D. Caverhill, "TNCs and the world economy". 1994 An essay submitted for the course 'Developing Countries in the World
Economy', MSc Development Studies, year 1, term 1.
Tutor: Dr. Robinson Rojas Sandford
Question: "Transnational corporations dominate the global economy, and
in so doing, they dominate less developed countries' economies. That
domination is the main blockage to LDC's development". Discuss, utilizing
at least two case studies.
Diana Caverhill
February 21, 1994
-----------------
INTRODUCTION
The expansion of Transnational Corporations since the 1950s has been the
major growth area of the world economy, measured against indicators
including exports, Gross National Product, and world trade movements.
There has been no economic organization in post-industrial society that
has grown as quickly.
Transnational corporations affect and change almost every element of
economic, social and political life in the areas where they operate. While
the largest amounts of foreign direct investment by transnationals are
currently made within developed countries, history has shown that TNCs
go anywhere their strategic objectives can be met according to a carefully
considered cost/benefit/risk analysis.
The 1993 World Investment Report indicates there are now approximately
37,000 transnationals, with over 170,000 foreign affiliates. The sales of
the largest 100 TNCs grew faster that the Gross National Product of the
capitalist world in the 1970s(Jenkins,p7).
By 1992, TNCs had a global stock of foreign direct investment of US $2
trillion. Sales by foreign affiliates were almost $5.5 trillion, considerably
larger than the $4 trillion in world exports of goods and non-factor
services(WIR,1993Press,p2).
This essay will illustrate how, through their role in the
international exchange of goods and services, TNCs have come to
dominate the global economy. I will examine how they have dominated
LDCs in the past and discuss whether they are currently the primary
blockage to LDC's development.
Several cases will be examined.
To illustrate the rise to global domination of the economy, the history of
TNCs will be reviewed. Woven together with this history, will be the path
of one of the world's oldest TNCs - the conglomerate Unilever. Then,
some figures of sector domination by the largest transnationals will be
discussed to illustrate the extent of TNCs powers.
The newly industrializing country of Malaysia is then analysed in some
detail, to investigate TNCs role in a "development success story". The
aim will be to explore TNCs potential to dominate a
society that is encouraging foreign investment and hoping to modernize,
solve cultural issues, solve a poverty problem and reduce unemployment.
I will argue that transnational corporations dominate the global economy
through their control of finance capital, production systems, technology
and marketing systems. They are able to do this through the many
advantages they have obtained by being a leader and an influencer in the
capitalist system.
The ultimate argument for contending that TNCs are the primary
blockage to LDC development depends on the definition of development
used and whether one believes that development is possible for LDC's
under the capitalist system. In such a brief
paper covering so many areas, it is impossible to analyse this in detail,
but is is possible to comment on possible areas where TNCs may affect
LDC's development, such as growth, poverty and cultural impact.
I will argue that it is not TNCs as an institution which is currently the
main blockage to LDCs development. However, as TNCs' dominance of the
world markets continues to increase, as suggested in the 1993 World
Investment Report, the capitalist system and world development will be
increasingly shaped, directed or dictated by the transnationals, except
in the cases of very strong opposition or clever policies or negotiation.
This will become a primary blockage to those who do not wish to develop
on the terms of the dominant powers, using the capitalist system's rules.
HOW TNC GROWTH BEGAN:
ADVANTAGES UNDER THE CAPITALIST SYSTEM
Transnationals have many advantages within the capitalist system;
advantages over states, uninational companies, smaller entrepreneurs
and smallholders.
These advantages gave the companies a huge "head start" in the
internationalization of world finance and production coordination. It is
important to recognize just how extensive they were when trying to
understand TNCs global domination.
They include:
: being thought of as independent entrepreneurs, but still protected
politically and economically by their home governments. (In the United
States, transnationals still portray the image of being competitive, while
in Japan several very large organizations are visibly dominate)
: not being internationally regulated by legislation Although this
has been on the UN and others' agenda for many years, no code of
conduct has been approved(Third World Resurgence,Issue 40,p31)
: having the flexibility of large incomes to: choose their investments and
economic activities; spread risks over geographical areas and sectors;
look for the cheapest factors of production and the best tax
arrangements; and pay for advisors
: having large budgets to spend on advertising, marketing, influencing,
buying and bribing to obtain what they want and to manipulate the
consumer market
: having ownership of technology and patents; and the ability to export
technology which enables TNCs to continue to profit from additional
sales, licencing arrangements or royalties
: being supported by the world-wide banking system; itself containing
many TNCs (or TNBs as they are called)
: operating in the international money and capital markets: TNCs are in a
position to take advantage of monetary investments such as currency
fluctuations or differences in rates of return
: being accountable only to the ultimate owners of the capital - the
shareholders, rather than the public at large, as the state must be
Since the 1980's these advantages have become stronger in some
areas (for example, foreign investment by TNCs is increasingly in
demand following the reduction in available credit after the debt crisis,
and the wish to avoid IMF or World Bank loans and their conditions of
structural adjustment and conditionality.), and become weaker in others
(for example, developing countries are aware of past problems with TNCs
and thus in theory should be better able to negotiate). However,
essentially they still represent reasons for the huge growth in the
business of transnationals.
STRUCTURAL CHANGES IN TNC INVESTMENTS
Historically, TNCs have shifted the structure of their investments
significantly between countries and sectors.
Before the First World War over 60% of all foreign direct investment was
located in developing countries(Jenkins,p5 citing Dunning, 1983).
By 1990, developing countries received only about 17% of the investment
made by transnationals, with four countries: Mexico, Malaysia, China and
Singapore receiving over 7% of this 17%(WIR92,p311).
TNCs are still often thought of as dominating countries in the Third
World. Prominent incidents reported in the media such as the Nestle baby
milk scandal and the explosion at the Union Carbide Plant in Bhopal gave
multinationals the image of being unscrupulous. However, as
Sunkel(p48) highlights, domination of developing countries is only the
"tip of the iceberg" - that part seen by the public. TNCs actually have
significant structural control over the industrialized countries'
economies, as will become obvious as we follow the historical rise of the
transnationals.
While reviewing this growth, I will attempt to synchronize the growth of
the multinational Unilever in order to provide concrete examples of TNCs
impact on both the global economy and LDCs.
As one micro-economic example of an LDC being blocked, the case of the
Sahel famine will be highlighted and more specifically, the case of
groundnut production in northern Nigeria.
Unilever is one of the earliest and largest world corporations.
It currently has operations in at least 70 countries and specializes in four
core areas - foods, detergents, personal products and specialty
chemicals. The organisation employs over 300,000 people worldwide, the
fifth largest TNC employer in the world. Foreign employment outside its
base of the U K/Netherlands was 261,000 in 1990, making it the largest
TNC employer in foreign countries(WIR93,p26).
EARLY STRUCTURAL INTEGRATION WITH LDCs
At the turn of the century the first modern TNCs to penetrate developing
countries were concentrated in the primary sector.
TNCs were attracted to the prospect of securing crude raw materials at a
low cost. These were vertical investments - foreign subsidiaries
established to secure raw materials for production processes elsewhere,
normally within the TNC's home country(Caves,p203).
Unilever began operations as a transnational in the late 1800s. The
organisation began expanding outside its base of Britain and the
Netherlands by establishing coconut and palm oil plantations and buying
companies that traded in African vegetable oil for use in many of its
products.
This secured its raw materials supply system and increased total world
production. As production increased, market prices reduced somewhat,
which had the effect of increasing the price competitivenss of Unilever's
products and therefore increased demand.(Fieldhouse,p558).
As early as 1916 the firm began trading in primary products as a
commodity , and moved from what had been a defensive strategy of
securing raw materials, to a profit maximization strategy through
horizontal investments.
After the First World War, the priorities of foreign private capital
changed. Investment was switched from primarily agricultural, mining,
and public services towards manufacturing and service industries such as
banking, mass media and advertising (petroleum remained the consistent
industry investment). This reorientation of TNCs represented the
reorganisation of the international economy, the emergence of the new
international division of labour, and the evolution of many new
subsidiaries in developing countries. The new model that emerged was
structured around the large manufacturing TNC.
Latin America was the main area for early manufacturing expansion where
by 1939 there were as many as 200 subsidiaries of US and European firms;
Lever (the British part of Unilever) being joined by such firms as Ford,
GM, Goodyear, ITT, Singer, Nestle, Philips, Olivetti.
Unilever was one of the earliest "modern" manufacturers in Africa and
Asia. There was very limited local competition, so the firm had a monopoly
of the local market, at the same time retaining its raw materials exports
from plantations to its European factories. It expanded rapidly and by
the beginning of the Second World War, total sales had reached 175
million(CIS,p9).
Parallel with the spread into manufacturing TNCs were absorbing new
areas including those in Africa and the Middle East as sources of raw
materials, : tea estates, coffee plantations, rubber
plantations, copper mines, precious metals and oil.(Jenkins,p6)
Unilever had begun this process earlier than most TNCs. The
manufacture of margarine increased the organisation's need for
groundnuts, and several trading companies in Africa were purchased.
In 1920 Unilever negotiated and acquired the Niger Company, one of the
two largest companies of the trade in groundnuts, as well as many other
primary commodities. The purchase cost was 8 million(CIS,p64).
The acquisition in effect meant that Unilever controlled the entire trade
in Nigerian palm oil, ground nuts, palm kernels, cotton, cocoa and hides
and skins. It later acquired significant interests in the cocoa trade in the
Gold Coast and the Ivory Coast.
Having control over the market meant that the firm had control over the
prices it paid to producers. Nigerian groundnuts were being purchased
at a price of 21.45 per ton, compared to the world price of 71 per ton.
Since no indigenous industry could compete with companies such as the
Niger Company, the price cut and low wages led to the relative
impoverishment of subsistence farmers who had become the labourers for
the plantations. Enormous surpluses were occurring through the
production of primary products, however, profits were both remitted
back to Europe or paid to the African Produce Marketing
Boards(CIS,p72). As the countries themselves had very low levels of
domestic savings, it was accepted ideologically that foreign investment
was needed for industrialization.
After 1945, with decolonization of most of the countries where Unilever
operated and weak domestic markets due to poverty, Unilever withdrew
some of its operations in Africa.
Alternate sources of raw materials were available from South East Asia
and America, where the domestic markets were also better. Purchases of
Nigerian groundnuts continued but at a lower level than before. Although
the company had reduced investment levels, the control of core
production areas was still strong. The company began its philosophy of
"think globally, act locally", opening supermarkets for the well off and
selling simple products such as soap to those less well off.
By the 1970s, a huge concern had arisen over the dominance of the
TNCs - a view expressed by Dudley Seers, who in 1977 said that the most
compelling need of the poor countries is not for more financial aid, but for
the curbing of the power of transnational corporations(Frank,p3).
Numerous critisms of TNCs were alleged, including foreign domination
and exclusion of local enterprises, cultural domination, political
interference, repatriation of profits
and transfer pricing and marketing of an unaffordable and wasteful
consumer society.
In Latin America, there were accusations of political interference, such as
the role of the American multinational International Telephone and
Telegraph in attempting to reverse Allende's election as President of
Chile, and in some countries of entire industry takeovers by TNCs.
For example, Brazil's pharmaceutical industry was described as an
industry where an "efflorescence of local enterprise was followed by a
thorough foreign domination" ( There were 11 local firms out of the top 35
pharmaceutical firms in 1957. By 1974 there was only 1)(Evans,p130).
In Africa, TNCs were often implicated in development blockages in a
different way.
Even after independence, no real attempts at been made to enable the
people to become self sufficient in agriculture in many areas, including
those where Unilever was involved Many rural people were still providing
raw materials for the factories overseas, or cash crops.
Disaster struck in 1970 with drought and subsequent famine in the Sahel.
In northern Nigeria two million acres of land had been devoted to
producing ground-nuts, with approximately 40-45% of the population
dependent on the production(CIS,p91).
The drought slashed the Gross National Product of six states by an
estimated 50%, and millions starved or were made homeless by their search
for food.
The status of transnational corporations as honest entrepreneurs and
mainly economic and business institutions was called into question by
many. TNCs were crossing borders so quickly that the sovereignty of
nation states was being questioned. The TNCs even began to realize this.
The Chairman of Unilever was quoted in the 1970's as saying "The nation
state will not whither away - some positive role will have to be found for
it" (Global Reach,p21).
The "storm" over the multinationals subsided somewhat in the 1980s due
to new concerns - the Debt Crisis which followed the OPEC oil crisis
after a fourfold oil price increase, and massive investments of OPEC
surpluses in US assets.
In addition to the preoccupation with these problems, the revival of
neoclassical economics and the disbandment of the UN Centre on
Transnational Corporations into the UN Secretariat will enable the
advantages afforded to TNCs to continue to allow them to expand.
Meanwhile, considering some of the statistics, Unilever is now a society in
itself. At the beginning of 1993, its consolidated accounts showed total
assets less current liabilities of over 9,000 million. In 1992 sales
(turnover) were 24,700 million according to Unilever's annual report(pgs
5,31).
TNCs such as Unilever argue that they are operating in difficult markets,
that profit margins are small, competition is fierce and immense amounts
have to be spent on research, development, manufacturing capacity,
distribution systems and advertising. They argue that they operate
under free trade and that large profits are merely payment for the
comparable level of large risk taken. Finally, TNCs such as Unilever
frequently argue that they try to be good corporate citizens in the
countries where they operate.
While these observations may be true for comparisons to equally large
TNCs such as Colgate-Palmolive or Proctor and Gamble, where the large
TNCs are trying to maintain or increase their market shares, there is
very little evidence of these comments being true in relation to
uninational firms, states, small entrepreneurs or smallholders, or if one
considers the human issues.
Following the examination of the reasons and the history behind the rise
of TNCs, I now present some facts illustrating the current size and
control of TNCs, at the Global Level and at the sector level.
DOMINATION OF THE WORLD ECONOMY - FACTS
GLOBAL LEVEL
While many TNCs are "medium-sized" or "small" by industrialized society
standards, the majority are larger than their domestic competitors within
a host country(Global Shift,chapt12). Some have become so large that
their sales exceed many countries' GDPs.
In 1984 the sales of the biggest 20 TNCs were larger than all of the
"lower income economy's" GDPs and many of the other developing
countries GDPs (using the World Bank's classification). The largest five
had sales greater than the GDP's of countries such as Thailand, Hong
Kong, Libya, Malaysia, Chile and Singapore(Jenkins,p9).
Along with the economic size, UNCTAD estimates that as much as one-
third of private sector productive assets of Japan and the U. S. are
under the control of TNCs(WIR93,Press,p4). Also, more than 50 per cent
of the total trade (exports and imports) of both the United States and
Japan consists of intrafirm trade conducted within TNCs!(Global
Shift,Chapt3).
SECTOR LEVEL
Primary Sector
TNCs dominate the ownership and control of many primary commodities.
Many of the most commonly used primary food products including oils,
cocoa, tea, coffee, bananas as well as cigarettes are controlled by TNCs.
A small group of TNCs also control a large proportion of natural
resources such as oil, minerals and metals such as bauxite, alumina,
aluminum, nickel, copper and iron ore(Jenkins,pgs40,107).
Industrial Sector
Within the industrial sector, similar domination has occured. Figures
show that as early as the 1970s foreign firms controlled significant blocks
of manufacturing industry in LDC countries/regions:
Argentina (31%), Brazil (44%), Central America (31%), Chile(25%),
Columbia (43%), Equador (66%),
Mexico (35%), Peru (32%), Venezuela (36%),
Trinidad and Tobago (40%), Ghana (50%),
Kenya (30-35%), Nigeria (70%), Zaire (30-35%), Malaysia (44%),
Singapore (83%)
Major TNCs also control the majority of Western world output of many
products - including machinery used to harvest primary products such as
tractors, agricultural machinery and tyres.
(Jenkins,pgs10,40).
Banking Sector
While this essay has not discussed the banking sector or transnational
banks (TNBs), it is relevant in illustrating the domination of TNCs to
highlight that the debt of developing countries to TNBs was US $650
billion in 1987(UN,p2).
This figure compared with US $484 billion of exports(f.o.b.) from the
developing countries in 1986 according to Todaro(p49).
While taken from separate sources, and thus possibly not the best
comparison, this illustrates the size of the debt and its burden as a
blockage to development.
Services Sector
There are suggestions that the TNC will play an increasingly dominant
role in this sector, unless a major event changes the global economy.
UNCTAD suggests that the pattern of industrial specialization is moving
towards an increasing domination by TNCs in the service sector(WIR,93).
Some Third World economies will become at least partially industrial
economies and the new dynamic agent will be
the transnational oligopolies specialising in R&D communications,
information and finance. There will also be techno-scientific
specialisation, with the "centre" being dominant by concentrating on the
generation of new scientific and technological knowledge, which will also
be moving from manufacturing to services.
The Malaysian Case Study will be used to examine in more detail the
potential for TNCs to dominate the economy and LDCs, which is
suggested by the figures illustrating their global power and sector
control.
MALAYSIA - CASE STUDY
In October 1976 the Malaysian authorities and Citibank organized a large
investment seminar in Zurich as part of a drive to attract more foreign
investment.
The Chairman of Malaysia's Federal Industrial Development Authority
(FIDA) outlined the reasons why Malaysia was a good place to establish or
expand operations:
- Malaysia has "one of the most stable" economic and political climates; it
has a "clean" Government (free from corruption and excessive
bureaucratic red tape);
- Malaysia has a "realistic attitude" towards foreign investment;
- The Malaysian Constitution guarantees foreign investment from
expropriation;
- There is a liberal programme for remittance of earning and capital;
- Educated, productive manpower exists in abundance;
- There is industrial "harmony" between management and labour unions
through a "mutual code of conduct";
- The infrastructure necessary for industrial development is already in
place and land is available at reasonable cost;
- The quality of life for foreign businessmen is high;
- Malaysia offers investment incentives, along with tax relief granted for
periods ranging up to ten years
(Utrecht,V3p73)
The Senior Vice-President of Citibank, indicated that he was favourably
impressed with the investment climate in Malaysia. The country had US $4
billion in international reserves, a strong currency, a good balance of
trade and a development plan which relies "primarily upon the growing
private sector".
In addition to this favourable investment climate, Malaysia has many
resource endowments including petroleum, rubber, tin, cocoa, coconut
and oil palms, good agricultural land, good fishing waters, forests,
minerals and adequate land for industrial expansion.
Given all of these incentives, what has been Malaysia's experience with
TNCs. Have transnationals contributed towards development in Malaysia?
Researchers and writers in the 1980s doubted the sustainability of
Malaysia' growth targets and questioned the benefits of TNCs for the
majority of the people. Utrecht (p91), questioned the contribution of
foreign investments and asserted that "the belief that TNCs are an
important force in the economic development of Malysia is a myth". Aside
from the contribution to the GNP, foreign investments may have retarded
aspects of development.
In order to analyze the contribution of TNCs, it is necessary to look at
the development goals of Malaysia, and examine the contribution of
transnational corporations toward meeting those goals.
At the time of the Zurich conference, Malaysia encouraged more foreign
investment for several reasons:
: it was believed that international collaboration was necessary for the
economic development of developing countries
: Malaysia wanted technology, managerial and marketing know-how to be
transferred into the country
: Malaysia lacked domestic capital for its development and
industrialization
: foreign investment would generate employment, solve the acute
unemployment problem and raise the living standards of the poor
: Malaysia hoped to increase its share of profits from current and
additional foreign investors
At the same time, the Government wished to increase Bumiputera
(indigenous Malay) ownership of the economy to 30 per cent of share
capital of limited companies by 1990.
Looking at each of these goals in turn, we see that international
collaboration and TNC activity did increase after 1976. Between 1970 and
1979, Malaysia was the third largest recipient of direct foreign
investment, after Brazil and Mexico. Between 1980 and 1990, it was sixth,
with Singapore, China and Hong Kong moving ahead.
The Appendix contains some relevant statistical details of the economy
over the period 1960 to the late 1980s.
The annual average foreign investment in Malaysia was US$1,058 million
between 1980-1985, and after dropping between 1986 to 1988, increased to
$2,902 million in 1990. In 1987, Foreign Direct Investment stock was
27.7% of GDP - higher than 56 developed and developing countries
reported in the World Investment report 1992(WIR,92pgs315,330).
The goal of a higher Gross Domestic Product has been realized. Malaysia's
economy is growing dramatically. GDP is forecast to grow at 8% in 1994,
up from 7.3% in 1993. There was a positive balance of trade in 1993 of
almost a billion pounds and inflation was 5.3%. The unemployment rate is
expected to fall below 4%, a level which "many consider to be full
employment. There is a labour shortage in the plantation, construction,
manufacturing and service sectors"(Hay).
Malaysia became so optimistic that the Government, led by the Prime
Minister Dr. Mahathir Mohamad, set a goal referred to as "Vision 2020" -
full industrialisation by the year 2020, with an economic growth rate of 7
per cent in each of the next 27 years(FT,pI).
Historically, TNCs established themselves through plantation ownership
and in factories both in and outside free trade zones. Two main types of
export-oriented industries have developed: resource based industries
around the processing of rubber, tin, palm oil, petroleum and timber
etc.; and non-resource based labour intensive export industries. The
most dramatic growth has been in electrical and electronic products which
have accounted for at least half the total value of manufactured exports
since 1981.(Jomo,p121). The electronics industry is now generally
regarded as the leading subsector in Malaysian industrialization.
Prior to 1971 there were two companies in the electronics sector. By 1982,
there were over 100, including names such as Hewlett-Packard, Intel,
ITT, Motorola, Hitachi, Philips, Thomson, NEC, Seimens and Sony.
It is this high growth industry that I would like to focus on.
After a review of relevant background, the impact of TNCs will be
considered in the areas of: capital and finance, technology transfers,
trade and linkages, industrial structure and entrepreneurship,
employment and labour issues and sovereignty and autonomy.
Background of TNCs entry into Malaysian society
Malaysian society, culture and economic policy have been dominated by
racial and ethnic preccupations, largely as a result of its history of
British colonial rule. British management of the economy rearranged the
structure of society. One of the most significant actions was to bring in
Chinese, Indian, and (what is now) Indonesian immigrants for the
expanding colonial economy - irreversibly changing the ethnic
composition of the population
Under the guise of protecting the Malaysian peasantry, most of the new
immigrants were not permitted to own land. The British put all
uncultivated land under colonial administrative control, later alienating
this land primarily to British-owned plantations and mines(Jomo,p4).
The Malayan economy grew impressively, especially during the first
quarter of the century , to become the single most profitable British
colony. Urban and commercially better connected Chinese entrepreneurs
seized profit-making opportunities in the rapidly growing colonial
economy. By the mid 1970s, at the time of the Zurich conference, the
ownership of the economy was distributed toward foreign and Chinese
Malay interests.
Malaya's infrastructure was one of the most developed of any British
colony. However its construction (largely from imported British
materials) was paid for by tax revenue from sources such as opium,
liquor and tobacco before the second world war, much more than tax
revenues from rubber or tin exports(Jomo,p5). Export earning extracted
from the colony have been credited with financing British post-war
reconstruction(Jomop10).
After a period of import substitution, Malaysia's economy since
independence in 1957 has been primarily export-led, and diversified its
exports from rubber and tin to pepper, palm-oil, tropical hardwoods,
petroleum, natural gas, and cocoa. Thus, Malaysia's relatively very open
economy has been vulnerable to external economic conditions.
Capital and Finance
In 1983 , of the firms with annual revenue greater than $5million, one-
fifth of the manufacturing firms were foreign-controlled. They accounted
for 47 % of shareholder funds, 65% of net profit, 94% of income accruing to
non-residents. Although local firms accounted for only 35% of net profit,
they accounted for 51% increase in net fixed assets in 1981, suggesting
the greater tendency for local firms to reinvest locally. In 1988 FDI was
responsible for 45.7% of exports, 19% of assets, 32.2% of employment,
31.4% of sales and 45.7% of profits.
Net foreign investment up until the 1980s may have been quite
negligible. For example in 1981, with new foreign investment of $747m and
investment income to non-residents of $680m, net capital inflow was only
$65m.
The largest exporters are the US firms, which exported 70% of the
industry's total exports, mainly back to the US(Jesudason,chapt6)
High employment levels were generated. However, there were problems.
Most intermediate goods were imported, making foreign exchange gains
from the industry much lower than would be expected. For example,
within the semi-conductor industry:
Exports, 1983 = $3.85 billion
Imported components and machinery = $ 3.54 billion
Net foreign exchanged earned from exports = $310 million
(Jesudason, chapt 6)
The Government's Industrial Master Plan (IMP), published in
1986 addressed such important issues. The IMP estimated that about 85%
of after-tax profits of foreign firms leaves the country in the form of
investment income outflows. (Jomo,p138)
Though details on transfer pricing in Malaysia are difficult to find, Khor
(1983), developed an estimate that actual pre-tax profits would have been
115 percent higher than those reported, assuming export prices were
undervalued by 10% and imports overvalued by 10%.(Jomo,p138).
Technology Transfers
Before the late 1980s evidence suggested that very little technology had
been transferred to the country. The IMP found that technological
dependence on foreign sources and the lack of an indigenous industrial
capacity was one of the major problems affecting Malaysia's ability to
industrialize. In the electronics industry, an industry with potential for
complex technological processes, this was a large problem. Rather than
developing an industry around technologically more complex industrial or
consumer electronics, 85.6% of electronics output is made up of
components(Jomo p140). The technological dependence resulted in an
outflow of royalty payments and fees to the parent transnationals. The
IMP report estimated that in 1978 royalty payments paid to foreign firms
were $196 million - equivalent to 46% of their after-tax profits. Another
survey calculated for 1983 the figure was $786m, or about 26% of after
tax profits (Jomo,p138).
Trade and Linkages
Until the 1980s Malaysia's balance of payments was the envy of many
developing countries. This positive balance was generated by the large
growth in exports which managed to stay ahead of the country's large
volume of imports. Exports of foreign firms boomed as foreign-owned
factories "brought their clients with them"(Economist, Feb 92,v322).
In fact there has been an overall deterioration in Malaysia's balance of
trade since 1960. By 1982, Malaysia had to export almost twice as much as
in 1955 to import the same bundle of goods. In recent years, Malaysia's
import dependence began to decline slightly, but in 1982 imports were
62.5% of GNP(Jomo,p69). Export-oriented manufacturing industries have
had a high import content since the 1970s(Jomo,p71). Both import-
substituting and export-oriented manufacturing remain heavily import
dependent. 36% of the import bill in 1987 consisted of intermediate
manufacturing goods and investment goods (machinery, transport,
equipment etc.) accounted for another 28%.
A Survey of the FTZs over the period 1973-9 revealed that after
subtracting out imports, the net export surplus from the Malaysian FTZs
was only $30m, before taking into account profit repatriation, royalty and
other fee payments. 64% of total manufacturing exports came from the
FTZs and the LMWs.
The IMP acknowledges "extremely weak interindustry linkages". This
problem has been highlighted in several studies. One survey of
electronic and electrical products factories found that only a
quarter obtained some simple parts from local firms, while the remaining
3/4s imported all their requirements. The IMP found in 1982 that only
6.5% of the raw materials used in the free-trade zones and licensed
manufacturing warehouses were from local sources.
Local firms merely supplied items such as plastic packaging materials and
cardboard boxes, and fitted the factories with furniture, wiring and
carpets. However, the weakness of these linkages cannot be attributed to
TNCs without evidence that the Government had attempted to develop
import substitution technology. There was very little incentive to
manufacture intermediate inputs because they could be flown in cheaply
from abroad. More research is needed to make conclusions in this
area(Jesudason,chapt 6).
Industrial Structure and Entrepreneurship
As the Malaysian manufacturing sector contains mostly foreign-dominated
firms, the IMP acknowledged that the heavy and sustained dependency
on foreign investment in some important industries in the key areas of
technology, marketing, management and components supply jeopardises
the development of an indigenous industrial base.
However, this priority is weighed against what the prime minister sees as
desirable overall growth levels being generated by foreign firms.
One area where Japanese TNCs have contributed is in product quality.
Malaysians have been taught by the Japanese to make products of a high
enough quality to sell anywhere, even in Japan.(Economist,Feb 92,v322)
Employment and Labour issues
One of the main aims of the Government in encouraging electronics
industries was to generate employment.
There have been many structural changes in employment as well as short
term "ups and downs", reflecting Malaysia's capitalist development and
increasingly diversified and open economy.
Employment in any export-oriented industry is precarious, and the
electronics industry has historically been unstable, fluctuating with the
boom times, recessions, cyclical downturns or TNCs movements in
production strategy.
The Malaysian labour force has grown fairly steadily, though at a
gradually declining rate.
Between 1970 and 1974, employment in multinational electronic
corporations grew from virtually none to 18,000, mainly women. The
TNCs prefer women between the ages of 16 and 23, considering them to
have the "cooperative" personality necessary to put up with the monotony
of the job, too young to be a "burden" of maternity benefits, and to be
less likely to unionize. At times of relative labour shortage, TNCs may
cooperate with one another on setting job rates, keeping wages low and to
minimize competition, firms in several areas agree not to hire experienced
workers who move from one company to another.(Kumar,p118)
The recessionary 1980's and Malaysia's attempt at encouraging capital
intensive heavy industry led to unemployment problems. The growing
unemployment problem was compounded by retrenchments - over 90,000
officially between 1983 and 1986. More than half were in the
manufacturing sector. Official retrenchment figures are widely believed
to underestimate grossly the workers who lost their jobs.(Jomo,p85)
The IMP's comparison of labour costs and productivity showed that, at
the time of the Report, Malaysia had the highest ratio of value added to
remuneration, exceeding the US by 56%, Japan by 26%, Singapore by 56%,
and South Korea by 31%. The average remuneration was 11.7% of
comparable US workers.
Penang is at the centre of Malaysia's manufacturing boom. Many
multinationals have opened factories within the industrial parks on the
island province.
The Malaysian Industrial Development Authority predicts that investment
projects approved in 1991(many of them by TNCs) will create at least
123,500 new jobs, many of them skilled and relatively well
paid.(Economist Feb 92,v322)
Rather than simple assembly work, the new jobs within these TNCs will
use low levels of skilled labour. In fact, many believe there is a labour
shortage in Malaysia, and thus labour-intensive work is being pushed off
to the other provinces or to Sumatra and southern Thailand. The
preference of multinationals is to hire Chinese malays. As expressed by
one TNC, Otis, "we chose to move to Penang rather than Kuala Lumpur",
because it is more Chinese in ethic(Economist, May93,v327)
GDP figures suggest that Penang is about 20% richer than Malaysia as a
whole and the gap is likely to grow. Last year the economy in Penang
provice grew by 11%, compared with 8.5% for the country as a whole.
However, the Government does not consider this uneven growth a major
problem at this time, believing what is good for Penang is good for
Malaysia as a whole.(Economist, May 93,v327).
The workers in the electronics industry do not have a union(Jomo,p122).
Unions are permitted in Malaysia and approximately 25% of workers are
reportedly unionised. However in reality, unions are very weak and
subject to harsh Government treatment for any action "prejudicial to ...
the public order."(Hay)
TNCs, particularly American TNCs have pressured the Government to
discourage unions and multinationals such as Monsanto, Texas
Instruments and RCA have met with the Government to reiterate this
point(Kumar,p120)
Sovereignty and Autonomy
The Malaysian economy tended to be dominated by the Chinese minority
and foreign interests(see appendix). As previously mentioned, this was
an important issue in the formation of economic strategy and policy in
Malaysia.
The Malaysian state administration is controlled by the Malays who are
attempting to reduce Chinese economic dominance. A feature of Malaysian
economic development strategy since 1970 has been to restructure
society - to increase the share of Bumiputera capital, increase the
number of Bumiputera businessmen and professionals within the context
of continued open capitalist development.
One of the reasons for encouraging foreign TNC capital is, ironically,
nationalistic. High tariffs by the US, Japan, the EEC, and Australia
against cheaper manufactured goods from developing countries lead to
even closer Singapore-Malaysia economic relations.(Singapore controlled
25% of foreign investments in 1983, compared to Japan's and the U K's 18%
each and the USA's 11%. Jesudason,p180). The Malays wanted to attract
foreign investment independently, to build up their own manufacturing
sector, to reduce the Singaporean Chinese capitalist dominance over the
Malaysian economy as well as the influence of the Chinese-Malays.
The general rule was that foreign companies that relied significantly on
the local market or on local raw materials were required to have 70%
Malaysian ownership, of which at least 30% had to be allocated to Malay
interests. However sluggish markets and thus competitive pressure led
the Government to revise these targets. By 1986, foreign companies were
allowed 100% equity if they exported 50% or more of their production, or
sold 50% of their product to the Free Trade Zones and Licensed
manufacturing warehouses. Companies had to reflect the racial
composition of the population in their employment patterns, and a
company with more than $2 million would be automatically allowed 5
expatriate staff. Jesudason (p189) provided evidence that this policy
worked and foreign capital did increase in these areas.
Summary of Malaysian Experience
The Government claims that TNCs have contributed toward growth in the
Malaysian economy by contributing towards industrialization.
Gross Domestic Product has increased substantially, and the Malaysian
workforce has moved from employment primarily in agriculture to
manufacturing. Over the past 30 years, life expectancy has increased
dramatically, mortality rates have dropped, poverty has been reduced,
women have been brought into the workforce and an infrastructure has
been built.
However, when reviewing the goals for TNCs with the original hopes of
the Government, TNC's investment came at a high price. Malaysia had
become technologically dependent, and a high percentage of profits of the
foreign firms are repatriated as royalties and fees. There is a domestic
manufacturing industry (controlled by Chinese Malays) who have
increased their share of assets in the manufacturing. However the large
firms' percentage of profits have increased substantially, although they
reinvest less.
Women employed in manufacturing work for very low wages, although
they are extremely productive. Union activity has been (in some cases
brutally) suppressed in Malaysia, as has civil unrest. The Government's
poverty alleviation projects have had success, but this was not due to a
trickle down effect of TNC's creating wealth in the economy. Linkages
with the rest of the economy have been shown to be minimal. The gap
between rich and poor has widened during the period of TNC
involvement. Government revenue fluctuated greatly, due to the nature
of the export economy and its uncertainties (Jomo, p173). Government
borrowing was undertaken at a bad time (due to high interest rates at the
time of borrowing), and levels of capital flight are very high (seeJomo
p29).
Despite the lack of evidence that TNCs have contributed to development
of Malaysia in other ways, GNP growth and the employment generating
effects (however unstable) seem to be enough of an incentive for the
Malaysian Government. For political, cultural and ideological reasons,
TNCs are increasingly encouraged to come to Malaysia. It appears that
the Government (and many Malays) believe that integration with the
global economy, combined with Government policy, is the way to develop.
While they are increasingly examining import substitution, they still
intend to concentrate on export focused growth. They intend to look at
ways of receiving increasing portions of TNCs profits, while still
encouraging transnationals in any way they can.
LESSONS FROM THE MALAYSIAN EXPERIENCE
In many ways, Malaysia is a unique society and thus one could argue that
its experiences with TNCs are not typical. However, if the position is
taken that all societies have a unique set of circumstances, then Malaysia
offers some valuable lessons in TNC relationships in the current global
economy.
Contrary to many of the historically disastrous experiences with TNCs in
Latin America and smaller developing countries, Malaysia is fortunate.
While the TNCs may not have contributed a great deal to the economy if
measured against the possibilities, they brought in their clients and
exports have grown substantially . Thus Malaysia is becoming more firmly
entrenched within the capitalist industrialized countries. Provided it can
continue to expand relations with the Japanese, there are forecasts that
the economy will stop its regular boom and bust cycles, provided that the
Japanese market continues to function.
While individual cases of TNC interference could be found, overall it was
left to the individual firm to decide on the merits of investing or
expanding. However, the Malaysian Government made many concessions
to encourage foreign investors in terms of incentives and lost profits.
A good infrastructure and educated workforce was one of the factors that
enable Malaysia to have more of a choice of TNCs than many developing
countries.
The Government's "stability" was also an attractive selling point to
foreign investors.
IS TNC DOMINATION THE MAIN BLOCKAGE TO LDC DEVELOPMENT?
The examination of Malaysia's case revealed the importance of domestic
policies and priorities in shaping development, rather than looking
entirely at models of external causation.
TNCs as institutions do have important implications for development
possibilities. However, what is also critical is whether a society is able to
initiate actions that maximize the benefits and anticipate the problems of
its interaction with the international economy(Jesudason,p199).
In other words, the role of transnational corporations in shaping and
directing the global economy is more important to the issue of blocking
development than the role of transnational corporations as business
institutions. This does not preclude the fact that some TNCs were
responsible within individual societies for deliberately attempting to block
autonomous development if it interfered with their activities, such as the
cases in Latin America.
Malaysia is measuring its success in development using the rules of the
capitalist society, markets and negotiating web. Given Malaysia's
resources and potential, there were enormous possibilities for growth.
While Malaysia may not have gained a great deal in relation to the
possibilities, the goals for TNCs in the areas of employment, increasing
connections with the global economy and increasing exports were met.
Like the other NICs, Malaysia is being integrated into the capitalist net,
and used as a success story for the capitalist system. As the TNCs
control much of the capitalist system, it is in this way that domination of
LDCs occurs.
I would therefore say that TNCs as institutions are not the main blockage
to LDC's development. However, TNCs within the capitalist framework
and global economy are one of the main blockages to development. Even if
LDCs have high growth rates and become wealthier, the cases illustrated
the ability of TNCs to infiltrate culture and contribute to inequality. On
this basis alone one might argue that TNCs are a primary blockage to
development.
The Unilever case study illustrated the ability of transnationals to move
about the globe freely, and coordinate production centrally, finding ways
around many barriers. The case illustrated the difference in goals
between the local people and the TNCs and the harmful, sometimes
disastrous consequences that can occur from unsustainable activities or
relationships. Many argue that the managerial class of the transnationals
now possess sufficient power and influence "to set the rules of the game".
The case of Unilever illustrated the ability of TNCs to establish these
rules due to their size and in many cases monopoly power. TNCs are the
thus a main blockage to development if one considers that autonomous
development it almost impossible for LDCs in such a global environment.
CONCLUSION
Transnational corporations are the major instigators in the
internationalization of capital and production processes. At this time they
do dominate the global economy, both through their economic size and
through their domination of individual sectors of the economy.
In the late 1980s and early 1990s more and more countries have "opted"
for a market friendly approach to development, and this trend is
expected to continue into the 1990s(World Bank,p157). Transnationals
will therefore have an even better advantage within the global economy -
they will be even more in demand, have access to wider markets and have
possibly a better relationship with their host countries than in the 1970s
and 80s, as they will have learned from their mistakes and successes.
The answer to whether TNCs' domination of the LDCs is the main
blockage to development depends on the definition of economic
development and views of how the world should be structured. Provided a
society is prepared to pay their costs and negotiate hard, benefits may
accrue to that society's overall economy through transnational's
activities. However, these must be weighed against the accompanying
losses in domestic activities, the uneven distribution of growth among
individuals and groups in society, the appropriateness of TNC activities
for the people and land, and the loss of sovereignty associated with the
entry of TNCs into a society.
The pervading question is: what will happen to those countries who do
not get involved in the Global Economy - and - if countries resist now,
do they have the power to fight the transnationals??
THE FUTURE
It appears that the momentum of TNCs is irreversible without a major
reversal in attitudes or support for the capitalist system.
The recently completed GATT negotiations reinforced the "free" trade
between participants and the role of TNCs, who will benefit from the
freer trading relationships and absence of regulations.
Through the new provisions, the European Union is set to gain $61.3
billion, the USA $36.4 billion and Africa to lose by $2.6
billion(Guardian,15/12/93).
--------------------------------------------------------------------
APPENDIX Malaysian Statistics
FDI inward flows 1980-1985 1986 1987 1988 1989 1990
(US$m) (ann. ave.)
(WIR,p315)
1,058 489 423 719 1,668 2,902
Ave. GDP 1961-65 66-70 71-75 76-80 81-85 86-88
Growth Rates
(Jomo,p39) 5.0 5.4 7.3 8.6 5.1 4.8
Household
Income dist. 1957/8 1970 1979 1989
(Jomo,p90) (WB'93)
highest 5% 22.1 28.5 n a n a
highest 10% 33.2 40.4 36.8 37.9
highest 20% 48.6 56.1 54.7 53.7
highest 40% 69.6 76.2 76.3 74.1
highest 60% 84.1 88.8 89.1 87.1
highest 80% 94.3 96.7 96.8 95.4
%
Ratio of FDI
inflows to Gross 1971-75 76-80 81-85 86-89
domestic capital
formation 15.2 11.9 0.8 9.6
Ratio of Gross 24.0 27.2 34.1 26.2
domestic capital
formation to GDP
(WIR,p322)
Commodity Exports
(ave. ann. growth %) 1961-70 71-80 81-86
(Jomo,p 54)
Crude petroleum 3.3 41.9 -3.5
Palm oil 15.3 25.7 2.5
Rubber -1.5 10.4 -6.0
Sawlogs 18.4 15.1 1.6
Tin 7.1 9.6 -20.1
Sawn Timber 10.6 20.6 -0.6
Manufacturing - 26.1 15.8
Summary of International Investment Position
(millions of ringgit)
inward flow of foreign direct invest.
1983-97 (annual average) 2,179
employment in foreign
affiliates, 1988 251,823
sales of foreign affiliates 44,243
Inward FDI (millions of ringgit)
Equity Reinvested Inter- Total
earnings comp. loans
1970 84 9 195 288
1980 127 396 726 1249
1988 311 490 899 1700
WIR Directory, 1992, Vol 1
Peninsular Malaysia: Percentage Ownership in Key Sectors 1972/73
Malay Chinese Other Foreign
Planted acreage(1973)
rubber & oil palm 20 26 11 42
coconut & tea 0 20 11 69
Industry(1972)
mining <1 35 10 55
manufacturing 7 32 15 46
Trade(turnover value
1972)
wholesale 1 55 3 41
retail 4 76 7 14
Transport(value fixed
assets 1972)
Taxi 40 40 20 0
Bus 18 54 18 10
Haulage 15 71 11 3
Professional* estab.(annual
revenue, 1972) 5 51 30 14
* private establishments of lawyers, accountants, doctors, dentists,
accountants, etc. (Utrecht,p 78)
----------------------------------------------------------------------
BIBLIOGRAPHY
Caves R E, Jones R W, Frankel J A,1990 , World Trade
and Payments. Illinois: Scott, Foresman and Company
CIS, (undated), Unilever's World, Issue No11.
Birmingham: CIS, SOMA and the Transnational Institute
Dicken P, 1988, Global Shift. Industrial Change in a
Turbulent World. Paul Chapman Publishing Ltd.
Evans P, 1979, Dependent Development. The Alliance of
Multinational, State and Local Capital in Brazil.
Princeton: Princeton University Press
Fieldhouse D K, 1978, Unilever Overseas: The Anatomy
of a Multinational. California: Hoover Institution Press
Frank I, 1981, Foreign Enterprise in Developing
Countries. Baltimore and London: The Johns Hopkins
University Press.
Hewitt T, Johnson H and Wield D (edited), 1992,
Industrialization and Development. Oxford: Oxford
University Press in association with The Open
University
Jesudason J V, Ethnicity and the Economy: the State ,
Chinese business, and Multinationals in Malaysia. New
York: Oxford University Press
Jenkins R, 1987, Transnational Corporations and Uneven
Development: The Internationalization of Capital and the
Third World. London: Methuen & Co. Ltd
Hay Management Consultants, 1993, Compnet Report:
Malaysia. Kuala Lumpur: Hay Management Consultants
Kumar K, Transnational enterprises: Their impact on
Third World Societies and Cultures, Westview, 1980
Murray R, May-June 1971, The Internationalization of
Capital and the Nation State. New Left Review, no 67 pp
84-109
Reiffers J-L, 1982, Transnational Corporations and
Endogenous Development. Paris: United Nations
Educational, Scientific and Cultural Organization.
Sunkel O, Towards an understanding of the emerging
transnational system, CTC Reporter, No. 20(Autumn
1985),p48.
Todaro M P, 1993, Economic Development in the Third
World - Fourth Edition. New York: Longman Publishing.
United Nations World Investment Report, 1992,
Transnational Corporations as Engines of Growth. New
York: Transnational Corporations and Management
Division, Department of Economic and Social
Development, UN.
United Nations World Investment Report, 1993,
Transnational Corporations and Integrated International
Production. New York: UNCTAD (also Press Statement,
July 20,1993)
United Nations, Transnational Banks and the External
Indebtedness of Developing Countries. New York:
United Nations Centre on Transnational Corporations
World Bank, World Development Report 1993: Investing
in Health. New York: Oxford University Press
-----------------------------------------------------------------------
BACK
|
