The Multinational Monitor


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From Corporations to Conglomerates

A Review of Multinationals Over the Last Twenty Years

by John Cavanaugh and Frederick F. Clairmonte

Over the past 20 years, multinational corporations have become the dominant force in the world economy. But they no longer take the same form or operate in the same ways as they did back in 1960.

Five basic changes have occurred in the structure of multinational enterprise.

The rise of the conglomerates and oligopolies

For all the talk of a "free market" and "free competition," the world economy over the past two decades has increasingly been run by giant companies that exercise control by virtue of their oligopolistic or conglomerate strength.

An oligopoly refers to a handful of firms that dominate the market by various collusive practices, such as predatory pricing or erecting barriers to entry.

International oligopolies have become paramount over the past decade in automobiles, microprocessors, seeds, and numerous primary commodities, such as coffee and cotton. Meanwhile, the ranks of older oligopolies have been thinned in industries like petroleum and cigarettes.

With the growth of these international oligopolies, their ability to control prices and wipe out competition has correspondingly increased.

Equally striking has been the rise of the conglomerates, companies whose subsidiaries engage in unrelated economic activities. Conglomerates have expanded through mergers and takeovers in a series of waves cresting in the 60's, 70's and into the 80's.

Certain conglomerates even straddle agriculture, industry, and service. A good example is the maker of Winston cigarettes, R.J. Reynolds, which has the following subsidiaries: Del Monte (fruit), Heublein (alcohol), Seal and Services (shipping), Kentucky Fried Chicken (food retailing) and Aminoil (petroleum).

By their nature, conglomerates have the ability to undermine their competitors. As different markets expand and contract, the conglomerates can shift resources into whatever sector is most profitable at any given time.

Moreover, conglomerates often engage in a practice called crosssubsidization, whereby they shift profits from one product line to subsidize another. This is an ideal marketing device which enhances the company's market share by underpricing competitors.

For instance, Marlboro cigarettes creator, Philip Morris, revolutionized the U.S. beer market in the 1970's by buying up a small regional brewer, Miller, and transforming it into the second largest beer producer in the world. Philip Morris pulled this off largely by low pricing and massive advertising, subsidized by Marlboro's tobacco profits. Coca-Cola, through its acquisition of Taylor Wines, is in the process of doing the same to the U.S. wine sector.

The relative decline of U.S. multinationals

The size of multinationals has increased dramatically over the last two decades. Revenues of the top 200 firms have jumped 10-fold, from around $200 million to over $2 billion.

But amidst this overall growth, the position of U.S. firms has fallen. In 1960, of the top 200 multinational companies, 127 were U.S.-based; these companies accounted for 72.7010 of the group's revenues. By 1980, however, U.S. firms numbered only 91 out of 200, their revenue share having fallen to 50.107o of the total (see chart).

As U.S. firms have lost some of their commanding lead, other companies based in foreign countries - particularly France and Japan - have gained ground. The number of France's multinationals in the top 200 has jumped from 7 to 15, with sales skyrocketing from $4 billion to $161 billion.

No less dramatic is Japan's steep ascent, with 20 companies now in the top 200, as opposed to only five in 1960. Revenues of these Japanese companies have zoomed up from $2.9 billion in 1960 to $155 billion in 1980. (The figures for Japanese companies do not include the Sogo Soshas, Japan's general trading companies. Led by Mitsui and Mitsubishi, there are nine giant Sogo Shoshas, whose 1981 aggregate revenues exceeded $357 billion.)

The shift away from direct ownership

Over the past two decades, multinationals have altered their approach to the control of production. In general, the giant firms have given up direct ownership of primary commodity output, while greatly increasing their control over processing, marketing, and distribution.

In response to internal political shifts in many developing countries since independence, multinationals have sought to preserve friendly relations with segments of local oligarchies by formally transferring mine and plantation ownership over to them. Crucial, however, in this entire process has been the retention by the multinationals of effective control over output. They achieve this result by various means, including contract farming in agricultural production.

Firms like Del Monte, Castle & Cooke (Dole) and even Gallo are often the sole buyers of agricultural products in a region. With total control over prices, product size and quality, they are able to squeeze local farmers to work for them on their terms. Peasants and farmers who don't like the arrangement have no place to sell their goods.

In the realm of marketing and distribution, multinationals have come to dominate world trade. Japan's nine Sogo Shoshas, for instance, handle over half of their nation's international trade, as well as a good deal of domestic trade.

Fragmentation of production

The production line is now global, as companies manufacture parts of one good in one country, assemble it somewhere else, and put on the finishing touches in yet another. Multinationals have achieved this globalization of production by means of joint ventures, licensing and subcontracting agreements, and the burgeoning free trade and export processing zones.

Engineered by companies seeking out the cheapest labor and most profitable concessions, this change in production has pitted Third World governments against one another. Developing nations now compete among themselves for the distinction of granting the greatest incentives to multinationals.

And the global production line has enabled multinationals not only to cheapen labor power, but also to neutralize the strike weapon. When workers try to demand higher wages, multinationals can either pull out and move to another country boasting cheaper labor, or simply threaten to pull out. Either tactic yields the same result: diminishing the force of the labor movement.

The rise of the big banks

International finance is no longer being performed primarily by the World Bank and the International Monetary Fund. Over the past decade, commercial banks have taken over this function, providing more than 50% of the loans to developing countries.

During this period, the assets of the major banks have scaled awesome heights; the top 100 banks have combined assets of $4.4 trillion, equivalent to half of the global gross domestic product. Big Japanese and U.S. banks together control two-fifths of the top 100's total assets, with 24 Japanese banks holding over a quarter of total assets.

The rapid ascent of private commercial finance has placed the banks in conflict, at times, with multinational corporations. Although the relationship between the two is generally harmonious in periods of growth, during the current global recession, tensions have arisen.

Multinational banks are increasingly concerned about the ability of their country clients to repay loans. Thus, in the past three years, the banks have decelerated their lending to developing countries. This is an unpopular move with multinational corporations which, in their desire to increase world trade, depend on bank loans to provide developing countries with the foreign exchange to buy Western goods.

By and large, the combined impact of these five structural changes has been to increase the power and influence of multinationals. In particular, the flexibility of multinationals to shift resources across economic sectors and national boundaries has been greatly enhanced over the past two decades. This maneuverability expands the companies economic power, as they can move readily to the most profitable areas. It also allows them to dodge political accountability, for whenever an entity -- be it a government, labor union, or consumer group - attempts to regulate the companies, they can simply pull up their stakes and find a more hospitable host.

While becoming better organized in many countries, workers and peasants are only beginning to develop the strategies, networks, and ability to counter such power and flexibility. _

John Cavanaugh and Frederick F. Clairmonte co-authored the book: The World in their Web: The Dynamics of Textile Multinationals (London: Zed Press, 1982)

The Return of Barter

Odd as it may seem, multinationals in the last decade have reintroduced the oldest form of trade: barter. Unlike conventional transactions based on foreign exchange in barter deals (sometimes called countertrades or buy-backs), purchases of one item are pegged to the selling of another. Prices of goods exchanged may or may not bear any relationship to prevailing world market prices.

For instance, Levi Strauss, one of the world's leading apparel manufacturers, entered into a countertrade agreement with the Hungarian government in 1978. Hungary received equipment and expertise in exchange for three-fifths of the plant's annual output, now amounting to around one million pairs of jeans a year, which Levi Strauss merchandises in Western Europe and Africa.

Levi Strauss is not alone in this practice. Other giant multinationals like General Motors and General Electric, have engaged so extensively in countertrade that special corporate departments have been set up to develop markets in countries where cash deals or capital investments are not feasible. With these trades, a company can increase its market share in an economy that would otherwise be difficult to penetrate, and can avoid taxes and tariffs in addition. Also, a multinational often can barter products at highly favorable terms, due to the pressing financial needs of its trading partners.

Centrally planned economies and Third World economies engage in such trades out of convenience or desperation: the countries simply don't have enough foreign exchange to buy all the goods they want. As debt levels increase in these countries, the lure of barter looks all the more attractive.

The world economic recession has spawned this increasingly popular means of exchange. According carding to General Electric, the global barter market accounted for $350 billion in 1979, or a fifth of world trade. As the global economic recession has deepened over the past three years,' countertrade transactions have risen as high as 25-30% of world trade.

Top 200Companies by Country, 1960-1980

Country Number (1960) Sales, $BIL (1960) % of Total Sales (1960) Number (1980) Sales, $BIL (1980) % of Total Sales (1980)
USA 127 144.6 72.7 91 1080.4 50.1
FRG 20 13.4 6.8 21 209.0 9.7
UK 24 19.6 9.9 16.5 199.5 9.2
France 7 3.5 1.8 15 161.0 7.5
Japan 5 2.9 1.5 20 155.2 7.2
Netherlands 3 6.4 3.2 5 89.6 4.2
Italy 3 1.9 0.9 4.5 69.5 3.2
Canada 5 2.6 1.3 5 32.5 1.5
Switzerland 2 2.0 1.0 4 31.9 1.5
Belgium 1 0.5 0.2 2 14.5 0.7
Sweden 1 0.4 0.2 2 11.0 0.5
Rep. Of Korea 2 10.0 0.5
Others 2 1.1 0.5 12 91.1 4.2
Total (Excl. USA) 73 54.4 27.3 109 1074.8 49.9
Total 200 199.0 100.0 200 2155.2 100.0

Source: Calculated from Fortune's listings of leading industrial corporations

Top 100 Commercial Banks by Country

Countries No. of Banks Assets ($BIL) % of Total Assets Profits ($BIL) % of Total Profits
Japan 24 1097.6 25.1 88.4 20.8
USA 12 650.7 14.9 91.2 21.4
France 8 509.2 11.6 35.8 8.4
FRG 11 464.3 10.6 45.9 10.8
UK 5 344.5 7.9 42.1 9.9
Italy 8 258.1 5.9 28.6 6.7
Canada 5 240.6 5.5 34.5 8.1
Netherlands 4 160.4 3.7 2.5 0.6
Switzerland 3 141.9 3.2 12.8 3.0
Belgium 4 100.2 2.3 12.2 2.9
Spain 3 67.5 1.5 6.7 1.6
Brazil 1 65.1 1.5 5.3 1.2
Sweden 3 64.6 1.5 3.1 0.7
Australia 3 60.0 1.4 7.1 1.7
Hong Kong 1 52.1 1.2
Iran 1 23.9 0.6 1.1 0.3
India 1 20.5 0.5 1.9 0.5
Israel 1 19.2 0.4 4.2 1.0
Mexico 1 18.4 0.4
Austria 1 18.2 0.4 1.7 0.4
TOTAL 100 4377.1 100.0 425.1 100.1

Source: Computed fom The Banker, June 1982.

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