Motorola donated equipment to the relevant government agencies. This increased the likelihood that the equipment would be used for the stated purpose. Hope Group donated textbooks to 17 million students in China to facilitate business relationships and enhance its reputation. In China, such relationships are considered especially important in business dealings, and this contribution also provided a substantial social benefit (Ahlstrom and Bruton 2001).

THE BUSINESS-GOVERNMENT BARGAINING MODEL: OLD AND NEW

Another way that MNEs interact with host government institutions that affects development is bargaining over the terms of their investments. Internationalbusiness scholarship dealing with MNE interactions with political actors and institutions can be divided into two related streams. Dahan, Doh, and Guay (2006) summarize the various streams of this literature and some of the critiques and shortcomings of this literature. The political-risk stream, as represented by the work of Robock (1971), Kobrin (1979), Simon (1984), and others, views the MNEs’ political environment

Institutional Governance and Development

as mostly a given; firms must react by either complying with or exiting the host country (Boddewyn 1988). The bargaining model, as proposed by Vernon (1971) and further explicated by Kobrin (1987), proposes that MNEs typically face more favorable terms early in the investment process but that their bargaining power erodes as their investment commitment increases. The model has provided a powerful perspective for understanding the dynamics of MNE– host country relations, is prominent in the international business literature, and has enjoyed many extensions. It offers a more dynamic view of the MNE as a political player involved in bargaining with the host country (Fagre and Wells 1982; Vernon 1971). Nonetheless, although significant theoretical enhancements have extended the scope of this approach over the past three decades (Moran 1985), there is growing skepticism about the efficacy of the bargaining model (Boddewyn 1988; Boddewyn and Brewer 1994). Dahan, Doh, and Guay (2006) identify four principal shortcomings of these models: (1) they are centered on the national level (that is, MNEs interact with states, overlooking other types of public authorities and political levels); (2) they consider primarily dyadic relationships (MNEs-states), but MNEs increasingly develop relationships with a multiplicity of public and private actors; (3) they deal with the MNE as the focal organization (with no consideration for collective actions undertaken by MNEs within groupings such as clubs, associations, forums); and (4) they restrict their analysis to the political environment of MNEs, that is, cover hard power in the forms of compulsory regulations, formal public policies, and court rulings, thus missing “soft power” aspects such as spreading ideas, shaping cognitive frames through discursive strategies and symbolic actions, and participating in the promotion of certain social norms and values. Vernon (1971) proposes a specific application of these models of MNE–host country relations in the obsolescing bargain model (OBM). He argues that the changing dynamic of bargaining relations between MNEs and host governments is a function of goals, resources, and constraints on both parties (Vernon 1971). Under this scenario, the desire of the host government to attract investment results in the initial bargain favoring the MNE. However, the relative bargaining power shifts to the host-country government as the MNE commitment becomes more substantial and more difficult to reverse. Once this bargaining power shifts, the host government imposes additional conditions on the MNE, ranging from higher taxes to contract renegotiations to complete the expropriation of MNE assets. Kobrin’s (1987) early insight that FDI in manufacturing industries and ex-

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port-oriented investment were less vulnerable to host-country intervention demonstrated that these models are subject to important conditions and constraints. These conditions and constraints have come to suggest that the bargaining model is outdated and in need of reconsideration. Indeed, the model was largely repudiated in the late 1980s and 1990s (Stopford and Strange 1991), reflecting, in part, evidence that outright expropriations in developing countries had declined precipitously through the period. Doh and Ramamurti (2003, 342), however, observe that “creeping” expropriations were replacing outright takings, noting that “beneath these generally favorable statistics lies a troubling pattern: governments continue to engage in a pervasive practice of selective and disruptive recontracting.” Recent contributions have sought to extend or revise the political-risk and bargaining models (Ramamurti 2001) rather than propose alternative conceptualizations. Teegen, Doh, and Vachani (2004) offer one of the more comprehensive critiques of the political bargaining model within the contexts of the emergence of the civil society and NGO sectors; however, they do not propose a fully developed alternative. Other useful extensions have included Ramamurti’s (2001) contention that the emergence of multilateral organizations and other state-to-state trade and investment agreements severely constrained hostgovernment intervention. Teegen, Doh, and Vachani (2005) added the rise of NGOs to this mix, suggesting at least a trilateral, as opposed to bilateral, set of relationships. These extensions, however, do not completely undermine the relevance of the model, as most recently evidenced by the actions of developingcountry governments, especially those in Latin America (for example, Venezuela, Bolivia, Ecuador, and Peru).

SUMMARY POINTS

The institutions created by a society to govern social, economic, and legal transactions have a critical role to play in the growth and development of economies. These institutions—or their absence—have a profound impact on the amount and quality of FDI, an important aspect of development. Corruption is one of the most perverse manifestations of poor institutional systems and has a particularly detrimental impact on the attractiveness of an economy for FDI. Indeed, Doh and others (2003) show that even when MNEs choose to invest in a country, despite its corrupt nature, those investments are less beneficial to the local economy. Another aspect of institutional governance is the nature of bargaining and

Institutional Governance and Development

negotiation among MNEs, host countries, and other stakeholders over the terms of investment. These interactions have evolved significantly over the past decades such that host governments have somewhat less influence over the terms of investment and instead compete for those investments, whereas other institutions such as international organizations and NGOs are more involved and engaged. The institutional environment that MNEs face in developing countries may be considered a CSA. The presence of quality institutions that provide legal protections as well as clear and transparent rules and limit corruption, potential threats to asset appropriation, and recontracting, contributes to making a developing country attractive to MNEs. When such institutions are absent or inferior, MNEs can contribute FSAs that can help bolster these deficiencies, leading to improved CSAs, more investment, and sustained development progress.

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Chapter 7 Multinational

Enterprises from Emerging Economies

In this and the two succeeding chapters, we turn our attention to the process of FDI and MNE activity in the emerging economies of Asia. Here we use the term “emerging economies” (versus “developing economies”) to emphasize those countries that have broken out of a larger collection of developing economies and established impressive economic growth and substantially improved incomes. Much has been written about the Asian “economic miracle.” In these three chapters, we explore the dynamics of MNE investment, host-country policy, and the development of indigenous regionally based MNEs as the critical variables that have produced that miracle. An innovative feature of our analysis is a focus on outward FDI and inward FDI. Both types of FDI affect economic development. Indeed, the complementarity between inward and outward FDI offers us many new and useful insights into the modern nature of economic development. In this chapter we look at the extent of outward FDI from the leading MNEs in the emerging economies. We pay particular attention to the new MNEs from China and Korea. According to the U.N. Conference on Trade and Development 124

Multinationals from Emerging Economies

(UNCTAD), in 2005, global FDI outflows amounted to $779 billion. Developed countries remain the leading sources of such outflows; however, there were significant increases in outward investment by developing economies, led by Hong Kong (China) with $33 billion. Indeed, the role of developing and transition economies as sources of FDI is increasing. Negligible or small until the mid-1980s, outflows from these economies totaled $133 billion in 2005, approximately 17 percent of the world total (UNCTAD 2006). The focus of this chapter is on identifying and analyzing the set of MNEs registered and based in the world’s emerging markets. To do this we take as the relevant population the world’s 500 largest firms, ranked by total revenues, as compiled annually in the Fortune Global 500. This entire set of 500 firms (most of which are MNEs) was analyzed by Rugman (2005). That study examined data on the regional sales of MNEs from the “broad triad” markets of Europe, North America, and the Asia-Pacific region, which is where nearly all of the 500 firms are based. Of the 500 firms in 2001, 428 were MNEs from the “core triad” of the European Union, the United States, and Japan. In this chapter we discuss the MNEs from emerging markets, which numbered 32 in 2001 (and 44 in 2004). The chapter first identifies this set of 32 (or 44) MNEs from emerging markets. As most of these are from the Asia-Pacific region, the substantive theoretical analysis of their performance focuses on a set of Chinese and Korean MNEs. The 16 Chinese MNEs already on the 2004 list of the world’s 500 largest firms provide perhaps the most interesting challenge to theories of international business, international economics, and FDI. In order to apply the relevant theory, we have adapted the basic firm and country level matrix from chapter 2 (Rugman 1981) to analyze the performance of China’s MNEs. Basic theory suggests that MNEs succeed when they develop FSAs. In Korea’s case, its large MNEs, mostly chaebols, have developed successful knowledge-based FSAs. They are also using scale economies based on Korea’s CSAs in skilled labor and government support. In the empirical work, we find that the Korean chaebols operate on a home region basis, much like the world’s other large MNEs.

THE REGIONAL PERFORMANCE OF MULTINATIONAL ENTERPRISES

The performance of the world’s 500 largest MNEs has been examined by Rugman (2005). The world’s 500 largest firms, ranked by revenues, account for ap-

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Table 7.1 Regional sales of the world’s largest firms, 2001 Number of Firms Total North America Europe Asia Third worlda

Average revenue ($ billions) Intraregional sales (%)

380 186 119 75

29.2 (28.0) 28.8 (28.5) 31.1 (29.0) 27.4 (25.8)

74.6 78.6 66.4 77.9

5

23.3 (21.8)

70.4

Source: Authors’ calculation based on data in Rugman 2005. Note: Intraregional sales can be identified for only 380 of the world’s 500 largest MNEs. Figures in parentheses are for the entire set of the 500 largest firms in 2001. a The third world countries include only Brazil, China, Malaysia, Mexico, the Republic of Korea, Russia, Singapore, and Venezuela.

proximately 90 percent of the world’s stock of FDI. They also account for more than 50 percent of the world’s trade (Rugman 2000). Recent research has shown that the vast majority of these large MNEs operate on an intraregional basis. This information is summarized in table 7.1. The geographic basis for the regions of the broad triad are developed and explained by Rugman (2005). Of the world’s 500 largest firms in 2001, 380 provided data on the geographic distribution of their sales across the three regions of the broad triad. As shown in table 7.1, the 75 MNEs from Asia generated an average of 77.9 percent of their sales in their home region. This is somewhat above the average of 74.6 percent for all 380 MNEs. The 75 Asian MNEs had average revenue of $27.4 billion, which is only slightly less than the average for North American MNEs of $28.8 billion and for European MNEs of $31.1 billion. In summary, the regional performance of Asian MNEs parallels that of their competitor MNEs from North America and Europe. Table 7.2 refines the data in table 7.1, examining a smaller set of 174 MNEs that fully reported their sales in each of the three regions of the broad triad. The results confirm the pattern of table 7.1. For example, the 45 Asian MNEs generated an average of 73.2 percent of their sales in their home region in 2001; however, we can now see that they generated an average of 16 percent of their sales in North America and an average of only 7.6 percent in Europe. Again, this focus on home region sales is paralleled by MNEs from North America (which generated an average of 77.7 percent of their sales in their home region and an average of 12.5 percent in Europe, with an average of only 6.3 percent in Asia). The 58 European MNEs generated an average of 69.1 percent of their

Multinationals from Emerging Economies

Table 7.2 Triad sales of the world’s largest firms, 2001 Regional sales (%) Number of MNEs Total North America Europe Asia

174 71 58 45

Average revenue North ($ billions) America Europe 30.4 (28.0) 30.1 (28.5) 29.0 (29.0) 32.4 (25.8)

42.6 77.7 19.8 16.0

30.2 12.5 69.1 7.6

Asia

Unidentified

24.1 6.3 6.7 73.2

4.0 3.8 4.9 3.1

Source: Authors’ calculation based on data in Rugman 2005. Note: Only 174 MNEs report their regional sales for each of the triad regions. Figures in parentheses are for the entire set of the 500 largest MNEs in 2001. Percentages may not sum to 100 percent because of rounding error.

sales in their home region, nearly 20 percent in North America, and only 6.7 percent in Asia. The asymmetric pattern of classifications reported in tables 7.1 and 7.2 is based on data for 2001 in Rugman’s study (2005). Some petty criticisms of that book have suggested that these data present a snapshot and do not reveal a trend toward regionalization. In fact, Rugman (2005) demonstrated that these data were consistent over the time period for which firms reported their geographic distribution of sales, basically starting with fewer than 200 of the 500 largest MNEs in the late 1990s. Indeed, for 2002 the same pattern emerged as for 2001. Table 7.3 presents data for the world’s 500 largest firms in 2001, 2003, and 2004. In the most recent years more firms report the geographic distribution of their sales. More specifically, table 7.3 is based on the data for 2004 instead of 2001 as in tables 7.1 and 7.2. The reason we take 2004 is that this is the year with the most firms reporting data on geographical sales. Using the set of firms with 2004 data, we then find the regional sales of the firms for three years. Thus only 291 firms are present in this data set for 2001, based on the 2004 listing (as some firms left the 2001 list by 2004). Of the 291 firms analyzed in the 2001 data set in table 7.3, only 8 could be classified as global. Another 33 were bi-regional (of which 6 were host region oriented). The remaining 250 firms were home region based. These firms generated an average of 77 percent of their sales in their home regions. Of the 337 firms included in the 2003 data set, 8 were global, 41 were bi-regional (of which 8 were host region oriented), and 288 were home region oriented. These 288

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Table 7.3 Regional sales of the world’s 500 largest firms Home region

2001 2003 2004

Bi-regional

Host region

Global

Total firms

No. of firms

% intraregional sales

No. of firms

% intraregional sales

No. of firms

% intraregional sales

No. of firms

% intraregional sales

291 337 311

250 288 271

77 77 77

27 33 26

42 43 41

6 8 7

24 29 29

8 8 7

34 33 34

Sources: The data for 2001 and the methodology for this table are based on Rugman 2005. Data for 2003 and 2004 are from annual reports. Note: Data for 350 firms are available for 2003, but data for only 337 firms are sufficient to determine their regional category. The number of firms that were excluded from the table because of insufficient data are 21 for 2001, 13 for 2003, and 18 for 2004. Of the 350 firms for year 2003, 312 firms and 329 firms are listed in the Fortune Global 500 for 2002 and 2005, respectively.

Multinationals from Emerging Economies

firms again generated an average of 77 percent of their sales in their home regions. Finally, in 2004 there were 7 global firms and 33 bi-regionals (of which 7 were host region oriented). The vast majority (271) of the 311 firms were home region oriented, with their home regions again accounting for an average of 77 percent of their sales. The conclusion to be drawn from tables 7.1–7.3 is that the world’s 500 largest firms operate predominately on an intraregional basis, not a global basis, and that this trend has been consistent over time.

MULTINATIONALS FROM EMERGING MARKETS

In this section data are reported on MNEs from emerging markets. Table 7.4 lists 32 such MNEs for 2001. Table 7.5 lists 44 MNEs from emerging markets for 2004. In table 7.4 the 32 MNEs from emerging markets are mainly from the Asia-Pacific region. Only 2 are from Europe, the Russian firms Gazpron and Lukoil. Another 3 are from the Americas (Pemex and Carso Global Telecom from Mexico, and an oil firm from Venezuela). In contrast, there are 12 firms from Korea. Another 11 are from China, 2 from Taiwan, 1 from Singapore, and 1 from Malaysia. Relatively few of the set of 32 MNEs from emerging economies in 2001 provided data on the geographic distribution of their sales. Using the 2001 data and the methodology in Rugman’s study (2005), we make the following observations. First, 5 Korean firms provided data that show that all of them are home region oriented. For example, POSCO generated 91.9 percent of its sales in the Asia-Pacific region, and Hyundai Motor generated 81.6 percent of its sales in the Asia-Pacific region and 18.1 percent in North America. The remaining 3 Korean firms are close to being bi-regional, but should be classified as home region based since more than 50 percent of their sales were in the AsiaPacific region: Samsung Electronics derived 60.6 percent of its sales in the AsiaPacific region, 20.8 percent in North America, and 18.3 percent in Europe; LG Electronics derived 60.4 percent of its sales in the Asia-Pacific region, 23.6 percent in North America, and 11.7 percent in Europe; and Hyundai (different from Hyundai Motor) derived 56.3 percent of its sales in the Asia-Pacific region, 24.2 percent in North America, and 10.5 percent in Europe. Only 1 of the 32 multinationals from emerging markets is a global firm: Flextronics of Singapore. It derived only 19.8 percent of its sales in its home region, but 44 percent in North America and 36.2 percent in Europe. This firm is clearly an exception. In contrast, all other multinationals from emerging economies reporting data on regional sales are home region based. Some of the most extreme examples

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Table 7.4 The world’s largest firms in emerging markets, 2001 % of sales by region Company State Power PDVSA China National Petroleum Sinopec Pemex (q) Samsung Electronics Samsung SK Hyundai Motor LG Electronics China Telecommunications Hyundai Gazprom Ind. & Comm. Bank of China LG International Bank Of China Petronas Samsung Life Insurance

Industry Electricity Gas Gas Gas Gas Electronic Trading Gas Motor Electronics Telecom Motor Gas Banking Trading Banking Gas Insurance

Region Asia-Pacific Other Asia-Pacific Asia-Pacific North America Asia-Pacific Asia-Pacific Asia-Pacific Asia-Pacific Asia-Pacific Asia-Pacific Asia-Pacific Europe Asia-Pacific Asia-Pacific Asia-Pacific Asia-Pacific Asia-Pacific

Country China Venezuela China China Mexico Korea Korea Korea Korea Korea China Korea Russia China Korea China Malaysia Korea

Revenue ($ billions) 48.4 46.3 41.5 40.4 39.4 36.0 33.2 33.0 30.9 23.1 22.3 21.7 20.1 19.8 19.5 17.9 17.7 17.5

North America

Europe

Asia-Pacific

n.a. n.a. n.a. n.a. 91.74 20.84 n.a. n.a. 18.13 23.63 n.a. 24.19 n.a. n.a. n.a. n.a. n.a. n.a.

n.a. n.a. n.a. n.a. 3.68 18.30 n.a. n.a. 0.25 11.71 n.a. 10.49 n.a. n.a. n.a. n.a. n.a. n.a.

n.a. n.a. n.a. ⬎90 n.a. 60.63 n.a. n.a. 81.61 60.40 100.00 56.33 n.a. n.a. n.a. n.a. n.a. n.a.

China Mobile Communications SK Global Sinochem Korea Electric Power Flextronics International China Construction Bank COFCO KT Lukoil Carso Global Telecom Cathay Chinese Petroleum Agricultural Bank of China POSCO

Telecom Trading Chemicals Electricity Electronics Banking Food, cereal Telecom Gas Telecom Life Insurance Gas Banking Steel

Asia-Pacific Asia-Pacific Asia-Pacific Asia-Pacific Asia-Pacific Asia-Pacific Asia-Pacific Asia-Pacific Europe North America Asia-Pacific Asia-Pacific Asia-Pacific Asia-Pacific

China Korea China Korea Singapore China China Korea Russia Mexico Taiwan Taiwan China Korea

Source: Authors’ calculation based on Rugman 2005 and annual reports for the companies.

17.4 17.2 16.2 15.7 13.1 13.1 13.0 12.3 12.1 11.9 11.6 10.8 10.7 10.2

n.a. n.a. n.a. n.a. 43.95 n.a. n.a. n.a. n.a. n.a. — n.a. n.a. 2.94

n.a. n.a. n.a. n.a. 36.21 n.a. n.a. n.a. 35.51 n.a. — n.a. n.a. —

n.a. n.a. n.a. n.a. 19.84 n.a. n.a. n.a. n.a. ⬎90 100.00 n.a. n.a. 91.90

Table 7.5 The world’s largest firms in emerging markets, 2004 % of sales by region Company Sinopec Samsung Electronics State Grid China National Petroleum Pemex Hyundai Motor LG Electronics SK Petronas OAO Gazprom Indian Oil Lukoil China Life Insurance China Mobile Comm. Ind. & Comm. Bank of China UES of Russia Samsung Life Insurance China Telecommunications POSCO Korea Electric Power Sinochem

Industry Gas Electronics Electricity Gas Gas Motor Electronics Gas Gas Gas Gas Gas Insurance Telecom Banking Electricity Insurance Telecom Steel Electricity Chemicals

Region Asia-Pacific Asia-Pacific Asia-Pacific Asia-Pacific N. America Asia-Pacific Asia-Pacific Asia-Pacific Asia-Pacific Europe Asia-Pacific Europe Asia-Pacific Asia-Pacific Asia-Pacific Europe Asia-Pacific Asia-Pacific Asia-Pacific Asia-Pacific Asia-Pacific

Country China Korea China China Mexico Korea Korea Korea Malaysia Russia India Russia China China China Russia Korea China Korea Korea China

Revenue ($ billions) Intraregional 75.1 71.6 71.3 67.7 63.7 46.4 37.8 37.7 36.1 35.1 29.6 28.8 25.0 24.0 23.4 22.6 22.3 21.6 20.9 20.9 20.4

⬎90 54.61 ⬎90 n.a. 58.05 63.33 51.16 n.a. ⬎90 100.00 96.08 21.97 n.a. n.a. n.a. 99.47 n.a. 100.00 93.75 n.a. ⬎90

North America

Europe

Asia-Pacific

n.a. 23.18 n.a. n.a. 58.05 25.08 25.24 n.a. n.a. 0.00 n.a. n.a. n.a. n.a. n.a. n.a. n.a. 0.00 2.21 n.a. n.a.

n.a. 21.76 n.a. n.a. n.a. 11.59 15.60 n.a. n.a. 100.00 n.a. 21.97 n.a. n.a. n.a. 99.47 n.a. 0.00 n.a. n.a. n.a.

⬎90 54.61 ⬎90 n.a. n.a. 63.33 51.16 n.a. ⬎90 0.00 96.08 n.a. n.a. n.a. n.a. n.a. n.a. 100.00 93.75 n.a. ⬎90

Shanghai Baosteel Group China Construction Bank China Southern Power Grid Sabic Bank Of China Hutchison Whampoa Hon Hai Precision Industry PTT Flextronics International Koc Holding Hanwha Agricultural Bank of China Chinese Petroleum KT Reliance Industries CFE Bharat Petroleum COFCO Hindustan Petroleum Samsung SK Networks China First Automotive Works Oil & Natural Gas

Steel Banking Electricity Chemicals Banking Telecom Electronic Gas Electronic Manufacturing Chemicals Banking Gas Telecom Gas Electricity Gas Food, cereal Gas Trading Telecom Motor Gas

Asia-Pacific Asia-Pacific Asia-Pacific other Asia-Pacific Asia-Pacific Asia-Pacific Asia-Pacific Asia-Pacific Europe Asia-Pacific Asia-Pacific Asia-Pacific Asia-Pacific Asia-Pacific N. America Asia-Pacific Asia-Pacific Asia-Pacific Asia-Pacific Asia-Pacific Asia-Pacific Asia-Pacific

Source: Authors’ calculation based on annual reports for the companies.

China China China Saudi Arabia China China Taiwan Thailand Singapore Turkey Korea China Taiwan Korea India Mexico India China India Korea Korea China India

19.5 19.0 18.9 18.3 18.0 17.3 16.2 16.0 15.9 15.6 15.4 15.3 15.2 14.9 14.8 14.5 14.4 14.2 14.1 13.9 13.8 13.8 13.8

⬎90 n.a. 100.00 ⬎90 98.41 52.57 n.a. ⬎90 45.31 n.a. n.a. ⬎90 n.a. n.a. 78.24 n.a. 100.00 ⬎90 100.00 93.00 82.01 ⬎90 91.33

n.a. n.a. n.a. n.a. n.a. 13.81 n.a. n.a. 13.83 n.a. n.a. n.a. n.a. n.a. n.a. n.a. 0.00 n.a. 0.00 3.04 n.a. n.a. n.a.

n.a. n.a. n.a. n.a. n.a. 33.62 n.a. n.a. 40.86 n.a. n.a. n.a. n.a. n.a. n.a. n.a. 0.00 n.a. 0.00 3.97 n.a. n.a. n.a.

⬎90 n.a. 100.00 n.a. 98.41 52.57 n.a. ⬎90 45.31 n.a. n.a. ⬎90 n.a. n.a. 78.24 n.a. 100.00 ⬎90 100.00 93.00 82.01 ⬎90 91.33

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come from China, although the data are sketchy. China Telecommunications generated 100 percent of its sales at home. The Bank of China generated 98.4 percent of its sales in the Asia-Pacific region, and Sinopec derived 90 percent or more in the Asia-Pacific region. A related firm, Cathay Life, from Taiwan derived 100 percent of its sales in its home region. The pattern of dependence on sales in the home region for Asian MNEs is also exhibited by Pemex of Mexico, which generated 91.7 percent of its sales in North America. Table 7.5 updates the analysis of MNEs from emerging markets for 2004, examining a total of 44 MNEs, with the addition of 3 from Russia, 1 from Turkey, and 1 from Saudi Arabia. There were still 2 from Mexico. Otherwise, in 2004, the MNEs from emerging markets were all from the Asia-Pacific region, including India: 16 from China, 11 from Korea, 5 from India, 2 from Taiwan, 1 from Singapore, 1 from Malaysia, and 1 from Thailand. Data on the distribution of regional sales of these MNEs for 2004 has not yet been compiled, but it is highly unlikely to be substantially different from that of 2001. Because of the emergence of a large number of multinationals from China in recent years, the remainder of the chapter focuses on this group. The data on the regional sales of these 44 MNEs from emerging markets for 2004 in table 7.5 shows much the same pattern as for 2001 in table 7.4. In 2004, 25 firms provided some evidence that they were home region based. Only 5 firms were bi-regional (mostly the Korean firms, plus Flextronics). However, in 2004, Flextronics could no longer be classified as a global firm, as its sales to North America fell to 13.8 percent of the total. Instead, it was classified like Samsung Electronics, which is a bi-regional firm, with over 20 percent of its sales in each broad-triad region but over 50 percent in its home region. Overall, the data show that the firms from emerging markets were mainly home region based in 2004. Before exploring the data on China’s multinationals, the next section reviews the relevant theory needed to analyze MNEs from such emerging markets.

THE THEORY OF MNES IN A CHINESE CONTEXT

One of the unresolved problems facing the MNE in a foreign country is that it suffers from a liability of foreignness. From the viewpoint of the MNE’s managers, foreign markets present risks: there are social, political, and economic costs associated with entry to unfamiliar markets. The liability-of-foreignness literature suggests that the MNE has to make an investment in learning about foreign markets (Zaheer 1995, 2002). In general, this follows a process of inter-

Multinationals from Emerging Economies

nationalization; the MNE first goes to nearby countries, which is consistent with the empirical finding that the great majority of international business is conducted by MNEs in their home regions. The new insight that comes from this literature is that we cannot analyze the role of MNEs in a purely global sense. Instead, we must analyze the MNEs in a regional sense. We need to analyze the impact of Asian MNEs, primarily Japanese firms (66 of the 75 largest MNEs in Asia are Japanese), on the rest of Asia. Second, we can analyze the role of Chinese MNEs themselves; we follow this approach in the next section. We need to remember that of the 380 MNEs in the Fortune Global 500 (for which data are available), 320 derive an average of 80 percent of their sales in their home regions (Rugman 2005). Their distribution of foreign assets is even more regionalized. We conclude that analysis of Chinese (and later Korean) multinationals must focus on their regional sales in Asia. A case can be made that the recent economic development of China is almost entirely due to FDI. The opening of the Chinese economy to foreign MNEs, first in the special economic zones in the 1980s, and then in most coastal cities in the 1990s, introduced some market-based efficiency to a previously totally command economy. Although China is still dominated by stateowned enterprises and collectives, by 2005 foreign-owned firms accounted for one-third of production and half of exports (Thun 2005). The foreign MNEs operate on a world-class basis of competition, and they have developed efficient supply networks. Much of the privatized sector of small and medium-sized enterprises in China has become affiliated with the MNEs. Together the MNEs and the small and medium-sized enterprises are now driving forward the economic development of China. The inefficient and protected state-owned enterprises are beginning to reform and are starting to adopt more market-based strategies in the face of this new type of MNE-led domestic competition. Through this process, efficiency-based thinking is spreading from the coastal cities throughout China. In this sense foreign MNEs are the agents of economic development for China. This trend raises the question, when will China generate its own MNEs? The answer is, not for ten or twenty years. Although 11 Chinese firms are in the Fortune Global 500, none of them is truly internationalized. Indeed, these large Chinese firms are mainly state-owned enterprises, and they generate well over 95 percent of their sales within China (although only partial data are available for 8 firms). They are still largely in the protected banking, natural resources, and telecom sectors; they show few signs of developing any proprietary

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FSAs that would allow them to compete internationally, even on an intraregional basis. When the Chinese state-owned enterprises do go abroad, they are in search of technology, but they are not doing well through acquisition. Lenovo bought an obsolete IBM line of business; Baosteel bought up iron ore supplies in Brazil; Shanghai Motors bought the technologically laggard Rover of the United Kingdom; Haier bought Thomson TV and has found it difficult to upgrade it. Overall, these Chinese acquisitions reveal a search for the technology, management, and strategy skills missing in Chinese state-owned enterprises. The objectives appear to be to secure natural resources and market access, but, in fact, no useful technologies have been acquired. The Chinese MNEs still lack the internal managerial capabilities to integrate foreign acquisitions and develop anything resembling dynamic capabilities. They suffer from a lack of management talent. This competitive disadvantage in management will take about a decade to remedy before Chinese state-owned enterprises are competitive with Western MNEs. Related work by Nolan (2004) finds that Chinese firms have failed to develop FSAs and are lagging well behind Western firms, especially in technology. Nolan finds no evidence that Chinese firms can develop knowledge of the systems integration skills that characterize successful Western MNEs. The Chinese firms are protected, resource-based, labor-intensive, low-technology, and inefficient firms. The potentially efficient small and medium-sized enterprises are now linking to foreign MNEs rather than to the inefficient and uncompetitive state-owned enterprises. Japanese and Korean MNEs have developed FSAs, whereas Chinese firms have not. Basically there are no Chinese MNEs; they are just Chinese home firms.

DATA ON ASIA’S AND CHINA’S MULTINATIONALS

In table 7.6 we identify the home country of the 45 Asian MNEs providing data on their sales in each region of the triad. This list is dominated by the 37 MNEs from Japan, which in 2001 derived an average of 74.6 percent of their sales in Asia, 14.8 percent in North America, and 7.3 percent in Europe. Although there are 11 Chinese MNEs in the data set analyzed by Rugman (2005), none of them reports geographic sales across each region of the triad. The only firm from China reporting its geographic distribution of sales derived 100 percent of its

Multinationals from Emerging Economies

Table 7.6 Regional sales of Asian firms, 2001 Regional sales (%)

Total Australia Japan Korea Malaysia Singapore Taiwan China

No. of MNEs

Average revenue ($ billions)

North America

Europe

Asia

Unidentified

45 (121) 4 (6) 37 (88) 2 (12) 0 (1) 1 (1) 1 (2) 0 (11)

32.4 (25.8) 13.9 (14.1) 35.9 (27.9) 26.3 (21.2) n.a. (17.7) 13.1 (13.1) 11.6 (11.2) n.a. (25.0)

16.0 21.9 14.8 21.2 n.a. 46.3 0.0 n.a.

7.6 7.2 7.3 5.4 n.a. 30.9 0.0 n.a.

73.2 68.8 74.6 69.0 n.a. 22.4 100.0 n.a.

3.1 2.1 3.3 4.5 n.a. 0.4 0.0 n.a.

Source: Authors’ calculation based on data in Rugman 2005. Note: Of the 121 Asian firms included in the list of the world’s 500 largest MNEs, only 45 report regional sales data for the triad regions. Figures in parentheses are for the entire set of the 122 Asian MNEs in 2001. Percentages may not sum to 100 percent because of rounding error.

sales in Asia. We would expect the other 11 MNEs from China to generate close to 100 percent of their sales in Asia as well. Table 7.7 lists the 11 Chinese firms in the top 500 for 2001, arranged by industry group. We also show the 16 Chinese firms for 2004. Table 7.8 reports data on the regional sales of the 8 Chinese MNEs providing some data on the geographic distribution of their sales. We can see that China Telecom and China Southern Power generated 100 percent of their sales in Asia (indeed, virtually all within China itself ). The Bank of China derived 98.4 percent of its sales in Asia. The other 5 Chinese firms derived over 90 percent of their sales in Asia. Overall these 8 large Chinese firms, most of which have the potential of being classified as MNEs, generated an average of 93.1 percent of their sales in Asia. We would not expect this number to fall below 90 percent for many years. Indeed, it is likely to be at least ten to fifteen years before the 15 largest Chinese firms have intraregional sales close to the world average of about 75 percent. Until then the Chinese MNEs will continue to experience strong sales within China itself, with a gradual increase in foreign sales, but mostly within the Asian region.

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Table 7.7 Chinese MNEs in the top 500, 2001 and 2004 (billions of U.S. dollars) Industry 2001

Banking (4)

Utility (3)

Natural-resource manufacturing (2) Other manufacturing (2)

Company

Revenue

Industrial & Commercial Bank of China Bank of China China Construction Bank Agricultural Bank of China State Power China Telecommunications China Mobile Telecommunications China National Petroleum Sinopec Sinochem COFCO

19.8 17.9 13.1 10.7 48.4 22.3 17.4 41.5 20.4 16.2 13.0 21.9

China Life Insurance Industrial & Commercial Bank of China China Construction Bank Bank of China Agricultural Bank of China State Grid China Mobile Telecommunications China Telecommunications China Southern Power Grid Sinopec China National Petroleum Shanghai Baosteel Group Sinochem COFCO China First Automotive Works Hutchison Whampoa

25.0 23.4 19.0 18.0 15.3 71.3 24.0 21.6 18.9 75.1 67.7 19.5 20.4 14.2 13.8 17.3 29.0

Average (11) 2004

Banking and insurance (5)

Utility (4)

Natural-resource manufacturing (3) Other manufacturing (3)

Other (1) Average (16) Sources: Rugman 2005 and annual reports.

COUNTRY-LEVEL DATA ON TRADE AND FDI PERFORMANCE

Table 7.9 reports the ratios of trade and FDI stock to GDP across the three regions of the broad triad. The Asian economies are more heavily involved in the international economy through their trade performance than through their FDI performance. Although Asia’s ratio of trade to GDP is very close to the

Multinationals from Emerging Economies

Table 7.8 Regional sales of eight Chinese firms, 2004 Regional sales (%) Company Sinopeca China Telecommunicationsb Sinochemc China Const. Bankd China Southern Powere Bank of China f Hutchison Whampoag Agri. Bank of Chinah Average

Revenue ($ billions)

North America

Europe

Asia

Unidentified

75.1 21.6 20.4 19.0 18.9 18.0 17.3 15.3 25.7

n.a. n.a. n.a. n.a. n.a. n.a. 14.0 n.a. n.a.

n.a. n.a. n.a. n.a. n.a. n.a. 33.0 n.a. n.a.

⬎90.0 100.0 ⬎90.0 ⬎90.0 100.0 ⬎98.4 53.0 ⬎90.0 88.9

⬍10.0 0.0 ⬍10.0 ⬍10.0 0.0 ⬍1.6 0.0 ⬍10.0 5.2

Source: 2005 annual report for each company. Note: Of the 16 Chinese MNEs included in the world’s 500 largest MNEs in 2004, only 8 report their regional sales. If values are larger than 90%, 90% is used for calculation. If values are larger than 90%, 90% is used in the calculation of the average; similarly, if values are less than 10%, 10% is used. aAccording to the notes in the company’s annual report, Sinopec has less than 10% of sales and investment in foreign areas, and accordingly, under International Financial Reporting Standards (IFRS), it does not need to report its geographic sales. bAll of the group’s operating activities are carried out in the People’s Republic of China. c Exports make up 10% of Sinochem’s sales. We expect that regional sales would be larger than 10%. d The company follows IFRS, but it does not specify geographic segment data. Accordingly, it is possible to presume that less than 10% of the company’s sales and assets are foreign. e China Southern Power’s Web site shows that the company covers Guangdong, Guangxi, Guizhou, Yunnan, and Hainan, which are also connected with the power grid in middle China, Hong Kong, and Macao. It is possible to presume that the percentage of home region sales and assets is 100%. f The percentage of sales from China, Hong Kong, and Macao is 98.41%, and that of assets is 94.5%. g Annual report shows the value of geographic sales. h The values are not explicitly noted in the annual report, but given the geographic data on the company’s deposits, borrowings, and the like, it is possible to conclude that domestic sales exceed 90%.

overall average ratio of 24 percent (on both an inward and outward basis), its ratio of FDI stock to GDP is considerably below the average. With respect to the ratio of inward FDI stock to GDP, Asia averages 11.65 percent, compared with the overall average of 19.96 percent; and with respect to the ratio of outward FDI stock to GDP, Asia averages 10.48 percent, compared with the overall average of 22.08 percent. Perhaps the most significant point in table 7.9 is that the outward FDI stock of Asian countries is significantly below that of North American and European countries. This particular statistic is unlikely to

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Table 7.9 Inward and outward FDI stocks and trade as a percentage of GDP, 2002 Inward Region

Outward

FDI stock

Trade

FDI stock

Trade

Americas North Americaa South Americab

15.83 14.65 30.51

13.34 12.68 21.54

15.57 15.96 10.71

16.34 16.16 18.53

Asia-Pacific Asia Oceania

13.02 11.65 34.72

24.46 24.66 21.30

11.13 10.48 21.43

22.49 22.44 23.29

Europe, Africa, and Middle East Africa—Middle East Europe Total

29.50 18.77 30.80 19.96

35.95 34.26 36.16 24.05

37.15 4.70 41.10 22.08

33.89 32.20 34.09 24.04

Sources: FDI data are from UNCTAD 2004. Trade and GDP data are from World Bank 2005. a Central American countries are included in North America. b Caribbean countries are included in South America.

improve in the near future (the next three to five years) because it takes a long time to increase the FDI stock. Table 7.10 shows that the developed countries provide over 90 percent of the world’s stock of outward FDI but that they receive considerably less of the inward stock (74.82 percent). In contrast, the less-developed countries (which include China) receive nearly 25 percent of the world’s inward FDI stock but contribute under 10 percent of the world’s outward stock. China is a microcosm of the less-developed countries in this respect: China receives much more inward FDI than it provides in outward FDI.

KOREA’S MULTINATIONALS

The Republic of Korea is home to a set of large firms, so called chaebols, which can now be classified as MNEs. In the list of the world’s 500 largest companies, ranked by sales for 2001, Rugman (2005) found that there were 12 Korean firms. In 2004, there were 11 Korean firms in this list. These large MNEs are discussed here as the basic set of firms that will determine the success of Korea in developing MNEs. The purpose of this part of the chapter is to analyze the FSAs and

Multinationals from Emerging Economies

Table 7.10 Stock and flows of inward and outward FDI, 2002 (billions of U.S. dollars) Panel A. Inward FDI Inward stock FDI stock Developed countries Less-developed countries Least-developed countries Total

7,213.5 2,288.7 138.9 9,641.1

% of total 74.82 23.74 1.44 100.00

Inward flows FDI flow

% of total

565.8 129.9 4.9 700.6

80.76 18.54 0.70 100.00

Panel B. Outward FDI Outward stock FDI stock Developed countries Less-developed countries Least-developed countries Total

6,416.3 650.4 1.8 7,068.5

% of total 90.77 9.20 0.02 100.00

Outward flows FDI flow

% of total

603.2 39.6 0.1 642.9

93.82 6.16 0.02 100.00

Sources: Data from UNCTAD 2004, 2002. Note: Mexico, the Republic of Korea, and Turkey were moved from the UNCTAD “less-developed” category to the “developed” category. There are 33 developed countries, 82 less-developed countries, and 31 least-developed countries.

CSAs of Korean chaebols in the context of the regional dimension of world business. The literature now recognizes the importance of broad-triad regions in determining the sales of MNEs. It shows that the largest MNEs have developed FSAs and CSAs in their home regions (see, among others, Rugman 2000; Girod and Rugman 2003; Rugman and Verbeke 2004; Delios and Beamish 2005; and Oh and Rugman 2006). Korean firms have an incentive to become MNEs, as the size of their home market is relatively small for achieving scale economies. Like Western MNEs in large open economies, Korean chaebols have developed home region oriented FSAs and CSAs, but their FSAs and CSAs are different from those of Western MNEs. We show here that the chaebols have home region oriented advantages coming from business-government relationships, knowledge-based capabilities, and group-affiliated benefits. Considering the size of its economy, population, and land area, as well as the amount of natural resources it possesses, Korea is a relatively small country, but

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it has several very large firms. Therefore, Korean firms have a greater motivation to develop international capabilities to exploit host countries’ resources and markets than firms of similar size in larger countries. Only Canada, China, France, Germany, Japan, the Netherlands, the United Kingdom, and the United States have more firms listed among the world’s 500 largest firms, and these countries are all G8 countries except for China and the Netherlands. The Netherlands is the only country that has more companies listed in the world’s top 500, but it has a smaller GDP than Korea. Korean firms’ FSAs and CSAs have changed rapidly in accord with Korea’s rapid economic growth. In the past, the FSAs of Korean firms built on a set of CSAs that included the benefits of group-affiliated behavior, cheap and skilled labor, government subsidies for exporting, government protection from foreign firms in the domestic market, and collaboration between government and firms. Today their FSAs are building on an updated set of CSAs that includes a knowledge-oriented economy, highly educated workers, advanced infrastructure, and geographic proximity to cheap labor in Southeast Asian countries and China. Even though the Korean and foreign governments have sought to limit the group-affiliated behavior of chaebols—for example, cross-subsidization—since the economic crisis in Asia in the late 1990s, group-affiliated behavior of chaebols once again has become a strong CSA in the home market. Lee and Miller (1996) find that Korean firms using traditional technologies are able to succeed because they obtain help in the form of government subsidies and protection, and further claim that because of competition, government intervention is ineffective in industries using emergent technologies. They conclude, therefore, that government protection is no longer a strong CSA for large Korean firms.

THE FSAs OF KOREAN FIRMS

What, then, is the current status of FSAs of Korean firms, and to what extent have inward and outward FDI helped improve the FSAs of Korean companies? Since improving technological capabilities is ultimately an endogenous and accumulative process that requires substantial endogenous efforts (Kim 1997; Lall 1987), relying solely on direct technology transfer from joint-venture partners is not sufficient for the development of FSAs. Rather, firms need to internalize the benefits of knowledge creation, partly shown by their R&D expenditures. The R&D expenditures of 10 Korean firms accounted for 70 percent of the total R&D expenditures of the 550 largest Korean firms, and that of 30 firms

Multinationals from Emerging Economies

accounted for 85 percent of the total in 2002. The 10 firms included Samsung Electronics, LG Electronics, Hyundai Motor, POSCO, and KT, all MNEs listed in the Fortune Global 500. Except for SK, which ranked twelfth in R&D expenditure among Korean firms, all of Korea’s firms in the Fortune Global 500 are R&D-oriented manufacturing firms. The 3 largest Korean firms, Samsung Electronics, LG Electronics, and Hyundai Motor, account for 52 percent of the total R&D expenditure of the 550 largest Korean firms (see Science and Technology Policy Research Institute 2003). Nelson and Pack (1999) find that the successful growth of Korea and Taiwan is due to technology assimilation. They argue that individual firms had strong incentives to improve their FSAs in efficiency to enable them to export rather than engage in rent seeking in the domestic market. Korean firms had been using traditional or mature technologies that are established, well understood, and less valuable to advanced counties since the 1960s, but the Korean chaebols have adopted emergent or developing technologies because of their growing R&D capacities. Those emergent or developing technologies are valuable FSAs (Lee and Miller 1996). Advanced technologies are not easy to adopt, and firms have to improve their R&D capabilities by increasing in-house capability. Mathews and Cho (1999) report that the success of the semiconductor industry in Korea can be explained by the technological learning of the latecomer firms. The top-tier firms, like Samsung Electronics and LG Electronics, have to reduce the appropriability problem by securing their advanced R&D capability against possible imitators. This is done by internalizing their FSAs (Rugman 1981, 2006). A recent survey provides mixed evidence on the success of Korean MNEs. Building on their FSAs, during the five-year period 2001–2005, Korean MNEs invested in foreign countries to promote exports (38.2 percent of total outward FDI), to use low-wage workers (11.0 percent of total outward FDI), to exploit natural resources (9.6 percent of total outward FDI), and to circumvent trade restrictions (3.4 percent of total outward FDI). But only 2.1 percent of total outward FDI was for R&D purposes (see Korea EXIM Bank 2005). Only 5 percent of the foreign establishments of Korea’s 3 largest MNEs are in R&D-oriented facilities. Thus Korea’s MNEs develop FSAs based on home-country R&D, not on asset-seeking FDI. Guillén (2000) finds that firms and entrepreneurs create diversified business groups when they can accumulate an inimitable capability to combine domestic and foreign resources to enter industries quickly and cost effectively. Yet chaebols find it hard to use groupwide benefits, particularly in well-developed

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foreign markets. However, formal and informal benefits of a group-affiliated structure, such as trust, knowledge sharing, and supply chain management, will remain strong FSAs of chaebols. Hitt, Lee, and Yucel (2002) claim that relational networks represent important social capital in Korea. Chang and Choi (1988) and Chang and Hong (2000) find that group-affiliated firms extensively share technological skills and advertising. Indeed, Samsung Electronics has strong network advantages coming from its affiliates such as Samsung SDI, Samsung Corning, and Samsung Electro-Mechanics. It is interesting that the Samsung group and the LG group recently restarted their group level recruiting systems, which was suspended in the early 2000s.

OTHER ASIAN MNEs

The World Bank (1993) classified eight Asian countries into three groups: (1) Japan; (2) the first-generation newly industrialized countries (Korea, Hong Kong, Taiwan, and Singapore); and (3) the second-generation newly industrializing countries (Malaysia, Indonesia, and Thailand). Even though these eight Asian countries have experienced fast and export-oriented economic growth, they have different types of MNEs based on different CSAs. Redding (2001) analyzes the CSAs of firms in the smaller economies of Asia: an involved government, a centralized structure, human capital, and social capital. Rugman and Collinson (2006) examine the FSAs and CSAs of Japanese firms by using several case studies and conclude, among other things, that Japanese MNEs build on the CSAs in their home region, where their upstream FSAs are even more localized than their downstream FSAs. Debrah, McGovern, and Budhwar (2000) show that Singapore’s CSAs lie in skilled labor, advanced technology, advanced physical infrastructure, and advanced commercial infrastructure, whereas Indonesia and Malaysia have advantages in cheap (unskilled) labor and natural resources. The three other first-generation countries (and Japan) have similar advantages to those of Singapore. Brouthers, O’Donnell, and Hadjimarcou (2005) show that emerging-market firms achieve a higher level of export performance when they mimic the product strategies of Western MNEs in triad markets than when they enter emerging markets or when they develop other product strategies in triad markets. We note, as supporting evidence, that Korean MNEs have acquired foreign technologies (but not really strong FSAs) through acquisitions; for example, Samsung Electronics acquired Harris Microwave Semiconductor in 1993,

Multinationals from Emerging Economies

and LG Electronics purchased 57.7 percent of the stock of Zenith Electronics in 1995. Japanese firms are linked to firms in the newly industrialized Asian countries, which serve as markets for final electrical and electronic products and Japanese-made components. The first-generation newly industrialized countries developed their technological capabilities by relying on Japanese firms’ FSAs. Korean and Taiwanese electronics firms acquired technology mainly through licensing and contracting arrangements with Japanese firms such as Sony, Sanyo, and Matsushita in the period 1970 –1980 (Hobday 1995). Korea’s MNEs have been building on their neighboring countries’ CSAs, such as cheap labor in China, natural resources in Southeast Asia, and advanced technology in Japan. We now apply this theoretical work on FSAs and CSAs to Korean MNEs, using the data available on the nature and performance of Asian MNEs. We conclude by examining the available data on Korean MNEs.

THE PERFORMANCE OF KOREAN FIRMS

In table 7.6 we identified the home countries of the 45 Asian MNEs that provided data on their sales in each region of the triad. Although there are 12 Korean MNEs in the data set analyzed by Rugman (2005), only 2 of them report their geographic sales across each region of the triad. These 2 Korean firms derived an average of 69 percent of their sales in Asia in 2001. Table 7.11 shows the 12 Korean firms in the Fortune Global 500 for 2001, arranged by industry group. We also show the 11 Korean firms for 2004. With the exception of POSCO, Korea Electric Power, and KT, all other firms can be categorized as chaebols. The presence of Korean chaebols is at least as stable as the other 500 large companies: of Korea’s 12 largest firms in 2001, 2, that is, 17 percent, were no longer on the list in 2004, and of the world’s 500 largest firms, 94, that is, 19 percent, were removed from the list in 2004. It is important to note that 4 Korean trading firms, Samsung, Hyundai, LG International, and SK Global, were listed among the world’s 500 largest companies and accounted for 34 percent of the revenue of Korea’s 12 largest firms in 2001. In 2004, only 2 trading companies, Samsung and SK Global (renamed SK Networks), were listed among the world’s 500 largest companies and accounted for only 9 percent of the revenue of Korea’s 11 largest firms. Over the same time period, Korea’s international trade increased more than 60 percent, from $292 billion to $478 billion.

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Table 7.11 Korean firms in the world’s largest 500 (billions of U.S. dollars) Industry 2001

Electronics (2) Trading (4)

Energy (1) Other manufacturing (2) Financial services (1) Utilities (2)

2004

Total (12) Average Electronics (2) Trading (2) Energy (1) Other manufacturing (3)

Financial services (1) Utilities (2)

Company

Revenue

Samsung Electronics LG Electronics Samsung Hyundai LG International SK Global SK Hyundai Motor POSCO Samsung Life Insurance Korea Electric Power KT

36.0 23.1 33.2 21.7 19.5 17.2 33.0 30.9 10.2 17.5 15.7 12.3 270.3 22.5 71.6 37.8 13.9 13.8 37.7 46.4 20.9 15.4 22.3 20.9 14.9 315.6 28.7

Samsung Electronics LG Electronics Samsung SK Networks (Global)a SK Hyundai Motor POSCO Hanwha Samsung Life Insurance Korea Electric Power KT

Total (11) Average Sources: Rugman 2005 and company annual reports. a SK Global changed its name to SK Networks in October 2003.

Table 7.12 shows the geographical distribution of sales for the 12 largest Korean MNEs, using data from their annual reports. Only 5 Korean firms reported their regional sales in 2001. We can see that all 5 Korean firms are homeregion-oriented MNEs because they had more than 50 percent of sales in their home region (the Asia-Pacific region). Overall these 5 large chaebols derived an average of 70 percent of their sales in Asia. That result is very consistent with the results in Rugman’s study (2005), which found that, on average, the world’s 500 largest companies derived 70 percent of their sales in their home regions.

Multinationals from Emerging Economies

Table 7.12 Regional sales of Korean MNEs, 2001 Regional sales (%) Company Samsung Electronics Samsung SK Hyundai Motor LG Electronics Hyundai LG International Samsung Life Insurance SK Global Korea Electric Power KT POSCO Average

Revenue ($ billions)

North America

Europe

Asia

Unidentified

36.0 33.2 33.0 30.9 23.1 21.7 19.5 17.5 17.2 15.7 12.3 10.2 22.5

20.8 n.a. n.a. 18.1 23.6 24.2 n.a. n.a. n.a. n.a. n.a. 2.9 17.9

18.3 n.a. n.a. 0.3 11.7 10.5 n.a. n.a. n.a. n.a. n.a. 0.0 8.2

60.6 n.a. n.a. 81.6 60.4 56.3 n.a. n.a. n.a. n.a. n.a. 91.9 70.2

0.2 n.a. n.a. 0.0 4.3 9.0 n.a. n.a. n.a. n.a. n.a. 5.2 3.7

Source: 2001 annual report for each company.

Hyundai Motor and POSCO generated 82 percent and 92 percent of their total sales in the Asian region, respectively. We presume that other Korean firms in the trading, energy, financial services, and utility industries derived similar percentages of sales in their home region because the data from the world’s 500 largest companies show those industries to be highly home region oriented. However, Samsung Electronics can be categorized as a near-global MNE, because it generated more than 20 percent of its total sales in North America and 18.3 percent in Europe. Likewise, LG Electronics and Hyundai are nearly bi-regionals because they generated more than 20 percent of total sales in Asia and North America but only 10 percent in Europe. More recent data also configure that the large chaebols are home-region-oriented MNEs. As shown in table 7.13, which is based on 2004 data, Samsung Electronics, Hyundai Motor, and LG Electronics diversified their sales geographically, but they still had more than 50 percent of sales in Asia. Samsung and SK Networks reported their regional sales data for 2004, which show that they are home region oriented MNEs like POSCO. The six firms generated an average of 71 percent of sales in Asia. We also track their geographic distribution of assets to analyze the chaebols’

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Table 7.13 Regional sales of Korean MNEs, 2004 Regional sales (%) Company Samsung Electronics Hyundai Motor LG Electronics SK Samsung Life Insurance POSCO Korea Electric Power Hanwha KT Samsung SK Networks (Global) Average

Revenue ($ billions)

North America

Europe

Asia

Unidentified

71.6 46.4 37.8 37.7 22.3 20.9 20.9 15.4 14.9 13.9 13.8 28.7

23.2 25.1 25.2 n.a. n.a. 2.2 n.a. n.a. n.a. 3.0 n.a. 15.7

21.8 11.6 15.6 n.a. n.a. n.a. n.a. n.a. n.a. 4.0 n.a. 13.2

54.6 63.3 51.2 n.a. n.a. 93.8 n.a. n.a. n.a. 93.0 82.0 73.0

0.5 0.0 8.0 n.a. n.a. 4.0 n.a. n.a. n.a. 0.0 18.0 5.1

Source: 2004 annual report for each company.

upstream FSAs in each region. All large Korean MNEs have more than 90 percent of their assets in their home region of Asia. Rugman (2005) defines downstream FSAs, or customer end FSAs, as strengths deployed in activities with a direct interface with customers; they are required to achieve successful market penetration. In contrast, upstream FSAs are deployed in activities that lack this direct interface but are critical to creating an efficient internal production system. Rugman (2005) further suggests and presents a reconceptualization of Bartlett and Ghoshal’s framework (1998) on “generic roles of national organizations” in the MNE. We apply this framework to our data in figure 7.1. The large Korean MNEs’ strength of geographic scope for upstream FSAs lags behind their downstream FSAs, as with other Western MNEs. Oh and Rugman (2006) find that the world’s 100 largest cosmetics companies also have the same asymmetry between upstream and downstream FSAs. The existing literature on multinationality and performance sometimes uses the number of foreign affiliates as a measure of geographic scope (see, among others, Errunza and Senbet 1984; Kim and Lyn 1986; Morck and Yeung 1991; Gomes and Ramaswamy 1999; and Zahra, Ireland, and Hitt 2000). Here we also analyze the number of foreign establishments and the number of workers in regional triad markets to check the robustness of our findings. These data are reported for the three largest Korean MNEs in table 7.14.

Multinationals from Emerging Economies

Figure 7.1 The FSAs of Korean MNEs Adapted from Rugman 2005, p. 198 and based on data from the firms’ annual reports. Data for Samsung Electronics, Hyundai Motors, LG Electronics, and POSCO are for 2004. Data of Hyundai are for 2001 (most recent available data). Geographic assets data for LG Electronics and SK Networks are unavailable. Numbers for geographic scope are counted when sales in the region exceed 20 percent of total sales.

The results show that the number of foreign establishments probably overstates the importance of international strategy. The foreign establishments are widespread throughout the world, but the employees work mainly in the home region. Moreover, the number of establishments in Europe is higher than in North America, whereas the number of employees in Europe is less than in North America. The overall results from an analysis of the number of employees are consistent with our previous results from an analysis of regional sales. We conclude that home region oriented strategy is very important from the perspective of performance as well as the organization of MNEs.

SUMMARY POINTS

The main conclusion of this chapter is that MNEs from emerging markets are not operating globally; instead they are home region based firms, like most of the world’s other MNEs. Nor is there any evidence that there is a trend toward globalization for either MNEs from emerging economies or MNEs in general. With reference to MNEs from China, the following four major conclusions can be drawn about the nature, extent, and future of outward FDI by Chinese and Korean MNEs.

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Table 7.14 Foreign operations of Korea’s “big three” MNEs Company

North America

Asia

Europe

Rest of world

Total

Number of establishments

Samsung Electronics LG Electronics Hyundai Motors Total

14 11 11 36

33 41 17 91

26 30 16 72

21 13 5 39

94 95 49 238

Number of establishments (% of total)

Samsung Electronics LG Electronics Hyundai Motors Total

14.89 11.58 22.45 15.13

35.11 43.16 34.69 38.24

27.66 31.58 32.65 30.25

22.34 13.68 10.20 16.39

100.00 100.00 100.00 100.00

Number of employees

Samsung Electronics LG Electronics Hyundai Motors Total

7,308 5,910 6,831 20,049

16,842 46,247 38,334 101,423

4,873 4,863 2,292 12,028

1,748 4,852 32 6,632

30,771 61,872 47,489 140,132

Number of employees (% of total)

Samsung Electronics LG Electronics Hyundai Motors Total

23.75 9.55 14.38 14.31

54.73 74.75 80.72 72.38

15.84 7.86 4.83 8.58

5.68 7.84 0.07 4.73

100.00 100.00 100.00 100.00

Source: Korea Trade-Investment Promotion Agency. Note: Establishments in the Republic of Korea are not included, but both Korean and non-Korean employees are included. Samsung Electronics, LG Electronics, and Hyundai Motors do not report the number of employees in some of their establishments (8, 13, and 4 establishments, respectively); most of those establishments (68 percent) are located in China.

First, the theoretical literature indicates that MNEs expand abroad based on a complex interaction between FSAs and CSAs. The successful MNEs from North America, Europe, and Japan, in general (this is something of a simplification), expand abroad to exploit FSAs that they have developed in their large internal home markets. The activities of their foreign subsidiaries, to an overwhelming degree, tend to replicate for local distribution the FSAs developed in the home market. This explanation of MNEs was developed in Rugman’s work (1981) and was still true as of the twenty-fifth anniversary republication of that book (Rugman 2006). Only to a minor extent do MNEs go abroad to gain access to knowledge and technology. A few Japanese MNEs engaged in assetseeking FDI in North America are the main exceptions to the rule that knowledge and technology is usually developed in the home market. Similarly, only a small set of Western MNEs go abroad to exploit natural resources—MNEs in

Multinationals from Emerging Economies

the energy, mining, and forestry sectors. They go abroad to exploit host country CSAs, but they retain proprietary control over managerial and marketing FSAs, where the latter are identified with their home countries. The implication of this for China is that its MNEs are likely to develop by exploiting China’s CSAs in cheap, unskilled, and skilled labor. It is highly unlikely that Chinese MNEs will go abroad in any significant numbers over the next five to ten years on the basis of FSAs. In general, China lacks firms with FSAs in knowledge and systems integration, especially in comparison with Western MNEs in the world’s top 500. Second, as Chinese MNEs develop and go abroad, their primary geographic focus will be within the Asia-Pacific region. Here their main competitors will be other Asian MNEs based in Japan, Australia, South Korea, Singapore, and other Asian Tigers. The empirical evidence on the performance of the world’s 500 largest MNEs, as summarized in Rugman’s study (2005), shows that the great majority of these firms operate on an intraregional basis. Of the 380 firms providing data on geographic sales, the largest set of 320 derived an average of 80 percent of their sales in their home regions. These firms had an even higher proportion of their foreign assets in their home regions. There are extremely few “global” firms, and only three dozen bi-regionals. The Chinese MNEs are highly unlikely to become global or bi-regional firms in the next ten to twenty years. However, this is not a problem, since there is no evidence showing that global and bi-regional firms are more profitable than home-region MNEs. Third, the major impact of the growth of Chinese outward FDI, and the development of Chinese-based MNEs, will be to enhance the internal efficiency of the Chinese economy. Only the best Chinese firms will succeed abroad. Thus, a prerequisite for international success is domestic efficiency. As the Chinese government has supported the establishment and improvement of domestic markets, economic efficiency within China has improved. The key agent for change in China has been the move toward unrestricted entry of FDI. Over the past ten years, Western MNEs have greatly improved the efficiency of the Chinese economy. They have established clusters and business networks with links to new and regenerated Chinese businesses. Indeed, many small and mediumsized Chinese firms are now affiliated with foreign multinationals in business networks. In contrast, the old state-owned enterprises have been slower to engage in the realities of market-driven efficiency. Consequently, many of these state-owned enterprises are poor candidates for internationalization. As they go abroad, their domestic monopoly protection, with its resulting inefficiency, will serve them badly in competitive foreign markets. Only the newer and more

151

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entrepreneurial firms in China will succeed internationally. The role of the Chinese government is to facilitate continuous improvements in the domestic market system. The government should continue to improve basic infrastructure, but a faster pace of liberalization in the service sector, especially financial services, is required to develop a competitive Chinese business system. As China’s economy improves, the most efficient firms will be able to expand abroad. Initially they will build on China’s CSAs, but eventually they will start to generate home-grown FSAs in knowledge and technology. Then Chinese MNEs will be on an equal footing with foreign MNEs in the list of the world’s 500 largest firms. Fourth, as Korean MNEs develop and go abroad, their primary geographic focus will be within the Asia-Pacific region. Here their main competitors will be other Asian MNEs based in Japan, Singapore, Thailand, China, and other Asian Tigers. The large Korean MNEs perform as well as their Western competitors in international markets, and they tend to be as intraregional as Western MNEs. We also find that in general, Korea lacks MNEs with FSAs in upstream integration in foreign markets but that the Korean MNEs have FSAs in downstream integration.

Chapter 8 Multinationals

and Development in Asia

In this chapter we continue our focus on FDI and MNE activities in the emerging economies of Asia. This chapter follows the logic of the previous chapter, in that outward FDI is shown to be a useful tool for economic development. Here we turn to a broader analysis of MNEs from all of Asia, in particular, adding the Japanese MNEs to the MNEs from China and Korea discussed in the previous chapter. We discuss certain MNEs in detail to understand their business strategies and impact on development. We build on prior empirical work that shows that the majority of the world’s 500 largest firms derive most of their sales in their home regions (Rugman 2005; Rugman and Verbeke 2004). Three sets of data are presented. The first set shows that 105 (91 percent) of the 115 Asian firms reporting geographic sales data are homeregion oriented. Just 3 are truly global, with a significant proportion of their sales in all three parts of the triad. In addition to sales data (which indicate output, or market-related measures of internationalization), we present data on the global distribution of the assets of these Asian firms. Measured by assets, all but 3 (97 percent) of the 111 Asian firms 153

154

Multinationals and Development in Asia

in the world’s 500 largest for which asset data are available are home region oriented. The third set of data shows that the vast majority of peer-reviewed academic publications have focused on the most global, and therefore the least representative, of these firms. Much of what we understand of Asian firms in terms of their distinctive characteristics (competitive strengths and weaknesses) is drawn from a biased sample of the most “global” firms. After presenting this data, we introduce an adapted “regional matrix” (Rugman 1981) as a framework for explaining the patterns of limited internationalization shown by the data. We then provide case studies to supplement the data and examine the most unusual bi-regional, host region oriented, and global Asian firms. As other studies and prior research (Rugman and Collinson 2006) have focused on the limited globalization of Japanese firms, we focus on nonJapanese firms (BHP Billiton, Hon Hai Precision, Flextronics, and Hutchison Whampoa) to see if there are common characteristics driving their unusual levels of regionalization. Finally, considering the additional data we have compiled on case-study selection in peer-reviewed management and business journals, we comment on the implications of the biases in research on Asian firms.

ASIAN BUSINESS IS REGIONAL, NOT GLOBAL

Empirical data increasingly support a regional perspective, countering the dominant view of globalization. Each region has 3 truly global firms, whereas North America has 167 home region oriented firms, Europe has 86, and Asia has 66. Despite the fact that these firms are large and multinational, the activities of, and influences on, these firms are strongly localized. Rather than increasingly homogenized markets (Levitt 1983) and a ubiquitous need for global strategies (Yip 2002), we have at most a situation of semi-globalization (Ghemawat 2001, 2003). Regional issues arguably provide better explanations of what influences these firms’ strategies and performance than do global issues. Here we add to the empirical evidence concerning the world’s largest firms. Table 8.1 lists 122 firms from Asia, 115 of which publish geographic sales data and 111 of which publish geographic asset data. We adopt the convention established by Rugman and Verbeke (2004). Home region firms are defined as those that generate over 50 percent of their sales in the home region; bi-regional firms generate less than 50 percent of their sales in the home region and over 20 percent in another triad region; host region firms generate over 50 percent of their sales in another triad region, out-

Table 8.1 The Asian firms in the top 500, 2004 Distribution of sales Company Toyota Motor NTT Hitachi Matsushita Electric Ind. Honda Motor Nissan Motor Sinopec State Grid Sony Nippon Life Insurance Toshiba Tokyo Electric Power Hyundai Motor NEC Dai-ichi Mutual Ins. Fujitsu AEON Meiji Yasuda Life Ins. LG Electronics SK

Distribution of assets

Fortune 500 rank

Country

Country rank

Revenue ($ millions)

Foreign to total sales (%)

Intraregional (%)

Type

Foreign to total assets (%)

Intraregional (%)

Type

7 18 23 25 27 29 31 40 47 56 72 90 92 96 98 99 112 113 115 117

Japan Japan Japan Japan Japan Japan China China Japan Japan Japan Japan S. Korea Japan Japan Japan Japan Japan S. Korea S. Korea

1 2 3 4 5 6 1 2 7 8 9 10 2 11 12 13 14 15 3 4

172,616.30 100,545.30 83,993.90 81,077.70 80,486.60 79,799.60 75,076.70 71,290.20 66,618.00 60,520.80 54,303.50 46,962.70 46,358.20 45,175.50 44,468.80 44,316.00 38,943.60 38,835.10 37,757.50 37,691.60

59 ⬍10 35 54 80 66 ⬍10 ⬍10 70 ⬍10 39 ⬍10 42 21 ⬍10 24 ⬍10 ⬍10 77 53

41 ⬎90 80 68 30 35 ⬎90 ⬎90 30 ⬎90 76 ⬎90 63 79 ⬎90 76 ⬎90 ⬎90 51 70

B D D D S B D D G D D D D D D D D D D D

54 ⬍10 23 20 69 48 ⬍10 ⬍10 50 12 19 ⬍10 11 15 ⬍10 38 11 12 NA NA

53 ⬎90 92 93 36 60 ⬎90 ⬎90 75 88 93 ⬎90 ⬎90 95 ⬎90 68 89 88 NA NA

D D D D S D D D D D D D D D D D D D I I (continued )

Table 8.1 The Asian firms in the top 500, 2004 Continued Distribution of sales Company Petronas Nippon Oil Ito-Yokado Sumitomo Mitsui Fin. Mitsui Mitsubishi Canon Mitsubishi Electric Nippon Steel Sumitomo Life Ins. Mizuho Financial Grp. Marubeni KDDI Millea Holdings JFE Holdings Denso Mazda Motor Mitsubishi Tokyo Fin. Kansai Electric Power Mitsubishi Heavy Ind. Sharp East Japan Railway

Distribution of assets

Fortune 500 rank

Country

Country rank

Revenue ($ millions)

Foreign to total sales (%)

Intraregional (%)

Type

Foreign to total assets (%)

Intraregional (%)

Type

133 142 145 147 148 149 154 156 157 158 184 185 194 197 202 203 211 217 219 221 225 226

Malaysia Japan Japan Japan Japan Japan Japan Japan Japan Japan Japan Japan Japan Japan Japan Japan Japan Japan Japan Japan Japan Japan

1 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36

36,064.80 34,150.70 33,631.90 33,318.20 32,805.90 32,735.00 32,071.50 31,735.40 31,536.90 31,000.20 28,278.70 28,273.70 27,170.10 26,978.70 26,087.60 26,052.70 25,081.40 24,457.50 24,317.70 24,106.00 23,632.60 23,610.50

77 2 36 9 41 15 75 14 ⬍10 ⬍10 14 32 ⬍10 ⬍10 ⬍10 44 60 40 ⬍10 12 49 ⬍10

60 99 64 94 59 87 27 98 ⬎90 ⬎90 89 74 ⬎90 ⬎90 ⬎90 65 40 64 ⬎90 90 63 ⬎90

D D D D D D G D D D D D D D D D G D D D D D

23 11 18 9 42 40 50 10 ⬍10 20 15 32 ⬍10 ⬍10 ⬍10 46 19 23 ⬍10 7 11 ⬍10

81 93 83 93 73 74 58 95 ⬎90 80 87 77 ⬎90 ⬎90 ⬎90 71 83 80 ⬎90 94 95 ⬎90

D D D D D D D D D D D D D D D D D D D D I D

Fuji Photo Film Coles Myer Sanyo Electric BHP Billiton Bridgestone Samsung Life Ins. Suzuki Motor China Telecom. UFJ Holdings National Australia Bank POSCO Korea Electric Power Sinochem Mitsubishi Chemical Woolworths Chubu Electric Power Japan Airlines Mitsubishi Motors Shanghai Baosteel Grp Sumitomo China Construction Bk. China Southern Power Nippon Mining Hldings Mitsui Sumitomo Ins. Japan Tobacco Itochu

227 235 237 241 250 251 255 262 264 269 276 277 287 288 289 300 301 304 309 313 315 316 318 319 320 327

Japan Australia Japan Australia Japan S. Korea Japan China Japan Australia S. Korea S. Korea China Japan Australia Japan Japan Japan China Japan China China Japan Japan Japan Japan

37 1 38 2 39 5 40 7 42 3 6 7 8 44 4 45 46 47 9 48 10 11 49 50 51 52

23,516.40 23,184.40 23,118.80 22,887.00 22,350.00 22,347.90 22,010.90 21,561.80 21,450.80 21,313.90 20,929.10 20,914.20 20,380.70 20,372.30 20,334.50 19,849.00 19,817.80 19,750.40 19,543.30 19,068.10 19,047.90 18,928.80 18,817.00 18,813.30 18,739.00 18,527.90

48 ⬍10 50 91 65 ⬍10 52 ⬍10 7 32 30 ⬍10 10 15 ⬍10 ⬍10 ⬍10 38 11 42 ⬍10 ⬍10 ⬍10 4 15 21

52 ⬎90 77 47 35 ⬎90 69 ⬎90 95 62 ⬎90 ⬎90 90 94 ⬎90 ⬎90 ⬎90 69 89 65 ⬎90 ⬎90 ⬎90 96 85 92

D D D B B D D D D D D D D D D D D D D D D D D D D D

28 ⬍10 27 53 50 12 47 ⬍10 10 40 ⬍10 ⬍10 ⬍10 14 ⬍10 ⬍10 ⬍10 51 ⬍10 22 ⬍10 ⬍10 ⬍10 ⬍10 32 12

76 ⬎90 83 55 62 ⬎90 68 ⬎90 93 72 ⬎90 ⬎90 ⬎90 94 ⬎90 ⬎90 ⬎90 82 ⬎90 81 ⬎90 ⬎90 ⬎90 ⬎90 69 86

D D D D D D D D D D D D D D D D D D D D D D D D D D (continued )

Table 8.1 The Asian firms in the top 500, 2004 Continued Distribution of sales Company Japan Post Bank Of China Sompo Japan Ins Hutchison Whampoa Daiei Aisin Seiki Ricoh Nippon Express Hon Hai Precision Ind. Sumitomo Electric Ind. PTT Flextronics International Taisei Kajima Mediceo Holdings Hanwha Cosmo Oil Agric. Bank of China Telstra Chinese Petroleum Cmnwlth Bk of Austral. Tohoku Electric Power

Distribution of assets

Fortune 500 rank

Country

Country rank

Revenue ($ millions)

Foreign to total sales (%)

Intraregional (%)

Type

Foreign to total assets (%)

Intraregional (%)

Type

337 339 344 347 353 354 356 368 371 372 373 375 377 384 390 393 396 397 401 402 406 409

Japan China Japan China Japan Japan Japan Japan Taiwan Japan Thailand Singapore Japan Japan Japan S. Korea Japan China Australia Taiwan Australia Japan

53 12 54 13 55 56 57 58 1 59 1 1 60 61 62 8 63 14 5 2 6 64

18,006.40 17,960.40 17,677.10 17,280.80 17,020.50 17,018.90 16,879.70 16,314.00 16,239.50 16,192.00 16,023.30 15,908.20 15,892.00 15,700.60 15,499.90 15,406.30 15,296.50 15,284.60 15,193.10 15,189.50 15,083.90 14,994.20

⬍10 25 ⬍10 74 ⬍10 24 49 17 ⬎90 23 ⬍10 ⬎90 ⬍10 10 ⬍10 NA 2 ⬍10 ⬍10 NA 19 ⬍10

⬎90 ⬎90 ⬎90 53 ⬎90 79 51 83 17 84 ⬎90 48 ⬎90 92 ⬎90 ⬎90 98 ⬎90 ⬎90 ⬎90 ⬎90 ⬎90

D D D D D D D D S D D B D D D D D D D D D D

⬍10 22 ⬍10 80 ⬍10 20 29 29 NA 17 ⬍10 90 ⬍10 10 ⬍10 NA ⬍10 ⬍10 12 ⬍10 17 ⬍10

⬎90 ⬎90 ⬎90 37 ⬎90 84 73 81 NA 91 ⬎90 47 ⬎90 92 ⬎90 ⬎90 ⬎90 ⬎90 88 ⬎90 ⬎90 ⬎90

D D D B D D D D I D D G D D D D D D D D D D

Nippon Yusen KT AMP COFCO Samsung Isuzu Motors SK Networks China (FAW) Autom. Shimizu Seiko Epson Asahi Glass Fuji Heavy Industries Kobe Steel Komatsu Dai Nippon Printing Toppan Printing Central Japan Railway Kyushu Electric Power Obayashi Westpac Banking Asahi Kasei Sekisui House Daiwa House Industry Australia & N.Z. Bankg Yamaha Motor

410 414 422 434 442 444 446 448 450 453 456 461 462 464 467 471 472 473 475 477 483 486 487 490 496

Japan S. Korea Australia China S. Korea Japan S. Korea China Japan Japan Japan Japan Japan Japan Japan Japan Japan Japan Japan Australia Japan Japan Japan Australia Japan

65 9 7 15 10 66 11 16 67 68 69 70 71 72 73 74 75 76 77 8 78 79 80 9 81

14,944.30 14,901.10 14,600.80 14,189.40 13,919.20 13,897.20 13,844.30 13,825.40 13,811.20 13,768.60 13,647.80 13,459.20 13,433.80 13,350.30 13,258.60 13,152.90 13,114.90 13,107.80 13,069.70 12,943.30 12,819.00 12,719.50 12,709.40 12,618.40 12,471.50

24 ⬍10 ⬍10 ⬍10 45 32 36 ⬍10 7 51 51 43 25 46 ⬍10 ⬍10 ⬍10 ⬍10 ⬍10 18 20 ⬍10 ⬍10 27 60

81 ⬎90 ⬎90 ⬎90 ⬎90 83 ⬎90 ⬎90 93 76 68 57 ⬎90 67 ⬎90 ⬎90 ⬎90 ⬎90 ⬎90 ⬎90 ⬎90 ⬎90 ⬎90 ⬎90 58

Source: Data are from the most recent annual report available for each company (2004 in most cases). Note: D ⫽ home-region oriented; S ⫽ host-region oriented; B ⫽ bi-regional; G ⫽ global; I ⫽ insufficient information.

D D D D D D D D D D D D D D D D D D D D D D D D D

⬍10 ⬍10 ⬍10 19 NA 13 ⬍10 19 ⬍10 28 56 22 ⬍10 36 ⬍10 ⬍10 ⬍10 ⬍10 ⬍10 19 ⬍10 ⬍10 ⬍10 27 45

⬎90 ⬎90 ⬎90 ⬎90 ⬎90 94 ⬎90 ⬎90 ⬎90 87 69 78 ⬎90 72 ⬎90 ⬎90 v90 ⬎90 ⬎90 ⬎90 ⬎90 ⬎90 ⬎90 ⬎90 68

D D D D D D D D D D D D D D D D D D D D D D D D D

Table 8.2 Asian firms in the top 500 by firm type, 2004

Firm type Global (G)

No. of firms measured by sales 3

% of total cases 3

Bi-regional (B)

5

4

Host region (S)

2

2

105 115

91 100

Home region (D) Total cases

The firms Sony (Japan), Canon (Japan), Mazda Motor (Japan) Toyota Motor (Japan), Nissan Motor (Japan), BHP Billiton (Australia), Bridgestone (Japan), Flextronics (Singapore) Honda Motor (Japan), Hon Hai Precision Industries (Taiwan) Others

No. of firms measured by assets

% of total cases

1

1

1

1

Hutchison Whampoa (China) Flextronics (Singapore)

1

1

Honda Motor (Japan)

108 111

94 97

Source: Data are from the most recent annual report available for each company (2004 in most cases).

The firms

Others

Multinationals and Development in Asia

side their home region; and global firms generate less than 50 percent of their sales in the home region and over 20 percent in each region of the triad. As summarized in table 8.2, 105 (91 percent) of the 115 firms for which geographic sales data are available are home region oriented (these firms are indicated in table 8.1 with a “D” in the column headed “Type”). There are 3 global firms: Sony, Canon, and Mazda Motor, all from Japan; 5 bi-regionals: Toyota, Nissan, and Bridgestone from Japan, BHP Billiton from Australia, and Flextronics from Singapore; and 2 host region oriented firms: Honda from Japan and Hon Hai Precision Industries from Taiwan. Overall, these 115 Asian firms derived an average of 81.9 percent of their sales in their home regions. Going beyond previous studies (Rugman 2005; Rugman and Verbeke 2004), however, we can also report that on average, 87.1 percent of the assets of these firms were located in their home regions. In table 8.3 we show the firms listed in table 8.1 by country, with the average revenues, intraregional sales, and assets for each country group. There are some interesting comparisons to be made, both between country groups and between the current and past levels of (limited) internationalization illustrated by these data. Briefly, 12 large Chinese firms have the highest average percentages of intraregional sales and assets, which is to be expected when we look at the composition of the group. As shown in the last chapter, many of the large Chinese firms build on China’s CSAs and tend to be (at least partly) government owned and supported. They are in the energy, commodities, utilities, and telecommunications sectors, where growth has been driven by the CSA of increased demand in the domestic market. This contrasts with the profile of the Japanese, South Korean, and Australian firms that developed knowledge-based FSAs and

Table 8.3 Asian firms in the top 500 by country

Country Australia China Japan Republic of Korea Others

No. of firms

Average revenue ($ billions)

Average intraregional sales (%)

Average intraregional assets (%)

9 12 79 10 5

17,573.26 27,030.83 29,735.77 24,406.94 19,885.06

86.00 90.58 80.63 84.90 63.00

87.22 90.17 86.00 95.00 79.50

Source: Data are from the most recent annual report available for each company (2004 in most cases).

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have experienced a longer period of growth, yet still remain oriented to the Asian region. The content of many of the annual reports from which the data was gathered suggests that there was an increased (or renewed?) focus on the Asian region because of the steady growth rates experienced in mainland China. Certainly the Japanese firms, which both dominate the list (79 firms) and are (on average) the largest, were shifting their focus toward China in terms of both inputs and outputs. This is confirmed by both FDI and trade data (Rugman, Collinson, and Hodgetts 2006). The main overriding message here is that very few of these firms can be thought of as global; they all conduct most of their business in the Asian region. This is the central empirical driver of this chapter: the vast majority of Asian firms are regional, not global. Accordingly, economic development in Asia is best viewed through regional, not global, lenses. Development in Asia is most likely to parallel the economic success of MNEs from Europe and North America, which are largely regionally based.

THE REGIONAL MATRIX AND ASIAN FIRMS

We take the basic model of international business, which distinguishes between country level and firm level effects (as introduced in chapter 2), and adapt it for this analysis. In earlier work (in chapters 2 and 7 in particular) we developed a matrix of CSAs and FSAs, based on the work of Rugman (1981) and Rugman and Verbeke (1992a). Much of the analysis in the international-business field can be synthesized within the simple framework of CSAs and FSAs. The FSAs possessed by a firm are based ultimately on its internalization of an asset, such as production, knowledge, managerial, or marketing capabilities. The firm exercises proprietary control over these FSAs, which are thus related to the firm’s ability to coordinate the use of the advantage in production, marketing, brand management, or the customization of services. Beyond the firm, there are country factors. They can lead to CSAs, which affect a firm’s strategy. For example, the CSAs can include political, cultural, economic, or financial factors, which are parameters exogenous to the firm. In Porter’s (1990) terminology, the CSAs form the basis of the global platform from which the multinational firm derives a home-base “diamond” advantage in global competition. Tariff and nontariff barriers to trade and other governmental regulation also influence CSAs. Here we advance on this two-by-two FSA-CSA matrix of chapter 2 to demonstrate that it can be modified to create the regional matrix shown in fig-

Multinationals and Development in Asia

Figure 8.1 Asian Firms in the Regional Matrix

ure 8.1. On the horizontal axis is shown the regional or global reach of the FSAs of a firm. On the vertical axis is shown the regional or global scope of the locational advantages of a firm’s FSAs. The vertical axis becomes operational for strategy, as for each firm there are data available on geographic scope. The regional matrix differs from the FSA-CSA matrix in that both axes represent FSA aspects of corporate strategy. For further discussion, see Rugman’s work (2005). We have positioned our 115 Asian firms from the top 500 inside the regional matrix. Almost all of these 115 firms are on the lower (regional) half of the vertical axis. Only 3 are unambiguously “global” in their geographic scope. The 3 biregional firms are also constrained in their geographic scope to the regional half of the vertical axis. This new regional matrix leads us to the following key analytical classifications: Quadrant 3: Global firms. Their FSAs have both global reach and global scope, as these firms are in all three regions of the triad. We find 3 among our 115 Asian firms. Quadrant 4: Bi-regional firms. Their FSAs have global reach but are not global in their geographic scope, as the firms have a significant presence in only two regions of the triad. Again, there are just 7 in our list of 115 Asian firms. Host-region firms, such as News Corp and Honda, also appear here.

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Quadrant 2: Home region firms. These firms have FSAs with a reach only in their home region, and they also have home region locational FSAs. Of the 115 Asian firms, 105 fit into this category. Quadrant 1: Firms with home region FSAs but a global scope in FSAs. There are very few of these in practice, although many firms think that they are global in scope. Data show, however, that they are actually home region based, in quadrant 2. We call quadrant 1 the “myth” of global scope.

THE PROBLEMS OF EXISTING “GLOBALIZATION” RESEARCH ON ASIA

The widespread view among the international business research community that large firms are more global in their business activities than they actually are has led to inaccurate views about the nature and extent of globalization and development. With hindsight we can see that biased research, focusing on the most “global” of firms rather than the most representative firms, has contributed to this inaccuracy. Further, those who write about development have tended to ignore the regional nature of the MNEs and the implications for development, for example, that regional trade agreements matter more than the WTO. The following discussion extends an argument put forward by Lynn (2006) and other authors in a recent special issue of the Journal of Asian Business and Management. They point to the inappropriateness of many of the theoretical approaches developed in the West for analyzing Asian business practices. However, they miss the related point that most of the published empirical research, by focusing predominantly on the more international Asian firms, is also part of the bias problem. Similarly, a number of reflexive papers in a recent volume (23) of the Asia Pacific Journal of Management discuss approaches to studying the distinctiveness of Asian business and management, but miss the empirical sample bias we show below. Our findings add weight to the main points of Meyer’s insightful article (2006) calling for greater “self-confidence” in studies of Asian business and management. Despite helpful guidance on appropriate methodological approaches, including qualitative methodologies, Meyer’s article also neglects the case study–selection bias that supports his overall argument about a U.S.centric approach to management studies. Mathews (2006), in an otherwise very useful addition to the literature on latecomer firms, makes a number of these mistakes in his discussion of “dragon

Multinationals and Development in Asia

multinationals.” His data on the “Asia-Pacific MNEs in UNCTAD’s list of Top 50 MNEs from developing economies” (table 8.1, p.11) shows total overseas assets of the selected firms but does not show a breakdown by geographic location. Moreover, by adopting UNCTAD’s Transnationality Index, the analysis misses the strong regional concentration of both sales and assets that our data illustrate. Finally, because it presents case studies of the “more globalized” firms in the list, including Ispat, Cemex, Acer, Li & Fung, and Lenovo, Mathews’s study (2006) contains the sample bias we discuss above. However, Mathews’s central argument focuses on the relative differences in the internationalization process between latecomer and incumbent MNEs, justifying this case selection. What should be clear is that we cannot make generalizations regarding the characteristics of the majority of Asian firms on the basis of analyses of this unusually international subgroup. Perhaps a more serious issue in the debate is the extent to which a new theory is required to explain Asian multinationals. Here we comment on the arguments in Mathews’s study (2006), simply because he has the most recent argument in favor of a new theory. He calls this the LLL framework. The first L stands for linkages, the second for leverage, and the third for learning. Basically, Mathews argues that the received theory of the MNE, as in Dunning’s eclectic paradigm, is unable to explain the emergence of latecomer MNEs. He also refers to these Asian MNEs as “peripheral,” “challengers,” “third world,” “emerging economy,” and “dragon” multinationals. However, it is apparent that the Asian multinationals still perform on an intraregional basis. Thus they are no different from MNEs in North America and Europe. The overarching regional dimension of all MNEs implies that the basic theory will explain the development of Asian MNEs. For example, emergingeconomy MNEs from China are obviously explained by country factors. They are driven by cheap labor, state support, and cheap money. The Korean-based MNEs are building on more experience and a higher level of R&D, and thus may be explained by FSAs as well as by Korea’s CSAs. Of course, most Asian MNEs are from Japan, and these are fully explained by the FSA-CSA framework, first developed by Rugman (1981). Our conclusion is that the detailed comments by Narula (2006) on the generic nature of the eclectic framework are basically correct. Furthermore, the comments by Dunning (2006) are rather subtle, as they suggest that the arguments of Mathews (2006) are complementary and need to be incorporated within the eclectic paradigm. Dunning’s work on the investment-development path is based on the eclectic framework, and it fully explains the development

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of Asian multinationals, as explained by Narula (2006). Thus the arguments of Mathews (2006) have failed to make the case for a new and distinctive theory to explain Asian MNEs. It is also argued by Mathews (2006) that many of the emerging economy MNEs from Asia are “born global.” These are generally small and mediumsized enterprises. Two points are in order. First, there is a well-known set of literature on emerging new ventures that would fully explain Asian firms. No singular theory for Asian “born globals” is required. Second, there is no empirical evidence that Asian born-globals perform in a manner different from that of North American or European firms. Furthermore, there is no published literature suggesting that born-globals, from anywhere in the world, actually perform other than within their home region. Indeed, all indications are that small firms will be more localized than large MNEs. Our conclusion is that no substantial case has been made for the development of a separate theory to explain Asian multinationals, large or small. Yet much of the literature on Asian firms is biased toward an assumption that these firms are global rather than regional. We pursue this conclusion by presenting data on the published literature in this area in the next section.

ASIAN-FIRM CASE STUDIES

We now apply the framework of figure 8.1 to analyze some specific firms in each of the major quadrants. This will help us classify the differences between regional and global structures and strategies of the world’s largest Asian firms. It will, indirectly, provide clues about the appropriate strategy required by MNEs to be successful—that is, a regional, rather than a simplistic global, strategy. In turn, this provides guidance for development, suggesting that the region matters for MNEs serving as indirect vehicles for development. These cases show that the former set of firms above is relatively unique in managing to develop FSAs applicable to other triad markets. Literature helps provide the beginnings of an explanation of why most firms are home-region based in their FSAs. First we develop an analytical framework to position these case studies. When we examine the unusual, more international, Asian firms, we find specific reasons they have internationalized to the degree they have. When we measure them in terms of sales, as in table 8.1, or downstream FSAs, as in figure 8.2, there are 5 bi-regional firms (Toyota, Nissan, BHP Billiton, Bridgestone,

Multinationals and Development in Asia

and Flextronics), 2 host region oriented firms (Honda and Hon Hai Precision Industries), and 3 global firms (Sony, Canon, and Mazda). In terms of assets, or upstream FSAs, there is just 1 bi-regional firm (Hutchison Whampoa), 1 host region oriented firm (Honda), and 1 global firm (Flextronics). Of course, there are industry sector effects that need to be considered in explaining the differences across this sample of firms. Steel and bulk chemicals, simply because of transportation costs, are less-internationalized industries. But this is another factor promoting regionalization rather than globalization. In past studies we have focused on Japanese firms, which dominate lists of the largest Asian firms (Rugman and Collinson 2006, 2004). In this chapter we briefly examine how the other Asian firms in the above list (BHP Billiton, Hon Hai Precision Industries, Hutchison Whampoa, and Flextronics) are different from the more representative home region oriented Asian firms. BHP Billiton

Many of the more international firms in our list have expanded geographically via mergers and acquisitions. BHP Billiton is a case in point. Formed by the merger in 2001 of BHP (Australia) and Billiton (United Kingdom), it now employs 37,000 people working in more than a hundred operations in approximately twenty-five countries. (BHP Billiton) Billiton was originally Dutch, and for some time was part of Royal Dutch Shell before becoming a separate listing on the London Stock Exchange. The firm is now a leading supplier of core steelmaking raw materials and one of the top five producers of copper, energy coal, nickel metal, and uranium. The merger brought together two firms with very different combinations of CSAs and FSAs. Billiton was an E.U.based raw-materials producer that expanded historically by establishing mining activities in Dutch and British colonial territories. It leveraged other countries’ advantages and built sales channels in the growing European markets. BHP’s growth was based on the CSAs of Australia, with the firm developing mining and processing operations initially to serve the domestic and regional markets. The geographic distribution of sales and assets today reflects this history. Less than 4 percent of BHP Billiton’s assets are in Europe, and over 50 percent remain in the Asian region, predominantly in Australia. In terms of asset distribution, it is a home region oriented firm. Just over 33 percent of the firm’s sales are generated in Europe. With only 47 percent of its sales in its home region, it became a bi-regional firm as a result of the merger.

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Hon Hai Precision Industries (Foxconn)

Hon Hai Precision Industries is described as “probably the biggest company you have never heard of ” (Hoovers). It is better known as “Foxconn,” and last year surpassed Flextronics to become the world’s largest contract manufacturer for computer parts, mainly connectors and cable assemblies. It was recently awarded a significant portion of the production contracts for Apple’s iPhone. The firm began manufacturing plastic products in the early 1970s, but grew rapidly in the 1990s on the back of steep demand for cheap IT components (Foxconn) and the move by firms such as Hewlett-Packard and Apple to reduce costs and contract out their assembly operations (Dean 2003). Its market value was over $17 billion in 2005 (up from less than $2 billion in 2002). Although the firm does not publish the details of the geographic distribution of its assets, we can be fairly sure that most of its assets are located in Asia. Although the company has established some manufacturing operations in Europe (Scotland and Ireland) and the United States (Los Angeles, Houston, and Kansas City), its main production operations are in Taiwan and mainland China (in Guangdong and Jiangsu provinces). Hon Hai Precision Industries has effectively built on its CSAs, notably cheap labor, and tapped into a growing global market for IT hardware during a period of rapidly increasing sales and declining prices (post 2000). Over 55 percent of its total sales are in North America, making it a host-oriented firm in terms of downstream FSAs. It could be argued that the success of the firm and its particular form of international expansion has been driven more by the outsourcing strategies of Western electronics-hardware brand owners than by the firms’ own FSA development (Ernst 2000). Flextronics

Flextronics and similar firms such as Solectron, Sanmina-SCI, Celestica, and Jabil make the Microsoft Xbox; Web TV set-top boxes for Philips and Sony; portable phones for Ericsson, Alcatel-Lucent, and Motorola; and PCs for a range of Western firms. Next to Hon Hai Precision Industries, Flextronics is the largest of these contract manufacturers. With 48 percent of its sales in Asia, 35 percent in Europe, and 17 percent in the Americas, it is a bi-regional firm in terms of its downstream FSAs. In terms of its asset distribution, Flextronics is global: 47 percent in Asia, 28 percent in Europe, and 25 percent in the Americas. It is the only firm with this distinction in our entire list of 111 firms (those from the 122 Asian firms in the Fortune Global 500 for which asset data were

Multinationals and Development in Asia

available). Its stages of growth since its beginnings in Singapore in 1990 give us some insights into this unusual pattern of internationalization. As in the case of Hon Hai Precision Industries, it could be argued that Flextronics has evolved on the back of a major transformation in the structure of global production networks, that of vertical specialization (Borrus, Ernst, and Haggard 2000). Global brand owners and original equipment manufacturers (OEMs) have increasingly outsourced manufacturing and related services to global contract manufacturers like Flextronics. Unlike Hon Hai Precision Industries, however, Flextronics has expanded rapidly by purchasing smaller electronics-industry contractors and factories from its customers. In 2000 it purchased a Japanese factory from Casio and was contracted to manufacture for the Japanese firm as it restructured to “externalize” its production activities. In 2001 it bought half of Xerox’s office equipment manufacturing operations for $200 million and took on a five-year outsourcing contract to manufacture Xerox products (Rugman, Collinson, and Hodgetts 2006; Flextronics). That same year, it took over much of Ericsson’s manufacturing and supply chain activities in Brazil, Malaysia, Sweden, and the United Kingdom. Ericsson decided to focus on high-end R&D and design activities and to let other firms manufacture telecommunications system components (UNCTAD 2003, 139). Through this route Flextronics has acquired and developed six industrial parks in low cost regions near each large core triad market. In Asia, it has two industrial parks in China, and a network of regional manufacturing facilities supply printers, cell phones, telephone switching boards, and PDAs. In the Americas, it manufactures products at its two industrial parks (one in Mexico, one in Brazil), and its network of manufacturing facilities produce automotive parts, telecommunications infrastructure equipment, electronics for automotives, printers, and disposable cameras. The strategy of buying out the manufacturing operations of telecommunications and IT firms continues, most recently with the purchase of Nortel’s manufacturing operations in Calgary, Canada, including the transfer of 650 employees. But Flextronics is also aiming to improve its innovative capabilities in R&D and design, and move higher up the industry value chain. By doing so, it will begin to challenge some of its own clients—the same firms that now outsource their manufacturing operations to specialize in these higher end capabilities (Engardio and Einhorn 2005).

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Hutchison Whampoa

This Asian conglomerate began in the 1860s as a Hong Kong trading company. It now encompasses container ports, property development, telecommunications, and retailing. It is still controlled by the influential businessman Li Kashing. Retailing dominates in terms of revenue, followed by telecommunications, which has grown rapidly with the firm’s investment in the 3G platform in Europe (Lim 2005). Hutchison Whampoa’s international expansion increased noticeably in the late 1980s, when it took over Canada’s Husky Oil, partnered with Procter & Gamble in personal care and retailing, and entered the U.K. telecommunications business. In the 1990s it expanded rapidly in four distinct business areas: (1) telecommunications and satellite TV, through partnerships with Cable & Wireless and China International Trust and Investment Company (CITIC) and by launching “Orange” in the United Kingdom in 1994 (which was bought by Mannesmann AG for $14.6 billion in 1999); (2) ports and port infrastructure, by acquiring the Port of Felixstowe in Britain in 1991 and developing terminal services around Asia; (3) energy and utilities; and (4) retailing and personal care products, through its A. S. Watson Group. The firm has continued to expand in these same four areas throughout this decade. In 2000 it won the largest 3G license “A” in the United Kingdom for over $6 billion. The platform was expanded to European countries and then to other parts of the world, primarily Asia. In Japan, the company’s expansion was accomplished through partnerships with NEC and NTT in 2002. By 2005, when a deal was struck with Skype, the group’s 3G global customer base had reached over 10 million. As a key license holder in the telecommunications industry, Hutchison Whampoa is now seen as a “flagship firm” alongside Vodafone, coordinating a wide array of hardware and software suppliers and service content providers (Whalley 2004). The ports business had also grown rapidly on the back of huge expansion in China and India, but the firm has also acquired interests in Turkey, Egypt, and Poland. Husky Energy (formerly Husky Oil) now spans the globe from Canada to Asia, with the company having completed large deals recently in the United Kingdom and China. A. S. Watson Retail has also continued to grow. The year 2004 saw particularly strong developments in Eastern Europe, and by 2005 A. S. Watson was seen as the world’s largest health and beauty chain. This pattern of diversified expansion, with a strong focus on U.K. and European ports, telecommunications, and utilities investments, explains the asset

Multinationals and Development in Asia

and sales distribution for Hutchison Whampoa. Sixty-three percent of its assets are outside Asia, with 44 percent in Europe, which makes it bi-regional in terms of its asset distribution. Europe accounts for 34 percent of its sales, but because Asia still accounts for over 50 percent of its sales, the company is classified as a home region oriented firm with respect to sales.

TESTING THE PERCEPTIONS OF “GLOBAL” MNEs

The previous case studies can provide us with idiosyncratic examples of relationships, patterns, or processes. Establishing the wider validity of context-specific phenomena lies at the heart of social science research in general. Moving from descriptive to normative theory, to create general principles with explanatory power and both predictive and prescriptive validity, is not easy (Carlile and Christensen 2005; Yin 1984). However, we now study all the large MNEs from Asia. Given that the objective data reported in this book shows that the Asian MNEs perform regionally, why is there a public perception that MNEs are global? We argue that this is partly explained by a bias in academic research (and in more popular media) toward the few “special cases” of MNEs that are global or bi-regional. In contrast, most large MNEs, operating largely in their home regions, are ignored. We now test this bias as it applies to Asian MNEs, especially the MNEs for the emerging economies of Asia, and in particular, those from China and Korea. Bibliometrics is the quantitative study of document-related processes. Robust research citations and evaluation methodologies have evolved from the early work of Derek de Solla Price (1963), and the related disciplines of informetrics and scientometrics are now used widely (Egghe and Rousseau 1990; Narin 1976). We employed a simple keyword metric similar to co-word analysis, based on a frequency analysis of the co-occurrence of keywords. This approach has not been used in this way in the field of business and management studies. The 75 largest Asian firms were subjected to a keyword search using the Business Source Premier database. An article “hit” is counted when the search finds an article that features the name of the firm and the keyword “business.” Only peer-reviewed periodicals were included in the search. The search process returned a total “hit count” for each firm. Table 8.4 lists the top 37 firms, ranked in order of the frequency of hits across this entire range of journals, and shows

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the aggregate data for all 75. There was an aggregate total of 518 hits across the top 75 firms. Note that this does not equate to 518 individual articles, since single articles that mention more than one firm are counted more than once (once for each firm). Business Source Premier is described by the database providers as “the world’s largest full text business database.” It enables full text searches of nearly 3,800 scholarly business journals and full text retrieval for more than 1,100 peer-reviewed business publications. Over 6.5 million articles are viewable on the online system, covering all subject areas related to business, with some journals dating as far back as 1922. EBSCOhost updates the system on a daily basis. Checks were run by accessing listed articles to ensure that these featured the firms highlighted by the search process. To validate the findings, we conducted a second search of a sample of these firms, employing an identical approach but using the Social Sciences Citation Index, a database that covers 1,725 journals spanning 50 disciplines (Social Sciences Citation Index). This returned slightly different hit counts, but the relative ranking of the firms and the proportion of hits for each group of firms validated the results of the main search. Finally, it should be noted that the database, although providing global coverage of business and management journals, is dominated by English-language, U.S.-based publications. This is, however, simply a reflection of the research field and the proportion of U.S. academics and academic institutions in the field. Table 8.4 shows that the more “global” Asian firms dominate academic research across all business and management disciplines in peer-reviewed journals. There is a strong correlation between the degree of globalization of a firm and the attention paid to it in academic research: 13 percent of the 75 firms in table 8.4 are global (G), bi-regional (B), or host region oriented (S) in terms of sales (even fewer in terms of assets), yet these firms account for over 54 percent of the total 518 hits and have an average hit count of 27.4 hits per firm, compared with an average of 3.6 hits per firm for home region firms (D) and 6.9 across all 75 firms. None of the top 5 firms in this list (table 8.4) are the usual home region oriented type of Asian multinational, yet these 5 unrepresentative firms account for over half of the total number of articles for the entire group of 75. There is an overwhelming bias in management studies toward firms like Toyota, Sony, Canon, and Honda because of their impact in the global economy (particularly in the United States). Yet they do not provide us with examples of what really differentiates Japanese or Asian firms from other firms. We know least about

Multinationals and Development in Asia

the most “typical” group of Asian firms whose sales are predominantly in their home region. There are other sample-selection biases in table 8.4. It is notable that Japanese firms dominate the list but also achieve a higher average hit count overall (including the many home region oriented firms). The 66 Japanese firms in the total list of 75 in table 8.4 average 7.4 hits per firm compared with 5 hits per firm for the South Korean firms, 3 for the Australian firms, and 1 for the other Asian firms listed. Of the Asian firms in our list, 88 percent are Japanese, but 95 percent of the total 518 article hits are for Japanese firms. No firm from any other country received more than 5 hits, and the 17 Japanese firms that top the list accounted for 86 percent of the total hits. Again, the top 5 firms in terms of hit count illustrate this point. With an average of 52.6 hits per firm, Toyota Motor, Sony, Canon, Honda Motor, and Nissan Motor accounted for over half the total hits. None of them are home region oriented; all are Japanese. There are parallels between past research on Japanese firms and the newer research on firms from emerging markets in Asia, including China. The current research is driven largely by concern about the evolving global competitiveness of large Asian firms, which is similar to the fear of Japanese economic superiority among U.S. and European CEOs and policymakers in the 1970s and 1980s. The perceived threat from Japan stemmed from the rapid relative growth in GDP, exports, and outward FDI, which suggested that an alternative model of market capitalism had given rise to specific competitive advantages that Western firms could not access. High-profile articles and books on the Japanese threat (Franko 1983; Wolf 1983; Ouchi 1981; Drucker 1981; Vogel 1979) fed this fear, and research efforts tried to identify what was different about Japan and its firms and how such differences might convey sustained competitive advantages. As a subset of the literature connecting multinationality and performance (Hitt, Hoskisson, and Kim 1997; Rugman 1979, 1981; Buckley and Casson 1976) studies of Japanese firms have attempted to connect differences in the CSAs of Japan itself, as the “locus of origin of geographic diversification” (Wan and Hoskisson 2003), with attributes in Japanese firms that convey advantages vis-à-vis their U.S. and European counterparts (Westney 2001, 1999; Nelson 1996; Aoki 1994; Fruin 1992; Whitley 1990). This research has tended, however, to over-generalize on the basis of the export-led growth of a relatively small number of industry sectors, the international success of a relatively small number of firms, and superior capabilities in a limited range of business processes. As a result, the accepted wisdom (until the Japanese recession that began in the

173

Table 8.4 The 75 Asian firms ranked by frequency with which they feature in academic articles (top 37 shown) Data for selected groups Article hits

500 rank

Cumulative hit total

Cumulative hit total (%)

Average no. of article hits

Average revenues ($ billions)

Average AsiaPacific (%)

91 51 45 40 36

10 37 190 41 58

Toyota Motor Sony Canon Honda Motor Nissan Motor

Japan Japan Japan Japan Japan

263

51

52.6

62.8

37.4

26 26 20 20

12 84 77 251

Mitsubishi NIEC Toshiba Fuki Photo Film

Japan Japan Japan Japan

355

69

39.4

58.1

53.0

18 16 13 9 9 8 8 8

32 45 88 13 381 23 141 285

Hitachi Matsushita Elec. Ind. Fujitsu Mitsui Suzuki Motor Sumitomo Mitsubishi Electric Bridgestone

Japan Japan Japan Japan Japan Japan Japan Japan

Company

Country

5 5 5 5 5

133 219 379 411 442

Hyundai Motor Hyundai Motor Ricoh Telstra Woolworths

S. Korea S. Korea Japan Australia Australia

469

91

8.8

37.5

74.2

4 3 3 3 3 2 2 2 2 2 2 2 2 2 2

296 82 171 252 364 229 293 348 368 378 388 399 404 445 499

Mazda Motor Mizuho Holdings Mitsubishi Motors Denso News Corp. Nippon Steel Sanyo Electric Dentsu Japan Telecom Taisei Flextronics Intl. Japan Airlines Isuzu Motors Yasuda Fire & Mar. I. Asahi Glass

Japan Japan Japan Japan Australia Japan Japan Japan Japan Japan Singapore Japan Japan Japan Japan

505

97

2.4

17.1

71.6

518

100

6.9

19.7

83.2

For all 75 firms

Source: Data are from the most recent annual report available for each company (2004, in most cases).

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early 1990s) was that these unique competitive advantages would lead to the widespread dominance of Japanese firms over incumbent firms in their own home markets. With hindsight we can see that even the more rigorous comparative studies of Japanese firms tended to focus only on a small subset of the most-international firms in the relatively few industry sectors experiencing export-led growth (Pearce and Papanastassiou 1996; Fransman 1995; Dunning and Cantwell 1991). They also tended to focus on specific superior capabilities achieved by these Japanese firms in a limited range of business processes. Trade data show that the export success of Japanese firms was limited to a small number of industry sectors (Fransman 1995), and these same sectors were responsible for much of the outward FDI and foreign sales of Japanese firms (Pearce and Papanastassiou 1996; Dunning and Cantwell 1991). The data presented further show that this success, expressed in terms of the proportion of overseas sales of a wide range of Japanese (and other Asian) firms, has also been rather limited. The size of these Japanese firms, as is the case for many U.S. firms, reflects success in their large regional home market rather than their global competitiveness. What we now know is that relatively few Japanese firms have ever managed to internationalize across the triad. The vast majority of Japanese firms are still strongly dependent on the domestic market. This bias toward the more unusual, more international, Japanese firms has given rise to a number of related problems, which we can learn from in guiding current research on Asian business and management. Past studies promoted an exaggerated perception of the competitive threat from Japan, suggesting that the advantages demonstrated by the relatively small number of exporters in autos, consumer electronics, and engineering were general Japanese advantages. A more objective approach would have questioned the degree to which we could generalize from these unusual examples. This bias was also linked to the expectation that the majority of Japanese firms would eventually internationalize to the same degree as the lead exporting firms in these key sectors. As our data show, they have not. A follow-up study examined the article hits for the Chinese firms in our larger list of 122 Asian firms that are among the world’s 500 largest: 4 hits for Sinopec; 3 for the China Construction Bank and Shanghai Baosteel Group; 2 for China National Petroleum, China Life Insurance, Industrial and Commercial Bank of China, Agricultural Bank of China, and China Telecommunications; 1 for State Grid, China Mobile Communications, and Sinochem; and no hits for China Southern Power Grid, COFCO, or China First Automotive

Multinationals and Development in Asia

Works. (Note that not all of these firms are listed in table 8.1, because data on the international distribution of their sales and assets were not available.) Hutchison Whampoa received 17 hits, however, and Chinese firms that are not currently in the Fortune Global 500 but are well known for their international activities and aspirations are also starting to attract more attention than their size warrants: Haier (14 hits), Shanghai Automotive, or SAIC, (10 hits), and Lenovo (9 hits).

SUMMARY POINTS

Figure 8.2, which is based on Rugman’s model (2005), summarizes our main findings. The top Asian firms, which have an intraregional scope to their FSAs, based on both sales and asset data, are distributed across the regional matrix. We find that 108 out of the 111 firms with asset data on upstream FSAs are home-region oriented and lie in cell 2. We also found that 105 of the 115 firms with sales data are in cell 1. Only 3 of the 108 firms with asset data are not homeregion based. Only 10 are non-home-region based, based on sales data on downstream FSAs. We placed the companies discussed in the case studies earlier in this chapter in the appropriate cells of figure 8.2.

Figure 8.2 Upstream and Downstream FSAs in Asian Firms

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The FSAs, whether downstream or upstream, possessed by a firm are ultimately based on its internalization of a knowledge resource or capability. As a result, a firm’s ability to leverage advantages away from its home region and compete successfully in other markets is restricted by its ability to internalize knowledge resources and capabilities. In the case of the Asian firms examined, their major knowledge assets and capabilities have evolved in the specific regional selection environment of Asia. It is highly unusual to find Asian firms like Toyota, Flextronics, and Sony that have managed to de-couple from the home region base of their FSAs or to adapt and customize to compete outside their home region. Yet such unrepresentative “global” firms are the overwhelming focus of the traditional international business-strategy research into the alleged differentiating characteristics and superior competitive advantages of Asian firms. In contrast, we find here that the vast majority of Asian firms have evolved FSAs to succeed in the regional Asian home market. They are unlikely to substantially expand their sales or foreign assets into other regions of the triad in the foreseeable future. In turn, this means that the emerging-economy MNEs from China and Korea will expand mainly within Asia. Any exceptional firm (like Lenovo) is likely to be a special case, and not a model MNE to be imitated.

Chapter 9 Yang Multinationals

In this chapter, we discuss the potential of yang MNEs to contribute to the positive transformation of the development patterns of countries. Yang is a Chinese philosophical expression indicating a positive force, in contrast to the negative yin force. By yang MNEs, we mean sunshine multinationals that bring happiness and joy through economic development and prosperity. More specifically, we refer to outward FDI by MNEs from China, the Republic of Korea, Singapore, and Taiwan (the major Asian-based emerging economy MNEs). We will discuss the role of yang MNEs as instruments for economic development in Asia.

GOVERNMENT POLICY TOWARD MNES

Today public policy toward FDI needs to take into account the role played by yang MNEs. It is now widely accepted that MNEs are the key institutions driving globalization. As shown previously, the 500 largest MNEs account for about 90 percent of the world’s stock of 179

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FDI, and they also account for about 50 percent of the world’s trade in goods and services, which has important public policy implications. Emerging economies today have two-way flows of FDI—a symmetrical pattern of cross-investments—which is typical of the mature economies in North America, Europe, and Japan. Therefore, public policy toward inward FDI (to attract MNEs from North America, Europe, and Japan) will have an indirect impact on outward FDI by emerging economy MNEs. We explore the data on both inward and outward FDI, especially for Korea, analyze it in terms of the modern theory of MNEs and international business, and describe the policy implications for Korea. One aspect of particular importance is the strong intraregional dimension of MNE activity. The implications of this regional dimension to the world’s MNEs will be discussed with reference to Korean outward-FDI and inward-FDI policies. MNEs, the key institutions driving globalization, interact with both their home and host country governments. The complexities of such MNE–public policy dynamics were first introduced by Rugman and Verbeke (1998b), and extended by Rugman, Verbeke, and Greidanus (2005). Three main shifts were identified in MNE-government relationships: a shift toward complementary goals, a shift toward national responsiveness and thus dispersed FSAs, and a shift toward endogenous government policies. Here, this framework is applied to MNE-government linkages in a Korean context, by exploring the data on both the inward and the outward FDI of Korea, analyzing the data in terms of the modern theory of MNEs and international business, and suggesting policy implications for Korea. Korea is at a good and relevant stage for the application of the new regional trends identified by Rugman, Verbeke, and Greidanus (2005). The focus of Korea’s economic development policy shifted from a foreign loan-based development strategy to an FDI-based strategy after the financial crisis in 1997. For example, Korea attracted $60 billion of inward FDI from 1998 to 2002, which is 2.4 times the $24.6 billion it received from 1961 to 1997. Inward FDI has helped Korea reform its national economic system for further economic development and recover its status as one of the top four foreign exchange reserve nations in the world. Most of the world’s FDI is made by MNEs in the triad. The triad is a group of three major trading and investment blocs in the international area: North America, Europe, and the Asia-Pacific region (Rugman and Hodgetts 2003). About 80 percent of the world’s total FDI is conducted in the triad, and the world’s 500 largest MNEs account for about 90 percent of the world’s stock of

Yang Multinationals

FDI. Moreover, most of these firms generate the vast majority of their sales within their home regions of the triad (Rugman 2005). Therefore, understanding the importance of the triad and the strong intraregional dimension of MNE activities is a prerequisite for our analysis on the inward and outward FDI of Korea.

ASIA’S REGIONAL MNEs

MNEs are companies that are headquartered in one country but have upstream or downstream operations in other countries (Rugman and Hodgetts 2003). According to this definition of MNEs, all the companies in the Fortune Global 500 are classified as MNEs. In chapter 8, we demonstrated that most MNEs are not global but regional. Table 7.6 shows the regional sales of the largest Asia-Pacific MNEs. The 45 Asia-Pacific MNEs that provide full data on their geographic sales in each region of the triad generated an average of 73.2 percent of their sales in the AsiaPacific region and only 16.0 percent and 7.6 percent in North America and Europe, respectively. Most of the 45 Asia-Pacific MNEs are dominated by Japanese MNEs, which generated an average of 74.6 percent of their sales in the Asia-Pacific region, 14.8 percent in North America, and 7.3 percent in Europe. As shown in table 7.11, there were 12 Korean companies in 2001 and 11 in 2004 in the Fortune Global 500. Only 5 Korean MNEs provide data on their geographic sales in the triad. All of them are home region oriented MNEs, with an average of 70.2 percent of their sales coming from the Asia-Pacific region. POSCO, the largest steel company in Korea, had the highest percentage of home region sales, with the Asia-Pacific region accounting for 91.9 percent of its sales. Hyundai Motor was second, with 81.6 percent of its sales coming from the Asia-Pacific region. Samsung Electronics, the highest ranked Korean company in the Fortune Global 500, also realized more than 60 percent of its sales in its home region. LG Electronics and Hyundai show similar geographic sales patterns.

THE FSA-CSA MATRIX FOR ASIAN MNEs

The theoretical basis for the regional nature of the world’s 500 largest MNEs can be partly explained by the liability of foreignness that most MNEs face when they go abroad (Zaheer 1995, 2002). Because of this disadvantage, foreign MNEs entering new markets must go through a learning process, which en-

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Figure 9.1 The FSA-CSA Matrix and Korean and Chinese MNEs

courages MNEs to enter nearby countries first, learning about international business in an incremental fashion (Rugman 1981). This theoretical argument is consistent with the regional nature of the world’s 500 largest MNEs discussed in the previous section. The expansion of MNEs abroad helps them realize their FSAs in foreign countries. As defined earlier, in chapters 2 and 8, an FSA is a unique capability proprietary to the firm built on innovations on product or process technology, marketing, or distributions skills (Rugman 1981, 2005). The FSAs of each MNE can be supported or reinforced by country-specific factors from its home country (Rugman 1981). These CSAs are based on the factor endowments of natural resources, labor, and land, cultural factors, or government regulations of each country where an MNE is operating (Rugman 1981, 2005). Therefore, MNEs should make decisions about the optimal configuration of FSAs and CSAs that leads to the best choice of strategies when they go abroad to expand on their FSAs in foreign markets. This dynamic process can be explained diagrammatically with the now familiar FSA-CSA matrix in figure 9.1. Quadrant 1 depicts the situation in which MNEs go abroad based on strong CSAs from their home countries but without unique and strong FSAs. The MNEs in this quadrant are resource-based, mature, and globally oriented firms

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producing a commodity type product at the later stage of the product life cycle. Since CSAs (such as natural resources, labor, and land) are important for maintaining a competitive advantage in the global market, MNEs usually adopt low cost leadership strategies. Any resulting FSAs in economies of scale are strictly based on CSAs and are not sustainable FSAs. Quadrant 2 represents a situation in which MNEs do not have strong FSAs or CSAs. Any MNEs in this quadrant are regarded as being inefficient, and will likely exit. MNEs in quadrant 3 have both strong FSAs and strong CSAs. Since the strong CSAs of low production costs from the home country can be complemented by the strong FSAs of the MNEs in distribution channels, for example, these MNEs can adopt both cost-leadership and differentiation strategies in the global market. Quadrant 4 depicts the case in which MNEs go abroad based on their strong FSAs, but the CSAs from their home countries are not required for a competitive advantage in the global market. Therefore, the MNEs in this quadrant are differentiated firms with strong FSAs, for example, in brands or customization. By including not only home countries but also host countries as the sources of CSAs, we can expand the FSA-CSA framework for a better understanding of MNEs’ activities. First, we can overcome the limitations of Porter’s (1990) view that MNEs rely solely on a strong home-base diamond, which has been criticized by scholars in international business (Rugman and Verbeke 2003b; Dunning 1993a, 1996; Moon, Rugman, and Verbeke 1995, 1998). Weak CSAs from home countries can be complemented or upgraded by strong CSAs from host countries when MNEs go abroad for upstream activities in the host countries. In the previous section we noted that 320 of the 380 of the world’s 500 largest 500 MNEs derive an average of over 80 percent of their total sales from their home regions of the triad. Their distribution of assets is even more regionalized. The evidence from the world cosmetics industry also confirms that the upstream activities of the MNEs are more home region based than their downstream activities (Oh and Rugman 2006). Second, we can identify the different key location-specific advantages of host countries for different types of FDI—natural-resource seeking, market seeking, efficiency seeking, and strategic-asset seeking (Dunning 1998b). Therefore, the FSA-CSA framework can be applied to the analysis of inward FDI in a host country. We provide some examples in the next section, where we analyze the data on inward FDI in Korea. Third, we can pay attention to the dynamic process of upgrading FSAs and CSAs through interactions between them. MNEs try to select locations where

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they can maximize their profits, because the location choice by itself is one of the most important strategic decisions by which they can not only improve their competitive advantages but also upgrade the location advantages of the places where they operate (Rugman and Verbeke 2003b). The location choice of FDI would be the direct result from the interaction between a company’s FSAs and the type of CSAs it faces (Rugman and Verbeke 1992a). Therefore, if an MNE whose employees have strong managerial skills, for example, enters a new region, it will upgrade the quality of labor in that host region. This will, in turn, act as a catalyst for upgrading the FSAs of companies in the host region through knowledge spillover and flexibility of labor movement. This dynamic process of upgrading CSAs and FSAs will lead to outward FDI in the future by the domestic firms in the host region, based on their upgraded FSAs by the initial inward FDI. Therefore, expanding the sources of CSAs from home countries to host countries gives us a good basis for the current trends toward the symmetry of FDI, which is discussed in the next section. In general, Chinese MNEs are in quadrant 1 of figure 9.1. They are successful because of China’s CSAs, namely, cheap labor, cheap money, and state support. The world’s manufacturing goes to China because of its cheap labor. China’s MNEs go abroad in natural resources sectors, funded by state support and cheap money from a financial system overflowing with foreign exchange resources earned by China’s trade surplus. In contrast, Korea’s MNEs are now more knowledge based and are in quadrant 3. They build on Korea’s R&D and educated work force. Similarly, MNEs like Flextronics of Singapore are in quadrant 3. These emerging economy MNEs from Korea and Singapore are like MNEs from North America and Europe, many of which are also in quadrant 3.

THE SYMMETRY OF INWARD AND OUTWARD FDI

Inward FDI

Inward FDI is the inflow of the funds from foreign countries to a domestic country, whereas outward FDI means the reverse. FDI is undertaken by MNEs to establish footholds in foreign markets by setting up operations (greenfield FDI) or acquiring other businesses (M&A). In both cases MNEs can exercise direct control over their foreign affiliates (Rugman and Hodgetts 2003). Table 9.1 presents the data on inward FDI notifications for Korea across all

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Table 9.1 Inward FDI notifications (thousands of U.S. dollars) Region

1990 –2004

1990 –1994

1995–1999

2000–2004

Asia-Pacific Europe North America South America Africa–Middle East Others Total

26,694,566 31,081,837 33,530,643 4,723,280 644,478 173,976 96,848,780

1,636,209 2,027,686 1,670,563 78,166 18,549 22,743 5,453,916

9,928,805 13,321,073 12,019,424 967,231 162,933 105,878 36,505,344

15,129,552 15,733,078 19,840,656 3,677,883 462,996 45,355 54,889,520

Source: Authors’ calculation based on the inward FDI statistics at the Ministry of Commerce, Industry, and Energy in Korea (http://www.mocie.go.kr).

industries for the fifteen-year period 1990 –2004, from each region of the triad. The total amount of inward FDI increased over this time period, especially after the mid-1990s. About 95 percent of the total investment of $96.8 billion was made after 1995. The same table also shows that the largest source of inward FDI in Korea was Europe until the late 1990s, but changed to North America at the beginning of the twenty-first century. There is a similar pattern for inward FDI in the manufacturing industries. However, we should note that since 1995, the most important source of inward FDI in the manufacturing industries has been Europe, accounting for 38.2 percent of the inward FDI over the fifteen years. The Asia-Pacific region, Korea’s home region of the triad, has become more important for inward FDI in manufacturing industries, accounting for 26.9 percent during the period 1995 –1999, and 31.7 percent during the period 2000–2004. Table 9.2 presents the data on inward FDI notifications in Korea made by the 2001 Fortune Global 500 companies for the same time period, again across the entire set of industries. Of these 500 firms, 195 MNEs invested a total of $19.6 billion in Korea during the period 1990 –2004, which constitutes 20.2 percent of the total amount of inward FDI in Korea. The largest portion of inward FDI by the Fortune Global 500 was made by MNEs from Europe, with about 60.5 percent from 1990 to 2004. We should note that the contribution of European firms decreased from 67.4 percent in the period 1995–1999 to 55.5 percent in the period 2000 –2004, across all industries, and from 71.9 percent to 52.8 percent in the manufacturing industries. At the same time, the contribution from MNEs in the Asia-Pacific region increased from 7.8 percent to 18.4

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Table 9.2 Inward FDI notifications by top 500 companies (thousands of U.S. dollars) Region

1990 –2004

Asia-Pacific Europe North America South America Total

1990 –1994

2,542,850 (12.98) 95,833 (8.42) 11,848,024 (60.46) 548,036 (48.14) 5,187,252 (26.47) 494,408 (43.43) 18,044 (0.09) 240 (0.02) 19,596,170 1,138,517

1995–1999 695,447 (7.81) 6,002,934 (67.38) 2,207,152 (24.77) 4,183 (0.05) 8,909,716

2000–2004 1,751,570 (18.35) 5,297,054 (55.48) 2,485,692 (26.03) 13,621 (0.14) 9,547,937

Source: Authors’ calculation based on the inward FDI statistics at the Investment Notification Statistics Center in Korea (http://mgr.kisc.org/insc/). Note: Percentages are in parentheses. Percentages may not sum to 100 percent because of rounding error.

percent, across all industries, and from 13.5 percent to 25.1 percent in the manufacturing industries. These recent trends of inward FDI in Korea can be explained in several ways based on the modern theory of MNEs discussed in the previous sections. First, MNEs from Europe have brought their advanced FSAs to Korea through inward FDI in manufacturing industries. Renault, Philips, BASF, Alstom, and Nokia are good examples of firms that have a proprietary knowledge capability built on innovations in product or process technology and management skills. MNEs from North America are important for the inward FDI in Korean service industries. Costco, Citigroup, and FedEx have aimed to realize in Korea their FSAs built on their unique capabilities in marketing or distributions skills. Second, each of these MNEs investing in Korea can be positioned in the FSA-CSA matrix according to the CSAs that MNEs want to upgrade or complement by investing in Korea. For example, General Electric (GE), number 9 in the Fortune Global 500 in 2001 and one of the home region oriented companies, can be positioned in quadrant 1. GE sought natural resources (for example, low cost but high quality labor) in Korea during the 1970s and 1980s, pursuing a low cost leadership strategy in household electric appliances, medical devices, and lighting (Invest Korea 2004). Since these items are commodity-type products at the late stage of the life cycle, GE’s FSAs were not as important compared with Korea’s strong CSAs in low cost labor and efficient production processes. Recently, GE has moved to quadrant 3 because of its strong R&D activities in Korea. It has developed ultrasonic diagnostic devices at the R&D facilities in Songnam, Korea, that have been supplied to the global

Yang Multinationals

market through GE’s global distribution networks (Invest Korea 2004). Nokia, the world’s largest manufacturer of mobile devices, number 147 in the Fortune Global 500, and one of the nine global firms, can be positioned in quadrant 3. With strong FSAs in R&D and brand awareness, Nokia has been seeking strategic assets (IT infrastructure and technological capabilities of parts suppliers) in Korea. Korea’s strong CSAs are complemented by Nokia’s FSAs (Invest Korea 2004). Nokia’s recent contract with Samyoung Technology, one of the high-quality mobile phone parts suppliers in Korea, supports this positioning in the matrix. Tesco, a home region based MNE ranked 114th in the Fortune Global 500, can be positioned in quadrant 4. In the retail industries, MNEs go abroad solely based on their strong FSAs, but the CSAs of the host countries are not essential for their success in the global market. Using its existing FSAs in brands and distribution channels, Tesco has developed location-bound FSAs in Korea (quality control, customization, and differentiated stores with entertainment, culture, and high quality service) to realize the benefits of national responsiveness (Invest Korea 2005). Last, the data on inward FDI in Korea by each region of the triad confirms the importance of the home region orientation for MNEs’ activities. It shows the deepening process of regionalism of inward FDI in Korea, especially in manufacturing industries and by the world’s 500 largest companies. This result is consistent with recent findings that most MNEs are not global but regional. Outward FDI

Table 9.3 presents the data on outward FDI notifications from Korea across all industries for the fifteen-year period 1990 –2004 for each region of the triad. Tables 9.1 and 9.3 reveal that the amount of outward FDI increased during this time period, especially after the mid-1990s. For example, 84.1 percent of the total outward FDI of $73.8 billion was made after 1995, as was 84.2 percent of the outward FDI of $40.5 billion in the manufacturing industries. We should note that the majority of the total outward FDI was made in the Asia-Pacific region, Korea’s home region of the triad. This tendency has accelerated in recent years, with the Asia-Pacific region accounting for 48.7 percent of Korea’s outward FDI from 1995 to 1999, and 53.2 percent from 2000 to 2004. The data on outward FDI in the manufacturing industries confirms the deepening process of regionalism for MNE activities. During the period 1995–2004, the AsiaPacific region accounted for 61.1% of Korea’s outward FDI in manufacturing, with Asia’s share increasing from 54.2 percent during the period 1995–1999 to 65.6 percent during the period 2000–2004.

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Table 9.3 Outward FDI notifications (thousands of U.S. dollars) Region Asia-Pacific Europe North America South America Africa—Middle East Total

1990 –2004

1990–1994

1995–1999

2000–2004

38,397,482 (52.00) 11,086,469 (15.01) 17,500,842 (23.70) 4,899,290 (6.63) 1,956,438 (2.65) 73,840,521

6,657,046 (56.76) 1,260,980 (10.75) 2,797,826 (23.85) 398,096 (3.39) 615,236 (5.25) 11,729,184

14,272,398 (48.72) 4,739,944 (16.18) 7,519,573 (25.67) 1,862,403 (6.36) 900,735 (3.07) 29,295,053

17,468,038 (53.23) 5,085,545 (15.50) 7,183,443 (21.89) 2,638,791 (8.04) 440,467 (1.34) 32,816,284

Source: Authors’ calculation based on the outward FDI statistics from the Export-Import Bank of Korea (http://www.koreaexim.go.kr). Note: Percentages are in parentheses. Percentages may not sum to 100 percent because of rounding error.

Yang Multinationals

Table 9.4 summarizes the data on outward FDI notifications by large Korean firms (large firms are defined here as having more than 300 employees or more than 30 billion won, or roughly $30 million, in revenue).Outward FDI by the large firms decreased in recent years, despite the increase in the total amount of outward FDI over the same time period. For example, 82.6 percent of the total outward FDI of $52.1 billion was made after mid-1990s, but outward FDI decreased from $23.4 billion for 1995 –1999 to $19.7 billion for 2000 –2004. The data on outward FDI in the manufacturing industries confirms this tendency. Although 83.9 percent of the outward FDI of $26.9 billion in the manufacturing industries was made after 1994, outward FDI decreased from $12.5 billion for 1995–1999 to $10.0 billion for 2000 –2004. Of the triad regions, the AsiaPacific region receives the most outward FDI from large Korean firms. During the fifteen-year period, Korea’s home region received 46.2 percent and 49.7 percent of Korea’s outward FDI across all industries and in the manufacturing industries, respectively. The data demonstrate that the deepening process of regionalism of MNEs’ activities is still under way. These recent trends in outward FDI from Korea can be discussed in terms of the modern theory of MNEs as follows. First, the outward FDI of Korea is expanding, and Korean MNEs are realizing their FSAs mainly in the Asia-Pacific region, Korea’s home region of the triad. The evidence of home-region orientation with respect to outward FDI from Korea is stronger in the manufacturing industries. The upstream activities of the Korean MNEs are being conducted in other lower-cost Asian countries; Samsung Electronics, for example, has “offshored” some of its manufacturing operations to China for cheap assembly of its electronic parts. This trend of regionalism of Korean MNEs’ activities has also been deepening in recent years, which is consistent with recent empirical evidence that most MNEs are regional, operating primarily in their home regions. Second, although the total amount of outward FDI by Korean MNEs increased over the 1990–2004 period, the outward FDI by the large firms has decreased in recent years. This implies that the recent outward FDI from Korea has been driven by small and medium-sized enterprises. The underlying reasons for this increasing trend of outward FDI by small and medium-sized enterprises are multifold, but one potential explanation can be found from the upgraded FSAs of small and medium-sized enterprises in Korea. We should note that Korea has been very active in attracting inward FDI from foreign MNEs with sophisticated FSAs, for example, from Europe in the manufacturing industries and from North America in the service industries, as discussed in

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Table 9.4 Outward FDI notifications by large firms (thousands of U.S. dollars) Region Asia-Pacific Europe North America South America Africa–Middle East Total

1990 –2004

1990–1994

1995–1999

24,068,916 (46.19) 10,371,825 (19.90) 13,148,873 (25.23) 2,678,620 (5.14) 1,845,836 (3.54) 52,114,070

4,571,640 (50.49) 1,173,800 (12.96) 2,471,496 (27.30) 234,544 (2.59) 602,831 (6.66) 9,054,311

10,566,985 (45.18) 4,471,247 (19.12) 6,030,919 (25.78) 1,467,668 (6.27) 854,094 (3.65) 23,390,913

2000–2004 8,930,291 (45.40) 4,726,778 (24.03) 4,646,458 (23.62) 976,408 (4.96) 388,911 (1.98) 19,668,846

Source: Authors’ calculation based on the outward FDI statistics from the Export-Import Bank of Korea (http://www.koreaexim.go.kr). Note: Percentages are in parentheses. Percentages may not sum to 100 percent because of rounding error.

Yang Multinationals

the previous section. The foreign MNEs operate with worldwide competition, and they have developed efficient value-chain networks. Serving as parts suppliers (or as potential suppliers), many of the small and medium-sized enterprises in Korea have had more interactions with foreign MNEs than ever before, and have been able to capture spillovers of tacit knowledge from the MNEs by locating their operations in close proximity to the MNEs. Therefore, through the dynamic process of upgrading the CSAs of Korea and the FSAs of the local small and medium-sized enterprises, outward FDI by Korean small and medium-sized enterprises is made possible based on these upgraded FSAs. Lastly, the data on outward FDI from Korea and the dynamic process of upgrading CSAs and FSAs by the initial inward FDI from foreign countries suggest that Korea has become both a recipient and an exporter of substantial amounts of FDI. This implies that Korea is moving toward the “deep integration” of FDI symmetry, which is discussed in more detail in the next section.

MNE-GOVERNMENT LINKAGES

Rugman, Verbeke, and Greidanus (2005) consider three recent shifts in MNEgovernment relationships: (1) the goal consistency between MNEs and governments at a macro level; (2) the dispersion of FSAs and the symmetry of inward and outward FDI at an institutional level; and (3) the endogeneity of government policy at a firm-strategy level. These shifts will be used as a framework for evaluating the MNE-government linkages in Korea and suggesting policy implications for attracting inward FDI in Korea. Complementary MNE-government goals

Rugman, Verbeke, and Greidanus (2005) attribute the initial conflict between the goals of MNEs and the goals of host-country governments to differences in their ultimate objectives. Foreign MNEs pursue efficiencies at a micro level by minimizing (transaction) costs and maximizing profits, whereas governments want to attain efficiencies at a macro level by achieving distributional objectives. However, as the host governments begin to understand the importance of FSAs (which MNEs bring with them into the host country), they will generally implement policy measures for the liberalization of inward FDI. This process is reinforced when the host governments realize the impossibility of direct acquisition of the FSAs from the MNEs, who internalize them as intermediate goods. Therefore, the increasing number of measures for liberalizing inward

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Table 9.5 Trend of liberalization of inward FDI in Korea Jan. 1997 Total number of industries (A) Number of industries regulated for inward FDI

Not opened (B) Partially opened (C)

Rate of liberalization on inward FDI (%)a

Jan. 1998

Jan. 1999

Mar. 2000 Mar. 2002

1,148

1,058

30

21

7

4

2

24

29

16

24

27

97.4

98.2

99.4

99.6

99.8

Source: Korea Ministry of Commerce, Industry, and Energy 2003. a Rate of liberalization of inward FDI (%) ⫽ (A⫺B) / A ⫻ 100.

FDI reflects the complementarity between the efficiency goal of MNEs and the equity goal of governments (Dunning 1993b). There has been a strong shift in Korea’s policy regarding inward FDI toward recognition of the complementary goals between foreign MNEs and the government. Korea has adopted a series of policy measures to liberalize inward FDI. For example, inward FDI was used only for promoting export-driven or import-substitute industries in the 1960s, but almost all sectors in manufacturing and service industries were liberalized before the end of the 1990s. The regulation on foreign ownership structure (foreign ownership was not permitted to exceed 50 percent) was eliminated during the 1990s, and inward FDI was permitted upon notification to, not permission from, the Korean government in the mid-1990s. Additional strong incentives for inward FDI began to be provided after 1998, including preferential tax treatment and provision of locational advantages for greenfield FDI. Table 9.5 confirms the trend toward complementary MNE-government goals in Korea. The rate of liberalization of inward FDI is defined as the number of industries opened for inward FDI divided by the total number of industries in Korea. The data show that Korea had achieved a 99.8 percent rate of liberalization of inward FDI as of 2002. This is good evidence of the goal consistency between the foreign MNEs operating in Korea and the Korean government.

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High FSA Dispersion and FDI Symmetry

Rugman, Verbeke, and Greidanus (2005) also consider the recent trends in the low FSA dispersion of MNEs (where non-location-bound FSAs of the MNEs are created exclusively in their home countries) to the high FSA dispersion of MNEs (where the development of location-bound FSAs in their host countries becomes indispensable). With strategic-asset-seeking FDI, the objective for the MNE is to develop its FSAs abroad and to realize the benefits of national responsiveness in the host countries. The high FSA dispersion of MNEs will be encouraged by the national treatment of the host-country government, which, in turn, leads to symmetry between inward and outward FDI. A country is said to have achieved symmetry of FDI if it becomes both the origin and recipient of substantial amounts of inward and outward FDI. Therefore, public policy measures toward MNEs will be highly dependent on whether the country has a symmetry or asymmetry of FDI. The concept of FDI symmetry is an important departure from the traditional literature on FDI discussed by Caves (1996). The trend from low FSA dispersion to high FSA dispersion of MNEs can be observed from cases in which inward FDI in Korea failed because of the lack of national responsiveness. The best examples are Wal-Mart and Carrefour, which decided to withdraw from Korea in 2006. Wal-Mart was the world’s largest company, with $219.8 billion of sales in 2001. Carrefour was ranked thirty-fifth, with $62.2 billion of sales in 2001, by the Fortune Global 500, but it is the largest retail company in Europe. Both Wal-Mart and Carrefour are home region based MNEs: 94.1 percent and 81.3 percent of their sales, respectively, were intraregional in 2001. Both have accumulated high FSAs in marketing and distribution channels attributable to an economies of scale strategy based on cost reduction; these FSAs have been developed exclusively in their home regions (Rugman 2005). However, they could not succeed in the Korean market, because they did not develop location-bound FSAs in the host country. They ignored different relationships with suppliers (long-term relationships) and different shopping styles and tastes of consumers (preference for easy access to stores and high-quality goods and services, dislike for frozen foods) in Korea. These examples demonstrate the importance of the development of “national responsiveness” FSAs for inward FDI in Korea. Table 9.6 shows the trend toward symmetry of inward and outward FDI in Korea. Korea has been increasingly involved in substantial volumes of both inward and outward FDI since 1995. This has lead to a “deep integration” with

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Table 9.6 FDI stocks as a percentage of GDP Region/economy World Inward Outward Developed economies Inward Outward Developing economies Inward Outward Asia and the Pacific Inward Outward Korea, Republic of Inward Outward Japan Inward Outward China Inward Outward

1990

1995

2000

2001

2002

9.3 8.6

10.3 10.0

19.6 19.3

21.2 20.4

22.3 21.6

8.2 9.6

8.9 11.3

16.5 21.4

17.9 23.0

18.7 24.4

14.8 3.9

16.6 5.8

31.1 12.9

33.4 12.8

36.0 13.5

17.9 2.6

19.1 5.8

32.1 15.8

32.7 15.3

33.3 15.4

2.1 0.9

1.9 1.6

8.0 11.0

9.5 9.6

9.2 9.1

0.3 6.6

0.6 4.5

1.1 5.8

1.2 7.2

1.5 8.3

7.0 0.7

19.6 2.3

32.3 2.4

33.2 2.7

36.2 2.9

Source: UNCTAD 2003.

FDI symmetry (inward FDI was $43.7 billion and outward FDI was $43.5 billion in 2002). The degree of symmetry in Korea is higher than that in the AsiaPacific region and China, but much lower than that in developed economies. We find a similar pattern when we look at FDI stocks as a percentage of GDP. Table 9.6 shows that Korea has achieved a symmetry of FDI since 1995 (inward FDI was 9.2 percent of GDP and outward FDI was 9.1 percent of GDP in 2002). The most important aspect of this for public policy is that it is the national treatment of the host-country government that encourages the high FSA dispersion of MNEs. This high FSA dispersion, in turn, leads to outward FDI by the domestic firms of the host country, based on their upgraded FSAs, which they obtained through the initial inward FDI from foreign countries. Although governments might support their MNEs to become first movers in a global market with strong subsidies or other preferential treatment, it has been shown

Yang Multinationals

that such policies have not been successful enough, because governments have limited ability to guide domestic MNEs in that direction (Rugman and Verbeke 1990). Public policy measures toward attracting inward FDI from foreign countries will have a direct and indirect impact on the outward FDI of domestic MNEs. MNEs and Government Policy

Rugman, Verbeke, and Greidanus (2005) also discuss the endogeneity of government policy at a firm strategy level as the final shift in the MNE-government relationships. MNEs intentionally attempt to influence the process of public policy formation by the government of the host country so that the policy for inward FDI makes it easier for them to capture the benefits of national responsiveness. Therefore, negotiations between foreign MNEs and the Korean government become an important issue in the process of attracting inward FDI to Korea. It is too early to evaluate the trend toward the endogeneity of government policy at a firm-strategy level in Korea, but the next two examples will give some insights. The first case is the negotiation between LG.Philips LCD and the Korean government in 2004, during the process of implementing the government’s plan to transform the Paju area into the world’s largest cluster for the production of flat-panel display. LG.Philips LCD is a joint venture between Royal Philips and LG Group that was created in 1999, and which became the leading manufacturer of thin-film-transistor liquid crystal displays (TFTLCDs) (Invest Korea 2005). It began construction of its main factory in the Paju area in 2003 with total investments of $20 billion, and as a result of its negotiations with the government—at both the local and national level—the Korean government agreed to build industrial complexes for parts suppliers, roads leading to the factory, and a waste-water disposal plant for the factory for free. The second case is the newly introduced incentive for attracting inward FDI in Korea in 2005—cash grants. According to the guidelines for awarding the cash grants, MNEs that are more than 30 percent foreign owned and that are investing at least $10 million in the high-tech industry are eligible for cash grants (Invest Korea 2006). At least 5 percent of the inward FDI can be covered by the cash grants through negotiations between an MNE and the Korean government. The grants should be used for the purchase or rent of land for the factory, the construction of the factory and common facilities, the purchase of production equipment or R&D facilities, and training programs for employ-

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ees. The number of applications by MNEs for these cash grants has not been reported yet, but the adoption of this incentive system will make MNEs investing in Korea start to think of national government policies as being critical to the success of their business strategies in host countries. A recent study shows in a game-theoretical setting that the effect of subsidies for cluster formation is highly dependent on the type of clusters characterized by the type of goods produced: in a symmetrical cluster where imperfect substitutes are produced, the subsidies do not give any incentive to cluster formation in host countries (Lee 2006).

SUMMARY POINTS

After analyzing the data on inward and outward FDI for Korea for the fifteenyear period 1990 –2004, we have applied Rugman, Verbeke, and Greidanus’s framework (2005) on the MNE-government linkages toward FDI to investigate three recent shifts in MNE-government relationships in Korea. Our study shows that the complementarity of goals between the MNEs and the Korean government has increased since the 1990s, as evidenced by the proactive liberalization measures with respect to inward FDI by the Korean government. The increased complementarity of the goals has fostered substantial amounts of inward FDI flow into Korea based on the national treatment of foreign MNEs. The development of location-bound FSAs in Korea by the MNEs became indispensable for their survival in the Korean market (high FSA dispersion of MNEs), as evidenced by the withdrawals of Wal-Mart and Carrefour from Korea. This led to an increase of outward FDI by Korean MNEs based on their upgraded FSAs, making Korea a country with FDI symmetry. Location-bound FSAs provide the MNEs investing in Korea with a strong incentive to endogenize the process of policy formation by the Korean government at a firm-strategy level, as evidenced by the LG.Philips LCD case and the newly adopted cash-grants system. We should note that these three shifts in MNE-government relationships in Korea are interrelated and reinforce each other in a virtuous circle. The policy implications for Korea are multifold. First, the crux of FDI is the realization of FSAs. Inward and outward FDI is closely interrelated through the dynamic process of MNEs upgrading CSAs (and FSAs) in host countries. Korea’s public policy toward inward FDI has both a direct and an indirect impact on outward FDI by Korean MNEs, as discussed in the previous section. Policy measures that attract foreign MNEs with high quality FSAs provide a shortcut

Yang Multinationals

for upgrading the FSAs of Korean MNEs, making them go abroad as outward FDI to realize their enhanced FSAs in foreign countries. This process is especially effective when an MNE investing in Korea acts as a leading “flagship” firm that plays an important role as a strategic leader of the partners in an asymmetrical business network model (Rugman and D’Cruz 2000). Second, because of the positive interactions between inward and outward of FDI, the increase of outward FDI is not an outflow of national wealth anymore. Rather, outward FDI allows MNEs to realize upgraded FSAs of domestic MNEs in foreign markets, which leads to the creation of national wealth abroad. This gives us a good rationale for making the achievement of FDI symmetry another policy goal in Korea. Korea has two-way flows of FDI today—a symmetrical pattern of cross-investments—which is typical of the mature economies in North America and Europe. However, as we saw in table 9.6, Korea is still much behind developed economies in terms of FDI stocks as a percentage of GDP. Encouraging inward and outward FDI, and in particular, increasing both inward and outward FDI as a percentage of GDP, should be a public policy goal. Third, the importance of home region orientation for MNEs’ activities should be fully understood. Most MNEs are not global but regional, operating primarily in their home regions. The data show that Korea has imported highquality FSAs of foreign MNEs from Europe in the manufacturing industries and from North America in the service industries, and it has exported its upgraded FSAs to the Asia-Pacific region (Korea’s home region of the triad) in past years. However, the data also show that the process of regionalism of both inward and outward FDI of Korea in the Asia-Pacific region has been deepening and accelerating in recent years. This evidence should help policymakers choose strategic regions when they design policy measures for attracting inward FDI in, and encouraging outward FDI from, Korea. Last, policymakers should be careful about the effect of cash grants when they negotiate with MNEs, especially if they want to create a cluster in Korea by attracting inward FDI. As briefly touched on in the previous section, the effect of subsidies for cluster formation is highly dependent on the type of clusters.

CONCLUSIONS

In this chapter—and throughout the book—we have highlighted the promise and potential for MNEs to make sustained positive contributions to the devel-

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opment process. More importantly, we have specified a set of conditions that we believe help realize these impacts. Here we offer a few concluding comments based on the empirical analysis of these last three chapters. Our review of the basic conditions that lead MNEs and FDI to have positive impacts on development suggests that host countries should recognize and embrace the FSAs that MNEs can deploy when investing abroad. Indeed, rather than view MNEs as potential threats, hosts should identify where their CSAs offer MNEs the most attractive environment for investment, and leverage these CSAs to maximize the potential positive impact of MNEs. It is this interaction between the host country and multinational assets that is the catalyst for growth and development. We also contend that the architecture of the global economic system—the WTO, the World Bank, the IMF, and similar organizations—has limited, but generally positive, impacts on development. When MNEs and countries work with these institutions, and craft agreements that liberalize trade and investment, that provide developing countries with access to developed-country markets, and that foster important institutional reform within developing countries, the development process is greatly accelerated. In fact, developing countries would be well served by improving their governance, anticorruption, financial, and other regulatory systems to limit graft and economic distortions and provide a predictable and reliable institutional infrastructure for investment. The role of NGOs in fostering development can be positive if those NGOs recognize the potential to collaborate and leverage MNE investment in ways that advance development. Some NGOs that are focused exclusively on criticism and antagonistic expressions are unlikely to elicit supportive MNE investment that is critical for development. In this final section, we have illustrated sequentially how indigenous firms from emerging economies have become critical institutions for taking developing countries to the next stage of truly emerging economies. The cases of China and Korea—and for that matter Singapore and in the future, other developing economies—clearly demonstrate how the interaction of FDI and local CSAs can create conditions for the development of emerging-market MNEs, which are becoming global players. The role of FDI within Asia underscores another important theme of this book—that trade, investment, and development is largely a regional, not a global, phenomenon. Accordingly, the regional patterns of FDI—inward and outward—are essential to understanding the process of development. Global solutions to development, though worthy, may not be appropriately scaled to

Yang Multinationals

the reality of the regional dynamics that are driving trade, investment, and economic progress. Certain MNEs—the yang MNEs—can have especially beneficial impacts on development, as these MNEs are at the axis of the interactions of inward and outward FDI and of domestic and foreign MNEs. Yang MNEs are the hub of a series of spokes connecting developing and developed economies and providing productive connections between developing countries.

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Chapter 10 Conclusions

In this book we have demonstrated that MNEs unambiguously contribute to the economic development of nations, although the distribution of those benefits may vary. MNEs bring foreign direct investment, transfer technology, increase national income, provide more skilled jobs, pay taxes, and otherwise contribute to the overall macroeconomic growth of host economies. In an interesting and novel twist to this, we also find that MNEs from emerging economies build on the improved macroeconomic infrastructure created by foreign MNEs. These new indigenous emerging economy MNEs grow and help improve the prosperity of their countries. We found evidence of these yang MNEs in Korea, Singapore, Taiwan, and China. Although we have not specifically investigated the growth of MNEs from India, Latin America, Russia, and other emerging economies, we expect that the virtues of yang multinationals will also apply in these other emerging economies. Thus, our analyses provide two key contributions. First, MNEs from the advanced triad economies of Europe, North America, and the Asia-Pacific region serve to foster the development and growth of poor economies. Second, as a result of this improved 200

Conclusions

macroeconomic infrastructure, the emerging economies generate their own MNEs, thus further enhancing their growth and prosperity. These conclusions can be observed by a retroactive study of figure 2.1, which combined the country level and firm level factors relevant to MNEs. This framework was used throughout the book, especially in chapter 3, where management strategies were adapted to this efficiency-based framework. It was then applied in chapters 7, 8, and 9 to examine the activities and performance of MNEs in the Asia-Pacific region. For example, figure 9.1 applies the thinking in this framework to an analysis of the general nature of Chinese and Korean MNEs. On the basis of our analysis of the Chinese and Korean MNEs in the world’s 500 largest firms, we came to some interesting conclusions. Of primary importance is that the success of Chinese MNEs is almost entirely due to favorable country factors. Chinese MNEs are successful because they build on abundant cheap labor, which can lead to economic efficiency in terms of cost competitiveness and low prices across a variety of manufacturing and routines based service sectors. Such firms develop FSAs that are strongly dependent on the nature of China’s CSAs. Thus Chinese MNEs may develop economies of scale (a type of FSA)—but as a result of cheap labor (a CSA) rather than any inherent proprietary FSAs. This means that the competitiveness of Chinese manufacturing relies on country factors, not firm factors. Chinese MNEs are also successful because of access to relatively cheap money. To help process the large balance-of-trade surplus with Western economies such as the United States, the Chinese banking system (with government guidance and support) has provided cheap financing to Chinese businesses. This has led to outward FDI in the form of acquisitions of foreign firms, especially in the natural-resource sectors. In the last few years, Chinese MNEs have been active in FDI in the energy sector and in the acquisition of mining companies in African countries. Again, this is a quadrant 1 strategy in figures 2.1 and 9.1. In contrast, we have demonstrated (in chapters 8 and 9) that Korean MNEs are located in quadrant 3 of figures 2.1 and 9.1. Firms such as Samsung Electronics have developed knowledge-based FSAs, building on the improved macroeconomic infrastructure of Korea. Indeed, Samsung Electronics now outsources much of its basic manufacturing and assembling to plants in China. In other words, Korean MNEs are now performing in the same manner as leading Western MNEs in the sense that they rely on strong firm-driven factors that build on a set of country-specific attributes. Yet we did not find any evidence to support the existence of emerging economies in quadrant 4 of figures 2.1 and 9.1. In other words, there are few (if

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any) purely knowledge-based emerging-economy MNEs. Instead, the emerging-economy MNEs we observed combine country and firm advantages in quadrant 3. As yet, there are no emerging-economy MNEs with pure brandname marketing FSAs, or pure technology-based FSAs, where these are independent of their home-country infrastructure. Furthermore, we find no evidence that there is asset-seeking FDI. Instead, the emerging economy MNEs that make acquisitions do so by building on strong home country advantages, such as cheap money in China. A case in point is the Lenovo acquisition of the IBM computer-assembly division. With this acquisition, Lenovo has acquired the existing routines in computer assembly, but not the intangible brand-name and knowledge and service advantages of IBM. Thus, the Lenovo acquisition is not asset-seeking in the host economy but is driven by country factors in the home economy. The emergence of IT and services offshoring and outsourcing, however, may begin to change this dynamic. Offshoring is an important economic and social phenomenon that has generated considerable attention in practitioner outlets, in the popular press, and in political circles; however, its impact on the development process is not yet clear. Hence, we have not focused on offshoring or international services investment as an explicit dimension of the interactions between multinationals and development. It is clear that worldwide trade in services is growing at a rapid rate, and services account for increasing shares of domestic and global output. Initially driven primarily by cost, offshoring appears to be evolving into a more complex phenomenon with broad implications for economic and management theory and practice. Of relevance to the focus of our analysis, the emergence of IT and business process outsourcing MNEs in India—such as Infosys, Wipro, Tata Consultancy, and others—may point to the emergence of a more knowledge-based services sector in developing countries. Yet to date, these firms—like the Chinese MNEs—are dependent primarily on CSAs. However, some appear to be on the verge of developing genuine FSAs related to business process outsourcing. Despite these signs, it is still too soon to determine the scope and impact of this trend on MNEs and development. We recognize that some readers may have an intellectual problem with our focus on the efficiency aspects of MNEs. Many scholars and practitioners in the field of economic development subscribe to what we might best call a distributional framework rather than our efficiency framework. We have been upfront about our approach (as noted both in the preface and in chapters 1 and 2). We believe that the business-school focus on analysis of MNEs from the efficiency

Conclusions

viewpoint has been badly neglected by development economists and policymakers. Thus we included figure 2.2, which developed a stakeholder viewpoint in the social triangle. We have also attempted to incorporate explicitly the nature of the stakeholder viewpoint. In particular, in chapters 4, 5, and 6 we explored the nature, extent, and performance of international institutions and the role of the NGOs and civil society on economic development. With regard to international trade agreements, institutions, and NGOs, we have suggested that MNEs alone may not be sufficient in ensuring that the development process takes hold and that its benefits are fully realized. International trade and investment agreements facilitate and encourage multinational investment, often in conjunction with important financing from multilateral development agencies. Hence, we see the role of these agreements as potentially important signaling mechanisms, in that they provide validation of market reforms and policy changes—which can be considered CSAs—to the international investment community. These agreements also encourage government policy reforms that generate a hospitable investment climate and lock in those reforms so that subsequent government regimes are not tempted to reverse them. Increasingly, these agreements also touch on the distributive side of the development process by, for example, incorporating labor and environmental commitments and obligations. Domestic institutional development is another important facilitating process that works to ensure the security and integrity of an investment climate and thus increases the likelihood of positive development effects. Such an environment unarguably works to promote MNE investment and increase the potential distributive impact of that investment. In contrast, corrupt regimes are more likely to divert economic resources for their own ends. Indeed, democratic, well-functioning institutional regimes in which the rule of law is upheld not only provide a supportive environment for foreign investment, entrepreneurship, and innovation, but they also promote a responsive government and vigorous civil-society sector that is able to advocate for investment in physical infrastructure, human capital, and social programs. Hence, the institutional environment (a CSA) is an important complement to basic economic conditions that are necessary for MNE investment and the development it generates. Our discussion of the role of NGOs is perhaps not directly related to the main frameworks of our analysis, but we do attempt to analyze both NGOs and MNEs in a neutral manner. Hence, in this discussion, we detailed the emerging role of NGOs and the changing nature of business-NGO relationships. We also illustrated how NGOs—working with MNEs—can help facili-

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tate some aspects of the fair distribution of economic gains, within the context of the efficiency orientation of MNEs and the equity focus of host governments. In this sense, MNEs and NGOs occupy a complementary space in developing countries. The MNEs provide investment and critical resources and capabilities. The NGOs advocate for a distribution of government and other resources to address poverty, environmental protection, and the like. Nonetheless, the viewpoints of MNEs and NGOs are often in conflict because they use different frameworks. The MNEs need to perform efficiently, and they are held to account by the stock markets and their shareholders. In contrast, NGOs, although sometimes aware of the efficiency constraints facing MNEs, have a broader distributional viewpoint. The focus of NGOs on poverty is ultimately a relativist viewpoint. We have shown that MNEs improve the macroeconomic conditions for growth. Thus, they indirectly reduce poverty. However, in this book we did not explore indicators of poverty; instead we deconstructed the activities of MNEs from both the wealthy and the emerging economies of the world. In so doing, we believe that this book makes a distinctive contribution in which the role of MNEs, in fostering economic development, can be understood as a complement to the traditional analysis in the field of economic development. As we proposed at the beginning of the book, the topic of MNEs and development is complex, dynamic, and critical to the health and welfare of the global economy. In this volume, we have sought to bring a specific perspective to this topic, one that is based on solid evidence and reasoned analysis, and views MNEs and FDI as important elements in the development equation. We hope this approach has shed new light on long-standing questions and opened up new horizons for future research and inquiry.

Glossary

ADB—Asian Development Bank. http://www.adb.org/. AFTA—ASEAN Free Trade Area. http://www.us-asean.org/afta.asp. Andean Community (Communidad Andina, or CAN)—Formerly, the Andean Group. A trade organization consisting of Bolivia, Chile, Colombia, Ecuador, and Peru. http://www.comunidadandina.org/. ASEAN—Association of Southeast Asian Nations. Includes Brunei Darussalam, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam. http://www.aseansec.org. CACM—Central American Common Market, also known in Spanish as Mercado Común Centroamericano (MCCA). In existence from 1960 to 1969, then reinstated in 1991. Includes Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua. CAFTA-DR—Central America—Dominican Republic Free Trade Agreement (also known as DR-CAFTA). CAN—See “Andean Community.” CARICOM—Caribbean Community Common Market. Its members are Antigua and Barbuda, the Bahamas, Barbados, Belize, Dominica, Grenada, Guyana, Haiti, Jamaica, Montserrat, Saint Kitts—Nevis, Saint Lucia, Saint Vincent and the Grenadines, Suriname, and Trinidad and Tobago. http://www .caricom.org/. 205

206

Glossary

CIS—Commonwealth of Independent States. An economic union created in 1991 after the fall of the Soviet Union and composed today of Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Russia, Tajikistan, Ukraine, and Uzbekistan; Turkmenistan was a member only until 1995. CSA—Country-specific advantage. CSR—Corporate social responsibility. EBRD—European Bank for Reconstruction and Development. http://www.ebrd.com/. E.U.—European Union. Formerly the European Economic Community and the European Community. http://europa.eu/. FSA—Firm-specific advantage. FTA—Free-trade agreement, such as NAFTA, CAFTA, and AFTA. FTAA—Free Trade Area of the Americas. http://www.ftaa-alca.org/. GATT—General Agreement on Tariffs and Trade. Designed to provide an international forum that encouraged free trade between member states by regulating and reducing tariffs on traded goods and by providing a common mechanism for resolving trade disputes. GATT is one-third of the Bretton Woods system that was created after World War II to ensure a stable trade and economic world environment. The International Monetary Fund (IMF) and the World Bank are the other two bodies of the Bretton Woods system. Often referred to as an international organization, the GATT had a “de facto” role as an international organization before the creation of the World Trade Organization (WTO). See also “WTO.” IBRD—International Bank for Reconstruction and Development. Lending arm of the World Bank Group. http://go.worldbank.org/SDUHVGE5S0. IDA—International Development Association. Provides long-term low- or no-interest loans and grants to the poorest countries. http://www.worldbank.org/ida. IDB—Inter-American Development Bank. http://www.iadb.org/. IFC—International Finance Corporation. http://www.ifc.org/. IMF—International Monetary Fund. http://www.imf.org/. International Centre for the Settlement of Investment Disputes—http://www.worldbank .org/icsid/. International Labor Organization Declaration of Principles concerning Multinational Enterprises and Social Policy (also called MULTI)—http://www.ilo.org/public/english/ employment/multi/index.htm. LLL framework—Linkages, leverage, and learning framework. M&A—Mergers and acquisitions. MENA—Middle East and North Africa regional section of the World Bank. http://www .worldbank.org/mena. MERCOSUR—Southern Common Market. http://www.mercosur.int/msweb/principal/ contenido.asp.

Glossary

Millennium Development Goals—Eight goals developed by the United Nations to improve world living standards. http://www.un.org/millenniumgoals/. MNE—Multinational enterprise. Mozal Project—http://www.mozal.com/. Multilateral Investment Guarantee Agency—Insures international investments. http:// www.miga.org/. NAFTA—North American Free Trade Agreement. http://www.fas.usda.gov/itp/Policy/ NAFTA/nafta.asp. NGO—Nongovernmental organization. NIC—Newly industrialized country. OECD—Organization for Economic Cooperation and Development. http://www.oecd .org. OECD Guidelines for Multinational Enterprises—http://www.oecd.org/documentprint/ 0,2744,en_2649_34889_2349370_1_1_1_1,00.html. OEM—Original equipment manufacturer. PDA—Personal digital assistant. A handheld computer. R&D—Research & development. transition economy—an economy changing from a planned to a free market and moving from public to private ownership of resources by letting market forces set prices, lowering trade barriers, and undertaking privatization. Examples include China, Croatia, Kazakhstan, Mongolia, and Vietnam. Transnationality Index—Arithmetic average of the ratio of foreign to total assets, sales, and employment. triad economies—The huge markets of North America, Europe, and the Asia-Pacific region. The core triad consists of the United States, the European Union, and Japan; the broad triad consists of North America, Europe, and Asia. U.N. Global Compact—Nine principles on business responsibility. http://www.global compact.org.pk/aboutgc.htm. UNCTAD—United Nations Conference on Trade and Development. http://www.unctad .org. World Bank—Source of financial and technical assistance to developing countries. Made up of two development institutions: the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA) http://www .worldbank.org/. WTO—World Trade Organization. Develops ground rules for international trade and mediates trade disputes. The WTO was established on January 1, 1995, by the Final Act of the Uruguay Round of negotiations under the GATT. http://www.wto.org/. See also “GATT.”

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References

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Index

absorptive capacity, 6, 20 ACCIÓN, 99 ACER, 37, 165 ADB (Asian Development Bank), 7, 60, 74, 205 ADEMI (Association for the Development of Microfinance = Asociación para el Desarollo de las Microprensas), 100 administrative heritage, 39 –40 AEI (American Enterprise Institute), 86 Africa, 2, 16, 60, 81, 107 Africa-Middle East region, 27 AFTA-ANSEAN Free Trade Area, 205 agricultural subsidies, 75, 76 Ahlstrom, David, 120 Aitken, Brian J., 5, 19 Alberto Moreno, Luis, 74 Aldrich, Howard, E., 106 Algeria, 64 aluminum production, 66 Amsden, Alice, 52, 54

Andean Community. See CAN. Anderson, Andrew, 56 Aoki, Masahiko, 173 APEC (Asia Pacific Economic Cooperation), 69, 72–73, 210 Apple (Firm), 168 Argenti, Paul A., 94 Argentina, 115, 116; see also Latin America. ASEAN, 69 –70, 73 Ashman, Darcy, 89, 93, 94 Asia, 2, 23, 27, 60, 81, 89, 98, 124,126, 127, 144, 147, 161, 171 Asia Pacific Journal of Management, 164 Asia Pacific region, 27, 29, 30, 129, 134, 146, 181, 185, 187, 197, 200; see also Asia, China, Japan, Korea. Asian financial crisis of 1997, 180 Asian firms. See MNEs, Asian asset risks, 105 asymmetry, 43, 56, 127, 197 Auster, Ellen R., 106 231

232

Index

Austin, James E., 93, 95 Australia, 72, 75, 161, 167, 173, 175 automotive industry, 82 avoidance costs, 111 Baden-Fuller, Charles, 39 Banco Popular, 100 Banco Solidario, 99 Bank of China, 134, 137 bank secrecy, 115 banks and banking, 99. See also World Bank. Baosteel (Shanghai Baosteel Group), 136 Baran, Paul A., 4 Barber, Benjamin R., 5 Barclay, Lou Ann, 36, 51 bargaining model, 122 Barlett, Donald L., 148 Bartlett, Christopher A., 39, 40 Beamish, Paul W., 141 Benzing, Cynthia, 106 Berger, Gabriel, 95 Berger, Marguerite, 98, 99, 100 Bergsten, C. Fred, 55 BHP Billiton, 154, 161, 166, 167 bibliometrics, 171 Bielefield, Wolfgang, 88 biodiversity, 65 bi-regional firms, 127, 128, 129, 134, 147, 154, 163, 166, 168, 172, 177 Birkinshaw, Julian, 40 Blomstrom, Magnus, 5, 19, 20 Boddewyn, Jean J., 121 Bolivia, 122. See also Latin America. Borrus, Michael, 169 bottom of the pyramid, 20, 21 Bove, Roger E., 106 Boycko, Maxim, 104 Boyd, Gavin, 52 Bradsher, Keith, 63 Brazil, 23, 35, 76, 92, 94, 115, 116, 136, 169 Bretton Woods Conference (1944), 59, 61, 63 Brewer, Thomas L., 121

bribes, 111, 118, 120 Bridgestone, 161, 166 broad triad (North America, Europe, Asia), 22, 26, 125. See also core triad, triad economies. Brouthers, Lance E., 144 Brown, L. David, 88, 92, 93 Brunetti, Aymo, 110 Bruton, Gary D., 120 Buckley, Peter J., 173 Budhwar, Pawan S, 144 Bulgaria, 116, 117. See also Eastern Europe. business associations, 87 business-government relations, 141 business groups, 107, 143 business-NGO relationships, 202 business practices, Asian, 164 Business Source Premier database, 171–2 Butkiewicz, James L., 67 Cable & Wireless (Firm), 170 CACM, 71, 205 CAFTA-DR, 72, 205 Callanan, Gerard, 106 CAM, 71 Campos, J. Edgardo, 110 CAN (Andean Community), 205 Canada, 22, 35, 55, 70, 71, 75, 89, 142, 169; see also NAFTA; North America. Canon, 161, 172, 173 Cantwell, John A., 176 capital, 68 capital markets, 104, 105 CARE, 71, 94, 95 Cargill, 120, Caribbean, 7, 22, 36, 51, 56, 71–72, 73, 79 CARICOM, 71, 72 Carlile, Paul R, 171 Carr, James H., 98 Carrefour (Firm), 193, 196 Carso Global Telecom, 129 case study selection bias, 164 Casio, 169 Casson, Mark, 173

Index

Cathay Life, 134 Caves, Richard E., 4, 5, 19, 36, 193 Cemex, 165 Center for International Private Enterprise, 117 Central Europe, 107. See also Europe; European Union. centrally planned economies, 84 chaebols, 52, 54, 125, 141, 142, 143, 145, 146, 147 Chang, Sea Jin, 144 Chang, Weih, 106 child mortality, 77, 78 Chile, 51, 52, 54, 72, 115, 116 China, 6, 8, 9, 20, 23, 33, 35, 44, 52, 64, 81, 120, 124, 125, 129, 134, 135 –140, 142, 149, 161, 168, 169, 171, 173, 179, 184, 198, 200 China International Trust and Investment Company (CITIC), 170 China Southern Power, 137 China Telecommunications, 134, 137 Cho, Dong-Sung, 143 Christen, Robert P., 99 Christensen, Clayton M., 171 Chu, Hung Man, 106 Citibank, 99 civil society, 7, 8, 17, 79, 83, 86,90, 102 Clarke, George, 100 Clay, Jason, 96 –98 clean water, 65 cluster, symmetrical, 196 Coca-Cola, 117 Cogman, David, 120 Collins, Jamie, 103, 107, 109, 110, 122 Collinson, Simon C., 144, 162, 167, 169 competitiveness, 40, 183 complementarity, 192, 196 Comprehensive Anti-Apartheid Act (1984), 84 contract manufacturers, 168 core triad, 32, 35, 125. See also broad triad, triad economies. corporate philanthropy, 95 corporate social responsibility. See CSR

corruption, 65, 69, 79, 104, 107–120 cost analysis, 51 cost leadership, 38 counterfeiting, 63 country specific advantages. See CSAs. CPI (Corruption Perception Index), 112– 113 CSAs (Country specific advantages) (e.g. labor, land, natural resources), 3, 8, 11, 12, 14, 17, 32, 53, 80– 81, 102, 142, 144, 162, 206 CSR (Corporate social responsibility), 5, 17, 21, 114, 206, 258 Cuervo-Cazurra, Alvaro, 114 Cull, Robert, 100 Cummings, Larry L., 106 Czech Republic, 2; See also Central Europe; Eastern Europe; European Union. Dahan, Nicolas, 120, 121 Daniel, Shirley, 38 Danis, Wade M., 106 D’Cruz, Joseph R., 21– 36, 37, 52, 197 Dean, Jason, 168 De Backer, Koen, 4 Debrah, Yaw A., 144 debt relief, 65 deforestation, 79 Delios, Andrew, 141 dependency, 4 de Tocqueville, Alexis. See Tocqueville, Alexis de. developed countries, 23, 25 developing countries, 23; MNEs in, 34 developing economies, 2, 24, 25 development, 162, 197–198 development assistance, 79 development financial institutions. See DFI. DFI (development financial institutions), 107 diamond framework, 35, 40, 183 differentiation strategy, 38, 56 distributional framework, 202

233

234

Index

Dobel, J. Patrick, 89, 91– 93 Doctors without Borders (Médecins sans frontières), 88 Doh, Jonathan P., 7, 17, 84–89, 91, 102, 107–109, 120, 121, 122 Doha Development Round, 7, 35, 60, 62, 75–76, 82, 89 Dominican Republic, 100; see also Latin America. Dore, Ronald, 173 double-diamond framework, 52 downstream FSAs. See FSAs, downstream. Doz, Yves L., 40 dragon multinationals, 164 –165 Dreher, Axel, 69 Drucker, Peter F., 173 Dunfee, Thomas W., 117 Dunning, John H., 5, 20, 36, 52, 53, 165, 176, 183, 191 East Asia, 52, 54, 78, 79. See also Asia Pacific. East Asian Tigers. See Tigers, East Asian. Eastern Europe, 51, 107, 114, 170. See also Europe; European Union. EBRD (European Bank for Reconstruction and Development), 7, 60, 73, 206 EbscoHost, 172 eclectic paradigm, 165 economic development promotion, 9, 17, 19, 22, 54 economies of scale, 34, 201 Ecuador, 122; see also Latin America. Eden, Lorraine, 103, 107, 108, 109, 110, 122 education, 65, 77, 92; see also LLL framework efficiency-based strategy, 42, 202 Egghe, Leo, 171 Egypt, 64 Einhorn, Bruce, 169 El-Said, Hamed, 64, 66 emerging economies, 124–125, 129; See also developing economies. employment, 98 endogeneity, 191, 195

energy sector, 170, 201 Engardio, Pete, 169 environmental regulations, 90 environmental sustainability, 77, 79 Ernst, Dieter, 168, 169 Ericsson (Firm), 169 Errunza, Vihang R., 148 Esty, Daniel C., 91 Europe, 2, 126, 167, 168, 170, 173, 180, 181, 200; see also European Union; Eastern Europe; Central Europe. European Union (EU), 15, 28, 29, 30, 69, 89, 95, 206 exchange rates, 63 Fagre, Nathan, 121 fair trade coffee, 94, 95 family-clan system, 52 FCPA (Foreign Corrupt Practices Act, 1977), 115 FDI (Foreign direct investment), 1, 11, 23, 114, 124, 180, 193; FDI notifications, 185– 187, 190; greenfield FDI, 192; inward FDI, 9, 18, 23, 24, 25, 26, 35, 141, 184, 185 –187, 192, 195, 197; outward FDI, 23, 24, 25, 26, 29, 30, 141, 143, 187–191, 194, 197; 179, 194; FDI flows, 24, 25, 125, 141, 180; FDI stocks, 24, 25, 27, 28, 29, 30, 139; FDI symmetry, 184, 191, 193 –194 Federalist Society for Law and Public Policy Studies, 86 Filatotchev, Igor, 107 finance companies, 100 FINCA (Foundation for International Community Assistance), 100 firm specific advantages. See FSAs Fischer, Rosa Maria, 95 five forces model for competitive advantage, 37, 38 five partners framework, 37 flagship firms, 21, 36, 57, 170, 197 Flextronics, 129, 134, 154, 161, 167, 168–169, 178

Index

FMCG (fast moving consumer goods) sector, 96 Ford, Kevin, 119 Ford Motor Company, 38 Foreign Corrupt Practices Act (1977). See FCPA. foreign direct investment. See FDI. Forest Stewardship Council, 85 Fortune Global 500, 43– 44, 125, 135, 143, 145, 168, 181, 184, 187, 193 Foundation for International Community Association. See FINCA. Foxconn. See Hon Hai Precision. France, 89, 142; see also Europe; European Union. Frank, Isaiah, 55 Franko, Lawrence G., 173 Fransman, Martin, 176 free trade, 84 Friedman, Thomas L., 5 Fruin, W. Mark, 173 FSAs (Firm specific advantages), 3, 4, 11, 12, 14, 17, 41, 51, 80– 81, 142, 178, 184, 206; downstream FSAs, 144, 148, 149, 168, 177; knowledge based FSAs, 32; location bound FSAs, 40, 187, 196; non-location bound FSAs, 40, 193; upstream FSAs, 144, 148, 149, 177 FSA-CSA matrix, 6, 8, 12, 13, 14, 80, 162, 163, 181, 182, 183; quadrants, 13, 14, 17, 182–184; regional matrix, 154 FTAA (Free Trade Area of the Americas), 72, 206 FTSE4Good Index, 117 GATT, 45, 59, 60, 61, 85, 206 GDP (Gross domestic product), 27, 139, 194 gender equality, 77 General Electric, 117, 186–187 General Motors, 38 George, Gerard, 107 Gerlach, Michael L., 52 Germany, 89, 142; see also Europe, European Union, Central Europe.

Ghemawat, Pankaj, 54, 154 Ghoshal, Sumantra, 39, 40, 148 Giddens, Anthony, 89 Giuliani, Rudolph, 119 Global Compact, 118 global firms, 154, 161, 163, 168, 171, 172, 177, 178, 187 global partnership for development, 77, 79 globalization, 4, 84, 89, 91– 93 Globerman, Steven, 5, 19 Goldman Sachs, 119 Gomes, Lenn, 148 Görg, Holger, 4, 19 governance, institutional. See institutional governance. governance indicators, 109 government economic policy, 55, 191, 195 Gray, John, 89 Greenaway, David, 4, 19 Greidanus, Nathan, 180, 191, 193, 195, 196 G20+ group of developing countries, 76, 90 Guay, Terrence R., 84, 85, 120, 121 Guillén, Mauro F., 143 Gutierrez, Roberto, 95 Habib, Mohsin, 108, 114 Haddad, Mona, 4 Hadjimarcou, John, 144 Haggard, Stephen, 169 Haier, 136, 177 Hamel, Gary, 37 Harrigan, Jane, 64, 67 Harrison, Ann E., 4, 5, 19 Haskel, Jonathan, 19 Hausmann, Ricardo, 105 health, 65; see also HIV/AIDS, malaria, child mortality. health, maternal, 77, 78, 79 Henisz, Witold J., 104 Hess, David W., 117 heterogeneity, 20 Hewlett-Packard, 168 HIPC Initiative (Heavily Indebted Poor Countries Initiative), 65

235

236

Index

Hitt, Michael, 144, 173 HIV-AIDS, 65, 74, 77, 79 Hobday, Michael, 145 Hodgetts, Richard M., 37, 162, 169, 180, 184 Hoekman, Bernard, 75 Holcombe, Susan, 95 home base, single vs. multiple, 40 home region based firms, 147, 149, 154, 161, 164, 172, 173, 177 Hon Hai Precision, 154, 161, 167, 168, 169 Honda Motors, 161, 167, 172, 173 Hong, Jaebum, 144 Hong Kong, 72, 125, 144, 170; see also Asia Pacific; Asia. Hope Group, 120 Hopkins, Nancy, 95 Horst, Thomas, 55 Hoskisson, Robert E., 105, 173 host country, 18, 80 Hudson, Bryant A., 88 human rights, 90 Hungary, 2; see also Eastern Europe; Central Europe; Europe; European Union. hunger reduction, 77 Husky Oil, 170 Hutchison Whampoa, 154, 167, 170 –171, 177 Hymer, Stephen H., 5, 19, Hyundai Motors, 37, 129, 143, 146, 181 IBD (Inter-American Development Bank), 7, 60, 73–74 IBM, 202 IBRD (International Bank for Reconstruction and Development), 59 IDA (International Development Association), 64, 206 IDB (Inter-American Development Bank), 73–74, 206 IFC (International Finance Corporation), 60, 64, 206 ILO’s Declaration of Principles concerning Multinational Enterprises and Social Policy, 85

IMF (International Monetary Fund), 67, 198, 206 India, 20, 35, 54, 65, 76, 94, 120, 134, 200 Indonesia, 6, 54, 72, 73, 97– 98, 144 Infosys, 202 INGOs (International NGOs), 89 innovations, 184 institutional advancement, 104 institutional environment, 203 Institutional governance, 103, 104, 107– 108 institutions, 7, 103 internalization theory, 55, 143 International Anti-Corruption Conference Council, 120 International business strategy research, 178 International Center for the Settlement of Investment Disputes, 206 International Chamber of Commerce (ICC) Commission on Anti-Corruption, 116 international competitiveness, 40 International Conference on Financing for Development (Monterrey, Mexico, 2002), 76 International development and relief organizations, 89 International government agreements, 84 International Labour Organization (ILO), 85 International Monetary Fund (IMF), 7, 59, 60; quota system, 63, 64 international strategy, 149 Interpol Group of Experts on Corruption, 119–120 Invest Korea, 186, 187, 195 investment, 50, 60, 73–74 IOs (International organizations), 86 Iran, 63 Irwin, Douglas A., 61 Ispat, 165 Israel, 73 IT (Information technology), 202

Index

Jain, Subhash C., 69, 73 Japan, 9, 22, 52, 54, 72, 73, 89, 142, 144, 161, 169, 172, 173, 174, 175, 176, 180 Johannesburg Declaration, 97 joint ventures and acquisitions. See JV&A. Jordan, 2, 64, 67 Journal of Asian Business and Management, 164 JV&A (joint ventures and acquisitions), 97 Kalegaonkar, Archana, 92 Kapur, Devesh, 63 Karnani, Aneel, 22 Karsai, Judit, 107 Kaufmann, Daniel, 104, 107 keiretsu, 52 Keller, Wolfgang, 19 Kenney, Martin, 4 Kenya, 16 Khan, Shahrukh R., 69 Khanna, Tarun, 54, 104, 105, 107, 108 Kiggundu, Moses N., 106 Kim, Hicheon, 173 Kim, Linsu, 142 Kim, Wi Saeng, 148 Kobrin, Stephen J, 120, 121 Kogut, Bruce M., 40 Kokko, Ari, 19, 20 Koljatic, Mladen, 95 Korea, South, 2, 8, 9, 24, 35, 50, 52, 54, 73, 110, 124, 125, 129, 134, 140 –150, 171, 173, 175, 179, 180, 181, 184–198, 200 Korea Electric Power, 145 Korea EXIM Bank, 143 Kostecki, Michel, 75 Kraay, Aart, 104, 107 Krugman, Paul R., 42 KT (Firm), 143, 145 Kwok, Chuck C. Y., 114 labor, 183, 184, 186 labor standards, 90 Lall, Sanjaya, 50, 142 La Mure, Lane T., 84

Lamy, Pascal, 76 La Porta, Rafael, 103, 105 Latin America, 2, 73, 74, 79, 95, 107, 110, 122, 200; See also Bolivia, Chile, Venezuela. learning. See education. least developed economies, 25 Lee, Ho-Uk, 144 Lee, In Hyeock, 196 Lee, Jangwoo, 142, 143 Leff, Nathaniel H., 52, 54 Lenovo, 136, 165, 177, 178, 202 less developed economies, 25, 64 leverage, 165. See also LLL framework. Levitt, Theodore, 154 Levy, Brian D., 104 LG Electronics, 129, 143, 145, 147, 181 LG Group, 37, 144, 195 Li & Fung, 165 liability of foreignness (LoF), 22, 34, 134 Lien, Donald, 110 Lim, Ghee Soon, 170 Lindenberg, Marc, 84, 89, 91–93 Linkages, 3, 5, 19, 20, 50, 57, 97, 165 Lipsey, Robert E., 19 LLL framework, 165, 206 Lopez-de-Silanes, Florencio, 103 Lowe, Nichola J., 4 Lozano, Gerardo, 95 Lukoil, 129 Lyn, Esmeralda O., 148 Lynn, Leonard H., 164 M&A (Mergers and acquisitions), 184, 206 MacMillan, Ian C., 106 MAI (Multilateral Agreement on Investment), 90, 120 malaria, 77 Malaysia, 72, 73, 129, 134, 144, 169 management skills, 50, 184 managerial behavior, 104 Mansfield, Edwin, 5 manufacturing industries, 121

237

238

Index

market imperfections, 55 market opportunities, 21, 43 marketing, 50, 99 Mastercard, 100 Mastruzzi, Massimo, 108 Mathews, John A., 143, 164, 165, 166 Mauro, Paolo, 108, 110, 114 Mazda Motors, 161 McGovern, Ian, 144 McKinnell, Hank, 118 Médecins sans frontières. See Doctors without Borders. MERCOSUR, 69, 71, 206 Merrifield, D. B., 106 Mexico, 24, 34, 51, 70–71, 72, 74, 89, 115, 129, 134, 169. See also Latin America; NAFTA. Meyer, Klaus E., 5, 164 MFIs (microfinance institutions), 100 microfinance, 98–100 microfinance institutions. See MFIs. Middle East and North Africa region, 64 Millennium Development Goals, 7, 60, 74, 76 –79, 82, 97, 207 Miller, Stewart R., 22 Mining firms, 201 MNEs (Multinational enterprises) vii, 1, 2, 8, 12, 13, 16, 53, 54, 102, 124, 125, 150, 164, 200–201, 204, 207; and corruption, 114 – 115, 120; and social policy, 85; Asia Pacific, 181; Asian, 154–164, 171, 172, 173, 174–175, 176, 177, 178, 181; born globals, 166; Chinese, 151–152, 162, 176, 182, 184, 201, 202; government relations, 180, 191, 195, 196; host country relations, 121, 191; India, 202; Japanese, 144 –145, 150, 162, 173, 174, 176; Korean, 145–149, 152, 165, 173, 182, 201; Yang MNEs, 9, 179, 199, 200 Moon, Hwy-Chang, 183 Moore, Mark H., 88 Moran, Theodore H., 55, 121 Morck, Randall, 148

Morocco, 64; see also Middle East and North Africa region. Morrisson, Allen J., 40 Motorola, 120 Mozal Project, 64, 66 –67, 207 Mozambique, 66. See also Africa. Multifiber Agreement, 51 Multilateral Agreement on Investment. See MAI. Multilateral Investment Guarantee Agency (MIGA), 207 Multilateral trade, 84 Multinational enterprises. See MNEs. Multinationality, 165 NAFTA (North American Free Trade Agreement) (US, Canada, Mexico), vii, 7, 15, 28, 29, 35, 60, 69, 70, 82, 89, 207 Narin, Francis, 171 Narula, Rajneesh, 20, 165, 166 national responsiveness, 39, 40, 56 Nelson, Richard R., 143, 173 Netherlands, 142 New Era, New Challenge, 119 New Zealand, 75 Newman, Karen, 105 NGOs (Nongovernmental organizations), 4, 7, 8, 16, 53, 57, 58, 83– 89, 91, 92, 93, 102, 198, 203 –204; advocacy NGOs, 88; International NGOs see INGOs; operational NGOs, 87; social purpose NGOs, 87, 88 niche, 34, 37, 50 Nissan Motors, 161, 166, 173 Nokia, 187 Nolan, Peter, 136 Nollen, Stanley D., 105 nonbusiness infrastructure, 21 nongovernmental organizations. See NGOs. Nortel, 169 North, Douglass C., 103, 107

Index

North America, 126, 129, 134, 147, 180, 181, 200; See also Canada, Mexico, NAFTA, United States. North American Free Trade Agreement. See NAFTA. not-for-profit sector, 86 OAS InterAmerican Convention against Corruption (1997), 115 obsolescing bargain model (OBM), 121 O’Donnell, Edward, 144 OECD (Organization for Economic Cooperation and Development), 28, 85, 114, 116, 207; Convention on Combatting Bribery of Foreign Public Officials, 114, 115; Guidelines for Multinational Corporations, 85, 207 OEM (Original equipment manufacturer), 169 Offenheiser, Raymond, 95 Offshoring, 189, 201 Ogliastri, Enrique, 95 Oh, Chang Hoon, 141, 148, 183 Olson, Mancur, 86 operational NGOs, 88 Oppenheim, Jeremy M., 120 Organization of American States. InterAmerican Convention against Corruption, See OAS InterAmerican Convention against Corruption. Organization for Economic Cooperation and Development. See OECD. Ouchi, William G., 173 outsourcing, 202 Oxfam, 88, 89, 94, 95– 97 Pack, Howard, 143 Pakistan, 69 Palepu, Krishna, 54, 104, 105, 107, 108 Palma, Gabriel, 2, 4 Papanastassiou, Marina, 176 Pearce, Robert D., 106 Peng, Mike, 106

Pereira, Sonia, 19, 100 personal care products firms, 170 Persson, Hakan, 5 Peru, 122 Pfizer, 118, 119 Philippines, 73, 74, 93 piracy, 63 Porter, Michael E., 5, 13, 15, 35, 36, 38, 40, 50, 56, 162 ports and port infrastructure firms, 170 POSCO, 129, 143, 145, 146, 181 post-war reconstruction, 59 poverty reduction strategy, 60, 64, 73, 74, 77, 97, 204 Prabhu, Ganesh, 107 Pradhan, Sanjay, 110 Prahalad, C. K., 20, 40 Price, Derek de Solla, 171 private capital flows, 68 Proctor & Gamble, 170 production, 50 profit driven capitalism, 101 profits, 54, 55 property rights, 106 protected markets, 38 protection (organized crime), 111 R&D (Research and Development), 50, 56, 142, 143, 165, 169, 184, 186, 207, 213 Ramamurti, Ravi, 122 Ramaswamy, Kannan, 148 Red Crescent, 88 Red Cross, 88 red tape, 111 Redding, Gordon, 144 regional MNEs, 22, 26. See also MNEs. regional sales, 128, 137, 139, 147, 148, 154, 183 regional strategy, 198 Reitsperger, Wolf D., 38 Republic of Korea. See Korea, South. research bias, 164, 173 research methodologies, 164 Reuters, 63

239

240

Index

risk diversification, 54 Robock, Stefan H., 120 Rodriguez, Peter, 103, 107, 108, 109, 110, 122 Rodrik, Dani, 5, 105, 106 Romeo, Anthony, 5 Rosenberg, Richard, 99 Roth, Kendall, 40 Rousseau, Ronald, 171 Rover (Firm), 136 Royal Dutch Shell, 167 Royal Philips, 195 Rugman, Alan M., 4, 5, 13, 16, 21, 22, 26, 35, 36, 37, 38, 39, 40, 41, 42, 43, 52, 55, 56, 89, 125, 126, 127, 135, 141, 143, 144,146, 148, 149, 150, 154, 161, 165, 167, 169, 173, 180, 181, 182, 183, 184, 191, 193, 195, 196, 197 Russia, 62, 63, 110, 129, 134, 200 Salinas de Gortari, Carlos, President of Mexico, 1988–1994, 34 Samsung Corning, 144 Samsung Electro-Mechanics, 144 Samsung Electronics, 129, 134, 143, 144, 147, 181, 189, 201 Samsung Group, 37, 144, 145 Samsung SDI, 144 Sanchez, Susan, 100 Sappington, David E. M., 105 Saudi Arabia, 134 Schulz, Andrea, 5 Science and Technology Research Institute (Korea), 143 Senbet, Lemma W., 148 Shanghai Automotive, 136, 177 shelter-based strategies, 41–42, 43. See also strategies. Shipilov, Andrew V., 106 Shleifer, Andrei, 103, 105, 109 Simon, Jeffrey D., 120 Singapore, 2, 50, 73, 75, 129, 134, 144, 161, 169, 179, 198, 200 Singer, Peter, 5 Sinha, Jayant, 104, 105, 108

Sinopec, 134, 176 Sjoholm, Fredrik, 19 SK Networks, 143, 145, 147 Slaughter, Matthew, 19 Sleuwagen, Leo, 4 Slovakia, 116; see also Eastern Europe; European Union; Central Europe. small and medium enterprises. See SMEs. Smarzynska, Beata K., 114 SMEs (Small and medium enterprises), 20, 67, 136 Social Accountability International, 85; SA8000 standard, 85 social benefits, 57 social movements, 86, 87. social triangle, 12, 15, 203 SOEs (Small open economies), 6, 34, 35, 38, 40, 41– 52, 54 – 55, 56, 57 Soloaga, Isidro, 70 Sony, 161, 172, 173, 178 Soros, George, 5 South Africa, 2, 54, 84, 94 Southeast Asia, 107, 110 Southern Asia, 78, 79 Spar, Debora L., 84 Spiller, Pablo Tomas, 104 spillovers, 3, 4, 5, 18, 19, 20, 184 Sri Lanka, 50, 51 SSCI (Social Science Citation Index), 172 Stackhouse, Dale E., 115 stakeholders, 87, 101, 102 Starbucks, 94, 95 Staw, Barry M., 106 Stiglitz, Joseph E., 5, 85, 105 Stopford, John, 39, 122 Strange, Susan, 122 strategies, 3, 36. See also efficiency-based strategy, shelter-based strategy. Strobl, Eric, 19 sub-Saharan Africa, 78, 79 sustainable economic practices, 85, 97, 101 Sweden, 169

Index

Tadesse, Solomon, 114 Taiwan, 134, 143, 144, 161, 168, 179, 200 Tallman, Stephen, 38, 81 Tang, Donny, 69 tariff and nontariff barriers, 13, 41, 54, 61, 62, 72, 75, 76, 162 Tata Consultancy, 202 technology transfer, 18, 19, 55 Teece, David J., 4, 5 Teegen, Hildy, 7, 17, 85–89, 102, 122 telecommunications firms, 170 Tesco, 187 Thailand, 73, 134, 144 Thompson RV, 136 Thun, Eric, 135 Tigers, East Asian, 44, 50 TNI. See Transnationality Index. Tocqueville, Alexis de, 86 Tong, Zhong Y., 98 Toyota Motors, 38, 161, 166, 172, 173, 178 TRACE (Transparent Agent and Contracting Entities), 117 trade liberalization, 3, 60, 75 trade negotiations, 61 Tran, Nhu-An, 99 transaction cost approach, 52 Transnationality Index (TNI), 45, 207 Transparency International, 112, 113, 118 triad based disputes, 90 triad economies, 180, 207; see also broad triad; core triad. triad markets, 56 – 57, 127 Tunisia, 64 Turkey, 24, 134 Uhlenbruck, Klaus, 103, 107, 108, 109, 110 UI. See Unilever Indonesia. Ukraine, 6, 63 U.N. Millennium Summit 76; see also Millennium Development Goals. Unilever Indonesia (UI), 95 – 98 United Kingdom, 142, 169, 170. See also Europe, European Union.

United Nations (U.N.), 76, 78, 79, 227 United Nations Conference on Trade and Development (UCTAD), 23, 24, 125, 165 United Nations Global Compact, 85, 207 United Nations Monetary and Financial Conference (1944), 59 United States, 16, 54, 70, 71, 72, 89, 95, 115, 142, 168, 172, 173 United States–Canada Free Trade Agreement, 15 United States Information Agency (USIA), 115, 116 United States. Trade Representative, 71, 72 unproductive behavior, 111 upstream FSAs. See FSAs, upstream. utility firms, 170 Vachani, Sushil, 7, 85– 89, 102, 122 Vakil, Anna C., 87 values driven capitalism, 101 Venezuela, 122 Venture capital (VC) markets, 107 Verbeke, Alain, 5, 36, 38, 39, 40, 41, 42, 43, 141, 154, 161, 162, 180, 183, 184, 191, 196 Vietnam, 62, 63 Visa (Firm), 100 Vishny, Robert W., 103, 105, 109 Vogel, Ezra F., 173 Wal-Mart, 193, 196 Wan, William P., 173 Wang, Chengang, 64, 66 Wang, Jian-Ye, 20 Watson, A.S. (Firm), 170 Weder, Beatrice, 110 Wei, Shang-Jin, 108, 114 Wells, Louis T., Jr., 107, 121 Westney, D. Eleanor, 173 Whalley, Jason, 170 Whitley, Richard D., 52, 54, 173 Wignaraja, Ganeshan, 50, 51 Williamson, Oliver E., 104 Winters, L. Alan, 70

241

242

Index

Wipro, 202 Wolf, Marvin J., 173 World Bank, 2, 7, 59, 60, 63 – 65, 79, 81, 116, 144, 198; loans, 64 World Bank Anti-Corruption Knowledge Center, 116 World Investment Report, 23 World Trade Organization (WTO), 7, 51, 56, 59, 61– 65, 75, 76, 84, 90, 198 World Wide Fund for Nature (WWF), 88– 89 Wright, Mike, 107 WTO. See World Trade Organization. Xerox, 169 Xin, Katherine R., 106

Yang MNEs. See MNEs, Yang. Yanikkaya, Halit, 67 Yeaple, Stephen R., 19 Yeung, Bernard, 148 Yin, Robert K., 171 Yip, George, 154 Yucel, Emre, 144 Yunis, Mohammad (Nobel Prize laureate), 98 Zaheer, Srilata, 22, 134, 181 Zahra, Shaker A., 148 Zelner, Bennet A., 104 Zenith Electronics, 145 Zoido-Lobaton, Pablo, 104 Zurawicki, Leon, 108, 114