Globalization and development: an international business

strategy approach

This article seeks to reformulate the “colorful and fluid” early debate on the effects of foreign
direct investment in two ways. Firstly, the wide range of separate specific concerns of the early
debate is subsumed within four generic issues: efficiency, distribution, sovereignty, and growth
and development. Secondly, the analysis is now structured around modes of analysis of
transnational corporations, as the agents that carry out foreign direct investment. Transnational
corporations are seen as using the freedoms of international transfers central to globalization in
order to leverage competitively the differences of national (or other coherently-defined) economic
units.
Crucially this response to difference is analyzed as reflecting three potential strategic motivations:
market seeking, efficiency seeking and knowledge seeking. The core of the article investigates
how the adoption of different motivations by transnational corporations would affect performance
in terms of the different generic issues. The synergies of this mode of analysis with trade policy
(the implicit, or often very explicit, move to outward-oriented industrialization in the era of
globalization) and new growth theory are also discussed.

Introduction
The early debate on the role of foreign direct investment (FDI) in developing countries
has been neatly characterized as “colorful and fluid” (Balasubramanyam, 1985, p. 159).
One reason for the colorfulness of this debate was its emergence within the politically-
charged birth of development economics per se and related attempts to co-opt it into
disparate wider political-economic postures. This points forward to my, hopefully calmer,
concern here with the parallel need to evaluate transnational corporations (TNCs) as
participants in the processes of globalization. Another factor in leaving the early debates
open and fluid was the lack of a commonly agreed methodology for analyzing, in a
convincing manner, an observable mode of international transaction (FDI) with an
obvious potential for a wide-ranging diversity of often intangible or immeasurable
implications. This meant that much early analysis of the developmental effects of FDI
fractured around detailed investigations of specific aspects of a wide range of separate
areas of concern (e.g. extent and appropriateness of technology transfer; job generation
and employment conditions; the allegation of de capitalization; balance-of-payments and
trade effects; bargaining mechanisms; spillovers; industry structure). As V. N.
Balasubramanyam (1985, p. 173) indicates, the emergence of a separate analysis of the
TNC (as the principal source of FDI) and its immediate association with market
imperfections further undermined attempts (e.g. MacDougall, 1960) to formalize the
evaluation of FDI around the constructs
of orthodox trade theory and, in particular, perfect competition.
If early theorizing of the TNC helped to explain the indecisiveness of attempts to evaluate
the implications of FDI, then the subsequent analysis of these firms, now most usefully
positioned at the interface of business strategy and economics, provides methodologies
that are highly attuned to elucidation of issues of globalization and development. Central
to this analysis, and to the lines of argument developed here, is a preference for
organizing an understanding of diversity, rather than simplifying it or assuming it away.
Two vectors of diversity
define the structure of our subsequent analysis.
Firstly, the aims of an evaluation of TNCs in a globalized economy are seen as still
having logical origins in the diversity of concerns addressed in early analysis of FDI.
However, to organize these into a more functional structure, I suggest that these
variegated concerns can be subsumed into an evaluation framework of four distinct
generic issues (Dunning and Pearce, 1994). Within globalization, the opening of national
economies (with an increasing freedom of trade) has been interpreted as allowing TNCs
to improve the ways in which productive resources are used, so that efficiency becomes
an element of the framework through which we evaluate their performance. By contrast
the “flexibility and adaptability” (Balasubramanyam, 1985, p. 160) provided to TNCs by
globalization may limit their need for positive embedded in the growth and development
processes of individual national economies. This provides another concern for the
evaluation framework. However, an important insight of analysis of the growth of TNCs
was that organizing globally through “an internal bureaucracy of the enterprise
transcending the market” (Balasubramanyam, 1985, p. 161) gave them powers “in areas
of pricing of products and technologies”, and in bargaining more generally, that raised
issues of the distribution “of gains between [TNCs] and host countries”; furthermore,
these characteristics of TNCs give them control over dispersed elements of a global
strategy that can be “seen to pose a threat to the economic sovereignty of new nation
states in the Third World” (Balasubramanyam, 1985, p. 161).
The core of this article, therefore, seeks to evaluate the implications of TNCs in terms of
the four broadly-defined issues of efficiency, distribution, sovereignty, and growth and
development. To do this, it is useful to characterize the strategic posture of the
contemporary TNC as one of seeking to use the increasing freedoms of international
transfers, reflecting the essence of economic globalization, to leverage the differences
between economic areas. Such areas may, in practice, be national economies (especially
where policy factors are influential), regions defined by the capacity to support cost
effective production, or the type of technology- and skill-based agglomerative clusters
that build around creative interdependencies and tacit-knowledge spillovers (Porter, 1998,
chapter 7; Birkinshaw and Hood, 2000; Cantwell and Iammarino, 1998;
Balasubramanyam and Balasubramanyam, 2000).
To operationalize this view of the TNC as responding to such international differences, it
is useful to see its overall global strategy as encompassing a number of analytically
separable motivations or priorities. Thus, this framework discerns three strategic aims.4
Firstly, market seeking (MS), in which a TNC invests in a particular economy in order to
supply its established products to the market of that country. Secondly, efficiency seeking
(ES), where a TNC’s operations in a particular location are expected to supply certain
parts of the product range to the company’s international markets in a highly cost-
competitive manner. Finally, knowledge seeking (KS), involves the internationalization of
a TNC’s learning, technology-generation and creative processes. The two aspects of KS
invoked in the subsequent discussion here are product development through product
mandate (PM) affiliates,5 and decentralization of R&D operations (including
precompetitive basic/applied research). The exposition also makes use of the ownership
advantage (OA) and location advantage (LA) elements of John H. Dunning’s (Dunning,
1977, 1993, 2000) eclectic framework.
The aim of the methodological framework outlined here is, ultimately, to understand how
TNCs’ strategic behavior (now conditioned in particular by the forces of globalization)
affects the development of the global economy. The efficiency criterion is explicitly
articulated at this level. However, since the argument then focuses on differences between
components (locations) of this global economy, much of the remaining exposition is
mainly illustrated by the cases of developing countries or economies in transition. It is
not, though, explicitly about (or limited to) these cases, but uses them to exemplify
factors likely to impinge on changes or processes faced by any country (or location)
affected by TNC

Efficiency
Here we address the purely economic concern with the effectiveness (allocative and
productive efficiency) of the use of the world’s fixed stock of resources and capabilities.
Essentially, I idealize the question as “under what conditions do the operation of TNCs in
a host country contribute to raising world economic welfare to a level that could not have
been achieved in any other way?” I can perhaps initiate discussion rhetorically, with the
suggestion that the sustained growth, in recent decades, of the numbers of internationally-
competing firms, alongside the persistent deepening of the global scope of most existing
TNCs, must surely be strongly indicative of such efficiency growth. Immediately,
however, a full acknowledgement of the strategic heterogeneity of TNCs questions the
inevitability of such a prescription. Two aspects of the strategic concerns or behavior of
TNCs can support such doubts.
Firstly, the presence of MS motivation certainly need not support, and often actively
compromises, productive efficiency. Two historical contexts can now be seen as having
generated MS behavior in TNCs. During the interwar years, the economic disruption of
the early 1920s and the later period of sustained economic depression generated high
levels of protectionism in most leading industrial economies. This forced many firms
with a strong established commitment to international markets to extend considerably the
number of countries in which they located supply facilities, with such production
affiliates now predominantly constrained to provide only for the host-national market.
This mode of international supply can be seen to remain dominant in the first two
decades after World War II, as trade protection remained in place but the individual
national economies grew at healthier rates in response to processes of
reconstruction and the confidence generated by an emergent
belief in Keynesian macro policies.
A second historically distinctive wave of MS investment by TNCs occurred in the 1950s
and 1960s, in response to theimport-substitution strategies adopted by many poor
countries seeking to initiate a manufacturing sector. Here again, TNCs had to resort to
tariff-jumping investment in order to retain access to established profitable markets for
their goods, in the face of infant-industry protection. A second significant factor often
conditioned this mode of MS behaviour by TNCs, however, in the form of a dualistic or
highly-inequitable local economy. Thus the availability of significant demand for the
normally middle- and high-income goods that were supplied in TNCs’ existing trade
patterns frequently required the presence of a peculiarly prosperous elite in essentially
poor countries. A concomitant use of capital- and skilled-labor-intensive production
processes by TNCs often meant that they not only supplied an urban elite but also
generated employment and reward patterns that served to reinforce it. Ultimately the
difficulty of sustaining and deepening this form of industrialization, and the limited
potential for such industrial/urban growth to spread into wider forms of development, led
to the abandonment of these import-substitution strategies.
A third, more contemporary and differently focused, use of the MS strategy has also been
observed. Thus survey evidence (Manea and Pearce, 2004a; Lankes and Venables, 1996;
Mutinelli and Piscitello, 1997; Rojec and Svetlicic, 1993) on
the early operations of TNCs in the Central and Eastern European (CEE) transition
economies found that, rather than the predicted extensive ES use of (presumably cost-
effective) inputs, the predominant initial motivation was MS supply of local markets.
Rather than the traditional response to new protection barriers denying access to
established markets, the MS in this case has a more market-development orientation, with
local production and marketing seeking a first-mover familiarity within these new
environments. In fact there may thus be an implicit a priori acceptance of inefficiency in
this approach to the geographical expansion of established TNCs, acknowledging that the
relatively unformulated economic, market and institutional infrastructure of these CEE
economies would preclude optimized decisions regarding immediate supply potentials.
MS entry may here allow TNCs to use their most secure OAs (underpinning supply of
well-established goods) to learn about the real capabilities of CEE LAs, prior to possible
movement to more refined ES operations or even creative accessing of technological and
skilled capacities (KS) (Manea and Pearce, 2004a, b).
These contexts for use of MS strategy by TNCs are likely to generate inefficiency in
several ways. Firstly, the limited markets in which MS behaviour was usually constrained
would be likely to preclude a full realization of plant-level economies
of scale. Secondly, the fact that patterns of production in MS operations were dictated by
the structure of demand and protection in the local economy, rather than its most effective
productive potentials (static comparative advantage), provoked problems of inappropriate
technology transfer. Thus, TNCs again suffer from non-optimization of the use of their
OAs, whilst host-countries do not secure the most efficient activation of their LAs.
Thirdly, the protection against imports and frequent limitations in local competition often
allowed scope for high levels of X-inefficiency. A second strategic context for
understanding that TNC expansion often did not mean achievement (or even pursuit) of
optimized efficiency emerged from pioneering research (Knickerbocker, 1973; Flowers,
1976; Graham, 1978) on oligopolistic interaction in the location decision process. Such
research indicated that many TNC investment decisions (at least in increasingly
concentrated globally-competitive industries) were made more as a subjective response to
moves made by leading rivals than on the basis of an independent objective evaluation of
a country’s LAs in conjunction with the firm’s OAs. Rather than proactively making
location decisions directly aimed to optimize their own efficiency, growth and
profitability, TNCs were often taking defensive options to limit the effect on their
position of rivals’ moves and/or to precisely constrain the benefits pursued by rivals.
Though quite significant elements of MS behavior may
still play important roles in the competitive expansion of contemporary TNCs, changes
central to the evolution of the global economy have moved the focus of their strategic
development elsewhere. Two of these changes explicitly remove the key LAs that
supported earlier MS dominance. Firstly, with the moves towards a free-trade
environment, through the multilateral negotiations of GATT/WTO rounds and the rise of
significant regional-integration schemes (EU, NAFTA, MERCOSUR, ASEAN).
Secondly, the reorientation of developing countries’ industrialization strategies away
from protectionist import substitution towards export-oriented participation in an opening
global economy.7 Taken with a rise in the numbers of major internationally-operating
firms in many industries, the systematic opening of national economies amounts to a
radical intensification of globalized competition for TNCs. At the level of an established
MS affiliate this change was manifest in the removal of protection for its inefficiencies,
through an opening to generalized import competition and, crucially, a more focused
group-level awareness that the particular national market might now be supplied more
cost-effectively by another affiliate through trade. The latter perception is central to
TNCs’ use of freer trade to move towards network supply strategies in which individual
affiliates play the ES role. the key LAs that supported earlier MS dominance. Firstly, with
the moves towards a free-trade environment, through the multilateral negotiations of
GATT/WTO rounds and the rise of significant regional-integration schemes (EU,
NAFTA, MERCOSUR, ASEAN). Secondly, the reorientation of developing countries’
industrialization strategies away from protectionist imports substitution towards export-
oriented participation in an opening global economy. With a rise in the numbers of major
internationally-operating firms in many industries, the systematic opening of national
economies amounts to a radical intensification of globalized competition for TNCs. At
the level of an established MS affiliate this change was manifest in the removal of
protection for its inefficiencies, through an opening to generalized import competition
and, crucially, a more focused group-level awareness that the particular national market
might now be supplied more cost-effectively by another affiliate through trade. The latter
perception is central to TNCs’ use of freer trade to move towards network supply
strategies in which individual affiliates play the ES role. About some degree of efficiency
improvement in the ways indicated here.
Distribution
If the articulation of the efficiency issue could be seen as purely economic, then the
logical follow-on is a more political economic concern with fairness, justice or equity in
terms of how the performance outcomes of TNCs (whether seemingly beneficial or
problematic) is distributed. The premise here is that, since the performance of a TNC
investment in a particular country reflects both the firm’s OAs and the country’s LAs, the
distribution of the outcome should reflect in some fair way the respective contribution of
these inputs. The provenance of distribution issues in early concerns that FDI11 might, in
some sense, exploit (in particular) host developing countries has widened into the
suggestion that TNCs’ positioning in globalization can increase inequalities between
countries and within countries.
The persistence and stridency of debates about equity can be seen to reflect the
impracticality of attempting to define what would be a fair distribution of the outcome
from a particular TNC investment project, or even providing a meaningful summary of
what that distributed outcome actually is (from an overall perspective). This allows for
the intuitive assertion of reasons why a TNC, in particular, may be able to co-opt “unfair”
benefits from investments that may, on other grounds, be effective and desirable. The
problem of categorizing an accurate/ fair distribution derives from the absence of
anything approaching a competitive market price for many of the inputs to a TNC
operation. From the TNC side the intangible and highly firm-specific nature of many of
their OAs leads to their internalized transfer and use, which precludes any form of even
negotiated informed pricing of specific attributes? Whilst many host-country inputs (e.g.
labor, energy, raw materials) will certainly be rewarded in terms of a transparent price, it
is not always the case that the market in which this was determined operates
competitively or is immune to policy-based manipulation, so that elements of
distributional unfairness are again possible. When a significant aspect of the viability of
an operation reflects host-government policies that pursue specific objectives (variants of
import-substitution industrialization) at
the expense of permitting rent-seeking TNC behavior, then any idea of fair “pricing” of
benefits is again meaningless. Though the ”stakeholders” in a TNC operation may be able
to hold clearly formulated views of aspects of its successes or failures, these would
represent elements of very differently composed objective functions. For a TNC, a
particular affiliate would be expected to make distinctive contributions to the current
profitability and/or longer-term competitive development of its overall global operations.
It is central to my analysis that this contribution can take various forms at any point in
time, and also be open to change over time (so that processes of evolution can be
accepted as a reason for temporarily compromised performance). For a host country, the
varied expectations from TNC participation may include improved supply to local
customers (quality and/or price of goods and services), improved conditions for local
inputs (degree of usage and levels of rewards), improved achievement of short-run
government policies (e.g. taxation, industrialization, trade balance) and the provision of
significant impetus to longer-run objectives in terms of sustainable growth and
development. Under these (essentially bounded-rationality) circumstances, a particular
investment may be deemed satisfactory by both “partners” and allowed to progress in an
orderly fashion (i.e. without unanticipated strategic repositioning by the TNC or
additional performance requirements from the host government). This does not imply the
presence of any form of aggregated measure of the overall level of achievement of the
operation or, therefore, of any possible way of specifying what was the actual division of
the outcome between TNC and host-country interests.
Thus, the comparison of actual distribution outcomes with idealized fair outcomes
presents a doubly infeasible calculation, precluding empirical verification of suggested
injustices driving aspects of globalized inequality. Nevertheless, the arguments
demonstrating the implausibility of resolving distribution issues in practical terms also
provide equally precise reasons for a persisting concern, by underlining the presence in
determining the basis for a successful operation (i.e. one satisfying the needs of interested
parties enough to survive) of various market imperfections and policy distortions. These
factors also indicate that in many cases distribution is, in practice, strongly influenced by
explicit or implicit bargaining processes between TNCs and host locations (countries,
regions or, increasingly, creative clusters) in which the parties seek to leverage the unique
characteristics and capacities of their inputs (i.e. in effect claim monopoly prices for their
OAs or LAs respectively). Once again, a crucial factor determining the content and
concerns of such bargaining situations is the strategic positioning of the operation, in
terms of perceived contributions to wider objectives of both the TNC and host country.
The focus of much of the practical intuitive assertion of inequities in globalization is, in
effect, ES behavior by TNCs.
In its most contentious form, one can see an ES strategy as TNCs using undifferentiated
cost-effective host-country inputs to enhance the international efficiency of supply of
highly price competitive goods embodying standardized technology and low skill
production processes. The potential for distributional concerns here reflect a case of
asymmetrical information, in the sense that TNCs may be able to project superior
knowledge of key factors in a bargaining process. In terms of LAs, once a host-country is
not able to assert convincingly any strongly distinctive qualitative characteristics to its
inputs, a TNC may then be in a position to claim a more informed comparative
knowledge of rival economies and thereby suggest a potential for competitive location (or
relocation) of investments elsewhere. Such an invocation of the ‘footloose’ option
represents the bargaining strength accruing to TNCs from operating a global-network
strategy, both in terms of a manifest flexibility and an ability to assert plausibly
possession of better information on comparative productivity than would be available to
an individual host-country government.
Though the OAs used in much ES behavior are in fact likely to be routine and not
significantly differentiated qualitatively between competing firms, the ability to assert
otherwise may still be projected by TNCs. This, of course, reflects the familiar market-
failure argument for intangible or knowledge-based competitive attributes, in that TNCs
will not reveal the detail of the technology or commercial information central to their
bargaining position. Something that may, indeed, differ between potential investors and
that can therefore be “spun” strongly in bargaining processes is the market to which
export-oriented ES supply may have access, both in terms of current size and growth
possibilities. If such elements of asymmetrical information are convincingly projected by
TNCs, they can assert both that their OAs can better develop competitive potentials of a
host economy than could those of rival firms, and that other locations are available to
them with equal or better supply potentials (LAs). This, it could be suggested, would then
lead a host location to concede unnecessarily beneficial terms to a TNC, imparting a bias
to the distribution process.
A generalized capacity of TNCs to exercise bargaining advantages in ES situations would
lead to excessively generous incentive packages (fiscal benefits in terms of tax breaks
and subsidies) and downward pressure on input prices, with a notable emphasis on low
wage-rates and perhaps repressive employment regulations and conditions. One
distributional outcome of this would be worsened international inequality, in that
enhanced benefits would normally accrue to interests in more developed countries
(shareholders and home-country governments benefiting from TNCs’ profitability gains,
and consumers from lower prices) at the expense of reduced benefits in host developing
countries. Furthermore, where TNCs benefit from ES relocation of labor-intensive
supply, this normally places downward pressure on employment levels and conditions in
the home country and other countries in the supply network. Unless governments activate
effective adjustment mechanisms in these countries (as required in the positive efficiency
scenario), the overall outcome would be a deterioration in global income distribution in
terms of a worsened situation for low-skilled labor to the benefit of capital, skilled labor
and higher-income consumers.
In the light of my association of the traditional (import substitution) contexts for MS with
pervasive inefficiency, one may here be dealing with the distribution of losses as much as
gains, though these would normally be interpreted as the costs of protectionism rather
than willfully perverse TNC decision making. From a TNC point of view, it might still
logically impute profitability gains to a particular MS investment, where these represent
the difference between profits now earned through local production and those that could
have been earned through continued external supply under the implemented levels of
protection. It might also feel a clear awareness of losses, however, by comparing the
counterfactual (often “once factual”) profitability of supply under free (or freer) trade
with the lower profitability of the current MS production.
An MS involvement can also be interpreted as providing forms of second best benefits to
a protected economy. In the case of rising generalized protectionism in developed
economies (a counter-globalization scenario), TNCs’ MS investments may provide
offsets to declining employment levels (due to declines
in export sectors), though the protected jobs created are likely to be inefficient and
insecure. In import-substitution industrialization strategies, MS investments create jobs
that would not otherwise have emerged but, as noted in the previous section, these would
be closely associated with an inequitable internal income distribution and usually be too
small in number to be part of a sustainable and balanced development process.
Where an MS operation is implemented successfully, this implies welfare gains for local
consumers compared to the alternative of importing under protection. They may also be
aware, however, of welfare declines compared to importing under a freer trade regime.
Profitability in a MS affiliate should generate tax revenue for the local government,
though this will be offset by some loss in the tariff revenue from any imports that would
have continued without the local production. Where a government is actively pursuing
MS investments, tax rates may be subject to bargaining, probably in conjunction with
levels of effective protection (covering tariff levels for both the final good and any
imported intermediates). Though less clearly established as a matter of public concern,
our perception of globalized knowledge seeking (KS) behavior in TNCs can certainly
also provoke distribution issues (Pearce, 2002; Pavitt and Patel, 1999; Narula, 2003).
Thus, where a KS operation in a particular location achieves success
(in terms of securing original scientific results from a precompetitive basic/applied
research project or the competitive finalization of a significant new product innovation),
this is likely to reflect its position in two technological and creative communities: that of
the host country (its national system of innovation – NSI) and that of a TNC group. The
selection of a particular location for a pure-science research operation will reflect its
established reputation and capacity in an area of investigation of strong interest to a TNC
(i.e. one with a potential to provide new technology capable of driving innovation in the
firm’s industry). Similarly a product mandate affiliate with innovation responsibilities
will emerge where a TNC accepts such an operation’s capacity to leverage distinctive
local creative capacities (scientists, technologies, market research insights, perceptive
engineers, dynamic entrepreneurial management) to complete and operationalize the
development of new goods. However, a presumed ability to use these attributes of an NSI
more effectively than could local industry (an aspect of efficiency in innovation) will
depend on the application of complementary inputs from a TNC. In the case of
basic/applied research a TNC is likely to provide additional funding and, perhaps more
significantly, new scientific questions and complementary scientific knowledge that
enrich the perspectives and potentials of this element of the host-country NSI. The
localized product mandate innovation may also be supported by supplementary inputs of
technology, engineering expertise and market-research insights from elsewhere in a TNC
group. On the one hand, this suggests that TNCs’ globalized approaches to knowledge-
based competitive progress can enrich a host-country’s NSI, both in terms of its scientific
capacity and its ability to operationalize successfully creative potentials. But particular
KS successes are normally seen in terms of their networked positions by TNCs, and
sequential benefits may therefore accrue elsewhere in the group’s operation (rather than
moving “horizontally” within the originating NSI). Thus, exciting new scientific results
from a particular basic R&D lab are most likely to move forward towards commercial
potentials when possible synergies with other results and technologies in other locations
can be realized. Therefore, such results may flow out of the country in a raw-science
state, and have no further local effects. So such successes may well secure further
research projects for the TNC laboratory, but will not have benefited the immediate
competitiveness of the host country. Similarly sustained appropriation of the rewards of
successful new product development in a mandate affiliate is not guaranteed. Though the
innovating affiliate is likely to initiate production of its new product (and thereby secure
early high-value export trade), the international success of the good may soon lead to the
sharing of supply responsibilities with other parts of the group network (for ES or MS
reasons), again limiting the benefits a host country receives from its contribution to the
competitive enhancement of the TNC.
Sovereignty
Here, I briefly review selected aspects of the more politically-oriented concerns with the
ways that economic globalization might undermine the sovereign powers of
governments. This could involve both constraints on the ability to secure the intended
results from implemented policy (e.g. monetary and fiscal) and restraints on governments
in terms of even the meaningful formulation of policies to pursue desired aims in certain
areas (welfare and social policies). In general terms, the theme of such sovereignty
concerns is that the vast opening up of global markets for, especially, capital, technology,
skilled labor, intermediate goods and final products and services, places many
governments in a situation of international policy competition. TNCs can then be seen as
distinctive contributors to such sovereignty concerns, partly because they are major
players in many of these markets and partly because they often, in practice, avoid such
arms-length transactions with internalized transfers between different parts of their global
networks. Though generalized concerns about such aspects of
TNC behavior are longstanding, they become much more strident and precise with the
growth of ES networks. This reflects both the inherent higher levels of intra-group
transfers within such integrated supply programmes and the ability to leverage the
internally-competitive flexibility of their networks in negotiating with host-country
governments (with, therefore, concomitant distribution implications).
The classic illustration of TNCs’ scope to use intra-group transactions to undermine the
effectiveness of a particular host country policy is, of course, the transfer pricing of
intermediates. Here, the prices charged for transactions between parts of a TNC group can
be set at levels to influence the extent of reported profits in a particular location, so as to
minimize the payment of corporation tax in high-tax locations and, thereby, maximize
global post-tax profitability. A country that persists with high tax rates may then get
limited revenue from any international firms (domestic as well as foreign) within its
economy. Alternatively, a country with high levels of TNC participation may have to
abandon any intention of implementing tax rates that are out of line with those acceptable
to those firms as being in line with global norms. Fiscal policy thus becomes constrained
by the international positioning of a country’s industry. Governments may also find that
attempts to attract inward investment in order to generate improved employment
opportunities for their labor supply may then constrain their ability to influence the
quality of jobs and to implement other aspects of welfare policies. Here again, TNCs are
able to play on the footloose potentials of a range of potential locations for their more
standardized production processes, where the discriminating factor derives from costs
rather than any distinctive qualities in inputs. Then, minimum wage legislation, setting of
particular standards for workers welfare, permission of active unionization, and general
attempts to determine employment conditions above levels that appear to be available
elsewhere, can be presented by TNCs as seriously compromising the “natural” value of
host-country labor. As an extreme, it is sometime suggested, TNCs may even project
suspicion of the competitive implications of social democratic publically financed
welfare and social programmes as indicative of a climate unsympathetic to business
interests. In the same way, any attempts to increase levels of business regulation in
general may lead to threats of relocation by TNCs.

Growth and development

If the generic issue of efficiency was concerned with the purely economic matter of how
effectively a fixed stock of productive capacities (OAs of TNCs and LAs of host
countries) was utilized at a point in time, I can now complete the evaluation framework
with the complementary issue of how the expansion of such capacities can support
growth and development. This then broadly relates to the capacity of TNCs’ globalized
pursuit of knowledge seeking (essentially the aim of regenerating their OAs) to play a
role in the creation of dynamic sources of comparative advantage in host locations.
Central to the investigation of such possibilities is the acknowledgement that, from the
point of view of TNCs, growth and development means changes in LAs. Thus
development can be seen to manifest (but also, of course, to pursue) changes in host-
country market size and characteristics, changes in input prices and productive capacities,
changes in infrastructure and policy stances, and the increasing emergence and
importance of a distinctive science base and research capacity. Our analysis of TNCs’
strategic motivations can indicate four possible responses to changing location
characteristics of economies in the processes of development (Pearce, 2001).
Firstly, footloose closure of existing ES affiliates as increasing wage rates and other input
prices undercut their cost-effective position in the TNC supply network. Secondly, the
upgrading of an affiliate’s position in a supply network, by co-opting the higher
productive potentials of, in particular, increasingly skilled (albeit also higher-cost) labor
into production of more technologically-sophisticated higher-value-added elements of a
TNC’s existing product range. Here a TNC transfers the use of more technically-
advanced and quality-competitive OAs into a particular affiliate/country, replacing the
more standardized ones originally used there (which are then, indeed, reapplied – in the
footloose manner – in other countries, which, in effect, can replicate the original LAs).
Thirdly, TNCs may use their operations in a particular country to address the more
forward-looking strategic aim of extending their competitive scope by drawing local
creative resources (also, obviously, part of a country’s key developmental potentials) into
the innovation of new products. Here, product mandate operations now seek to generate
and activate new OAs for their group in a KS manner, rather than apply existing OAs in
pursuit of MS or ES aims. Fourthly, as countries generate increasingly strong and
distinctive science bases and research capabilities, as part of their pursuit of sustainable
longer-term growth; these too may become attributes (more intangible forms of LA)
attractive to the KS strategies of TNCs. Thus, the fully developed pursuit of strategic
competitiveness (Pearce, 1999b) in TNCs would recognize the need to investigate quite
systematically those sources of precompetitive scientific progress (basic research) that
have the potential to fuel the more radical long-term evolution of their industry’s core
technologies, and also perceive that increasingly these sources can be dispersed in a
number of separate environments (specific creative clusters as well as more traditional
NSIs). The relation of these last two strategic responses in TNCs to growth and
development will be elaborated below. First, however, I review how they might emerge
from the traditional (MS/ES) strategic positions in TNC affiliates. It is in the nature of
effective MS affiliates to build up knowledge of aspects of their local economies, in the
process of adapting existing products and processes so as to maximize the profitability
they can generate from their TNCs’ established sources of competitiveness. Sustained
embedded in a country where development eventually begins to individualize
significantly local tastes, skills, technologies and scientific capabilities would be quite
likely to lead ambitious MS affiliates to seek to internalize the elements of locally
distinctive creative scopes towards the aim of accession to product mandate innovation. It
is likely that, in practice, little of this mode of localized product development occurred
during the earlier phases of MS operations. Thus the need to refocus import-substitution
MS affiliates may have mainly occurred before very many host countries were strongly
demonstrating such creative/knowledge potentials, and also before restructured TNC
supply networks became systematically amenable to the incorporation of KS/ product
mandate operations.
More realistic possibilities may be implied, however, within the more contemporary,
innately exploratory, MS operations through which TNCs seem to build their bridgeheads
in emerging European economies in transition (Manea and Pearce, 2004a). Here, these
affiliates have a tendency, quite early in their operations, to seek to individualize their
competitiveness in CEE markets by generating distinctive additions to their TNC group’s
established product range, through the substantial competitive development of existing
local goods and the adoption of local technologies. The more original and competitive of
these new goods may then be found to have considerable potential for export to the
parent TNC’s more important existing markets (notably Western Europe). It may, in fact,
be the case that, whereas attempts to build-up new cost-efficient export-supply (ES)
facilities in CEE economies may have been constrained inter alia by the political skills
and influence of those existing Western European units that they might usurp, the export
of newly-derived goods would be easier because they do not seem so clearly competitive
with existing interests in the established network. Ultimately CEE operations of TNCs
may enter wider group supply-networks on the basis of KS creativity rather than ES cost-
efficiency. This would then also be likely to provide a more valuable and more
sustainable contribution to the development and growth of these transition economies.
As already observed, the purely resource-allocative interpretation of ES operations
precludes any form of endogenous dynamism. A specific set of host-country LAS are
activated in a highly competitive manner by a very specific package of TNC OAs. This
projects an entirely group-positioned crole, with no scope for affiliate-level individualism
or ambition and, therefore, no allowance for forward-looking creationoriented
expenditures (R&D; market research). In fact, the heterarchical (Hedlund, 1986, 1993)
TNC views its network asinherently flexible and as seeking dynamic sources of
competitive evolution as much as static efficiency. Thus, rising input prices may not be
automatically interpreted as a reason for closure, in a one-dimensional decision process,
but rather as a signal for a re-evaluation of the particular location and the competitive
positioning of the affiliate in it (Pearce, 2001; Birkinshaw and Hood, 1998; Birkinshaw,
Hood and Jonsson, 1998). This would, in turn, allow increasingly ambitious and
confident local managers to assert the developmental possibilities that they can derive
from their economy’s widening qualitative potentials. As noted above, this would initially
involve the employment of increasingly distinctive and productive local inputs in the
supply of more sophisticated and technologically-advanced parts of a group’s product
range. In some cases, this systematic process of affiliate evolution, involving an
increasingly committed interpretation and cooption of the expanding host-country
capacities, can eventually reach the point of using local creative capacities to develop
new parts of a TNC’s product range. This process of creative transition (Papanastassiou
and Pearce, 1994, 1999) ebeds the affiliate more profoundly in a country’s development,
by basing its supply operations around, in effect, unique locally-generated OAs, rather
than persisting dependence on those from elsewhere in the group.
Product mandate (PM) affiliates can be considered to make a positive contribution to
development when they secure better performance from those local creative attributes
that they access than indigenous enterprises would otherwise have been capable\ of
doing. Thus, a PM affiliate emerges within a TNC group in reflection of its ability to
internalize distinctive host-country competences in human capital (talented scientists,
creative engineers, innovative marketing personnel, entrepreneurial and ambitious
managers) alongside favoured access to existing stocks of indigenous technology (either
already embodied in established products or awaiting commercial development) and
unique elements of research capacity in the science base (e.g. areas of world class
specialization in local universities). Policy support by governments for the generation of
such attributeswithin a development programme will target specific aspects of broadly
perceived growth. These may summarize as sustainable full employment across an
appropriate range of skills, so as to support an internationally-competitive economy that
is increasingly driven by logically-evolving sources of dynamic or created comparative
advantage. A TNC’s strategic expectations from a PM affiliate (normally the creation and
supply of competitive new goods to international markets) are clearly consistent with a
host-country’s normal developmental expectations. The precise forms of host-country
benefits that emerge, and the ability of PM operations to generate them, can then be seen
to remain strongly influenced by the affiliate’s intragroup positioning.
One aspect of this is that the developmental aims of a PM (or, importantly, of an
advanced ES affiliate that is seeking the move to a systematic creative KS role) will be
formulated in the light of its familiarity with the established core competitive capabilities
and aims of the group (existing OAs). This may give it a superior capacity, compared to
local enterprise, to detect and evaluate emerging innovation-supporting potentials
(knowledge-related LAs). Nevertheless, PM affiliates will often need to secure their
access to these creative inputs in competition with local firms. Their ability to do this
may reflect their ability to offer higher rewards, along with a more stimulating creative
environment. Once again, this will reflect a PM’s ability to leverage its access to group-
level OAs. Here, the core established technologies and skills of the group are still likely
to be relevant, often providing an affiliate with a secure and familiar platform from which
to assimilate the distinctive local inputs and build the idiosyncratic contributions of its
own innovation process.
Similarly, even where a PM affiliate takes responsibility for key aspects of how its own
products are marketed internationally, it is likely to receive considerable benefits
(compared with an alternative indigenous product innovator) from access to a TNC’s
global distribution network and established trademarks and reputation. PMs can be seen
as an embedded element of development since they extend a country’s competitiveness
through the operationalization of new skill and knowledge scopes generated by
investments in education and training and scientific research and technology
programmes. The most direct manifestation of this may be higher levels of higher-wage
employment, improved foreign-exchange earnings and higher growth rates, which can
then generate (at the macro level) capacity for further public investment in resource
improvement. Within the purview of evolutionary economics, a successful PM generates
its own sources of developmental momentum. Thus, those sources of local creative
competence (personnel employed, research collaborations, etc.) that are co-opted because
of their current expertise will exercise this in conjunction with TNC technology and
insights and, in the processes of contributing to immediate (product development)
success, also increase their own tacit knowledge. This may not only be a source of
evolutionary impulsion within the PM (bases for further innovations) but also a new and
distinctive (because partly conditioned by TNC inputs) element in the country’s creative
scopes. It can also be observed that the more successful a PM is in its developmental
objective, the less need there is to be concerned with the potential distributional problem
(noted in the relevant section) that the TNC might quite quickly relocate production of a
new good to an alternative lower cost site. Thus, where the internal creative competences
of a PM can sustain a strong developmental impetus, reflecting growing capacities of the
host NSI, the freedom to focus on the higher-value-added innovation stages of the
product life cycle and shed the more routine supply of maturing goods would be
welcomed.
The other form of KS to be evaluated briefly here is the increased propensity of TNCs to
carry out (through “stand alone” labs or collaborations with local universities)
precompetitive (basic and/or applied) research in internationalized networks.
The emergence of this reflects, firstly, an acknowledgement, by both firms and countries,
that new scientific knowledge is likely to fuel the longer-term processes of development
in the form ofthe capacity to create radically new goods and services.
Secondly, the decentralization of such research reflects TNCs’ realization that different
parts of a programme of investigation covering a range of different scientific disciplines
can be beneficially spread across a number of different country’s science bases. This
reflects a globalized technological heterogeneity, in which particular countries have
established positions of research leadership in particular areas of investigation.
The decision by a TNC to locate a particular facet of its precompetitive research agenda
in a particular country is likely to strengthen further the relevant areas of that country’s
scientific capacities. One aspect of this is that the TNC’s commitment of additional
funding may permit, otherwise unavailable, expansion of work in these areas of
specialization. Perhaps most significantly, the TNC participation may enrich this
expansion by providing it with new challenges and perspectives. Thus, the TNC will
locate a project in a country where the science base is highly qualified to carry it out, but
with the aims of the research defined within the firm’s much wider technology interests.
Local scientists will exercise their defining capabilities (reflecting the technological
heritage of their NSI) to address a rather different research agenda than would have been
otherwise generated and probably in conjunction with new technology perspectives
(those of the TNC). This may usefully offset an increasing agglomerative narrowing of
the scientific specialization of the NSI, by adding new research dimensions that use its
existing areas of leadership but widen them in logical and coherent directions (that would
not have been provoked by local needs).
If TNC involvement may strengthen the facet of a country’s
NSI that pursues pure-scientific investigation through basic and applied research, it
would not seem to have any potential to improve the inherently rather inchoate and ill-
defined mechanisms through which new scientific results are perceived to provide real
possibilities in commercial development. Two interlinked factors may in fact diminish the
potential for the achievements of TNC’s basic research in a country to flow towards
localized innovation. Firstly, in a way that might be more elusive for R&D units in a
purely national firm, TNCs’ basic research laboratories are often able to secure physical
and organiational independence from their company’s other operations in the country.
Whilst this allows them to avoid undesirable distractions, in the form of “firefighting”
short-term technical problems in production and marketing, it also limits the possibilities
of providing direct technological inputs into the generation of developmental aims in the
TNC’s local operations. Secondly, complementing the previous point, the more or less
predetermined destination for the results of successful pure research in these stand-alone
units is out of the country, for some form of synthesis or co-development with the work
of other similar TNC-group labs. Thus, the corollary of the strengthening of basic
research, through access to new resources, challenges and technologies, is that this
networked positioning implies the leakage of significant results into wider group-
determined usage.
TNC strategy, trade policy and new growth theory
One area of debate, developed within mainstream economics, that has strong synergies
with lines of argument generated here, is that relating host country trade-policy regimes
to differential implications of FDI for growth performance. The pioneering exposition of
Jagdish Bhagwati (1978; 1985; cited in Balasubramanyam et al., 1996) combines two
assertions: export promotion (EP) trade strategies will attract more FDI than import
substitution (IS) strategies; and FDI made underEP regimes has more favourable effects
on growth than that made under IS policies.
The Bhagwati indictment of an IS environment for FDI encompasses many of the
distortions and inefficiencies that have been here associated with the MS mode of TNC
strategy, deriving primarily from tariffs and quotas on trade as the principal policy
instruments. Summarized by Balasubramanyam et al. (1996, pp. 93-94), this includes
“widespread distortions in factor and product markets” and “adoption of techniques of
production widely at variance with the factor endowment of the economy”. Also, along
with such promotion “of misallocation of resources [IS] also encourages X-inefficiency”.
Furthermore IS “contributes to growth of income disparities” and “provides widespread
incentives for rent seeking and directly unproductive profit seeking activities”. By
contrast, Bhagwati’s characterization of EP as emerging from a trade neutral or bias free
policy framework, “allows for a free play of market forces
and the allocation of resources on the basis of comparative advantage”
(Balasubramanyam et al., 1996, p. 94) that could be compatible with TNCs’ ES
strategies.
In an empirical investigation, Balasubramanyam and Salisu (1991) validated Bhagwati’s
expectation that EP countries would attract greater quantities of FDI than IS countries.
Subsequently, Balasubramanyam, Salisu and Sapsford (1996) addressed Bhagwati’s
qualitative assertions. Here, the effect of FDI on growth in a sample of EP countries was
significantly stronger than for a sample of IS countries, with, in fact, FDI not being
significantly related to growth for the latter group of countries. Furthermore, in the tests
for the EP-country sample,
FDI proved the strongest determinant of growth, “followed by additions to the labour
force, followed by increased exports”, with increase in the stock of domestic capital least
influential
(Balasubramanyam, et al. 1996, p. 102). The authors interpret these results in terms of the
tenets of new growth theory. This argument (Balasubramanyam et al., 1996, pp. 94-96)
embodies two strands. Firstly, that FDI in principal has the capacity to add to a country’s
endowment of those characteristics (humancapital accumulation and learning by doing;
R&D and technology generation; scale economies; knowledge spillovers) whose
endogenization in growth allows the social rate of return on investments to exceed the
private rate. Secondly, that this potential is more likely to be realized when FDI is part of
a country’s EP industrialization strategy than an IS regime.
Our interpretation of TNCs’ strategic options is fully compatible with the explanation
offered above, and can offer a supportive refinement to the second strand of
Balasubramanyam et al.’s exposition. As suggested earlier, the sources of profitability for
MS affiliates in a host-country’s IS policy environment involve no guarantee (indeed
limited likelihood) of the transfer of appropriate technologies or human capital
capabilities, in the sense of being those that can become endogenized in host-country
growth that is realizing the true potentials of local comparative advantage.18 By contrast,
both
ES and KS (PM innovation and R&D) strategies fit into EP policy frames, and do so in
potentially sequentially-embedded (or endogenously-evolutionary) ways. Thus, ES
transfers appropriate technologies that secure economies of scale and productive
efficiency and inculcate (through training) the most relevant improvements in local
human capital to support activation of growth around current sources of static
comparative advantage. Then KS and product development activities of TNCs can
supersede ES technology transfer by (within a properly formulated host-country
development programme) generating new technology and sources of dynamic
comparative advantage that embed these affiliates’ operations within the core attributes of
the growth process.
Conclusions
This article seeks to investigate the use by TNCs of two separable aspects of the
globalizing economy of recent years. Firstly, the institutions of globalization have
increased the freedoms of international transfer and motivated the opening of national
economies. Secondly, the processes of globalization have often enhanced the rate of
change of the characteristics of national economies in ways that increasingly respond to
external challenges and potentials. The differential strategic imperatives of heterarchical
TNCs are seen as inherently interactive with the dynamic diversity inculcated within
economic globalization.
The analysis has indicated two positive potentials that can derive from the globalized
context for the TNC/national economy interface. Firstly, the efficiency seeking
motivation can support countries’ moves towards outward-oriented industrialization
based on activating sources of static comparative advantage.
This can not only provide an initiating impulse to national economic growth but improve
global resource-allocative efficiency. Secondly, TNCs’ expanding knowledge-seeking
motivation can both enhance the competitive application of a country’s creative attributes
(notably in localized product development) and also become embedded in the further
enrichment of these technology- and skill-related sources of sustainable growth.
Since the suggested positive efficiency and development potentials are predicated on
TNCs’ beneficial leveraging of various differences between national economies (or sub-
regions thereof), it is logical to emphasize also the continued responsibilities of national
governments’ policies within the globalization scenarios. One aspect of this is to ensure
that the national economy is perceived as one whose existing sources of competitiveness
are freely available for international strategic operationalization. Part of this would be a
neutral trade policy stance in the sense of one that does not discriminate against export-
oriented activity per se, and then allows this to emerge around the country’s genuine
sources of comparative advantage
(i.e. eschewing any form of distorting export subsidization). Complementing this, internal
factor and other markets should also be permitted to allow resources to move into those
industries that manifest international competitive efficiency. Then, from the development
point of view, government policies need to accept the (desirable) transitory nature of a
particular source of competitiveness (e.g. low-cost labour) and invest in the upgrading of
human- and knowledge-capital through education, training and scientific research.
But these positive potentials are also predicated on TNCs’ move to global strategies
(predominantly encompassing ES and/ or KS motivations rather than MS) that position
individual affiliates within internationalized programmes and networks.
Thus, for TNCs, success is defined in terms of realizing a desired objective in terms of
contribution to the group’s overall competitiveness, which may reflect very different
priorities from those of a host country. Though TNC operations may often provide
positive sum outcomes, how this is then distributed may be a cause of considerable
concern. Central to this is the perception that unique firm-level competences and
globalized competitive postures provide TNCs with considerable bargaining strength.19
This perception has often been manifest in the adoption of some variant of inward
investment policy. Where countries feel themselves to be in a very competitive market for
the types of FDI they believe will benefit them, they may seek to boost their
attractiveness through the defensive offering of investment incentive packages. Or where
countries believe they are capable of providing more distinctive attributes to TNCs, they
may adopt a more proactive stance, targeting particular benefits through the imposition of
various performance requirements. Both of these have clear distribution implications,
with incentives surrendering (perhaps unnecessarily) possible benefits ex ante to secure
investments and performance requirements (UNCTAD, 2003) aiming to ensure ex post
that TNC operations behave in ways that provide explicit forms of benefits targeted by
the host country. Importantly, however, these measures may also affect the efficiency and
development outcomes by potentially distorting investment decisions and the content of
affiliate operations.
The bargaining stances affecting distribution may also be seen to have implications for
national sovereignty, in the sense that policy positions are articulated specifically in
relation to the needs and influence of external economic agents. The origins of this in the
global options (and, therefore, flexibility) of TNCs can then be generalized into the
concern that wider, essentially non-discriminatory, areas of national policy become
constrained by a perceived need to attract TNCs and to secure particular types of
performance from them.