CHAPTER 2
DEVELOPING COUNTRY MULTINATIONAL CORPORATIONS:
A SURVEY OF THE LITERATURE REVIEW
2.0 Introduction
2.1 Emergence of Developing Country Multinational Corporations: The Theoretical Explanation of MNC
2.1.1 General Theories of Multinational Corporation
i. The Pioneering Work of Stephen Hymer: The Industrial Organization Theory
ii. The Transaction Cost Theory to the Internalisation Theory
iii. The Product Life Cycle Theory
iv. Dunning Eclectic Paradigm
v. A Selected View of MNCs Theories: FDI and Country Development
IDP and Stage Theory: Side by Side
2.2 the Emergence and Evolution of Multinational Corporations: from developed Country: the Theoretical Explanation
The origins of trade and industry are innate to the history of mankind who, as soon as he learned to walk on his two feet, discovered the value of moving in teams and packs similar to the animals they hunted for food back in the prehistoric times. As humans became more civilized, they developed the social order which only humans can do as rational beings. Within the social order, man developed the underpinnings of society through roles, protocol, work assignments, rights, duties and responsibilities thereby creating the human society. As the societies’ functions were initially internal and for survival, roles and functions revolved around these. Later, and with sporadic contact with other like small societies, human beings blended into a more homogenous community with slightly altered roles until the land and its resources which they occupied could not be cultivated to support the lifestyle of the community – thus communities tended to be nomadic until they found a place that could sustain their livelihood while maintaining contact with the outside world: the river systems.
The roadmap that history presents to humankind was born on the riverside: these were considered the highways to the rest of the world and this is why such waterways as the Ganges, Mississippi, Rio Grande, Panama Canal, the Chinese Yellow River, the Amazon, Hudson and Nile, among others, have never lost their places in history. These water highways paved the way for indigenous goods per tribe or civilization to be traded with other cultures, other tribes – other nationalities. The galleon ships of Spain and Portugal, the Chinese merchant junks as well as the dreaded sea pirates were proof that there was riches to be found in the water-based commerce. However, a system had to be in place to facilitate the trade such as the discovery of the barter concept, and later the concept of currency which was usually salt, gold or common precious minerals. These later evolved into more complex economic principles – such as overseas trading.
As early as 2500 BC, Sumerian merchants found in their foreign commerce that they needed men stationed abroad to receive, to store and to sell their goods. The famed conquistadors of the Indian people – the British – had their East India Company chartered in London during the 1600 and established branch overseas. The mid-seventeenth century saw the English, French and Dutch mercantile families sending relatives to America and the West Indies to represent their firms. It was only in due time that the American colonists discovered in their own foreign trade that it was desirable to have agents and, on occasion, branch houses in important trading centers to warehouse and to sell American exports.
History also describes the Virginia Company which was chartered in 1606 by King James I to establish the first permanent English settlement at Jamestown as “the first foreign direct investment in America” which went bankrupt by 1624. The period of 1875-1914 is identified by historian Mira Wilkins as “the rise of truly large-scale foreign investments in the private sector” including “more foreign direct investments than most subsequent commentaries have recognized”. Wilkins identified two types of these investments as one being a carrier of potentials for control but having a fragile if not negligible home office with little capacity beyond that of raising capital while the other one would be more akin to today’s multinational companies which provide extension of a company and its operating organizational and competitive advantages.
The domains where multinationals were normally involved in where in railways, mining, tramways, water, gas, electricity, banking, insurance, finance, land plantations and even manufacturing – most of them being infrastructure projects that one can see as key operational and competitive advantages of the developed nations during the industrial revolution. These infrastructure projects have been conceived with the ancient concept of trade in mind. The key transport systems of railways and tramways were mere conduits of transferring the produced goods from the farm to the international marketplace via land, sea and later, by air in the different ports. The infrastructure and distribution projects of water and electricity made sure the production of the goods were done efficiently and with proper irrigation, power and electricity. The financial intermediaries made sure the working capital for the farm and manufacturing sectors during the industrial revolution were kept in place while the continuous mining of precious elements ensured the valuation of the loans as well as financial instruments were viable when presented to the market. By adopting this complex interplay of strategies of the developing countries during the industrial revolution, the world as we know it today is composed of countries that have been able to implement properly said strategies and become developed countries. Of course, the strategies would not have had their share of losses particularly during a time when there was a need for strong political will, a dedicated and committed leadership as well as conducive cultures and natural resources able to support such strategy. It can be seen in other countries that tried the same strategy but lacked a strong leadership or a favorable culture – even a country that can accommodate laying the back-breaking groundwork for railways and telecommunication lines especially within intense warring factions or geographic and archipelagic constraints: that the strategy had to integrate with the nation’s strengths and abilities to be led toward development.
The American and European economies were at the forefront of the industrial revolution – with capital intensive projects focusing on enhancing the competitive advantage of their nations and a rich source of natural resources, they were able to perfect their craft within their backyard using their own indigenous resources. They each propelled their economies through public flotations, bonds, money market placements, financial derivatives including options and securities although records other than these such as the Latin American and Asian economies, particularly those of China and Japan, have not been considered in the literature of US economic history. The American and European development model was grounded on very strong antitrust policy, market competition and private ownership. However, the industrial giants of the time also realized that with their exploding economies and advances in sciences and the arts, their intrinsic local natural resources could be imperiled which led them to exploit and look outward: their immediate neighbors and more importantly: their colonies.
The American and European colonies at that time were very rich in key ingredients for the expansion of the industrial revolution not only within their boundaries but to outside territories as well. The arrogance and pride of the white race coupled with their more advanced weaponry and gadgets made a formidable stance versus the colored race of the rest of the world. The stance which also set the US and European counterparts from the rest of the world was their perceived supremacy and management of this perception vis-à-vis other trading partners, even those it did not trade with always had a fair share of market perception of the Caucasian traders from its other contemporaries who may have traded with the whites.
The era of puritanism especially in the conquest of the whites over the Indian inhabitants of the virgin Americas as well as the issue of black slavery during the two world wars was very pronounced and provided a strong backdrop to the statement that British, American and European supremacy, although hinged on a gentleman’s agreement amongst themselves, was pervasive and affected the growth of their respective economies although history proves that as each party adopts its own strategy i.e. America becomes unifies its domain to become the United States of America (hereafter referred to as USA in this chapter) while the British adopts a monarchy controlled by Parliament and Europe adopts the more laissez faire style amongst its member countries and each country strategy has its own resultant socio-political economy.
The American and European economies are largely developed economies and as such have much to protect which is how the propensity to create a strong military competence arose. The Depression in the 1930’s was a result of the absence of any real threat to the ballooning economy of America and Europe that overindulgence and overspending contributed to an overheated economy thereby reducing the value of such revered assets as mining inventories, precious metals – most of which undermined the commercial value of the marketplace.
Given that the developing nations were expanding their territories across the globe, seeking more indigenous cultures to conquer and annex, the developing entities created two power blocks: the Central Powers of Germany, Austria and Hungary versus the Allied composed of Britain, France and Russia. Their respective alliance structures, imperial rivalries and mutual distrust escalated a minor conflict into the Great War struck at Sarajevo during the assassination of Austrian’s crown prince sometime in 1914. It was only when the Central Powers downed three US merchantmen three years into the war that the USA sided with the Allies. The sheer number as well as firepower of the US contingent contributed to a compromise for peace resulting in the oppressive Treaty of Versailles in 1919, imposing stringent sanctions on Germany and the rest of the Central Powers.
After the momentary peace offered by the respite from the previous world war – despite being localized in Northern American and European territories, the industrial revolution continued to bear much industry to the extent of easy credit leading to widespread stock speculation in local and offshore activities, having not fully recovered from the war. Further, economic policies under the English and European economies created domestic overproduction and less foreign trade resulting in the implosion of the Great Depression for the respective countries as well as for the whole North America and European states. It was during this time that the Allied forces were perceived by the embittered Germans regarding the sanctions of the Versailles Treaty that launched the second World War – and that helped the English economies, particularly the Americans, to recover using military and defense spending.
Slightly prior to these events in history, a small archipelago in the Southeast Asia was slowly studying and imbibing the developmental models of its bigger contemporaries in the Northern hemisphere of the globe. Japan was rising from a largely feudalistic society with shoguns and warlords keeping the governance of its empire and evolving into a Meiji empire or “enlightened rule” where intellect and learning was sought throughout the world in order to establish the foundation of the empire. Japanese rule was a combined effort of government and businesslike commitment to adopted strategy by all sectors of society. With surprising perspicacity, Japan saw that military strength, which was one of their objectives, depended on industrial power, technical knowledge, and administrative efficiency and that it would not be enough to merely acquire Western armaments. Thus, they embarked upon a broad and intensive program of economic, political and even social reform with impetus mainly driven by the government. The Japanese borrowed several models from the developed countries: the French prefectural system of local governance, the German national railway system model versus the local-based railway system of Western countries, the German national and excellence training for technology and engineering, the US banking model of having several national banks issuing business notes and currency versus the British central bank model where only the central bank issues said notes and currencies to control the inflation and lastly – the penchant for total quality excellence in production of US Industrial Engineer William E. Deming in the early 1950’s. Of the four borrowed models, it was the US banking model that failed for Japan after the Bank Act of 1872 which spurred several expensive rebellions for Japan and resulted in a restructured banking system. What followed was a depletion of natural resources particularly gold, silk and tea which enamored the British colonizers in the first place amidst farmers and working class who took to more luxurious lifestyles given their previous victories in economic policy improvements. This was when the capital-rich Westerns loaned finances to simple Asiafolk such as Japan in order to indebt the country and become a de facto annex to its burgeoning empire.
When the Germans launched their offensive on the weakened economies and spirits of the western world, they used superior weaponry, blind-loyalty to the supremacy of the Aryan race and a promise of rich spoils for its allies – among which was debt-ridden Japan. Further that the Great Depression intensely affected Japan due to its borrowed banking and financial model that was interpreted by the anti-American Japanese as a devious and underhanded manner of acquiring an ally thru indebtedness unlike the Germans and the French who allowed relative freedom in letting Japan adopt its accordant operational model of railways and governance respectively. The effects of World War 2 left deep scars in the German and Japanese economies in 1945 – one of which was used by Japan to heal itself quickly and surpass the growth of the world developed leaders to become one of them.
A key component of the war’s aftermath was the agreements made between Japan and the victorious countries. Concern with US reactions did not prevent some Japanese from desiring to amend their new constitution – particularly the contentious provisions that made not the emperor but the people – sovereign, and that denied Japan the right to wage war. A resultant budgetary savings from military resources was immediately realized compared to other recovering economies. The war also enabled the spectrum of political parties within Japan to be one of two: the Liberal Democratic Party (LDP) and the small but growing Communist party. The previous efforts to broaden the educational system in Japan proved instrumental in rebuilding Japan and fueling its miracle growth during the postwar era. The previous cooperation between government and business was strengthened by lessons learned in the war and the Ministry of International Trade and Industry (MITI) evolved to be the cementing factor between government and the large family-owned businesses called zaibatsus which were similar to the Korean chaebols. Government was given a very deliberate role in focusing on which economic policies to pursue, which industries to develop, and which ones to cease supporting – all of which were followed and supported by the zaibatsus. Government and zaibatsus determined the basic industries and goods that had to be protected which included rice and staple food items attributable to its culture. Strong protectionist policies were set up as well as complex tax and distribution schemes which were applied even to later Japan-exported value-added products such as VCRs, tape recorders, and the like.
One of the industries severely affected by the war was the steel industry which was maximized by the Japanese in making weapons and armaments. These were now highly unutilized but presented a key component in Japan’s economy resurrection. Japan saw the opportunity for building not only its foundations and infrastructure but also those of others affected by the war. With the penchant for discipline and excellent workmanship which was augmented by the Total Quality Management principle from an American who was rejected by his own countrymen, W.E. Deming taught the Japanese the tools of zero wastage, effectiveness and efficiency in production, manufacturing as well as in basic service industries, Japan’s leaders saw the opportunity to use its steel industry components as building blocks to economic supremacy. From being a swollen military production facility, the steel industry produced high quality metal for shipbuilding, skyscrapers, houses, automobiles and airplanes. The grade and quality of the steel outstripped those coming from the US and German counterparts, being more bulky and heavy. The technological training of Japanese students abroad applied their skills in Japan’s steel mills churning slabs and sheets of metal – importing their raw materials from around the world and adding value by using already existing and continuously improving production facilities and practices. Parallel to this, the Western counterparts were experiencing postwar boom in terms of sale of preventive firearms – those which would be used only for last resort purposes based on agreements made after the war. World economies also progressed under the cloak of peace and the start of the cold war simply made the viability of weapons manufacture a continually viable economic activity.
In this context, the multinationals of the West and those of the East had key characteristics: the West had the more sophisticated technology and mass-produced commodities being marketed to the whole world where most were still annexes of its previous conquests but made legal under the operation of law while the East had more direct-materials and indigenous products that were marketed usually through western intermediaries. However, Japan, among the Asian countries, was exceptional since it went beyond its core competitive advantage of high-quality grade steel making, distribution, procurement and pricing by moving into higher value-add manufacturing such as technology and automobiles. Of course, the accompanying shortages in food, energy, raw materials and foreign exchange and the rampant postwar inflation led forced laborers from Korea and China crippling the nation’s coal industry which in turn threatened the manufacturing and transportation industries and increased the country’s dependence on imports. Since Japan’s chief sources of raw materials: China, Manchuria and Korea, were closed to Japanese trade postwar, Japan had to turn to western suppliers who were more expensive and usually required letters of credit from western-accredited Japanese financial intermediaries. This was the situation of Japan as it deliberately focused on its steel industry.
By 1975, Japan produced 113 million tons of crude steel, approximately 16% of world steel output or 20% of all world steel exports done by its zaibatsus - an amount approximately equal to US steel production that year which indicated Japanese steel industry’s phenomenal postwar growth and development. The US could then feel the emerging dominance of a country which was able to pay its international debt, pull ahead of Britain, France and West Germany in terms of GNP, develop a world-respected work-ethic and limited imports to only the most essential products. By 1983, Japan had the unique problem of an unprecedented large world trade surplus which was fueled by the growth of three key industries in Japan: steel, electronics and autos. By 1987, Japan registered a nearly one hundred billion trade surplus, the largest surplus for any country in history which was offset only by and equivalent amount in long term capital outflows per annum.
Fast forward to the present time, the emergence of American and Western multinationals may have been explosive during times when strong military spending was important – even as recent as the September 11 attack on the Twin Towers where smaller nations have expressed inadequacy of their superior’s ability (US) to protect itself, how much more can it provide for other less developed countries? Although the technology aspect has always been the compelling advantage of the western world, its application for the defense and monitoring tasks of governance are largely attributable to military applications, despite the erstwhile commercial functions its has been touted to perform. As for the Japanese emergence of its indigenous multinationals, they have focused on the commercial and higher value-add commodities such as electronics and automobiles, veering away from the basic industries which could be copied by similar emerging economies as had been done by Korea which focused more on shipbuilding than automobiles given its accessibility to nearby ports and given an inherited competence from the postwar era. Given that the Japanese were highly disciplined and trained in quality management, they countered the American atomic bomb in Nagasaki and Hiroshima by unleashing the economic bomb in the US by virtue of their adaptable constituency and economic prowess – to become the economic superpower of the 1980’s.
2.3 The Emergence and International Expansion of Developing Countries Multinationals: Theoretical Review
(i) The Emergence of Developing Country MNCs: The ‘First Wave’ of Literature
(ii) The Expansion of Developing Country MNCs: The ‘Second Wave’ of Literature
2.4 Summary of the Literature on Developing Country Multinationals
2.5 the Comparison of Multinationals from Developed and Developing Countries
(i) Behavior and Characteristics – Multinationals in Developed and Developing Countries exhibit the basic behavioral components and characteristics in their commercial objective: to engage in commerce beyond their sovereign borders where such economic activity shall net a favorable return of expenditures on the said overseas investment.
The timeline of history has shown that trade and commerce have always had the resultant beneficial outcome in mind for the owner of such proposed transactions. The proactive party has historically occupied the position of power in negotiations of transactions thereby resulting in a net gain compared to the more passive recipient of the transaction who, although may gain from the deal, such gain may not be comparable to that of the initiator. To illustrate, developed countries are assumed to have more mature infrastructure systems: physical as well as intellectual and legal infrastructure. Their characteristic penchant for banding together and leading cooperative efforts stem from the basic learnings of history that more heads are better than one especially in a collaborative effort where it is clear that the positions of power will benefit the most and ably determine the outcome to their advantage. Thus, the GATT, WTO and United Nations, among other collaborations, develop from painful losses in the world wars and use the operation of common law – despite and in spite of sovereign laws governing each nation in the world. The developing nations are thus at a perceived disadvantage in that by operation of law and of peer pressure to be admitted into the communities of countries participating in world trade, they have to be accredited, accepted and vouched for as if in an old boy’s exclusive club or even the pre-pubescent treehouse of western boyhood years.
Multinationals in developed countries are perceived to be remnants of the time when the human race was starting to master its world – thereby gaining first to market strategies which also carried the priority rights over discovered channels or complementary systems or products to their already expanding empire. The general characteristic and behavior of western multinationals were therefore expansive in their focus rather than complementary given that their innate culture was one of annexing, expanding and colonizing – gaining for itself for the pure purpose of ownership, expansion and exploitation. It is only recently with the resurgence of globalization, wide media coverage and more benevolent multinationals that aspects such as corporate responsibility and commitment to community development are being imbibed. These shall be discussed further in the succeeding section.
(ii) Business Strategies and Performance – It should be considered that Developed Countries were Developing countries at one time and while applying similar strategies, the variable factors such as timing, leadership, resources and environmental conditions at the very least could spell the difference from a successful implementation of business strategies or a failure.
The previous section mentioned about the expansive focus on the strategies of multinationals from the previous developed nations – which have been stymied by the globalization and digitization of technology that enables an idea to be spread at the speed of thought throughout the world in an instant. Multinationals at this point have blurred – either deliberately or not – since the world has sensitized itself to the sins of the past which dealt with racism, prejudice and divisive behavior. Multinationals have been defined by ownership in the past although by virtue of globalization, the boundaries have blurred except for a few who remain to be very strong at certain localities particularly when location is a prime competitive advantage for the multinational company.
In the past, western multinationals were very aggressive in adopting international strategies mainly for expanding their market and searching for low-cost production facilities outside their expensive factories. This still takes place particularly for labor and basic capital outlay projects that do not require much technology or infrastructure dependence such as the migration of factories into the sweat-factories of China, Tibet and Latin America. However, for multinational operations that require more coverage in terms of market, a sophisticated but lesser costing area of operations, business process outsourcing of non-core competencies, coupled with strong infrastructure but relatively accommodating legal systems – plenty of potential multinational sites fall into this category. This is the current strategy being adopted by a more sensitized developed country with multinational expansion plans – or even transplanting plans similar to when many multinationals transferred their regional headquarters from Hong Kong to Singapore before the turnover to China in 1997.
The current strategy of multinationals, both from developed and developing countries, is to be more sensitive to a globally politically correct way of setting up and dealing with its multinational efforts. Whereas the less competitive times during the early 1900’s to the 1980’s offered countries and companies to adopt industry specific strategies without regard for the others, or core-competency of business dictating economic development, versus technology driven or even human-capital competency strategy, the 2000’s offer similar but more niche areas to develop since the developed countries have led in the development of the more basic areas and that more value-added industries and activities are needed to spur the next leapfrog in world economic development.
As presented in the beginning of this section, the same business strategies may be in play but the how, in what context, who is playing the cards and other variable factors should be considered but with a similar viewpoint that Japan did after the war: it gave itself an honest appraisal of its strengths, weaknesses, opportunities and threats, plus a key factor of its strong government-business cooperation that withstood the restructuring challenges in order to attain Japan’s collective vision. In essence, the success of Mitsubishi, Sony, Toshiba, Toyota, Nissan and the other initially Japanese-born zaibatsus who are in their own right multinationals with co-owners in the United States, England, and Britain – is the success of Japan.
(iii) Structure – Business sense dictates that the structural bias of a multinational depends largely on the purpose for which it was set up. The developing countries’ multinationals were set up vis-à-vis the legal parameters available during that time which were: agencies, sole proprietorships, partnerships and corporations. Any multinational office or branch would fall within the confines of these legal structures, differing only in the description of the main purpose in the area of operations. The usual office structure of owner and worker was embellished as time went by given the different mandates of the overseas offices. Most of them also took off from the military hierarchy where a chain of command and accountability was established for reportorial, monitoring and management purposes of satellite offices. In fact, the first multinationals were military outposts that had to be outfitted with defensive measures in case of hostilities. The evolution of this structure came to pass as the industrial revolution necessitated more productive hands, feet, and parts of a persons body that could be employed to produce a good for commerce. These were later replaced by machines and automation until the term systems became all encompassing as descriptive of monitoring and management tools.
Present day multinationals have blurred in ownerships since the strategies employed were not for mere operational efficiencies but also, as offshoot of being business entities, for tax efficiency purposes. In this sense, a multinational can be set up to be in the tax-haven areas of the Bahamas or Cayman Islands but actual operations in a low-cost Asian locale with marketing and sales in the Western hemisphere and human resource a combination of tax-haven/flexible taxation locale in South or Latin America. Regardless, the multinational is still dictated where the seat of power resides: and that is a philosophical debate this paper does not intend to discuss.
2.6 Conclusion and Research Propositions
In view of the above criticisms, this thesis adopts a non-comparative approach in analyzing and examining the expansion and development of indigenous Malaysian multinational corporations. It seeks to understand the mechanism that allows the selected firms to strengthen their strategies and core competencies in order to become a respected global player. In essence, this thesis proposed (as discussed in the proposal in chapter 1) that the developing country multinational’s strategy in competing with their competitors is not solely dependent on the technology accumulation process, as has been suggested by the conventional literature on developing country multinationals, but it is also dependent on the variety of resources and other advantages enabling their growth at home and on the international level. This portion of the discussion has also shown that strategies which may have worked before for other countries and multinational corporations may not work for the emerging Malaysian multinational since other factors which are yet to be discussed in the remainder of this paper have to be seriously considered in drafting the combined strategic plan of Malaysian Multinational Incorporated.
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