Glob MNC

The Japan Program’s Working Paper Series on
GLOBALIZATION
The Japan Program’s Working Paper Series on
Globalization
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Globalization and the Multinational Corporation

Joseph J. Savitsky
Shahid Javed Burki
Paper #3
"A world government has been emerging – quietly and organically… the increasingly dense ganglia of international
1
corporations and markets."
-Robert D. Kaplan in The Coming Anarchy.
It has been said that the multinational corporation (MNC) is the most powerful institution in the world
today. Indeed, the process of globalization, which is radically transforming our world, is driven in large
part by the rapid growth and spread of corporations. Since the end of the Cold War in 1991, nearly all
nations in the world have reduced the role of the state in the economy and lowered barriers to the
international movement of goods, services, capital, ideas and technology. As the walls imposed by nation-
states have crumbled, multinational corporations have thrived, spreading across the globe in search of new
markets and factors of production. MNCs have expanded across national borders in two ways: trade and
foreign direct investment (FDI). Each has contributed to stable, lasting benefits to the world economy.
Two major financial crises notwithstanding, the 1990s were a decade of substantial world economic
expansion, due in large part to the rapid growth of trade and FDI.i
Expansion of size and scope became the rallying cries of corporate managers as they watched the barriers
dividing the global economy fall down, yielding fewer, larger competitive arenas. The arrival of the
Information Age paved the way for a new breed of powerful corporation, dramatically altering the
competitive landscape. Compounded by economic liberalization, the digital revolution allowed
corporations to develop complex, integrated production networks spanning large parts of the globe. The
collapse of economic barriers brought formerly secluded corporations into direct competition with one
another. New managerial techniques encouraged foreign affiliates to cater to local customers and suppliers
while pursuing the strategies formulated by the home office. While new technologies and liberalization are
i
Neither trade nor FDI caused the tequila crisis of 1994-95 or the Asian financial crisis of 1997-98. If
anything, these factors contributed to recovery as export revenues and FDI helped to compensate crisis
countries for the outflow of speculative capital.
Globalization and the Multinational Corporation 2
helping big corporations to increase their efficiency and reach, these same forces also allow small, new
firms to challenge even the most powerful multinationals for market share and the race for new products
and services.2
By the early 1990s, much of the developing world had begun to welcome foreign goods, services,
investment and technology. At the same time, liberalization contributed to the spread of developing
country corporations, and these firms began to operate across national borders, effectively becoming
multinationals in their own right. In the past decade, the multinational corporation has spread aggressively
into the emerging markets of Latin America and Asia. With the collapse of the Iron Curtain, MNCs also
expanded into Eastern Europe and the former Soviet Union. Through FDI, these MNCs – the major drivers
of international trade and investment – incorporated developing and transition countries into the world
trade system. As a result, developing countries have played, and will continue to play, a much larger role
in world trade in this second wave of globalization (1973 - ?) than they did in the first (1848 – 1914).3
But as the size and reach of multinational corporations have grown, so too has resistance to what is termed
“corporate globalization” or “monopoly capitalism.” This resistance is most acute not in the developing
world where one might expect, but in the advanced economies of the OECD, the home base of 99 of the
world’s 100 largest MNCs. The United States, home of 27 of the 100 largest MNCs, has been the epicenter
of the anti-corporate movement, as evident in the presidential campaign of Green Party candidate Ralph
Nader and the protests against “corporate globalization” and the international financial institutions in
Seattle, Washington DC and Prague.
The multinational corporate order is growing and spreading, weaving together distinct pieces of the global
economy that previously were separated by culture, geography or nationality. The relationship between
globalization and MNC proliferation is one of mutual causation, but neither process is inevitable. World
War One brought the first wave of globalization to a grinding halt. The war destroyed international
commerce and reasserted nationalism at the expense of international cooperation. Today, globalization is
coming under increasing attack by nation-states from above and by civil society from below. The outcome
of this struggle is far from certain. As this process unfolds, policymakers in emerging markets and
developing countries increasingly must factor the implications of globalization into their decision-making.
Should they welcome investment and trade by foreign MNCs? What type of industrial policy should they
implement in order to gain the most from globalization? Should they concentrate state resources on
building “national champions?” What sort of regulatory structure, at both the national and international
levels, must be in place for MNCs to flourish, but without trampling democracy, culture or the
environment?
The purpose of this paper is to examine the rise of the multinational corporation and its effects on the
global economy, with an eye toward defining an agenda for policymakers at the national and international
levels. Emphasis will be placed on the impact of MNC activity on the developing world.
After the introduction, Part I gives an overview and brief history of the multinational corporation. We focus
on how the corporation has evolved in the United States, and how ideology has shaped its evolution. Part II
looks at the multinational corporation as it exists today. In particular, Part II covers the dominance of
MNCs, their penetration into the developing world, the evolving structure of global competition, the
relationship between MNCs and research and development (R&D) and the ongoing debate over the pros
and cons of the corporate model. The sum of this analysis should provide us with a better understanding of
the MNC, the many ways in which it is shaping the global economy and its implications for economic
development. In Part III, we study the two forces – globalization and the digital revolution – that will
impact heavily on the future evolution of multinational corporations. Part III also covers a range of issues
drawn from the preceding analysis that should guide policymakers as they set economic and industrial
policy.
Part I – Evolution of the Multinational Corporation
A corporation is a legal entity that is separate from the people who own it. As such, a corporation is
viewed, in legal terms, as acting separately from its owners and workers when entering into business deals,
borrowing money and performing other business-related activities. A multinational corporation can be
defined as a corporation that engages in international production and that bases its management decisions
on regional or global alternatives.4 Sometimes, such a firm is referred to as a “global corporation,”
“multinational enterprise (MNE)” or “transnational corporation (TNC),” but for the sake of simplicity, we
will use the term “multinational corporation (MNC)” throughout this paper. It should be noted, however,
that these different terms sometimes reflect conceptual differences in the way that the firms operate. Most
notably, the terms “global corporation” and “TNC” sometimes are used to describe a firm that has “shed
[its] home-nation identity and operates as [an] essentially stateless entity on a global scale.”5 This is the
type of firm described by Kenichi Ohmae in his book, Borderless World: Power and Strategy in the
Interlinked Economy.6 While modern MNCs may be evolving toward this truly global reach, few, if any,
seem yet to have attained this level of sophistication.ii In fact, as we will argue later in this paper, the trend
toward regionalism encourages firms to concentrate on expanding within their region before going truly
global.
Why do we have multinational corporations? The first reason is economies of scale. As we will argue
later, new developments in information technology may reduce the importance of size in some sectors, but
for now, many commercial activities, such as automobile production, can be performed efficiently only on
a large scale; a ‘mom and pop’ operation cannot build turbine engines. The second reason is comparative
advantage. The manufacture of complex products, such as personal computers or automobiles, typically
involves a number of distinct tasks (design, marketing, manufacturing), various materials (steel, copper,
glass) and a number of factors of production (workers, machinery, contacts with suppliers and customers),
all of which must be coordinated by management. To build an airplane, one needs engineers, steel,
welders, rubber and many other inputs. A plane might be built most efficiently with American engineers,
Korean steel and Mexican assembly, for example. A third reason that we have MNCs is consumer tastes.
Consumers in different countries often have similar tastes. If many consumers in New York want German
BMWs, it might make sense for BMW to establish a presence there: maybe set up a dealership, an
assembly plant, even an engineering team. The fourth reason derives from the very nature of the
corporation: its ultimate objective is profit. Shareholders (who want returns) demand that a corporation
increase profits. Workers (who want pay raises) pressure a corporation to expand costs. To keep both
parties happy, a firm needs to increase its revenue base and raise productivity. When a market for the
ii
General Electric (GE) and Nestlé are two firms often cited as truly global operations.
firm’s product becomes saturated, a profit-seeking corporation needs to find a new consumer market (often
overseas) in order to continue expanding its revenue base.
From where did the model for the multinational corporation emerge? The modern multinational
corporation has its roots in the Dutch and British East India Companies of the 17th century. These
companies imposed some semblance of order, often forcefully and illegitimately, on the world of
commerce, which until then was ruled by economic anarchy. Where once pirates threatened trade and
commerce, the East India companies assembled armies and erected fortresses to protect their pursuit of
profit. They often gained market share by force – against rivals, including one another, and against the
inhabitants of lands they wished to colonize. Typically, the companies demanded free trade and local
monopoly rights in the markets in which they operated so as to maximize profits. These predatory
practices impacted the colonized lands for the worse. The British company led to the bloody Indian mutiny
of 1857; it also brought opium into China. In its wake, the Dutch company left, among other things,
apartheid in South Africa. But despite all these pernicious deeds, both companies “were pioneering the
skills and networks of modern global commerce,” and advancing technology in the form of better ships and
equipment.7
Arguably, the most important lesson to draw from the experience of the East India companies is that no
matter how much harm these mighty firms caused, they also produced valuable innovations and efficiency
gains. One serious defect in the structure of 18th century corporate commerce was that the very companies
that conducted the commerce also designed and enforced the rules of commerce. The challenge for future
generations would be to harness the good that large multinationals could create, while placing checks and
balances on them to prevent abuses of power. The next step in the process was to separate economic from
military power, and allow corporations to conduct commerce, while national governments protected
commercial interests from would-be pirates. This separation of power and division of responsibilities
enabled commerce to flourish while limiting the potential for abuse of corporate power. Eventually,
governments also would assume the role of designing and enforcing the rules of commerce. In the mid-20th
century, many national governments even went a step further, assuming the role of producer.
Corporate charters were issued in the American colonies to religious and community groups, and
eventually, to aspiring businesses. It was the latter that held the greatest economic potential, and also
stirred the greatest backlash. It did not take long for people to envision the potential for a clash of interests
between government and big business. Thomas Jefferson warned against the spread of corporations as
early as 1816:
“I hope that we shall crush in its birth the aristocracy of our monied corporations, which dare already to challenge our
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government to a trial of strength, and bid defiance to the laws of our country.”
In line with Jefferson’s worst nightmares, the 19th century evolved into the Gilded Age. In the US, giant
corporations emerged under the direction of the “robber barons,” a term used to describe the likes of
Andrew Carnegie, J.P. Morgan and John D. Rockefeller. Eventually, Standard Oil and US Steel essentially
monopolized the oil and steel industries, respectively. By the early 20th century, popular opinion began to
lean toward populism and against the mighty corporations. Workers demanded that they be allowed to
assemble labor unions, and “muckrakers” exposed various abuses of power by corporations. Antitrust laws
– most notably, the Sherman Act of 1890 – were passed. In addition, this anti-corporate movement saw
international economic liberalization as aiding and abetting the proliferation of corporate abuse. Thus, the
first great wave of globalization, which began in 1848, was blamed for growing income inequality and
insecurity.iii Disenchanted with globalization, disgruntled members of the political left set out to halt it.
The First World War quickly ended that first wave global economic integration and the nations of the world
receded into autarky in the 1920s.
The Great Depression and the Second World War cast doubts on the viability of laissez faire capitalism.
Afterward, most countries, especially Japan and Germany, built their economies on a foundation of large
corporations and big government. Businessmen and bureaucrats worked together to reap the benefits of
free markets, while imposing, via regulation, some semblance of order. It was easier for governments to
regulate a few mega-corporations than a whole slew of smaller firms. As a result, large corporations spread
quickly after the war. Free trade prospered between the industrial economies as a result of the General
Agreement on Tariffs and Trade (GATT) and the Marshall Plan. Developing countries did not offer a
fertile ground for these corporations since the GATT permitted the erection of barriers to foreign trade in
these countries. The developing world was permitted under GATT to protect its “infant industries,” which
often led to rent-seeking and inefficiency.
Meanwhile, membership in labor unions swelled in the industrial world, and a “post-war bargain” emerged
between national governments, corporations and labor. National governments comforted workers by
providing pensions, welfare and unemployment and health insurance. Corporations were free to conduct
commerce and workers were free to organize. The state enforced the rights of each and attempted to ensure
that the relationship between labor and management ran smoothly. Essentially, the post-war bargain
promised workers “a steady increase in wages and benefits in return for labor peace.” 9 But this bargain
began to break down a generation after the end of the war. In 1967, John Kenneth Galbraith, citing the
“application of increasingly intricate and sophisticated technology to the production of things,” predicted
the natural tendency toward, and the dangers of, the concentration of power in The New Industrial State:10
iii
The choice of 1848 as a starting point is fairly arbitrary, but that year coincides with the repeal of the
Corn laws in the UK, which paved the way for liberalization of trade throughout much of the world.
“With the rise of the modern corporation, the emergence of the organization required by modern technology and planning
and the divorce of capital from the control of the business, the entrepreneur no longer exists as an individual person in the
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mature industrial enterprise.”
Like many social theorists before him, Galbraith worried that “the danger to liberty lies in the subordination
of belief to the needs of the industrial system,” and that the inherent tendency toward concentration of
industry threatened to make this subordination into reality.12 Events that have transpired in the three
decades since Galbraith issued these warnings do not support his fears. In fact, the tendencies he described
were more applicable to the heavy industry, state-led form of capitalism popular in most of the world in the
four decades after World War Two than to the more liberal economic order that is emerging today. The
type of organization Galbraith described as essential to then-modern technology was the direct result of the
heavy state interference, segmented capital markets and large economies of scale (and consequent tendency
for “natural monopoly”) of the oil, steel and auto industries that dominated that time. Today, capital
markets, especially in the Anglo-Saxon world, are far deeper and more accessible than thirty years ago.
Some of the biggest industries (e.g., IT, telecom, e-commerce) rely more on human capital than heavy
machinery, and value efficiency and flexibility more than size or market share. A new deal has been struck
to replace the post-war bargain: “the promise of more wealth in exchange for the readiness to change,
adjust, be alert, move people, money and resources in and out of various activities, geographic locations
and industries.”13 Labor traded a measure of stability for more opportunity.
Nevertheless, the mere size of the world’s largest corporations inspires fear and suspicion among many
people even today. In spite of the pro-competitive forces of technology and worldwide liberalization,
globalization seems to have re-awakened these anti-corporate sentiments, embodied in the following
statement by Ralph Nader, which he delivered shortly after the now infamous “Battle in Seattle”:
“The global corporate model is premised on the concentration of power over markets, governments, mass media, patent
monopolies over critical drugs and seeds, the workplace and corporate culture. All these, and other power concentrates,
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homogenize the globe and undermine democratic processes and their benefits.”
Such statements illustrate that opposition to corporations remains strong even in the world’s wealthiest
nation. As policymakers in the developing world assess the many opportunities and challenges of
globalization, they must consider the impact of multinational corporations on national economic
development. Multinational corporations can bring cutting-edge technology and large sums of foreign
direct investment into a technology- and capital-scarce economy. But their entry into a market could spell
trouble for domestic competitors and the environment. In the following section, we will look at specific
aspects of these corporations, weigh the pros and cons of their expansion and attempt to provide a well-
rounded analysis of the opportunities and challenges posed to economic policymakers by multinational
corporations.
Part II – “The Most Powerful Institution in the World Today”
1. Power Play
The increasing power of the multinational corporation (MNC) is beyond doubt. The production of MNCs
amounts to approximately one-quarter of world output. Fifty-one of the world’s largest 100 economies are
corporations, not countries.15 The total value of foreign sales of MNCs now exceeds world exports of
goods and services, and intra-firm trade alone by MNCs accounts for about one-third of world trade. There
are now approximately 63,000 multinational corporations – defined as firms that engage in international
production – with over 690,000 foreign affiliates.16 In 1997, these firms controlled $12 trillion in foreign
assets, employed 30 million workers and earned $9.5 trillion in revenues – larger than the annual GDP of
the United States or the European Union (EU). The rapid growth of MNCs is a direct result of the
worldwide liberalization of trade and investment. Corporations have grown larger because they now
compete in much bigger markets.
An elite few dominate the large and diverse family of MNCs. For example, the world’s largest 100 non-
financial MNCs held $1.9 trillion in foreign assets, employed 6.5 million people overseas and registered
$2.1 trillion in foreign sales in 1999.17 Presently, MNCs are based disproportionately in advanced
economies, or “the Triad” (US, EU and Japan), where 89 of the 100 largest MNCs are based.18 Only one
firm (Petroleos de Venezuela) from the developing world makes the top 100. This may begin to change in
the years ahead as firms based in developing countries join the ranks of the big multinationals, but the
process will be slow.
Multinational corporations are the main conduits of foreign direct investment (FDI), the annual flow of
which has grown steadily and rapidly since the mid-1980s. The unique attributes of FDI (most notably, its
long-term nature, association with the transfer of technology and foreign ownership) have made it the
subject of much economic analysis. In recent years, FDI has attracted a great deal of attention from the
economic development community as its flow into the developing world has skyrocketed. FDI, as we will
see, is one of the driving forces of globalization.
Figure 1: FDI Inflows

1,000
900
800
700
600
500
400
300
200
100
-
93
94
95
96
97
98
99
2*
Source: UNCTAD. World Investment Report, 2000.
Foreign direct investment is defined as “an investment involving a long-term relationship and reflecting a
lasting interest and control of a resident entity in one economy (foreign direct investor or parent enterprise)
in an enterprise resident in an economy other than that of the foreign direct investor (FDI enterprise or
affiliate enterprise or foreign affiliate).”19 Furthermore, “FDI implies that the investor exerts a significant
degree of influence on the management of the enterprise resident in the other economy.”20 Development
ultimately rests on the ability to increase total factor productivity. Foreign direct investment can – and has
– played an important role in bringing this about. An empirical study by Romain Wacziarg suggests that a
1 percent increase in the ratio of foreign capital flows to GDP is associated with a 0.1 percent increase in
the GDP growth rate. An identical increase in FDI, however, is associated with an increase in the GDP
growth rate of 0.3 – 0.4 percent.21 Moreover, “FDI is mostly undertaken by the world’s largest and most
technologically dynamic firms.”22 This feature increases the impact of the investment’s positive spillover
effects – the transfer of technology and training of the workforce, for example.
World FDI Stock, 1997

Amount Proportion
Region (Billions of US$) to total
World 3,456 100%
Industrial Countries 2,349 68%
Western Europe 1,277 37%
North America 858 25%
Other 215 6%
Proportion to total for
Developing Countries 1,044 developing countries only
30%
Argentina, Brazil
and Mexico 249 7% 24%
Other Latin America 126 4% 12%
China & Hong Kong 244 7% 24%
SE Asia* 253 7% 24%
Other Asia 96 3% 9%
Africa 65 2% 6%
Other developing
countries 9 0.3% 1%
- Top 9** 725 21% 70%
Source: World Bank. World Development Report, 1999.
* Indonesia, Korea, Malaysia, Philippines, Singapore, Taiwan (PRC), and Thailand
** China, Brazil, Mexico, Poland, Argentina, Singapore, Indonesia, Malaysia, and Saudi
Arabia
As shown in Figure 1, the worldwide flow of FDI more than quadrupled tripled from 1993 to 1999. Even
in the midst of the Asian and Russian financial crises, the developing world received $165 billion in gross
FDI inflows in 1998, up from an annual average of $35b during 1987-92. China and Brazil registered the
most dramatic growth, as these two very large economies opened up to the global economy and to
multinational corporations. In 1998, China and Brazil received $45b and $28b of FDI, respectively. For
Brazil, this represented a twenty-fold increase over 1993.
As a result of a steadily increasing flow, the worldwide stock of FDI in 1997 was estimated at $3.5 trillion.
(See Table above, “World FDI Stock, 1997.”) Of this, 30 percent – or slightly more than $1 trillion – was
located in the developing world. But the corporations and markets investing there have been very selective.
As illustrated in Figure 2, 70 percent of the stock of FDI in the developing world was in just nine countries
– China, Brazil, Mexico, Singapore, Indonesia, Malaysia, Saudi Arabia, Poland and Argentina, in that
order.iv China, with six percent of the total worldwide stock of foreign direct investment ($200 billion),
and 20 percent of the total in the developing world, now tops the list of emerging countries receiving this
type of investment.23 This list of countries indicates that a number of factors determines the destination of
FDI. These include size (China), natural resources (Saudi Arabia and Indonesia), openness (Singapore,
Argentina, and Malaysia), access to a major market (Mexico) and long-term growth potential (Brazil and
iv
For some reason, Singapore (per capita income of $30,000) is still considered a developing country in the
statistics maintained by the World Bank.
Poland).24 Later in this paper, we will take a look at how the determinants of FDI are likely to change in
the years ahead in response to the evolution of the world economy and the multinational corporations that
drive it.
Figure 2 - Share of total FDI stock in

the developing world
Other
China
developing
20%
countries
31%
Brazil
13%
Saudi Arabia
3%
Mexico
Poland Singapore Indonesia 10%
3% 7% 7%
Malaysia Argentina
3% 3%
Source: World Bank. World Development Report, 1999.
MNCs have expanded into new markets as liberalization has swept across the globe. In some cases,
corporations have established new affiliates or facilities overseas. In other cases, they have purchased
existing firms or assets. The latter, which is referred to as mergers & acquisitions (M&A), now constitutes
80% of FDI in the advanced economies and around one-third in the developing world.25 The rise of M&A
in emerging markets was aided by the ambitious privatization drives carried out by their governments in the
1990s, especially in Latin America and Eastern Europe. M&A is also growing rapidly in the advanced
economies. Aided by the massive $182 billion merger of AOL and Time-Warner, global M&A reached
$1.85 trillion in the first six months of 2000, up 25% from the first half of 1999, according to data compiled
by Thompson Financial.26
With the breathtaking growth of M&A activity, the world’s first ever $1 trillion merger may not be too far
off. On the other hand, a re-assessment of the trend toward ever larger mergers may be in order, as various
researchers find that approximately two-thirds of mergers fail to increase shareholder value.27 The global
M&A market will slow if the big mergers of the past couple of years fail to raise shareholder value – the
number one objective of any corporation. This is a built-in feature of the marketplace that will limit the
tendency toward concentration: market share will become concentrated only to the extent that it creates
gains in efficiency.
As highlighted by Vodafone’s nearly $200 billion acquisition of Mannesman and the proposed $130 billion
merger of Worldcom and Sprint (which was subsequently blocked by the US and EU on antitrust
concerns), telecom continues to be a hotbed for M&A activity as firms position themselves to take
advantage of this high-growth sector. This is not limited to the industrial world, however. One very
important stipulation of the US-China WTO Accord, which will go into effect upon China’s admission to
the WTO, is that China must allow foreign ownership (up to 50%) in domestic telecom firms within two
years of accession. With a national penetration rate of just 10.6%, a population of 1.3 billion and an
economy expected to continue its rapid growth, foreign direct investment in Chinese telecommunications
could skyrocket during the next five or ten years. Land-based telephone lines will be leapfrogged. The big
market will be third generation (3G) mobile telephony combined with Internet services. The telecom
infrastructure also will need massive investment in laying a fiber optic backbone. The telecom
conglomerates, such as AT&T, NTT and Cisco, will pour billions of dollars of investment into this huge
market.
The impressive statistics cited above allude to the rapid spread of multinational corporations in terms of the
resources they control and the number of markets in which they operate. Through world trade and foreign
direct investment, these firms are binding together economies throughout the world. They are integrating
production networks across borders while localizing goods and services to meet the needs of consumers in
various markets. Some firms have expanded aggressively through mergers and acquisitions in the
expectation that scale and scope will be increasingly vital for success in the globalizing economy. But as
MNCs grow in size and number, they are raising concerns about market concentration. Others fear that
large corporations have become more powerful than democratic governments and institutions, or that they
aid authoritarian regimes such as the case of Shell in Nigeria or ITT’s involvement in the coup that brought
Augusto Pinochet to power in Chile. Later in this paper, we will take a closer look at these and other
concerns.
2. Survival of the Fittest: Competition on a Global Scale
As national barriers to trade fall, large corporations, once shielded by national borders, are coming into
direct competition with one another. A flurry of mergers and acquisitions (M&A) activity has occurred as
these corporations prepare for global competition. As competition takes place in an increasingly global
arena, national rules for competition are beginning to converge. As we will see, global competition has
important implications for economic policy.
One of the major criticisms of the multinational corporation is that its size and scope enable it to stifle
competition. When critics complain about “corporate globalization” or “monopoly capitalism,” they
generally refer to this feature; some even contend that laissez-faire capitalism (or some similar variant of
unfettered markets) has a natural tendency toward oligopoly or monopoly. Economists understand well
that such a concentration of market share and market power, when combined with the profit incentive,
distorts the allocation of resources, raises prices, decreases output and reduces aggregate welfare (i.e.,
creates a “deadweight loss” or a sub-Pareto optimal outcome). Therefore, following this logic, it is in the
interest of governments and consumers to ensure the presence of competition in the markets by reining in
the dominant firms. The presence of antitrust legislation stems from this logic.
The best indicator of the loss of consumer welfare due to concentration in the market for a given good,
service or factor is the level of profit. While an exhaustive survey of profit levels across sectors and
countries is well beyond the scope of this paper, a recent study of 214 companies on the 1999 Fortune
Global 500 by Templeton College, Oxford found that these firms earned a rather underwhelming 8.3%
return on foreign assets in the mid-1990s, declining to 6.6% in 1998. In previous years, the same survey
estimated returns on foreign assets for Fortune 500 firms to range from 2–8%.28 Clearly, if MNCs were
immune to competition, one would expect much higher profit margins. Other research shows that the
world’s largest multinationals do not, over time, earn excessive profits, and that economic efficiency is
enhanced by their activities.29
Globalization is exposing corporations throughout the world to competition from which national barriers,
both man-made and natural, once shielded them. The collapse of man-made barriers accelerated with the
end of the Cold War and the spread of economic liberalism. However, one should be careful not to
exaggerate the global spread of free markets; it is true that capitalism seems to be spreading in all corners
of the earth, but different regions are cultivating different variants and threatening to polarize the “global”
economy into three or four regional ones.30 The proliferation of regional trade agreements is indicative of
this trend. Even so, regionalism, like full-blown globalization, increases the intensity of competition in
each market.
The largest natural barriers to new markets were culture and geography. Although both continue to play
important roles in segmenting markets, globalization is reducing the impact of each. The
internationalization of business practices allows the affiliates of MNCs to adapt to local cultures while
helping the parent corporation to pursue its global strategy, as evident in the “multi-local” strategy of
McDonald’s.31 Dramatic improvements in technology – especially in transport and telecommunications –
have reduced the impediment of distance, allowing firms to compete in new markets. But far from aiding
large corporations in their bids for world domination, the digital revolution has introduced “atomistic
competition” to the business world.32 New technologies (IT) and the deregulation of capital markets
(venture capital) now allow small start-ups to compete with the most powerful corporations.33
As competition among firms grows ever more intense, the interests of shareholders and customers carry
greater weight in corporate decision-making, even in countries where cross-shareholdings have been the
norm. Firms that resist this new form of corporate governance do so at their own peril, as they risk losing
access to finance and customers to their more progressive competitors. Governments must do their part to
encourage this transition to a more accountable, transparent and, ultimately, efficient form of corporate
governance within their economies. This is what US Treasury Secretary Larry Summers refers to as the
“Global Structural Reform Challenge.”34 Economies of all shapes and sizes – including China, Germany,
France and the Asian tigers – are confronting this challenge. But the clash of traditional business practices
with the “Global Structural Reform Challenge” is perhaps most acute in Japan, where the forces of
globalization are eroding the heavily fortified keiretsu structure, and opening up the economy to mergers
and acquisitions, including those by foreign investors. Since the Japanese experience is most striking, it is
worth exploring as a case study.
The keiretsu system was assembled in Japan after the Second World War. It involved close collaboration
between business and government bureaucrats and led the war-torn country onto a path of rapid economic
growth for four decades. Government and business leaders allocated capital to key industries and forged a
powerful export-driven economy. Rapid growth begot high savings rates, further fueling the economy and
making Japan, Inc. self-sufficient in terms of capital. This arrangement was extremely well suited for the
world economic system governed by the Bretton Woods doctrine of fixed exchange and interest rates, free
trade and immobile capital.
In light of the widespread prosperity and stability garnered by the keiretsu system, it is easy to understand
why the Japanese were hesitant to dismantle it. However, the rules of the global economy have changed
rapidly in the past two decades. Worldwide liberalization has re-defined the role of the state; new
technologies have ushered in the “Information Age,” which, in turn, has accelerated the pace of change in
the business world; each of these developments has raised sharply the flow of goods, services, information
and capital across national borders.35 Cumulatively, these developments have created the embryo of a truly
integrated global economy rooted in capitalism. It appears as though the keiretsu system is ill equipped to
deal with these new rules.36 In fact, one influential Japan expert traces the origin of the present economic
problems in the design of the postwar financial system, which was part of an overall plan that gave the
government “unusual power” to guide the economy.37
Until recently, large banks dominated the Japanese capital markets. The industrial conglomerates relied
very heavily on these banks for access to capital. But the implosion of the “bubble economy” in the early
1990s, which unleashed the looming threat of deflation and a string of bankruptcies, forced a re-evaluation
of Japan, Inc. Globalization demands openness and the erection of a level playing field, both of which run
contrary to the keiretsu system.
Risutora, the Japanese term for restructuring, is transforming the way that savers and investors interact. At
present, only 9% of Japanese household financial assets are held in stocks, bonds and mutual funds, as
against two-thirds in the US. Yet, the role of the big commercial banks is diminishing, as various forms of
direct financing take off. Consequently, greater emphasis is being placed on shareholder value, allowing
for a more efficient process of capital allocation. In September 1999, the Financial Times wrote of these
changes:
“The ice is breaking in corporate Japan… What is startling about the keenly awaited restructuring plans from NEC, the
electronics group, is the language used. NEC is talking about shareholder value, and about how it is going to evaluate its
businesses in future by such un-Japanese yardsticks as free cash flow and return on equity. Its Internet service provider is
seen as the driving force behind the company over the next few years…
There are still lots of companies in Japan that are not subject to foreign competition and are not in dire straits, and many of
them are still trying to pretend that their world has not changed. But the impact of deregulation and greatly improved
distribution systems will hit them too, even if it takes a little time…
As Japan’s politicians continue to posture in much the same old familiar ways, the economy is at last beginning to be
38
restructured, from the ground up.”
Moreover, changes in commercial law and accounting rules are making it easier for firms, including foreign
corporations, to sell and acquire businesses. Some of the more notable deals include the acquisitions of
Nissan by French carmaker Renault and of Long Term Credit Bank (LTCB) by US private equity firm
Ripplewood Holdings. The sale to foreigners of Renault and LTCB, once among the jewels of Japan, Inc.,
is a sign of the times – for a firm to compete in the global economy, it must prove that it can compete with
foreign firms on its home turf. Other Japanese firms, especially banks, are preparing for increasing foreign
competition by entering into defensive mergers. To this end, the 1999 merger of Fuji Bank, Dai-Ichi
Kangyo Bank and Industrial Bank of Japan created the world’s largest bank with 140 trillion yen in assets.
Shortly after that merger was announced, Sumitomo and Sakura banks agreed to complete a merger by
2002, yielding another super-bank with nearly $1 trillion in assets.
Even so, size alone does not ensure competitiveness (in fact, in many cases, it can be detrimental, as
illustrated by IBM’s failure to adapt quickly enough to stave off competition from upstarts Hewlett-
Packard, Apple and Microsoft). Firms need to be better managed in order to survive. In fact, recent
research shows that microeconomic factors, such as the quality of management, are playing an increasingly
influential role in determining corporate profits.39 Meanwhile, the impact of macroeconomic factors – the
most important being GDP growth – on corporate earnings seems to be on the decline. Analysts attribute
this change to the following: One, the increasing role of international trade (one-third of earnings now
come from overseas, as against one-sixth in the mid-1980s); two, the changing composition of the Standard
& Poor’s Index toward companies that are less dependent on volatile commodity prices (technology and
services firms now dominate the Index, whereas oil companies once held this position); and three,
improved managerial techniques and supply chain management (e.g., just-in-time inventory) have slashed
costs and improved efficiency. Bruce Steinberg, chief economist for Merrill Lynch, heralds the growing
impact of management as “probably the most rapid change in corporate business models in history.”40 This
revolution in management will only raise the intensity of competition in the emerging global marketplace.
3. The Developing World: Open for Business
Globalization is producing profound changes in the way multinational corporations are operating, and
generating new opportunities as well as challenges for the developing world. Reduction in barriers to entry
and the programs of privatization carried out by many developing countries – in particular, those in the
regions of Latin America and Eastern Europe – have significantly increased the presence of multinational
corporations (MNCs) there. This has happened as a result of greenfield investment as well as by the
acquisition of assets from both the public and private sectors. In the past, mergers and acquisitions (M&A)
activity in the developing world was relatively rare; it increased significantly as a consequence of the
opening of the Latin American countries in the late 1980s. This trend was continued by the Eastern
European countries as they abandoned communism and adopted capitalism. Following the severe
economic crisis of 1997-98 in East Asia, the countries in that region have also begun to welcome
multinational corporations. These firms, in turn, acquired domestically owned assets.
TABLE 7 - Cross-border M&A sales (Billions of US$) Average for

Region 1991 1992 1993 1994 1995 1996 1997 1998 1999 1991-99
World 80.7 79.3 83.1 127.1 186.6 227.0 304.8 531.6 720.1 260.0
Advanced economies 74.1 68.6 69.1 110.8 164.6 188.7 234.7 445.1 644.6 222.3
Developing economies 5.8 8.1 12.8 14.9 16 34.7 64.6 80.8 64.6 33.6
Asia 2.2 3.6 7.3 4.7 7 13.4 21.3 16.1 25.3 11.2
Latin America & Caribbean 0.63 2.1 2.3 2.6 2.1 3.6 15.7 17.1 2.9 5.4
Source: UNCTAD. 2000. World Investment Report.
As illustrated in Table 7, the value of cross-border M&A has risen dramatically in recent years – from $81
billion in 1991 to $720 billion in 1998, including a 59 percent jump from 1997 to 1998.41 The share of
developing countries in this activity was insignificant at the start of the 1990s. In 1991, M&A by
developed countries into developing countries amounted to less than $6 billion. Seven years later, in 1998,
it increased to $81 billion. In other words, the share of total M&A that took place in the developing world
amounted to only 7.2 percent in 1991, but rose to 21.2 percent in 1997.42 By the end of the 1990s, the
MNC had established a significant presence in the developing world.
The role of multinational enterprises in economic development has been controversial for many years.
From the end of the Second World War until the 1980s, most developing countries, fearing exploitation,
foreign influence and the potential for increased market concentration, sought to prevent multinational
conglomerates from penetrating their markets. This began to change in the 1980s, as many nations came to
recognize the benefits of attracting investments by MNCs. These benefits include FDI, transfer of
technology, and in many cases, substantial export earnings.43 Emerging markets can also use
multinationals to gain a foothold in the global economy, where multinationals act as units of integration.
Their “global-scanning capacity” enables them to divide their operations among the many countries in
which they operate, sourcing production in each country according to its comparative advantage. It is for
these reasons that the exploitation of corporate advantage by a multinational corporation often promotes
the exploitation of comparative advantage by its host countries.44 In other words, the interests of both the
multinational corporation and the host country often overlap, producing an outcome of advantage to both.
Integration of national economies into larger regional economies, and even into a single global economy,
increases the potential efficiency gains that can be achieved by economies of scale. MNCs often catalyze
the export of complex, technology-intensive products made by small- and medium-size firms (SMEs)
located in host countries. For example, approximately two-thirds of consumer electronic products made in
Korea and Taiwan are sold to MNCs such as GE, IBM and Toshiba on an “original equipment
manufacture” basis.45 In addition, research indicates that the presence of foreign multinational affiliates in
an economy stimulates competition and raises productivity levels of all firms – that is, not only the
affiliates, but also domestic firms, presumably in response to increased competition and transfer of
knowledge.46
Most MNCs now exercise much tighter control over their foreign affiliates than in the past. They have
implemented increasingly complex “integrated international production systems,” which now comprise
close to one-third of world trade.47, 48 The term “integrated international production” describes the
“decoupling of production of a good into its subcomponent parts and processes, which in turn are
distributed across countries on the basis of comparative advantage.”49 Thus,
“… firms split up the production process into various specific activities (such as finance, R&D, accounting, training, parts
production, distribution), or segments of these activities, with each of them carried out by affiliates in locations best suited
to the particular activity. This process creates an international intra-firm division of labor and a growing integration of
50
international production networks.”
Thus, a Toyota automobile can be built by the cumulative efforts of Toyota affiliates in scores of countries
across the globe. A car might be designed by Japanese engineers; the upholstery could be produced in
Argentina; the engine might be built in Mexico; and the car might roll off the assembly line in Brazil and
shipped to a dealership in Canada. This type of specialization – the integrated international production
system – allows each economy to contribute to the final product according to its comparative advantage. It
is a fundamental component of globalization, as it integrates the efforts of several economies to produce a

single product. Integrated international production increases efficiency by exploiting economies of scale.
Driven by the overwhelming need to turn profits, MNCs are becoming increasingly dependent on
developing countries for low-cost labor and new markets, just as developing countries are dependent on
MNCs for capital and technology. Thus, the world is entering a period of growing interdependence
between MNCs and the developing world in which both parties will benefit from greater interaction.51 The
challenge is for developing countries to structure their economies in a way that gives them much to offer
MNCs in the way of human capital and other resources supported by a strong macroeconomic, legal and
institutional framework.
The exports of many developing countries are concentrated among a few types of products, particularly
natural resources and agricultural goods. This is especially true in Latin America and Africa. Exports from
East Asia – and now, increasingly from India – are technologically more sophisticated.52 The reliance on
commodities for export earnings leaves these nations more susceptible to external shocks. Developing
countries that lack the capital and technology necessary to compete in global markets can diversify their
export bases by attracting investment by MNCs, thereby hedging against unfavorable movements in the
world prices of certain exports. The capital, technology and management methods contributed by MNCs,
when combined with low-wage labor and abundant natural resources provided by developing countries,
results in a symbiotic relationship – stable, long-term investment is stimulated, technology transferred, new
types of goods and services produced, jobs created, profits earned, tax revenues generated to the host
country government and the host country’s export base diversified.
Finally, MNC investments, whether they take the form of privatization, greenfield FDI, or M&A, will
result in substantial benefits for the developing world only if supported by smart, effective regulation. This
involves antitrust legislation, environmental oversight, protection of fair labor standards, and removal of
distortions such as local content requirements and labor market rigidities.
Despite the potential benefits of attracting multinational corporations, many countries have, especially prior
to the 1990s, been reluctant to accept them. This is the result of a number of concerns, mostly related to the
potential for exploitation of the host country by the MNC – a point that is covered in more detail later in
this section. This is partly political in that control of economic assets by foreigners tends to be unpopular.
The potential for increased pollution and erosion of worker rights are two more examples of possible
manipulation by MNCs. In addition, the fear of exploitation has a macroeconomic dimension. Insofar as
the presence of powerful multinational corporations renders existing and potential domestic firms
uncompetitive, the efforts of local entrepreneurs will be stifled. MNCs are also known to take advantage of
the differences in tax regimes among countries, thus contributing to leakages in tax revenues. Moreover,
most of the profits earned by MNCs are repatriated to their home countries, usually OECD nations. Of
course, without the infusion of capital and technology made possible by MNCs, these profits would not
exist in the first place; neither would a number of productive jobs.
Traditionally, developing countries have been more reluctant to welcome capital inflows resulting from
M&A than from greenfield FDI. The major concern is that, unlike greenfield investment, M&A involves
not the establishment of new production facilities, but the acquisition of existing facilities, often
accompanied by payroll cuts. This is an uninformed view. Greater integration of the developing world’s
enterprises in the global economic system through mergers and acquisitions serves an important purpose.
Like greenfield FDI, it also brings capital, new technology and managerial practices. M&A can salvage
existing facilities that otherwise would not survive liberalization or other competitive pressures. Of course,
the greatest benefit resulting from M&A may be that it improves efficiency and international
competitiveness.53 This is especially true of the privatization of loss-making, state-owned enterprises.
Policymakers from East Asia and Latin America can learn a great deal from each other in terms of how to
gain the most from multinational corporations. Each region has had very different experiences with MNCs,
although both began to attract large flows of investment from foreign corporations only recently.
Latin America began to attract large flows of FDI from foreign investors and MNCs when nations there
began to liberalize their markets in the late 1980s. Large-scale privatization drives continue to attract very
large flows of FDI. Even more encouraging is the fact that the privatization movement is showing signs of
creating a self-generating flow of FDI as a growing share of inward FDI is directed toward the restructuring
and expansion, rather than the purchase, of former state-owned enterprises. In 1998, Latin America
received $73.7 billion of FDI, $29b (39%) of which went toward the purchase of state-owned enterprises
while in 1999, it received $90.5b of FDI, with just $21b (23%) going toward the purchase of state-owned
enterprises.54
On the downside, most of the investment by MNCs in the region has gone into non-tradable services,
manufactures for the domestic market and natural resource-intensive industries.55 Thus, investment by
MNCs in many Latin American countries has done relatively little to upgrade or diversify their export
sectors. This is natural, however, in light of the region’s present stage of structural reform. Former state-
owned enterprises, particularly those which served the domestic market (i.e., the legacy of import-
substitution industrialization), tended to be vastly inefficient and lacked the resources and incentives to
maintain an adequate level of investment. At this stage of Latin American structural reform, a great deal of
foreign investment is now going into these recently privatized industries to make up for the upgrade and
expansion foregone. As the process of structural reform continues further, a greater share of foreign
investment will go into the export industries. Major Latin American governments are taking steps to hasten
and strengthen this process by passing measures to improve competitiveness. Brazil, Chile, Peru and
Mexico now allow their currencies to float freely, thus reducing the burden of an overvalued exchange rate,
while Argentina, which lacks the former option, has passed numerous measures to balance the federal
budget and make labor markets more flexible.
TABLE 8 - Sales of cross-border M&A by sector classification (millions of US $)

1991 1992 1993 1994 1995 1996 1997 1998 1999
Southeast Asia* 1,093 1,180 866 1,567 2,468 2,558 6,308 10,866 14,719
- Primary 46 … 93 59 76 3 367 146 47
- Secondary 648 285 196 248 457 935 5,134 5,087 8,125
- Tertiary 400 895 577 1,260 1,935 1,619 807 5,633 6,547
Latin America 3,529 4,196 5,110 9,950 8,636 20,508 41,103 63,923 37,166
- Primary 159 599 304 2,337 211 560 1,445 829 287
- Secondary 982 1,060 1,971 2,807 2,918 8,497 11,184 19,285 20,422
- Tertiary 2,388 2,538 2,835 4,806 5,508 11,451 28,474 43,268 16,456
* Indonesia, Korea, Malaysia, Philippines and Thailand
Source: UNCTAD. World Investment Report, 2000.
In contrast, a large share of investment by MNCs in East Asia goes into the export sector, especially into
technology-intensive and manufacturing activities. This is a testament to East Asia’s international
competitiveness and deep linkages with the global economy. Like Latin America, East Asia, until fairly
recently, largely ignored the potential for economic benefits that foreign corporations could bring. Of
course, with very high savings rates and a wealth of human capital (in stark contrast to Latin American
economies), the tigers were not particularly dependent on foreign capital and expertise. This changed in
the 1990s, especially when the financial crisis struck. Korea, Thailand and other Asian tigers found
themselves in need of foreign investment to restructure and re-capitalize ailing domestic firms. Table 8
shows a dramatic increase in the value of cross-border M&A sales by Southeast Asian firms, albeit from a
low starting point, from $2.6 billion in 1996 to $14.7 billion in 1999. Most of this investment has gone into
the secondary sector, which consists mainly of manufactures. The electronics industry, which drew over $2
billion of M&A sales in 1999, was particularly attractive to foreign corporations. By opening further to
foreign direct investment by MNCs in the years ahead, the economies of East Asia will reap substantial
benefits in the form of faster productivity growth, greater transparency, more stable capital inflows and
more intense competition.
In sum, the entry of multinational corporations into the developing world has the potential to raise
efficiency, facilitate integration with overseas markets and bring new technologies and management
methods. The challenge for policymakers will be to harness this vast potential while limiting the scope for
abuse, particularly in the realms of market share, politics and environment.
4. Developing Country Corporations Go Multinational
The penetration of the developing world by Triad-basedv MNCs is not the only result of trade and
investment liberalization. Another, more recent, phenomenon has been the emergence of MNCs based in
the developing world. The growing international presence of developing country corporations is evident in
their rising share of global FDI flows, from just 3% ($1.7 billion) in 1980 to 8% ($66 billion) in 1999.56
While only one developing country firm made the 2000 UNCTAD list of the top 100 MNCs, more may be
on the way, particularly if these countries sustain the momentum of structural reform.vi With that caveat in
mind, one could predict an increasing number of large MNCs emanating from India, as that country gives
rise to a plethora of fast-growing IT firms such as Infosys and Satyam Infoway, both of which are now
listed on the Nasdaq. “Old economy” types of Indian firms also have begun to acquire assets abroad, most
notably, Tata Tea’s acquisition of Tetley. However, it is in the IT sector that the Indian firms will create a
space for themselves in the global arena.
Beginning in the late 1980s, most Latin America nations began stripping away the many layers of the
import substitution model they had piled on since the 1960s. Essentially, four forces embodied this
revolution.57 Two of these were driven by policy, one by technology and the fourth by demographics. The
adoption of the Washington Consensus placed new emphasis on fiscal prudence and competition.
Privatization and liberalization of trade and investment constituted the means to obtain these objectives.
Led by Argentina, Latin American governments privatized large, inefficient state-run enterprises in power,
water, telecom and transportation, opening these sectors to competition. The liberalization of trade – via
the sharp reduction of tariffs and non-tariff barriers – and foreign investment – via opening of the capital
account and relaxation of taxes and investment regulations – dramatically increased the role of triad-based
MNCs in the region. MNCs from Spain, in particular, expanded aggressively into South America, while
US firms responded to NAFTA by stepping up relations with Mexico. Perhaps more importantly, Latin
American firms, as a result of trade liberalization, gained an outlet to the global marketplace, and the
insatiable American consumer market, in particular. This opens up an incredible opportunity for Latin
American firms to expand abroad – to grow into what one observer calls “multi-Latinas.” Mercosur is
acting as an incubator for emerging “multi-Latinas,” allowing firms to achieve economies of scale and to
develop regional strategies. Now that macroeconomic stability, democracy and some level of labor market
flexibility are fairly well rooted in much of the region, the pieces are falling into place for Latin American
corporations to go global.
In addition to the reforms enacted as part of the Washington Consensus, the third and fourth major forces
reshaping the Latin American business landscape are, respectively, the emergence of information
v
The “Triad” refers to the United States, European Union and Japan.
vi
Actually, UNCTAD uses the term “transnational corporations” or TNCs.
technology (IT) and youth. The former allows Latin firms to implement very sophisticated digital systems,
which cut costs by improving relations with suppliers and streamlining supply chains and increase revenues
by improving customer relations. A recent study by IDC, an IT consultancy, forecasts the annual growth of
Internet commerce revenues in Latin America to exceed 100% for each of the next three years, reaching
$11 billion in 2003.58 Over the same period, the number of Latin American Internet users is expected to
grow from 7 million to nearly 20 million.
The fourth component of the Latin American business revolution is the entry of youth, which is remolding
the corporate culture. For decades, powerful, closely knit family groups, known as “grupos”, wielded
heavy influence over Latin American business in much the same way as the chaebol did in Korea. One key
difference is that the grupos produced mainly for the domestic market, while the chaebol produced mainly
for export. Whereas the chaebol were disciplined by international competition, the grupos instead devoted
their efforts to lobbying government to insulate them from foreign competition.
Even after the economic and regulatory overhaul conducted as part of the Washington Consensus, the
founding fathers of the grupos remained firmly in place atop their businesses and continued their
dominance in corporate affairs. But demographics are changing all that. The heads of the grupos are now
retiring and being replaced by a younger generation of more sophisticated and well-educated executives
who are keen to prosper in a more liberal economic environment. This culture is in stark contrast to that of
the grupos, which evolved within a closed and heavily regulated economic system. The new generation of
Latin American executives are bringing modern management techniques, financial accounting systems and
business strategies to their corporations.
These developments, which are reshaping the corporation in Latin America, are by no means restricted to
that region. The decline of the keiretsu in Japan, the unwinding of cross-shareholdings in Germany and
increasing emphasis on corporate governance in places as diverse as Southeast Asia and Amsterdam all
point to the global corporate revolution that is occurring in response to globalization. Clearly, it is the
developing world that is most backward in this regard, and hence, has the most to gain from reform. The
need to implement international best practices at the corporate level was one of the major lessons of the
financial crisis that erupted in Southeast Asia three years ago. Consequently, the Korean chaebol, such as
Hyundai and Samsung, are restructuring, reducing leverage and improving transparency.
In response to the liberalization of the developing world, the corporations based there are growing and
expanding abroad. FDI outflows (a measure of foreign investment by MNCs based in a given country)
from the developing world accounted for 14% of global FDI outflows in 1997 (up from 5-7% in the 1980s),
but fell to just 8% the following year, due to the financial crises in East Asia, Russia and Brazil.59 In all
likelihood, the 1998 slump was nothing more than an anomaly and FDI outflows from developing countries
will continue to grow both in absolute terms and as a share of the world total. In general, FDI outflows
from developing countries tend to go to other developing countries.60 Of course, this increasing flow of
investment between developing countries does not yield a zero-sum outcome. Rather, it represents a more
efficient allocation of capital, as developing country firms invest not according to legal constraints, but
wherever the risk/return relationship is most favorable. Liberalization and structural reform have
encouraged the proliferation of developing country multinationals, as the erosion of protection in the home
market forces these companies to take a more global approach in locating customers and factors of
production. The trend toward regional trade pacts also gives these firms a larger home market and allows
for greater diversification. Finally, the widespread adoption of export processing zones (EPZs) has
stimulated the growth of Third World multinationals, as these firms constitute approximately 16-22% of all
foreign investors in EPZs worldwide.61
Even as privatization and liberalization gain steam, there remains the temptation for policymakers in
emerging markets to focus on industrial policy and to build “national champions.” Indeed, this approach
was instrumental in several very successful Asian economies – most notably, Korea and Japan, where the
economy was dominated by the close relationship between government and big business. Bureaucrats
steered capital toward the chaebols in Korea and toward the keiretsu firms in Japan. For over three
decades, this industrial policy brought rapid growth and widespread prosperity to both countries. But the
potential for corruption and inefficiency was always very high. Eventually, this system of allocating capital
collapsed. Throughout the 1990s, Japan struggled to recover from the bursting of the “bubble economy”
and Korea’s chaebols suffered dearly in the Asian financial crisis. In both cases, the cozy relationship
between bureaucrats and business obscured mounting evidence of financial mismanagement, allowing non-
performing loans, debt-to-equity ratios and unhedged liabilities to grow. In the past, this same arrangement
produced fantastic results, but the rules of the global economy have changed. Economies that favor
transparency, free markets, openness and vibrant competition will gain the most from globalization.
Economies that favor a select group of firms, where the public sector extends implicit guarantees to protect
these firms and where bureaucrats, not free markets, determine the allocation of capital will suffer as
international investors and consumers demand openness and efficiency.62
Policymakers in the developing world should consider the new demands of international investors and
consumers when designing policy. They should concentrate on setting the conditions for the most efficient
firms to succeed, rather than pin the economy’s hopes on a few chosen firms. Allow the firms that best
navigate the markets to succeed. They will be leaner and more competitive. Many will find a niche or
comparative advantage that enables them to grow internationally. Allow foreign firms to provide the goods
and services that they can produce more efficiently. Policymakers should not appoint “national
champions;” they should try to provide an enabling environment and allow the markets to pick the winners.
5. About Face: MNCs in the Court of Public Opinion
Shortly after the end of the Second World War, numerous colonies – from India to Indonesia and elsewhere
– gained independence. These newly autonomous nations entered the global economy as developing
countries. But with fresh memories of their colonial past, most of these nations viewed the advanced
countries with suspicion. As the troops from Britain, France, Japan and other nations withdrew from their
soil, many of these newly independent countries planned to insulate themselves from any future penetration
of the corrupt influence of foreign hegemony. As the economies of Europe, Japan and the US roared back
to life after the war, many developing countries saw the mighty corporations (which, at the time, were
based in America for the most part) as a fleet of Trojan horses. These suspicions were not totally
unfounded. After all, colonialism arrived in India and the East Indies on the backs of multinational
corporations. Countries in Latin America and Africa, in particular, sealed off their economies and focused
their energy on import substitution industrialization (ISI).
Meanwhile, the advanced nations set about building a liberal world economic order, buttressed by the IMF,
World Bank, the GATT and the United Nations. By lowering barriers between nations and pooling
resources to foster prosperity and stability throughout the free world, these countries enjoyed the fruits of
liberalization and the beginning of the second great wave of globalization.
In the late 1980s and early 1990s, a number of important developments occurred throughout the world:
Eastern Europe abandoned communism; the major Latin American nations abandoned ISI and embraced
democracy and free markets; China continued to make steady and impressive progress toward integrating
with the global economy; India, buried by a balance-of-payments crisis, began to liberalize its economy;
and finally, the Soviet Union collapsed. These events brought about 3 billion more people into the world
economy, precipitating an acceleration of globalization. As autarkic, state-led industrialization fell out of
favor, much of the developing world changed course and welcomed the investment and technology offered
by MNCs. Indeed, governments in the developing world quickly came to view multinational corporations
as “the embodiment of modernity and the prospect of wealth: full of technology, rich in capital, replete with
skilled jobs.”63
The euphoria of the early 1990s dissipated rather quickly once it became evident that the transition to a
truly global economy would be a long, bumpy ride with little understood implications. Just as the
developing world in the late 1980s quickly reversed its stance toward economic integration and
multinational corporations, so too did large (or at least, loud) factions within the industrial countries. Labor
unions, sunset industries (e.g., textiles), environmentalists, isolationists and all sorts of civil society groups
in the United States and Western Europe began to agitate against globalization. This agitation has been
illustrated most vividly in the anti-corporate, anti-globalization protests in Seattle and Washington, DC; in
the hoopla surrounding José Bové, the French farmer who destroyed a McDonald’s restaurant; and in the
populist rhetoric of Ralph Nader, the Green party candidate for US president. Jagdish Bhagwati of
Columbia University describes this strange role reversal:
“If the poor countries once worried about the outflow of their skilled – the brain drain – to the center, scholars like George
Borjas and Orlando Patterson and the [labor] unions now fear the inflow of the unskilled from the periphery. Poor
countries once worried that trade with the center would harm their nascent industrialization and development; today, trade
with the periphery strikes terror into the hearts of the center’s unions, who believe their wages will be reduced to Chinese
levels. Whereas the periphery once resisted the inflow of FDI, rich-country unions now resist its outflow. If the periphery
64
once opposed being dominated by the center, the center now fears losing its identity to the periphery.”
The fireworks at the 1999 WTO ministerial meeting in Seattle came as a rude awakening for anyone who
thought that these groups were too disjointed, paranoid and ignorant to fulfill any objective other than to
annoy. The follow-up to the Seattle protests took place in Washington, DC at the 2000 IMF-World Bank
Spring meetings. But one should be careful when attempting to pinpoint the target of the protestors.
Although the protestors gathered at the meetings of international institutions, multinational corporations
and capitalism itself drew much of their ire. While this anti-corporate lobby remains a small minority,
albeit a very loud one, its demands reflect real concerns and a general lack of understanding about
globalization that might well be shared by quieter, more mainstream members of society. Their actions and
rhetoric were enough to persuade US President Bill Clinton to call for the inclusion of labor standards in
WTO procedures. If these protests were enough to sway President Clinton – the same president who
fought for NAFTA and for permanent normal trade relations with China – it would not be outrageous to
think that they might gain a critical mass of public opinion. But while many of the various concerns about
globalization are legitimate (some, of course, are absurd), many of the remedies proposed by the protestors
stem from poor understanding or garbled logic.
In many cases, civil society feeds off of anti-corporate and anti-establishment sentiment. Several consumer
rights groups have concluded that since trade liberalization benefits big business, it necessarily does so at
the expense of consumers – nevermind the inherent contradiction of protecting the rights of consumers by
denying them wider selection and lower prices.65 Few dispute that protecting “public goods” such as the
environment is important, but for the most part, the downsides of doing so – among others, that the pace of
economic development would slow – have been largely ignored by popular media. Let us take a closer
look at some of the issues raised by the anti-corporate lobby in Seattle as they pertain to MNCs.
Multinational corporations have become too powerful in absolute terms as well as relative to
governments. The enormous resources controlled by multinational corporations (See Section 1: Power
Play) give them a tremendous amount of power, especially relative to individuals and governments.
The ongoing reduction of national barriers to trade and investment enables these firms to close shop
and head overseas if government, workers or NGOs place restrictions (e.g., minimum wage, taxation,
labor standards, fines for pollution, etc.) on them or otherwise inhibit their ability to earn profits.
The criticism stated above is the focal point of the presidential campaign of Ralph Nader, long-time
consumer advocatevii and critic of large corporations. Certainly, there is a danger that any organization
that controls resources and market share on a par with giant conglomerates like Nestlé or General
Motors may abuse its power, perhaps in ways that undermine democratic processes or hurt consumers.
But these corporations earn their profits through efficiency and innovation, without which they would
quickly lose market share to rivals. They employ millions of workers with competitive wages, provide
relatively low-cost/high-quality goods and services to consumers and enrich shareholders. Moreover,
they must accomplish all of this without stepping beyond the boundaries of antitrust law in the
countries in which they operate. If they fail to meet all of these objectives, they will be bought out or
bankrupted by more competent rivals. The antitrust case against Microsoft, the blocking by the US
and EU of the proposed Worldcom-Sprint merger and the enormous penalty imposed on the US
tobacco industry by jurors in the state of Florida all serve as evidence that the power of MNCs remains
firmly in check by national governments.
The confusion concerning the power of corporations to influence government, perhaps at the expense
of the social good, stems from the fallacy of equating economic power with political power (i.e.,
MNCs can use their considerable financial resources to undermine democracy). In light of the profit
motive, it is rational for a firm to spend money to influence legislation to its favor if doing so is likely
to enhance profitability – in fact, this is essentially just a form of investment. Hence, the
pharmaceutical company Schering-Plough has lobbied US Senators and contributed political donations
to legislators in order to win a renewal of its patent on the popular allergy drug Claritin. Therefore,
argue anti-corporatists, the rights and privileges of corporations must be scaled back for the sake of
democracy and the greater social good. Of course, doing so would impose on the economy hefty costs
in efficiency, employment, output, investment and trade. But economic power is not equivalent to
political power. There must be a link for one to translate into the other. In some countries, this link is
stronger (i.e., it is easier to leverage one type of power to attain the other) than in others. Governments
must work to sever this link in order to improve the social good while also maintaining the economic
benefits that only corporations can bring. The means to this end are greater transparency, anti-
vii
Actually, Nader represents only 150,000 (0.06%) – the membership of Public Citizen – of the 270
million US consumers, although he claims, without our consent, to speak on behalf of the other 99.94% as
well.
corruption measures, conflict of interest laws (e.g., the President cannot use his office for personal
financial gains), limits on political donations by corporations and individuals, and independent checks
and balances to ensure that these rules are complied with. The solution is not to destroy one power to
prevent abuse, but instead to separate the powers. In the US, the drive for campaign finance reform
aims to break the link.
Multinational corporations put profits before people. Critics contend that too much emphasis is placed
on attaining profits and enhancing shareholder value. The sharp focus on shareholder value causes
firms to undertake activities that reduce the level of social welfare in order to make a buck.
It is true that the sole focus of a corporation is to earn profits. However, the simplicity of the corporate
incentive system facilitates regulation while encouraging efficiency. For example, a firm will not
pollute if the cost (e.g., a fine, for instance) is greater than the benefit (e.g., money saved by bypassing
proper disposal). That is why legislation based on the “polluter pays” principle is so effective and so
efficient. A corporation will not abuse its workers, consumers or shareholders, lest these parties
abandon the corporation for one of its competitors. Collective action by competing corporations could
allow them to circumvent this outcome, but laws, penalties and surveillance are, in most cases,
sufficient to prevent such collusion. Moreover, the rapidly growing capacity of civil society,
particularly NGOs, places a heavy check on corporate practices. The increasing sophistication of
telecommunications and the scope of media coverage ensure that harmful corporate practices are
revealed to millions of people. In this way, mobilization by citizens, fines levied by governments,
class-action lawsuits and scrutiny in the media all adversely affect the single objective of any
multinational corporation: profit. Consumer boycotts, fines and other penalties cut into a firm’s
bottom line. Consequently, corporations attempt to avoid activities that might draw the ire of civil
society groups, government and consumers. Finally, empirical evidence shows that multinational
corporations typically use the more environmentally-friendly technology, which can be transferred to
developing countries via FDI, even when not required, and there is little evidence that governments
lower environmental standards in order to attract investment.66
Another contention is that multinational firms are too powerful in relation to workers and even unions.
Worldwide liberalization magnifies this mismatch. Fleet-footed multinationals can simply pick up and
move jobs overseas to a place where unions are weak or illegal, wages are low and working conditions
are horrific. Workers, on the other hand, cannot just pick up and head overseas in search of better
wages and working conditions. The result, according to this “logic,” is a “race to the bottom” in terms
of labor standards and wages. This is a deeply flawed argument. First, many, though certainly not all,
workers are mobile enough to move about in search of better work. Second, a firm cannot necessarily
reduce labor costs by trampling labor standards. It is only marginally more expensive (as a result of
training expenses) for a firm to employ 100 workers, each working eight hours, than to employ 50
workers each working sixteen hours. And since the types of positions that are usually discussed in this
regard tend to require low skills, training costs are likely to be minimal, anyway. Moreover, a healthy,
happy worker is much more likely to be productive than one who is unhealthy, undernourished,
overworked and who despises his/her employer. Finally, labor costs represent only a fraction of total
production costs, and returns on labor represent only a fraction of total returns on factors of production.
Other factors that impact the choice of firm location include, but certainly are not limited to: proximity
to suppliers and markets; local costs of inputs such as raw materials, land and capital; the quality of
regulation; protection of property rights; and quality of the macroeconomic environment.
Multinational corporations abuse workers. The liberalization of trade and investment, critics contend,
allows MNCs to move operations from rich countries with high labor standards to poorer countries
with lower or non-existent labor standards, producing the “giant sucking sound” described by Ross
Perot in reference to free trade between the US and Mexico. The result is a “race to the bottom” in
which workers worldwide must accept lower wages and increasingly unpleasant working conditions.
In poorer countries, MNCs employ heinous tactics such as child labor, abuse of female workers and
sweatshop labor.
Jagdish Bhagwati presents the other point of view:
“…Rich country labor unions as also some of the rich country NGOs such as Public Citizen in the United States have
become obsessed by the notion that outward flow of FDI is a source of harm to the working class there and,
remarkably, that these multinationals ‘exploit’ the workers (by giving them low wages) in the poor countries. These
contentions are basically illogical. In the US, for example, in the 1980s at least as much FDI has come in as gone
out: focusing on the outflow and ignoring the inflow is either dimwitted or dishonest. Again, every student of
multinationals knows that they typically pay a ‘wage premium’ compared to domestic wages in the host countries:
around 10%. Is paying such a premium ‘exploitation’? That would be a strange definition of exploitation indeed!
This goes also for the charge that a ‘living wage’ is not paid by multinationals. Are people in the poor countries
working for a ‘dying wage’ when they are paid even less than what multinationals pay with their wage premiums?
Poverty is tragic; but what words can characterize and castigate adequately people in the rich countries who would
protect their own turf by denying the creation of more economic opportunities for the truly poor in the poor countries
67
by pretending that this is to these people’s advantage?”
And again, regarding the alleged abuses of female workers:
“While, again, globalization is typically charged with hurting women – as when multinationals, for example, are
accused of exploiting female labor in the Export Processing Zones – the opposite may in fact be true. Thus,
economists Sandra Black and Elizabeth Brainerd have argued recently that globalization has helped reduce the
Gender Wage Gap in the US. Drawing on Gary Becker’s idea that increased competition means that a firm would
find it increasingly difficult to indulge its ‘taste for discrimination’ such as hiring equally productive men at higher
wages and yet survive, they show that increased import competition … during 1977-94 is associated with greater
reduction in the men-women wage gap. And as for women’s employment in the poor countries, surely the correct
take on it is that it is the protectionist policies in the rich countries in industries such as textiles and garments that help
to reduce the demand for female labor in the poor countries and is thus a contributory factor to keeping them poor.
More important, without the benefit of suitable employment and income that alone can give them the economic
independence, even women’s human rights cannot be advanced meaningfully. For it is easy enough to pass socially
progressive legislation and yet accomplish little: you may legislate against men beating up their wives but, if the
battered wife cannot walk away and support herself with a job, the legislation’s potency is unlikely to be
68
compelling.”
Finally, with respect to child labor, the case is similar to that of women. Anti-WTO protesters in
Seattle successfully pressured President Clinton to demand that WTO member states adopt
international labor standards, the violation of which would be punishable by multilateral trade
sanctions. The focus of attention was on child labor and poor working conditions. But for many of the
world’s poorest women and children, the only two alternatives are to steal or to starve. Labor unions
in industrial countries explain that their support for raising trade barriers against developing countries
stems from their concern about basic human rights and for the preservation of international labor
standards. But an unintended – or, in some cases, intended – consequence of this is protectionism,
which deprives consumers of choices and developing countries of full access to lucrative markets.
Such an outcome does more harm than good to the poorest people in the world. If desperately poor
children with no opportunity to attend school are forced out of work, they will turn to panhandling or
worse yet, prostitution, gangs or other criminal activity. So long as one-quarter of the world’s
population continues to live on less than $1 a day, there will be, in many cases, a tradeoff between
environmental protection, workers’ rights, human rights and the eradication of poverty.
Before falling victim to the unfounded fears of protectionist, anti-corporate lobbies, policymakers both in
developing countries and industrial countries must fully understand the implications of multinational
corporations and global economics. Moreover, policymakers, academics and business leaders must educate
men and women in their countries in order to stimulate lively, rational debate regarding the role of
multinational corporations in society. The events that brought down the first great wave of globalization,
plunging the world into war and depression, should remind us of the dangers of simply allowing interest
groups to spread their propaganda without encountering truth and reason. Of course, the same argument
must be applied to corporations, as well. It is imperative, however, that people - not just policymakers and
businessmen – understand the meaning of globalization in order to make their own judgments based on its
potential implications.
6. MNCs and R&D

Research and development (R&D) is the key to innovation and productivity growth. It is the process that
generates new technology, which is the cutting edge of innovation and, ultimately, economic growth. Most
R&D takes place in the advanced economies, particularly in the Triad (US, EU and Japan), and
encompasses the efforts of governments, scientific institutions and corporations; in many cases, R&D
involves some collaboration between all three. The impact of R&D on economic dynamism is well
understood, even intuitive. But for many developing countries, fostering domestic R&D on a large scale
has been an elusive goal for many decades. Some of the more successful cases have occurred in the East
Asian economies of Taiwan, Korea, Malaysia and Singapore, where reverse engineering often kick-started
the domestic process. As discussed below, multinational corporations, if supported with sound policies,
could play a potentially powerful role in catalyzing R&D efforts in the developing world.
The OECD countries spend approximately 25 times as much on (R&D) as developing countries, implying
that the developing world must rely on the transfer, rather than the creation, of new technology.69 The most
thorough data are for the United States. In 1989, US multinationals spent $82.2 billion on in-house R&D.
Of this total, $57.6 billion was for their own use, $21.9 billion was for the use of the US federal
government and $2.7 billion was for the use of other parties. In the same year, these same firms outsourced
an additional $2.3 billion in the US for their own use. Overseas affiliates of these firms performed another
$7.9 billion worth of R&D. The total R&D performed by US MNCs ($82.2b) represented over 58% of all
R&D done in the US.70 Clearly, multinational corporations dominate the field of R&D in the US, which
places them at the cutting edge of technology. This is a very attractive feature from the stance of
developing countries, which need capital and technology to stimulate economic development.
As a long-term goal, developing countries should seek to create a domestic environment conducive to
research and development, but in the short- to medium-term, they could implement policies that encourage
the transfer of technology. MNCs act as a medium for technology transfer, and as such, can play a vital
role in economic development by transmitting cutting-edge technology from industrial to developing
countries. The transfer of technology and management skills is enhanced when MNCs engage in joint
ventures with domestic firms.71 Many developing countries have attempted to ensure this transfer by
imposing sharing requirements or local content requirements. However, such arrangements are
distortionary, and hence, counterproductive. In fact, the International Labor Organization finds that
technology transfer does occur, but that it is “usually the result of individual initiatives of enterprises, rather
than the result of government policies to this effect.”72
A more effective strategy would be to help develop competitive domestic enterprises with which MNCs
could work. This requires a more comprehensive, yet subtle, approach than simply dictating the terms
under which a foreign firm can invest in a country. The first step should be for developing countries to
equip their citizens with desirable skills by investing aggressively in education and vocational training, and
support them by implementing a sound, clear policy framework conducive to foreign investment. The
public sector should encourage and supplement private investment in all levels of education, including
advanced technical training – for instance, training for electrical engineers, software developers and
scientists. In the past, many countries have focused too much on the provision of primary education while
ignoring advanced education, perhaps fearing that the “brain drain” would prevent recovery of the fruits of
such investment.
The term “brain drain” describes the phenomenon in which the most promising scientists from the
developing world leave their native lands for greener pastures in the industrial countries. These native
countries often feel cheated when their investment in human capital picks up and heads overseas, rather
than stay behind and contribute to economic development. In the past, quite a few developing countries,
resigned to the fact that highly skilled workers would leave, decided that investment in tertiary education
would not pay dividends and chose instead to focus on primary and secondary education. Other countries
attempted to put a lid on emigration in order to preserve homegrown talent. But this approach missed the
boat, and typically did more harm than good. From a purely economic angle, this type of government
interference introduces inefficiency via the misallocation of resources (e.g., preventing human capital from
reaching the environment in which it can be used most efficiently). From a development perspective, it
ignores the value of highly trained workers as a source of export earnings. The development of the Chinese
diaspora and the emerging elite of Indian IT professionals in Silicon Valley point to the benefits, to the
home country as well as the emigrants’ destination, of nurturing talent and allowing it to go wherever it can
be used most productively. For example, foreign workers remit approximately $75 billion to their home
countries each year, not including informal transactions.73 Net transfers of this type from industrial to
developing countries (by developing country natives who migrated to industrial countries) represent
approximately 40% of that value. Typically, these funds are paid in hard currency.
Instead of enacting distortionary policies aimed at heading off the “brain drain,” in the long run,
policymakers should seek to foster an environment in which the highly educated would choose to stay and
in which foreign investors, including corporations, would choose to invest. Highly skilled individuals will
be much more likely to stay in their home country if the legal, political and socioeconomic environment
there rewards human capital and entrepreneurship. Why would highly skilled people choose to remain in a
country that stifles economic activity and does not reward innovation? Before the balance of payments
crisis in 1991, India was among the most autarkic economies in the world. The public sector bureaucracy
stifled activity in every sector it could reach. But in the early 1990s, while the government was
preoccupied with the crisis, it was caught off guard as the nascent software industry exploded without state
interference, forcing a re-think of Indian industrial policy. Now the state is actively encouraging the sector
(which often means nothing more than staying out of the way), which has drawn investments from New
Economy heavyweights such as Microsoft, Cisco and Oracle. Seeing the rebirth of opportunity and
vitality, Indian IT specialists who had emigrated to the US and elsewhere began to return to their homeland
to work in the booming industry in places like Bangalore and Hyderabad. Of the Indian millionaires in
Silicon Valley who did not return, many now act as angel investors for startups back home. A virtuous
circle emerged.
The Indian case gives some insight into the type of strategy conducive to nurturing the development of
homegrown research and development. Obviously, the presence of high-quality research and scientific
institutions is one factor in establishing such an environment. Bangalore, for example, is home to a large
number of world-class electrical engineers and research facilities. Two other factors stand out: well-
defined and enforced property rights and accessible capital markets. The way for policymakers to
initiate a virtuous circle like that in the Indian software industry is to provide citizens with economic
opportunity. In tandem with high-level education, property rights and access to capital – be it foreign or
domestic, venture capital or micro-credit – go a very long way in providing opportunity, which, in turn,
encourages the highly skilled to stay put, work hard and prosper AND encourages foreigners to invest in
the economy. In fact, as noted by Hernando de Soto in the passage below, property rights and the
development of capital markets go hand in hand:
“Clear-cut property rights are indeed essential since you can only pledge collateral if you own something. If you give
somebody a valid, respected, secure property title, it’s really the first step in the securitization process. Let’s take the US
example … at the bottom of these mechanisms [financial instruments] is the fact that somebody who owns land or other
private property can pledge it as collateral. This engenders a great deal of the capital markets in the US and even anchors
the rest of its financial system.”viii
In addition, FDI by MNCs allows talented domestic workers to work with foreign technology and
management methods without leaving their native country. Indeed, FDI can substitute for, and help spur,
domestic R&D. A recent regression analysis of 72 industrial and developing countries finds that the impact
of FDI on developing country exports is particularly high in high tech products.74 MNCs can serve as a
medium for domestic small- and medium-size firms (SMEs) to tap into global markets. When a
multinational invests in an affiliate overseas, local suppliers are also likely to prosper. In fact, the presence
of a domestic network of capable and reliable suppliers (often SMEs) is a major determinant of the
destination of FDI.
In this age of globalization, state-crafted industrial policy is becoming obsolete, even counterproductive.
Instead of identifying sectors and firms to mold into national champions, governments must focus their
scarce resources on building an enabling environment in which the market and the vibrant people who
drive it can work their magic. This includes clear delineation, and fair enforcement, of property rights,
viii
The passage comes from an interview with Hernando de Soto, which was conducted by the Center for
International Private Enterprise in August 1998. Quoted from the Inter-Summit Property Systems Initiative
of the Summit of the Americas, which can be located at www.cipe.org.
heavy focus on high-level education and vibrant capital markets. Attracting investment by MNCs could
play a crucial role in introducing and transferring advanced technology and management practices to the
developing world. Doing so would require governments to spell out in clear and favorable terms the rules
and regulations under which foreigners, including corporations, can invest in the economy.
Part III – MNCs in the Age of Information and Globalization
As stated throughout this paper, multinational corporations are constantly adapting to new technologies,
consumer needs and competition. These firms, along with the global economy in which they operate, are in
an endless state of evolution. But this evolution does not occur smoothly over time. Progress often comes
in sudden leaps. In the late 18th and early 19th centuries, the Industrial Revolution reshaped the economies
of Western Europe and the United States. The invention of the spinning jenny, the steam engine and the
cotton gin stimulated an acceleration in productivity growth that propelled the economies of Western
Europe and the US for decades. In the late 19th and early 20th centuries, the onset of mass production and
the invention of the telegraph, telephone, electricity and the internal combustion engine initiated another
productivity boom. Today, as the 21st century is upon us, we find ourselves in the dawn of the Information
Age and the second great wave of globalization. How will these forces combine to reshape the world’s
corporations in the years ahead? What are the implications for economic policymakers? Below, we
address these questions in the context of three factors that will influence the future evolution of
multinational corporations: One, the impact of the Information Age on the world’s largest corporations;
two, the impact of information technology on competition; and three, the socioeconomic phenomenon of
widespread ownership.
The New Corporate Landscape in the Information Age
The Information Age will continue to reshape the corporate landscape. The corporations that dominate the
global economy twenty years from now will be very different than those that dominate now. Already,
firms like AOL and Cisco Systems have market caps much larger than General Motors. Just like the
Industrial Revolution, the digital revolution will dramatically alter the composition of the world’s largest
companies. And the digital revolution is still in its early stages. Arthur C. Clarke noted that people
typically overestimate the impact of technology in the short-term, but underestimate it in the long-term.
We are witnessing this with the Information Age today. The dot.com stock mania of 1999 reflected the
exaggerated expectations that people had for the immediate commercial impact of the Internet. But the real
impact of the digital revolution has yet to be realized. It will unfold over the next two or three decades as
new applications are found for this new technology. Firms will find new ways to reduce costs and increase
sales by implementing increasingly complex procedures for procurement, supply chain management,
marketing and delivery. The New Economy will depend more on silicon than petroleum. The Information
Age will alter not only the names of the companies that dominate the global economy. It will also alter the
structure and improve the efficiency of all the largest corporations.
“Perfect Information” and Competition

The Internet reduces barriers to entry and intensifies competition. According to Daniel Yergin and Joseph
Stanislaw in their book, The Commanding Heights, “Nothing so symbolizes globalization as the Internet, a
technology with the power to leap across the geographic borders of nation-states and across time zones.”75
The Internet is a giant marketplace. Buyers and sellers can find one another online and conduct business
online. It matters little that the buyer might be in Germany and the seller in Malaysia. The digital
revolution is reducing the importance of geographic distance. This trend will continue with the
convergence of digital applications. As the costs imposed by distance plummet, it will be much easier for
firms to expand operations into new geographic areas. More and more MNCs will emerge, many local
firms will establish an overseas presence and many of the largest corporations will enter new markets and
continue to grow.
Yet, the digital revolution is also challenging many large companies and industries. It will enable the
creation of many businesses as well as the destruction of others. Impressed by the “atomistic competition”
made possible by technology, Michael Porter, of Harvard Business School, declared, “… market forces and
entrepreneurial ways are being driven further down toward the individual level. Organizational
bureaucracies of every kind – corporate, government and union – suddenly look vulnerable to the Internet’s
decentralizing power.”76 The fact that the Internet has no headquarters (although much of its traffic is
becoming increasingly dependent on a number of hubs)ix makes it difficult to control. Governments are
struggling to maintain some control, whether through censorship or monitoring criminal activity, over the
Internet. The Internet also allows small firms to reach suppliers and customers all over the world, thus
enabling them to compete with larger firms.
Open source programming will present a stark challenge to owners of intellectual property, making patents
effectively unenforceable. With open source programming, software is written and posted for free (along
with its code) on the Internet so that programmers all over the world can make improvements and add new
applications. It is difficult to imagine, regardless of the outcome of the ongoing antitrust trial, Microsoft
maintaining a near-monopoly over browsers, operating systems and applications software for the next
decade, as Linux, an open source operating system, is already gaining market share. Like IBM, Microsoft
will be with us for a long time, but just as greater competition and new technologies – not the antitrust trial
– pried open IBM’s monopoly over computer hardware, the same forces will cut into Microsoft’s
monopoly over software. Open source programming is challenging media titans, as well. The Recording
Industry Association of America has fought tooth and nail to prevent Napster from distributing free
recordings – everything from Bach to Metallica – over the Internet. But open source programs like
ix
For the Internet to fulfill its promise as a decentralized means of communication and a hyper-competitive
global marketplace, its traffic will need to be dispersed. The designed to be so decentralized that even an
intense nuclear attack could not shut down all its avenues. Now Internet traffic is relying increasingly on
major arteries, which makes it more susceptible to attack or manipulation – by governments wishing to
censor content or snoop on citizens, by companies trying to corner a market or by hackers trying to wreak
havoc.
Gnutella, which is free and has no control center, cannot be stopped by litigation. As long as audio and
visual recordings can be copied in digital form, it will be impossible for Hollywood and the record industry
to prevent free distribution. Gigantic multinationals will emerge and grow in industries where economies
of scale are important, where consumer tastes are homogeneous across borders, where transportation costs
are low and where a product requires many different inputs. But in industries without these features,
technology will allow more and more firms, even small ones, to compete.
What If Everyone Were a Capitalist?
Another new and exciting phenomenon is that of widespread ownership. According to the US Federal
Reserve, 49 percent of American owned stocks in 1998, and estimates put the share at close 60 percent
today. Less than one-third of the population owned stocks in 1988. Other statistics show that two out of
three American households now own shares in a mutual fund. With shareholder value dominating the
corporate agenda (as in the US and UK, especially), this type of widespread ownership links the interests of
individuals with those of corporations. Widespread ownership defies the class separation envisioned by
Marx, in which society would be divided into capitalists and workers. Today, workers are owners of
capital, too, and they benefit from rising corporate profits. Marx saw the potential for capital to become
increasingly concentrated and society increasingly polarized into two economic classes. He invoked the
notion of widespread ownership as a solution to this problem. The wealth created by a firm accrues to the
owners of the firm. In order to prevent concentration of wealth and, subsequently, polarization of society,
Marx suggested that everyone should own a slice of all the firms. Due to the logistical complications, all
firms would be owned by the state, which would be responsible for distributing the benefits to its citizens.
The 20th century has shown that the state is often a more unjust steward of industrial assets than a class of
capitalists.
In the novel Jailbird, Kurt Vonnegut describes a mega-conglomerate called RAMJAC, which is majority-
owned by Mary Kathleen, a wealthy socialist.77 Her plan was to acquire, under the auspices of RAMJAC,
every corporation in the world. Upon her death, the woman would bequeath shares of RAMJAC to all
members of the working class. Thus, everyone in society would directly own a share of every corporation
in society without the need for the state to act as middleman and custodian. In fact, globalization and the
modernization of capital markets are achieving what Mary Kathleen hoped to achieve: widespread
ownership of industry by all segments of society. The emergence of a shareholder society has many
implications that are not yet understood: implications for income distribution, financial markets, corporate
governance and business ethics, among others. One thing that it clearly does signify is greater
inclusiveness in the benefits of corporate growth. Policymakers can help to build a shareholder society by
implementing and enforcing property rights, eliminating red tape and liberalizing capital markets so that
small investors can save and borrow.
Clearly, globalization and the digital revolution will continue to reshape the corporate landscape in exciting
ways. All nations have much to gain from MNCs, which help to integrate countries into a single global
economy. MNCs, with mountains of capital and cutting-edge technology, have much to offer the
developing world. Of course, policymakers will need to implement sound macroeconomic policies,
strengthen the rule of law and ensure that their health and education systems are efficient and inclusive.
The quality of corporate governance, which we explore more thoroughly in the final section, will be a
crucial factor for policymakers to consider. In the words of one central banker, “The Asian financial crisis
showed that even strong economies lacking transparent control, responsible boards, and shareholder rights
can collapse quite quickly as investors’ confidence erodes.”78
Conclusion
In closing, we would like to review the major themes covered in this paper and then present some of the
implications of our analysis for economic policymakers in the developing world. Finally, we look at policy
implications in terms of how to govern multinational corporations, how to attract productive investment by
them and how to help build strong homegrown corporations.
The multinational corporation has come a long way since the East India companies. We have learned of
the dangers of excessive market concentration, but realize that economies of scale are necessary for some
types of commercial activity to be viable. In order to prevent abuse of economic power, but without
sacrificing the benefits that only economies of scale can achieve, policymakers must ensure that economic
power is separate from political and military power. The role of military power, which is necessary to
protect commerce, was taken from the East India companies and assumed by the state so that it could be
applied more objectively. The struggle to separate political power from the big corporations began in the
US with the populist movement led by William Jennings Bryan, and strengthened by Teddy Roosevelt. It
continues today with calls for campaign finance reform.
Multinational corporations have prospered since the end of the Second World War, spurred on by trade
liberalization, first among the industrial countries, and more recently, among nearly all countries. As
barriers to trade have fallen and technology has reduced the burden of distance, MNCs have played a key
role in integrating hundreds of national economies into a few regional ones, and eventually they will help to
form a single global economy. They can bring technology, jobs and capital to the developing world while
global competition with other MNCs forces them to remain competitive. By liberalizing trade and
investment, developing countries can attract foreign MNCs, while enabling domestic firms to grow and
spread across borders.
New technologies will enable many MNCs to grow far larger and to spread into new markets. At the same
time, technology will pull the rug out from under many other large corporations, allowing small
competitors to win market share on the basis of flexibility and efficiency.
In spite of their growing size, number and reach, multinational corporations have not, and will not, force
the nation-state into obsolescence. The state plays vital roles as regulator, macroeconomic manager and
protector of consumers, producers and investors. Economic policy is as important as ever.
In sum, the multinational corporation has become an important economic player in the developing world.
It has grown in size as a consequence of mergers and acquisitions, as well as by investments in greenfield
operations. The increasing presence of MNCs in the developing world, while bringing considerable
benefits, has not been without controversy. MNCs are resented for a variety of reasons – their detractors
claim that the MNCs don’t keep all their profits in the places where they are generated; they take advantage
of the differences in tax regimes; and they exploit natural resources and damage the environment.79 It was
because of some of these perceptions that civil society organizations agitated in Seattle against the further
liberalization of the world trading order. However, if supported by a strong, but not distortionary,
regulatory framework, developing countries can benefit substantially from the presence of multinational
corporations in terms of the transfer of technology, increased efficiency and inflows of foreign direct
investment. To attract high-quality FDI, developing countries must build human capital, implement and
enforce sound laws and regulations (including standards for corporate governance) and nurture SMEs that
can act as suppliers for multinationals. By pursuing open regionalism, policymakers can offer MNCs a
very large market with access to at least one of the three major hubs.
The financial crises that rocked many parts of the developing world in the 1990s are likely to make a
lasting impact on the operations of multinational corporations. In contrast to earlier periods when
developing countries were generally seen as a homogeneous investment class, investors and corporate
managers now realize that they must place greater emphasis on country- and region-specific policies and
trends when deciding where to invest. In addition, the managers of developing country-based MNCs in
Asia – particularly, the Korean chaebol and companies run by overseas Chinese – are likely to consider
their plans for foreign expansion more carefully, perhaps choosing to diversify overseas operations by
moving into other regions.80
Corporate Governance: Now, Not Later
In the past two decades, corporate governance has emerged as a major concern for businesses and
policymakers. The Savings & Loan (S&L) scandal in the US, the attempted cover-up of bad debt by
keiretsu in Japan, the tainted loans-for-shares program in Russia, the part played by “crony capitalism” in
initiating the East Asian financial crisis: each of these episodes highlighted the importance of corporate
governance. As business is increasingly conducted on a global basis, global standards for corporate
governance must be established.
“Corporate governance results from a set of institutions (laws, regulations, contracts and norms) that create
self-governing firms as the central element of a competitive market economy.”81 More specifically,
“corporate governance deals with the ways in which suppliers of finance to corporations assure themselves
of getting a return on their investment. How do the suppliers of finance get managers to return some of the
profits to them? How do they make sure that managers do not steal the capital they supply or invest it in
bad projects? How do suppliers of finance control managers?”82 Establishing a system of sound corporate
governance requires the collaborative efforts of both the public and private sectors. At the very least,
corporate governance must include the following features:
1. Shareholders elect directors who represent them.

2. Directors vote on key matters and adopt the majority decision.
3. Decisions are made in a transparent manner so that shareholders and others can hold directors
accountable.
4. The company adopts internationally accepted accounting standards to generate the information
necessary for directors, investors and other stakeholders to make decisions.
5. The company’s policies and practices adhere to applicable national, state and local laws.83
Corporate governance, or lack thereof, played a crucial role in the opening up of the developing world that
began in earnest just over a decade ago. A number of important lessons can be drawn from the ambitious
privatization movements carried out in Latin America and the former Soviet bloc. By and large, the
success (or failure) of these privatizations is directly related to the quality of corporate governance in place
at the time of the sale. Of course, hindsight is 20/20, but the objectives of corporate governance are
efficiency and transparency. Transparency and efficiency alone cannot ensure the success of a business
venture, but their absence leaves the door wide open to corruption and potentially costly legal battles. The
loans-for-shares debacle in Russia is a case in point. The oligarchs, as they are now called, took advantage
of political connections and vaguely worded, unenforceable or loophole-ridden regulations to gain
ownership of the country’s largest industries. For the most part, the privatizations were carried out very
quickly outside the public spotlight, so that the deals were finished before a fuss could be made. Not
surprisingly, the Russian privatization drive is widely considered as a model of failure. The crown jewels
of Russian industry, built by the Russian people during seven decades of communist rule, were essentially
handed to a few well-connected individuals. Now the country is stuck to sort out this mess. Russia, as
always, is a special case, but it underscores the importance of corporate governance for the developing
world, as many of the country’s present difficulties stem directly from lax governance.
The major lesson from the debacle in Russia is that solid and clear regulations for corporate governance,
and enforcement measures, must be established before privatization begins. Otherwise, it leaves the door
open to asset stripping, corruption, monopoly and various other cancers. If regulations are not clearly
spelled out and enforced prior to privatization, both buyer and seller are likely to spend a great deal of time
and money in legal battles afterward. It is incredibly difficult to sort out these types of problems once
ownership has been transferred, and even more difficult to do so without driving away other potential
investors. For many developing countries, implementing corporate governance standards after
privatizations that have already taken place will be a crucial challenge in the years ahead. Implementing
these standards before future privatizations is imperative, not just to ensure the quality of corporate
governance in the newly privatized companies, but also in all companies operating in the economy.
Interestingly, the globalization of capital encourages good corporate governance. Institutional investors,
such as pension funds, mutual funds, hedge funds and the like, manage very large (and growing) pockets of
capital, a sizeable share of which they are investing in emerging markets. These investors will put their
money wherever the risk-return ratio is most appealing. Poor corporate governance raises the risk level of
a transaction, thus hindering foreign investment. Countries that implement sound regulations will draw
much more investment from these institutional investors. Countries that do not reform will get little. There
is a huge opportunity for developing countries to attract heavy foreign investment, but only if they improve
corporate governance.
Industrial Policy in the New Economy
As illustrated above, the Age of Information and Globalization will dramatically reshape the multinational
corporation and the entire network of MNCs in the years ahead. New corporations will be born, some old
ones will die and what is left will be a very different collection of MNCs that lead the world of business in
the 21st century. Economic policy in the 21st century will need to account for this new animal, especially in
the developing world where policymakers have had relatively little experience in dealing with global
corporations. What considerations should guide policymakers in this endeavor? Below, we provide some
suggestions in the context of industrial policy, attracting foreign investment and external trade policy.
The most successful emerging economies in the four decades after the Second World War were the Asian
tigers. Each employed its own variant of the Japanese economic model, allocating capital and other inputs
to strategic industries, which were charged with providing full employment and fueling rapid growth.
Clearly, the strategy worked very well for some time. But before policymakers in other parts of the globe
attempt to emulate East Asian industrial policy in their own countries, they should consider the context in
which that strategy succeeded. Specifically, Japan and the tigers formulated industrial policies that worked
well in the economic system of the post-war world.
At the time, oil and heavy industry dominated the world economy. As a result, economies of scale were
extremely important. Thus, the tigers favored large industrial conglomerates – firms like Mitsubishi and
Sony in Japan and Daewoo and Hyundai in Korea, for instance. The quality and availability of information
were minimal compared to today’s standards. Capital markets were far less sophisticated and were
national, not international, in nature. Consequently, firms needed to rely on domestic savings to finance
investment, and paucity of information and shallowness of financial markets distorted the allocation of
capital. To counter, the tigers relied on a consortium of bureaucrats and businessmen, rather than the
markets, to allocate capital. Finally, the commitment to free trade opened outlets to consumer markets in
the industrial countries, while closed capital accounts prohibited foreign investment and potentially
destabilizing capital flows. The tigers took full advantage of this regime by investing aggressively in
export industries, while employing trade barriers selectively on imports. In sum, East Asian industrial
policy was customized to the state of the post-war world economy.
We have illustrated throughout this paper that the changes in the global economy, spurred by liberalization,
technology and demographics, have profound implications for economic policy. Japan and the tigers
succeeded because they understood the nature of the post-war world economy and crafted economic
strategies to exploit it. In Part III, we described trends in competition and the type of corporate order that is
emerging in response to the Age of Information and Globalization. What type of industrial policy is
optimal in light of these ongoing developments?
National champions. The industries and corporations that lead the New Economy will be fundamentally
different from Old Economy leaders, even if some of the names remain the same. The leading industries of
the future – information technology, biogenetics, etc – will place less emphasis on economies of scale and
more emphasis on creativity and flexibility. With dramatic improvements in information and less need for
economies of scale, these industries will resemble the free markets described in textbooks more closely
than any major industry today. In the New Economy, a country will not need vast conglomerates and a
centralized control structure to succeed. Policymakers should generally ignore the temptation to subsidize
or protect infant industries in the name of building national champions. Instead, the state should work to
improve the availability of capital to small- and medium-size enterprises (SMEs) and equip citizens with
human capital. Let national champions build themselves.
Attracting foreign investment. Unlike in the post-war period, developing countries today do not need to
rely solely on domestic savings to finance investment. Liberalization allows capital-surplus countries to
invest in capital-scarce countries. Of course, as illustrated by the Tequila crisis and the Asian financial
crisis, reliance on foreign capital, if handled improperly, can cause more harm than good. The view put
forth in this paper is that FDI, on average, is more stable and productive than commercial debt as a form of
capital flow. In the past, and into the present, many developing countries have employed special tax and
other incentives to attract FDI. The Export Processing Zone (EPZ) model has been used in scores of
countries to attract investment to build industrial clusters. These tactics have, by and large, been quite
successful in the past. But as the world’s corporations evolve and as national economies integrate, these
types of policy interventions will be far less effective:
“One of the most important consequences of the new environment is that FDI location decisions increasingly depend on
economic factors (reflecting underlying cost competitiveness) rather than on policy interventions that temporarily skew
such decisions (by offering high levels of protection or tax incentives). However, this does not mean that policy is
84
unimportant. On the contrary, policies affecting national competitiveness … are more important than before.”
“Economic factors,” as mentioned in the citation above include things like the cost and quality of the
workforce and local suppliers, macroeconomic stability, the legal and regulatory framework for foreign
investment and physical infrastructure.85 Most important among these will be human capital, as we are
beginning to see as investors flock to India in search of skilled programmers.
“Low cost ‘raw’ labour by itself is becoming less important in FDI location, and is being replaced by the need for qualified
human capital able to cope with emerging technologies at world best practice levels. While there are investors that seek
cheap unskilled labour, they tend to be at the lowest end of the technological spectrum, with low sunk costs and a
propensity to move to other locations as wages rise. These ‘footloose’ investors offer very short-term benefits, and their
spillover effects in terms of creating new skills, technologies and supply linkages are often negligible. For countries that
seek more complex, sustainable and high quality FDI – with long-term perspectives and beneficial spillovers – it is
86
imperative to provide a growing and diverse supply of modern skills.”
This implies that governments would be wise to allocate resources to enhance education and human capital
rather than to offer tax incentives and subsidies to foreign investors. Tax incentives and subsidies, if they
are to be used, would probably be more productive if directed to research and technology institutions
instead of to MNCs. Vibrant scientific research institutions can form the hub of a high-tech industrial
cluster.
Of course, EPZs will continue to play an important role in attracting foreign investment, but for developing
countries to follow Korea into the industrial world, they will need to improve total factor productivity. Tax
breaks and protection for MNCs will not produce lasting productivity gains. Still more interesting is the
potential for national governments to compete for MNC investment by offering better tax treatment, thus
applying downward pressure on the ability of governments to raise taxes. One result could be that the
burden of providing tax revenues to governments could shift from relatively mobile entities (e.g., capital) to
relatively immobile entities (e.g., labor).87 If the interests of both multinational corporations and national
governments are considered legitimate, an ideal response to this tendency could be the adoption of a
multilateral framework for investment agreed to by representatives from national governments and the
private sector.88 To gain broad participation, such a framework would have to be minimal, clear and easily
enforceable. The Multilateral Agreement on Investment (MAI) was killed in 1996 largely because it
represented an effort to do too much and was seen by many as unfair, particularly to governments in the
developing world.
External trade policy. At present, there are two major movements taking place simultaneously on the
world trade front: globalization and regionalism. Globalization, in this respect, is rather clear: member
states of the WTO commit to multilateral reductions in tariffs and non-tariff barriers (NTBs) to trade.
Regionalism is a bit more complicated, as it consists of piecemeal free trade (e.g., the US, Canada and
Mexico agreed to eliminate tariffs on trade between these three countries, while maintaining tariffs and
NTBs on imports from other countries). During the past decade, regional trade agreements (RTAs)
multiplied. Today, we have NAFTA, the EU, Mercosur, APEC and the Andean pact, just to name a few.
Nevertheless, RTAs remain quite controversial. The ongoing debate focuses on two points: One, whether
RTAs promote further liberalization or polarize the global economy into exclusive regions; and two,
whether RTAs foster trade creation in excess of trade diversion.89 In addition, many RTAs include
discriminatory local content requirements and distortionary external tariff structures, both of which reduce
nearly categorically the gains from free trade.
As progress toward free trade slows at the global level (i.e., at the WTO), RTAs may continue to grow in
importance. Indeed, it seems rather likely that the world economy is moving not toward a seamless global
market, but one where commerce is concentrated in hubs. Today, the major hubs are the US, EU and
Japan. How should policymakers in the developing world respond?
Arguably, the optimal external trade policy is based on “open regionalism.” Open regionalism means that a
country looks for free trade agreements anywhere possible, be it at the bilateral, regional or global level,
but that these trade agreements do not discriminate against non-members of the agreement. If a bilateral
deal allows for further trade liberalization between two countries, it should be pursued so long as it does not
interfere with broader multilateral liberalization. A country that pursues open regionalism can evolve into
an import-export hub, serving as a link for various regional and national free trade areas. Open regionalism
accepts the fact that large trade blocs are emerging in the world economy, and attempts to build bridges
between them.
Chile is a prototype for the open regionalism model. Chile is an associate member of Mercosur (and likely
to become a full member within the next year or so) and utilizes a single external tariff rate of 9%, which is
set to fall by one percentage point each year until 2003. The country is very committed to liberalization of
trade at the multilateral level, but also seeks bilateral and regional trade agreements (e.g., Mercosur,
NAFTA and Free Trade Area of the Americas), so long as they do not interfere with the country’s
unilateral liberalization efforts. Brazil and Argentina have pressed Chile to join Mercosur as a full
member, but Chile has thus far refused, citing the high external tariffs imposed by Mercosur (Chile would
actually have to raise its tariffs on the rest of the world in order to join Mercosur).x Mexico also is moving
toward open regionalism, as indicated by its accession to NAFTA and its recent free trade agreement with
the EU.
x
However, current negotiations may allow Chile to join Mercosur without implementing the same external
tariff as other members.
The three major trade blocs that seem to be emerging are NAFTA, which will eventually become the
FTAA, the EU and Asia, where Japan, China and the tigers are working to increase regional trade and
investment. Policymakers and business leaders must recognize the importance of hubs in international
trade. Presently, the EU, NAFTA and Japan are the major hubs in the world economy. For countries
outside these hubs to tap into the benefits of the global economy, they must build bridges to these hubs.
Open regionalism is one way to do this.
The purpose of this paper has been to examine the rise of the multinational corporation and its effects on
the global economy, in order to help to define an agenda for policymakers at the national and international
levels. Our conclusion is that the multinational corporation, as a vital cog – indeed, the engine – of
globalization, offers great potential for the economies of the developing world. Of course, the MNC also
poses risks to emerging economies that could potentially be overwhelmed by powerful foreign-based
corporations. Openness, however, is the most powerful factor in determining the success or failure of
economic policy and greater openness to an increasingly sophisticated and dynamic species of
multinational corporation could very well hold the key to economic development in the 21st century.
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The Japan Program’s Working Paper Series on

The Japan Program’s Working Paper Series on

Globalization and the Multinational Corporation

-Robert D. Kaplan in The Coming Anarchy.

Part I – Evolution of the Multinational Corporation

Part II – “The Most Powerful Institution in the World Today”

Figure 1: FDI Inflows

Source: UNCTAD. World Investment Report, 2000.

World FDI Stock, 1997

Figure 2 - Share of total FDI stock in

2. Survival of the Fittest: Competition on a Global Scale

3. The Developing World: Open for Business

TABLE 7 - Cross-border M&A sales (Billions of US$) Average for

is a fundamental component of globalization, as it integrates the efforts of several economies to produce a

TABLE 8 - Sales of cross-border M&A by sector classification (millions of US $)

4. Developing Country Corporations Go Multinational

5. About Face: MNCs in the Court of Public Opinion

Jagdish Bhagwati presents the other point of view:

And again, regarding the alleged abuses of female workers:

6. MNCs and R&D

Part III – MNCs in the Age of Information and Globalization

The New Corporate Landscape in the Information Age

“Perfect Information” and Competition

What If Everyone Were a Capitalist?

Corporate Governance: Now, Not Later

1. Shareholders elect directors who represent them.

Industrial Policy in the New Economy

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