142 Historical Perspectives
aspirin in the United States. If the German aspirin industry were more efficient
than the American, Bayer could simply produce the pills in its factories at home
and export them to the United States. Why, then, does Ford make cars in England,
Volkswagen make cars in the United States, and both companies make cars in
Mexico instead of simply shipping them, respectively, across the Atlantic or the
Rio Grande?
For the answer, students of the MNC have examined both economic and political
factors. The political spurs to overseas direct investment are straightforward. Many
countries maintain trade barriers in order to protect local industry; this makes
exporting to these nations difficult, and MNCs choose to “jump trade barriers”
and produce inside protected markets. Similar considerations apply where the
local government uses such policies as “Buy American” regulations, which favor
domestic products in government purchases, or where, as in the case of Japanese
auto investment in the United States, overseas producers fear the onset of
protectionist measures.
Economic factors in the spread of MNCs are many and complex. The simplest
explanation is that foreign direct investment moves capital from more-developed
regions, where it is abundant and cheap, to less-developed nations, where it is
scarce and expensive. This captures some of the story, but it also leaves much
unexplained. Why, for example, does this transfer of capital not take the form of
foreign lending rather than the (much more complex) form of foreign direct
investment? Furthermore, why is most foreign direct investment among developed
countries with similar endowments of capital rather than between developed and
developing nations?
Economists have often explained foreign direct investment by pointing to certain
size-related characteristics of multinational corporations. Because MNCs are very
large in comparison to local firms in most countries, they can mobilize large amounts
of capital more easily than local enterprises. Foreign corporations may then, simply
by virtue of their vast wealth, buy up local firms in order to eliminate competitors.
In some lines of business, such as large-scale production of appliances or
automobiles, the initial investment necessary to begin production may be prohibitive
for local firms, giving MNCs a decisive advantage. Similarly, MNC access to
many different currencies from the many markets in which they operate may give
them a competitive advantage over firms doing business in only one nation and
currency. Moreover, the widespread popularity of consumption patterns formed
in North America and Western Europe and then transplanted to other nations—a
process that often leads to charges of “cultural imperialism”—may lead local
consumers to prefer foreign brand names to local ones: for example, much of the
Third World population brushes their teeth with Colgate and drinks Coke, American
brands popularized by literature, cinema, television, and advertising. However,
though these points may be accurate, they do not amount to a systematic explanation
of foreign direct investment.
The first step in the search for a more rigorous explanation of foreign direct
investment was the “product cycle theory” developed by Raymond Vernon.^2 Vernon
pointed out that products manufactured by MNCs typically follow similar patterns
or cycles. A firm begins by introducing a new product that it manufactures and