Historical Perspectives 143sells at home; over time, it expands exports to foreign markets; as the product
becomes more widely known, it eventually engages in foreign investment; and
finally, as production of the good is standardized, the firm begins exporting back
to the home market. This jibes with observations that MNCs tend to operate in
oligopolistic markets (those dominated by a few firms); that their products often
are produced with new technologies; and that they tend to have important previous
exporting experience.
The product cycle theory did not answer all the economic questions, however.
There was still no explanation of why firms would invest abroad instead of simply
exporting from their (presumably more congenial) home base or licensing the
production technology, trademark, or other distinguishing market advantage to
local producers. In the past twenty-five years most economists have come to regard
the multinational corporation as a special case of the vertically or horizontally
integrated corporation. In this view, large companies come to organize certain
activities inside the firm rather than through the marketplace because some
transactions are difficult to carry out by normal market means—especially in cases
where prices are hard to calculate or contracts hard to enforce. When applied to
MNCs, this approach suggests that foreign direct investment takes place because
these firms have access to unique technologies, managerial skills, or marketing
expertise that is more profitable when maintained within the corporate network
than when sold on the open market. In Reading 9, economist Richard E.Caves
surveys the modern economic theories of MNCs.
If the origins of MNCs are analytically controversial, their effects are debated
with even more ferocity. In the 1950s and 1960s, as American-based corporations
expanded rapidly into Western Europe, protests about foreigners buying up the
European economies were common. At the time, most Americans regarded these
protests as signs of retrograde nationalism, as they had traditionally taken MNCs
for granted—few even realized that such firms as Shell, Universal Studios, Bayer,
Saks Fifth Avenue, Nestlé, and Firestone Tires were foreign owned. However, as
investment in the United States by firms from the rest of the world grew, some
critics began to argue that this represented a threat to American control over the
U.S. economy. Thus, even in the United States, the most important home base of
MNCs, the role of foreign direct investment is hotly debated. American MNCs
employ 6 million people around the world, while foreign firms employ 5 million
Americans, which means that foreign direct investment is, directly or indirectly,
relevant to many people at home and abroad.
While foreign direct investment is controversial in the developed countries, it
is far more contentious in the Third World. Developed nations, after all, have
technically advanced regulatory agencies and relatively large economies. However,
most of the less developed countries (LDCs) have economies smaller than the
largest MNCs, with governmental regulatory bureaucracies that are no match for
MNC executives. In many LDCs, then, the very presence of MNCs is viewed
with suspicion. MNCs have been known to interfere in local politics, and local
businesspeople often resent the competition created by huge foreign enterprises.
Over the years many LDCs have imposed stringent regulations on foreign direct
investors, although most of them continue to believe that on balance, MNCs have