IIVG dp 78-8

IIV G P a p e r s

V e r ö f f e n t l i c h u n g s r e i h e d e s I n t e r n a t i o n a l e n I n s t i t u t s f ü r

■ V e r g l e i c h e n d e G e s e l l s c h a f t s f o r s c h u n g W i s s e n s c h a f t s z e n t r u m B e r l i n

IIVG dp 78-8

TECHNOLOGY, INTERNATIONAL POLITICAL ECONOMY and

INTERNATIONAL RELATIONS THEORY by

Brian M. Pollins

Discussion-Paper

Publication series of the International Institute for Comparative Social Research

Wissenschaftszentrum Berlin

- 1 -

In tro d u c tio n

Students o f In te rn a tio n a l R e la tio n s are becoming in c re a s in g ly aware o f the importance o f technology in ' glo b a l a f f a ir s . A cursory exam ination o f the pre­

v a ilin g th e o re tic a l lit e r a t u r e in the f i e l d would show a crude but unm istakeably p o s itiv e correspondence between the amount o f a tte n tio n any given th e o r is t pays to the technology fa c to r , and the recency o f t h e ir work. In s p ite o f th is growing in t e r e s t , a comprehensive tre a tm e n t o f the impact o f technology upon in te r n a tio n a l a f f a ir s does no t e x is t .

The e a r lie s t and most w id e ly held pe rce p tio n o f technology in in te rn a tio n a l re la tio n s is concerned o n ly w ith the impact o f s p e c ific breakthroughs in m ilit a r y technology upon the war-making c a p a b ility o f nations and, by e x te n s io n , in te rn a tio n a l diplomacy. S c h o la rly tr a c ts d a tin g back to Thucydides have pondered the p o l it ic a l consequences o f the in v e n tio n o f the c h a r io t and chain m a il, the crossbow and the c ru is e -m is s ile .

In a d d itio n to th is common p e rce p tio n o f technology in w o rld p o l it ic s , w r ite r s ) f the R e a lp o litik school have considered the impact o f technology upon n a tio n a l a ttrib u te s such as the in d u s tr ia l base, and the s k i 11- le v e l and a d a p ta b ility o f the labor fo rc e . To Hans Morgenthau, Raymond Aron, Klaus Knorr and o th e r "R e a lis t"

/ r i t e r s , technology is im po rta nt in s o fa r as i t in flu e n c e s the m ilit a r y and economic c a p a b ilitie s o f n a tio n s , which are themselves c e n tra l determ inants o f p o lit ic s among n a tio n s .

A t h ir d view o f technology is o ffe re d by what m ight be termed the "dynamics o f ixpansion" view. This would in c lu d e the c la s s ic a l th e o rie s o f im p e ria lis m as w e ll as

;he re ce n t work o f N azli Choucri and Robert North regarding the u n d e rlyin g processes o f ta tio n a l expansion. In the c la s s ic a l th e o rie s , the le v e l o f te c h n o lo g ic a l development

s associated w ith the mode o f socio-econom ic o rg a n iz a tio n . A c a p it a lis t mode o f iro d u ctio n p u rp o rte d ly engenders a com pelling n a tio n a l d riv e to expand trade and

-2 -

investm ent, as w e ll as m ilit a r y adventures to support such a c t iv it y . The Chourci- North work ge n e ra lize s th is d riv e to pre- and p o s t- c a p it a lis t s o c ie tie s as w e ll, and a r tic u la te s a c e n tra l and im portant place f o r technology as a determ inant o f a n a tio n 's c a p a b ility to expand, as w e ll as i t s need to do so.

I t is im po rta nt to note th a t in a l l o f the lit e r a t u r e s discussed above, the fundamental view o f the impact o f technology is the same, to the e x te n t th a t

technology is seen as having o n ly n a tio n -le v e l e ffe c ts . That i s , whether technology determines m ilit a r y c a p a b ility , economic c a p a b ilit y , o r an un derlyin g n a tio n a l

d riv e to expand, i t s relevance to w orld p o l it ic s re sid e s o n ly in i t s e ffe c ts upon those c h a r a c te r is tic s o f n a tio n -s ta te s which are im p o rta n t to t h e ir conduct in the global arena. I t should also be noted th a t w ith the exception o f Choucri and N orth, and Klaus K norr, technology is r a r e ly a s u b je c t o f extended d iscu ssio n .

There is one branch o f the lit e r a t u r e which does consider tra n s n a tio n a l and system ic e ffe c ts o f te c h n o lo g ic a l change. The "Interdependence" w r ite r s contend th a t the in c re a s in g economic s e n s it iv it y and v u ln e r a b ilit y o f n a tio n -s ta te s has re s u lte d from dram atic improvements in tra n s p o rta tio n and communication technology.

That is , because o f new tra n s p o rta tio n and communication te c h n o lo g ie s , the c a p a b ility o f tra n s n a tio n a l acto rs (such as m u ltin a tio n a l c o rp o ra tio n s ) to

" r a tio n a liz e " economic a c t i v i t y on a global scale w ith l i t t l e regard f o r n a tio n a l borders has increased. In a d d itio n , the s e n s it iv it y o f n a tio n a l economic w e lfa re to f is c a l, monetary, o r wage developments in o th e r c o u n trie s is g re a te r. These new economic r e a l i t i e s , they contend, w i l l have s ig n if ic a n t e ffe c ts upon the conduct o f in te rn a tio n a l p o l it ic s .

Although the Interdependence w r ite r s a ffo rd technology a place o f c e n tra l importance, t h e ir treatm ent o f th is question is q u ite incom plete. F ir s t , t h e ir view o f the ro le o f technology in w orld p o lit ic s is s t a t ic . The most in te r e s tin g consequences o f te ch n o lo g ica l growth ( i . e . , to erode the basis o f n a tio n a l sovereignty

-3 -

and increase the c a p a b ilitie s o f tra n s n a tio n a l a c to rs ) have a lre a d y occurred.

A ll th a t r e a lly remains is f o r the in te rn a tio n a l p o lit ic a l ord e r to a d ju s t to these new r e a lit ie s . There is some c o n s id e ra tio n o f the in flu e n c e o f technology upon tra d e and investm ent, bu t o n ly in s o fa r as tra n s p o rta tio n and communication tech no lo gies have p u rp o rte d ly increased flow s o f tra d e inve stm en t, and also made such flow s more v o la t ile . As we w i l l d isco ve r below, the le v e l o f

te c h n o lo g ic a l development w ith in n a tio n s is an im po rta nt determ inant o f the p a tte rn o f tra d e , the com position o f tra d e , and even terms o f tra d e . Moreover, t h is re la tio n s h ip is continuous and ongoing, and no t sim ply an id io s y n c h ra tic occurrence. The Interdependence lit e r a t u r e does not adequately t r e a t e ith e r the e ffe c ts o f n a tio n a l te c h n o lo g ic a l endowment upon tra d e , o r the changes in these re la tio n s h ip s over tim e .

W ithin the p r e v a ilin g lit e r a t u r e o f In te rn a tio n a l Relations-, we cannot fin d an adequate account o f the impact o f technology upon w orld p o l it ic s . The "n a tio n - le v e l" views o f technology do not co n sider im p o rta n t system ic e ffe c t's (which are by no means r e s tr ic te d to those mentioned by Interdependence w r it e r s ) ; nor do they p rovide a complete account o f a ll n a tio n -le v e l e ffe c ts . The "tra n s n a tio n a l" view o f technology disregards the n a tio n -le v e l e ffe c ts described in t h e - lit e r a t u r e

X

which preceded i t , and does not con sider the dynamic or ongoing in te r p la y o f

technology and w orld p o l it ic s . A more comprehensive exam ination is in o rd e r. I t is my con te n tio n th a t such an exhaustive study would make an im p o rta n t c o n trib u tio n to In te rn a tio n a l R elations th e o ry not o n ly by in fo rm in g the e x is tin g lit e r a t u r e , but by suggesting new and im p o rta n t d ire c tio n s f o r co n c e p tu a liz in g p a tte rn s o f o rd e r and c o n tro l in the in te r n a tio n a l system.

Because global economic issues have in c re a s in g ly become an o b je c t o f in te r e s t to In te rn a tio n a l R elations s c h o la rs , our f i r s t step in broadening our understanding

-4 -

o f technology is to examine i t s place in the in te rn a tio n a l economics lit e r a t u r e . Here we w i l l fin d im po rta nt e ffe c ts o f technology upon in te rn a tio n a l a f f a ir s which have been e ith e r t o t a l l y overlooked o r , in a few cases, tre a te d super­

f i c i a l l y w ith in our f i e l d . The ro le o f technology in micro-economic th e o ry w i l l also be considered f o r i t s re la tio n s h ip to market and non-market exchange o u t­

comes .

I t is im p o rta n t a t the o u tse t to h ig h lig h t the key p o in ts which our survey o f th is lit e r a t u r e w i l l re v e a l. These same p o in ts w i l l be. c e n tra l to our

u ltim a te re c o n s id e ra tio n o f the ro le o f technology in in te rn a tio n a l r e la tio n s : 1. N ational te c h n o lo g ic a l endowment is a c r i t i c a l determ inant o f

p a tte rn s o f in te rn a tio n a l tra d e and investm ent.

2. G lo b a lly , the lo c a tio n o f te c h n o lo g ic a l in n o v a tio n , and in te r n a tio n a l p a tte rn s o f te ch n o lo g ica l d iffu s io n suggest the c re a tio n and maintenance o f a p a r t ic u la r in te rn a tio n a l o rd e r. One c h a r a c te r is tic o f t h is

o rd e r is th a t a l l n a tio n -s ta te s do not have an equal a b i l i t y to m odify th a t o rd e r.

3. N ational te c h n o lo g ic a l endowment and p a tte rn s o f te c h n o lo g ic a l d iffu s io n s ig n if ic a n t ly e ff e c t the g lo b a l d is t r ib u t io n o f b e n e fits which accrue from in te rn a tio n a l economic exchange re la tio n s h ip s . As a r e s u lt , th is d is t r ib u t io n is much more advantageous to some p a rtie s ra th e r than others in exchange re la tio n s h ip s .

A number o f developments in the economics lit e r a t u r e w i l l be reviewed w ith in the con text o f these th ree ce n tra l p o in ts . The f in a l se ctio n o f th is paper w i l l consider some p o ssib le im p lic a tio n s f o r In te rn a tio n a l R elations th e o ry suggested by th is work, and w i l l also explore d ire c tio n s f o r fu r th e r study.

-5 -

I . The Role o f Technology in the D eterm ination o f Comparative Cost

The th e o ry o f com parative co st has provided the foundation f o r in te rn a tio n a l tra d e th e o ry o ve r the p a st 200 y e a rs , but technology has been s e rio u s ly considered as a d e term inan t o f com parative co st f o r on ly the past f if t e e n to tw enty yea rs.

B r i e f l y , David; R icardo o ve rtu rn e d the p r e v a ilin g c o n te n tio n form ulated by Adam Smith th a t two- n a tio n s , each producing the same two goods, would not engage in tra d e i f one o f those n a tio n s could produce both goods a t less co st than could the o th e r n a tio n . R icardo demonstrated th a t even in such a case, tra d e would be

m u tu a lly p r o f it a b le i f th e f i r s t n a tio n produced good "A" a t le ss co st than i t could produce good "B“ , w h ile th e second n a tio n produced good "B" a t less co st than

i t cou ld produce good "A 1.1. Hence, the f i r s t n a tio n had a "com parative cost advantage" in good "A“ and th e second n a tio n held com parative advantage in the p ro d u ctio n o f good "B ". E ffic ie n c y would be m u tu a lly enhanced i f both n a tio n s

con centrate d t h e i r dom estic p ro d u ctio n in the good f o r which they held a comparative advantage and tra d e d t h e i r s u rp lu s produ ction f o r the o th e r.

To i l l u s t r a t e . , R icardo o ffe re d the example o f P o rtu g a l, which could produce both wine and c lo th cheaper than B r ita in co u ld . However, B r ita in produced c lo th a t fess co st than i t co u ld produce w ine, w h ile in P o rtu g a l, the opposite was tru e . So in s p ite o f" th e f a c t th a t Portugal enjoyed an absolute advantage over B r ita in in producing both c lo th and w ine, B r it a in 's comparative advantage in - c lo t h and P o rtu g a l's com parative advantage in wine assured the mutual p r o f i t a b i l i t y o f tra de in these item s f o r both p a r tie s .

The im p o rta n t q u e stio n then became: how d id i t happen th a t B r ita in enjoyed a com parative advantage in c lo th manufacture w h ile Portugal held a comparative advantage in wine p ro d u ctio n ? Ricardo answered th a t the determ ining fa c to r was c lim a te . 2 Supposedly, England's c lim a te was conducive to growing wool and

- 6 -

persuading people to t o i l in fa c to rie s w h ile P o rtu g a l's c lim a te f a c i l i t a t e d the growing o f grapes and persuading people to t o i l in vineyards. This e x p la n a tio n persuaded few.

There was no answer to th is question which gained wide acceptance before the 1920's. At th a t tim e , two econom ists, E li Heckscher and B e rti 1 Ohl in , working indepe nde ntly, o ffe re d the 'R e la tive fa c to r p ro p o rtio n s " e x p la n a tio n . That i s , given th a t the fa c to rs o f production are c a p ita l and la b o r, i t can be observed th a t va rio u s nations do not have the same p ro p o rtio n s o f la b o r and c a p ita l. Consequently, the p ric e o f these two fa c to rs w ith in n a tio n a l economies w i l l be d if f e r e n t in

d if f e r e n t nations, and th e re fo re , some n a tio n s w i l l s p e c ia liz e in the pro d u ctio n o f la b o r-in te n s iv e goods, (such as wine) w h ile o th e r s ta te s , w h e re -ca p ita l is r e la t iv e ly

3 cheap, w i l l produce c a p ita l in te n s iv e items (such as t e x t il e s . )

R icardo, o f course, gave no c o n s id e ra tio n to the p o s s ib ilit y th a t n a tio n a l te c h n o lo g ic a l endowment m ight determine com parative advantage. Both Heckscher and O hlin however, wondered whether the r e la t iv e p ric e s o f la b o r and c a p ita l in a

co u n try m ight be an a r t i f a c t o f i t s le v e l o f te c h n o lo g ic a l s o p h is tic a tio n . U ltim a te ly , each decided th a t the fa c to r p ro p o rtio n e xp la n a tio n was "n e u tra l" to d iffe re n c e s

between na tions in te c h n o lo g ic a l development; and th is conclusion was based upon two key assumptions: F ir s t , i t is assumed th a t any given technology is a v a ila b le to a ll s ta te s . Secondly, Hecksher and O hlin assume th a t th e re is no d iffe re n c e between s ta te s in t h e ir a b i l i t y to u t i l i z e a given technology; such as d iffe re n c e s in the s k i l l le v e l o f the la b o r fo rc e , o r d iffe re n c e s in the size o f the country which would p e rm it a la rg e cou ntry to employ s c a le -o f-p ro d u c tio n techniques more e f f e c t iv e ly than a small s ta te .

Not s u r p r is in g ly , many econcomists have decided th a t such assumptions are too high a p ric e to pay f o r a "te c h n o lo g y -n e u tra l" e xp la n a tio n o f in te rn a tio n a l trade and have a c tiv e ly begun to explore the re la tio n s h ip s between te c h n o lo g ic a l endow­

ment and comparative advantage. In 1961 Michael Posner demonstrated th a t comparative

- 7 -

advantage in a good could be created by means o f te c h n o lo g ic a l in n o v a tio n / G. F. Hufbauer then e m p iric a lly te ste d Posner's theory,and once co n firm in g i t , found th a t i t was a lso p o ssib le to d is tin g u is h between tra d e which re s u lte d from a "te c h n o lo g ic a l gap" between c o u n trie s , from tra d e which re s u lte d from d iffe re n c e s in th e p r ic e o f la b o r. 5 More re ce n t te ch n o lo g ica l th e o rie s o f tra d e w i l l be

discussed below. For now, i t is im po rta nt to note th a t technology is now considered to be an im p o rta n t determ inant o f p a tte rn s o f in te rn a tio n a l tra d e because o f i t s im pact upon com parative advantage whereas i t was once e ith e r ign ore d, o r assumed away. Even Harry G. Johnson, described by Robert G ilp in as "th e consumate

lib e r a l e c o n o m is t , " r e c e n t ly s ta te d :

I t is obvious th a t both the a b i l i t y to produce s u p e rio r products and the possession o f s u p e rio r pro d u ctio n technology c o n s titu te sources o f comparative advantage a d d itio n a l o r a lte r n a tiv e to comparative advantaged based upon r e la t iv e fa c to r abundance.

V la d im ir P e rto t, an Eastern European econom ist, b e lie ve s th a t i t is no longer re le v a n t to speculate p u re ly about th e o rie s o f " tr a d e ," because they presume

o

t h a t goods are the o n ly im p o rta n t item in in te rn a tio n a l exchange. Hecksher-Ohlin t tra d e th e o ry assumes th a t c a p ita l and la b o r are p e r fe c tly im m obile, w h ile technology is assumed to be p e r fe c tly m obile. P e rto t observes th a t se rvice s and c a p ita l are now common item s in in te rn a tio n a l exchange (which v io la te s Hecksher-OhTin*s f i r s t assum ption), and the p e rfe c t m o b ility o f technology, as we have seen, is w id e ly d is p u te d . P e rto t proposes th a t we th in k instead in terms o f "th e o rie s o f in t e r - n a tio n a l exchange" Q which w i l l com pletely encompass the tr a n s fe r o f goods, services and investm ent in the in te rn a tio n a l arena. Harry Johnson p o in ts out th a t th e re are two approaches to th is broadened view o f in te rn a tio n a l exchange. 10 The f i r s t is commonly termed the " in d u s tr ia l o rg a n iz a tio n approach" and the second, which in ­ cludes some aspects o f t r a d it io n a l tra d e theory and the in d u s tr ia l o rg a n iz a tio n

- 8 -

view , centers around Raymond Vernon's th e o ry o f the "p ro d u ct c y c le ." Each w i l l be considered in tu r n , and p a r tic u la r a tte n tio n w i l l be paid to the r o le o f technology in the theory and to the im p lic a tio n s f o r in te rn a tio n a l o rd e r and c o n tro l contained in each.

I I . Technology, In d u s tr ia l O rg a n iza tio n , and the Global D iv is io n o f Labor

Stated s im p ly , the in d u s tr ia l o rg a n iz a tio n approach contends th a t because o f the a b i l i t y o f the m u ltin a tio n a l c o rp o ra tio n to a llo c a te resources g lo b a lly , the r e s u ltin g in te r n a tio n a l d iv is io n o f la b o r w i l l tend to resemble the o rg a n iz a tio n o f la rg e fir m s , ra th e r than the m a rk e t-d ic ta te d in te rn a tio n a l d iv is io n o f la b o r p re d icte d by the te n e ts o f fre e tra d e th e o ry . P atte rns o f in te rn a tio n a l exchange o f goods, s e rv ic e s , and investm ent th e n , w i l l depend n o t on ly upon n a tio n a l endowments o f re le v a n t fa c t o r s , bu t a lso upon the n a tio n a l f ir m 's lo c a tio n w ith in the in t e r ­

n a tio n a l s tru c tu re o f th e o rg a n iz a tio n .

Stephen Hymer is c re d ite d w ith the e a rly development o f the in d u s tr ia l o rg a n iz a tio n approach. This work was conducted a t M .I.T . in the e a rly 1 9 6 0 's .^

Hymer had been stud ying the economic " lo c a tio n th e o ry " o f A lfre d Chandler and F r itz Redlich as i t a p p lie d to the h is to r ic a l development o f the U.S. fir m and found th a t because o f the c a p a b ilitie s o f the MNC, lo c a tio n th e o ry had powerful in te rn a tio n a l a p p lic a tio n s as w e ll.

Chandler and R e d lich , in stud ying in d u s tr ia l o rg a n iz a tio n , contend th e re are three le v e ls w ith in any fir m . That i s , they fin d th re e le v e ls o f decision-m aking and a d m in is tra tio n , th re e o p e ra tin g tim e h o riz o n s , and th re e le v e ls o f ta s k . The lowest le v e l, which they term Level I I I , in vo lve d the day-to-day op era tions o f the fir m . Level I I contains m iddle-echelon managers who coordinate the a c t iv it ie s o f Level I I I o p e ra tio n s . Managers in Level I are re sp o n sib le fo r long-range

zoncerns such as g o a l-d e te rm in a tio n and p la n n in g . Because the tasks o f each le ve l are d if f e r e n t , the needs o f each le v e l w i l l be d if f e r e n t , and Chandler and Redlich

-9 -

a s s e rt th a t the geographic lo c a tio n o f the op era tions o f each le v e l w i l l be de­

pendent upon i t s unique needs. The da y-to-day op era tions o f Level I I I re q u ire la b o r, raw m a te ria ls , and a market f o r t h e ir o u tp u t. Level I I management re q u ire s more w h ite - c o lla r la b o r, communication f a c i l i t i e s to co o rd in a te va rio u s day-to-day o p e ra tio n s , and in fo rm a tio n management f a c i l i t i e s . The long range planners o f Level I should be near to fin a n ce c a p ita l m arkets, the m ajor media, and ( in the case o f n a tio n a l firm s ) the seat o f government.

G lo b a lly , the a c t i v i t i e s o f Level I I managers across in d u s trie s w i l l be more g e o g ra p h ic a lly concentrated than Level I I I op e ra tio n s because Level I I needs re q u ire these managers to be in major urban areas w h ile Level I I I requirem ents d ic ta te p ro x im ity to s p e c ific raw m a te ria ls and la b o r s u p p lie s . For example, the South American produ ction f a c i l i t i e s f o r General Motors C orporation and Dow Chemical may be in very d if f e r e n t lo c a tio n s , but both could share the same b u ild in g in

Buenos A ire s f o r t h e ir Level I I re g io n a l headquarters. The geographical d i s t r i ­ b u tio n o f Level I op era tions across several in d u s trie s w i l l be even more con­

ce n tra te d than Level I I .

The re s u ltin g in te r n a tio n a l d iv is io n o f la b o r can be found throughout the non-communist w o rld , but i t is c e r ta in ly most v is ib le in the Western Hemisphere.

The s u b s id ia rie s o f the m u ltin a tio n a ls o p e ra tin g in L a tin America are c h a ra c te ris ­ t i c a l l y Level I I I o p e ra tio n s . Level I I a c t i v i t y is concentrated in some major urban areas, such as Rio or Caracas (a lthough i t is unusual f o r the Level I I

managers the re to be South American n a tio n a ls . 12) And, o f course, Level I a c t i v i t y is found o n ly in the m ajor urban areas o f the advanced s ta te s ,w h ic h in th is case u s u a lly means New York. This s p a tia l d if f e r e n t ia t io n o f economic a c t iv it y is re ­ c e iv in g broader a tte n tio n . Raymond Vernon has sta te d th a t the MNC " ...te n d s to concentrate economic a c t i v i t y on geographical lin e s , to a degree th a t is g re a te r than i f the m u ltin a tio n a l e n te rp ris e s d id not e x is t . " 13 And regarding re s u ltin g

- 1 0 -

ja tte rn s in in te rn a tio n a l exchange, Vernon s ta te s :

. . . t h e choice o f tra d in g p a rtn e rs by the a f f il i a t e d u n its o f m u ltin a tio n a l e n te rp ris e s is in flu e n c e d by the presence o f a f f i l i a t i o n ; the le a s t co st assu m ptio ns.. . w i l l a ffo rd a poor p r e d ic tiv e model a t tim e s .* 4

ffoe English economist John Dunning compared the im po rt and e xp o rt p a tte rn s o f sub­

s id ia rie s o f m u ltin a tio n a ls a g a in s t p u re ly domestic firm s and concluded:

No one can doubt th a t the geographical and in d u s tr ia l p a tte rn o f w orld tra d e has been very much a ffe c te d by the op era tions o f m u ltin a tio n a l e n te rp ris e s J 5

In l i g h t o f these fin d in g s , and given the purpose o f th is paper, i t is

m portant to f in d the r o le o f technology in th is global d iv is io n o f la b o r i f we are :o understand the r e la tio n s h ip o f technology to in te rn a tio n a l exchange. To th is

>nd, we should ask two q u e stio n s: F i r s t , where are technology and te c h n o lo g ic a l nnovation concentrated w ith in th is d iv is io n o f lab or? Secondly, how does technology :o n trib u te to the esta blishm ent and maintenance o f such an order?

•To answer the f i r s t q u e s tio n , we r e it e r a t e Chandler and R e d lic h 's fin d in g th a t esearch and development, and a ll o th e r a c t i v i t i e s r e la tin g to te c h n o lo g ic a l

nnovation (such as market p re p a ra tio n f o r new products) are Level I r e s p o n s ib ilitie s ccording to Hymer, th e re fo re , these a c t i v i t i e s w i l l be concentrated in Level I

o u n trie s J G E m p iric a lly , i t has been observed th a t the p ro p e n s ity to concentrate nnovative a c t i v i t y a t Level I is so s tro n g , th a t should such c re a tiv e a c t i v i t y ccur spontaneously in a Level I I I lo c a tio n , i t is l i k e l y to be taken., o u t o f Level I I and s h ifte d up to Level I . Raymond Vernon w r ite s :

I f the c re a tiv e in s p ir a tio n s tr ik e s in some o th e r lo c a tio n such as in an overseas a f f i l i a t e o r s u b s id ia ry , i f the in s p ir a tio n is recognized as v a lu a b le by h e a d q u a rte rs ...

th e re w i l l be a stro ng tendency to 7s h i f t the developmental a c t iv it ie s close to headquarters.

The answer to the second question ju s t ra ise d is found in the th e o ry o f the roduct cycle and i t s subsequent re finem ents.

- T i ­

l l I . The Product L if e Cycle and P atterns o f Technological D iffu s io n

As s ta te d in the in tr o d u c tio n , one o b je c tiv e o f th is paper is to e s ta b lis h th a t th e re are d e fin a b le p a tte rn s o f in te rn a tio n a l exchange, and th a t the uneven g lo b a l d is t r ib u t io n o f technology and te c h n o lo g ic a l in n o v a tio n c o n trib u te s funda­

m e n ta lly to t h is o rd e r. Examining the in d u s tr ia l' o rg a n iz a tio n approach provided us w ith a p ic tu r e o f s tr u c tu r e in in te rn a tio n a l exchange; one in which in n o v a tiv e a c t i v i t y is lo ca te d in a p a r tic u la r place f o r p a r t ic u la r reasons. I f we accept t h is re p re s e n ta tio n o f s tr u c tu r e , we must s t i l l fin d a dynamic element before we can have a complete system; th a t i s , we must have some mechanism which describes the movement o f such a system through tim e . Product c y c le th e o ry in tro d u ce s such a dynamic.

Technological in n o v a tio n ‘is the very engine o f product c y c le th e o ry . This concept p o s its th a t every product experiences phases o f b i r t h , grow th, m a tu r ity , and senescence, and th a t the lo c a tio n o f produ ction w i l l be determined by the phase in th e l i f e c y c le . A t " b i r t h , " a product w i l l be manufactured in the home market o f th e fir m which developed i t because the produ ct was most l i k e l y developed f o r th a t m a rk e t? 8 In a d d itio n , produ ction w i l l be lo ca te d in the fir m 's home

market a t t h is stage because the development o f a new product a ffo rd s the in n o va tin g fir m w ith c e rta in - economic advantages (re fe rre d to by economists as "quasi-monopoly

*

re n ts " ) which the fir m w i l l seek to m aintain as long as p o s s ib le . Over tim e , however, o th e r firm s w i l l develop s im ila r products o f t h e ir own, o r d isco ve r the means o f p ro d u ctio n employed by the f i r s t firm . Once several firm s have marketed the p ro d u c t, i t is considered "m a tu re ," and the in n o v a tin g fir m w i l l lose i t s

p a r t ic u la r economic advantage,and the p ric e o f the product should drop nearer to it s

* The r e la tio n s h ip between te ch n o lo g ica l in n o v a tio n , quasi-monopoly re n ts , and b a rg a in in g power w i l l be discussed below.

-1 2 -

c q s t o f p ro d u c tio n , as assumed in c la s s ic a l th e o rie s .

The product c y c le p re d ic ts the lo c a tio n o f p ro d u c tiv e a c t i v i t y in th a t product

" b ir t h " w i l l tend to occur in c o u n trie s where in n o v a tiv e a c t iv it ie s are most common tfh ile p ro d u c tio n d u rin g the "mature" phase w i l l be tra n s fe rre d to n a tions h o ld in g com parative advantage in raw m a te ria ls and s e m i-s k ille d and u n s k ille d la b o r. We io te the correspondence o f these a c t iv it ie s to Level I and Level I I I in our d e s c rip tio n o f s tru c tu re .

Product c y c le th e o ry i t s e l f on ly e xp la in s p a tte rn s o f tra d e , in ve stm en t, and services over the 1ife tim e o f one p ro d u ct. I f the fo rtu n e s o f any given fir m were :ie d to o n ly one p ro d u c t, i t s ra te o f growth would l i k e l y fo llo w the l if e - c y c le ) f t h a t p ro d u c t.19 As the product matured, the c o rp o ra tio n would f i r s t lose i t s ir iv ile g e d p o s itio n in the m arket, and e v e n tu a lly cease growing. One means o f avoiding t h is outcome o f course, is to c o n tin u a lly in tro d u ce new products as old iro d u cts pass in to m a tu rity . Many c o rp o ra tio n s operate on th is p r in c ip le . Raymond 'emon notes th a t m u ltin a tio n a l e n te rp ris e s have b u i l t t h e ir s tre n g th p a r t i a l l y by ievel oping new products and d if f e r e n t ia t in g o ld ones.20 F rede rick Knickerbocker

o te s t h a t such "p ro d u ct pio n e e rin g " has c h a ra c te riz e d U.S. m anufacturing since he 19th c e n tu ry ,2"' and by s p e c ia liz in g in a c t i v i t i e s lik e product d is c o v e ry , ia rke t in tr o d u c tio n , and market s a tu ra tio n , he argues, the U.S. a c tu a lly s e lf - enerated i t s com parative advantage in in n o v a tiv e a c t i v i t y . 22

Product c y c le th e o ry is a dynamic e x p la n a tio n o f p a tte rn s o f exchange because, n lik e c la s s ic a l tra d e th e o ry which considers o n ly the momentary ( i . e . , s t a t ic ) ndowments o f c a p ita l and la b o r to p r e d ic t p a tte rn s o f tra d e a t one p o in t in tim e , ro d u c t c y c le the ory gives an account o f how the comparative advantage between a tio n s in the production o f any good changes over tim e. I t is v a lu a b le to our roader c o n c e p tu a liz a tio n o f in te rn a tio n a l exchange because i t not o n ly describes

-1 3-

changing tra de flo w s , but i t provides a p a r tia l d e s c rip tio n o f the motive fo rc e u n d e rlyin g d ir e c t fo re ig n investm ent and the tr a n s fe r o f service s such as new technology.23

By wedding product c y c le the ory to the e a r lie r d e s c rip tio n o f s tr u c tu r e , we have a dynamic account o f what Richard Nelson c a lls the " d iffu s io n h ie ra rc h y " 24 where a given in n o va tio n is born in the most advanced s ta te s , then g ra d u a lly grows by im ita tio n and tr a n s fe r in o th e r advanced s ta te s , and is f i n a l l y tra n s fe rre d to the T h ird World in m a tu rity . The place o f any n a tio n in th is d iffu s io n h ie ra rc h y , according to Nelson, is dependent upon i t s endowment o f in n o v a tiv e fa c to rs .

S p e c ific a lly , Nelson re fe rs to s c ie n t is t s , en gine ers, and a f l e x i b le , re tr a in a b le la b o r fo rc e . 25

To th is p o in t th e n , we have a concept o f the dynamic in the system which views the w orld centers o f te c h n o lo g ic a l in n o v a tio n as the fountainhead o f tra d e , in v e s t­

ment, and s e rv ic e flo w s in the s tru c tu re o f in te r n a tio n a l exchange. Our task here, however, is no t com plete, f o r th e re are c r itic is m s o f produ ct cy c le th e o ry which w arrant c o n s id e ra tio n . These c r itic is m s ce n te r upon the p re cise tim in g in the model r e la tin g the tr a n s fe r o f pro d u ctio n to the T h ird World w ith the "mature"

phase o f the p rodu ct. Charles Cooper and o th e r economists have conducted e m p irica l stu d ie s re la tin g the tr a n s fe r o f produ ction a c t i v i t y abroad w ith the age o f the p rodu ct. B roa dly, t h e ir fin d in g s show th a t c o n tra ry to the ten ets o f product c y c le th e o ry , e n te rp ris e s lo ca te d in T h ird World c o u n trie s o fte n undertake pro­

d u ction o f goods before the y are f u l l y "mature" and th a t produ ction techniques are o fte n more c a p ita l-in te n s e than p re d ic te d by p ro d u c t-c y c le th e o ry . The im p lic a tio n th e n , is th a t p ro d u c t-c y c le th e o ry ( i r o n i c a l l y , lik e c la s s ic a l tra d e th e o ry) over­

estim ates the importance o f lo c a l fa c to r a v a i la b i l i t y (c a p ita l and la b o r) in pre­

d ic tin g the lo c a tio n o f produ ction over tim e.

- 1 4 -

A p a r tia l e xp la n a tio n o f Cooper's observations lie s in the a b i l i t y o f

u lt in a t io n a l co rp o ra tio n s to tr a n s fe r c a p ita l across n a tio n a l borders w ith con- id e ra b le f a c i l i t y . Freed from dependence upon lo c a lly a v a ila b le c a p it a l, the HCs may tr a n s fe r production to the T h ird World before lo c a l fa c to r p ric e s would ake i t economical to do so; and as a c o r o lla r y , the y may tr a n s fe r produ ction echniques which are more c a p ita l-in te n s e than c la s s ic a l the ory would p r e d ic t.

u t t h is e xp la n a tio n is not complete because i t does not t e l l us why they do so.

The answer to th is question was suggested by Cooper in h is c r it ic is m o f ro d u ct cy c le th e o ry 27and has now been developed by Raymond Vernon and his ssocia tes a t the Harvard M u ltin a tio n a l E n te rp ris e p r o je c t. 28 The c r i t i c a l h a r a c te r is tic o f the w orld economy neglected by e a rly fo rm u la tio n s o f product y c le th e o ry is th a t m u ltin a tio n a l e n te rp ris e s operate w ith in o lig o p o lis t ic ra th e r than p e r fe c tly c o m p e titiv e ) market s tru c tu re s . The e x p la n a tio n o f the bserved abberations in the lo c a tio n o f pro d u ctio n before the f u l l "m a tu rity " o f he product th e n ,is found in th e th e o ry o f o lig o p o lis t ic fir m b e h a vio r.

V. O lig o p o lis t ic Firm Behavior and the Reinforcement o f Engendered P atterns o f Technological D iffu s io n

U n like a fir m o p e ra tin g in a c o m p e titiv e m arket, an o lig o p o lis t ic fir m enjoys ome measure o f c o n tro l over the environment in which i t operates ( i . e . , the

la rk e t). I t s prim ary m o tiv a tio n th e n , is to m aintain th a t environm ent, and

s a s ic a lly , i t does so by undertaking a c t i v i t y which w i l l preserve i t s share o f the la rk e t v is - a - v is o th e r member firm s . Out o f t h is u n d e rly in g d riv e emerge two

i i s t i n c t m o tiva tio n s f o r d ir e c t fo re ig n investm ent, which are unique to o lig o p o lis t ic narket s tru c tu re s .

F ir s t , a fir m w i l l undertake d ir e c t fo re ig n investm ent to m ain tain i t s share in new markets ( o r , s im ila r ly , to m ain tain i t s share in markets f o r new p ro d u c ts ).

- 1 5 -

\s sta te d b e fo re , product in n o va tio n s in t h e ir e a rly phases o f the l i f e cycle are la rg e ly marketed in t h e i r country o f o r ig in . As the in n o v a tio n enters, the oeriod o f ra pid growth, new n a tio n a l and re g io n a l markets are c u ltiv a te d by the n’ s te r firm s o f the o r ig in a l in n o v a to r. These firm s may be lo ca te d in both the lome market as w e ll as the new m arket. Unless th a t fir m can capture p a rt o f the new market, i t s share o f the o v e ra ll market w i l l d e c lin e , and i t s p o s itio n w ith in the s lig o p o ly w i l l be th re a te n e d . Over the long ru n , o f course, any fir m unable to jp e ra te in markets o th e r than i t s home market w i l l d e c lin e . Because a p ro d u ctive jp e ra tio n loca ted w ith in a new market enjoys c e r ta in economic advantages over jroducers who must e x p o rt to th a t m arket, the fir m w i l l tr a n s fe r produ ction to the lew market before product m a tu rity in order to gain advantage over r iv a ls in i t s lome market. 29 A ls o , because the fir m can circum vent p r o te c t io n is t government a o lic ie s by lo c a tin g p ro d u ctio n w ith in the new m arket, i t w i l l tr a n s fe r p rodu ction ,e fo re m a tu rity in o rd e r to b e tte r compete w ith indigenous f ir m s . 30

According to the th e o ry o f o lig o p o lis t ic fir m b e h a vio r, once d ir e c t fo re ig n investment is in it ia t e d by one f ir m , o th e r firm s in th a t in d u s try are h ig h ly

jo tiv a te d to in v e s t, in o rd e r to p ro te c t t h e ir o v e ra ll market share. This p a tte rn is re fe rre d to as the " fo llo w the le a d e r" phenomenon 31 and has been stu d ie d

ix te n s iv e ly by F rede rick T. Knickerbocker a t the Harvard M u ltin a tio n a l E n te rp ris e a ro je c t. Knickerbocker analyzed the fo re ig n investm ent behavior o f 187 U.S.

enterprises between 1948 and 1967. Examining the p a tte rn s and tim in g o f the establishm ent o f ro u g h ly 2,000 s u b s id ia rie s revealed th a t firm s w ith in a given in d u stry do in v e s t d e fe n s iv e ly in a new market a f t e r any one fir m i n i t i a t e s in v e s t- le n t. Moreover, they tend to do so q u ite soon a f t e r the f i r s t fir m " in lo c k -s te p ­ lik e f a s h i o n . T h i s phenomenon o f o lig o p o lis t ic re a c tio n then, e xp la in s one n o tiv a tio n fo r the tr a n s fe r o f produ ction v ia d ir e c t fo re ig n investm ent before the n a tu rity o f the product.

-16-

A second m o tiv a tio n f o r d ir e c t fo re ig n investm ent p r io r to product m a tu rity is the consequence o f the d e s ire o f a l l firm s to maximize the re tu rn on t h e ir investm ent in the development o f any new product. New products are p r im a r ily developed f o r the home m arket, but regardless o f the s iz e o f the eventual m arket, the c o s t o f developing the new product is a fix e d c o s t. As a consequence,

according to Stephen Hymer:

The a ctu a l co st o f produ ction is t y p ic a lly w e ll below s e llin g p ric e and the l i m i t on o u tp u t is no t r is in g c o s ts , bu t f a l l i n g demand due to sa tu ra te d markets. The marginal p r o f i t on new fo re ig n markets is thus h ig h , and co rp o ra tio n s have a stro n g in t e r e s t - in m a in ta in in g a system which spreads t h e ir products w id e ly .

The re tu rn s on investm ent in research and development thus increase as the s iz e g f the t o t a l market f o r any new product can be increased.

M odifying th e basic te n e ts o f pro d u ct cycle th e o ry by in c o rp o ra tin g the observed phenomenon o f o lig o p o lis t ic re a c tio n has re s u lte d in a re -a p p ra is a l o f the p re cise tim in g o f the tr a n s fe r o f produ ction as i t is p re d ic te d in the pure th e o ry .

C onsideration o f o lig o p o lis t ic fir m b e h a vio r has also re in fo rc e d the ro le o f d ir e c t fo re ig n investm ent in the tr a n s fe r process. Although our pe rce p tio n o f th e tim in g in t h is process has been m o d ifie d , i t is im p o rta n t to note th a t the d i r e c ti on o f exchange flow s over tim e in the system is s t i l l the same. That i s , we s t i l l have a view o f the advanced sta te s as the source o f in n o va tio n and e a rly product develop­

ment, and the developing sta te s as the eventual re c ip ie n ts o f investm ent and s k i l l tra n s fe rs . The m o tiv a tio n f o r such tra n s fe rs is b e tte r e x p lic a te d , in th a t firm s seek to p ro te c t . t h e ir shares in an o lig o p o lis t ic market. The means by which they p ro te c t t h e ir p o s itio n is to tr a n s fe r produ ction before a product reaches m a tu rity , under c o n d itio n s which perm it high re tu rn s and c o n tro l over p ro d u ctio n and d i s t r i ­ b u tio n . F in a lly , by emphasizing the importance o f investm ent and o f the inn ate economic advantages o f in n o v a tio n , we in tro d u ce questions r e la tin g to co n tro l and d is t r ib u t io n w ith in such a system o f in te rn a tio n a l exchange.

.-1 7 -

Having described basic s tr u c tu r a l fe a tu re s in the p a tte rn o f in te rn a tio n a l exchange and d e lin e a tin g in n o v a tio n and the d iffu s io n o f in n o v a tio n as the under­

ly in g dynamic in t h is system, i t is im po rta nt to f u r th e r e xp lore the d is t r ib u t io n o f costs and b e n e fits in t h is system o f exchange in o rd e r to exp lore the t h ir d key p o in t' d e lin e a te d in the in tr o d u c tio n . By e x p lo rin g the r e la tio n s h ip between the in te rn a tio n a l p a tte rn o f te ch n o lo g ica l in n o v a tio n and d iffu s io n and the glo bal d is t r ib u t io n o f costs and b e n e fits r e s u ltin g from in te rn a tio n a l exchange, we w i l l e f f e c t iv e ly re in tro d u c e the in te r p la y o f technology and p o l it ic s .

if. Technology and Terms o f Trade

The d if f e r e n t ia l d is t r ib u t io n o f technology has proiound e ffe c ts upon the d is tr ib u tio n o f costs b e n e fits r e s u ltin g from in te r n a tio n a l exchange. This

d is tr ib u tio n ranges from the actual terms o f exchange as they appear in c o n tra c tu a l form, to the h ig h e r-o rd e r e ffe c ts o f t h is exchange system (such as the consequences fo r economic development r e s u ltin g from n a tio n a l s p e c ia liz a tio n in a p a r t ic u la r type o f e x p o rt). Technology plays an im p o rta n t p a rt a t each o f these le v e ls , and ve w i l l f i r s t examine i t s impact upon terms o f tra d e .

k As discussed above, technology is an im p o rta n t determ inant o f com parative

advantage in in te r n a tio n a l tra d e . Nations which are r e la t iv e ly r ic h in te ch n o lo g ica l endowment w i l l tend to e x p o rt c a p ita l-in te n s e products w h ile technology-poor

oountries w i l l tend to s p e c ia liz e in the e xp o rt o f prim ary m a te ria ls and la b o r- intense manufactures. E s s e n tia lly , terms o f tra d e w i l l tend to improve f o r the te ch n o lo g y-rich because te c h n o lo g ic a l growth is i t s e l f the most im p o rta n t determ inant of p r o d u c tiv ity growth. 04 G reater p r o d u c tiv ity improves a n a tio n 's p o s itio n in vo rld tra de because i t e f f e c t iv e ly lowers the p ric e s o f th a t n a tio n 's goods r e la tiv e to w orld p rice s (because th a t n a tio n can produce more o u tp u t w ith the same inp uts is b e fo re ). V la d im ir P e rto t has stu d ie d global trends in terms o f tra de and found

- 1 8 -

th a t in the post-W orld War I I p e rio d , the terms o f tra de f o r p rim ary products

has s te a d ily d e te rio ra te d v is - a - v is the r e la t iv e ly c a p ita l-in te n s e m anufactures.*35 L in k in g technology to te rm s -o f-tra d e , lib e r a l economist Harry G. Johnson noted th a t:

. . . t h e standards o f a fflu e n c e enjoyed in the developing c o u n trie s are a consequence o f a temporary /cjuasi7 monopoly o f s u p e rio r technology bu ttre ssed b y .. . t a r i f f s . . .and

r e s tr ic tio n s on im m ig ratio n. 6

This is o n ly one way in which te c h n o lo g ic a l endowment e ffe c ts the d i s t r i ­ b u tio n o f b e n e fits in in te rn a tio n a l exchange.

/

V I. Technology and Terms o f D ire c t Foreign Investment

Technology also e ffe c ts in te rn a tio n a l terms o f investm ent and s e rv ic e s , although the re la tio n s h ip is somewhat more complex than in the case o f terms o f tra d e . This r e la tio n s h ip a ris e s from the fa c t th a t the a ct o f te c h n o lo g ic a l in n o v a tio n i t s e l f a ffo rd s p a r tic u la r advantages to the in n o v a to r. To understand the nature o f th is advantage, we must b r ie f l y venture in to the realm o f m icro - economic th e o ry.

From the p e rspe ctive o f microeconomic th e o ry , the s in g le most im po rta nt aspect o f te c h n o lo g ic a l in n o va tio n is th a t i t fo re v e r separates r e a l i t y from the

id e a l-ty p e o f p e rfe c t c o m p e titio n . P e rfe c t com petition assumes th a t the manufacturers o f any product w i l l face s im ila r circum stances. That is , cost schedules and

demand schedules w i l l be v i r t u a l l y the same; consumers and producers w i l l have p e rfe c t in fo rm a tio n regarding changes in p ric e and product a v a i l a b i l i t y ; and the

* As a caveat, i t should be noted th a t P e rto t's study ended in the m id-1960's, and since th a t time cooperative a c t i v i t y by resource exp orte rs may have checked or

( in the case o f petroleum) even reversed th a t tre n d . For our present purposes, however, i t is safe to say th a t in the absence o f concerted government in t e r ­ ve n tio n in the exchange process, the te c h n o lo g y -ric h do enjoy an advantage over the technology-poor in the d is t r ib u t io n o f b e n e fits d ic ta te d by te rm s -o f-tra d e .

-1 9-

same production technology w i l l be in s ta n tly a v a ila b le everywhere. O perating in such a w o rld , the en trepreneur seeking to maximize his re tu rn , can m anipulate on ly the le v e l o f ou tp u t o f his fir m and the p ric e he charges f o r his produ ct.

Given these assumptions and c o n s tra in ts , c la s s ic a l microeconomic th e o ry demonstrates th a t th is re tu rn w i l l be maximized when the e n tre p re n e u r's m arginal cost o f

production is equal to his marginal re tu rn . When th is occurs, i t so happens th a t marginal cost and m arginal re tu rn w i l l also be equal to the m a rk e t-d ic ta te d p ric e f o r the p rodu ct. This is the Utopia o f c o m p e titiv e e q u ilib riu m where the producer's re tu rn is maximized w h ile market p ric e is sim ulta ne ously minim ized.

The assumptions which support c la s s ic a l th e o ry are pro b le m a tica l to say the le a s t. David Ricardo f o r one, was p a r t ic u la r ly tro u b le d by the assumption th a t

new technology would be in s ta n tly a v a ila b le to a l l producers. He concluded, however, th a t re a l-w o rld lags in the d iffu s io n o f new technology would no t permanently

d is tu rb c o m p e titiv e e q u ilib riu m because in th e long ru n, any new technology wo’uld be a v a ila b le to a l l . 37

Why does a v io la t io n o f the "e q u a lly a v a ila b le technology" assumption d is ru p t e q u ilib riu m a t a ll? Because i f any given technology is not e q u a lly a v a ila b le , the assumptions regarding s im ila r costs and p e rfe c t in fo rm a tio n are v io la te d as w e ll, and the advantage in every case lie s w ith the in n o v a to r.

B a s ic a lly , the in n o va tin g fir m can:op

1. Pay c a p ita l and la b o r hig her p ric e s than com petito rs can.

2. Set product p rice s lower than the m arginal p r o d u c tiv ity o f co m p e tito rs.

3. S e ll the product a t a p ric e which is h ig h e r than i t s own m arginal co s t.

4. Use i t s e x tra p r o f i t to expand v e r t ic a lly o r h o r iz o n ta lly .

5. Use e x tra p r o f i t to generate demand by means o f m arketing techniques.

The act o f in n o v a tio n , then, undermines every m ajor assumption o f co m p e titive

e q u ilib riu m th e o ry. Ricardo believed th a t i t on ly te m p o ra rily d istu rb e d e q u ilib riu m , but Ricardo liv e d in a tim e when the pace o f te c h n o lo g ic a l change was considerably

-20-

slower than th a t which has been witnessed in the 20th ce n tu ry. I f we view th is quest f o r e q u ilib riu m as being c o n tin u a lly d is ru p te d due to in n o v a tio n , then the c la s s ic a l assumptions are not sim ply compromised, they are transform ed. They are transform ed because the fir m can now m anipulate more than i t s le v e l o f output and the p ric e i t charges; i t can m anipulate the technology i t employs, and thereby e x tr a c t i t s e l f from the d ic ta te s o f a co m p e titive market.

Joseph Schumpeter recognized t h is some tim e ago. 39 Schumpeter argued th a t the u n d e rlyin g r e a lit y in the economic system was not th a t o f a co m p e titive e q u ilib riu m which each fir m b lin d ly sought, and a ll firm s in a d v e rta n tly found.

In ste a d , c a p it a lis t economies were c h a ra cte rize d by the conscious and continuous e f f o r t by a l l firm s to e x tr a c t themselves from the c o m p e titiv e w orld by means o f in n o v a tio n . 40 Schumpeter’ s fo rm u la tio n would appear to have been born o u t, at le a s t to the e x te n t th a t in n o v a tiv e a c t i v i t y is indeed pervasive among firm s ; p a r t ic u la r ly , we have seen, among firm s in the advanced s ta te s . Charles Cooper has noted th a t the advanced n a tio n s hold a v ir t u a l "monopoly o f w orld R&D."41 F rede rick Knickerbocker found th a t in n o v a tiv e a c t i v i t y — s p e c if ic a lly product development, market in tro d u c tio n and market s a tu ra tio n - - has been the v e r ita b le hallm ark o f U.S. in d u s try sin ce the 19th century.42

How does the in h e re n t economic advantage a ffo rd e d to in n o v a tio n -o rie n te d firm s in flu e n c e terms o f investm ent and se rvice tra n s fe rs ? E s s e n tia lly , i t is because the market im p e rfe ctio n s introdu ced by in n o v a tiv e a c t i v i t y * suffuse a ll exchange r e la tio n s . C oncom itantly, i t is im portant to note th a t the most

prominent form o f "s e rv ic e exchange" is the tr a n s fe r o f technology i t s e l f ; and lik e w ise, d ir e c t fo re ig n investm ent re la tio n s h ip s c h a r a c t e r is t ic a lly in clu d e technology tra n s fe rs . 43 The technology market is in h e re n tly im p e rfe c t. The I n v is ib le Hand —

* b u ttre s s e d , as Johnson says, by o th e r r e s t r ic t iv e p ra c tic e s such as t a r i f f s and im m igration r e s tr ic tio n s which th w a rt c ro s s -n a tio n a l wage e q u a liz a tio n .

-2 1 -

the lib e r a l econom ists' b lin d - a r b it e r o f economic ju s t ic e — is in o p e ra tiv e here.

Consequently,, i f no unconscious market mechanism e x is ts to im p a r tia lly a llo c a te the b e n e fits o f an exchange r e la tio n s h ip , then the outcome w i l l depend upon the

r e la t iv e b a rg a in in g power o f the p a r t ic i pants in th a t exchange.

The p a r tic ip a n ts in investm ent and technology exchange re la tio n s h ip s have c h a r a c t e r is t ic a lly in v o lv e d the m u ltin a tio n a l c o rp o ra tio n s as the purveyors o f these goods, and th e n a tio n a l governments o f those c o u n trie s in which the h o s t-firm is lo ca te d as the consumers. Evidence in d ic a te s th a t the m u ltin a tio n a ls enjoy a r e la t iv e advantage in ba rga ining power; and th a t th is advantage is e x p lo ite d . Regarding t h e i r in n a te advantage in the technology m arket, p a r t ic u la r ly in n e g o tia tio n s w ith LDCs, Charles Cooper w r ite s :

The t r a n s f e r o f technology does no t take place because some e n te rp ris e in the underdeveloped c o u n trie s 'draws from the s h e lf o f w o rld te c h n o lo g y .' Rather i t is the outcome o f a process in which technology-owning e n te rp ris e s in the advanced c o u n trie s e x p lo it t h e ir q u a s i-m o n o p o lis tic advantages in T h ird World markets. 4

T h is m arket c o n c e n tra tio n e x is ts not o n ly in technology, but in o th e r c r i t i c a l areas such as investm ent fin a n ce and in e xp o rt markets f o r LDC goods. 4-5 More im p o rta n tly , t h is m arket con centratio n e x is ts not o n ly w ith in va rio u s economic fa c to r s , b u t between them as w e ll. That i s , a m u ltin a tio n a l e n te rp ris e w i l l often c o n tro l te ch n o lo g y, c a p it a l, and market o u tle ts and o f f e r them to p o te n tia l buyers o n ly as a complete package. I t s options thus r e s t r ic t e d , the ty p ic a l LDC govern­

ment has l i t t l e leverage a t the bargaining t a b le . *

This d iscre pa ncy in r e la tiv e bargaining s tre n g th is , not s u r p r is in g ly ,

m anifested in the c o n tra c tu a l terms o f investm ent and se rvice exchanges. Raymond Vernon has noted th a t d e spite expressed preferences by LDCs since 1959 against whole-ownership o f s u b s id ia rie s , roughly 54% o f e n te rp ris e s e sta b lish e d in th a t time

* T h ird World governments, re a liz in g the power im p lie d by th is m u ltip le c o n tro l o f several fa c to rs by the MNCs, have given a high p r i o r i t y to developing methods o f

34-507

fo rc in g the m u ltin a tio n s to "unoackage" such exchanges. P re lim in a ry in d ic a tio n s o f t h e ir r e la t iv e success (in Mexico and o th e r L a tin American c o u n trie s ) proviaes

room f o r ca u tio u s optim ism . See Business Week, August 9, 197b, pp.

-2 2-

have been wholly-owned s u b s id ia rie s o f fo re ig n m u ltin a tio n a ls . This is n e a rly the same p ro p o rtio n as e x is te d before 1959. 46 Harry G. Johnson notes th a t a ll host n a tions — not ju s t LDCs — are a t such a disadvantage in these exchanges th a t they have made e x tra o rd in a ry concessions in c lu d in g ta x sub sidies to w h o lly owned s u b s id ia rie s , im port p ro te c tio n a g a in st " fo re ig n " e n te rp ris e s , export

s u b s id ie s , p r e f e r e n t ia l access to lo c a l c a p ita l and guarantees on the r e p a tr ia tio n o f e a rn in g s .47 An OECD study o f 70 fo re ig n owned e n te rp ris e s found th a t concessions such as those described by Johnson had been made in a l l but 10 cases. 48

Concessions made by the m u ltin a tio n a ls to host governments — in the form o f corporate income taxes and reinvestm ent o f p r o f it s — can be illu s o r y . Contractual o b lig a tio n s o f the s u b s id ia ry to the parent pe rm it MNCs to s u r r e p t it io u s ly siphon o f f s u b s id ia ry p r o f it s by means o f " tr a n s fe r p r ic in g . " These c o n tra c tu a l " t i e - i n clauses" may re q u ire the s u b s id ia ry to buy in p u ts from the parent a t p rice s

determined by*the p a re n t, ra th e r than w orld market p ric e s . S im ila r ly , the sub­

s id ia r y may be re q u ire d to s e ll a l l i t s outpu t to the p a re n t, o r p ro h ib ite d from e x p o rtin g i t s product. I t may a lso be o b lig a te d to purchase p ro p rie ta ry knowledge from the parent fir m . Such o b lig a tio n s , provide the MNC w ith s u f f ic ie n t c o n tro l o f the s u b s id ia ry 's accounts th a t governmental taxes may be circum vented.

T h usfa r, the d is t r ib u t io n o f b e n e fits re s u ltin g from in te rn a tio n a l exchange in tra d e , investm ent, and service s would appear to fa v o r the r e la t iv e ly

" te c h n o lo g ic a lly r ic h " advanced n a tio n s and the MNCs as the purveyors o f d ir e c t fo re ig n investm ent, production technology, and o th e r se rvice s such as marketing techniques. But our co n sid e ra tio n o f exchange outcomes is not complete. This p a r tic u la r framework o f exchange described above; the p a tte rn o f exchange and the terms o f exchange have h ig h e r-o rd e r consequences o r " s p in - o ff s " 49 which must be examined in order to complete our examination o f the d is t r ib u t io n o f costs and b e n e fits in in te rn a tio n a l exchange.

-23-

V II. Technology and Higher Order Costs and B e n e fits o f In te rn a tio n a l Exchange For those sta te s w ith a ric h te c h n o lo g ic a l endowment, the fa vo ra b le terms o f tra de re s u lts in grow th-generating income and a b e tte r balance o f payments p o s itio n than would otherw ise be the case. Harry Johnson a ttr ib u te d the com fortable l i f e ­ s ty le o f the advanced s ta te s to t h e ir s u p e rio r in te rn a tio n a l p o s itio n in technology.

Most im p o rta n tly f o r the long term, the r e a liz a tio n o f quasi-monopoly re nts and the wide d is t r ib u t io n o f advanced co u n try in n o v a tio n ensures a high re tu rn on R&D f o r innovate firm s . 50 This provides both, in c e n tiv e and fin a n c in g f o r fu r th e r in n o v a tio n , r e in fo r c in g the te c h n o lo g ic a l s u p e r io r ity o f the advanced s ta te s . C oncom itantly, t h e ir general economic w e lfa re is enhanced because as discussed

above, te c h n o lo g ic a l growth generates p r o d u c tiv ity grow th. And g re a te r p r o d u c tiv ity perm its an e q u iv a le n t r is e in wages w ith o u t i n f la t io n (im proving the domestic

liv in g standard) as w ell as im proving a c o u n try 's p o s itio n in w orld tra d e .

From the p e rsp e ctive o f the "te c h n o lo g y -p o o r," i t is im portant to note th a t the dram atic ra te s o f economic growth over the past two decades enjoyed by some

( lik e B r a z il) re s u lte d from p a r tic ip a tio n in th is system o f exchange. The d is t r ib u t io n o f b e n e fits , then, is by no means a zero-sum game between the

p a r tic ip a n ts . But conceding the p o s s ib ilit y o f a p o sitive -su m outcome in no way means th a t an’ a lte r n a tiv e d is tr ib u tio n m ight be p re fe re d by one p a rty o r the o th e r.

The heavy re lia n c e upon e n te rp ris e s based in the advanced n a tio n s f o r in v e s t­

ment and technology has re s u lte d in several un d e sira b le consequences — "or negative s p in - o ffs " — f o r the technology-poor. 51 These in c lu d e a s ig n if ic a n t erosion o f governmental a b i l i t y to c o n tro l n a tio n a l economic p o lic y , balance o f payments c o m p lic a tio n s , and undesirable p a tte rn s o f economic and s o c ia l development. Each o f these problems w i l l be b r ie f ly discussed.

B r a z il's dram atic growth rates is a t le a s t p a r t ly a ttr ib u ta b le to governmental p o lic ie s which a c tiv e ly encouraged d ir e c t fo re ig n investm ent. As a r e s u lt , 59 o f

-2 4-

B r a z il's TOO la rg e s t co rp o ra tio n s are fo re ig n c o n tro lle d . More than 80% o f the pro d u ctio n in key in d u s trie s such as rubber, autom obiles, and pharm aceuticals is by MNC s u b s i d i a r i e s . R e c e n t l y , B ra z ilia n o f f i c i a l s , spanning the e n tir e p o lit ic a l spectrum, voiced concern th a t "...d e c is io n -m a k in g power over the economy is d r if t i n g to fin a n c ia l centers in the United States and o th e r developed c o u n trie s ." 53 This lo s s o f c o n tro l re s u lts f i r s t from the tremendous m o b ility o f the m u ltin a tio n a l c o rp o ra tio n , which perm its i t to circum vent governmental a ctio n not in i t s

immediate in te r e s ts . I t a lso re s u lts from the observed fa c t th a t the behavior o f MNC s u b s id ia rie s tends to be more v o la t ile than n a tio n a l firm s . 54 That is , f o r the MNC s u b s id ia ry , d e cisio ns to expand o r c o n s tr ic t p ro d u c tio n , o r even to com pletely close down may be determined not by the lo c a l economic c lim a te , but

in ste a d upon c o n d itio n s in the MNCs home c o u n try , o r even upon c o n d itio n s in another co u n try where the parent fir m c o n tro ls a s u b s id ia ry . Government economic planning consequently, can be u t t e r ly confounded. Raymond Vernon commented:

The comprehensive n a tio n a l

_pl

w id e ly as o ff e r in g a serious approach to the achievement o f m ajor n a tio n a l go a ls. Comprehensive n a tio n a l plans demand th a t the planner be able to p ro je c t o r to c o n tro l the fo re ig n se cto r o f the economy.55

A sce rta in in g the net balance o f payments e ffe c ts o f d ir e c t fo re ig n investment packages is extrem ely d i f f i c u l t . Analyses o f these e ffe c ts to date show balance o f payments d e f ic it s have been in fla te d by d ir e c t fo re ig n in v e s tm e n t;^ but in ­ vestment may have lo n g e r-te rm e ffe c ts which m ight reverse these conclusion s.

Assuming, however, a continued i n a b i l i t y to c o n tro l tr a n s fe r - p r ic in g p ra c tic e s , and a continued dependence o f s u b s id ia ry im p o rt-e x p o rt p a tte rn s on the parent f ir m , the balance o f payments p ic tu re is not b r ig h t.

The work o f many South American s o c ia l s c ie n tis ts — members o f the Dependencia School — is concerned w ith the "misdevelopment" o f the T h ird World due to the

presence o f the M u ltin a tio n a ls . Some o f t h e ir arguments are worth n o tin g in our

-25-

assessment o f h ig h e r-o rd e r costs and b e n e fits re s u ltin g from e x ta n t p a tte rn s in in te rn a tio n a l exchange. The c e n tra l th e s is o f these w r ite r s is th a t economic and so cia l fa c to rs which are e s s e n tia l to b u ild in g a v ia b le economic in fr a - s tr u c tu r e are not provided by present arrangements; and indeed may be thwarted by the p ra c tic e s o f MNC s u b s id ia rie s . These e s s e n tia l fa c to rs in clu d e heavy in d u s tr ia l p la n t, a size a b le tra in e d la b o r fo r c e , and a v ia b le m iddle class as the prominent fe a tu re o f the socio-econom ic system.

The produ ction processes o f MNC s u b s id ia rie s are adopted from the pa ren t.

They f a i l to make e f f ic i e n t use o f lo c a lly a v a ila b le fa c to rs o f produ ction ( i . e . , c a p ita l and la b o r) because these p ro d u ctio n tech no lo gies were i n i t i a l l y developed f o r advanced n a tio n markets where c a p ita l is r e la t iv e ly abundant and la b o r scarce.

This makes the s u b s id ia ry more dependent upon fo re ig n c a p it a l, which is lo c a lly scarce and u n d e ru tiliz e s lo c a lly abundant la b o r. This n o t o n ly re ta rd s the

growth o f the n a tio n a l la b o r fo r c e , i t cre ates im po rta nt d is lo c a tio n s in the la b o r market. American economi s t' Geral d M eier has commented:

...e x c e s s iv e domination o f the economy by d ir e c t fo re ig n investm ent can cre a te severe d is to r tio n s in the la b o r market o f the r e c ip ie n t co u n try by c re a tin g enclaves

paying high wages and s a la rie s n o t re la te d to p r o d u c tiv ity in the re s t o f the economy. In t h is way i t can destroy as i, many job s as i t c re a te s ; re ta rd a g r ic u ltu r a l development;

and through tra d e union a c tio n , lead to r a p id ly r is in g wages and s a la rie s in the p u b lic s e c to r .57

Much o f the investm ent and technology flo w in g to the T h ird World has mis­

d ire c te d economic growth in th a t i t has been o rie n te d toward produ ction o f consumer goods ra th e r than heavy in d u s try . This engenders and re in fo rc e s p a tte rn s o f saving and consumption which c o n f lic t w ith the p rim ary o b je c tiv e s o f economic development.

Charles Cooper noted:

The success o f these p ro d u c ts ,1 ik e d iffe r e n tia te d consumer goods in the markets o f underdeveloped c o u n trie s is o fte n p r im a r ily a r e fle c tio n o f a p a tte rn o f demand in which the consumption p a tte rn o f the e l i t e predom inates, and t h e ir presence may

s tim u la te consumption a t the expense o f investm ent, as w e ll a s „ in tr o d u c in g production techniques o f high c a p ita l in te n s ity . 00