by
George V. Sherman, Jr.
When I was asked to participate in this meeting last year, I felt the topic In Defense Of Multinational Corporations sounded a bit timid for this audience. After all, talking about free trade and its principal prime movers to a distinguished group of Libertarians at a meeting celebrating the birth of Frederic Bastiat hardly seemed to require much defense.
That was then and this is now. Since then, two well-publicized trade gatherings of world leaders have been held. At the meeting of the World Trade Organization last fall in Seattle, and the recent meeting of the European Union in Stockholm, part of the debate took place in the streets to the accompaniment of water cannon, tear gas and rubber bullets. There are clearly major differences of opinion on the subject. I rise to my topic this morning in the hope of adding more light, rather than heat, to the discussion.
Free trade, and the role of multinational corporations in it, is a complex subject. Truly, it could be the sole theme of a multi-day meeting such as this. What I would like to do this morning is to summarize the basic arguments from a free traders perspective based upon my experience. At the same time I hope to illustrate how well Frederic Bastiat so many years ago foresaw the bounty of harmony and progress that free trade would bring to mankind.
Let men labor, exchange, learn, band together, act, and react upon one another ; since in this way, according to the laws of Providence, there can result from their free and intelligent activity only order, harmony, progress and all things that are good...
(Economic Harmonies - To the Youth of France, Frederic Bastiat, 1850)
Today, the discussion includes another generation of economists and theorists, and special interest groups of every persuasion. All use the popular press and media to influence a much larger, more involved, better-educated and empowered voting public and its legislators. Bastiat would no doubt be pleased by the expansion of individual freedom and voting rights, since his day. He would be dismayed that the evidence of 150 years to the contrary, free trade is still a subject of great controversy and street violence. The role of the multinational corporations, as a prime mover in global trade, is a central question in this controversy.
The passing years have not changed the core of the debate : government market intervention and protection, in a variety of new disguises, versus free and expanding trade. This morning I will examine how private multinational corporations, acting in much the manner as Bastiat advocated in this famous quotation, have served to bring about the harmony and progress he so fervently desired.
I will begin this morning with a brief definition and historical perspective. I will then discuss the benefits that multinational corporations bring to world development and to the nations and people that host them. I will examine their often-complex relationships with governments and how MNCs have responded to the criticisms, which are sometimes made about their operations. I will conclude with a discussion of how new technology and current world market circumstances affect the actions of both MNCs and governments : improve the quality of world trade, and insure further progress in the future.
Many Nations Provide :
Many Nationalities Provide :
The word multinational, often referred to as international or transnational, has a variety of meanings. For our discussion this morning, I mean a public company that meets all or most of the criteria on this chart. Simply defined, multinational means that a wide range of nations and people provide the core elements of a companys business. These are materials, factories, markets, labor and capital. Any exceptions from the pure form today most often involve the restricted ownership, management and capital of some companies. These exceptions are disappearing.
The first true multinationals were founded in Europe in the 19th century. From an early date they combined overseas raw materials and markets with European management and capital. Shell, Lever and Nestle are outstanding examples, still very successful and widely admired today. The Economist rates Nestle as the worlds most multinational company with 87% of its assets, 98% of its sales and 97% of its workers outside of its homeland. Coca Cola and Mc Donalds, perhaps the best-known global brands, are 31st and 42nd, due to the size of the U.S. Home market, relative to foreign sales.
The North American based multinationals, which predominate in many industries today, became more truly multinational in the post WWII period. Prior to that time, foreign trade was a sideline, and management and capital were almost exclusively American. The postwar availability of overseas capital from extensive international banking and securities trading facilitated this change. Also, the growth of operations in many countries and the specialized needs of overseas manufacturing and marketing brought many nationalities into higher management, both abroad and in the U.S.
The multinationals of Japanese origin are extremely successful, but unique, examples. Historically, culture, language and traditional Japanese financial relationships presented barriers to broader multinational management and capital utilization. Today, an extensive manufacturing presence outside of Japan, the recent prolonged weakness in Japanese financial markets and, resulting international mergers are contributing to rapid change. These factors now bring a growing number of non-Japanese to senior management, even in Japan.
Mercantilist : Spice, New World Products
Industrial : Manufactured Goods
Future : Services
The modern multinational corporation has its roots in the East and West Indies traders of the mercantilist era of the 16th-18th centuries. These were rarely multinational, and often instruments of colonialism. However, traders of the maritime nations of that era led the expansion of trade, which occurred with the age of discovery and the development of accurate long distance navigation at sea.
The coming of the industrial age saw the need to capture markets for an expanding output of basic manufactures. Improvements in ocean and continental transportation and emerging thought about free trade as an element of political and economic freedom, also gave rise to the first rudimentary MNCs. Possessing multiple markets and raw material sources, the ownership, management and capital of these early MNCs was still largely limited to the nation of origin. They often enjoyed direct or indirect government support by means of tariffs, investment and financing.
By the end of the 20th century, and with many former government monopolies in telecommunication, power generation and transport expanding into international markets, the multinational corporation dominated world trade in goods and services. They account for 70% of total foreign trade of $ 7 trillion. Their operations range from mining, manufacturing and energy to modern financial and communication services of all kinds. They are truly multinational in all major respects.
Critics of multinational corporations base much of their argument on social concerns, such as national income differentials, environmental impacts or unwelcome changes in ethnic culture. These contentions tend to ignore the major contributions that MNCs and free trade have made to world and human development. There is a Luddite tone to this opposition that seems to say that improvements in the material aspects of the human condition are not worth the social cost. The facts do not support this.
This is not to say that multinational corporations and the way that global trade is conducted today deserve no criticism. Whatever defects that are observed, and I will address these shortly, should be measured against visible improvements in the common good. These improvements are still not fully shared by all human kind. As the millennium dawns, however, the benefits of free exchange to nations and people the world over is enormous and growing. Any imbalance in the distribution of these benefits throughout the world today is more a of the problems in governance and protectionism that Bastiat addressed 150 years ago, as of any inherently flawed manner in which MNCs manage their affairs.
Today, the trade of the world and its national and personal income is measured in trillions of Dollars or Euros -- numbers difficult to grasp. Most of this growth has taken place in our lifetimes. Such statistics represent a sophisticated measure of world progress. I believe, however, that an audience devoted to individual liberty would prefer to judge the improvement in world development in terms of the lives and well being of ordinary people. Here the change is equally enormous, and while measurement is more subjective, it is apparent by inspection to most of us of a certain age. It is products conceived, manufactured and distributed by MNCs the world over that bring about this improvement.
Think of inexpensive, widely available tools in the hands of ordinary workmen, medicines that eradicate deadly diseases, food grown and distributed on an industrial scale, and improvements in personal mobility and travel. The progress made in our lifetimes is enormous. Compare todays situation to any earlier period : 1945, the lifetime of Bastiat or the discovery of the New World, and the extent this progress becomes apparent to those of us accustomed to such things in our daily lives.
People the world over cooperate to bring these wonders to market. Think of friendships and alliances between formerly antagonistic nations, founded on shared economic interests. Think of wars and conflicts avoided, of lives not put at risk, just in the recent past. Doing so, the brilliance Bastiat's vision of harmony and progress fostered by free trade thus becomes a thesis, not only well conceived, but also proven by the evidence of our times.
To Host Nations :
To Host Governments :
Recognizing these benefits to development and the human condition, it is not surprising that nations compete to attract MNC investment. It is a common fiction that MNCs use financial power to impose unfavorable conditions or unfair terms on host nations, particularly those in the Third World.
The reality is that governments compete for multinational favor by offering attractive terms, including, concessions, tax holidays, advantageous depreciation, low cost land for factories and other incentives. The prize won by governments in granting these short-term advantages is the acceleration in national development that follows. Such multinational investment not only provides benefits to the economy of the host nation but also to its political leadership.
The foreign investor brings access to capital, both equity and debt, on terms which may not be available to the host nation. Foreign investment in natural resources permits the early realization of income and value from dormant national assets, such as minerals, oil or hydroelectric potential. These investment projects often utilize advanced technology that would not normally be available to the host nation. Equally important, national productivity is improved by access to the specialized machinery, modern tools and laborsaving equipment that leading MNCs use routinely in their operations.
The multinational investor also brings the techniques of modern management to supervise and safeguard his investment. These include planning and management systems, personnel policies and benefits, safety training and other proven techniques to enhance efficiency and train local staff. This investment of intellectual capital becomes part of the host nations business culture as employees move into and through the MNC organization.
Finally, concrete benefits of considerable political value accrue to the nations leadership responsible for attracting MNC investment. Most obvious is increased revenue and tax income in the long term, even if deferred by tax holidays and temporary abatements. Less concrete in developmental terms, although still of political importance, is the increased diplomatic and economic stature that a successful foreign investment brings, particularly with nations, which provide the project materials, markets and capital.
The benefits that MNC investment brings to the individual citizens of the host nation are public and visible in the street. Foreign investment creates work that did not previously exist. Many of these new jobs require technical training that the foreign investor freely provides. Other positions have supervisory or leadership content and potential. This permits local employees to achieve increased responsibility and compensation at rates more attractive than the local market provided previously.
A significant employment effect comes from new jobs created in local companies, which provide goods and services to the foreign investor. Support enterprises grow up around the new investment to provide construction, local transportation, food service, supplies, and other necessities. These new entrepreneurial ventures create an important employment and income multiplier in the local economy.
Inevitably, this increasing national and individual wealth attracts sellers of products seeking new markets. This new wealth also creates demands for basic products that improve individual nutrition, health, communication and mobility. Other multinational investors bring new or improved products into the local market, either directly through new factory investments, or indirectly by import. Some critics decry the introduction of such items in the third as consumerism. The demand for these products is universal, however, since they satisfy basic human needs and improve the quality of life.
Finally, multinational investors require sophisticated banking, transportation and commercial services to support their operations. Local firms are organized to provide these services, or other multinational companies will invest to support a valuable existing relationship. These useful services, often improved and at offered at lower cost, become available to all other local companies and individuals.
Governments Have Sovereign Power to :
MNCs Have Financial Power to :
Both Are Subject to :
The most controversial and contentious area of debate about multinational corporations involves their relations with governments. History is filled with instances of nationalization and expropriation. Many were associated with violent revolutionary changes in government, such as occurred in the last century in Russia, Bolivia, Mexico and Iran. Many resulted in confiscations of assets without compensation. Similarly, in other instances, the original terms of an investment were changed unilaterally by decree, usually to the disadvantage of the investor. The relative balance of power between the two parties determines the quality and success of a MNCs relationship with its host.
The balance is heavily weighted in favor of governments, which by their nature possesses sovereign power. The exercise of this power in generating and maintaining a favorable economic climate attracts foreign investment. Adverse government action or regulation may repel it. As circumstances change, or in response to internal political pressure, government will use its power to manage its relationship with foreign investors and often to change the terms, which have been agreed between the parties.
Difficulties arise when one party is perceived to enjoy greater or lesser financial success than anticipated. Significant changes in international market prices may occur. In other instances there is a change in government leadership. The foreign investor or its operations become identified with a specific political faction or philosophy, which attracts criticism from the opposition and its allies. In the worst case, both government and the opposition view an international investor as a non-voting source of cash to repair budget deficits or fund unrelated projects, often social in nature.
The recourse of MNCs in the face of sovereign power is limited to legal or constitutional arguments, these are often ineffective in areas of the world where the executive branch exercises strong political control over the legislative and judicial branches. Here a positive outcome depends on negotiation. In negotiation MNCs possess considerable economic power.
MNCs usually control marketing systems based upon well-known brands that enjoy worldwide trademark protection. They may also maintain logistical or distribution systems that are difficult for governments to access or duplicate at reasonable cost. Equally advantageous, the MNC may be utilizing proprietary technology essential to the operation of the product, technology that a government controlled or alternative local investor might not have. At some considerable cost, a multinational investor can withhold capital and move its operations elsewhere.
The very fact of disagreement between governments and international investors has a negative impact on the quality of the host nations investment climate, as evaluated in world financial and business circles. On the other hand, and to emphasize the positive, mutual agreement to invest capital to enhance operations, and improve income to both government and the investor is often enough to resolve a dispute, or rebalance the relationship satisfactorily.
Today, there is great pressure on both parties to seek an amicable resolution to most disputes. Loss of international reputation can have serious financial and political consequences for either party. Recently, a significant number of changes in business terms between governments and MNC investors have resulted in a continued mutually profitable relationship under different terms. This was the case in Saudi Arabia in the recent past, where the foreign oil companies surrendered their concessions, but maintained a mutually satisfactory role providing technology, distribution and new project development to government. Another major agreement to develop Saudi natural gas resources was recently announced.
Today, both governments and MNCs are increasingly subject to pressure from external sources. There is external pressure on both : on governments from other nations seeking foreign investment, and on companies from their multinational competitors. In democratic societies, business and employer associations, labor unions and special interest groups also exert influence on both government and the investor. Finally, the actions of both governments and MNCs in the trade arena are under increasing scrutiny by international non-governmental organizations and the media.
Current Criticisms :
Market and Management Response :
Free trade is now a topic of broad public discussion in a manner unlike any time in the past. A better informed public recognizes that trade plays an important role in todays greatly improved quality of life. It is also accepted that MNCs have a socially useful role in the manufacture and distribution of products that contribute to the comfort and convenience of modern life. Still, concerns are expressed about the size and power of MNCs. Monopoly potential, job losses, damage to the environment and the potential for corruption are among the most repeated complaints. While conceding that there have been abuses in the past, a number of current trends suggest that most world trade today, and further growth tomorrow is and will be conducted responsibly.
Monopoly power of MNCs is not a realistic fear. In the post WWII period, not only has the volume of world trade increased, but also so has the number of players, nations and individual MNCs, alike. The Asian tigers, Japan, Korea, China, Thailand, Taiwan, and an emerging power in computer software, India, are world-class competitors to the established trading nations of the west. A new generation of MNCs has also emerged from this trade to become household names, Sony from Japan, Samsung from Korea, Nokia from Finland, Embraer from Brazil, just to name a few.
Multinational survival today depends not just upon retaining historic markets, but also upon capitalizing on new technologies and creating new markets. This is why Shell And Lever still prosper ; Microsoft and Nokia are in their ascendancy, and governmental telephone monopolies whither. Fully one third of the companies in the American Fortune 500 lost their independence by 1990. Another 40% were gone five years later. Today, to the extent that monopoly-pricing power exists in the world, it is more likely to be in the hands of a shrinking number of government sponsored monopolies and cartels, such as OPEC.
A further improvement involves the process of trading, itself. The exchange of all manner of essential commodities today, minerals, raw materials, basic chemicals, securities and capital, is being conducted electronically. In this way world prices are instantly available to buyers and sellers on every continent. This wider availability market intelligence now exists even at the retail level. There the popular press and consumer advocacy groups, almost in real time, evaluate a wide range of consumer products from many sources, in terms of quality, features and price. This readily available market information assures the success of quality products and the demise of the rest.
You are no doubt aware of a number of well-publicized cases of inadequate working conditions, labor standards and child labor in the third world. Most of these cases involve contractors manufacturing internationally known brands of apparel and footwear on behalf of North American and European MNCs. Although the sponsoring MNCs were not directly involved in local operations, which often took advantage of weak local laws and enforcement, considerable bad publicity and loss of business resulted.
Similar bad publicity has resulted from cases of environmental damage by multinational energy, mining and timber companies. In these cases vivid television coverage and a sympathetic press create a very strong negative public and shareholder response. Damage awards have been considerable.
Consequently, MNCs, which manufacture in the third world, or operate in environmentally sensitive areas, have taken steps to control operations more closely. Most subject themselves industry wide codes governing both labor and environmental standards, they insist on compliance by their contractors, and evaluate their own and contractor performance periodically, or have theirs auditors do so.
Wherever there is government regulation the potential for corruption exists. This is an endemic problem in a world where many routine aspects of commerce require permits or some other timely action by government at every level. It is not exclusively a Third World issue, nor is it one confined to international companies, as a survey of the press on every continent will confirm.
Established trading nations in the west consider corruption a criminal offense, and have strong anti-corruption legislation. In The West most recently enacted anti-corruption legislation now covers acts of bribery outside of the national territory. Penalties involve prison terms, large fines and considerable negative press and media coverage.
Responsible MNCs, therefore, make strenuous efforts at the highest level to manage the business conduct of their employees, both at home and overseas. They publicize ethics policies extensively to their employees, suppliers, customers and contractors, and audit their operations periodically. Considerable training is conducted around ethics issues, and violations generally involve discharge and loss of benefits. Strict enforcement, by public authorities, or by management, never entirely eliminates such cases, but it drastically raises the price of violations and management inattention.
Non-governmental organizations now have an important and expanding responsibility in the oversight of world trade and all of its participants : governments and MNCs. At last count, twelve major international organizations, such as GATT, the OECD and the World Bank, and eleven regional groups, such as the EU, NAFTA and the OAS are prominent. The establish rules, hear complaints, exercise judgments and promote free trade among their members.
In the last analysis, the strongest deterrent to neglect of public concerns remains the 24-hour news cycle and an inquisitive media. Bad news and scandal sell better than good news. It travels around the world in hours. Public companies wish to be remembered for their products, not for their sins. They spend large sums to advertise and establish their brands, and cannot afford bad publicity or an unsavory reputation anywhere. The relatively minor advantages gained by unpopular or lawful behavior are rarely worth the bad publicity, and today, multinational managements know this.
To conclude, the modern MNC, a private, risk taking enterprise, utilizing capital and human talent from many nations has been an important factor in the growth of world trade and in the resulting improvement in the conditions in which mankind lives and works. The MNC is still an evolving institution, which remains imperfect, but which has fostered the massive movements of capital, products and talented people, which characterize world trade today.
The benefits to society of trade less constrained by government restrictions, tariffs and protectionist constraints are now widely appreciated. The volume of free trade will grow in the future for a number of fundamental reasons. Most important among these : the number of free societies is growing. Free people demand access to the products of a better life, and governments respond, albeit sometimes reluctantly, to this demand.
Consequently, monopolies, now most of them government sponsored, are on the decline. It is interesting to see newly privatized and once fiercely protected entities confront intense international competition without the support of government. Some will succeed and some will fail, but consumers will have wider choice and better service in the future.
The multinational corporation is now a universal phenomenon. It has grown from roots in many countries and cultures. Companies from all over the world compete for markets all over the world, bringing new products and technologies never before found in foreign trade. This competition brings useful goods and modern services to markets that were considered too remote or politically inaccessible in the past.
Today, world markets for the essential elements of trade, raw materials, energy, transportation and capital are now truly international and transactions are conducted instantaneously on an offer and bid basis around the clock. Prices, as never before, reflect the free competition of large numbers of buyers and sellers, and protectionist constraints are minimal, if not always fully absent.
Finally, and encouraging to those of us at this meeting, Libertarian trade concepts and ideals are now more widely recognized. These principles are now in routine public debate on the Left, as well as the Right. The degree of enthusiasm varies from nation to nation and among legislatures, depending on the strength of vested and protectionist interests. Nevertheless, the growth of multilateral free trade associations and the visible progress of societies with liberal trade policies, compared to others, demonstrate benefits for the world to see. Even reluctant governments cannot suppress the disparity in wealth and well being that instant world communication by the press, satellite TV and mass tourism convey.
As a measure of the acceptance of free trade concepts in the world today, it is revealing to note that those who oppose free trade in principle, now operate, sometimes violently, in the streets, and in the international arena. With the practical evidence of progress apparent to all, in anarchy they find themselves opposing governments and international or worldwide organizations, not just an individual companies. I believe that Frederic Bastiat and others like him would be pleased with all that has been accomplished. He would certainly recognize the contributions that the modern MNC has made to this result. We would not be here, if there were not still much more to be done. I would be happy to take your questions.