March 2001JIBS Book Review

The Globalization of Multinational Enterprise Activity and Economic Development

By: Neil Hood and Stephen Young

MacMillan Press, 20000312225377

Reviewed By: Michael W. Hansen

Copenhagen Business School


In his seminal article from 1994 re-evaluating the benefits of foreign direct investment”, John Dunning described how a notable change in the debates on foreign direct investment (FDI) and economic development was underway. He argued that technological developments, new ways of organizing economic activity across borders, and liberal ideological currents prompted governments around the world to re-evaluate the benefits (and costs) of FDI and to re-formulate their economic development strategies. Today, Dunning’s observation is no less relevant: Driven by technological developments and policy liberalization, multinational enterprises (MNEs) are continuing to extend their global reach through equity and non-equity means, prompting radical changes in the organization of the international economy. Governments are more than ever struggling to understand the nature of this new competitive context and devise appropriate economic development strategies in response. Essentially, the anthology “The Globalization of Multinational Enterprise Activity and Economic Development” edited by Neil Hood and Stephen Young, both professors at University of Strathclyde, examines these issues. The anthology is based on a workshop held at Strathclyde Graduate Business School in Glasgow in May 1998 with the rather broad theme of “exploring the interrelationship between and among globalization, multinational enterprise activities and economic development and highlight the implications for policy makers”. The anthology’s 16 contributions are organized in five parts: Issues and theory; Corporate perspectives; Country perspectives; Policy perspectives; and Conclusion. In the introductory and concluding chapters, the editors seek to bind the various contributions together by presenting an integrative framework.

 

MNEs and economic development strategy

The main attraction of the book is that it focuses on the interface between the changing strategies of MNEs and “the role of national and sub-national governments as to how (or if) they are able to influence the spatial organization of economic activity in directions consistent with their economic development objectives”. The point of departure for this focus is according to Hood and Young that corporate and government objectives not always coincide and that globalization makes it increasingly difficult to reconcile those objectives. The source of growing tensions is a series of radical changes in the world economy, what might be labeled ‘the new competitive context’. Among its defining characteristics are rapid technological change (e.g. addressed in articles by Kobrin, Mytelka, and Dunning); growing geographical dispersion of economic activity (e.g. addressed by Mirza and Dunning); policy liberalization (e.g. addressed in articles by Young and Brewer, and Mytelka); competition increasingly based on innovation and knowledge appropriation  (e.g. addressed by Dunning, Kobrin, and Birkinshaw); and growing importance of intra nd inter industry clusters, alliances and networks (e.g. addressed by Enright and Ozawa).

 

In this ‘new competitive context’, it is increasingly meaningless to ignore MNEs. As any reader of this journal is well aware, an incredible and sustained expansion in international production orchestrated by multinational enterprises has taken place throughout the 1990s. MNEs are increasingly deploying resources at a global scale, joining their mobile assets (e.g. knowledge, technology, finance or marketing skills) with the ‘immobile’ assets of host countries (e.g. natural endowments, labor resources, infrastructures or industrial clusters). Instead of merely exploiting comparative advantages or market potentials of host countries, MNEs are increasingly seeking world class infrastructure, skilled and productive labor, innovative capacities and an agglomeration of efficient suppliers, competitors, support institutions and services. One consequence of the growing role of MNEs is that the competitiveness of nations increasingly is associated with their ability to attract and exploit MNEs. Phrased in terms of Michael Porter’s ‘Diamond of Competitiveness’, the new competitive context assigns an increasingly important role to governments as facilitators and coordinators of the four facets of the diamond. How countries around the world – be they MNE home or host countries – address these challenges can be seen as the common thread running through most of the contributions to the anthology.

 

MNE strategies and developing countries

The book adopts a rather broad definition of ‘economic development’, treating the concept as referring to all countries and regions. Thus, Scotland, Wales and Japan are discussed in the same context as India, Egypt and Argentina. However, more detailed consideration of what is understood with ‘economic development’ and ‘developing countries’ and how this reflects on corporate and government strategies would have been timely, given the title and theme of the book. Apart from Kobrin’s thought-provoking article on the Indian software industry and Chutnovsky’s excellent account of the Argentinean FDI based development strategy, the anthology fails to explicate the implications of changing MNE strategies for developing countries’ economic development strategies and capacities. For instance, it could have been examined, how changing strategies of MNEs have conditioned the apparent movement from inward looking, import substituting and state centered industrial development models toward more outward looking, trade and investment oriented, and market facilitating models witnessed in many developing countries? Furthermore, most articles focus on corporate strategies in a knowledge and innovation driven economy, yet it can be debated whether this economy is that relevant to developing countries or whether the traditional cornerstones of developing countries’ competitiveness -cheap labor and abundant natural resources – remain as important as ever. Also, government facilitation of industrial clusters and networks is emphasized by several contributors as a localized response to globalization, yet the potential advantages (and limitations) of such a strategy in a development context is nowhere emphasized. Finally, a book on economic development strategy might have raised the question whether developing countries have - or are likely to build in the foreseeable future -the governance capacity that will enable them to assume the roles of effective coordinators and facilitators of competitiveness in an increasingly global economy.

Impacts and economic development strategy

As mentioned in the article by Brewer and Young, it is necessary to identify, where the economic development gains (and costs) from globalization flows in order to formulate appropriate policy. The gains from FDI might be positive externalities such as technology and knowledge spillovers, the creation of marketing outlets or inflow of capital, etc., the costs negative externalities such as dumping of polluting activities, regulatory races to the bottom, ‘hollowing out’ of local industry, the surrender of self-determination, etc. Ho wever, one weakness of the book (and in fact much of the political economy literature on MNEs), is that such impacts of MNE driven development are addressed only in passing. It is in my view essential to analyze the question of impacts extremely thoroughly in order to elevate the current debates on economic development strategy and globalization beyond stark ideological positions.

Theoretical contributions

Due to the broad theme of the anthology, it lacks a common theoretical ground and the apparently ex post developed framework offered by Hood and Young adds little new to already existing frameworks on the relationship between government and MNE strategy. However, two theoretical contributions -that of Birkinshaw and that of Dunning - deserve specific attention. In particular, I enjoyed reading the article by John Dunning and to do it full justice would require a separate review article. Dunning is a central figure in the international business literature, not least because he represents a historical continuity going back to the 1950s and because he has refused to abandon the ambition of finding common theoretical and thematic ground within this literature. In an, as usual, well crafted article, Dunning once more demonstrates the superior flexibility of his Eclectic Paradigm, now by ‘consuming’ more recent challenges from perspectives emphasizing knowledge as competitive assets, e.g. the resource based and evolutionary theories of the firm.

 

I also enjoyed the notion of ‘internal markets’ in MNEs analyzed in an article by Julian Birkinshaw. He notes that while economic schools of MNEs (in particular the transaction cost school) still are engaged in analyzing MNE activities qua MNEs, then the strategic management school (e.g. Bartlett and Ghoshal, and Prahalad and Doz) has largely abandoned this effort, instead directing their attention to generic business issues such as competency and knowledge generation. Birkinshaw offers a framework – ‘the internal market model’ – for analyzing the new competitive context’s implications for the internal organization and deployment of resources in MNEs. While the framework is tentative, the endeavor may eventually help bridging the economic and the strategic management literatures.

On a methodological note, several contributions to the anthology raise the question whether MNEs is the relevant unit of analysis when we discuss globalization. Kobrin suggests that we should focus more broadly on coordination of international activity, arguing that “information technology facilitates the integration of geographically dispersed operations and allows networked coordination to replace ownership and hierarchy as the primary mode of control”. Indeed a provocative statement and a major challenge to the economic literature’s traditional emphasis of MNEs defined as foreign investors!

Conclusion

In spite of the editor’s valiant efforts to link together the various contributions, the book remains a micro cosmos of the heterogeneous globalization literature, offering highly select extracts from that literature. Normally, I would be skeptical about the merits of such an undertaking and would prefer a clearer theoretical, thematic and/or methodological focus. This potential problem however is amply compensated for by the fact that Hood and Young have succeeded in bringing together an impressive group of distinguished scholars from the international business field, each offering novel and often thought-provoking perspectives on particular issues. Thereby, the book amply illustrates the current vitality and comprehensiveness of the literature on MNEs and economic development. Together with for instance publications by UNCTAD’s Investment Division, the book fills a lacuna in the literature on economic development and globalization and should be welcomed by anyone working with such issues both from a practical as well as academic perspective.


Published at http://aib.msu.edu/JIBS/BookReviews/HTML/2001-04.html
Reviewed on: March 1, 2001
(c)2001 - Academy of International Business

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