FOREIGN INVESTMENT, TRANSNATIONALS AND DEVELOPING COUNTRIES

FOREIGN INVESTMENT, TRANSNATIONALS AND DEVELOPING COUNTRIES

Also by Sanjaya La// Foreign Private Manufacturing Investment and Multinational Corporations: An Annotated Bibliography Also by Paul Streeten Economic Integration Value in Social Theory (editor) The Crisis of Indian Planning (editor with M. Lipton) Unfashionable Economics (editor) Commonwealth Policy in a Global Context (editor with Hugh Corbet) Diversification and Development: The Case of Coffee (with Diane Elson) Aid to Africa The Frontiers of Development Studies Trade Strategies for Development (editor)

FOREIGN INVESTMENT, TRANSNATIONALS AND DEVELOPING COUNTRIES Sanjaya Lall Institute of Economics and Statistics, Oxford and Paul Streeten Queen Elizabeth House and Institute of Commonwealth Studies, Oxford M MACMILLAN

Sanjaya Lall and Paul Streeten 1977 Softcover reprint of the hardcover 1st edition 1977 978-0-333-16898-1 All rights reserved. No part of this publication may be reproduced or transmitted, in any form or by any means, without permission First edition 1977 Reprinted 1978, 1979, 1989 Published by THE MACMILLAN PRESS LTD London and Basingstoke Associated companies in New York Dublin Melbourne Johannesburg and Madras ISBN 978-1-349-02292-2 ISBN 978-1-349-02290-8 (ebook) DOI 10.1007/978-1-349-02290-8

To the memory of my mother S.L.

Contents Preface xi 1 PART 1: TNCs AND DEVELOPING COUNTRIES INTRODUCTION 3 The Unsettled Background Foreign Investment and Transnational Corporations: Scope and Definition 2 THEORIES OF FOREIGN INVESTMENT AND TRANSNATIONAL BEHAVIOUR 16 Economic Theories of Direct Foreign Investment Motivational Aspects of TNC Behaviour Organisation and Management Salient Features of TNCs 3 WELFARE OF HOST COUNTRIES: TNCs AS OLIGOPOLISTS A Digression on 'Welfare' Provision of Capital Organisation and Management Technology Marketing Bargaining and Political Power Concluding Note 47 4 WELFARE OF HOST COUNTRIES: FOREIGN INVESTMENT AS A 'GENERAL' INFLOW OF CAPITAL Macro-economic Approaches Micro-economic Approaches 81

viii Contents PART II: THE COUNTRY STUDIES 5 THE BACKGROUND TO THE SAMPLE FIRMS AND GOVERNMENT POLICIES 89 The Conduct of the Research Nature of the Sample The Environment of Sample Countries for Foreign Investment 6 AN ANALYSIS OF THE SAMPLE FIRMS' ACCOUNTS 99 Relative Size of Sample Firms Selected Measures of Performance Financing Patterns Profitability 7 'DIRECT' BALANCE-OF-PAYMENTS EFFECTS 130 Overall Direct Balance-of-payments Effects Exports Capital Inflows and the Cost of Servicing Foreign Investment Import Dependence Technical Payments Profits and Transfer Pricing 8 'TOTAL' BALANCE-OF-PAYMENTS AND 'SOCIAL' INCOME EFFECTS: METHODS OF EVALUATION 156 The Analytical Approach Alternative 1: The Little-Mirrlees Procedure Alternative II: Financial Replacement Alternative III: Most Likely Local Replacement 9 'TOTAL' BALANCE-OF-PAYMENTS AND 'SOCIAL' INCOME EFFECTS: THE RESULTS 169 Alternative 1: The Little-Mirrlees Model Alternative II: Financial Replacement Alternative III: Most Likely Local Replacement 10 'SOCIAL' INCOME EFFECTS: EVALUATING THE EVALUATION 181 What We Have Learnt about 'Social' Costs and Benefits Practical Limitations of 'Social' Cost-Benefit Analysis

Contents Conceptual Limitations of 'Social' Cost-Benefit Analysis lx PART III: HOST GOVERNMENT POLICY 11 REGULATION AND BARGAINING Regulation Evaluation Bargaining Conclusion 12 THE IMPLEMENTATION OF POLICY Limitations on Willingness Limitations on Ability Notes References Index 191 219 225 251 273

Preface This book brings together many years of work on foreign investment and transnational corporations (TNCs). We have both been concerned with the impact of TNCs, particularly in the manufacturing sector, on the economies of less-developed countries (LDCs), and we have both come increasingly to realise that the conventional tools of economics, narrowly conceived, are inadequate to deal with issues which are much broader than those of 'private foreign investment'. What is at stake is the transformation of political, social and economic structures, and what is needed is political economy in the broadest sense. Unfortunately, political economy is an underdeveloped art, and this book reflects our difficulties in dealing with the enormous issues in hand without proper tools. Although we stay largely within the realms of economics as conventionally defined, it also reflects our disquiet with the use. of the tools of conventional economic theory. Part I of the book concentrates on the general questions of the growth of TNCs and their implications for the welfare of host LDCs. Part II draws upon research conducted for the New York office of the United Nations Conference on Trade and Development (UNCTAD) on the balance-of-payments and income effects of a sample of foreign investments is six LDCs. Chapters 7 to 10 present the main findings of these studies; Chapter 6 gives the results of some later work on the data collected for these studies on various aspects of the sample firms' performance. Part Ill discusses policy measures for host governments and outlines the difficulties in formulating and implementingpolicy.lt is hoped that each part will in its own way prove useful to students and practitioners in this field. The empirical part of the book was the work of Lall; the analytical sections were prepared jointly. Most of the drafting was done by Lall, but we collaborated in so many ways that it is difficult to separate our ideas and our contributions. We owe gratitude to so many people that it would be impossible to name them all here. The secretariat of UNCT AD, and in particular Sidney Dell and Gerry Arsenis, deserve our greatest thanks for having

Preface xii financed the initial research project and encouraged and commented on our work. Several people worked on the research teams; of these we should especially like to thank Andrew Elek, Daniel Chudnovsky and Kenneth Mayhew. Those who helped us in the field must, of necessity, remain anonymous, but we are deeply grateful to them all for their co-operation and kindness. Harikleyia Bacon did valuable statistical work in the final stages of preparing the book. Of those who helped to form our ideas (though they may not agree with them) and who commented on the manuscript, we wish to thank Max Corden, Gerry Helleiner, Robert Mabro, Ajit Singh, Frances Stewart and Constantine Vaitsos. We should like to acknowledge the secretarial assistance of Valerie Boulton, Caroline Carr, Judy Chance, Margaret Ko, Karen Exley, Muriel Payne and Karen I'opham. September 1976 SANJA y A LALL PAUL STREETEN