The Lost Massey Lectures (42 page)

Peter Drucker accurately reflected the euphoria and awe surrounding global corporations when he wrote: “Multinationals, whether corporate or communist, put economic sovereignty ahead of political nationality; the multinational corporation is by far our most effective economic instrument today and probably the one organ of economic development that actually develops. It is the one nonnationalist institution in a world shaken by nationalist delirium. It puts the economic decision beyond the effective reach of the political process and its decision makers, national governments.”

However much one may be astonished by Mr. Drucker's eulogy, he speaks what is for many the simple truth. The dominant and dominating institution of our time is the commercial corporation. Few suspected when the act of incorporation for commercial purposes became, in the nineteenth century, a simple right, that the chartered company would ever attain its present importance and strength.

Drucker puts his point of view very well. In essence, he is saying that it is economics that determines the directions that a community should take, because the corporation knows best what are the priority needs and problems facing the nation. The nation-state has become an outmoded and archaic institution unable to deal with the mounting complexities and decisions of the world.

While attempts at military, religious, and revolutionary domination of our social institutions are in fact the history of the Western world, the commercial attack on the role of politics, the open discussion of directions and the possibility of choosing freely, is now the dominant threat to our liberties, as President Eisenhower foresaw.

The heart of the problem lies not in the multinational corporation or the giant conglomerate as such but rather in the concept itself of the corporation as a social institution.

The multinational is not a non-nationalist institution, as Mr. Drucker puts it, but is, in fact, the supreme national instrument of the industrial powers. American economic power is based on hundreds of huge international corporations operating in all corners of the globe. As Mr. Fowler, secretary of the treasury under President Johnson, described them, they were “mighty engines of Enlightened Capitalism.” He then went on to declare that “for this nation—the United States—they have not only a commercial importance but a highly significant role in U.S. foreign policy.” That is blunt enough! The occasion was the imposition of guidelines on the operations of American subsidiaries in Canada, December, 1965.

To emphasize the point, the secretary went on to say that “much more is involved than the economic advantages of investors of capital and the return to profits.” While Canadians have been repeatedly told by their political leaders that the citizenship of those who own and control Canadian resources and Canadian
markets is a matter of little or no importance, the secretary of the United States Treasury lays down the doctrine that American multinationals are expected to serve the interests of United States foreign policy. While Canadian economists were teaching that the essence of free enterprise lies in the pursuit of profits and maximizing the return on investment, a member of the U.S. cabinet says not so.

As a colleague of mine, Dr. John Dales of the University of Toronto, pointed out at the time, “We did suppose that American subsidiaries were business enterprises, run by businessmen intent on making a profit. If they really are a herd of little Trojan horses under the control of Washington, economists have nothing to say about them. We know nothing whatever about the behaviour of Trojan horses.”

The 1965 imposition of guidelines on subsidiaries of American corporations operating in Canada, while later rescinded, illustrated the extent of Canadian vulnerability to American priorities. In this instance, controlling their balance-of-payments deficits limited United States multinationals, who were told to require their branch plants abroad to import more of their requirements from or through the American parent, to declare larger dividends, and to return excess working capital to the home office. Drucker's point that multinationals put economic sovereignty ahead of political nationality is wrong on two counts. When the United States Department of Commerce orders hundreds of American multinationals to force an expanded repatriation of funds from abroad to reduce the severity of balance-of-payment deficits, we are no longer dealing with the economic sovereignty of multinationals or even with the large numbers of economic theory, but rather with a single, directing political voice—not with the disparate and independent decisions of thousands of businessmen acting in their own corporate interests but with deliberate and hard government
policy in Washington. Secondly, it is not economic sovereignty and decision making that rides over the political sovereignty of the host country but the demands and political priorities of the investing nation.

Of even greater concern to Canadians than Mr. Drucker's views should be the attitude of the federal government and its agencies such as the Bank of Canada to the whole question of ownership and control. Briefly, the opinion has always been that, as long as investment funds flow in and incomes are rising, the citizenship of those who own and control major sectors of the Canadian economy does not matter.

With respect to the imposition of the guidelines on Canadian business in December, 1965, there was more resistance from the managements of the Canadian companies (who saw their freedom to buy in the best market and to reinvest funds in such projects as they deemed to be in the best interests of the company dramatically reduced) than there was from their American parents or the Canadian government.

The American parent, of course, could not afford to antagonize the federal government and the Pentagon, particularly by opposing U.S. policy, given their dependence on the enormous market for goods and services in Washington.

As for the Canadian government and the officials in the Department of finance, together with the Governor of the Bank of Canada, they did not comprehend in the slightest the significance of this serious infringement of Canadian sovereignty and the national interest. It remained for an American economist, Professor Fritz Machlup of Princeton University, to point out that the introduction of guidelines to control economic activity abroad meant that the “United States has taken an enormous step away from our systems of free enterprise.”

Contrary to Mr. Drucker, the world of the multinationals is
no longer the world of private capitalism but is, in fact, the world of a guided capitalism wherein the leading industrial governments transform the managements of multinational corporations into lengthened arms of the home governments. It is this consistent invasion of the political authority of the host nations that is creating the hostile environment to the concept of an emerging international organization of production and specialization with consequent political and economic vulnerability for the smaller countries.

When Mr. Drucker speaks of the multinational as “probably the one organ of economic development that actually develops,” he is talking nonsense. There is an immediate investment period that gives construction jobs; but the purpose of any investment is to show a profit, i.e., to take out more from a market or an economy than one puts in. In the case of the multinational, a one-time investment of capital, often a minimal contribution, has secured control of a resource or a share of a market with the rights to an indefinite flow of income arising therefrom. Investment by the multinational takes place only when the opportunity exists to take more out of an economy than is put in. A multinational pursues the surplus in any situation and leaves the social problems to governments.

Equity flows of foreign capital with absolute and perpetual rights to future surpluses drain the recipient nation of the very sums needed to maintain and to expand its own economy. The objective of each investment is to take out of the zone of operations more than has been committed, and inevitably the investing nations expand at the expense of the less-developed ones. More importantly, since the debtor nations have sold the control of future as well as the present streams of revenue to their creditors, they never do get back control of their economies.

When the Kennedy administration conducted hearings in 1961
on tax recommendations governing the operations of global companies, hundreds of pages of testimony proved the point that the United States multinationals brought back far greater sums than they invested abroad. Thus Standard Oil of New Jersey had a cumulative surplus of $1.5 billion over a five-year period. Procter and Gamble, during a ten-year period, sent abroad $11 million and brought back to the United States $290 million. And on and on.

Once established and in control of a market share or a resource endowment, the subsidiary is in a position to exert the power that comes from the property rights that it has acquired, for property is sovereignty and the right to income flows. Sovereignty over its activities enables the foreign corporation to insist on the laws, privileges, and concessions necessary to encourage its expansion and control.

Everyone agrees to the free flow of international capital and particularly to developing nations. In its equity form, however, the absolute ownership and property rights attached to their investments enable multinationals to accumulate the surpluses out of each market in which they operate and to dispose of them as they will. Thus a minimal income to labour may remain in the host nation, but the surpluses such as royalty and management fees, interest, dividends, and retained earnings accrue to the creditor nation through its multinational firms.

To declare, as Drucker does, that multinationals put economic sovereignty ahead of political nationality is to assert that the nation has lost all power to limit the rights of private property in the interests of the conservation of exhaustible resources, and the provision of social services such as education, health, welfare, and acceptable working conditions based on the reconciliation of the needs of future generations with the greed for immediate capital gains. But this cannot endure; it invites growing hostility and the certain destruction of the multinational system as we know it.

The dominance of multinationals begins initially with the exploitation of their domestic markets and the consequent accumulation of surpluses. Capacity soon comes to exceed domestic markets and, eventually, the export markets that are not protected by effective tariffs and quotas. One could ask whether the excess capacity was not bad investment and suggest that the funds might have been better distributed to share owners in the home country who could pursue their own consumption and investment patterns. But the capital is retained and moved abroad as direct investment to capture the protected markets for the same technology. The technology that is exported is the technology of the advanced economy. It has to be because the parent, denied the profits on the export of final products, is looking for the profits inherent in the export of the same basic raw materials, equipment, and component parts that it has produced to satisfy its domestic market.

Cosmocorps, then, do transfer advanced technology widely. But a suitable technology for a highly industrialized nation may not be and likely will not be appropriate for a developing nation. The supply of the factors of production in the two economies will certainly not be the same. In the more advanced home economy, capital will be more abundant and its price cheaper, while labour will be relatively scarce and wages much higher than in the developing nation. The transfer of a technology based on a high capital-output ratio to an economy where capital is scarce and expensive and ignores the employment of the labour that is abundant and cheap distorts the pattern of growth and is bad economics, however advanced the technology. As Professor Schumpeter has stated, “This explains why technically backward methods of production may still be the most rational ones, provided the more perfect methods would require less of a plentiful factor and more of one which is less plentiful, and why the technically most
perfect method of production is so often a failure in economic life.” As Keith Marsden has pointed out, it would be easy to substitute a high-technology bakery employing 60 workers at double their daily wage for traditional methods in West Africa, thereby rendering redundant 565 workers, but the burden of caring for and finding employment for the displaced labour falls upon the economy.

Slower and steadier improvement of existing technologies in the backward nations would enable all sectors of such an economy to advance in concert, but this is not what the multinational has to sell.

The global corporation sells mass-production techniques, even in their branch-plant version. To be profitable, however, mass production requires mass consumption—that is, the homogenization of the tastes, needs, values, and priorities of all the nations within which the firm and its subsidiaries operate. In the name of technical efficiency, we erase the differences among persons, the style and the art of their living. People of different cultures and nations in varying stages of development are made, through enormous selling and advertising pressures, to want the same things. The freedom of the individual to choose, to maintain his own preferences, and to search for satisfaction, is reduced. So it is with nations. If their governments believe that their resources, human and material, are appropriated and applied to objectives other than those of their own choosing, on whom do they turn? The end results are easily foreseen, and therein lies the tragedy. The developing nations will inevitably reject the final and complete Americanization, Japanization, or Europeanization of their economies. The multinationals, as the vehicles of that domination, must face at best control of their operations, if not expropriation. And this brings the governments of the powerful industrial economies, determined to protect the wealth of their corporate citizens, into open conflict with the developing nation-states.