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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. 


-3- 

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; 


-4- 


(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 


-5- 

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. 


-6- 

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 


-8- 

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. 


-9- 

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. 


-10- 


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 


-11- 

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. 


-12- 

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 


-13- 

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). 


-14- 


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. 


-15- 


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-,..-. 


-16- 


(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 


-17- 

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. 


•  -18- 

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 


■19- 


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. 


-20- 

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. 


-22- 

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 . 


-2  3- 

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 


-25- 


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 

-26- 

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)  . 


-27- 


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. 


-29- 


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. 


-30- 

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 


-31- 


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 


-32- 

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. 


-33- 

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 


-34- 

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 


-35- 

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 


-37- 

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 


-33- 

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 


-39- 

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 


-40- 

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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Enterprises  (New  York:   Basic  Books,  Inc.,  1971).   .Also  see  John 
Stopford  and  L.  T.  Wells,  Managing  the  Multinational  Enterprise — 
'Jr'f  animation  of  the  Firm  and  Ownerslilp  of  the  Subsic  iar  ies  (N'ew 
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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 


:  ^r^f/  >'i«ir.">>  V* 


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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 


;CKMAN       k 
DERY  INC.        P 

JUN95 

■.    ^J  N  MANCHESTER] 
.To-PloW  ifjgiy^NA  46962      J