Department of Economic and Social Affairs

MULTINATIONAL CORPORATIONS IN WORLD DEVELOPMENT

UNITED NATIONS New York, 1973

NOTE Symbols of United Nations documents are composed of capital letters combined with figures . Mention of such a symbol indicates a reference to a United Nations document .

UNITED NATIONS PUBLICATION Sales No . E .73 .ILA . 1 1

Price : $U .S . 10.00 (or equivalent in other currencies)

CONTENTS Page ` INTRODUCTION . . . . . . . . . . . . I} CONCEPTS AND DIMENSIONS . . . Definitions . . . . . . . . . . . . . . . . . . . . . . . . .

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. . , 6 8 10 12 13 15 18 21 24 28 28 28 29 31 33 34 36 k0

Size, patterns and trends Size and concentration . . Geographical distribution Distribution by sector . . . . . . . . . . . . . , . .. . . . . . . . . . . . . . . . . . . . . . . . .

Ownership patterns . . . . . . . . . . . . . . . , . Dimensions in the world spectrum . . . . . . . . . . . . . . . . . . .

Dimensions in developed market economies . Dimensions in developing countries . Summary . . . . . . . . II~ . . . . . Dimensions in centrally planned economies

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THE NATURE OF MULTINATIONAL CORPORATIONS

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Development of raw materials and manufacturing Raw materials Manufacturing . . . . . . . . . . . . . . . .

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Organization and control Organizational structure . . . . . . . . . Control procedures . Profit management Summary . . . . . . . . . . . . . . . . . . . . . Profit and ownership policies . . . . . . . . . . . . . . . Ownership policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Page !III . IMPACT AND TENSIONS The multinational corporation in international relations . . The nation-state and the multinational corporation . . . . . The multinational corporation and the host country . . . . Sovereignty . . . . . . . . . . . . . . . . . . . . . . . National objectives and planning Pattern and process of development Technology and skills . . . . . Employment and labour . . . . Balance of payments . . . . . Socio-cultural considerations . . . . . . . . . . . . . . . . .

42 43 46 47 47

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The multinational corporation and the home country . . . . . Implications for the international monetary and trade r6gimes . . . . . . . . . . . . . . . . . . . . . . . . . . Implications for the international monetary system Implications for the international trade r6gime . Taxation and related jurisdictional issues . . Summary IV. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

49 52 54 57 58 60 60 65 66 71 75 76 78 79 80

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TOWARDS A PROGRAMME OF ACTION Recent trends in policies

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Programmes of multinational corporations . . . Programmes of organized labour . Home country programmes Host country programmes Regional programmes . . . . . . . . . . . . . . . . . . . . . . . .

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"

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International programmes . . . . An international forum Technical co-operation

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A multinational corporation information centre . . . . . . . . . . Harmonization of national policies

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A general agreement on multinational corporations . A supranational corporation . . . . . . . Summary . . . . . . . . . .

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International machinery for the settlement of disputes . . . . . . . . . . . . . . . . .

82 85 86 87 87 87 89 92 93 94 96

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Page Annexes I. II . III . Excerpts from resolutions of United Nations bodies itelating to the issue of multinational corporations . . . S}lected definitions . . . . . . . Statistical tables . . . . . . . . . . . . . . . . . . . . . . . . . 106 118 122

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PREFACE The United Nations Economic and Social Council, in resolution 1721 (LIII) adopted unanimously on 28 July 1972, requested the Secretary-General to appoint a Group of Eminent Persons to study the role of multinational corporations and their impact on the process of development, especially that of developing countries, and also their implications for international relations ; to formulate conclusions which may possibly be used by governments in making their sovereign decisions regarding national policy in this respect, and to submit recommendations for appropriate international action . The present report has been prepared by the Department of Economic and Social AffAirs of the United Nations Secretariat to facilitate the deliberations of the Group of Eminent Persons . The report seeks to clarify various concepts pertaining to multinational corporations, provides basic data on their size, geographical distribution, industrial structure and ownership patterns, and assesses their dimensions in the world economy. The review of the salient characteristics of multinational corporations is followed by a discussion of their impact on international relations, and on home and host countries, including tensions that may develop between them and these countries . An account is also given of the implications of the operations of multinational corporations for the international monetary and trade regimes as well as of jurisdictional issues relating to taxation. In conclusion, the report reviews existing policies in respect of multinational corporations and includes proposals for national, regional and international action . A summary appears at the end of each chapter. In addition, annex I contains excerpts from relevant decisions of United Nations bodies, annex II provides alternative terms and definitions of multinational corporations and annex III contains statistical tables . In view of the widespread interest in the workings and implications of multinational corporations, this document is being made available to a wider audience in the hope that the information and analyses presented therein will make a useful contribution to the debate on this important phenomenon .

INTRODUCTION IIn the past quarter of a century the world has witnessed the dramatic deve pment of the multinational corporation into a major phenomenon in inte-national economic relations . Its size and geographical spread, the molt plicity of its activities, its command and generation of resources around the use of such resources to further its own objectives, rival in the of scope and implications traditional economic exchanges among nations . to cope The unprecedented expansion of the multinational corporation has evoked a st ng interest in this phenomenon among scholars, the mass media and the general public . While much information and understanding have been gained from thisisurge in interest, the complexity of the subject and the controversy that surr~unds it call for serious analysis lest myths should prove more appealing than facts and emotions stronger than reason . Multinational corporations, which are Depicted in some quarters as key instruments for maximizing world welfare, are seen in others as dangerous agents of imperialism. The basic facts and issuo still need to be disentangled from the mass of opinion and ideology and a practical programme of action still awaits formulation. The deliberations of the United Nations on this subject reflect the cupations and currents of thought of the times . The United Nations Economic ocial Council, in unanimously adopting resolution 1721 (LIII) in July 1972, ly and explicitly recognized the importance of multinational corporations subject for comprehensive study and possible action by the world organization . Many previously adopted decisions had a-ready had some bearing on the matter . Recently the cial consequences of the activities of multinational corporations was the theme o a resolution adopted by the International Labour Conference in 1971, and iln 1972 the Third Session of the United Nations Conference on Trade and Deve pment adopted a resolution on restrictive business practices (resolution 73 (41)) . Many other resolutions and decisions adopted within the United Nati s family, on topics ranging from the flow of resources to the developing countries through permanent sovereignty over natural resources and the transfer of techi*logy to the importance of the promotion of exports of manufactures for the overstrategy of development, are one way or another related to the preset subject . I/ Partial and indirect investigation, however, is no longer enough. Although progress can often be accelerated by a more limited approach, in this case the full import of the subject can best be appreciated by taking a broadjperspective .

in

e political and social dimensions of the problem corpo ations are only too apparent. The United Nations the s ject was in fact prompted by incidents involving corpo ations . The concern and excitement occasioned by

of multinational present involvement in certain multinational those incidents

See annex I for excerpts from resolutions of United Nations bodies relev~t to the issue of multinational corporations .

testifies that the general public is no longer willing to stand by passively . The degree of uncertainty that exists regarding the way in which the power of the multinational corporations may be exercised and what the reactions and consequences are likely to be is no longer acceptable . Despite the considerable and transnational power which multinational corporations possess they, unlike governments, are not directly accountable for their policies and actions to a broadly based electorate . Nor, unlike purely national firms, are the multinational corporations subject to control and regulation by a single authority which can aim at ensuring a maximum degree of harmony between their operations and the public interest . The question at issue, therefore, is whether a set of institutions and devices can be worked out which will guide the multinational corporations' exercise of power and introduce some form of accountability to the international community into their activities . The multinational corporations have developed distinct advantages which can be put to the service of world development. Their ability to tap financial, physical and human resources around the world and to combine them in economically feasible and commercially profitable activities, their capacity to develop new technology and skills and their productive and managerial ability to translate resources into specific outputs have proven to be outstanding . The importance of the foreign private sector to the development of developing countries was recognized in the International Development Strategy for the Second Development Decade unanimously adopted by the United Nations General . Assembly in 1970 . At the same time, the power concentrated in their hands and their actual or potential use o it, their ability to shape demand patterns and values and to influence the lives of people and policies of governments, as well as their impact on the international division of labour, have raised concern about their role in world affairs . This concern is probably heightened by the fact that there is no systematic process of monitoring their activities and discussing them in an appropriate forum.

The important contribution that such firms can make to world welfare needs to be understood in the context of the objectives that they pursue . While their operations are often global, their interests are corporate . Their size and spread imply increased productive efficiency and reduction o risks, both of which have positive effects from the point of view of the allocation o resources . Yet, their predominance can often create monopolistic structures whick reduce world efficiency and may displace or prevent alternative activities . The concentration of multinational corporations on the production and promotion of certain types of products and services not only influences consumption patterns but, in developing countries, often responds mainly to the demand of small segments of the population . The divergence in objectives between nation-states and multinational corporations, compounded by social and cultural factors, often creates tensions . Multinational corporations, through the variety o options available to them, can encroach at times upon national sovereignty by undermining the ability of nation-states to pursue their national and international objectives . Moreover, there are conflicts of interest regarding participation in decision-making and the equitable division of benefits between multinational corporations and host as well as home countries . In recent years the situation has been sharpened, on the one hand by changes in the internal socio-political conditions of many

countri~s, and on the other, by shifts in bargaining positions . As a result, existing arrangements are frequently questioned and new ones sought . Al hough the issues in regard to multinational corporations must be understood thin the socio-political context, they are closely bound up with the interna ional economic system . However sacred and inviolable national sovereignty may be om the political point of view, few national boundaries correspond to economi demarcation lines and few states are self-contained economic entities. most ions would find it both necessary and useful to have some system of intern ional exchange not only for goods and services, but also for finance and techno While the conditions in the real world hardly permit an ideal system int national exchange and co-operation, a practical economic solution is of requir in which the political entities, differing widely in endowment, whethe by accident or design, can co-operate to reconcile their conflicting intere ts, harmonize their policies for their mutual benefit, and achieve a greate measure of international distributive justice. 11~ere is, of course, no unique solution whereby the interests of all partie can be reconciled . Nor is there a ready means of attaining the accepted goal o~ greater distributive justice in the international context . Few can doubt, however, that the issues raised by the multinational corporation have a direct bearing, for good or ill, on international relations and call for urgent international attention. Many will agree that some measure of accountability of multinational corporations to the international community should be introduced. Many will also agree that the vast capabilities of multinational corporations can be put to the service of mankind . Because of the intrinsic difficulty of the subject and the practical obstacles in the way of arriving at speedy solutions, it may be useful to regard the present study as the beginning of a series of efforts . Immediate steps can be taken in the short run where a consensus is found to exist, and at the same time a start can be made towards longer run measures that will demand farther investigation and negotiation. In order facilitate discussion some possible lines of action are proposed below, preced d by a review of basic information and an assessment of the issues involv~d .

I.

CONCEPTS AND DDENSIONS

The upsurge in interest in the multinational corporation has been accompanied by an expansion of the vocabulaz-i relating to it . The various terms and concepts used have often been developed to suit particular purposes at hand In empirical research, moreover, and are subject to individual preferences . rely on data derived from administrative records in which in most cases has to which the concepts are not uniform, differing definitions have been employed . A review and clarification of these concepts and definitions will help to avoid unnecessary controversy and facilitate an understanding of the true dimensions of multinational corporations . Any description, however, of the dimensions of multinational corporations faces manifold problems . The difficulties stem not only from the limited availability of conventional data, but also from the fact that even when they are available the data do not adequately measure the phenomenon of multinational sales nor earnings of affiliates, nor capital corporations . Neither the number, flows and investment stock, particularly taken separately, can fully measure the size of the operations of the multinational corporation . The large incidence of inter-affiliate transactions and attendant transfer pricing can distort the real picture, as can other practices involving capitalization, accounting procedures and control of local resources . Until sufficient methodological work and collection of standard information has been carried out the figures must be treated with caution and their interpretation is subject to a considerable margin of uncertainty . Definitions While the terms "corporation", "firm" and "company" are generally used interchangeably, the term "enterprise" is sometimes preferred as clearly including a network of corporate and non-corporate entities in different countries joined together by ties of ownership . In the present context, "corporation" is not used as a legal term but rather in accordance with common usage as reflected in the wording of the Economic and Social Council resolution 1721 (LIII) . The term "multinational" signifies that the activities of the corporation or enterprise involve more .than one nation . Certain minimum qualifying criteria are often used in respect of the type of activity or the importance of the foreign component in the total activity . The activity in question may refer to assets, sales, production, employment, or profits of foreign branches and affiliates . A foreign branch is a part of an enterprise that operates abroad . An affiliate is an enterprise under effective control by a parent company and may

See selected definitions in annex II .

be eit er a subsidiary (with majority or sometimes as little as 25 per cent contro of the voting stock by the parent company) or an associate (in which case as lit e as 10 per cent control of voting stock may be judged adequate to the criterion) . In the broadest sense, any corporation with one or more satis branches or affiliates engaged in any of the activities mentioned may forei as multinational . More strictly, a particular type o activity (e .g. quali produc ion), a minimum number of foreign affiliates (e .g . six), or a minimum foreig share of activity (e .g . 25 per cent of sales or assets) may be added as condit*ons for qualifying for the definition. S ch concepts are amenable to further variations according to the main chars eristics and motivations of multinational corporations and may be rather theor ical in character . Some authors emphasize the fact that, despite the importance of foreign activities, many corporations are basically homegrowl count oriented concerns that operate abroad, and prefer the terms "international" or "t nsnational" . On the basis of their orientation, corporations are also disti ished into "ethnocentric" (home-country oriented), "polycentric" (hostcountry oriented) or "geocentric" (world-oriented) . When internationalism is taken'1to the limit the corporation may be considered "a-national" and hence be referred to as "denationalized", "supranational" or a "cosmocorp" . ~ecause of the broad frame of reference of this survey, in accordance with the terms of the Economic and Social Council resolution, the term "multinational corporation" is used here in the broad sense to cover all enterprises which counr 1 assets - factories, mines, sales offices and the like - in two or more count ies . This definition has the advantage that no important aspect of the pheno enon (e .g. finance or services) or of the problem (e .g . questions assoc ated with nationally-oriented enterprises or small firms) is arbitrarily exclu ed . It also permits maximum and flexible use to be made of existing data which are variously defined and not generally amenable to reclassification to suit more restricted definition . At the same time, as the data that follow will ~ndicate, there is a very high degree of concentration in multinational corporations, with a relatively few firms accounting for the bulk of their activities . Thus, fairly good picture of the situation can frequently be obtai#ed by concentrating on the largest and most important firms, especially thosejengaged in extractive and manufacturing activities .

One implication of the present definition is that multinational corpo tions are responsible for most foreign direct investment . Nevertheless, a stu of multinational corporations must be distinguished from the study of forei n direct investment, chiefly because the most important questions to be asked in connexion with multinational corporations are not limited to and in some Oases are even independent of financial flows . They concern a host of other activ ties also, such as the transfer of technology as well as goods, the provi ion of managerial services and entrepreneurship and related business pract ces, including co-operative arrangements, marketing restrictions and trans er pricing. As the operations of multinational corporations have expanded

and evolved, the elements not directly related to the provision of capital have become increasingly important . Moreover, these operations can only be understood as components of an international corporate system. As will be demonstrated below, parent companies that own foreign-based enterprises typically control these enterprises` activities and determine the way in which finagbial, technical and managerial resources are allocated around the world and the resulting mix of the entire package . Size, patterns and trends Size and concentration Although quantitative information on multinational corporations leaves much to be desired and the wide disparities in methods of estimation among corporation6, economic sectors and countries introduce a considerable margin of error in the interpretation of all the essential economic magnitudes, a few general characteristics are discernible. A central characteristic of multinational corporations is the predominance of large-size firms . Typically, the amount of annual sales runs into hundreds of millions o dollars . Each of the largest four multinational corporations has a sales volume in excess of $10 billion, and more than 200 multinational corporations have surpassed the one billion level . Indeed, for most practical purposes, those with less than $100 million in sales can safely be ignored . The very size of these corporations as compared with other economic entities, including the economies of many nations, suggests an important source of power . Moreover, there are strong indications that the multinational corporations have grown dramatically, especially during the last decade . As a result, both their absolute and relative size has expanded .

~J

Closely related to their large size is the predominantly oligopolistic character of multinational corporations . 2/ Typically, the markets in which they operate are dominated by a few sellers or buyers . Frequently they are also characterized by the importance of new technologies, or of special skills, or of product differentiation and heavy advertising, which sustains or reinforces their oligopolistic nature .

See tables 1 to 10 in annex III for sources and explanation of quantitative information cited in this section . Sources for other quantitative information cited in the text and not contained in tables are indicated in separate footnotes in the text . Raymond Vernon, Sovereignty at Ba : The Multinational Spread of United States Enterprises New York, .1971), p. K. see section on dimensions in the world spectrum, below . Frederick T. %nickerbocker, Oligopolistic Reaction and Multinationa l Enterprise (Boston, 1973) .

their Altho one c world subsi which bunt freq multi

other characteristic of the very large multinational corporations is tendency to have a sizeable cluster of foreign branches and affiliates . h almost half of some 7,300 multinational corporations have affiliates in try only, nearly 200 multinational corporations, among the largest in the have affiliates in twenty or more countries . The establishment of iaries or the making of foreign investments, particularly in industries in there is a high degree of industrial concentration, generally tends to be d in periods of relatively strong economic activity . These activities ntly reflect the need to react to or counter the activities of other tional corporations.

A further central characteristic of multinational corporations is that they are ip general the product of developed countries . Although the non-availability of statistical information on multinational corporations in many developing coon ies obscures the over-all picture, this fact in itself reflects the high degree o concentration of the location of parent companies in the developed counties . Eight of the 10 largest multinational corporations are based in the United States . All in all, the United States alone accounts for about a third of the total number of foreign affiliates, and together with the United Kingdom, the F~ederal Republic of Germany and France, it accounts for over three-quarters of the total .
The high degree of concentration of the origin of multinational corporations in the developed countries is even more clearly revealed by the distribution of the sock of foreign direct investment as measured by estimated book value . of a total estimated stock of foreign investment of about $165 billion, most of which is owned by multinational corporations, the United States accounts for more ban half, and over four-fifths of the total is owned by four countries, the Ulited States, the United Kingdom, France and the Federal Republic of Germany . ~oreover, foreign direct investment tends to be concentrated in a few firms withi0 each home country . For the United States, about 250 to 300 firms account for over 70 per cent . For the United Kingdom, over 80 per cent of the total is controlled by 165 firms . For the Federal Republic of Germany, 82 firms control over 0 per cent and the nine largest foreign investors alone control 37 per cent of th total . In the case of Japan, although there are some giant firms active abroad, many small firms appear to .have participated in foreign investment activities . e size of affiliates varies with the sector and area of operation . In the n tural resources sector, for example, affiliates appear to be three to four times larger than in manufacturing. In the petroleum sector and in trade the avera ;e size of affiliates is somewhat larger in developing countries than in devel ed. In manufacturing, the size of affiliates in developing countries is only that in developed, whereas in public utilities it is double. Some changes in this pattern appear to have occurred over the last two decad~ . The size of United States affiliates in developed market economies doubl between 1950 and 1966 . In the European Community the increase was almostlthreefold and in Japan more than fourfold. on the other hand, no change was re orded in the average size of United States affiliates in developing countries, except in Africa where the United States presence had previously been very limited . A similar trend suggests itself among United Kingdom affiliates,

w ere an increase in average size in the developed market economies has not beep tched by an increase in the size of affiliates in developing countries . The ttern reflects the fact that affiliates in developing countries often serve e local markets only, especially in the case of import-substituting manufactures, e the relatively larger affiliates in developed countries frequently serve gger regional as well as national markets . The dramatic growth of multinational corporations in the postwar period has an accompanied by unprecedented growth in the number of affiliates, the levels capital flow and the stock of investment . Between 1950 and 1966, the number United States affiliates increased three times, from 7,000 to 23,000. The ber of affiliates of the 187 main United States multinational manufacturing times during the same period . The growth of rporations increased almost 3 " 5 ited Kingdom affiliates during this period was less dramatic, possibly a flection, among other factors, of the sluggish growth of the economy and the onger history in the United kingdom of direct investment abroad . In the first enty years after the Second World War, the number of affiliates less than oubled . In contrast, the more recent entry of Japan into the field has been rked by a rapid rate of growth in the number of affiliates . Although no $recise data exist, there are indications that the growth of French affiliates yas somewhat higher than those of the United Kingdom, while affiliates of the Federal Republic o Germany are growing more rapidly than those of the United States . The growth of foreign affiliates has been accompanied by an increase in rect investment and the accumulated stock of foreign direct investment . During hhe last decade, the flow of direct investment from 13 countries of the Organisation for Economic Co-operation and Development rose from $2 .9 billion o $7.9 billion a year . Among the countries with an above-average rate of ncrease were Japan, the Federal Republic of Germany, Italy, the Netherlands and the Scandinavian countries . The growth of investment flow has been reflected in the increase in its ative stock. Between 1960 and 1971, the book value of United States direct nvestment increased from $33 to $86 billion and that of the United Kingdom from 2 to $24 billion. The most dramatic increase, from less than $300 million to approximately $4 .5 billion, was registered by Japan - a fifteen-fold rise . Recent 34adications show that this pace has continued if not accelerated . Almost equally impressive was the performance of the Federal Republic of Germany, which exhibited on almost tenfold increase of investment stock to $7 .3 billion by 1971 . Geographical distribution Although the network of multinational corporations is world-wide, the bulk their activities is located in the developed market economies . Over twods of the estimated book value of foreign direct investment is located in s area where the advanced economic level and similarities in institutional and social structures have facilitated the spread of the multinational corporate s~stem. o

See also tables 11 and 12 in Annex III and figures 1 and 2 in the text. 70e discussion of the distribgtiou of affiliates is this section refers to a#fil1ate links as defined in the tables, except in the case of the United States .

,f

boylars

;o

Figure i . Developea market economies (DAC countries) : estimated stock o foreign direct investment by country of origin and area of investment, end 1967

Developing countries

jUS Source :

UK

Fr

Switz .

Can .

FRG

Neth .

it .

Belg .

Jap .

Others

Table 12 . Figure 2. Developed market economies (DAC countries) : distribution of estimated stock of foreign direct investment by developing region, end 1967 (Percentage distribution)

Per cent

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Al total e as the in the their e economi

ugh the developing countries have received only about a third of the timated stock of foreign direct investment, that is, only half as much eloped countries, the presence of foreign multinational corporations eveloping countries is generally of greater relative significance, since onomies account for much less than half of that of developed market s.

g the developing countries, the western hemisphere has attracted an estimat d 18 per cent of the total stock of foreign direct investment, Africa 6 per c nt, and Asia and the Middle East 5 and 3 per cent respectively . The distrib tion of affiliates (links) is roughly similar . Country variations reveal ertain special relationships between the multinational corporations of some developed market economies and countries of investment . The corporations o some of the smaller European countries with no colonial experie ce, such as Austria, Switzerland and the Scandinavian countries, have a limited spread in the developing world . Faced apparently with a limited domestic market, and at times with trade barriers, corporations in these countries have invested in other developed countries with a view to enlarging the market for their p oducts . On the other hand, the developing countries' share in the number of off' fates as well as the estimated stock of investment is relatively high for ug , France, the United Kingdom, Italy, Belgium and the Netherlands . This pattern of distribution reflects the importance of former colonial ties . Thus, Port two-thi ds of the French and Belgian affiliates in developing countries are in Africa,jmost of them in French-speaking countries . The more balanced distribution of the network of affiliates and stock of investment of the United Kingdomiparallels to a large extent the geographical spread of the Commonwealth . One th' d of United Kingdom affiliates, for instance, are in developing countries, Of the total stock of 40 per 'ent of them in Africa and 32 per cent in Asia . United 'ngdom direct investment, 38 per cent is in developing countries and is similar geographically diversified . Sixty per cent of it is equally distributed b tween Asia and Africa, 26 per cent is in the western hemisphere and 13 per ent - above the average of 9 .5 for all Development Assistance Committee countri~s - is in the Middle East . The Japanese presence in the developing Sixty per cent of affiliates and investment stock countries is also pronounced. is located in these countries, with a strong concentration in Central and South America and Asia. Central and South America is also the preferred region for affili as as well as book value of investment in the case of the Federal Republi~ of Germany. Canada, in particular, and Switzerland also, shows a high concentration in the developing countries of the western hemisphere, while the Austral$an presence is felt almost exclusively in Asia. A little more than one quarter of United States affiliates and o the Central and South stock o direct investment is located in developing countries . for about 70 per cent of the number of United States affiliates America account and of the book value of investment in developing countries, with the rest more or lessjequally distributed among Africa, Asia and the Middle East . ~ther light can be shed on this distribution of foreign direct investment among developing areas and the pattern of relationships between home and host countri~ s by examining the distribution of investment by industrial sector .

Distribution by industry :

natural resources and manufacturing

Historically, the activity of multinational corporations developed in the extractive and public utility areas before it became prominent in manufacturing . By the turn of the century, European and North American investors, attempting to secure their markets in petroleum, a field in which oligopolistic conditions were soon formed, had extended their vertical integration from the source o the supply to marketing . The entrenched United Kingdom and French positions in the Middle East were successfully challenged by United States corporations . Cartel arrangements concluded between multinational corporations before the Second World War were weakened in later years as the discovery of rich new fields in various parts of the world, in developing countries especially, encouraged the entry of new corporations into the field and brought about a large degree of market interpenetration among the largest multinational corporations in petroleum. ~/ As the technology of production has become standardized and patents have expired, national corporations in developing countries, operating independently or in joint ventures with foreign multinational corporations, have been moving increasingly towards downstream vertical integration . Market interpenetration and partnership have diluted the pre-war international cartels in ether extractive industries also, but the growth of multinational corporations experienced in the petroleum sector has not been matched by most metal industries . Where technology, economies of scale and market control by the multinational corporations do not constitute formidable barriers, and the geographical distribution of the raw material source is limited, as in the case of copper, host countries have at times succeeded in increasing their participation or even wresting control from foreign multinational corporations . In other industries, such as aluminium, where not all these conditions are present, multinational corporations continue to play a primary role . Manufacturing activities abroad, on the other hand, appeared later than operations in natural resources, either as the processing of raw materials or as the production of consumer goods . It appears that, initially, manufacturing operations increased faster in developed countries, later in developing countries, and in the last ten years their growth has again been more dynamic in developed countries, especially in western Europe . Industrial sectors involving high technical skills have witnessed the fastest growth . Manufacturing is at present the major activity of multinational corporations . It represents a little more than 40 per cent of the total estimated stock of foreign direct investment of the main developed market economies . Petroleum ti See also tables 13 to 15 in annex III for sources and explanation of quantitative information cited in this section . See also figures 3 and 4 in the text . The nine largest United States multinational corporations in petroleum Iliad crude oil operations in 1938 in 40 countries and in 1967 in 96 countries . !Over the same period their subsidiaries in all types of operations related to (Petroleum increased frog 351 to 1,442 . Vernon, op . cit. , p. 32.

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-Figure 3 . Developed market economies (DAC countries) : estimated distribution of estimat1L`d stock of foreign direct investment by sector and area, end 1966 (Percentage distribution)

x+7.3

eloped market economies

Developing countries

Source li

Table 13 .

?igure 4 .

elected developed market economies : stock of foreign direct investment by sector, 1970 " (Percentage distribution) United Kingdom Federal Republic of Germany

rr !nt

Unit ld StatOs

JapanL/

Source : Footnotes)

Table 15 . _10a_

1965 .,

Petro~eum and mining combined .

sccountsjfor 29 per cent, mining and smelting for 7 per cent and other industries for 24 per cent . A similar picture emerges from the distribution of United g~ates affiliates among industrial sectors . Th e is an asymmetry in the industrial distribution of multinational corpora on activities in developed and developing countries . Whereas in develop countries half of the estimated stock of investment is in extractive s and a little more than a quarter in manufacturing, in developed industr market conomies half of it is in manufacturing, and about 30 per cent is in extract ve industries . 9/ Wi a particular industrial sector, pronounced concentration in a few tries is evident . Four-fifths of the estimated stock of investment home c in petr leum and in manufacturing originates in the United States and the United agdom. Significant variations exist among major investing countries in the distribution of the stock of investment by sector . Although the largest investing countries, namely the United States and the United Kingdom, have a similarjpattern in industrial distribution (one-third in extractive industries and 40 per cent in manufacturing) both Japan and the Federal Republic of Germany show a different pattern of concentration ; the former in trade and extractive industries, the latter in manufacturing . Japan's foreign direct investment appears) to be aimed at securing raw material sources and export markets for the p nt corporations . Even its investment in manufacturing (one quarter of the to is relatively heavily concentrated in lightly processed raw materials such a lumber and pulp and low technology industries such as textiles and steel and no -ferrous metals. In contrast to the Japanese structure, almost 80 per cent o the foreign direct investment of the Federal Republic of Germany is in manufa wring and high technology products such as chemicals, electrical produc and transport equipment . When compared with the dominant position of the U; ted States and the United Kingdom in petroleum, the Federal Republic of Ger 's investment in this area is almost negligible (3 per cent in petroleum and 5 per cent in mining) . 1D Co centration in high technology industries is also a characteristic of UnitedStates investment and- to a lesser extent that of the United Kingdom .

Investment in petroleum in developed market economies is mainly in refining and distribution . LO/ The radically different foreign direct investment structures of these countr es reflect, to a certain extent, differences in endowments of factors and natural resources, in industrial competitiveness and in business traditions and orientation . In the case of Japan, the re-emergence of large trading com es and the desire to secure raw materials have played a determining role ; in the case of the Federal Republic of Germany, the major factors were the competi ive strength of the IG-Farben successor corporations and apparent disint est in building up a major domestically-owned petroleum industry tely 90 per cent of the petroleum industry of the Federal Republic (appr of Gern~any is foreign-owned) .

Chemicals, machinery, electrical products and transport equipment account for half of all the manufacturing investment of the United Kingdom and almost 60 per cent of that of the United States . The technological strength of United States multinational corporations in the major chemical and automotive industries has given that country a dominant position in these fields . Much of the expansion of United States manufacturing affiliates abroad has been in the production o "skill-oriented" products, in which research and development is relatively a high percentage of sales and where an oligopolistic structure is prevalent . 211 Multinational corporations have also been active recently in the service sector, especially in banking, tourism and consulting. Banking in particular has grown spectacularly in recent years . Between 1965 and.1972, United states banks more than tripled their foreign locations from 303 to 1,009 . In 1972 alone, United Stags banks opened 106 foreign locations (i .e . branches, representative offices and agencies, affiliates and subsidiaries) while in the same year Japanese banks opened 25 new facilities, bringing the total to 145 . The total number of foreign facilities of United Kingdom banks in 1972 amounted to 192, those of the Federal Republic of Germany to 103 and those of France to 91 . L2/ Foreign deposits represent an increasing share of total deposits of United States multinational banks . For example, for the larger New York-based banks foreign deposits increased from 8.5 per cent of the domestic deposits in 1960 and 33 .6 per cent in 1968 to 65 .5 per cent in 1972 . L3/ The expansion of the Eurocurrency market to $100 billion by the. end of 1972, coupled with the phenomenal expansion of overseas branches, especially of United States banks, provides a readily available source of funds that can be shifted internationally, as well as the mechanism through which such shifts can be made . At the same time, they provide an important source of credit in several areas of the world, over and above what can be supplied by local banks . The potential implications of these sources of funds are discussed in greater detail in Chapter III . Ownership patterns By and large, multinational corporations exercise effective control over their foreign affiliates through complete or majority ownership, although at times such control can be exercised from a minority position . At least 80 per cent of United States affiliates and 75 per cent of United Kingdom affiliates are either wholly-owned or majority-controlled . In terms of stock of investment, these two countries have placed about 90 per cent in affiliates which are at least majority-owned . This desire for majority ownership and

Vernon, op . cit . , p. 63, and also the section on technology and skill below . L2/ Data supplied by the Chase Manhattan Bank . Monetary Frank Mastrapasqua, U.S . 97, ansion via Foreign Branching : Ex Policy Implications (New York, , pp. 23-25 .

14 See also tables 16 to 18 in annex III and the section on profit li management and ownership policies below .

contro appears to be a general characteristic of multinational corporations from o her home countries, except in the case of Japanese multinational corpor tions, where a somewhat more sizeable proportion of affiliates and stock f investment are minority-owned joint ventures . This difference in the owners p pattern is apparently influenced by differences in methods of control as in the industrial and the geographical distribution of foreign as we ies. The predominance of trading activities and light industries in the activi case o Japanese multinational corporations suggests that relatively small affili tea may be adequate in many cases . Moreover, since a relatively high propo ion of Japanese investment - made mostly in recent years - is located oping countries, the ownership pattern may also have been influenced by in de ten ncy of some Japanese multinational corporations to maintain a relatively a low p file in some of those countries . This geographical influence on ownership patte s is also suggested by the somewhat lower share of wholly-owned affiliates in th total number of affiliates of United States corporations in developing count ies as compared with that in developed countries . Over the last three decad s, a slight increase in the proportion of minority ownership, particularly in de loping countries, is suggested by United States data. There is also an indication that the longer the life of an affiliate, the more likely is it to be wholly-owned. This tendency can, of course, be offset by pressures from host untries, as exemplified by recent trends towards increased local owners~ip in the OPEC and other countries . I Dimensions in the world spectr 15

*e enormous size and steadily growing importance of multinational corporations are clearly revealed when viewed in the context of world economic activi ies . Although the usual comparison of gross annual sales of multi tional corporations with gross national product of countries exaggerates the r tive importance of the activities of multinational corporations, the gener conclusion that many multinational corporations are bigger than a large number of entire national economies remains valid . Thus, the value-added by each of the top ten multinational corporations in 1971 was in excess of $3 billion or gre ter than the gross national product of o"mr 80 countries . The valueadded f all multinational corporations, estimated roughly at $500 billion in 1971, #as about one-fifth of world gross national product, not including the centrally planned economies . I ternationa1 production, defined as production subject to foreign control or dec sion and measured by the sales of foreign affiliates of multinational corpor*tions has surpassed trade as the main vehicle of international economic

15

See also table 19 in annex III.

exchange . It is estimated that international production reached approximately $330 billion in 1971. L6/ This was somewhat larger than total exports of all market economies ($310 billion) . Since the rate of growth of international production is estimated to have exceeded that of world gross domestic product or world exports, an increasing share of world output would be generated by the foreign production of multinational corporations if recent trends were to continue. 1-71/ However, future developments will depend very much on the extent to which the problems raised by the operations of multinational corporations are dealt with by appropriate national and international measures which will permit continued growth in desired areas and directions, or by restrictive measures which will obstruct further growth . In addition, changing relationships between different groups of countries, for example increased co-operation and exchange between developed market economies and centrally planned economies, will influence the direction of multinational corporation activities .

16/ Estimates of international production made in the literature vary according to the methodology used. J . Polk, on the basis of sales associated with direct investment and portfolio investment, estimates international production at $420 billion for 1568, see Judd Polk, "The Internationalization of Production", mimeo (United States Council of the International Chamber of Commerce, 1969) ; J. ,ehrman, on the basis of sales associated with direct and portfolio investment as well as licensed rights, estimates international production at $450 billion for 1971, see J.N. Behrman, "New Orientation in International Trade and Investment" in Pierre Uri, ed . Trade and Investment Policies for the Seventies : New Challenges for the Atlantic Area and Japan (New York, 1971T. Both authors, without adjusting for value added, evaluate the internationalized gross domestic product of market economies to be 23 per cent for 1968 (Polk) and 22 per cent for 1971 (Behrmen) . If the adjustment is ! made these shares would be considerably lower. S. Robock and K. Simmonds in !I calculating foreign production do not include portfolio investment or licensed rights ; their figure for foreign production for 1970 is $230 billion, representing approximately 11 per cent of market economies' gross domestic 'product . See S .H. Robock and K. Simmonds, International Business and (! Multinational Enterprises , (Homewood, Illinois, 17 Whereas between 1961 and 1971 gross domestic product of market economies at current prices rose at an annual average rate of 9 per cent, international ;production, estimated on the basis of sales at current prices of United States !foreign affiliates between 1962 and 1968, rose at an annual average rate of ! about 13 per cent .

Dimensjions in developed market economie I'

18

the world-wide integrative role of the multinational corporation is le, its importance to the inter-relationship of the developed market debat econo es is beyond doubt. Most of the developed market economies serve simul eously as home and host countries . The United States, however, acts y as a home country, while certain others, such as Cyprus, Greece, pri Spain, Turkey, New Zealand and South Africa, are almost exclusively hosts to multinational corporations . forei DOring the period 1968-1970, inward direct investment flows were on the aver only 20 per cent of the outward flows for the United States, 30 per cent J an, 63 per cent for the United Kingdom and the Federal Republic of for Ge and 90 per cent for the Netherlands . The reverse is the case with most the other countries . In France inward direct investment flows were almost of twice p.s high as the outward flows, in Italy and Canada a little more than twice, in Newt Zealand, three times higher, in Belgium, four times and in Australia, Spain,'I Portugal and South Africa, 7.5 to 12 times greater than outward flows . far as the United States is concerned, the preponderant position in the economy is occupied by domestic multinational corporations, rather than foreign multi tionai corporations whose presence is not as yet significant . More than one-third of the manufacturing output of the United States is represented by the to 187 United States multinational manufacturing corporations . In certain indust ial sectors, such as automotive, pharmaceutical and fabricated metal produc s, the consolidated sales of these corporations account for more than three- ourths of the sales of all United States firms, and in petroleum refining, chemic s, rubber and electrical machinery, for more than one-half. A larger group, of 264 multinational corporations, is responsible for half of all United States exports of manufactures . In 1971, United States multinational corpcr tions generated an outflow of capital of $4 .8 billion for direct invest ent abroad and an inflow of approximately $9 billion in interest, divide s, royalties and management fees . Furthermore, given the practice of extens ve local borrowing, their control of overseas assets is substantially higher than the book value of long-term equity and debt held abroad.

18

See also tables 20 to 25 in annex III .

194 United States net capital exports for direct investment abroad as a share f investment outlays of United States affiliates vary considerably by year, s ctor and area of investment . In 1968, in western Europe, the share was lea than one-third; in a sample of 125 large multinational corporations (representing one-sixth of United States industry's ex-factory sales) only 6.7 per cent of gross foreign investment was financed through a net capital outflow from United States parent companies, the principal source being foreign depreci tion reserves, earnings and borrowings . Business International, The Eff cts of United States Corporate Foreign Investment, 1960-1970, New Yo k, 1972, .

-1 5-

In contrast, the relative importance of foreign multinational corporations ~.n the United States is limited . Foreign investment in the United States, ~ihile far from negligible, is mainly portfolio investment . The European investment in the United States, for instance, is about as high as the United States investment in Europe ; but whereas 80 per cent of the latter is in direct investment, 70 per cent of the European investment in the United States is in portfolio form, almost equally divided between stocks and bonds . Thus, the book value of United States direct investment in other developed countries, with the exception of the Netherlands, is several times higher than the book value of direct investment of those countries in the United States . 20/ Multinational corporations from the United Kingdom, the Netherlands and Switzerland are the leading investors in the United States, accounting for about 60 per cent of total direct foreign investment . Although European and, more recently, Japanese corporations have penetrated the petroleum industry, manufacturing and the service sector in the United States, there is no single industry in which they have assumed a preponderant role . With the exception of Japan, the reverse is true in the case of the other developed economies, where foreign affiliates account for an important share of output, investment, employment or exports . In Japan, where regulatory policies have restrained foreign entry, firms with foreign capital participation represented in 1968 only 2 .3 per cent of total fixed assets and 1 .65 per cent of total sales in manufacturing . The share was much higher in the oil industry (60 per cent) and in rubber (19 per cent) . 21 Given the recent Japanese liberalization measures, the share of foreign affiliates (more than half of which are joint ventures) must certainly have increased. In Canada, at the other end o the spectrum, the presence of foreign multinational corporations is pervasive, representing one-third of total business activity . Foreign affiliates account for 60 per cent of manufacturing output and 65 per cent of output in mining and smelting . The United States accounts for 80 per cent of total direct foreign investment and the United Kingdom for most of the rest . In the United Kingdom, United States affiliates represent almost 70 per cent of the total stock of foreign direct investment . They account for 13 per cent of total manufacturing output, employ 9 .2 per cent of the labour force and are responsible for one-fifth of all manufacturing exports . 22/ In Belgium, foreign affiliates are responsible for a quarter of the gross national

Japanese Trade and Industry Ministry, Special Report on Foreign Owned Firms in Japan (Tokyo, 1968) .
EV

20 The United States' stock of direct investment in the European Community 3 .5 times higher than the Community's investment in the United States ; it is is 7 times more in the case o Canada and almost 70 times more in the case of Latin America. Rainer Hellmann, The Challenge to United States Dominance of the Multinational Corporation (New York, 1970)-

22 John Dunning, United States Industry in Britain (London, Economists' Advisory Group Research Study, Financial Times, 1972) .

-16-

product,lone-third of total sales, 18 per cent of employment and 30 per cent of exports . More than half of the total foreign direct investment is accaunte for by United States-controlled affiliates . L3/ In the Federal Republic of Germany, Italy and France, foreign penetration is less pronounced, with the United States accounting for at least half of it, except in the case of Franc where its share is less than a third. 24 The importance of multinational corporations in the developed market economie varies considerably by industrial sector . There is a high concentr tion in a fairly small number of industrial sectors characterized owth, export-orientation and high technology, sectors which are also by fast regarded as key sectors by the host countries . It appears that in most of the developer d market economies foreign-owned firms own very high (75 - 100 per cent) or high 50 - 75 per cent) sector shares in industries characterized by high technolo y. Thus, there is very high or high foreign presence in the oil refining industry in Canada, the Federal Republic of Germany and Japan . ChemicalO are under very high foreign ownership in Canada, high in Australia, and medi um (25 to 50 per cent) in the Federal Republic of Germany and Norway. The comp ter and electronics industries are under very high foreign ownership in the deral Republic of Germany and the United Kingdom. Transport equipment is under very high foreign ownership in Canada and Australia, and medium in the Uni d Kingdom. Electrical machinery is highly owned by foreign corporations in Aust a, the Federal Republic of Germany and Canada. Thel presence of United States multinational corporations is also more pronounced in some sectors than in others . For instance, they control more than half of the petroleum industry in Belgium, approximately three-fifths of the food, tobacco, oil-refining, metal manufacturing, instrument engineering, computer and technical manufacturing industries in the United Kingdom, and more than 15 Oer'cent o the production of semiconductors and 80 per cent of computers and electronic data-processing equipment in the European Community. In the s rvice sector, the United States presence is considerable in the hotel and recrleation industries, consulting, public relations and banking . It is estimat that in 1970'there were more than 30 United States banks operating in Europe, many of them having established affiliates jointly with European banks .

L3/ D. Van den Buleke, The Foreign Com anies in Belgian Industry (Ghent, Oelgian Productivity Centre, 1973)24/ The foreign share in the total nominal capital of firms in the Federal $epublic of Germany was 19 per cent at the end of 1966, and in Italy in r cent. In France, out of a total of $707 million of direct foreign 1965 15 investm t in 1967, the United States accounted for 30 per cent, the European Communit countries for 29 per cent, and Switzerland for 22 per cent. G . Berti "Foreign investment in France", in Foreign Investment ; The Experience of Host countries , I. Litvak and C . Maine, eds . New York, 1970)-

Another indication of the importance of United States affiliates in developed countries is their share in the gross fixed capital formation of these countries . In Canada in 1970 it amounted to one-third, in the United Kingdom to one-fifth, in Belgium and Luxembourg and the Federal Republic of Germany to between 12 and 13 per cent, and in France 6 per cent . In certain was much higher, e .g. in Canada it was more than 50 per cen industries, the share in chemicals, fabricated metals, machinery and transportation equipment. Dimensions in developing countries25 In 1968 developing countries accounted for about one third of the book value of foreign direct investment as opposed to only one sixth of world gross domestic product and one fifth o world exports, not including centrally planned economies . Half of foreign direct investment in developing countries was in the development of natural resources, a little less than one-third in manufacturing and the rest in trade, public utilities, transport, banking, tourism and other services. Generally speaking, the relative importance of the multinational corporation in developing countries is rising in the manufacturing and services sectors and declining in the primary industries, in particular those connected with agriculture (plantations) . On balance, the over-all importance of the multinational corporation is growing . As a source of the net flow of resources to developing countries, private direct investment flows from such corporations represented about one-fifth of the total in the 1960s . During the same period, this flow increased at an average annual rate of 9 per cent . In 6 out of the 12 developing countries for which data were available, the stock of foreign direct investment increased faster than that o gross domestic product . In the second half of the 1960s, the slow growth of investment in some countries is attributable to the liouidation of foreign investment through nationalization. The relative size of the accumulated stock varies by industrial sector and country, and the share of foreign affiliates' activity in output, employment or exports varies accordingly . In some countries, the foreign content of the local economy is very high and at times concentrated in one sector, while in others it is less significant or more diversified . Id the Middle East, which accounts for 9 .4 per cent of the total foreign direct private investment in developing countries, petroleum accounts for approximately 90 per cent of the total stock of foreign investment . 261 In South America (36 per cent of the total), on the other hand, 39 per cent of

25

See also tables 26 to 35 in annex III .

The discussion on the distribution of stock of foreign direct investment in developing countries is based on rough estimates made by the Organisation for Economic Co-operation and Development . See OECD, Stock of Private Direct Investments by DAC Countries in Developing Countries, end 1967 Paris, 1972) .

.18-

of dollars

01111V( "b

18~

100

per cent

Western hemisphere P M F 0

Figure 5 .

Developing regions ; distribution of stock of foreign direct investment by sector and country of origin, end 1967 (Billions of dollars and percentage shares)

KEY

161514131211 10-

Investin g country Other

75
"

Federal RePui of Germany Netherlands France United Kingd United State,

I'III'
50
Sector

987654-

Per cent 100

Africa P M F 0 .. .: .:: Per cent 100 Asia P M F 0 _ Per cent Middle East p

P = Petroleum M = Mining and smelting

F = Manufacturing = Other

25

75
--

50 2 '1 25

. .. . 50 25

" !SS~I

ii

M+0

(not brok doevn bY countrie

I~IIIIIIIIIIT

%
Source ; Tables

31

loo
to

34 .

100

0 -T lUU

100

foreign investment is in manufacturing, 28 per cent in petroleum and per cent of the total), 10 perlcent in public utilities . In Africa (20 petroleum, 20 per cent in mining and smelting and 19 per cent 39 per'Icent is in manufacturing has attracted in manlaYacturing . In Asia (15 per cent), per cent and agriculture 18 per cent of the total 30 per cent, petroleum 22 foreign investment stock. In Central America (19 per cent of the total), manufacturing has attracted 31 per cent, -petroleum 16 and trade 13 per cent of the total . s aggregate picture, however, does not reveal the fact that multinational corporations have tended to concentrate in a few developing counties . Only a few developing countries have a stock of direct investment Thus, Argentina, Brazil, India, Mexico, Nigeria, of more than $1 billion . venez4ela and certain Caribbean islands, 27 account for 43 per cent of the totallstock o investment in developing countries, which is roughly the same propo ion as that of their combined gross domestic product to the estimated total for all developing countries . According to OECD estimates for the end of 1 7, in another 13 countries 28 in various developing regions the stock of in estment was between $500 million and $1 billion, accounting for nearly anoth r 30 per cent of the total stock of investment in developing countries . This oncentration is related to the sector in which foreign investment is predo inant . In African countries and in Central and South American and Middle Easte n countries (Algeria, Libya, Nigeria, Zambia, Jamaica, Netherlands Anti es, Trinidad and Tobago, Peru and Venezuela, Iran, Kuwait and Saudi Arabia), it is the extractive industries which predominate . In all these counties, the stock of investment in either petroleum or mining exceeds $200 million . " In several other countries, manufacturing is the predominant secto , more than $200 million being invested in manufacturing in Argentina, BraZ7. , India, Mexico and the Philippines . In India and Malaysia, investment in ag iculture exceeds $200 million . ~, e activities of United States multinational corporations represent half of the total stock of foreign direct investment in developing countries . In certar regions, however, such as Central and South America, the United States acco is for almost two-thirds of the total stock o foreign direct investment . The rest of the stock is represented by the United Kingdom (9 per cent), Canada (7 per cent), Netherlands (5 per cent) and the Federal Republic of Germa0y (4 per cent) . In Africa, on the other hand, the United States accounts one-fifth of the total stock ; the United Kingdom predominates with only or 30 per cent, France following with 26 per cent. Belgium, the Netherlands and Italy account for 7, 5 and 4 per cent respectively . In the Middle East, the Unite States accounts for 57 per cent, the United Kingdom for 27 per cent and t e Netherlands and France for approximately 5 .5 per cent each. In Asia, the U ted Kingdom has the largest share (41 per cent), the United States follows per cent, France with 7 per cent and the Netherlands with 5 per cent . with

J6

Leeward Islands, Windward Islands, Bahamas, Barbados and Bermuda . 2 Algeria, Libya, Jamaica, Panama, Trinidad and Tobago, Chile, Colombia, Peru, Iran, Kuwait, Saudi Arabia, Malaysia and the Philippines .

.19.

In some developing countries where the stock of investment exceeds 000 million, the foreign affiliates of a single developed market economy account for more than 80 per cent of the stock of total investment . 29 Data on the share of foreign multinational corporations in local production s limited . In Singapore, in 1966, affiliates from the main investing countries are estimated to have contributed one-third of the total value added in manufacturing . 30 It has been estimated that in the mid-1960s, sales of United States enterprises alone represented 17 per cent of the gross value of industrial production of Mexico, 13 per cent of that of the Philippines and 11 per cent of that of Argentina and Brazil . 31 In Central America, the output of foreign affiliates is estimated at 30 per cent of the output of ,the manufacturing sector . Among the 500 largest manufacturing firms in Brazil, iPoreign affiliates controlled . 37 per cent of total assets . 32 In Mexico, (among middle and large-sized firms, weighted . average foreign participation ~,reached 45 per cent in 1970. Foreign participation in the output of Mexican ~imanufacturing industries, however, reached 100 per cent in rubber products 'l and transportation materials, and a weighted share of more than 75 per cent jin industrial chemicals and tobacco in 1970, while foreign participation in 'itextile production was only 8 per cent . 33 Expenditures of multinational corporations on plant and equipment represent a varying share o the total gross fixed capital formation of developing countries . In 1970, the share of such expenditures by United States manufacturing affiliates was 9 per cent in Mexico and. 18 per cent in Brazil . In some cases, such as electrical machinery in Brazil, the expenditure of United States affiliates on plant and equipment accounted for more than half of the total fixed capital formation in the industry . 34

29 In 1968, in Chile, Colombia, Panama, Peru, Philippines and Saudi Arabia, (more than 60 per cent of the stock of foreign investment was owned by United (States affiliates . In Zaire, 88 per cent of total investment was made by '(Belgian affiliates . 30 H. Hughes and You Poh Seng, eds ., Foreign Investment and IndustrialI ization in Singapore , (Canberra, Australian National University Press, 1T97 p . 192 . 31 Economic Commission for Latin America, Economic Serve of Latin America ((United Nations publication, Sales No . E .72 .II .G .1 , p . 293. 32 F . Fajnzylber, Sistema industrial y exportaci6n de manufacturas ; l anAlisis de la experiencia brasilera , Economic Commission for Latin America, (November 1970 . See C . Vaitsos, "The changing policies of Latin American Governments 33 ~Itcwards economic development and direct foreign investment", forthcoming in (Journal of World Trade Law; Carlos Bazdzeseh Parada, "La politics actual hacia la invers1 n extranjera directs", Comercio Exterior (Mexico City, 1972), p. 1012. 34 United States Senate, Committee on Finance, Implications of Multinational Firms for World Trade and Investment and for United States Trade d Labor Washington, D.C ., 1973) .

_20"

In addition to their dominant role in the export of products of the extract ve industries, multinational corporations are in general playing an increasingly important part in the export of manufactures from developing There is evidence of an over-all increase in the exports of countries . 35 affili~~es, both as a share of total sales and as a share of total exports by the post country. Tt~us, exports of United States manufacturing affiliates in Central and South America accounted for 4 per cent of their total sales in 1957, 7.5 per and 9 .4 per cent in 1900- 301 Their share in the to of exports cent i . of man actures from these regions, which was 12 per cent in 1957, -eached 41 per cent in 1966 . This share varies by country ; thus, in Argentina, betwee 1965 and 1968, exports o United States affiliates accounted for cent of total exports . In Mexico, in 1966, United States manufacturing 14 .5 P affili es accounted for 87 per cent of exports of manufactures, and in Brazil they represented 42 per cent . radix data suggest that despite their visibility and presence in key sector, the contribution of foreign affiliates to the total gross domestic products of developing countries remains relatively small in most host countries . This is~ because the bulk of the gross domestic product of most developing countries originates in agriculture and the service industries where, on the whole, the presence of the multinational corporation is relatively limited . Dimen4ns in centrally planned economies Although the centrally planned economies have attracted only a very small amount Of direct investment and very few affiliates of multinational corporations, they are more involved in the activities of these corporations than a cursory examination of the standard data might indicate . The form in which t e multinational corporations extend their operations in these economi s differs from that taken in others . Equity participation in countries in whic the private ownership of means of production is not congruent with the system s naturally uncommon . The major exceptions are a limited number of . sales o ices of multinational corporations and some minority participation, which i$ permitted by law in Romania and, on a very limited basis, in Hungary . 37

35 i The relative contribution of foreign affiliates may be affected by their orientation towards import substitution, which is enhanced by the restrictive tariff policies of host countries, and by the type of products manufactured in developing countries in connexion with the global requirements of multinational corporations . 329 I United States Department of Commerce, United States Business Investment in Foreign Countries, 1960 (Washington, D .C . 1960 and Survey of current Business October 1970. 37 '1 Il:goslavia is a special case . It was the first socialist country to permit nority participation by foreign enterprises . A constitutional amendment of l97.1 goes so far as to offer a guarantee against subsequent expropri*tion and nationalization, once a joint venture contract has come into effect . -21-

Yet, apart from straightforward trade, the relationship between multinational corporations and the centrally planned economies has often involved co-operative arrangements in production, the development and transfer of technology, and marketing . Most of these arrangements are relatively recent in origin, reflecting the general trend in the centrally planned economies towards more outward-looking policies and a new emphasis on economic co-operation . Typically, a complex set of arrangements provides for technical help by the multinational corporation in plant construction (e.g . Occidental Petroleum and the proposed fertilizer complex in the USSR), exports and imports (e .g. the purchase by Occidental of the products of the plants, and sales to the USSR of Occidental products) and trade credit. It has been estimated that there were about 600 industrial co-operation agreements with the developed market economies in force in Eastern European countries at the beginning of 1973 . About one-third .of these agreements have been concluded within the last two or three years, and continued fast growth is indicated. On the whole, these agreements account for a relatively small proportion of total trade with developed market economies . In some Eastern European countries, however, they already account for 10 to 15 per cent of exports to the developed market economies in some branches of industry . In Hungary, for example, they are responsible for one-sixth of engineering exports to developed market economies . 38 Similarly, while these agreements do not account for a significant share of the total output of Eastern European countries, they are important for certain branches . These are mostly industries requiring high technology or large investment . For example, over half of passenger automobile production in the USSR in 1975 is expected to come from Fiat, under one of the first industrial co-operation agreements negotiated with Italy. The current figure for Poland is two-fifths . More recently, the role of multinational corporations in the exploitation of natural resources in the USSR has assumed particular importance . The copper project in Eastern Siberia being negotiated with multinational corporations would involve an investment of $1 to $2 billion, with an annual production of several hundred thousand tons . The natural gas project in Siberia, also involving the active participation of multinational corporations, would account for a major part of the entire natural gas production of the USSR by 1980 . Moreover, as exports of these natural resources would continue to flow long after the initial foreign investments were paid off, import capacity would be correspondingly expanded . A further implication of these projects is that because of the vast outlay and the scope of activities involved, they will probably require the participation of very large multinational corporations or consortia of a number of them. Moreover, since many of these arrangements involve large deferred payments beyond the capacity of multinational corporations to finance, they will require finance from banks or export credit institutions .

38 United Nations Economic Commission for Europe, Analytical Report on Indus rial Co-operation among ECE Countries (mimeographed document, E ECE 4, 1 March 1973 .

-22-

Si lar co-operative agreements have also been made between enterprises the entrally planned economies and developing countries . Here, on the of other h nd, the centrally planned economies are usually the providers of aid, machinery and equipment and credits, to be paid off with the technic product of the newly set-up plant . I recent years, such co-operation has become a rapidly growing source opment assistance from socialist countries . Among the socialist de of countries* main partners are India and the countries of North Africa . Since 1971, here has been a tendency for a rapid spread to new partners in other region and continents . 39

39 For further information, see "Centrally Planned Economies and the Intern tional Development Strategy" in Implementation of the International Develo ment Strategy : Papers for the First Over-all Review and Appraisal of Pro ress during the Second United Nations Development Decade, vol. II (Unite , Nations publication, Sales No . E.73 .II .A .3 . .23_

Summary The term "multinational corporation", used in accordance with the wording of the Economic and Social Council resolution, is employed in the report in a broad sense to cover all enterprises which control assets - factories, mines, sales and other offices in two or more countries . Under this definition, multinational corporations are responsible for most foreign direct investment, and such investment is used as one of the measurements of the size o the activities of multinational corporations . Since a relatively small number of firms are responsible for the bulk of multinational corporation activities, a description of these firms gives a fair picture of the characteristics of multinational corporations . The typical multinational corporation is a largesize, predominantly oligopolistic, firm with sales running into hundreds of millions of dollars and affiliates spread over several countries . Another relevant feature is that most parent companies of multinational corporations are located in the developed countries . The United States accounts for more than half of multinational corporations having total annual sales of manufactures of more than $1 billion, and also for more than half of the total estimated book value of investment, which by $160 billion .

1971 had reached approximately

The United States, together with the

United Kingdom, France and the Federal Republic of Germany, accounts for 80 per cent of foreign activities by multinational corporations . Multinational corporations, especially those of Japan, the Federal Republic of Germany, and the -24-

United States, have grown dramatically in the last two decades, reflecting rapid post-war economic growth, technological advances, the intensified search for sources of raw materials and market outlets, and shifts in the relative economic power of major industrial countries . Although during the 1960s multinational corporation activities grew faster in developed host countries than in developing, and although the latter have received only half as much of the total estimated stock of direct investment as the developed countries, the presence of foreign multinational corporations in developing countries is generally of greater relative significance, since their economies together account for much less than half of the total of developed market economies . The distribution o investment in developing countries still reflects historical ties, some of a formerly colonial nature . Multinational corporations were active in the extractive, agricultural and public utility areas, where at present they still account for nearly two-thirds of the stock of direct investment, before becoming prominent in manufacturing and recently in the service sector, especially banking . In the developing countries the share o manufacturing is no more than a quarter, while in developed market economies it represents half of the total investment in these activities . Through its capacity to move capital, technology and entrepreneurship across national frontiers, the multinational corporation has become the main vehicle for the internationalization of production, which is relations . Indeed, international production (defined

acquiring growing importance in international economic as sales by foreign affiliates of multinational corporations to non-affiliates), estimated at -25-

approximately $330 billion in 1971, has equalled and in some countries even surpassed trade as the main channel of international economic exchange . Whether an

increasing share of world output will be generated by multinational corporations will depend very much on the direction and effectiveness of national and international regulatory measures . If the role of the multinational corporation in the rational allocation of resources on a world-wide basis is debatable, its importance in intertwining the economies of most developed countries is beyond doubt . Many of these countries serve simultaneously as home and host, but any symmetry is interrupted in the case of the United States which is primarily a home country and by the southern European and southern hemisphere countries which are mainly host countries . The importance of multinational corporations in the developed market economies varies considerably by country and industrial sector, with a high concentration in a fairly small number of sectors characterized by fast growth, export orientation and high technology, some of them regarded gs key sectors by host countries . In many developing countries, the presence of multinational corporations is of increasing significance relative to total capital flows from industrial countries and to the output of the domestic sector . The preponderant position of multinational corporations in the extractive industries seems to be declining but in manufacturing and other sectors there is a rising trend . In the centrally planned economies, the modest but growing presence of multinational corporations has taken a different form, reflecting the local political and economic system. While minority equity participation

is allowed in only a few countries, the relationships of multinational corporations with the centrally planned economies have usually involved industrial co-operative arrangements, the transfer of technology and marketing, chiefly in the areas of the exploitation of natural resources and high technology .

II.

THE NATURE OF MULTINATIONAL CORPORATIONS

The enormous size and importance of multinational corporations and their ry high rates of growth during the last two decades have been indicated in e foregoing description and analyses . Sheer size and importance combined *ith rapid growth have caused concern about their influence . Any useful action oncerning multinational corporations, at a national or international level, iaust be based on a thorough understanding of the nature of these corporations . While some salient characteristics of the operations of multinational orporations have been revealed by aggregate data, a deeper understanding of heir nature can be gained by examining the multinational corporation at the y' cro-level . Clearly, differences in the strategies of particular multinational orporations in particular countries will have an important bearing on their 1,recise impact . Government policy with respect to the operations of multinational corporations, whether in home or host countries, must therefore be based on an }analysis of the multinational corporation in various circumstances in some detail . Development of raw materials and manufacturing Firms invest abroad for a variety of reasons . Although the pursuit of profits is a major motivating factor, there are others equally important . Firms subject to igopolistic competition frequently reach abroad in the effort to capture large hares of world markets . Reduction of uncertainty in their market environment nd continuous growth are other strong objectives . The relative importance of base and other factors varies of course from firm to firm and over time, depending pon the particular circumstances and pressures . Despite the voluminous literature on the subject, it is clear that the available data are incomplete and that conceptual limitations persist . Nevertheless, several general considerations have been established . Raw materials one of the earliest motivations to invest abroad was the desire to control spurces of raw materials . In the second half of the nineteenth century, European d North American businessmen laid the foundations of many of today's major multinational corporations which are concerned primarily with the extraction, transportation and processing .of raw materials . Whereas a few decades ago foreigners dominated virtually all the raw materials industries, they are today less prominent in the agricultural industries and their presence has also mewhat diminished in mining, as governments become increasingly successful in gaining control over their natural resources from foreign investors .

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Thro _ out the development of sources of raw materials there has been coasidera e tension between foreign investors and host governments . ~J Today, the inves r is usually one of a small group of huge firms, all attempting to achieves ble and predictable growth under oligopoly conditions . Although this shared by host or home governments, tension arises between them in goal may e to attain the respective objectives and to divide the rewards . The the st outcome o this struggle varies from industry to industry and also over time, according to the relative power of the two sides . Beca e of the special nature of the raw materials industries, the points tensio and the steps taken in the struggle have differed considerably from of those encountered in manufacturing industries . The ecent decline of the domination of multinational corporations over a number of raw materials sectors, especially petroleum, reflects the gradual diminution of their initial advantages as suppliers of funds, technology and skills noeasily available elsewhere . Furthermore, these firms have been losing some of their original power of control over export markets, as governments have gained grater access to foreign consumers or have clubbed together to co-ordinate The reaction of some corporations has been to strengthen their ex p~rt strategies . their position by offering new advantages, such as local processing, new technology, marketing outlets and new ownership schemes . These reactions suggest their conaider4le flexibility and resourcefulness . Manufacturing For4gn direct investment in manufacturing was stimulated at first by a desire to~protect markets originally developed by exports and subsequently threatene by increasing barriers to trade, by other multinational corporations or by local competition . ~J More recently, the growing practice of world pourcing by multinational corporations, especially in such industries as trans rt equipment and electronics, has given new importance to cost advantages . Amon many United States manufacturing industries which are characterized by a high degree of research effort, foreign investments have tended to follow a common attern . V Innovations in these industries are nurtured by the high per capit~ income level in the home market, which gives United States exporters a temporary advantage at the early stage. As foreign markets expand, and as technology becomes widely known and economies of scale assume primary importance, productio begins in foreign countries . The first few production sites are

.F . Mikesell and others, Foreign Investment in the Petroleum and Mineral I dustries (Baltimore, 1971T. or survey data on this point, see Emergency Committee on American Trade, Tht Role of the Multinational Corporation in the United States and World Economies Washington, D.C., 1972) . .T. Wells, The Product Life Cycle and International Trade (Boston, Harvard Business School, 1972 .

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generally in advanced countries with a demand pattern closely resembling that in the United States . Eventually, as the particular product reaches maturity, United States and other multinational corporations in foreign countries export Ito the world from foreign bases . At a later stage still, production starts in (developing countries . For a few products, such as textiles and electronic (components, a further stage seems to exist : the primary source of production !shifts away from the United States and Europe to developing countries, which then supply the advanced markets . This pattern of development, which applies mainly to the experience of (!United States firms, especially in industries such as automobiles, chemicals, land engineering, has undergone changes in more recent years . Some firms have Ibuilt elaborate networks of specialized factories producing components or a part lof a product range in investment countries, for shipment to other locations, A less developed host country may ~Iunder the stimulus of tariff advantages . (thus be engaged in the production of fairly sophisticated products with the ltraditional stages of development not being followed . Moreover, investment 'decisions are basf-d on a conception of the firm as a global entity and are (less dependent on local resources than in the case of industries processing raw (materials, or on the local market, as id'import-substituting industries. As a 'result, each affiliate in such a network becomes subject to a greater degree of ,centralized control by the parent company.

Multinational corporations of other national origin have experienced jdifferent patterns of foreign expansion . United Kingdom-based multinationals, (for example, have not depended to the same extent as those of the United States 'on the possession of distinctive technology. Many of the largest United Kingdom (firms long confined their foreign manufacturing investments to Commonwealth Iterritories rather than investing in countries with similar per capita income '!levels . !,/ French multinational corporations have followed patterns largely while the primary motivation of similar to those of the United Kingdom, Japanese multinational corporations was initially the establishment of low-cost production sites for supplying home and world markets, and more recently the control of raw materials and markets .

G .K. Helleiner, "Manufactured exports from less developed countries and *ultinational firms", Economic Journal , March 1973 ; United States Tariff commission, Economic Factors Affecting the Use of Items 807 .00 and 806 .30 of the ~!riff Schedules of the United States Washington, D .C ., 1970) . For some details of the strategies of international expansion of these firms, see J .M . Stopford, "British-Based Multinational Firms : External on Strategy and Style", paper presented to NATO Symposium, Brussels, influences pril 1973 . A detailed exposition of the patterns of foreign investment by a large ample of firms and their stated reasons for moving abroad is contained in . Michalet and M. de la Pierre, "Les facteurs de constitution des enterprises tinationales frangaises", Centre d'Etudes et de Recherches sur !'enterprise tinationale, (Paris, 1972), mimeographed . See, for example, G. Adam, "New trends in international business : world-wide sourcing and domiciling", Acts, Oeconomica, Vol. 7, 1971, and MI. Yoshino, "Japanese Foreign Direct Investment", a paper commissioned by the C~mmittee for Economic Development (forthcoming, 1973) . -3 0-

Th re have been some exceptions to the general pattern of development of non-Uni ed States multinational corporations . A few firms have made large investor nts in the United States in order to exploit research-based or other oligopo istic advantages, or to acquire knowledge through direct exposure to the United tates market . Thus several large European and Japanese firms have been , impelleJ to protect their market positions by direct investment in the United States.', It is these firms which, resembling their United States competitors, have created global networks of the type described earlier . The others have preferred to remain primarily dependent on affiliates with a lower degree of specialization in production . Since the number o firms which are likely to or assault on the United States market in the foreseeable future is make a limited and since they will take some time to assume predominant importance, it is probable that the current asymmetry o investment flows between the United States d other advanced econom5es will persist for a period. There are, howeve , indications that this asymmetry may not be permanent . ~ There are also indications that United States investments in the less developed world are likely to remain. distinctive in scope and strength for some time, despite faster rates of growth of other foreign investment there and some divestment by the United States .] Organization and control Organizational structure The increasing size and complexity of multinational corporations has forced manager s constantly to seek new ways of maintaining an adequately efficient scheme of arganization . Corporate growth. has produced a web of powerful and often opposing forces within each enterprise . The methods of organization and control devised to counteract these pressures without unduly diminishing the local initiative of foreignlsubsidiaries have been closely related to the strategies of expansion and have va~ied according to the national origin-, of the parent company. AnI analysis of the organizational development of 170 United States-based multina ional corporations suggests that the firms have adopted their formal structures of organization in several fairly discrete stages . 9/ From an initial period of uncontrolled experimentation, which gave considerable autonomy to the subsidi ies, and the subsequent establishment of international divisions which curtail d this autonomy to some extent, many multinational corporations moved eventually to dismember their international divisions and create either worldwide product Idivisions or area divisions, depending on the firm's strategy of expansion . Other corporations found a combination or "mixed" structure, consisting of some world-w4de product divisions and some area divisions, to be a more appropriate

pp.

Stopford and L.T. Wells Jr ., Managing the Multinational Enterprise , (New Yo*, Basic Books, 1972) .

AI-544. 9/ J.M .

F.

Root, International Trade and Investment (Cincinnati, 1973),

=31-

ftructural arrangement for their particular strategy . 10 These reorganizations have been accompanied by considerable changes in ~e attitudes of top management : assumptions that business abroad is fundsntally different from business at home have been replaced by a global perspective and recognition of the need to integrate closely related domestic ~9nd foreign units . At the same time, the organizations have developed new skills d control procedures appropriate for global operations. I Co-ordination problems still persist, however, in these 'global' structures . Such problems appear in acute form for those firms with widely diversified product lines and extensive geographical coverage . A few firms are attempting In addition, many further structural adaptations to handle the problems . firms are relying increasingly on improved training procedures to maintain Ico-ordination . Such training,' designed to induce managers and employees to ~Ibehave in predictable ways consistent with parent company policy, helps to (reduce the need for continuous consultation with the centre and thus to reduce the costs of co-ordinating staff groups . L2/ The responsiveness of firms to new challenges of international business continues unabated .

Lij

Whereas United States-based multinational corporations have developed care!fully designed formal organizations, those of other national origin have tended ,to rely more on informal procedures . A keynote in the procedures linking the !affiliates to both United States and European parent companies has been reliance ',on the loyalty and esprit de corps of the affiliates' managers . Changes in !procedures have occurred not in discrete stages but rather in the form of ,continuous adaptations . The reasons for the differences are as yet imperfectly iunderstood, but they clearly involve historical, cultural and institutional 'factors, and attitudes towards competition . 13 With increasing competition, and also increasing scale and complexity, European-based multinational corporations have increasingly been forced to employ

The "world-wide" product division structure is related to a strategy having a wide diversity in products, while the "area division" is related more to a strategy based on taking a narrow line of products into more and more foreign countries . These adaptations take the form of imposing dual or triple lines of IZ !reporting and control in a 'grid' structure . See Stopford and Wells, op. cit . , 'Ch . 6 . See also M.Z. Brooke and H.L. Remmers, The Strategy of Multinational Inter rise (London, Longman, 1970), for similar observations . 12 Some evidence of this factor is contained in J.H. Dunning, American nvestment in British Manufacturing (London, Allen and Unwin, 1958), p. 112 ; .E. Safarian, Foreign Ownership of Canadian Industry (Toronto, McGraw Hill, 966), pp . 88-93 ; and I .W . Meister, Managing the International Financial ction (New York, National Industrial Conference Board, 1970), pp . 9 -95 . 13 Van der Haas, The Enterprise in Transition, (London, Tavistock Press), ro ides an interesting exploration of the effect of these variables on puropean firms .

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more f realized procedures o organization and control. During the late 1960s, veloped structures that resemble the United States type . The resemblance many is clooest among those with integrated networks of specialized production abroad becaUS it is there that managerial tasks are most similar : a high degree of planning and advance scheduling of product flow is essential if the centr c gains from reduced costs are to be realized . Nevertheless, in general, econ non-U ted States multinationals probably preserve a greater degree of local autonomy, or at least decentralization, than do United States-based multinationals . _ Control procedures s organizational changes occur in multinational corporations, so changes are i troduced into operating policies regarding corporate planning, control, finan e, measurement of performance and manpower, which in turn indicate the degre of autonomy enjoyed by the subsidiary . 14 ~n the early years, control of foreign subsidiaries is often minimal or restr cted solely to the screening of capital projects . The need for greater centralization, set off by the creation of an international division or by some traumhtic event such as a devaluation or the write-off of a capital project, leads~tc the establishment of a strong central finance and control group . 15 This roup introduces procedures for optimizing the cash flows of the entire glob system . Decisions about hedging on foreign exchange, borrowing, declaring divi nds and so on, are taken centrally . The effect is to subordinate the inte sts of the subsidiary to those of the corporation as a whole . Consequently, the profits reported for local tax purposes may be understated and measures of performance may become meaningless unless appropriate adjustments are made to allow for the distortions associated with global optimizing decisions . Despite these major efforts to centralize the financial decision system, the continued growth of foreign subsidiaries has at times been accompanied by a loosening of the financial reins. Part of the reason appears to be the re"ation that the system can be overmanaged and a high cost of overhead can be added without a proportionate return in the form of improved decisions . Financial control can be achieved by various means and few foreign subsidiaries are allowed to set their own financial policies . Apart from direct cont~ol, the enterprise has developed a corps of trained men attuned to a common

Stat and Poli

in operating policies regarding control and finance in United based minationals are described in considerable detail by S .M. Robbins Cha11112t B. Stobaugh, Money in the Multinational Enterprise : A Study of Financial (New York, Basic Bobks, 1973) .

A common response to past error, and one not restricted to multinational corporations, is to tighten the control system . For observations of such a response on the part of United States firms in Australia, see D .T. Brash, American Investment in Australian Industry (Cambridge, Harvard University Press, 19bb), p. 120 .

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Iset of policy guidelines and standard procedures . L6/ Similarly, in other functions, common procedures are enforced . Product choices for the subsidiaries are almost always limited to those products manufactured in the home country, especially in the case of the United States. L7/ Marketing procedures, long considered to be the function immune above all others to efficient centralization, are in some firms becoming standardized . Manpower policies regarding key managerial positions are, as a result, being constantly adapted in order to '! select and train men of different nationalities who can work within this new 'istyle of management and at the same time provide an adequate response to jgovernmental pressure for local representation . Profit and ownership policie IFrofit management Dividends and royalty payments are not the only means whereby multinational ccrporations withdraw profits from a foreign subsidiary. Profits can be recorded y in other units of a globes: system, including holding companies located in tax Ihavens, through control of the transfer prices for goods and services supplied by the parent company or exports to ether affiliates . The importance of these controls in influencing the net profit before local ',taxes depends largely on the proportion o total purchases and sales tied to 'other affiliates . Import purchases, which are usually tied in, though large in iabsolute terms for all multinationals taken together, are generally small relative to purchases from local sources . ly/ Thi s percentage tends to decline Ias the local economy develops, but it increases as firms develop networks of specialized, interrelated production,. Exports to other affiliates, though subject to controls and allocations among all the affiliates, are becoming increasingly important, particularly as the networks are developed . Prices charged for tied imports have been shown in some instances to be far above prevailing "world"prices, LO/ and conversely those for exports have been below world prices . As already noted, overpricing, particularly for wholly-owned 18

16 J .M. McInnes, "Financial control systems for multinational operations : Ian empirical investigation", Journal of International Business Studies , Fail, ;971, provides detailed evidence of the use of highly systematized sets of accounting statements and control techniques . 17 L8/ Stopford and Wells, op . cit. , pp . 36-38See tables 36 and 37 in annex III.

In Central and South America, import payments of United States panufacturing subsidiaries were 10 per cent of total sales . See, Raymond Vernon n Restrictive business practices, LNCTAD, TD/B/399, 1972, Table 9 . A similarly 399, ow percentage was reported for United Kingdom manufacturing and mining subsidiaries n 15 countries by W .B . Reddaway, The Effects of United Kingdom Direct Investment erseas : An Interim Report (Cambridge, Department of Applied Economics, University Of Cambridge, 19 7 , Chapter 6 . 20 See C . Vaitsos, Income Generation and Income Distribution in the Foreign I vestment Model, forthcoming, Oxford University Press .

affilia es, has been used as an alternative to royalty payments . Considerable exists, however, in the amount of overpricing or underpricing and variati -all frequency is not known . There is some evidence to suggest that its ov overpri ing has been reduced both by governmental pressure and by problems of control . ~/ The alternatives are complex and their effects little inte unders Nevertheless, the issue makes for considerable tension between home governments and foreign investors, as will be shown later . host A they aspect of profit management that generates tension is the profitability of foreign subsidiaries . The apparent high profitability record of foreign affiliates of multinational corporations needs to be examined carefully : not only are the profit figures liable to distortion but also the capital base o the affiliate has many discretionary components . Some aspects of the discretionary practices can be deduced from examining different procedures generally adopted for wholly-owned affiliates as opposed to joint ventures . The capital structure of a newly established subsidiary generally has a 1 arge proportion of locally raised debt if it is a joint venture, much less if it is wholly-owned . 22 Studies of United States investment in Australia and Jan n have shown that contributions of technology are likely to be capit zed in joint ventures, but not in wholly-owned subsidiaries . L3/ This differ nce may partly explain why wholly-owned subsidiaries have generally report d a higher return on book equity than joint ventures . L4/ Further differences in financial policy are evident, especially in the early years of existe~ce : wholly-owned subsidiaries are provided with special support services at lowlor zero cost ; royalty payments are temporarily forgiven ; dividends are postponed . On the other hand, in later years, parent companies expect to be able to move funds between subsidiaries on demand . 25 These qualifications should be kept in mind in analyzing data on the record profits of foreign affiliates . Aggregate data conceal variations by sector and area of investment whereas rates o return depend on the accuracy

21/

J .S . Arpan, International Intercorporate Pricing (New York, Praeger, 1971) .

See United States Department of Commerce, United States Direct Investments 22 Abroad '1966' Part II : Investment Position Financial and Operating Data (Washington, D.C ., Social and Economic Statistics Administration, Bureau of Economi Analysis, 1972), Group 2, BEA-SUP 72-01, Table 6 . 'See also, for United 'ngdom practice, Brooke and Remmers, op. cit . , pp . 203-206 . 23 I Brash, op, cit . , p . 77, and W. Winiata, "United States Managerial Investment in Japan, 1950-1964, An Interview Study", unpublished doctoral dissert tion, University of Michigan, 1966 . 24 Indian ' See, for example, Reserve Bask of India, Foreign Collaborations_in dust -`(Bombay, Examiner Press, 1968) .

For a comprehensive analysis of financial practice, see Robbins and 25 Stobaug4, op . cit .

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and relevance of figures on stock of direct investment . Thus, in the period 1965-1968, United States multinational corporation operations were twice as If petroleum profitable in developing countries as in developed countries . is excluded, the difference is smaller both for the United States and the United Kingdom. This reflects the fact that the profitability of petroleum operations is several times higher in developing countries than in developed market economies . This difference is partly explained by the oil companies' preference for declaring profits, for tax purposes, in the producing countries rather than in the countries where they refine and market their products . This example highlights, once more, the flexibility with which multinational corporations conduct their global operations and indicates that data on earnings should be interpreted with caution . Ownership policies Profit management is closely related to ownership policies . As has been shown earlier, multinational corporations generally prefer their foreign Control is the variable that leads to this affiliates to be wholly-owned . preference . Nevertheless, there are many firms that actively search for joint venture partners . It is the strategy of expansion which generates the particular ownership policy adopted by any one firm . 26/ Some strategies require such tight, centralized control that conflicts with local partners would be intolerable to the parent company . For example, strategies dependent on cost-reduction through the building of specialized networks rely on the ability of the firm to subordinate the affiliates' interest to that of the whole . Strategies emphasizing the exploitation of new technology create such serious problems of reaching agreement with local partners on what constitutes a fair return for the technology contributed and such problems of controlling proprietary knowledge that joint ventures are avoided. 27 When innovation in production is the basic strategy, firms prefer to capture themselves the monopoly rents from their technological lead. Furthermore being sole owners of the technology, such firms retain a strong bargaining Once the technology slips out of the position vis-&-vis a host government . 28 innovator's hands, this advantage is eroded. In the chemical industry, for example, .there is evidence that firms can insist on complete ownership only for products at the beginning of their life cycle ; for more mature products firms can do so less frequently, because of the number of competitors willing to grant licences . 29

26/

See Stopford and Wells, op. cit .

27 For a discussion of this aspect of the problem, see Junta del Acuardo de Cartagena, Transfer of Technology, UNCTAD, TD/107, 197128/ For examples drawn from IBM activities in India and Japan, see J. Baranson, "Technology transfer through the international firm", American Economic Review, May 1970. 29 R.B . Stobaugh, "The Product Life Cycle, United States Exports and International investment", unpublished doctoral dissertation, Harvard Business school, 1968 . _36.

e multinational corporations following any of the above strategies do not find the contribution of a local partner especially useful, other multinational corporations following alternative strategies might regard such a contribu ion as valuable . For instance, firms actively diversifying their product Xines abroad turn to local partners for marketing skills appropriate lines. Such partners can often increase the speed of entry into to the the local market and can also increase the number of markets that can be tackled ously . Where the diversified lines abroad differ from those at home, simult particularly for some United Kingdom-based multinationals, central supervision In such cases, local partners can be is much looser than for other lines . 30 readilylaccepted . Multinational corporations in raw materials industries, though they pr er wholly-owned subsidiaries for the extractive operations, sometimes turn to local partners when they enter local manufacturing operations. Oil compani s, for example, will share ownership of refineries, particularly if that way in which they can obtain continued access to the local. market, is the

my

As corporations shift their strategies, so their ownership policies change . incr"se in centralization of control, particularly when accompanied by an An organiz tional change to area divisions, has tended to reduce the Dropensity of firms to enter new joint ventures and increase the propensity to buy out ex~sti partners. 31 This tendency towards "denationalization" has given rise to tens ons in some host countries . As firms continue to expand and develop their f reign interests, it is likely that ownership policies will continue to be adam 3 to new requirement Itlis probable that many more firms, at present oriented mainly or exclusively to their home markets, will be drawn into the international arena . Most of~these firms will be based in developed countries, but firms based in develop ng countries may increasingly follow suit. Already the beginnings of such a rend are observable in Latin America and the petroleum-exporting countries . These wcomers are likely to encounter the same problems as those faced by others efore them and to respond accordingly . probab without will be reorga Their a be trie traini And, as attitud meeting tinational corporations with extensive foreign interests will most continue to grow and to diversify their product lines . To do so allowing diseconomies of scale to overwhelm their special skills, they forced to experiment with new forms of organization . The recent zations referred to above are the beginnings of such experimentation . ccess is far from certain, however, and other approaches will undoubtedly A large increase can be expected in expenditure on communications and in order to enhance the abilities of firms to harmonize their policies . firms promote to senior positions foreign nationals who do not share the s and objectives of their 'home' country colleagues, the need for will become even greater .

30

See, for example, Safarian, op. cit . , p . 93 .

31/ I L.G. Franko, Joint Venture Survival in Multinat ional Corporations (New Yolk, Praeger, 1972), Ch. .

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rill

Advances in data processing and in techniques for transmitting information help to speed this trend towards greater harmonization of policy throughout omplex global systems. These advances will be particularly important for firms hich are building specialized networks of interrelated production. Many mor e firms will be forced to specialize production within free trade areas and some attempt greater specialization on a global scale . As these trends develop manufacturing firms may find joint ventures harder to live with and attempts day be made to buy out existing partners and to own new facilities outright . The vertically-integrated multinational corporations are likely to present complex change in ownership policies . Until recently, they have generally used wholly-owned facilities in the extractive and primary processing operations, and joint ventures for downstream operations (at the final stages of fabrication, and distribution) where control is less critical than access to markets . But many are losing their oligopoly positions, as new entrants or governments become able to set up their own extractive or processing facilities . In order to re-establish some barriers to competition, these firms will probably try to ',develop a greater degree of control at downstream stages, for example by ddeveloping new technology . Thus, joint ventures may become increasingly lacceptable to these multinational corporations at upstream stages and less ',so downstream . L2/ The general trend towards centralization and tighter control indicates ~!increased conflict with governments as they become more insistent upon a greater degree of local participation and influence . Although changes in the (relationships between foreign investors and host governments are indicated, the (nature of these changes is as yet uncertain . Most probably, in any given country, 'there will be combinations of various alternatives, depending upon the power and the contribution to the local economy of the investor concerned . Increasingly novel forms of ownership arrangement will come into being . (Multinational corporations may be allowed unambiguous control for as long as they (make a critical contribution that cannot be made by others . As that contribution (diminishes, so local control will increase . Various 'fade-out' arrangements have Already been implemented and more are appearing in the legislation of developing (Countries . There are many problems in identifying contributions with sufficient 'clarity for the purposes of writing a contract, but doubtless these will be Overcome as the multinational corporations realize from experience that ownership for a limited time is not necessarily against their interests .

The use of management contracts is also likely to become more frequent . ere the multinational corporation can make a contribution and at the same time am profits without having the tie of owning physical assets . Such contracts e already widely used by consortia of construction firms in developing untries . Some, particularly marketing contracts, are appearing in the manufacturing sector. Management contracts in production may be closely tied to ~ew forms of royalty agreement .

L2/

See Stopford and wells, op . cit .

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The attitudes continue of links . members o the growi national form o i when it c would eve

sourcefulness of multinational corporations in the face of changing d regulatory legislation is boundless . They will most probably expand on some fronts, retreat on others, and to develop new types But the increasing power of host governments individually or as a regional group to insist on participation if not outright control, sentiment in some home countries for stricter scrutiny of multiorporations, and the fact that first tentative steps towards some ternational action have been taken, suggest that the days are gone uld be predicted with some justification that the world economy tually be dominated by a handful of giant firms .

Summary The enormous size and spread of multinational corporations and their high rates of growth during the last two decades have dramatically expanded the areas in which corporations can affect international relations and economic development. Any action in respect of multinational corporations, however, must be based on a thorough understanding o their nature and motives and ways o behaviour . Corporations become multinational for a variety of reasons, usually connected with the protection of their oligopolistic position . Reduction of uncertainty, continuous growth and the retention or enlargement of their share of the market may be as important as the pursuit of immediate profits . Originally the desire to The decline in their control raw materials was reflected in a dynamic expansion in the area of natural resources . dominant position in this field reflects the gradual diminution of their initial advantage as suppliers of funds, technology and skills, as well as action by many host countries . In manufacturing, investment abroad was stimulated by increasing barriers to trade which threatened exports . In industries where a high degree of research effort is employed, it may appear more advantageous during the later life of a product to invest abroad than in the country of the original innovation . More recently, however, specialized factories producing components for shipment to other countries, based on cost considerations, have assumed increasing importance .

-4o-

The rapid expansion of multinational corporations has required complex schemes of organization . greater centralized control. In most cases, more flexible systems have been replaced by The centralization is In stricter in some areas, such as financing, although variations exist by product, nationality and area. a global context, the free movement of funds is the bloodstream of the corporation . royalty payments being only two . same purpose . It is achieved through Transfer pricing and various methods, not all of them obvious - dividends and other practices are also extensively used to achieve the Methods and organizational schemes are The need to exercise control constantly being adapted .

is reflected in the preference o multinational corporations for wholly-owned subsidiaries, although control can at times be achieved through joint ventures and even minority positions . Often the strategy of expansion generates the particular ownership policy adopted by any one firm. On the whole, the manifested resourcefulness and flexibility of multinational corporations in the face of changing internal and external forces underlines their almost boundless capacity for adaptation . This attribute should permit them to adjust to new realities in the light of efforts by governments at the national, regional and international levels to prevent multinational corporations from exerting undue influence .

III .

IMPACT AND TENSIONS

The multinational corporation in international relations Contemporary international relations take place on different stages and involve many actors . Although the nation-state is the most important participant there are'others, including non-governmental entities, which interact and ' compete with governments in shaping and participating in international relations . Non-governmental bodies can participate in international relations by influencing the policies and actions of their own governments, or by influencing the policies and actions of foreign governments, either directly or through non-governmental entities in those countries . In the latter case they bypass their own _governments, although the consequences may affect those governments' policies and actions . Furthermore, modern communications permit non-governmental entities to affect the environment in which international relations take pace by influencing tastes, values and attitudes . Given their world-wide spread and significant role in the world economy, multinational corporations are one of the main non-governmental participants in international relations . Yet, despite the fact that their activities cover many countries, that they participate in diverse economic and social systems, and that their interests extend around the globe, there are no "world citizens" by whom multinational corporations can be staffed. The equity of such corporations the top management of their global operations tends to be in the hands of and citizens of their home countries . At the same time, their interests do not necessarily coincide with those of the home country, but rather reflect the particular objectives of the corporation. As has been suggested above, multinational corporations can participate in and affect international relations in various ways . Multinational corporations link the managerial and other personnel employed by them in home and host countries in transnational structures . Given the strong and sometimes even dominant role of these individuals in both home and host countries, and the relations established by multinational corporations with local groups and lites having similar interests, these corporations are often close to the centres of political power and can thus influence the affairs of nations . This influence can also extend directly or indirectly to the distribution of income and the allocation of resources .

For a discussion of this subject, see, among others, J .S . Nye and 'R .O . Keohane, "Transnational relations and world politics", Introduction, ( International Organization, vol . 25, 1971; Aldo Ferrer, "El capital extranjero glen la economia argentina", El Trimestre Economico, April-June 1971 ; T .H. Moran, I"Transnational strategies of protection and- defence by multinational corporations : !i Spreading the risk and rising the costs for nationalization in natural resources" lin Iuternaional Organization, vol . 27, Spring 1973 . pp. 273-269 ; J,N. Hehrmen, Wational Interests and Multinational Rnter^rise : Tensions among tae Norm Atianzic Countries Inglewood, H.J . , Prentice Hall, 1970), pp . 101-113-42-

inational corporations can also have an impact on international elations . by contributing towards placing countries in interdependent or r dependent positions from which governments may find it difficult to extricate themsel s except at considerable cost . To a large extent such dependence and interde . ndence results from the fact that the operations of the multinational corpora ons are controlled from outside the territory of the host country and that th policies of the multinational corporations are based on considerations scend those of host as well as home countries . 2/ Sometimes the which t reluct ce of governments to pursue policies in respect of multinational corpora ions that are desirable from their national point of view may be due to thei concern about the repercussions which may result from the reactions of ruments . Such inhibitions may also stem from arrangements which home g multina ional corporations might enter into to protect their interests . Those can res~lt in bringing pressure to bear on a particular government by influencing foreignl official or private lending and insurance agencies, customers, and other firms . , M tinational corporations can also wilfully or involuntarily affect the relatils between the governments o home and host countries . Problems experienced by a multinational corporation in a particular host country may in some ca es have a determining influence on the policies of the home government . In othe instances, multinational corporations may be used by home governments as vehicle# for the implementation of their foreign policy. Multinational corporations not only participate in and affect international relations, but are also themselves affected by the pressures and limitations that arise ont of the interaction o other actors, chiefly governments . Foreign operations by governments with respect to anti-trust measures, strategic export control, foreign investment (balance of payments) controls, etc . may prompt conflic s among states which can significantly affect multinational corporations . The nation-state and the multinational corporation Th: global operations of multinational corporations within the framework of nation- tates frequently give rise to conflicts . While conflicts arising out of diverge4cies between the private objectives of a profit-making firm and the social welfare goals pursued by a government can apply to domestic as well as national corporations, there is an important difference in the capacity of governments to resolve such conflicts. Those of a purely domestic nature can be settled by the "pouvoi~ supdrieur souverain" of the government through its policies and regulat*y machinery . Given the nature of the multinational corporation, however,) conflicts between governments and such corporations assume greater and morejcomplex proportions . Governments often feel a lack of power to deal effectively with powerful multinational corporations . Indeed, no single national

!For example, the quasi-official Watkins report on Canada stated that "the mos 1 serious cost for Canada resulting from foreign ownership is the intrusio of (foreign) law and policy into Canada . For Canada, the essential feature f the problem is not the economic cost, but the loss of control over an impor-ant segment of Canadian economic life ." Foreign Ownership and the Structur of Canadian Industry, (Ottawa, 1968), p. 345 . _43 ..

urisdiction can cope adequately with the global phenomenon of the multinational orporation, nor is there an international authority or machinery adequately quipped to alleviate the tensions that stem from the relationship between ultinational corporations and nation-states . The possibility of conflict is most apparent in host countries . Differences ~n objectives are exacerbated by the location of the decision-making apparatus Of the multinational corporation in foreign centres . In many developing host countries especially, the suspicion is often expressed that the multinational orporation serves as an alien agent to extend "imperialistic" domination and perpetuate politico-economic dependencia . 5/ Even in developed host ountries, foreign control of key sectors by multinational corporations is egarded in many quarters as a serious infringement upon political independence, ad even sovereignty itself . In spite of such strong reservations, however, the majority of governments l!of host countries have, on the whole, encouraged foreign direct investment . 'Indeed, through their offers of generous incentives, governments at times lappear to be bidding against each other in efforts to attract multinational ccorporations . In encouraging the entry of multinational corporations, host ggovernments seem to look upon their contribution as positive, although at the lsame time they tacitly attempt to obtain an acceptable trade-off between political, economic and socio-cultural costs and benefits . Since such calculations have usually been made ex post and especially during the later life of an investment, when costs appeared to supercede benefits, tensions have often been jgenerated. Furthermore, recent changes in world economic structures, which Ih~ave resulted in wider options being made available to developing countries, 'have with political changes within these countries and enhanced knowledge bout the operations of multinational corporations have frequently led to a e-evaluation of "trade-offs", and to the adoption of new policies towards oreign direct investment, including the renegotiation of cont-acts and fade-out f participation arrangements . When considering economic costs and benefits, governments are sometimes ( aced with a dilemma. On the one hand, they judge that multinational corporations can contribute to the rate of increase of income and exports, and an raise the level of technology, employment and managerial know-how . On the

i 3/ 0. Sunkel, "Intgration capitaliste transnationale et ddsintgration *ationale en Amdrique Latine", Politique Etranghre , No . 6, 1970, and "Big business and 'dependencia' : a Latin American view", Foreign Affairs, vol . 50, 972 ; Celso Furtado, "La concentraci6n del poder econ mico,UU . y sus royecciones en America Latina", Estudios Internacionales , Ano I (Santiago, 968) . See Foreign Ownership and the Structure of Canadian Indust , Report tIf the Task Force on the Structure of Canadian Industry, Privy Council Office, Ottawa, 1968), p . 339, and J.J. Servan-Schreiber, Le DEfi Am6ricain ~~Paris, 1967) .

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d, they recognize that multinational corporations can also undermine tal priorities, fiscal and monetary policies, and income distribution gover The polici s, and may have an unfavourable effect on the balance of payments . is a function of the difficulty of grasping all the implications and dile also 0 maintaining an adequate perspective on differing long and short-term effect Small developing countries are the most vulnerable to this dilemma, eir limited expertise, the inadequacy of the information available given to the*, and their limited political bargaining power . B contrast, most developed host countries belong to a network of advanced econo c, and even political, relationships which allow for more successful econ c and political bargaining . Possession of scarce resources is, of course an added advantage and one that is increasingly being used in the bargai ing process between host governments and multinational corporations . e political aspect o the host country-multinational corporation relationship i* assuming greater importance as multinational corporations continue to expand~and as national independence in many countries has lent immediacy to the is*ue of sovereignty over natural resources and key industries, and as episods of disguised or overt political interference have come to light . Another source of tension lies in the introduction by multinational corporations of for~ign cultural values and the dilution of the host country's heritage . In home countries, an old debate has recently been rekindled concerning the econo c and political implications of investing abroad . The beneficial effects on emp oyment and balance of payments have been disputed by various groups, partic arly by organized labour . Governments of the home countries have also f nd, at times, that multinational corporation activities tend to circumvent or even disrupt their trade, fiscal or monetary policies . Political ramifications in home countries arising out of the operations of multinational corporations have also come under increasing scrutiny, as they can leald to conflict with other governments . Such tensions between governments arise t only from political confrontations in support of multinational corpor ions, but also from jurisdictional problems . Although issues of jurisdi tion are common in international economic relations, multinational corpor e activities have magnified the problems of extraterritoriality, and of tax oop-holes or of overlapping taxation . 2/ Sot sources of tension can be clearly identified from the existing evidence, some arr still largely a matter of conjecture . But the pervasiveness of tensions suggest that the sources are not imaginary. Further studies on the impact of multina Tonal corporations in fields where the present evidence is inadequate, such as employment and the development path, would contribute to a better underst ding of the problem and probably aid in efforts to establish a new modus which tensions could be reduced and interests reconciled . vendi

in

51 See, among others, A . Fatouros, "The computer and the mud hut ; notes on multi. ational enterprise developing countries", Columbia Journal of Transnat onal Law , vol . 10 (1971) ; D .F. Vagts, "The multinational enterprise : enge for transnatlonal law", Harvard Law Review, vol. 83, (1970) . a new ch ,

in

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The multinational corporation and the host country vereignt In a certain sense, the manifold operations of foreign-based multinational Ilcorporations and their pervasive influence on the host country may be regarded as a challenge to national sovereignty. The challenge has, moreover, economic, !,social, political and cultural dimensions which are frequently inseparable from one another . The tensions and conflicts thus generated are, likewise, the (result of complex interaction between many agents in many areas . Frequently, the multinational corporation is perceived as capable of circumventing or subverting national objectives and policies . g While foreign affiliates can and often do choose to integrate their activities with national plans, the mere possibility of their being able to choose - and to afford to do so - is unsettling for host countries, developed as well as developing. Generally, the powerful multinational corporations possess a variety of options in response to governmental policies . This is particularly so in the case of manufacturing affiliates for which locational advantages are not rigidly jdetermined . In contrast, affiliates involved in the field of natural resources !have more limited locational options, since they are tied to the sources of raw (materials, and hence are more susceptible to governmental incentives or pressures . On the other hand, it is the operation of the multinational corporations ',in the field of raw materials which gives most immediacy to the issue of !sovereignty, especially in developing countries . The presence of multinational 'corporations in the extractive industries is highly visible ; they own. land in the host country and they make decisions involving the extraction of usually nonrenewable natural resources . The principle of permanent sovereignty over natural resources, generally ,accepted by the international community, ~ is raised when disputes arise over !the control and distribution of benefits . Similarly, foreign plantations and (land operations pose particularly sensitive issues of foreign intrusion. When !nationalization is resorted to, the question of adequate compensation frequently ,arises . In some cases, attempts by multinational corporations to seek better ,compensation through legal action and sanctions by governments and financial institutions tend to escalate the conflict . See, J.N . Behrman, National Interests and Multinational Enterprise ,

~op . cit .

YJ According to the Report of the Task Force on the Structure of Canadian ,Industry, op . cit . , "The tendency inherent in direct investment to shift decision"king power in the private sector outside Canada, has on occasion posed serious problems for those responsible for formulating Canadian policy, and has created widespread unease among Canadians as to the continuing viability of Canada as an !independent nation-state ." See General Assembly resolutions 525 (VI) of 12 January 1952, 626 (VII) f 21 December 1952, 1314 (XIII) of 12 December 1958, 1515 ()Cv) of 15 December 960; 18; (A=) of i4 December 1962, 2158 =I) of 25 November 1966 and 2692 .3 XXV) of 11 December 1970 ; and General Principle Three, adopted at the first ession of the United Nations Conference on Trade and Development (UNCTAD) . -46-

4 Natio~ s1 objectives and planning +'he issue of sovereignty is related to the ability of the host country to sh#pe its own objectives . These objectives may be explicitly formulated in a national plan . Differences in both scope and content between national and crporate planning are sources of conflict. 2/ It is not certain whether affil aces of foreign multinational corporations will sacrifice essential needsTT of the corporate global strategy in order to fulfil the requirements o the n tional plan . For instance, where the focus of the national plan is on rural development, or on the traditional sector, multinational corporation opera ions may concentrate on urban areas or on the modern sector . Where the plan aims at more equal distribution of income, the effect of natio multi ational corporations may be to accentuate inequality . Where the creation oyment is a major goal, the techniques and products introduced by the of e multi ational corporations may be largely labour-saving . Moreover, the creation of wa is similar to those of the developed societies through advertising may creat a pattern of consumption that is unfavourable to development . t the same time, the difficulty of reconciling national and corporate objec Ives may be partly due to deficiencies in the national plan . In many cases plans fail to provide adequate guidance for the activities of the private sectc , whether domestic or multinational corporations . When plan objectives are clearly stated and concrete measures are put into effect, multinational corporations may in fact be responsive to them . 10/ Pattern and process of development Often it is not the divergency in explicit objectives but the subtle impact of the multinational corporation on the process and pattern of development that is the source of tensions and conflicts . the operations of multinational corporations may be 1~o begin with, destr tive of the local economy. For instance, the introduction of machinemade ods may contribute to net output but only at the expense of displacing handic aft products . Although this is a common phenomenon in the process of moder ation, caused also by domestic enterprises, the ousting of local produc s by the output of multinational corporations and the displacement of indigenous entrepreneurs by foreigners are highly visible and much resented .

In contrast to the national private sector, managers corpor tions do not usually participate in the preparation of becaus they are not thought to share national aspirations or not gi n the authority by the parent company to commit it on

of foreign the plan, either because they are essential issues .

LO/ According to Behrman, there is evidence that multinational corporations have i many cases responded favourably by locating in-depressed areas, e .g . Firestone, Goodyear and Courtaulds settled in depressed areas of France. See, J .N. Belhrman, United States International Business and Governments (New York, 1971), p. 36 .

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on the other hand, when a multinational corporation operates in a more or less self-contained fashion, without any significant change in the old order, as though an oasis had been created in a desert, the question arises as to whether much benefit can be derived from the "enclave" . Indeed, the enclavetype of activity may be considered a typical case of "growth without development", in the sense that fundamental economic structural transformation fails to take place on a broad basis . In practice, even a foreign enclave has some links with the local economy. The linkages of multinational corporations with the host country economies, however, may sometimes be tenuous or limited . Recent studies suggest that almost half the inputs of foreign firms are supplied locally . The ratio is lower for export products than for those oriented toward the local market . Although the local share is not insignificant in most cases, it may fall below the host country's expectations . From the point of view o the process of development, it is not only the amount of local inputs but also the type that is important . This depends on the activities of the foreign affiliates themselves . It is often observed that foreign affiliates tend to be "truncated" . In other words, they do not "carry out all the functions - from the original research required through to all the aspects of marketing - necessary for developing, producing and marketing '(their goods. One or more of these functions are carried out by the foreign parent" . ],~j Thus, research and development, and components and services, 'especially the more sophisticated, may be procured from the parent company or ',elsewhere . While such practices may be rational from the point of view of the ,global strategy of the multinational corporation, they are seen by some as an ',instrument for increasing the dependence of the periphery on the centre . More ,generally, the structure of industries in the host country may be so lopsided las to hinder sustained development . 12 This is most glaring in cases where ose sectors, such as luxury articles ',activity is highly concentrated in catering for the few, which have limited prospects of interaction with the rest ',of the economy . 13 Indeed, not enough has been done either by the multinational corporations themselves or by governments to channel corporate production towards ~Isatisfying basic consumption needs in nutrition, health and housing .

11, Government of Canada, Foreign Direct Investment in Canada (Ottawa, I 1972Tp . 405. 12/ H.G . Johnson, "The multinational corporation as an agency of economic (development : some exploratory observations" in B. Ward, L. d'Anjou and J .D. Runnals, eds. The Widening Gap : Development in the 1970s (New York, 1971) . 13 S .H . Hymer, "The efficiency (contradictions) of multinational corporations", American Economic Review , LX No . 2, May 1970 .

I has long been recognized that private direct investment through the multi tional corporation is unique in providing from a single source a packag of critical industrial inputs : capital, technology, managerial skills and o er services required for production and distribution. scale requirements of present research and development activity, the decre e of technological and commercial risks in the development of new products and processes through multi-product and/or multinational operations, as the specific organizational requirements for the application of science well and t hnology to economic needs, give a particular comparative advantage to the tinational corporation . Quite often this advantage has rested on its to combine for commercial use different developments in science and abili technology for which the basic research was undertaken elsewhere . $needd, multinational corporations generally do not undertake major innov*tive research without visible prospects of a substantial market, unless they ire subsidized . Thus, although a large part of commercialized technology is injthe hands o multinational corporations, the basic knowledge often origi#ates in government-financed research and training centres . 15 The contributions of multinational corporations derive from their ability to combine different kinds of lasting knowledge into commercially viable processes and ptoducts . In other words, the expenditure on technology financed by the corporation is in most cases related to practical development rather than to basic research . the part of research. and development expenditures undertaken by the busin~ss enterprise sector appears to be concentrated in a few firms . For examp~Le, in 1964 in the United States, of more than 2,000 firms which reported rese*ch and development activities, 28 accounted for about 63 per cent of the total's. Similarly, in France, 16 out of 440 enterprises accounted for 43 per cent of total research and development expenditure . 17

See tables 38 to 40 in annex III. a si enter 1863_ in th agenc Unite 24 .9 Austr 1 According to the Organisation for Economic Co-operation and Development, ificant part of the research and development performed in the business rise sector was quite often financed by governments . For example, during 4, of the total business enterprise research and development undertaken United States, 51 .2 per cent was financed by defence, space and nuclear es. The equivalent percentages for other countries were as follows : Kingdom 32 per cent (1964-65) ; Sweden 25 .8 per cent (1964) ; France er cent (1964) ; Federal Republic of Germany 13 .5 per cent (1964) ; a 10.7 per cent (1963) . See Organisation for Economic Co-operation and pment, Gaps in Technology, Analytical Report (Paris, 1970) .

In 1965 in the United States, out of total company-funded activities only- .5-per cent-went . to basic research. See Organisation for Economic Co-oporation and Development, op. cit . , pp . 130 and 165. See Organisation for Economic Co-operation and Development, Gaps in Ge neral Report (Paris, 1968), p . 15 . -49-

Furthermore, the bulk of the research and development financed by corporations is done by the parent corporation or in the home country of the parent . For instance, in 1966 only 6 per cent of the total research and development budget of United States multinational corporations engaged in manufacturing was spent abroad . As far as developed economies, which serve as both home and host countries, are concerned, technology flows and payments for them move in both directions between buyers and sellers., with different net effects depending on their relative magnitude . For developing countries on the other hand, the flow is predominantly or exclusively in one direction. The significance of this one-sided flow is illustrated by data on six Payments by these countries for developing countries in the late 196os . 18 patents, licences, know-how and trademarks, as well as management and service fees, amounted to approximately 7 per cent of their combined exports and to a little more than half of 1 per cent of their combined gross domestic product. The total cost for such payments for 13 developing countries, representing 65 per cent of the total population and 56 per cent of the total gross domestic product of developing countries, is estimated at approximately $1 .5 billion, which amounts to more than half of the flow of direct private foreign investment to developing countries . These payments are growing steadily at a rate which is estimated by the UNCTAD Secretariat at about 20 per cent per annum on the average and are absorbing an increasing proportion of the export earnings of developing countries . L9/ Estimates of royalties, however, may distort the true payments for know-how in various ways . The distortion may take the form of overpricing of intermediate products and capital goods, which are tied to the imports of technology, or the underpricing of exports to the suppliers of the technical know-how . Since royalties constitute only one of the channels of effective income remission, especially in the case of wholly-owned subsidiaries, changes in royalty payments do not necessarily imply changes in technology flows . They may simply reflect a readjustment in the distribution of returns among the different channels of income remission as a result of corporate strategy and government policies . The effect of technological advances on the international market, given the existing concentration of products and know-how in the hands of the multinational corporations, has become one of the main causes of monopoly or oligopoly control . This is reinforced by the existence of specific legislative provisions, such as the patent laws, which give exclusive power !, over the use or licensing of certain innovations . The dedication of significant amounts of resources by the multinational corporations and their corporate i commitment to technology is largely induced by the expectation of monopoly

18

Argentina, Brazil, Colombia, Mexico, Nigeria and Sri Lanka .

19 See United Nations Conference on Trade and Development, Transfer of !Technology, TD/106, to November 1971 .

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rents effor and s is p just

from new products and processes, as well as from the need to match the s of other such firms in order to protect their market participation are . Since the technology supplied by the multinational corporations prietary and part of it is patented, an issue arises about the ication and impact of the system of patents and trade-marks . 20

~t should be noted that an important part of the technology required for most industries in developing countries is not subject to patents ; the Grit s1 limitation these countries face is access to proprietary know-how . Then is now a significant tendency to modify and strengthen the apparatus of national and international patent institutions into vehicles for the storage, retrieval and dissemination of industrial information and for facilitating direct contacts with licensors and other sources . ultinational corporations are only one source from which enterprises in deve ooing countries mey acquire proprietary technology and management . For some technologies the options may be limited, but the situation is continually than ng. Host developing countries are increasingly taking steps to reappraise the hanging supply conditions for technology with a view to obtaining technology which will yield a larger measure of social benefits, as well as replacing imported proprietary technology and other factors with local inputs . The policy objectives of host countries in this area have been multiple . The aim has frequently been to capture a larger share of a given net benefit in the use of technology from the local affiliates of foreign firms and/or to increjase the total size of the benefit to be divided by promoting greater dome~tic value-added and various socially desirable "externalities", such as lot skill formation . Another strategy has been to explore the possibility of disaggregating the package of foreign inputs, particularly by obtaining . technology and management through commercial channels separately from capital . Amon the alternatives are foreign minority joint ventures, licensing of proprietary information and management contracts, sometimes in various combinations or, in the case of so-called direct or "embodied" imports of know-how, by contracting for the construction and running-in o "turnkey" plants and by the direct purchase of specialized industrial equipment . part from reflecting negative attitudes towards control by the multi ational firm and other motivations, the search for alternative vehicles for t e acquisition of proprietary technology implies a recognition, particularly

The positions taken range from the extreme view of denying the economic justification of the patent system on the grounds of a theoretical "first best" welte alternative of state ownership and distribution of all such industrial technology, to the advocacy of some tightening of regulations over the award to and use by licensors cf such legal rights . "Turnk:Y: arrangements refer to contracts with foreign enterprises where the rolf the latter is limited to establishing and bringing the plant into a position to begin operations .

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by governments of developing countries, that the market conditions under which such technology is available, whatever the transfer mechanism, are those of an imperfect competitive market reflecting, on the one hand, a degree of market control or oligopoly by the suppliers and, on the other, various limitations on the bargaining power of enterprises in the host country and of the government of the home country itself . 22 Another and increasing concern of the developing countries is whether the technology obtainable through the multinational corporation and other commercial channels is appropriate to their conditions . This is only part of the larger issue of the development and choice of appropriate technology - particularly in relation to the problem posed by superabundant labour and scarce capital and by the limited size of domestic markets - but the prominence of the multinational firm as a delivery vehicle for such technology and as a major agent of centralized research and development activity naturally focuses attention in respect of this problem on the performance of multinational corporations . Employment and labo 23

On the whole, the net employment impact on the host countries is positive since extreme cases of destruction of local industries and wholesale displacement of labour are rare . At the same time, the direct employment contribution, by foreign affiliates is modest in a global Derspective . 24 This is indicated by data from the United States which is 'the largest contributor . In 1970, the total number of employees of United States majority-owned foreign affiliates amounted to about 3 million . When direct employment by foreign affiliates of other countries as well as other United States-controlled affiliates is added, it is probably no more than 13 or 14 million ; this is a small fraction of total employment in market economies . The indirect employment effects, largely arising out of the use of local suppliers, distribution channels and ancillary services, are, of course, much larger, but the total employment impact, while significant for the modern sector, is still modest in the context of the total economy . For the developing countries as a whole, the employment contribution of foreign affiliates is small in relation to the massive employment problem .

22 See Walter A. Chudson, The International Transfer of Commercial Technology to Develo ing Countries, United Nations Institute for Training and Research UNITAR , Research Report No . 13 (New York, 1971) and a series of related UNITAR Research Reports ; also UNCTAD, Guidelines for the Stud the Transfer of Technology to Developing Countries, December 1972, United Nations publication, Sales No . E .72 .II .P .19 .

23 see, International Labour Organisation, Multinational Enterprises Geneva ; and Social Policy, Studies and Reports, New Series, No . 79, ILO, 1973)L4/ Grant Reuber, "Private foreign investment in less developed countries", paper presented at International Meeting of Directors of Development Research and Training Institutes, Belgrade, 28-30 August, 1972.

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This a ears to be especially the case in respect of foreign affiliates' partic'pation in the extractive industries which, when operated on a large In Venezuela and Chile, for example, scale, are highly capital intensive . the importance of oil and copper, labour employed in the combined despit petrol um and mining sectors accounted for 2 .3 per cent and 4 .1 per cent, respec ively, of the total economically active population in 1960 . Moreover, there ppears to be very little growth in employment in the foreign-operated large- sale extractive industries. the other hand, the effect of foreign affiliates on employment in specific localities is often a major attraction in a given multinational torpor tion project . This is especially true of depressed areas, where the location of a plant can make a significant contribution to solving the local unemployment problem. There is thus a tendency towards keen competition for the foreign enterprise among the various localities . ~reover, the contribution through "learning by doing", especially for techni~Ca1 and professional employees, may be significant. 2~/ Thus, an OECD study shows that for a sample of 50 foreign investment projects, local clerks and accountants accounted for 97 per cent of the staff concerned, and supervisors 90 per cent, sales and marketing personnel 80 per cent, forem There is, moreover, a management and engineering personnel 73 per cent. time, especially in the tende y of the local share to increase over professional categories . Furthermore, many managers and technicians move Nevertheless, the particular from reign affiliates to domestic enterprises . ski31sj learned may be more suitable to the activities of foreign enterprises Similarly, they may be associated with than for national development . technologies that are inappropriate for local conditions . 27 e relatively high labour standards generally adopted by foreign In some host affili ates of multinational corporations are a mixed blessing . wage rates paid by multinational corporations are several times countries, the higher than those prevailing elsewhere . The creation of an Mite labour group raise irritating questions of competition, especially for technical personnel, with ]local enterprises . It also accentuates distortions in the wage structure, betwe occupational and skill groups as well a; between rural and urban areas . Moreover, the standards imported from highly developed economies gradually tend to be opted as a national norm, although they may be beyond the means of lesseloped host countries, especially from the point of view of inter tional competitiveness and employment . Constantine V. Vaitsus, Employment and Foreign Direct Investments in es, Junta del Acuerdo de Cartagena, Devel in Countries : Some Notes and F' o Rev . 1 (Lima, 1973) . mimeo aphed document J AJ 35 Council for Latin America, The Effects of United States and Other 26 Fore3 Investment in Latin America New York, 1970 ,, p . 5 .

25

27

Grant Reuber, op . tit .

Another source of tension is the impact on local labour when local plants are shut down in line with a global strategy . Although there is little evidence that this happens frequently, when it does occur the adverse effects are highly visible and attract public attention and reaction . Balance of payments28 Evaluating the impact of multinational corporations on the balance of payments of host developing countries is no less complex a task than evaluating the impact on other economic variables . If the evaluation concentrates on the capital flow of direct investment, the effect on the host country is undoubtedly positive . For the developing countries as a whole, direct investment amounted to $4 billion in 1971, almost half the total official bilateral and multilateral flows . At the same time, if the earnings generated by past investment which accrue to the foreign affiliates are deducted from that flow, the net flow is generally negative for host countries . Between 1965 and 1970, net foreign direct investment inflow into 43 developing countries was 30 per cent of the investment income outflow . If the oil-producing '. countries in the sample are excluded, infl-,u was 68 De-- cent of outflow: L9 The difference reflects the differ , ':g time ^&tter .s of capit l flow and earnings rather than the balance of payments effect ;,_ - -=ren investment . Nevertheless, 0ping ~,u`_,. s where the :, D often a problem, ,f the excess of this outflow over inflow has been a fa:aiar source of tension with multinational cor7=ations . Such tension is particularly likely' to Occur corporation has operated in the host country for in cases where a mul~ na .'ion a an extended period o_' time and where the outflow of investment income increasingly exceeds the inflow o_' new capital . _.. addition .C the effect on the capital ac_^urt and the irves;.merit income account, a foreign w____iate also generates imporus and experts . if it is assumed that these imports and e::ports would no otherwise be made, the trade effect on the host countries is generally positive, In Latin America, for example, in 1966, United States affiliates exported about $4.5 billion of their products and imported about $1 .3 billion of materials and supplies . When all the direct effects on the balance of payments accounts are taken into consideration, the net result in developing countries is usually positive, though it is more visible in the case of extractive industries than in the case of manufacturing, because manufacturing affiliates are heavily oriented towards

28

See also tables 41 to 43 in annex III.

L9/ Another calculation of the flows, adjusted for petroleum, shows that between 1964 and 1968 the United States and the United Kingdom (representing 80. per cent of total foreign direct investment) received approximately $5 .8 billion from developing countries (in investment income) and paid $3 .2 billion (in capital- flow) . See, W .A .P . Manser, The Financial Role of Multinational Enterprise, (Paris, International Chamber of ommerce, ~, PP- 17-30 .

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producti n for import substitution rather than for export, a fact which usually reflects the host government's industrialization policy . 30 At the same time, nts effect may be partly limited by export-restricting practices the pa followed by the multinational corporation, and moreover, the import bill may be infla , ed by tied-purchases and over-pricing . 31 The direct balance of payments effects of foreign affiliates do not, of course, answer the question of what the total effect may be . Thus, to the direct e fects must be added the indirect effects resulting from the fact that the inc es and sales promotion generated by affiliates raise the level of income d thus induce higher consumption of imports and possibly even lower the export supply of some domestically produced goods . 32 At the same time, insofar s the affiliate may serve as a "growth pole" stimulating the establishment of complementary domestic industries, it may also generate additional exports from the local production of other firms . Basic to the entire calculation of total trade effects is the question, at present unanswerable, whether the foreign affiliates' output is entirely additional to what would otherwise be produced or whether local replacement of output can be assumed . When all the indirect effects are taken into account, the estimated net result vlaries with the assumptions made . For instance, a study of the impact of import-substituting United States manufacturing investment in developing country s reached different conclusions depending on the model used . 33 The onelased on the assumption that no local replacement was possible indicated a positive impact on the balance of payments of developing countries ; the other, assuming local replacement, indicated negative impact in the case of Latin America,'I and neutral in other developing areas . Ot er case studies made under the auspices of UNCTAD examined the over-ail effect f several foreign manufacturing affiliates in Colombia, India, Iran, Jamaica, Kenya and Malaysia. L4/ It was found that in 55 per cent of a sample of 159 oreign firms, the impact was positive . In the case of the other firms, it was concluded that it would be cheaper for the host country to substitute its own capittal for the existing foreign capital . However, 60 per cent of the firms

30 iAmong 159 foreign. firms in Colombia, India, Iran, Jamaica, Kenya and Malaysia, 53 per cent had negligible exports or no exports at all . See, P.P. Str eten and S . Lall, UNCTAD, Main Findings of a Study of Private Foreign Investmet_ in Selected Developing Countries , TD B C .3 111 , 1973 . 31 ISee UNCTAD, Private foreign investment in its relationship to develo m nt (TD/134), 1972. 32 See detailed discussion in David Robertson, "The multinational enterprise : trade fl s and trade policy" in John H. Dunning, ed ., The Multinational Enter ri e, (London, 1971) . 33 ISee G.C . Hufbauer and F.M . Adler, Overseas Manufacturing Investment and the Bala4ce of Payments , (Washington, D .C ., United States Department of Commerce, 1966 See, UNCTAD, TD/B/C .3/111, op . cit .

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fall around the demarcation line between positive and negative impact, and only 21 per cent show a clearly positive, and 11 per cent a clearly negative, impact . on the whole, the study indicates that no conclusive results can be obtained . Uncertainty is high, as conditions change and effects differ greatly from case to case . In host developed market economies, the impact of foreign direct investment on the balance of payments appears on the whole to be positive . In so far as evidence is available, the export performance of foreign affiliates seems to be as good as that of domestic firms and often better. It is better in the United Kingdom, for instance, where United States affiliates in manufacturing export on the average a quarter of their output - a much higher proportion than that of the average United Kingdom firm. 15J It is equal to that of domestic firms in Canada and is increasing steadily. 36/ But it was also found, in Canada, that in a large number of cases foreign affiliates followed exportrestrictive policies . This is apparently a reflection of the marketing strategy of parent companies, which try to protect export markets for themselves or for their other affiliates . They may also be obliged to resort to this practice either as a result of international market sharing with other multinational corporations, or in response to the governmental policies of the home country . A large share of exports is, moreover, represented by intra-company sales . In the United Kingdom, half the exports of United States affiliates were made to affiliated firms . In Canada, as much as three-fourths o all exports of foreign affiliates were accounted for by intra-company sales in 1969 . 37 Such sales suggest a large scope for transfer pricing and the vulnerability of the host country's economy to foreign governmental or corporate policies . As far as the import content of purchases by the affiliates is concerned, it appears to be relatively small in the case of United States affiliates in the United Kingdom and more important in Canada . Thus, three-quarters of the imports of foreign affiliates in Canada (which amount to one-third of their total purchases) originate with other affiliates and almost all the imports of United States affiliates originate in the home country. L8/

J.H. Dunning, United States Investment in Britain (London, 1972) . 36 A .E. Safarian, Foreign ownership of Canadian Industry (Toronto, 1966) . The share of exports of foreign affiliates to their total sales increased from 18 per cent in 1964 to 28 per cent in 1969 . See Foreign Direct Investment in Canada (Grey Report), op. cit . The increase in this share from 52 per cent in 1964 largely reflects 37 the very rapid increase in exports of motor vehicles under the CanadaUnited States Automotive Agreement . In 1969, more than four-fifths of the exports of foreign affiliates were made to the United States, while only half of total Canadian exports were sold to the United States .

35/

For the effect of short-term capital flows, see section on implications for the international monetary system below .

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Socio-cltural considerations Thelpassage above has concentrated on the more tangible considerations . Even hers, however, it is important to interpret these considerations in a - broad se e . Thus, the issue of sovereignty is not simply jurisdictional but is inti tely related to the rise of nationalistic feelings which may acquire special ing as a rallying political force for cementing diverse interests and grou s, especially in developing countries . The issue of development is not merely a matter of maximizing the growth rate of output but is inseparable from social n eds and style of living. Even with questions of employment and balance of payme ts, it is sometimes the less tangible aspects that are more important .
1

The strong reaction against the multinational corporation in some host countrie must therefore be understood in the broad socio-cultural context . Zhe mere I presence of powerful foreign enterprises may serve as a reminder o past foreign domination . The popular sentiment expressed in the form of consumer boycotts against the home country of certain multinational corporations testifies to the broad base o such sentiment and the readiness to make economic sacrifices . In ny host countries, there is growing dissatisfaction over playing a peripher role, quite apart from the economic consequences . 39 Host developing countrie are, moreover, suspicious of the multinational corporations' style of doing th ngs . Their financial power and easy access to the top hierarchy o governme t and business may be used, openly or covertly, to influence the domesticjpolitical process to their liking . Such alien influence is especially resented'Iby local lite groups, such as intellectuals, government cadres, labour and business leaders, who see themselves as contenders for power and guardians of the values and heritage of the country . The multinational corporations, through t~eir tacit alliance with certain social groups, may even be regarded as obstacles to appropriate social and political development. The stentatious living styles of foreign personnel as compared with those of domest c employees are a source both of envy and resentment . Styles of i ee Raul Prebisch, Towards a New Trade Policy for Development, 39 (United N tions, 1964) ; also, according to M. Wionczek in R . Vernon, ed ., tin-!14 ca ew re (New York, 1965) : "The efforts of oreign c ital to perpetuate the political and economic dependence o Latin America o the industrial countries, particularly dependence on the United States, represent robably the single most important element in the growing conflict between f eign private capital and Latin American society", p . 13 . See also Edith Pe se, "The State and Multinational Enterprise in Less-Developed Countries" in J. Dunn ng, ed ., The Multinational enterprise, op . cit ., and Andreas G. Papandreou, Paternalis is Capitalism, (Minneapolis, 1972) . Even in host developed countries, similar vi s have been voiced ; see, for instance, the 1969-1970 Re ort and Accounts 3f the Ind trial Reorganization Corporation , (London, 1970 . Britain has also to protect he vital industrial interests as a state . . . if this was neglected Britain :ouid find_itself becoming a branch office economy where - industries vital for Powth, to ology or defence were either absent or entirely directed from )ther parts) of the world." p. 17 .
1

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li management directed towards efficiency but insensitive to local cultural values may appear to people in the host country as arrogant and dehumanizing. Even the local people who receive a good technical training through working with the multinational corporations may be regarded as unduly influenced by alien values . Although these reactions may change with the change in attitudes on both sides, the intensity of the feelings that have been aroused should not be under-estimated . The multinational corporation and the home country Tensions between multinational corporations and their home countries have generally been kept down . Many home countries which are also hosts tend to view their own multinational corporations as a countervailing force to those of other industrial countries . European countries, for instance, often view theirs as an answer to the "American challenge", while Japan has endeavoured to make the activities of its multinational corporations consistent with its national objectives . The chief home country to raise serious questions about the impact of its multinational corporations is the United States, whose experience as a host country is as yet very limited . These questions range from domestic economic effects to balance of payments and foreign policies . Multinational corporations have been blamed for "exporting jobs" through "run-away plants" and for making high technology available to foreign lands or taking advantage of low-wage foreign labour . Moreover, the option open to the multinational corporation to locate plants in foreign countries tends to weaken the bargaining power of domestic labour . As in the case of the consideration of the effect of multinational corporatii on employment, trade and the balance of payments in host countries, there is considerable uncertainty about the effects on home countries, the conclusions depending upon the assumptions made regarding what the alternative to the A recent multinational corporation's activities would be likely to be . 40 employment in the United study on the effect of investment abroad on domestic States between 1966 and 1970 shows that, under certain assumptions, the presence of United States plants abroad may have resulted in a net loss of 400,000 to 1 .3 million jobs . Under an alternative assumption, the net effect may instead

United States Senate, Committee on Finance, Implications of 40 Multinational Firms for World Trade and Investment and for United States Trade and Labor Washington, D.C., 1973 .

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have been a gain of about 500,000 United States jobs . 41 Moreover, there were import ~t industry differences . While most of the assumptions made are hypothetic ap., the result nevertheless demonstrates the importance of the underlying assump ions in any assessment . M tinational corporations have also been blamed for deficits in the United States balance of payments resulting from capital outflows and an allege reduction in the rate of increase of exports . Here also studies have indica ed that different assumptions, regarding such questions as whether UnitedIStates enterprises would have lost their export markets abroad if they had no~ made the investment, yield different results . T*king into account all the considerations, the governments and social groups thelhome countries, especially the United States, are increasingly concerned of with t~4e implications o the activities of multinational corporations . The key issues not whether the home country should hamstring or do away with the multin tional corporations, but how their behaviour may be influenced so as to correspond more closely to a set of enlightened national and international objectives . Zn this connexion the entire range of policies and institutions, including tax, money, and trade and anti-monopoly machinery, will have to be reviewed.

It should be mentioned in this connexion that the findings in five out of six earlier studies dealing with the domestic employment effects of fore,' investments by United States multinational companies were that such inves ents had caused United States employment to increase . See, for example, Business International, First Report on the Business International Investment and Trade Study (New York, 1972 ; Emergency Committee for American Trade, The Rae of Multinational Corporations in the United States and World Economies , . Nations :,- Association of Manufacturers, vols and II Washington, D.C., 1972) U.S . S take in World Trade and Investment (New York, N.Y.) ; National Foreign Trade ouncil, The act of U.S . Direct Invas-..nent on U.S . Employment and Trade (New York, 1971 ; Stanley Ruttenberg, ~;eeded : A Constructive Foreign AT Trade olicy" (;,FL-CIO, 1971) : Robert Stobaugh and associates, U.S . Multinatio Enterprises and the -~ .S. Economy (Cambridge University, 1972) ; U.S . amber of commerce, Multinational Enterprise Survey (Washington, D.C ., 1972) .', . 42 See, G .C . Hufbauer and F .M. Adler, op cat . ; Raymond Vernon, The Ec nomic and Political Consequences of Multinational Enterprise : An Anthology Boston, 1972) ; Robert B. Stobaugh, U.S . Multinational Enterprises and the U.S . Economy (Washington, D .C ., United States Department of Commerce, 1972 ; Susan Foster, "Impact of direct investment abroad by United States multin tional companies on the balance of payments", Monthly Review, Federal Reser Bank of New York, July 1972 .

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Implicatio ns for the international monetary and trade regimes The responses of host and home countries to the activities of multinational ~i corporations may in turn be a source of tension between these countries . Action land reaction tend to be escalated, unless great restraint is exercised. Many icountries have probably underestimated the international repercussions of their ',own actions . Thus, nationalization of property by some host countries, and "extra' territoriality" as practiced by some home countries (e .g. in the area of 'anti-trust law, security and exchange disclosure requirements, export controls !l and balance of payments regulations) raise many difficult jurisdictional issues . The extension of anti-trust policies abroad, for instance, although it may at times benefit the host countries by preventing monopolistic practices, can collide with the policies of host countries that encourage mergers as a way Export controls motivated by political to rationalize their industr .es . considerations can arouse political tensions in addition to conflicts of economic interests . At the same time, the double allegiance of the subsidiaries is put to critical test . These problems underline the far-reaching implications of multinational corporations, not on!-., for host and home countries but also for international implications for the international monetary and trade regimes ; relations . The as well as some jurisdictional issues concerning taxation of multinational corporations which are in the forefront of world attention, should be especially noted . Implications for the international monetary system it has often been suggested that m-Ctinational corporations are capable of Credit undermining the monetary policies of host as well as home countries . example, have the same effect on multinational restraint does not, for corporations as on domestic firms in the host country because the former have greater access to the resources of the parent . Similarly, tight monetary conditions in the home country can be circumvented by shifting funds from subsidiaries . Most recently, multinational corporations have been linked to the viability of the entire international monetary system . L, particular, the jolted massive movements by multinational corporations against the dollar have workability of the existing rules . the exchange parities and thrown doubts on the There is no doubt that multinational corporations could precipitate a currency crisis if they were to move only a small proportion of their assets from one currency to another . At the same time, "hot money" movements would have resulted regardless of the degree of participation by multinational I corporations, given fundamental condition's of disequilibrium that the monetary system is not equipped to correct .

The vast amount of liquid assets owned by multinational corporations, to the the of several hundred billion dollars, is often cited as a source of potential danger . / During the recent currency crises, massive inter nationa movements of funds were a well-known fact . At times, central banks had to bsorb several billions of dollars in a single day. The "current assets" of foreign affiliates are frequently cited as a measure of the magnitu e of the funds which multinational corporations can move at will at times o exchange disturbance . Foreign assets of local banks are used as a similar measure . It should be observed in this connexion, however, that currentlassets include inventories and receivables as well as cash balances . Not all of them are immediately convertible into other currencies, nor are they strict comparable to international reserves . Moreover, a substantial compon t of the assets reported for United States banks consists of "collections outstanding for account of reporting banks and domestic custom s" and "acceptances made for account of foreigners" . These are not altogether available to the United States banks to be shifted at will to oth r currencies in moments of crisis . Even after such allowances are made, owev6r, the orders of magnitude involved are substantial .
1 1 -4

Alnumber of multinational corporations have correctly stated that currency speculation is not their business and that predatory and destructive motivations s7?oul4 not be attributed to them. Yet the decision-makers of multinational corporations, which have assets and liabilities in different parts of the world land a variety of currencies, mast take into account risks resulting from shifts in the exchange rates . uite apart from purely speculative activities, exchange rate questions enter into management decisions almost ever, day . Assets denominated in a cur envy which may be depreciated can be protected by a forward sales cont ct. Similarly, liabilities in a currency that is expected to be reval ed can be covered in a forward purchase . In this connexion, it is not the current assets or cash balances alone that are subject to exchange rate rieks6 A broad range of assets and liabilities is involved which may in turn be re ponsible for a stream of future flows. Thus, at the end of 1970, foreign affiliates of United States firms had outstanding borrowings equal to about $11 ion, half of which had maturity dates in 1976 and beyond . It is clear that l*dverse movements in the exchange rate can significantly increase the burden of servicing the debt . Protective measures against exchange risks do not necessarily have to be take for each transaction or each subsidiary. If the decision-making with respect to currency operations is centralized, as long as the expected exchange-rate shift does not result in a net exchange loss, no action may be

See, United States Senate, Committee on Finance, Implications of Mutt national Firms for World Trade and Investment and for United States Trad and Labor, Washington, D .C ., 1973

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(considered necessary . Where action is required, the amount that may be shifted lis not limited to the current assets or cash balance alone, since the ability Ito operate on the foreign exchange market depends on the over-all availability lof credit to the firm. Nor does a shift of funds necessarily involve the foreign exchange Ilmarket . Various techniques of "leads and lags" can be employed . For example, 'laffiliates in undervalued currency areas may be instructed to speed up (collections and reduce their liabilities . 44 In addition, if a devaluation 'is expected in a given country, the parent may instruct the affiliate to lincrease borrowing locally and make pre-payments to the parent or other Conversely, payments to the affiliate affiliates in the hard currency area. may be deferred . In view of the variety o ways in which multinational corporations may affect the stability of currencies, however, the recorded transactions do not usually reveal the whole story . Currency transactions through banks, for example, do not reveal the identity of particular clients . Nevertheless, the large increase of claims by United States banks to $2 .94 billion in 1971 from an average of $300 million in the previous five years, reflected shifts in currency holdings financed by short-term loans . A further substantial increase was recorded in 1972 . There is also some evidence in the large increase in intra-corporation claims of United States affiliates from $1.4 billion in the first three quarters of 1970 to $2 .7 billion in the same period in 1971 . This was apparently in anticipation of the exchange realignment prior to the Smithsonian agreement . A reversal of 'this flow of $0 .9 billion was recorded Similar behaviour is observed with respect in the fourth quarter of 1972. to Japanese firms in changing claims on United States affiliates . In addition to recorded transactions, the "leads and lags" and speculative movements are partly reflected in errors and omissions in the balance of payments accounts . In 1971, outflows from the United States recorded in errors and omissions amounted to $ll billion, almost half o which occurred in the third quarter . This compared with the average of $1 billion per year in the 1960s . After reversing the flow in the first quarter of 1972, errors

44/ Multinational corporations often use a single invoicing centre to serve a large market area. The centre can use different time-periods for issuing invoices and enforcing collections located in different currency areas .

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and omi sions once more indicated increased outflows and reached as much as $4 .2 billion in the first quarter of 1973 . 45

L5/ The net short-term outflow during that quarter was estimated at $7 .0 bl lion. This sum consisted of interest rate-sensitive funds, including a large increase in bank loans to foreigners who drew on their lines of credit, and funds moved via "leads and lags" in commercial payment. Further, despite a reduced trade deficit, deterioration in net invisible transactions might h ve caused the current account deficit to approach $2.0 billion (on a seaso ally adjusted basis), from $1 .6 billion in the fourth quarter of 1972. There w .s most probably a reduction in repatriated earnings of foreign subsidiaries of United States companies and shifts of funds out of United States dollars and into foreign currencies because o the considerable uncertainties in the foreign exchange markets culminating in the devaluation of the nited States dollar by 10 per cent on February 12, 1973 . Following a decline in confidence in sterling in June 1972, errors and omissions in the "overseas sector" of the United Kingdom during the seconquarter of 1972 registered an outflow of 883 million, compared to an inflow of 229 million in the same period of 1971 . A part of the outflow was duo to an acceleration of payments for United Kingdom imports and a delay in payments for exports . Additionally, United Kingdom barks shifted funds to the best of the world by 215 million in the second quarter of 1972, as comparell to an inflow of 263 million during the same period of 1971, and an over-all inflow of 2532 million in the fourth quarter of the same year . when t inflow millio previo In the case of the Federal Republic of Germany in February 1973, realignment of the value of the United States dollar occurred, the f funds was DM 5,938 million on short term capital and DM 6,961 on unrecorded transactions, both of which were negative during the month.

In the case of Japan, on the other hand, short-term capital inflows rose to $2,435 million for 1971, and $2,035 million for 1972 (compared with an annual average during the preceding five years of a little more than $300milion . Japanese foreign exchange banks reduced their net position in foreign currencies by $2,808 million between August and December 1970 (in anticipation of the revaluation of the yen) and again by $178 million in January 1973 . Similar currency shifts, reflecting the disturbances in the interns Tonal currency markets occurred in all the developed market economies . The abo e examples demonstrate the magnitude of currency movements in anticipation f exchange rate realignments in which both financial institutions, non-fin cial institutions, and multinational corporations appear to be involved .

These volatile short-term capital movements reflected the international !financial mobility that followed external convertibility of major world !currencies toward the end of the 1950s . They also reflected significant !interest differentials among the major money markets, as monetary policies ,have assumed greater importance in influencing the pace of business activities ',which have not always kept step in different countries . In addition, recent developments have demonstrated that exchange rate fluctuations, even among the major currencies, can be significant. 46 Although the future international monetary system is still to be ,determined, some of the underlying reasons for short-term capital movements :will continue to exist . The money markets of the financial centres of the !,world have been closely knit together and thoroughly entrenched in 'institutions, such as the Euro-currency markets and branch banking across the frontiers. The stability of the future system will thus depend on the ,degree of success in avoiding massive speculative movements . In considering the various alternatives, it should be noted that in practice it is extremely difficult to distinguish speculative from ordinary transactions . Moreover, recent experience with various systems of exchange controls indicates that unless they are extremely rigid there are bound to be many loop-holes . At the same time, rigid exchange controls are fraught with familiar dangers . There is therefore no easy solution, other than a reform of the international monetary system and a reorientation of national policies which would provide for fundamental adjustments in the face of changing circumstances . At the same time, no matter how responsive to fundamental adjustments the system may be, the question will remain as to the need for compensatory capital arrangements as well as for some measure regulating, or at least monitoring, short-term capital movements under an international scheme in a future monetary rgime . Any such scheme should take into account the long-term implications of the operations of multinational corporations for the international monetary system, as well as the impact that a new system would have on these operations . In the past, foreign investments by multinational corporations have been stimulated by overvalued currencies in home countries . Income remitted by affiliates to parent corporations tends to increase the demand for the currency Such of home countries and the supply of the currency of the host country. demand on home country currency did not occur in the case of the United States dollar in spite of the expansion of United States foreign direct investment because of the existence of the Euro-dollar market . To some extent existence of this market is due to United States foreign investment but it has also served as a source of funds for further investment by multinational corporations . 46/ Pierre-Paul Schweitzer, "International Investment and the World 'Monetary System", an address to the Financial Analysts' Federation, (Washington, D .C., 8 May 1973-

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It is possible that in the long run the natural tendency of the multina Tonal corporations to concentrate their vast funds in hard currencies, coupled with their enormous ability to shift these funds internationally even in the presence of strict capital controls, will tend to increase the frequency of parity changes or amplify exchange rate fluctuations . ions for the international trade regime de is still a basic ingredient in monetary and payments equilibrium. Yet, for the multinational corporation, trade and capital movements are partialy interchangeable options . Thus, in the general framework of decisiT ns on the location of activities, exports from domestic plants may be replac4d by investment and production abroad . A trade barrier may, for exampl*, induce capital flow in lieu of trade flows. At the same time, the multinational corporations are in themselves a major orce in world trade . In many countries, a few multinational corporations are responsible for a significant portion of exports of manufactures . Moreover, intra- orporation trade has also grown in importance . Trade between parent firms ~nd their affiliates, as well as among the latter, represents a major compongnt of the total operations of multinational corporations . Since the goodsnd services entering intra-corporation trade do not involve "arm's length transactions (i .e ., transactions with non-affiliated firms at marketjprices) their prices are not determined by the market mechanism but by the'corporations themselves . A firm's transfer prices are designed to satisf a variety of requirements, and a number of factors are taken into accoun in determining their level, including the tariffs of the importing count , absolute and differential tax rates, actual or expected exchange rate d fferentials, government policies on royalty payments and profit trans f rs, the need to satisfy equity holders both in the home and host county es and numerous others . Transfer prices can also include payment for part o the corporation's global overhead cost much of which is incurred by the p ent firm. T~ese characteristics have significant implications for the international trade regime . In the first place, the link between trade and investment has not as~yet been adequately reflected in current trade negotiations . While trade negotiations might conveniently come under the auspices of GATT, a negoti ting machinery and set of rules concerning investment and other activities of multinational corporations are as yet lacking . L7 Another implication is that the predominance of intra-corporation trade Thus, exports may repder the tra~}itional adjustment mechanisms less sensitive . of machinery to affiliates or imports of components from them are unlikely to be ii uenced by minor cost changes, once the location of activities has been decide This may render trade insensitive not only to domestic price changes but also to exchange rate adjustments . The lag in the improvement of the United'IStates trade balance following exchange rate adjustments may have been partly[influenced by this consideration .

47

See below for suggestions for a programme of action. - 6 5-

A further implication for the trade regime is that trade conducted ) .argely by multinational corporations tends to be influenced by oligopolistic considerations . Host countries tend in turn to react to the large size of tinaticnal corporations by strengthening their bargaining positions . Some these measures are undoubtedly protectionist in character, but most of hem tend to reinforce the oligopolistic tendencies on both sides of international trade . In such circumstances there are real possibilities of mounting disputes or even trade wars . Whatever the trade regime may be, t is increasingly difficult to assume that the automatic rules of the invisible hand" will operate smoothly. The gravitation toward large bargaining units is reinforced by the volution of regional trading groups . Basically, these groups apply two ets of trade regimes, one for insiders and the other for outsiders . They tend to encourage multinational corporation activities within a group . t the same time, they also encourage, intentionally or.unintentionally, the location of activities by multinational corporations based in other groups . this tendency may, however, be increasingly neutralized by discriminatory measures against foreign affiliates . These measures range from scrutiny of investment, as well as finance, to anti-monopoly regulation or even rice ~olicies . It is evident, then, that in a world in which the activities o ultinational corporations predominate, the international trade regime cannot pe isolated from the international investment and monetary regimes or from domestic and regional policies . Taxation and related jurisdictional issues Governments and multinational corporations pose certain unique problems each other in the field of taxation. which are not found in the relationfor These problems Phip between governments and purely national corporations . 48 arise primarily in the area of the corporation income tax . While this . i s the most widely used instrument of taxation, its ubiquity is not matched by Oiformity ; the taxation of corporate income varies significantly from one Oountry to another . Differences among countries are found not only in the tax rates - which usually range between 35 and 50 per cent of profits - but also in the definitions of taxable income, in the principles that govern taxing jurisdiction and in practices in making allowances for foreign taxation . In the face of these differences, the problem of the allocation of a Multinational corporation's world-wide income among the taxing jurisdictions of the countries in which it operates assumes particular importance . The 4location affects, on the one hand, the tax revenue of the corporation's home country and the various countries in which the subsidiaries are located, d on the other the corporation's over-all, tax bill .

48 The individual income tax is often related to corporate tax since countries seek to avoid over or under taxation of corporate profits by the combined thrust of corporate and individual income tax. A part of the large problem of how to tax corporate profits is the question of how to treat d$vidends, undistributed profits and capital gains on the sale of corporate scares . -66-

case by a anoth an in for t profi overh

e of the most troublesome aspects of the allocation problem in the f multinational corporations is that of "transfer pricing" . The sale rent company to its foreign. subsidiary, or by one subsidiary to ,r, of intermediate goods used as inputs by the purchaser is affected at ernal so-called "transfer price" . Since there is often no market price e goods in question. and their pricing or. the basis of cost plus a normal raises problems of costing - notably with respect to the allocation of ad cost - the setting of the transfer price can be quite arbitrary .

ince the price at which goods are transferred determines the profits of th parent company or subsidiary which sells the goods, and the subsidiary which uses them in its production process, the distribution of a multinational corpo ation's world-wide profits among_ its various units depends on the level at which the transfer price is set . The corporation, operating within several tax j isdictions, can minimize its over-all tax bill by establishing an artif cial transfer price which will, inflate the profits of subsidiaries locat d in'countries where the tax burden is lowest and limit the profits earne in countries where taxes are higher. The tax authorities in the vari count see, not having access to al:. the relevant data in the books of the paren . firm and the affiliates, cannot determine their consolidated profits or evaluate the reasonableness of the transfer prices . They must therefore base heir tax assessment on 'he book profits o-" the enterprise within ` .,heir ju Ls ist.ion . the setting of transfer prices at unreasonable levels can not only serve to minimize a corporation's over-all tax bill, but can also be used to circumvent exchange restrictions, minimize customs duties, satisfy local partners of foreign subsidiaries and for a variety of other purposes . In order 'ito avoid disputes and uncertainty arising from the problem of transfer pricing, a few countries, including the United States ~~and the Federal Republic of Germany, have made or are ma_'king an effort to formalize certain rules to be followed for transactions "not at arm's length" . Further action in this field will need to be taken if existing anomalies are to be eliminated . T~e problems that surround the taxation of multinational corporation activities are further exacerbated by differences in the taxation principles followed by various countries . While every country claims the right to tax incomelarising within its borders ("territorial" principle), some also claim the right to tax income arising outside their borders when that income is receiv d by a corporation incorporated, domiciled or with its centre of control withinjthe country ("world-wide" taxing principle) . In these circumstances, a clai to tax income arising abroad implies double taxation. It also implies that competition among firms within a given host country will take place under differ*nt tax rates if the home countries of these firms follow different taxation principles . 49 . The concern over the regulation of transfer prices and the transfer of techno ogy readily fall under the jurisdiction of existing national tax laws . The United States Treasury, for example, has elaborated some acceptable methods for determining the allocation of research costs . Such elaborations were designed to define more precisely the taxable income arising from these transac~ions . See Detlev F. Vagts, "Multinational enterprise", Harvard Law Review, I vol. 83 No. 4, PP- 767 and 770 . I -67-

In fact, however, those countries which tax income arising beyond their borders grant tax credit on account of " foreign taxes paid on income from . foreign sources, usually up to the level of the domestic tax rate . 50 In the United States the credit provision is very broad, encompassing both withholding taxes and corporate income taxes and extending down through three tiers of foreign subsidiaries . 51 This unilateral credit reflects the willingness of the United States Government to give priority to the host aountry in taxing corporate profits while it retains the power to set the lower limits of the combined taxation . On the other hand, if a foreign government grants a tax holiday and if the subsidiaries repatriate their profits to the United States as dividends during that holiday, the absence of tax in the host country confers no benefit on the United States corporation . The tax holiday only remains effective if earnings are not repatriated during the holiday period . Although the "world-wide" taxing countries have unilaterally granted credit for income tar_ paid abroad, double taxation or undertaxation has not been altogether avoided. Partly for this reason, several developed market economies have concluded bilateral tax treaties, which are designed to ensure that foreign taxes paid by multinational corporations incorporated in or managed from a world-wide taxing country will not encounter the problem of "excess taxation" . Such excess taxation is especially apt to arise if, in addition to a substantial corporate income tax, the government of the host country imposes heavy withholding taxes on dividends, interest and royalties paid by the foreign subsidiary to its parent firm. Under the tax treaties, contracting countries agree to limit their withholding taxes to relatively low levels . Developed countries have been able to reach agreement on such treaties chiefly because of the similarity of their economies and the existence of a two-way flow of income between them. Since the flow of investment income between developed and developing countries is predominantly in one direction - from the subsidiary in the developing to the parent in the developed country - the latter cannot offer a meaningful concession to its partner in exchange for an agreement by the developing country to keep its withholding tax rates low and tax treaties between them are therefore rare . 52

50 If the host country's tax rate is higher, the difference is not refunded by the home country. In effect, it is the higher of the two rates that applies . For a brief history of the United States foreign-tax credit, see, 51 United States Senate, Committee on Finance, Implications of Multinational Firms for World Trade and Investment and for U.S . Trade and Labor Washington, D .C ., 1973 , pp. 7 -75 . A group of tax experts established under the auspices of the United 52 'Nations, under Economic and Social Council resolution 1273 (XLIII), has been 'formulating guidelines which reflect a compromise between the interests of (developed and developing countries . A broad consensus has already been achieved ',',on a majority of issues .

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Instead of inter-country agreements on tax matters, developing countries have tended to conclude agreements with multinational corporations concerning a specific project or group of related projects . They refer chiefly to the gran ting of tax relief as an investment-inducing,measure, and usually also include such non-tax matters as convertibility of earnings at a fixed rate and other benefits . Tax relief ranging from generous depreciation allowances to tax holidays has also been granted independently of agreements between govern*nt and corporations by both developed and developing countries . Some sn*ll countries observing the territorial principle and also taxing profit .} at zero or very low rates have attracted multinational corporation subsi aries and holding companies . While these countries benefit from the financial and commercial activity that grows up around the subsidiaries, the multinational corporations, by making their profits appear to be within the jurisdiction of the "tax haven", minimize their over-all tax burden . The effectiveness of the incentives granted depends in part on the attitude of the home country. Whereas some encouragement has been given to multinational corpor tions to invest in developing countries, 53 agreements between host countr es and multinational corporations are not allowed to contravene the tax la s of world-wide taxing home countries . Furthermore, there is a discer ible tendency among hc-ne countries which follow the territorial principle to mov towards the world-wide taxing principle and to tax profits when they are repatriated and in some cases ever. when they are not . ~e question of the discontinuation of tax deferrals for nor,-repatriated profit$ is probably most urgent in countries belonging to common markets . In the'European Community, efforts have been made towards the gradual harmonization of direct taxation . 54 Another -force that is gradually making for more uniform taxation of multinational corporations arises out of dissatisfaction over the variety of methods at present employed to integrate the corporate and individual income !,tax . 55 Many countries fear that ether countries' methods of integration may become more attractive to direct investment . 56 Decisions on 53, For a list of United States measures that encourage investment in developing countries, at least relative to investment in foreign developed countries, see Implications of Multinational Firms . . . op . cit . , pp. 71, 124-25, 882-84 .', This list is important, since the great majority of multinational corporations are based in the United States . . ." ibid ., p . 868 . See "Tax harmonization measures planned for first stage of the proposed 54 economi~ and monetary union" in Euro can Taxation, vol . 11, No . 3, March 1971:. Work inlthe field of taxation is s~Ty the Organisation for Economic Co-oper*tion and Development, through a new Committee on Fiscal Affairs establihed in 1971 . See Carl S. Shoup, Public Finance (Chicago, 1969) . 55 L6J~ For a lengthy description and analysis, with many numerical examples, see "A comparative analysis of the classical, dual rate, and imputation taxation systems and an examination of the corporate tax systems in Belgium, France; Germany, Italy, the Netherlands and the United Kingdom", European Taxation, vol . 12, Nos . 5 and 6, Say-June 1972, pp . 1/112-174 .

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investment and the distribution of profits are affected by countries' policies regarding the taxation of distributed and undistributed profits in connexion with taxation of dividends . In some countries, shareholders are given tax relief for profits taxed at the corporate level, in others, a "split rate" tax is used under which distributed profits are taxed at reduced rates . Among the European Community countries, there is now a tendency to move towards the relief of the shareholder method, as witnessed by the recent There is finally a large adoption o this system by the United Kingdom. 57 number of countries, including the United States and most developing countries, which do not accord relief for distributed profits . Withholding taxes on dividends, interest and royalties paid to recipients abroad, on the other hand, are often regulated by tax treaties . Although it does not appear that an immediate crisis in the taxation of multinational corporations is pending, there is a tendency to long-term deterioration that could eventually result in drastic unilateral actions by governments, or even by the corporations themselves in respect of their investment decisions .

United Kingdom, "Tax Reform", European Taxation , vol . 12, No . j, 57 March 1972 .

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