It was widely believed that economic liberalization would lead MNCs to both expand their business operations and relocate much of their existing operations to low-to-middle-income countries in the Asia-Pacific region and in Latin America. However, the BEA evidence is contrary to such expectations. Between 1989 and 1999 there was little change in the share of US MNCs in economic activity both in the US and elsewhere. In fact, the share of US MNCs in world GDP in 1999 (6.1 per cent) was slightly lower than what it was in 1989.
Besides, although the shares of Asia-Pacific and Latin America in the gross product of US majority-owned foreign affiliates (MOFAs) worldwide went up from 15 per cent and 9 per cent in 1989 to 18 per cent and 11 per cent respectively in 1999, Europe still remains the most important location for production by US MOFAs. The total gross product of MOFAs in Europe in 1999 was US $321.6 billion out of a worldwide figure of US $ 561.2 billion, with the United Kingdom and Germany accounting for over half this gross product. In percentage terms, MOFAs in Europe produced 57.31 per cent of the total gross product of US MOFAs. Canada accounted for another US $63.8 billion, or 11.37 per cent of the total gross product of US MOFAs worldwide.
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The principal gainers of the rise in gross product of MOFAs in the Asia-Pacific region between 1989 and 1999 were developed countries like Japan, Australia and Singapore. Japan and Australia accounted for almost half of the gross product of the MOFAs in the region and almost 9 per cent of total gross product of US MOFAs worldwide. Together with Singapore and Taiwan province of China, the total share of these economies in the gross product of MOFAs in the region was about two-thirds.
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UK's share in the total gross product of MOFAs in 1999 was larger than that of Asia-Pacific, while Canada's share, though significantly lower in 1999 than what it used to be a decade ago, was still higher than the share of all Latin American countries taken together. Most countries where MFOAs accounted for a significant share of the GDP in 1999 are in the developing world, Nigeria, the Honduras and Malaysia being exceptions. The share was the highest in Ireland (16.8 per cent), followed by Singapore (10.7 per cent) and Canada (10 per cent).
All this points to the fact that, even though the periphery has witnessed some increase in MNC activity, this growth has not been at the expense of the presence of multinationals in the metropolis. Even after including the MOFAs in developed countries, the presence of US parents in the global operations of MNCs remains strong. While in 1989 the share of US parents in the gross product of parents and MOFAs put together was 76.6 per cent, a decade later it was only marginally lower at 76.3 per cent. Indeed, with trade restrictions easing, it has now become simpler for MNCs to produce in one country and export the products to others. So, while earlier MNCs had to often set up production facilities in countries they intended to sell in, there is no need for that any longer. The share of export sales in total sales of US parents actually increased from 6.71 per cent in 1989 to 8.05 per cent five years later. If liberalization entails shifting more and more of the production processes to the country of final sale (or to countries near the country of final sale) one would have expected a reduction in the share of export sales in total sales of US parents. Though this share came down to 7.10 per cent in 1999, it was still higher than what it was in 1989. Thus, it is not true that liberalization has always worked to the advantage of developing countries so far as attracting investment from MNCs are concerned. For many, it can work the other way around, with MNCs relocating production facilities away from some countries, and later, exporting to them. If liberalization had indeed worked in favour of the developing countries, one would have expected to see more and more of the production being transferred to the countries of final destination. The share of export sales in total sales of US parents should have steadily climbed down, a claim that the data fail to substantiate. The table below gives an idea of the increase in assets of MOFAs in different countries between 1989 and 1994 and between 1994 and 1999.
Table 1 >>
Even as the growth of total assets of MOFAs fell sharply during 1994-99 as compared to the preceding five-year period, the growth of assets of MOFAs in Canada during 1994-99 was more than thrice the growth during 1989-94. The growth in Europe, although lower during 1994-99, was still a respectable 32 per cent. Africa’s spectacular performance in this regard may be attributed to the low base period asset value, rather than to the region’s emergence as a destination for new investment.
In terms of the number of employees, the share of US parents recorded a fall, from 78.6 per cent in 1989 to 74.1 per cent in 1999. But this does not necessarily imply that expansion of MOFAs is taking place faster than expansion of their parents in the US. It may well be true, and possibly is, that labour-intensive segments of technology-intensive production processes are being relocated to alternative sites in the developing world where labour is cheap. Or, it may be the case that production processes in developed countries are getting increasingly mechanized, thereby not allowing the employed labour force to grow as fast as it would otherwise have. In fact, the gross products of US parents and their affiliates grew at about the same rate in 1999. However, while employment in the affiliates increased 4 per cent, parent employment declined.
It must be noted that the view that lower wages in some developing countries makes them an attractive site for multinational investment is not borne out by the evidence relating to US MNCs. A sample survey carried out in 1992 in thirteen high-wage and fourteen low-wage economies(the latter included economies like Hong Kong, Singapore and Taiwan province of China) revealed that 65 per cent of employment by manufacturing MOFAs was in relatively high-wage countries. If one takes into consideration the same two sets of countries and calculates the percentage of employment by manufacturing MOFAs in 1999, it is found that there has been only a 2 per cent decline in the share of the said employment in the thirteen high-income countries.
The share of US parents in the worldwide gross product of US MNCs has remained near-constant throughout the 1990s in almost all sectors, including manufacturing, finance, insurance and real estate. Only the services sector has seen a significant decline in this share during the second half of the 1990s. This sector has seen a rise in its share in gross product of all industries, mainly owing to the growth of computer and data-processing services. And a larger part of this growth has taken place in the periphery, as parents have been outsourcing many of these activities to take advantage of the cheap but skilled work force that English-speaking developing countries provide. In 1989, out of the total gross product of $67 billion of US MNCs worldwide in the services sector, US parents accounted for US $57.1 billion, or about 85 per cent. In 1999 their share was US $178 billion out of a total of 220.8 billion, or about 81 per cent.
US MNCs are the leading spenders on research and development (R&D). However, R&D is still carried out mainly by US parents: their share in R&D expenditure has increased during the 1990s, from 83 per cent in 1989 to 87 per cent a decade later. In 1999, US parents accounted for 68 per cent of total R&D expenditure in the US. This reflects the fact that large multinational firms still use technology as a means to market leadership, and points to control that patenting ensures as a means to higher profits. The fact that parent firms account for a large share of R&D expenditures even within US MNCs shows that the tendency of firms to locate research activities at or near their headquarters still persists, reducing the possibility of scientific and technological spin-offs from MNC investment in the periphery. Many MOFAs do not undertake R&D at all. While US parents undertaking R&D accounted for 61 per cent of the gross product of all US parents in 1999, the share of MOFAs undertaking R&D in the gross product of all MOFAs in the same year stood at a mere 35 per cent. The ratio of R&D expenditures to the gross product (R&D intensity) of all US parents in 1999 was 6.8 per cent. In contrast, the corresponding figure for MOFAs was only 3.3 per cent. In terms of R&D intensities, MOFAs in Israel and Sweden had very high percentages of 21.3 and 15.6, respectively; the R&D intensity in China was 7.8 per cent, followed by the OECD countries. In 1999, MOFAs in developing countries, leaving out China and Brazil (with R&D intensity of 1.9 per cent), had an abysmally low average R&D intensity of 1.3 per cent.
The ratio of R&D expenditures to the gross product of R&D-undertaking MOFAs in 1999 was 9.4 per cent, while that of R&D-undertaking parents was 11.3 per cent. For Israel it was 50.8 per cent, for Sweden 41.4 per cent, and for China 22.5 per cent. At the other end of the spectrum, the ratio of R&D expenditures to the gross product of R&D-undertaking MOFAs in Brazil in the same year was only 4.3 per cent, and in other developing countries the average was 6 per cent.
In the communications equipment segment, however MOFAs spent more on R&D in 1999 than their US parents. Among R&D-undertaking communications equipment firms, MOFAs had an R&D intensity of 50 per cent, while that of US parents was only 38 per cent. The figures are exactly the opposite in computers and peripheral equipment, with MOFAs in the field having an R&D intensity of only 8 per cent while parent firms had 27 per cent.
Manufacturing parents have been the largest spenders on R&D with R&D intensities being particularly high in computers and electronic products (especially communications equipment), chemicals (especially pharmaceuticals and medicines), and transportation equipment. Almost all US parents manufacturing computers and electronic products undertake R&D: while their R&D intensity in this industry in 1999 was 30 per cent, the industry figure for all parents in computers and electronic products in the same year stood at 29 per cent. Outside manufacturing, parents in publishing, computer systems design and related services also exhibited relatively high R&D intensities.
Of a total of US $18.4 billion spent by MOFAs on R&D in 1999, US
$15.7 billion were spent in research centres in developed countries, with
those in the UK, Germany, Canada, Japan and France accounting for around
US $10.8 billion of the expenditures. The UK and Germany together accounted
for more than two-fifths of all R&D spending by MOFAs.
Chart
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The share of R&D-undertaking MOFAs in the gross product of all MOFAs
has been higher in most of the developed countries compared to the developing
world. For all countries taken together, this share was 34.9 per cent
in 1999. In Germany it was 49 per cent, in Singapore 48.4 per cent, in
France 43.7 per cent, in the UK 42.7 per cent and in Israel 41.9 per cent.
Among the developing countries, the share of R&D-undertaking MOFAs
in the gross product of all MOFAs has been particularly high in Brazil,
standing at 43.8 per cent in 1999. If one leaves out Brazil and China
(34.5 per cent), this share was only 22.3 per cent for developing countries
in that year.
The figures above imply that not many of the MOFAs in developing countries
engage in R&D, and that those who do have not contributed significantly
to the gross product. It may well be the case that MOFAs in developing
countries are more interested in exploiting the natural resources of those
countries, oil and natural gas in particular. MOFAs in the manufacturing
sector, which account for most of the R&D expenditure made by MOFAs,
are mostly located in the OECD countries.
Finally, if we look at the expansion of US MNCs in 1999, we find that
more than half of the new affiliates of US MNCs have been acquired and
only a little more than 46 per cent of the new affiliates have been newly
established, resulting in investment in green-field projects. This means
that only in a little more than half the cases does the creation of new
affiliates involve investment in new capacity or the creation of new employment
opportunities in the host countries. On the contrary, take-overs by US
MNCs have often led to retrenchment of workers in these companies.
Europe is still the most popular location for new affiliates. In 1999,
56 per cent of all new affiliates were accounted for by Europe. The new
European affiliates produced 68 per cent of the gross product of all new
affiliates put together, and accounted for 61 per cent of all the people
employed by the new affiliates. Canada accounted for another 8.5 per cent,
and only 18 of the 1,077 new affiliates were set up or acquired in Africa.
USDIA
US direct investment abroad (USDIA), on a historical cost basis stood
at US $1244.7 billion at the end of 2000. However, hardly any money has
been invested till date in poor countries, particularly those in Africa:
the share of USDIA that accrued to Africa till 2000 was only 1.27 per
cent of total USDIA worldwide. US $233.4 billion or about 19 per cent
of USDIA had gone to the United Kingdom; another 10 per cent had gone
to Canada; and then Netherlands had a 9 per cent share. Within Europe,
USDIA on a historical cost basis was only US $672 million in Greece in
the year 2000. In Central America, it amounted to only US $115 million
in the Honduras and US $904 million in Guatemala; Ecuador, in South America,
has received only US $838 million till 2000.
Chart
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Of the US $113.9 billion worth of fresh USDIA made worldwide in 2000,
Europe got US $60.4 billion and Canada US $15.4 billion, together bagging
two-thirds of the investment. Africa got less than US $1 billion, with
countries like Nigeria and South Africa witnessing an outflow of US money.
South America attracted close to US $5 billion worth of USDIA in 2000,
with money actually flowing out of Ecuador. The same was true of the Honduras
in Central America.
The shares of individual countries in the total investment of US $60.4
billion that went to Europe were as follows. The UK got more than a third,
and the Netherlands, Ireland, Switzerland and Italy together got half.
That is, these five countries garnered US $50.3 billion, with the rest
of Europe getting only US $10.1 billion. Many European nations also saw
their net USDIA dwindling during 2000, Belgium, France, Austria and Finland
being the prominent ones among them.
The table below gives the shares of the major destinations of USDIA on
a historical cost basis in 2000 and the shares of fresh USDIA made in
2000. One can see that only in Europe and Canada (besides the Middle East,
whose share of USDIA is very low) are the shares of fresh USDIA in 2000
higher than the shares on a historical cost basis.
Table
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These figures reject the widespread belief that increasing shares of fresh
USDIA are going to the developing countries, and negate all claims about
the erstwhile East European countries becoming a hotbed for investment
by US MNCs in recent years. USDIA in Eastern Europe at historical cost
in 2000 was only US $11 billion, with new net investment in the year 2000
being a meagre US $1.4 billion. Further, most of this new investment was
in the financial sector and did not contribute much to the growth of infrastructure
or manufacturing industries in the region. While Asia and the Pacific
region saw a US $17.7 billion rise in USDIA in 2000, Japan got US $6.2
billion, and Hong Kong and Singapore together got another US $6.3 billion.
China, an emerging Asian market, got only US $1.6 billion during the year.
This is contrary to the perception that, since it is the largest recipient
of FDI among developing countries, China must be attracting a lot of USDIA
as well. The share of China in USDIA on a historical cost basis till 2000
was only 0.77 per cent of total USDIA, and 4.80 per cent of USDIA in the
Asia-Pacific region. Out of the fresh USDIA made in 2000, China got a
mere 1.33 per cent. Its share of the fresh USDIA made in the Asia-Pacific
region in 2000, although standing at a not-too-significant 8.57 per cent,
reveals that China’s share in USDIA is rising and that its importance
as a destination for investment by US MNCs is increasing.
Much of the increase in USDIA in 2000 was accounted for by reinvested
earnings of affiliates except in the UK, Switzerland and Italy, where
the increases mainly reflected acquisition. In the UK, the acquired firms
were mostly existing British businesses, while in Switzerland and Italy
existing foreign businesses were acquired. So there has been little additional
capacity created through fresh investment by US parents in foreign countries
in 2000, not even in Europe. Acquisitions rarely create additional capacity,
and are often followed by downsizing of the existing work force rather
than expansion of acquired firms.
Most of the USDIA that Africa and the Middle East have received till date
has gone into exploiting petroleum resources in these regions. As we have
already observed, in the section on R&D, MOFAs do not spend much in
these regions. USDIA figures on a historical cost basis for 2000 for the
Middle East show that while about US $2.9 billion was invested to explore
petroleum, manufacturing industries got only US $2.5 billion. The figures
for Africa reveal even greater exploitation of the region’s oil and natural
gas resources by US MNCs. USDIA in Africa in 2000 on a historical cost
basis was around US $10 billion in the petroleum sector, but only a meagre
US $2.2 billion in manufacturing. Of the USDIA in manufacturing in Africa,
a little less than US $950 million went to South Africa.
On looking at recent direct investment by the US in different countries
and comparing its rise in 2000 over what it was in 1999, one finds that
USDIA has grown by only 6 per cent in Africa and about 8.5 per cent in
Latin America. In contrast, USDIA in Canada and Europe has grown at 14
per cent and 10 per cent respectively. In the Middle East it registered
a 12.7 per cent, this was probably owing to the fact that the assets of
MOFAs in the region had fallen sharply in the five years preceding 1999.
Overall, USDIA rose 10 per cent during the year.
Also, the distribution of whatever little USDIA has gone to the developing
countries reflects an extremely skewed pattern, with a few countries getting
almost the entire USDIA. For example, USDIA on a historical cost basis
in 2000 in South America stood at US $79,354 million, of which US $35,560
million, or about 45 per cent went to Brazil, 18 per cent to Argentina,
14 per cent to Chile, and 11 per cent to Venezuela. The distribution was
even more uneven in Central America. Of the US $74,754 million that the
region attracted as USDIA till 2000, Mexico and Panama got more than 47
per cent each. Out of the USDIA going to other countries in the western
hemisphere, Bermuda got more than 63 per cent and the Caribbean got 24
per cent. The investment in Bermuda does not really help the country much,
as it is used as an offshore tax-haven by US parents, not as a destination
for setting up production facilities.
These data relating to US MNCs, thus, fly in the face of the optimism
in the developing world about increases in FDI after liberalization. While
much of the expansion and investment by US MNCs is still being directed
at the OECD countries, the increased spate of acquisitions and mergers
would in all probability increase the dominance of a few MNCs over the
global economy. That increase in dominance falls far short of the expected
increase in new production facilities and employment opportunities on
which the case for economic liberalization rests.