MULTINATIONAL ENTERPRISE AND THE NATION STATE

PROJECT REPORT FROM THE HARVARD BUSINESS SCHOOL

BY RAYMOND VERNON

SUMMARY

This is the third annual progress report relating to the study of multi- national enterprists at the Harvard Business School. This report, like its predecessors, is drafted in such a way as to provide an up-to-date picture of the state of the project without reference to prior reports.

From the first, the project was conceived as the opening phase of a long-run effort to understand certain aspects of the operations of the multinational enterprise. The original plan was to complete this phase by the summer of 1969. By that time, a dozen doctors' theses and per- haps twenty articles will have ap eared. In addition, completed first

scheduled to be in hand; a fifth volume, synthesizing and exten ing the others, is to be written in the year following.

Collectively, these publications are expected to illuminate the prob- lems of the multinational enterprise in the fields of finance, marketing, organization, and business-govemment relations. In addition, new light will have been shed u on the role of multinational enterprises

Perhaps the most telling contribution of the project in Ae long run- one that had not been clearly contemplated a t the time that the project was first conceived-will be the development and dissemination of an historical file tracing the history of some 12,000 subsidiaries of U.S. parents since 1900. This hle, generated as a by-product of the analytical work being undertaken by the project, is being designed so that rG- searchers at other institutions may have access to some of its contents, within the limits imposed by confidentiality commitments.

d drafts of three of the four books re P ating to this phase of the pro'ect are

in international trade, capita P movements, and technolo ical transfers.

THE AREAS OF STUDY

The main areas of study that make up the project are summarized in the sections that follow.

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The Finance Study This study is being conducted by Sidney M. Robbins, Professor of Finance a t the Graduate School of Business at Columbia University; Daniel M. Schydlowsky, Assistant Professor of Economics at Harvard University; and Robert B. Stobaugh, Jr., Lecturer on Business Adminis- tration at the Harvard Business School.

The main object of this study, as described in earlier reports, is to detennine how multinational enterprises handle the financial manage- ment of their foreign operations. More specifically, the aims are five- fold: (I) to describe existing patterns of behavior in the finance field; (2) to discover whatever relationships may exist between the charac- teristics of the multinational firm and the way it conducts the financial function; (3) to develop a theory to explain this relationship; (4) on the basis of this theory to predict future behavior; and ( 5 ) to identify the the behavior that might be regarded as optimal given the apparent objectives of the enterprise. Thus, in addition to being descriptive, the study is also predictive and normative.

Four primary sources of data are being used for the study. The first is a series of prolonged in-depth interviews with the headquarters staff of the company. A second source consists of interviews in Turkey, Japan, and several European countries. A third consists of unpublished financial data obtained &om several companies and &om theBritish government. A fourth is published financial data obtained &om an exhaustive analy- sis of fhancial reports of parents and subsidiaries made to stockholders and to regulatory agencies. From this last-named source, reasonably uniform data are available &om about IIO companies, of which the data for 50 will be quite detailed.

Of the four sources of data, the interview analyses were the most advanced by the end of 1968. All interviews had been substantially compieted, although M e r selected interviews and a short question- naire to fill specific informational gaps were being contemplated. The completed interviews were being analysed through computerized statistical techniques. A program was also being developed to analyze the company financial data, in an cffort to find out how the variatiops in company characteristics and methods of conducting the financial h c t i o n eventually a pear in relationships in balance-sheet and income-

the hal stages of completion at the year-end. The proposed book is to be divided into six major parts as follows:

(I) the problems and opportunities of multinationality and the frame- work of a theory of multinationality; (2) the organization, planning, and control aspects of financial action; (3) the management of short- term and long-term assets and liabilities; (4) the role of financial

statement data. Deta' s ed working papers on Japan and Turkey were in

I 62 JOURNAL OF COMMON MARKET STUDIES

managers in regional offices and subsidiaries; (5 ) a mathematical model of financial management indicating the normative method of financial action, given certain goals of the com any and the costs of deviating fiom such methods; and (6) expected P uture developments.

T h e Murketirrg Study This study is being conducted by Professor Richard H. HoIton, Dean ofthe School of Business Administration of the University of California at Berkeley.

Considerable time and effort were devoted during the year to prob- lems of methodology. It gradually became evident that a statistical sample of the sort usually encountered in empirical studies was not appropriate or feasible. The hypotheses for test and the structure of the observable data appeared too complex for standard statistical analysis. Accordingly, the basic materials for analysis will consist of exTensive surveys of the secondary literature, enriched by detailed interviews of a non-random sample of 4 w d d firms.

Despite the dif5culties in devising adequate statistical tests, some interesting hypotheses were coming to the surface. The role of market- ing policies as a means of acquiring better information prior to an investment decision is a major case in point. Firms experienced in international operations generally prefer to enter markets abroad by methods that minimize risk and uncertainty, maximize control, and yet maintain flexibility. Evidence on t h i s point suggests that this theme, appropriately developed, should be an important part of the normative theory of management of international operations. The research promises to shed new light, too, on the rationale behind the cenaaliza- tion and decentralization of marketing policy-making in international operations. The final manuscript should come close to being a textbook in international marketing, although it will not provide the institutional detail ordinarily available in such texts. The projected date for a com- pleted first draft is now the early fall of 1969.

Studies of Olganization Studies in this field have been conducted by Lawrence E. Fouraker, Ford Professor of Business Administration at the Harvard Business School, in collaboration with John M. Stopford, Senior Lecturer at the Mauchester (England) Business School; and by Assistant Professor Louis T. Wells, Jr., a t the Harvard Business School.

Professor Fouraker’s work on the organizational structure of the multinational enterprise has been built upon the prior work of others in the organizational field, utilizing concepts and taxonomies that are

MULTINATIONAL. ENTERPFUSE I 63

already well understood. It now appears likely that it will be possible to identify the apparent effects of foreign business upon the structure of the multinational firm in these terms. The techniques employed in this aspect of the study are both qualitative and quantitative in character. The interrelationships between profitability, growth rates, and the propensity to invest abroad for multinational enterprises are being correlated with the organizational forms that such enterprises adopt. The sequences in structure characteristic of organizations that are going abroad also are being quantitatively described.

Professor Wells's research centers on the ownership patterns that multinational enterprises are using with respect to their foreign sub- sidiaries. The choice between the wholly owned subsidiary and the joint venture, it is hypothesized, is far from random; the choice can be explained not only in terms of the pressures imposed by the countries concerned, but also in terms of the nature of the economic activity of the enterprise. Once such a choice has been made, there are predictable implications for policies in the fields of transfer pricing, dividend pay- out, market assignment, and so on. Some of these implications, accord- ing to the hypotheses, are quite at variance with the assumptions ofhost countries about the relative advantages of joint ventures and wholly owned subsidiaries.

There is a dynamic dimension in the analysis as well. The hypotheses assume that joint ventures may be tolerable at one stage in the sub- sidiary's development but much more dif€icult at a subsequent stage. The study tries to develop a systematic view of the factors tending to alter the optimum ownership form over time.

Professor Wells's work was well advanced by the end of the year. Some of the programs had already been written to test the predicted relationships between the frequency of joint rentures among the firm's subsidiaries and characteristics of the firm, its industry, and the country in which the subsidiary is located. Initial computer runs were scheduled for completion early in 1969. Company interviews were also contemplated as part of the 19% program to check the causal relation- ships suggested by the data.

The two bodies of work, being addressed to the two most dacul t aspects of multinational organization, will be published in a single volume. The completed manuscript should be available early in the fall of 1969.

Industry Studies The project has supported two major industry studies: one on niulti- national enterprise in the petrochemicals business; the other on niulti- national enterprise in pharmaceuticals.

164 JOURNAL OF COMMON MARKET STUDIES

The harmaceuticals study is being conducted by Lawrence H. Wortze P , Associate Professor and Area Coordinator, Marketing and Administrative Sciences, Boston University Business School. The task of collating and digesting a global bibliogra hy of the pharmaceuticals

relevant historical material was developed in the process. In addition, an extensive program of interviewing in Britain and Europe was com- pleted. The rinciple tasks remaining were to conduct interviews with

It was anticipated that the interviews would be completed during the winter and early spring of 1969 and that a first draft of the book would be available in the fall of 1969.

The petrochemicals study, under the direction of Robert B. Stobaugh, Jr., Lecturer a t the Harvard Business School, had already been com- pleted in preliminary form in 1968 in the form of a D.B.A. thesis. The thesis, which took second place in the Association for Education in International Business competition, provided extensive quantitative tests of certain critical hypotheses regarding the forces behind the creation of multinational enterprises. The task of expanding and im- proving the thesis for book publication still remained.

Stidy of Business-Government Relations An advanced draft of a manuscript by Jack N. Berhrman, Professor of International Business at the University of North Carolina, was in hand by the late summer of 1968, as scheduled. This study traces the source of the nature of tension growing out of the development of multinational enterprise before World War II. It then seeks to identify the critical events since the war, defining the issues of jurisdictional conflict and jurisdictional avoidance that underlie relations between business and government. At the end of the year, consideration was still being given to the most appropriate form for the publication of these rwdts.

In addition to the Berhrman study, Raymond Vernon, Professor of International Trade and Investment at the Harvard Business School and coordinator of this project, had published a series of articles on the same subject, stressing especially the problem of businessgovernment re- lationships in the developing countries. These articles, which appeared in various publications, are listed in a succeeding section of this report. Finally, Detlev Vagts, Professor of Law at the I Yarvard Law school, was pursuing a series of studies of national policies with respect to multi- national enterprise. While his studies were only loosely associated with the project, efforts at at systematic interchange were going forward for the purpose of mutual enrichment.

industry was largely completed during t 1 e year and considerable

internationa P divisions of U.S. firms, and to complete the writing task.

MULTINATIONAL ~NTERPRISE 165

Studies of International Ecorioinic Aspects As part of the project, Professor Vernon has undertaken to develop the international economic implications of the operations of multinational enterprises, including the implications for international trade, payments, capital movements, and the transmission of technology.

During the year, William Hi Gruber, Associate Professor of Manage- ment at Northeastern University, together with Professor Vernon, developed a world trade matrix that shed significant light upon the ties between multinational enterprises and international trade. The results of this work, which was based upon some rather elaborate statistical exercises and some extensive computerized analysis, were presented at a Conference on Technology and International Competitiveness, sponsored b the Universities-National Bureau Committee on Econo-

ference will appear in a conference volume under the editorship of Professor Vernon. This work was financed principally by the Program on Technology and Society at Haward, supplemented by additional h d s not only fiom the Ford Foundation but also fiom NASA and from the Center for International Affairs at Harvard h order to extend the implications of this work, Professor Gruber

is now launched on a comparative study of the management of the R&D ftnction in the United States and other advanced countries. Working in conjunction with Professor Otto Poensgen of the Univer- sity of Saarbrucken, Professor Gruber has developed a questionnaire to collect extensive information on the role, management, and control of RBrD in large firms throu hout the world. This work is being financed

enrich our understanding of the operation of multinational enterprises.

mic Researc B in New York in the fall of 1968. The results of this Con-

principaIlybytbeNationa Ig ScienceFoundation. Itwillserve toenlargeand

TEACHING AND RESEARCH IMPLICATIONS

The Muftirrationaf Enterprise Data Fife The bodies of statistical data now being developed in cmection with various aspects of the study have reached major proportions and con- stitute an important research roduct in their own right. The materials

Wells, Gruber and Vernon, all stored for computer access, have proved especially rich.

Consideration is being given to the best means for making these data available to others, consistent with the restraints imposed by con- fidentiality requirements.

Of the various statistical materials compiled, plans were most ad- vanced for developing appropriate access to a computerized file of the

collected in connection with t! e work ofRobbins, Stobaugh, Stopford,

I66 JOURNAL OF COMMON MARKET STUDIES

history of the 12,000 or so foreign subsidiaries of 185 selected U.S. parent firms. These data were developed under the direction of Mrs. Joan P. Curhan, who su ervised the work of about forty assistants in

storage and access design, as well as the publication plans, were de- veloped by James W. Vaupel, a D.B.A. candidate at the Harvard Business School.

The publication plans for this file contemplate a sourcebook of charts and tables mapping the salient features of the 12,000 foreign subsidiaries from 1900 to 1967. These features include classifications of the subsidiaries by industry, product, business activity, ownership pattern, country of incorporation and of principal market, means of entry and exit, and selected U.S. parent characteristics. In addition to the tabulations to be published fiom these files, procedures were being devised to implement a plan to permit other researchers access to the file according to their o m format, subject to the restraints imposed by confidentiality requirements and by technical limitations. Plans called for publication of a manual in the spring of 1969, containing both the basic tabulations and the access procedures.

their collection from pub P ished and unpublished sources. The computer

Teaching Activities It is already clear that the multinational enterprise study is having a significant impact upon the international business field at Harvard, as well as some consequences for teaching and research in this field at other institutions, including Boston University, Berkeley, North Carolina, and Columbia.

The most visible aspect of the impact is seen in the work of doctoral candidates. Thus far, the following theses have been undertaken with some support &om the multinational enterprise study:

James S. Shulman, TrunJfer Pricing in hluultinational Business (com- pleted August 1966)

David B. Zen06 The Deterniinants OfDividetld Remittance Practices of Wiolly-Owned Eiiropeati and Canadiati S:rbsidiaries of Atriericuti Midtinational Corporations (completed September 1966)

David Ruttenberg, Stochastic Programing With Recourse for Plutinitig Optimal Flexibility in Multinational Cotnpanies(comp1eted September

Wayne A. Yeoman, The Selection ofProdirctioti Proccssesfor the Foreign hlanufcturing Platits of U.S. Based h b h a t i o n a l Corporatioris (completed June 1968)

Richard J. Aylmer, hlaarketirg Decision Makitg iti tlieMultinatiotral Firrn (completed June 1968)

1957)

MULTINATIONAL. ENTERPRISE 167

Robert B. Stobaugh, Jr., The Product Life Cycle and International Investment (completed June 1968)

John M. Stopford, The TransitionalNatrrre OftheItiternatiortalDivision as a Form of Organizationfor Foreign Operations (completed June 1968)

Robert J. Wiley, Financing the Corporate Subsidiary in the Developing Country: A Study of the Financing Decisions arid Techniques of a Group of Subsidiaries Manufacturing in Brazil (completed 1968)

Cedric L. Suzman, The Changing Role OfExporfs and the Export Deparf- merit in U.S. Firms with Foreign Manujduri t lg A . l i a t e s (in process)

Lawrence Franko, Strategic Choice and Joint Venture Instability in the Multinational Firnr (in process)

Hassanand T. Jadwani, Some Aspects of the A4ultinational Corporations’ Exposure to Exchange Risk (in process)

Frenck Waage, An Aspect $Risk Analysis Applied to Corisrrrtier Decision Theory (in process)

The teaching participants in the study report that they are making extensive use of the study findings in connection with classroom work. Professor Robbins is incorporating some of his results in a revised text on Security Analysis, currently under way in collaboration with Maurice Mendelsohn of the Wharton School. Professor Vernon is planning to use some of the materials extensively in a revision of his Manager in the International Econoniy.

In addition, student and faculty researchers at the Harvard Business School and elsewhere have continued to draw upon these files to a sigdicant extent. Thus far, over 100 students and faculty members, drawn not only from the Harvard Business School but also from other domestic and foreign institutions, have based research reports upon materials garnered from the files.

At another level, the materials of the study are being used in various seminars outside of the University, addressed to other kinds of groups. For example, the Council on Foreign Relations is conducting a series of seminars on the multinational enterprise, designed by Professor Vernon. The American Academy for Arts and Sciences, the U.S. Department of State, the Transportation Centre of Northwestern University, and other institutions have organized meetings at which the results of the study have figured prominently.

Reports to Cooperating Companies Some 185 U.S. companies cooperating’ in the study were invited to request copies of two theses recently completed at the Harvard Business School, and supported in part by the grant &om the Ford Foundation. One thesis offered was written by John M. Stopford on ‘Growth and

168 JOURNAL OF COMMON MARKET STUDIES

Organizational Change in the Multinational Firm’ and the other by Colonel Wayne Yeoman on ‘Selection of Production Processes for the Manufacturing Subsidiaries of U.S.-Based Multinational Corporations’. The cost of reproducing these theses was underwritten by the Associate Dean for External Affairs a t the Harvard Business School. Eighty-four companies requested and received copies of both theses, and thirty- four additional companies requested and received only the Stopford thesis. Two years ago David Zenoff’s thesis on ‘The Determinants of Dividend Remittance Practices of Wholly-Owned European and Canadian Subsidiaries of American Multinational Corporations’ was offered to the participating com anies, and eighty-eight companies requested and received copies o f t fl is thesis.

PUBLICATIONS

The complete list of publications to date is as follows: ‘International Investment and International Trade in the Product

Cycle,’ Quarterly Journal of Eonontics, May 1966, by Raymond Vernon.

‘Foreign-Owned Enterprise in the Developing Counmes,’ Public Policy, Vol. 15, 1966, by Raymond Vernon.

‘Multinational Enterprise & National Sovereignty,’ Haruard Business Review, March-April 1967, by Raymond Vernon.

‘The RBrD Factor in International Trade and International Investment of United States Industries,’ The ournal of Political Eiononry, Vol. 75, No. I, February 1967, k y William Gruber, Dileep Mehta, and Raymond Vernon.

‘The Role of U.S. Enterprise Abroad,’ Duedalus, Winter 1968, by Raymond Vernon.

‘Conflict and Resolution between Foreign Direct Investors and Less- Developed Countries,’ Public Policy, Vol. 17, 1968, by Raymond Vernon.

‘Capital Budgeting and the Multinational Co oration,’ CaZiJornia Managrnettt Review, Summer 1968, pp. 39-54, ?l y Arthur Stonehill and Leonard Nathanson.

‘Antitrust and International Business,’ Haruard Business Review, September-October 1968, by Raymond Vernon.

‘The Technology Factor in a World Trade Matrix,’ by W. H. Gruber and Raymond Vernon, to be published in a Universities- National Bureau conference volume in 1969.

‘Economic Sovereignty at Bay,’ Foreign Afuirs, October 1968, Vol. 47, No. I, pp. 11~22, by Raymond Vernon.

MULTINATIONAL ENTERPRISE 169

‘Product Policy and the United States Multinational Corporation : Some Emerging Generalizations,’ Proceedings o f f h e 1968 Educators’ Conference, Anierican . Marketing Association, Denver, by Lawrence H. Wortzel.

‘Test of a Product Cycle Model of International Trade; U.S. Exports of Consumer Durables,’ scheduled for February 1969 issue of Quarterly Journal ofEconomics, by Louis T. Wells, Jr.

‘A Product Life Cycle for International Trade?’ Journal of Marketing, Vol. 32; July 1968, by Louis T. Wells, Jr.

‘Die Technologische Lucke und der Markt,’ Europa-Archiv, Vol. 7 , April 10, 1968, by Louis T. Wells, Jr.

‘Organizational Structure and the Multinational Strategy,’ Admiti is- frafive Science Quarterly, Vol. 13, No. I, June 1968, by Lawrence E. Fouraker and John M. Stopford.

‘The Growing Importance of International Operations,’ in Hand- book of Modmn Marketing, McGraw Hill, by Lawrence H. Wortzel (forthcoming).

‘Systematic Bias and the Terms of Trade,’ T h e Review ofEiononiics and Statistics, Vol. XL.IX, November 1967, pp. 617-19, by Robert B. Stobaugh, Jr.

‘Where in the World Should We Put That Plant?’ Harvard Business Review, January-February 1969, by Robert B. Stobaugh, Jr.

‘Organization as a Scale Factor in the Growth of Firms,’ by Raymond Vernon, to be published in 1969.

In addition to the fist above, Fortune, September 1968, published an article, ‘The Rewarding Strategies of Multinationalism,’ based heavily on the work and conceptions of the study, providing the usual partial attributions.

The list of books contemplated is:

Author Sulject Fouraker, Stopford & Wells Organizational aspects of multinational

enterprise Holton Marketing aspects of multinational

enterprise Robbins, Schydlondcy & Financial aspects of multinational enter- Stobaugh prise Stobaugh The multinational enterprise and the

petrochemicals industry Wortzel The multinational enterprise and the

pharmaceuticals industry

Professor Vernon’s plans to write a synthesizing volume which

170 JOURNAL OF COMMON UARKET STU?)IES

summarizes and extends the meaning of the materials in the other books were rapidly c stallizing. This book, however, will be written after this first phase o 7 the project has been terminated.