Multinational Corporations in World Politics

Author(s): Joseph S. Nye Jr.

Source: Foreign Affairs , Oct., 1974, Vol. 53, No. 1 (Oct., 1974), pp. 153-175
Published by: Council on Foreign Relations

Stable URL: http://www.jstor.com/stable/20039497

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 MULTINATIONAL CORPORATIONS IN
WORLD POLITICS
By Joseph S. Nye, Jr.

AS dramatic as the rise of the multinational corporation has

/-\ been its increased political prominence. The very term
implies a political visibility not associated with the words
"direct investment" that were used a decade ago. In the past two
years the role of these spreading enterprises has been debated in
the International Labour Organisation, the Organization for
Economic Cooperation and Development, the European Com
munity, the U.S. Senate and the U.N. General Assembly. During
1973 a "Group of Eminent Persons" met under the auspices of
the U.N. Economic and Social Council to study the role of multi
national corporations in international relations and the process
of development.1
To the common (and oversimplified) question whether multi
national corporations are likely to render the sovereignty of the
nation-state obsolete, the answer surely is a qualified "no." The
multinationals are undoubtedly a large force to be reckoned with.
There are currently some 200 large multinational enterprises or
clusters of corporations which operate simultaneously in 20 or
more different nations and are joined together by common owner
ship and management strategy.2 The three billion dollars of value
added annually by each of the top ten multinationals is already
greater than the gross national product of some 80 member-states
of the United Nations, and some observers are predicting that by
the end of the century 300 giant corporations will account for a
large majority of world industrial production. Yet even weak
states can and sometimes have nationalized the local affiliate of a
1 Of the 20 persons appointed, eight came from less-developed countries, two from Com
munist countries, and ten from the "rich" countries, including two Americans, Senator
Jacob Javits of New York and J. Irwin Miller, Chairman of the Cummins Engine Com
pany. During 1973, the Group heard testimony from corporate presidents, professors, trade
unionists and general social critics, and in the summer of 1974 presented its report. U.N.
ECOSOC, The Impact of Multinational Corporations on Development and on International
Relations, E/5500/Rev. 1 1974.
2 In a document prepared for the Group of Eminent Persons, the U.N. Secretariat dis
cussed problems of alternative definitions, and pointed out that the number of multina
tionals can be set as high as 7,300 if one foreign affiliate is set as the criterion. Multi
national Corporations in World Development, ST/ECA/190, 1973. While the term
"enterprise" is more strictly accurate, "multinational corporation" remains the more pop
ular term.

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 154 FOREIGN AFFAIRS
multinational corporation. For the foreseeable future, the two
kinds of entities will continue to coexist, in uneasy tension.
Why do multinational corporations now seem to many nations
to represent an important threat? What in fact are the intended
or unintended political roles they play? What can one now say
about the longer-term impact of multinational corporations?
And, the most acute subject of present controversy, what can be
done to cushion or regulate the conflict that many now see be
tween multinational corporations and the less-developed coun
tries?
II

Apart from their sheer size, the significance of multinational

corporations has acquired an additional dimension in consequence
of the growing prominence of economic and welfare-oriented
objectives in the national security equation. Nuclear technology
and changing domestic values have made the use of military
force a more costly option for the governments of the advanced
industrial societies. While in extreme situations force is indeed
necessary to guarantee national survival, much of international
politics is not extreme and not about survival, and in these areas
military force is far too blunt and costly an instrument to be use
ful. (A threat of bombardment may have helped the United
States to induce Japan to trade a century ago, but it was not a use
ful instrument in the recent struggle over the value of the yen.)3
Most national security policies in today's world are designed not
merely to insure the physical survival of individuals within na
tional boundaries, but to assure some minimal expected level of
economic welfare, a certain political and social autonomy for the
nation, and a degree of national political status. Indeed, some
national security policies actually increase the risks to physical
survival in order to insure greater certainty in the enjoyment of
economic welfare, political status and national autonomy.
For many states, the strongest sense of threat has shifted from
the military area and territorial integrity to the economic area.
Often such threats are unconventional and unintentional. As the
distinguished Canadian John Holmes has described Canada's
relations with the United States, "it isn't Washington we have to
3 The relationship between politics and economics is developed in "World Politics and
the International Economic System," by Robert O. Keohane and Joseph S. Nye, Jr., in C
Fred Bergsten (ed.), The Future of the International Economic Order, Lexington, Mass.:
D. C Heath, 1973.

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 MULTINATIONALS IN WORLD POLITICS 155
fear. It is Houston and Pittsburgh and Hollywood. . . . Our fear
is not that the U.S. army will destroy Toronto a second time, but
that Toronto will be programmed out of existence by a Texas
computer."
Thus it becomes quickly apparent why multinational corpora
tions have become important in world politics whether they wish
it or not. Shifts away from the use of force are shifts away from
the area of corporate weakness, and shifts toward greater prom
inence of economic welfare objectives are shifts in the direction
of corporate strength.
Beyond this, generalizing about the political roles of multi
nationals becomes rather complicated. Corporations invest
abroad for a variety of reasons. Firms in service industries differ
considerably in size and mobility from those in extractive indus
tries or in manufacturing. Even within manufacturing there are
important differences in the bargaining positions at home and
abroad of firms whose investments are oriented more or less to
ward access to local markets, inexpensive labor or exploitation of
a technological advantage. Moreover, the same firm may have a
very different impact on a country with a weak economy and
fragmented society than on a country with a balanced economy
and stable government.
Nonetheless, in general terms, multinational corporations can
be seen to play at least three important roles in the day-to-day
processes of world politics. These are:
1. The Direct Role : Private Foreign Policy
Here lie some of the most dramatic examples?notably the
case of the International Telephone and Telegraph Company
(ITT) in Chile, which helped to stimulate both the U.S. Senate
hearings and the creation of the special U.N. group. This sort of
case becomes particularly notorious because it contravenes the
traditional assumption of world politics that governments deal
with governments and that citizens or corporations affect govern
ments of other countries indirectly through policies they press
upon their own government. But here citizens and corporations
are also affecting the governments and politics of other countries
by dealing with them directly, quite apart from the activities of
their home governments.
It is true that the widespread publicity attendant on such dra
matic cases may lend them a disproportionate significance. The

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 i56 FOREIGN AFFAIRS
Chilean disclosures are informative in that ITT was notably
unsuccessful in persuading other multinational corporations to
join in direct political intervention. While evidence about this
type of direct role is almost impossible to assemble scientifically,
present evidence suggests that cases of major direct political in
volvement such as United Fruit in Guatemala in the 1950s, Union
Mini?re in Katanga in the 1960s, or ITT in Chile in the 1970s,
are a small portion of state-corporation interactions. Indeed, one
careful case study that documents the political roles of American
corporations in Peru indicates a trend away from such blatant
direct political involvement.4 If we conceive of a scale of direct
political actions by corporations ranging in descending order
from the hiring of private armies through the bribery of host
country soldiers or politicians, campaign contributions to polit
ical parties, legitimate lobbying of host government legislators,
and so on down to advertising to influence the climate of ideas,5
we would undoubtedly find most direct political activities clus
tered at the lower end of the scale.
Nonetheless, direct transnational political behavior can be of
crucial importance to particular states. Beyond the rather rou
tinely used battery of lower-level political activities, corpora
tions may also use economic means (both inducements such as
the promises of new investment, and deprivations such as threats
of withdrawal) in direct bargaining with host governments for
favorable policies.
When one considers the direct political role of the corporation
in world politics, it is useful to drop another traditional assump
tion, that states always act as coherent entities. If one recognizes
that different groups in societies have different interests and that
governments are sometimes alliances of competing bureaucracies
pulling in different directions, one can conceive of policy coali
tions composed of parts of different governments and corpora
tions.
Private foreign policies toward host countries thus may work
on internal differences within a country or may try to bring out
side pressure to bear. Faced with the prospect of Chilean copper
nationalization in the late 1960s, Anaconda relied on the local
4 Charles T. Goodsell, American Corporations and Peruvian Politics, Cambridge:
Harvard University Press, 1974.
5 Or not advertising. In 1972, some U.S. companies in Mexico organized an advertising
boycott of the "anti-American" newspaper Excelsior. {The New York Times, June 23,
1974)

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 MULTINATIONALS IN WORLD POLITICS 157
political defense of forming an alliance with the conservative
elite in the host country?to no avail. Kennecott, on the other
hand, worked out a sophisticated external defense based on trans
national market and credit networks, so that when nationalization
occurred the Chilean government would jeopardize its standing
with credit institutions on several continents if it failed to pro
vide adequate compensation. In situations of rising nationalism,
the latter strategy may be the safer for a corporation. In retro
spect, Harold Geneen, president of ITT, has argued that:
the answer may be a multinational approach. By this I mean the Germans,
the Swiss, the World Bank, and others share in the investment. Then six
countries are involved, not one. If something goes wrong, the countries can
get tough and do things. You don't go to war, but maybe everybody refuses
to give the offending country credits.

Finally, it is important to make clear that transnational coali

tions do not always direct their influence toward host-country
governments. The radical critique of multinationals, focusing
on their penetration of weak states, or on alliances between cor
porations and central sectors in peripheral states, sometimes
ignores the fact that these enterprises can also affect the coherence
of home governments and societies. A prime example is the inter
national lobbying that has taken place over a new seabed regime.
There one could find oil companies (and some elements of the
U.S. government) allied with some relatively cohesive poor
states and against the official U.S. government position.
2. The Unintended Direct Role : Instruments of Influence
Apart from any political initiative of their own, the existence
of corporations with decision domains crossing several national
boundaries has provided an additional instrument that govern
ments may attempt to use in their relations with each other. For
example, the United States has attempted through extraterrito
rial control of the trading relations of affiliates of U.S.-based cor
porations to extend its foreign policy embargoes into the jurisdic
tion of other states. Similarly, in the 1960s, the United States used
guidelines on capital transfers by multinationals to strengthen
its international monetary position. And there can be little
doubt that the U.S. government has on occasion been able to use,
wittingly and unwittingly, the information-gathering capacities
of global corporations domiciled in America for intelligence
purposes.

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 i58 FOREIGN AFFAIRS

Examples of political problems arising from such instrumental

use are not hard to find. Of 16 conflicts cited by J. N. Behrman
as arising from corporate activities among the Atlantic nations in
the mid-1960s, 12 involved the American Trading with the
Enemy Act, one involved computer technology related to nuclear
weapons, and three involved enforcement of U.N. sanctions. In
none of these cases did a corporation directly or deliberately
provoke or profit from the conflict. And in the data assembled
by David Leyton-Brown on 61 public conflicts in Britain, Can
ada, and France arising as the result of the activities of multi
national corporations, interstate conflicts arose primarily from
extraterritorial assertions of jurisdiction. In only two cases did a
multinational enterprise seek the diplomatic support of its parent
government.6
Manipulation of transnational corporations, however, is an
instrument available to the host as well as the home government
(an aspect to which the U.N. report gave little attention). The
most dramatic recent example was the 1973 oil embargo. While
the companies exerted some independence in diverting non-Arab
oil to the Netherlands and the United States, the Arab countries
were able to obtain almost total company compliance in regard
to Arab oil. Even a small country like the Philippines was able
to use a threat to nationalize American corporations in the 1960s
to induce the U.S. government to extend trade preferences.7
Canada, with a third of its corporations foreign-owned (58
percent by value in manufacturing), is sometimes cited as a vic
tim of the home government's ability to manipulate its corpora
tions. Yet in a recent study of 31 non-trivial conflicts between the
United States and Canada that reached the presidential level in
the 1950s and 1960s,8 corporations were used as instruments as
often by the Canadian government as by the U.S. government.
Altogether nine of the 31 cases involved activities of transna
tional corporations; in five of the nine, corporations played an

6 J. N. Behrman, National Interests and the Multinational Enterprise, Englewood Cliffs,

N.J.: Prentice-Hall, 1970; David Leyton-Brown, "Governments of Developed Countries as
Hosts to Multinational Enterprise: The Canadian, British and French Policy Experience,"
unpublished Ph.D. dissertation, Department of Government, Harvard University, 1973,
P- 423
7 J. N. Behrman, "The Multinational Enterprise and Nation States: the Shifting Balance
of Power," in A. Kapoor and Phillip D. Grub, (eds.), The Multinational Enterprise in
Transition, Princeton: Darwin Press, 1972, p. 420.
8 J. S. Nye, "Transnational Relations and Interstate Conflicts: An Empirical Analysis,"
to be published in International Organization, Autumn 1974.

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 MULTINATIONALS IN WORLD POLITICS 159
active lobbying role, but in four others, they were used (success
fully) as instruments by governments?twice by the United
States and twice by Canada. In the auto pact of 1965, the Cana
dian government achieved its objectives by obtaining letters of
intent from the American auto companies, and on the Arctic
sovereignty issue it got a de facto acceptance of its jurisdiction
from Humble Oil. In general, Canada did no worse in govern
ment bargaining in cases involving foreign corporations than in
those in which corporations were not involved. As Americans
found out in the auto pact or in the oil negotiations at Tehran
in 1971, multinational corporations have their own interests;
when they are pressed in different directions by different govern
ments, they cannot automatically be expected to be hard bar
gainers on behalf of the U.S. government's interests.
Fixed investments can be hostages as well as outposts?not only
for governments but also for non-state groups. The corporation
as hostage has provided a particularly valuable instrument for
terrorist groups, both as a source of finance and as a means of
destroying a government's credibility. Within the past year,
in Argentina alone, guerrillas have kidnapped 12 foreign cor
porate officials and raised some $36 million in ransom.
Political suasion, rather than force, is also used against the
corporations by non-state groups. Pressure from black workers
in the United States, for example, led Polaroid to adopt policies
in South Africa that were designed to improve the social position
of the South African Blacks.
The important point is that direct investment creates a trans
national interdependence which groups or governments may try
to manipulate for their own political purposes. Governments and
interest groups in both developed and developing countries fre
quently employ this instrument, even as they may deplore its use
at other junctures. A double standard is widely applied in this
area.9

3. Indirect Roles: Setting the Agenda

Why some issues rather than others absorb the attention of
statesmen is a question of considerable political importance that
has received too little attention. Even if they had no other effect,

9 The recent U.N. report is no exception, seeming to deplore multinationals' pressure on

host governments at some points, while inviting home governments to influence corporations
to further positive social objectives within host countries in others.

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 16o FOREIGN AFFAIRS
the intentional and unintentional roles of multinational corpora
tions in helping to set the agenda of interstate politics have been
significant. Their lobbying for particular actions by their home
government toward the host country is familiar but nonetheless
important, often taking the form of appeals for intervention in
support of claims against host governments. As a classic example,
in the 1960s the dispute between the International Petroleum
Corporation and Peru became a tail that for years wagged the
dog of American policy there.
In other cases, such as the lobbying of Congress by executives
of multinational corporations in favor of more liberal tariff treat
ment of the host country by the home country, the lines of policy
influence run in the other direction. Canada has benefited from
such allies in a number of instances. Perhaps most intriguing,
in light of supposed ideological differences, has been the recent
lobbying by business executives on behalf of more liberal trade
arrangements with the Soviet Union. (Nor, one might add, is
there much evidence for the charge that multinational corpora
tions form a powerful lobby for a militaristic foreign policy.
With a few exceptions, American multinational?as distinct from
merely large?corporations do not have a particularly strong
stake in military-oriented production or activities.)
Where multinational corporations have created conflicts
among states, they have more often done so unintentionally than
intentionally. One can identify three major unintended effects on
the political agenda. First, in the past decade, the transnational
activities of such enterprises have given rise to conflicts of juris
diction and problems of extraterritoriality in such matters as anti
trust, capital controls, trade restrictions, and taxation policy.
Second, multinationals have had major effects on the flow of
trade and money. It may startle the uninitiated that production
by subsidiaries of corporations outside their home countries has
now grown to over twice the total value of trade among the de
veloped countries. Moreover, a significant portion of interna
tional trade (more than a quarter of U.S. exports by some
estimates) has been transformed from uarms length" to intra-en
terprise transactions, between one arm of a multinational corpo
ration and another. The result is that a variety of new trade
policy questions have been put on the intergovernmental agenda
and become intertwined with a broader range of industrial policy
questions. Similarly, the ability of a few score corporate treas

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 MULTINATIONALS IN WORLD POLITICS 161
urers, thinking globally and acting rationally, to transfer vast
sums with extraordinary rapidity was one of the factors that con
tributed to the inability of countries to maintain an international
monetary system based on fixed exchange rates.
Third, multinational corporations have unintentionally af
fected the agenda of interstate relations by stimulating other
social groups to press for particular governmental policies.
Groups such as banks, advertising agencies, and some labor
groups have been stimulated to press for policies of liberaliza
tion that would permit them to emulate the transnational strategy
of the multinational corporation. Other groups, particularly most
of labor, which are less transnational^ mobile and feel them
selves threatened or disadvantaged by the activities of the cor
porations, have pressed their governments for protective or
nationalist policies. An apt example was the recent struggle be
tween transnational^ mobile corporations and the relatively
immobile labor unions over the Burke-Hartke bill, which would
have sharply affected the trade and investment policies of the
United States.
Ill

It is easier to identify the various roles of multinational cor

porations in the day-to-day processes of world politics than to
assess their likely long-term effects on its structure. Will they
become more important as actors or instruments in world politics
or have they passed their period of prime political importance?
If they continue or grow in importance, will they have beneficial
or malign effects on the creation of a peaceful and just world
order? Will they redistribute power, wealth and status or lead to
their increasing concentration?
It is sometimes argued that the political importance of the
multinational corporation is a product of a unique confluence of
factors in world politics in the decades following World War II.
A major aspect of this situation was American military strength
and a geographically broad definition of security that resulted in
what has been called a Pax Americana. According to this line of
thought, the multinational corporation is largely a creature of
American political preponderance in the period following
World War II, and will recede in economic and political impor
tance as the American government defines its security interests
in less expansive terms in the aftermath of Vietnam.

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 I?2 FOREIGN AFFAIRS
While there is certainly some relationship between the Pax
Americana and the transnational activity of multinational cor
porations, it is not as simple as this "military-security determi
nism" implies. First, it is sometimes forgotten that the American
multinational corporation arose in the nineteenth century when
the United States was a net debtor; that it was not (then or later)
located primarily in the Caribbean and Latin America; and that
it had already created fear of a d?fi am?ricain in Europe at the
turn of the century. In fact, U.S. direct foreign investment was as
large a percentage of GNP (seven percent) in 1914 as in 1966.10
Second, the causes of growth and the causes of continued exis
tence are not necessarily the same. Sorcerers' apprentices have
been known to take on lives of their own. While the United States
was the primary source of the rapid growth of multinational
corporations in the postwar period, there is a current trend
toward the development of European- and Japanese-based multi
nationals. American preponderance as a source of direct foreign
investment (some 60 percent of book value in the mid-1960s) is
slowly being eroded by the more rapid growth rates of European
and Japanese direct investment. Moreover, the past and future
relations of Swiss and Swedish multinationals to a Pax Amer
icana is at best uncertain and indirect.
Third, some 70 percent of U.S. direct investment is located
in other advanced industrial societies, not in the less-developed
countries. Yet it is the latter which are the most likely areas to
be left out of a more narrowly defined conception of national
military security.
In other words, the erosion of bipolarity and the decline of
American hegemony need not diminish the role of multinational
corporations unless it should be accompanied by a shift toward
greater use of force and away from economic welfare goals.
While it is true that multinational corporations exist within, and
are affected by, the structure of political-military relations in
world politics, it does not follow that the postwar Pax Americana
is the only such structure under which they could prosper.
A somewhat different case for projecting a decline in the polit
ical importance of multinational corporations might be based on
the continued importance of nationalism and on long-term trends
10 Contrast Robert Gilpin, "The Politics of Transnational Economic Relations," in Robert
O. Keohane and J. S. Nye (eds.), Transnational Relations and World Politics, Cambridge:
Harvard University Press, 1972, with Mira Wilkins, The Emergence of Multinational
Enterprise, Cambridge: Harvard University Press, 1970.

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 MULTINATIONALS IN WORLD POLITICS 163
toward government intervention in economic affairs. Protec
tionism is not a temporary aberration. Governments are un
likely to give free rein to organizations that powerfully affect
their economies, and that threaten feelings of national autonomy
and national status. The trend toward politicization of issues
of direct foreign investment is likely to continue. Indeed, the
process is prompted by the rapid growth and large scale of multi
national corporations as they stimulate domestic groups to emula
tion and opposition.
Such politicization, however, need not imply a decline in polit
ical importance. If multinational corporations were merely a
nuisance or an inconvenience, states could simply curtail them
by resorting to restrictive economic policies or their police
powers. Multinationals, however, present opportunities as well
as problems. Governments are faced with trade-offs between their
objectives of welfare and autonomy. Even when government
controls constrain and diminish the direct corporate role in world
politics, they may simultaneously increase the indirect impor
tance of multinational corporations as an instrument or agenda
item in intergovernmental politics.
Thus, the odds are that both the size and political impact of
multinationals will continue to grow. On the other hand, predic
tions that 300 giant corporations will run the world economy
tend to be based on simple projections of past ten-percent annual
growth rates, and fail to take into account some of the disadvan
tages that appear with large size, particularly in manufacturing,
when temporary monopoly advantages have been competed away.
The challenge to governments will come more from global scope
and mobility than from corporate size. Even smaller multina
tionals can make crucial allocative decisions that challenge the
welfare goals of governments.
Corporate mobility (which is greater in service and some
manufacturing than in extractive industries) is not only a chal
lenge to small states, but also to large states like the United States
(and particularly to groups like labor which influence the for
eign policy of large states). If there is increased movement of
some corporate headquarters and major divisions, whether to
remote and pleasant tropical islands as some foresee, or simply
in the form of shopping among developed states, the process of
separating or differentiating corporate and home government
interests will be speeded along.

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 164 FOREIGN AFFAIRS

Today most multinational corporations can be identified with

a single home country. They are multinational in operation, but
rarely in ownership or top staff. Home governments tend to have
jurisdiction over a major portion of the corporate empire's as
sets, and to have close informal ties with top management. None
theless, because corporate profits and growth come to depend on
economic and political conditions in political jurisdictions other
than that of their home government, corporations gradually de
velop a view of their short-term interests coinciding with differ
ent governments at different times, and of their long-term inter
ests as different from the interests of any particular state. The
point was put rather dramatically by Carl Gerstacker, Chairman
of Dow Chemical, when he admitted to dreaming of buying a
neutral island for Dow's headquarters, "beholden to no nation or
society."
This trend toward corporate differentiation from both home
and host countries has not yet gone very far. Of some 193 manu
facturing firms that operate transnational^ and for which data
was available, the U.N. Secretariat found only nine percent had
more than 50 percent foreign content in employment; seven per
cent derived half or more of their earnings from abroad; and
some 14 percent had half or more of their sales abroad. Nonethe
less, some corporate developments do seem to point toward in
creased multinationality and autonomy of staff. Technological
improvements are continuing to reduce the costs of communica
tion and to enhance the corporate capacity to develop global
strategies divorced from identification with the interests of any
particular country.
This trend is complemented and to some extent reinforced by
political attitudes toward multinational corporations in their
home countries. A decade or more ago, multinationals were much
less an object of domestic controversy, and it was widely assumed
that the interests of American-based multinationals were roughly
similar to the "national interest." Today the range of domestic
attitudes is more diverse. The AFL-CIO has called for limits on
direct foreign investment, and Senator Jackson has accused oil
companies of disloyalty for obeying the embargo of Saudi Arabia
even on deliveries to the U.S. Navy. While such criticism may
force some firms to a closer identification with their home gov
ernment, it is at least equally likely that the experience will en
courage other firms to move activities out from under their orig

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 MULTINATIONALS IN WORLD POLITICS 165
inal "home" jurisdiction. It is said that some American-based
corporations, with nearly half their operations abroad, planned
in the event of congressional passage of the Burke-Hartke legisla
tion to establish binational structures, with European headquar
ters handling operations outside the United States.11
If the trends toward growth and differentiation of multina
tional corporate interests from national interests continue, would
the effects on world order be benign or malign? Not surprisingly,
there is a good genie and a bad genie theory of whatever may be
escaping from the national bottles.
The enthusiasts, or optimists, endorse the growth of corporate
autonomy as having a profound potential for transforming world
politics and creating a better world order. Increasingly auton
omous corporations, in this view, can even transform world pol
itics from a contest among states into a broader game with more
actors who focus primarily on welfare-oriented goals. Multina
tionals will become a vehicle by which mankind transcends the
nation-state, our dominant international institution of the past
four centuries. States will not cease to exist, but transnational
production units will take over a large part of their role in pro
viding for the citizens' welfare?and will even claim a propor
tionate share of their loyalties. These broadened economic do
mains will call forth new political institutions that go beyond the
nation-state.
The optimists thus see the multinational corporation tying the
world together in a meaningful way. It shifts industrial produc
tion toward the poorer parts of the globe. It transfers technology
and managerial resources from advanced to less-developed coun
tries. It promotes both regional and global economic integration.
The Economist has predicted, for example, that by the end of
the century most automobile and machinery production will be
carried out in less-developed countries. As it becomes politically
difficult to bring workers from poor countries to jobs in rich
countries, multinational corporations will promote global eco
nomic integration by taking the jobs to the workers.
The multinational corporation may also help to erode the great
ideological cleavage that divides the world. Already there are
more than a thousand agreements between Western corporations
and Communist countries. Many of these are simple arrange
ments for "turn-key" plants. (A multinational corporation builds
111 am endebted to Howard Perlmutter of the Wharton School for this point.

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 166 FOREIGN AFFAIRS
a plant, turns it over to the Communist government, and is paid
out of future production.) But a number of Communist coun
tries in Eastern Europe have found that long-term managerial
involvement by the multinational corporation is a better way to
insure continuous inputs of managerial and technological re
sources. Now some East European governments, particularly
Yugoslavia, have followed this logic a step further, and to insure
full access to the latest generation of technology have invested
abroad, often in joint ventures with multinationals. Should this
trend continue, it would require ideologists to reinterpret their
view of imperialism as the transfer of labor's surplus value across
national borders and raise questions about the simple equation of
multinational corporations, capitalism and imperialism.
Looking further ahead toward the end of the century, it is
possible that the multinational corporation will itself evolve into
a new and flexible form of functional international organization.
Not only will East European (and other) governments partic
ipate, but with increasing politicization of the question of control
of multinationals in their former home countries, demands may
increase for government, labor or consumer group representation
on their management boards. Large segments of world industrial
production will be managed by large public and quasi-public
multinational corporations as well as a host of smaller private
ones. Autonomous management (regardless of ownership) will
provide flexibility and efficiency in the organization of global
production. Questions of public versus private ownership will
have been transcended. Only questions of managerial autonomy
versus democratic control will remain.
Pessimists share with the optimists many of these projections
about the future of multinational corporations?but see the
malign effects prevailing over the benign. The economic benefits
of global integration, they feel, will be unevenly spread and some
areas will gain very little, so that the resulting inequality is likely
to breed conflict. Moreover, even if multinational corporations
distribute industrial production more evenly about the globe
than is now the case, they will tend to centralize strategic deci
sions in regional coordinating centers and at global corporate
headquarters. Technologies and areas to develop will be deter
mined from a few key cities in the advanced countries, sur
rounded by regional sub-capitals, while the rest of the world is
confined "to lower levels of activity and income, i.e. to the status

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 MULTINATIONALS IN WORLD POLITICS 167
of towns and villages in a new Imperial System."12
This might not matter if economic welfare were the only goal
that peoples seek. But middle classes seek high status occupations
that are associated with managerial and research functions. In
addition, people often desire status for their nations, and some
sense of autonomy, of helping to shape decisions rather than
always feeling shaped by them. Such people fear that the trans
national systems of production organized by multinational cor
porations will perpetuate and even accentuate an international
economic structure that leaves them dependent on the advanced
countries. Slogans of "global interdependence" frequently gloss
over the reality that it makes an important political difference
if one party is continually more dependent than the other.
As multinational corporations become more autonomous, this
sense of dependence, threatened status, and lost autonomy may
not be confined to poor countries. Social groups and regions
within advanced countries may experience the same feelings.
Autonomous corporations are a challenge to governments and
politically important groups in large states as well as small.
According to this view, the diminution of the role of the na
tion-state would signal a new feudalism rather than healthy
progress. Kings and corporate barons will engage in conflicts and
coalitions, but the serfs of the world will suffer. The real global
divisions will not be among nations, but between a world city knit
together by transnational elites and the diverse but intense paro
chialisms of the world countryside. The decline of the nation
state would not be a sign of health but a sign of disaster : "a sound
international order cannot be built on the wreckage of nation
states."13 The nation-state provides the internal order and sense
of political community that underlie democratic institutions, and
there is little prospect that our political norms can be adapted to
keep pace with the evolution of powerful and autonomous trans
national corporations playing increasingly political roles.
IV

At the extremes, neither the optimistic nor the pessimistic view

of the future seems likely to come to pass. Indeed it is unlikely
that there are any prognoses that represent reality as it will be at
12 Stephen Hymer, "The Multinational Corporation and Uneven Development," in
Kapoor and Grub, op. cit., p. 441.
13 David Calleo and Benjamin Rowland, America and the World Political Economy,
Bloomington: Indiana University Press, 1973.

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 168 FOREIGN AFFAIRS
the end of the century. What is clear, however, is that the evolu
tion of multinational corporations has tremendously important
implications for current and future world order. Apart from the
direct and indirect political roles they already play, their effects
on the long-term structure of world politics amply justify the
attention of a United Nations charged by its Charter to achieve
cooperation and harmonization of the actions of nations.
On any reading the most likely intermediate prospect is that
the relations between multinational corporations and nation
states will continue to be mixed. To a certain extent they are com
plementary institutions: one, the corporation, pursues (with a
few notorious exceptions) a relatively specific set of economic
objectives; the other, the territorial community of the nation
state, seeks a broad range of goals. Each institution can profit
from the activities of the other.
But it is also amply clear that conflict is endemic in the rela
tionship. As non-territorial entities without military force, cor
porations are not a threat to the physical survival of a nation,
but their economic power can be used to threaten particular
political parties or ruling regimes. Second, while multinational
corporations may bring in the technological and managerial re
sources that enhance national autonomy vis-?-vis other states (and
vis-?-vis the corporations themselves in the long run), there may
be high costs in terms of autonomy in the short term, and possibly
over the long run as well, if a structure of dependent relation
ships becomes firmly established with strong local roots. Third,
although corporate contributions to development may in one
sense enhance national status, a too-powerful foreign ownership
(particularly if high-status managerial and research jobs are
concentrated abroad) may be seen as a threat to national status
in another sense. This is the contrast, and dilemma, that seems
to have developed in Canada in the course of the past decade.
Even in regard to economic welfare, where corporate benefits
are likely to be greatest, a certain amount of conflict is unavoid
able. What distinguishes the modern multinational enterprise
from the large international corporations of earlier centuries is
its global management strategy, made possible by the technology
of modern communications. The most honest corporate manager
allocating resources rationally within a transnational perspective
is bound to have conflicts of interest with the most reasonable of
statesmen whose rationality (and democratic responsibility) is

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 MULTINATIONALS IN WORLD POLITICS 169
bounded by national frontiers. For example, Chrysler resisted
British government pressures in 1971 and granted an inflationary
wage increase to its British workers, not because it wished to
thwart the government but because the increased wage costs were
less important, from a global point of view, than avoiding disrup
tion of production for the American small car market.
Given the complex pattern of potential threats and benefits
that multinational corporations present in relation to a variety
of national values, it is sensible to expect conflictual relationships.
It is equally likely, however, that the conflicts will frequently be
of the type that have solutions from which both parties can bene
fit. In many instances, the enlarged size of the pie can be more
important than the size of the slices. A basic principle for an
international economic order will be to enhance situations in
which joint gains are perceived and shared by states and corpora
tions. This will help to diminish the intensity of conflicts.
However, since many national values are involved, and their
intensity may vary among nations and over time, a second and
equally important principle must underlie a just international
economic order. National communities must be allowed to decide
for themselves what degree of interdependence with corporations
they find optimal and what they are willing to pay for it. If the
benefits of multinational corporations are as great as proponents
claim they are, then there should be no objection to letting host
countries choose freely. If the economic, social and political costs
are as great as the critics charge, then host countries should be
free to reject the transnational organization.
V

These two principles?that all parties should seek to e

actual and perceived net economic gain, and that in the e
vidual nations must be free to decide?help to illuminate th
difficult area of present and potential conflict, that involv
relationship of multinational corporations to the less-dev
countries.
This is the area which received greatest attention both in the
deliberations and in the report of the U.N. Group of Eminent
Persons. As the International Chamber of Commerce has cor
rectly pointed out, the report thus does not focus on the two
thirds of investment that is among the developed countries.
Nonetheless, the focus of the Group was politically justified.

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 170 FOREIGN AFFAIRS
Multinational corporations do pose greater political problems
for less-developed countries, because of the difference in scale
(General Motors' annual profits exceed the annual income of
most African states), the sensitivity of post-colonial states to
situations of dependence, and the internal cleavages that often
make their polities both penetrable and fragile. Moreover, poor
countries have generally found themselves as hosts, but rarely as
homes of multinational corporations.
There has been no shortage of arguments recently about the
economic costs and benefits of multinationals to less-developed
host countries. Proponents contend that transferring technology
and relocating industrial production from the richer to the
poorer parts of the globe can only be done through transnational
organization, to overcome what for many states is the economic
irrationality of narrowly bounded political sovereignty. Unlike
portfolio investment, the contribution of the multinational cor
poration is not so much the movement of capital as the organiza
tion of capital, management, technology and access to rich coun
try markets into an economic package which is greater than the
sum of its parts.
Critics, on the other hand, argue that the four parts of the
package are often obtainable separately, and that the costs of
"packaging" are too great. Among the costs sometimes charged
to the corporation are inappropriate technology; creation of
inefficient oligopoly patterns in small national markets; discour
agement of local entrepreneurship; erosion of local economic
policy and controls; stimulation of inappropriate consumer
tastes; and illegitimate meddling in the local political process.
Evidence can be marshalled on both sides of the economic
argument, and the facts vary from case to case. From a practical
point of view, proponents and critics who focus on the system as
a whole often fail to ask the crucial question: "What are the
realistic alternatives in a given situation?" In some cases a critical
factor such as advanced technology can be obtained by licensing;
in other cases it may be unobtainable except as part of a corporate
package. In some cases, access to markets is a simple matter; in
others, protected markets in rich countries can only be reached
through the sales network or political clout of a multinational
corporation.
Less-developed countries can follow a wide range of strategies
vis-?-vis multinational corporations. At the two extremes are the

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 MULTINATIONALS IN WORLD POLITICS 171
strategies of laissez-faire and complete exclusion. (The benefits
or costs of exclusion look somewhat different depending on
whether one thinks of it as the "Chinese" or "Burmese" ex
ample.) Another approach is to let multinationals enter on gen
erous terms and renegotiate these terms as the factors that the
corporations bring in become less scarce. This situation of "let
them in and squeeze them later" has characterized many raw
material investments, where the terms of the original bargain
tend to become politically obsolete over time.
A quite different approach is the "high threshold." The An
dean Group of countries, for example, permit entry only on quite
stringent conditions (including eventual divestment), which are
agreed to by the corporation at the outset. Other countries permit
entry only if corporations agree to joint ventures with local cap
ital or the local government. A further variant of this approach is
to disassemble the four-part package of direct investment and
allow corporations entry on contractual terms to provide a spe
cific service.
These various strategies are discussed at some length in the
U.N. Report. A recurrent theme in the dissenting comments is
the fear that any restrictive strategies will discourage corporate
investment in less-developed countries and inhibit the beneficial
relocation of industrial production in the southern part of the
globe. A common-sense conclusion, however, might be that each
of these strategies promises different costs and benefits for differ
ent countries, and for different economic sectors at different
times. No single strategy or legal regime is likely to satisfy all
countries, or even the same country over time. For this reason
alone, agreements on international legal regimes are distasteful to
many less-developed countries.
As we saw earlier, multinational corporations can also follow
a number of political strategies in their bargaining with host
states: (1) they can appeal to their home governments for sup
port; (2) they can use their economic power to participate in the
local political process, legally or illegally; (3) they can organize
external boycotts and restrictions of credit. Alternatively, the cor
porations can restrict themselves to economic agreements, at
tempting to convince host states that the corporation brings in
resources from which there is a joint gain. In other words, they
can seek to prove that the goose roasted is worth less than the
goose laying golden eggs. As Charles Robinson, president of

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 172 FOREIGN AFFAIRS
Marcona Corporation, has put it, "the only thing that counts is
whether you [the corporation] are worth more alive or dead."
If one is concerned with an international order that involves
global equity and freedom of choice?or indeed if one seeks
merely to avoid unbearable strain and conflict?it is clearly pref
erable that corporations eschew the more extreme forms of ac
tion and pursue the "golden egg strategy." A process of realistic
discussions and bargaining with individual host countries is what
is needed, and what a U.N. commission charged with develop
ing international codes of conduct should attempt to promote?
rather than rigid rules that cannot hope to cover the great variety
of cases and political attitudes involved.
In line with the principle of free choice (and, one might add,
with political realism), host countries must be free to disassemble
the package of direct investment, to accept or reject all or part of
any proposed investment project. But it is essential that the bar
gains be freely struck, and free choices require meaningful alter
natives and accurate information. Particularly with regard to the
less-developed countries, international institutions should help
enhance the conditions and opportunities for free political choice
on such matters as how much aggregate growth a people are will
ing to sacrifice for autonomy and experimentation (and vice
versa). This requires dispelling the fear and mistrust that fre
quently blocks clear appraisal of self-interest by poor, weak
countries. It also means discouraging the use of home govern
ment influence that goes much beyond normal diplomatic repre
sentation, or corporate political activities that prevent free choice
by the indigenous political processes of the host state. As a num
ber of comments in the U.N. Report indicate, it is unrealistic to
expect governments to refrain completely from support of their
corporations. Nonetheless, the basic diplomatic norms should
reflect the principle of free choice.
VI

It is sometimes suggested that the only international institu

tions needed are those which would establish a legal order to
facilitate the corporation's work. This view, however, fails to
take into account the political roles of the corporation that we
have described above. Even while pursuing economic goals, their
involvement in the political process is too untidy and changeable
to be contained within a static legal order.

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 MULTINATIONALS IN WORLD POLITICS 173
Given deep-seated differences among countries, moreover, it
is unrealistic at this stage to expect, for example, a strong supra
national organization to oversee the activities of multinationals,
or the global chartering of corporations as suggested by George
Ball, or Charles Kindleberger and Paul Goldberg's "GATT
for direct investment."14 A global charter would formally dena
tionalize corporate origin, but would remove none of the real
conflicts stemming from the central dilemma of differing deci
sion domains. As for a specific legal convention, the broader the
agreement in numbers of countries or scope of subject matter
the less likely the prospects for success.
The problem is not only one of organizing collective action
among large numbers of states. It also stems from the basic polit
ical reality that underlies corporation-state bargaining, partic
ularly between rich and poor. As Raymond Vernon has pointed
out, when the basic bargain is political and may be obsolescing
over time, poor countries consider it unwise to institutionalize a
set of norms or adjudication procedures that represent a stage in
which they are relatively less favored.15 (This is one of the rea
sons why a number of countries have refused to join the Interna
tional Center for the Settlement of Investment Disputes that has
been established by the World Bank.)
The U.N. Report recommended the creation of an expert com
mission which would, among other things, work out codes of con
duct for multinationals. This sort of continuing discussion and
negotiation of codes of conduct is a more realistic approach to the
task of creating and adjudicating norms than the more elegant
solutions would be. As L. K. Jha, former Governor of the Bank
of India and Chairman of the Group, commented in the report,
developing countries need not feel disappointed with the recom
mendations if they look upon the report as the beginning rather
than the end of an exercise in the creation of norms.
The U.N. Group also recommended the creation of an infor
mation and research center on multinationals as part of the Sec
retariat, and a number of specific steps, including technical
assistance, designed to strengthen the bargaining position of the
less-developed countries vis-?-vis the multinationals. Access to in
formation, variable identity and mobility of resources are key as

14 "Toward a GATT for Investment: A Proposal for Supervision of the International

Corporation," Lavo and Policy in International Business, 2 (Summer 1970).
15 Raymond Vernon, Sovereignty at Bay, New York: Basic Books, 1971, p. 46.

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 174 FOREIGN AFFAIRS

sets of multinational corporations in their bargaining with states.

Information that improves governments' knowledge about global
corporate activities and about mutual alternatives can affect the
terms of the bargain. Much of the information will be difficult
to obtain and equally difficult to assess. Since knowledge is power,
it will not be easily parted with, either by corporations or by
governments. Many countries have weak rules for disclosure of
corporate information, and sometimes governments find it to
their advantage, on tax incentives for example, not to disclose the
information they have. Even the Commission of the European
Community has had to compile inadequate data on corporate
mergers from public sources because some member-governments
refused to share the information that they collected nationally.
Nonetheless, the collation and sharing of information from
public sources can be useful to many governments. Moreover,
the amount of information in the public domain may increase as
national demands grow for corporations to demonstrate their
contribution to the local economy. Comparison of such company
national reports by an international staff can identify discrep
ancies and raise important questions. The usefulness of the inter
national institution will be greater the more the staff develops
a reputation for fair-mindedness. This last point is essential,
since the only sanction which a U.N. Commission on Multina
tionals would have is publicity. This is not an insignificant sanc
tion against corporations dealing with the public, but it would
be quickly dissipated by biased work.
Not all governments have the ability to make full use of the
information already available to them. Providing experts in this
area can be an important function. Technical assistance cannot
remove all conflicts from the interaction of weak states and for
eign corporations, but at least it can help to dispel the mistrust
that stems from fear of the unknown, and allow the parties to
bargain on the basis of more clearly perceived self-interest. The
experience of Harvard's Development Advisory Service in help
ing countries such as Liberia and Indonesia to improve the terms
of their contracts with foreign corporations is an instructive ex
ample. Again, while controversy cannot (and should not) be
completely avoided, a reputation for fair-mindedness is essential.
The obstacles to any larger role for the United Nations here
are several. Specifically, there are the problems and pitfalls
of "geographic distribution," extraneous politicization, and occa

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 MULTINATIONALS IN WORLD POLITICS 175
sional bias that beset the U.N. system. Steering clear of these will
be essential. More generally, one cannot be too optimistic about
states reaching agreement on international institutions in the
short run, because, as we saw earlier, states have conflicting as
well as complementary objectives vis-?-vis multinational cor
porations.
On the other hand, there are several trends that increase the
elements of common challenge which corporations present to
governments. With Europe and Japan growing rapidly as sources
of direct investment, more of the crucial governments?and par
ticularly the United States?will feel the divided interest of be
ing both home and host rather than merely home to multina
tional corporations. Second, as we have seen, many corporations
are moving toward differentiation of their corporate interests
from the interests of either their home or host countries. Third,
corporations are more and more caught up in politics, whether
they will or no.
The initial response to these challenges is likely to be unilateral
national efforts, rather than international cooperation. But con
flicting unilateral policies can be self-defeating unless there are
some international rules and mechanisms for coordination. More
over, multinational corporations may find themselves so hindered
by contradictory national regulations that they may press various
governments to initiate efforts to achieve greater international
uniformity. At this point the prospects for international eco
nomic organization improve. Whether the United Nations or
another institution will acquire a sufficiently strong mandate to
deal with the problem, the political challenge of the multina
tional corporation seems to be gradually leading to a concerted
response. The role of the multinational corporation today cannot
be understood merely in economic terms, but must be seen in
terms of this larger political challenge and response.

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