MULTINATIONAL CORPORATIONS, TECHNOLOGY AND EMPLOYMENT This book deals with an important issue in development economics: the role of multinational corporations in technical progress and employment generation in the host developing countries. This book begins with a critical and systematic survey of the theories of foreign direct investment. The neoclassical, neo-technology and eclectic theories are critically examined in some detail. This book then goes on to discuss the production, transfer and diffusion of technology by multinational corporations. The case in point is Hong Kong manufacturing in which 369 firms, both foreign and local, were surveyed. It is found that the presence of multinational corporations does have the effect of speeding up the rate of technical progress. Foreign firms in Hong Kong while they do not tend to produce more technologies do have a higher capacity to offer training and to transfer and diffuse technologies, compared with local firms. The controversial issue of the choice of technology by multinational corporations is taken up next. There is no clear evidence that multinational corporations tend to choose 'inappropriate' technology, and have a lower employment creation capability. On the other hand, it does not seem to be true that foreign firms tend to have a higher propensity to export and therefore a greater effect on employment generation. Results on the choice of technology are also reported for Indonesia, Malaysia, Taiwan and Thailand in Asia. While there is some evidence that multinational corporations tend to choose more capital-intensive technology than local firms in Indonesia and Thailand, this is not the case for Malaysia and Taiwan. Lastly, this book turns to discuss the newly arisen phenomenon of multinational corporations from a developing country. Hong Kong being the developing country which has the largest
amount of foreign direct investment is again the case in point. Special attention has been paid to the discussion of the differences in characteristics and behaviour between developedcountry and developing-country multinationals. The author Dr Edward K.Y. Chen is Director of the Centre of Asian Studies at the University of Hong Kong. He received his B.A. and M.Soc.Sc. from the University of Hong Kong and his D.Phil. from the University of Oxford. He has been Visiting Fellow in Economics at Yale University and Visiting Professor of Economics at the University of California, Davis. He is the author of several books including Hyper-Growth in Asian Economies, and has published many articles on economic growth and development in various academic journals.
Multinational Corporations, Technology and Employment EDWARD K.Y. CHEN University of Hong Kong
For Rosie Edward K.Y. Chen 1983 Softcover reprint of the hardcover 1st edition 1983 978-0-333-31995-6 All rights reserved. No part of this publication may be reproduced or transmitted, in any form or by any means, without permission First published 1983 by THE MACMILLAN PRESS LTD London and Basingstoke Companies and representatives throughout the world ISBN 978-1-349-06108-2 ISBN 978-1-349-06106-8 (ebook) DOI 10.1007/978-1-349-06106-8
Contents ~~ru~ ~ List of Figures Preface Acknowledgements 1 Introduction 1 The Purpose of Study 1 The Scope of Study 2 Foreign Direct Investment in Hong Kong 5 The Subject Matter of this Book 7 Methodology and Data 12 2 Theories of Foreign Direct Investment 16 Macro-economic Theory of Foreign Direct Investment 17 Oligopolistic Models of Foreign Direct Investment 20 Location Theory 25 Product Life Cycle Theory 26 Internalisation Theory 29 An Eclectic Theory of International Production 32 Motivations of Foreign Investment: the Survey Approach 35 3 The Production and Transfer of Technology 43 The Rate of Technical Progress 43 Foreign Investment and Technical Progress 49 The Production of Technology 51 The Transfer of Technology 63 Conclusion 66 xi xiii xv v
vi Contents 4 The Diffusion of Technology 69 Diffusion in the Process of Technological Change 69 The Determinants of the Rate of Diffusion 71 A Model of Diffusion 74 Technical Progress and Diffusion 84 Inter-industry Differences in the Rate of Diffusion 87 Conclusion 91 5 The Choice of Technology and Employment 94 Economic Growth and Employment in Hong Kong 94 The Choice of Technology 96 Multinational Corporations and the Choice of Technology 102 MNCs and the Choice of Technology in Hong Kong Manufacturing 104 Adaptation of Technology 113 6 MNCs, Export, and Employment 121 MNCs and Manufacturing for Export 122 Export Expansion and Employment Generation 133 7 Multinationals, Technology and Employment in Some Asian Countries 141 Indonesia 141 Malaysia 145 Taiwan 150 Thailand 156 Conclusion 160 8 The Rise of Third World Multinationals: Hong Kong's Foreign Direct Investment in Manufacturing 166 The Rise of Third World Multinationals 166 Hong Kong's Foreign Direct Investment in Manufacturing 172 The Motivations for Investment and Reasons for Survival: Some Survey Results 188 In Search of a Theory of Third World Multinationals 196
Contents vii 9 Summary and Conclusion 205 Appendix A: Questionnaire for the Study of MNCs in Hong Kong 211 Appendix B: Questionnaire for the Study of Hong Kong MNCs 216 Bibliography 223 Index 243
List of Tables 1.1 Percentage share of major industries in Hong Kong's domestic exports, 1959-80 6 1.2 Overseas investment in Hong Kong manufacturing by industry 8 1.3 Overseas investment in Hong Kong manufacturing by country 9 1.4 Size of sample and response rates 15 2.1 An eclectic theory of foreign direct investment 34 2.2 Investment factors in Hong Kong: American investors 37 2.3 Investment factors in Hong Kong: Japanese investors 38 2.4 Investment factors in Hong Kong: British investors 39 2.5 Investment factors in Hong Kong 40 3.1 Technical progress and capital-labour substitution in four industries 47 3.2 Technical progress and foreign investment in selected industries 50 3.3 Expenditure on R & D and on training, 1973 53 3.4 R & D and training in the textiles industry by type of firm 54 3.5 R & D and training in the garment industry by type offrrm 56 3.6 R & D and training in the plastics and toys industry by type of firm 57 3.7 R & D and training in the electronics industry by type offrrm 59 3.8 Transfer of technology by type of firm and by industry 65 4.1 Technology diffusion: textiles 77 4.2 Technology diffusion: garments 78 4.3 Technology diffusion: plastics and toys 79 4.4 Technology diffusion: electronics 80 viii
List of Tables ix 4.5 Technology diffusion: four industries compared 82 4.6 Determinants of diffusion: regression results 85 4.7 Determinants of diffusion: additional regressional results 85 4.8 Technical progress and diffusion 86 4.9 Inter-industry differences in diffusion rates and other variables 88 5.1 Unemployment rates in Hong Kong, 1971-80 95 5.2 Manufacturing employment in Hong Kong, 1960-80 97 53 Elasticity of substitution in Hong Kong manufacturing: foreign v. local finns 108 5.4 Factor proportions in Hong Kong manufacturing: foreign v. local firms 111 5.5 Adaptation of technology: foreign firms 117 6.1 The share of multinational manufacturing frrms in the exports of manufactures from selected developing countries 127 6.2 The share of majority-owned affiliates of US companies in manufactured exports from developing countries 128 6.3 Export propensity of foreign and local frrms 131 6.4 Direct labour requirements of Hong Kong's exports: selected years 135 6.5 Total labour requirements of Hong Kong's exports: selected years 136 6.6 Ratio of employment generated through manufactured exports to total and manufacturing labour force 138 7.1 Comparison of capital intensity between foreign frrms and local frrms: Indonesian manufacturing 144 7.2 Testing the differences between MNCs and local frrms: Malaysian manufacturing 147 7.3 Capital intensity and exports propensity: foreign and local frrms in Taiwan manufacturing, 1976 152 7.4 Capital intensity of foreign frrms in Taiwan manufacturing, 1975 154 7.5 Employment effects of foreign frrms in Taiwan manufacturing, 1975 155
X List of Tables 7.6 Cobb-Douglas production function estimation: Thailand manufacturing, 1977 158 7.7 CBS production function estimation: Thailand manufacturing, 1977 159 7.8 Capital intensity of foreign and local f111il'i in Thailand manufacturing 161 8.1 Hong Kong investment in the manufacturing sector of Indonesia as in December 1976 174 8.2 Hong Kong investment in Malaysia 175 8.3 Hong Kong investment in Malaysia by industry 176 8.4 Hong Kong investment in Taiwan, 1964-78 178 8.5 Hong Kong investment in Taiwan by industry, January 1974 to July 1979 179 8.6 Hong Kong investment in Singapore by industry, 1966and 1973 182 8.7 Motivations for Hong Kong foreign direct investment 190 8.8 Criteria for selecting host countries 192 8.9 Advantages of Hong Kong multinationals over local ftnns in host countries 193 8.10 Advantages of Hong Kong multinationals over other multinationals in host countries 194 8.11 Technology and training in parent ftnn and subsidiaries 195
List of figures 2.1 A macro-economic theory of foreign investment 18 4.1 The process of technological change 70 4.2 A logistic diffusion function 73 5.1 Choice of technology under neo-classical assumptions 98 5.2 Choice of technology in the case of a frontier production function 1 00 xi
Preface This book deals with an important issue in development economics: the role of multinational corporations in the technology transfer and employment generation in the host developing countries. It also includes a chapter on the rise of multinational corporations from developing countries themselves. Although the focus in point is generally the manufacturing sector of Hong Kong, the conclusions should have wide implications. In fact, theoretical discussions and empirical findings on the subject of foreign direct investment in general are often referred to; a chapter on the experiences of some Asian countries has actually been included. I have always been interested in the study of technological change in economic growth and development, but had not developed any interest in the subject of multinational corporations. Then I was invited to participate in a research package on multinational corporations and host country technology and employment, sponsored by the Council for Asian Manpower Studies. Some preliminary explorations into the vast area of multinational corporation studies have led me to a confirmed belief that the subject of multinational corporations is fascinating and there is still plenty of scope to weld together the economics of technological change and the activities of multinational corporations. Moreover, my knowledge of multinational corporations was much broadened while I was Visiting Fellow at the Economic Growth Centre of Yale and had the opportunities of discussing the subject with Professors Gustav Ranis and Carlos Diaz-Alejandro. A large number of people and organisations have given me great support and assistance, without which this book could never have been completed. First of all, I am grateful to the Council for Asian Manpower Studies which has provided the generous financial support. I must thank Mr T.K. Tse of the Trade, Industry and Customs Department of the Hong Kong government and Mr J.P. Lee of the Chinese Manufacturers' xiii
xiv Preface Association (Hong Kong) for their assistance in the selection of sample firms in the surveys I conducted. Similarly, I must thank Mr S.K. Chan of the Hong Kong Productivity Centre, who has given me great assistance in the selection of the major innovations in Hong Kong manufacturing. In addition, a group of my students at the Economics Department of the University of Hong Kong worked very hard for me in the summer of 1979 in conducting interviews with firms. I am also grateful to Ms Becky Fung, Ms Elsa Leung and Ms Cathy Wong for their proficient typing of the manuscript under great time pressure. Last but not the least, I am so very grateful to my wife Rosie who undoubtedly has suffered most from my writing of this book. I have shut myself in my study for countless evenings and weekends writing this book, which time I should have been spending with her. The pressure on me was especially great because while I was writing this book I was at the same time given a new administrative responsibility, that of reorganising the Centre of Asian Studies at the University of Hong Kong. Rosie's contribution goes beyond just her forbearance of my hard work. She has read over the entire manuscript very carefully, leading to many improvements in style and presentation. University of Hong Kong June 1981 E.K.Y.CHEN
Acknowledgements I would like to thank the Oxford University Press for permission to reproduce Table 2.5; M.E. Sharpe, Inc. for permission to reproduce Tables 2.2, 2.3, and 2.4; and the Chinese University Press for permission to reproduce Tables 6.4 and 6.5. XV