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Finance & Development, December 1980
Article

Book notices

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
December 1980
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The Multinational Enterprise:

Thomas G. Parry

International Investment and Host-Country Impacts

Jai Press, Inc., Greenwich, CT, U.S.A., 1980, xiv + 172 pp., US$26.50.

Isaiah Frank

Foreign Enterprise in Developing Countries

The Johns Hopkins University Press, Baltimore, MD., U.S.A., 1980, xv + 199 pp., US$12.95 (cloth), US$5.95 (paperback).

Between 1972 and 1978 direct foreign investment in developing countries averaged US$6.6 billion per year. Despite the magnitude of this flow of funds, relations between multinational corporations (MNCs) and the Third World nations where they operate continue to be marked by tension. Moreover, prospects are dim for a blueprint to be designed that could forewarn corporate executives and developing country policymakers of all the pitfalls that threaten harmonious relations between their respective institutions.

Despite the gloomy outlook, these two recently published books provide an in-depth examination of the sensitive subject of MNC direct foreign investment in the Third World. Although the authors approach the issues from completely different perspectives, each has made an important contribution to the growing reservoir of literature on the subject. If the volumes are to be read back-to-back, Professor Parry’s should be read first. The Multinational Enterprise: International Investment and Host-Country Impacts is the more theoretical of the two, written more with an eye toward the academic community than the corporate boardroom. Readers who are relatively unfamiliar with, or uninterested in, theories of direct foreign investment may find the book a difficult exercise, particularly because the author writes in a rather turgid, academic style that does not always make for effortless reading.

The purpose of Parry’s book is to identify and explain the principal factors that determine why MNCs undertake direct foreign investment in Third World countries, and what effects this investment has on the recipient countries. His explanation centers on so-called “market imperfections and distortions” (such as tariff and nontariff barriers, taxes, and labor policies) that influence MNC investment policies. Parry believes that MNCs, with a broad array of global opportunities to choose from, make investment decisions based on their assessment of the effect that these market imperfections and distortions ultimately will have on the investment.

The author’s thesis is particularly important in light of the potential for tension between MNC investors and recipient countries. Parry correctly observes that there is a “tendency inherent in direct investment from abroad to shift decisionmaking power in parts of the private sector outside the [host] country” (p. 9). This shift opens the door wide to potential conflicts and makes an assessment of the linkage between market imperfections and investment decisions crucial for both investor and recipient.

It is Parry’s conclusion that the policy implications derived from his analysis place the burden squarely on the shoulders of the recipient countries. If market imperfections do indeed provide the principal explanation of MNC decisions on direct foreign investment, then it is incumbent on host governments to design and implement policies that will maximize their gains without rebuffing prospective investors. However, the author is weakest when trying to suggest how government policymakers should alter their behavior without creating disincentives that could result in the curtailment of the flow of direct foreign investment from MNCs.

Although the subject matter is the same as the Parry book, Foreign Enterprise in Developing Countries by Professor Isaiah Frank has a completely different style and approach. His book is concise, well-organized, and written with a simplicity and clarity that is rare among economists. As a result, the book should appeal to a wide variety of readers—corporate executives and their bankers, students interested in the behavior of MNCs in the Third World, and host-country policymakers concerned with gaining insights into the motivations and attitudes of the corporate executives who are responsible for making important decisions on direct foreign investment.

Professor Frank does not deal in the theoretical realm, as does Professor Parry. Instead, his book represents a compilation and analysis of corporate attitudes based on a series of in-depth interviews with 90 key individuals from various industrial countries who have primary responsibilities for direct MNC investment in developing countries. Both his research methodology and his conclusions differ sharply from Parry’s. The results of Professor Frank’s interviews reveal that concern for political and economic stability in the host country—not market imperfections—is the principal determinant of corporate decisions on foreign investment.

According to his analysis, the concept of instability comprises not only prospects of political upheaval, but also such factors as complex bureaucratic procedures for foreign investors, continuous changes in federal regulations, and other arbitrary, unpredictable changes that may abruptly alter the investment climate. The desire for stability and continuity in the host country, according to the interviews, is far more important than any specific set of inducements the government may adopt to attract foreign investors. Only a handful of the respondents claimed that special incentives granted by the recipient country played a major role in their investment decisions (p. 95). In sharp contrast to Parry’s thesis, the “companies believed that their security depends less on specific laws and regulations than on the good will of host governments” (p. 107).

The Frank interviews also reveal that the executives appear to be more sensitive to the interests of the less developed country (LDC) recipients than is commonly believed. In the author’s view, the respondents do not “question the legitimacy of host countries evaluating the impact of the multinationals… in terms of their own broad national goals” (p. 144). Thus, the corporations appear willing to accept reasonable constraints on their activities, but they also expect negotiations to occur in a spirit of accommodation and sensitivity to the legitimate interests of both parties.

If this excellent book has a flaw, it lies in the one-sided nature of the analysis. Although the interview results clearly reveal that there is a diversity of opinion among corporate executives, no attempt is made to present other viewpoints, most significantly those of LDC representatives. The reader can hardly be surprised to learn, for example, that most interviewees “argued that host countries should play little or no role in the selection of subsidiary management personnel” (p. 68). It also is predictable that most company representatives deny that “they exploit transfer pricing to gain special advantage” (p. 97), or that they “bribed or attempted to bribe host-country officials…” (p. 125). It would be interesting to poll some Third World government policymakers to gauge the extent to which there is a consensus on these issues.

Professor Frank has presented a well-balanced analysis of the costs and benefits of MNC foreign direct investment in the Third World. Although there will always be ample room for tension between MNCs and the host-country governments, Professor Frank’s analysis provides a convincing case that relations between MNCs and their Third World hosts have improved in recent years, and that the potential for substantial mutual benefit is real if both parties are prepared to approach the relationship in a spirit of compromise and concern for each other’s interests.

Roger S. Leeds

Sogoshosha:

Yoshi Tsurumi

Engines of Export-Based Growth

Renouf U.S.A., Inc., Brookfield. VT, U.S.A., 1980,94 pp., US$8.95.

Alexander Young

The Sogoshosha:

Japan’s Multinational Trading Companies

Westview Press, Boulder, CO, U.S.A., 1979, 247 pp., US$24.50.

For a country poorly endowed with natural resources, export-led growth may be the only avenue to rapid industrial prosperity. One example of an economy that has become a great industrial power through such foreign trade is Japan. During the past 15 years, various aspects of the Japanese experience have been exhaustively analyzed in an attempt to distill the essential ingredients of an effective development “strategy.’’ But there have been surprisingly few detailed studies in the English language of the sogoshosha, the general trading companies which have spearheaded Japan’s export drives throughout this century and have provided the channels through which the bulk of the country’s imports are purchased and distributed.

The two books under review do not give the definitive analysis of the trading companies that is needed, but both of them (especially the one by Alexander Young) contain a considerable volume of useful and fairly up-to-date information. The books trace the evolution of the sogoshosha since the first one was formed in 1876. Tsurumi’s book is slight, both in length and in content. Although it discusses the sogoshosha management and recruitment system in some detail, the discussion is too uncritical. Young’s treatment of these topics may be cursory, but it is more analytical; he finds that both financial and organizational management were relatively inefficient until quite recently and that many of the weaknesses are only now being rectified.

The first sogoshosha was Mitsui and Co., which exported coal and concentrated on the import of textile equipment and cotton. By the close of the 1960s, the bulk of the marketing business was in the hands of ten companies, some tied to zaibatsu (or industrial conglomerates), but all having strong links with a major bank that provided the financial support so essential for their dealings. By the mid-1970s, the trading companies were handling from 10,000 to 20,000 products each and had gross sales of US$155 billion, which was equal to 56 per cent of Japan’s total trade and about 5 per cent of world exports. In addition, they accounted for 20 per cent of the wholesale trade within Japan.

The sogoshosha now are primarily first stage wholesale traders of raw materials, grain, and standardized commodities such as steel, fertilizer, and synthetic fibers. They have long served as conduits through which financial resources were distributed by risk-conscious banks to small-sized and medium-sized firms in need of funds, but without the collateral or the sure prospects to obtain capital directly. By taking on the role of intermediaries, the sogoshosha absorb the risk, support a range of production units, and find export outlets for their goods. Outside Japan, the trading companies have moved into mining and agriculture on the one hand and factories and wholesale businesses on the other.

The interest of the sogoshosha in developing their activities abroad increased from the mid-1970s. Since the 1973-74 oil price increase and then the Lockheed bribery scandal, Japanese public opinion has become suspicious of the sogoshosha and has come to feel that the trading conglomerates may be manipulating supplies of essential materials for their own advantage. In 1975, the Government began imposing restrictions on the volume of lending by group banks to their associated sogoshosha.

These developments have been interpreted by the companies as signs that they must reduce their stakes in Japan and spread their trading and borrowing activities more evenly around the world. Young points out that, in the past three or four years, the sogoshosha have begun to view their operations from a global perspective. They have allowed their foreign subsidiaries far more autonomy than previously, are more concerned with social responsibilities, and have begun to promote actively the industries with growth potential in order to boost their trading operations.

Of the two books, Young’s provides the more thorough coverage. Unfortunately, it has the flavor of an official biography. He is a little awestruck by the sogoshosha. The book is also repetitive and the author is not inclined to go in for the kind of analytical probing that would give the readers an idea of why the Japanese society has been so hospitable to the trading companies, and the effect they have had on economic and political activities within the country. Without such analysis, it is hard to accept for instance Tsurumi’s unqualified enthusiasm for homegrown sogoshosha in Brazil, Korea, Canada, and the United States.

Both Brazil and Korea have been encouraged to try to emulate the Japanese. Under prodding from the Government, a number of large Korean corporations began establishing general trading companies in 1975. Associated with the phenomenal recent growth of Korean exports, these firms have now bloomed into 11 giant enterprises with extensive trading contracts abroad. Brazil has moved more slowly. The Government helped in setting up a trading company in 1971 and another one was created within the public sector during 1976. Both companies have grown steadily over the years, but they have not attracted a host of imitators, perhaps in part because of differences in cultural and economic traditions; the Koreans, with a cultural affinity and geographic proximity to the Japanese, have taken more readily to the organizational forms represented by the sogoshosha than the Brazilians.

The question can be raised: has Korea profited greatly from creating sogoshosha and should its experience be seen as a model for other semi-industrialized countries? It is difficult to come to conclusions on these points. It is hard to disentangle the role played by trading companies in the growth of Korea’s exports from the influences of other factors. Already Korea is finding that the wholesale approach taken by the trading houses may not be appropriate for their export-mix in which sophisticated consumer items, such as machinery and electronics, are predominant. In addition, the high debt/equity ratio of the firms and their heavy dependence on the banking system, which is a characteristic of the sogoshosha, may be acceptable under conditions of very rapid growth but can become a liability in more prosperous times. Finally, if Korean firms adopt the global perspective of their Japanese counterparts, conflicts may arise between the economic objectives of the Government and those of the trading companies, with the result that Korea’s own development may suffer. It would seem, therefore, that even those countries which are in a position to provide a home to sogoshosha and can use the benefits of marketing and wholesale services on a large scale must think hard about what form of trading firm would best serve their future needs. They should also give weight to possible adverse consequences of large oligopolistic conglomerates on competition and entrepreneurial initiative within the economy and to uncertainties about the responsiveness of such firms to policies based primarily on domestic considerations adopted by governments.

Shahid Yusuf

Une enquéte du Monde

Vingt ans de réussite allemande

Economica, Paris, France, 1979,127 pp., F 30.

Le Monde enquéte

La nouvelle economic anglaise

Economica, Paris, France, 1980, 251 pp., F 29.

With these two books the economic staff of Le Monde set out to familiarize the reader with the economies of two important partners and competitors of France—the Federal Republic of Germany and the United Kingdom. In both cases, the authors review industry, agriculture, the financial system, labor relations, and social and political factors affecting each economy.

Both books are written for a general audience and provide a well-informed and sound—though nontechnical—analysis of the two economies. The discussion of the performance of Germany includes a comparison with economic developments in France, which adds a particularly interesting dimension.

Other books received

Paul B. Pearson and T. Richard Greenwell (editors)

Nutrition, Food and Man:

An Interdisciplinary Perspective

University of Arizona Press, Tucson, AZ, U.S.A., 1980, xiii + 159pp., US$11.50 (cloth), US$5.95 (paperback).

This collection of papers occupies an ill-defined middle space between highly technical studies of nutrition, on the one hand, and the informative survey written for the nonspecialist about various aspects of nutrition, on the other. The book covers a broad area and contains some fairly detailed and interesting articles on human adaptability to lack of nutrition, the relation between nutrition and immunity, and on restraints to accepting new foods.

Sources and Problems of Arab Development

Organization of Arab Petroleum Exporting Countries (OAPEC). Kuwait City, Kuwait. 1980, 144 pp.

Abdelaziz Alwattari

Oil Downstream:

Opportunities, Limitations, Policies

Organisation of Arab Petroleum Exporting Countries (OAPEC), Kuwalt City, Kuwait, 1980, 111 pp.

These two slim volumes provide a rare and informative view of thinking on policies and programs relating directly and indirectly to the use of oil resources of the Arab countries. The first volume deals with four subjects that concern these countries: development of low-income Arab countries—the case of Egypt; financial markets; food security; and use of natural gas. The second is an authoritative statement on efforts by OAPEC to develop downstream oil industries.

Masao Fujioka

Japan’s International Finance:

Today and Tomorrow

The Japan Times, Ltd., Tokyo. Japan, 1979. xv + 277 pp. ¥3,200.

A collection of speeches and articles by a former senior civil servant, which constitute an authoritative commentary in English on Japan’s international financial policies over the past two decades.

Yoshio Suzuki

Money and Banking in Contemporary Japan:

The Theoretical Setting and Its Application

Yale University Press, New Haven. CT, U.S.A., 1980, xx + 256 pp., US$18.

A translation into English of a book based on a series of lectures at Tokyo University by a former official of the Bank of Japan. The five parts of the book provide a review of Japan’s financial structure, how the instruments of monetary policy operate, and the effectiveness of monetary policy on the domestic economy A background in advanced monetary theory is required of the reader.

Andrew A. Beveridge and Anthony R. Oberschall

African Businessmen and Development in Zambia

Princeton University Press, Princeton, NJ. U.S.A., 1979, xv + 382 pp., US$22.50.

Since the lack of entrepreneurs has been identified as one of the major constraints on growth in most African countries, this case study of the Africanization of commerce and industry in Zambia adds valuable empirical evidence to an understanding of the problem. The authors investigate the performance of entrepreneurs and the impact of government policies on business growth and of small business on Zambian society. For the general reader.

Leslle Stein

The Growth of East African Exports and their Effect on Economic Development

Croom Helm Limited, London, U.K., 1979, 272 pp., £11.95

This volume analyzes the export performance and economic growth of Kenya, Tanzania, and Uganda. It provides information on macroeconomic and general export trends, on major export crops, an analysis of the impact of export instability, and the relationship between exports, gross domestic product, savings, and investment. There is a chapter reviewing manufacturing exports within the East African Common Market with a good summary of the forces which eventually led to the disintegration of the market.

Joan Edelman Spero

The Failure of the Franklin National Bank:

Challenge to the International Banking System

Columbia University Press. New York, NY, U.S.A., 1980, xi + 235 pp., US$14.95.

An original inquiry into the failure of the Franklin National Bank of New York in 1974 by an academic political scientist who had access to the archives of the Federal Reserve Bank of New York. The story is told of the principal reasons for the closing of the twentieth largest U.S. commercial bank in terms of deposits. It also covers the successful efforts by U.S. banking authorities to provide for an orderly liquidation of the assets of the institution in order to minimize the effects of its downfall on domestic and International financial stability. The vulnerability revealed by this episode led to efforts by central banks to contain and avoid international financial crises. An informative survey for those with questions about the stability of the international banking system.

Brendan Brown

The Dollar-Mark Axis:

On Currency Power

Macmillan Press, London, U.K., 1979, xv + 154 pp., $12.00.

Against the background of current institutional developments in specialized international financial markets, especially in Europe, the author describes the evolution of world monetary arrangements from a universal dollar-based system (1957-71) to one of regional currency blocs (after 1973), centered around two principal currencies: the dollar and the deutsche mark.

J. E. Wadsworth and F. Leonard de Juvigny (editors)

New Approaches In Monetary Policy

Sijthoff & Noordhoff International Publishers, Wllheiminalaan 12, The Netherlands, 1980, xiv + 390 pp., US$42.50 (f. 85).

Some 25 papers presented at a Colloquium at Wiesbaden. Federal Republic of Germany, in 1977, which survey the changes in monetary policy and particularly in central bank approaches to monetary aggregates. Included in the volume are contributions from 12 European central banks describing their experience with monetary targets.

Ayubur Rahman Bhuyan

Economic Integration in South Asia:

An Exploratory Study

The University of Dacca, Dacca, Bangladesh, 1979, xv + 224 pp., US$12.

This book studies the possible advantages of regional economic cooperation, mainly through a customs union, among the countries of South Asia—Bangladesh, India, Pakistan, and Sri Lanka. While listing the economic arguments in favor of such regional economic integration, it recognizes also the difficulties posed by political differences among these countries.

John Cody, Helen Hughes, and David Wall (editors)

Policies for Industrial Progress in Developing Countries

Oxford University Press, New York, NY, U.S.A., 1980, ix + 316 pp., US$16.95 (cloth), US$5.95 (paperback).

A collection of ten papers dealing with the experience in industrialization of less developed countries. The main topics Include: the achievements and objectives of industrialization; trade in manufactures: the formulation of financial, labor, technological, and taxation policies: effects of government intervention through production and price regulation, public ownership of enterprises and controls over location and the availability of infrastructure; industrialization and agricultural development; and the international environment for industrialization.

George M. von Furstenberg

Social Security Versus Private Savings, Vol. I in the series on Capital Investment and Saving

Ballinger Publishing Co., Cambridge, MA, U.S.A., 1979, xx + 435 pp., US$35, Vol. II, The Government and Capital Formation, 1980, xxiv + 535 pp., US$35 Vol. III, Capital Efficiency and Growth, 1980, xx + 561 pp., US$35.

The papers incorporated in these three volumes were the outcome of a study on the role of capital in the growth of the U.S. economy during the past 30 years sponsored by the American Council of Life Insurance. In them, prominent economists apply advanced econometric techniques to some of the major problems facing the U.S. economy. Volumes I and II are devoted to an analysis of the determinants of savings and investment and Volume III covers the relationship between capital and economic expansion.

Nigel R.L. Hudson

Money and Exchange Dealing in International Banking

John Wiley & Sons, New York, NY, U.S.A., 1979, xi + 135 pp., US$24.95.

T. H. Donaldson

Lending in International Commercial Banking

John Wiley & Sons, New York. NY. U.S.A., 1979, ix + 187 pp., US$24.95

These two books are part of a series on international banking designed to explain how basic international banking functions are performed Both are written by experienced London commercial bankers. The Hudson volume deals with the technical aspects of International money and foreign exchange dealing and includes arithmetic examples of selected transactions. The Donaldson volume is concerned with the lending function—how banks analyze international credits and how such lending differs from domestic operations.

Richard M Levich and Clas G. Wihlborg

Exchange Risk and Exposure:

Current Developments In International Financial Management

D.C. Healh and Company, Lexington, MA, U.S.A., 1980, xi + 211 pp., US$21.95.

Papers and commentary presented at a conference at New York University in February 1979 organized around the question: does the currency of denomination matter in international business operations? The papers bring together key themes of extensive recent academic writing on various aspects of exchange risk under floating currencies and the effects of uncertainty on international firms. Of advanced academic interest.

In the book on Germany, the emphasis is on an explanation of the country’s favorable performance as to growth, employment, price stability, and external balance. These achievements are traced back to German industry’s need to re-equip itself after World War II and its great adaptability to changes in demand and supply conditions. This adaptability was a result of a heavy reliance on market forces and of an efficient financial system open to taking risks and unhampered by privileged financial circuits and credit controls. The implementation of adjustment programs benefited from good labor relations.

The review of the economy of the United Kingdom mainly elucidates the reasons for the stop-and-go nature of economic development over the past 30 years, which was accompanied by increasing internal and external imbalances and a low rate of economic growth. The authors lay the responsibility for these developments on the trade unions, business, and government. In their view, the great priority accorded by British trade unions to full employment, their excessive emphasis on preserving existing jobs, and their fragmented organization hampered economic adjustment and progress. The business community neglected investment and was incapable of following changing market conditions, which entailed a loss in productivity, competitiveness, and market shares at home and abroad. Government failed to turn the tide because it overemphasized consumption and lacked a general concept of economic development. Owing to the absence of such a program and to the fact that incomes policy and investment incentives were neglected, economic policy was limited to anticyclical demand management. Against this background, the authors investigate the outlook for the U.K. economy under the new policies of Prime Minister Margaret Thatcher, although they reserve final judgment on the eventual outcome of the experiment.

J. Somogyi

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