MULTINATIONALS FROM THE SECOND WORLD

Multinationals froDl the Second W orld

Growth of Foreign Investment by Soviet and East European Enterprises

earl H. McMillan Professor of Economics Carleton University, Ottawa

St. Martin's Press, New York for the Palgrave Macmillan

For my parents

ISBN 978-1-349-08841-6 ISBN 978-1-349-08839-3 (eBook) DOI 10.1007/978-1-349-08839-3

© Carl H. McMillan and the Trade Policy Research Centre, 1987

Softcover reprint ofthe hardcover 1st edition 1987 978-0-333-41991-5

All rights reserved. For information, write: Scholarly & Reference Division, St. Martin's Press, Inc., 175 Fifth Avenue, New York NY 10010

First published in the United States of America in 1987

ISBN 978-0-312-55253-4

Library of Congress Cataloging-in-Publication Data McMillan, Carl H. Multinationals from the Second World. Bibliography: p. Includes indexes. 1. Investments, East European-Developing countries. 2. Investments, East European. 3. Investments, Russian­Developing countries. 4. Investments, Russian. 5. East-West trade (1945- ). 6. Competition, International I. TitIe. HG5993.M38 1987 332.6'7347 86-10095 ISBN 978-0-312-55253-4

Trade Policy Research Centre

The Trade Policy Research Centre, based in London, was established in 1968 to promote independent analysis and public discussion of international economic policy issues. The Centre is managed by a Council, set out below, which represents a wide range of international experience and expertise.

SIR KENNETH DURHAM Chairman

ANDRE BENARD

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PROFESSOR w. M. CORDEN

PROFESSOR GERARD CURZON

DlRK DE BRUYNE

F. M. DE SELUERS DE MORANVILLE

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of international economic relations - whether commercial, legal, financial, monetary or diplomatie.

The prineipal function of the Centre is the sponsorship of research programmes on poliey problems of both national and international importanee. Conferences, seminars, lectures and dinner meetings are also convened from time to time.

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Contents

Trade Policy Research Centre v

List o[ Tables ix

List o[ Figures xi

Biographical Note xii

Pre[ace xiii

Acknowledgements xvi

1 NEW DIMENSIONS TO MULTINATIONAL ENTERPRISES 1 Phenomenon of Comeeon foreign direet investment 2 Strueture of the analysis 4

2 COMECON COUNTRIES AND THE WORLD ECONOMY 6 Origins and evolution of the new orientation of

external poliey 6 Expansion of extra-regional trade 12 Growth and diversifieation of external finaneing 18 Integration into the international division of labour 22 Deeeleration in the 1980s 24

3 PROFILE OF EXTERNAL INVESTMENTS BY THE COMECON COUNTRIES 29 Organisational forms and strueture of ownership 29 Geographie and funetional distribution 33 Seale of operations 42

4 ACTORS AND STRATEGIES 48 Aetors 49

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Decision-making process 52 Rationale for Comecon investment in the West and

South 56 Inhibiting factors 63 Differences in organisation and approach among

Comecon countries 66 National strategies for foreign direct investment 71

5 INVESTMENTS IN THE SERVICE SECTOR: NATURE AND EXPERIENCE 78 Foreign commercial operations 78 Foreign banking and insurance 89 Transport and other services 96

6 DYNAMICS OF INVESTMENT IN PRODUCTION FACILITIES ABROAD 103 From export marketing to foreign production 103 Foreign sourcing for horne industry 111 Conclusions 118

7 INVESTMENT CONDITIONS AND EXPERIENCE IN FOUR HOST COUNTRIES 122 Developed countries 123 Developing countries 135

8 TRENDS, ISSUES AND PROSPECTS 161 Trends in socialist multinational enterprise 161 Questions of policy raised by the spread of socialist

multinational enterprise 169 Significance and prospects for Comecon

foreign investment 185

Appendix: Data and Methodology 197

Glossary 201

Bibliography 203

Index o[ Company Names 211

Subject Index 215

List of Tables

2.1 Growth of East-West trade, 1965-80 13 2.2 Trends in Comeeon exports of manufaetures to the

West, 1970-80 15 2.3 Growth of East-South trade, 1970-80 17 2.4 Geographie distribution of East-South trade, 1979 18 3.1 Ownership strueture of Comeeon investments in the

West, end-1983 31 3.2 Ownership strueture of Comeeon investments in the

South, end-1983 31 3.3 Geographie distribution of Comeeon investments in

the West, end-1983 34 3.4 Geographie distribution of Comeeon investments in

the South, end-1983 36 3.5 Distribution of Comeeon investments in the West by

aetivity, end-1983 38 3.6 Distribution of Comeeon investments in the South by

aetivity, end-1983 40 3.7 Estimated value of authorised eapital invested in

eompanies in the West with Soviet and East European equity partieipation, end-1983 44

4.1 Types of state enterprises in the Comeeon eountries engaging in foreign direet investment aetivity, end-1983 51

4.2 Comecon state enterprises with five or more investments in the OECD eeonomies, end-1983 53

5.1 Distribution by export produet eategory of marketing eompanies abroad, end-1983 79

5.2 Estimated annual value of sales by Comeeon marketing eompanies in the West, 1980-82 88

5.3 Soviet-owned banks abroad, 1983 90 6.1 Major Comeeon investments in manufaeturing in the

West, end-1983 106

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6.2 Distribution of Comecon investments in manu­facturing in the West and South by category of product, end-1983 107

7.1 Soviet and East European companies in Canada 125 7.2 Soviet and East European companies in the United

States 136 7.3 Soviet and East European companies in Nigeria 144 7.4 Soviet and East European companies in India 154

List of Figures

8.1 Periods of growth of Comecon direct investment in the West 162

8.2 Periods of growth of Comecon direct investment in the South 163

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Biographical Note

Carl H. McMillan has been Professor of Economics at Carleton University, Ottawa, in Canada since 1980. At the University, which he joined in 1968, he has been since 1973 the Director of the East-West Project, having been Director of the Institute of Soviet and East European Studies in 1975-82. In 1974-75, Professor McMillan was a Visiting Research Associate at the Institute of Comparative Economic Studies, in Vienna, and in 1982 he was a Visiting Research Professor at the Institut Universitaire de Hautes Etudes Internationales, University of Geneva.

After graduating in 1952 from Yale University, in the United States, Professor McMillan obtained a masters degree in international relations from the same university and afterwards served, as a commissioned officer, in the United States Navy (1953-57). He then joined the Department of State, in the United States Administration (1957-64), and held posts in the American embassies in Manila and Moscow, having studied at the Uni ted States Army Institute of Advanced Russian Studies. Later, Professor McMillan was a Visiting Scholar at the Russian Research Centre at Harvard University in 1966--67, before moving to Carleton University. In 1972, he obtained his doctorate in economics from lohns Hopkins University, Baltimore.

In his research and writing, Professor McMillan has specialised in comparative international economics, with particular reference to the external relations of the centrally planned economies. He is the co-author of Joint Ventures in Eastern Europe: a Three Country Comparison (1974), edited Changing Perspectives in East-West Commerce (1974) and co-edited Partners in East-West Economic Relations (1980). His published articles and papers have been addressed principally to questions of Soviet foreign trade, East European economic integration and East-West relations.

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Preface

Over the last decade and a half the Soviet Union and its six East European partners in the Council for Mutual Economic Assistance (Comecon), emerging from comparative isolation, have been increasing their economic relations with countries in the rest of the world economy. There has been a marked increase in East-West trade and also a marked increase in foreign direct investment by Comecon state enterprises in Western countries and the Third World. Over six hundred companies of Comecon origin have been established in developing countries and in twenty-three, of the twenty-four, countries belonging to the Organisation for Economic Cooperation and Development (OECD). By contrast, Western equity participation in enterprises operating within the Comecon countries has been far more limited.

Who and what are these multinational enterprises from the Second World, these 'red multinationals' , as some Western journalists have called them? What challenges do they pose to host countries and to international business competitors? These are the questions addressed here in Carl McMillan's study. Professor McMillan assesses the phenomenon, describing its nature, establishing its quantitative dimensions and explaining its motivations and limitations, as weH as identifying its more significant directions.

The growth of state-socialist investment in the market-oriented economies of the OECD and the Third World has received little serious academic attention until now. Professor McMillan's study has drawn on a unique data base on Soviet and East European foreign investment which has been built up over aperiod of ten years by a research team, under his direction, at Carleton University in Ottawa. Using this statistical information, and using illustrative case-study analyses, Professor McMillan has traced the growth of Comecon direct investment outside the Second World's domain, setting out the range of Comecon investment activities and the kinds of problems encountered by individual Soviet and East European companies in their operations abroad.

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With the rapid integration of the world economy since World War II, the growth.of multinational enterprises has assumed dimensions which, for many, have challenged the sovereignty of nations - as if the growing interdependence of national economies was not in any case blurring the meaning of national interest, national power and national sovereignty. In developing and developed countries some have queried whether the operations of multinational enterprises serve the goals of stable growth, industrialisation, employment security, and so on. A number of instances of questionable political activity by multinational enterprises have stimulated the public debate. Multinational enterprises per se have been a controversial issue.

The study elaborates on these issues by addressing four more issues, namely (i) how the activities of multinational enterprises might be regulated through an international code of conduct, (ii) whether foreign direct investment by Comecoß state enterprises poses a special threat to the economic interests of host countries, (iii) whether they undermine the national security of host countries, and (iv) whether direct investments increase the power of foreign leverage for the Soviet Union and El\st European countries.

The Comecon countries, as state-socialist economies, maintain that their enterprises are not geared primarily to making profits and are necessarily distinct from multinational enterprises which originate in the private sector of market-oriented economies. This is the argument put forward by the Comecon countries in the United Nations and in other inter-governmental discussions on the perceived abuses by Western multinational enterprises. Ideology apart, the Comecon countries are in effect arguing for their exemption from any international regulation of the behaviour of multinational enterprises.

If the extern al investment activities of comecon enterprises are not geared to profits, what, it may be asked, is their primary objective and what are the implications for host countries? Is there not a danger , it is asked, that they will be used, as have Comecon trade missions in the past, for espionage and subversion?

The evidence presented by Professor McMillan in this study indicates that Comecon subsidiaries adhere to familiar commercial narms and in fact are principally concerned with profits (or at least hard-currency turnover). Professor McMillan finds that their operations do not appear to differ significantly from the practices of other foreign-owned firms.

Professor McMillan concludes that Soviet and East European investment activities are of considerably more qualitative than.

Preface xv

quantitative significance. They represent, in the first place, an important new element in the external activities of the Soviet and East European economies, indicating a continued commitment to increased participation in the world economy. In the second place, they constitute a form of 'state investment' (by 'state-trading' countries) in which the parent state enterprises are subject to a relatively high degree of control by central governmental authorities in the horne countries.

As usual, it has to be stressed that the views expressed in this study are those of the author and do not necessarily reflect the views of the Council, staff or associates of the Trade Policy Research Centre which, having general terms of reference, does not represent on any particular issue a consensus of opinion. The purpose of the Centre is to promote independent analysis and public discussion of international economic policy issues.

London May1986

HUGHCORBET Director

Trade Policy Research Centre

Acknowledgements

The original data on which this study for the Trade Policy Research Centre is based were assembled over a number of years with the assistance of a succession of young researchers in the East-West Project at Carleton University in Ottawa. Without their dedication, the work could not have been done; and without their enthusiasm, it would have been far less enjoyable. For this I should like to thank Bruce Morgan, Reid Henry, Michel Goffin, Frank ter Borg, Barbara Darnowska, Fran<$ois Cadieux, Peter Egyed and especially Agnieszka Warda, who provided general research assistance in writing. The work also owes much to the co-operation of many of the companies themselves and to a number of officials in the horne and host countries. I am indebted, as weIl, to several colleagues who have given their help and advice throughout, in particular to Patrick Gutman and Jeanne Laux.

At the Trade Policy Research Centre in London, thanks are due in particular to Janet Strachan, the Administrative Director, for coping patiently with the various stages of the project, and to Annabel Huxley for preparing the typescript for publication.

I should like to acknowledge the financial support of the Social Sciences and Humanities Research Council of Canada in the initial stages of the research and a grant from the Dean of Social Sciences at Carleton University which greatly facilitated the preparation of the final manuscript. Tara McCreery ably processed the final drafts.

A section of Chapter 8 is based in part on a paper, 'Soviet and East European Participation in Business Firms and Banks Established in the West', which was presented to the 1983 NATO Colloquium, published as External Economic Relations o[ the CMEA Countries (1983). Lastly I am grateful to the Economics Directorate of the North Atlantic Treaty Organisation for permission to use this material.

CARL H. McMILLAN Ottawa J anuary 1986

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