transnational corporations and third world consumption: implications of competitive strategies

World Developmenr, Vol. 16. No. 11, pp. 136%1370. 1988. 030%75OYJ88 $3.00 + 0.00 Printed in Great Britain. @ 1988 Pergamon Press plc

Transnational Corporations and Third World Consumption:

Implications of Competitive Strategies

RHYS JENKINS University of East Anglia, Norwich

Summary. -The paper discusses a number of ways in which the competitive strategies of transnational corporations affect consumption patterns in Third World countries. The development of TNC strategy is discussed and the effects of the introduction of new products, of advertising expenditure and trademarks, and of product proliferation are analyzed. It is argued that TNCs do not necessarily depend on an unequal income distribution in order to sell their products in the Third World. Finally, it is stressed that TNC activities constitute part of a broader process of internationalization of capital which is transforming Third World consumption.

The role which the Ministry of Propaganda plays in shaping values, tastes and attitudes in what the U.S. Government likes to call “closed societies.” global corporations are playing in many parts of the “free world.”

(ii)

Barnet and Miiller (1974). p. 172. (iii)

1. INTRODUCTION (iv)

A major accusation leveled at the transnational corporations (TNCs) by their critics is that they distort consumption patterns in the Third ___ . .

for the relatively well-off consumers of those countries; when these products are sold or produced in less developed countries (LDCs), little or no modification is made to them; TNCs are able to persuade consumers to buy these products by the use of intensive promotion techniques; TNCs are also able to use their “influence” to persuade host governments to provide the necessary complementary in- puts such as infrastructure, e.g., building super highways for cars.

hitions of the host counihes: In the early 1970s this erupted into a major scandal when it was alleged that the use of powdered baby milk, heavily promoted by TNCs such as Nestle, had contributed to increased malnutrition and infant mortality in the Third World (New Znternationaf- bt, August 1973). It is also often asserted that TNCs produce luxury products which are only accessible to local elites while neglecting the “basic needs” of the mass of the population (Griffin, 1978, Chap. 7).

The debate both parallels and relates to the _ . _

New products developed by TNCs incor- porate real improvements and enhance consumer choice;

World, mampulating consumer demand through advertising and other strategies and introducing Against this, supporters of TNCs generally argue

products which are “inappropriate” for the con- that. :.. I’)

(ii)

(iii)

(iv)

adaptations to specific local conditions and tastes are often made; consumers are sovereign and the fact that they buy these products is a reflection of their preferences. Advertising is primarily a means of providing consumers with information about new products; host governments are not regarded as being subservient to foreign capital.

Issue ot technology transfer discussed elsewhere (Jenkins, 1984b). This is emphasized by the ter- 2. THE HISTORICAL DEVELOPMENT OF minology used by many of the critics.’ The critics TNC STRATEGY argument involves four propositions:

(i) TNCs develop products for developed Hymer, analyzing the expansion of US corpor- country (DC) markets which are suitable ations in the late 19th and early 20th century, has

1363

136-t WORLD DEVELOPMENT

pointed out the existence of two alternative paths of development. One, which he calls the .-capital widening” path, would have involved the expansion of mass production techniques throughout the world to make available basic consumer goods on a general scale. The other path of "capital deepening” (i.e., employing more capital per worker) was associated with continuous innova- tion to increase productivity and the introduction of new consumer goods before the old ones had been widely disseminated. It is of course the latter path which has characterized the development of capitalism in the 20th century, As a result product development and marketing rather than production become the dominant concern of capital (Hymer, 1979. Chap. 2).

The new competitive strategies which emerged with the concentration and centralization of capital in the United States in the late 19th and early 20th century were characterized by a number of features. Increasing emphasis was given to the introduction of new products or new models. In the motor industry for instance the practice of annual model changes was introduced by General Motors in the 1920s. At about the same time there was also a trend towards producing a wider variety of products rather than concentrating on mass production of a single standardized product. Again the motor industry provides a ready illustration in the contrast between Ford’s stra- tegv of producing a cheap, standardized car (the Mcddel T) and General Motor’s policy of providing a car for every purse and purpose with which it overtook Ford as the market leader in the United States. The growth of advertising and the emergence of specialized advertising agencies also dates from the period of the consolidation of oligopolistic firms in the United States.’ The modern practice of promoting brandnames through advertising was also pioneered by Lever with his Sunlight soap in the late 19th century.

3. NEW PRODUCTS IN THE THIRD WORLD

In extending their operations overseas TNCs have adopted the same strategy of introducing new products as have characterized their operations in their countries of origin. This is true even in the Third World where the rate of introduction of new products has accelerated rapidly in the postwar period. A significant portion of technology transfer to the Third World takes place in order to’introduce new products. It also appears that the lag between the time when a product is first sold in the developed country and its introduction in the LDCs is decreasing. Thus the

implications of the introduction of new products in the Third World acquires major significance.

The view that the products developed by TNCs are inappropriate for Third World countries is not based on a belief that they are inconsistent with local culture or tradition. Rather it is argued that new products introduced in the advanced capitalist countries have tended to increasingly emphasize high-income (or “luxury”) characteristics as opposed to low-income (or --essential”) characteristics.’ There is a clear parallel here with the tendency for production technology to become increasingly capital-intensive over time.

With a certain time lag these new products are introduced in the LDCs. Because of the limited importance of LDCs as markets for the TNCs it is not usually profitable to develop products which are more suitable to income levels in the Third World and adaptations when they are made are usually minor, e.g., stronger axles for vehicles because of the poor quality of local roads. Even a writer generally relatively well disposed towards the TNCs admits that efforts to develop appropriate products by TNCs are “at a pace and on a scale that betokens good works rather than com- mercial campaigns” (Vernon, 1977, p. 54).

Whether or not the introduction of new products in fact increases choice in Third World countries or causes a deterioration in the welfare of low-income consumers depends on the assumptions which are made. If the introduction of a new product involves the replacement of an existing product whose characteristics are more oriented towards “essentials” than “luxuries” then the welfare of low-income consumers may decline absolutely. Similarly if the new product diverts demand from an existing “low-income” product leading to an increase in the price of the latter because of the loss of scale economies, there may also be welfare losses to low-income groups.’

Unfortunately the empirical evidence on the consequences of the introduction of new products in LDCs is rather limited. The case studies surveyed by James and Stewart (1981) suggest that in practice the introduction of new products has widened consumer choice in most cases. HOW- ever, the implications are much more ambiguous if the assumption of inherent individual preferences is relaxed and the possibility of TNCs affect- ing tastes is admitted. In order to analyze this possibility it is necessary to consider the marketing strategies employed by international firms.

4. ADVERTISING AND TRADEMARKS

In many industries in which TNCs are promin-

TNCs AND THIRD WORLD CONSUhlPTION 1365

ent. product differentiation through brandnames and trademarks supported by substantial outlays on advertising are common. This is the case both in those industries in which the prime advantage of TNCs is in the area of marketing such as pro- cessed foods. drinks, cigarettes, cosmetics and soap, and in those industries in which the TNCs enjoy a technological advantage which is re- inforced by product differentiation such as drugs, electrical equipment and vehicles. In the course of expanding in the Third World, TNCs in these sectors have made extensive use of trademarks and advertising. Contrary to the view of certain Marxists (e.g., Baran and Sweezy) and non- Marxists (e.g., Galbraith) who have identified such strategies with mature capitalism, in practice these strategies are also widely used in LDCs (see James and Lister, 1980. for a critique of the Galbraithian thesis in the context of LDCs).

More than a quarter of all trademarks are registered in the Third World (Patel, 1979). Almost half of these are accounted for by foreigners who are, in the main, the TNCs. Moreover between 1964 and 1974 the proportion of all trademarks registered in LDCs which are owned by foreigners has increased from just over a quarter to almost a half (Chudnovsky, 1979, Table 1). The extensive use of foreign trademarks both by TNC subsidiaries and local licensees is supported by substantial advertising expenditures.

As Table 1 indicates, two Third World countries (albeit relatively industrialized ones) rank third and fourth in terms of the ratio of advertising to GNP and there is little evidence of a clear relationship between level of development and advertising. Thus Jamaica has similar levels to Britain; Singapore, Thailand and Venezuela rank above France and Colombia and South Korea ahead of West Germany. Given low average per capita income levels such hi!h advertising ratios imply two things. First, massive advertising campaigns directed at a relatively small high-income elite to promote sales of luxuries such as cars or cosmetics. Second, advertising to promote sales of certain consumer goods amongst the poor who often, despite having barely sufficient income to cover subsistence needs, can be induced to buy certain sophisticated products as the worldwide success of Coca Cola bears eloquent witness.

The contrast between the historical experience of the advanced capitalist countries where advertising was unimportant in earlier periods of development and the present day situation in the Third World can. to a large extent, be attributed to the presence and behavior of TNCs. TNCs are usually leaders in terms of advertising in LDCs. In Malaysia and Kenya it has been estimated that foreign firms spend six times as much on advertis-

Table 1. Adverrising as a percentage of gross national product and per capita advertising expenditures in

selected countries

Country

Advertising as a percentage of gross

national product

United States ...................... 1.98 Bermuda.. .......................... 1.65*,t Argentina.. ......................... 1.4o*,t Brazil ................................ l.?O$ Finland .............................. 1.38s

Denmark.. .......................... 1.30’.§.1 Netherlands ........................ 1.30*.: /I ** , . Spain.. ............................... 1.25’,:,1( Switzerland.. ....................... 1.33’ t ?j II ** Canada .............................. l.;o*:il.‘*;“‘

Austria .............................. 1.18 South Africa ....................... 1.09*.;.g Australia.. .......................... 1.07$ United Kingdom.. ................ 1.04*,**.tt Jamaica .............................. 1.03’,?

Sweden.. ............................ 1.039.4 New Zealand.. ..................... 1.02*,+./j.** Norway .............................. 0.95g.T Lebanon ............................ 0.93s Ireland.. ............................. 0.92’.:.‘1.”

Japan ................................ 0.88 Singapore ........................... 0.85*,: I1 ** Costa Rica.. ........................ 0.83; .‘. Thailand ............................ 0.82 Dominican Republic.. ........... 0.77

Venezuela .......................... 0.77$ France ............................... 0.72 Colombia ........................... 0.69’ South Korea.. ...................... 0.69’,1/.*- Bahamas ............................ 0.68+,/1.“.3,$$

Ecuador ............................. 0.68 Germany, Federal Republic of 0.68$,~.@ Peru .................................. 0.65 Bahrain.. ............................ 0.65*,:.**,;t Panama.. ............................ 0.64

Source: UNCK (1979) Table l-4 on the basis of World Adver- rising Expenditure (1978). ‘Sales promotion expenditures not repot-ted. tReference publications expenditures not reponed. $Direct advertising, exhibitionJdemonstrations. display/point of sale, sales promotion and reference publications expenditures not reported. §Radio not available for advertising. jjTelevision not available for advertising. I/Exhibitions/demonstrations expenditures not reported. “Display and point of sale expenditures nor reported. ttDirect advertising expenditures not reported. SSCinema expenditures not reported. 8PCinema not available for advertising. alTransportation and outdoor expenditures not reported.

1366 WORLD DEVELOPMENT

ing as local firms (UNCTC. 1979). In a number of countries on which information is available all the firms with the largest advertising budgets are foreign subsidiaries.

In the wake of the internationalization of industrial capital. the 1960s and 1970s have seen a tremendous international expansion of advertising agencies particularly from the United States. In the decade between 1961 and 1971 the major advertising agencies established almost five times as many foreign subsidiaries as in the whole of the preceding 45 years. Moreover overseas billings by US advertising agencies increased from less than a third in the mid-1950s to almost a half by the mid-1970s (UNCTC. 1979). In the Third World more than two-thirds of all advertising agency revenue is controlled by foreign advertising agencies (Chudnovsky. 1979, Table 4).

What then are the implications of high (relative to income) advertising expenditures in LDCs and the international expansion of advertising agencies? As already mentioned there are two contrasting views of advertising in general. The first sees it as an effective means of providing consumers with information about the avail- ability and characteristics of products. The second emphasizes the distorting effects of advertising which tends to lead to more expenditure on heavily advertised as opposed to non-advertised products and on consumption as opposed to savings. It also stresses the role of advertising as a barrier to the entry of new firms and therefore as a factor leading to increasing concentration and greater market power of existing producers.

The claim that advertising is a major channel for consumer information is even less plausible in LDCs than in the advanced capitalist countries.5 The primary purpose of advertising is to sell the product and therefore there is a tendency to stress the characteristics of the product which are most likely to achieve this aim. Left to them- selves tobacco companies are unlikely to publi- cize the link between smoking and lung cancer in their promotion campaigns. The less strict control over advertising standards in the Third World compared to the advanced capitalist countries is thus likely to result in more biased advertising in the former.

The pharmaceutical industry provides a strik- ing illustration of this point. A comparison of 40 different prescription drugs sold in the United States and Latin America by 23 TNCs revealed major differences in the way in which the same drug was described to doctors. In general the diseases for which a drug was recommended were far fewer in the United States than in the Latin American countries, while the contra-

indications, warnings and potential adverse reac- tions were given in much greater detail in the United States (Silverman, 1976). Not only is the information provided by drug TNCs in Latin America less than in the United States, but also the type of sales promotion techniques most fre- quently used are much more oriented to promoting a particular brandname and less towards diffusion of medical information than in the advanced capitalist countries (Jenkins, 1984, Chap. 4).

The intensity of advertising varies considerably among different products. If, as seems plausible, advertising has an effect on the level of consumption of the advertised product, differences in advertising levels will have implications for the structures of consumption and production.6 In a number of LDCs it has been found that certain products such as cosmetics, pharmaceuticals. breakfast cereals, alcoholic beverages, cars and electrical consumer durables are heavily advertised.’ These tend of course to be the differentiated consumer goods in which TNCs are heavily involved. Thus advertising is likely to switch demand towards TNC dominated industries and within industries away from traditional product forms to the new products manufactured by TNCs.

The cigarette industry illustrates the way in which TNCs are able to increase demand for their products in the Third World.x In the 196Os, following a major health scare over smoking in the United States, the US tobacco TNCs faced with a stagnant home market expanded rapidly overseas. One of the target areas for this expansion was Latin America where apart from a number of subsidiaries of the British American Tobacco Company set up in the early part of the century, the industry was mainly controlled by local capital. These local firms produced the traditional dark tobacco cigarettes as opposed to the light tobacco which is used in US cigarettes.

Through massive advertising campaigns associated initially with imports (often smuggled) and later licensing of local firms and finally acquisi- tion of the local firms, the US TNCs were able to penetrate the local market creating a demand for their product form, i.e., the longer, filter, light- tobacco cigarette. In Argentina for instance the share of dark tobacco in cigarette sales fell from almost two-thirds in 1950 to only 13% by 1975, a trend that was paralleled in other Latin Ameri- can countries. Not only was the structure of demand shifted towards the TNC product form through advertising but there was also a substantial per capita increase in cigarette consumption, suggesting that demand may have been diverted from other goods.

TNCs AND THIRD WORLD CONSUMPTION 1367

A further example is the Kenyan soap industry where TNCs producing differentiated products (detergents and toilet soaps) have displaced local firms making simple laundry soap produced by labor-intensive methods. A major cause of this shift in tastes in favor of TNC products has been heavy expenditure on advertising which is about six times as high for TNCs as for local firms (Langdon, 1975). Other cases where advertising has led to the substitution of TNC for traditional product forms have been found in the bread industry, breakfast cereals and the pharmaceutical industry (James and Stewart. 1981).

Although not as convincing as the evidence on the effects of advertising on consumption of individual products, there is also some evidence from the industrialized countries to suggest that advertising tends to increase total consumption at the expense of savings (Greer, 1979). If the same were true in the Third World then the heavy advertising expenditure associated with TNC expansion would have serious implications for the rate of accumulation. Even if the level of aggregate consumption is not affected by advertising, the fact that advertising expenditure is not productive implies a diminution in the surplus available for accumulation.

A further effect of advertising is to create bar- riers to entry of new firms thus contributing to a higher rate of profit.

Empirical studies of Colombia, Brazil and Mexico indicate that level of advertising expenditure was an important independent factor explaining the rate of profit of foreign subsidiaries (Chudnovsky, 1974; Connor. 1977). It was estimated that a 1% increase in the ratio of advertising to sales led to an increase of at least 1% in the rate of profit.

The evidence suggests therefore that far from advertising being a means by which consumers are provided with information about different products, it is primarily a strategy by which TNCs influence consumer tastes in favor of their own products and ensure their control over Third World markets enabling them to earn substantial profits. Local firms seeking to compete with the TNCs are often forced to follow suit and so the international standardization of consumption patterns is further extended.

5. PROLIFERATION OF PRODUCTS

Another aspect of the competitive strategies of TNCs is the production of a range of similar products in order to obtain a foothold in every nook and cranny of a particular market. Often differences between products are little more than cos-

metic changes in appearance. This practice is illustrated by the pharmaceutical industry in a number of Third World countries. The total number of pharmaceutical brandnames registered in various countries were Argentina 17,000; Brazil 14,000: Colombia 15,000; India 15,000; Iran 4,200; and Mexico over 12,000 (UNCTAD, 1975; Paredes Lopez, 1977). In Mexico it is estimated that there are almost 1,600 different makes of antibiotics on the market. When it is realized that 50 to 60 basic drugs could meet 80% to 90% of total health needs in the Third World the extent of this proliferation of brandnames is readily apparent (Gereffi, 1985). The vast range of brandnames which are available in most LDCs can hardly fail to be a source of confusion to doctors and patients alike.

A similar situation exists in the car industry in a number of Third World countries. Despite small domestic markets there is little specializa- tion with TNC subsidiaries producing a range of models. The result is very small runs for individual models and. because of the importance of economies of scale in this industry, substantial cost increases. The situation is further aggravated when frequent model changes prevent runs being lengthened by extending the life of a model over a number of years (Jenkins, 1977).

6. DEMAND AND INCOME DISTRIBUTION

Critics of TNCs sometimes suggest that they produce for a restricted market made up of the richest 10 or 20% of the population in most LDCs.’ They are thus regarded as having a vested interest in the preservation of income in- equalities which are the only means of guaran- teeing a market for their products (Frank. 1969, pp. 168-169). Thus it is argued that although there has been a shift of foreign investment from the primary export sector to manufacturing, the fact that the source of demand is now within the LDC does not alter the situation substantively because wages still enter the capitalist’s equation as a cost and not as a factor in the demand for his product.

While it is clear that income concentration in countries with a low average per capita income level can increase the demand for certain products identified with TNCs, cars being a prime example, it is not so obvious that for TNCs taken as a group, inequality is necessarily functional from the point of view of demand. Unfor- tunately, there is only limited empirical evidence on this point. Studies for both Brazil (Morley and Smith, 1973) and Mexico (Lustig, 1979) suggest


that increasing income inequality does tend to contribute to a faster rate of growth of demand in those sectors which are dominated by TNCs. But the effect is relatively small and a more equal distribution of income is also compatible with the continued growth of demand for TNC products. lo

There are a number of factors which account for the relatively limited significance of income distribution. First, the different patterns of final demand associated with changes in income distribution tend to generate broadly similar structures of production in intermediate and capital goods industries in countries where these are relatively well developed. Second, foreign capital is often well represented in industries with relatively low- income elasticities of demand such as cigarettes and pharmaceuticals. Finally, in both Brazil and Mexico (admittedly relatively advanced LDCs) ownership of consumer durables other than cars has been diffused well beyond the richest 10% of the population - to the point that ownership has reached saturation levels and a less regressive distribution can in fact increase demand for these products (Wells, 1977; Lustig, 1979).

Indeed, far from merely serving the rich, the most serious effects associated with the activities of TNCs are a result of their ability to create a demand for their products amongst low-income groups. The marketin? of formula milk for babies is a case in point. Similarly in Brazil there was a significant increase in working class expenditure on domestic appliances in the 1960s at the expense of food consumption with an absolute deterioration in nutrition levels as a result (Wells, 1977). In Mexico heavy promotion of differentiated food and drink products have also led to dietary changes which are detrimental from the nutritional point of view (Montes de Oca and Escudero, 1981).

What this suggests is that TNCs need not be particularly concerned about changes in income distribution as far as the effect on the demand for their products is concerned. Provided that they are allowed to continue using their methods of persuasion, and the mass media continue to pump out images from the West, then they have little to fear from reformist measures to reduce income inequality. A more serious threat would arise from a deliberate strategy of meeting “basic needs” at the lowest possible cost. Within such a strategy the marketing advantages of TNCs

would have no place and their powers of persuasion would have to be drastically curtailed.”

7. CONCLUSION

Although this paper has stressed the ways in which the competitive strategies of TNCs have affected consumption patterns in the Third World, TNC activities should not be viewed in isolation. The internationalization of capital, of which the growth of TNC activities is only one aspect, is integrating the LDCs more closely into the capitalist world economy. This is promoting Western style consumption patterns in a number of ways, e.g.. through the “demonstration effect” of films. television programs and tourists, as well as through the direct sales efforts of the TNCs. Indeed without the backup of these other forces it is unlikely that TNC advertising would be nearly so effective.

A major manifestation of the internationalization of capital is the tendency for consumption patterns to become standardized worldwide. As Vernon (1977, p. 4) points out:

The manufactured products that appear in the stalls and markets of Accra or Dar-es-Salaam are no longer very different from those in Djakarta or Cartagena or Recife. The plastic pail has replaced the gourd, the earthern pot. and the banana leaf; tin roofs are replacing the local varieties of thatch; electric batteries and electric bulbs are taking over the function of kerosene, wood, vegetable oil and tallow; the portable radio and the aspirin tablet are joining the list of life’s universal necessities.

There is of course also a process of differentiation as firms introduce new products in certain markets. but the time lag before these products are produced internationally is decreasing, thereby intensifying the process of standardization.

It is illusory to suppose that measures to control certain TNC practices such as advertising can significantly alter the situation described in this paper. Integration into the capitalist world economy leaves a country exposed to so many other forces which tend to structure consumption in favor of the patterns which prevail in the advanced capitalist countries. Even the socialist countries have not been entirely immune from such forces, as the demand for jeans in the Soviet Union illustrates.

NOTES

1. “Consumption technology,” see “production see “appropriate technology” (Stewart. 1978); “taste technology” (Helleiner. 1975); “appropriate products,” transfer,” see “technology transfer” (Langdon. 1975).

TNCs AND THIRD WORLD CONSUMPTION 1369

2. McCann Erikson in fact began life in the public 7. See Connor and Mueller (1977) on Brazil and relations department of Standard Oil and became inde- Mexico: James and Lister (1980) on India and Chud- pendent with the anti-trust actions against Standard novsky (1979) on Argentina and Peru.

Oil. 8. What follows is based on Shepherd (1985).

3. The argument is an application of Lancaster’s approach which sees products as embodying certain 9. “The principal targets of most global operations objective characteristics, e.g., soap is characterized by are the enclaves of affluence within destitute countries” its washing properties, color, smell and packaging. It is (Barnet and Miiller, 1974. p. 174). elaborated by Helleiner (1975); Stewart. (1978, pp. 78- 81) and James and Stewart fl981). 10. These studies are at a relatively high level of ~

aggregation and their results should be t;eated with 4. See the Appendix for graphical illustrations of caution.

these situations. 11. Even in this situation TNCs would not necessarily

5. See Greer (1979) for a discussion of the informa- be totally eliminated. They might still play a part in tion content of advertising in the United States and the those industries where they enjoyed a genuine tech- conclusion that there is an inverse relationship between nological superiority and whose products would still be advertising intensity (the rate of advertising to sales) demanded with a radically different pattern of final and the information content of advertising. demand (particularly intermediate and capital goods

industries). 6. See Greer (1979) for references to studies in

developed countries which support the contention 12. This is based on the Appendix to Helleiner that advertising affects the consumption of specific (1975). products.

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trademarks: Lessons for developing countries,” Montes de Oca, R., and G. Escudero, “Las empresas World Devetoomenf. Vol. 7. No. 7 (1979). transnacionales en la industria alimentaria Mexi-

Griffin, K.. International Inequality and ‘National cana,” Comercio Exterior, Vol. 31, No. 9 (1981). Poverty (London: Macmillan, 1978). Morley, S., and G. Smith, “The effect of changes in the

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APPENDIX: THE IMPLICATIONS OF NEW PRODUCTS IN LDCs”

Pockaging

Figure 1.

According to Lancaster’s approach, a product can be defined in terms of a vector of characteristics (e.g., nourishment. flavor, convenience, appearance) and consumers’ preferences are ordered in terms of characteristics rather than products. This can be illustrated diagrammatically for the simple example where products and preferences are defined in terms of two characteristics, e.g., in the case of soap washing quality and packaging. Different products comprise these two qualities in different’proportions as indicated by the rays OX and OY. Given the relative prices of products X and Y, the combinations of packaging and washing which a consumer can obtain for a given expenditure on either product can be indicated by points A and B. By buying a combination of X and Y the consumer can also achieve any point on the line A B. With an indifference curve represented by II. the consumer will buy a combination of X and Y represented by point D.

If a new product is introduced characterized by the ray OZ. with a price that enables a quantity C of the two characteristics to be obtained for the same expenditure as A and B, then consumers can choose to consume in any point in the line BAC. In the case of the consumer represented by the indifference curve II there is no improvement in welfare and he continues to

consume at point D. If, however, the new product OZ replaces OX which is withdrawn from the market. then the consumer can only choose a point on the line BC and his welfare is reduced to a lower indifference curve than that represented by If. Similarly if the introduction of product OZ increases the price of OY, for example, because of the loss of economies of scale and consequently increased costs, the consumer whose preferences are represented by II is made worse off since he now has to consume on the line EAC.

Generalizing this analysis, the characteristic washing quality can be termed an essential and packaging quality a luxury. Over time new products introduced from the advanced capitalist countries are likely to be represented by combinations which give more emphasis to luxury rather than essential quahties, thus the rays are likely to move in a clockwise direction. Different income groups are likely to have different tastes with the indifference curves of low-income consumers giving greater weight to essential characteristics and those of high-income groups stressing luxury characteristics (see Figure 2).

Thus the introduction of new products which result either in the withdrawal of existing products, or an increase in the price of existing products can lead to a deterioration in the welfare of the poor in LDCs.

If indifference curve of

I I’ tow - mcome group

I ‘I’ indifference curve of high-income group

Luxuries

Figure 2.

transnational corporations and third world consumption: implications of competitive strategies

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