All Commentary
Tuesday, January 1, 1974

The Multinational Corporation


Mr. Peterson is a recent graduate of Princeton and a free-lance writer.

Is the AFL-CIO right when it warns of the “dimming of America ” ensuing from the “export” of American jobs by multinational corporations? And are many nonindustrial or underdeveloped countries, such as Mexico, right in clamping curbs and controls on multinationals?

I think not. The multinational corporation, one that undertakes a significant portion of its production outside its original home country, is actually a very natural phenomenon, like the weather, which recognizes no national boundaries. The multinational corporation (MNC) is simply a response to certain economic facts of life: Consumer markets for products are often international, and natural resource deposits bear little relation to Rand McNally’s maps. Thus, Swiss Nestle, an MNC, produces chocolate here because the market is here. GM produces Opels in Germany because the market is there. And Standard Oil (N.J.) is a MNC because nature favored Venezuela and the Middle East.

Accordingly, I believe the MNC is a natural, common sense response to the major law of economics: be efficient, or don’t waste scarce resources. I hope to show that organized labor is wrong, since jobs are not really being “exported,” and that underdeveloped countries are equally wrong, since the MNC helps, not hinders, economic growth. Notwithstanding the seemingly universal criticism, the MNC is an example of Adam Smith’s “invisible hand” at work, of private enterprise in the public interest.

The stakes involved are huge. Perhaps $350 billion worth of goods and services annually, or one-eighth of the free world’s output, pours out from MNC factories located outside the MNC home countries. American MNCs account for roughly $210 billion or three-fifths of the total MNC output.¹

Organized labor looks askance at that $210 billion, wondering whether American workers wouldn’t be better off if there were no foreign investment by MNCs. The AFL-CIO appears to contend that if MNCs were restricted, the investment money would be spent here, and our growth rate might rocket.

Jobs “Exported”

As it is, jobs have been “exported,” according to George Meany. He’s vexed by the “runaway plant,” which boards up in New Jersey only to pop up in Taiwan, where wages are much lower. He claims the loss of such plants has cost hundreds of thousands of jobs. If the product is destined for foreign markets, why can’t it be produced here and exported? Or if we Americans are the consumers (we import. Opels, for example), isn’t it more logical to produce the product here? (Actually, according to Commerce Department data, only 7 per cent of U.S. MNC production abroad comes back to the U.S.)

The AFL-CIO argument is as full of holes as Swiss cheese, since it fails to recognize the compelling reasons of economic efficiency behind MNC production abroad. For example, when the customers are foreign (usually the case), U.S. firms often can’t easily export to them, due to transportation costs and tariffs. With regard to the former, GM, for example, put up assembly plants in Europe during the 1920′s, because it could ship nine unassembled Chevrolets from New York at the same cost as two assembled ones. If there were no assembly plants overseas, GM would have sold fewer cars in Europe, with fewer jobs for its American employees building parts.

In the case of tariffs, or taxes by foreign countries on U.S. exports, again American firms have trouble competing in foreign markets. Production inside the tariff walls of those countries enables them to compete.

Still another efficiency consideration is labor cost. Meany is irked by plants which have “run away” to low-wage countries. But why does this happen?

In the words of a Harvard Business School professor: ²

Although U.S. firms have a preference for operating in the United States, in most cases of U.S. foreign… investment, U.S. firms do not have the alternative of continuing to serve the relevant market — either in the U.S. or abroad — from their U.S. plants. If U.S. firms tried to continue operating only in the U.S., they would lose their markets to foreign firms, usually large enterprises from Europe and Japan.

Thus, the U.S. electronics firm which has “run away” to Taiwan does so only to survive in the face of Japanese competition; the jobs lost when the domestic plant shut down would have been lost anyway. No jobs have been “exported.”

But why is foreign competition such a threat in the first place? Here the unions themselves are to blame. Normally (that is, in a free market), American firms would shun foreign sites because, though wages are higher here, productivity (or output per worker) is correspondingly higher, due to larger amounts of invested capital per worker. (Another factor for higher productivity is greater “human capital,” i.e., better training and education of American workers.) But the unions, with monopoly power over labor, have pressured wages above productivity levels. To recoup this added expense and to survive in the face of less unionized foreign competition, the MNC has arisen.

American workers benefit in many ways from the MNC’s quest for efficiency — despite, or rather because of, the MNC’s move to outflank the unions.³ First, workers benefit through the added profits from foreign operations. It’s an economic axiom that capital goes where its return is highest; a firm would never go abroad unless it expected a heightening of profits thereby. These profits return to the U.S.; part are paid out in dividends, and the rest swell the supply of savings. These savings are then often invested in the domestic operations of the company, thereby creating more jobs here.

Thus, in the long run there may be more investment in American factories than there would be if firms were ordered to confine their investment to the U.S. True, foreign investment consumes a growing slice of the pie of total business capital, but, thanks to foreign investment, the pie is growing.

Some data bear out this assertion. MNCs do appear more profitable than other large firms.”

And apparently these profits have fueled domestic expansion, for MNC domestic employment grew by 2.7 per cent a year during the late 1960′s compared to only 1.8 per cent for the overall U.S. private sector (Commerce Department data). However, I’m not claiming this evidence is conclusive, since other, hidden factors may be at work.

A second way American workers benefit is through the domestic activity generated by foreign production. For example, American capital equipment may be installed in an overseas plant. Furthermore, an overseas plant can help the foreign sales of domestically produced goods by creating a “full” product line. For example, the addition of a low-priced item manufactured abroad may complement the high priced export from America and thereby aid the whole sales effort.

Third, American workers benefit as consumers in the relatively rare case of foreign production for domestic consumption. If the MNC can economize on labor costs, it will pass the savings on through lower prices, thanks to competition. Thus U.S. purchasers of portable radios benefit from the plant which has “run away” to Taiwan.

Fourth, American workers benefit from the foreign prosperity created by MNC investment, through a kind of “feedback.” MNC foreign investment tends to expand the economy of a foreign nation; that nation then becomes a better market for U.S. exports. In addition, U.S. owned foreign factories are often better managed than locally owned foreign businesses. Foreign businessmen learn better management techniques by watching U.S. firms in action and by working for U.S. firms.5 Through a feedback, we benefit as well, since those more proficient foreigners can sell their goods to us at lower prices and feel more confident about investing here.

For these reasons, I conclude the AFL-CIO’s warning of the “dimming of America” is pushing the panic button. The MNC contributes solidly to the national interest. What of the international interest — in particular, that of underdeveloped countries?

The MNC offers nonindustrial nations an opportunity to break out of poverty. One manner in which the MNC promotes growth is the provision of capital. Even liberal economist Paul Samuelson agrees on the need for capital.6 The MNC’s capital provides jobs for many. Thus, to take one example, United Fruit enormously expanded the living standards of the peoples of Central America.’

Not only does the MNC pay good wages, but sometimes it offers training in skills, semiskills, and basic literacy and arithmetic, as well as more advanced subjects, in order to foster “human capital.” In the case of GE Brazil, the workers had to contribute half the time for such training, while GE Brazil paid them for the other half and met all expenses of the courses.

Improved Management

Another way underdeveloped countries benefit is through the learning of better management techniques. Sears Roebuck, for instance, sent consultants to its local suppliers to aid their operations.9 GE Brazil contacted local firms, encouraged them to enter new fields and supply GE, and loaned them funds; GE also sent a few engineers from the U.S. to give advice.

Furthermore, GE Brazil opened its executive suite to Brazilian nationals; of the 51 highest managerial posts, 35 were held by Brazilians in 1961. These native executives soon found themselves in demand throughout Brazil, and some left GE Brazil to work in other firms.

The MNC helps underdeveloped countries in still another way. It provides local consumers with the goods they want at prices lower than the competition’s — the traditional way business helps consumer welfare and economic growth in all countries. Thus, Sears Roebuck introduced Mexico to the supermarket and its discount prices; in addition, it initiated a credit system for poorer customers. And GE Brazil built locomotives and electric generators, both helpful to growth, along with products much in demand by individual consumers, such as lamps and radios. When a businessman is able to reduce the price a consumer pays for a product, he helps economic growth, since the consumer has more money to save or spend on other products.

In view of these favorable effects of MNC investment, it is not surprising that the fastest growing underdeveloped countries have been those which have taken a lenient attitude toward foreign investment: Brazil, South Korea, Thailand, Iran, Jordan, Taiwan, Hong Kong.’” Meanwhile, India’s people have experienced hardly any improvement in living standards since their government imposed stringent controls on MNCs, though part of the blame must be shared by India’s central planning.

In view of this record, why the hostility to MNCs, such as Mexican President Echeverria’s hard line policy and Libya’s expropriations or nationalizations (thefts) of oil wells? One root of the problem is leftist ideology, the Leninist concept of imperialism. Another root is the sheer size of some MNCs, which are frequently big, inviting targets, hard to miss, and convenient scapegoats.

Still another root is the competition of MNCs with local businessmen; often a U.S. subsidiary may drive out less efficient local producers. So the government steps in to protect these businessmen (hurting the consumer in the process). Or the government may force the MNC to hire more nationals in top management and allow more shareholding by nationals (local ownership of the subsidiary). These policies manifest a desire to help the rich, the local businessmen, not the poor, the workers and consumers.

The hard line taken by underdeveloped countries is responsible for the relatively declining interest shown by MNCs. For example, MNC investment in Latin America has declined from 39 per cent of the world total in 1950 to 19 per cent in 1970, while Europe’s share increased (Commerce Department data).

However, Latin American investment increased in absolute terms.

I believe the hard line policy and the reliance on central planning by nonindustrial nations are responsible for a disturbing trend: the income gap between rich and poor nations seems to be widening, not only absolutely, but relatively.”

In essence, both unions and most underdeveloped countries are blind to the virtues of the free market and fail to perceive how private enterprise serves the public interest. As the late Ludwig von Mises, the distinguished economist, noted, we live in an age of interventionism, and the “anti-capitalistic mentality” increasingly predominates. The critics of multinationals in particular and of capitalism in general should keep in mind Albany’s point in King Lear: “Striving to better, oft we mar what’s well.”

 

¹ The Diebold Institute, Business and Developing Countries, Praeger, New York, 1973, p. 5.

2Robert B. Stobaugh, “U.S. Multinational Enterprises and the U.S. Economy,” in U.S. Department of Commerce, The Multinational Corporation, Studies on U.S. Foreign Investment, Vol. 1, U.S. Gov’t. Printing Office, Washington, March 1972, p. 28.

3 For an explanation that the workers are the real victims of the unions, see W. H. Hutt, The Strike-Threat System, The Economic Consequences of Collective Bargaining, Arlington House, New Rochelle, N.Y., 1973.

4 Raymond Vernon, Sovereignty at Bay: The Multinational Spread of U.S. Enterprise, Basic Books, New York, 1972.

5 John H. Dunning, The Role of American Investment in the British Economy, available from the Committee for Economic Development, New York, 1969.

6 Economics, McGraw-Hill, New York, 1973, 9th edition, pp. 775-81.

7 Stacy May and Galo Plaza, The United Fruit Company in Latin America, National Planning Association, Washington, D. C., 1958.

8 Theodore Geiger and Liesel Goode, The General Electric Company in Brazil, National Planning Association, Washington, D. C., 1961.

9 Sears Roebuck de Mexico, S.A., National Planning Association, Washington, D. C., 1953.

¹º Diebold report, supra note 1, p. 86.

¹¹ Peter G. Peterson, The United States in the Changing World Economy, U. S. Gov’t. Printing Office, Washington, 1971.