Big business in the third world: gains on all sides

A quiet revolution is taking place in the relationship between multinational corporations and the developing world -- they are learning to live together and like it.

This finding is one of the major conclusions of a study I recently conducted for the Committee for Economic Development and six of its overseas counterpart organizations. Despite much publicized conflicts, multinational corporations are becoming more sensitive to the political and social needs of the third world , while, at the same time, developing countries are demonstrating greater pragmatism and confidence in their negotiations with foreign firms.

Through extensive interviews with senior executives of 90 multinational firms based in the United States, Japan, Australia, and eight countries of Western Europe, the study identified numerous examples of both current accommodation and continued tension in such key decision areas as local equity participation, labor market practices, appropriateness of technology, local borrowing practices , transfer pricing, investment incentives, export requirements, and corrupt practices. The assessments of such corporations as AMAX, Bendix, Kraft, Union Carbide, Mitsubishi Corporation, Nissan Motor, Courtalds, Unilever, Volvo, and Pechiney-Ugine- Kuhlmann, among others, are represented in this survey of top management personnel involved in the day-to-day operations of over 400 third-world subsidiaries.

It is apparent from the interviews that an important evolution has taken place in the attitudes of transnationals toward the growth process in the developing countries. To a much greater extent than in the '50s and '60s, the corporations recognize both the diversity of circumstances in the third world and their own need for flexibility in their approach to individual countries.

There is also less of a tendency to regard the historical transformation now taking place in much of the third world as a replica of the industrialization process that occurred in the now-developed countries during the 18th and 19th centuries. As latecomers to development, the nations of the third world are in a profoundly different position, and many are confronted with problems of poverty and population pressure on a scale that exceeds anything experienced by the Western world during the period of its industrialization.

With this new perspective has come a greater willingness on the part of many multinational corporations to accept some of the constraints imposed by host countries on their activities and mode of operation. Moreover, they have discovered that the consequences for the firm have rarely been catastrophic and in some instances have indeed been beneficial. In any case, the flame in a number of burning issues in relations between multinationals and host countries has substantially gone out as the corporations, regardless of home country, have accepted many aspects of the host-country position, sometimes in their own interest and sometimes because they had no alternative.

A few examples of accommodation may suffice. With few exceptions, multinationals employ and train host-country nationals for their foreign operations not only for unskilled and skilled manual jobs but for all levels, including technical, financial, and managerial positions. In many instances, the managing director of the foreign affiliate is a local national. Company self-interest and national policies of indigenization of employment happen to coincide nicely in this field.

The multinationals' attitude toward joint ventures has also changed. Although company opinion was divided, a substantial majority of firms are willing to accept some local equity participation. "We have fewer hangups on this subject today," said an executive of one firm whose historical position had been to insist on 100 percent ownership.

A further example is the prevailing attitude toward the Calvo Doctrine, under which foreign subsidiaries are required to give up access to diplomatic support from their home governments in cases of dispute and to seek remedies entirely within the local law and judicial system. The Calvo Doctrine may be an additional risk element, but the firms generally accept the legitimacy of host-country insistence on the supremacy of local law and, with the exception of extractive companies, do not regard the doctrine as a significant deterrent to foreign investment.

Just as transnationals have been increasingly accommodating to the changing realities in the third world, a significant evolution has been taking place in the attitudes of governments of developing countries. Longer contact and experience with multinationals have given host-country governments a better understanding of how the corporations operate and an appreciation that the relationship need not be of the zero-sum variety but can be one of mutual gain. In many developing countries, stronger economies and better- trained individuals have led to greater competence and confidence in dealing with the multinationals and a growing tendency to take a pragmatic approach to the relationship.

It would be a mistake, however, to convey the impression that a convergence of views has developed between multinationals and developing countries on most of the issues that concern host governments. Substantial differences of perception persist, and they exacerbate whatever tensions are inherent in the relationship.

How can these conflicts be resolved? Transnationals, on the one hand, must increasingly recognize that most third-world governments are committed to the goal of fulfilling the social and economic needs of their people. They must accept the fact that this often requires modifications of private business behavior through constraints as well as inducements.

Host governments, on the other hand, must recognize that transnational corporations are by their nature not direct agents of social change but that, given reasonably stable and equitable conditions under which to operate, they can make major contributions to th ird-world development goals.