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FACULTY WORKING PAPER NO. 910

Estimation Biases in Discounted Cash Row Analyses of Equity Capital Cost: A Pedagogical Note

Charles M. Linke J. Kenton Zumwalt

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College o? Commerce and Business Administration Bureau of Economic uno Business Research University of Illinois, Urbana-Champaign

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THE LIBRARY OF THE

MAY 291986

UNIVERSITY OF ILLINOIS

FACULTY worki:;g paper no. 917

College of Commerce and Business AdministraCion

University of Illinois at Urbana-Champaign

December 1982

Interaction Between Multinational Corporations and Host Countries: Power, Conflict, and Democratization

in Decision-Making

Anant R. Negandhi, Professor Department of Business Administration

Not to be quoted without the written permission of the author.

Abstract

This paper, based on empirical research in 2^4 subsidiaries of American, European, and Japanese Multinational Companies, examines the trend towards the convergence in organizational practices and decision- malcing among three types of multinational corporations. The results show that the global rationalization drive is equally pursued by the .\merican, German, and Japanese companies. And such practices are creating a higher level of centralization in decision-making, creating tension and conflict between the headquarters and subsidiaries and the 'Tui cinational companies and the host countries.

INTERACTION BETOEEN MULTINATIONAL CORPORATIONS AOT HOST COUNTRIES: POWER, CONFLICT, AND DEMOCRATIZATION IN DECISION-MAKING

Confliccs are not made in heaven. They are basically a creation of human-beings. They permeate in all societies, wherever interpersonal and interorganizational interactions are involved. In a sense, they portray the existence of an age-old basic economic truth of limited means to achieve limitless ends in the socio-economic life. In this light, conflicts could be viewed as the basic disagreements between and among persons and/or institutions concerning the achievements of given goals and objectives and the application of means to achieve such goals. Conflicts also signify the existence of imbalances of power leverage among the interacting parties, persons, or organizations.

To a considerable extent, conflict and power are interrelated and

inseparable phenomena. As Kahn has stated:

"The implication of conf lict . • . to power is inescapable. To say that A has the power to change B's behavior necessarily implies that A exerts some force in opposi- tion to some or all of the previously existing forces on B. This is conflict; its extent and consequences depend, of course, on many factors — the nature, basis, and nagnitude of the force which A exerts and of the forces which he is attempting to overcome in order to determine B's behavior" (Kahn, 19b4:l).

."J.C Nation-State Relations in Persoective

Increased attention recently has been focused on the impact of the r.ui tinational corporations on the national economy, employment, balance of payments, security, national defense, foreign policy, national sovereignty, and the social and economic development plans of the host countries.

This upsurge of concern for the impact of the MNCs can easily be seen from the numerous inquiries and investigations presently completed or underway. Such august bodies as the U.S. Senate Finance Committee (1973), the United Nations (1973, 1978), and many professional associa- tions, such as the British-North-American Research Association, the National Industrial Conference Board, and a number of prestigious uni- versities both here and abroad, have embarked upon issues relative to the impact of multinational corporations.

The issues raised and intensive dialogues on the subject have augmented the sensitivity of those outwardly Involved. This has resulted in an optimistic outlook on the one hand and pessimistic over- tones on the other hand (Kendall, 1974; Shaker, 1970). Figure 1 shows the various parties involved in questioning the impact of the MNCs.

The advocators argue that the MNCs are the most powerful engines of progress ever invented by man; they regard them as "harbinger of a true world economy" (Ball, 1968).

Critics, on the other hand, accuse the multinationals of exploiting 1 jcal labor, charging high royalty payments tor supplying obsolete or inappropriate technology, using monopolistic power to eliminate local entrepreneurs, and of interfering with the national sovereignty of the developing countries (Turner, 1971; Barnet and Muller , 1974).

In the industrialized countries, except for concern about their etnical behavior and attacks by organized labor for exporting jobs (Ruttenberg, 1972), the MNCs are conceived as either a positive force or a natural element.

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Ilowever, since Che 1973-oll crisis, the potentials and probleras of the industrialized countries have shifted dramatically. Energy short- ages and Che ever increasing cost of oil, resulting in double-digit inflation, uneraploymenc , and overall slowdown of induscrial and econo- nic acCivlcies have become a cenCral issue in nosC nations around the world. Ac the sane time, the developing countries, with the help of the oil-rich Arab countries, have increased their pressures on the industrialized developed countries to change fundamentally the existing international 'economic order.

With such fast-changing economic and political realities in the world, the multinationals, although facing declining sales, profits, iui intensive competition, have remained silent agents. At the same tine, to cope with these adverse economic situations, the ilN'Cs ' quest f.r achieving greater efficiency in their operations has been inten- 5i:ted. Global rationalization of production, financial, research, 'i^'velopraental, and marketing activities have been suggested for i.i.'i-itMicing the operational efficiency of the multinationals (Vernon,

Although the global-rationalization concept and its accompanying g ..obai-level organizational structure form have been well articulated •i:-.(i selectively implemented (Stopford and Wells, 1972; Franko, 1976), tl'.i' r.'.il attributes or components of this concept, as well as implica- tions of the process of rationalization, have noc been systematically explored or even questioned by many researchers. Specifically, answers to ti»e following questions have not been well explored;

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(1) To what extent does the rationalization process lead to a higher level of centralization in decision-making at the headquarters?

(2) What specific decisions are most likely to be centralized?

(3) IVhat are the implications of such centralization in decision- making on headquarter^subsidiary relationships and on morale and motivation of the subsidiaries' managers?

(4) What are the Implications of the rationalization process on the IlNC-nation state's relationships?

The main purpose of this paper is to examine briefly the above

questions.

Research Sources

The paper is based on two large-scale studies on multinational- nation-state relationships directed by the author during the period 19 74 to 1982. The first study was undertaken with 124 multinational companies (54 American, 43 European, and 27 Japanese) operating in six developing countries — Brazil, India, Malaysia, Peru, Singapore, and Thailand. The second study was conducted with 120 MNCs (34 American, 45 German, and 41 Japanese) operating in seven industrialized countries-- Australia, Japan, Belgium, France, West Germany, United Kingdom, and the 'Jnited States.

RESEARCH FOCUS AND CONCEPTUAL SCliEME Although the study utilized the so-called open-system perspective pursued in organization and interorganization theory areas, the process itself is the reverse of the current tliinkiny; (Emery 5< Trlst, 19o9; Lawrence i. Lorscii, 1969) in these areas. briefly, an cpen-systera approach highlij;hts the impact of e".ternal environmental factors on the

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Internal attributes of an organization, while in this scudy, atcerapts were made to explore the impact of internal attributes of an organiza- tion (MNC) on the external relationships of the focal organization with the other units of the organization in a given socioeconomic system. The model postulates that nature and intensity of conflict are a function of, among other things:

(a) The managerial style (for which U.S., European, and Japanese ownership of MNCs was substituted as a surrogate);

(b) industries in which MlICs were operating;

(c) size of the MNC's subsidiary (measured in terms of number of employees, capital investment, perception of the subsidiary's executive of the relative size of his firm in a given country);

(d) extent of diversification;

(e) relative market power of MNCs;

(f) age or years of the MNC's (subsidiary's) operation in the host country; and

( g) the expectation differences between MNC and host government toward each other.

On the host-country side, such attributes as relative political stibi.ity and extent of diversity among influential political parties in the country, level of economic and industrial development, and market and economic conditions, were conceived as important factors affecting MNC-host-country relationships. To develop a conceptual model we reviewed and analyze: (a) 119 cases of conflict between MNCs .ir.d host governments and other publics in the host countries as reported in academic and popular journals, articles, and books (;.'eganahi, Fry and Fry, 1974), and ( b) the U.S. State Department study of i-*3 disputes of American firms operating overseas (U.S. State Department, 1974). Figure II given in the appendix outlines the ini- tial conceotual model.

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Dependent Variable (Conflict)

The nature of conflict was classified into four categories: (a) Value-level conflict; (b) negotiat ional-level conflict; (c) policy-level conflict; and (d) operational-level conflict. (For operational defini- tions see Negandhi-Baliga, 1979:17-13).

Categorization in the above manner enabled us to discriminate between essentially interface and intraorganizational conflict. The interface construct is used here to denote conflict and interactions with units in the aggregate and macro environments. The intraorganiza- tional construct is used to denote conflict and interactions with units in the task, environment. Thus, value, negotiational contiicts, and policy conflicts were considered to be interface conflicts, and the operational conflict to be an intraorganizational conflict.

FU>;CTIONING OF THE MULTINATIONAL COEIPORATIONS" We will first examine the level of formalization of policies and pr.ictices, degree of centralization-decentralization, and the relative influence of the headquarters and the subsidiaries in decision-making. T'iien we will explore the impact of these factors on the headquarter- >>uSsldlary relationships. As noted earlier, our aim of examining these olL-ments was to assess the extent of the global rationalization strate- -■:>"^ litilized by the three types of multinational corporations, namely the i\merican, the German, and tlie Japanese.

In the next section, we will examine the implications of these practices on the relationsnips between the .'L'.'Cs and the nation-states.

Level of Foonallzat ion

To assess the level of formalization in the /Xnierican, Ger:aan, and Japanese niulti national coinpanies, three asoects are examined:

(1) The subsidiaries' dependence on manuals, policies, and procedures supplied by t'.ie headauarters;

(2) utilization of these policies and procedures for decision- making; and

(3) the nature and the frequency of the reports required by the headquarters .

.\n overwhelmingly large number of the yXmerican subsidiaries (88") relied on the headquarters' policies. Approximately one-third of the Ger— .an subsidiaries did the same, while merely 12 percent of the Jaoanese subsidiaries utilized the policies supplied by their head- quarters. Conversely, only 6 percent of the t\merican, CS percent of the German, and 66 percent of the Japanese subsidiaries indicated a verv iegii;;ible influence on strate;Tic and policy decisions affecting their operations.

A similar picture emerges when one examines the influence of the written policies and procedures (whether those supplied by the h.ead- quarters and/or modified by the subsidiaries) on actual strategic and policy-level decisions.

')ne can also evaluate the headouarters' relative influences on the s'i:;sid iaries ' operations by examining the nature and frequency of the roj. irtj that were required from the subsidiaries' managers.

■\lnost all the American subsidiaries, and approximat'?iv two-thirds of the German arri Japanese subsidiaries studied were required, by their respective headquarters, to provide up-to-date information on balince sheet, profit and loss fi'^zures, production output, market

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share, cash and credit posictons, inventory levels, and sales per pro- duct. The frequency of reporting was (greater for the American (mostly raonthly) than for the German and Japanese subsidiaries. The only items with which the subsidiaries were less bothered were the perfor- raaace reviews of their personnel and the local socio-economic and political conditions. In other words, the stress is placed more on those aspects affecting the short-run financial picture of the conpany rather than on the factors affecting the firm's lonR-term survival and ^rov'th.

The analyses of the above three aspects of the formalization clearly indicate the increasing levels of formalization that are being introduced hv f-iie American multinational companies, while the (German MNCs seem to be cat -hin^ up with the /\merican3. The Japanese companies, however, are sciii relying on their informal network.

THE RELATIVE INFLUENCE OM DECISION'->LAt:iNG Centralization versus subsidiary-autonomy is a perennial and c .--r.flict ini situation faced by most multinational companies. Increasing corn-petition in the '.<rarld market requires some measure of rationalization or oroduction and marketing processes at a global level, thus requiring a '..igher degree of centralization of decision-making at the headquarter nd or regional headquarter levels. On the other hand, to satisfv the increasing demands from the host as well as the home countries of the multinationals necessitates some measure of the subsidiary's autonomv on strategic decision-making.

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To assess the relative influence of the headquarters and sub- sidiaries in decision-nailing, we exanined the followinj? factors:

Borrowing from local banks

Use of cash flow by the subsidiary

Extension of credit to major customers

Choosing public accountant

Introduction of new product for local market

Servicing of products sold

Use of local advertising agency

Expansion of production capacity

Pricing decisions

Determining aggregate production schedules

Maintenance of production facilities

Appointment of chief executive

Use of expatriate personnel

Layoff of operating personnel

Training programs for local employees

Overall, our results indicate that the subsidiaries seem to have at least equal influence on decision-making. American suhsiii iaries possess the least autonomy and Japanese subsidiaries the most. The C-erman sub- sidiaries are in between those two extremes.

However, the picture of the greater autonomy of the subsidiaries changes once we compare strategic versus routine decisions (see Appendix Table 3) .

To probe further, we computed an overall delegatii:)n index by assigning different weights to strate^^ic versus routine decisions. The strategic decisions were wei'-^hted three times hi'^her tfian the routine decisions. The weighing factor was rhosen to reflect the approximate ratio of time span of feedback of the stratejiic decisions comoared to the routine decisions. Table 1 presents the findings for the overall delegation index and the extent of delegation provided to the subsidiary's management alone with a set of decisions.

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TABLE 1

e;xtent to which subsidiaries depend on the

WRITTEN POLICIES FROM HE.5lDQU.\RTERS

iMNC-Ownership

Great Deal

%

To Sone	Ver	■y Little
Extent	to	Not at All
6		6
20		48
22		66

American (N^SS) GerTaan (N=44) Japanese (N"40)

88 32

12

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As it can be seen from Clie Cable, the overall delegacion indeK is fairly low in absolute terms. Despite the headquarters' acknowledgement of a less than perfect understanding of Che subsidiary's operation and its environment, the subsidiary's influence on strategic decision-making is minimal.

Relatively speaking, the Japanese subsidiaries seem Co enjoy the greatest autonomy and the U.S. subsidiaries Che least. German sub- sidiaries are again in between these two extremes.

Policy and Process Controls

Organizational structure, formalization of policies, reporting requirements, and the centralized decision-making, wicli respect to Che strategic business decisions are some of che important means through which the multinational companies implement clieir unification drive. To a great extent, such structural devices are simply proforraa tech- ni>i'ies utilized by an organization to achieve Che desired ends. In addition, Co imulemenC Che global scracegies, mul tinacional companies ■jn.i.TCake corresponding changes in their policies, controls, and coor- di:>acion of devices concerning:

Ownership of overseas subsidiaries

Sources and means of concrol and coordination

Technological transfer of policies

Incra-company sales and purchases

Strategic and long-range planning

Manpower and staffing policies

In other words, it is tlirough chese processes chaC c'ne global struc- ture and scracegies are being implemenCed.

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Ovmershlp Policies

Although the ownership of foreign subsidiaries and controlling of these subsidiaries are conceptually two different aspects, the inter- 'elationships among them are very close and at times undistinguishable. As the firm expands its international business activities and accumu- lates certain expertise in conducting international business, a desire to integrate and unify its overseas units into a global system increases, To accomplish these objectives, besides restructuring the organization, the firm will move to increase its ownership share in the overseas sub- sidiaries.

Ln other words, as Stopford and Wells have found, in their study of 187 U.S. NNCs , "In most cases in which firms showed strong preference for wholly-owned subsidiaries, the issue of control appeared to be paramount" (1972:107). They go on to state that "certain strategies demanded tight central controls: others did not. ...Strategies that are generally extracted through a tightly controlled organization are also usually associated with a strong preference for wholly-owned sub- sidiaries" (1972:107). Overall, they found that the firms emphasizing marketing and advertising techniques, rationalization of production proresses, and control over sources of raw materials tend to prefer wholly-owned subsiaiarles.

This trend seems quite visible with respect to the /American multi- national companies. For example, the study undertaken in 1971 by Booz, Allen and Hamilton, a consulting firm, observed that appro:<lmately 60 percent of the new overseas subsidiaries established by the U.S. M!JCs were wholly owned, another 8 to 9 percent were majority owned, and in

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only 7 to 8 percent, the U.S. parent companies had minor equity interests (1971:9). In spite of increasing demands by the host countries, especially the developing nations, this trend of increased equity holding in overseas subsidiaries continues. As we will see below, even the European and Japanese multinational companies, which were more inclined to enter into joint ventures, now seem to prefer either wholly-owned or majority-owned subsidiaries.

Data collected in the mid-1960s by the Harvard Multinational Project Group indicates that some 63 percent of the subsidiaries of the large 187 U.S. multinational companies were wholly owned by the parent companies, an additional 14 percent of the parent companies had majority equity, and in only less than one-fourth of the subsidiaries, the U.S. .".;.Cs had minority interests (Stopf ord-Wells , 1972:100). It is also irceresting to note that there were no appreciable differences with respect to the levels of equity holdings by U.S. parent companies in o.orseas subsidiaries located in industrialized versus developing coun- tries.

This trend of maintaining overall control on subsidiaries through the direct ownership has changed very little during 1966 to 1975. For exainple, of the total of 11,198 U.S. subsidiaries operating in foreign CMintries (as of Jan. 1976), some 7,741 (69 percent) were wholly owned, 1". additional 10 percent were majority owned, and only 10 percent of the U.S. parent companies were holding minority interest (Curhan et al, 1977:21).

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Our Results

Although our study attempted to secure equal numbers of the wholly- owned and jointly-owned subsidiaries of American, German, and Japanese multinational companies, we were not able to find the required number of Joint-venture subsidiaries in the various countries. Thus, of the 120 subsidiaries studied in the seven countries (Mexico, W. Germany, U.K., France, Spain, Portugal, and the U.S.), about 107 of thera (89 percent) were wholly owned, while only 3 percent were minority owned. There were some minor differences among the three types of the multi- national companies studied, namely, the Japanese companies still pre- ferred joint ownership of their subsidiaries as compared to the American and German multinationals; but this preference, as discussed above, was on a decline.

To summarize, our own results as well as those reported by other researchers, clearly indicate the multinationals' preference for main- taining control through the ownership. And the drive for Che unifica- tion and global rationalization is pushing even the German and Japanese multinational companies to acquire larger equity in their overseas sub- sidiaries. However, while carrying out the global rationalization plans, the headquarters 'nave, by and large, remained ambivalent about their policies with respect to ownership. Our inquiry indicates that only one-fourth of the companies have had a specific policy of acquiring 100 percent ownership in their subsidiaries, the rest claimed a pre- ference for joint ventures or were guided by t!ie specific circumstances and demands made by the host countries.

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CnneroUlPg ^^'""'^ Technology

P„ .00. .i^ now, .he cechnolosy cran.fe. has he=o« .he focal ,3sue, eeoaonaUy deha.e. hoch 1„ l„.us„lali«. a„a .evelopln. co.„„ies. .3 Beh.«a„ a„a nsche. ha»e .1..-, a...e.. -.o.e^.encs ,.e heco^n, Inc.easln.X. co„oe.„e. .Uh „o. J.s. .ech„olo., ..a„..e.

.„. aUo With cechaolog. ge»e.acl„„ T.a„s„acio„al co.pan.e, are.

o, co„.se. Che principal generators ot technolo,. In Che prtvace sec- „„ helng a.le Co ca.e a..a„C3.e of Che lacernaclonal ,ar.ecs lor chelr particular expercise- (1980::<it).

Thos, the fact is chac Che oolcinaclonal flr.s. espec.all. the lar.e. .acre, ana cecHnolo.ioall, advance., hav.n. concrol over l=por-

, , ► --. rhi-^ Ipvpratre co secure ..nc conaerclal cechaoLogies . are Likely co ... en.. le -

r^i^<, as w»-ll as nron their partners favorable teras fron the host couatra.es a. .-i

... The -;Cs. therefore, create depeadeacy reiat.on- in those countries. The .-.v^b,

Ships With Che host =o„„cries as well as chelr owa sehsidiaries. technolosical '.now-how provides Che power Co concrol.

.^„„, Che three types oc Che cniclnacional =o»pa„res we studied.

. ..nr- -ir^ -ore a function or their the ,^nerican >CJCs' foreign investment, are

.- e-<oLii-ed in the so-called Product-Lif e- technological expertise, a=, e.<?lai..ea

, ,,, , 1077 ) than the InvesCnients cycle Theory advanced by Vernon U^'I ^nd 1^7),

by the ;";er::2an and Japanese :ir-:is.

Uchon.h o,.r Inceresc in this sf..... was not Ureoced cward exanin- 1., the role of technology in Ind.cln. foreign lnvesc.=ents , we were

- „F --e technoloticil factor as a

cainlv interested in knowing t.ae u.. ot ...

.- -he -.LLvwir./ rxir types oi Lnroroia-

,.,eans .z control. Ln this respec -a. ---

tion were coliectec at t..e m:o-,..-.

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(a) The level of sophisticated technology utilized by the subsidiaries

(b) Relative technology of the subsidiaries as compared to what was utilized by other firms in respective countries

(c) The extent of technological transfers from the head- quarters to the subsidiaries, and from the subsidiaries to the headquarters

(d) Research and development activities undertaken by the subsidiaries.

Collectively, the results on these four aspects of technoloi^y clearly indicate a heavy reliance on the part of the overseas sub- sidiaries on their respective headquarters. The subsidiaries are not only initially borrowing technologv from their headquarters, but thev are also depending on then for new technological Icnow-how from their research and developmental laboratories. In other words, very little R and D activities are being carried out at the subsidiaries' levels. Sone 60, 80, and 78 percent of the American, German, and Japanese sub- sidiaries, respectively, did not spend significant amounts of money on this account. Among the three types of M>JCs , a greater number of .Ar.erican MNCs have begun to decentralize their R and D activities (sine 40 percent of the U.S. subsidiaries claimed to spend between 1 to 10 million U.S. dollars on such activities, as compared to 11 and 2 3 oercent by the German and Japanese subsidiaries). \Iheii one con- siders the fact that the majority of the subsidiaries studied, were located in the highly industrialized countries, such as the United States, West Germany, United Kingdom, France, and Japan, this >unount of expenditures on R and D does not look very impressive. Vorv few subsidiaries have matured enough to transfer technological know-how to

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their headquarters. Here also, Che American MNCs are Che forerunners. Some 41 percenc of cheir overseas subsidiaries are involved in Che reverse flow of the technology. However, at the same Cirae, overwhelmingly larger proportions of their subsidiaries (88 percent) secure their technologies from the headquarters.

As the mul tinationality of Che firm increases, Che technological transfer is likely to be stabilized and Che reverse flow of Ceciinology nay increase. Our results thus far show that the exports from the headquarters outnumbered the imports of technology by Che headquarters from their own subsidiaries, indicating a considerable degree of depen- dency on the part of the subsidiaries on their home offices.

In cr,3-Comoanv Purchases and Sales

Besides creating a technological dependency, the global rationaliza- tion drive by the MNCs may induce the firns to internalize their trans- actions both to minimize the competitive pressures and to achieve efrective coordination of the global units of operations.

As Buckley and Casson's study indicates, the nuitinational firms attempt to grow by eliminating external oiarkets of inCermediace goods through internalizing those mar!:ets within the firm. They also found that the incentives to internalize the markets are strongest among the r ir~.s with high technology and research and developmental intensity (1976;.

It has also been shown that the .American multinational firms seem to have greater tendency to internalize their markets.

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The United Nations' statistics show that some 23 percent of sales of the /\iiierican affiliates were Intra-company transactions (1978). Such intra-company dealings are higher in mining and petroleum industries than in the manufacturing sector, and area-wise, they are more significant for the affiliates located in developing countries than for those in the developed countries. On the other hand, European and Japanese multinational firms are known to be utilizing local Inputs in greater proportions, both to satisfy the host governmental demands as well as to grant higher degrees of autonomy to their overseas sub- sidiaries. This is especially true for developing countries where such demands are most intensive.

Our results show a great deal of convergence in sourcing policies and practices of the three types of the multinational companies. Approximately two-thirds of the American, German, and Japanese sub- sidiaries purchased more than one-quarter of their requirements of raw materials, semi-finished, and finished goods from their respective parent organizations. However, at the same time, except for the .■\merican subsidiaries, very negligible trade exists among the sub- sidiaries and other affiliates of the parent company located in different countries.

/v.-lronmental Scanning and Strategic Long-Range Planning

Environmental scanning and strategic long-range planning are perhaps the most important integrating devices available to the multi- national firms tD achieve their global strategies. These f«D functions are conceived as the top-level executives' responsibilities and are

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concerned with the development of tundamental goals and major policies, assessment of the corporate strengths and weaknesses as well as the external environments and the deployment of corporate resources to meet the stated objectives. If these goals and objectives are well articu- lated within the restraints of the environmental conditions and cor- porate resources, they in turn, become powerful tools of control and coordination of the global units. Our inquiry on this aspect was mainly directed toward examining the use of strategic planning and environmental scanning as a control device. To explore this aspect, we collected the following data from the M>JCs ' neadquarters and their subsidiaries:

• Nature of environmental scanning undertaken by the head- quarters and subsidiaries.

• Use made of the environmental scanning data.

• Role of the subsidiaries in generating information.

• Information feed-back system.

• Nature of long-range planning undertaken by the headquarters and subsidiaries.

• Involvement of the subsidiaries in long-range planning processes.

Our results show that the U.S. MMCs are the most active among the

three types of JCJCs ' systems studied in utilizing the planning processes

as integrating and controlling devices as discussed above. The majority

of the U.S. companies not only undertakes Long-range, strategic planning

but also involves in scanning the environments in a systematic manner,

although the factors examined in the environmental scanning are iMiniy

related to the general economic environments ^nd iTiarket conditions.

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Many of Chese companies also ciain a systematic use of environmental forecasting in their planning processes.

However, both the planning and the environmental scanning functions are, to a large extent, headquarter-oriented . More specifically, approximately one-third of the subsidiaries of American, German, and Japanese multinational companies undertake some sort of environmental scanning, while some 46, 33, and 18 percent of these subsidiaries, respectively, are involved in long-range planning. The centralization of these two functions is more clearly seen with respect to the com- nunication patterns concerning the planning and environmental scanning processes between the subsidiaries and the respective headquarters. .Anon'j the American JINCs , the nature of communication concerning these two aspects is highly formalized , while the German and Japanese com- panies seem to be moving rapidly by following the .'\merican example. Moreover, these communications are transacted through instructions and i^oeratives rather than constructive exchanges of ideas and information. Approximately :)ne-third of the subsidiaries surveyed felt that their vie-wpoints were utilized by the headquarters in formulatinjj long-range -^oals and objectives.

To sum up, all the three t;fpes of IttJCs are utilizing strategic l')ng-range planning and environmental scannin?^ as an inro'/rating device to control and coordinate their global spanning activities. Moreover, these functions are largely headquarter-oriented, and the overseas sub- sidiaries seem to play a very mar-^inai role in ;^oals and target-settings even for their own individual operations.

There has been a considerable move on Che pare of Che raultlnacionai companies to localize Cheir foreign subsidiaries' operations and place local nationals in Cop positions. For example, in an earlier study- undertaken by Che senior author, which was referred above (Negandhi) , there were no nore than a dozen or so American nationals in 56 sub- sidiaries surveyed in Che six developing countries. Also, in the 1974-76 study of 124 U.S., European, and Japanese mulCinatliMial com- panies in developing councrles (Negandhi-Ballga) , we observed the con- tinuation of this trend among Che American MMCs . The majority of the I p-level executive positions in the U.S. subsidiaries were filled with locil nationals. In contrast, the majority of Che Japanese MNCs (79%) did not employ even a single host-country national In the top-level management ranks. The German ''CJCs have localized their overseas opera- tt yns more than the Japanese and less than the <Vmerlcans.

The drive for global rationalization by the MfJCs in Industrialized countries seems to be changing Che above pattern of localization.

Our inquiry concerning the manpower policies and practices for staffing of Che subsidiaries' cop posiclons, Che number of foreign nationals represented in the corporate board, and the holding of top- level executive positions in the headquarters, all points toward an tn- crrtasiag trend of establishing controls through key personnel from the hone offices. An overwhelming proportion of the three MNCs studied filled Che key positions of their ovi^rseas subsidiaries through expatri- ates, although policy-wise, they were largely ambivalent In pursuing such policies. In the same vein, there were few foreign personnel r3presencad in the corporate board and/or top management echelons at the headquarters.

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Other researchers also have reported such trends in the multi- nationals' manpower policies and practices. For exanple, Galbraith and Edstrom (1976:289-310), in their study of four large European multi- national companies, found that the managerial transfers from the home offices to the overseas subsidiaries were, to a large extent, motivated to control and coordinate the global strategies of these firms. Simmonds (1966:115-22) had indicated such ethnocentric trends among the U.S. multinationals as early as 1965.

IMPACT OF CENTRALIZATION ON HEADQUARTER-SUBSIDIARY RELATIONSHIPS

We realize that the inter-unit relationships are not always smooth and conflict-free in any organization. Besides the communication problems, there are perceptual, motivational, and cognitive differences among the persons working in different units of a given organization. And conflicts arising due to these differences are not necessarily dys- functional. In fact, as the studies of Barker, Dembo and Levin (1941), Goldstein (1951), Allport (1953:107-10 9) and Rogers (1959:184-256), to name a few, indicate a certain amount of tension and frustration actually increases creativity, satisfaction, performance, and effec- tiveness of the individuals concerned. However, as Caplow (1953:3) has argued, the spontaneous and unregulated conflict is a direct threat to t.ie crganizatlonal growth and existence. What is discussed below are the actual cases of dee;r-seated conflicts and frustrations as reported by the managers of the overseas subsidiaries which were seriously affecting their abilities to effectively raanage their units of opera- t tons .

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Crltlcal Problems In Developing Countries

Our earlier studies (Negandhl-Ballga) , conducted in the six deve- loping countries, indicate a high intensity of conflict between the headquarters and subsidiaries of the American ICJCs. Particularly, the subsidiaries' managers complained a great deal about their inabilities to meet the environmental demands of the host countries due to the centralized decision-making at the headquarters' level. A large majority of the executives interviewed in American subsidiaries (n = 54) felt that they were little more than "peons" in terras of their head- office hierarchy, and that communication between them and the head- quarters' personnel was strictly orders and imperatives from the home oft ices.

In contrast to such apparent tensions Jnd misgivings between the L'.S. subsidiaries' managers and their head-offices, the European and the Japanese managers felt rather comfortable in their relationship with their head-offices. Although there was relatively much less for- mal reporting to be found in the European and Japanese ;-CICs , the over- seas managers felt that they were involved in and informed about the major strategic decisions undertaken back home, and their own voices and viewpoints were seriously considered during the formulation of major policies affecting their operations. They also felt tliat they 'ijj considerable latitude in running their operations. In this respect, most of the American expatriate managers we interviewed f..'it that their roles and duties were narrowly defined; they were simply just another cog in the corporate machine.

Critical Problems In Industrialized Countries

In the industrialized countries, the scene of greater satisfaction on the part of the European and Japanese subsidiaries' managers has changed considerably. The global unification plans pursued by all the three types of MNCs — American, German, and Japanese — in these countries have brought about similar problems in their relationship with the respective headquarters.

As shown in Table 2, the capital investment and market- and product- related issues dominated the scene in all three types of multinational companies. More than one-third of the critical problems existing between the headquarters and the subsidiaries were related to these two aspects. Overall, the Japanese subsidiaries were less concerned about their decision-making authorities, while both for American and German subsidiaries this was a critical problem by itself. Who has the right and the power to make decisions concerning subsidiary-operations, was a highly debated and unsettled issue in the latter subsidiaries. On the other hand, the issues related to the personnel problems were more pre- valent in the Japanese subsidiaries.

Although all the three types of ^IflCs have been utilizing home- country nationals to staff the key exectitive positions in their over- seas subsidiary-operations, Japanese MTICs seemed to rely more heavily on expatriates to run their subsidiaries. The same was true ia the developing countries, where they were more inclined to even fill the middle-management and technical-level positions in their overseas sub- sidiaries with expatriates. Such ethnocentric practices iiave resulted in serious tensions and conflicts, not only between expatriates and

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TABLE 9

NATURE OF CRITICAL ISSUES BETWEEN

HEADQUARTERS AliD SUBSIDIARIES OF ;\MERICAN,

GERllAN, AND JAPATJESE MULTINATIONALS

	Nationa	lity of Multinationals
NATURE OF CRITICAL ISSUES AIID PROBLEMS	American	German	Japanese	Total
Nature of Critical Issues Concerning:	(N=12) %	(N=20)	(N=16)	(N=48)
Capital Investment	25	25	18	23
Marketing and Sales- Related Issues	17	15	25	19
Personnel Problems	8	10	25	15
."'.eeting Home and Host Countries' Demands	8	10	19	12
Issues Concerning Decision-Making Authorities	42	AO	13	31
Total Percentage	100	100	100	100
.-:rjoccurring of Critical ProDiens Between H'j.iviquarters and Sa:?s idiaries	(N=8)	(N=i2)	(N=b)	(N-25)
rlr.ancial Matters	50	50	33	45
Production and Product- Helated Matters	50	33	17	33
Personnel-Related Issues	~	17	50	22
1 Toc.il ?-jrcenCJce	1(1. J	I'j )	LUiJ	i!j(J

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Local nationals in subsidiaries, but also between expatriate subsidiary personnel and the home-office executives. In othor words, the exces- sive use of the personal mode of control which the Japanese companies traditionally have used to utilize the so-called "rinf^i" or "bottora-up" system of decision-making, has become a more serious bottleneck in managing the subsidiary-operations in West European countries and Australia. On the other hand, in the United States, Japanese sub- sidiaries seem to be receiving hi^h marks on their tnanat^ement practices due to the current productivity problems encountered by the U.S. com- panies (Ouchi, 1981). Conseauently , the myopic fad of utilizing Japanese practices to boost the American competitive position in the domestic and world markets seems to ignore the problems the Japanese companies themselves are facing. Yoshino, for example, underscored tie practical limitations of such decision-making systems several ye irs ago. He stated:

"Japanese have extended the Ringi system of decision-making to international operations with virtually no alterations. ..( However) the extension of the Ringi system... has several immediate as well as long-range implications. .. First ... it has created some practical difficulties for the management of foreign subsidiaries, because it is they who must, somehou, bridge Che gap that is created by their physical operation and isolation from the parent company. This diverts their attention from the pressing needs of management of the local enter- prise and is often a great source of frustration for them. Furthermore, the decision process can be extremely time-consuming when circumstances require rapid responses. ..( The] long-terra implica- tions of extending the Rlntri system... are that it makes the participation of non-Japanese nationals in the decision-making process extremely difficult" (Yoshino:163) .

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Ir.censity of Critical Issues

To a large extent, the problems outlined above are not unique for Che ciulcinational companies. Any diversified large company with divi- sional product responsibilities may face similar capital investment, Tiarket and product related and personnel issues. However, domestically oriented firms nay be able to cope with these issues more easily than the multinational companies due to relatively homogeneous environmental t-onditions under which they are operating. The multinational company, by its very nature, has to respond to the varied environmental and socio- cultural conditions. And by so doing, the issues may indeed stifle its efficiency, drain the executives' energies, and even threaten its growth and survival.

To probe into the seriousness of such critical issues, we inquired about the climate of interactions between the headquarters' and the SLibsidiaries ' personnel, level of executive personnel involved, and the tii:ie and cost of resolving the issues. We also attempted to assess the ov.^rail impact of such critical issues on the executive's morale and I'.i^ motivation.

Our results indicate the seriousness of these critical problems existing between the headquarters and the subsidiaries. The climate of t IL-T.jct ions was most tense in tlie U.S. MNCs , and the least tense in .J.ipanese !-C<'Cs . German IIi.'Cs were in-between these two extremes. In all the three types of >CiCs , the top-level executives were directly involved in these issues, and the large majority of the cases were not resolved in less than six months. These issues were generally brouelit up by the suosidiaries ' personnel, and they were resolved i.n formal meetings called by the headquarters.

Besides Che differences in che incerpersonal-interaccion cliniaco, Che /Xmerican, German, and Japanese MNCs differ In Che relacive influences of headquarters versus subsidiaries in resolving the issues. The Gernan and Japanese MNCs' subsudiaries have greater influence in resolving Che issues Chan Cheir counterparC Americans.

Notwithstanding such differences in American, German, and Japanese approaches, the critical issues arising due to Che impleraencacion of che global unification plans do drain off the executives' energies in ail three types of MNCs. Moreover, such issues adversely affected the Taorale and motivation of the subsidiaries' managers.

MNCs-NATlON-STATES' KJELATLONSHIPS Conrlicts and Conflicting Issues in Developing Countries

From time Co Cime cercain conflicts between MNCs and host govern- mencs erupc in a spectacular manner, in the form of nacionalizacion and e:<propriacion of propercy. However, as Fayerweather (196b) has remarked, "'lore common and actually of greater overall importance are a multitude ->: lesser points of conf lict . . . (such as) the share of capital and cur.crol a foreign company may hold in a local' venture , Che degree of r-> •ulaclon foreign governmenCs exercise over foreign operaCions, and •^any ocher facecs of overseas business."

rimilarly, Mikesell (1971) has idencified Che following factors iiaving the potential of causing conflict between MNCs and host govern- ments, particularly with respecc co Che mineral and peCroleum indusCries:

1. Division of total net revenues iron i^perations between the foreign countrv and the host L^overnment.

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2. The control of export prices, output, and the other conditions affecting the level of total revenues.

3. The domestic impact of foreign-companv operations. U. The percentage of foreign o\^mership.

Bergsten (1974) has suggested that the differences between the domestic socio-economic objectives of the host government, and the objectives of the foreign investor, give rise to conflicts between these two parties. In more specific terms, he identifies the following

sues over which conflicts and tensions are bound to arise:

Job-quota requirements by the host government; quantitative and qualitative aspects.

Requirement for use of local inputs and parts in manufacturing.

Research and development activities.

Export requirements.

!Iarket power of foreign investors; a demand for reduction in order to promote local enterprises.

External financing requirement.

Buildini^ up a high-technoloey enterprise.

Reduction of imports.

'n/nership requirement: a reduction of foreign share, and an increase in local participation.

ir Results

Three issues, namely equity participation, desire to place manage- -.1 nt control in the hands of local nationals, and transfer pricing were most often mentioned. Other issues, such is utilization of local ir.nuts, MNCs ' interference with the tiost-count ry ' s socio-.t-conomic norns, etc.. were not considered to be najor problems.

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A similar trend was also observed bv the U.S. State Departnient in its analysis of conflicts between U.S. business firms and host govern- ments during the period from 1960 through 1973. The State Department study indicates that of the 198 cases of conflicts, 128 were concerned with equity participation. Conflicts on such issues have been on the rise since 1969.

The >(MCs' Attributes and Conflicts

As outlined in Figure 1, we attempted to examine the relationships between certain important attributes of the >!NC3 , such as ownership, oquitv holding in subsidiary, type of industry, nature of technolotjy, si.'.e, etc., and the nature and intensitv of conflicts between *{?JCs and host countries. In this section we will briefly summarize the overall r'^sults of this study. (For details, the reader is requested to refer to N'egandhi-Baliga, 1979.)

O'wnershlp and Conflict

The U.S. ."!MCs have had more Interface conflicts, while Japanese ■'NCs have more operational-level conflicts. However, there were no .ii-rnif leant differences between the .\merican and European cor- porations. In fact, the majority of the European MIJCs also faced nri^rot ional- and policy-level conflicts just like the U.S. MNCs , but TTiter-.-Ly a fraction of them were plagued with operational problems. In specific terras, the types of interface problems cxper ienrcd by U.S. and F.urooean .'KCs centered around the host governments' renuirenents for dilution of equity and manaijement control, reduction or elimina- tion of rovalty pa;/ments fi^r technology and '.■:now-how, transfer pricing

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policies, etc. The operational problems faced by Japanese "Cs'Cs were: low morale and employee productivity, hi^h turnover and absenteeism, and interpersonal conflicts between Japanese expatriate managers and locals. Such operational problems faced by the Japanese "IMCs have been recognized for some time by a number of scholars (Kobayashi, 1976).

Fr;nitv and Conflict

One of the most sii^nif leant types of the host country's demands, especially from the developing countries, is the concern for equity par t ir ipation by the local nationals in the foreiv^n enterprises. Such demands by the host countries seem to have resulted in conflicts of the "M's with the <jovernraents. As sliov>m in Tahl«? •) , who 1 1 v-nwncfi and •".1 )')r ity-owned corporations tend to have a si:nif icantiy ';reater nro- 'i;rtion of conflict as compared to iCJCs with only a luinority-equi tv -like. It is emphasized at this stage that minority-participation did n 31 imoly complete lack, of conflict. Minor itv-owned companies still hi(i Co contend •..'Ith other policy demands, such as proportionate eraploy- ■^ent of nationals, reduction in royalties, etc. This indicates that T'lL filling one set of the host 'government's demands does not make the M'.'C immune to further other demands.

r- i-jstrv and Conflict

It is commonly believed that the firms in the resource-based indu-.tries tend to -^et involved in iii;-:her levels of conflict than tliose i"' manaf acfiring and service. Our findings 'ive some tnd'.iiations of thi- -^orc. The extractive industries were involved in a iarvier number

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of interface conflicts than the industries producing nondurable ^oods. However, the results across the various industries were statistically insis^nif icant.

Technology and Conflict

Of the 56 cases of conflict observed in technologically advanced firms, 77% appeared at the interface level. The comparable figures for intennediate- and low-technology firms were 66% and 53%, respectively. ■^his could be attributed to the fact that the advanced firms were ques- tioned about their leverage through the monopolistic powers, pricing policies, royalty payments, etc., while the low-technology firms came unc'.er scrutiny with respect to their usefulness (lack of usefulness) and contribution to the host countries' developments.

MNCs' Visibility and Degree of Diversification

The degree of visibility of the MMCs affects the views of citizens and government officials in the host countries positively or negatively, A firm nay become visible for any one of the following reasons:

1. Extraordinary contributions to the host country;

2. use of specialized technologies;

3. generation of high employment;

i. payment of high wages, and provision of extensive employee

training;

5. high level of conflict with the host-hone >:overnments;

6. international publicity (e.g., ITT episode in Chile; recent cases of bribes by I'ulf, Lockheed Aircraft, litc);

7. Lone period of operation in the host country; and >l . pervasiveness of end products in daily life.

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The last factor, of course, reflects both the degree of diversifica- tion as well as the frequency of use of the end products. Such perva- siveness achieved through end-product use, is likely co catch the attention of governmental decision makers and local business competitors, evoking fears of economic domination. Sinilarly, highly diversified firms, such as ITT, nay generate the same fears in the host countries.

The diversified MNCs ^'ere confronted with a larger number of nego- tiational conflicts in the host countries (al:uost twice as many as chose not diversified). There were less <li f ferenci?s between the most diversified and the least diversified firms as far as policv-level conflicts were concerned.

P'^riod of Operation and Conflict

Frequent stories and newspaper headlines about firms suc'n as ^'nited Fruit in Haiti, ITT in Chile and other Latin .Vmerican countries, International Petroleum and Cerro de Pasco in Peru, to name a few, lead .jne to believe that older, well-established firms might have secured favorable concessions, and, consequently, attained significant bargain- {■^.^ power over host countries. Also, at times, their overt behavior suggests that they have not hesitated to use their powers against host i-ountries. Critics have argued that it is the persistence of such h>'';-,avior on tlie part of the established .'!'i(;s v/hicli causes high levels of conflict between them and the liost countries (Bergsten, 1976). On the other hand, the newer firms presumably mav be less prone to conflict as they have come under recent v'>'>'ernmi'nc i"'''ul at ions .

Our results show that, nrooorcionally , the oKier firms faced more interface conflicts, while the newer ones were plagued wich a larger

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number of operational problems. However, Chese differences between the older and newer firms were not statistically significant.

Size and Conflict

It has been argued that MNCs operate on a theme of "bigger is better," and that bigness is viewed with hostility by the host govern- ments. To test such a hypothesis, we explored the relationship between MNC-size and conflict. MNC-size was operationalized in terms of level of capital investment, sales volume, size of employee force, .Tnd the executive's perception of his company's size relative to other companies — foreign and local, in a given country. Level of investment and sales volume do not seem to be significantly associated with level of conflict. The number of employees seems to have some rela- tionship with the level of conflict; corporations with a larger work force appeared to have a higher level of conflict. This might be due to the fact that with a large work force the interests of a larger constituency have to be borne in mind; and also, with host governments being sensitive to emploN-ment levels and labor demands, even small skirmishes with labor easily tend to be escalated into policy— and -legotlational-level conflicts.

S'. re'-tational Differences and Conflict

Psychologists, political scientists, and other social scientists concerned with the study of human behavior, have argued for quite some time that actual or imaginary differences in expectations between two parties involved in an interaction ar.i likely tu result in a breakdown

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of comaunicacion, and night generate tension and even conflict between them.

In order to examine whether differences in expectations between MMCs and host governnents led to a breakdown in cornraunication and .generated tension and conflict, we drew up a list of a niinber of items in reisiard to which MNCs and host governments niieht have differing expectations (see Negandhi-Bali.i^a , pp. 32-33).

Governnental policies, documents, newspaper reports, and other iafornation gathered through personal interviews with the ILNCs ' e^'.ecti- tives and government officials in these countries, provided additional infornation about their expectations toward each other.

Our results show that a wide ^ap existed between the expectations of the 'tNCs and the host ^ovei^nments . Such breakdowns in understanding of "ach other have. Indeed, created continuous tensions and conflicts in their relationships.

In aore specific terms, many of the developing countries, in order to .laximize their returns from foreign private investments, have enacted l'">^ islation which requires a majority local equity in foreign enter- prises, higher proportion of local nationals in top positions, increase of exports and foreign exchange earnings, and reduction of imports of r iw Tiaterial and spare parts.

Such demands by the host countries hav.> , to some extent, constrained the '!>.'Cs to rationalize their worldwide productive capacitv. In order to achieve this goal, '■C'.'Cs <)n their part liave rcduireii that host countries -jrovide then with efficient inf r istructuraL facilities.

-3b-

reduce bureaucracic controls and interference in corporate affairs, and provide favorable labor legislation and more flexible expansion policies

Market Power and Conflict

One of the major concerns of the host nations about MTJCs is that their local industries are being displaced by foreign-owned companies. There is also a genuine fear that the !-lNCs could becone nonopolistic powers, beyond the control of national governments. As Behrman has observed, "although the host country likes improvement of quality, reduction of prices, increases of wages, etc., resulting from foreign i ".ves tr.ent , it -nay not like to see its donestic enterprise pushed to t:-.e •-■all" (1974:44).

Thus, potentially monopolistic or oligopolistic market powers of t^.e multinationals which could result in a virtual "takeover" of local •enterprises are actively resisted, not only by the developing, but also the industrially developed nations. Countries such as Canada, France, W-est Germany, and the United Kingdom, have enacted regulations to discourage such behavior on the part of foreign investors. Even the "nited States, the champion of the free-enterprise system, has shown concern about the adverse impact of foreign investments on its domestic entororises (Safarian & Bell, 1975).

'Respite such './idespread concern about the adverse impact of the r'u 1 ' inat ionals ' market domination in the host countrii.'s, our studv did not indicate a significant relationship between the TIC' market share and the nature of conflict in the host ('.ouncries. Altliough a large proportion of the :";Cs studied indicated that their narket share was more than iV- , their problems were, in no case, different from those

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faced by conpanies whose aarkeC share was nininal. In oclier words, ic appeared chat, regardless of aarket share, they were equally susceptible Co similar issues and problens. .\inong the six countries we studied, only in Malaysia, and to some extent in Brazil, did the MNCs' market share have some impact on the type of problems experienced with the host government. However, the overall relationships between these two variables was less striking. But this lack of a relationship does not imnly tliat the developing countries are unconcerned about issues of economic domination by the :nuicinat ionals . Historical evidence seems to indicate that the host countries follow a three-phase pattern in sorting ouC this issue of iLMC-domination. Initially, the host country nai'.es an assessment of the inpact of forei.ijn direct investment on its economy. This is i^enerally followed by the imposition of Indus trv-wide controls of the type India, ilalaysia, Peru, and Brazil have, in the recent past, imposed on their petroleum, mining, petrochemical, and pharmaceutical industries. In the final phase, host .'-governments seek tj attain direct control of the dominating MNCs in a particular industry throu=;h some form of ownership or managerial control. Some of the I'ivTnced industrial countries have already entered the final phase men- tioned above. The U.S., Canada, and U'est (Germany all impose restric- tions 'n the kinds of industries in which foreign conpanies may invest (-".ifarian ii Sell, 1975). The ;i.S. government, for example, does not permit foreign investment in and control of its coastal shipping and nuclear-related industries. The I.'.S. government also iias not shown much hesitation in using antitrust Legislation to prevent the formation of giant monopolies. On the other hand, the ".urooean .■.ountries and

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Japan have either directly or iadireccLy supported v^rowch or fomation of ,<^iant domestic firms in order to combat the influence of the U.S. MMCs .

NATURE AND INTENSITY OF CONFLICTS BETIVEEN MHCs AND INDUSTRIALIZED COUNTRIES

In the industrial countries, governmental decision-riiakers as well as other public groups (labor unions, consamer advocates, environmen- talists, and so on) are discovering that national needs, ambitions, and objectives can be at variance with the ItNCs' objectives, goals, and strategies.

The range, nature, and intensity of these issues, of course, differ considerably from country to country, depending upon the prevailina pi'Iitical climate and economic conditions (unemployment, inflation, balance of payment position) and the level of industrial and economic development. For example, in a companion study of lINCs in West Germany and Belgium, Fry (1977) reported that the issue of worker participation ( "Mi tbestimmung") was the one most prominent in '.Jest Germany, and the trilitional issues such as providing new tec'nnology, employment up- - riding of wages, and the developing local resources were considered s.-cotidary by the government officials.

In contrast, the Belgian Government was more concerned about the '!'.''.' 5 ' impact on employment, balance of pa;/ment position, research and development activities, and development and utilization of local resources.

Our results indicate that the labor organizations constitute the ma^or sources of the JC.'Cs' lieadaches both in industrialized and semi- industrialized countries. If anything, this trend in labor-management

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relationships is likely Co worsen if the news headlines, such as Che following, conCinue in Che induscriaiized councries:

• EasCern Air employees were asked Co accepC a one-year's wage freeze next year (WSJ, Nov. 18, 1981:17).

• American Air will ask ics 36,000 employees Co accepc a 5 percenc pay-cuC during 1982's firsc quarcer and a wage freeze, possibly for Che resC of Che year (WSJ, Nov. 18, 1981:1).

• Unemploymenc In the EEC... has climbed Co 9.4 million — a record 8.5 percenc of Che work force (Economise, 1981).

Relacively speaking, such problems are more pronounced in semi- induscrialized counCrles and Che German companies have Che mosc problems, while Che Japanese companies face fewer labor problems in Che induscri- aiized naCions. The laCCer observacion is in conformiCy wich Che recenc discussions and spoclighcs Che Japanese companies are receiving concerning their "humanized" approach to employees (Ouchi, 1981). As indicaCed earlier, in our previous sCudy in developing councries, c he Japanese companies were noc very successful in miinaging cheir work force (Negandhi-Baliga) . How long che Japanese companies will be able Co maincain harmonious employee relacions in induscriaiized councries, and Co whac exCenC such improved relacions are a function of declining employment opportunities, is still an open question requiring furcher research.

The hose governcenc icself was Che second mosC imporcanc source of problems che multinationals faced in industrialized and semi- industrialized countries. The specific problems encountered were con- rerning controls on foreii^n exchange, pricin-.;, prorits, uul expansions. Approximately Su percent of the multinational companies studied indi- cated that the government agencies in Che host ccMincries created

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obstacles by enacting restrictive legislations and erecting unnecessary bureaucratic red tape. This is in line with our previous argument that higher levels of centralization in decision-making at the MNCs' headquarters, necessitated by their pursuit of the global rationaliza- tion process, will create greater tensions in the iLNC-government relationships. With respect to the consequences of the MNCs' conflicts, approxinately one-fourth of the companies interviewed indi- cated that such conflicts have seriously affected their operational efficiency and demoralized their subsidiaries' managers.

SUMMARY AND IlIPLICATIONS

The paper analyzed the increasing trend toward centralization in decision-making in multinational companies originating from the U.S., Wejt Germany, and Japan. In our earlier study in developing countries, it was observed that the European and Japanese companies were maintain- ing more organic-organizational structures. However, this situation has changed in recent years, particularly with respect to their sub- sidiaries operating in industrialized countries. Thus, the question sh.r.uld be asked whether or not the German and Japanese nultinationals are flexible enough to turn the tide and maintain their organic struc- tures, as they have been able to do in the developing countries, once c lie circumstances demand them to do so in the industrialized countries.

Even the Anerican multinationals, champions of evolving progressive organizational structures for managing expanding international business (from export department to international division, regional structure, worldwide product setup, and the matrix system) have been warned about the swiftly changing environnental conditions in both the developed and the developing countries.

-AL-

De dining or Stagnant Economic Growth in the Industrialized Countries

On the average, Canada, France, West Germany, Japan, the United States, and the United Kingdom experienced a drop in the growth of the GNT from about 3 percent in 1979 to 1 percent in L980. The respective figures for other countries frou 1979 to 1980 are: Japan, 6.0 to 4.75 percent; West Germany, 3 to 2 percent; Canada, 2.75 to 1.5 percent; and the United Kingdom, 0.5 to 2 percent. While the growtli rates in aajor industrialized countries are declining, inflation continues to soar. Thus, the poorer the future outlook and the higher the inflation rates, the greater the protectionist forces that may be reinforced in the United States and other developed countries.

Declining Growth in Productivity and a Drop in Real Wages

During the last decade, the United States recorded the lowest rate of productivity growth of any major industrial nation. This Lower growth rate, coupled with increasing demands by the labor unions for higher wages, will further increase the tension in labor-management relations. Under such circumstances, the U.S. Government will be com- pelled to exercise greater control over wages, prices, and imports, which in turn may seriously undermine the effectiveness of the global rationalization policies of the oultinat lunai i-.ompanies.

Given such changing economic and political conditions. Business International predicts that the multinational corporations will have to create a responsive organizational structure that will bo able to com- bine the centralization of strategies and policies with increasing decentralization of subsidiary-operations.

Whether che German and che Japanese companies, In cheir quest to adopt the iVmerican model of global rationalization, will be able to achieve a marriage between centralization of strategies and policies (as required by the global rationalization concept) and the needed decentralization or higher autonomy of the subsidiary operation is still an open question.

•)' 131

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Buckley, Peter J. and Casson, Mark, The Future of Multinational Enter- prise (London: MacMillan, 19 76).

3i:s: ;ess International, "Pressures on Jlanai^ement Call For Coordination and Innovative Twists," Business International, New York, January 4, 19dU, pp. 1, 7, 8.

Caplow, T. , "The Criteria for Organizational Success," Sociological Forces, Vol. 32, No. 1 (October 1953), p. 3

Curtsan, Joan P., Davidson, William H. , and Suri, Ratain, Tracing; the

Multinationals*, A Source Book on U.S. -Based Iinterprises (.'Jamor id^e : Ballinirer, 1^77), p. 2U9.

Emery, F. C. and Trtst, E. L. , "The (Causal Texture of Or:J:ani::ational Environment," Human Relations, 19o3, 18, pp. 21-32.

F iverveather , John, "Nineteenth Century Ideology and Twentieth Century Reality," Columbia Journal of Uorld Business, Winter, 19r)6, p. 77.

Franko, L. G. , The European Multinacionals, Scanford, Conn.: Greylock Publishers, 197ti, especially Ch. 7, pp. 2-22.

Fry, David E. , Multinational Corporations-Host Government Relationships: An Empirical Study of Behavioral Expectations, DBA dissertation, Kent State University.

Galbraith, J. and Edstrom, A., "Creating Decentralization Through In- formal Networks: The Role of Transfer," in R. Kilraann, L. Pondy, D. Slevin (Eds.) , The Management of Organization Design (New York: North-Holland), pp. 289-310.

Goldstein, K. , Human Nature (Cambridge, Harvard University Press, 1951).

Kahn, Robert L. , "Introduction," in Robert L. Kahn and Elise Boulding (Eds.), Power and Conflict in Organizations (New York: Basic Book Inc., 1969), pp. 1-2.

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I^iu-rence, P. R. and Lorsch, J. W., Organization and Environment, Homewood, 111.: Richard D. Irwin, Inc., 1969.

Mikesell, Raymond F., et al. , Foreign Investment in the Petroleum and Mineral Industries (Baltimore, Maryland: Johns Hopkins Press, 1971), p. 30.

r.'er.andhi , Anant R. and Baliga, B. R. , i)uest for Survival and Growth: A Study of .American, European, and Japanese Multinationals, Koenigstein, West Germany: Athenaeum. ;few York: Praeger.

.".'egandhi, A. R. and Prasad, S. B. , The Frightening Angels, Kent, Ohio: Kent State University, 1975.

^.■ecandhi, Anant R. , Organization Theory in an Open System (Port

Washington, N.Y. : Kennikat Press Corp., 1975), Ch. 3, pp. 27-53.

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Safarian, A. E. and Bell, J., "Issues Raised by National Control of the

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Vernon, R. , Sovereignty at Bay: The Multinational Spread of U.S.

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Wall Street Journal, November 18, 1981.

Economist , October 31-Novenber 5, 1981, p. 75.

Yoshino, M. Y. , "Emerging Japanese Multinational Enterprise," in Ezra

F. Vogel, Modern Japanese Organization and Declsi<3n Making (Berkeley, University of California Press, 19 7 5), p. lo3.

Appendix

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TABLE 3

RELATIVE INFLUENCE OVER 15 DECISION AREAS: SELECTED STRATEGIC DECISIONS

Item Overall U.S. Japan Germany Sweden U.K.

Appointment of CEO -2.1 -3.0 -1.6 -3.0 - .4 -1.7 Expansion - .8 -1.4 - .2 -1.2 - .5 - .2

:.'ew Products - .2 -1.2 - .8 - .6 .4 .4

Mean -1.3 -1.87 - .33 -1.6 - .17 - .50

Source: Authors' interviews

Nei'.ative score indicates higher influence by the headquarters, while

positive score implies greater autonomy on the part of the overseas

:iubsidiaries.

TABLE 4

CONFLICT VERSUS CONTROLLING OVVNERSHIP OF tlNC (OVERALL)

U.S. European Japanese

NegoclaClonal Policy Operational Total

17	39.5	13	38.2	5	21.7
16	37.2	15	44.1	4	17.4
10	23.3	6	17.6	14	60.9
43	100	34	100	23	100

TABLE 5 INTERNAL ATTRIBUTES OF MNCb (SUBSIDIARIES) AfJD THE NATURE OF CONFLICT

Company actrlbuces

(N-lOO)

Nature of Conflict

negotlatlonal policv (%) (') "

rational

slRnlflcance

Equity holding Wholly ovraed Majority owned Minority owned

Karkec share More than 60Z 26-59: Less Chan 26Z

Degree of compeclclvantai Seller's oarlcac Moderately competitive Highly competitive

Expectation difference

(between MNCs and

host governments) Large difference Moderate difference Little or no difference

Number of employees More Chan 1000 999 to 400 399 to 100 Less than 100

Size of InvesCmenC $4.9-t3 cdllion 52.9-S2 million S1.9-S.5 million Less than $500,000

Period of operation More Chan 15 years 6 Co 14 years Less Chan 6 years

Degree of dl versif Icstlon High — more than 5 products InCeriKdlace — 2 to 5 products Low — ies6 than 2 products

Level of technology Advanced technology Intermediate technology Low technology

Type of Industry

Extractive Industry (petroleum & mining)

Cheraical « pharmaceutical

Auto, rubber tires, con- sumer durables

Consumer nondurables (soaps, foods)

36	36	28
38	27	35
20	60	20
40	35	25
33	42	25
35	27	38
70	30	0
46	37	17
25	36	39

54	28	18
27	59	14
21	28	51
40	31	29
40	40	20
19	50	31
17	0	83
43	31	26
33	42	25
20	40	40
60	40	0
39	35	26
39	35	26
0	50	50
43	33	24
24	36	40
24	40	3b
40	37	23
35	31	34
20	33	47

70	20	10
36	29	35
35	38	27
11	50	39

p < .08

p < .4704

p < .05

p < .003

p < .0421

p < .5315

p < .4356

p < .3349

p < .4135

p < .10

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Figure 2

Research and Development Expenditures by the Subsidiaries

E]Amerfcan (N = 20) CZ] German (N = 39) d] Japanese (N = 22)

in

in

^1

cj -

CO ro

O

I

1 to 2	2.1 to 10	Over 10	None -
Million U.S.	Million U.S.	f.liilicn U.S.	Insigni/icant
S	S	S

Source: Authors' interviews

t-T-'^y

WORKING PAPER NO. 918

Sources of the Slowdown in Productivity Growth: A Structural Interpretation

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College of Commerce and ausireas Administration Bureau 'A Economic and Business Re?'earch Univ?«9fTv of illinors. Jroana-CMarripaigr;

;CKMAN k DERY INC. P

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Coiiege of Comrrerca and Susiress Administra: Bureau oi Economic and 3uain»ss Pes^arch Urive<9ity of Illinois. Jroana-Ciiampaigr:

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