Thursday, December 09, 2010

Multinationals and the extent of institutions

Chapter 8 of The Company: A Short History of a Revolutionary Idea is titled "Agents of Influence: Multinationals, 1850-2002. As the title suggests, this is a very brief history of the development of multinational corporations over a century and a half. I quote some interesting data from the chapter:
By 2001, there were about sixty-five thousand "transnational" companies in the world, roughly five times the number in 1975; around the globe they gathered together 850,000 foreign affiliates, employed 54 million people, and had revenues of $19 trillion. In the late 1990s, foreign direct investment grew four times faster than world output and three times faster than world trade. Roughly a third of trade flows consisted of payments within individual companies, reflecting the way that multinational production systems stretched around the world. In 2000, the global figure for FDI passed $1 trillion.
Not only have multinationals grown larger and more powerful over the period, the action has shifted. At the beginning of the period, British firms dominated the multinationals. American firms surpassed them in scope and influence early in the 20th century and were made relatively more powerful still by the European destruction of World War II. There was concern in Europe about "the American Challenge" in the third quarter of the 20th century, and about the "Japanese Challenge" in the 80s and 90s, as there is not concern about the growing international power of companies from China, India, Russia and Brazil.

Micklethwait and Wooldridge, the authors, make the point that the trend is for multinationals to be more benign. Of course, the early multinationals not only enslaved people but literally branded their slaves with their corporate names.

The Extent of Institutions

I got to thinking about the relative extent of institutions. The Australian and North American hunter gatherers found by European explorers did not have companies, but there were trade routes that allowed certain high-value, light products to be moved hundreds and even thousands of miles from their source to their ultimate destination. These routes apparently were institutionalized, moving from tribe to tribe along the route based on relations of trust between members of the trading tribes.

Military institutions, such as those of Alexander the Great or the Roman Empire, spanned hundreds or even thousands of miles. The governance institutions were not always coterminous with the military ones. Sometimes conquered territories could not be held, sometimes governance was extended without conquest when new people sought affiliation with an empire based on the economic benefits that citizenship in the empire conferred.

Religious institutions seem often to have grown in the past within empires with a single governmental institution. Think of Buddhism and the Empire of Ashoka, Christianity and the Roman Empire, or Islam and the Arab expansion. Today, however, the world religions are, as the term suggests, international. Their institutions are not limited in geographic scope by the scope of the country in which they are "headquartered".

In the hay day of European empires, their multinationals were related to the extent of their imperial control. Loss of colonies could be economically devastating because the loss of government control meant loss of markets for the products of the center and loss of raw materials from the periphery. Obviously, that pattern was not rigid or universal. The British empire profited greatly from the sale of Opium produced in India to people in China. Still, I think there is a major difference today in which so much trade crosses national boundaries as compared with the 19th century when much was limited within imperial boundaries.

I have read that a trader in the Islamic world could move freely from across North Africa, the Middle East and Central Asia under the protection of his religion and of local Muslim rulers. In the British Empire the British navy and British army similarly could provide safe passage for trade. Today, international law (with some minor exceptions such as Somali pirates) similarly protects trade, and empire is not necessary. That is fortunate because we moderns don't much like being governed by people far away who do not put our interests first.

This is one of a series of postings on the book. Others are:

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