Foreign Direct Investment in A Changing Global Political Economy

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SOUTHEAST ASIA IN THE NEW WORLD ORDER: The Political Economy of
a Dynamic Region
Foreign Direct
Investment in a
Changing Global
Political Economy
Edited by
Steve Chan
Professor of Political Science
University of Colorado at Boulder
~
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Selection, editorial matter, Chapter I © Steve Chan 1995, 1996
Chapters 2- 11 © Macmillan Press Ltd 1995, 1996
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Contents
List of Tables vii
List of Figures viii
List of Acronyms IX
Notes on the Contributors xi
1 Introduction: Foreign Direct Investment in a Changing

World
Steve Chan 1
2 Auto Bargaining in Canada, 1965-87

Kenneth P. Thomas 7
3 Maquiladorization as a Global Process

ieffrey A. Hart 25
4 Japanese Foreign Direct Investment in East Asia:

The Expanding Division of Labor and the Future of
Regionalism
Kit G. Machado 39
5 Industrial Upgrading and Multinational Corporations:

A Bumpy Runway for Taiwan's Aircraft Industry
Chi Huang 67
6 MNCs and Developmentalism: Domestic Structures as

an Explanation for East Asian Dynamism
Cal Clark and Steve Chan 84
7 State or Market: The Development of the Ecuadorian

Banana Industry
David W. Schodt 104
8 Foreign Direct Investment in Eastern Europe:

Harnessing FDI to the Transition from Plan to Market
Carl H. McMillan 127
9 Foreign Direct Investment in Ghana and Cote d'Ivoire

Susan McMillan 150
v
vi Contents
10 Do MNCs Matter for National Development?

Contrasting East Asia and Latin America
Steve Chan and Cal Clark 166
11 Investment Dependence and Political Conflict in

Developing Countries: A Comparative Regional
Analysis
John M. Rothgeb, Jr 188
References 219
Index 240
List of Tables
4.1 Japanese FDI since 1951 44
4.2 Japanese 'Third Wave' FDI, 1985-91 47
4.3 Purchases and Sales of Japanese Overseas Affiliates
in Manufacturing (World and Asia), 1989 56
5.1 Financial Structure of the Taiwan Aerospace
Corporation, December 1991 78
6.1 National Status on Analytic Variables 91
7.1 World Banana Exports 110
7.2 Major Firms Exporting Bananas from Ecuador,
1954-63 116
7.3 Credit by the Banco de Fomento for Banana
Production, 1948-63 120
8.1 Estimated Stock of Foreign Direct Investment in
Central and Eastern Europe, 1991, 1992 143
8.2 Estimated Flows of Foreign Direct Investment to
Central and Eastern Europe, 1990-92 144
11.1 States in the Data Set 194
11.2 Data Sources 195
11.3 World and Regional per capita and Industrial
Growth Rates, 1967-78 197
11.4 Foreign Investments and Growth in per capita
Income 199
11.5 Foreign Investments and Income Inequality 200
11.6 Foreign Investments and Internal War, Controlling
for Growth 202
11.7 Foreign Investments and Internal War, Controlling
for Inequality 204
11.8 Foreign Investments and Turmoil, Controlling for
Growth 206
11.9 Foreign Investments and Turmoil, Controlling for
Inequality 208
11.10 Foreign Investments and Protest, Controlling for
Growth 210
11.11 Foreign Investments and Protest, Controlling for
Inequality 212
vii
List of Figures
3.1 MaquiladoralEPZ Plants in Mexico, Mauritius, and
Jamaica 26
3.2 Employment in MaquiladoralEPZ Plants in Mexico,
Mauritius, and Jamaica 26
9.1 Net FDI Flows, Ghana and Cote d'Ivoire 161
viii
List of Acronyms
ACP African, Caribbean, and Pacific countries
ADB Asian Development Bank
AIC ASEAN Industrial Complementation
AIDC Aero-industry Development Center
ANBE Asociacfon Nacional de Bananeros del Ecuador
APEC Asia Pacific Economic Cooperation
ASEAN Association of Southeast Asian Nations
BAe British Aerospace
BBC Brand-to-Brand Complementation
BCE Banco Central del Ecuador
BIP Border Industrialization Program
BNF Banco Nacional de Formento
CASID Committee for Aviation and Space Industry Development
CIST Chungshan Institute for Science and Technology
COCOM Coordinating Committee
COMECON Council for Mutual Economic Assistance
COPDAB Conflict and Peace Data Bank
CTE Confederation of Ecuadorian Labor
CTM Confederacfon de Trabajadores Mexicanos
CVA Canadian Value-Added
EC European Community
ECLA Economic Commission for Latin America
EPZ Economic Processing Zone
EU European Union
EAEC East Asian Economic Caucus
FOI Foreign Direct Investment
GATT General Agreement on Tariffs and Trade
GDP Gross Domestic Product
GEACPS Greater East Asia Co-Prosperity Sphere
GM General Motors
IBM International Business Machines
IMF International Monetary Fund
IPTN Industri Pesawat Terbang Nasantara
ITRI Industrial Technology Research Institute
JAIC Japan Asia Investment Company
JAIDO Japan International Development Organization
JICA Japan International Cooperation Agency
IX
x List of Acronyms
MD McDonnell Douglas
MITI Ministry of International Trade and Industry
MMC Mitsubishi Motor Corporation
MNC Multinational Corporation
NAFfA North American Free Trade Agreement
NATO North Atlantic Treaty Organization
NICs Newly Industrializing Countries
NIBs Newly Industrializing Economies
ODA Official Development Assistance
OECD Organization for Economic Cooperation and
Development
OECF Overseas Economic Cooperation Fund
OHQ Operational Headquarters
PCE Ecuadorian Communist Party
PNDC Provisional National Defense Council
PRI Partido Revolucionario Institucional
R&D Research and Development
TAC Taiwan Aerospace Corporation
UBESA Union de Bananeras Ecuatorianos
UMOA Monetary Union of West Africa
UNCTC United Nations Centre on Transnational Corporations
Notes on the Contributors
Steve Chan is Professor of Political Science at the University of
Colorado at Boulder. He received his PhD in Political Science from
the University of Minnesota. He was a recipient of the Karl Deutsch
Award of the International Studies Association. He was also a recipi-
ent of the Pew Faculty Fellowship of International Affairs at Harvard
University and of Fulbright Awards in 1984-85 (Taiwan) and 1992
(Singapore). His teaching and research interests focus upon inter-
national relations theory and international political economy with
special emphasis on China and the East Asian NICs. He is the author
of East Asian Dynamism and International Relations in Perspective;
co-author of Flexibility, Foresight, and Fortuna in Taiwan's Develop-
ment and Understanding Foreign Policy Decisions; and co-editor of
Defense, Welfare, and Growth, The Evolving Pacific Basin in the
Global Political Economy, and Foreign Policy Decision Making. His
work has appeared in such journals as American Political Science
Review, Journal of Conflict Resolution, Comparative Political Studies,
International Studies Quarterly, and World Politics.
Cal Clark is Professor and Head of Political Science at Auburn

University. He has previously taught at the University of Wyoming
and New Mexico State University. He received his PhD in Political
Science from the University of Illinois in 1973. His primary teaching
and research interests include international political economy, East
Asian development, comparative public policy, and US competitive-
ness. He is author of Taiwan's Development; co-author of Women in
Taiwan Politics and Flexibility, Foresight, and Fortuna in Taiwan's
Development; and co-editor of Studies in Dependency Reversal, State
and Development, and The Evolving Pacific Basin. His work has
appeared in such journals as American Political Science Review, Com-
parative Political Studies, International Studies Quarterly, and Journal
of Conflict Resolution.
Jeffrey A. Hart is Professor of Political Science at Indiana Univer-

sity, Bloomington, where he has taught international politics and
international political economy since 1981. His first teaching position
was at Princeton University from 1973 to 1980. He was a professional
staff member of the President's Commission for a National Agenda
xi
xii Notes on the Contributors
for the Eighties from 1980 to 1981. Hart worked at the Office of
Technology Assessment of the US Congress in 1985-86 as an internal
contractor and helped to write its report, International Competition
in Services (1987). He was visiting scholar at the Berkeley Roundtable
on the International Economy. 1987-89. His publications include The
New International Economic Order (1983), Interdependence in the Post-
Multilateral Era (1985), Rival Capitalists (1992), and articles in World
Politics, International Organization, British Journal of Political Sci-
ence, and Journal of Conflict Resolution.
Chi Huang is Associate Professor of Political Science at the Univer-

sity of Kentucky. He received his PhD in Political Science from
Indiana University. His research interests focus on political method-
ology. defense security, and the political economy of development.
He is co-editor of Inherited Rivalry: Conflicts across the Taiwan Strait
(forthcoming). He is also author or co-author of articles published in
such journals as American Political Science Review, American Journal
of Political Science, China Economic Review, Comparative Political
Studies, Defence Economics, Journal of Conflict Resolution, Journal
of Politics, Pacific Focus, and Policy Studies Review.
Kit G. Machado regularly teaches international and East Asian pol-

itical economy at California State University, Northridge. For the
1993-95 school years, he is at Waseda University, Tokyo. He has in
the past spent extended periods at the University of the Philippines,
Universiti Sains Malaysia, the Institute of Strategic and International
Studies (Malaysia), and Waseda University. His chapter in this book
has its origins in an earlier research project on Japanese transnational
corporations' participation in Malaysia's state-sponsored steel and
motor vehicle industries. It is also the starting-point for a current
project that extends the concerns of that work to additional sectors
and to the rest of East Asia.
Cart H. McMillan is Professor of Economics at Carleton University

in Ottawa, where he also teaches in the graduate programs in business
and international affairs. He served for a number of years (1975-82)
as Director of Carleton's Institute of Soviet and East European
Studies. In 1973, he organized at Carleton a special program of re-
search on East-West trade and investment - the East-West Project
- which he continues to direct. He also helped found the Research
Centre for Canada and the Soviet Successor States at the university,
Notes on the Contributors xiii
and is a member of its executive board. His published work has

focused on the international dimensions of the economies of Central
and Eastern Europe and the former Soviet Union. He is the author
of several books and of journal articles in Soviet Studies, Compara-
tive Economic Studies, Journal of International Business Studies, Jour-
nal of Development Planning and elsewhere. He also acted as the
principal investigator and compiler of several major directories of
international investment published by the United Nations. Carl
McMillan has been a visiting research professor at the Vienna Insti-
tute for Comparative Economic Studies and at the Institute for
Advanced International Studies of the University of Geneva. Early
in his career, he did military service as an officer in the US Navy and
worked in the US Department of State, serving as Second Secretary
of the US Embassy in Moscow in 1963-64. He has acted as consult-
ant to international organizations, to the US and Canadian govern-
ments and to a number of business firms. He is a member of the
Executive Committee of the Association for Comparative Economic
Studies and serves on the editorial board of several international
journals.
Susan McMillan received her PhD in Political Science at the Univer-

sity of Colorado, Boulder, in 1993, and is currently Assistant Profes-
sor of Political Science at the Pennsylvania State University. Her
dissertation examined the effects of foreign direct investment on
developing countries in Asia and Africa, and she is the author of an
article in International Interactions.
John M. Rothgeb, Jr is Professor of Political Science at Miami Uni-

versity. He taught previously at Boston University and Morris Harvey
College. He received his PhD from the University of Kentucky in
1980. He is the author of Defining Power: Influence and Force in the
Contemporary International System, and The Myths and Realities of
Foreign Investment in Poor Coulltries. In addition, he has published
a number of articles in professional journals.
David W. Schodt received his MA in Public Administration/Policy

Analysis and his PhD in Economics from the University of Wiscon-
sin, Madison. He has taught at St. Olaf College since 1977, where he
is currently Department Chair. His research interests have focused
on political and economic change in Ecuador, where he served as a
Peace Corps volunteer and later returned as a Fulbright Research
xiv Notes on the Contributors
Fellow. He is author of Ecuador: An Andean Enigma and co-author

of The Administration of Justice in Ecuador, as well as other articles
on Ecuadorian political economy.
Kenneth P. Thomas is Assistant Professor of Political Science and

Fellow at the Center for International Studies at the University of
Missouri-St. Louis. He received his PhD from the University of
Chicago in 1992. His research centers on the distributional implica-
tions of international integration, focusing on the cases of North
America and the European Union.
1 Introduction: Foreign
Direct Investment in a
Changing World
Steve Chan
After a brief decline during the early 1980s, foreign direct investment
(FDI) has increased dramatically. During 1986-90, the amount of
global FDI grew at an annual rate of 24 per cent, rising from US$78
to US$184 billion (United Nations, 1992, p. 14). In 1990, the devel-
oped countries received 83 per cent of this amount, with Western
Europe (54 per cent) and North America (23 per cent) absorbing the
largest shares (the amount of FDI received by Japan was relatively
small, constituting only about 1 per cent of the global total). These
figures point to the dense networks of cross-holdings of production
and financial assets among the industrialized countries of the world.
The developing countries received only 17 per cent of the total
FDI in 1990. This amount, moreover, was concentrated among a few
host countries, so that 13 per cent of the global total (or about 74 per
cent of the amount received by the developing world) went to the top
ten countries. These are newly-industrializing countries (NICs) that
command large domestic markets and/or serve as dynamic export
platforms (Singapore, China, Malaysia, Mexico, Thailand, Brazil,
Argentina, Taiwan, Indonesia, and Egypt).
The sectoral destination as well as the country origination of FDI
have undergone some change over time. The relative share of FDI in
the primary sector has fallen, whereas those in the secondary and
tertiary sectors have risen. Among the major investor nations, FDI in
the primary sector exceeded 15 per cent of the total FDI portfolio
only in the case of the Netherlands and the United Kingdom (United
Nations, 1992, p. 18). The bulk of this investment has gone to the
manufacturing and especially service sectors. Consequently, the tra-
ditional form of Western investment in the developing world's min-
erals and cash crops has declined in importance.
Most of the FDI still originates from the developed countries. In
1990, five countries - Japan, the United States, France, the Federal
1
2 FDI in a Changing Global Political Economy
Republic of Germany, and the United Kingdom - were responsible

for 69 per cent of the value of global FDI outflow (United Nations,
1992, pp. 14, 16). However, motivated by concerns with rising labor
wages, pollution costs, and foreign protectionism, several NICs have
also begun to make more FDI. For instance, Taiwan made US$12
billion of FDI in 1989-90, and the amount for South Korea was
US$1.3 billion in these two years (United Nations, 1992, p. 24). They
have become net capital exporters, whereas the reverse has been
true for the United States (whose FDI inflow has been several times
larger than its FDI outflow in the recent past). Among the major
home countries for FDI, Japan and the United Kingdom led the
United States in the value of FDI outflow during 1986-90 (United
Nations, 1992, p. 16).
The above patterns reflect several recent and ongoing trends. First,
rising FDI has signified the increasing importance of intrafirm trade
- that is, transactions among the subsidiaries of the same multina-
tional corporations (MNCs) - in world commerce. It has tended to
displace arm's-length transactions, and thus to create comparative
advantages due to domestic sourcing, economies of scale, transfer
pricing, and 'captive' markets. Disparities in such advantages can in
turn alter international trade balance and national industrial com-
petitiveness (Encarnation, 1992). These considerations augment the
traditional incentives for FDI that stem from the desire to prolong
product cycle and to protect market share (Knickerbocker, 1973:
Vernon, 1977).
Second, the ongoing processes of globalization as well as regional-
ization of national economies tend to spur FDI. The diffusion of pro-
duction techniques, the standardization of product designs, the easing
of transport and communication barriers, and the conventions of
subcontracting and local sourcing have facilitated this investment,
especially of the export-oriented kind. At the same time, signs point-
ing to possible regional trading blocs in Western Europe and North
America have raised the prospects of protectionism, and the conse-
quent fears of being excluded from lucrative foreign markets have
fueled defensive investment of the tariff-leaping kind.
Third, the diminishing amount of official development aid, the debt
crisis of the early 1980s, and the examples of East Asia's export-
oriented economies have increased the relative acceptance of FDI in
many developing countries. Concomitantly, a process toward priva-
tization has been evident in a number of capitalist economies, devel-
oped or developing, whereby governments deregulate industries and
Introduction 3
abandon the less efficient public enterprises. These trends as well as

a general turn away from the import-substitution approach to indus-
trialization have opened up more opportunities for FDI.
Fourth, the developments just noted have been most dramatic in
the economic reforms of the former socialist economies. In an ironic
reversal of dependency theory, officials in Eastern Europe, China,
and Vietnam have eagerly sought FDI in their attempts at market
liberalization and export expansion. Although starting from rather
low levels, FDI inflow has expanded rapidly for some. For example.
from 1986 to 1990 its value rose from US$O to US$16 million for
Vietnam, from US$16 to US$89 million for Poland, and from US$1,875
to US$3,489 million for China (United Nations, 1992, pp. 315-16).
The incorporation of these countries into the capitalist world economy
appears to augur more competitive bidding for FDI.
The following chapters analyze FDI in different historical con-
texts, economic sectors, and host countries. They focus on different
units of analysis, ranging from specific industries to broad global and
regional patterns. They also employ a variety of methodologies, in-
cluding case studies, regional comparisons, and statistical analyses.
Notwithstanding these differences, the authors share a common inter-
est in analyzing the role of FDI in promoting or hindering economic
development, political stability, social welfare, national autonomy, or
regional integration, or in un!ierstanding the manner in which the
latter conditions can possibly influence FDI. Alternatively, they seek
to understand the incentives and strategies that motivate MNCs to
make FDI abroad.
In Chapter 2, Kenneth Thomas looks at the Auto Pact between
Canada and the US auto manufacturers. He argues that the integra-
tion of the auto market between the two countries has promoted
greater capital mobility, which in turn has enhanced the bargaining
leverage of automobile manufacturers at the expense of the host
government. After the Auto Pact, Canadian provinces had to resort
to greater concessions in order to attract new FDI. This manifesta-
tion of a weaker Canadian position occurred despite ongoing trends
toward greater deconcentration of and fiercer competition in the auto
industry. Thomas's analysis suggests that the removal of additional
trade and investment barriers, such as following the North American
Free Trade Agreement (NAFTA) and the European Union (EU),
should further strengthen the bargaining position of the MNCs.
The advent of the NAFTA extends market integration from the
US and Canada to Mexico. In Chapter 3, Jeffrey Hart analyzes the
4 PDI in a Changing Global Political Economy
maquiladoras in the latter country. FDI has been attracted to export-

processing zones (EPZs) by the lure of low wages. favorable tax
treatment, and proximity to the US market. The evolution of Mexico's
maquiladoras as well as the experiences of Mauritius's and Jamaica's
EPZs, Hart contends, suggest that the host countries will not capture
positive externalities (such as developing forward and backward link-
ages, promoting technology and entrepreneurial diffusion), reach for
higher stages of the product cycle, or even retain the footloose foreign
manufacturers on a constant lookout for lower-cost sites - unless
they are willing and able to invest in and improve their stock of human
capital and physical infrastructure. Although the maquiladorization
process is becoming more globalized as MNCs continue to seek low-
wage, labor-intensive offshore production platforms, it is uneven and
limited by emergent regional trade arrangements that present differ-
ent barriers and incentives for such platforms.
Turning from the North American region. Kit Machado examines
in Chapter 4 the close coordination between Japanese business
and government in promoting FDI in East Asia within a framework
intended to further extend and deepen a Japan-centered regional
division of labor. The Japanese strategy involves a deliberate dis-
aggregation of the production process, so that Japan retains the higher
value-added operations and its neighbors are recruited to play a
subordinate role in supporting these operations. The basic asymmetries
in this 'work sharing' foster dependency relationships.
Recently, several NICs have joined developed countries such as
Japan and the US as home countries for MNCs. In Chapter 5, Chi
Huang studies Taiwan's efforts to gain advanced aerospace techno-
logies through a failed attempt to acquire partial ownership of
McDonnell Douglas and British Aerospace. We are thus presented
with an attempt (albeit so far unsuccessful) at role reversal, whereby
a former periphery country seeks to use its capital surplus to gain
access to high-tech companies in the core countries. As is typical
among the late industrializers (Amsden, 1989; Gerschenkron, 1966),
the state has assumed an active role in this case. However, Huang
shows that Taiwan's bid was hindered by considerable difficulties, in
part due to entry barriers posed by the structure of the aerospace
industry. the extent of forward and backward industrial linkages
required, and the sensitivity of the relevant technology for national
security.
What can one learn about the influence of FDI on national eco-
nomic performance? In Chapter 6, Clark and Chan examine six East
Introduction 5
Asian countries with different FDI involvement and economic suc-

cess. The divergent experiences of Hong Kong, Singapore, Taiwan,
South Korea, Thailand, and the Philippines suggest that neither the
relative strength of their state apparatus nor that of their social in-
terest!> can alone account for these differences. Thus, for instance,
Hong Kong and Singapore have both sustained high economic growth,
even though FDI has operated in a laissez-faire economy in one case
and in partnership with a dominant state in the other case. It seems
instead that the extent of collaboration between state and society
and the nature of political culture constitute key variables that shape
the impact of FDI. Countries that are characterized by a more
synergistic working relationship between the public and private sec-
tors and that have followed a 'Japanese model of development' have
apparently been more successful than others in harnessing FDI for
national development.
Many observers are not sanguine about the impact of FDI, espe-
cially in the agriculture sector, on the developmental processes and
mass welfare of the poorer countries. In Chapter 7, David Schodt
reports a 'success story' that contradicts this pessimism. Focusing on
the evolution of the banana industry in Ecuador, he shows that a
combination of fortuitous events, existing domestic infrastructure,
and facilitative government policies helped to keep the control of
banana industry in native hands, and contributed to a relatively equit-
able distribution of the income from its exports.
In Chapter 8, we are presented with another instance of role re-
versal, involving in this case downward rather than upward status
mobility. The former socialist economies of Eastern Europe have
been gripped by severe economic problems. Their officials have sought
FDI in the hope that it will facilitate these countries' transition to
market economies. However, as Carl McMillan shows, there contin-
ues to be a considerable gap between this hope and reality; various
forms of institutional w1.!akness and the problems associated with the
replacement of the old system have hindered the realization of this
hope. Foreign investors are hesitant to make large commitments
because of the considerable uncertainties about these countries'
political stability.
With the large deficit financing of the United States and the eager
courtship of MNCs by the former socialist economies, what prospects
do the poorer developing countries have in attracting FDI? In Chap-
ter 9, Susan McMillan analyzes Ghana and Ivory Coast. Her conclu-
sion suggests that the differences in their governments' policies and
ideological outlook have had only a marginal influence on FDI inflow,

which has been constrained mainly by global economic conditions
beyond the direct control of these countries. Within this constraint,
however, market factors have favored Ivory Coast relative to Ghana,
although the actual historical impact of FDI on economic develop-
ment and mass welfare in these countries remains to be determined.
Why did FDI have apparently a positive impact in some countries,
but a negative one in others? Chan and Clark examine this question
in Chapter 10. They apply the logic of comparative inquiry to analyzing
the developmental patterns in East Asia and Latin America. Differ-
ences in natural resources, class formation, cultural predisposition,
state policies, and, indeed, historical accidents have mediated the
impact of FDI in these regions. The authors thus argue for a more
process-oriented approach to analyzing the impact of FDI, an ap-
proach that acknowledges historical contingencies and the importance
of timing and sequence of events in affecting developmental paths.
The themes of regional variations and historical contingencies are
further underscored in Chapter 11, where John Rothgeb undertakes
a cross-national statistical analysis exploring how FDI could affect
domestic conflict in the developing countries through its effects on
economic growth and income distribution. His results show impor-
tant variations in the level and nature of conflict experienced by the
Latin American, African and Asian countries, depending on the
amount and type of FDI, the extent of the host countries' class strati-
fication and economic development, and the prevailing global eco-
nomic climate. Thus, the impact of FDI on domestic strife seems to
operate through different causal mechanisms in different regional
and historical settings.
In combination, the essays in this volume show the emergence of
some new trends as well as the persistence of some old patterns. The
emergence of the former socialist countries as hosts to FDI and the
ascendance of some NICs as sources of FDI are recent phenomena.
The regionalization and even globalization of production processes
in both high and low value-added manufacturing activities, such as
US investments in Canada and Mexico and Japanese investments in
East Asia, exemplify the continuation of existing trends over the
recent decades. The effects of such FDI seem to be influenced to a
significant extent by existing conditions in the host countries, so that
a variety of positive and negative outcomes is possible. This contin-
gent nature of FDI challenges both scholarly analysis and policy
making to adjust to a complex and evolving reality.
2 Auto Bargaining in
Canada, 1965-87
Kenneth P. Thomas
The US-Canada Auto Pact of 1965 created not only a North Ameri-
can market for automotive production and sales but a North American
market for automotive investment as well. For the first time, bidding
for investment between US states and Canadian provinces was pos-
sible. In this new environment, the bargaining power of the Cana-
dian government fell relative to that of Ford and General Motors
(GM) because of the new cross-border mobility of production and
investment competition among states and provinces. This is indicated
by the cost the Canadian federal and provincial governments in-
curred for automotive investments, as measured by investment in-
centives given to the automakers. No incentives were provided for
the Auto Pact-era plants built in the 19608; in the late 19708, Cana-
dian governments gave Ford 12.8 per cent of the value of its invest-
ment for an engine plant in Ontario and were prepared to give 15 per
cent for a GM parts plant in Quebec which was ultimately not built.
In the mid-19808, the Canadians gave 17 per cent of the capital cost
of the GM/Suzuki joint venture in Ontario and provided 43.8 per
cent of the cost for GM to modernize its assembly plant in Ste.-
Therese, Quebec. These worsening outcomes took place despite the
decreasing concentration of the industry (a factor which should favor
the host) and without such firm-favoring developments as acquisition
of new allies in the host country or new technology beyond the reach
of the host government (both more relevant with less developed host
countries). This result argues for explicitly considering capital mobil-
ity in analyses of bargaining between MNCs and host governments,
as its effects can clearly overshadow those of other previously iden-
tified determinants of relative bargaining power.
An important mid-19808 study points out that economic integra-
tion can increase the competition for investment (Guisinger et ai.,
1985). This is because reducing trade barriers among countries, as in
the EU (European Union), makes more localities substitutable for
each other as investment sites. As in any market, if the number of
7
'buyers' rises, in general the price will increase as well. In the case of
attracting investment, host governments are the buyers of investment
(in Guisinger's terminology, they are the sellers of investment loca-
tions, but the effect is the same), and increasing competition for
investment should drive up its 'price.' In advanced countries, invest-
ment incentives provide a fairly straightforward measure of that price.
(By contrast, in developing countries, the goals of host governments
may vary sufficiently that incentives alone are not a good measure
of the relative bargaining ability of host and MNC. In developed
countries, the most common goal of hosts is ultimately jobs. In de-
veloping countries, broader control goals, embodied in demands for
ownership participation, are very common. Thus, Kobrin (1987) uses
percentage of local ownership as his outcome measure.) While in-
centives may not be completely comparable across countries, due to
differences in comparative advantage, they can serve well as a measure
of relative bargaining power for a single host government over time.
The industry studies of the Guisinger et al. work do not have this
longitudinal aspect; here I provide it explicitly.
For this study I compiled a list of major investments by the Big
Three automakers from the early 19605 to 1987, relying especially on
the Wall Street Journal. I also undertook substantial archival research
at the John F. Kennedy and Lyndon B. Johnson Presidential Librar-
ies, and at the National Archives of Canada, specifically on the Auto
Pact. In this chapter 1 show that (1) The Canadian government, which
instituted the diplomatic conflict over automobiles that ended with
the Auto Pact, did so in order to attract investment to Canada and
make gains in employment and its balance-of-payments position; (2)
The integration of automotive production for the US and Canadian
markets indeed led to increased competition for investment, as
Guisinger would predict, illustrated by bidding wars between US
states and Canadian provinces for major investments, beginning in
the 1970s; (3) This heightened competition for investment weakened
the bargaining ability of the Canadian government, as measured
by the 'price' that Canada paid for subsequent investments (in fact,
my data suggest the same was true for the US); and (4) The ultimate
cause of this process was the increase in capital mobility during the
period under consideration.
Auto Bargaining 9
HOW INVESTMENT CONDITIONS TRADE POLICY
Trade policy is subject to considerations of investment in a variety of

direct and indirect ways, as the Auto Pact well illustrates for Canada.'
Tariff levels are decided with the preferences of actual and potential
investors in mind, as governments generally wish to maintain an
attractive investment climate. Governments also face the likelihood
that domestic production will become less efficient by world stand-
ards as capital mobility increases, an effect that shows up in terms of
prices, employment, and the balance of payments. At the same time,
rising capital mobility orients multinational firms' preferences toward
more liberal trade (Milner, 1988) and strengthens them politically
as well as economically (compare Rogowski, 1989; there, actors are
strengthened by changes in trade; here, by changes in capital mobility).
The Canadian auto industry, which grew up behind protective tariffs
(as did much of Canadian industry in general), fell into crisis in the
late 1950s as a result of trends ultimately based on the mobility of
production in the auto industry, and its complete dominance by for-
eign firms. Exports outside of North America declined during the
1950s due to the substitution of foreign production by the Big Three
for exports from their Canadian subsidiaries. At the same time, the
Canadian subsidiaries generated bilateral trade deficits for Canada as
they made substantial imports of parts from the United States but
had virtually no exports. In large part, this was due to the structure
of Canadian automotive protection, which allowed duty-free imports
as long as they were classified as 'not made in Canada' and a mini-
mum level of Canadian content (usually 60 per cent) was met (Royal
Commission on the Automotive Industry, 1961, p. IS, Table II; Beigie,
1970, p. 36, Table 8; and Keeley, 1980, p. 221).
Besides a deteriorating trade balance, the crisis of the Canadian
industry was also exhibited in falling employment and a significant
and rising price differential for cars sold in the two markets (net of
taxes). This price differential could be expected to rise further, as
production in the US became more efficient and Canada was unable
to share in those efficiencies because of its small market size. And
rising capital mobility, in the form of new 'tri-level' rail cars, was
increasing efficiency by lowering the transport cost for finished vehi-
cles and making it more efficient for plants to specialize in the pro-
duction of one make for the entire continent, rather than to produce
all makes for their immediate areas (Rubenstein, 1988, p. 14).
The direct impact of considerations of investment is also clear. As
Lindblom (1977, Chapter 13) has argued and as Milner (1988) has
clarified in the case of trade, the views of large multinational corpo-
rations are heard by national policy makers precisely because they
are large investors. In the case of the Auto Pact, the fact that these
were foreign companies did not affect the calculus of the Canadian
government. The industry accounted for 4.9 per cent of Canadian
GNP in 1963, and since the Big Three were the largest investors, the
Canadian government at times sacrificed the interests of domestic
firms in the industry (of course, no Canadian companies were auto-
makers, but there were a number of smaller firms which made parts
and specialty vehicles) in order to satisfy the Big Three. 2
Because of the need for investment, the Canadian government
attempted to ensure that a wide variety of fiscal policies did not
interfere with its goal of attracting automotive investment. As one
memo put it,
From the viewpoint of the automotive industry, the most serious
effect of the last budget's application of sales tax to production
machinery was in the field of tools, dies, jigs and fixtures - which,
in this industry, are largely annually consumed items. The sugges-
tion to exempt such items from sales tax when they are classified
as completely depreciable in the year of acquisition is sound and
should be supported by [the Department of] Industry. The present
tax simply makes it harder to source parts into Canada, or to take
advantage of the incentive program ....
In addition, and difficult as it may be interdepartmentally, we
should record - from the viewpoint of the Mechanical Transport
Branch at least - that the differential which appears likely to exist
between US and Canadian corporate income tax rates will directly
affect the interest of US companies in participating in the incentive
program. Assuming the effective US tax rate is reduced to about
48 per cent, while Canada's remains at 51.5 per cent, a 20 per cent
return before taxes (a bare minimum standard for automotive
companies) becomes 10.4 per cent after taxes in the US and 9.7 per
cent after taxes in Canada. This 0.5 per cent [actually 0.7 per cent]
point spread will be enough to direct investment toward the US.
[Memo from N. B. MacDonald, Director, Mechanical Transport
Branch, Department of Industry, to B. G. Barrow, Assistant Deputy
Minister, 10 February 1964]
This shows that the Canadians were keenly aware of the intricacies
of attracting investment, and designing policy in a way which did not
compromise that goal.
Auto Bargaining 11
THE CANADIAN RESPONSE TO THE INDUSTRY CRISIS
The Canadian government appointed a one-man Royal Commission

(Dean Vincent Bladen of the University of Toronto) to study the
crisis of the industry, and it criticized short production runs as the
main cause of the industry's inefficiencies. Bladen's solution was to
replace the existing 60 per cent Commonwealth content requirement
with a 60 per cent Canadian value-added (CVA) requirement, but
also allowing exports to count toward fulfilling manufacturers' obliga-
tions to the government, an innovation he called 'extended content'
(Wonnacott, 1987, pp. 4-5; Keeley, 1983, p. 284). The main alterna-
tive to this was the creation of a Crown Corporation to make auto-
matic transmissions, a classic import-substituting approach (Kirton,
1980-1, p. 45). Instead, the government decided to keep the local-
content requirement (Wonnacott, 1987, p. 5), but give manufacturers
the opportunity to import components duty-free if they were matched
by an equal dollar value of exports. In its first (October 1962) incar-
nation, automatic transmissions and engines could be imported duty-
free if they were matched by increased exports. The US government
at first left this unchallenged, due to Canada's balance-of-payments
difficulties, but independent US parts makers objected that this was
an illegal export subsidy which they could force the American gov-
ernment to countervail under US law. These complaints grew stronger
when, in October 1963, Canada broadened the duty remission pro-
gram to give credit for exports of all automotive products, including
replacement parts (Kirton, 1980-1, pp. 44-5; Keeley, 1980, p. 231).
Evidently the Treasury Department stonewalled the parts manu-
facturers, rejecting their complaints on technicalities, while trying
to resolve the situation with the Canadians. As Keeley (1988, p. 287)
relates: 'Fourteen complaints and requests for the application of coun-
tervailing duties were received before, on 15 April 1964, "the Modine
Manufacturing Company forced [the Treasury Department's] hand
by submitting a complaint in exact conformance with the regulations" '.
Formal negotiations with Canada to head off countervailing duties
began in July. The US tried to move toward sectoral free trade while
Canada attempted to guarantee its 'fair share' of North American
automotive production. By letting the Canadians accomplish the latter
in separate 'Letters of Undertaking' with the carmakers, a compro-
mise was finally reached and the Auto Pact was signed on 16 January
1965 (Keeley, 1983, pp. 290-4).
The form which free trade took in the Auto Pact strongly reflected
the role of the automakers in the bargaining process. Most importantly,
12 FDf in a Changing Global Political Economy
'free trade' was restricted to bona fide manufacturers of automobiles

which, while including many small specialized firms, prevented indi-
viduals from taking advantage of lower cross-border prices. This was
because the Canadians feared that without such a provision, there
would be no way to reward or punish firms for their performance in
increasing Canadian production. And without production guarantees,
there was nothing to stop the companies from sourcing parts from
American firms that had already achieved continental economies of
scale, rather than using Canadian firms that had the potential to do
so. However, restricting free trade privileges to qualified manufac-
turers allowed the Big Three to preserve the price differential which
created higher prices in Canada, a factor which was especially of
concern to General Motors. Used vehicles were excluded from the
agreement, which had a similar impact. Both of these factors were in
the general interest of the Big Three. Finally, in at least one instance
I have been able to document, the automakers were able to use the
leverage given by the 'Letters of Undertaking' process to make
changes in the intergovernmental agreement itselC
The results of the Auto Pact were quite dramatic. After dropping
the 17.5 per cent Canadian and 6.5 per cent US tariffs, vehicles im-
ported into Canada increased from 3 per cent of the market in 1964
to 40 per cent in 1968, while in the same period the proportion of
Canadian production exported to the United States increased from 7
per cent to 60 per cent (Beigie, 1970, pp. 4-5). Ford, for example,
concentrated the assembly of one truck model and two small car
models, the Maverick and the Pinto, in Canada (Oassbach, 1989, p.
377). These larger production runs increased the relative efficiency of
Canadian auto plants, as the proportion of North American produc-
tion in Canada increased during 1964-68 while its proportion of the
workforce remained the same. In addition, the Auto Pact had the
further effect of reducing the price differential on cars from 10 per
cent higher in Canada (net of sales tax) before the agreement to only
4 per cent afterwards. Finally, the Canadian trade deficit in vehicles
and parts was estimated to have fallen from $586 million in 1964 to
$229 million in 1968 (Beigie, 1970, pp. 4-6). The Auto Pact thus
helped achieve Canada's goals at the same time that production for
the formerly separate markets was integrated. Because tariff barriers
were eliminated and Canadian production reached efficiency levels
similar to those of the US, manufacturers were freed to allocate
production for the two countries however they saw fit. In other words,
production sites in both countries were essentially substitutable for
Auto Bargaining 13
one another. This long-run effect of the Auto Pact reduced the bar-
gaining power of the Canadian government with the Big Three, as
the next section shows.
BARGAINING FOR PRODUCTION IN CANADA, 1963-87
In this section I examine the main investments which Ford and

General Motors had made in Canada since the period of the duty
rebate programs to the late 1980s. The rising trend of investment
incentives granted to these firms is striking. While exact measure-
ment of capital mobility (as opposed to movements) is difficult, there
can be no doubt that it increased during the period under considera-
tion. 4 As the industry became less concentrated and saw no great
technological breakthroughs5 during this time - two factors which
ought to favor the host - the fact that host outcomes deteriorated
strongly suggests that rising capital mobility is the cause, as it was the
only factor moving in a firm-favoring direction.
Ford's major investments in Canada have been the Ontario Truck
plant, announced in August 1964, the St. Thomas Assembly Plant,
announced in 1965, and the Essex Engine Plant in Windsor, the
announcement of which in August 1978 caused a major rift between
the two national governments due to the incentives provided to Ford.
General Motors' most important investments include the Ste.-
Therese Assembly plant outside Montreal, announced in 1965, the
CAMI joint venture with Suzuki at Ingersoll, Ontario (1986), and
massive expansions at Oshawa, Ontario (CS2 billion in March 1986)
and at Ste.-Therese (C$450 million in April 1987).
In addition to these cases discussed in detail below, there have
been several other important cases of cross-border bidding wars for
automobile plants. A Ford engine plant in 1971, finally located in
Lima, Ohio, had at various times been rumored to be going to Canada,
England, Germany or Brazil (Wall Street Journal, 22 June 1971, p. 6).
Throughout 1979, the Canadian government tried to lure a GM parts
plant to a depressed area of Quebec with increasingly large aid offers.
GM was also considering sites in the US and Mexico for the plant.
US government pressure eventually stopped GM from accepting the
Canadian aid, and the plant was never built (Wall Street Journal,
30 July 1979, p. 3). Finally, Brampton, Ontario, was one of four
sites considered by Chrysler for an assembly plant in 1983, though it
eventually went to the St. Louis suburb of Fenton. A late offer of
approximately $250 million in incentives by the Canadian govern-

ment apparently caused the Missouri package to increase modestly
(Thomas, 1992, pp. 193-4; Wagman and Hannon, 1983, p. 1).
Duty Rebate/Auto Pact-Era Plants
Ford and General Motors (as well as Chrysler and American Mo-
tors) both expanded in Canada near the time of the signing of the
Auto Pact. Their three largest plants of this time were Ford's Ontario
Truck plant, built on its major complex at Oakville, Ontario, the St.
Thomas, Ontario, Ford assembly plant, and the Ste.-Therese, Que-
bec, OM assembly plant. The Ontario Truck and Ste.-Therese plants
were both products of the then-current Canadian duty remission
program. Indeed, an analysis of Ford's announcement in August 1964
listed the duty rebates and an expanding Canadian market as two
factors generally increasing automotive investment in Canada (Wall
Street Journal, 28 August 1964, p. 3). The St. Thomas plant, by
contrast, was decided with the Auto Pact's duty-free exports to the
US in mind, as Ford had publicly denied its plans until the agree-
ment was ratified by Congress (Wall Street Journal, 3 November 1965,
p.3).
In none of the three cases were investment subsidies provided to
the manufacturers. The advantages of the Auto Pact, and the duty
rebates before that, were sufficient to cause the investment.6 The
relatively convergent interests of the automakers and the Canadian
government were clear, as the reduction in tariffs made it easier for
the firms to integrate their production across the national boundary.7
In all. these plants created 6,000-8,000 jobs, with the Ontario Truck
plant contributing 500, Ste.-Therese 2,500, and St. lbomas 3,000-
5,000 (Wall Street Journal, 28 August 1964, p. 3; 4 May 1964, p. 5; 3
November 1965, p. 3). In addition, Ford's chassis/transmission plant at
Windsor was converted to an engine plant, fulfilling one of Canada's
goals of attracting such higher-end components. H
This was not a time of substantial unemployment for Canada. In
1964 the unemployment rate stood at 4.7 per cent (with 3.2 per cent
and 6.4 per cent rates in Ontario and Quebec, respectively), and in
1965,3.9 per cent.9 This contributed to a stronger bargaining position
for Canada than would be the case later.
Auto Bargaining 15
Essex Engine Plant, 1978
Ford's introduction of a new V-6 engine for the North American

market came during a period of increased unemployment in Canada,
with the national unemployment rate running at 8.3 per cent and
unemployment in Ontario at 7.2 per cent. 1O The company had to
decide between expanding an existing engine plant at Lima, Ohio,
which was preferred by the North American Automotive Operations
division, or building a new plant at Windsor, Ontario, which Ford of
Canada preferred. Ford publicly auctioned the site between the two
locations, generating offers of substantial incentives at both of them.
Of the total investment of C$533 million, C$40 million was provided
by Ottawa and C$28 million by Toronto, for a total of 12.8 per cent
of the investment, or C$26,154 for each of the 2,600 jobs expected to
be created (Wall Street Journal, 4 August 1978, p. 10; Ley ton-Brown,
1979-80, p. 176).
Initially, Ford of Canada asked for C$30 million in incentives, which
it said would offset the difference between Canadian and northern
US construction costs and taxes (Leyton-Brown, 1979-80, p. 172).
When the federal Department of Trade, Industry, and Commerce
agreed, Ford then came back with a request for C$75 million, based
on the company's claim that there were numerous other extra costs
associated with building in Windsor as opposed to expanding at Lima,
as well as the fact that Ohio would provide $5-10 million in incen-
tives (Leyton-Brown, 1979-80, p. 174). The Canadians acceded to this
almost completely, and once a federal/provincial cost-sharing formula
was worked out, they approved the final C$68 million package.
Oshawa, Ontario, Expansion, 1986
On 24 March 1986, General Motors announced that it would invest

C$2 billion to convert its two Oshawa assembly plants to a new line
of midsize cars, the W-body. The investment generated sighs of relief
in Ontario but increased worry at the Ste.-Therese plant,1I which had
not been assigned a product beyond the 1987 model year. According
to George Peapples. GM Canada president, although the output of
the two Oshawa plants would increase by approximately 9 per cent,
they did not expect to hire any new. workers because the plants would
be highly automated. In addition to GM's investment, supplier firms
would invest a further C$500 million and create up to 1.700 jobs
(McNish, 25 March 1986, p. 6; Milner, 25 March 1986, p. 81).
GM did not receive any incentives for this modernization. 12 One

GM of Canada official indicated that incentives were never an issue
at Oshawa, and would not have been well-received by the govern-
ment when GM was planning for the expansion in 1981-82. He ob-
served that incentives became much more commonly used with the
election of the Mulroney government in 1984.13 Even after the
election of the Conservative government, however, most likely GM
could not raise the question of incentives because GM had no good
alternative to producing at Oshawa. While the CAMI plant was brand-
new and could locate anywhere, and Ste.-Therese was and is a can-
didate for eventual closure, given the safeguards of the Auto Pact,
there is no practical way GM could threaten to close Oshawa, the
largest vehicle facility in North America. Oshawa employs more than
40 per cent of all GM of Canada employees (Tedesco, 31 March
1986, p. 40); without its production it would be impossible to meet
Canadian production requirements. Moreover, since it is located in
the prosperous Toronto area, there is no plausible way to provide
regional incentives. While GM's investment made the jobs there more
secure (Tedesco, 31 March 1986, p. 40), no new jobs were created,
again making it difficult to justify government funds. Finally, it is
possible that, given the constraints just enumerated, GM chose to
announce this big investment while leaving Ste.-Therese hanging, to
maximize its leverage on aid for that plant.
Canadian-American Motors, Inc. (CAMI), 1986
In May 1986, General Motors and Suzuki sent up trial balloon that
they would form a joint venture to build an assembly plant to make
small cars under both Chevrolet and Suzuki nameplates. After con-
sidering sites in Ontario, Quebec, and British Columbia, Ingersoll,
Ontario, was chosen as the location (New York Times, 17 May 1986,
p. A36). The C$500 million investment was expected to employ 2,000
people when completed. The incentive package for the plant was
larger than for the Essex engine plant, but part of it consisted of
forgivable loans: C$40 million in federal government training grants
and C$45 million in provincial government loans, or 17 per cent of
the capital cost. The provincial loans were to be forgiven if CAMI
met investment, production and employment criteria; by October
1991, it had essentially met the criteria for the entire amount to be
forgiven.14 In addition, Ottawa increased Suzuki's import quota from
3,000 to 20,000 cars annually. Both Suzuki and GM (under whose
Auto Bargaining 17
nameplate the cars would be sold) made the quota increase a precon-
dition for building the plant in Canada (New York Times, 27 August
1986, p. D3; Milner, 12 August 1986, p. Bl; Levin and McNish. 28
August 1986, p. 6; Berkowitz, 11 August 1986, p. 4).
The CAM I move was fueled in part by what automakers claimed
were lower labor costs in Canada. According to GM, lower health-
care costs in Canada were an important part of an $8/hour cost dif-
ferential between the US and Canada (McNish, 13 March 1986, p. 6).
At the same time, GM was laying off 26,000 hourly workers (5 per
cent of its blue-collar workforce) and 3.000 salaried employees in
nine complete and two partial closures in the US (Wall Street Jour-
nal, 7 November 1986. p. 3). In 1986. unemployment in Ontario had
fallen from its 1985 peak of 8.0 per cent to 7.0 per cent.l~ Besides
CAMI. American Motors. Honda. and Toyota were all building in
Ontario. and Hyundai was building a plant in Quebec. The feast-and-
famine contrast heightened US disapproval of Canadian investment
incentives. as was made especially clear in the next case.
Ste.-Therese, Quebec, 1987
Negotiations over the fate of the Ste.-Therese. Quebec. assembly

plant involved General Motors. the Canadian government. the gov-
ernment of Quebec. and the US government. which chose this case
as the fight to pick. General Motors put the pressure on Ste.-Therese
in 1986 by not assigning a product line to the plant for the 1988
model year: after June 1987. there would be nothing to produce. In
response to widespread fears that the company would close the plant.
at a time when Quebec's unemployment was well above the national
average (11.0 per cent in 1986. 10.3 per cent in 1987);6 workers there
agreed to reduce the number of job classifications and to adopt team
production methods (Wall Street Journal, 23 September 1986. p. 10;
McNish. 25 March 1986. p. 6). These were in place at both of GM's
North American joint ventures, NUMMI (with Toyota in Fremont.
California) and CAM!.
Despite US pressure. GM and the Canadian and Quebec govern-
ments entered into negotiations for the terms for keeping Ste.-Therese
open. and incentives were on the table. In addition to not closing the
plant. General Motors was proposing to add a paint plant. There was
widespread speculation reported at the time that the US government
would demand that the Auto Pact be renegotiated. A large part of
the dissatisfaction was that Canada was running an overall trade
surplus in automotive products (parts plus finished automobiles),

which in 1985 was on the order of C$5 billion (Wall Street Journal,
22 December 1986, p. 7).
While negotiations were under way for the US-Canada Free Trade
Agreement, a deal to save Ste.-Therese was announced on 31 March
1987. The Canadian federal and Quebec provincial governments each
provided GM with a 30-year, C$110 million interest-free loan to
finance C$220 million of the C$450 million to be spent on modern-
izations and a 500,000 sq. ft. paint facility. This loan, which had a
single repayment due in 2017, was equivalent to a C$197.1 million
grantP Structuring the aid package as a loan rather than a grant also
allowed GM to save over $CllO million in taxes (Milner and Waddell,
1 April 1987, p. 1). The Canadian Minister of Regional Economic
Expansion, Michel Cote, defended the agreement as being necessary
to save the 3,500 jobs at the plant and thousands more jobs at the
company's suppliers. GM-Canada president George Peapples said
that without the loan, it would have been too risky for the company
to make the investment. On the other side, US outrage was imme-
diate. The chief American negotiator for the Free Trade Agreement
told the Wall Street Journal the deal was 'very explosive.' And an
unnamed US trade official claimed that over 30 years the loans rep-
resented a $1 billion subsidy.IS According to Paul Wonnacott (1987,
p. 26), these subsidies were particularly galling to the Americans
because of the perception that 'Canada apparently intend(ed) to pre-
vent even the least efficient plant from closing, while 11 GM plants
[were] being closed in the United States'.
Unlike the case of a potential Valleyfield, Quebec, site for General
Motors, where US pressure apparently dissuaded the company from
accepting C$96.5 million to build a C$625 million foundry (Kirton,
1980-1, p. 66; Wall Street Journal, 30 July 1979, p. 3), in this case the
company went ahead and accepted the joint federal/provincial offer.
CONCLUSION
The cases examined here show that the bargaining power of the auto-
makers has increased since the early 196Os. At that time, the poten-
tial for increased efficiency at Canadian plants, due to continental-level
production runs, combined with the lower-cost Canadian labor, made
production in Canada economically attractive. As a result, the Big
Auto Bargaining 19
Three shared the Canadian government's desire to increase produc-

tion there, and they teamed up on the US government to give the
Auto Pact a shape that encouraged Canadian production. 19 The plants
announced in 1964-65, then, did not need special concessions from
the Canadians to encourage their location. Once production in Canada
was rationalized and integrated with US production, however, Ameri-
can carmakers no longer produced all their models in Canada. They
instead produced huge numbers of components and just a few mod-
els, destined mainly for sale in the US, while importing most of the
models sold in Canada. The producers were then less vulnerable to
possible actions by the Canadian government and could make pro-
duction decisions on their estimates of the best locations for the
production and distribution of their cars.
Subsequent events have shown that the two countries are now
highly competitive locations for automotive investment, as exempli-
fied by specific bidding wars and diplomatic battles over incentives.
This bidding dynamic has contributed greatly to worsening outcomes
for Canada, in that the government has had to give ever-increasing
incentives to the Big Three to induce them to locate in Canada. This
has been done through an auction, as in the case of Ford's engine
plant, or a threat to close, as in the case of Ste.-Therese, but in all
these later cases the advantages of mobility were in full evidence.
Note that this result is not simply due to rising unemployment.
Ontario unemployment was lower in 1986 than in 1978, yet the federal
and provincial governments gave a larger package to CAMI than to
the Ford engine plant.~n Another interesting point to remember is
that the problems that initially caused the Canadian government to
launch its efforts to change the status quo with its duty-remission
export subsidy grew partly because the Canadian subsidiaries of US
firms had their exports hurt by the foreign expansion of the parent
companies (Kirton. 1980-1, p. 44).
The Canadian case also demonstrates the interrelationship of cap-
ital mobility and free trade. It had to be economically feasible to
integrate production continentally before the automotive trade could
be made freer by the Auto Pact. (Recall that the Canadians would
not have agreed to it without the Letters of Undertaking from the
firms. The firms would not have signed unless locating in Canada was
going to be advantageous economically for the foreseeable future.)
In addition, the firms' use of capital mobility elsewhere (production
in Europe, Australia. etc.) put the pressure on the Canadian govern-
ment that made the status quo intolerable. Again, had the carmakers
in Canada been locally owned, they might have responded differently

to the competitive challenge. 21
Once the Auto Pact was approved, it further increased the firms'
ability to locate anywhere they chose, and they rearranged them-
selves in a way that made them less vulnerable to Canadian govern-
ment action. Competition for auto investment increased between the
two countries, as seems to be the general result for common markets.22
The US-Canada Free Trade Agreement is likely to spread this com-
petition beyond the auto industry, and the recently approved North
American Free Trade Agreement will intensify it further (Jenkins,
1992, pp. 1%-7).
The competition for investment within North America contrasts
from that within the European Union. While certainly sharp, there is
a long-standing body of regulations and case law empowering the
Commission to regulate investment incentives given to firms (Com-
mission of the European Communities, 1990). In the NAFTA treaty,
there is nothing to regulate incentives, and the combination of no
tariffs and no subsidy regulation may make future North American
bidding wars larger and far more conflictual than in the past.
Interviews
Marc Angers, Automotive Officer, Canadian Department of Industry,
Science, and Technology
Leslie Desjardins, Manager of Trade and Market Policy, General
Motors of Canada
Frank Huyberts, Treasurer, CAMI Automotive
Stu Lowe, Public Relations, General Motors of Canada
Simon Reisman, chief Canadian negotiator of the Auto Pact and the
Free Trade Agreement
Archives
John F. Kennedy Presidential Library, Boston, Massachusetts
Lyndon B. Johnson Presidential Library, Austin, Texas
National Archives of Canada, Ottawa, Canada
Auto Bargaining 21
Notes
I. For a further elaboration of this argument, see my 'Trade Policy and
the Politics of Investment: The Big Three and the Auto Pact' (under
review at International Organization).
2. For example, the government was prepared to let smaller parts firms
lose out in free trade. See 'Meeting with u.S. Officials, Washington,
Oct. 9, 1964,' n.d., National Archives of Canada, Accession RG 20,
Series B-1, Vol. 2053, File VI021-11, pt. 2. Chief Canadian negotiator
Simon Reisman reported at the meeting that 'The parts people did
not like the agreement, did not think they could compete with US
producers. Nevertheless it was our conclusion that we should proceed,
although we would need transitional arrangements to ease problem of
Canadian parts people' (emphasis added). Moreover, Ford was able
to scuttle a last-minute attempt by the Canadians to remove certain
large trucks (a segment in which Ford had a near-monopoly) from the
agreement, in order to benefit a small Canadian producer. Ford stopped
it by threatening not to sign a production guarantee with Canada if it
insisted on exempting the segment. Compare Drury to Deputy Min-
ister,22 December 1964, which reported that the Ford letter was ready,
with Barrow to Reisman, 23 December 1964, which reported the call
from Tony Alic. National Archives of Canada,. Accession RG 20, Series
B-1, Vol. 2053, File V1021-11, pt. 4.
3. See note 2 above.
4. See Thomas (1992, Chapter 4) for a full treatment of viewing capital
mobility as a potential factor. I see mobility as a function of the cost
of coordinating one's business functions across space. Transport and
communications costs figure prominently here. A fall in these costs
increases the number of economically feasible sites for a particular
facility (manufacturing plant, research center, headquarters, etc.). This
gives firms an increasing choice of locations, especially when establish-
ing a new facility (as compared with relocations, which are more con-
strained due to sunk costs). As a result, my measurement strategy is
to use real transport and communications costs over time as a proxy
for capital mobility. I found that real telephone costs fell over 95 per
cent between 1946 and 1990 (for a call from New York to London)
and real international air-transport costs (in terms of revenue per
passenger-mile) fell over 80 per cent between 1945 and 1988. In gen-
eral, then, capital mobility was increasing during the 1960-90 period
under discussion here. At the beginning of the case discussed here, the
introduction of tri-level rail cars reduced the real cost of transporting
finished automobiles by over 40 per cent (calculated from White, 1971,
p. 43). According to economic geographer James Rubenstein (1988,
p. 14), the reduction was dramatic enough to make it less expensive
for automakers to let each plant specialize in producing one or two
models for the entire continent than to have each plant produce all the
models needed for its hinterland. as had previously been the case. This
led carmakers to close most of their coastal assembly plants and re-
place them with plants near the US-Canadian popUlation center.
Later in this period, though there were no dramatic changes in trans-

port or communications costs, tirms learned to use public bidding wars
to take advantage of their mobility, which further strengthened their
negotiating position.
5. The three-firm concentration ratio (share of the top three firms in the
production of the top 20) for world automobile production fell from
69.5 per cent in 1962 to 43.2 per cent in 1989 (Thomas, 1992. p. 155).
While this increased the theoretical likelihood that a non-American
firm would place automotive investment in Canada, it was not until
the 1980s that this possibility was actualized with the placement of
second-tier Asian 'transplants.' Until 1987, when the first Canadian
Hondas rolled off the assembly line. the Big Three plus American
Motors produced 99 per cent of all passenger cars in Canada (MYMA.
1988, p. 9) However, Honda announced in June 1984 that it would
build an assembly plant in Ontario, followed by Hyundai in November
1985 (Quebec) and Toyota in December 1985 (Ontario). This should
have strengthened Canada's bargaining position vis-li-vis OM on the
CAMI and Ste.-Therese plants, as the Big Three share fell to 80.6 per
cent of Canadian auto production in 1991, when those plants were on
line (MYMA. 1992, p. 5). On the technology side, some have argued
for the importance of lean production as a major change in the indus-
try. However, with its emphasis on being close to consumers and just-
in-time manufacturing, it favors hosts in developed countries such as
Canada compared with hosts in less-developed countries. Thus it
cannot be a complicating factor in the present analysis.
6. Telephone interview with Simon Reisman, chief Canadian negotiator
of the Auto Pact and the US-Canada Free Trade Agreement, 10 Sep-
tember 1991.
7. An interview reported by Keohane and Nye (1977, p. 2(7) suggests
that the Americans may not have understood the extent to which the
Canadians' interests converged with that of the carmakers. They quote
a US official as saying, 'We knew about the Canadian plan to black-
jack the companies, but we expected the companies to be harder bar-
gainers [i.e., over the letters of undertaking]. They didn't have to give
away so much. It must have been profitable to them ... .'.
8. Litvak et al. (1971, p. 61). Increasing production of engines and auto-
matic transmissions were listed as Canadian goals by their chief Auto
Pact negotiator, Simon Reisman. Telephone interview with Reisman,
10 September 1991.
9. National unemployment statistics from Statistics Canada, Canadian
Statistical Review, December 1973, Section 1, p. 16. Provincial unem-
ployment from Canadian Statistical Review, December 1966, Table 24,
p.18.
10. Statistics Canada, Canadian Statistical Review, December 1987, Sec-
tion 1, p. 10, for national rate; ibid., December 1979, Section 4, Table
5, p. 47 for Ontario rate.
11. Part of the C$2 billion had been allocated to the St. Catherine's,
Ontario, parts plant, but nothing for Ste.-Therese.
Auto Bargaining 23
12. Telephone interview with Leslie Desjardins, Manager of Trade and

Market Policy. General Motors of Canada, 20 September 1991; tele-
phone interview with Mark Angers. Automotive Officer, Canadian
Department of Industry, Science, and Technology, 24 October 1991.
13. Telephone interview with Stu Lowe, Public Relations. General Mo-
tors of Canada. 11 October 1991.
14. Salter and Tedesco (8 September 1986, p. 42); telephone interview
with Frank Huyberts. Treasurer, CAMI Automotive, 15 October 1991.
15. Statistics Canada. Canadian Statistical Review, December 1987, Sec-
tion 4, Table 5. p. 53.
16. Statistics Canada. Canadian Statistical Review. December 1987, Sec-
tion 4, Table 5, p. 53, for 1986; Statistics Canada. Canada Yearbook
1990, Table 5.6, pp. 5-22, for 1987.
17. Author's calculation. GM could have used C$22.9 million to buy 30-
year (US or Canadian) Treasury bonds, yielding 7.84 per cent as of 30
March 1987 (Wall Street Journal, 31 March 1987). This amount would
yield C$220 million in 2017 (calculated using Andrew Tobias, Manag-
ing Your Money software). The difference, C$l97.1 million, would be
available for GM's use on the plant.
18. Wall Street Journal, 1 April 1987, p. 2. By contrast, Peapplcs estimated
the interest savings to be C$180 million; see 'Keeping the assembly
line rolling', Mac/ean's, 13 April 1987. p. 10. As shown above, GM
would have C$197.1 million left over after buying enough 30-year
Treasury bonds to have the necessary C$220 million in 2017.
19. Of course. Canadian and Big Three interests were not congruent on
every issue. The fact that the industry is 100 per cent foreign-owned
is certainly undesirable from many Canadians' point of view. but there
is no practical way to Canadianize the industry. As mentioned above,
the last time it was seriously considered was in 1962, when the idea of
a Crown Corporation to make automatic transmissions was shot down.
See Kirton (1980-1, p. 45). Furthermore, the preference of the firms
was for trade, but the Canadian government only wanted liberaliza-
tion with production guarantees. See Reisman to Drury, 11 September
1964, National Archives of Canada, RG 20, Series B-1, Volume 2053,
File VI021-11, pt. 2 (September 1964-15 October 1964).
20. This was also true in another case I have examined, GM in New York
state (Thomas, 1992, pp. 196-200).
21. Interestingly enough. the auto industry itself provides a counter exam-
ple. In 1964, when Studebaker was in deep financial trouble, it closed
its last US plant but continued producing at its plant in Hamilton,
Ontario, for two years before the firm finally shut down. See John B.
Rae (1984, p. 108).
22. Guisinger (1985, p. 18). Interestingly enough. though Guisinger says
that common markets were more competitive than domestic markets
in the pursuit of investments, there was a higher proportion of domestic
market-oriented investments influenced by incentives (77.8 per cent)
than common market-oriented investments (65.4 per cent). See Table
1-6, p. 49. I would suggest that we should expect the opposite if
24 FDJ in a Changing Global Political Economy
common markets are more competitive. There is no question. how-

ever. that common markets often witness open bidding wars for an
investment that will serve all its members.
3 Maquiladorization as a
Global Process 1
Jeffrey A. Hart
INTRODUCTION
A maqlliladora is an assembly plant set up under the Border Indus-

trialization Program instituted by the Mexican government in 1965
'to provide employment for Mexican citizens in the cities along the
U.S. border. An immediate reason for the government's action was
the termination of the hracero (guest worker) program by the United
States that left many Mexican workers idle in these cities. The new
program allowed duty free importation into Mexico of production
equipment and materials and allowed 100 per cent foreign ownership
of maquiladoras' (Mobley. 1990. p. x). The United States supported
the Mexican border policy by adopting legislation in the 1960s to
introduce items 806.30 and 807.00 of the Tariff Schedules of the
United States.~ These special trade provisions permit importation
of products assembled abroad in export processing zones with the
appropriate tariffs applied only to the added value associated with
assembly (and not the total value of the products).
The Maquiladora Program has had a dramatic impact on the in-
dustrialization of Mexico, and especially Northern Mexico. since its
beginning in 1965. There were 1,938 maquiladora plants in operation
by 1990 (see Figure 3.1). These plants have created a source of
employment and wealth for almost 400,000 Mexicans who might other-
wise have been tempted to migrate illegally to the United States (see
Figure 3.2). The maquiladoras have created an increasing number of
jobs for technically trained Mexicans, as more and more firms placed
state-of-the-art assembly technologies in the region. In addition,
the maquilas have helped to support local supplier industries and
infrastructure that might not have been built in the absence of the
program.
The dynamism of the region has created strong support for oppo-
sition parties in Northern Mexico, which may lead eventually to in-
stitutional reforms that permit a competitive party system to emerge
25
Number
2,500 , . . - - - - - - - - - - - - - - - - - - - - - - - - - - ,
.. Mexico
2,000
+Mauritius
.Jamaica
1.500 .... - ................. _............... _........... _............ -..... .
1,000 ..................................................................... .
Year
Sources: Instituto Nacional de Estadistica (various years); Matthew Roberts (1991.

p.88).
Figure 3.1 Maquiladora/EPZ Plants in Mexico, Mauritius, and Jamaica
Thousands
500
"'Mexico
400
. +Mauritius
.Jamaica
300
200 ...................................................................... .
Year
Sources: as for Figure 3.1.
Figure 3.2 Employment in Maquiladora/EPZ Plants in Mexico, Mauritius,

and Jamaica
Maquiladorization 27
in Mexico. It has also increased support for the shift from import-
substituting industrialization to export-led development strategies in
Mexico.' and hence for the negotiation and implementation of the
North American Free Trade Agreement both in Mexico and in the
United States.
However, work in the maqui/adoras paid lower-than-average wages
even in Mexico where wages were already low; working conditions
were poor, many of the more unpleasant jobs were held by female
workers, and environmental and safety regulations were poorly en-
forced. The Mexican unions have organized the workers of
maquiladora plants in the usual way, with mixed results. Union lead-
ers affiliated with the PRJ (Partido Revoillcionario Institl/cional) did
not vigorously defend the interests of the rank and file. The PRJ
government was unable, because of general austerity, to provide
adequate public services for the maqlli/a worker communities. Thus,
maquiladora workers were forced either to accept poor pay and
working conditions or organize rival unions and face the attempts by
the PRJ unions and the government to suppress those rival labor
organizations.
The results of the Maquiladora Program are similar to those of
export processing zones (EPZs) set up in other countries.~ However,
in many smaller and poorer Third World countries, like Mauritius
and Jamaica, EPZs have not resulted in increased numbers of highly-
skilled jobs, larger supplier industries, and improved infrastructure.
The key difference between the Mexican experience and that of poorer
countries appears to have been the amount of prior investment in
human capital formation and the willingness to improve physical
infrastructures. These poorer countries were likely therefore to be
locked into a situation in which increases in wages for EPZ workers
result in the closure of EPZ plants and their reestablishment in other
lower-wage countries or regions. Thus, one important lesson from
the histories of the Maquiladora Program and the EPZs is that de-
veloping countries should not expect long-term benefits from EPZ-
driven inflows of foreign investment unless they are able and willing
to invest in human and physical infrastructures.
The argument in this chapter proceeds as follows: (1) I summarize
the actual performance of the Maquiladora Program in Mexico and
compare it with the EPZs of a variety of other developing countries;
(2) I put forward some general propositions about the compar-
ative statics of investment decisions by managers of multinational
corporations (MNCs) confronted with the decision of where to
locate labor-intensive processes; (3) I consider the mid- and long-

term dynamics of the relationship between the MNCs and the EPZ
host country; and (4) I provide some general conclusions about the
'maquiladorization process.'
MAQUILADORAS IN MEXICO
In 1964, the United States ended the 22-year-old bracero program,

which had legalized the flow of approximately four million Mexicans
across the border to work on US farms. That same year, the Mexican
Minister of Industry and Commerce toured production facilities in
Asia, where US firms were setting up assembly operations in a vari-
ety of different countries and industries. The following year, the
minister announced a new program called the Border Industrializa-
tion Program (BIP) to encourage inward foreign investment for the
establishment of assembly plants called maquiladoras (Wilson, 1990,
pp.36-7).5
The main domestic supporters of this new program initially were
the owners of the land which would be used for industrial develop-
ment. Very little inward foreign investment followed the announce-
ment of the BIP. Flows did not begin in an appreciable manner until
the clarification of the program in laws issued in 1971. These laws
permitted 100 per cent ownership of maquiladoras, in contrast to
ownership limits of 49 per cent for firms 'producing for the internal
market.' Maquiladoras could be established either as wholly-owned
subsidiaries or as joint ventures with Mexican partners. In either
case, the maquiladora was supposed to produce for export back to
the foreign owner only. Mexican-owned firms wishing to participate
in this market had to set up either a joint venture with a foreign firm
or a separate maquiladora subsidiary.
Initially, maquiladoras tended to be restricted to sweatshops for
the employment of low-paid female workers, and foreign investors
were not perceived to have a long-run interest in Mexican develop-
ment. A new labor law passed in 1970 under the Echeverria govern-
ment improved the organization rights of maquiladora workers, and
the subsequent reactions to a variety of managerial abuses resulted
in a rise of maquiladora labor militancy and the withdrawal of sup-
port of the rank and file for the government affiliated union, the
Confederacion de Trabajadores Mexicanos (CTM).
The recession of 1973-74 and the election of Lopez Portillo created
a climate of lower labor militancy and the return of the CTM as the
official representative of the workers. This pattern was repeated during

the recession of 1981-82. The biggest change in the Maquiladora Pro-
gram since its establishment came with the reorientation of Mexican
development strategy after the 1982 debt crisis.
The 1982 debt crisis convinced the Mexican political elite that the
past policies of import-substituting industrialization could not be
continued. Stable revenues from petroleum exports combined with
increased debt service payments in the late 1970s and early 1980s
resulted in a large increase in the balance-of-payments deficit. The
Echeverria and L6pez Portillo governments had adopted overly
ambitious governmental spending programs on the basis of increased
petroleum revenues and increased inflows in foreign loan capital after
1973. These programs were not cut back when the revenues stabil-
ized and the debt servicing bills grew. Mexico faced the problem of
'twin deficits' in both the balance of payments and government spend-
ing. After several unsuccessful attempts to use currency devaluation
alone to reduce the balance-of-payments deficit and a massive debt
rescheduling of 1982 to lengthen the payback period of foreign loans,
the Mexican elite was ready to try something new.
The something new in this case was a switch to a more export-
oriented development strategy; a sort of Mexican version of the
export-oriented strategies adopted by the Asian newly-industrializing
countries (NICs). The Mexican strategy included further devaluation
of the peso, a tight monetary policy to reduce inflation, and the
lowering of tariffs with respect to manufactured goods, especially
those which could be considered inputs for Mexican manufacturing.
In addition, many state enterprises were privatized, and restrictions
on inward foreign investment were eased.
The shift toward export promotion focused the attention of gov-
ernment elites on the role of the maquiladoras in generating exports.
In 1982, accordingly, President Miguel de la Madrid declared the
maquiladora sector a priority for the economy. De la Madrid estab-
lished by presidential decree in 1983 a new set of rules for the sector,
which included, among other things, the right of maquiladoras to sell
up to 20 per cent of their output on the domestic market, a decentral-
ization of maquiladora regulation, and a general easing of maquiladora
regulation.
The government of President Carlos Salinas de Gortari issued a
new maquiladora decree in 1989 which further simplified the process
of certifying a maquiladora enterprise and encouraged establishment
of maquiladoras in the interior of the country. Maquiladoras were
now permitted to sell up to 50 per cent of their production in Mexico,
as long as they paid the regular duties on imported components. It

is not surprising, therefore, that the number of maquiladoras and the
number of workers in maquiladoras rose sharply after 1982 (Wilson,
1990, pp. 37-42; see Figures 3.1 and 3.2).
In addition, the value of maquiladora exports from Mexico to the
United States under tariff items 806.30 and 807.00 increased from
$2.9 billion in 1982 to $8.7 billion in 1987 (Scheinman, 1990, p. 24).
Whereas initially maquiladora exports had tended to be mainly in
unsophisticated, high labor-content industries like toys, apparel, and
the assembly of printed circuit boards, by the late 1980s a significant
portion of maquiladora exports had shifted toward more sophisticated
automotive and electronics products. Assembly became more sophis-
ticated with the introduction of advanced equipment and other types
of factory automation. Work in the maquiladoras shifted toward a
higher percentage of higher value-added jobs, including those geared
toward installing and maintaining the new automation equipment,
and the lower value-added jobs in the older apparel and electronics
factories were increasingly shunned by male workers (Scheinman,
1990, pp. 27-30; Wilson, 1990, chaps. 3-4).
By the late 1980s, many non-US foreign firms were setting up
maquiladoras to supply their markets in the United States, particu-
larly in consumer electronics, as more and more US firms either sold
out or exited the consumer electronics markets (Hart, 1993). Japan-
ese firms in particular had a great incentive to set up maquiladoras
because the exports of Japanese maquiladoras were likely to be less
susceptible to anti-Japanese trade measures than exports from Japan
or other Asian countries (Rohter, 1987).
So far, I have presented the 'up side' of the maquiladora phe-
nomenon in Mexico. There is, however, a 'down side' which figured
prominently in the internal Mexican debate over the maquiladoras
as well as in the US debate over the North American Free Trade
Agreement (NAFTA). First and foremost is the exploitation of young
and unskilled female workers. Around 68 per cent of the workers in
maquiladoras are female, which is a reverse of the male/female ratio
in Mexican manufacturing. Turnover is high and working conditions
remain very poor for female workers. Many are not represented by
unions, CTM or otherwise. Many live in substandard housing areas
without adequate sanitation, health care, educational facilities, or high-
ways. Many have long commutes to work in unsafe jitney buses. The
poor enforcement of anti-pollution regulations by the Mexican author-
ities leaves them and their children vulnerable to environmentally-
caused illnesses (Stoddard, 1987; Bassols, 1990; Baker, 1989).
Second on the list of negatives has to be the environmental prob-

lems created by the rapid and unregulated growth of maquiladora
industries. There are severe problems of congestion and infrastruc-
ture insufficiencies in border cities like Ciudad Juarez, Nogales, Nuevo
Laredo, Matamoros, and Tijuana. These cities do not have the fiscal
resources to finance improvements in public services and physical
infrastructure, so things have gone from bad to worse in those areas.
Pollution of rivers in maquiladora border zones has become so bad
in some cases that US authorities have proposed pumping Mexican
river water back to Mexico. 6 The pollution issue figured largely in the
Clinton administration's objections to the NAFfA treaty as negoti-
ated by the Bush administration. Even though the NAFfA treaty
was ratified by the US Congress in November 1993, there is likely to
be further negotiation on the environmental and labor policy side
agreements that went with the treaty.
Finally, one has to consider the costs connected with the failure to
create linkages between the maquiladora industries and local firms.
This failure to link activities is not universal, but limited to certain
industries and locations. The Maquiladora Program, unlike similar
programs in Asian NICs (particularly Taiwan), has not emphasized
the participation of local entrepreneurs or the development of indig-
enous technological capacities and infrastructures. The desire to
stimulate exports in order to reduce unemployment and the balance-
of-payments deficit has tended to eclipse other concerns. As a result,
the Mexican Maquiladora Program and Mexican development strat-
egy in general have a long way to go in matching the successes of the
Asian NICs in building up indigenous technological strength and in
fostering forward and backward linkages between the export sector
and the rest of the economy.
Nevertheless, there are signs that things are moving in this direc-
tion. Investments in human capital are proving to be an important
advantage for Mexico in attracting further EPZ-type investments.
Some multinationals, like Apple and IBM, have been donating funds
to Mexican vocational schools to ensure that certain technical skills
are included in their curriculum. In my own interviews with US semi-
conductor and consumer electronics executives, I have learned that
they value Mexican technical skills highly, and increasingly transfer
the latest product and process technologies to their Mexican plants
rather than waiting first for the bugs to be ironed out in their US
operations.
The indispensability of maquiladora operations for all businesses
operating in North America is likely to increase with the successful
implementation of NAFfA. NAFfA will increase the competitive-

ness of Mexican supplier firms and will make it easier for successful
Mexican firms to establish a presence in Canada and the United
States. The maquiladora phenomenon, which had already begun to
spread to the Mexican interior under the Salinas de Gortari regime,
is likely to do so all the more rapidly after the NAFf A takes effect.
In short, I would argue that maquiladorization is now an irrevers-
ible North American process if not a global one. Now I would like
to consider the EPZs in other countries to see if one can generalize
the maquiladorization process beyond North America.
EPZs IN OTHER COUNTRIES
As of 1984, there were 35 countries with a total of 79 export process-

ing zones in operation. By early 1989, there were 200 EPZs in opera-
tion, and more than 100 under construction. In the 200 zones in 1989,
over 1.5 million workers were employed. It was projected that em-
ployment would rise to as high as 3 million workers by the mid-1990s
(Currie, 1984; United Nations Centre on Transnational Corporations,
or UNCTC, 1990a). This is not an enormous proportion of the Third
World's workers, but the rate of increase has been rapid in recent
years and it is highly likely that EPZs will spread to other parts of the
world.
EPZs are to be found not just in the capitalist countries, but now
increasingly in communist and formerly communist nations. The
economic reforms adopted in 1988 in the People's Republic of China
and the leadership's desire to accelerate growth through the adop-
tion of an export-oriented development strategy resulted in the es-
tablishment of 'special economic zones' in China. After 1989, Russia,
Poland, Hungary, Bulgaria, and Vietnam were all in the process of
either establishing EPZs or considering their merits.
Early discussion of the offshore assembly operations in EPZs,
particularly in Asia, focused on a 'new international division of labor'
(Frobel et al., 1980) and of 'the global factory' (Grunwald and Flamm,
1985). Reich (1991) spoke of the replacement of 'national hierarchies'
in the organization of high value-added businesses with 'global webs,'
where various parts of the production and commercialization process
were done within any given firm in the most appropriate parts of the
globe regardless of the nationality of the firm.
The Mexicans may have taken the EPZ concept farther than any
other single country. Employment in their maquiladoras accounts for
between a fourth and a third of the total employment worldwide in
EPZs. Nevertheless, it is important to compare the experiences of
different EPZ countries over time to understand both the dangers
and opportunities presented by the global trend. Two particularly
interesting cases of the potentially negative effects of maquiladoriza-
tion can be found in Mauritius and Jamaica.
The Case of Mauritius
The EPZ in Mauritius began in 1970. Any factory on the island can
be an EPZ if it manufactures exclusively for export. The growth of
EPZ plants was almost as rapid in Mauritius as it was in Mexico (see
Figure 3.1), and, as in Mexico. the most rapid growth came after a
major debt crisis (1983) and a structural adjustment agreement with
the International Monetary Fund. EPZ exports were $738 million in
1990: that is. 60 per cent of the total exports of the country and about
35 per cent of the gross domestic product. The EPZs employed more
than 90,000 people in around 600 factories in 1990. Almost all the
EPZ factories established after 1970 were in the textile and apparel
industries. Employment in EPZ factories was primarily low-wage jobs
for female workers. Most of these workers were not unionized.
Employment in EPZ firms helped to bring the unemployment rate
down from around 20 per cent to under 3 per cent in the late 1980s
(Roberts. 1991. pp. 53-60; Wong, 1990, p. 12).
There were very important differences. however. in the type of
enterprises that invested in plants there and in the types of jobs
created. Most of the enterprises established in Mauritius were in the
textile and apparel business. Most of the jobs created were low-skill
and low-wage jobs. Unlike the Mexicans. the Mauritians did not have
the resources to invest in human capital and physical infrastructure
in order to increase productivity so that wages could rise. So the
Mauritian case demonstrates the risks of pursuing a maquiladora/
EPZ-based export-led development strategy for smaller and poorer
developing nations (Roberts, 1991, chaps. 4-6).
The Case of Jamaica
The Jamaican EPZs were created in 1976 under the Seaga govern-
ment. There are three zones: Kingston EPZ began operations in
1976; Montego Bay Free Zone in 1985; and Garmex in 1988. King-
ston EPZ grew rapidly until 1981, when growth slackened off due
mainly to the economic recession in the United States. After 1983,
growth resumed until another downturn in 1987, this time induced by
the combination of a destructive hurricane and labor militancy in the
zone. The return to power of Michael Manley in 1989 resulted in
some changes in Jamaican EPZ policies, including an attempt to put
the EPZs under the control of the Jamaican port authority. This
attempt created some confusion within the EPZ community about
the future direction of state policies.
As in Mauritius, the greatest proportion of firms and employment
in the Jamaican EPZs was in the garment industry. The main attrac-
tions for foreign investors were low wages and the proximity of
Jamaica to US markets. The Seaga government adopted a very favor-
able attitude to foreign investors, in sharp contrast with the previous
government of Michael Manley. Despite its extensive bauxite depos-
its, Jamaica is a poor country unable to invest extensively in physical
infrastructure or human capital. Bauxite export revenues could not
support an ambitious state-led development strategy. The defeat of
Michael Manley by Edward Seaga in 1980 was at least partly due to
the perceived failure of Maniey's state-led industrialization strategies
and hopes for an export-led development.
It is not surprising that the Jamaican EPZs did not contribute as
much as either the Mexican maquiladoras or the Mauritian EPZ to
the growth of exports and employment. There was ambivalence in
government policies and uncertainty about the continuity of those
policies. Jamaica lacked the physical infrastructure and human cap-
ital base to move beyond simple assembly operations to more sophis-
ticated manufacturing processes and to link EPZ activities to those
of local firms. Thus, Jamaica's experience was less successful than
that of Mauritius, which in turn was considerably less successful than
that of Mexico.
THE COMPARATIVE STATICS OF MAQUILADORAIEPZ

INVESTMENT DECISIONS
Some of the studies cited above emphasized the importance of

wage differentials in the decisions of MNC managers in locating
production activities in maquiladoras and export processing zones.
Wage differentials are obviously quite important in the US-Mexican
maquiladoras, as Mexico's average wages in manufacturing are less

than one fifth those of the US and maquiladora wages are even lower.
But wages alone cannot be the sole criterion, because lower pro-
ductivity can cancel out the cost-reducing effects of lower wages. In
addition, wage differentials should matter more for products in which
the percentage of total manufacturing value-added attributable to wage
labor is high relative to other inputs. Products for which this is true
- for example, shoes, apparel, semiconductor and printed-circuit-board
(PCB) assemblies - are more likely to be manufactured in low-wage
countries or regions. Similarly, the costs of transporting the final
product or subassembly back to its final market should be small rela-
tive to other commercialization costs. Thus, the production of bulky
or fragile items like refrigerators, large television picture tubes, or
elevators is not likely to be relocated from high-wage to low-wage
regions if the market is in the high-wage region.
To summarize, the main factors in relocating production activities
to low-wage regions would be:
(a) the wage differential;

(b) the productivity differential;
(c) the percentage of value-added attributable to wage labor in
the production process; and
(d) transportation and other production or commercialization costs.
In addition, one would want to know if the low-wage region has an

adequate transportation and communication infrastructure, a reliable
set of local suppliers of needed goods and services, and a reasonably
stable and favorable business climate.
A favorable business climate will include, among other items: (a)
zero or low tariffs and no quantitative restrictions on imports of com-
ponents or technology from the home country; (b) willingness to accept
investments that involve 100 per cent ownership by the foreign firm;
and (c) at least national treatment for the foreign firm (i.e., no discrim-
inatory policies aimed at foreign versus domestically-owned firms).
Even these additional factors do not quite adequately characterize
the current environment for relocation of labor-intensive processes,
however. Recent evidence on maquiladoras and EPZs suggests that
the availability of trained personnel - skilled workers and engineers
- is also a consideration, especially for investments in more advanced
production processes such as flexible automation and computer-
integrated manufacturing (CIM) methods. 7
THE DYNAMICS OF MNC-HOST RELATIONS
Over time, the relations between MNCs and host countries in EPZs
will change to reflect their different agendas. A pure policy of ex-
ploiting low wages for highly labor-intensive production of reexported
goods will probably be bad for both the MNC and its host. The MNC
will get the reputation of not caring about the communities in which
it is located, of being willing to relocate 'at the drop of a hat' to a
lower-wage country; the host will not be able to justify the policy
changes behind the formation of the EPZ in terms of observable
long-term progress for the work-force. The MNC will be tempted to
sell some of the output of its EPZ factories on the domestic market
of the host, as otherwise it can expect these goods to be stolen and
sold on the black market. The host government will want to encour-
age this activity, as it will allow the government to claim that one of
the benefits of the EPZ was to increase the supply of inexpensive
but technologically-advanced consumer goods in domestic markets.
Local manufacturers of competing products will oppose this, but they
are not likely to prevail in the long run.
Thus, both MNCs and host governments will support moves to
create backward and forward linkages between the MNCs and local
firms and to deepen the industrialization that occurs in the zone. The
firms and host governments will support efforts to upgrade the skill
levels of zone workers, and may increase funding of local educational
institutions to accomplish this. They may also agree to fund local
research and development efforts to strengthen the technology base
for the region.
These theories about the statics and dynamics of MNC activities in
EPZs are based on my reading of the history of the Mexican Maqui-
ladora Program and the EPZs of Mauritius and Jamaica.
CONCLUSION
The maquiladorization process is becoming increasingly global in the

sense that MNCs in all the industrialized regions of the world are
looking to the low-wage developing regions for the location of labor-
intensive parts of their increasingly globalized businesses. This pro-
cess is not fully 'global' in the sense that major countries and MNCs
are completely indifferent about regional location.
The maquiladoras of Mexico are dependent upon a US-Mexican
regime which started with the Mexican Border Industrialization Pro-

gram and the US 806.30 and 807.00 tariff legislation. They will be
dependent in the future on the implementation of the NAFfA treaty.
The maquiladoras are globalizing to the extent that non-US and non-
Canadian MNCs want to locate in Mexico to gain access to North
American markets under the NAFfA. But by the same token, EPZs
in the Caribbean will be hurt, to some extent, by the focus of US,
European, and Japanese MNCs on locating in Mexico. In other words,
the tendency of the major industrial regions to regionalize their trad-
ing systems as a defense against other regions will limit the 'global-
ization' of the maquiladora process.
Similarly, EPZs in the developing world do not have the same
access to the European or Japanese markets as they do now to the
North American markets. Unless there is an extension and upgrading
of the Generalized System of Preferences (or something like it) to
make it resemble more the US 806.30 and 807.00 tariff scheme, there
will not be the same incentives to establish EPZs aimed at European
and Japanese markets. It is much more likely that regional agree-
ments will be made or strengthened, along the order of the Lome
Agreements between the EC (European Community) and the ACP
(African, Caribbean, and Pacific) countries or the association agree-
ments between the EC and individual non-EC countries in Europe
and the Mediterranean.
From the global standpoint, it would be better if these North-
South trade regimes were both global and multilateral- as the GATT
(General Agreement of Tariffs and Trade) was intended to be - so
that industrialized countries would not be tempted to cut special
deals for developing countries in their 'region.' But with the growing
concern over the decline in US relative competitiveness and over the
rise of Japanese competitiveness in world markets, the political pres-
sures are tending to go strongly in the other direction. Thus, we can
conclude that maquiladorization is a global process, but one which
very much reflects the current trend toward increased regionalization
of the world economy.
Notes
1. This chapter was originally prepared as a paper for delivery at the
annual meeting of the International Studies Association at Acapulco,
Mexico, 23-7 March 1993.
2. The tariff schedules were changed on 1 January 1989. The new sched-
ules for these items are 9802.00.80 and 9802.00.98 respectively.
3. For a full description of the difference between these two development
strategies, see Haggard (1990).
4. One important difference between the Maquiladora Program and most
EPZs is that the government which establishes an EPZ generally pro-
vides financial support for the physical infrastructure of the EPZ (e.g.
buildings, port facilities) as a way of attracting foreign investment. In
exchange for this infrastructure support, the government may insist
upon equity ownership rights in new enterprises. In contrast, the Mexi-
can government provides little support for infrastructure in the
Maquiladora Program and does not require any equity participation in
new ventures.
5. Wilson (1990) explains that the word was originally used to describe
the function of a grain miller, who performs a process on an input and
then gives the resulting product back to the original producer for mar-
keting. The term maquila apparently is used to refer to any kind of
contracting out of labor-intensive processes.
6. Presentation by Daniel McGraw, Associate General Counsel, Interna-
tional Office, US Environmental Protection Agency, at a conference on
the 'Globalization of Law, Politics, and Markets,' at the Indiana Uni-
versity School of Law, Bloomington, Indiana, 4-6 March 1993.
7. According to 1993 UNESCO statistics, for example, Mexico had over
16,000 scientists and engineers in the late 1980s, as compared with 192
in Mauritius and 18 in Jamaica. Given the higher literacy levels in
Jamaica (98 per cent) than in Mexico (87 per cent) and Mauritius (82
per cent), one could argue that Jamaica has invested more in basic
skills on a per capita basis than the other two countries. Thus. the
larger size of the Mexican economy and its greater ability to invest in
technical training may be the key differentiating factors. The data on
literacy are from Central Intelligence Agency (1992).
4 Japanese Foreign Direct
Investment in East Asia:
The Expanding Division
of Labor and the Future
of Regionalism l
Kit G. Machado
This chapter shows that Japanese multinational corporations (MNCs)

in concert with key ministries and agencies of the Japanese govern-
ment are, attendant to the pursuit of their larger economic objec-
tives, systematically promoting expansion of an East Asian division
of labor and integration of regional production on a sector-by-sector
basis. It also shows that Japanese foreign direct investment (FDI) is
central to this process. The chapter begins with some brief comments
on regionalism and globalism in the changing world political economy
and a short analysis of Japan's global and regional FDI patterns to
date and their future prospects. These are followed by an elaboration
and explanation of Japanese official and corporate strategies and
policies in promotion of regional integration and an assessment of
their progress to date. Finally, the chapter assesses some of the likely
consequences of the trends analyzed, particularly for other regional
actors. It concludes that Japanese FDI is central to accelerating
regional economic integration, but not of an exclusive kind; that Jap-
anese celebration of the idea of expanding the regional division of
labor, translated into an ideology of 'cooperation,' cannot serve as the
basis for a widely acceptable regionalism; and that, in any case, the
enormous asymmetry of economic power between Japan and its neigh-
bors is a serious problem for the advance of a durable regionalism.
39
REGIONALISM AND GLOBALISM IN THE CHANGING

WORLD POLITICAL ECONOMY
One prominent interpretation of changes currently underway in the

world political economy sees them as representing movement, how-
ever halting, toward the formation of three major economic regions
centered on Germany, the US and Japan. Regionalization and con-
tinuing globalization are commonly treated as sequential develop-
ments or as counter tendencies. Thurow (1992, p. 82) sees an emergent
world of quasi-trading blocs featuring 'free trade within regions and
managed trade between them,' and he regards these nascent blocs as
potential building-blocks of a true world economy. Garten (1992,
pp. 162-89), in contrast, sees a movement toward more exclusive
regional blocs and expects this to feed further conflict between the
three major economic powers. Gilpin (1993, p. 34) advances an alter-
native and more helpful perspective on current trends. He contends
that they are part of 'a dialectical process [in which both] globalization
... and regionalism ... are taking place simultaneously ... [and that
both trends] ... are in fact complementary and responsive to one
another' and stresses that 'the ultimate balance between global and
regional emphases ... has yet to be decided'. Consistent with this is
Gereffi's (1993, p. 52) point that '[f]lows of goods, capital, and people
within East Asia and North America ... [are] ... creating similar re-
gional divisions of labor - [in both areas, while] ... trans-Pacific trade,
investment, and migration flows are leading to a multilateralization
of these regional blocs'. In any case, Gilpin's assessment reflects his
view that major actors are attempting both to expand the benefits to
be derived from participation in a more open world economy and at
the same time to secure the special benefits to be derived from po-
sitions of regional predominance. Each attempts to move global and
regional trends in directions consistent with its own preferences while
at the same time trying to position itself to operate to best advantage
under alternative circumstances.
Where regional and global tendencies strike a balance is likely to
be most affected by decisions taken in Europe, where the greatest
immediate potential for exclusivism exists, and North America, where
this potential could clearly grow. Some such decisions will continue
in part to be responses to Japanese action and inaction in further
modifying its trading and market access practices. Japan is, however,
unlikely to push exclusive East Asian regionalism except as a defen-
sive measure. Given its extensive investment in and trade with both
Japanese FDf 41
North America and Europe, its primary economic interests are clearly
global. Its economic activities in East Asia are heavily geared to its
extra-regional interests, as many of the manufactures produced by
Japanese affiliates in the region are currently exported to North
America and Europe. At the same time, Japanese regional activities
systematically further East Asian economic integration. Japan would,
however, have to divert a considerable portion of its regional affili-
ates' exports to its own market and accept more manufactures from
non-Japanese affiliated regional firms, to move the region toward
exclusivism. Japan does not currently find it in its interest to do this,
but a framework that will make such a shift easier should it later
seem desirable is emerging. Hence, Hollerman's (1991, p. 20) con-
clusion that 'Japan is prepared to play the global game either in a
regionalized or in a wholly multilateral world economy' is particularly
convincing. How East Asian regionalism will ultimately fit into the
emerging architecture of the global political economy remains to be
seen, but whatever direction it takes in this regard, its importance for
the states of East Asia is already clear.
The structural and operational features of regionalism in Europe,
North America, and East Asia differ in important ways. These fea-
tures reflect the different historical and geo-political circumstances
of each region; the auspices under which and the time frames with-
in which they have developed; the differing degrees of cultural, eco-
nomic and political diversity within and among regional states; and
the characteristics of capitalism as practiced in the core states. Gov-
ernments have played a leading role in the promotion of common
institutions and policies in the EC (European Community) and the
much more recent trade and investment liberalization of the North
American Free Trade Agreement (NAFTA). In East Asia, Japanese
companies, much facilitated by their government, have through in-
vestment and finance been creating the underpinnings of a much less
institutionalized regionalism (Doner, 1993; Gilpin, 1993; Johnson,
1993; Unger, 1993). This is particularly so because of the character-
istics of vertical integration practiced in Japanese industry and the
fact that this pattern of corporate organization is being extended
across national borders and hence creating an intra-industry inter-
national division of labor in various sectors. This is accompanied by
encouragement of more open trade among other East Asian coun-
tries to create a larger regional market.
In all three major world economic areas, there is a dynamic inter-
action between the development of formal regional arrangements
(i.e., institutions, common policies, treaties). a regional division of

labor, a regional market, and regional society and culture. In the Ee
and NAFf A, a regional division of labor and market antedated re-
gional arrangements, but once established, the arrangements created
the context in which they expanded and can be expected further to
expand. In East Asia, an expanding regional division of labor and
market may be precursors of expanding regional arrangements. Many
regional political and business leaders and academics of a globalist
persuasion, however, stress the superiority of market-driven, non-
institutionalized regionalist tendencies. Moreover. owing to continu-
ing regional reactions to the legacy of Japanese imperialism in the
first half of this century, Japanese leaders have been reluctant to
appear keen advocates of regional arrangements. Their regional
approach increasingly stresses social/cultural matters (Heng, 1994),
but their overwhelming emphasis to date has been on celebrating a
Japanese corporation-centered regional division of labor to their
neighbors. It seems improbable that this can in the long run be an
adequate substitute for a more balanced approach to regionalism.
As the four cited elements of regionalism advance, they embody
different mixes of hierarchy and community. A durable regionalism
must rest on a mix that is widely acceptable to important regional
and national actors, and those who determine and implement the
arrangements can play an important role in shaping this mix. Inevi-
tably, a Japan-centered regional division of labor will be based al-
most purely on hierarchy, especially when it crosses Japanese borders.
To the extent that it features aspects of community, they are based
narrowly on mutual economic interest. This is clearly acceptable in
commercial arrangements, and it is apparently more widely accept-
able under current conditions. These include high growth rates and
relatively stable national politics across the region. In most cases,
current growth rates and stability both depend on, among other things,
regime containment of those sectors of labor directly participating in
the emergent regional production networks. It is not farfetched to
imagine such conditions changing. Additionally, regional production
networks are still in relatively early stages of development. As they
expand and become more elaborate, the ways in which they limit
national autonomy and distribute costs and benefits will become more
apparent, and these are less likely to be palatable if the foregoing
conditions change. In the long run then, a widely acceptable mix of
hierarchy and community is unlikely to be found in an approach to
regionalism that gives overwhelming emphasis to the division of labor
Japanese FDI 43
as its centerpiece. The Japanese appear to be aware of this, as they

invest much energy and imagination in glossing over the hierarchical
features of the division of labor they do so much to extend across the
region.
PATTERNS OF JAPANESE GLOBAL AND REGIONAL FDI
Three 'Waves' of FDI
When Japan was forced from East Asia in defeat in 1945, its overseas
investments were confiscated and the Greater East Asia Co-Prosperity
Sphere (GEACPS) was apparently in ruins. By 1951. the Japanese
had commenced foreign investment anew. FDI only began to in-
crease significantly in the second half of the 1960s, however, as the
country's postwar balance-of-payments problem abated and govern-
ment restrictions on capital outflows began gradually to be relaxed.
Since the late 1960s, there have been what Japanese investment
officials describe as three 'waves' of FDI (Nihon boeki shinkokai,
1993, pp. 63-4). These 'waves' have been characterized by accelerat-
ing annual rates of growth, a crest, and then either slower growth or
decline. As Table 4.1 shows, Japan's 1968 cumulative FDI of $2.0
billion increased four times during the first 'wave' of 1969-73; the
1973 total of $10.3 billion was just matched during the following four
years; the 1977 cumulative FDI of $22.2 billion more than doubled
during the second 'wave' of 1978-84; the 1984 total of $71.4 billion
increased more than four times during 1985 and the third 'wave' of
1986-90, reaching $310.8 billion in the latter year. Japanese FDI
declined in the two subsequent years, but had reached a cumulative
total of $386.5 billion in 1992. Average annual investment during the
third 'wave' reached its peak to date of $45.4 billion. These Ministry
of Finance figures for FDI represent the sums of amounts invested in
acquisition of stock, cash loans, establishment of overseas branches
and, through 1981, acquisition of real estate. By the end of 1990, 58
per cent of cumulated investment was in stock and 40 per cent in
loans (Toyo Keizai, 1992, p. 1(27).
Increases and slowdowns in Japanese FDI have been driven by a
combination of domestic and international factors. Increases have
been accounted for by: (1) Labor shortages, rising wages, and in-
creasing land prices in Japan. These have motivated firms to estab-
lish overseas operations in an effort to cut costs since the early 1960s.
Table 4.1 Japanese FDI since 1951 - Cumulative Amounts and Numbers of Companies by Region
(Fiscal Years*IUS$ billions)
North Rest of World Annual avg

America Europe Asia world total per wave
1st Wave: Before 1968 .6 .2 .4 .8 2.0

End 1973 2.5 2.0 2.4 3.4 10.3 (1.7)
2nd Wave: Before 1977 5.4 3.1 6.3 7.4 22.2
End 1984 21.5 9.1 18.0 22.8 71.4 (7.0)
3rd Wave: Before 1985 27.0 11.0 19.5 26.2 83.7
End 1990 136.2 59.3 45.5 67.8 310.8 (45.4)
Most recent year 1992 169.6 75.7 59.9 81.4 386.5
(% world total) (44) (20) (16) (21) (100)
No. Japan cos. 1991 3,791 2,877 5,126 1,728 13,522
(% world total) (28) (21) (38) (13) (100)
No. Japan mfg. cos. 1991 1,186 595 2,680 456 4,917
(% mfg. sector total) (24) (12) (55) (9) (100)
(% regional total) (31) (21) (52) (26) (36)
*Japan's FY ends on 31 March of the following calendar year.

Sources: Sekiguchi (1983, p. 233); Dobashi (1988, p. 13); Nihon boeki shinkokai (1990, pp. 416-17; 1993, pp. 64, 521-23);
Okurasho (1993, pp. 163-65); Toyo Keizai (1992, pp. 4, 1020-22).
Japanese FDI 45
(2) Market access problems have encouraged firms to jump over

other countries' protective barriers and locate in their domestic
markets since the 1960s. This was a big consideration in developing
countries engaged in import-substitution industrialization, mainly
through the mid-1970s, and it has remained important in still-
protected sectors. More recently, market access has been a prominent
motivation both for investment in export platforms in the developing
world and the major increases in investment in North America and
Europe previously noted. (3) Policies of the Japanese and host gov-
ernments have also provided important incentives for FDI since the
1960s. Such Japanese policies have in many instances been exten-
sions of domestic industrial restructuring policies. (4) Japan's desire
to secure stable supplies of natural resources prompted increased
FDI in this sector in the late 1960s (Tanaka, 1986), and this has con-
tinued on a smaller scale since. (5) Growing Japanese public concern
with industrial pollution and the mounting costs to business of com-
plying with tightening regulations began to spur the location of some
offending industries overseas from the late 1960s. (6) Episodes of
yen appreciation since the 1971 advent of flexible exchange rates
have had adverse consequences for the price competitiveness of Jap-
anese exports and have thus been a major stimulus to new overseas
investments and the relocation of established Japanese firms in coun-
tries with lower wages. The steep rise in the value of the yen follow-
ing the 1985 Plaza Accord was clearly a major factor behind the third
'wave' of Japanese FDI. (7) The country's consistent surplus of sav-
ings over domestic investment became available for use overseas
after the deficit was brought under control in the early 1980s, and the
government was no longer absorbing most of it. Slowdowns in FDI
have accompanied economic difficulties in Japan, such as those occa-
sioned by the first oil 'shock' in 1973 and the current recession.
Regional and Sectoral Distribution of FDI
Japanese FDI was particularly heavily concentrated in Third World

natural resources through the first 'wave' of investment, but as Table
4.1 shows, it remained relatively evenly distributed across the major
regions of the world up to that time. During the second 'wave,' FDI
increased in manufacturing in North America and in both industry
and additional natural-resource development in Asia while lagging in
Europe. From 1984, through the third 'wave,' FDI increased around
five-and-a-half times in both North America and Europe but only
about one-and-two-thirds times in Asia (overwhelmingly in East Asia).

By far the largest amount of Japanese FDI, $169.6 billion (44 per
cent), is now in North America, and the amount in Europe, $75.7
billion (20 per cent), has grown to exceed the amount in Asia, $59.9
billion (16 per cent). As Table 4.1 also shows, however, the largest
number of Japanese companies, 5,126 (38 per cent), are in Asia, fol-
lowed by North America, 3,791 (28 per cent), and Europe, 2,877 (21
per cent). Moreover, far and away the biggest number of Japanese
overseas manufacturing companies are in Asia, 2,680 (55 per cent),
followed by North America, 1,186 (24 per cent), and Europe, 595 (12
per cent). This is of particular importance because it is manufactur-
ing that is of central importance in the growth of regional economic
integration. Clearly there are larger numbers of smaller Japanese
investments in Asia than elsewhere, and this reflects the dispropor-
tionate amount of activity there by Small and Medium Industries
(SMIs), many of them engaged in manufacturing (Takeuchi, 1993).
Expansion of the regional division of labor and increasing regional
economic integration are primarily a product of the third 'wave' of
FDI in the second half of the 1980s. The conditions for this in Japan
were created by the convergence of a rapidly rising yen, the availability
of a huge pool of surplus savings, and foreign pressure to reduce its
trade surplus, particularly in manufactured goods. The conditions in
other East Asian countries were created by the nearly universal
adoption of export-oriented industrial strategies and more open
economic policies, both of which had been aggressively pushed by
the advanced capitalist states directly and through multilateral insti-
tutions. Major thrusts of the third 'wave' of investment were to 'in-
crease "outsourcing," or procurement from overseas affiliates' and to
cut corporate production costs (Ministry of International Trade and
Industry, or MITI, 1992, p. 115). Another was to dampen trade fric-
tion both by increasing production in North America and Europe
and increasing exports to those markets from third countries rather
than from Japan. As Table 4.2 shows, while investment in manufac-
turing constitutes only 27 per cent of total investment, it grew stead-
ily from $24.4 billion in 1985 to $104 billion by 1992. It shows that
52 per cent of all Japanese companies in Asia are in manufacturing,
compared with 36 per cent worldwide. As noted, 38 per cent of all
Japanese companies but 55 per cent of manufacturing companies are
in Asia. Though companies in finance, services, and transportation
constitute only very small percentages of Japanese companies in Asia,
they are respectively 25, 32, and 31 per cent of all such companies
Table 4.2 Japanese Third 'Wave' FDI - Cumulative Amounts World and Asia by Sector (fiscal yearslUS$ billions)
M'facturing Finance ins'nce Real estate Services Commerce Transport Other Total
3rd wave: Before 1985 24.4 10.9 2.5 4.7 12.7 5.9 22.6 83.7
(% of total) (29) (13) (3) (6) (15) (7) (27) (100)
3rd wave: End 1990 81.6 65.3 45.8 34.7 31.3 17.4 34.6 310.8
Most recent year 1992 104.0 74.9 59.9 46.6 40.3 21.7 39.2 386.5
(% of total) (27) (19) (15) (12) (10) (6) (10) (100)
No. Japan cos.!world 1991 4,917 1,406 398 949 4,103 633 1.116 13,522
(% world total) (36) (10) (3) (7) (30) (5) (8) (100)
No. Japan cos.!Asia 1991 2.680 349 74 300 1,137 199 387 5,126
(% Asia total) (52) (7) (1) (6) (22) (4) (8) (100)
(% sector total) (55) (25) (19) (32) (28) (31) (35) ( 38)
Sources: Nihon boeki shinkokai (1990. pp. 416-17; 1993, pp. 64, 521-23;); Okurasho (1993, pp. 163-65); Toyo Kezai
(1992, p. 1020).
worldwide. Increases in investments in these sectors are, as will be

shown in another context, closely related to increasing regional
integration.
The foregoing figures on FDI show both that Japan has extensive
extra-regional interests and that its economic presence looms large in
East Asia. In this connection, it has to be noted that regional inte-
gration is also being furthered by increasing regional FOI by the four
Newly Industrializing Economies or NIBs (Hong Kong, Singapore,
South Korea. and Taiwan). Their portion of cumulative investment
in the ASEAN 4 (or Association of Southeast Asian Nations, namely,
Indonesia, Thailand. Malaysia and the Philippines) during 1987-91 (36
per cent) substantially exceeded the Japanese (26 per cent) and US
(8 per cent) portions for the same years (Ministry of Finance Malay-
sia, 1993, p. 67). Further investigation will be required to determine
the extent to which such NIE investment should be understood also
to facilitate extension of Japanese influence in the region, but some
evidence on this will be presented in another context. In any case,
such NIE regional investment clearly furthers the process of regional
integration.
Trade Patterns and Regionalism
Trade figures also show both how far East Asia is from being an
exclusive region, and the magnitude of the Japanese role in the re-
gion. In the EC, the most exclusive of the three major economic
areas, in 1991, intra-regional trade ($846 billion) greatly exceeded
inter-regional trade ($447 billion). But this relationship was reversed
in both NAFTA ($246 billion intra- /$578 billion inter-regional) and
the Asia-Pacific ($380 billion intra-/$582 billion inter-regional). The
Asia-Pacific's inter-regional trade with NAFTA ($356 billion) came
close to its intra-regional trade ($380 billion) (Nikkei Weekly. 24 May
1993). At the same time, it is the case that East Asian intra-regional
trade has been growing rapidly. Between 1987 and 1991, it increased
106 per cent, compared with a growth in total world trade of 47 per
cent (Ministry of Finance Malaysia, 1993, p. 65). An examination of
Japan's ranking as a source of imports and an export destination for
the rest of East Asia gives a simple demonstration of its role in intra-
regional trade. Among the NIEs, ASEAN 4. plus China and Viet-
nam, Japan was, in 1992, the leading source of imports for six of
these countries and second for the other four. It was. however. the
leading export destination for only two countries. second for four,
Japanese FDf 49
third for three, and fourth for one. The US was the leading export
destination for five countries and second for two. China, Germany,
and Hong Kong also constituted important export destinations (Asian
Development Bank, 1993). Increasing intra-regional trade notwith-
standing, Japan would, as noted, have to do much to increase access
to its market for other East Asian countries in order to move the
region in more exclusive directions.
Future Trends in FDI
It is important at this point to consider future trends in Japanese

FDI, as they will affect the prospects for the country's regional strat-
egy. As noted, FDI has been down since 1990. Officials at Japan
External Trade Organization (JETRO) do not expect an upsurge
soon and predict that the quality of investment will be increasingly
emphasized, focusing on such things as localizing product develop-
ment and R&D (research and development) work and strengthen-
ing sales and service networks (Nihon boeki shinkokai. 1993. p. 83).
On the other hand. a recent Export-Import Bank of Japan survey
showed the first increase in five years in the number of companies
with plans for overseas investment within the next three years. The
interest in investing in East Asia was particularly strong (Japan Times,
7 January 1994). It is difficult in the midst of the current recession to
predict exactly when the next 'wave' of FDI will begin or how big it
will be. but there are good reasons to believe that overseas invest-
ment will again be up and that. as the Export-Import Bank survey
suggests, a larger portion of it will be going to East Asia. That this
is already happening is suggested by the fact that fiscal year 1993 FDI
was up by 5.5 per cent, the first year-on-year increase since 1989
(Nikkei Weekly, 6 June 1994). Even though FDI in Asia still lagged
behind that in North America and Europe, the relative portion going
to Asia was up somewhat from that of the third wave.
Labor-cost differentials between Japan and a large part of the rest
of the region will continue to be a major factor pushing Japanese
companies overseas. This will be all the more so because Japanese
corporations are in the process of shifting their strategies to deal with
an era of slower growth, and this is expected to result in a change in
emphasis from competing for market share to making larger profits
(Japan Times, 7 January 1994). In this context, companies will find
cost-cutting even more important than they have in the past. At the
same time, rapid growth in other East Asian countries is expected to
boost demand and pull more Japanese companies into the region as
they find it necessary to produce regionally so as to meet more effec-
tively local needs and tastes (Iijima, 1993, p. 43). There has for some
time been discussion of problems associated with 'hollowing'
(de industrialization) of the Japanese economy, but the total portion
of industrial production by value located offshore in 1991 was still
only 6.6 per cent (compared with almost 26 per cent for the US).
However, when only companies with overseas affiliates were consid-
ered, this figure stood at 17 per cent (Tsushosangyosho or MIT!,
1993, p. 21). More attention is likely to be focused on increasing
exportation of Japanese jobs, although it seems probable that this
process will continue for some time. If the FDI that fosters this pro-
cess moves increasingly to East Asia, it can be expected to accelerate
regional integration.
Japanese Official and Corporate Regional Strategies and Policies
Like the leaders of the other advanced capitalist states, Japanese

leaders seek to maintain and extend their predominant economic
position in their region under the best possible terms. Regional leader-
ship has been a Japanese goal since the founding of the modern state
in the mid-nineteenth century. That goal was translated into Japan's
creation by conquest of the GEACPS in the 1930s and 1940s. Acqui-
sition of empire was an effort to resolve domestic economic prob-
lems and part of the long-term drive to 'catch up' with the leading
states of the day. Having 'caught up' after the postwar recon-
struction, Japan's current assumption of a leading, but not yet a real
leadership, role in East Asia has been driven by essentially the same
concerns that shape the international economic behavior of the other
leading states. These are the desire to maximize national economic
competitiveness and to reduce the economic uncertainties of the
current period. As noted, Japanese companies have located or relo-
cated manufacturing operations throughout East Asia largely to re-
duce costs, further domestic economic restructuring, protect against
the vagaries of other countries' market-access policies, deal with fluc-
tuating exchange rates, and hedge against the possible consequences
of regionalist tendencies elsewhere. Such expansion is planned and
carried out with a view to taking advantage of regional divisions of
labor in key industrial sectors, and it thus promotes a Japan-centered
regional integration. While the methods and stated rationale of Jap-
anese expansion have changed since 1945, the extent to which Japan's
Japanese FDI 51
regional activities have followed from its perceived domestic eco-

nomic needs and its global competition (first, 'catch up,' then 'stay
up' or 'stay ahead') with other leading states has remained constant.
Regional Arrangements and Regional 'Cooperation'
Top Japanese political leaders have long been interested in the de-
velopment of formal regional arrangements in East Asia. They took
some official initiatives to these ends in the 1960s and 1970s, but
these were met with little enthusiasm by their neighbors, who per-
ceived them as offering advantages mainly to Japan. In 1967, when
ASEAN was being formed, the Japanese government even indicated
that it would look favorably on an invitation to join (Sudo. 1988. p.
510). The invitation did not come. There are still many in the region
who remain leery of participating in a formal regional organization in
which Japan is the only major economic power. Tokyo's top leaders
have consistently denied that they seek regional economic domina-
tion, and they have for some time concentrated on supporting the
Asian Development Bank (ADB), ASEAN, and broader regional
arrangements instigated by others, such as the Asia Pacific Economic
Cooperation (APEC) forum (Sudo, 1992). As of early 1994, they had
steered very clear of agreeing to join the controversial East Asian
Economic Caucus (EAEC) proposed by Malaysian Prime Minister
Dr. Mahathir bin Mohamed in December 1990. Indicative of the
kinds of concerns that remain in the region is the view of Indonesian
scholar Hadi Soesastro (1991, p. 13), who said the EAEC proposal
was 'perhaps the first time after World War II in which a leadership
role in East Asia is handed to Japan on a silver platter by another
Asian country [Malaysia]'. On the other hand, some equally knowl-
edgeable Malaysians believe that regional states would, by formaliz-
ing their relationship with Japan in an arrangement like EAEC,
enhance and not reduce their influence with Tokyo. Japanese leaders
still find it necessary to heed the former kind of concerns. Their
reluctance on EAEC was even more a function of American oppo-
sition to formation of an organization that excluded the US and that
appeared to be intended as an alternative to APEC. There are, how-
ever, said to be a growing number of officials in key ministries asso-
ciated with an emergent 'neo-Asianism' who favor EAEC (Nikkei
Weekly, 17 January 1994). In Malaysia, both Japanese government
and company officials were telling their local counter-parts that they
favored EAEC but that they were reluctant because of American
opposition (personal interview, Malaysia, December 1993). This was

probably more truth than ingratiating fiction.
Owing to widespread concerns about Japanese domination, Japan-
ese government and corporate officials and policy-oriented academ-
ics have for some time avoided assertive advocacy of structured
regional arrangements, particularly of an exclusive kind. They have,
however, been far from reticent in pushing regional economic 'co-
operation.' This very widely used term is shorthand for a number of
related ideas and practices. These include proffering large amounts
of financial and technical assistance to promote development of a
Japan-centered regional division of labor in various industrial sectors
and increased coordination between the industrial policies of Japan
and other regional countries to facilitate this. They also include urging
freer trade among other East Asian countries in order to create a
regional market and thus to enhance the profitability of regional
production. Exemplary of the connection made in Japanese business
circles is the view that 'Pacific-rim cooperation has been transformed
... into a reality ... [as the] international division of labor is ... inter-
twining the economies of many countries together' (Tokuyama, 1988,
pp. 2-3). In any case, these three ideas constitute the underpinnings
of regional economic integration. They have a long history. The idea
of a regional division of labor was central to the rationale for the
GEACPS in the 1930s, though at that time it was bolstered by an
assertion of racial superiority. Pyle (1992, pp. 18-19) explains that
the GEACPS 'was to be a vertical order, presided over by the supe-
rior Japanese, ... [in which] there should be a division of labor with
each people performing economic functions for which their inherent
capabilities prepared them.' Stripped of their overt racist justifica-
tion, such ideas have since the early 1960s been consistent themes
as prominent Japanese have pushed broader regional economic 'co-
operation' through the successive waves of FDI in East Asia.
Currently, Japan and the United States are attempting to maneuver
APEC in directions consistent with their own approaches to regional
order. The Americans have tended to think in terms of guiding prin-
ciples to be followed in relationships, such as to be embedded in
formal arrangements. The Japanese, on the other hand, have tended to
think in terms of the structure of relationships based on their notions
of 'cooperation.' The Americans have, for example, expressed their
intention to make APEC into a vehicle for forging agreements on a
variety of economic issues, such as customs matters, trademarks,
investment codes, and trade liberalization. In contrast, the Japanese
Japanese FDI 53
have stressed the importance of APEC as an agency for promoting

technological cooperation among member states and accelerating in-
dustrialization in Asia, with special emphasis on the importance of
technology transfer and industrial cooperation as a means of boosting
the technical standards of local suppliers to Japanese affiliated com-
panies in the region. These aims are not mutually exclusive, but they
reveal competing views, rooted primarily in Japanese and American
corporate interests, on the ultimate architecture of the East Asian region.
The Regional Division of Labor and Production Networks
Japanese corporations have long seen the fragmentation of the East

Asian market as an obstacle to the profitability of their affiliates
operating in the area. In 1974, an economist complained that re-
gional countries 'are ... not prepared to move toward integration of
their ... industrial development policies, ... [even though] this would
enlarge the market for industrial products .. .', and attributed this to
their 'national pride and sovereignty, as well as mutual distrust .. .'
(Hirono, 1974, p. 17). Japanese and host-country domestic interests
that defined this as a problem have, with some success, been chipping
away at it for twenty years. A regional division of labor has also been
assertively promoted. Exemplary of the thinking on this is that of a
Japanese economist who says that because East Asia is comprised of
countries at three levels of development, 'their respective structures
of production and trade mutually complement each other ... , [so]
each country adjusts the structure of its production according to its
own stage of development, but this is not always perfect'. He goes on
to say that 'if Japan, the Asian NIBs and the ASEAN countries were
to specialize respectively in high-technology intensive ... , capital
intensive ... , and labor intensive goods, then their interdependent
economic relations would be both profitable and balanced' and that
'these countries now have to adjust their structure of production in
order to take account of the interdependent economic relations in
the region' (Ohata, 1989, p. 3). It is no doubt with such adjustment
in mind that an MITI official advocates 'comprehensive cooperation
involving aid, investment and trade ... [carried] out under unified
guidelines ... [and through which] we must assist each country in
determining which industries will best meet its needs and developing
suitable development plans for [them]', an arrangement he describes
as a Creative Relationship of Industrial Interdependence (Nangaku,
1989, p. 510, italics in original). More generally, Japanese academics
and technocrats have projected colorful images of East Asia devel-

oping under the leadership of a Japan that is variously portrayed as
the head of geese flying in 'V' formation and as the 'Asian brain.'
Such ideas have been generalized and extended to the notion, ex-
pressed in this case by the Chair of Keidanren (Japan Federation of
Economic Organizations), that 'Japan should act as a "coordinator"
in the Asia-Pacific ... to help [regional] economies integrate them-
selves smoothly into the world's ... market' (Hiraiwa, 1991, p. 4).
Central to the promotion of a regional division of labor is the
effort by both Japanese government and corporate interests to pro-
mote 'complex international work sharing' (MITl, 1992, pp. 101-118)
in manufacturing based on 'agreed specialization' between Japan and
other regional countries. The aim is to optimize complementarity
within specific transnational industries (Aoki, 1986; Dobashi, 1988;
RIM Studies Group, 1988). 'Work sharing' means that the stages of
manufacture of a product are carried out or the parts and compon-
ents of a product are made in different countries, depending prim-
arily on the cost efficiencies they offer, and that the resultant
intermediate goods (semifinished goods and parts) are traded among
them for eventual incorporation into finished products. This is in-
tended to be an integrated process based on 'agreed specialization',
that is determination by corporate leadership of who is to produce
what and where. Such processes are particularly advanced in the
electronics and motor-vehicles industries. At its simplest, 'work shar-
ing' is what takes place in the manufacture of semiconductors when,
for example, 'the first half of [the] ... process [e.g., chemical and
exposure treatment] - which requires high technology - takers] place
in Japan, while the labor intensive second stage of assembly, testing
and the like occurs in Southeast Asia' (MITl, 1992, p. 103). In its
more complex forms, it takes place within 'reciprocal networks for
interchanging spare parts, components, and finished items' (RIM
Studies Group, 1988, p. 9). Such, for example, is a Toyota regional
production scheme under which its ASEAN affiliates produce items
that they supply intra-regionally for assembly into Toyotas in each
country. In this scheme, Thailand produces diesel engines, pressed
parts and electrical parts; the Philippines, transmissions; Malaysia,
steering gears and electrical parts; and Indonesia, gasoline engines
and pressed parts for such exchange (Iijima, 1993, p. 45). One of the
reasons that Japanese MNCs favor such an approach is that it per-
mits taking advantage of economies of scale in parts and components
making. something it is impossible to do in the many countries with
Japanese FDI 55
small domestic markets. More fundamentally, however, Encarnation

(1992) argues that Japanese (and American) corporations attempt to
gain industrial competitiveness and trade advantage through control
and expansion of intrafirm trade.
Intrafirm trade is a prominent result of Japanese FDI in East Asia,
and it is a significant force for regional integration. Some Japanese
social scientists label the conventional index of intrafirm trade as an
index of intra-industry international division of labor (Kobayashi and
Hayashi, 1993, pp 39-40). Table 4.3 shows where Japanese overseas
manufacturing firms in selected industries in Asia (and also world-
wide for all manufacturing) bought their inputs and sold their prod-
ucts in fiscal year 1989. It also indicates what portion of those
transactions were on an intrafirm basis. The selected industries are
ranked by the size of their sales. The figures show that in general
these firms bought mainly in Japan and locally, and sold mainly lo-
cally and in third countries. They also show that a big portion of their
purchases from Japan (83 per cent worldwide/63 per cent in Asia)
and their relatively smaller sales there (62/59) were intrafirm, while
only a very small portion of local purchases or sales were on that
basis. With an increasing number of Japanese suppliers moving to
Asia, the latter portion will probably be larger in the next survey.
The aim here is not to present a detailed analysis of these data but
only to give an indication of the importance of intrafirm trade. One
notable point, however, is that intrafirm trade tends to be somewhat
lower in Asia than it is on a worldwide basis. Besides reflecting the
specific mix of industries in the region (i.e., less precision and general
machinery with high rates of intrafirm trade; and more transport
machinery with lower rates), it also perhaps reflects the aggressive
localization policies of some East Asia states.
While Japanese corporate ties with and coordination of the activ-
ities of their regional subsidiaries are central to the production net-
works currently under construction in East Asia, understanding the
great complexity of these networks requires looking at a much broader
set of relationships. In ASEAN and the NIBs together, 30 per cent
of Japanese affiliates currently use at least 20 local companies as
subcontractors, and another 21 per cent use between five and 19
(MITI, 1992, p. 141). Some firms that act as subcontractors to Jap-
anese corporations in Japan have followed them to regional produc-
tion sites, set themselves up as local firms, and continued to supply
these corporations' affiliates there. For example, '74 Japanese auto
parts makers have set up local operations in Thailand, with another
Table 4.3 Intra-Industry International Division of Labor: Purchases and Sales of Japanese Overseas Affiliates in
Manufacturing, World and Asia - FY1989 by Source and Destination and Portion of Intra-Firm Transactions
Purchases Sales
Amount Sources Amount Destination
(billion yen) (%1% intra-firm) (billion yen) (0/0/0/0 intra-firm)
3rd 3rd
Japan C'ntry Local Japan C'ntry Local
World
All manufacturing 15,410 46/83 9/38 46/5 22,267 8/62 12144 SO/8
Asia
All manufacturing 3,411 39/63 11124 50/4 5,095 16/59 20/37 6417
Electric machinery 1,428 45/65 13130 42/5 1,987 27/60 36/44 38/13
Transport machinery 717 42/49 111 58/2 979 2/36 6/9 92/6
Chemicals 263 35/84 9134 56/3 429 10/40 12/35 78/4
Non-ferrous metals 209 18/42 23/3 59/5 344 12/17 1517 73/4
Textiles 137 22/19 35/24 43/5 249 15150 15117 71/5
General machinery 138 43179 4132 54/1 204 18/99 25/45 57/1
Precision machinery 84 45/96 13186 42/4 200 22/51 23/55 55/16
Ironlsteel 88 56/64 810 36/4 131 4114 8114 88/3
Source: Tsushosangyosho (1991, pp. 203, 211, 215, 223, 225, 229, 231, 235).*
*This volume presents data from a MITI survey of 3,331 overseas firms done at the end of FY 1989 (31 March 1990).
The overall rate of returns for manufacturing enterprises was 75 per cent, but differed from industry to industry. The
amounts shown, however, are overall purchase and sales figures.
Japanese FDI 57
38 each in Indonesia and Malaysia, [and t]hese firms are playing a

central role in the supply of auto parts in these countries' (Tradescope,
1993, p. 19). Larger Japanese companies may, but do not necessarily,
hold a stake in such firms. Furthermore, wholly locally-owned firms
may also act as subcontractors. In Thailand, for example, 35 per cent
of the parts makers are Japanese affiliates (which supply 75 per cent
of the parts by value); 18 per cent are indigenous firms with technical
tie-ups (supplying 20 per cent), and 47 per cent are purely indigenous
(supplying 5 per cent) (Tradescope, 1993, p. 21). Aoki (1992, p. 86)
argues that in Malaysia, Japanese affiliates are playing the central
role in forming internal economic networks by creating forward and
backward linkages among other local industries. The Japanese cor-
porate system is, in effect, being reproduced on a regional basis.
Tokunaga (1992a, p. 14) argues convincingly that if local firms,
Japanese-affiliated or not, are incorporated 'in a Japanese corpora-
tion's intracompany production network by means of furnishing
technology, capital equipment, [or] parts ... , those local firms are
obviously overseas production facilities of Japanese corporations'.
He stresses that acquiring ownership is only one way of extending an
international production network, and says that corporations may
incorporate local firms in such a network by furnishing directors,
technology, raw materials, parts, or semifinished products and by
such practices as production sharing and renting or lending capital
equipment and buying products back (p. 16). Such facts increasingly
lead scholars to argue that FDI should be defined broadly to include
not only 'equity participation' but also 'intermediate forms ... , such
as technology agreements [and] licensing' (Doner, 1993, p. 159). A
recent study shows the increasing value of technology agreements
between Japanese firms and companies in other countries (Tachiki,
1993). It found both that the value of such agreements went steadily
up from an annual average of $449 million in the 1976-79 period to
$2.342 billion in 1990, and that the portion of this transfer to the NIEs
and ASEAN 4 together rose from 16 per cent to 40 per cent over
the same years. Tachiki (1993, pp. 27-30) also indicates that many
locally-owned MNCs in the NIEs and ASEAN enter into such agree-
ments with Japanese corporations to assist them with R&D, design
and engineering, and manufacture. To the extent that such agree-
ments lead these local firms to adopt Japanese standards, equipment,
and parts, they certainly also help to extend a Japan-centered regional
integration when they invest in other countries of East Asia.
The subcontracting arrangements just described extend the
boundaries of regional production networks beyond the ties between

Japanese corporations and their East Asian affiliates. An extensive
array of associated services in such areas as finance, management,
and transportation extends regional networks well beyond simple
production and trade relationships. Japanese banks have established
branch offices throughout East Asia, and other Japanese financial
institutions have established ties for joint lending with local finance
companies and merchant banks. In 1991, of the 318 branches of
Japanese banks worldwide, 82 (25 per cent) were in Asia. but there
appears now to be an increasing emphasis on lending in Asia (Far
Eastern Economic Review, 19 March 1992). While 'the main source
of Japanese subsidiaries' FDI funds is local financial markets in de-
veloping Asian countries,' much of the local borrowing is organized
by such branch offices or joint operations (Tokunaga, 1992b, p. 154).
Some Japanese joint ventures in the region are also listing on local
stock markets to boost local fund-raising, and Japanese securities
houses are establishing a regional presence to facilitate this (Far
Eastern Economic Review, 19 March 1992).
Japanese corporations have also been developing regional man-
agement systems, particularly under Singapore's Operational Head-
quarters (OHO) scheme (Dicken and Kirkpatrick, 1991; Rodan, 1993).
This scheme, begun in 1988, offers tax incentives for MNCs establish-
ing regional centers in Singapore. OHO perform administrative,
technical and managerial functions, do R&D and design work, and
manage finances for regional affiliates of MNCs. The settlement of
accounts for intra-regional purchases and sales in local currencies
is also managed by regional centers (Tokunaga, 1992a, p. 40). More
than 20 major Japanese corporations, including Matsushita, Toyota,
and Sony, have now adopted or are moving to regional management
strategies (Iijima, 1993, p. 45). International and domestic integrated
intermodal transportation systems which coordinate all elements
required for door-to-door physical distribution on a worldwide basis
have also been created (Tokunaga, 1992a, pp. 25-30). These are organ-
ized both by Japanese firms that specialize in transportation and on
an intracompany basis. Freight forwarders playa central role in the
former cases, and a little over half of the 139 member firms in their
national association have now set up overseas operations to partici-
pate in this. Within large Japanese corporations, especially in the
electronics and electric-machinery industries, 'international intra-
company product movements are centrally controlled on a day-to-day
or even hourly basis, ... and therefore systems for coordinat[ion] of
Japanese FDI 59
logistics on a regional or global level have been developed' (Tokunaga,

1992a, p. 29). All of the foregoing contribute to regional integration
and advance ties between the regional and global divisions of labor.
The Ideology and Reality of 'Cooperation'
Japanese official and corporate leaders and many academics portray

the expanding division of labor and increasing regional integration in
the benign language of 'work sharing' and 'cooperation' while stress-
ing the benefits that inevitably flow to those who follow the lead
goose. Awanohara (1989, pp. 200-1) points out, in a good exposition
of Japanese views on these subjects, that it is often said that the
emergent relationships differ from an old-fashioned vertical division
of labor, and that if they do not yet constitute a fully horizontal
division of labor, they are moving dynamically in this direction as the
economic gap between leaders and followers narrows. As noted,
exchange relationships between Japan and its neighbors appear to be
taking on somewhat more horizontal characteristics. Unlike the hori-
zontal exchange of differentiated manufactured products that takes
place in North America and Europe, however, Doner (1993, p. 174)
argues, 'FDI in Asia has promoted a more vertical type of horizontal
trade involving the exchange of goods within similar industries at
different stages of assembly or processing.' Most importantly, what
those who speak for Japanese corporate interests gloss over is that
such exchange takes place in a hierarchical matrix characterized by
great inequalities in power among participants. The expansion of the
East Asian division of labor is, after all, centered on an extension of
Japanese corporate activity throughout the region. Corporations are,
for better or worse, vertically organized and based on the principle
of corporate control of the activities within their domain, whether
responsibility for this is concentrated at the center or dispersed to
specialized entities. It is precisely because this is inevitable in organ-
izations devoted to advancing commercial advantage that they are
unsuitable candidates to be nearly exclusive instruments for advanc-
ing regionalism. The kind of 'cooperation' that must exist between
corporations and their subsidiaries and suppliers does not contain
the levels of voluntarism and give-and-take required to insure ac-
ceptable measures of community in the emergent mix.
The character of Japanese corporate organization and practice
extended overseas is made clear in the unsentimental analyses of
some Japanese management specialists and economists. A professor
of business explains that vertical integration is common in Japanese

corporations. This means that the 'market mechanism is replaced by
internal transactions', and that 'the stages of production and distribu-
tion are included in one hierarchical system' (Kono, 1984, pp. 118-
19). Such integration 'serves to unify the decision-making on and
operation of several processes for a common purpose' and, to accom-
plish it, 'some kind of power is necessary .... It [need not] come
from ownership, but [can come] from unequal transaction between
the [core corporation] and the integrated companies' (p. 120). Such
organization is readily extended overseas. Tokunaga (1992a, p. 14)
explains that the reason Japan counts loans as FDI is that the 'es-
sence of FDI ... is ... not necessarily to acquir[e] "ownership" but
to exercis[e] effective influence on the management of a foreign-
located firm'. He also stresses that if such a firm is important to
'the main company's business activities, and further, if it has strong
bargaining power in the area of technology or other matters, ...
management control must be sought by the Japanese firm' (p. 15).
If substantial technology is being transferred, 'Japanese firms aggres-
sively pursue the acquisition of majority ownership of their overseas
... production facilities ... , a crucial strategy ... to keep local firms
from becoming competitive on their home ground' (p. 43). More
broadly, he contends that 'with the move of production facilities
abroad, the vertically integrated industrial structure as a unit has
come apart ... [and that p ]roduction processes spread haphazardly
throughout Asia must once again be coordinated into a cohesive
system' (pp. 31-5), trends which reinforce the need for more control.
Hollerman (1988, pp. 8-11) offers a convincing explanation of the
foregoing trends, arguing that Japan's 'domestic industrial policy ...
has evolved into [a] geopolitical strategy [which] coordinate[s] Japan's
external relations with the transformation of its indigenous industrial
structure, ... [including] calculated disaggregation ... of the produc-
tion process, with some stages being assigned abroad and some re-
tained at home.' In this process, 'Japan retains for itself the higher
value added operations that yield the best rates of return'. At the
same time, 'export of plants and equipment [establishes a] depend-
ency relationship [in terms of financing, maintenance, management,
and distribution of output] ... between Japan and its clients' (p. 11).
He further contends that Japan aims to become a 'headquarters
country' able to 'impose central management on a world network of
joint ventures, subsidiaries, and affiliates' and to 'coordinate the
relations of its foreign clients with each other as well as with itself'
Japanese FDI 61
(p. xi). It is no doubt for such reasons that an MITI report includes
among its list of precautions for firms engaged in FDI that they
should take measures to 'prevent local resentment of Japanese dom-
ination of all the key positions' (cited by Pyle, 1992, p. 79). In any
case, both Japanese government and corporate interests actively
promote the foregoing trends in a variety of ways.
Government Promotion of Regional Integration
Ministries and agencies of the Japanese government have not been

the driving force behind the flow of FDI to the rest of East Asia and
the region's increasing integration. These have been largely the work
of Japanese corporations, but government has done much to facil-
itate both trends. At the broadest level, government officials have
played a leading role in formulating the ideology of 'cooperation'
and creating friendly-sounding language (e.g., 'work sharing') to
describe what are in fact exercises of control within vertically organ-
ized corporations. From the mid-1980s, the economic ministries and
agencies began to formulate plans for promoting regional economic
integration, primarily as a vehicle for domestic industrial restructur-
ing. In this connection, it has even been argued that Japan 'agreed to
yen revaluation in accordance with its own industrial policy for phas-
ing out sunset industries at home and for the purpose of accelerating
its [FDI]' (Hollerman, 1988, p. 17). Whether this is so or not, the
rapidly appreciating yen created the context in which other govern-
ment efforts were undertaken.
The 1987 MITI New Asian Industries Development Plan (New
AID Plan) was the most elaborate formulation of the official scheme
to foster FDI and location or relocation of export-oriented industries
in the region. This plan was never officially adopted and the desig-
nation is no longer used, owing to intra-bureaucratic conflicts (Unger,
1993b, pp. 160-2) and perhaps American concerns about the pros-
pects of yet more Japanese sponsored export-oriented production
(Orr, 1990, pp. 77-8), but it is apparent that its most important ele-
ments are in place. These involve coordination of Official Develop-
ment Assistance (ODA), other lending, and technical assistance to
improve the conditions for investment (e.g., infrastructure, tax poli-
cies, skill levels) elsewhere in East Asia and to increase direct incen-
tives for companies to invest in the region. They also include the
creation and support of industrial plans for regional countries in
consultation with their governments (Wall Street Journal, 20 August
1990). Exemplary of such activities is a recent agreement between

MITI and its counterparts in ASEAN, calling for Japanese assistance
to these countries in upgrading key industries, particularly through
development of supporting industries like parts suppliers (Japan
Times, 10 October 1993). Related is a Japan International Coopera-
tion Agency (JICA) team currently in Malaysia for 18 months to
work with that country's Economic Planning Unit and Ministry of
International Trade and Industry to formulate a development and
promotion plan for the auto parts and components industry. This
plan will include selection of products for development (Business
Times, 22 December 1993).
Japan has in the past five years been the world's biggest dispenser
of ODA. In 1992, along with Other Official Funds (OOF), these
totaled nearly $15 billion, and they are slated to remain at this level
for the next five years (Japan Times, 6 October 1993). At present,
about half of all ODA is dispensed in Asia. Between 40 and 50 per
cent of ODA is in the form of concessional loans extended by the
long-established Overseas Economic Cooperation Fund (OECF). In
1992,85 per cent of OECF loans were allocated to Asia (Overseas
Economic Cooperation Fund, 1993, p. 16), and such loans have been
used particularly for infrastructure development. In 1991, the highest
career official in the Ministry of Finance made it clear that Japan was
transforming ODA 'into a magnet for private ... Japanese manufac-
turers,' particularly in East Asia, where, he said, 'Japanese companies
have established dominant positions, ... turning the region into a low-
cost manufacturing base that is an integral part of Japan's industrial
strategy' (New York Times, 5 August 1991). Both ODA and OOF
are hence systematically used to promote the aims contained in the
New AID Plan. For example, MITI recently announced a package
for ASEAN to support construction of components-manufacturing
factories and technical assistance in adoption of international indus-
trial standards (Nikkei Weekly, 9 August 1993).
Several more recently established agencies or changes in older
ones are very clearly designed to foster the same aims. The Japan
Asia (ASEAN until 1991) Investment Company (JAIC) was founded
in 1981 with the 137 members of Keizai Doyukai (Japan Association
of Corporate Executives) as shareholders, and in 1985, OECF be-
came a shareholder. JAIC has, since it became operational in 1988,
put together six venture capital funds to invest in as yet unlisted
subsidiaries and joint ventures of Japanese companies as well as local
firms in the region (Japan Asia Investment Company, 1993, p. 7).
Japanese FDI 63
The Japan International Development Organization (JAIDO) was

established jointly by Keidanren and OECF in 1989 to promote pri-
vate Japanese-local joint ventures in developing countries. By 1993,
17 of its 29 approved investment projects were in Asia (Japan Inter-
national Development Organization, 1993, unnumbered insert). In
1989, the enabling legislation of the Export-Import Bank of Japan
(EXIM Japan) was amended to shift its primary focus from export
promotion to FDI promotion. In 1992, 38 per cent of its loan com-
mitments were made in Asia (Export-Import Bank of Japan, 1990,
p. 20; 1993, p. 9). These are some of the more prominent activities
which show the close ties between Japanese government and busi-
ness in promoting FDI within a general policy framework meant to
further the extension of the regional division of labor.
Corporate Promotion of Regional Integration
Japanese financial institutions and corporations have also taken a

number of independent initiatives to the same ends. The expanding
regional role of Japanese banks has already been briefly mentioned.
Exemplary of such a corporate initiative was that successfully taken
by Mitsubishi Motor Corporation (MMC) to shepherd a Brand-to-
Brand Complementation (BBC) agreement of its design through a
long ASEAN approval process in 1987-88 (Machado, 1992, pp. 189-
96). The BBC scheme was the first established under an ASEAN
Industrial Complementation (AIC) program that dates from 1981. It
resulted in a margin of tariff preference and local-content accredita-
tion for ASEAN-produced auto parts traded among participating
companies on a brand-to-brand basis, meaning that parts for only
one make of vehicle can be exchanged under any specific agreement.
Indicative of the Japanese preference for substantial control in such
undertakings, the initial MMC proposal gave the firm proposing a
specific agreement the power to specify which parts each participat-
ing company should produce and which it should buy. At the insist-
ence of ASEAN representatives, however, the final agreement says
that there will be no mandatory single sourcing of parts. In any case,
the BBC agreement has been an important condition for the already
mentioned Japanese automakers' establishment of regional networks
and development of ASEAN auto-export bases. These networks are
expanding rapidly. Combined transactions in the Toyota scheme are
at present only $25 million, but they are slated to increase to $190
million by 1995 (Economist Intelligence Unit, 1993, p. 37).
A very closely related example is the recent Mitsubishi presenta-

tion to the government of Vietnam of a comprehensive Master Plan
for the Automotive Industry of Vietnam. The Plan contains 'projec-
tions for how Vietnam's industrial structure will evolve ... [and] ...
provides detailed production schedules for both vehicles and parts'
(Japan Times, 28 July 1993). In connection with this plan, MMC's
Malaysian affiliate, Proton, which is a joint venture with that coun-
try's government, is slated to enter a joint venture with Mitsubishi
and the Vietnamese government to produce vehicles in Vietnam (Far
Eastern Economic Review, 23 September 1993). The Vietnamese
government approved this joint venture in early 1994 (Japan Times,
14 May 1994). This represents a broadening of the regional auto-
production network. Somewhat ironically, it would also mean that
one early step in forging important new ties between Vietnam and its
neighbors after a long period of estrangement will be taking place
under Japanese commercial auspices.
CONCLUSION
This chapter makes it clear that Japanese corporations, with much

encouragement and support from their government, have been very
active investors on both a worldwide and East Asian regional basis,
and that Japanese FDI and the way it is deployed advance both
globalizing and regionalizing tendencies simultaneously. It seems
probable that when the next 'wave' of overseas investment starts, a
larger portion of it will be directed to East Asia. While Japan's FDI
drives the extension of the regional division of labor and increases
regional economic integration, the Japanese do not seek exclusivism.
It would take major changes in their practices with respect to market
access to bring this about. Even then, it would require a major reduc-
tion in the US economic presence in East Asia as well. Neither de-
velopment appears likely in the foreseeable future.
It has frequently been noted that Japan's international leadership
potential is limited by its lack of an attractive idea or vision. Celebra-
tion of the incorporation of regional industry into Japan-centered
corporate organizations as 'cooperation' in 'work sharing' cannot be
such an idea, at least if its implications are fully understood by those
being incorporated. This may be particularly so because the latter
are being encouraged to join a corporate system that is probably on
the verge of changes for the worse from the point of view of its less
Japanese FDI 65
powerful participants. The seriousness of the current economic

downturn in Japan may presage significant changes in corporate
practices that will be to the permanent disadvantage of SMIs that act
as suppliers (which have, in any case, normally taken the brunt of
downturns) and many employees. It is hard to imagine that this will
not be reflected in corporate operations overseas. The inappropriate
placement of a Japan-centered division of labor at the heart of an
approach to regionalism, of course, reflects the balance of forces in
the domestic Japanese political economy. It will be difficult for Japan
to take a more balanced approach to its neighbors prior to change in
this regard. The spread of 'neo-Asianisf thinking in official circles
could alter this circumstance. but the recent comment of a former
MITI official who opposes this tendency is indicative of the difficulty
that its proponents face. With respect to Asia. he said, '[f)rom an
economic point of view. creating a sense of unity is important. [b]ut
without economics we have nothing to share' (Nikkei Weekly, 17
January 1994).
It is certainly the case that Japanese FDI and the promotion of
industrial production in East Asia are a major force in the spread of
industry and the high rates of growth in most regional states. These
states derive significant immediate economic benefits from this, and
this is widely and justly applauded. The cost. however. is diminished
autonomy and acceptance of benefits that are largely concessions
granted on Japanese corporate terms or, less frequently. extracted
only after very hard bargaining rather than gains anchored in na-
tional industrial strength. It may be objected that durable regional-
ism inevitably means diminished national autonomy. What ultimately
determines the acceptability of this fact is whether autonomy is lost
primarily as a result of being assigned a lower station in a hierarchy
or whether it is bargained away in a more balanced process of build-
ing a community. It is difficult to be optimistic about the latter pros-
pect in East Asia given the enormous asymmetry of economic power
between Japan and its neighbors. Ultimately, the advance of a widely
acceptable regionalism would require both a substantial change in
Japanese ideas and practices and collective efforts on the part of the
less powerful regional states to redress this imbalance. The earlier
mentioned question of whether institutionalization of EAEC would
or would not simply reinforce Japanese power in the region may be
generalized to the question of whether it is possible to create any
kind of arrangements within which existing asymmetries may be re-
duced in even small ways. If not. Japanese corporate organization
extending throughout East Asia will form an increasingly important

matrix within which regional states, businesses and ordinary people
must, for better and worse, conduct their affairs.
Note
1. I thank the California State University (Northridge) Faculty Research
and Grants Committee for financial support; and Waseda University.
Tokyo, for institutional support for the research on which this chapter
is based. I also thank Greg Felker for his helpful comments on an
earlier draft. I alone am responsible for the views expressed here.
5 Industrial Upgrading
and Multinational
Corporations: A Bumpy
Runway for Taiwan's
Aircraft Industry
Chi Huang
Rapid economic growth in the East Asian newly-industrializing

countries (NICs) is often referred to as a model for the developing
world. These NICs, however, are facing the dilemmas of their past
successes from an export-oriented strategy (see. for example. Bello
and Rosenfeld, 1990). These problems include the rapidly eroding
traditional factor endowment (i.e., abundant cheap labor) compared
to the second-tier NICs such as Thailand and the People's Republic
of China (PRC), fierce competition among the NICs themselves. as
well as rising protectionism of the industrialized countries where the
NICs sell most of their products. In order to maintain and enhance
their international competitiveness, they have been anxiously search-
ing for and trying to create 'new forms of competitive advantage'
(Simon, 1992).
The Republic of China (ROC) on Taiwan is no exception to this
general trend. Within four decades since 1950 the island has trans-
formed itself from a poor economy into a middle-income developing
country. Equally impressive is that Taiwan has evolved from a cap-
ital importer during the 19508 and 19608 to a capital exporter since
the mid-1980s. Its huge foreign exchange reserves due to trade sur-
pluses has ranked it as one of the highest in the world. I All these
changes seem to render the topic of foreign corporations in Taiwan
less relevant than the investment abroad by Taiwanese businesses.
Yet Taiwan. like South Korea and Singapore, has been struggling to
upgrade the technology content of its industry in order to produce
higher added-value goods so as not only to survive the international
competition but also to fulfill its dream of joining. in the near future.
67
the club of developed nations. Multinational corporations (MNCs)

from the developed countries, which possess the badly-needed pack-
age of production technology, management skills and marketing chan-
nels, can playa significant role in this process of economic transition
(United Nations Centre on Transnational Corporations, or UNCfC,
1990b, pp. 18-19). By carefully studying Taiwan's experiences in what
Wallerstein (1974) calls 'promotion by invitation' (i.e., development
by introducing foreign factors of production), we can gain a better
understanding of both the opportunities and the constraints facing
the NICs in forming strategic alliances with giant MNCs in the hope
of achieving ambitious goals of industrial transformation.
INDUSTRIAL UPGRADING AND INDUSTRIAL

TARGETING IN TAIWAN
The term 'industrial upgrading' in Chinese (ch'an-yeh sheng-chi)

literally means restructuring the industry so as to elevate it to a more
advanced level. The term reflects both Taiwan's dissatisfaction with
its existing domestic industrial capacity and its desire to narrow the
gap between itself and the developed economies such as Japan and
the United States, and eventually to catch up with them. In other
words, the focus here is not so much on the general indicators of
economic performance such as total output or per capita income as
on the structure and capacity of the industry as a whole so that
economic momentum can be sustained.
This goal of upgrading industries is undoubtedly an ambitious one
for a late industrializer with poor natural resources. First. to catch up
with the industrialized economies means that Taiwan has to accom-
plish within a short time what the West took decades to develop.
Competition from other NICs further adds pressure to decision
makers. This sense of urgency often makes state planners impatient
to wait for market forces to evolve by themselves. When such need
for rapid development coincides with the exigency of defense secur-
ity, state intervention seems even more imperative. Second, to up-
grade the economy also means that the existing structure of various
industrial sectors has to be transformed. Those non-competitive
traditional industries have to be either phased out, moved out, or
substantially restructured to enhance efficiency. Concomitantly, the
development of some em~rging and promising industries has to be
facilitated, especially if the private sector hesitates to step in for one
Taiwan's Aircraft Industry 69
reason or another. It takes concerted efforts to first identify the

appropriate industrial targets and then to mobilize resources, both
human and financial, in order to 'push' such economic transformation.
The major argument for targeting certain 'strategic industries' is
the external economy they bring about through linkage effects. The
greater the potential for such spill-over effects to the rest of the
economy, the more an industry is desired by the state technocrats.
Conversely, the greater the linkage effects, the more technology-
intensive, if not also capital-intensive, the industry is. Therefore, high
technology is an indispensable element in accomplishing the task of
industrial restructuring. As an economic official in Taiwan states
clearly, 'if we don't lead in industrial technology, our country will
have no outlet in the future' (Free China Journal, 12 January 1993.
p.3).
Science and technology (S & T) policy in Taiwan became linked
with industrial policy partly due to mounting concerns for defense
security. With the expectation of Washington-Beijing rapprochement,
Taiwan held its first National Science and Technology Conference
(NSTC) in 1978. The Conference set three major objectives of Tai-
wan's S & T development: to enhance economic growth, to improve
people's livelihood, and to establish a self-sustaining national defense
system. In February 1979, one month after the United States shifted
its diplomatic recognition to the PRC, the ROC government singled
out three 'strategic industries', i.e., machinery, electronics (later ex-
panded to include informatics) and selected chemical industries. The
NSTC has been held every four years since 1978. Each Conference
makes some adjustment to the list of key technologies, but its pro-
claimed goal of promoting 'development cum security' remains un-
changed. Meanwhile, the number of strategic industries grows
accordingly. By 1991 when the most recent Six-Year National Develop-
ment Plan rolled out, the list evolved into 'ten emerging industries'
(Council for Economic Planning and Development, or CEPD, 1991,
pp. 44-6). This list included a new entry, the aerospace industry.2
There are several different ways of obtaining the needed technol-
ogy. The first decision officials usually need to make is whether to
develop the technology locally or to buy it 'off the shelf.' If the
former approach of indigenous research and development (R & D)
is considered too costly and time consuming, then technology from
external sources becomes the natural choice. The latter, in turn, may
be transferred either via a foreign direct investment (FDI) 'bundle'
or by means of a variety of contractual arrangements such as purchase
of patents, licensing, technical cooperation, joint production, original-

equipment manufacturing (OEM) with technical-assistance contract,
and so on (Robinson, 1988). In general, the more competitive the
'technology market' is (if it exists) and the easier it is to 'unbundle'
the package, the more options a developing country has in acquiring
what it wants at lower costs. However, the technology market typically
consists of a small number of buyers and sellers, and the 'products'
involve intellectual property that tends to be difficult to divide and
separate. Therefore, technology-centered partnership often takes the
form of joint ventures.
HOST STATE-MNC RELA nONS
Most orthodox economists agree with the Hymer-Kindleberger argu-

ment that product- and factor-market imperfections open the door to
FDl (Hymer, 1960, Kindleberger, 1969). MNCs benefit from oligopoly
advantages such as technological knowledge, superior managerial and
marketing skills, and economies of large-scale production. Therefore,
MNCs in international markets evaluate investment projects from
the viewpoint of global profitahility. MNCs' oligopolistic power im-
plies that they could be important agents of resource dissemination.
Their transnationality, however, means that their interests need not
coincide with those of the host countries. The MNCs, by their nature,
may challenge the role of the host states in promoting domestic de-
velopment (Huang, 1989).
International joint ventures, like other business partnerships, are
formed for the pursuit of mutual benefit. They differ from direct
investment in that the focus is no longer on equity control but on
pooling resources and sharing cost and risk. That is, each party owns
something that the other lacks. This by no means implies that all
members of the consortium are equal. When the parties involved are
relatively equal in terms of technological capability but with different
specializations, it is a joint venture between or among equals. Other-
wise, it is an interfirm alliance between or among non-equals.
Multinational joint ventures between entities from industrialized and
industrializing nations usually fall in the second category.
An established MNC from industrialized countries reaches out for
a foreign ally when the costs and risks of its business activities be-
come too high for it to shoulder alone and/or when the penetration
of foreign markets dictates the need for a local partner. Naturally,
the higher the costs and the greater the risks involved in a business,
the stronger the incentive and demand for 'partnering.' Firms in de-
veloping countries which are financially strong but technologically
weak are willing partners. if for no other reason than to exchange
capital for access to technology. Besides those 'push' factors inside
MNCs, host governments of developing countries also manipulate
policy instruments to 'pull' targeted MNCs to their territories. Access
to local markets and availability of lower-cost capital are just two
attractions often used to lure MNCs. When the push and pull forces
move in harmony, joint ventures between non-equals can form and
even prosper.
Although most economists believe that developing countries bene-
fit from transnational teaming, due to the more efficient use of local
comparative advantages, the effects of MNCs on the technology level
of host developing countries differ considerably. Those who emphasize
firm-specific advantages (Hymer, 1960) and the internalization of
MNCs' advantages (Rugman, 1980) tend to assume that there is no
significant difference in production and management between parent
companies and their affiliates. The MNCs' superior technology natu-
rally has demonstration and diffusion effects on local firms over time.
For those scholars who focus on product-cycle theory (Vernon, 1966),
however, there are differences between parents and their affiliates.
Production lines transferred to the developing countries are likely to
be limited to matured products manufactured by standardized, if not
obsolete, technology. MNCs form joint ventures in developing
countries mainly to penetrate the hosts' markets or to reduce pro-
duction cost by taking advantage of cheap local labor or raw materials.
In this sense, only low-level technology is used by MNCs in devel-
oping countries, which are not likely to learn high technology from
their foreign partners.
From 'radical' viewpoints, MNCs are not benign agents of technol-
ogy but economic and commercial arms of western imperialism. Their
objective is to exploit local resources for the purpose of reinforcing
the existing capitalist division of labor, no matter whether it is the
dichotomous metropolis-satellite dependency structure (Frank, 1969)
or the tripartite world system of core, semiperiphery, and periphery
(Wallerstein, 1974). Facing those giant MNCs, host governments and
local businesses are weak both in terms of what they have to offer
and in their ability to affect the behavior of outside investors. An
upward shift in the world hierarchy through the strategy of incor-
porating foreign factors is very difficult, if possible at all.
Theorists of dependent development recognize the coexistence of

dependency and development in some developing countries. Evans
(1979), for example, argues that this is possible because the host
state, through its control of state apparatus and the public sector,
plays an important mediating role in forming what he calls a 'triple
alliance,' i.e., an alliance between the state itself and the local and
transnational bourgeoisie. MNCs, in order to access local resources
or market, have to share some of their knowledge with local firms.
This opens the possibility of utilizing foreign technology to upgrade
local industry and to stimulate economic growth, although this growth
by no means assures the equal distribution of its fruits.
The statist perspective further elevates the state to a greater signi-
ficance (see, for example, Wade, 1990). The crux of this approach is
that. for latecomers in industrialization. the state can playa leading
role in stimulating and restructuring their economies. This state-led
industrialization is possible when the state gains and maintains au-
tonomy from the pressure of dominant economic and social forces.
domestic or foreign, and is capable of carrying out its own policy
agenda. Therefore, the power relationship between the state and the
dominant social forces must be incorporated in explanations of policy
formulation, policy implementation, and economic performance. As
Chan and Clark (1992a) caution, however, not only a state's autonomy
but also its flexibility in adapting to international and domestic con-
ditions, an elite's foresight, as well as some less predictable good
luck, must be taken into account.
Each perspective discussed so far deals with the relations between
MNCs and their hosts in the developing world. Although these per-
spectives can be quite illuminating, they serve only as the departure
point for this study because the strategic industries targeted by Tai-
wan are rather unusual. To gain greater insight, we examine the
twists and turns of the special features of one targeted sector, the
aircraft industry.
POLITICAL ECONOMY OF THE AIRCRAFT INDUSTRY
Although no actual market is perfectly competitive or purely mono-

polistic, the aircraft industry is perhaps one of the manufacturing
industries that comes closest to the extreme of natural monopoly.
The near-monopoly nature of this industry is obvious by the fact
that the top three airframe makers, Boeing, Airbus Industries and
McDonnell Douglas, accounted for 57, 21, and 18 per cent. respec-
tively, of the world's large commercial jet market as of late 1991
(Aviation Week and Space Technology, or AW&ST, 9 December 1991,
p. 24). Such a high degree of concentration, in turn, is due to the
requirements of enormous amounts of capital investment and R&D
expenditure, sophisticated technology. continuous innovation. and
resilience in facing the high risks of launching new products (Bluestone
et al., 1981; Mowery. 1987: Tyson. 1992). This industry structure gives
incumbent firms the advantage not only in economies of scale but
also in economies of learning. They tend to collect as long and as
much as possible the 'rent' of their firm-specific assets. For potential
new entrants. however. these entry barriers are already formidable
even if the existing giant firms do not exercise their power to sup-
press future competitors. It should surprise no one that it takes four
European companies to pool their resources and two decades of
government subsidies in order to make Airbus Industrie a credible
competitor with major US aircraft manufacturers. Although the glo-
bal aircraft market may seem lucrative. the competition among the
few firms in the market is no less fierce than in other sectors because
the number of buyers are also relatively few:' As Bluestone et al.
(1981, p. vi) point out. ,[t ]he winning or losing of a single contract can
often spell success or failure for the firm'. In other words. the near-
monopoly is almost bilateral.
Economics aside. governments' hands are also more visible in this
sector than in others. First of all. the aircraft industry is closely re-
lated to defense security: military and commercial aircraft technologies
are potentially transferrable. and many major manufacturers of com-
mercial airplanes are also defense contractors.~ Therefore. home
governments of MNCs constantly monitor the latter's activities. Fur-
thermore. the cutting-edge technology. employment opportunity and
trade surplus generated by the industry are often jealously guarded
by the MNCs' home governments for reasons ranging from national
interest to national pride. Conversely. purchasing decisions of com-
mercial aircraft. not to mention military ones. either are made by or
require approval from governments, which rarely hesitate to exercise
political leverage whenever possible. These characteristics suggest
the politically sensitive nature of this industry. Therefore. potential
new entrants have far more than giant MNCs and a nearly mono-
polistic market to reckon with.
The significance of the aforementioned sector-specific features for
developing countries which try to break into the aircraft industry
cannot be exaggerated. First, the 'advantages of late industrializers',

such as being able to catch up with industrialized nations by leap-
frogging, may be hard to harvest if the developing countries do not
have access to the technology monopolized by a small number of
giant MNCs. At the very least, the 'first-mover advantages' of giant
aircraft manufacturers impose a high cost for a developing country to
acquire needed technologies that are not easily licensed. Second, the
product cycle that drives the manufacturing of matured products
to developing countries may be very slow, if at all, to realize in the
aircraft industry. Given the importance of technology expertise over
labor cost, the life cycle of major aircraft models may both begin and
end in the MNCs. For example, the Boeing 707, America's first jet
transport that entered service as early as 1958, had neither its airframe
nor its engine manufactured abroad. Instead of offshore sourcing for
cheap unskilled labor, airplane makers that do shift part of their
production lines abroad, such as Boeing's having 21 per cent of the
structural work of its new 777 transport built in Japan (AW&ST, 19
April 1993, p. 15), are mainly motivated by the needs to penetrate
local markets, to preempt rival competitors, to take advantage of
local manufacturing expertise or low-cost capital, or other non-
economic reasons such as political pressure from the host government.
Third, the political economy of the aircraft industry demands the
government, the military, and private firms to work closely together
in order to succeed. If governments have to play such significant
roles in the advanced capitalist countries, public authorities in devel-
oping countries can be expected to be even more active, serving as
'institutional substitutes' (Gerschenkron, 1966) for certain missing
links, in building and regulating aircraft industries. Given the neces-
sity to gain access to aerospace technologies from abroad, an ambitious
NIC has to forge a strategic 'quadruple alliance' among the civilian
sector of the government, the military, the domestic private sector,
and foreign aircraft manufacturer(s). Unlike Evans's (1979) 'triple
alliance,' which is a tacit division of labor consisting of the three broad
sectors of multinationals, state and local capital, the strategic quad-
ruple alliance in question focuses on specific projects of multina-
tional joint venture in a targeted industry. The strategic nature of the
latter, in turn, is shaped by the setting in which a small number of
large MNCs as well as host and home governments interact (see, for
example, Richardson, 1990).
To bring together these partners who are more often heading to-
ward different directions than teaming in harmony, the state has to
play multiple roles as an initiator, a planner, a mediator. a financier.

and even an entrepreneur. This is the case even when the lower-end
segment of the aircraft industry. which involves at best interim tech-
nology. is targeted. Brazil's experience in building and maintaining
its light aviation industry illustrates this point. In 1969. the military
regime issued a decree-law to establish a joint government-private
Brazilian Aeronautics Corporation (Embraer) with the government
retaining at least 51 per cent of the voting shares. Since then. the
state has had to pass legislation to protect the domestic market. civil
and military. of light aircraft from foreign competition: to provide a
variety of tax and non-tax incentives in order to eliminate risks for
private investors; to pour in more than US$600 million in two dec-
ades to subsidize various R&D. production and export programs; to
further raise tariff on small aircraft in exchange for a license from
Piper Aircraft Corporation of the US to allow Embraer to produce
Piper's models; to impose an Embraer-Northrop offset contract to
produce component packages for the F-5 while purchasing 42 such
jet fighters from the US firm; to 'rationalize' the industry by merging
the other light airplane manufacturer. Neiva. with Embraer; and. of
course. to resist US and European pressure to liberalize Brazil's
domestic market for light aircraft (Green. 1987).
The other developing country that has ventured into airframe
manufacturing is Indonesia. In 1974. the military regime established
a government-monopoly aircraft company. Industri Pesawat Terbang
Nusantara (IPTN). This company entered into joint ventures with
several foreign airframe makers in order to gain access to aerospace
technology. For example. it reached a licensed-production agreement
with CASA (Construcciones Aeronautics. S.A.) of Spain in 1974 to
assemble 20/26-seat passenger transport. and later with Bell of the
US to produce helicopters. As in the case of Brazil. the Indonesian
government protected local civil and military markets. and imposed
offset contracts on MNCs in exchange for business. By the early
1990s. IPTN completed the design of its 50-seat N-250 regional trans-
port and scheduled its first flight in 1995 (A W &ST. 16 April 1990. p.
40; 28 September 1992, p. 15). While impressive in its technological
leap. IPTN has paid a staggering price. In one-and-a-half decades since
its establishment. 'the Indonesian government has invested [US]$600
million in IPTN facilities and contributed another [US]$400 million
for the company's working capital' (A W&ST. 16 April. 1990). So far.
the expensive project subsidized by heavy foreign debt shows no sign
of profit. Worse. it fails to demonstrate convincing evidence of the
linkage effects that are supposed to restructure the entire economy

(Far Eastern Economic Review, 29 July 1993, pp. 58-61).
A BRIEF HISTORY OF TAIWAN'S AIRCRAFT HISTORY
Taiwan's aircraft industry, like those of other countries, was stimu-

lated by security concerns stemming from its long-time rivalry with
the PRC (Huang and Wu, forthcoming). In contrast to Brazil or
South Korea, aircraft assembly, design, and manufacturing in Taiwan
had remained strictly military operations for more than two decades
since the industry's modest start in 1968. The high degree of insulation
of the military aircraft 'industry' from the rest of the economy was
due to not only the need for military secrecy but also the cool, if not
tense, relations between the military, which has been dominated
until recently by the Mainlanders who moved to Taiwan after 1945,
and the civil society and economy dominated by the majority local
Taiwanese.
The first single-engine trainer (Chieh-shou) was made in Taiwan,
based on a PL-1 design purchased from the US in 1968, the same
year as the military-run Chungshan Institute for Science & Technol-
ogy (CIST) was established. On 1 March 1969, the Aero Industry
Development Center (AIDC) was established as a subsidiary of CIST
to manufacture Chieh-shou trainers. The first important project for
Taiwan's air-defense industrialization started in 1973 with a co-
assembly, and later co-production, program for F-SEIF jet fighters
with Northrop. Engineers at AIDC obtained technologies in the
fabrication of components, particularly structural assembly of wings
(Nolan, 1986, p. 55). In 1980 when the AT-3 jet trainer co-designed
with Northrop rolled out, it was touted as a 'decisive step' toward
self-reliance in national defense.
In retrospect, however, the centerpiece project of AIDC did not
begin until 1982 with the development of the Indigenous Defense
Fighter (IDF), an extremely costly project triggered by President
Reagan's refusal to sell Taipei the advanced FX fighter aircraft. IDF
involves several US defense contractors, including General Dynam-
ics in assisting the design, Garrett in developing the engine, and Lear
Siegler International in integrating the avionics (A W&ST, 31 March
1986, p. 31; 7 January 1989, p. 4). After a decade of R&D and
probably US$4 billion of investment, the first squadron of the IDF is
scheduled to be formed in the ROC Air Force by the end of 1994
(World Journal, 26 February 1994, p. A6). As a result of these as-

sembly, co-design and production programs, the AIDC has made
impressive technological strides in manufacturing combat jets. A
report by the ROC's Ministry of National Defense (1992, p. 113)
claims that AIDC now has the ability to undertake the design, analysis,
simulation, ground- and fly-testing of airplanes and aircraft engines.
Furthermore, AIDC also succeeded in building a supplier base, small
as it may be, for IDF components that involved more than 100 local
businesses (AW&ST, 27 April 1992, p. 40). These subcontractors
are relatively strong in machining, forging and castings, but weak in
tooling and have little capability in specialty metals. Due to AIDC's
insulation, there are few aviation engineers outside its tightly guarded
walls.
FORGING A CIVILIAN AIRCRAFT INDUSTRY
After IDF's first successful test flight in mid-1989 (Central Daily News,
29 May 1989, p. 1), state planners in Taiwan believed that it was time
to materialize the 'synergy' of the defense industry. In June 1990, the
Executive Yuan (the Cabinet) adopted the Aerospace Industry
Development Plan. The Plan specified two broad objectives: (1) to
facilitate the development of the aerospace as well as its parts and
components industries so as to bring about an overall industrial tech-
nology advancement, and (2) to build an integrated system of aerospace
industry that incorporates both military and civilian manufacturers
(National Science Council, 1992, p. 195). These goals were later re-
flected in the Six-Year National Development Plan which listed aero-
space as one of the 'ten emerging industries.'
The Roles and Actions of the State
To implement the ambitious industrial upgrading policy, a 22-member

Committee for Aviation and Space Industry Development (CASID)
was formed at the cabinet level in 1990. All major aircraft procurement
by government agencies or private businesses are required to go
through the CASID. Among other duties, CASID takes charge of
negotiating and signing offset agreements with foreign sellers. These
agreements, like precedents set by other nations, usually require air-
craft MNCs to consent to technology transfers, to purchase local parts,
or to undertake joint production that amounts to a certain percentage
Table 5.1 Financial Structure of the Taiwan Aerospace Corporation,

December 1991
Share-holder Subscribed Paid-in Percentage Number of

capital capital of total seats on
(US$ mil.) (US$ mil.) capital the board
Development Fund # 48.47 12.12 24% 4*

Chiaotung Bank # 10.10 2.52 5% 1
Hualon Group 38.83 9.71 19.23% 3
Tatung Group 19.42 4.85 9.615% 1
Formosa Group 19.42 4.85 9.615% 1
Evergreen Group 19.42 4.85 9.615% 1
Tung Ho Steel 9.71 2.43 4.8% 1
Yulon Group 9.71 2.43 4.8% 1
Pacific Electric 9.71 2.43 4.8% 1
Wire & Cable
Chang Mien 4.85 1.21 2.4%
Industries
Tainan Enterprise 3.88 0.97 1.9% 0
HongKong Yangtze 3.88 0.97 1.9% 1
Development
Crinkle Textile 3.88 0.97 1.9% 0
others 0.66 0.17 0.32% 0
Total 201.94 50.49 100%
Notes: # represents the government.

* does not include the Board Director, David Huang, but
includes Hua Hsichun, General Director of AIDe.
Source: World Journal, 7 December 1991, p. A6.
of the sale's value. By 1990, the semi-state-run China Airline and the
new Eva Airways had accumulated a total of US$690 million offset
credit with Boeing and McDonnell Douglas (MD).
Besides charging the semi-official Industrial Technology Research
Institute (ITRI) with the development of inspection and testing cap-
ability required by the aviation industry, the government also ini-
tiated a capital-mobilization campaign to form a government-private
joint venture, the Taiwan Aerospace Corporation (T AC). According
to David Huang, T AC's first Board Director and the former chief of
CIST, T AC would be 'the hub around which the related local indus-
tries develop aerospace technology' (Free China Journal, 11 October
1990, p. 8). In mid-1991, TAC was formally established - with the
state taking a 29 per cent stake and the private sector the remainder
(see Table 5.1) - to lead Taiwan's efforts to forge a civilian aircraft
industry. It should be clear from TAC's financial structure that it is

a consortium of the civilian government (represented by the Develop-
ment Fund and the Chiaotung Bank), the military (represented by
David Huang and General Hua Hsichun, AIDC's Director-General),
and several leading private business groups.
Two Failed Attempts to Form Quadruple Alliance
In November 1991, America's debt-laden McDonnell Douglas an-

nounced that it signed a memorandum with T AC to sell 40 per cent
of its commercial aircraft business for US$2 billion to partly finance
its development of MD-12 jumbo jets. The news immediately stirred
debates in Taiwan about the wisdom of this huge investment. It also
caused great concern in the US regarding the potential loss of in-
dustrial technology and job opportunity, and the possible leak of
military technology to TAC (see US Congress, 3 December 1991 and
27 February 1992); the last concern led to David Huang's resignation
in 1992. Meanwhile, the ROC government commissioned a team led
by China Steel, a state-owned enterprise, to conduct a feasibility
analysis. The report of the team to the Cabinet in late April 1992 was
mixed (see World Journal, 28 April 1992, p. 6, for an excerpt). It
recognized that the proposed venture would be a great opportunity
for Taiwan to start a civil-aerospace industry in a big way, but warned
against the high risks involved and expressed concerns about the
possibility of technology transfer. Hesitation on the part of T AC's
private backers due to perceived investment risks finally shelved the
MD-TAC deal by late summer 1992, despite a series of negotiations
between the two parties. Although this setback did not halt the gov-
ernment's effort to blaze the trail to the civil-aircraft industry, it did
shift the policy to a lower gear. In August, the Industrial Develop-
ment Bureau of the Ministry of Economic Affairs decided to select
a dozen local firms and develop them into high-quality international
suppliers of aircraft parts. The Bureau commissioned McDonnell
Douglas to give these local companies guidance on manufacturing
technology, quality control, and management practices (AW&ST, 5
October 1992, p. 29).
While most people's attention was attracted by President Bush's
announcement on 2 September 1991 to sell 150 F-16s to Taiwan
(New York Times, 3 September 1992, p. AI), TAC was seeking its
second opportunity with another struggling airplane manufacturer. 5
On 23 September, TAC and British Aerospace (BAe) announced a
50-50 joint venture to produce medium-sized regional jetliners (RJs)

for cargo and for 70 to 115 passengers, much smaller than the MD-
12 planned by McDonnell Douglas (AW&ST, 5 October 1992, p.
36). According to the agreement finalized in January 1993, TAC and
BAe would pool together US$386 million to form a new company
called Avro International Aerospace Ltd. Avro would manufacture,
market, and support the new RJ family of aircraft, which will be
produced from parallel assembly lines in BAe's plant at Manchester
and Taiwan's AIDC at Taichung. The senior vice president of T AC
claimed that 'there will be no limit as far as technology transfer is
concerned. Complete manufacturing skills and technology will be
transferred to TAC' (Free China Journal, 21 January 1993, p. 3). This
turned out to be wishful thinking. In subsequent negotiations, BAe
was reluctant to sign formal agreements that would commit it to
transfer advanced technology. Dissension within TAC - between the
profit-conscious private share-holders and the over-zealous state
technocrats, and later among some private share-holders themselves
- almost brought the company to a stand-still. After months of agony,
the TAC-BAe venture eventually failed (New York Times, 15 No-
vember 1993, p. D7).
Opportunities and Constraints for Taiwan's Aircraft Industry
From the state planner's viewpoint, Taiwan enjoys several great op-
portunities to break into the aircraft industries. First, the military
technology accumulated by AIDC and its experience in building IDFs
could 'trickle down' to the civilian sector. Second, Taiwan has
abundant capital and can afford paying the very high entry costs of
the aircraft industry. Third, the aircraft industry is in recession and
Taiwan can grasp this window of opportunity by exercising its finan-
cial muscle to strike deals with giant aircraft MNCs and obtain cutting-
edge aerospace technology. Fourth, the Asian market for airplanes is
the fastest growing in the world, and Taiwan has a location advan-
tage in serving this market. Fifth, despite rising wages, salaries for
engineers and technicians in Taiwan are still lower than their counter-
parts in the West.
These opportunities are overshadowed by internal and external
constraints, however. First, the convertibility of military technology
to civilian use cannot be taken for granted. The cool relations be-
tween the military and civilian society further restrain the quick
realization of such spin-off effects, if any. The resignation of David
Huang due to external pressure certainly did not help in integrating

the military with the private sector in T AC.
Second, Taiwan's 'deep pocket' may be shallower than most peo-
ple think. Both MD and BAe were eyeing Taiwan's huge foreign
reserves and the government's support for T AC. They fail to realize
that, due to the fast democratization process in Taiwan, public
spending has increasingly come under the scrutiny of assertive leg-
islators and the mass media. Electoral accountability in Taiwan has
made state authorities and technocrats more risk-averse than they
used to be. Besides, many other policy objectives, especially those
related to public welfare, are competing for the government budget,
which has been in the red due to the ambitious US$300 billion Six-
Year National Development Plan. State technocrats themselves
disagree about budget priorities. The more obvious the lack of
consensus among government officials, the less willing the private
sector is to participate in risky investment projects. This explains why
T AC's own financial structure remains fragile. and why it has had
difficulty raising capital to its initial goal of NT$lO billion (about
US$388 million).
Third, the political economy of the aircraft industry dictates a tough
battle for Taiwan in negotiating with giant MNCs for technology
transfer. The more deeply an MNC is in financial trouble, the more
anxious it is to find a financially rich but technologically weak part-
ner for joint venture. The more junior a partner is in a technology-
centered joint venture, however, the more vulnerable it is to the
manipulations of the MNCs. Windows of opportunity that occur when
the MNCs are financially weak do not guarantee a bargain in tech-
nology transfer for developing countries. This is illustrated by MD's
demand that T AC pay US$3 billion for its technological assets in
addition to the original US$2 billion deal (World Journal, 24 Sep-
tember 1992, p. 1).
Taiwan's 'location advantage' plays a minor role because it can be
easily replaced by another Asian country, such as South Korea. Its
lower wages for engineers may not last long, either. Furthermore,
Taiwan's domestic market for aircraft is too small to ensure econo-
mies of scale. Thus, Taiwan does not have the same option as Brazil
or Indonesia to protect domestic airframe makers by closing its
market. When the rhythms of Taiwan's domestic politics prevent the
state from dredging deep into its reserves for more capital, its only
effective bargaining chip is lost.
Development-minded technocrats in Taiwan, like their counterparts
in other developing countries, tend to be attracted by the glamor of

the high-technology aircraft manufacturing and underestimate the
prohibitive cost and risk involved. Yet the aircraft industry operates
in a market that demands constant and swift state intervention and
support, which require the political will to take economic risk. Gone
are the days in Taiwan when the unchallenged top state leader can
intervene without worrying too much about political accountability.
Perhaps state planners need to identify a niche in the world market
that is less glamorous but fits better with Taiwan's political economy.
CONCLUSION
Host state-MNC relationships can be best understood by taking into

account the interplay among the relevant players. In a strategic sector
such as the aircraft industry, we need to examine the relations among
the government, the military, private groups, and foreign aircraft
manufacturers. The case of Taiwan indicates that the state can play
an active role in promoting industrial restructuring, as some statists
argue. However, there are limitations to the costs and risks that the
state alone can absorb. The higher the costs and risks to break into
a strategic industry, the more effective the state must be in forming
and keeping the alliance. Ironically, the higher the risk a joint venture
involves, the less willing the private sector becomes to join the alliance
and the greater the burden the state has to shoulder. This heavy
burden may in turn produce disagreements within elite circles and
paralyze the state's ability to forge the quadruple alliance.
Notes
1. Taiwan's foreign exchange reserves were US$72.4 billion in 1990,
US$82.4 billion in 1991, and US$82.3 billion in 1992. They hit US$84.4
billion by October 1993 (Central Bank of China, November 1993, pp.
2-3).
2. The aerospace industry refers to the firms and institutes involved in
research and development (R & D) and manufacture of aircraft, mis-
siles, spacecraft and satellites. The aircraft industry, which is the focus
of this study, is the sector engaged in R&D and manufacture of
airframes, engines and parts of airplanes (see Aerospace Industries
Association of America, or AIAA, 1993, pp. 164-5).
3. These potential buyers consist of the air forces of different countries

and some 500 airlines worldwide (Hayward, 1989, p. 3).
4. For example, McDonnell Douglas is the largest defense contractor in
the United States (AIAA, 1993, p. 162). It is estimated that somewhere
between 40 and 46 per cent of the total revenues of the US aircraft
industry is attributable to defense contracts (Dertouzos and Dardia,
1993, p. 5). British Aerospace, the largest aerospace company in Europe
by 1986, is also the West's largest defense contractor outside the US
(Hayward, 1989, pp. 175-8).
5. British Aerospace suffered a loss of £129 million (US$219.3 million) in
the first half of 1992 due to a sharp decline in its regional aircraft
business (AW&ST. 28 September 1992, pp. 23-4).
6 MNCs and
Developmentalism:
Domestic Structures as
an Explanation for
East Asian Dynamism
Cal Clark and Steve Chan
The nature of the relationship between multinational corporations

(MNCs) and developing countries and the implications of this rela-
tionship for economic growth remain highly controversial in the study
of international political economy (IPE). For several decades, the
debate occurred primarily in a dialogue of the deaf between modern-
ization theory (which saw MNCs as promoting growth in the periph-
ery) and dependency theory (which argued that MNCs prevented or
distorted growth). More recently, statist theory has tried to resolve
this conundrum by 'bringing the state back in.' In particular, this ap-
proach argues that 'strong and autonomous' states can regulate MNCs,
thereby making them contribute to national economic performance.
This chapter seeks to analyze the interactions among state-society
relations, MNC access, economic growth, and political-economy cul-
ture in six Asian cases: Hong Kong, Singapore, Taiwan, South Ko-
rea, Thailand, and the Philippines. The historical experiences of these
cases challenge some of the basic propositions of the dependency,
modernization, and statist perspectives regarding the impact of a
dominant state and easy MNC access on economic performance.
Although each of these perspectives is able to cite some supportive
evidence from our cases, none is able to account for all the permu-
tations across them. The welter of seemingly conflicting tendencies,
however, is clarified significantly when we take political economy
culture into account in our analysis.
84
MNCs and Developmentalism 85
THEORETICAL RATIONALE
As adumbrated by Risse-Kappen (1992), the impact of transnational

actors on a political economy is in part a positive function of the
extent of the latter's involvement in international affairs. This im-
pact, however, is significantly mediated and shaped by domestic in-
stitutions. In particular, state-dominated systems allow fewer points
of access for transnational influence than corporatist and especially
society-dominated systems. However, once transnational influence is
able to penetrate a state-dominated system. it is apt to have a more
profound and enduring impact. Conversely, this influence is likely to
be considerably diluted in corporatist systems (through the policy
processes of log-rolling) and negated by countervailing interests in
society-dominated systems.
In our analysis, the transnational actors are the MNCs; and the out-
comes of concern are their access to the host economy and their impact
on its growth performance. Two aspects of domestic structure are used
to explain these outcomes. The first is state-society relations in terms
of the balance of power between them. The second is political-
economy culture based on the work of Fajnzylber (1990a, 1990b).
We consider both of these variables to be important aspects of do-
mestic structure. We moreover argue that they interact in significant
ways to facilitate certain policy options and block others. Most
particularly, societies are not blank sheets on which a strong state
can impose its script at will. Instead. pre-existing cultural dispositions
can facilitate (or obstruct) state domination by granting (or denying)
legitimacy for government intervention. Legitimacy facilitates the
implementation of state policies and thus their effectiveness, thereby
creating a positive feedback loop that reinforces state domination.
According to this logic, political-economy culture is a first-order
variable, whereas state-society relations have secondary influence.
Still another basic proposition underlying the following analysis is
that countries are not closed cultural systems. Rather, a country's
political-economy culture (especially in the developing world) is
subject to important outside influences. It is shaped in part by major
past and ongoing transnational relations. Thus, to the extent that
relations with Japan and the US have helped to propagate and
perpetuate certain patterns of national production and consumption
among the countries selected for this analysis, we may appropriately
refer to them as subscribing in varying degrees to the Japanese
and American models or styles of development. This transnational
diffusion of ideological and cultural norms (sometimes dubbed face-

tiously 'coca-colonization' in the case of the US) is an important
source of external influence on domestic structure.
CASE CHARACTERISTICS
The six cases selected for this analysis - Hong Kong. Singapore.
Taiwan. South Korea. Thailand, and the Philippines - present con-
siderable variation in growth performance. MNC access. cultural tra-
dition, and state-society relations.
Hong Kong. Singapore. Taiwan. and South Korea have commonly
been treated as a single group of successful NIEs (newly-industrializing
economies) pursuing a strategy of export-led economic growth. Yet.
despite their common success in export expansion and industrial
development. these political economies are quite different in many
ways. Hong Kong and Singapore are much smaller than Taiwan and.
especially, South Korea in population and economic output. Their
limited domestic size makes an inward-looking strategy of import
substitution much less feasible. They are accordingly much more
reliant on external sources of capital. technology. and consumer
demand to offset the limitations in their domestic resource base. At
the same time. however, both Hong Kong and Singapore are highly
attractive sites for MNC location because of their considerable
human capital. developed physical infrastructure, and strategic geo-
graphic location. In 1990, Hong Kong's GNP per capita was $11,490.
and Singapore's was $11.160 - thus qualifying them as high-income
industrial economies, according to the World Bank's definition.
Hong Kong is generally perceived (with more than a little. but not
total, justification) to represent the neoclassical vision of political
economy. The British administration in Hong Kong has traditionally
refrained from active economic intervention, and the Crown Colony
has featured perhaps the best example of a laissez-faire economy in
the world. Although the major banks have played a considerable role
in providing financial stability. the key source of entrepreneurial elan
has come from the numerous small and medium-size firms. These
firms are the backbone of the Colony's dynamic export sector. They
tend to be owned and operated as family enterprises with relatively
low capitalization. They are highly adaptable to changing market
conditions, and excel in the flexible manufacturing of small batches
of 'faddish' consumer goods - such as digital watches, transistor radios,
M NCs and Developmentalism 87
mobile telephones - with short product cycles. As a result of their

being able to redeploy manufacturing resources quickly from one
product line to another, these firms practice what Lam (1992) has
called guerilla capitalism. They present a moving target to competitors
(e.g., those in the US) with far greater capital and technology resources
to take advantage of economies of scale. Although Hong Kong's
entrepreneurs have been very adept in seizing business opportunities
and in exploiting temporary market niches, they typically have a
short commercial time-horizon and a low capacity for long-range
planning (Krause, 1988; Lam and Lee, 1992; Rabushka, 1979).
South Korea represents the polar opposite to Hong Kong, in the
sense that its political economy is based on a strong develop mentalist
state. In Korea, the Japanese-style Confucian culture created a strong
state devoted to promoting economic development and welfare, and
engendered an ethic stressing competition and achievement. Given
its much larger domestic market, South Korea also has understand-
ably pursued industrial deepening with an emphasis on heavy and
chemical industries to a much greater extent than the smaller East
Asian nations. This emphasis has promoted economic concentration
in the form of large conglomerates (the chaebol), a heavy reliance on
foreign loans (as opposed to foreign direct investment, or FDI), and
a 'top-down' approach to industrial management that gives govern-
ment bureaucrats a powerful role. There is in this approach a strong
'bias for action,' in the sense that the South Koreans are often willing
to initiate large projects without detailed long-range analysis of all
the relevant implications. Instead, they seek to gain experience and
modify plans on the basis of 'learning by doing.' Although this ap-
proach has the advantage of promoting a rapidly rising 'learning
curve: it can also result in expensive errors, given the heavy sunk
investment necessary for large industrial projects. Among the four
'little dragons,' South Korea's state has clearly taken the most active
role as a 'gate-keeper' in regulating MNC access and in asserting
national autonomy over foreign investors (Amsden, 1989; Chu, 1989;
Haggard and Moon, 1983; Jones and Sakong, 1980; Kang, 1989;
Mardon, 1990; Mardon and Paik, 1992; Moon, 1988).
While the city-economies of Singapore and Hong Kong have simi-
lar British colonial traditions and historically entrepot economies in
addition to their common small populations and national products
noted above, their political economies have now diverged markedly.
In contrast to Hong Kong, with its decentralized and laissez-faire
system, the state assumes a dominant position in Singapore's economy.
Whereas Hong Kong practices a sort of 'market rationality' that

promotes individual entrepreneurial initiatives, diffused technical
learning and market adaptation, and opportunistic or even specula-
tive commercial ventures, Singapore provides an example of 'plan
rationality,' whereby government agencies and public enterprises play
a greater role in developing infrastructure, mobilizing resources,
and especially making long-range preparation for orderly transition
to higher stages of the international product cycle. Government
bureaucrats engage in thorough examination and detailed analysis of
socioeconomic conditions and potential courses for economic devel-
opment, and plan with a view to 'getting things right the first time.'
This attitude stands in sharp contrast to the typical South Korean
attitude of 'let's get the ball rolling and then figure out what to do
next.' Although both Hong Kong and Singapore welcome MNCs.
the state plays a much more active and direct role in recruiting and
screening these companies in the latter. In addition, the Singapore
case (as well as Hong Kong) raises the interesting point that gov-
ernment spending for subsidized housing, education, and other aspects
of popular welfare actually constitutes a 'subsidy' for businesses who
can pay lower wages for fairly skilled labor, rather than a 'drag'
which diverts resources from 'more productive' private investment
(Caste lis et al., 1990; Deyo, 1981; Krause, 1988; Mirza, 1986; Rodan.
1989; Schiffer, 1991).
Taiwan shares Hong Kong's tendency for commercial opportun-
ism and its emphasis on family enterprises and flexible manufacturing.
The island's export sector is likewise dominated by small and medium-
size firms. However, in contrast to Hong Kong, Taiwan also has large
state enterprises that control various strategic upstream industries
(e.g., steel, energy, chemicals) and engage in extensive provision of
physical infrastructure. The nature of the island's political economy
has evolved very significantly over time. During the 1950s period of
import-substitution industrialization, Taiwan resembled the South
Korean model fairly closely. However, the strategic reorientation
to export-led growth in the early 1960s entailed the evolution of a
considerably different political economy. The rapid expansion of the
private sector meant that, given the very strong ethic of family-based
entrepreneurship in the island's Confucian culture, the economy came
to be dominated by small firms whose 'competitive advantage' is
rapid and flexible response to market conditions.
In some ways, then, the Taiwanese case combines features of the
South Korean and Hong Kong political economies. The state is much
MNCs and Developmelltalism 89
more active than in Hong Kong, but the economy is much more
decentralized than in South Korea. Given its smaller domestic mar-
ket, Taiwan has eschewed ambitious industrial deepening and the
'big push' ideology as exemplified by the South Korean model. Over
time, there has also been substantial change in the strength and
autonomy of the state in Taiwan. During the 1950s and 1960s, the
state clearly dominated over society. However, over time, social in-
terests began to assert themselves, so that there has recently developed
a greater degree of balance between state and society. Significantly,
this balance has been buttressed by a bifurcation of political and
economic power along lines of provincial origin. Until the recent
political liberalization, the Mainlanders (who came to Taiwan with
Chiang Kai-shek in 1949) were in control of the political and military
apparatus, whereas the Islanders (whose ancestors arrived much
earlier) have been dominant in the business sector (Chan and Clark,
1992a; Cheng and Haggard, 1992; Chu, 1989; Clark, 1989; Galenson,
1979; Gold, 1986; Haggard, 1990; Ho, 1978; Lam, 1992; Li, 1988;
Myers, 1984; Tien, 19X9; Wade, 1990; Winckler and Greenhalgh, 1988;
Wu, 1985).
Among our six cases, the Philippines has fared the worst economi-
cally, especially during the 1980s. This country has had the longest
history of being integrated into the global economic system since the
late 1500s under Spanish colonial rule. Agricultural commercializa-
tion (sugar, hemp, tobacco) has been the central feature of its politi-
cal economy, whereby large landowning families have dominated
provincial politics in the fashion of powerful political dynasties up
to this day. The power of these political barons has been based
significantly on an extensive patronage system, and this power has
always been a source of centrifugal force challenging the authority
of the state. These oligarchs, with extensive entrenched interests in
agricultural exports and import substitution, have led to blocking
coalitions that have effectively prevented socioeconomic reforms. Most
particularly, the traditional plantation mode of production has created
a highly inegalitarian system of income and land distribution, and
efforts to bring about greater equality in these respects have been
stymied by the oligarchs (whose power has been concentrated in the
Senate, whose approval is required to pass the necessary legislation).
Unlike the other Southeast Asian countries, the Philippines did
not have an indigenous aristocratic-bureaucratic class, or a tradition
of central bureaucracy prior to the establishment of colonial rule.
Conversely, even after its political independence, Americans still
maintained parity rights in the commercial sector, enjoying the same

economic freedom as Philippine citizens. These legacies suggest that,
except for Hong Kong, the Philippines has been less able to buffer
external influences than the other cases under examination. The
impact of foreign (mainly American) economic influence has also
been greater. Whereas the US was primarily motivated to support
and defend South Korea, Taiwan, and Thailand for political and
strategic reasons during the Cold War, its interests in the Philippines
have been driven more by commercial concerns. This penetration of
US commercial interests has fostered a more autonomous business
class than elsewhere in Southeast Asia. Thus, business interests - as
well as the political oligarchs, as noted earlier - have been in a better
position to lobby or oppose the state for favorable policies, although
these interests have themselves been sharply divided among those
favoring agricultural exports, import substitution, and subcontracting
for foreign manufactures intended for re-export (Crouch, 1985; Doner,
1991; Hawes, 1987; Timberman, 1991; Wurfel, 1988; Yoshihara, 1988,
1985).
In Thailand, things worked much better for several reasons. Agri-
culture was traditionally based on small farmers who owned their
land, thus preventing the extreme inequality and class divisions that
mark the Philippines. Even the military governments never degener-
ated into the gross corruption of the Philippines. Presently, Thailand
occupies a lower niche in the international product cycle than the
four 'little dragons.' However, even though its GNP per capita is
significantly lower, its rate of economic expansion has been remark-
ably fast in the past decade. Concomitantly, its manufactured exports
as well as foreign investment inflows have grown rapidly in recent
years. Yet, despite Thailand's current rapid development, some fears
have been raised that the lower levels of domestic entrepreneurship
and weaker state institutions have combined to denationalize the
most dynamic sectors of the economy, leaving Thailand highly vul-
nerable to massive MNC 'exit' when the country begins to price itself
out of the low-cost labor niche in the global economy (Mardon and
Paik, 1992).
Thailand's political economy has had a long history whereby gov-
ernment officials used state power to extract private gains from the
predominantly Chinese business community (Girting, 1981; Riggs,
1966; Rodan, 1989; Skinner, 1957; Yoshihara, 1988). There has, there-
fore, historically tended to be a bifurcation of political power and
economic power along ethnic lines - a trait that Thailand shares with
Table 6.1 National Status on Analytic Variables
Case Culture Power MNC Access Growth
Hong Kong Japanese society high high

Singapore American state high high
Taiwan Japanese balance medium high
South Korea Japanese state low high
Thailand American balance high medium
Philippines American society high low
Malaysia and Indonesia and. in the somewhat different manner pre-

viously described. with Taiwan. Because the Thai state has been quite
dominant over social forces. its political economy has been descrihed
as a bureaucratic polity. Yet. frequent changes in the political leader-
ship. a comparatively lethargic bureaucracy. and a high degree of
concentration of business expertise and economic power in a small
number of financial conglomerates owned and operated by the Thai
Chinese tend to undermine the continuity, cohesion, and competence
of state power in directing economic policy.
EMPIRICAL DIMENSIONS
Table 6.1 rates these countries along the four dimensions adumbrated
in our theoretical rationale. We are especially interested in the manner
in which political-economy culture and state-society relations can
affect MNC access and economic growth.
On the dimension of political-economy culture, Fajnzylber (1990b)
has delineated two contrasting policy styles - alb,eit in somewhat
caricatural form - characterized by him as the American and Japan-
ese models of development. In the US, firms have traditionally been
inward-looking, being concerned primarily with production for a large
domestic market. Due to its abundant natural resources, the export
of primary commodities has always been an important source of
foreign exchange for the US. The country's popular ethos professes
profound misgivings about 'big government: and places a high value
on individual freedom, exuberant consumerism, and the equality of
opportunity (a view that can coexist with an acceptance of pronounced
socioeconomic inequality in actual distributive outcome). Public policy
as well as mass culture encourage consumption at the expense of

savings.
In contrast, in Japan there has always been a much higher level of
popular support for government intervention in the marketplace. The
state is seen as a guardian of public trust and common welfare against
special interests. In fact. an ingenious system has seemingly evolved
in which 'patronage politics' is limited to sectors not involved in
international trade, such as agriculture and construction, while tech-
nocratic control over policy-making about major industries has been
protected (Calder, 1988). Moreover, Japanese firms have always been
outward-looking - foreign exports are the central mission rather than
a subsidiary concern of corporate executives. Being poor in natural
resources and saddled with a large population, manufactures with
high added-value are the island's chief exports. Concomitantly, cul-
tural norms emphasize the virtues of group conformity, interpersonal
collaboration, collective responsibility, and social integration at the
expense of personal liberty. They also encourage frugality, savings,
and distributive justice. Thus, Japan features more austere consump-
tion patterns. higher rates of capital formation, and greater equity in
income distribution than the US. Its public and private sectors both
espouse fiscal conservatism.
Fajnzylber (1990b) shows that Latin American countries tend to
adopt the American model of development. They feature import-
substitution industrialization, export reliance on primary goods, large
fiscal deficits. heavy public and private debts, ostentatious consump-
tion of luxurious imports by the elite, and highly inegalitarian systems
of income distribution. In East Asia, an earlier analysis by us (Chan
and Clark, 1992b) found that the Philippines. a former US and Spanish
colony. has followed the American model most closely. With its tra-
ditional hacienda culture, agricultural exports (sugar and coconut),
Catholicism. extended patronage system, and skewed socioeconomic
distribution. it is also the most Latin American of the Asian coun-
tries (Hawes, 1987). Imitation of the 'American way of life,' from
pop art to political campaigns, has gone the farthest in the Philippines
in comparison to its regional neighbors. Although, in various ways,
the political economies of Thailand and Singapore also exhibit fea-
tures of the American model, the extent of this replication is much
more limited in these countries than in the Philippines.
Perhaps not surprisingly, our earlier analysis showed that Taiwan
and South Korea, two former colonies of Japan, resemble the Japan-
ese model of development most in terms of their patterns of economic
production, consumption, and distribution. Hong Kong also belongs

to this group, sharing with the other two a profile consisting of a
large manufacturing sector, a heavy reliance on the export of con-
sumer products, a high savings rate, a low tendency for luxurious
purchases (especially for privately-owned vehicles), and a compara-
tively egalitarian system of income distribution.
Turning to the second empirical dimension of state-society rela-
tions, Hong Kong certainly does not have a strong developmental
state. Thus, the British colony has clearly been society-dominated. It
has the most laissez-faire economy among our six cases, and prob-
ably in the world (Krause, 1988; Rabushka, 1979). As already
mentioned, Hong Kong's chief source of entrepreneurial dynamism
has come from the medium and small family-operated enterprises.
Historically, the Philippines also has a weak state, although for
reasons different from Hong Kong. Whereas the British colonial
administration in Hong Kong has pursued a purposeful policy of
minimal government intervention, the Philippine state apparatus has
been notoriously 'soft' in the sense of its vulnerability to being pen-
etrated and captured by private interests. Government bureaucracies
are often used to dispense lucrative patronage and extract economic
rents. During the later years of the Marcos era, a more acute form
of 'crony capitalism' was employed by the dictator to in part crush
the power of opposing oligarchs. In comparison with neighboring
Malaysia and Indonesia and especially in the recent past, ethnic in-
tegration, government-business interaction, and mass political mo-
bilization (as in the May 1992 events that deposed Prime Minister
and General Suchinda) have developed to a much greater extent in
Thailand (Doner, 1991; Laothamatas, 1992; Suehiro, 1989), so much
so that we consider that there is a rough balance of power between
state and society.
In contrast to Hong Kong and the Philippines, Singapore, South
Korea and, to a lesser extent, Taiwan have featured strong develop-
mental states that have taken an active and direct role in their effort
to promote economic expansion and industrial upgrading. In this
effort, they have resorted to a battery of policy instruments, including
the allocation of financial credit, production subsidies, tariff protection,
export quotas, and tax rebates to influence entrepreneurial incentives.
They have also to varying degrees and at different times assumed a
direct economic role by establishing public enterprises, entering into
joint ventures with foreign companies, and providing banking and
other financial operations. Taiwan, Singapore, and South Korea all
have a competent and cohesive bureaucracy with a strong esprit de

corps, high social prestige, and considerable autonomy from competing
social interests. However, state intervention in Taiwan has been much
less extensive than in Singapore and South Korea, in the sense that
the government has little direct relationship with or impact upon the
important sector of small private businesses. Thus, we consider the
former country to be characterized by 'state-society balance' and
the latter countries to be state-dominated political economies.
Our six cases embody substantial variation in their policy treat-
ment of MNC access (Huang, 1989; Mardon, 1990; Mardon and Paik,
1992; Mirza, 1986; Yoshihara, 1988). South Korea stands out in its
practice of 'sovereignty en garde,' in that it has imposed the most
stringent conditions on MNC access (i.e., it has the lowest net FDI
to total investment ratio). It has preferred to rely on foreign debt
over FDI as a source of external finance. Although other governments
also often stipulate technology transfer, domestic content, export
quotas, and majority equity ownership as a price for MNCs to enter
their countries, Seoul tends to drive a harder bargain. Its policies
have aimed at building up 'national champions' among the chaebol,
first by forcing MNCs into joint ventures with them and then by
forcing the foreign corporations to divest once the Korean enterprises
'learned the business and technology.' Thus bolstered, the Korean
conglomerates have spearheaded the country's assault to move into
increasingly sophisticated and higher value-added production and
exports. Some of South Korea's assertive strategies, such as debt
financing and the drive for heavy industries in the late 1970s and
early 1980s, though, have encountered occasional setbacks that were
quite severe.
Singapore, with its explicit strategy of growth through invitations-
to-MNCs, defines the other end of the spectrum of MNC access as
FDI plays a much larger role there than in any of our other cases.
The state also underwrites popular welfare, human-capital develop-
ment, and physical infrastructure to increase its already considerable
attraction due to geographic position as a site for MNC location.
However, the role of public enterprises is also much more significant
in Singapore than in most of the rest of East Asia, thus restricting the
room available for MNCs to maneuver (Krause, 1988; Mirza, 1986;
Rodan, 1989). We see in Singapore the clearest example of a partner-
ship between the state and MNCs, with private capital assuming a
minor role.
Taiwan constitutes an intermediate case. Entry barriers for MNCs
have been higher in South Korea than Taiwan, which in turn appears
to have taken more institutional efforts to screen and regulate FDI
than Singapore (Huang, 1989). Private capital is also much stronger
in Taiwan, whose economy and export sector are dominated by small
and medium firms. The state has exercised diligent oversight of the
MNCs. These firms were strongly regulated and channeled into those
export sectors, most particularly electronics, where Taiwan's firms
did not have the expertise to operate. Because there were few
'national champions,' like the Korean chaebol, the MNCs assumed a
larger and more lasting role in Taiwan's economy. Technology trans-
fer also occurred much differently in Taiwan. Instead of government-
enforced direct transfers to large domestic partners in joint ventures,
indigenous managers hired by the MNCs would 'learn the business'
and then spinoff their own small enterprises. Taiwan's rapid move-
ment up the international product cycle in the 1970s and 1980s led to
two major changes in this political economy. In the 1970s, state cor-
porations were used to prevent the denationalization of heavy industry
(i.e., steel and petrochemicals) as Taiwan moved into 'second-stage
import substitution.' In the 1980s, the foreign-capital regime was
liberalized greatly, both because domestic firms had become highly
competitive in their own right and because the government hoped
that MNCs would lead an economic upgrading into high-tech pro-
duction. Unlike Singapore and especially South Korea, Taiwan's
industrial structure has continued to be less concentrated and its
state has not engaged in a 'top-down' approach to achieve a 'big
spurt' in industrialization.
The bureaucratic ability to enforce MNC compliance with existing
regulations and agreements tends to be much weaker in Thailand
and the Philippines than the 'harder state' cases reviewed above
(Doner, 1991; Fry, 1992; Mardon and Paik, 1992; Hawes, 1987). The
recent surge of FDI into Thailand has tended to overwhelm that
country's physical infrastructure as well as its bureaucratic capacity.
This investment has been primarily attracted by the low cost of labor,
thus leaving the country vulnerable to massive MNC exit when its
wages are no longer competitive. Moreover, traditional patronage
politics and sluggish bureaucratic processes saddle entrepreneurship.
Nevertheless, Thailand has achieved rapid growth in recent years.
This is probably explained by the cooperation that began to emerge
between domestic businessmen and government technocrats in the
1980s on policies limiting the power of MNCs (Doner, 1991; Fry,
1992; Girling, 1981; Hewison, 1985; Schlosstein, 1991). Thus, among
our six cases, Thailand comes closest to resembling the triple alliance
of state capital, domestic (Chinese) capital, and foreign MNCs de-
scribed by Evans (1979).
Instead of being attracted, MNCs have been repelled by the recent
instability in the Philippines. Although it can boast of richer human
resources and a longer history of import substitution than its South-
east Asian neighbors, the Philippines has been mired in economic
stagnation during the past decade or so. As noted earlier, its prob-
lems stem from broader socioeconomic forces, rather than the per-
sonal idiosyncracies of a dictator tied to his wife's 'shoe-fetish'
consumerism. The political economy has been gripped by a stalemate
among competing elite groups - those with their base in plantation
agriculture, old import-substitution industries, and newer export in-
dustries - which attempt to use public policies to promote their special
interests in the style of what Olson (1982) has called 'distributional
coalitions' (Doner, 1991; Hawes, 1987; Indorf and Mayerchak, 1989).
Still, the country's relative openness to FDI results in its ranking a
distant but perhaps surprising second to Singapore in the .FDIItotal
investment ratio for 1987, despite the extremely poor investment
climate that existed at that time.
In Hong Kong, the government does not as a matter of policy treat
local and foreign investors by different standards. It has not sought
to erect entry or exit barriers that discriminate against foreign busi-
nesses. It thus features high MNC access by design (as in Singapore,
which has explicitly pursued MNCs as a partner to promote economic
growth and industrial upgrading), whereas the same condition has
existed for Thailand and the Philippines to a large extent by default.
Nevertheless, contrary to the popular view of a minimalist government,
the British colonial administration has always underwritten a large
public-housing sector and has recently undertaken a greater regulatory
interest in areas such as the stock market, banking transaction, real
estate, and medical practice (Caste lIs et al., 1990; Krause, 1988;
Rabushka, 1979; Schiffer, 1991).
The final dimension presented by Table 6.1 is economic growth
performance. By any reasonable standard, four of our cases - Hong
Kong, Singapore, Taiwan, and South Korea - have excelled in this
dimension; all have achieved very rapid and sustained growth during
the past two-and-a-half decades. This accomplishment has enabled
these four 'little dragons' to climb the international product cycle
to the point where they have now joined or are about to join the
ranks of developed economies. The growth record for Thailand is
somewhat less even, with a dramatic economic surge taking place

over the last decade or so. As already noted, it has recently attracted
large amounts of FDI, and has become a leading offshore production
platform as rising wages erode the four 'little dragons" earlier com-
parative advantage in labor-intensive manufacturing. Among our six
cases, the Philippines has had the worst growth record, especially
during 1980-90.
PATTERN RECOGNITION
Although our cases obviously do not form a representative sample

and are not numerous enough for statistical analysis, we can still dis-
cern some important relationships among the pertinent variables. Our
attention is drawn first to the relationship between state power and
MNC access. Neoclassical modernization theory, dependency theory,
and statist theory would all lead us to expect that state-dominated
political economies should have lower MNC access and, conversely,
society-dominated systems should have higher MNC access. We do
find such a tendency for South Korea at one end of the spectrum,
and the Philippines and Hong Kong at the other end. However,
between these two extremes, there is Singapore with a combination
of strong state and high MNC access. We are therefore led to the
conclusion that, depending on its ideological predisposition and de-
velopment agenda, a strong state may encourage or discourage MNC
participation in its domestic economy - as indicated by South Korea's
and Singapore's divergent postures. A strong state, however, appears
to be a necessary condition for excluding and dislodging MNCs from
the domestic economy. That is, this policy is not likely to be success-
fully implemented in the absence of a strong state. Put alternatively,
among our cases and, we suspect, as a cross-national norm, society-
dominated systems are usually associated with high MNC access.
This generalization suggests that society-dominated systems offer a
larger number of channels for transnational actors to influence do-
mestic policies and interest groups, whereas such channels are more
limited in state-dominated systems.
Table 6.1 indicates that state-society relations can produce a vari-
ety of outcomes in terms of macroeconomic performance. Hong Kong,
with its combination of weak state and high growth, has always been
heralded by neoclassical economists with their emphasis on the magic
of marketplace. Conversely, South Korea and Singapore, featuring
strong developmental states and equally impressive rates of GNP

expansion, lend support to the statists, who stress the need for a
powerful central bureaucracy to orchestrate and spur rapid modern-
ization among the late-industrializing countries. When confronted with
evidence supportive of the opposing perspective, neither moderniza-
tion theory nor statist theory seems complete.
The case of Hong Kong demonstrates that, contrary to statist theory,
a strong developmental bureaucracy is not a necessary condition for
rapid economic growth. Moreover, previous analyses of India - a
country with a strong state and low MNC access - have shown that
the presence of such a bureaucracy capable of stringently controlling
MNC access is also not a sufficient condition for rapid economic
growth (Clark and Roy, 1993; Encarnation, 1989; Grieco, 1984). On
the other hand, contrary to the expectation of neoclassical econo-
mists, the recent histories of South Korea, Singapore and, to a lesser
extent, Taiwan indicate that state intervention does not always im-
pair economic development, and may in fact have promoted it in
these countries. Thus, the roles of state and market need not be mut-
ually exclusive, and the impact of each on economic growth is suffi-
ciently indeterminate to indicate the intervention of other variables.
Whether MNCs facilitate or hinder economic growth is, of course,
a principal focus of contention between the neoclassical moderniza-
tion theorists and the dependency scholars. The former argue that
MNCs contribute to growth, because they provide the critical missing
ingredients - capital, technology, management expertise, and foreign
markets - that are needed for industrialization in the developing
world. Classical dependency scholars disagree with this assertion, and
contend that MNCs damage the host's economy due to their tend-
ency to engage in transfer pricing, adopt inappropriate technology,
encourage frivolous consumption, exacerbate income maldistribution,
support authoritarian regimes, and form distributional coalitions with
conservative forces to defend the socioeconomic status quo (Amin,
1974; Biersteker, 1978; Bornschier and Chase-Dunne, 1985; Cardoso,
1973; Cardoso and Faletto, 1979; Evans, 1979; Frank, 1969).
Among our six cases, we find examples of high MNC access being
associated with both rapid growth (in Hong Kong, Singaporl:!, and
more recently Thailand) and economic stagnation (in the Philippines).
Conversely, a policy of restricting access by MNCs also has divergent
outcomes in South Korea (high growth) and India (slow growth). We
are consequently persuaded that the key variable discriminating these
outcomes is not MNC access per se, but is rather a host's capacity to
mobilize and utilize MNCs for the cause of national development.

We are, in other words, led to look for deeper causes beyond MNC
access and beyond state-society relations (which. as seen earlier. are
also associated with discrepant growth records among our six cases).
We thus turn to a country's political-economy culture. As dis-
cussed earlier. this culture embodies enduring patterns of production,
consumption. and distribution. and consequently is not easily subject
to change. At the same time, it permeates the political economy.
setting norms of expectation and behavior for both the elite and the
masses. These norms underlie and shape official policies. entrepre-
neurial decisions, and ordinary daily behavior about working. learning.
spending, and 'having a good time.' In countries with a strong Con-
fucian influence (Berger and Hsiao. 1988; Kahn. 1984) and following
the Japanese model of development. there is widespread social
consensus about the importance of effort mobilization. deferred grati-
fication. coll~ctive responsibility. social integration, meritocratic com-
petition. economic frugality, deference to authority. and knowledge
and education. These values tend to encourage a social environment
that is more conducive to economic growth and entrepreneurship. and
to effective efforts by both the public and private sectors to apply the
MNCs' assets (e.g., capital, technology. overseas market) to national
growth. There are concomitantly a stronger social 'safety net' to
cushion the inevitable traumas of rapid growth. and greater political
consensus and bureaucratic cohesion to resist transnational agents'
attempts at influence penetration.
We thus argue that political-economy culture is more important
than state-society relations in determining a country's economic
performance. As shown in the example of Japan-US trade rivalry
(Encarnation, 1992). protection of the home market need not de-
pend on government regulation; corporate traditions. customary
practices, and habitual associations can be even more powerful in
keeping out foreign intrusion. Concomitantly. industrial competitive-
ness cannot in the final analysis be created or sustained by govern-
ment subsidies. In-depth case studies of East Asia's successes at
flexible manufacturing have instead shown that they are a product of
the more intangible entrepreneurial assets embedded in culture
(Friedman, 1988; Lam and Lee, 1992; Morawetz, 1981).
Table 6.1 shows that countries subscribing to the so-called Jap-
anese model of development have all achieved rapid growth. regard-
less of their state-society relations and regardless of the differences
in MNC access. It thus implies that the cultural traits emphasized by
this model may in combination with some yet unspecified factor(s)

provide a sufficient condition for high rates of GNP expansion. These
traits, however, are clearly not necessary for such expansion. Singa-
pore, a political-economy culture that in some respects resembles the
American model of development more closely than the Japanese
model, has produced rapid economic growth. Thus, both the Japan-
ese and American models can be compatible with this desideratum.
Nevertheless, we find that among the three countries following the
American model, the one replicating it the closest (the Philippines)
has scored the worst economic performance, whereas the one show-
ing the greatest departure (Singapore) has performed the best. More-
over, among these three countries that subscribe in varying degrees
to the American model, the extent of state strength seems to make
a difference for growth outcomes. Singapore has the strongest state,
the Philippines has the weakest, and Thailand is in an intermediate
position. Their respective growth records have the same rank order,
thus implying that state-society relations do have an important effect
after controlling for political economy culture. Therefore, a strong
state seems to be a facilitating condition in promoting rapid eco-
nomic growth among countries with an American type of political-
economy culture.
GENERAL IMPLICATIONS
The preceding discussion leads us to distinguish MNC access from

the impact of these firms, defined in terms of their effects on expanding
or constricting a host's economic potential and development options.
By definition, access is a prerequisite for impact. Thus, South Korea
- with its limited access for MNCs - has also been affected the least
by these firms in its economic performance. High access can produce
either beneficial or debilitating developmental consequences - as
shown in the divergent experiences of Singapore and the Philippines.
The case of Singapore confirms the argument that although trans-
national actors face higher hurdles in penetrating state-dominated
systems, this penetration. once achieved, is apt to have more pro-
found and enduring effects. Indeed, among our six cases, MNCs have
assumed the most powerful role in Singapore, where a partnership
between foreign and state capital has also been most effectively and
deeply institutionalized.
Conversely, the Philippines offers an example whereby a society-

dominated system not only permitted easy access to the MNCs, but
also proved to be unable to resist the influence of these companies.
The impact of MNCs has been generally negative and profound.
Neither a strong state nor a favorable culture has stood in the way
of MNC influence. We cannot necessarily expect countervailing so-
cial forces to automatically reduce or cancel out the influence of
powerful transnational agents in society-dominated developing coun-
tries - a basic proposition of classical dependency theory. Local elites
in these countries are instead apt to be recruited as the junior partners
of MNCs.
Dependency theory, however, has the drawback of treating the
above observation as a constant rather than as a variable. That is, it
often fails to consider other contextual factors that could affect the
validity of this observation. As argued in this analysis, state-society
relations and political-economy culture can both make a difference.
We have already seen that in South Korea a strong state has kept the
MNCs at bay, and in Singapore an equally strong state has entered
into a developmental alliance with the MNCs. The case of Hong
Kong further illustrates that MNCs need not produce the debilitating
socioeconomic consequences predicted by the dependentistas even in
the absence of a strong state, provided conducive cultural disposi-
tions exist to contain the unfavorable effects and to maximize the
favorable effects of MNC operations.
The experience of Hong Kong, however, hardly provides a persua-
sive case upholding the virtues of unbridled capitalism. This unquali-
fied confidence of neoclassical economists in the magic of market
forces is questionable, because 'comparative advantage' has become
increasingly 'arbitrary' in the modern world economy and because
the state often has to deliberately 'set prices wrong' in order to over-
come market signals and steer the economy in a desirable direction
(Gilpin, 1987; Wade. 1990). 'Bringing the state back in' (Evans et 01.•
1985) appears especially pertinent advice for offsetting MNC influ-
ence in those political economies with a predilection to follow the
American model of development.
Just as in the treatment of state-market relations. state-society
relations need not pose mutually exclusive categories conjuring a
zero-sum game. One of the key distinctions between Thailand and
the Philippines has been the greater ability of government and busi-
ness to work together in the former country. An easier collaborative
relationship between state and local capital serves to contain somewhat
the domination of MNCs. In an analysis of the automobile industries

in four Southeast Asian countries, Doner (1991) cites Thailand as the
most successful case because of the closer working relationship be-
tween its public and private sectors. Thus, strong and autonomous
states are perhaps less functional in certain circumstances than pro-
ductive coalitions between the government and domestic entrepre-
neurs (or, as in Taiwan and South Korea, where government policies
seek to promote the development of vibrant private industries, thus
bringing about greater state-society balance). We are further reminded
by the experiences of Taiwan and Thailand that state-society relations
can undergo substantial change over time, so that these relations
should again be treated as an empirical variable rather than an
analytical given. Accordingly, our attention is drawn to the dynamic
interaction between the state and society in which they constantly
shape each other's power and interests.
In conclusion, our analysis offers several basic propositions. First,
what we have termed political-economy culture is a key variable
shaping a country's development possibilities. This culture sets the
policy agenda and socioeconomic conditions that both national and
transnational actors have to work with. Second, this culture is an
interactive product of domestic traditions and foreign influences, and
it would be profoundly ahistorical and arbitrary to overlook its en-
during effects and external sources - key qualities that underlie the
concept of neocolonialism. The patterns of economic production,
consumption, distribution, and decision-making, as embodied in the
Japanese and American models of development, show the enduring
importance that past and ongoing dense networks of transnational
interaction and cultural osmosis can have in shaping developmental
paths. Thus, international structure and one's path in it matter. Third,
the type of foreign exposure as suggested by the Japanese and
American models of development is as important a consideration as
the extent of a country's involvement in international institutions.
The consequent behavioral patterns and norms of expectation, how-
ever, only constrain but do not determine the access and impact of
MNCs.
More specifically, a variety of state-society relations can wexist
with rapid growth. Countries endowed with stronger and more co-
herent states have been better able to regulate MNC access, but
MNC access does not always correspond with higher (or for that
matter, lower) economic growth. It thus appears that national au-
tonomy over the MNCs is in itself neither a sufficient condition (as
in India) nor a necessary condition (as in Hong Kong) for superior

economic performance. This observation in turn brings us to our
final conclusion: the effectiveness of policy institutions and market
mechanisms in promoting economic growth must be evaluated in
specific historical contexts. That is, both state-society relations and
political-economy culture matter, and we need to attend to their
interactive effects in our analysis.
7 State or Market:
The Development of
the Ecuadorian Banana
Industry
David W. Schodt
An extensive literature surrounds the question of the relationship

between multinational corporations (MNCs) and economic develop-
ment. East Asia is frequently cited as an example of a decidedly
positive relationship between MNCs and economic development. In
contrast, case studies drawn from the Latin American region tend to
emphasize the negative consequences for economic development.
Even within Latin America, however, the pattern is far from uni-
form, with some countries evidencing strongly positive outcomes from
MNC investments. Most of this literature interprets the varying con-
sequences of MNCs for economic development in terms of factors
related to the market. and to the role of the state.
In recent years, the programs of structural adjustment adopted by
many developing countries have advocated a diminished economic
role for government, and an increased openness to foreign capital,
along with promotion of exports. As countries in the region seek to
reorient their economies along these lines, the debate surrounding
the relationship between MNCs and economic development takes on
renewed importance. Although the East Asian model points to the
importance of manufactured exports, the vastly different structure of
many of the Latin American economies suggests that, at least ini-
tially, export expansion will occur through primary products, mostly
agricultural goods.
This chapter explores the role of state and market in the develop-
ment of the Ecuadorian banana industry during 1948-65, and com-
pares this to the earlier development of the industry in Central
America. In both periods, the banana industry was dominated by
MNCs, with a single firm, the United Fruit Company, occupying a
dominant position. The negative association between the banana
104
Ecuadorian Banana Jndllstry 105
companies and economic development in Central America is widely

documented. as is the passive role played by host governments in
that region. In sharp contrast. the Ecuadorian banana boom. although
much less well documented. appears to have contributed in very
positive ways to the country's economic development (Larrea. 1987;
Silverman. 1986; Martfnez. 1976). Indeed. the period has been
identified by many Ecuadorians with the beginnings of the country's
economic and political modernization (Salgado, 1981. pp. 45-52).
The explanation for these differences between the Central Ameri-
can and Ecuadorian experiences is partly attributable to the distinc-
tive structure of this industry in the latter country. In contrast to the
pattern of large foreign-owned plantations that typified banana pro-
duction in other parts of Latin America. the Ecuadorian banana
industry was characterized by very limited foreign direct investment
(FDI). and a strong small-producer orientation. However, why the
industry developed with this particular structure is less easily ex-
plained. particularly since it appears that the United Fruit Company
had every intention of replicating the Central American pattern in
Ecuador. Is the different Ecuadorian experience accounted for by
state policies intended to harness the dynamism of the banana export
sector to social purposes. or was it simply the result of changes in the
international market? Most Ecuadorians would answer that the out-
come was due to the policies of the Galo Plaza administration; most
banana producers assert vehemently that it was private initiative
responding to opportunities provided by the market. In either case,
what shifted the balance of bargaining power from the fruit multina-
tionals to local Ecuadorian producers, allowing the latter to shape
the structure of the banana industry?
THE ECUADORIAN BANANA INDUSTRY: 1948-65
Fruit bananas had been cultivated for domestic consumption in Ecua-

dor ever since their introduction following the Spanish conquest, but
the banana export boom did not begin until after World War II. As
early as 1910 (if not earlier), approximately 71,000 stems (racimos)
had been shipped to external markets, and exports increased slowly
through the 1920s (Asociacion Nacional de Bananeros del Ecuador.
or ANBE, 1957a, p. 46). Prior to 1934, however. banana exports
from Ecuador were insignificant both as a share of total exports and
as a share of world production. Between 1910 and 1933, the value of
banana exports, most of which were destined for markets in Chile

and Peru, never exceeded 1 per cent of the value of total exports.
Banana exports fell sharply during the early depression years, then
rose briefly to a level of approximately two million stems before the
overseas market collapsed with the outbreak of World War II. From
the early 1930s until the end of the war, most exports were handled
by two firms, the Compania Frutera de Sudamerica (Chilean) and
the Compania Bananera del Ecuador (a subsidiary of United Fruit).
Between 1947 and 1955, Ecuadorian banana exports rose from
68,944 metric tons (67,858 tons) to 612,615 metric tons (602,968 tons)
- a staggering 800 per cent (Valles, 1968. pp. 12-14: Rodriguez, 1985,
p. 200). Their importance to the domestic economy rapidly began to
rival that of cacao during its golden years. By the early 1960s. Ecua-
dorian banana exports provided more than 60 per cent of total ex-
port earnings. and accounted for nearly 30 per cent of the value of
total world exports. In the space of approximately 10 years. Ecuador
saw itself transformed from a minor exporter of bananas into the
world's largest producer and exporter.
ECONOMIC PERFORMANCE IN ECUADOR DURING

THE BANANA BOOM
In sharp contrast to the Central American experience, the growth in

Ecuador's banana trade contributed very positively to the country's
economic development. The collapse of the earlier cacao boom in
the early 1920s had ushered in a prolonged period of economic stag-
nation. The sharp decline in the value of exports from US$15 million
in 1925 to slightly less than US$6 million in 1940 points to the gen-
erally poor performance of the Ecuadorian economy (Banco Central
del Ecuador, or BCE, 1977, p. 48). The economy improved some-
what between 1940 and 1945, as the disruption in international trade
caused by World War II increased demand for Ecuadorian rice and
other basic products, but this source of growth was transitory and
never resulted in an annual rate of gross domestic product (GOP) of
much over 4 per cent.
After World War II ended, the explosive growth of Ecuador's
banana industry provided a powerful stimulus to the economy. From
1945 to 1950, as banana exports rose in value from 2,872,000 sucres
to 112,163,000 sucres, the annual rate of growth of GOP increased
to nearly 7 per cent. From 1950 to 1965, with the maturing of the
Ecuadorian Banana Industry 107
banana industry, the economy grew at a relatively steady annual rate

of 4.8 per cent. I In this period, banana exports accounted for 93 per
cent of the increase in the value of agricultural exports.
The increased earnings from banana exports were broadly distrib-
uted beyond the export sector. Between 1950 and 1960, consumption
by households in real terms rose at an annual rate of 5.3 per cent.
Although some of this increased consumer demand spilled over into
imported goods, there was a growing demand for local production.
Increased demand for food from the small but growing urban middle
class stimulated domestic agricultural production, which rose by 25
per cent between 1950 and 1952 alone. Because most commercial
food production took place in the sierra, the rising demand for food
linked growth of the coastal economy with that of the sierra. Rising
labor demands from the booming export sector drew large numbers
of migrants from the sierra to the coast. Between 1942 and 1962,
while Ecuador's population increased by 45 per cent, the population
of the coast rose by 100 per cent.
The banana boom also stimulated road construction as the produc-
ing areas were linked to markets. Between 1944 and 1958, for exam-
ple, approximately 3.363 miles of all-weather roads were added to
the system, an increase of 136 per cent (Linke, 1960, p. 123). Other
infrastructure projects were also undertaken to improve the market-
ing of export crops, notably the construction of a new Guayaquil port
in 1958.
Unlike the Central American experience, Ecuadorian banana ex-
ports became an important source of government revenue. Bananas
were subjected to a bewildering array of earmarked taxes, accruing
to all levels of government. In 1956, bananas incurred levies ranging
between 2.72 and 3.82 sucres per stem, depending on the province in
which they were produced and from which they were exported. This
amount represented a total income of approximately 69 million sucres,
or nearly 5 per cent of government income for the year 1956.2 In 1966,
for example, Ecuador received approximately 11 cents per 40-pound
box; Costa Rica (a large Central American producer) in contrast
received only 1.5 cents.3
STATE OR MARKET
The pattern of development of the Ecuadorian banana industry was

the result of a variety of factors that shifted the balance of bargaining
power from the MNCs to local producers. Historical timing played

an important role, as a combination of disease-induced supply con-
straints in the traditional supplying regions, and expanding global
demand, particularly stemming from the growth of European con-
sumption following World War II, created a highly favorable open-
ing to the world market for Ecuadorian producers. In addition, the
previously unchallenged dominance of the industry by United Fruit
had weakened with the emergence of a serious rival in Standard
Fruit, and with the US anti-trust case then pending against the former.
For reasons that were both the result of historical accident and
deliberate policy choice, domestic conditions highly favorable to the
development of the industry coincided with the opening to interna-
tional markets. In contrast to development of the banana industry in
Central America, where high capital requirements created significant
barriers to the entry of small producers, Ecuadorian production
benefitted from ideal climatic conditions, a network of navigable rivers
draining the coastal plain, and a relative abundance of low-wage
labor located in or near potential growing regions that ensured low-
cost banana production. In addition, the previous cacao boom had
left in place a financial infrastructure easily adapted to support banana
exports, as well as individuals with experience in the production and
export of agricultural products. Within this context, Ecuadorian gov-
ernment policies were strongly supportive of rapid expansion of the
industry on the basis of small-holder production.
Favorable market conditions, low barriers to entry, and favorable
state policies provided a window of opportunity for domestic produc-
ers to establish control over the emerging banana industry. Coastal
elites in Ecuador, who had acquired both land and expertise from
the earlier boom in cacao exports, competed directly with foreign
multinationals, and were eager to seize control of the industry. In
this, they found an ally in small European producers who had been
shut out of Central America by the large multinationals. Further-
more, Ecuadorian coastal elites were willing to support state policies
in aid of small producers as long as these policies contributed to
keeping out the foreign multinationals, and did not seriously threaten
elite dominance over local production and export.
INTERNATIONAL FACTORS
From the emergence of bananas as an internationally traded com-

modity in the early twentieth century, banana production had been
primarily located in the Central American and Caribbean region.

Between 1935 and 1939, 65 per cent of total banana exports origin-
ated from this area. Geographical concentration in the US market
was even more striking. In 1937, for example, slightly more than 90
per cent of US imports were supplied from the countries of the Central
American and Caribbean region (Arthur et ai., 1968, pp. 173, 182).
Two diseases that threatened to seriously curtail banana produc-
tion from the major producing areas made their appearance in the
early years of the twentieth century. Sigatoka leaf spot, apparently
first identified in Fiji, spread rapidly to the western hemisphere,
becoming a serious problem in Central America and the Caribbean
by the 1920s and 1930s. Although Sigatoka could be controlled by
spraying the plants with a copper-sulfate solution (Bordeaux mixture),
this solution required heavy capital investments in pipes and other
equipment. In the late 194Os, Panama disease, a fungus that attacked
the roots of the banana plant and which had been present in Central
America since the early 1920s, also began to make serious inroads
into production. With no chemical method available for controlling
this infestation, the only recourse available to banana producers
was to bring new lands into production, or to practice a technique of
'flood fallow', whereby plantations would be submerged under water
for lengthy periods before production could be recommenced.
Both of these diseases and the technologies adopted to combat
them increased the costs of production, concentrating production
within the major producing countries, and limiting the growth of
exports. Increases in production cost and political considerations also
led to the elimination of some producing countries. Between 1935
and 1939, Mexico, Cuba, and Jamaica had supplied approximately
29 per cent of the world market. By 1951, the combined share of
these three countries had fallen to a meager 4.4 per cent (Economic
Commission of Latin America, or ECLA, 1958, pp. 28-9). The major
banana companies were unwilling to make the required large invest-
ments in countries evidencing hostility to such undertakings; small
producers could not afford to do so. Mexico, for example, the world's
largest exporter in the late 1930s, lost ground in the aftermath of the
1938 expropriation of its petroleum industry.4 Similarly, by the mid-
1950s, exports from Haiti had virtually ceased as a result of political
disagreements with Standard Fruit. Cuba's share had fallen to in-
significant levels in the early 1950s, prior to the 1958 revolution, and
did not recover in later years.
These disease-borne changes also affected the structure of the
international banana industry. Independents did playa role of some
Table 7.1 World Banana Exports (thousands of metric tons)
Year Cent. Am. Carib. Total Ecuador
1935-39 1,123.3 379.1 1,502.4 43.5

1950 1,197.9 258.0 1,455.9 169.6
1955 998.8 353.7 1,352.5 612.6
1960 1,113.6 677.4 1,791.0 1,065.0
1965 1,270.5 672.3 1,942.8 1,200.0
Note: Figures for Caribbean exclude Haiti and Cuba.

Source: Author's calculations from Arthur et al. (1968, pp. 173-5).
significance, particularly in the formative years of the industry during

the late nineteenth and early twentieth centuries. However, increased
costs of production resulting from efforts to control disease made it
difficult for smaller firms to survive as producers. The loss of inde-
pendent sources of supply and the constraints on production by the
major firms reduced opportunities for independent exporters. By the
19205 the industry was unquestionably dominated by two firms, United
Fruit and Standard Fruit.
Although the total volume of production from the traditional sup-
plying countries in Central America remained relatively constant
through the first half of the 1950s, this was largely the result of bring-
ing new land under production. The United Fruit Company was par-
ticularly able to benefit from this strategy, as it possessed large
amounts of idle land. Yet, despite United's large land reserves, the
failure to find a cure for Panama disease clearly signalled that con-
tinued production would require the development of new producing
areas outside the affected Central American region. By 1952, it was
apparent even to United Fruit that its costs were rapidly becoming
prohibitive.5
Beginning in 1947, supply constraints in the traditional banana-
producing areas combined with large increases in world demand for
bananas began to create a powerful stimulus for expansion of pro-
duction. From the end of World War II to 1955, the volume of
banana exports from the traditional producing countries in Central
America and the Caribbean remained relatively constant while total
world import demand grew by 35 per cent. Given the relative con-
stancy of imports by the United States, the largest consuming coun-
try, most of the increase in world demand carne from the European
market where, over the same period, imports increased by 195 per
cent. 6 These market conditions following World War II were highly
propitious for the development of Ecuador as a banana supplier.
DOMESTIC FACTORS
In many respects, Ecuador was ideally suited to fill the gap created
between relatively stagnant Central American production and rap-
idly rising European demand. The coastal region offered excellent
conditions for raising bananas. Large areas of land were readily
available, either in the form of abandoned cacao plantations in the
south, or as virgin rain forest to the north. Rainfall and temperature
were ideal for banana production. The country's equatorial location
promised that hurricane damage, so often responsible for large losses
in the Central American region, would not threaten production. In
addition, unlike the case in Central America, the months of greatest
production in Ecuador (September to March) corresponded to win-
ter months in the northern hemisphere, when the lack of substitute
fresh fruits increased the demand for bananas.
Most important, however, Sigatoka had not yet appeared in Ecua-
dor, and would not until just before 1950, when it was first reported
in northern Esmeraldas province. By the mid-1950s, the disease had
become a serious threat to the plantations in the Esmeraldas area,
and had begun to spread as far south as the Dunin-Tambo highway.
The southern producing areas of Guayas and ElOra appeared to
have stayed relatively free of the infestation as late as the early 1960s
(Preston, 1965, pp. 81-2). Fortunately for Ecuador, research by French
technicians in Martinique and Guadeloupe held the promise of a new
method of Sigatoka control that was far more effective than the
Bordeaux mixture used previously. Furthermore, the new method
could be applied by backpack sprayers, or by airplane, thus reducing
the requirement for large consolidated plantings that the Bordeaux
method demanded.
Panama disease, while reported in Guayas province as early as
1936, was light in incidence and confined to small areas of the south-
ern coastal plain. The producing areas from Quevedo north into
Esmeraldas province were free of infestation. Although the relatively
slow spread of this disease and the large tracts of potential banana
land available in Ecuador reduced its immediate threat, it was clear
from an early date that future development of the industry would
have to confront the threat of Panama disease: between 1954 and

1955, the United Fruit Company is reported to have been forced to
abandon about 20 per cent of its land in bananas (Parsons, 1957, pp.
210-11).
Unlike the Atlantic coast region in Central America, where
banana production had developed earlier, Ecuador's coast was neither
as unpopulated, nor without means of transportation for the fruit.
Exports of both cacao, and later rice, had bequeathed a favorable
legacy for the subsequent development of the banana industry. Al-
though the earlier cacao boom had few linkages to the local economy,
the labor demands of this crop had begun to draw workers from the
sierra to the coast. Between 1889 and 1926, the share of Ecuador's
population living on the coast rose from 19 per cent to 38 per cent
(Rodriguez, 1985, pp. 204-5). With the collapse of cacao production
in 1922, many of these workers withdrew to subsistence farming, or
migrated to Guayaquil and other coastal cities. In addition, high
population density and rapid rates of population growth in the sierra
created a large pool of potential workers for the banana industry.
Limited employment opportunities elsewhere in the economy fol-
lowing the collapse of the cacao and rice booms, together with the
persistence of semi-feudal relations in the sierra, meant that wages
would be low, and that the expansion of the banana industry could
take place without large wage increases.
These same conditions also contributed to weak labor organiza-
tions on the Ecuadorian coast. There was little history of labor agi-
tation, such as that encountered by United Fruit earlier in Costa Rica
and Colombia. Although the Ecuadorian Communist Party (PCE)
denounced United's land acquisitions at its first national congress in
1935, the party's ability to mobilize peasants was very limited. Even
by 1944, after the formation of the Confederation of Ecuadorian
Labor (CTE), labor unrest posed only sporadic challenges to the
foreign banana companies. Not until the late 1950s did the PCE's
campaign against the latter become a serious threat to their contin-
ued production.
The early development of the banana industry in Ecuador could
proceed without major infrastructure investment. The rive! system
draining the Guayas basin provided excellent opportunities for the
transport of bananas produced in the southern region of the country
to Guayaquil, the country's principal port, and one which had experi-
enced some modernization during the cacao boom. This form of
transportation for export crops was a well-established one on which
both cacao and rice, which were cultivated in the Guayas basin, had
relied extensively. For example, Luis Noboa, the largest Ecuadorian
exporter of bananas, began as a rice producer who transported this
product to port in small boats. During the rainy season, he began to
use his surplus boat capacity to ship bananas.
In the northern part of the country, the Esmeraldas river system,
although it had not experienced significant export traffic prior to
World War II, had long figured as a route for shipping products from
the interior to the coast. It was the northern area around Esmeraldas
where exports expanded most rapidly from 1948-53.
Continued expansion of the banana industry, however. required
investment in improved coastal roads. The transportation require-
ments for bananas differed importantly from those of cacao and rice.
Because bananas ripen continuously, transportation must be avail-
able throughout the year. In addition, bananas are highly perishable
and very susceptible to bruising. Much of the river system was navi-
gable only during the rainy season, which extends roughly from
December to May. The few dirt roads that provided access to the
banana areas were passable only during the dry season. And neither
river nor road transport, as it existed, was conducive to supplying
high-quality bananas for export markets. Subsequent expansion of
Ecuadorian banana exports, therefore, required investment in all-
weather roads and in upgrading the port facilities.
The existence of a class of individuals who possessed knowledge
about both producing and exporting agricultural products was a
further legacy of the cacao boom. In marked contrast to what had
occurred in Central America with coffee and bananas, cacao exports
in Ecuador had been principally an Ecuadorian enterprise. Although
production took place on large plantations, these were generally
Ecuadorian-owned and -operated. 7 Similarly, the earlier export of
cacao had left a financial infrastructure that could easily be turned to
support a new agricultural export.
THE STRUCfURE OF ECUADORIAN PRODUCfION
The Ecuadorian banana industry developed primarily on the basis of

small- to medium-sized local producers. According to the 1954 agri-
cultural census, approximately 60 per cent of banana production
corresponded to farms of less than 100 hectares.K Although foreign
producers had operated in Ecuador since the early part of the
twentieth century, unlike the pattern in Central America, at no time

in the postwar years did foreign firms control a large share of banana
production.
An important characteristic of the generally small-producer orien-
tation of the Ecuadorian banana industry is its duality. At least two
distinct types of producers can be identified. The first group includes
established coastal elite families, who had connections either to cacao
or to finance, as well as entrepreneurs able to capitalize on oppor-
tunities created by the expanding banana industry. As the banana
industry in Ecuador developed after World War II, production first
took place on former cacao plantations, primarily in southeastern
Guayas province. Foreign firms bought some of these plantations,
but the coastal elite, whose fortunes had been in decline since the
collapse of the cacao boom in the 1920s, also saw the opportunity to
participate in the new export boom. The most prominent of the
entrepreneurial group is Luis A. Noboa, who used capital and experi-
ence acquired through his involvement with rice exports, along with
his connections to the Guayaquil financial elite, to build the most
important Ecuadorian banana enterprise.9
A second group consisted of small producers who acquired land
either through spontaneous colonization of the road frontiers, or as
the result of colonization programs implemented to settle unoccu-
pied areas of the coast, particularly in the northern regions from
Quevedo to Esmeraldas. These producers typically had limited re-
sources and, especially in the Santo Domingo area, were frequently
Quito professionals who sought to share in the banana boom. It was
these small producers who benefitted most directly from government
policy designed to encourage expansion of the banana industry.
FOREIGN PARTICIPATION IN ECUADORIAN BANANA

PRODUCTION
Foreign interest in banana exports from Ecuador began early in the

twentieth century. The earliest companies to export Ecuadorian
bananas were Chilean, although United Fruit soon thereafter began to
seek holdings. In the early 1950s, European firms, particularly those
from countries which did not have colonial ties to banana-producing
countries, and which had been excluded by United Fruit from Cen-
tral America. also began to export bananas from Ecuador. Some of
these firms produced bananas from their own plantations, but many
exported the production of independent growers.
In the 1930s, the Chilean firm, Compania Frutera Sudamericana,
purchased several former cacao plantations for conversion to banana
production. In 1956, the Standard Fruit Company began to export
large quantities of Ecuadorian bananas. which the company bought
from independent producers.
As early as 1924, the United Fruit Company had begun exploring
production possibilities in both Guayas and Esmeraldas. and had
begun negotiations for the purchase of the old cacao hacienda Tenguel,
located in the far southeastern corner of Guayas province. United's
interest in Ecuador stemmed principally from its desire to acquire
reserves against the increasing inroads made by disease on its Cen-
tral American holdings. Partiy, however, United was concerned with
controlling Ecuadorian exports to the US market, as the Chilean
company, Frutera Sudamericana, which already exported fruit from
Ecuador to Chile, had plans to expand its exports to the west coast
of the United States. 10 In 1933, United purchased Tenguel through its
subsidiary. the Canadian Ecuadorian Cacao Company. Two years
later, United also bought the 30.000-hectare plantation Taura-Vainillo.
as well as 12 other plantations. from the Chilean group Communidad
Echeverria. Although initially the quantities were small. United be-
gan to produce and export bananas to the US from Tenguel. During
the war years. the company also exported rice and balsa. In 1955.
United accounted for approximately 20 per cent of Ecuador's total
banana exports; of this total. the company produced about 25 per
cent (May and Plaza. 1958. p. 76). By 1962. labor protests and
government opposition to United had forced the company to sell its
land holding. although it continued to purchase bananas from local
producers.
European firms began operations in both the northern and south-
ern regions of the coastal plain. In 1948, the Swedish firm, Fruit
Trading Company (ASTRAL), purchased several haciendas in the
Esmeraldas region. and had about 7,000 hectares planted in bananas
for export to the United States, Sweden, and Belgium (MartInez,
1976, p. 42). In 1952, Dutch and Belgian capital formed a banana
exporting company, the Compania Ecuatoriana Europea, which
shipped out of Guayaquil to Belgium. In 1955, the German firm,
Exportadora de Frutas Ecuatorianas, was established. and in 1958
this firm split into two companies, Union de Bananeras Ecuatorianos
(UBESA) and Exportadora de Frutas Ecuatorianas. With the
Table 7.2 Major Firms Exporting Bananas from Ecuador, 1954-63

(thousands of stems)
Year
Exporting firm 1954 1959 1963
Frutera Sudamericana 4,786 2,486 1,765

(Chile)
Bananera del Ecuador 3,959 7,067 5,888
(UFCo)
Noboa Naranjo 3,212 3,215 7,292
(Ecuador)
Compaiiia Frutera de Astral 2,177 1,846 1,525
(Fruit Trading)
Corporaci6n Ecuatoriana 1.602 1,058 433
Europea
Exportadora de Frutas del 4,469 5,631
Ecuador
Standard Fruit 3,998 5,293
tJBESA 3,329 6,533
Subtotal 15,736 27,468 34,360

Other exporters 3,098 7,293 7,898
(number of firms) (24) (24) (25)
Total 18,834 34,761 42,258
Source: ANBE (1960-61), Guayaquil; and Ministerio de Fomento-

Direcci6n Nacional del Bananao (1964, pp. 27, 28).
exception of the Fruit Trading Company, the European firms tended

principally to purchase from local producers to whom the firms gave
contracts and supplied plants. In the mid-1950s, the two German
firms had between 80,000 and 120,000 hectares under contract.ll
DOMESTIC VERSUS FOREIGN CONTROL OF

ECUADORIAN BANANA EXPORTS
Ecuadorian control of the export of bananas was much more limited

than their control of production. Access to export markets was one
of the major problems facing Ecuadorian producers. Prior to the end
of World War II, access to the US market had been controlled by
the United Fruit Company. European markets had yet to develop.
Fortunately for Ecuador, its rise as a banana producer occurred just

as United's control of the market weakened and possibilities for inde-
pendent exporters brightened. In 1959, for example, Ecuador counted
29 banana exporters, of which United's share was only 21 per cent.
And United's own production accounted for only a small share of its
exports. In 1955, for example, United purchased 3.8 million stems on
the open market, equal to 75 per cent of its total exports (May and
Plaza, 1958, p. 170).
The largest Ecuadorian exporter, Luis Noboa Naranjo, entered
the banana trade as a buyer and supplier of bananas to United Fruit.
He rapidly dominated the internal market and later began to take
advantage of the expanding European market by initially contracting
space on Belgian ships. By 1955, Noboa was exporting 16 per cent of
the bananas leaving Ecuador.
Until the end of World War II, an obstacle faced by independent
firms desiring to export Ecuadorian bananas to US markets was the
duration of the voyage and the need for fast refrigerated ships. This
was particularly important for shipment to the major markets on the
eastern seaboard because of delays passing through the Panama Canal.
Prior to 1948, United Fruit had contracted with W. R. Grace and
Company, a subsidized American flag line, and the only accommoda-
tion in which bananas could be shipped regularly to the United States,
for exclusive rights to cargo space for bananas between Ecuador and
the United States.
In late 1947, however, United's monopoly on shipping space began
to crack when a small exporter, I. B. Joselow. managed to acquire
shipping space on Grace Lines vessels. In the same year, Ecuador
joined the Flota Mercante Gran Colombia, which by 1959 had 22
ships.12 In 1948, the largest exporter of Ecuadorian bananas, Frutera
Sudamericana, was given one third of Grace's refrigerated cargo space
out of Ecuador. By 1953, the pressure from independents had be-
come so great that United permitted its contract with Grace Lines to
expire (D'Antoni, 1965, pp. 82-3 and 96). By 1959, the lack of ship-
ping space no longer appeared to be a constraint to the entry of
independents, as evidenced by United Fruit president Thomas Sun-
derland's comment that the 'oversupply of refrigerated ships ... meant
that entry into the banana industry became easy for anyone' (Arthur
et ai., 1968, p. 147).13 Although initially United might have been willing
to cede direct control of Ecuadorian production because of its mono-
psonistic control of the export trade, by the mid-1950s this assumption
was clearly no longer valid.
THE ROLE OF GOVERNMENT POLICY
In marked contrast to the case in Central America, where private

companies provided virtually all the support for development of the
banana industry, in Ecuador the government played an important
role through subsidized credit, technical assistance, road construc-
tion, and by fixing minimum prices to be paid by exporters to banana
producers. The reasons for this difference are manifold, but include
what appears to have been a genuine desire by the Ecuadorian gov-
ernment in the immediate post-1948 period to encourage small-holder
production. It coincided with strong concern from Ecuadorian coastal
elites that the banana industry not be dominated by foreign interests.
With the election in 1948 of Galo Plaza Lasso (1948-52) as presid-
ent of Ecuador, the political climate was one of openness to foreign
investment; undoubtedly one factor contributing to United Fruit's
decision to expand its production and purchases of Ecuadorian
bananas. 14 The son of Leonidas Plaza, one of Ecuador's most illustrious
Liberal presidents, Galo Plaza had been born in New York, received
his university education in the United States, and had served as a mem-
ber of the Ecuadorian mission in Washington, first as Civil Attache
(1930), and subsequently as Ambassador (1945-46) (Albornez, 1988,
pp. 135-40). He was both receptive to ideas of economic modern-
ization, and personally acquainted with leading members of the US
business and diplomatic community.15
Galo Plaza, along with his vice-president. Clemente Yerovi
Indaburi, established the Comision de Orientacion y Credito para el
Banano to channel credit from the recently created national develop-
ment bank (Banco Nacional de Fomento, or BNF) to banana growers.
In 1948, the government assigned 15 million sucres to the BNF
for development of the banana industry. The important role played
by BNF credit in stimulating banana production is shown by the fact
that in 1950, for example, the BNF supplied 31 per cent of all agri-
cultural credit. Of this amount, banana cultivation received approx-
imately 22 per cent (BCE, 1988, pp. 244 and 258).
A clear small-holder orientation to the BNF's lending was apparent,
as the maximum amount allowed per borrower for the estabhshment
of new production, or the expansion of existing production, was 50,000
sucres (US$3,704 at the official rate of 13.5 sucres to the dollar)
(BNF, 1964, p. 7). In addition, the geographical distribution of BNF
loans in the early years of the banana boom also appears to have
been directed to small producers. Although Guayas province, where

banana production first began to expand, received the largest share
of banana credit in 1949 (38 per cent), from 1949 to 1951 the frontier
areas in Esmeraldas province received the greatest proportion of
credit, absorbing 28 per cent of the total.
In later years, as the international market for bananas became
saturated and Sigatoka disease began to make serious inroads into
production in the northern provinces, credit and production began to
shift southward. From 1953 to 1958, Guayas province absorbed the
largest volume of credit, followed closely by Manabi province. By
1959, it was the southernmost province of El Oro that began to
receive the most credit for banana production (BNF, 1964, p. 8). This
geographical reallocation of credit contributed to the shift in the
locus of production from the northern to the southern provinces.
As shown in Table 7.3, BNF credit to the banana industry accel-
erated rapidly between 1948 and 1950. In 1951, banana credit experi-
enced a sharp decline in both absolute terms, and as a percentage
of total agricultural credit provided by the BNF. From 1952 to 1956,
credit to banana producers climbed steadily to a maximum of 32
million sucres. In 1957, the government became worried that the
country was over-producing relative to world demand. By 1955, for
example, banana production in Ecuador was estimated at 62,045,000
stems; of this amount only 39 per cent was exported (ANBE, 1957b,
p. 26). From this date on, a steady contraction in BNF credit occurred,
along with a sharp restriction of credit for new production.
In addition, larger Ecuadorian banana producers received credit
from private banks and from the exporting companies with whom
they might have had affiliation. Larger amounts of credit could be
had from these sources, although at shorter loan periods and, in the
case of the private banks, at a 2 per cent interest premium over BNF
rates. Credit from expo/ters was either free of interest, or at rates
below that charged by the BNF. Private banks tended to provide
principally export credits, although borrowers with the ability to
guarantee their loans could finance land purchases and production
costs. Esmeraldas province, for example, where small-holders pre-
dominated, received no private bank credit between 1949 and 1952
(BCE, 1952, p. 98). The exporting companies lent principally for
harvesting and packing. The volume of credit from each one of these
sources was approximately 20 million sucres annually, or roughly equal
to the average annual amount provided by the BNF. Thus the
Table 7.3 Credit by the Banco de Fomento for Banana Production,

1948-63 (thousands of sucres)
Year Banco de Fomento Credit

Banana All agricultural AlB
cultivation crops (per cent)
(A) (B)
1948 9,969 76,854 13.0

1949 28,367 112,061 25.3
1950 21,467 96,699 22.2
1951 13,526 86,405 15.7
1952 15,405 110,136 14.0
1953 19,140 111,174 17.2
1954 22,973 105,009 21.9
1955 30,809 138,404 22.3
1956 32,307 137,216 23.5
1957 20,977 159,974 13.1
1958 21,414 136,543 15.7
1959 14,134 87,501 16.2
1960 13,948 86,509 16.1
1961 16,045 121,048 13.3
1962 9,292 92,671 10.0
1963 6,945 97,462 7.1
Source: Banco Nacional de Fomento (1964, p. 11).
banana industry received an annual average of approximately 60 mil-

lion sucres during the boom years (BNF, 1964, pp. 14 and 19).
At least until 1954, the principal source for this expansion in gov-
ernment credit for banana production appears to have been domestic
savings. Prior to this date, Ecuador's access to foreign credit was
severely limited by the country's suspension of payments on its for-
eign debt, the principal item of which was owed to bond-holders of
the Quito-Guayaquil railroad (Linke, 1960, p. 163).
The combination of low import demand during World War II, and
relatively strong economic performance during those years, appears
to have increased domestic resources available for investment in the
banana industry. The war-induced expansion in demand for some
Ecuadorian products, notably rice, allowed for a small surplus in the
trade account, and a modest 4.4 per cent rate of growth in real GOP.
Following the war, a sharp increase in international prices for coffee
and cacao contributed to an expansion in the rate of economic growth,
although a concurrent explosion in import demand produced trade
deficits from 1947 until 1949, when banana exports began to acceler-
ate. The war might have helped to keep more of this trade-generated
wealth within the private banking system than would otherwise have
been the case. From 1938 to 1945, deposits in the private banking
system rose from 91,618,000 sucres to 373,391,000 sucres, an annual
rate of increase of 22 per cent (BCE, 1977, p. 113).
From 1941 to 1954, Ecuador's principal source of foreign credit
was the Export-Import Bank of the United States, which provided
loans for public works and, to a lesser extent, agricultural develop-
ment. After 1954, following Ecuador's resumption of payments to
foreign bond-holders, the country became eligible for credit from the
World Bank.
The Ecuadorian government also contributed to the development
of the banana industry by constructing roads in the coastal region. To
ensure the availability of quality bananas throughout the year, and to
open up areas of land in addition to those adjacent to river systems,
new coastal roads were a priority recognized by Ecuadorian admin-
istrations. In 1947, Ecuador received the first of several loans from
the Export-Import Bank for the construction of the Quevedo-Manta
road. ln In 1954, with a loan of US$8.5 million to the Roads Commit-
tee of Guayas (a semi-autonomous government agency dominated
by banana interests), the World Bank began to finance the construc-
tion and improvement of coastal roads serving the banana areas in
southeastern Guayas province. In 1957, Ecuador received another
loan of $14.7 million from the World Bank for road construction
(Wiles, 1971. pp. 10-25; May and Plaza, 1958, p. 172). In 1954, the
important Dunin-Tambo highway was completed, joining banana
areas around Taura-Vainilla to Guayaquil. This was followed shortly
thereafter by the completion of the coastal trunk highway that reached
from Guayaquil to the southeastern corner of Guayas province, where
both United's Tenguel and Sudamericana's Balao Chico plantations
were located.
Technical assistance was another area of government support for
banana production. The primary emphasis was on developing cost-
effective methods to treat Sigatoka disease. In June 1955, the govern-
ment created the Asociacion Nacional de Bananeros del Ecuador
(ANBE), which was financed by a tax of 0.15 sucres per stem exported.
This organization functioned as a lobby group for banana interests,
and promoted technical assistance to growers. In the same year,
ANBE entered into a contract with the Servicio Interamericano
de Cooperacion Agricola (SICA) of the United States for technical
assistance. Following the development of a successful method of

controlling Sigatoka, typically applied by aerial spraying, the principal
technical service provided by ANBE to its members was spraying for
disease control. In 1963, the military junta then in power dissolved
ANBE, forming the Direccion Nacional del Banano (DNB), with
broader powers than its predecessor.
Both sectorally specific price policy as well as macroeconomic policy
favored the development of the industry. As early as 1947, the Ecua-
dorian government had established minimum prices to be paid by
banana exporters to producers. These prices were established by
reference to the price in the United States, the principal market for
Ecuadorian bananas (BCE, 1952, p. 11). During the early years of
the industry, exchange rates supported export products. Low infla-
tion and the increase in reserves accumulated during the war years
helped to prevent overvaluation of exchange rates. The low level of
industrialization (Ecuador did not begin to promote import substitu-
tion until the mid-1960s) minimized political conflict over exchange-
rate policy.
The net effect of government assistance on the development of the
Ecuadorian banana industry was strongly positive. The provision of
credit was essential to incorporating small independent Ecuadorian
producers into the export market. Technical services played a similar
role, particularly with respect to Sigatoka control. While the greatest
direct benefit may have been to the smaller independent producers,
the larger producers (who could have financed their own disease
control) needed to have this highly communicable disease controlled
for the multitude of small farms. Infrastructure projects, such as roads
and ports, were critical toward the continued expansion of the indus-
try for both independent producers and the larger producers with
connections to the established export and financial elitesP
Nevertheless, while government assistance made possible the entry
of small independent banana producers, this group was highly vul-
nerable to changes in the international market, and to shifting politi-
cal interests in Ecuador. The development of disease-resistant varieties
of bananas helped the recovery of Central American production.
This, together with the much greater productivity of the new vari-
eties, turned Ecuador into a reserve supplier to international markets.
Within the country, the smaller independent producers became the
buffer by which Ecuadorian exports adjusted to fluctuations in the
world market. Thus, for example, after 1957 government credit to
banana producers contracted sharply.
CONCLUSION
The dramatic growth of banana exports from Ecuador in the postwar

period was facilitated by an opening in the international market cre-
ated by disease and the expansion of European consumption. Ideal
growing conditions on the Ecuadorian coast, the existence of a local
export elite, and strong government support promoted the growth of
Ecuadorian production.
The distinctive structure of Ecuadorian production - limited for-
eign ownership and a preponderance of medium-sized farms - al-
though generally attributed to the enlightened policies of the Galo
Plaza government, had depended also on the role played by coastal
export elites. As the Ecuadorian banana industry matured, technical
change and the ability of larger producers to influence policies affect-
ing the banana sector contributed to an increasing concentration in
the industry. Nevertheless, the structure of Ecuadorian banana in-
dustry has contributed to the country's economic development in
significantly more positive ways than was the case earlier in Central
America.
Although MNCs were among the first to produce Ecuadorian
bananas for export. foreign control of production was never large
and in fact declined as the industry expanded. Unlike the situation
earlier in Central America. where MNCs were able to acquire largely
unutilized land at very low cost, and where the local export elite
already had large investments in coffee, a non-competing export crop.
these firms faced in Ecuador a very different environment. Following
World War II. as it became clear that both internal and external
conditions were highly favorable to Ecuador's establishment as a
major banana producer, MNCs competed directly with local export
elites for land. The other side of the cacao boom legacy, and its
earlier collapse, was that coastal elites in Ecuador had a vested interest
in limiting the growth of foreign production.
In addition to opposition from coastal elites, foreign firms also
faced demands from workers and land-hungry peasants. Particularly
after 1955, as banana producers confronted both increasing damage
from Panama disease and a saturating world market, labor protest
increased, targeting foreign producers. In May 1955, the PCE organ-
ized a strike against the Fruit Trading Company in Esmeraldas prov-
ince (Uggen, 1975, p. 159). Although the strike was ultimately
unsuccessful, it contributed to the demise of an already struggling
company.
The southern colonization areas along the Dunin-Tambo and

Coastal Trunk (from the former to Machala) highways also were foci
of PCE organizing efforts. United Fruit's holdings at Tenguel and
Taura-Vainillo were primary targets. By this time the company was
under pressure from both the US and Ecuadorian governments to
reduce its land holdings. In 1954, United had signed a consent decree
agreeing to divest itself of reserve lands in Latin America; Taura-
Vainillo fell into this category. In the early 1960s, Ecuadorian banana
interests had persuaded their government to pass legislation mandat-
ing that foreign companies buy a certain percentage of Ecuadorian-
produced bananas.
In 1960, Velasco Ibarra had been elected president, promising a
land-reform program. However, rather than acquiring United's land
for redistribution to peasants, Velasco allowed the company to sell
its properties to Ecuadorian producers, who were then contracted to
sell to United. ls In 1960, United disposed of its Taura-Vainillo prop-
erty in this manner. It continued to produce at Tenguel until 1962,
when a PCE-Ied invasion took over this plantation, forcing the com-
pany to sell to the Ecuadorian government for one million sucres. 19
Thus, in the southern region, the exit of a major foreign company,
United Fruit, strengthened the position of the most important na-
tional producers. The few remaining foreign firms engaged in pro-
duction of bananas maintained a strictly low profile, often registering
their holdings through Ecuadorians.z°
Several additional factors combined both to increase the concen-
tration among national producers, and change markedly the geo-
graphic distribution of production in favor of the southern region.
The decline in government support, along with the shift to the new
Cavendish varieties, contributed to increasing production costs for
small producers (Tazan, 1968, pp. 5-8). The duality observed among
national producers began to diminish as those producers with links
to commercial and financial elites gained ground. Since small produc-
ers were concentrated in the northern region of the coast, this area
was disproportionately affected by the increase in production costs.
It was also the northern region that was worst affected by Sigatoka.
After 1953, damage from Sigatoka and the difficulty of controlling
this disease on small, scattered plots, began to severely limit produc-
tion. In 1953, for example, 32 per cent of banana exports were shipped
through the port of Esmeraldas; by 1965 this figure had dropped to
7 per cent (Martinez, 1976, p. 55). The historical antagonism between
Esmeraldas and Guayaquil (over which city would control the coastal
export wealth) contributed to the demise of the north, as southern

producers sought to establish their dominance over banana exports.
Notes
1. GDP figures for 1940-50 are from BCE (1977, p. 82); and those for
1950-70 are from BCE (1984, pp. 319-42). Growth rates have been
calculated using the least squares method.
2. Assuming an average of 3 sucres tax per racimo (ANBE, 1957a, pp.
53-4).
3. Nebot (1966) cited Arthur et al. (1968, p. 69). See also p. 141 for addi-
tional evidence.
4. Mexico supplied approximately 20 per cent of total banana exports
from the Central American and Caribbean region during 1935-39.
5. United had abandoned approximately one million acres to Panama
disease in the first half of the twentieth century (D' Antoni, 1965, p. 50).
6. Between 1950 and 1955, US imports of bananas grew only by some
200,000 metric tons (16.4 per cent); European demand grew by over
1,000,000 metric tons (Arthur et ai., 1968, p. 178).
7. There is little direct evidence on foreign investment in cacao, but
William Glade had estimated that in 1914 less than 1 per cent of total
British and US investment in Latin America was in Ecuador. All of
the US investment in Ecuador was in mining and railways. Some
German capital was invested in cacao, but the amounts were probably
very small. See Glade (1969, pp. 216-24); Crawford de Roberts (1980,
p. 54); and Guerrero (1983).
8. ANBE (1957a, p. 55); and Preston (1965, pp. 77-9). Note that these
data refer primarily to producers who are members of ANBE and
cover about 95 per cent of commercial production for export.
9. Noboa's major backer was Guayaquil financier Juan X. Marcos.
to. According to D'Antoni (1965, pp. 22-3), United managed through a
series of manipulations to exclude Sudamericana from the west-coast
market by 1934.
11. Interview with Enrique Becerra, Guayaquil, 5 June 1989.
12. There is no indication how many of these ships were refrigerated
(Linke, 1960, pp. 126-7).
13. This comment cast some doubt on Larrea's (1987) thesis that the 1965
banana crisis for Ecuador was caused by the majors' monopolization
of the export trade.
14. The northern Colombian coast was another possible area for expansion
as it also was relatively free of Panama disease, but the bitter labor
disputes experienced by United in the late 1920s were undoubtedly
one factor reducing the attractiveness of this region.
15. As Plaza (1955, p. 39) told the story: 'One day in 1948, I was visited
in my office by some high oflieials of United Fruit who had been
inspecting their plantations on the eoast of Ecuador. ... This bit of
technical advice put the government to work encouraging the growing

of bananas .. .'. One of Plaza's contacts in the United States was with
Nelson Rockefeller. Shortly after assuming the presidency in 1948,
Plaza invited the first of several technical missions from the Interna-
tional Basic Commodity Corporation, which Rockefeller directed.
16. A total of approximately $8 million was received for this project
(Export-Import Bank of Washington, 1956, pp. 46-9).
17. It is interesting to note that United Fruit had planned to build a rail-
road from Tenguel to Puerto Bolivar (Machala) but could not obtain
the necessary government approval to do this (interview with William
Orton, Guayaquil, December 1989).
18. According to William Orton (interview, December 1989, Guayaquil),
a manager at United's Tenguel plantation, Luis Noboa, helped to set
up the independents. Ecuadorian banana producers and members of
the Guayaquil elite figured prominently among the purchasers.
19. Uggen (1975, p. 188); and Orton interview. Orton described this sum
as 'absolutely nothing.' He also claimed that 'the government had run
us out of Tenguel.'
20. The European firms, in particular, appear to have adopted this strat-
egy (interview with Enrique Becerra, Guayaquil,S June 1989).
8 Foreign Direct
Investment in Eastern
Europe: Harnessing FDI
to the Transition from
Plan to Marketl
Carl H. McMillan
As the drama in the East continues to unfold, the situation calls for
continuing assessment and reassessment. The dust has not settled
from the major upheavals of the turn of the decade, but some of the
contours of the new landscape are beginning to be discernible. In any
appraisal of the still-emerging role of foreign direct investment (FOI)
in the Eastern economies, it is important to distinguish the potential
from the actual. This chapter will first set forth the rationale for FOI,
as an important element in the transition from planned to market
economy, that is specific to Eastern Europe in the 19908. It will then
use this as a framework for analyzing - in a necessarily preliminary
way - the actual role of FOI in the first four years of the decade.
First, however, it is necessary to recall the limited role of FOI in
the Soviet-style, socialist economic system. The experience under
Soviet socialism is currently regarded as a past offering little to build
upon, and therefore necessitating a radical and rapid departure. That
past has nonetheless left a legacy of institutions and experiences that
inescapably shapes the current transition and inftuences its outcomes.
THE INHERITANCE
Foreign direct investment played virtually no role in the industrial de-

velopment of the Eastern economies under traditional state-socialist
regimes and central planning.2 Only as some East European coun-
tries sought to experiment with modifications of the traditional 'com-
mand economy', did they begin to flirt with the notion that FOI
127
might be useful to the purposes of economic reform. Like the reform

measures more generally, these steps to permit FOI were a matter of
too little, as well as too late. 3
The attitude of communist regimes toward such investment was in
fact highly ambivalent. They were attracted to it as a means of stimu-
lating the sluggish performance of their economies. Official expecta-
tions in this regard were based on perceptions of the key function of
multinational corporations (MNCs) in international flows of indus-
trial technology and know-how and of the Eastern countries' need to
tap into these flows. At the same time, communist governments,
conscious of their fundamental political weakness, were clearly con-
cerned about the potentially destabilizing effects on official ideolo-
gies, planned economic systems, and controlled societies if foreign
(especially private, capitalist) firms were accorded a major direct role
in their economies. These concerns led them to impose severe, initial
restrictions on FOI that were only gradually relaxed. The most fun-
damental of these was the requirement that foreign investment take
the form of an equity partnership with a state enterprise of the host
country.
The most powerful constraints, however, lay not in the ambival-
ence of FOI policy but in the nature of the communist political and
economic systems and in their deterrent effects. Bureaucratic alloca-
tion of resources, administrative determination of wages and prices
(hence profits), and severe restrictions on private economic activity
limited the scope for foreign firms to exercise effective control over
operations in host Eastern countries. It was in fact questionable
whether the concept of 'foreign direct investment' in its customary
Western usage was even applicable in these circumstances. More-
over, the failure of attempts at economic reform under communism
to address fundamental deficiencies perpetuated these systemic
constraints.
Considerations such as these militated toward a self-imposed iso-
lation, one that was externally reinforced by the political divide be-
tween East and West that characterized the Cold War period. As a
result, one of the unique characteristics of the development experi-
ence of the Eastern economies was that their industrialization occurred
largely without FOL
Communist rule therefore left a poor inheritance; there was nei-
ther a significant stock of FOI nor a rich history of accumulated
experience with it. The conditions that constrained MNCs had kept
it marginal in form, dimension, and effect.4 For the most part, FOI
FDI in Eastern Europe 129
had been a neglected issue, even of external economic policy. More-

over, the fear and suspicion that permeated Eastern FDI policy under
communism left a negative psychological legacy. It meant that FDI
was not only little known and understood, but also suspect. This in
many cases reinforced national psychologies of suspicion of foreign
investment inherited from earlier historical periods.
The situation had begun to change, however, in the final years of
communist rule. The shift in policy toward foreign investment that
had begun very gradually in the 1970s, accelerated in the 1980s, es-
pecially in the second half of the decade. Successor governments in
the 1990s inherited at least the foundations of a legal and regulatory
regime for FDI. More importantly, they inherited the momentum for
rapid liberalization of the conditions for FDI that had been lately
introduced by their predecessors. They also benefitted from an al-
ready sharply stimulated foreign interest in the investment opportun-
ities opening up in the region, especially in the large, resource-rich
Soviet economy.
PRINCIPAL ELEMENTS OF THE POST-COMMUNIST

ECONOMIC TRANSITION
The upheavals that led to the fall of communist governments in

Central and Eastern Europe (in 1989-90) and in the Soviet Union (in
1991) removed the political constraints that had inhibited earlier
attempts at reform of their 'command' economies, and made much
more radical economic change possible. New governments could act
on the basis of a strong political consensus in favor of a major eco-
nomic transformation: replacement of the now discredited system of
comprehensive state ownership and allocation of resources by a
market-based, mixed-ownership economy along Western lines. Within
this broad consensus, disagreements centered on the desirable extent
of marketization and privatization of the economy (basically a question
of which Western models to emulate), and on the pace and sequencing
of the transition ('shock therapy' versus a gradualist approach).
An extensive literature has emerged quickly on the post-communist
transition (see Kornai, 1992, bibliography, p. 627ft). It suffices to
recall here its principal aspects in order to provide a framework for
an examination of the role of FDI in these processes. The processes
of transition will be dealt with under the following broad headings:
stabilization (both in the fiscal-monetary sense and in terms of broader
economic recovery); marketization (the dismantling of the system of

state planning and control and its replacement by the institutions of
the market); privatization (a major shift in the ownership structure
through denationalization of state assets and the encouragement of
new private enterprises); and finally the attendant restructuring of
domestic production and foreign trade (resulting from both the inter-
nal forces of reform and developments in the external economy).
Before turning to FDI, some elaboration of each of these four pillars
of the transition is necessary.
The most urgent task of the transition in many countries has been
stabilization. The disruptive effects of the transfer of political power
and the dismantling of old institutions of administrative control,
against the backdrop of structural imbalances inherited from the
previous 'economies of shortage', precipitated budget deficits, gener-
ated strong inflationary pressures, permitted the rapid accumulation
of bad debts, and led to growing imbalances on external account. For
some countries, these monetary and fiscal imbalances quickly attained
crisis proportions. Governments came under strong international
pressure to pursue comprehensive, macroeconomic stabilization
programs as a condition for external cooperation and assistance in
the transition.
Monetary stabilization can, in theory, be achieved relatively quickly
(although not painlessly) through a package combining liberalization
and austerity measures, if the institutions through which these meas-
ures must work are in place. Economists differ about whether or not
the institutional conditions have been met in the post-socialist
economies of Eastern Europe. Moreover, governments may not be
strong enough politically to sustain, or even to undertake, the 'shock
therapy' measures prescribed to them. s Gradualist approaches may
be more realistic, in these circumstances, but are not necessarily less
painful.
Unfortunately, in the initial years of post-communist adjustment,
Eastern governments have been beset by further, no less severe eco-
nomic problems that have complicated and slowed the transition.
The Eastern economies have suffered harsh shocks from sources other
than self-imposed austerity measures, adopted in the interests of near-
term stabilization. The collapse of preferential trade under the
COMECON (Council for Mutual Economic Assistance) system and
the disintegration of the Soviet Union, the axis of the regional
economy, forced a drastic foreign-trade reorientation at a time of
world recession. The disjuncture was aggravated by the dissolution
FDf in Eastern Europe 131
of another linchpin in regional economic relations, the German

Democratic Republic. Meanwhile, the rapid decline in Soviet oil
production after 1988, which was the culmination of long developing
trends in the industry, now exacerbated by national economic and
political decline, created a severe energy crisis in the region. Political
dislocation, in some cases spilling over into civil strife, has raised
uncertainty, disrupted the course of economic relations, and impeded
foreign assistance. The list has lengthened of nation-states in the area
that have not survived the post-communist transition as political
entities (the German Democratic Republic, Yugoslavia, the Soviet
Union, Czechoslovakia). Thus economic recovery and political
stabilization have overshadowed the restoration of monetary/fiscal
balance as urgent policy objectives.
The task of marketization is two-pronged. There is the easier (but
certainly not painless) dimension of 'liberalization'. This entails the
dismantling of the institutions of centralized planning and manage-
ment that had operated through formally established targets, quotas,
taxes, and subsidies, as well as through less formal instruments of
control. Here, the freeing of prices and wages and the reduction in
foreign-exchange controls have been among the first measures under-
taken in most countries. The more difficult dimension (inevitably
slower to achieve) is the establishment of market -based institutions
to replace the allocative mechanisms of the old system. As has come to
be understood, this involves a staggering task of institution-building
in the educational, legal. and commercial spheres. It means. among
other things. the development of new managerial, legal. and account-
ing professions, the creation of a new body of commercial law and
the mechanisms for its enforcement. the establishment of a new
banking system and related financial markets, the construction of a
new system of wholesale trade, and the institution of a new tax sys-
Lem, of new systems of social welfare, and of mechanisms to foster
competitive markets.
The processes of privatization also involve the dismantling of old
institutions and the creation of new ones. The objective is to replace
the dominant state institutions of ownership with a system that ac-
cords primacy to alternative forms. notably private ownership. This
involves the restructuring of state enterprises and the transfer of the
ownership of their assets to their managers and workers. to the
citizenry at large, and to foreign owners. These aims are accom-
plished through a variety of means, from sale or mass distribution of
property rights administered by state property agencies through more
haphazard, 'spontaneous' privatizations initiated by enterprise col-

lectives. Bankruptcy laws and procedures provide a mechanism by
which state enterprises that are not economically viable can be closed
and their assets reallocated. At the same time, the formation of
new enterprises by private initiative is permitted and their growth
encouraged.
Economic restructuring was on the Eastern policy agenda long
before the current transition. Under communism, the Eastern econo-
mies were developed not only in relative isolation but also according
to political priorities set by the party and state. It became increasingly
apparent that party/state preferences had created and perpetuated
an industrial structure that was in significant respects inefficient by
international standards. Officially, structural problems tended to be
viewed as signs of industrial backwardness that could be remedied
by periodic 'modernization' drives. As these problems became more
intensely felt, however, they were more frankly addressed as being
central to slowing growth and poor export performance. They were
increasingly understood as requiring the restructuring (perestroika)
not only of the economy itself but also of the institutions that had
determined its development.
The post-communist transformation is designed to continue and to
accelerate this approach. Stabilization will eliminate state subsidies
to inefficient enterprises, while privatization and marketization will
subject them to the force of economic rather than administrative
criteria. For most countries, the resulting industrial restructuring will
be the most painful aspect of the transition. The enterprises most
affected tend to be large and concentrated in industries long favored,
not only in terms of more generous investment funds but also in
terms of higher wages and social benefits to workers. This enlarges
the scope of the required structural adjustment and its economic,
social, and political repercussions. Growing concerns about these
consequences have forced many area governments to back away from
radical reform policies and to adopt a more gradualist approach to
economic restructuring.
Moreover, in many cases, most acutely in that of the former Soviet
Union, the problems of restructuring are magnified by the task of
demilitarizing the economy. The dismantling of the defense complex
adds greatly to the scale of restructuring, and the massive demobil-
ization of the armed forces compounds the related social problems
(such as unemployment and lack of housing). In Russia, where much
of the Soviet defense industry was concentrated, the scale of the
problem has made it much more difficult to find the political will to
proceed with structural reform.
The shift from plan to market also involves dismantling the mono-
lithic system of state trading and replacing it with a decentralized,
diversified, and competitive framework for the conduct of external
relations. Determination by market rather than by plan would inevi-
tably have led to a major restructuring and reorientation of foreign
trade, as competitive forces substituted for administrative criteria.
The collapse of the COMECON regional economy and the break-up
of the Soviet Union greatly accelerated these processes. The dismant-
ling of the state trading system has liberalized the conditions for
trade, and reduced the traditional insulation of the Eastern econo-
mies from external market forces. The ending of the Cold War has
eliminated a major political cause of their international isolation, and
has created the political conditions that have allowed their incorpo-
ration into the organizational framework of the international economy.
In sum, a fundamental dimension of the transition is the opening
of relatively closed economies and their reintegration into the world
economy. In particular, their opening up to foreign investment has
been accelerated.
FOREIGN DIRECT INVESTMENT IN THE TRANSITION
In their approach to FDI, post-communist governments have been

less inhibited by political and ideological concerns than their pred-
ecessors. They have more openly sought FDI, in all its forms, and
have even competed to establish regulatory conditions attractive to
potential investors. Most important, the programs they have launched,
to establish market economies with extensive private ownership, are
creating systemic conditions more favorable to MNCs.
The opening of the Eastern economies to FDI may be viewed
simply as the reestablishment of a net capital-import position vis-a-
vis the West. This would be a return to what could be regarded as a
more natural relationship, given relative levels of development, and
one which state policies in the communist period had artificially dis-
torted. The standard literature on the causes and effects of FDI could
then be applied to the analysis.
However, this is not the whole, nor even more important, story.
In fact, current policies are strongly motivated by a special set of
considerations, namely the positive contributions that FDI can
potentially make in the transitional period to its reformist aims and

processes. 6 Here, its beneficial effects are perceived to be as signifi-
cantly institutional as purely economic. Although shared by Eastern
reformers, this viewpoint is perhaps even more strongly held by
'Western advisers, and it is a fundamental premise of Western eco-
nomic assistance to economies in transition. As the leading interna-
tional economic organizations in their joint assessment of the Soviet
economy maintained in 1991, 'attracting substantial flows of foreign
investment could be crucial in the transition to a market economy'
(International Monetary Fund, or IMF, et al., 1991, p. 75). The United
Nations Economic Commission for Europe asserted, more generally,
that 'foreign direct investment is expected to playa major role in the
transformation of the Eastern economies' (United Nations/Economic
Commission for Europe, 1992, p. 96). Let us then examine these
perceived contributions to the major transitional processes.
Stabilization and Recovery
Perhaps the aspect of the transition in which FDI has the least ob-
vious part, given its essentially long-term nature, is in achieving the
near-term goal of monetary stabilization. Nevertheless, inflows of
direct investment capital, especially when involving cash transfers,
improve the host-country's short-term balance-of-payments position.
This in turn facilitates stabilization policy and provides policy-makers
greater room for maneuvre. In some Central European countries,
these FDI-related financial inflows have begun to be substantial. In
Hungary, for example, the net FDI inflows on a cash basis amounted
in 1991 to about US$1.54 billion, which may be compared to convert-
ible currency reserves at end-1991 of US$4.02 billion and a net con-
vertible foreign debt of US$14.55 billion (National Bank of Hungary,
1991).
If stabilization is defined in broader terms as recovery from the
economic shocks that have plagued the Eastern transitions, FDI has
a more direct part to play. Significant inflows of real resources in the
form of capital, technology, and know-how can speed up recovery
and thereby accelerate the longer-term processes of transition. The
Eastern economies that have shown the first signs of recovery, those
in Central Europe, are in fact those that have benefitted from the
largest inflows of FDl.7
Marketization
It is in the area of institutional transformation, the creation of the

institutional infrastructure that allows markets to function effectively,
that FDI may be especially important to a successful transition. In
the first place, it creates pressure for institution-building. As has been
argued, a liberal regulatory regime is not in itself sufficient to attract
FDI on a major scale. The institutional conditions to make it effective
and profitable must also be created. For example, as Levcik (1991)
noted, governments have been under great pressure to make pro-
gress toward currency convertibility in order to accommodate FDI
requirements.
Pressures for institution-building are generated not only at the
level of government policy, but at the micro-level as well. Foreign in-
vestors create a strong and profitable demand for banking, account-
ing, and other business services. At the same time, FDI is a mechanism
for improving the supply of such services. Branches of Western banks
and accounting firms have rapidly been established in the Eastern
countries, and business services generally have been a major target
of FDI in the area's economies. Their effects extend beyond the
immediate sphere of activity of the foreign investor, spreading indi-
rectly to other areas of the economy.
The operation of foreign affiliates within the host Eastern econo-
mies can also contribute, directly and by example, to the development
of management skills essential for efficient enterprise behavior in a
market economy. Under central planning, enterprise directors (typi-
cally engineers by training) were primarily responsible for the man-
agement of production. Moreover, in the conditions of excess demand
that resulted from forced growth and over-full employment planning,
the function of managers was essentially superfluous in the areas of
product development, quality control, marketing and sales. Since in-
vestment planning and financing were largely centralized, the entre-
preneurial function was also rendered superfluous.
The development of long-neglected management skills and the
institution of related organizational and operational changes within
Eastern enterprises (not to mention the general improvement of work
habits) are important tasks of the transition. Managerial retraining
has accordingly been a particular focus of Western governmental
and non-governmental assistance programs. Foreign investors often
organize their own in-house training for Eastern personnel, managers
and workers. Arguably the most effective training is on-the-job,

working closely with Western counterparts on a daily basis, accord-
ing to international standards and procedures introduced through
direct foreign involvement in enterprise operations.
Moreover, new business standards introduced through FDI extend
via forward and backward linkages beyond foreign affiliates them-
selves. Perhaps the most celebrated case of the introduction of strict
product-quality standards, with significant backward linkage effects,
is the case of McDonald's. In order to maintain company standards
in its operations in Eastern Europe, McDonald's was frequently forced
to develop entirely new chains of supply, from the farm to the res-
taurant. Hertzfeld (1991) has emphasized this point with regard to
McDonald's Russian operations.
One might conjecture that the diffusion of new management prac-
tices would be more rapid when investment is undertaken in partner-
ship with a local enterprise than when it is made in a wholly-owned
branch or subsidiary. In the latter case, on the other hand, it might
be possible to introduce international norms more quickly into local
management practices.
The direct presence of MNCs can help to impart not only new
management skills but also to build a new business ethic. It is gen-
erally recognized that the old system failed to encourage a respect
for property or to engender a sense of personal economic respons-
ibility. It is therefore not surprising that the dismantling of the tradi-
tional system of controls should be succeeded in many instances by
a free-for-all, 'wild West' approach to business activity. While some
foreign firms may simply join the action, the majority can be expected
to help to introduce standards of business ethics that are interna-
tionally accepted in the context of a market system.
It is clear from on-the-spot reports that the efforts of MNCs to
instill new work habits and ethics may encounter local resistance.
Imse (1993) provides a vivid account in the context of foreign invest-
ment in the Russian oil industry. The short-run impact is therefore
likely to be limited in many cases. The receptivity of Eastern person-
nel to new 'foreign' ways will depend on how deeply old habits were
ingrained (older employees, especially at the managerial level, are
likely to be more resistant), as well as on other factors determining
the cultural gap between foreign and local employees.
Another legacy of the past that must be overcome in the transi-
tion, if newly-created markets are to function efficiently. is the mono-
polistic organizational structure of much of the economy. Attempts
FDf in Eastern Europe 137
to dismantle this structure are politically difficult and slow. In these

circumstances, the opening up of the economy to FDI can be an
effective way to expose monopolistic, domestic enterprises to a more
competitive environment, especially when a weak balance of pay-
ments makes it difficult to open domestic markets to the competition
of imports. On the other hand, their dominant shares in home markets
may constitute much of the attractiveness of large national enterprises
to potential foreign investors. The acquisition of a controlling equity
in such enterprises has in fact been the objective of many of the
major foreign investments to date. especially in Central Europe. The
interests of foreign investors may therefore conflict with the anti-
monopoly objectives of host government policy.
Privatization
The most obvious way in which FD I can contribute to the privatiza-

tion of the Eastern economies is financial. Private savings in these
countries has been greatly eroded by inflation and would in any case
have been inadequate in light of the enormity of the privatization
task. Foreign financing can help to breach the savings gap. Of course.
for this purpose. it need not necessarily be in the form of direct
investment. A number of specialized investment funds have been set
up in the West to facilitate Western portfolio investment in the Eastern
economies. as assets are privatized. N
Improvement in the operational efficiency of enterprises has. how-
ever. been one of the major aims of Eastern privatizations. If financing
is through portfolio rather than direct investment, the potentially
beneficial effects on the management of assets are more likely to be
diluted. The ways in which FDI can act as a channel for the intro-
duction of new managerial functions and techniques were already
discussed. Direct investment can also raise the efficiency of operations
by introducing new productive technology. providing links to new
markets and. perhaps most importantly, subjecting Eastern managers
to the discipline of commercial rather than administrative criteria
('hard' rather than 'soft' budget constraints, in the conceptualization
of Kornai. 1992). Hence. the influence of MNCs on the management
of privatized state enterprises can accelerate their restructuring.
Whether FDI can exercise these potential effects on the efficiency
of enterprise operations depends much on the nature of privatization.
Privatization programs have varied considerably among the Eastern
countries (Stark. 1992). The politically attractive mass distribution of
state-owned assets to the citizenry, by means of various voucher

schemes and often through the intermediation of newly-created in-
vestment funds, tends to restrict the participation of foreign investors
and hence the potential effects of FDI on enterprise behavior. 9 It is
in those cases (most notably the former German Democratic Republic
and Hungary) where state assets have been sold off that FDI is
accorded greater scope (cf. Mizsei, 1992; Hunya, 1992). The so-called
spontaneous privatizations have also provided the opportunity for
MNCs to undertake major acquisitions even in countries (e.g., Czecho-
slovakia) that have otherwise favored mass privatization schemes.
The development of a significant private sector hinges not only on
the denationalization of state-owned assets but also on the creation
of new assets through the growth of private enterprise. The initial,
joint-venture phase of FDI in the Eastern economies created entities
that were legally independent but in fact functioned within the admin-
istrative and operational framework of their partners (state enter-
prises). They nevertheless served to initiate the process of evolution
of the dominant state-owned sector toward a more mixed ownership
structure. More recently, a second phase, where the acquisition of
state-owned assets became possible, has enlisted FDI in privatization
of a more direct nature, and on a larger scale. A third phase, already
legally open although as yet relatively undeveloped, will engage MNCs
increasingly in the task of establishing entirely new firms to swell the
ranks of the private sector (through 'greenfield' investments).
Economic Restructuring
If FDI can thus help to move the ownership structure of the economy
from preponderant state ownership toward a more desirable mix, it
can also assist in another form of transitional restructuring. This is
the restructuring of production away from a pattern heavily deter-
mined in the past by political-ideological priorities, and toward a
structure more firmly grounded in economic realities. While indus-
trial restructuring is the primary objective, other sectors also come
into play. Moreover, restructuring should not be regarded as a task
limited to the transition, but rather as ongoing.
The enormity of the task and the difficult and costly political and
social adjustments that accompany economic restructuring were
stressed earlier. FDI can potentially facilitate restructuring by easing
some of the domestic constraints that slow its progress. The most
obvious of these is the capital constraint. Capital requirements are
FD I in Eastern Europe 139
enormous and domestic resources are inadequate; the latter have

been reduced by recession and stretched by the multiple tasks of the
transition (Zoethout, 1993). The potential impact of external capital
is enhanced, in these circumstances, especially if it can be directed to
areas where expected, immediate returns from additional investment
are high, such as incomplete investment projects inherited from the
previous period (provided that they are economically sound). Take-
overs of existing plants and distribution networks will not increase
the net capital stock of the host country unless accompanied by com-
plementary, capital-creating investments.
Much has been made in the Western literature of the role of FDI
as a channel for the international transfer of technology. This hinges
on the notion that proprietary rights can be better safeguarded and
more profitably exploited if technology is kept within the firm rather
than leased or sold. The acquisition of Western technology has been
the primary objective of Eastern policy favoring FDI. It is arguably
even more important now, in the transition, given the scale of the
currently envisaged restructuring and the notable failure of earlier
efforts to close the technology gap.
Moreover, the ending of the Cold War has created a much more
favorable international political climate. The Western strategic em-
bargo against the Eastern countries has virtually ended, and NATO's
(North Atlantic Treaty Organization) Coordinating Committee
(COCOM) has been reorganized and redirected. In these circum-
stances, there is considerably enlarged scope for technology-based
FDI in aid of restructuring. The possibility of using FDI to modern-
ize the Eastern telecommunications and electronic data-processing
systems is a prime example. These are technically weak areas of the
Eastern economies, where Western export controls have been rela-
tively effective deterrents in the past. At the same time, they consti-
tute an important part of the infrastructure necessary to the success
of the transition.
There are important limits to the potential role of FDI in the
processes of industrial restructuring. One of the major impediments
to restructuring is the absence of a social safety-net to provide unem-
ployed workers with the social benefits that they have traditionally
received through their place of work. State enterprises played an
important social role, providing housing, food, health, and leisure
services to employees. Meanwhile, until a new social-welfare system
is put in place, foreign investors may be forced to assume the burden
of at least some of these social services or risk a popular backlash.
This can discourage FDI, if the expected costs are high. Another
problem of restructuring, the legacy of past environmental neglect,
can also impose constraints on FDI. Foreign investors may not be
prepared to assume the costs of environmental clean-up which are
attached to specific projects or potential acquisitions.
The most difficult part of industrial restructuring is the closing
down of 'white elephants' inherited from the communist period. The
task, as noted earlier, is all the more daunting because the enter-
prises in question are frequently large and were accorded preferential
treatment under the old bureaucratic system. It is doubtful that FDI
can do much directly here. It will naturally be attracted to the more
profitable enterprises, and there is thus the danger that it will just
'skim off the cream', leaving the problem cases to local resolution
(and thereby raising the risk of a political backlash). FDI can at best
ease the adjustment indirectly by creating alternative areas of growth
and employment in the economy.
Perhaps the most straightforward role for FDI in the transition is
to establish long missing links between the Eastern economies and
the world economy. As pointed out earlier, the Eastern economies
developed in relative isolation, even from each other. The reasons
for this isolation had as much (if not more) to do with the nature of
the planned economy as with the circumstances of international
political economy. The external economic relations of the Eastern
countries were comprised largely of merchandise trade, conducted
on a state-to-state (or, at most, Eastern state-to-Western firm) basis.
They were most weakly developed at the level of international, inter-
firm relations; and intrafirm linkages existed only through the trans-
national activities of a few Eastern state enterprises, typically state
trading organizations.
The opening up of the Eastern economies to FDI can thus help to
fill an important institutional void inherited from'the past. This is not
simply a question of achieving a more diversified and flexible, organ-
izational framework for the conduct of external economic relations,
however desirable that may be. It is more fundamentally a matter of
the nature and dimension of the relations that take place within that
framework.
There are theoretical arguments and empirical evidence for re-
garding FDI flows as trade-creating. It is possible that some forms of
trade may not take place without the organizational framework of
the MNC (Murrell, 1991). In the case of the planned economies, the
absence of FDI also contributed to the development of industrial
PDf in Eastern Europe 141
structures that were not oriented to world markets and of enterprises

poorly qualified to operate in them. FDI can help to channel re-
sources into branches and enterprises that are potentially capable of
competing internationally. The multinational linkages established
through FDI can help them to break into markets to which, with the
collapse of COMECON and the dismantling of state trading, their
export focus must now be primarily directed.
As the political/administrative criteria that shaped them in the past
were removed, the trade relations of these economies have under-
gone an immediate and drastic geographic reorientation toward the
West, especially Western Europe. This has occurred at the price of
a collapse in the volume of trade. Ownership ties with Western firms
can help to accelerate the recovery, and ensure the longer-term
expansion, of trade along these new lines. They provide the channels
for the technology, know-how, and market access required to boost
Eastern shares in Western markets. They also stimulate the intrafirm,
intra-industry ties on which so much of the expansion of trade among
Western industrial countries has been based in the postwar period
(Grubel and Lloyd, 1975). Not least importantly, they generate within
Western economies interest groups that favor East-West trade
expansion through the reduction of long-standing trade barriers.
In these ways, FDI can contribute to the successful future devel-
opment of the Eastern economies in a more open context. The forced
geographic reorientation of Eastern foreign trade has entailed signifi-
cant immediate changes in its commodity content, but the required,
full-scale restructuring is necessarily a long-term process. To some
extent, this entails a return to pre-communist patterns of specializa-
tion; but it also requires the creation of new ones. Especially for
the smaller, more naturally open, Eastern economies, this must be
accomplished in harmony with trends in the world economy. FDI can
potentially provide the organic links that will ensure such harmony
in their future development.
ACTUAL VERSUS POTENTIAL ROLE OF FOREIGN

DIRECT INVESTMENT
Alerted by the dramatic events that led to the opening up of a long-

closed area of the world, MNCs quickly enlarged their investment
horizons to incorporate possible Eastern locations. Of course, Ea!\t
European countries vary greatly in size, resource endowment, and
industrial structure, and thus in their appeal to potential investors. In

general, Western firms are attracted to Eastern Europe by three
important considerations: (1) the advantages the area offers, in geo-
graphical proximity and cultural affinity, as a locus of production
from which to serve European markets; (2) the availability it affords
of skilled (and still relatively cheap) labor, and the access it provides
in some important instances (especially the former USSR) to valu-
able and underdeveloped sources of industrial raw materials; and (3)
the market potential it holds in comprising relatively high income
populations that have long been starved of consumer goods and ser-
vices. For large MNCs, the reintegration of Eastern Europe into the
world economy represented the opening up of what might be regarded
as the 'last frontier' of international business.
Despite the strong, revealed investor interest that these considera-
tions prompted, actual FDI flows to the former socialist economies
of Eastern Europe have been far below Eastern or Western expec-
tations; and they have been heavily concentrated on a few Central
European targets, notably Hungary and the Czech Republic. The
data available on FDI in the Eastern economies are limited in scope
and generally poor in quality.1O They are nonetheless adequate to
demonstrate that general point. The most recent and comprehensive
data available - compiled from a variety of sources - are presented
in Tables 8.1 and 8.2.
Two kinds of problems lead to variations in the data reported. For
most countries, there are major differences between FDI values based
on protocols of intent (registrations) and FDI values reflecting actual
transfers. This difference is especially wide in the case of the Soviet
Union and its successor states. Values based on the foreign share of
the registered capital of joint ventures in the USSR greatly exceed
the share of capital in operating joint ventures. Furthermore, FDI
can be made in cash or in kind. Balance-of-payments data on FDI
flows - now generally available for the Central European countries
- represent only cash transfers through the banking system. They
thus understate actual flows. Data on investments in kind are more
difficult to obtain and estimates based on them vary. Depending on
the base used, therefore, statistics on the magnitude and nature of
FDI flows can vary greatly.
If the data are messy, their message is nevertheless clear. The end
1991 stock of FDI in the area's economies combined was (using the
more conservative figure for the USSR) US$10.1 billion, according
to the data presented in Table 8.1. Total flows to the area in that year
PDf in Eastern Europe 143
Table 8.1 Estimated Stock of Foreign Direct Investment in Central and

Eastern Europe, 1991, 1992 (million dollars)
Country 1991 1992
Bulgaria 350 570

Czechoslovakia 1,200 2,750
Hungary 2,900 5,200
Poland 770 1,450
Rumania 270 600
USSR" 1,550/4,900
Russia" 1,300/2,100 1,500/3,000
Yugoslaviab 3,080
Slovenia 750 1,050
(a) Values are for investments made (in kind as well as in cash, wherever
possible), and do not include commitments except in the case of the
USSR and Russia where the ranges given reflect data on capitalization of
both operational and registered investment projects (see explanation in
text). For the USSR and Russia, then, the lower capital figures
(operational investments) are more comparable to those given for other
countries.
(b) 1991 data for Yugoslavia are mid-year; all other data are end-year.
Sources: United NationsrrCMD (1992); World Bank (1992); PlanEcon
reports (1992); and Institute for Economic Policy, Moscow (unpublished
data, 1992).
were about US$4 billion. Although these figures represent rapid

growth from negligible amounts just three years earlier, they are
nevertheless well below expectations and potential. They may be
compared with FDI figures for China, which alone recorded a stock
in 1991 of well over US$20 billion and an inflow of over US$3 bil-
lion. 11 The data do not permit a systematic breakdown by industry
for the region; but it appears that investments in manufacturing have
tended to be concentrated in the automotive and food-processing
industries, while in the service sector they have focused on travel and
tourism (hotels and restaurants), property development, and busi-
ness services.
Trends in FDI are mixed, as Table 8.2 shows. The further growth
of flows to the area in 1992 suffered major shocks with the disinte-
gration in 1991 of those economies of particular interest to foreign
investors: the USSR and Yugoslavia (and in the case of the latter,
the outbreak of civil war). On the other hand, there was a notable
Table 8.2 Estimated Flows of Foreign Direct Investment to Central and

Eastern Europe, 1990-92 (million dollars)
Country 1990 1991 1992
Bulgaria 70 250 220

Czechoslovakia 300 690 1,500
Hungary 420 1,900 2,300
Poland 270 400 680
Rumania 112 156 331
USSR" 480/953 240/n.a.
Russia" n.a. 120 200
Yugoslavia b 1,381 235
Slovenia 333 290 300
(a) As in Table 8.1.

(b) As in Table 8.1; but 1991 data for Yugoslavia represent first four
months of the year.
Sources: as for Table 8.1.
increase in flows to the Central European countries, and there was

optimism about the pace of FDI going to Poland. '2 The negative
impact of the break-up of Czechoslovakia at the end of 1992 is,
however, still to be fully revealed.
Why these disappointing results? Certainly, inadequacies and other
negative features of the regulatory framework are a factor (including
regulations and procedures governing not only the initial investment
but also the resulting operations, especially taxation of revenues and
transfer of funds abroad) but by no means the principal one. The
institutional legacies of the past, such as the lack of developed input
markets and infrastructural deficiencies in areas such as banking and
communications have also been important deterrents, as have the
severe economic dislocations discussed earlier. But systemic flux and
economic chaos also provide opportunities to alert investors. Surveys
confirm that investors have been most concerned about the high
degree of political instability, policy uncertainty, and the consequent
risk that they face in most countries of the region. I.'
The uncertainty and risk are augmented by the evident absence of
a broadly-based public opinion in the host countries in favor of FD I.
On the contrary, important segments of the populations in the East-
ern countries look upon foreign investment with a combination of
fear, resentment, and suspicion. These attitudes provide popular

support for those who are philosophically opposed to FDI or whose
interests are directly threatened by it.
These deterrent factors are well illustrated by the Russian oil in-
dustry, a case that is all the more important because it is so widely
regarded as offering enormous investment potential. Still possessing
enormous potential and long virtually closed to foreign business
(except in terms of arm's-length sales of some equipment and tech-
nology), it presents to Western oil companies perhaps a last major
opportunity to extend productive capacity. Moreover, the sharp fall-
off in output since 1988 has created on the Russian side a strong
need for inputs of Western capital, technology and know-how. De-
spite this potential and despite high expected returns from oilfield
operations, actual FDI in Russian oil has been negligible and most
has been in service contracts for the work over of existing fields in
partnership with Russian enterprises. This seems likely to remain the
case, so long as political instability continues to generate great policy
uncertainty about the future organization and development of the
industry and hence high risks to investors.l~
Western responses to such uncertainties have been to postpone
investment projects, to withdraw from negotiations, or to leave ne-
gotiated commitments unrealized. Those investors who have pro-
ceeded have typically sought to reduce their exposure by minimizing
their 'upfront' capital investment and by making their contributions
in kind rather than in cash. or indirectly in the form of loans.
Governments in turn have sought to offset the risks that investors
face by negotiating bilateral investment treaties and by putting into
place official insurance programs (especially against political risk),
but to little effect.
The case of Hungary is the exception that also helps to prove the
point. Hungary, one of the smallest of the regional economies and
possessing relatively limited natural endowments of minerals and
metals, has attracted by far the largest amount of FDI. This is gen··
erally explained in terms of the stable business environment that
Hungary offers in comparison with its neighbors. Its ethnic homo-
geneity and its progressive history of reform in the communist period
have provided Hungary with greater internal cohesion. a more de-
veloped. market-oriented institutional base and therefore a more
investor-friendly business environment than is found in neighboring
countries.
CONCLUSION
The transition in Central and Eastern Europe has created a unique

role for FDI. The opportunities that have thus opened up have at-
tracted strong investor attention and interest. At least in its initial
phase, however, the instability that has accompanied the transition
has motivated many investors to take a cautious approach and even
to abandon or postpone investment projects.
There is therefore an incongruity between the expectations of
transition managers of the role that FDI would play in restoring
growth and restructuring their economies, and the perceptions of
many potential investors of the associated risks and returns. Invest-
ment flows to the area, in the crucial first years of the transition, have
as a result generally not been of the magnitudes required for FDI
to ease domestic resource and institutional constraints sufficiently to
have an appreciable impact on progress toward a market-based
economy. In most cases, the FDI stock is a negligible share of gross
domestic product (GDP). Its sectoral distribution has been uneven,
however, and FDI has been concentrated in a few industries where
its impact is therefore far greater than the average.
Only in Hungary, and perhaps also in the Czech Republic, had
FDI by end-1992 attained magnitudes where it might be said to be
playing a significant role in economic recovery and transformation.
In Hungary, the ratio of FDI stock to GDP in 1992 is estimated to
have attained 8.6 per cent.ISIt is not at all clear, however, that future
flows to Hungary will continue at past levels. To date, foreign acqui-
sitions of major shares in leading Hungarian enterprises have ac-
counted for the bulk of FDI inflows. That phase of privatization now
appears to be ending in Hungary, and with it Hungary's favorable
treatment by foreign investors. I6 Greenfield investments will now have
to take up the slack, and few such investments on a major scale have
been made in Hungary or elsewhere in the region.
In the communist period, FDI was fundamentally limited by the
institutional features of the command economy, even when official
policies favorable to it had been adopted. In the post-communist
period, the legacies of that system, combined with the political, eco-
nomic, and social problems associated with its replacement, continue
to create conditions that hold the actual level of FDI well below the
desired level. It therefore seems increasingly unlikely that FDI will
play the important role in the Eastern transition that was originally
envisaged for it.
If this analysis is correct, the deterrents to FDI are embedded in

the transition itself, or more specifically in the instability that it has
bred. The depth of the problem means that it is not readily amenable
to solution through shifts in a host country's foreign investment poli-
cies. There is little that East European governments can do to break
the impasse but to move as rapidly forward as possible along the
reform path, in the hope that it will ultimately produce a more
favorable investment environment. Meanwhile, both East and West
should reassess approaches that rely unrealistically heavily on FDI,
and should seek to develop alternative mechanisms capable of fulfill-
ing the functions that were desired of it.
Notes
1. This chapter is based on research supported by a grant from the Ontario
Council of International Business. The results were first presented at
the Thirty-fourth Annual Convention of the International Studies
Association, in Acapulco, Mexico, March 1993. An earlier version was
published in the journal Transnational Corporations, Vol. 2. No.3
(December 1993), pp. 97-120. under the title 'The Role of Foreign
Direct Investment in the Transition from Planned to Market Economies'.
2. Outward investment did play a limited role in the development of
their external economic relations outside the COMECON (Council
for Mutual Economic Assistance) system. Eastern enterprises had long
been allowed to undertake direct investments abroad. and from the
mid-1960s sought to increase the pace and scope of their transnational
activities (see McMillan. 1987).
3. Yugoslavia was the first, in 1967; then Rumania and Hungary. in 1972.
Others gradually emulated them; and toward the end of the 1980s,
there was what proved to be a last-minute rush to follow suit by the
more conservative countries. most notably the USSR. By 1990. all of
the Eastern countries had taken the initial legislative steps to allow
FDI in their domestic economies. The German Democratic Republic
adopted enabling legislation only at the very beginning of 1990. just
months before its demise as an independent state. Albania was the
last. in July 1990. For a full chronology, see United NationsffCMD
(1992. p. 3, Table 1).
4. A few figures (United NationstrCMD, 1992) will illustrate the limited
extent of FDI, even toward the end of the period of communist rule.
By the mid-1980s. the cumulative total of FDI in the Eastern econo-
mies combined was estimated to have reached scarcely US$I billion.
Yugoslavia, with the longest experience and the most open economy,
accounted for more than three quarters of this amount. In the second
half of the 1980s, the increased pace of reform in the area economies.
most notably perestroika in the USSR, greatly increased investor in-

terest and opportunities in the region. By the end of the decade, the
FDI stock in the Eastern economies had grown by more than 300 per
cent to an estimated US$3.8 billion, for which Yugoslavia and the
USSR together accounted for over four fifths. Almost all of this in-
vestment was in the form of joint ventures; wholly foreign-owned
companies were still quite rare.
S. Full-scale stabilization programs of the 'shock therapy' sort were intro-
duced at the beginning of 1990 in two East European countries sliding
into hyperinflation, Yugoslavia and Poland. In the case of the former,
the program was not carried through, because of the rapidly growing
constitutional crisis which led to the disintegration of the federal state.
In the case of the latter, it provoked a prolonged period of political
instability, marked by a succession of short-lived governments.
6. The example of China, and the demonstrable part FDI played in the
success of its reforms (especially in the economies of its coastal re-
gions), have been especially important to this perception.
7. The recovery in Poland began in 1992 and GDP (gross domestic prod-
uct) growth of 4.S per cent was estimated for 1993. Hungary's GDP
was expected to grow by about 4 per cent in 1993. The Czech Republic
experienced positive growth in the second half of 1992, but its further
recovery has been delayed by the negative impact in 1993 of the loss of
the Slovak market. For details, see PlanEcon Reports, IX, 7-12 (1993).
8. Investment funds have been created in Europe, North America, and
Japan to take advantage of these new possibilities. These include the
First Hungary Fund, the Austro-Hungary Fund, the Hungarian In-
vestment Company, First Europe Capital Fund, and the Central
European Development Corporation, On the whole, such funds have
been understandably conservative in their approach, and have pro-
ceeded cautiously in acquiring Eastern assets.
9. Foreign direct investment may, however, playa part in the distribu-
tion scheme itself. For example, an Austrian bank, Creditanstalt, has
set up one of the larger investment funds in the Czech Republic.
10. The data problems are scarcely surprising, given the recency of the
phenomenon for the economies concerned and the absence of well-
established recording and publication procedures. Moreover, the pol-
itical and economic chaos in the years concerned has made reliable
statistical reporting generally difficult.
11. These values are for actual investments (versus commitments). To
render the figures for China more comparable with those for the
Central/East European and former Soviet economies, the value of
foreign investments in contractual joint ventures in China has been
subtracted. Preliminary data indicate a tremendous surge of FD I in
China in 1992, with an estimated inflow for the year of nearly US$5
billion. These data are from Yang (1993).
12. The US$2 billion Fiat investment in Poland will be a major factor
here, although the treatment of roughly US$1 billion of this, repre-
senting Fiat's assumption of the bad debts of the Polish enterprise in
which it acquired a 90 per cent stake, will be problematic.
FDI ill Eastern Europe 149
13. Survey data indicate the importance of these factors. For investor
attitudes toward the area's economies in 1992, see Business Interna-
tional (1992). See A. B. Sherr et al. (1991) and McMillan (1991) for
surveys of investor approaches to the Soviet economy. For a general
discussion of the obstacles to FDI in the USSR. see IMF et al. (1991),
especially Volume 2, pp. 75ff and, for Central and Eastern Europe,
Artisien et al. (1993).
14. Optimistic articles continue to appear in the business press. These are
based on investor interest, not action. They sum up all of the con-
templated investment projects to boost foreign-investment figures.
See, for example, 'Investors see a new star rising slowly in the East',
Financial Times, 5 January 1993, based on a report in The East Euro-
pean Investmeltt Monthly (New York), or 'Oil boom in CIS may attract
$85 bIn', Financial Times,S May 1993, quoting East-West Investment
(Geneva).
15. Calculation based on PlanEcon GDP projection for 1992.
16. This was affirmed by Lajos Csepi, head of the Hungarian State Property
Agency, who was quoted as adding that many of the best companies
have now been privatized. See 'Privatisation before restructuring says
Baok', Financial Times, 26 April 1993, and 'Hongrie: privatisation
populaire', Les Echos, 24 April 1993.
9 Foreign Direct
Investment in Ghana
and Cote d'Ivoire 1
Susan McMillan
INTRODUCTION
This chapter seeks to understand the determinants of foreign direct

investment (FDI) flows to developing countries, with specific refer-
ence to Ghana and Cote d'Ivoire. The beginning assumption is that
in the present global political and economic climate, developing
countries wish to attract FDI. It is therefore important to policy-
makers in developing countries to identify the demand-side deter-
minants of FDI over which they may have some control (Tsai, 1991,
p.282).
The recent trend of FDI flows to developing countries in general
has been upward, but flows have been quite limited and grew less
rapidly than flows to developed market economies (United Nations,
1993, p. 162). Moreover, the share of FDI flows going to African
countries was only 2.4 per cent in 1980-84, and that share decreased
to 1.9 per cent in 1988-89 (United Nations Centre on Transnational
Corporations, or UNCTC, 1991, p. 11). Clearly, if a developing coun-
try in Africa wishes to obtain more FDI, it will need to buck this
declining trend (Wubneh, 1992, p. 55).
Cote d'Ivoire and Ghana are chosen as case studies for several
reasons. They are similar in geographic location, climate, and depend-
ence on agricultural products. Yet they are quite different in terms
of strategies for development, and until recently, Cote d'Ivoire has
experienced relative political stability while Ghana has experienced
political instability. Comparing these two countries provides an oppor-
tunity to investigate whether these are key differences in attracting
FDI.
Toward that end, the first section of the chapter reviews the litera-
ture concerning the determinants of FDI in less developed countries,
and develops a rank order of importance for those factors. The second
150
FD/ in Ghana and Cote d'/voire 151
section compares Ghana and C6te d'Ivoire in terms of the factors

expected to be most important. Third, actual trends in FDI flows are
examined to determine whether they support the expectations. Finally,
the conclusions offer some speculations regarding whether policy-
makers can control the FDI determinants.
DETERMINANTS OF FOREIGN DIRECT INVESTMENT
Understanding FDI flows requires an investigation into the 'supply-

side' determinants, as well as the 'demand-side' or 'pull' factors in-
fluencing FDI flows. In general, global economic downturns have
been followed by a decline in the real level of FDI flows to develop-
ing countries. So some understanding of the role of fund suppliers in
international markets is essential (Goldsbrough, 1986, pp. 178-9).
Perhaps one of the most well-known theoretical explanations of
foreign investment in manufacturing is Vernon's (1966) product-cycle
theory. The first stage in the cycle is the innovation stage in which
firms need effective communication with customers in order to iron
out problems. The 'maturing product' stage is attained when a cer-
tain degree of standardization takes place. Demand for the product
expands, concerns with costs of production become more important,
and overseas trade increases (Vernon, 1966, pp. 196-7). Finally, the
'standardized product' stage is one in which production is most likely
to be moved to another advanced country to service the local market
(Vernon, 1966, p. 198). Production is not likely to move quickly to
the poorer developing countries since typically they lack the qualities
required for the earlier stages of a product life cycle. As developing
countries acquire infrastructure and better-trained labor forces, they
are more likely to attract investment for standardized production
(p.205).
Caves (1982, p. 256) provides a complementary explanation for
FDI that is termed the 'transactional approach'. Direct investment
abroad is understood as the result of efforts by firms to reduce the
transaction costs of production. FDI in the manufacturing sectors is
likely to be attracted to those host countries with large local markets
and higher levels of economic development because the transaction
costs are likely to be lower (p. 256). Export-oriented investment is
explained as an attempt by firms to protect intangible assets by hori-
zontal integration.
Dunning (1981, pp. 30-1) presents an 'eclectic theory of interna-

tional production' in which FDI is determined by ownership-specific
advantages, incentives for firms to internalize the specific advantages.
and the location-specific advantages that present incentives for firms
to invest across national borders. Thus. countries vary in their pro-
pensity to be net investment importers or exporters according to the
differences in their level and structure of resource endowments, size
and character of markets, and government economic policies (Dun-
ning, 1981, p. 60). Dunning also shows that FDI flows are linked to
the level of development in a given country, which is consistent with
Vernon's product-cycle theory.
The theoretical literature suggests the relative importance of vari-
ous factors that are important for attracting FDI, and this is a key
bit of information for policy-makers. Perhaps the strongest and most
obvious pull factor for FDI is an endowment of mineral resources.
Caves (1982, p. 253) maintains that the motivation for FDI in the
extractive sector is so clear that it needs no theoretical explanation.
Empirically, Lim (1983) finds mineral endowments to be a strongly
positive determinant of FDI in a statistical analysis of 27 countries.
Market conditions follow mineral endowments in importance.
Market size, strength, and potential are expected to be important
pull factors for FDI because firms perceive a domestic market for
their products, and transaction costs are thought to be lower in
countries with higher levels of economic development (Caves, 1982;
Dunning, 1981; Reuber et al., 1973; Vernon, 1966). Separating the
effects of market size, strength, and potential is difficult empirically
since the same aggregate economic indicators are often used for these
distinct concepts.
In addition to mineral resources, Lim (1983) includes incentive
packages for FDI, the level of economic development (average gross
domestic product, or GDP, per capita, 1960-65), and the rate of eco-
nomic growth as predictors of FDI. He finds that natural resources
and strong past economic performance were the most important
determinants of FDI flows (Lim, 1983, p. 207). Torrisi (1985) in-
vestigates FDI flows into Colombia, and concludes that market size
(GDP) is a strong and positive determinant of FDI during 1958-80.
Market growth, measured as the growth rate of GDP, was positive
but not statistically significant.
While market factors are very important pull factors for FDI, the
relative importance of political stability and development policies is
less clear. Political instability is generally expected to decrease FDI
because it increases investment uncertainty. However, the empirical
evidence does not unequivocally support this expectation (Agarwal,

1980, p. 761). For instance, Green (1972) finds no significant relation-
ship between US foreign investment and a host country's political
instability.
A discriminant analysis by Root and Ahmed (1979) examines FDI
in the non-extractive sectors for 70 developing countries during 1966-
70. They find GDP per capita, GDP growth rate, economic integration,
and a measure of commerce, transport and communication to be the
four significant economic factors. The number of regular constitutional
changes in government leadership was the one significant and posi-
tive political factor.
Levis (1979) concludes that quality of life and economic conditions
are the primary determinants of foreign-investment flows. Political
instability, especially lagged one time period, is negatively related to
FDI flows to developing countries. Similar evidence is found in at
least one study on African countries (Wubneh, 1992).
Schneider and Frey (1985) develop a politico-economic model which
includes six economic determinants of FDI, four political factors, and
one factor to represent both political and economic interests. In a
sample of 54 developing countries, they find that the most important
economic variables are the level of economic development (real GNP
per capita) and balance-of-payments deficit. The most important
political determinants are the amount of bilateral aid from Western
donors, and the amount of multilateral aid. Political instability, as
measured by political strikes and riots, significantly reduced the in-
flow of FDI, but the presence of a left-wing ideology was not a
significant factor.
Survey evidence provides further support for the relevance of strong
market factors and low political instability for attracting FDI, but
does not help sort out which factors are more important. One early
survey of executives indicated that political instability and market
potential were the most important factors determining foreign-
investment decisions (Basai, 1963). More recently, the Group of Thirty
(cited in Wubneh, 1992, p. 62) found that the main influences on the
decision to invest, in both the 1970 and 1983 surveys, were access to
the host country's market, and access to markets in the host coun-
try's region. With respect to Africa, this study found that deterioration
of the economic and political climate, and the lack of stability were
the two major reasons investors found that continent unattractive for
investment.
Most of the studies reviewed here indicate that political instability
is a negative factor for FDI inflows, but it does not necessarily follow
that political stability is a strong pull factor. It may be that political

stability adds to a general feeling of investment security, and so the
specific 'pull' is not as strong as that created by market factors.
A host country's development policies, including its willingness to
develop external economic ties, seem to be theoretically and em-
pirically less important than market factors and political stability.
Countries pursuing FDI and other external ties are expected to fit
more easily into global production and trade patterns, and would
thus be more attractive to international investors (e.g. Vernon, 1966).
Empirical support for this position comes from Root and Ahmed
(1979) who, as noted above, found commercial ties to have a strong
positive influence on FD I inflows. Balasubramanyam (1984) also
presents limited evidence that countries following an export-oriented
development strategy receive more FDI than countries following an
import-substitution strategy.
Fiscal incentive packages undertaken to attract foreign investors
have been the most widely studied type of host-country policy. The
evidence suggests that fiscal incentives do not have a positive effect
on FDI inflows (Balasubramanyam, 1984; Shah and Toye, 1978, p.
281). Lim (1983) finds a negative significant relationship between
incentives and FDI flows. He agrees with Shah and Toye (1978) that
the negative relationship is the result of an 'illusory compensating
effect' that comes into play when host countries try to use incentives
to make up for the lack of resources and economic development.
Based on this review, a rank order of importance for the deter-
minants of FDI begins with mineral-resource endowments in the top
position, with market factors following next. For countries without a
strong natural-resource base, strong market factors are probably the
most important pull factors. Political stability is expected to be the
third most important pull factor. A host country's development
policies, including its willingness to open the economy to FDI, are
expected to be less important than market factors and political stab-
ility. The following section compares Ghana and Cote d'Ivoire with
respect to their relative strengths on these determinants of FD I.
DETERMINANTS OF FDI FLOWS TO GHANA AND

COTE D'IVOIRE
Ghana and Cote d'Ivoire are similar in many respects, and these
similarities enable us to better isolate those critical factors that
FD! in Ghana and Cote d'!voire 155
influence the differences in their FDI inflows. Both countries are

located in West Africa, and both are very poor by world standards.
Both have poorly-developed human resources relative to Asia's newly-
industrializing countries (NICs). Both are also heavily reliant on agri-
cultural exports such as cocoa and coffee. Although each country has
a colonial history, Ghana and C6te d'Ivoire maintained different types
of relationships with their former colonial rulers, the British and
French respectively.
In addition, the two countries have been very different in terms of
leadership in the post-independence period, the level of economic
development, patterns of economic growth, and development policies
pursued. Ghana and C6te d'Ivoire have exhibited very different re-
gime attitudes toward FOI, and toward economic ties with the already
developed countries. Mass and elite political stability have been quite
different in the two countries through time, and economic policy
consistency has varied between them. In short, the differences allow
us to contrast each country's relative advantages in attracting FDI.
Neither country is heavily endowed with mineral resources, al-
though Ghana has a slight edge because of its access to gold and
other minerals (Pellow and Chazan, 1986, p. 13; Rimmer, 1992, p.
14). C6te d'Ivoire had very little mining activity at independence in
1960, and the only real resource was arable land (Rapley, 1993, p. 6).
Both countries now produce quite small amounts of oil (Rimmer,
1984, p. 7).
Evaluating the strengths of the two countries in terms of market
conditions is more complex because there are more factors to con-
sider, and because relative advantages have shifted through time.
Market size, measured as population size, seems to give an initial
edge to Ghana, and the Ghanaian population was better educated at
independence than that of most other black African countries (Killick,
1978, pp. 3-4). In C6te d'Ivoire, the population was more sparse, and
the government encouraged migrant workers from other African
countries in order to keep labor costs down (Gbetibouo and Delgado,
1984, p. 129). C6te d'Ivoire was also more heavily reliant on Euro-
pean (French) experts (den Tuinder, 1978, p. 6).
In the early 1960s, Ghana had a stronger position relative to C6te
d'Ivoire with respect to economic growth and development. Prior to
independence in 1957, economic developments in Ghana seemed very
promising. It was pursuing FDI for industrialization, the standard of
living was presumed to be increasing, as there was a sharp increase
in imports of consumer goods, and school enrollments doubled at
every level between 1950 and 1958 (Rimmer, 1992, pp. 61-6). At in-
dependence, the average income was higher in Ghana than in most
other black African countries (Killick, 1978, pp. 3-4), presenting an-
other indicator of strong market potential.
The initial advantages for Ghana did not translate into sustained
economic success. Ghana adopted a highly centralized economic
system, and is often taken as a model of the 'disastrous consequences'
of that system (Fieldhouse, 1986, p. 139). Serious economic difficulties
began for Ghana in 1961 when imports and government expenditures
exceeded export earnings (Pellow and Chazan, 1986, p. 44). A de-
cline in world cocoa prices between 1960 and 1966, exchange-rate
policies that produced disincentives for export, declining production
in government-owned plants and farms, and massive expansion of
the public sector during the 1960s all combined to create a serious
economic downturn (Fieldhouse, 1986, pp. 139-40; Jeffries, 1989, p.
76). The fiscal policies of the 1970s also contributed to rapid inflation,
an imbalance in external accounts, a rise in debt to cover budget
deficits, and increases in government expenditures (Rothchild and
Gyimah-Boadi, 1986, p. 263).
The growth rate of agriculture was only 1.6 per cent for 1965-80,
and it was 1.4 per cent for industry (World Bank, 1993). The in-
dustrialization which did occur produced few linkages to the other
sectors of the economy, and made little contribution to employment
(Fieldhouse, 1986, p. 143). Foreign and international banks began
refusing Ghana credit in 1979, and it was unable to raise new capital
to sustain development (Fieldhouse, 1986, p. 149).
Per capita GDP fell by about 3.2 per cent during 1970-81, gold and
mineral production was down by 47 per cent and 32 per cent respec-
tively, and cocoa production had also dropped relative to the 1968-
69 harvest (Kraus, 1991, p. 121). By the time Rawlings and his
Provisional National Defense Council (PNDC) took power at the
end of 1981, economic conditions had clearly fallen far short of the
expectations at independence. The Rawlings regime made arrange-
ments with the International Monetary Fund (IMF) and the World
Bank for a stabilization program, and the results had been fairly
strong in aggregate terms.
The longest period of sustained growth in Ghana occurred from
1984 to 1989, with average annual GDP growth at 6 per cent, although
output in cocoa, timber, and mining and industry was still low com-
pared with 1970 levels (Kraus, 1991, p. 128). Although aggregate
growth rates have been improving, socioeconomic conditions have
not shown much improvement (Kraus, 1992, p. 86). Real urban wages
in 1987 were lower than 1970 levels, while healthcare user fees re-
duced productivity and increased disease (Kraus, 1991, pp. 143-6).
Infrastructure and productive capacities are being rehabilitated, but
the progress is slow (Kraus, 1992, p. 86).
In stark contrast to Ghana's economic decline, Cote d'Ivoire was
the African economic success story during the 1960s and 1970s, but
that success gave way to economic crisis in the 1980s. The market for
Cote d'Ivoire was not as highly developed as it was in Ghana at
independence. The economic growth rate in Cote d'Ivoire for the
decade prior to independence in 1960 was virtually zero (Rimmer,
1984, p. 55).
Despite this beginning, the average annual economic growth rate
was 7.5 per cent during the first two decades after independence, and
the peasant-based export-oriented agricultural sector led the aggre-
gate growth (Michael and Noel, 1984, p. 78). The Ivorian government
supported the agricultural sector through public investment in in-
frastructure, and by maintaining high and stable producer prices (den
Tuinder, 1978, p. 5). During the 1970s, Cote d'Ivoire experienced a
boom in cocoa profits which was not experienced by Ghana, as Ghana
experienced declines in production during the 1970s (Gbetibouo and
Delgado, 1984, p. 121).
Efforts to diversify the Ivorian economy had some success. The
growth rate for industry was 10.4 per cent during 1965-80 (World
Bank, various years). The share in GOP of the three main exports
dropped from 91 per cent in the 1950s to 78 per cent in the 1960s, as
export crops were expanded to bananas, pineapple, coconut, and
palm oil (den Tuinder, 1978, p. 17). Foreign investment dominated
industry, but Ivorian entrepreneurs were able to build up from their
base in small businesses and began investing in the larger companies
(Rapley, 1993, p. 86).
Despite some economic successes, rising levels of foreign debt began
to produce serious constraints in the 1980s. External debt had been
relatively low in the 1960s because of the reliance on direct invest-
ment rather than loans (Fieldhouse, 1986, p. 199). Insufficient do-
mestic savings, heavy government spending on infrastructure and
parastatal enterprises, and limited amounts of new FDI led to ac-
celerated foreign borrowing in the 1970s (Mytelka, 1984, p. 158). In
1978, a sharp collapse of coffee and cocoa prices coincided with a rise
in imports and increasing interest rates, and the IMF was called in
for assistance in 1980 (Faure, 1989, pp. 59-60).
Cote d'Ivoire began an economic stabilization program in 1981,

but the fiscal targets were not met by the end of 1982 (Michael and
Noel, 1984, p. 86). Yet, when cocoa prices fell in the late 1980s, the
decision was made to maintain the producer price for this crop at
1985-86 levels. To cover the losses, the Stabilization Fund - the
parastatal organization responsible for producer prices - ran up new
debts, and in October 1989 new World Bank and French loans were
made to prop up the Fund (Crook, 1990, p. 661; Kraus, 1992, p. 86).
Thus, the 'miracle' country began the 1990s in continuing economic
crisis, while at the same time Ghana was beginning to emerge from
its long period of economic decline.
Political stability was much higher in Cote d'Ivoire than in Ghana
for much of the post-independence period. The elite in Ghana has
been highly unstable, at least since the first military coup in 1966
(Pellow and Chazan, 1986, p. 5). Four coups d'etat, plus one internal
putsch, put the military in control for much of the post-independence
period, and the three elected governments were all overthrown by
coups (Pellow and Chazan, 1986, pp. 38-9). In addition to the instab-
ility shown among the leaders, economic declines were accompanied
by general social unrest and civilian disorder (Kraus, 1971, p. 42).
Ghana has been plagued by political strikes even though most labor
action was outlawed in 1957 (Rathbone, 1978, p. 24). Coercion and
repression were used to suppress strikes in 1981-90 (Kraus, 1991, p.
150). Even so, in the mid-1980s the urban middle class, students and
trade unions engaged in a series of strikes to protest the Rawlings
regime's policies (Chazan, 1992, p. 132).
Rawlings managed to defeat at least six coup attempts, but from
mid-1990 on, public opposition to the PNDC increased (Kraus, 1991,
p. 150). A presidential election was finally held in November of 1992,
and Rawlings won with approximately 58 per cent of the vote (Joseph,
1993, p. 45). Violence continued, and led to the imposition of a curfew
for a few days following the election (Joseph, I\)93, p. 45).
In contrast to the elite instability experienced in Ghana, Houphouet-
Boigny was the only head of state for Cote d'Ivoire from independ-
ence until his death in early December 1993. Moreover, Cote d'Ivoire
experienced fewer protests, strikes, and riots for much of the post-
independence period (Taylor and Jodice, 1983). It did, however,
experience some political crises. One such episode occurred between
1962 and 1964 (Zolberg, 1971, pp. 15-20). Reports of an attempted
coup exacerbated conflicts between the first and second political
generations, but the regime was able to iron out the sources of conflict
(Zolberg, 1971, p. 16).
FDI in Ghana and Cote d'Ivoire 159
In 1969, demonstrations by the unemployed, rent strikes, tax boy-

cotts, and student unrest led Houphouet-Boigny to initiate a process
of 'dialogue' with different segments of society to come up with a new
economic plan for the 1970s (Mytelka, 1984, p. 156). A supposed coup
attempt in June of 1973 was followed by the integration of military
officers in the Ivorian elite (Zartman and Delgado, 1984, p. 4).
Finally, in mid-1990 relations between the Ivorian government, the
middle class, and the public-sector workers collapsed as middle-class
confidence was destroyed by the new structural adjustment program
demanded by the World Bank and the IMF (Crook, 1990, p. 666).
Trade unions began a series of protest strikes in public utilities, which
prompted student and university riots, and strikes by professional
associations (Crook, 1990, pp. 666-7).
Political opposition to the regime surfaced in 1990 over the way in
which the spending cuts had been handled and, following more street
riots, the regime legalized opposition parties in May (Crook, 1990, p.
668). Relatively competitive presidential elections were held in Octo-
ber 1990, and President Houphouet-Boigny maintained his position
(Faure, 1993). The president's reluctance to address questions of
succession in the event of his death added to the political uncertainty
introduced with the elections, and that uncertainty remains following
Houphouet-Boigny's death.
In general, policies toward FDI in Cote d'Ivoire have been consist-
ent and stable in the post-independence period. During the colonial
period, French policies favored French capital over indigenous capital.
A liberal FDI code was passed even before independence in 1959,
with incentives to foreign investors which included guaranteed trans-
ferability of profits and capital, numerous tax concessions, and guaran-
tees against nationalization in industrial investments (Fieldhouse, 1986,
pp. 190-1; Mytelka, 1984, p. 153).
Cote d'Ivoire also exhibits a willingness to form other types of
external ties. The country joined in bilateral trade agreements with
the French in 1961, and is also a member of the Monetary Union of
West Africa (UMOA). The UMOA centralizes foreign currency re-
serves, issues a single currency (CFA franc) tied to the French franc,
has a common interest structure, and allows free trade within the
Union (Michael and Noel, 1984, p. 85). These ties provide a certain
amount of economic stability to Cote d'Ivoire that is not present in
Ghana.
The policies toward FDI and their implementation have been far
less consistent in Ghana. In the immediate post-independence period,
Nkrumah encouraged FDJ while at the same time maintaining strict
exchange controls in order to prevent 'crippling' ties to foreign

countries (Killick, 1978, pp. 37-40). He also supported 'complete
ownership of the economy by the state', so foreign investors were not
particularly encouraged.
From 1966 to 1972, the rhetoric of the National Liberation Council
(NLC) and then the Busia regime sounded more accommodating
toward FDI, but the system of controls remained in place (Killick,
1978, pp. 300-2). When the National Redemption Council (NRC)
took over in 1972, it announced intentions to reactivate state enter-
prises and take control of foreign-owned industries (Killick, 1978, p.
317). Despite the controls on exchange and the anti-FDI rhetoric,
between 1962 and 1978 foreign capital increased its share in produc-
tion, although foreign ownership was diluted by obligatory or tactical
partnerships with the Ghanaian state and individuals (Fieldhouse.
1986, p. 140).
When the Provisional National Defense Council (PNDC) took
power in December 1981, it professed a radical program based on
dependency theory (Chazan, 1991, p. 25). Some steps were taken
against foreign firms but the actions were not as drastic as the rhetoric
implied (Rothchild and Gyimah-Boadi, 1986, pp. 269-70). The PNDC
government forced renegotiation of contracts with several foreign
companies, which reacted by announcing cuts in their operations
(Ahiakpor, 1985, p. 548).
Based on this brief comparison, it seems reasonable to expect higher
FDI flows to Ghana in the immediate post-independence period,
because of its initially stronger market factors. Once Cote d'lvoire
established a record of economic growth and Ghana began its eco-
nomic decline, we should expect a shift in FDI inflows. We should
also expect political instability to be followed by FDI outflows, al-
though the economic context may be critical. Political stability should
attract FDI to Cote d'Ivoire. Finally, if policies toward FDI are
important, we should expect to see the policy differences reflected in
different patterns of FDI flows to these two countries.
FDI FLOWS TO GHANA AND C6TE D'IVOIRE
The flows of FDI to Ghana and Cote d'Ivoire have been very low
relative to developing countries in Latin America or Southeast Asia
(Organization for Economic Cooperation and Development, or
OECD, 1990). Even so, both countries have experienced positive
FDI in Ghana and Cote d'lvoire 161
100
.lV\
80
c
~ tlO
~
til ! \
+..-.......
j
::J
<A 40 1
:/:
~ f
0
ti: 20
i5
u..
;:;
Z 0 I
-20 II i I f I i I
1960 1965 1970 1975 1980 1985 1990

Years
- - Ghana ...... COle D'ivoire
Figure 9.1 Net FDI Flows, Ghana and Cote d'Ivoire
net flows of FDI for much of the period under consideration. Figure
9.1 presents the annual net flows of FDI to Ghana and Cote d'Ivoire.
The graph includes data on net FDI inflows for Ghana from 1960
through 1990, while data prior to 1963 are not available for Cote
d'Ivoire and are indicated with zero values on the graph. The data
presented in Figure 9.1 are from IMF and World Bank sources.
The first point to make with respect to Figure 9.1 is that the
fluctuation of FDI flows to both countries does exhibit slight signs
that these flows are related to the global economic situation. The
level of flows to both countries decreases either during or immedi-
ately following global economic downturns in 1970-71. 1974-75, and
1980-82. This limited evidence of a relationship between global supply
and the allocations to individual countries is certainly not surprising.
given the theoretical explanations for FDI. Ghana and Cote d'Ivoire,
being small and marginal for the global economy, should both be
adversely affected by global economic downturns.
The second point is that the levels of FDI flows to these two
countries support the broad expectations about which country should
receive higher FDI during specific time periods. The initial mineral
and market advantages of Ghana should draw in more FDI than
Cote d'Ivoire. Although flows to Ghana were slightly negative in

1961 and dipped below flows to Cote d'Ivoire in 1963 and 1969, the
overall level of FDI was quite a bit higher in Ghana until approxim-
ately 1~71. Economic deterioration accompanied by political instab-
ility then contributed to a less certain investment environment.
Cote d'Ivoire's stronger economic growth during the 1960s and
1970s, accompanied by political stability, consistent policies toward
FDI, and a stronger affinity toward external ties, should make it
more competitive than Ghana in recruiting FDI. The data indicate
that FDI flows to Cote d'Ivoire were indeed much higher in general
from about 1972 through the rest of the period. Since Cote d'Ivoire
also maintained stronger external ties than Ghana, we can speculate
that those ties helped to keep its FDI level higher - even during the
debt crisis.
The relative unimportance of regime attitudes toward FDI also
receives support from the data presented in Figure 9.1. The long-
term trend in FDI was upward for both countries until 1975. During
this period the two countries were following very different policies
toward FDI. Specifically, Cote d'Ivoire was actively recruiting invest-
ment, while rhetoric and policies toward FDI in Ghana were not
always friendly. The similarity in long-term trend provides limited
support for the expectation that policies toward FDI are not as
important as the other factors. This conclusion fits well with evidence
from other studies (e.g., Shah and Toye, 1978).
The third point to make with respect to Figure 9.1 is that although
the global supply of FDI may be an important determinant, it is not
the only driving factor. The within-country variation of FDI inflows
through time indicates that factors other than supply are important.
Comparing the changes in trends with changes in the country's
demand-side determinants of FDI might provide clues about the
validity of the rank order developed earlier for those determinants.
The relative political stability in Cote d'Ivoire makes it a less com-
plicated case. The peaks in FDI flows to Cote d'Ivoire exhibit a long-
term upward trend until 1980, almost reaching the peak in 1987 before
dropping off again in 1988. This upward long-term trend was matched
by the strong economic growth during 1965-80, thus supporting the
latter's importance for FDI.
The evidence for a relationship between political instability and
FDI is mixed. FDI increased slightly following rumors of political
instability in 1962-64, and unrest in 1969. Rumors of a coup attempt
FDJ in Ghana and Cote d'Jvoire 163
in 1973 were followed by lower FDI inflows the next year, but this
downturn also coincided with a global economic downturn. The pol-
itical uncertainty surrounding the economic recovery policies and the
succession of President Houphouet-Boigny also has been followed
by a decline in FDI.
The variations in FDI flows to Cote d'Ivoire seem to indicate that
political instability is a more important negative factor when eco-
nomic determinants of FDI are weaker, for instance in the 1980s and
1990s. The role of political stability as a drawing factor is still unclear,
however. One possibility is that it acts as a cushion such that down-
turns in flows due to economic difficulties are not as dramatic when
they occur within the context of political stability.
Economic deterioration and political instability seem to go together
in Ghana. so it is difficult to sort out which has a stronger impact on
FDI. Relatively strong initial market conditions did seem to produce
an upward trend in FDI inflows from 1961 to 1975. The economic
situation began to disintegrate already in the early 1960s, but inves-
tors were apparently still willing to take risks in the country based on
its perceived market potential.
As in Cote d'lvoire. specific instances of political instability in
Ghana have not necessarily been followed by lower FDI inflows. The
1966 and 1978 military coups were followed by decreased FD I inflows,
but slightly higher inflows followed coups in 1972 and 1979. Changes
in regime attitude toward FDI generally came with the coups, thus
such changes do not seem to produce a distinct pattern either. It
should be noted, however, that by 1978 FDI flows to Ghana were
very low already, not even reaching $20 million per year.
Following the global economic downturn of 1974-75, FDI flows to
Ghana went down sharply, and never recovered to peak levels. By
1977 it appears that investors had lost all confidence that the successive
regimes could effectively manage economic difficulties. The 'cushion'
created by political stability seems to be lacking. Compared with the
trend in Cote d'Ivoire, FDI flows to Ghana did not go up quite as
steeply after 1966, and the declines were more dramatic.
FDI flows to Ghana finally began to increase again in 1989, but
this was at least six years after the government had taken an active
interest in attracting investors. The new inflows started only after
aggregate economic indicators began to show a history of improve-
ment. The market factors once again seem to overcome political
instability that accompanied the economic recovery program.
CONCLUSION
The comparison of Ghana and Cote d'Ivoire indicates that the

supply ~f FDI to small, poor developing countries is constrained by
global FDI supply, but countries do vary in their ability to attract
FDI within the constraints of the global supply. Aside from differing
resource endowments, the variation depends first on market factors.
Expectations for market potential, in terms of level of development
and aggregate economic growth, seemed to overcome a certain
amount of political instability in both Cote d'Ivoire and Ghana.
Political instability was more likely to be followed by decreased
FDI when the economic factors were already weak. The implication
is that economic pull factors for FDI are stronger than the negative
impact created by political instability. Political stability, while perhaps
not a strong pull factor by itself, certainly seems to contribute to a
more positive investment environment. Fiscal incentive strategies and
changes in regime attitudes toward FDI had little independent im-
pact on flows, but maintaining strong external ties may have boosted
FDI flows to Cote d'Ivoire.
Since fiscal incentives and regime attitudes toward FDI seem to
have little independent effect on FDI, we must question how much
control policy-makers have over the latter. Policy-makers have little
control over the presence of natural resources. Ghana's resources,
however, did provide the country with a drawing card for FDI if
economic policies make it profitable for foreign firms to undertake
exploration and development of the mining sector (Cable and
Mukherjee, 1986, p. 1(0). In this sense, overall economic-development
policies can playa critical role in attracting investors.
Market size as a pull factor for FDI is difficult to manipulate di-
rectly, but again, general economic policies can help to overcome
limitations. That is, by being willing to trade freely with their neigh-
bors, small countries can expand the size of the local market. Accept-
ing and strengthening trade ties with the developed world should
also provide opportunities to attract export-oriented investment.
Market growth and economic development obviously present the
greatest difficulties for policy-makers in developing countries. The
evidence from this study supports the conclusion that economic
development and strong economic growth are two of the most im-
portant demand-side determinants of FDI. Factors that determine
FDI inflows are likely to be the same factors that make countries
FDI in Ghana and Cote d'Ivoire 165
more or less credit-worthy in international capital markets (see Cable

and Mukherjee, 1986).
Here, the connection between the determinants of FDI inflows
and the consequences of prior inflows becomes vitally important.
Ability to capture the positive spin-offs of previous FDI is necessary
if policy-makers wish to continue receiving new inflows and even
increase their share relative to those of other developing countries.
C6te d'Ivoire was able to use FDI to help develop and diversify its
economy, and even though economic indicators have been sliding
down, FDI flows continue at a higher level than in Ghana.
Note
1. A previous version of this chapter was prepared for delivery at the annual
meeting of the International Studies Association, Acapulco, Mexico,
23-27 March 1993. I thank Tom Biersteker and Steve Chan for helpful
comments on earlier drafts, and Jonathan Erikson for research assistance.
10 Do MNCs Matter for
National Development?
Contrasting East Asia
and Latin America1
Steve Chan and Cal Clark
Multinational corporations (MNCs) playa pivotal role in the cross-

national flow of goods, capital, and technology (Gilpin, 1987, 1975;
Vernon, 1977, 1971, 1966). As such, they are a key part of the evolv-
ing international political economy characterized by rising global-
ization of production processes, interpenetration of national product
markets, interlocking holding of financial assets, and diffusion of man-
ufacturing technology. Foreign direct investment (FDI) by these firms
has recently gained further importance as many developing coun-
tries, beset by the debt crisis of the 1980s, have begun to seek this
investment as an alternative source of external finance. The turn
toward market economics by the former socialist countries and their
reinsertion into the capitalist world economy have also increased the
salience of FDI. This salience has moreover been accentuated by the
declining amount of foreign assistance provided by the United States
and Russia to many developing countries. Finally, because intrafirm
trade among the majority-owned subsid{aries of MNCs has consti-
tuted a major source of surplus or deficit in international trade, FDI
has become a new focus for analyzing the industrial competitiveness
and commercial rivalry among developed countries such as the United
States and Japan (Encarnation, 1992).
In this chapter we examine the strategic interactions between MNCs
and host governments, focusing especially on the vastly different
developmental outcomes that such interactions have produced in Latin
America and East Asia (which in turn contains rather sharp differ-
ences between the Northeast Asian and Southeast Asian capitalist
economies). While the capitalist Northeast Asian countries have
generally compiled an impressive record of rapid economic growth.
equitable distribution of income, and comparatively high physical
166
Do MNCs matter? 167
quality of life in the past three decades, the Latin American coun-
tries have fallen behind despite their considerable natural resources
and, for some such as Argentina, an earlier lead in human resources.
The lackluster performance of the Latin American countries gives
rise to the 'empty box' problem (Fajozylber, 1990a), so called be-
cause none of them has been able to achieve growth with equity. The
Southeast Asian countries (excluding Indochina) show considerable
divergence that puts them in varying intermediate positions between
the Northeast Asian and Latin American ideal types with regard to
historical background and recent national performance.
CORE THEORETICAL PROPOSITIONS
Four basic propositions underlie our argument. First, we subscribe to

the perspective of historical structuralism. That is, we believe that
the past influences, though hardly determines, the present in what
has been called 'path dependencies.' Moreover, existing domestic and
foreign patterns of interaction shape a country's policy agenda and
the available assets to achieve its fulfillment. These patterns can be
enabling in some respects, and disabling in other respects. We are,
however, quite skeptical of any attempt to overemphasize the role of
history or structure to the point of historical or structural determinism.
Therefore, we attach great analytic importance to historical contin-
gency (such as luck, accident, and fortuitous timing) and to effort
mobilization, policy choice, bureaucratic competence, work discipline,
and creative imagination. We contend that social structures, cultural
predilections, and political institutions are after all the creations of
people's volitions and actions. Accordingly, the pertinent national
assets for successful policy performance include not only tangible
resources such as mineral deposits, monetary reserve, and weapons
stock, but also intangible qualities such as public morale, elite co-
hesion, and national purpose (Bobrow and Chan, 1987, 1986). Our
basic argument is that these latter factors also influence policy capacity,
which in turn matters because it can change structure and reshape
environment.
Our second proposition argues that the environment facing indi-
vidual developing countries varies greatly in the threats and oppor-
tunities that it presents to them. Nature as well as history can certainly
play favorites in the sense that countries have different comparative
advantages. Thus, the assets and opportunities for upward status
mobility are unevenly distributed. However, these assets and oppor-

tunities are a necessary but insufficient condition for achieving such
mobility. People have to take advantage of them. Therefore, we need
to consider differential national capacity to operationalize their exist-
ing resources and to seize opportunities when they come knocking
on the door. Our attention is accordingly drawn to those historical
legacies and entrenched structures that can affect this capacity by
either constraining or promoting a nation's willingness and ability to
exploit and create opportunities. Note that we have just suggested
that opportunities are not merely a matter of nature or history playing
favorites; they are also a product of effective statecraft and mass
exertion.
Our third basic proposition thus argues that there is a strong, al-
beit imperfect, interactive relationship between policy effort and policy
outcome. This postulate in tum implies three arguments. First, because
the relationship between effort and outcome is imperfect, analytic
attention may be more usefully directed to the processes producing
outcomes rather than to outcomes qua outcomes. Second, because
different processes can produce similar outcomes, one is led to look
for and compare behavioral substitutability, functionally equivalent
policies, and alternative developmental paths. And, third, instead of
being driven by the nomothetic concern to search for universal truths
across time and space, we are persuaded to seek less extensive
generalizations (the so-called nice laws) that are applicable under
specific scope conditions and local contexts (Most and Starr, 1989).
Finally, we contend that it is more fruitful to concentrate on the
jointly necessary conditions for certain policy outcomes than to en-
gage in the more elusive search for sufficient conditions. For example,
with regard to the impact of MNCs on developmental outcomes, it
may be useful to inquire which other factors - when combined with
a large MNC presence - must exist in order for the predicted adverse
developmental consequences to take place or to be overcome. Of
particular concern here are the interactive effect of MNCs' opera-
tions with the host's socioeconomic institutions, and the necessity of
particular historical timing and sequence for producing certain de-
velopmental outcomes. To test the assertion of necessity, one is
naturally drawn to apparently deviant cases where 'the dog did not
bark' (such as the experience of Hong Kong). One is also attracted
to those seeming exceptions that actually prove the rule (such as the
Philippines which, despite its location in East Asia, conforms to the
Latin American pattern of development).
Do MNCs matter? 169
In sum, the current literature is largely concerned with the relative

importance of policy (stressed by the bargaining school) versus envir-
onment (stressed by the dependency school) in shaping alternative
developmental outcomes in different countries. Clearly, policy and
environment interact. It is also evident that whereas environment
constrains policy, it does not predetermine it. Therefore, the really
interesting question for theoretical construction and empirical in-
vestigation is why some countries have been able to engineer upward
mobility in the world system despite their environmental handicaps,
whereas others have been unable to exploit their seeming advantages
from a more benign environment. A comparison of the developmen-
tal histories of East Asia and Latin America suggests three sets of
discriminating factors: (1) initial conditions. (2) historical breaks, and
(3) coping capacity. The next three sections, then, consider how each
of these factors affects the relationship between MNC activities and
developmental outcomes.
Initial Conditions
By initial conditions we mean the early domestic structure of a

country's political economy and its niche in the international division
of labor. We also include mass political culture and elite ideological
predispositions. The Latin American countries are distinguished by
their hacienda oligarchy. Spanish culture, and an earlier and more
thorough absorption into the capitalist world system as exporters of
cash crops and minerals. In Northeast Asia, small-holder rice cultiva-
tion and Chinese Confucian influence tend to prevail, and Korea and
Taiwan were absorbed into the Japanese orbit only in the late 1800s
(Cumings, 1984). Plantation culture (rubber, sugar) and mining activ-
ities (tin, petroleum) were historically more prominent in South-
east Asia, where Dutch (Indonesia), British (Malaya), and French
(Vietnam) colonial administrators collaborated with a native aristo-
cracy and Chinese entrepreneurs. Among the Southeast Asian
countries. the Philippines is most similar to the Latin American ini-
tial conditions due to its heritage of Spanish colonialism and its
political economy dominated by latifundia, rural oligarchs, and large
agri-exports (hemp. coconut. and sugar).
Several implications emerge from these initial conditions. Long
before the arrival of modern MNCs, FDI had assumed a greater
presence in Latin America than in East Asia. The more abundant
resources of Latin America (compared especially to Northeast Asia)
fostered a traditional reliance on the export of primary commodities,

and entrenched a highly unequal pattern of land distribution and
political influence. These conditions were largely absent in Northeast
Asia and, with the prominent exception of the Philippines, applied to
a more limited extent to Southeast Asia. Paradoxically, the greater
resource abundance of the Latin American countries and their earlier
political independence and popular mobilization created greater
opportunities and incentives for domestic actors to engage in rent-
seeking behavior in conjunction with their foreign business partners
(Fajnzylber, 1990a). In the Philippines, the comparatively early
emergence of a middle class of mestizo origin and a generally per-
missive climate for forming distributional coalitions (Olson, 1982)
during the US colonial administration produced a similar tendency.
In contrast, European and especially Japanese colonialism was much
less receptive to local economic interests which, in Southeast Asia,
had been further split by the ethnic cleavage between the indigenous
people and the Chinese immigrants.
Mass culture and elite ideology were also influenced by colonial
and neocolonial legacies. Fajnzylber (1990b) has argued persuasively
that the US and Japan have propagated two distinct models of devel-
opment within their respective spheres of influence. The Latin
American countries have generally followed the US model- although,
obviously, the fit is not tight in all respects. The US model of devel-
opment features a predominant corporate orientation concerned with
satisfying domestic demand, a reliance on commodity exports to earn
foreign revenues, a proclivity toward consumption rather than savings,
and a political culture that stresses personal freedom even at the
expense of distributive equity. Fajnzylber (1992b) suggests that, fol-
lowing these US predilections, there has been substantial receptivity
within elite circles in Latin America for policies that explicitly pro-
mote or implicitly condone import substitution, resource exports,
deficit financing, ostentatious consumption, and asymmetric income
distribution. These preexisting institutions and ethos in Latin America
in turn induce certain deleterious tendencies stressed by the depend-
entistas, such as an enclave-pattern of development, inappropriate
capital-intensive technologies, heavy debt burden, massive under- and
unemployment, deteriorating terms of trade, import of luxurious goods
for elite consumption, and a skewed distribution of income. The origin
of these tendencies predated the entry of modern MNCs, even though
the subsequent operations of these firms could have reinforced and
exacerbated these tendencies.
Do MNCs matter? 171
In South Korea, Taiwan, and Hong Kong, the Japanese model of

development has prevailed (Chan and Clark, 1992b). This model
emphasizes an outward-looking industrial strategy focused on the
export of manufactures, fiscal conservatism by both the public and
private sectors, austere consumption patterns and high savings rates,
and social integration over individual liberty. Naturally, some aspects
of this culture (such as export-oriented industrialization) developed
only in the recent past, whereas other aspects (such as the emphasis
on group conformity) had deeper historical roots. The Confucian
influence in these societies has moreover tended to promote defer-
ence to authority, respect for a meritocratic bureaucracy, a keen
interest in education, and a willingness to practice personal frugality
and to postpone material gratification (Berger and Hsiao, 1988; Kahn,
1984). These cultural proclivities have in turn facilitated greater
bureaucratic authority and competence. a higher rate of domestic
capital formation, a more rapid diffusion of entrepreneurial impulses,
and a steeper collective learning curve - factors that constitute im-
portant levers in subsequent national interactions with the MNCs.
Except for Hong Kong, the presiding regimes in Northeast Asia
have all been characterized by bureaucratic authoritarianism. More-
over, in Korea and Taiwan the development of an organized labor
movement and the formation of an indigenous middle class were
stunted by Japanese colonialism. Japanese colonialism further fostered
state enterprises in conjunction with the zaibatsu. while simultane-
ously shutting out Western investors from Korea and Taiwan. For-
eign businesses - primarily British banks and commercial houses -
were actively involved in Hong Kong's entrepot trade before World
War II. and nurtured a substantial native comprador class in this
enclave (as well as in Shanghai). In contrast to Latin America, in all
the Northeast Asian cases the absence of a latifundia culture, the
lack of abundant mineral wealth, and the delay in gaining political
independence (which came as a result of Japan's defeat in World
War II) forestalled the formation of a rentier class with a vested in-
terest in perpetuating resource exports in alliance with foreign MNCs.
In various degrees, the Southeast Asian countries fall into inter-
mediate positions between the US and Japanese models of devel-
opment (Chan and Clark. 1992b). The Philippine political economy
- with the longest history of import substitution, the dominant influ-
ence of the 'sugar bloc,' lopsided income distribution, and ostentatious
elite consumption - comes closest to the US model described by
Fajnzylber (1990b). It is. in these regards. the most 'Latin American'
of the Asian countries. Significantly, the Philippines also shares Latin

America's less glowing record on growth and equity. While it had in
the early 1960s one of the highest per capita incomes and human
capital stocks among East Asia's developing countries, these early
advantages did not avert subsequent economic stagnation, widening
income disparity, and severe debt burden, especially during the 1980s
- which, as in Latin America, became a 'lost decade.' The Ameri-
canization of popular culture, the earlier emergence of a substantial
middle class, the entrenched power of provincial oligarchs, consider-
able assets in both human capital and agricultural resources, and an
earlier and longer history of import-substitution industrialization
characterize the Philippines, and offer striking parallels to Argentina
(the most European of the Latin American countries). These two
countries also happen to have experienced the greatest downward
status mobility in terms of relative economic accomplishments, even
though both were at one time heralded as promising models for
other developing countries.
The other Southeast Asian countries have been characterized, to
varying degrees, by only some of the standard features of the US
model. Moreover, in Thailand, Malaysia, and especially Indonesia,
various coalitions of rent-seekers, consisting of politicians, bureau-
crats, and businesspeople, have influenced the allocation of govern-
ment concessions, permits, and contracts. These coalitions can,
however, be somewhat fragile, as they seek to bridge the perennial
ethnic tension stemming from the bifurcation of economic and political
power in these countries. While controlling capital and business
expertise, the Chinese entrepreneurs have been politically impotent
and thus vulnerable to economic extortions by the state. This bifur-
cation and the resultant tension contribute to the less easy working
relationship between state and society in Southeast Asia in comparison
with Northeast Asia, thereby reducing the former's coping capacity
in interacting with the MNCs.
As in Latin America, primary commodities (rice, rubber, tin, natural
gas, petroleum) have provided 'easy' export earnings for most
Southeast Asian countries. They have also promoted the formation
of a rentier class, luxurious consumption by a small elite, and a
relatively autonomous state relying on resource exports as its chief
source of revenues. Unlike Latin America, however, private economic
entrepreneurship has been concentrated in the hands of the ethnic
Chinese minority. Thus, except for Singapore, the governments of
Southeast Asia often perceive state enterprises and MNCs as a
Do MNCs matter? 173
necessary means to balance the economic dominance of the Chinese.

Accordingly, unlike the Brazilian model of triple alliance among the
state. MNCs, and domestic private capital (Evans, 1979), the rela-
tionship between public and private (predominantly Chinese) capital
has tended to be more tense in Southeast Asia (being more acute in
Malaysia and Indonesia than in Thailand). In both Southeast Asia
and Latin America, however, state-operated enterprises have often
been used to control and distribute patronage, with Indonesia's
Pertamina and Mexico's Pemex offering the most prominent examples.
Historical Breaks
The evolution of East Asia's and Latin America's political econo-

mies and the role played by MNCs have been also affected by his-
torical breaks. For Taiwan and Korea, the defeat of Japan in World
War II suddenly removed that country's imperialist control. More-
over, the devastation of the Chinese and Korean civil wars helped to
shatter many entrenched distributional coalitions, so that, for exam-
ple, land reform was successfully launched finally in the territorial
remnants of their regimes. Being cut off from their historical trade
partners (the Chinese mainland and the Japanese metropole, which
lay in ruins immediately after World War II) and having to operate
from a smaller territorial base, the reality of a new and more chal-
lenging world provided impetus for economic reorientation. The shock
of losing the civil war had also a certain therapeutic value. In the case
of Singapore, the disintegration of the political union with Malaysia
provided a somewhat comparable trauma that helped to focus the
elite's attention.
In the rest of Southeast Asia (except Indochina) and in Latin
America, there was no functional equivalent of such policy traumas
or sharp historical breaks. Whereas Japan's defeat in World War II
led to the dismantling of its colonial empire, the US influence has
remained dominant in Latin America. This important difference
means that Taiwan and South Korea were given a rare opportunity
to make a new start. This opportunity came not only from their
detachment from Japan's economic and political orbit, but also from
their being saved by US military intervention against communist take-
over. Moreover, the Cold War and a policy aimed at the containment
of communism inclined Washington to initiate a massive aid program
(military as well as economic) to foster its clients in East Asia, espe-
cially in Taiwan and South Korea (where the US interest was defined
primarily in political and military terms). By comparison, the absence

of a similar sense of urgency led to a much more lethargic US policy
toward Latin America, even after Fidel Castro's victory in Cuba and
the onset of the Alliance for Progress. Because US interests in Latin
America and in parts of Southeast Asia (except Indochina) have his-
torically been defined mainly in economic rather than political terms,
there has been greater congruence between state and corporate poli-
cies (Evans, 1987). This is another way of saying that the US state
has been less inclined to intervene against American corporate inter-
ests in these areas than in other areas where Washington was en-
gaged in a vigorous ideological and strategic contest with Moscow
and Beijing.
Also, the manifestly small size of the Northeast Asian markets,
their lack of physical resources, and security concerns about the
communist threat across their borders deterred the MNCs from in-
vesting in Taiwan and South Korea in the 1950s and 1960s. This
interval provided a crucial 'breathing space,' whereby the Taiwanese
and Korean state enterprises were able to preempt the more strategic
sectors (such as steel, energy, banking, transportation) from subse-
quent MNC takeover, and whereby native entrepreneurs were able
to develop substantial market presence and business expertise to
resist economic denationalization. Moreover, when the MNCs were
eventually attracted to invest in these countries, they were primarily
attracted by their human resources and thus tended to engage in
export-oriented operations (again, lessening the competition with
native producers for a share of the small domestic market).
In contrast, in countries such as Mexico and Brazil, MNCs in the
manufacturing sector have not been so much interested in production
for exports. They were mainly motivated to invest by the fear of
being excluded from the large domestic markets of these Latin
American countries. Thus, this FDI has been described as 'tariff
leaping' in contrast to the 'export-oriented' FDI going to the Northeast
Asian economies serving as export platforms for the MNCs. Given
the earlier history of Latin America's attempts at import substitution
during World War II and the greater legitimacy that a policy of
import substitution has gained in Latin America, it is not surprising
that the MNCs' operations in the region have been motivated by a
defensive concern to maintain these firms' market share in the host
economies. This more inward-looking strategy has also tended to
shield the MNCs' Latin American operations from the rigors of
international competition and the benefits of greater economies of
Do MNCs matter? 175
scale to be gained from exporting to a world market (as opposed to

serving a domestic market).
To varying degrees, the countries in Southeast Asia (again excepting
Indochina) experienced greater political continuity (especially in
Thailand) or at least smoother transitions to political independence
than their counterparts in Northeast Asia. US citizens continued to
enjoy parity rights in doing business in the Philippines after its inde-
pendence, and that country's exports (mainly sugar) continued to
receive preferential access to the US market. In effect, formal politi-
cal independence was granted on the condition of continued economic
dependence.
The huge size of US FDI in the Philippines distinguished it from
the rest of Asia, and put this country in the company of Latin
American countries (Evans, 1987). In 1%6, more than half of all US
FDI in Asia was located in the Philippines, an amount that was larger
than the US FDI in South Korea, Taiwan, Hong Kong, and Singa-
pore combined and larger than the comparable figure in Malaysia,
Thailand, Indonesia, and India combined (Encarnation, 1992, p. 154).
Moreover, unlike in these other Asian countries, US MNCs have
enjoyed a predominant position in the Philippines just as they have
in some parts of Latin America (with the major exception of Argen-
tina, where British capital had historically been important). European
and Japanese capital has not offered nearly as much a competitive
alternative to US FDI in the Philippines, Mexico, Peru, and Chile as
it has in most Asian countries. Although the behavioral patterns of
US and Japanese MNCs have converged considerably in the more
recent years, Kojima's (1978) well-known argument about their dif-
ferences is applicable to the 1960s and early 1970s. During those
earlier years, the smaller Japanese firms were more willing to take on
local partners, to engage in labor-intensive manufacturing for exports,
and to transfer appropriate technologies through licensing arrange-
ments. In contrast, US companies have traditionally been more in-
sistent on majority-owned subsidiaries, and more interested in
commodity exports or capital-intensive projects for import substitu-
tion. Hence, Kojima suggested that the nature of Japanese MNCs'
overseas operations tended to have greater beneficial complemen-
tarities with their developing host economies than those of the US
MNCs. One might add that the very presence of rivalry among MNCs
of different nationalities enhances the bargaining hand of the host
government (Moran, 1978). Accordingly, the size, duration, and char-
acter, as well as international competition of MNCs have constricted
the policy space and developmental options in the Philippines and

Latin America to a greater extent than in Northeast Asia.
Finally, with regard to historical breaks, timing and sequence are
important. Foreign colonialism and civil war contributed to the de-
struction of distributional coalitions in Northeast Asia, and the land
reforms in the early 1950s laid the basis for a more egalitarian society
in Taiwan and South Korea. This comparatively equitable basis
provided a source of political legitimacy, secured mass acceptance
for hard work and education as a means for upward mobility based
on merit, and gave credibility to the trickle-down benefits of indus-
trialization (Bobrow, 1992).
Efforts at industrial transformation also benefited from good timing,
because these countries' turn toward export-led growth coincided
with a liberal trade regime and booming world economy. Moreover,
in Taiwan, South Korea, Hong Kong, and Singapore, mass political
participation and interest mobilization came only after the economic
takeoff, thus alleviating institutional overload for the ruling regimes.
In contrast, the formation of a vocal middle class and the organization
of labor interests preceded rapid industrialization in Latin America,
and thus reduced the policy space available to officials in this region.
Paradoxically, the lucky breaks experienced by the Latin American
countries - specifically, the economic windfall due to their mineral
wealth (such as petroleum in Venezuela and Mexico, and copper in
Chile) - have had the additional effect of dampening the officials'
willingness to make hard policy choices that impose socioeconomic
tradeoffs and thus sacrifices. Furthermore, as discussed below, this
mineral wealth has fostered a greater sense of complacency regarding
fiscal discipline and financial indebtedness.
Paradoxically, however, myopic nationalist attempts to maximize
the host government's revenue share of the resource exports - such
as by charging the highest spot-market prices for one's commodity
exports and eliminating the MNCs as a buffer for dampening the
instabilities in international demand and supply - can boomerang by
encouraging customers to turn to alternative suppliers, to switch to
substitute products (such as aluminum for copper), and to seek
backward integration by securing their own sources of raw materials.
Thus, for example, Chile's efforts at dislodging the MNCs during the
1960s and early 1970s had the unintended effect of making that coun-
try into a marginal supplier catering to the most unstable edge of
international demand for copper (Moran, 1974). The maximization
of short-term profit came at the price of long-term stability; Chile
Do MNCs matter? 177
was in danger of becoming the last country to benefit from any price
hike in copper, and the first to suffer from any price decline. Whereas
the MNCs had earlier assumed a large part of the burden of un-
certainty regarding price fluctuations, Chile's assertion of national
autonomy and its determination to charge the highest current price
for copper had the effect of shifting the entire industry's burden of
instability onto itself. The loss of MNCs as a useful buffer similarly
produced setbacks for other copper producers such as Zambia and
Zaire (Shafer, 1983).
To conclude, the historical breaks in Northeast Asia tended to
create sharper discontinuities and thus more favorable occasions for
launching new policies. With their backs to the wall and given the
patent unacceptability of continuing business as usual in the face of
the recent disastrous setbacks, the elites of these countries were jolted
to engage in reform. And, when presented with the stark alternative
of succumbing to the communist challenge, the populace was mo-
bilized to make sacrifices and to defer to authority in the name of
national security. In contrast, the recent history of Latin American
countries did not produce these effects, and has instead perpetuated
the traditional status quo. In these respects, the Southeast Asian
countries (again excluding Indochina) occupy an intermediate posi-
tion between Northeast Asia and Latin America. Japanese occupa-
tion during World War II and the subsequent anti-colonial struggles
had some modest effect in challenging the traditional distributional
coalitions. To varying degrees, communist insurgency also contributed
to this effect. Internal and external developments have, therefore,
provided some opportunities as well as pressures for policy reform.
These opportunities and pressures were more extensive than in Latin
America, but much less so than in Northeast Asia.
Coping Capacity
Yet, as argued earlier, it cannot be automatically assumed that actors

will always utilize the opportunities extended to them and respond
constructively to environmental pressures. Therefore, we turn to the
third set of factors in our framework: coping capacity. Much of the
recent literature on late industrialization argues that the presence of
a strong and autonomous state has been instrumental in the socio-
economic development of Northeast Asia (c.g.. Alam. 1989; Amsden,
1989; Chan and Clark. 1992a; Chu, 1989; Clark. 1989; Cumings, 1984;
Deyo, 1987a, 1981; Galenson, 1979; Gold. 1986; Haggard, 1990;
Haggard and Moon, 1989; Johnson, 1982; Jones and Sakong, 1980;
Lockwood, 1965; Mardon and Paik, 1992; Mirza, 1986; Rodan, 1989;
Wade, 1990; White, 1988; Winckler and Greenhalgh, 1988). However,
previous accounts of governmental interactions with MNCs as well
as domestic interest groups indicate that Latin America also has rather
strong states (e.g., Becker, 1985, 1983; Bergsten et al., 1978; Collier,
1979; Evans, 1979; Gereffi and Wyman, 1989; Goodsell, 1974; Moran,
1974; O'Donnell, 1973; Stepan, 1978; Tugwell, 1975). The Latin
American host governments have been basically successful in
achieving their goals of divesting MNC ownership and managerial
control of mineral exports (such as copper in Chile, and petroleum
in Mexico, Peru, and Venezuela). They have furthermore been able
to pressure MNCs to invest in domestic production (such as in auto-
mobile parts, computer peripherals, petrochemicals) by threatening
these firms with the prospect of being excluded from their markets.
Other Asian countries - notably India and Indonesia - have also
successfully asserted national autonomy over the MNCs, and have
established giant public enterprises overpowering private capital (e.g.,
Clark and Roy, 1993; Encarnation, 1989; Grieco, 1984; Hill, 1989;
Kidron, 1965; Robinson, 1986; see also Biersteker, 1987; Shafer, 1983;
and Stephens and Stephens, 1985, for studies on Nigeria, Zaire,
Zambia, and Jamaica). Yet, with respect to developmental concerns
for growth-with-equity, these countries have generally performed
rather poorly. Historical analyses of Thailand and Malaysia also
demonstrate a dominant state apparatus that has operated relatively
free of social constraints and that has been frequently able to prevail
over various sectoral interests (Bowie, 1989; Clad, 1989; Crouch, 1985;
Girling, 1981; Hewison, 1989, 1985; Jesudason, 1989; Riggs, 1966;
Schlosstein, 1991; Skinner, 1957; Suehiro, 1989; Yoshihara, 1988, 1985).
To be sure, except for Singapore, the Southeast Asian states lack
the programmatic coherence, bureaucratic competence, and institu-
tional autonomy that characterize the Northeast Asian political
economies. Therefore, these states are 'softer' than their counterparts
in Taiwan, South Korea, and Singapore. However, differences in the
relative strength and autonomy of these two sets of states do not tell
the whole story. In addition, we need to take into account the dif-
ferences in their policy motivations, incentives, and ideology. A state's
strength and autonomy can be applied to the pursuit of economic
growth and industrial upgrading (as in Taiwan, South Korea, and
Singapore), or they can be used in the interest of ethnic mobilization,
bureaucratic graft, and crony capitalism (as is often the case in
Do MNCs matter? 179
Malaysia, Indonesia, Thailand, and the Philippines). As in Latin

America (Fajnzylber, 199Oa), heavy exports of natural resources have
encouraged the formation of a rentier state in Indonesia and the
Philippines, whereby the generals and politicians seek to extract
economic gains through their control and allocation of government
permits, business licenses and contracts, and import and export mono-
polies (e.g., Hawes, 1987; Higgott and Robison, 1985; Robison, 1986).
Given the previous remarks, we are understandably skeptical about
the assertion that a strong state is in and of itself a sufficient condition
for successful developmental outcomes. Surely, among the East Asian
political economies. Hong Kong and China should provide polar
opposites on the spectrum of state strength. We have already com-
mented on the generally laissez-faire attitude of the former's colonial
government (Krause, 1988; Rabushka, 1979). which treats local and
foreign firms according to the same criteria. It thus features one of the
world's most hospitable climates for MNCs, while avoiding the various
deleterious developmental outcomes alleged by the dependentistas.
Across the border in China, the government in Beijing started a
series of reforms in the 1980s aimed at reducing the heavy hand of
the state (Harding, 1987), ironically just when the statist paradigm
came in vogue in the US social science literature. Still, even while
eagerly recruiting foreign investment to its special economic zones,
the Chinese state has taken a much more active and vigilant posture
relative to the regulation of MNCs than Hong Kong's colonial ad-
ministration (Pearson, 1991). Media accounts would suggest that the
adverse socioeconomic consequences hypothesized by dependency
theory - such as worker marginalization, suppression of organized
labor, widening income gap, massive under- and unemployment. and
mass consumption of 'frill' items (such as cosmetics, soft drinks, for-
mula milk) induced by the MNCs' commercial advertisements - are
in some ways more noticeable on the Chinese side of the border than
in Hong Kong. Differences in state strength cannot account for these
divergent outcomes - at least not in the direction usually expected hy
both the dependency and the bargaining schools.
We often encounter examples of statist failure to influencc the
behavior of foreign and domestic capital in countries with ostcnsihly
strong developmental bureaucracies. Thus, the state in Taiwan was
rather ineffective in its efforts to establish an indigenous automohile
industry, and it played a lagging rather than leading role in the de-
velopment of a local computer industry (Arnold, 1989; Lam. 1992).
The South Korean government ran into serious setbacks when it tried
180 FDI in a Changing GLobaL PoliticaL Economy
to make a 'big push' into the heavy and chemical industries in the
early 1980s (Haggard and Moon, 1983; Moon, 1988). And the Singa-
pore government was forced to reverse its policy of forcing up the
local wage level, when this attempt resulted in reducing its competitive
edge in attracting MNCs. In India, the government's attempt to foster
a national computer industry led to the withdrawal of IBM, and
manufacturers in the private sector turned out to be more competitive
than the heavily subsidized state enterprise (Grieco, 1984). Finally,
even the Japanese Ministry of Trade and Industry (MITI) did not
always have its way. It was unable to consolidate the automobile and
machine tool industries, to pick the winner in VCR format, or to
block IBM's entry into the home market (Encarnation, 1992; Fried-
man, 1988; Noble, 1989). These examples show that there are limits
to the ability of even strong developmental states to influence the
behavior of recalcitrant domestic and foreign firms.
These considerations lead us to argue that coping capacity - that
is, the ability to exploit and indeed create opportunities - is more a
result of the collaborative synergism between the state and society,
and of their joint ability to take advantage of the MNCs' assets for
national development. Singapore presents a case of strong state and
weak society, whereas Hong Kong features a combination of weak
state and strong society. However, in both cases a large MNC presence
has contributed to growth with equity. In his study of the automobile
industry in four Southeast Asian countries (excluding Singapore),
Doner (1991) concluded that Thailand has had the greatest success
in dealing with foreign MNCs and fostering local development. The
primary explanation for this success is that the public and private
sectors in Thailand have had a much more effective working relation-
ship than those in the Philippines, Malaysia, and Indonesia.
Among the Latin American countries, the state has enjoyed a
stronger and more autonomous role in Peru, Venezuela, Mexico, and
Brazil, whereas social forces have been historically more powerful in
Argentina and Chile (Becker, 1985, 1983; Bennett and Sharpe, 1985;
Cardoso, 1973; Cardoso and Faletto, 1979; Collier, 1979; Evans, 1987,
1979; Gereffi, 1983; Gereffi and Wyman, 1990,1989; Goodsell, 1974;
Jenkins, 1987; Moran, 1974; O'Donnell, 1973; Stepan, 1978; Tugwell,
1975). These countries' variations in developmental performance,
however, seem to be better explained by the nature of interaction
than by the balance of power between state and society. Although
Brazil's and Mexico's income distributions have been notoriously
unequal and although their economies have suffered from cycles of
Do MNCs matter? 181
sharp contraction and rampant inflation, they have had the most
successful record in recruiting MNCs for indigenous development.
Structural conditions such as market size, geographic location, physical
resources, and human capital certainly tend to favor them, but are
unable to explain the lagging performance of Argentina which also
has had some of these comparative advantages. While featuring a
more equal distribution of national income than Mexico and especially
Brazil, Argentina has experienced a series of more devastating
economic slumps and inflationary spirals in the past three decades.
National capital and especially organized labor have had stormier
relations with the state in Argentina than the other 'big two,' where
there has been a more successful history of cooptation and collab-
oration. Thus, we argue again that a tradition of domestic cooperation
enhances effectiveness in recruiting and leveraging MNCs for national
development.
As can perhaps be surmised from the preceding discussion, we do
not believe that economic success and industrial upgrading can be
promoted simply by state fiat. Nor do we take a dichotomous view of
state versus market in developmental processes. We subscribe instead
to the position that state and market can playa mutually supportive
rather than mutually exclusive role in these processes (Chan and
Clark, 1992a; Gilpin, 1987). The state, through its subsidies to domestic
producers and its recruitment of MNCs as carriers of production
assets (e.g., capital, technology, managerial skill), can promote and
foster comparative advantage. However, in the final analysis the state
cannot itself create and sustain such advantage. That task has to be
fulfilled by the private sector, which has to be ready, eager, and able
to respond to the matket signals and the government's incentive pro-
grams. The capacity for such response is in turn conditioned by cul-
tural predispositions and historical legacies.
With the exception of laissez-faire Hong Kong, what distinguishes
the Northeast Asian economies from their counterparts in Southeast
Asia and Latin America is not so much the battery of policies (e.g.,
subsidized credit, tax rebates, export quotas, tariff protection, gov-
ernment purchases) used by thdr governments to promote and protect
local industries. Rather, the difference lies in the more vigorous
response to these policies by the local manufacturers and exporters
in the former countries (and Hong Kong as well). This more vigor-
ous response was in part due to the special cultural proclivities that
promote entrepreneurship and the work ethic (Fei, 1986; Greenhalgh,
1988a, 1984; Harrell, 1985; Hofheinz and Calder, 1982; Hofstede and
Bond, 1988; Kahn, 1984; McElderry, 1986; Pye with Pye, 1985; Silin,
1976; Tai, 1989; Winckler, 1987; Wong, 1988a, 1988b, 1986), and in
part due to the state's willingness and ability to impose performance
standards on domestic producers as a condition for receiving public
subsidies (Amsden, 1989). The latter phenomenon means that
preferential treatment of local capital is used to promote rapid as-
cendance in the international product cycle, rather than to sustain
distributional coalitions for the sake of extracting rent.
When compared to the Latin American countries, the Northeast
Asian economies are clearly at a disadvantage in terms of structural
factors such as domestic market size, distance to overseas markets,
preferential trade arrangements, and even comparative wage scale.
They offset these liabilities by emphasizing flexible manufacturing
and commercial adaptation (Friedman, 1988; Lam and Lee, 1992;
Morawetz, 1981; Yoffie, 1983). Attention to competitive pricing, qual-
ity control, design innovation, prompt delivery, post-sale service, and
product specialization according to customer needs provide North-
east Asia's edge in commercial competition. This dynamic competi-
tiveness of local industries, in turn, acts as a brake upon the danger of
'denationalization' through MNC penetration into domestic markets.
A fundamental debate about the impact of MNCs on developmental
outcomes is concerned with the externalities of these firms' operations
in a periphery economy. These externalities can present public goods
or public bads. To the extent that the MNCs' operations steepen
learning curves to master modern manufacturing processes, spur the
diffusion of entrepreneurial impulses in the population, and promote
economies of scale by producing for a global market, they create
externalities that facilitate growth with equity.
Naturally, the host governments of MNCs are interested in capturing
the positive spillover effects of MNC operations. In this sense, there
is a conflict of interest between these actors. For example, whereas
the MNCs want to control the pace and type of technology transfer
(often exporting obsolescent technologies that are approaching the
end of product cycle in their home countries), the host governments
are naturally eager to accelerate this transfer in order to upgrade
their own indigenous technological base. Evidently, a strong devel-
opmental state can drive a harder bargain in this regard against the
MNCs, and is in a better position to enforce agreements on technol-
ogy transfer after a bargain has been struck.
More generally, a strong developmental state can act as a gate-
keeper. Such a state is better equipped to unbundle the production
Do MNCs matter? 183
package offered by the MNCs effectively, so that some wanted ele-

ments of this package are recruited (such as useful technology, scarce
capital or raw materials, access to foreign markets) while other un-
wanted elements are kept out or at least minimized (such as foreign
ownership and managerial control, the MNCs' domination of local
market, repatriation of profits back to the MNCs' parent companies).
Coping capacity therefore includes sensitive discrimination among
the various production elements likely to be involved in the MNCs'
operations, and skillful mobilization of those inputs offered by the
MNCs that can offset current national shortages, coupled with effec-
tive exclusion or regulation of other MNC inputs that can undermine
national autonomy and developmental options. Significantly, this
conception argues that host governments should not only be concerned
with zero-sum contests with the MNCs over distributive issues, but
should also attend more importantly to positive-sum collaboration to
increase the size of socioeconomic output for distribution.
Yet, as already suggested, a strong developmental state is not a
sufficient condition to achieve desirable developmental outcomes.
Although the state's role as a g&.tekeeper barring the entry of harmful
foreign economic intrusion is important, so is the society's absorptive
capacity to benefit from the more positive elements of MNC opera-
tions. In order for technological diffusion, industrial ascendance, and
trickle-down economics to work, domestic producers and entre-
preneurs must be able and willing to take advantage of the production
assets introduced.
In South Korea, a strong impulse to gain practical experience
through experimentation by trial and error at the shop floor helps to
raise the managers' and engineers' learning curve for mastering foreign
production processes rapidly (Amsden, 1989; Kang, 1989). In contrast
to South Korea's approach of 'learning by doing' through concentrated
efforts and its style of 'big spurts' orchestrated by the state and spear-
headed by the large industrial conglomerates (the chaebol), indi-
vidual initiative and entrepreneurial opportunism tend to characterize
Hong Kong and Taiwan, where there is a strong popular ethos and
desire to own and operate one's own business. A perennial problem
facing the MNCs operating in these economies has been a high rate
of personnel turnover; local managers and technicians often leave to
start their own company after they have learned the 'secrets of the
trade.' These ex-employees thus become 'carriers' of entrepreneurial
dynamism, providing further vigor to the small and medium-size firms
that are the backbone of Hong Kong's and Taiwan's export economies,
as well as being a primary source of social mobility and entrepreneurial

diffusion. Because of their commercial adaptability, the business
philosophy of these firms has been described as 'guerilla capitalism'
(Lam and Lee, 1992).
Such diffused and spontaneous spillover effects are less evident in
Singapore, where the government often enters into more direct
partnerships with the MNCs through its many public enterprises and
statutory boards. It mobilizes capital through a compulsory savings
program called the Central Provident Fund, and sponsors various
programs and institutes for technical training in an attempt to both
attract and benefit from the MNCs' transfer of technology. Singapore,
like Hong Kong, provides subsidized housing which can be seen as
an indirect subsidy to MNCs (and local businesses) because it permits
them to pay lower wages (Castells et al., 1990; Schiffer, 1991). In all
the Northeast Asian cases, we are drawn to the interaction effects
between state and society in gauging the potential impact of MNCs
on national achievement of growth with equity (Chan, 1993, 1989;
Chan and Clark, 1992a; Hofheinz and Calder, 1982; Linder, 1986;
Prestowitz, 1988; Vogel, 1991).
In contrast to the Northeast Asian economies, both Southeast Asia
(except Singapore) and Latin America have a weaker entrepreneurial
tradition and a less equitable socioeconomic base. Moreover, the
improvement of human-capital stock has not been accorded a high
priority in either state policy or social values. These countries thus
have had greater difficulty in 'leveraging' the contributions of MNCs
to stimulate economic takeoff, social mobility, or income redistri-
bution. In the case of the Southeast Asian countries, ethnic tension
between a government dominated by politicians and bureaucrats
belonging to the Malay stock and an entrepreneurial class dominated
by ethnic Chinese citizens provides more bargaining room for the
MNCs, and lowers the local capacity to capture the positive exter-
nalities of these firms' operations. As for Latin America, a more
inward strategy of industrialization by import substitution also seems
to impair the generation of beneficial multiplier effects. To the ex-
tent that manufacturing FDI in Latin America has been motivated
by the fear of tariff walls to produce for domestic sales rather than
by the lure of local comparative advantage for worldwide exports, the
multiplier effects due to economies of scale and the rigors of market
competition have been curtailed (Balassa, 1988, 1981; Bradford and
Branson, 1987).
National control of indigenous financial institutions and relative
Do MNCs matter? 185
autonomy from foreign sources of capital are two additional critical

factors that have tended to distinguish the Northeast Asian and Latin
American experiences. Large domestic savings and, until the mid-
1960s, massive US aid provided for high rates of capital formation in
the former region. Indigenous capital, public banks, and government
regulators worked together in countries such as Japan, South Korea,
Taiwan, Singapore, Thailand, and India to assert and maintain
financial autonomy from the MNCs (e.g., Encarnation, 1992, 1989;
Huang, 1989; Mardon, 1990; Suehiro, 1989). In contrast, this financial
autonomy has been much more problematic in Malaysia, Indonesia,
the Philippines, and Latin America in general. These latter countries
have benefited from rich natural resources that provide an 'easy'
source of revenue which, as already mentioned, has encouraged fiscal
extravagance and a more complacent attitude about the need for
domestic savings. At least prior to the international debt crisis of the
1980s, there was a prevalent elite and mass willingness to incur heavy
foreign indebtedness by mortgaging national revenues from future
commodity exports.
Thus, again ironically, the possession of rich natural resources has
inclined a greater dependence on foreign finance, and has dulled
concerted national efforts to graduate to a higher stage of the inter-
national manufacturing product cycle and to 'sow the seeds' of oil
and other mineral revenue for public welfare. Massive revenue from
resource exports. however. has enhanced the fiscal autonomy of the
state relative to indigenous socioeconomic interests, whose attention
and energy have in turn tended to be diverted to the political arena
in competition for bureaucratic favors and government licenses instead
of concentrating on commercial races in the marketplace. Therefore,
we see again the deeper influence of political culture in shaping a
host society's ability to bargain with and to extract benefits from
foreign business interests.
In short, we argue that whereas a strong state is helpful (though
not necessary - remember the case of Hong Kong) for recruiting
facilitative inputs by the MNCs to be used for national development,
a conducive society is necessary in order to take advantage of these
inputs and to guard against the negative externalities of MNC pres-
ence. The negative externalities - such as frivolous consumerism,
worker marginalization, technological dependence, denationalization
of local enterprises, uneven development due to the disparity between
an affluent enclave and a poor hinterland - can be exacerbated
or dampened by those preexisting social conditions and cultural
proclivities discussed earlier. Therefore, the public and private sectors

- state and society - are jointly important for a nation's capacity for
managing the threats and opportunities coming from the interna-
tional market.
In Northeast Asia, a more equitable economic base, a higher social
premium placed on savings and education, and a tradition of pater-
nalistic authoritarianism have to varying degrees deflected the ad-
verse consequences of MNC operations decried by the dependentistas.
The countries in this area have also benefitted from two other kinds
of positive externalities. Their rapid GNP expansions have provided
a source of mutual stimulation, thus creating a regional contagion
effect described by the Japanese as a flying-geese formation whereby
the later industrializers emulate the example of the earlier indus-
trializer. There is, moreover, the externality of reputation effect. Once
these countries have established a reputation as a hospitable home
for FDI (because of their advanced physical infrastructure, produc-
tive workforce, peaceful labor relations, political stability, and so
forth), MNCs tend to follow each other in a bandwagon fashion, thus
putting them in a potential rivalry that tends to enhance the hosts'
bargaining power. This reputation effect in itself gives the Northeast
Asian countries a competitive edge in recruiting foreign business.
CONCLUSION
In this essay, we have surveyed the existing literature on the MNCs'

impact on developing host economies. After reviewing the divergent
socioeconomic experiences of East Asia and Latin America, we con-
clude that this impact tends to be contingent and thus quite context-
dependent. This context is provided by history, culture, elite policy,
and mass behavior. The presence of MNCs in a peripheral economy
does not automatically produce economic stimulus for growth, nor
does it inevitably create a reactionary force for stagnation and inequity.
Initial conditions regarding the domestic structure of a political
economy and its niche in the world system shape subsequent devel-
opmental paths. Yet these developmental paths are hardly predeter-
mined, as historical breaks do occasionally offer opportunities for
policy reform at home and status adjustment abroad. Whether such
occasions will be seized or squandered will in turn depend on elite
consensus, bureaucratic competence, mass exertion, and national pur-
pose. These latter variables can thus exert an important mediating
Do MNCs matter? 187
influence that helps to answer the question whether MNCs will present
opportunities or threats to national development. and whether they
will preserve the status quo or act as a catalyst for change. We have
argued that the MNCs can be either enabling or disabling in the pur-
suit of national development. depending on the coping capacity of the
host state and society. Explanations of divergent national perform-
ances will accordingly have to focus primarily on indigenous factors.
and only secondarily on the contributing role of foreign actors such
as MNCs.
Note
1. We thank Thomas Biersteker, Richard Doner, and Sam Fitch for their
helpful comments on an earlier version of this chapter that was presented
at the annual meeting of the International Studies Association. Acapulco,
Mexico, 23-27 March 1993.
11 Investment Dependence
and Political Conflict in
Developing Countries:
A Comparative
Regional Analysis
John M. Rothgeb, Jr
INTRODUCfION
This chapter investigates the relationship between the multinational

corporate penetration of developing countries and their levels of
domestic political conflict.) Political conflict is defined as action by
non-governmental actors that is designed to change either the gov-
ernment or its policy. Research by Rummel (1966) and Tanter (1966)
shows that political conflict may be separated into two dimensions,
turmoil and internal war, with the former consisting of spontaneous,
poorly organized, and violent conflicts and the latter including highly
organized and extremely violent attempts to remove the government.
Gurr and Lichbach (1986) describe a third type of conflict - protest
- that is non-violent, well organized, and focuses exclusively on
changing government policy. Hibbs (1973) shows that these forms of
conflict are both empirically distinct and a product of different social
forces.
The focus of this chapter will be on: (1) describing the conceptions
in the international political economy literature of the association
between foreign direct investment (FDI) and political conflict, (2)
considering whether some actors are more affected than others by
examining different regions of the developing world, (3) reviewing
the cross-national research literature to date, and (4) conducting a
systematic analysis of the relationships in question.
188
Investment Dependence and Political Conflict 189
MECHANISMS CONNECfING FOREIGN INVESTMENT

AND CONFLICf
A perusal of the international political economy literature reveals

three conceptions of how investment dependence affects domestic
conflict. These are labelled the deprivation, liberal, and mobilization
approaches. A brief description of each follows.
The Deprivation View
This view contends that a large FDI presence in developing countries

leads to lower per capita economic growth and to increased income
inequality.2 Growth supposedly is slowed for several reasons. One is
that foreigners use local resources without concern for local needs,
leading to lost jobs and commercial bankruptcies (Alschuler, 1988;
Cardoso and Faletto, 1979). A second comes from the repatriation of
profits, and is described as so large that 'the net flow of capital is
from the [developing country] subsidiary to the [foreigner's] home
office' (Alschuler, 1988, p. 144). Still another alleges profit-shifting,
whereby foreign investors use the money made in one developing
country to penetrate new markets in other countries (Bornschier and
Chase-Dunn, 1985). In each case, growth in the local economy suffers.
FDI is seen to produce income inequality by creating a foreign-
dominated elite who enacts policies that protect foreign interests
and ignores the needs of the people (O'Donnell, 1988). The result is
a maldistribution of resources that favors foreigners and their local
allies. For most people, this leads to smaller income shares and a
lower standard of living (Cardoso and Faletto, 1979; O'Donnell, 1988).
As growth falls and inequality increases, the problems stemming from
the dearth of resources in poor countries are magnified, and the
chance of conflict rises.
These views parallel the arguments of those who see resource
scarcity, or deprivation, as a key to conflict (Midlarsky, 1982; Midlarsky
and Roberts, 1985; Muller, 1985b). Deprivation may lead to conflict
in one of two ways (Lichbach, 1989). On the one hand, absolute
deprivation occurs when the disadvantaged face an absence of re-
sources and become increasingly desperate. This situation exists when
economic stagnation or decline accompanies dire poverty. On the
other hand, relative deprivation occurs when an elite enjoys immense
benefits while most experience misery. Midlarsky (1988, p. 492) uses
the 'difference principle' to describe this situation. In this case, conflict
results not from a lack of resources, but from the resentment that
some feel when others possess much more.
Investment dependence supposedly creates these circumstances,
for a climate of poverty is accompanied by an elite that gains from
the foreign presence, while the lower classes are marginalized by a
stagnant economy. Therefore, a large foreign presence is regarded as
resulting in less growth, more inequality, and more conflict.
The Liberal View
Liberals present a different picture. They agree that conflict is a

product of low growth and of the dissatisfaction generated by income
inequality, but argue that investment dependence leads to higher
growth and to less inequality, especially when the investments are in
manufacturing. Developing countries are depicted as obtaining vital
missing factors of production from FDI, most notably capital, tech-
nology, and entrepreneurial talent. Since these factors are essential
to growth, higher levels of foreign manufacturing investments are
expected to bring greater per capita growth (see Diaz-Alejandro,
1970; Frank, 1980; Reuber et al., 1973; Vernon, 1971). Higher growth
translates into more income for the poor. As income goes up, the
reasons for conflict fade. As a result, FDI is seen to produce more
growth, reduced inequality, and less conflict.
The MobUization View
The mobilization approach differs from the above views. While the
latter see conflict as resulting from resource scarcity, mobilization
theorists regard it as a product of social change. The basic presump-
tion is that those who benefit from change seek gains in the political
arena, while those who experience losses use politics to ward off
adverse consequences. Tilly (1978, pp. 144-7) labels the former
behavior proactive and the latter reactive. In each case, conflict oc-
curs because the group in question is demanding influence that only
is obtained at the expense of others.
Rogowski (1987) argues that international linkages create these
effects. The Stolper-Samuelson theorem explains how, stating that
extemallinkages create competition for producers who are expensive
and benefits for those whose costs are cheap when compared to inter-
national standards. For example, if labor is inexpensive and capital is
costly, international linkages should benefit labor and harm capital.
In this case, conflict will occur because labor engages in proactive

behavior and capital in reactive behavior.3
Investment dependence is described as creating these types of
changes by bringing opportunities for higher wages to the low-cost
labor in developing countries, while posing challenges to local cap-
italists who face ruin when forced to compete with multinational
corporations (MNCs) (Reuber et al., 1973, p. 91; Frieden, 1987, p.
184; Deyo, 1987b, p. 194). The upshot is more political conflict as
laborers and capitalists respond to the presence of foreigners.
Summary
Thus, one finds three conceptions of how FDI affects domestic conflict.
The deprivation view asserts that it harms the host's prospects for
per capita economic growth and leads to greater income inequality,
both of which produce conflict. Liberals maintain the opposite, arguing
that FDI enhances growth and reduces income inequality, which in
turn decrease conflict. Mobilization theorists suggest that growth and
inequality are not the key to conflict. Instead, they claim that FDI
more directly affects conflict by altering the basic political relation-
ships among groups in the host society.
Regional Variations
The effects of FD I are not uniform, but vary according to the type
of host country examined. One set of distinctions pertains to regional
patterns. 4 Past research strongly indicates that many political phe-
nomena vary by region. For example, Jackson and Rosberg (1982, p.
1) note that 'state institutions and organizations are less developed
in the sub-Saharan region than almost anywhere else; and Marshall
(1985) shows that a state's regional location is the best determinant
of gender politics. Regarding the role of external forces, Evans (1987)
and Greenhalgh (1988b) point out that Latin American countries are
more penetrated than states in other regions, and Bornschier et al.
(1978) and Rothgeb (1988) find that FDI affects economic growth in
African states more than in other regions.
Research also indicates that the politicization of domestic groups
differs. In particular, entrepreneurial and working-class organizations
vary. The size of the entrepreneurial class is related to a country's
level of development. Very poor countries, such as those in sub-
Saharan Africa, have minute entrepreneurial classes; wealthier
societies, such as those in Latin America and parts of Asia, have larger
working and capitalist classes (Deyo, 1987b; Evans, 1979; Gold, 1988).
As for the working class, Berg-Schlosser (1982) and Chazan (1982)
report that workers in Africa are poorly organized and playa minor
role in politics. By comparison, Latin American workers are described
as well-organized and as very political (Davis and Coleman, 1986;
Deyo, 1987b; Spalding, 1977). Asian workers usually are depicted as
falling between these extremes, with Gold (1988, p. 190) and Green-
halgh (1988b, p. 86) reporting that workers in this region are mostly
apolitical, focusing on economic objectives instead of on politics.
Based on these profiles, African states may be projected both as
the most susceptible to deprivation-induced conflict and as the most
likely to benefit from liberal effects because their poverty and
weakness either should make them easily exploited or should mag-
nify the contribution of FDI to offset the missing factors of production.
The stronger political institutions, the greater wealth, and the more
organized and political nature of key social groups, combined with
the higher level of foreign penetration in Latin America are the
ingredients that mobilization theorists treat as leading to proactive/
reactive conflict. In Asia, the absence of extensive penetration, the
stronger government institutions, and the less organized and less
political nature of important social groups would imply little, if any,
relationship between investment dependence and domestic conflict.
PREVIOUS RESEARCH
As outlined above, the heart of the deprivation and liberal concep-

tions of the relationship between FDI and domestic conflict is the
contention that slow growth and income inequality lead to instability.
The disagreement centers on whether FDI enhances or retards growth
and increases or decreases inequality. Given these arguments, it is
important to consider the evidence from cross-national research.
There exist large bodies of literature that deal with the pertinent
relationships. Bornschier et al. (1978), Bornschier and Chase-Dunn
(1985), Rothgeb (1989b), and Lichbach (1989) offer extensive reviews
on some of these relationships. However, the literature on the linkage
between investment dependence and domestic conflict is less well
developed. For example, Rothgeb (1989a, 1990) examines the effects
of FDI on only one type of conflict: political protest. Even when the
analysis is extended to include political turmoil and internal war.
there still is a failure to examine what economic mechanisms are

associated with deprivation (Rothgeb. 1991).
Timberlake and Williams (1987) correct for this in part by looking
at how a state's position in the world system affects its levels of
inequality and conflict. They find more inequality and internal war in
non-core states. Boswell and Dixon (1990) extend this analysis by
considering how FDI affects growth. inequality. and violence. dis-
covering that larger FDI is related to slower growth. more inequality.
and higher violence.
These results. however, are not unanimous. For instance, London
and Robinson (1989) argue that while FDI produces violence. growth
and inequality are not intervening variables. In addition. Weede and
Tiefenbach (1981) show that FDI is not related to inequality when
one controls for the curvilinear relationship between per capita in-
come and inequality.
Thus. previous research has been in determinant. In part. this can
be traced to the sample of countries analyzed. with Weede and
Tiefenbach (1981) and Timberlake and Williams (1987) examining
all countries. while others look only at developing societies. One also
finds differences with regard to the time periods examined. the types
of conflict investigated. and the measurement procedures employed.
To help clarify things, this chapter investigates a sample of de-
veloping countries subdivided according to region. In addition. pol-
itical protest. political turmoil, and internal war are examined during
four three-year periods between 1967 and 1978. Finally. FDI in the
manufacturing and mining sectors is analyzed. This design should be
useful for specifying where, when. and how investment dependence
affects conflict in developing countries.
RESEARCH DESIGN
A cross-national design is used to examine 84 countries classified by

the World Bank (1976, 1980, 1983) as underdeveloped. Table 11.1lists
these cases.
The dependent variables are political protest. political turmoil.
and internal war. Data from the Conflict and Peace Data Bank
(COPDAB) domestic scale were employed to measure these vari-
ables.~ This data set codes events on a scale that evaluates the type
of cooperation and conflict displayed. On this scale. value 10 includes
acts of political protest such as demonstrations, political strikes, and
Table 11.1 States in the Data Set
Afghanistan Egypt Madagascar Singapore

Algeria EI Salvador Malawi Somalia
Angola Ethiopia Malaysia Spain
Argentina Ghana Mali Sri Lanka
Bangladesh Greece Mauritania Sudan
Benin Guatemala Mexico Syria
Bolivia Guinea Mongolia Tanzania
Brazil Haiti Morocco Thailand
Burkina Faso Honduras Mozambique Togo
Burma Hong Kong Nicaragua Trinidad
Burundi India Niger Tunisia
Cambodia Indonesia Nigeria Turkey
Cameroon Iran Pakistan Uganda
Central African Republic Iraq Papua New Guinea Uruguay
Chad Ireland Paraguay Venezuela
Chile Jamaica Peru North Yemen
Colombia Jordan Philippines South Yemen
Costa Rica Kenya Portugal Yugoslavia
Cote d'Ivoire South Korea Rwanda Zaire
Dominican Republic Laos Senegal Zambia
Ecuador Lebanon Sierra Leone Zimbabwe
distributing anti-government propaganda, value 13 represents such

acts of political turmoil as rioting and civil violence, and value 15
pertains to events relating to internal war, such as terrorism, guerrilla
warfare, and civil war.
The conflict scores were computed as the number of events in each
conflict category divided by the total number of events coded by
COPDAB for each state. Separate scores were computed for each
time period. Proportions were used so that states with large total
numbers of events would not have high scores even though only a
small percentage of their events was of any particular type. 6
Conflict was treated as a function of the total stock of FDI in
manufacturing and in mining.7 Manufacturing FDI was examined
because it has been hypothesized as a key to the dependence that
creates deprivation in developing countries (Muller, 1985a, Rothgeb.
1989b), while mining FDI was included for comparative purposes.
FDI was measured as the value in constant 1970 US dollars of the
holdings of non-nationals in the manufacturing and mining sectors
divided by the gross domestic product (GDP) from these sectors (see
Jackman, 1982; Rothgeb, 1989b). Table 11.2 documents the data
sources.
Table 11.2 Data Sources
Variable Indicator Source
Stock of foreign investment in Measured in US 1

manufacturing and in mining dollars for 1967
Political protest, political Measured for 1967-69, 2
turmoil, and internal war 1970-72, 1973-75, and
1976-78
Repression Measured for 1967-69 2
Central government Measured in US 3
expenditures dollars for 1967
Total population Measured at mid-year 4
for 1967
Total GOP, GOP in mining and Measured in US 5
manufacturing dollars for 1967
Growth in GOP per capita and Measured for 1967-69, 5
growth in industry 1970-72,1973-75, and
1976-78
Income inequality Measured for 1965-70 6
OECD, Stock of Private Direct Investment by DAC Countries in

Developing Countries, Update, Paris: OECD, microfiche, no date.
2 Conflict and Peace Data Bank Domestic Scale
3 US Arms Control and Disarmaments Agency, World Military
Expenditures and Arms Transfers, various years
4 UN, Demographic Yearbook, various years
5 UN, Yearbook of National Accounts Statistics, various years
6 World Bank, World Tables, 1976, 1980, and 1983 editions
The control variables were the strength of the government, the

government's use of repression, and the size of the host country.K
Government strength and repression were included because many
analysts see these variables as important determinants of when an
individual will engage in conflict (Hibbs, 1973; Muller and Seligson,
1987; Tilly, 1978). Size was controlled because Jackman (1982) and
Rothgeb (1989b) see it as affecting a state's ability to regulate MNCs.
Strength was measured as central government expenditures divided
by GDP. Repression was operationalized with COPDAB data. A
proportional measure of the sort described above was constructed

by dividing the number of events coded as 11, 12, or 14 by the total
events for each state. Scale values 11, 12, and 14 include such repres-
sive acts as imposing curfews, forbidding public meetings, arresting
opposition leaders, and imposing martial law. Size was measured as
total population of the host country, which was logarithmically trans-
formed in order to adjust for skewness.
Interaction terms were used to analyze regional variations. Dummy
variables were created to represent sub-Saharan African, Latin
American, and Asian countries. These variables were produced by
assigning a 1 to all states in the region in question and a 0 to all
others. Interaction terms were then created by multiplying the dummy
variables by the FDI variables described above. These interaction
terms allowed one to compare the pattern for each region to the
pattern for the rest of the states in the data set.
Multiple regression analysis was used to examine the hypothesized
relationships. Scatter plots of the bivariate relationships between the
independent and dependent variables were examined to check for
nonlinear associations. No clear patterns were found. 9 Cook's D was
used to check for outliers, which were omitted when necessary. The
independent and control variables were regressed on one another to
test for multicollinearity (Lewis-Beck, 1980). Severe problems (R2 >
.90) were found for saturated equations that included the interaction
terms and the main effects. This problem was solved by examining
the interaction terms and the main effects in separate regression
equations.1O
A key to distinguishing between the deprivation, liberal, and
mobilization views of the association between FDI and conflict centers
on the intervening effects of per capita growth and income inequal-
ity. Investigating these effects involved analyzing three sets of re-
gression equations (Asher, 1976).11 The first considered the effect of
FDI on growth, which was measured as the average yearly real growth
in GOP per capita. The following equation was used:
(1) GDP per cap = a + bl Forinv + b2 GovExp + b3 Repress +

b4 Pop + e
The effects of the interaction terms were examined by substituting

these variables separately for ForInv in this equation. The same basic
equations were used for manufacturing and mining investments. 12
The next set of equations investigated FDI and inequality, which
Table 11.3 World and Regional per capita and Industrial Growth Rates,
1%7-78
1967-69 1970-72 1973-75 1976-78
Per capita growth

World 3.8 3.4 -0.9 2.4
Developed market economies 3.8 3.4 -1.3 2.8
Africa 3.9 2.5 0.9 2.4
Latin America and Caribbean 3.3 3.9 2.2 2.4
East and Southeast Asia 3.8 0.0 1.4 5.2
Industrial growth
World 7.8 5.4 -0.4 5.1
Developed market economies 7.1 4.4 -4.0 5.0
Africa 12.9 4.9 -2.7 4.0
Latin America and Caribbean 8.7 7.7 3.3 4.9
East and Southeast Asia 10.4 7.2 5.1 9.0
Note: The figures for Africa exclude South Africa and those for East and
Southeast Asia exclude Japan.
was measured as the share of a society's income that went to the

poorest 20 per cent of the people.13 The equation used was:
(2) Income = a + bl ForInv + b2 GovExp + b3 Repress + b4 Pop
+e
As above, examining the interaction terms used analogous
equations. 14
The final equations analyzed FDI, growth, inequality, and political
conflict. The following are examples:
(3) PolCon = a + bi Forlnv + b2 GDP per cap + b3 Repress +
b4 Pop + b5 GovExp + e
(4) PolCon = a + bl ForInv + b2 Income + b3 Repress + b4 Pop
+ b5 GovExp + e
The interaction terms were substituted as mentioned above.
To assess how the above relationships vary over time, the analysis
examined four time periods: 1967-69, 1970-72, 1973-75, and 1976-
78. These years were pertinent for analyzing changes over time
because they include periods when the economic performance
throughout the world and in the regions studied varied substantially.
Table 11.3 shows that, with the exception of East Asia in 1970-72,
1967-69 and 1970-72 were periods of solid per capita and industrial
growth. The years 1973-75 and 1976-78, however, experienced slower
and even negative growth. This especially is the case in 1973-75, with
1976-78 appearing as a time of mild recovery.
Given these differences, one is afforded the opportunity to inves-
tigate claims that changes in the international economic climate have
an effect on the stability of developing countries (see Krasner, 1976;
Gasiorowski, 1985). In particular, it is possible to assess whether a
poor country's investment dependence affects its economic prospects
and its level of political conflict during periods of prosperity (1967-
69 and 1970-72), recession (1973-75), and recovery (1976-78).15
Average yearly political conflict and growth figures were computed
for each of the above periods. The remaining variables were meas-
ured for 1967-69. FDI data were only available for 1967. The World
Bank provides inequality data for 1965-70. Government expenditures
and population were measured for 1967, and repression was averaged
for 1967-69. Rothgeb (1986) employed similar procedures when
studying the effects of FDI under differing international economic
conditions. 16
RESULTS
Table 11.4 reports the results for the association between FDI and
growth. There is a negative relationship between manufacturing FDI
and growth during 1973-75 and 1976-78 for the entire sample and
for African states. A negative association also exists for mining FDI
in Africa during 1970-72. In addition, mining FDI is positively re-
lated to growth when one examines the entire sample during 1976-
78. Latin American and Asian states display no relationships between
these variables. Population is the only control variable related to
growth, with a positive effect during the 1967-69 period.
As far as income inequality is concerned, the findings in Table 11.5
show that among the Latin American states higher manufacturing
FDI is associated with lower income shares for the poorest 20 per
cent of the population. For Asian states the pattern is different, as
both manufacturing and mining FDI is related to higher income shares
for the poorest segment of the population. The only control variables
displaying a relationship to inequality are government repression, which
is associated with higher income shares for the poor when the Asian
Table 11.4 Foreign Investments and Growth in per capita Income
Amerx Atr x Asia x

Time Forlnv Forlnv Forlnv Forlnv Repress Pop GovExp R2 N
Manufacturing investments
.10 .17 .29a .15 .12 55
1967-69 -.27 -.09 .08 .18 .11 55
.07 .15 .27 .16 .11 55
-.20 -.01 .33a .14 .10 55
-.16 -.17 .04 .09 .04 57
1970-72 .10 -.06 .13 .08 .03 57
-.26 -.12 .20 .07 .13 57
.00 -.12 .24 .08 .07 57
-.30a -.14 .04 .00 .10 56
1973-75 .05 -.06 .12 .02 .02 56
-.54d -.21 -.06 .13 .33 56
.17 -.06 .07 .00 .05 56
-.32a -.25 .04 .03 .13 54
1976-78 .02 -.05 .19 .09 .04 54
-.45c -.17 .06 .15 .24 54
.25 -.16 .06 .01 .10 54
Mining investments
.21 -.01 .29 .16 .09 52
1967-69 -.16 .02 .20 .11 .09 52
-.06 .10 .23 .12 .07 52
-.13 .00 .30 .14 .09 52
.08 -.10 .25 .05 .06 54
1970-72 .16 -.03 .29 .06 .08 54
-.34a .08 .07 -.01 .12 54
-.06 -.12 .24 .03 .06 54
.10 -.03 .16 .01 .03 54
1973-75 .06 -.03 .14 .01 .02 54
-.21 -.13 -.03 .10 .08 54
.14 -.07 .14 .02 .04 54
.30a -.15 .28 .02 .14 52
1976-78 .19 -.13 .22 .01 .09 52
-.25 -.05 .13 .12 .10 52
.11 -.19 .17 .16 .10 52
Beta weights are reported. a:p < .05, b:p < .01, c:p < .001, d:p < .0001
interaction terms for both manufacturing and mining FDI are in the
equation, and government expenditures, which is related to lower
shares for the poor when the Latin American manufacturing inter-
action term is in the equation.
Having established the patterns relating FDI to growth and in-
equality, it is now possible to consider their effects on political conftict.
Table 11.5 Foreign Investments and Income Inequality
Amerx Afr x Asia x

Forlnv Forlnv Forlnv Forlnv Repress Pop GovExp R! N
-.28 -.03 .19 -.10 .17 42
-.67d .03 .06 -.35a .41 42
.03 .02 .30 -.09 .11 42
.55b .35a -.06 -.14 .30 42
Mining investments
.08 .12 .28 -.21 .13 42
.01 .11 .25 -.22 .13 42
-.04 .01 .26 -.13 .10 42
.56b .40a -.20 -.12 .29 42
Beta weights are reported. a:p < .05, b:p < .01. c:p < .001, d:p < .0001
Table 11.6 presents the results for internal war when economic growth
is in the equation. Looking first at the effects of economic growth on
internal war, one finds that, except when the Asian interaction term
is present, lower growth is associated with higher conflict during
1973-75 and 1976-78 when manufacturing FDI is examined. Economic
growth also is negatively related to internal war during 1976-78 re-
garding mining FDI. If one reflects on the previous results from Table
11.4, one can discern a deprivation pattern for African states. Among
these countries, FDI is associated with lower growth, which is in turn
related to more internal war. This pattern only applies, however, to
the years of recession and recovery in 1973-75 and 1976-78.
As far as FDI is concerned, the results reveal few direct effects.
The Latin American manufacturing interaction term is positively
associated with internal war in 1967-69, and the African mining inter-
action term is negatively related to internal war in 1976-78.
Table 11.7 has the results for the effects of FDI and income in-
equality on internal war.17 These findings show that reduced income
shares for the poor are strongly related to higher levels of internal
war during the prosperity found in 1967-69. The patterns for the
remaining variables in the equations are much the same as they were
in Table 11.6, with the FDI variables displaying few direct effects on
internal war.
When one juxtaposes the results in Table 11.7 with those in Table
11.5, one finds support for the proposition that manufacturing FDI in
Latin America is associated with relative deprivation-based conflict
due to income inequality. At the same time, the results from Tables
11.4 and 11.6 support the conclusion that manufacturing FD I in Africa
is related to absolute deprivation-based conflict caused by lower levels
of growth. Thus, it would appear that each of the deprivation mech-
anisms is related to more internal war, but that these patterns vary
both by region and by time period. It should be noted that these
results conform with and extend Boswell and Dixon's (1990) findings
that FDI has an indirect effect on internal war by way of prior rela-
tionships with inequality and growth. 1M
Table 11.8 reports the first set of findings for political turmoil.
These results indicate that there is no relationship between growth
and turmoil. Manufacturing FDI. however, is related. There is a
negative relationship in 1967-69 and 1970-72 when one looks at the
entire sample, and in 1970-72 and 1976-78 when African states are
examined. Manufacturing FDI in Latin America is positively related
to turmoil in 1967-69. Mining FDl generally is not related to turmoil.
The only exception is the negative relationship for African states in
1970-72.
Table 11.9 shows the findings for turmoil when income is in the
equation. With the exception of a weak positive relationship in 1967-
69 when the interaction term for Latin American manufacturing FDl
is in the equation. income has no effect on turmoil. Interestingly. this
result indicates that in the better-off societies in Latin America. where
one finds higher levels of political organization among the disad-
vantaged. higher income shares for the poor during prosperous times
are associated with more turmoil. suggesting that increased income
may have a proactive effect. inclining the poor toward action designed
to increase their political clout. The direct effects of FDI on turmoil
in Table 11.9 parallel those found in Table U.8.
The final results are for political protest. Table 11.10 shows that
economic growth has a weak positive association with protest in the
1973-75 period when one looks at mining FDI. Table 11.11 indicates
that income inequality generally is not related to protest. The only
exception occurs in 1967-69 in the equation pertaining to mining
FDI in Asia. Given the absence of a prior relationship between mining
FDI and growth during 1973-75 (see Table 11.4), one may conclude
that investment dependence is not responsible for the way growth
affects protest. Mining FDI in Asia. however. is associated with greater
income equality; hence. one can surmise that the lower protest that
Table 11.6 Foreign Investments and Internal War, Controlling for Growth
Amerx Afrx Asia x

Time Forlnv Forlnv Forlnv Forlnv Growth Pop GovExp Repress W N
-.01 -.17 -.05 -.06 -.17 .05 55
1967-69 .53c -.16 -.05 .04 .05 .32 55
-.04 -.16 -.06 -.07 -.08 .05 55
-.27 -.19 .04 -.09 -.09 .11 55
-.17 -.10 -.31a .07 -.28 .15 57
1970-72 .15 .06 -.24 .31a -.35a .20 57
-.05 -.10 -.28a .05 -.23 .13 57
-.11 -.07 -.24 .06 -.22 .14 57
-.20 -.33a -.10 .23 -.27 .17 56
1973-75 .00 -.28a -.06 .23 -.21 .14 56
-.16 -.32a -.18 .15 -.37a .17 56
-.11 -.21 -.08 .25 -.31a .17 56
-.22 -.36a -.16 .01 -.13 .14 54
1976-78 .20 -.42b -.09 .11 -.09 .24 54
-.25 -.61c -.14 -.07 -.15 .31 54
-.15 -.26 -.07 -.02 -.04 .13 54
Mining investments
-.04 -.18 -.07 -.08 -.07 .06 52
1967-69 .05 -.21 -.07 -.15 .09 .08 52
-.15 -.21 -.11 -.16 .13 .10 52
-.16 -.21 -.04 -.17 .09 .11 52
-.01 .11 -.18 .27 -.27 .15 54
197~72 .24 .08 -.12 .09 -.14 .12 54
-.17 .06 -.22 .05 -.10 .09 54
-.06 .15 -.21 .04 -.15 .09 54
-.07 -.21 -.15 .29a -.29a .17 54
1973-75 .20 -.18 -.10 .19 -.20 .14 54
-.19 -.24 -.16 .3Oa -.28a .20 54
.02 -.17 -.18 .16 -.22 .10 54
.10 -.46b -.08 -.10 -.08 .23 52
1976-78 .19 -.41b -.06 .00 -.03 .20 52
-.31a -.44b -.18 -.02 .02 .24 52
-.10 -.35a -.10 -.04 -.05 .17 52
Table 11.7 Foreign Investments and Internal War, Controlling for Inequality
Amer x Afrx Asia x

Time ForInv ForInv Forlnv ForInv Income Pop GovExp Repress R2 N
-.12 -.54c -.06 -.18 -.07 .32 43
1967-69 -.03 -.54b -.02 -.18 -.07 .31 43
-.03 -.52c -.02 -.19 -.05 .31 43
-.14 -.51c .03 -.17 -.08 .33 43
-.45b -.15 -.29 .27 -.35a .33 43
197~72 -.25 -.18 -.18 .26 -.41a .20 43
-.20 -.06 -.18 .25 -.23 .20 43
-.15 -.07 -.08 .29 -.32 .19 43
-.06 -.26 -.17 .39a -.28 .33 43
1973-75 .04 -.24 -.14 .40a -.26 .33 43
-.03 -.25 -.16 .39a -.26 .33 43
.09 -.26 -.17 .39a -.27 .33 43
-.25 -.33a -.29 -.14 .11 .20 43
1976-78 -.14 -.34 -.23 -.15 .08 .16 43
-.15 -.27 -.24 -.16 .20 .17 43
-.18 -.27 -.14 -.12 .12 .18 43
Mining investments
-.01 -.51c -.04 -.23 -.06 .30 43
1967-69 -.02 -.51c -.05 -.23 -.07 .30 43
.08 -.52c -.02 -.22 -.10 .31 43
.00 -.51b -.04 -.23 -.06 .30 43
.22 -.04 -.10 .04 -.14 .11 43
197{}-72 .25 -.03 -.10 .05 -.12 .12 43
-.18 .00 -.24 .00 -.09 .09 43
-.08 .00 -.17 .01 -.18 .08 43
.24 -.18 -.12 .19 -.15 .20 43
1973-75 .27 -.17 -.11 .20 -.13 .21 43
-.16 -.14 -.25 .15 -.12 .17 43
.12 -.20 -.25 .15 -.17 .17 43
.07 -.25 -.21 -.21 .14 .16 43
1976-78 .11 -.25 -.20 -.21 .15 .16 43
-.25 -.20 -.30 -.23 .24 .20 43
-.06 -.23 -.22 -.22 .12 .16 43
Table 11.8 Foreign Investments and Turmoil, Controlling for Growth
Amerx Afrx Asia x

Time Forlnv Forlnv Forlnv Forlnv Growth Pop GovExp Repress ~ N
-.36a -.07 .00 -.17 -.12 .16 55
1967-69 .32a -.09 .16 .00 -.06 .14 55
-.26 -.09 .07 -.19 -.05 .13 55
-.20 -.07 .10 -.20 .01 .08 55
-.45b .07 -.15 -.05 -.31a .21 57
1970-72 .15 .08 .02 -.06 -.11 .07 57
-.46c -.01 -.11 -.07 -.25 .23 57
.06 .10 -.04 -.06 -.16 .05 57
.13 -.04 .06 -.12 .26 .07 56
1973-75 .19 -.06 .18 -.20 .39a .13 56
.04 -.05 .03 -.11 .23 .06 56
-.16 -.06 .11 -.21 .22 .10 56
-.04 -.12 .34a -.01 -.07 .13 54
1976-78 .21 -.14 .41b .00 .01 .16 54
-.31a -.12 .18 .03 -.05 .13 54
.18 -.15 .31a .00 -.06 .16 54
Mining investments
-.03 .00 .01 -.23 .08 .05 52
1967-69 .19 -.01 .17 -.15 .09 .08 52
.12 .00 .14 -.18 -.03 .06 52
.11 .00 .05 -.20 .10 .06 52
-.26 .05 -.04 -.08 -.17 .10 54
1970-72 -.02 .01 .05 -.05 -.16 .04 54
-.36a -.06 -.12 -.08 -.08 .16 54
.03 .13 -.12 -.11 -.12 .06 54
-.23 -.02 .05 -.23 .32a .16 54
1973-75 -.08 -.03 .11 -.20 .3Oa .12 54
.07 -.03 .09 -.17 .19 .07 54
.00 -.01 .05 -.21 .28 .09 54
.12 -.11 .45b .03 -.07 .17 52
1976-78 .27 -.13 50b .06 -.04 .22 52
-.28 -.13 .27 -.03 .02 .17 52
-.06 -.05 .33a -.05 -.02 .10 52
Table 11.9 Foreign Investments and Turmoil, Controlling for Inequality
Amer x Afrx Asia x

Time ForInv ForInv ForInv ForInv Income Pop GovExp Repress R2 N
-.38a -.13 -.05 -.29 -.23 .25 42
1967-69 .61b .40a .02 .05 -.11 .27 42
-.32a -.03 -.01 -.33a -.06 .24 42
-.13 .06 -.12 -.36a .01 .14 42
-.53c -.12 -.39b -.41 a -.01 .38 42
1970-72 -.04 .03 -.29 -.37a -.17 .21 42
-.56c .01 -.31a -.34a .08 .36 42
.31 -.13 -.35a -.30 -.04 .21 42
-.24 -.07 -.03 -.31 .41a .14 42
1973-75 .18 -.07 .16 -.29 .50a .18 42
-.02 -.18 .01 -.16 .29 .09 42
-.10 .06 .04 -.25 .24 .10 42
-.33 -.24 .17 -.33 .23 .21 42
1976-78 .26 -.19 .40a -.27 .29 .21 42
-.49b -.21 .18 -.34a .37a .36 42
.29 -.21 .24 -.17 .01 .23 42
Mining investments
.01 .07 -.15 -.38a .04 .14 42
1967-69 .00 .07 -.15 -.38a .04 .14 42
-.26 -.02 .01 -.32 -.05 .21 42
.14 .03 -.20 -.4Oa .06 .15 42
-.28 -.08 -.19 -.27 -.19 .17 42
1970-72 -.19 -.10 -.16 -.26 -.19 .13 42
-.48b .00 -.22 -.24 .07 .27 42
.23 -.06 -.29 -.25 -.11 .17 42
-.13 -.02 .04 -.23 .4Oa .17 42
1973-75 -.13 -.03 .04 -.23 .39a .17 42
.22 -.25 .08 -.13 .15 .13 42
.20 -.06 -.03 -.19 .34 .12 42
-.02 -.19 .28 -.21 .14 .15 42
1976-78 .22 -.17 .41a -.10 .09 .19 42
-.38a -.20 .24 -.27 .34 .28 42
.17 -.20 .19 -.20 .11 .15 42
Table 11.10 Foreign Investments and Protest, Controlling for Growth
Amerx Afrx Asia x

Time Forlnv Forlnv Forlnv Forlnv Growth Pop GovExp Repress R2 N
-.39b .16 -.08 -.43b -.04 .29 55
1967-69 .39b .09 .09 -.30a .07 .30 55
-.55d .23 -.13 -.43c -.19 .43 55
.08 .07 -.03 -.35a .04 .14 55
-.32a .20 .02 -.20 -.27 .26 57
1970-72 .29a .21 .19 -.11 -.10 .26 57
-.41b .12 .05 -.22 -.25 .32 57
-.03 .23 .12 -.22 -.16 .18 57
.01 .22 .14 -.13 -.26 .21 56
1973-75 .31a .15 .24 -.03 -.14 .24 56
-.32 .11 .20 -.07 -.27 .29 56
-.18 .27a .32a -.08 -.16 .24 56
-.34a .00 .11 .06 -.31 .18 54
1976-78 .42b .14 .13 .28 -.06 .20 54
-.SOc .10 .12 .05 -.31a .28 54
-.29a .17 .26 .02 -.16 .17 54
Mining investments
.16 -.01 .13 -.34a .04 .16 52
1967-69 .49c .09 .19 -.38b .20 .36 52
-.29a .17 -.14 -.41b -.07 .26 52
.25 .06 -.11 -.36a .01 .18 52
-.13 .25 .12 -.21 -.10 .19 54
1970-72 .16 .22 .18 -.18 -.10 .19 54
-.26 .16 .09 -.21 -.04 .22 54
.13 .26 .07 -.21 -.07 .19 54
-.06 .28a .22 -.20 -.21 .28 54
1973-75 .49d .24a .28a -.12 -.23a .47 54
-.05 .26a .10 -.24 -.29a .30 54
.07 .27a .11 -.23 -.19 .24 54
.06 .09 .28 .05 -.17 .13 52
1976-78 .49c .07 .33a .08 -.10 .29 52
-.33a .09 .08 .01 -.10 .20 52
.10 .18 .08 -.02 -.14 .10 52
Table 11.11 Foreign Investments and Protest, Controlling for Inequality
Amerx Afrx Asia x

Time ForInv ForInv ForInv ForInv Income Pop GovExp Repress If N
-.14 -.19 -.07 -.47b -.09 .28 42
1967-69 .26 -.12 .12 -.37a -.09 .32 42
-.41b -.05 -.16 -.49c -.09 .44 42
.01 -.22 .06 -.39a -.18 .28 42
-.15 -.09 .01 -.29 -.26 .23 42
1970-72 .27 .12 .12 -.13 -.18 .21 42
-.43b -.01 -.05 -.34a -.08 .35 42
-.05 -.07 .08 -.29 -.25 .22 42
-.11 -.13 .10 -.38a -.18 .28 42
1973-75 .31 -.05 .29 -.25 -.18 .36 42
-.39a -.Ol -.01 -.38a -.19 .42 42
.01 -.14 .10 -.30 -.27 .26 42
-.10 -.24 .18 -.09 -.25 .18 42
1976-78 .53a .12 .14 .12 -.22 .28 42
-.49b -.15 .06 -.16 -.06 .35 42
-.29 -.19 .31 -.07 -.27 .25 42
Mining investments
.14 -.21 .13 -.35a -.16 .27 42
1967-69 .12 -.20 .12 -.34a -.15 .26 42
-.23 -.07 -.07 -.41b -.14 .31 42
.33a -.31a .01 -.37a -.14 .33 42
.17 -.04 .09 -.28 -.19 .19 42
1970-72 .13 -.05 .11 -.28 -.20 .18 42
-.28 -.02 .06 -.28 -.05 .21 42
.20 -.14 .01 -.29 -.23 .24 42
.45b -.15 .20 -.25 -.36b .51 42
1973-75 .45b -.12 .19 -.24 -.32a .51 42
-.21 -.03 .02 -.36a -.22 .33 42
.18 -.14 -.01 -.34a -.25 .30 42
.16 -.21 .27 -.08 -.21 .19 42
1976-78 .23 -.20 .29 -.06 -.17 .21 42
-.41a -.15 .02 -.15 -.08 .24 42
-.11 -.20 .10 -.15 -.26 .16 42
results from this equality is at least in part a product of the prior

effects of FD I.
Perhaps the most interesting results in Tables 11.10 and 11.11 are
those for the direct relationships between FDI and protest. The basic
patterns that emerge indicate that manufacturing FDI in Latin
America is associated with more protest, while the same FDI in Africa
is related to fewer protests. This is true across all time periods. The
same general patterns hold when one examines mining FDI, except
that the relationships are weaker in the early to mid-1970s, especially
when African states are examined.
These results constitute the first evidence that supports the mobil-
ization and liberal views. The positive association among Latin
American states appears to exist in isolation from any linkage be-
tween investment dependence and either per capita growth or in-
equality. As one may recall, the mobilization conception is built on
just this sort of foundation, specifying that conflict occurs as a part of
an overall pattern of political struggle. The highly political nature of
Latin American labor unions and entrepreneurial organizations noted
earlier supports the notion that the increased protest in the face of
higher levels of FDI in this region may be a product of proactive and
reactive behavior. Future research should explore this possibility in
more detail.
As far as Africa is concerned, the negative relationship between
FDI dependence and protest fits in part with the view held by liberals.
The key question here has to do with the lack of any linkage to
either per capita growth or inequality. As was mentioned above,
liberals expect reduced conflict to come from economic improvements.
The results in Tables 11.10 and 11.11, however, show a direct effect.
This indicates the need to modify the liberal view, specifying both a
direct effect and that only a particular type of conflict, protest, is
affected among a certain category of countries, the extremely poor
states found in sub-Saharan Africa. Again, further research is needed
to provide a better grasp of the processes that are at work.
Before turning to conclusions, a few words are in order about the
effects of the control variables on political conflict. Government
repression has a weak direct negative association with each type of
conflict that varies over time. For internal war, the dampening effects
occur during 1970-72 and 1973-75; for turmoil, the impact is found
in 1970-72; and for protest, the relationship is in 1973-75 and 1976-
78. The size of a country's popUlation is weakly related to less internal
war in 1970-72, and positively associated with turmoil in 1976-78
and with protest in 1973-75 and 1976-78. The relationship between

population and protest only is found, however, in the equations for
mining FDI in Latin America. Finally, government expenditures have
a weak positive relationship with internal war in 1970-72 and with
protest in 1967-69.
CONCLUSION
This investigation has focused on the effects of FDI on conflict in

developing societies. Three conceptions of this relationship were
examined. The results indicate that a deprivation pattern of conflict
does occur when a country experiences FDI dependence. Depriva-
tion, however, only affects one type of conflict, internal war, and
appears as the product of manufacturing, but not mining, FDI. More-
over, the growth and inequality mechanisms that are at the heart of
the deprivation view are strongly tied to regional and international
variations, suggesting that context is a vital determinant of when and
how deprivation occurs.
The growth-oriented mechanisms associated with absolute depri-
vation only appear to function in very poor societies of the sort
found in Africa when there is a general climate of international eco-
nomic distress, as was the case in the mid- and late 1970s. This sup-
ports the argument that absolute deprivation leads to higher levels of
violence when extreme poverty is accompanied by a stagnant domes-
tic economy and by shrinking international opportunities, both of
which apparently magnify the already miserable living conditions of
the poor. Inequality patterns, however, seem to require that the
country is better-off, as are Latin American states, and that there is
the sort of international prosperity that existed in the 1960s. That is,
relative deprivation may lead to dissatisfaction and violence when a
country is somewhat wealthier and the overall economy is sounder,
thereby creating the conditions that encourage the poor to compare
their lot to those who have more. Future research should examine
these possibilities in closer detail.
This analysis also suggests that the liberal and mobilization con-
ceptions of the relationship between FDI penetration and political
conflict are at least in part accurate when one examines political
turmoil and protest. For these forms of conflict, the effects of FDI
appear to vary by region and are less tied to the time period that one
investigates and to the type of FDI one considers. This is especially
true of political protest, for higher FDI in Africa is consistently as-

sociated with lower levels of protest, while in Latin America higher
FDI is related to more protest. Apparently, in very poor societies a
substantial foreign presence helps to create conditions that provide
the appearance of economic progress and government legitimacy,
thus reducing mass protest. In the wealthier countries with better-
developed interest group structures, however, FDI penetration seems
to have a mobilizing effect, spurring proactive and reactive behavior.
Each of these possibilities points to avenues for further exploration.
In particular, there is a need to focus on the patterns found in Afri-
can countries among FDI. political protest, economic growth, and
internal war with an eye to determining how a reduction in protests
interacts with growth and with increased internal war. In Latin
America, an important research question pertains to investigating
the specific nature of mobilization that is produced by FDI in order
to determine whether it is reactive, proactive, or both.
In conclusion, the foregoing analysis indicates that dependence on
FDI does affect political conflict in developing countries. The effects,
however, are very complex and vary according to the types of coun-
tries, the time periods, and the sorts of conflict one examines.
Notes
1. Multinational corporations (MNCs) are businesses located in different
countries that follow a common strategy and share common ownership
(Vernon, 1971). Direct investments lead to foreign managerial control
over local assets. One may distinguish between stocks and flows of
foreign direct investment (FDI). Stocks are the total value of the hold-
ings of foreigners. Flows are the value of new capital introduced over
time.
2. Bornschier and Chase-Dunn (1985) and Rothgeb (1989b) discuss the
relationship between FDI in developing countries and their economic
growth and income inequality.
3. Rogowski (1987) examines trading linkages, instead of investment
dependence. The principles, however, remain the same.
4. Some scholars argue that regional analysis is inferior to work that
specifies the characteristics that result in differences between political
units. As przeworski and Teune (1970, p. 8) put it, 'the goal of com-
parative research is to substitute names of variables for the names of
social systems.' While there is sympathy for this ideal, regional varia-
tions are examined because, as is discussed in the text, previous re-
search shows that this variable retains considerable importance for
distinguishing between patterns of behavior. Many cultural, political,

and international factors vary on a regional basis. Therefore, the analy-
sis of regions remains a valuable approach.
5. Rothgeb (1991, p. 21) has compared the COPOAB data with the World
Handbook data set, finding that these sources produce conflict scores
that correlate highly with one another and that similar results are
produced by both data sets.
6. Muller (1985b) and Gurr and Lichbach (1986) argue that weighted
measures are preferable to raw measures, for they better indicate the
challenges made to the political system. Rothgeb (1991) has compared
the sort of weighted measures used herein with measures weighted by
popUlation, finding that both weighting procedures produce essentially
the same results.
7. The analysis was replicated with Rothgeb's (1989b) measure of flows
of FOI. The results showed that stocks have a greater impact on con-
flict than flows and that flows have little effect on the results for the
other variables in the analysis.
8. As suggested by Rothgeb (1991). parallel analysis that controlled for
such additional variables as ethnolinguistic fractionalization. trade as
a per cent of GOP. and changes in terms of trade also was conducted.
In each case. the relationship between FOI and conflict was the same
as reported herein.
9. Scatter plots of the relationships between error terms and independent
variables and between predicted values and error terms also were
used to assess biased estimates. In no case were patterns found that
indicated that there was a problem.
10. Only the results for the main effects of FOI and for the interaction
terms are reported. due to space limitations.
11. To conserve space. the regressions that separately analyze the effects
of the independent and intervening variables on the dependent vari-
ables are not reported. In each case. the relationships from the un-
reported equations paralleled those that are reported.
12. The impact of FOI on growth also was analyzed with a control for
domestic investment. as Ja~kman (1982) and Rothgeb (1989b) recom-
mend. The results were the same as those reported.
13. Parallel analysis was conducted that measured inequality as the share
of a society's income going to the richest 5 per cent of the people. The
results were very similar to those that are reported.
14. The impact of FOI on inequality also was analyzed with a control for
GOP per capita and GOP per capita squared, as Weede and Tiefenbach
(1981) suggest. The relationship between FOI and inequality was the
same as reported.
15. Rothgeb (1986) discusses how the role of FOI changes under differing
international economic conditions.
16. Sectoral data for FOI were only available for 1967. Correlations over
time for stock of total FOI. however. indicate a high degree of stability
among the data (see Rothgeb. 1986, p. 134). In addition, the data are
not perfectly ordered from a temporal point of view; some measures
of dependent and intervening variables are for periods occurring before
the measurement of independent variables. Therefore, the results herein

are only preliminary.
17. The different relationships between the independent, dependent, and
control variables in the growth and inequality equations raised the
question of whether the differences were due to the smaller sample
sizes of the inequality equations or the varying effects that growth and
inequality might have on the other variables in the analysis. To in-
vestigate this, parallel analysis was conducted on the inequality sample
that omitted the measure of inequality. In each case, the relationships
among the other variables was unaffected, indicating that the reduced
sample size accounts for the differences from the growth to the in-
equality equations.
18. The measures used in this study for the key variables differ from those
used by Boswell and Dixon (1990), indicating that the relationships
between these variables are not measurement-specific.
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Index
access to markets, 45 Boswell. T., 193, 201
aerospace see aircraft industry Brand-to-Brand Complementation
agriculture, 1 agreements. 63
banana industry, 104-25 Brazil. 1, 75. 180
Ahmed, A. A., 153, 154 Britain. 1
aid programmes, 2, 61-3 British Aerospace. 79-80. 81. 83nn
Airbus Industries, 72-3 Bulgaria
aircraft industry, 72-6 export processing zones in. 32
Taiwan study of, 76-82 foreign direct investment in, 143,
Albania, 147n3 144
American Motors, 17 Bush. George, 79
Apple, 31
Argentina, 1, 172, 175, 180. 181 cacao. 112, 113, 123. 125n7
Asia Pacific Economic Cooperation Canada. Auto Pact and, 7, 9-20
(APEC), 51, 52-3 car industry, 7-20
Asian Development Bank (ADB), Castro, Fidel, 174
51 Caves, R., 151, 152
Asociaci6n Nacional de Bananeros Chan. S., 72
del Ecuador, 121-2 Chile, 180
Association of Southeast Asian copper industry in, 176-7, 178
Nations (ASEAN), 48, 51, 63 China
Auto Pact (US-Canada. 1965). 7 economic development of. 179
effects of, 9-20 foreign direct investment in. I. 3.
automobile industry, 7-20 143. 148nn
Avro International Aerospace, 80 special economic zones in. 32
Awanohara. S.• 59 Clark. c., 72
cocoa (cacao). 112, 113, 123. 125n7
backward and forward linkages. 31. collaboration (joint ventures). 28,
36,57, 136 58,70
Balasubramanyam, V. N.• 154 Colombia, foreign direct
banana industry, 104-25 investment in, 152
Banco Nacional de Fomento commercial sector. 47
(BNF), 118-20 common markets, 23-4n22
banking, 58 communications. 21 n4. 35
Eastern European transition and. communism see socialist countries
135, 148n9 Compania Ecuadoriana Europea.
Ecuadorian banana industry and. 115
118-21 Compania Frutera de
Bladen Commission, 11 Sudamericana. 106. 115. 117
Bluestone. B., 73 control and ownership. 57
Boeing, 72-3, 74, 78 copper. 176-7
Border Industrialization Program, Costa Rica, banana industry in. 107
25,28 Cote d'Ivoire
Bornschier, V., 191 economy of, 154-5. 157-8. 162
240
Index 241
Cote d'Ivoire - continued see also individual countries

foreign direct investment in, 150. East Asian Economic Caucus
157, 159, 160-65 (EAEC).51
political instability in, 158-9, Eastern Europe, 3
162-3 foreign direct investment in.
Council for Mutual Economic 133-47
Assistance (Comecon), 130. reform programmes in. 129-33
133 socialist economy of. 127-9
Creditanstalt, 148n9 see also individual countries
Cuba. 109. 174 Echeverria. President. 28. 29
currency exchange rates. 45. 122 eclectic theory of international
Czechoslovakia. 131. 138. 148n7 production. 152
foreign direct investment in. 142. ecological problems. 30-1. 45. 140
143. 144 economic integration. 7-8
see also regionalization trends
debt crises. 2. 29. 157 economic restructuring. 130. 132-3.
defence sector. 75. 76-7. 80-81 138-41
deindustrialization. 50 Ecuador. banana industry in.
denationalization see privatization 104-25
dependency theory. 71-2. 84. 97. education and training. 31. 38n7.
98. 101 135-6
deprivation theory. 189-90. 192.215 Egypt. 1
determinants of foreign direct Embraer.75
investment. 151-60 'empty box' problem. 167
determinism. 167 Encarnation. D. J .. 55
developing countries. 1. 2-3. 8 environmental problems. 30-1. 45.
aid to. 2. 61-3 140
aircraft industry in. 73-6 ethics. 136
export processing zones in. 25-37 European Community (EC). 37. 4\.
foreign direct investment in. 42.48
150-65. 188-216 Evans. P. 8.. 72. 191
import substitution in. 45 exchange rates. 45. 122
multinational corporations and. export processing zones (EPZs.
84-103. 166-87 maqlliladoras). 25. 27. 32-3.
political instability in. 152-4. 34-7
162-3. 164. 188-216 Jamaica. 26. 27.33-4
see a/so imlividua/ countries Mauritius. 26. 27. 33
distribution of income. 189. 198-9 Mexico. 25-7. 28-32. 36-7
Dixon. W. 1.. 193.201 Exportadora de Frutas
Doner. R. F .. 59. 180 Ecuadorianas. 115
Dunning. J .. 152 Export-Import Bank of Japan. 63
Export-Import Bank of the United
East Asia States. 121
economic development of
comparison of Latin America Fajnzylber. F.. 85. 91. 92. 170
with. 166-87 female workers. 27. 31
political economy and. 84-103 Fiat. 148n12
regionalism in. 40-3. 46. 48-9. financial sector. 46. 47. 58
50-66 see also banking
242 Index
Ford Motor Co., 7, 12, 13, 14, 15, revenues of. 107
21n2 society's relations with. 85
forward and backward linkages, 31, Grace Lines, 117
36,57, 136 Great Britain. 1
France, 1-2, 159 Greater East Asia Co-Prosperity
Frey, B. S., 153 Sphere (GEACPS). 43.50.52
Fruit Trading Co., 115, 116, 124 green issues, 30-1. 45. 140
Greenhalgh, S., 191
Garrett, 76 Guisinger, Stephen, 23-4n22
Garten, J., 40 Gurr. T. R.. 188
General Agreement on Tariffs and
Trade (GATT), 37 Haiti, banana industry in. 109
General Dynamics, 76 health and safety at work, 30
General Motors, 7, 13, 14, 15-18, Hibbs, D. A., 188
23nn Hiraiwa, G., 54
Generalized System of Preferences, Hirono, R., 53
37 historical structuralism, 167
Gereffi, G., 40 Hollerrnan, L., 41. 60
Germany Honda, 17, 22n5
foreign direct investment by, 2 Hong Kong
post-communist transition in, foreign direct investment by, 48
138, 147n3 political economy and economic
reunification of, 131 development of, 86-7, 93,
Ghana 96,97,98, 101, 171, 176, 179,
economy of, 154-7, 161-2 180, 183
foreign direct investment in, 150, Houphouet-Boigny, President,
159-65 158-9
political instability of, 156, 158, 163 Huang, David, 78, 79, 81
Gilpin, R., 40 Hungary, 148n7
globalization trends, 2, 40-3 export processing zones in, 32
export processing zones and, 32, foreign direct investment in, 134,
36-7 138, 142, 143, 144, 145, 146,
Japanese foreign direct 147n3
investment and, 43-66 Hyundai, 17, 22n5
government and the state
aircraft industry and, 73-5, 77-9 IBM, 31, 180
Ecuadorian banana industry and, import substitution, 11. 45
118-23 incentives, investment, 7, 8, 10, 13,
export processing zones and, 15, 16, 18, 45, 154
28-9, 33-4, 36, 38n4 income distribution, 189, 198-9
industrial upgrading and, 68-70, India, political economy and
77-9,81 economic development of, 98,
instability of, 152-4, 162-3, 164, 178, 180, 185
188-216 Indonesia
investment incentives and, 7, 8, aircraft industry in, 75-6
10, 13, 15, 16, 18, 45, 154 economic development of, 169,
multinational corporations and. 172, 178, 179, 185
70-2, 73-5, 84-103, 177-86 foreign direct investment in. 1.
regionalism and, 41, 42. 54. 61-3 57
Index 243
Industri Pesawat Terbang labour unions see trade unions

Nusantara (IPTN), 75-6 land (real estate), 47
industrial upgrading, 67-70 Latin America
Eastern European, 139-40 comparison of economic
foreign direct investment and, development of East Asia
70-2, 138, 139-40 with, 166-87
Taiwan aircraft industry study of, see also individual countries
77-82 Lear Siegler International, 76
integration, economic, 7-8 Levis, M., 153
see also regionalization trends liberal theory. 190, 214, 215-16
International Monetary Fund Lichbach, M. I., 188
(IMF), 33. 134, 156, 157 Lim. D .. 152. 154
international trade see trade linkages, 31. 36. 57. 136
internationalization see globalization literacy, 38n7
intrafirm trade, 2, 55. 56 local content requirements. 9. 11
Ivory Coast see Cote d'Ivoire Lome Agreements, 37
London. B.. 193
Jackson, R, 191 LOpez Portillo. President. 28. 29
Jamaica, 38n7
banana industry in. 109 McDonald's, 136
export processing zones in. 26. McDonnell Douglas (MD), 73. 78.
27,33-4 79,81,83n4
Japan Madrid, Miguel de la, 29
aircraft industry in. 74 Mahathir bin Mohamed. Dr, 51
foreign direct investment by. 1-2. Malaysia
30, 39 economic development of, 169.
patterns of. 43-50 172. 178. 185
political economy and economic foreign direct investment in. 1. 57
development of. 92. 171. regionalism and. 51-2
180. 185 management. 58, 135-6
regiona1ization trends and. Manley. Michael. 34
40-3.46.48-9,50-66 manufacturing sector, 1, 46, 47
Japan Asia Investment Co .. 62 aircraft industry. 72-82
Japan International Development in export processing zones. 25-37
Organization, 63 motor vehicle industry, 7-20
joint ventures. 28. 58, 70 maquiladorization, 25-37
Joselow. I. B .• 117 market access, 45
marketization in Eastern Europe,
Keeley. J. F., II 130. 131, 135-7
Kojima, K., 175 Marshall, S. E., 191
Kono. Too 60 Matsushita, 58
Korea. South Mauritius, 38n7
foreign direct investment by, 2, export processing zones in, 26.
48 27,33
political economy and economic Mexico, 38n7, 176, 178, 180
development of. 86. 87. banana industry in, 109, 125n4
92-4. 96. 97. 98. 101. \02. foreign direct investment in, 1
171. 173. 174. 176. 178. maquiladoras in, 25-7, 28-32.
179-80. 183. 185 36-7
244 Index
military sector, 75, 76-7, 80-1 Panama disease, 109, 111-12

mineral resources, 152 path dependencies, 167
mining, 1 Peru, 178, 180
Mitsubishi, 63, 64 Philippines, political economy and
mobilization theory, 190-1, 214, economic development of, 86,
215-16 89-90, 92, 93, 96, 97, 98, 100,
modernization theory, 84, 97, 98 101,169,170,171-2,175,179,
Modine Manufacturing Co., 11 185
monetary stabilization, 130, 134 Piper Aircraft Corporation, 75
Monetary Union of West Africa, 159 planned economies see socialist
monopoly, 72, 136-7 countries
morality and ethics, 136 Plaza Accord, 45
motor vehicle industry, 7-20 Plaza Lasso, Galo, 118, 126n15
multinational corporations (MNCs), Poland
2 export processing zones in, 32
in aircraft industry, 72-4, 75, 76, foreign direct investment in, 3,
79-82 143, 144, 148n12
Eastern European transition and, post-communist transition in,
128, 136, 138, 141-2 148nn
economic development and, political economy
84-103, 104, 166-87 of aircraft industry, 72-6, 81
Ecuadorian banana industry and, economic development and
104-5, 108, 114-18, 123 culture of, 84-103, 169-87
export processing zones and, political stability, foreign direct
34-7 investment and, 152-4, 162-3,
industrial upgrading and, 68, 164, 188-216
70-2 portfolio investment, 137, 148n8
regionalism and, 53-61, 63-4, 65 prices, 122
relations of state with, 36, 70-2, privatization, 2-3
73-5,84-103, 177-86 in Eastern Europe, 130, 131-2,
137-8, 149n16
Nangaku, M., 53 product cycle theory, 151
natural resources production methods, 17
as determinants of foreign direct productivity, 35
investment, 152, 161-2 profit repatriation, 189
supplies of, 45 property (real estate), 47
Nkrumah, Kwame, 159-60 Proton, 64
Noboa, Luis, 113, 114, 117, 126n18 public sector see government and
North American Free Trade the state; privatization
Agreement (NAFTA). 20, 30, Pyle, K., 52
31,32,37,42, 48
Northrop, 75, 76 Rawlings, Jerry, 156, 158
Reagan, Ronald, 76
Ohata, Y., 53 real estate, 47
oil, 145 regional variations in effects of
Operational Headquarters scheme, foreign direct investment, 191-2
58 regionalization trends, 2, 40-3
outsourcing, 46 Japanese foreign direct
ownership and control, 57 investment and, 43-66
Index 245
Reich. R., 32 special economic zones see export

repatriation of profits, 189 processing zones
resources see natural resources stability see political stability
restructuring: in Eastern Europe, stabilization, 158
130, 132-3. 138-41 in Eastern Europe, 129, 130-1,
Risse-Kappen, T., 85 134, 148n5
Robinson, T. D., 193 Standard Fruit, 108, 110, 115
Rogowski, R., 190 state see government
Root, F. R., 153, 154 statist theory, 84, 97, 98
Rosberg. C, 191 Stolper-Samuelson theorem, 190-1
Rothgeb, J. M., 191, 192-3 structural adjustment programs, 104
Rubenstein, James, 21n4 structuralism, 167
Rumania, foreign direct investment Studebaker, 23n21
in. 143, 144, 147n3 subcontracting, 55, 57-8
Rummel, R., 188 Sunderland, Thomas, 117
Russia Suzuki, 7, 13, 16-17
export processing zones in, 32
foreign direct investment in, 143, Taiwan
144. 145. 148n4 aircraft industry in, 76-82
post-communist transition in, foreign direct investment by, 2, 48
130, 131. 132-3, 136 foreign direct investment in, 1
industrial upgrading in, 67-70
safety at work. 30 political economy and economic
Salinas de Gortari, Carlos, 29 development of, 86, 88-9,
savings, 45 92-5,96,98, 102, 171, 173,
Schneider, F., 153 174,176,178,179,183,185
science and technology policy, Taiwan Aerospace Corporation
69-70 (TAC), 78-81
Seaga. Edward, 33. 34 Tanter. R., 188
service sector, I, 46, 47 technology agreements, 57, 138
Sigatoka leaf spot, 109, 111, 119, technology policy, 69-70
121, 122, 124-5 telecommunications, 21n4, 35
Singapore Thailand
foreign direct investment by, 48 foreign direct investment in, 1,
foreign direct investment in, 1, 55, 57
58 political economy and economic
political economy and economic development of, 86, 90-1,
development of, 86, 87-8, 93,95-7, 100, 101-2, 172,
94,96,97,98. 100,173, 176, 178, 180, 185
178, 180, 184, 185 Third World see developing countries
Slovenia, foreign direct investment Thurow, L., 40
in, 143, 144 Tiefenbach, H., 193
social welfare, 139 Tilly, c., 190
socialist countries, 3, 156 Timberlake, M., 193
see also Eastern Europe Tokunaga, S., 57, 60
Soesastro, Hadi, 51 Toyota, 17, 22n5, 54, 58, 63
Sony, 58 trade
South Korea see Korea, South banana industry, 105-7, 109,
Soviet Union see Russia 110-11, 116-18
246 Index
trade - continued Asia and. 51-2. 173. 175

Eastern European transition and, Auto Pact and. 7. 9-20
no, 133, 140-1 foreign direct investment by. 1-2.
export processing zones and, 30, 175
33 foreign direct investment in. 2
intrafirm, 2, 55, 56 Latin America and. 174
investment and, 9-10 Mexican mtllf,,;ltulortl.~ and. 25.
regionalism and, 40, 48-9, 55 28
US-Canada Auto Pact and, political economy of. 91-2
11-12. 19-20
trade unions Velasco Ibarra. President. 124
in banana industry, 112, 124 Venezuela, 176. 17M. 180
and export processing zones. 27. Vernon. R .. 151
28 Vietnam
training and education, 31. 38n7, economic development of. 169
135-6 export processing zones in. 32
transactional approach to foreign foreign direct investment in. 3, 64
direct investment. 151
transnational corporations see wages: in export processing zones.
multinational corporations 27.34-5
transport Weede. E.. 193
in banana industry. 112-13, 117. welfare systems. 139
121 Williams. K. R.. 193
costs of, 9, 21n4, 35 women workers. 27. 30
investment in, 46, 47 World Bank. 121. 156
regionalism and. 58-9
Yerovi Indaburi, Clemento. 118
unemployment, 14, IS, 17 Yugoslavia
unions see trade unions foreign direct investment in, 143,
United Fruit Co., 104-5, 108, 110, 144, 147-8nn
112, 114, 117-18, 124, 125-6nn post-communist transition in,
United Kingdom, 1 148n5
United Nations, 134
United States of America Zaire, 177
aircraft industry in, 74, 79 Zambia, 177

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INTERNATIONAL POLITICAL ECONOMY SERIES

General Editor: Timothy M. Shaw, Professor of Political Science and International

Recent titles include:

All rights reserved. No reproduction, copy or transmission of

First edition 1995

ISBN 978-0-333-66476-6 ISBN 978-1-349-14121-0 (eBook)

A catalogue record for this book is available

~ Published in the United States of America 1995 by

ISBN 978-0-312-12378-9 (cloth)

1 Introduction: Foreign Direct Investment in a Changing

2 Auto Bargaining in Canada, 1965-87

3 Maquiladorization as a Global Process

4 Japanese Foreign Direct Investment in East Asia:

5 Industrial Upgrading and Multinational Corporations:

6 MNCs and Developmentalism: Domestic Structures as

7 State or Market: The Development of the Ecuadorian

8 Foreign Direct Investment in Eastern Europe:

9 Foreign Direct Investment in Ghana and Cote d'Ivoire

10 Do MNCs Matter for National Development?

11 Investment Dependence and Political Conflict in

Cal Clark is Professor and Head of Political Science at Auburn

Jeffrey A. Hart is Professor of Political Science at Indiana Univer-

Chi Huang is Associate Professor of Political Science at the Univer-

Kit G. Machado regularly teaches international and East Asian pol-

Cart H. McMillan is Professor of Economics at Carleton University

and is a member of its executive board. His published work has

Susan McMillan received her PhD in Political Science at the Univer-

John M. Rothgeb, Jr is Professor of Political Science at Miami Uni-

David W. Schodt received his MA in Public Administration/Policy

Fellow. He is author of Ecuador: An Andean Enigma and co-author

Kenneth P. Thomas is Assistant Professor of Political Science and

Republic of Germany, and the United Kingdom - were responsible

abandon the less efficient public enterprises. These trends as well as

maquiladoras in the latter country. FDI has been attracted to export-

Asian countries with different FDI involvement and economic suc-

ideological outlook have had only a marginal influence on FDI inflow,

HOW INVESTMENT CONDITIONS TRADE POLICY

Trade policy is subject to considerations of investment in a variety of

THE CANADIAN RESPONSE TO THE INDUSTRY CRISIS

The Canadian government appointed a one-man Royal Commission

'free trade' was restricted to bona fide manufacturers of automobiles

BARGAINING FOR PRODUCTION IN CANADA, 1963-87

In this section I examine the main investments which Ford and

approximately $250 million in incentives by the Canadian govern-

Duty Rebate/Auto Pact-Era Plants

Essex Engine Plant, 1978

Ford's introduction of a new V-6 engine for the North American

Oshawa, Ontario, Expansion, 1986

On 24 March 1986, General Motors announced that it would invest

GM did not receive any incentives for this modernization. 12 One

Canadian-American Motors, Inc. (CAMI), 1986

Ste.-Therese, Quebec, 1987

Negotiations over the fate of the Ste.-Therese. Quebec. assembly

surplus in automotive products (parts plus finished automobiles),

Three shared the Canadian government's desire to increase produc-

in Canada been locally owned, they might have responded differently

Later in this period, though there were no dramatic changes in trans-

12. Telephone interview with Leslie Desjardins, Manager of Trade and