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The Evolution And The Development Of Multinational Corporations

The Evolution and the Development of Multinational Corporations



American and European Countries Multinational Corporations

The domination of American in the development of Multinational Corporation has been widely identified (Nussbaum, 1980). This idea of the multinational corporation, according to Hymer (1979), was initially based on the American perspective. The precursor to this is the United States’ “national corporation”, which was created at the end of the 19th century when American capitalism developed a multi-city and continent-wide marketing and manufacturing strategy. These state-chartered companies were considered multinationals at least to the extent that they represented a business organisation with economic goals projected on an international stage (Reardon, 1992). Prior to 1970s, most of the early studies tend to examine the United States foreign investment activity. This process began in the latter part of the nineteenth century when American industry began to supersede its European rivals. 


The United States was economically self-sufficient during the half century, between the end of the Civil War and its entry into World War I. This resulted to the halt of the internationalisation of Corporate America. But when World War I forced the U. S. to be exposed to the outside world, its ideological isolationism changed dramatically. This unforeseen turn enabled the U. S. to learn various foreign business policies and to study how foreign corporations coped up from economic and political dislocations caused by a major continental war. Corporate America then realized that the U. S. and its economy had been isolated, virtually untouched by world events The effect of World War I to the economy of the U. S. included forming irreversible commitments by larger oil, paper, copper, nitrates, rubber, and aluminium companies to foreign investments to ensure their companies’ futures. However, some consumer-driven companies such as General Motors, Goodyear, General electric, and Du Pont had less aggressive foreign expansion. These foreign ventures had the geographic spread qualifications of  “MNCs” yet, in terms of corporate management and finances, they were American companies with “subordinate” foreign branches that acquired their justification because they served some specific limited objectives.


While World War II and America’s involvement therein halted the limited foreign expansion of the late 1930s, this was to become the window, which saves America a global perspective. Because of the recession and isolationism after World War I, many developing multinational corporations quickly withdrew from the global economy. The only U.S. corporations and true multinationals in the late 1940s and early 1950s were in the primary sector. These corporations anticipated real shortages, so they had to invest in the Middle East, Latin America, Africa, and Canada. Some even went so far as to rebuild their pre-war processing or distribution facilities in Europe. American corporations expanded their businesses into Latin America. But it was limited by labour-intensive industries’ establishment of assembly facilities in countries with depressed economies and an ample supply of cheap, unskilled labour.


The first real impetus to the multinationalisation process in the industrial and service sectors was developed during the late1950s. The United States direct investment abroad increased nearly fivefold, from $12 billion to $55 billion between 1950 and 1965, and by the end of 1980, the total was approximately $220 billion. America’s massive post-war aid to war-ravaged countries, allowed the international economy to recover sooner than expected. It formed a healthy and favourable economic climate for corporate expansion, reaching its zenith in the period 1960 – 1980. Following its victory in the war and in response to the Soviet challenge, the United States created in its own security interests the pattern of relations among the non-Communist countries within which American MNCs have flourished. In addition, the advances in transportation and communication, the introduction of the computer, and massive rebuilding requirements in Europe coincided with the rapid growth of American multinational corporations. Perhaps it was the common market that stimulated the multinationalisation of America’s manufacturing and service enterprises.


The response of European businesses to the expanding and developing U. S. MNCs was to join the MNC system rather than to challenge it. The European firms were already multinational, though their overseas expansion had been somewhat frustrated by balance of payment restrictions. As a result of mergers, nationalisation and growth, other firms became better equipped for multinational operations and began to extend their international operations in other European countries, in underdeveloped countries, and even in the United States. Therefore, the MNC system was no longer an American system, but at the very least became a North Atlantic system both in the sense that Europeans joined the MNC ranks and in the sense that American firms became less tied to the United States.


European, specifically British, capitalism has traditionally practiced capital export like portfolio investment and loans. In the 19th century, Great Britain’s direct investments were invariably infrastructure investments (Hall ed., 1968). In the 20th century, it has been largely in manufacturing, particularly in the growth sectors of advanced or rapidly developing countries. These investments were accompanied by mass migration of labour. Management, capital, and technology have gone as a package to foreign lands in search of labour, markets, and resources. In the 19th century, at least in the so-called lands of recent settlement (Canada, Australia, the United States, and South Africa), management and operating control usually remained in local hands (see Table 2.0).


Most of the original investment made by European countries to the USA was of the portfolio variety. Direct investments made in the US manufacturing sector near the end of the 19th century included capital from the British in textiles, primary metals, and food and beverages, and from the Germans in chemicals, beverages and electrical equipment. Subsidiaries in the United States were established during this time by such familiar MNCs as Bayer (in 1865), Merck, Geigy, Bosch, Siemens, Daimler, Lever Brothers, Dunlop, Michelin, and Nestle. By nationality, British holdings ranked first followed by German holdings. By type of portfolio, manufacturing ranked first, finance next, then transportation. The following (Table 2.0) is a comparison table between British and American foreign investment


Table 2.0: British and American Foreign Investment



British, 19th century



United States, 20th century






Bond Market


Type of Investment






Raw Materials


Utilities (railroads and seaport)


Raw Materials (especially petroleum)


Primary Motivation

Local Opportunity for Immediate Profit

Global Corporate Strategy

Location of Investment (Bulk of Investment)


United States

Lands of Recent Settlement (Australia, Canada)


Latin America


Middle East (petroleum)


Stimulated Mass Migration

Corporate Management



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


The Japanese Multinational Corporations

Japanese firms on the other hand, constructed an extensive network of exploration and production abroad. The move was stimulated by the need to guarantee supplies of raw materials, the need to be cost-competitive due to the rising of wages, labour shortages, and an appreciating currency, and the need to secure access to the world market. Those activities were conducted by leading Japanese trade firms who were already multinational (Hymer, 1979). Many of these ventures do not take the form of the wholly owned subsidiary or branch plant used by American MNCs. Instead, they frequently involve production sharing, guaranteed demand contracts, technical assistance, and portfolio capital.


After World War II, the Japanese continued their policy of not permitting foreign direct investment but of spending liberally for imported licenses of technology (Tsurumi, 1976). Their purchases of technology from abroad were considerable, yet at the same time they spent more than four times that amount on domestic research and development. The incredible result was that within a relatively short period of two decades, Japan succeeded in breaking up the “package” of capital, technology, and entrepreneurship, which foreign direct investment has most frequently entailed. Interesting was the fact that they didn’t need the capital and got the technology without managerial control by American corporations, and the entrepreneurship remained in the hands of Japanese.


Dunning (1993) categorised Japanese foreign direct investment strategies into two categories: as a defensive market-seeking investment and as an offensive. The first strategy was the use of their strong owner advantages. These advantages were sustained and supported by strong location advantages to protect existing export markets with respect to trade barriers and competitors’ threats. Cases in point are the green-field plant type of ‘screwdriver’ factory for automobile, electrical and electronic equipment industries. Majority of Japanese MNCs activities in the early 1980s were of this type. The second strategy was the supply-oriented investment aimed at gaining access to the information and technology needed to upgrade and rationalise ‘domestic’ operations, and to advance a global competitive strategy. By the end of the 1980s, Japan’s leading MNCs departed from  trade replacing function, towards a new phase of advancing global competitive strength. They increasingly adopted offensive strategies in their attempt to secure and advance their foreign markets. Such strategies have been largely driven by the need of Japanese firms to transform themselves from exporters to ‘insiders’ in the major markets of the world, and to keep in touch with the latest technological and organisational developments, while benefiting from economies of cross-border arbitraging and the gathering and disseminating of information.



In the late 1960s and early 1970s, outward FDI was encouraged in light manufacturing sectors (textile, toys) – former export ‘stars’ which were rendered uncompetitive by the increasing predominance of heavy industries (steel, chemicals, shipbuilding). Most of these labour intensive industries were exported to Asian developing countries (Ozawa, 1989). Subsequently, outbound investment was aimed at securing access to the natural resources (oil, mineral and etc.) required fuelling the growth of heavy domestic industry. Finally, the continuation of the upgrading process demanded a shift up the value-added chain into higher knowledge and technology intensive activities.


It was in the late 1970s and early 1980s, when Japanese MNCs were encouraged by the government to develop host countries to sustain or enlarge the markets for the exports of firms whose owner advantages had by then reached rough parity with their Western counterparts (Ozawa, 1989). In other words, because of changing location advantages of Japanese firms, the latter showed an increasing preference in the late 1980s to exploit those advantages by engaging in foreign production. This was particularly true for Japan’s burgeoning car and consumer electronics industries, whose highly competitive products (low-cost, high quality and market oriented) were beginning to capture high market shares in the United States and Europe. In the early 1980s, the main aim of the Japanese MNC was to protect the competitive advantage of Japanese-made products. This was evident in what were then Japan’s premier export sectors, i.e. cars and electronic goods. Japanese had invested more in the United States than to Europe because of location advantages, and the fact that because of differing regulatory environments, Japanese firms could internalise the market to their owner’s advantages more easily in the United States than in Europe.


In other words, industrial rationalisation and restructuring mainly took place in Japan, with outward manufacturing FDI geared towards maintaining or advancing markets for Japanese exports (in developed countries) and relocating uncompetitive activities (in developing countries). But relative to their United States and European counterparts, Japanese multinationals still possessed relatively weak owner advantages in the innovation of many new technologies. This meant that Japan needs a continual inflow of technology from abroad for its industrial upgrading. Given this, a second important function of FDI was to act as a channel to absorb technologies developed in the West (Ozawa, 1989). However, Japan preferred to acquire such technology through means other than direct investment (licensing, reverse engineering, etc.).


Some still maintain that Japanese MNCs are ‘late comers’ to the international political economy and that this forcefully sets them apart from the experienced American and European-based MNCs (Ozawa, 1979). The Japanese multinationals’ alignment with the overarching industrial policy of the Japanese government is a frequent issue for debate. This policy focuses on circumventing protectionist measures abroad that limit market access. Thus, the foreign direct investment behaviour of Japanese MNCs is said to be concerned primarily with establishing export platforms and the practice of transhipments (Yoffie, 1990). Other researchers believe that Japanese MNCs, have traditionally emphasised the development of natural resources rather than agricultural and manufacturing endeavours. And compared to American MNCs that have focused more on profit making in manufacturing, Japanese MNCs are more into foreign direct investment behaviour that is consistent with nature resources diplomacy.




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