Functioning of the Multinational Corporation. A Global Comparative Study

288 Pages·1980·3.214 MB·English

by  Anant R. Negandhi (Eds.)

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tinPER GAMON
ON BUSINESS
POLICY
STUDIES
Functioning of
the Multinational
Corporation
A Global Comparative Study
Edited by
Anant R. Negandhi
Pergamon Press
NEW YORK • OXFORD • TORONTO • SYDNEY • PARIS • FRANKFURT
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Copyright © 1980 Pergamon Press Inc.
Library of Congress Cataloging in Publication Data
Main entry under title:
Functioning of the multinational corporation.
(Pergamon policy studies)
Bibliography: p.
Includes index.
1. International business enterprises—Management-
Addresses, essays, lectures. 2. Comparative management
—Addresses, essays, lectures. I. Negandhi, Anant R.
HD69.I7F84 1980 338.8'8 79-27029
ISBN 0-08-025087-4
All Rights reserved. No part of this publication may be reproduced,
stored in a retrieval system or transmitted in any form or by any means:
electronic, electrostatic, magnetic tape, mechanical, photocopying,
recording or otherwise, without permission in writing from the
publishers.
Printed in the United States of America
Second Printing, 1982
To
PI A,
a transnational child
whose past, present and future
are all interwoven into one real world.
Preface
One of the foci of the research program of the International
Institute of Management, Science Center Berlin, is on the
participation of the private enterprise in measures to overcome
societal problems such as regional decay, structural unemploy-
ment, decline in competitive capacity of industries, and similar
industrial policy issues. The participation from the private
sector's side is looked upon as an attractive and promising al-
ternative to the establishment of governmental agencies for the
said purpose or, in many cases, as an appropriate complement
to public sector organizations.
Given the debate of the last ten years, it seems highly
necessary to study the preparedness of multinational corpora-
tions to engage in such - national and supranational - indus-
trial policy programs, and also to assess their performance in
this respect.
Professor Anant Negandhi, who in 1976 undertook to
organize a program segment with the said orientation within
the Institute, established a worldwide network of experts in
science and administration, in support of this task. From
time to time the experts met in order to assess the progress
and deliberations of the Institute's MNC research. The
present volume makes public a number of papers on the issue
which were delivered at one of those meetings.
The International Institute of Management wants to
express its sincerest thanks to Professor Anant Negandhi, the
members of this cooperating team, and in particular the con-
tributors to this volume. It is our hope that the publication
will shed light on the functioning of Multinational Corporations
in industrialized as well as developing countries.
Berlin, Autumn 1979 Walter H. Goldberg
Professor of Business Administration
Fellow, International Institute of
Management
Science Center Berlin
ix
Multinational Corporations:
Issues, Context,
and Strategies
Anant R. Negandhi
Energy shortages, inflation, unemployment, and slowdown in
economic and industrial activities in most of the industrialized
countries have become the "real" news issues both at national
and international levels. Only a few years ago, the critics
and advocators of the multinationals (MNCs) were arguing
about the negative and positive impact of MNCs in either
creating or resolving the very same issues of unemployment,
inflation, and balance of payment problems.
The advocators conceive MNCs as the most powerful
engine of progress ever invented by humans, and regard them
as "agents of change and progress . . . building . .. a new
world economic system - one in which the constraints of geog-
raphy have yielded to the logic of efficiency" (Kendall, 1974,
p. 22). Multinationals were also viewed "as a powerful engine
for diffusing the benefits of superior management and tech-
nology across national boundaries, thereby improving the
world's allocation of resources" (Benoit, 1970, p. 65).
On the other hand, critics blamed the MNCs for exporting
the jobs and technology (Goldfinger, 1973), while the leaders
of many developing countries accused them of exploiting local
labor, charging high royalty payments for supplying obsolete
technology, and of using monopolistic power to crush local
competition (Turner, 1970; Barnet and Muller, 1974). Provoc-
ative titles of the books on MNCs, published during the late
'60s and '70s, such as Sovereignty at Bay (Vernon, 1971),
The Invisible Empire (Turner, 1970), The American Challenge
(Servan-Schreiber, 1968) , The European Revenge (Heller and
Willat, 1975), The Sovereign State of ITT (Sampson, 1973),
Global Reach (Barnet and Mueller, 1975), and The Frightening
Angels (Negandhi-Prasad, 1975) , to mention just a few, reflect
public opinion concerning the role and status of the multina-
tional corporations.
3
4 THE MULTINATIONAL CORPORATION
Although the direct attack on multinational corporations
has dampened somewhat and talks of accommodations have
begun (Franko, 1976), the influence and stake of the MNCs in
the world's economy have changed little. If anything, their
role and influence have only increased during the last ten
years. For example, in 1950, American MNCs accounted for 17
percent of the total sales of United States manufacturers; by
1967, the percentage increased to 42 percent of the total sales,
and by 1974, to 62 percent (Vernon, 1977, p. 13). A similar
trend is also noticeable with respect to other countries.
Today the multinational enterprises represent one-third of
the world's industrial output and, beyond their economic
muscle, many countries in the world, especially the developing
countries, depend upon their technological, managerial, and
entrepreneurial skills for achieving industrial and economic
goals. And very often, the goals, objectives, and policies of
the MNCs and the nation-states are inconsistent, and unavoid-
able conflict results.
PURPOSE AND ORIGIN OF THIS VOLUME
This volume outlines and analyzes some of the critical issues
and conflicts between MNCs and nation-states. We will first
examine the changing world economic scene and how the New
International Economic Order may affect the activities of the
MNCs. Secondly, we will compare the strategies, policy
making, and organizational adaptability of the multinational
corporations with the nation-states' policies and demands.
Thirdly, we will look briefly at the individuals who manage
multinational corporations in terms of their backgrounds,
education, training, and outlook.
The volume is an outcome of a recently organized confer-
ence on The Functioning of Multinational Corporations; Their
Internal and External Modes of Operations, in West Berlin,
Germany, under the auspices of the International Institute of
Management, Science Center, Berlin. Some 30 academic
scholars, business executives, and governmental officials were
invited to share their empirically-based studies on various
aspects of the functioning of multinational corporations. More
specifically, the following topics concerning the operations of
the MNCs were examined:
1. Formulation of Codes of Conduct at international, national,
and firm levels, focusing on their rationale, implementa-
tion processes, successes, and failures.
2. Conflicts and conflicting issues between MNCs and host
countries, MNCs and their home countries, and the MNCs1
home and host countries, and the modes of resolution
used by different types of MNCs and governmental
agencies.
ISSUES, CONTEXT, AND STRATEGIES 5
3. The processes of adaptations used by different MNCs to
cope with the home and host countries' demands and pol-
icies.
4. The MNCs' contributions to the home and host countries'
economies - such as balance of payment, and employment.
5. Transfer of skills by MNCs - managerial and techno-
logical - to the host countries.
6. Internal structures, control and coordination mechanisms
used for managing world-wide operations.
7. Management orientations, philosophy, strategies, and
policies of MNCs to manage their world-wide operations.
8. Management of subsidiaries.
9. Personnel and industrial relation policies and practices
used by MNCs.
10. Impact of the MNCs' operations on the host countries'
socio-cultural norms and life styles.
Research-based papers included in this volume analyze many of
the above topics.
ECONOMIC DEVELOPMENT DECADE OF THE 1960s
During the 1950s and 1960s, industrialization became the key
goal for many newly-born nations of Asia and Africa. It
offered a major hope for solving the problems of poverty,
insecurity, overpopulation, and preserving the hard-won
political freedom. One author was tempted to call this quest
for industrial and economic progress "one of the great world
crusades of our time" (Bryce, 1960, p. 3). In the same vein,
former Brazilian President Kubitschek, (McMillan et al. 1964)
echoed the concern of many leaders of developing countries,
almost two decades ago, by saying,
The majority of our people are convinced that if the
road to material progress is barred, Brazil will not
be able to avoid the choice between development and
the wreckage of its democratic institution.
Many political leaders, businesspeople as well as academ-
icians, believed that the foreign private investor and the multi-
national corporation could play an important role in achieving
the goals of industrial and economic development in developing
countries.
The open-arm welcome to foreign investors and multina-
tional corporations was accompanied by numerous incentives
offered to the MNCs in the form of tax holidays, tariff pro-
tection, duty-free imports of capital goods, and similar other
facilities which did result in an increase of inflow of private
6 THE MULTINATIONAL CORPORATION
foreign investment into those countries. However, for many-
known and unknown reasons, the developmental decade failed
to realize its lofty promises of industrial and economic growth.
Disappointed with the negative results and encouraged by
the successful attempt of the OPEC countries to increase the
oil prices fourfold in a single year, the leaders of the so-
called "Group of 77" focused on strengthening their collec-
tive political powers at international levels. The North-South
dialogue and the current discussion for establishing a New
International Economic Order reflect this change in strategies.
In his paper, Sauvant identifies the origin of this cur-
rent discussion of the New International Economic Order and
pinpoints the implications of the changing international eco-
nomic and political realities for the multinational corporations.
It is well recognized by now that the industrial and
economic development is not all blessings. Although indus-
trialization could provide employment, reduce poverty, and
increase the standard of living, it also brings along pollution,
urban unrest, crime congested housing, and disruption to the
existing lifestyle of the people.
Kumar, in his paper, seeks to identify the sociocultural
impact of multinational investments in the developing countries,
and points out the areas where further research is needed.
As stated earlier, multinationals have been accused of
exploiting local labor, charging high royalty payments for
obsolete technology and patent rights, and using monopolistic
power to crush the local competition. The so-called transfer-
pricing practices utilized for intra-company sales are believed
to be the central mechanism through which MNCs are accomp-
lishing their objectives.
Rugman, in his paper, argues against this widely-held
belief and provides the real reasons for transfer-pricing
practices - existence of imperfect market conditions, undue
constraints imposed by governments on the private enterprise
system - and suggests a novel methodology to ascertain the
nature and intensity of transfer-pricing practices utilized by
the multinational corporations.
STRATEGIES AND POLICIES OF
MULTINATIONAL CORPORATIONS
The fast changing international environments and the in-
creasing demands by the nation-states have obligated the
multinationals, to a large extent, to adjust their strategies
and policies in order to achieve global rationalization of
production and marketing processes. However, organizations,
like human beings, resist change, and yet, change is the
very essence of international business today.
ISSUES, CONTEXT, AND STRATEGIES 7
In the section to follow, we seek to capture some of the
dilemma and frustration experienced by the multinationals as
they attempt to perfect the act of balancing strategies and
policies to achieve two conflicting demands - global ration-
alization versus adaptation to differing demands made by the
home and host countries.
Prahalad and Doz, utilizing their own empirical studies in
the developed and developing countries and published data on
the trends and methods of intervention of governments, ex-
plore the use of a matrix-type of organizational structure and
policy-making the MNCs could use to achieve twin objectives of
global rationalization and coping with the differing demands of
the host countries, as well as the demands of the complexity of
the diversified product-lines and advanced technological and
engineering problems.
Studies on the strategies, policies, and structures of the
multinationals, undertaken during the last ten years or so,
amply suggest that the multinational companies, originating
from the United States, Western Europe, and Japan, are differ-
ent in their modes of operation (Stopford and Wells, 1972;
Franko, 1976; Yoshino, 1976; and Negandhi and Baliga, 1979).
In spite of differing strategies, policies, and structures
utilized by different types of multinationals, the economic and
technological imperatives are pushing all large-scale industrial
companies around the world to a point of convergence into
their modes of operations and responses. Especially when the
environment is benign and the market and economic conditions
are competitive rather than controlled, different types of multi-
nationals, as well as large scale local firms, do behave and
respond in similar manners. Only when the environment is
hostile and restrictive, and market and economic forces are
under severe constraints imposed by the governments, do
different types of multinationals seem to respond differently.
In the two papers by Negandhi and Baliga, and Negan-
dhi, such similarities and differences among American,
European, and Japanese multinationals have been observed.
In the West European countries, where the market and
economic conditions are relatively free of undue governmental
constraints, American, German, and Japanese MNCs seem to
opt for global rationalization strategies, while in developing
countries, where governmental controls are severe, these three
types of multinationals are responding differently. European
and Japanese MNCs are opting to adjust their strategies to the
host countries' demands and constraints, while American MNCs
are still pursuing a global rationalization strategy.