Early this year, the conservative business journal, The Statist of London observed that:
"It takes no great prescience ... to see that the future lies with a new type of company whose dominant concept will be total internationalism in operations, management, and philosophy."
If this is true, and I think it is, then management in industries engaged in international business, such as the chemical industry, must be giving serious thought to developments in the world market and what is necessary to adapt their businesses to that market. Today I want to focus your attention on some of these developments and to draw a few conclusions from them - conclusions that I believe are significant to all of us who have responsibility for planning thefuture of our companies.
Let me begin with just a few statistics. In the fifteen-year period from 1950 to 1965, production and sales in the noncommunist world outside the United States rose at a significantly greater rate than in the United States. Production of motor vehicles in the period was up 39 percent in the United States, nearly 500 percent abroad. Telephone units up more than 100 percent in the United States, over 200 percent abroad. Petroleum up 74 percent in the United States, 370 percent abroad, and a similarly rapid rate of growth has been achieved also in the office equipment, food and pharmaceutical industries, to name a few.
During a period of such prosperity abroad, one would expect that exports from the U.S. would have increased substantially and so they did - from about $10 billion in 1950 to about $27 billion in 1965 - but something else occurred of even greater significance to the United States and to the world. Local production overseas by U.S. controlled companies rose from about $20 billion in 1950 to about $100 billion in 1965. This is a simple'average growth rate of 26.6 percent per year compared with a corresponding export growth rate of 11.3 percent. This $100 billion worth of goods produced abroad by American based companies is about four times the value of U.S. exports, and it is clearly increasing all the time.
Looking at the chemical industry we find that it has not only kept pace with these trends in direct investments and the output from them, it has outstripped them. The value of the direct investments abroad of the chemical industry rose from $1,378 million in 1957 to $3,068 million in 1964 - an increase of 122.6 percent or ap- proximately 17.5 percent a year. Sales from these investments rose from $2,411 million in 1957 to $5,903 million in 1964 or an increase of 144.8 percent, approximately 20.7 percent a year. In the same period, the growth in output of the domestic chemical and allied products industry was 8.3 percent a year. Thus the overseas operations of American chemical firms were increasing their output 2 1/2 times as fast as their domestic operations. And the large investment overseas was responsible for an even larger net return of dollars to this country. Indeed, this net return on direct investment of all industry overseas now represents the largest positive item in the U.S. balance of payments.
Why Direct Investment?
What is behind this enormous growth of direct investments and consequent production in overseas markets by American based companies? Primarily, it is the need to compete effectively in these fast growing markets. To a certain extent government regulations in the host countries may require local production by cutting off or heavily taxing imports of finished goods, or even of some basic materials but, regardless of this, to compete effectively for a good share of any major market requires direct investment in that marketplace in the form of sales offices and warehouses and, at least, packaging and as- sembly plants, if not basic production units. It is just not possible for a mere exporter to a market to become a major, long-term factor in a market in this second half of the twentieth cen- tury. And as I have just indicated, the American chemical industry has recognized this change in the facts of life by its rapid expansion abroad in the past few years.
It is still true that many American companies are primarily oriented to the domestic market. And if there is an international division in such companies, it probably has a junior status in the allocation of managerial and financial resources. In many companies there is little incentive to take on the complexities of international business operations. The domestic market seems to offer sufficient opportunity. They react, therefore, somewhat negatively to the proposal to move into distant and unknown places, and to make sizeable expenditures beyond the immediate supervision of U.S. management. It may well be that many of these companies are right in such an attitude. Their resources are limited and, with adequate potential for growth in the United States and without the depth in management that would permit a breakthrough into international operations, concentration on the domestic market may well be prudent.
Emergence of World Enterprise
For a company, however, which has already realized a good share of its potential in the U.S. marketplace or for a less mature company which discovers an outstanding new product that will attract strong demand everywhere, the case for worldwide marketing seems almost irresistible. To leave competitors to enjoy the growth potentialities abroad would be to concede to them substantial earnings which they can use to compete more effectively everywhere, including the domestic market. For such a company, a beginning is made with exports. But more importantly, the company will inevitably be drawn to make direct investments, first in marketing facilities, sales offices and warehouses and then, as necessary, with plants. And so a company, keyed to expansion under American conditions will be drawn out of its shell. In a decade or so, a domestically oriented management will find it has a large proportion of its assets deployed around the world, that many of its employees are foreign citizens, that a large amount of its earnings are in foreign currencies, and that it is operating to an important extent outside the jurisdiction of the United States.
In these circumstances, the company finds it has not just grown - it has been transformed. In making direct investments abroad, it has become multinational. In such a situation, though the headquarters of the company is in the United States and though it has the large U.S. market at hand, it must now be organized as a world enterprise. The company's assets and efforts must now be managed multinationally, in accordance with market opportunities wherever they may be.
This is the stage now reached by the U.S. chemical industry, and we will be wise to recognize it. Reacting to these powerful new economic forces, the chemical industry finds itself a leader in the construction of a true world economy. And it finds itself faced with the need to adapt its organization and its people to the facts of this economy.
As you well know, there is an immense amount of thinking going on as to the best form of organization for multinational companies. Whatever specific solution is arrived at, it is clear that we are struggling to find patterns that will reflect new relationships within the enterprise. Most broadly we are striving to estab- lish appropriate relationships between the parent company and the international division, and between the parent company management and domestic operations. Indeed, it occurs to me that one crucial test of the maturity of a multinational company might be whether the domestic operating organization and the parent company are separate functional entities.
New Issues; New Environment
But the change is not only in the organization chart. Again to the degree that the multinational organization is mature, there will be found a change in the attitudes of its people towards a more international viewpoint. The development of an international viewpoint, however, does not take place rapidly. It must be learned and it must be continuously emphasized. Many people at higher as well as at lower levels must be exposed to new experiences. There must be a continuing supply of men who have participated in both international and domestic operations. And as a continuing part of management development, they must be given the challenge to stretch their minds and from varied experiences to develop a truly worldwide view.
In addition to these organizational and personnel changes, we find that when a domestically oriented company has gradually evolved to the point at which it can truly be described as "multinational" it must cope with some totally new issues in its new environment. Prior to World War II, to all but a very few Americans, international business meant exports/imports. The situation now is very different. As I have already pointed out, U.S. multinational companies have found it necessary to go abroad to do the job themselves. They put roots down in a country. They add foreign identities to their American identity. They buy land. They hire and train people. They borrow money locally. They negotiate with governments. Their operations stimulate other industries. They bring about developments in housing and education. They may become a part of a national economic development plan or participate in a national program for the expansion of exports or reduction in imports. In other words, multinational companies become committed to their host countries and inevitably play a significant role in their future growth.
It is obvious that a few large investments can have quite revolutionary effects on the developing societies of small countries. Even in developed countries, however, the cumulative impact of U.S. investments can be considerable. They stimulate competition. They change financial institutions and practices. They transform labor-management relations. They alter social habits. They break down class barriers. Abroad as in the United States, the U.S. company offers opportunities for talented people to get ahead without reference to social background and thus adds considerably to social mobility. We are accustomed to this in the United States, but abroad where class divisions have been more rigid this social impact of the multinational company has been and will be even more dramatic.
Growth of Interdependence
In these circumstances, multinational companies generate tensions. They are agents of change, socially, economically and culturally. They are pacesetters. They reach across geographic boundaries and overlap political jurisdictions. It is not surprising, then, that the reception in host countries of multinational companies is often mixed. For some reasons, they are welcome; and for others, they are resented. They bring employment, but they also bring competition. They import technology and skills, but the foreign connections of these corpora- tions sometimes offend national sensitivities. The dilemma is evident. All countries want to raise their standards of living but fear some loss of independence if foreign investment is part of the process.
But is this a realistic view? It is true that modernization has a price. But it is not so much the loss of independence as the growth of interdependence. The economic as well as the political history of nations is converging, and the multinational company plays an important role in that convergence. Though countries may be in different stages of development, modern economies show similar characteristics. Computer plants, supermarkets, telephone systems, automobile assembly lines, pharmaceutical production facilities are local expressions of an industrial technology that is not national but supranational. They would quickly become obsolete without the constant feeding with new techniques and new products from abroad, and this process is to a large extent the work of multinational companies.
But, as I have suggested, multinational companies have not always been welcome by their host countries abroad; and because of national sensitivities, this is not completely surprising. What is surprising is that these enterprises are not infrequently regarded with some hostility by their home governments. It is a curious fact that many men in government and in universities who have done much to build up international governmental institutions in the political and financial fields have, at the same time, failed to see the unique benefits of worldwide private industrial and financial enterprises. As Lord Cromer, former Governor of the Bank of England, said so aptly in a recent address in New York, "Although the world has moved forward substantially in international cooperation particularly since the last world war, governmental thinking on international investment has lagged behind that of the business and financial communities."
Jurisdiction: the Conflicting Demands
In the field of international direct investment, practice is clearly ahead of theory and policy, and the gap is becoming troublesome. There is a growing number of problem areas requiring that laws and policies affecting world business be reviewed in the light of multinational corporate operations. Multinational companies are urged - and wish - to become good citizens of the countries in which they operate, but it is sometimes difficult for them to satisfy the political and economic demands of conflicting jurisdictions. American based multinational companies owe allegiance to the laws and policies of the United States, but their operating affiliates are spread across the globe and are equally subject to the laws and policies of the countries which they inhabit. Thus, at times, conflict will arise - with the multinational corporation unwittingly caught in the middle.
It is relevant to raise a question as to how far it is always in the interests of the United States to press jurisdiction over the operations of American subsidiaries abroad. In 1961, for example, there was an effort by the U.S. government, partially successful, to make the foreign earnings of multinational companies subject to U.S. taxes, even when these earnings never leave the host countries. Some foreign commentators have suggested that under the voluntary Balance of Payments program the U.S. Government reaches across national bounda- ries to control local business operations to their detriment. As you know, U.S. laws governing trade with communist countries, including trade. by foreign subsidiaries of U.S. corporations, have been criticized, most noticeably in Canada. And to pose a final difficult issue, to what extent should the U.S. anti-trust laws, confusing as they sometimes can be to us at home, apply to actions of American based companies overseas where such actions fit within the laws and the mores of host countries?
Toward a True World Economy
Such conflicts, so far, have not proved irreconcilable, but as the operations of multinational companies grow and become more visible, one need not be a prophet to predict that they may easily result in serious strains between friendly nations. These matters are sensitive. The conflicting claims are difficult to resolve. But this resolution is important to future world development and governments and businessmen and students of world business should be concentrating their attention upon them now, before they explode in debates heated up by sensitivities always associated with conflicting claims of sovereignty.
It has been said that the function of the entrepreneur is to bring about new and more effective combinations of economic resources. This role involves more than passively reacting to new business conditions. It involves initiative; it involves looking ahead and acting now in the light of things to come. In a speech made in Tokyo recently, George W. Ball, former Under Secretary of State, now Chairman of Lehman Bros. International, asked what objective should we work toward. His answer was we must work toward the construction of a true world economy. "This is no idealistic pipe dream," he went on, "but a hard-headed prediction; it is a role into which we are being pushed by the imperatives of our own technology."
Essential to the existence of such an economy and to the prosperity of the multinational companies which operate within it, is the free flow of invesment and trade. As I have suggested, an increasing number of companies now have a substantial proportion of their assets abroad. Such companies quite evidently have an important interest in continuing to be able to invest in marketing organizations, warehouses and plants wherever opportunities exist. Such companies have an important interest in being able to feed those plants with raw materials and intermediates imported from outside of local markets and to bring into these markets other items to fill out the product line of their organizations. Often, in order to make optimum use of corporate facilities, it is necessary to export from overseas plants to third countries.
The conclusion is clear. The growth of multinational companies depends significantly on the free movement of goods and capital throughout the world. In this connection, I do not propose to enter on a discussion of the merits and demerits of the Kennedy Round. This is a subject of its own. But with respect to this subject of degree of border restrictions, it is relevant to note that our interests are dual, that we have significant interests both at home and abroad and between them a delicate balance must be struck. I would emphasize that in striking this balance it is in our best interests to avoid going back to the ultraprotectionist policies of the past which again are being voiced in the debates on this subject.
If the chemical industry, and all American industry, is to continue to flourish, we must now be prepared to think and build on a world basis, defining and implementing our policies in terms of a world market. And, indeed, in pursuing such policies, American businessmen will not only serve well their individual corporations but will be promoting the further development of a supranational institution, private and corporate, that the record shows offers the best hope for the effective development and use of the world's scarce resources.
