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Challenges for multinational corporations
Challenges for Multinational Corporations Lee L. Morgan
The author presents some thoughts about multinational corporations, traces the evolution of the multinational operations of his organization, and outlines some of the broad challenges ahead for multinational companies.
FACT AND FICTION ABOUT MULTINATIONALS Unquestionably, the multinational corporation has been attracting a growing amount of attention, which it should. Unfortunately, the perceptions of this form of business enterprise are as varied and inaccurate as those of the proverbial blind men examining the elephant. In the United States, the multinational corporation has often been portrayed by unions and union-oriented legislators as an institution exporting jobs and payrolls. Abroad, multinational companies are often portrayed as being beyond the control of governments--particularly in the less developed countries. These apprehensions about multinationals are being translated daily into laws and regulations that limit the undoubted benefits multinational companies bring to the world's economies. These constraints threaten to restrict international trade and investment just when expanding population and its newly
Address correspondence to: Lee L. Morgan, Chairman, Caterpillar Tractor Co., 100 N.E. Adams Street, Peoria, Illinois 61629.
identified needs and aspirations are requiring more production, investment, and economic activity. Multinationals are not, of course, the only vehicles available for mobilizing capital, technology, and human and natural resources. But there is nothing else in sight which can so efficiently and effectively do the job on a worldwide scale. Declining incentives and difficult operating environments encountered by multinational corporations could foreshadow a serious investment drought for the emerging nations. The effect of such a possibility becomes obvious when you realize that multinational companies today are responsible for over 15% of the world's production of goods and services. What is more, American companies are involved in more than 60% of that total. Unless there is more practical understanding by governments of the need for individual enterprises to produce profits as well as products, the 1970s could go down in business history as "the decade of dis-incentive" instead of the period of development and growth that it can otherwise be. This discouraging prospect will not be dwelled on except to observe that its negative effects would certainly be felt far beyond corporate balance sheets, corporate employment, or even local economies. It could obviously also effect political stability, social aspirations, and human opportunity in many countries. In an interdependent world, economic adversity in one country cannot be kept from those other countries with which it has ties.
© Elsevier North Holhmd, Inc., 1979 Industrial Marketing Management 8, 187-191 (1979)
187 0019-8501/79/030187-05/$01.75
On a more optimistic note, we observe that the growth in number, size, and value of U.S. multinational companies since World War II testifies to the attraction of profit opportunities around the globe and the ability of American business to respond to them. Since 1950, direct investment from the United States has risen more than tenfold, to $133 billion in 1975. The multinational opportunity is not a one-way street leading outward from the United States. By the end of 1975, foreign investors--sensing the opportunity--had directly invested more than $26 billion in the United States, i.e., about one dollar for every five that Americans invested outside our borders.
source of parts that could be bought in Britain for sterling, we established our first overseas subsidiary-Caterpillar Tractor Co. Ltd. in 1950. After establishing the parts procurement and warehousing operation, we learned that a British company and another U.S. company were planning to build track-type tractors in Britain. To meet these challenges, Caterpillar, with the consent of the British government, undertook the production of track-type tractors at Glasgow, Scotland, and the manufacture of related earthmoving equipment at Newcastle, England. Thus began the transition of Caterpillar from a midwestern U.S. company, exporting from its U.S. base, to a multinational corporation.
CATERPILLAR'S MULTINATIONAL ROLE
OVERSEAS MANUFACTURING
Caterpillar has had the good fortune to become the world's largest manufacturer of earthmoving, construction, and materials handling equipment. Last year, our sales were slightly over $7 billion, and our after-tax profit was more than $566 million. Among the multinational companies around the world, Caterpillar ranks about 53rd in size--and, in the United States, according to Fortune Magazine, we rank 24th in sales among all industrial enterprises. Caterpillar has been heavily involved in international trade since its incorporation in 1925, and today we are one of the leading U.S. exporters. After World War II, American companies saw inviting opportunities to sell products needed to rebuild Europe and develop the economies of other parts of the world. But Caterpillar, like most other American companies, quickly discovered we could no longer serve these areas solely with exports. Great Britain, for example, was struggling to conserve precious foreign exchange, and instituted tight restrictions on purchases from foreign countries. British users of Caterpillar-built machines could not import sufficient quantities of replacement parts--to say nothing of new machines. To provide a
Like most major American companies, we were faced with two alternatives--build plants abroad or forfeit the sales opportunity. It was usually with great reluctance that American companies committed their resources to direct investment abroad. Overseas projects were approved only after all other alternatives were reviewed and rejected. As Caterpillar began establishing plants overseas, the objective was to maximize sales in the reachable sales areas. In no case were lower wage rates--or any of the other motives often attributed to multinational business--a significant consideration in our decision. In most cases, lower wage rates were not a factor at all. We located abroad because it was essential to be in that area in order to sell our products there. Through our multinational operations we have been able to extend the availability and sales of Caterpillar products to parts of the world we could not have reached otherwise. By building some products abroad, we have usually been able to sell all of our products there due to the supplemental marketing force. As of today, we have 13 manufacturing plants located abroad: three in Great Britain, two each in Brazil and France, one each in Australia, Belgium, Canada, and Mexico, and joint venture companies in Japan and India. We have parts distribution facilities in Belgium, Great Britain, Mexico, Brazil, Canada, Australia, Japan, Singapore, and South Africa, and marketing subsidiaries in Geneva, Switzerland, and Hong Kong. Our U.S. facilities have increased from two in 1950--when we made our first foreign investment--to 14 manufacturing plants and 15 parts distribution facilities. Worldwide employment is about 88,000, excluding our affiliated companies. Of that total, about 70,000 are in the United States; 4,900 are located in Canada and Latin America;
LEE L. MORGAN was graduated from the University of Illinois. Having joined Caterpillar in 1946, he served in various marketing activities and administrative roles. Since 1977, he has held the position of chairman and chief executive officer. Mr. Morgan is a Director of the Minnesota Mining and Manufacturing Co. and Mobil Corporation. He is a member of the Policy Committee of the Business Roundtable; a trustee of The Conference Board and the Committee for Economic Development; and a member of the Council on Foreign Relations.
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14,000 live in Europe, Africa, and the Middle East; and 800 are in Australasia. With the aid of our overseas operations, we have become one of the largest U.S. exporters. Last year, Caterpillar contributed $1.9 billion toward a favorable U.S. balance of payments and we estimate that 39% or about 25,000 of our U.S. jobs are the result of our exports. Nations where we have subsidiaries or affiliates benefit by the local employment we provide, the taxes we pay, the purchases we make from our suppliers, and a source of essential products for domestic use and for export.
GROWING ECONOMIC NATIONALISM For many years, the multinational corporation was a welcome tool in furthering the development of industrialized countries. These companies had the capital, technology, and strong market base that was needed, and they were large enough to assume risks. It is ironic that their very success has created grave concern on the part of many countries, as evidenced by the United Nations Report of Eminent Persons released in late 1974. In this report, multinational corporations were viewed as potential threats to the sovereignty and economic well being of their host countries---especially the developing countries.
"Multinational opportunity is not a one-way street." As a result of these fears, we now find more and more efforts directed toward limitations and restrictions on the operations of MNCs. Some of these involve: •
local participation in ownership and management decisions local content requirements high import tariffs and controls credit restrictions restrictions on foreign personnel dictated export requirements assorted other proposals to impose requirements and limitations on multinational firms that are not imposed on domestic companies.
We, therefore, see a new dimension to the nationalistic trend that goes beyond the economics of production, employment, and conservation of exchange. The growth of economic nationalism--particularly in the less developed nations--poses serious challenges to multinational corporations. The future of capital intensive industries could be increasingly affected by our ability to accommodate to this growing economic nationalism. The developing countries generally fall into two categories, those that have oil and those that do not. Countries that lack oil are demanding manufacture within their borders, not only for developmental purposes, but to earn and conserve foreign exchange to pay for imports of oil and other needs. The oil-producing countries are also demanding manufacture within their countries. They see it, principally, as a means of economic development-not as a source of foreign exchange. Their sudden wealth, of course, gives them great economic clout, and the rest of the world needs their buying power to recycle petrodollars. As more and more countries decide they want a "piece of the action" multinationals are forced to make additional decisions regarding whether to manufacture locally or to have their sales potential restricted. These decisions will become more difficult as countries increase pressure on foreign finns to share ownership in new ventures with local investors and to incorporate a higher percentage of locally manufactured components in the finished product.
REASONS FOR OVERSEAS MANUFACTURING In the past, many countries have invited Caterpillar to establish facilities--primarily factories--within their borders. We have usually declined to risk the considerable investment required. Production of some products may justify investment in a given country just to serve the country's customers. This is not the case with a capital intensive business like Caterpillar, whose manufacture of metallurgically sophisticated machines requires large investments in manufacturing plants along with the availability of an advanced supplier industry. Overall, our decision to decline such an invitation has usually been based on the fact that a whole range of conditions we consider favorable for investment are not present. Qualified supplier firms do not exist. Economies of scale would be lessened throughout the company. Return on investment would be unattractive. There may
189
be political instability in the country, making living conditions for U.S. foreign service employees unsatisfactory. The reason Caterpillar facilities overseas have been successful is that most of the factors just mentioned were favorable. In Europe, for example, the sales potential was large enough to provide economy of scale and to justify the substantial capital investment. Supplier industries were sufficiently developed or developable for certain parts of the product meeting Caterpillar's standards to be purchased at reasonable price and delivery. A trained or trainable work force was present. However, it is becoming extremely difficult--and perhaps impossible--for multinational firms to base their sourcing decisions on the traditional economic considerations. The reason for this is simple: Many of the LDCs are demanding localized manufacture and assembly of some products. If MNCs fail to respond, they are threatened with losing sales to others who are willing to meet the demands of the LDCs. So, MNCs are faced with the need to reevaluate their plans and philosophy. They are increasingly being asked to consider the possible manufacture of products in various countries. All of this is a direct result of economic barriers that have been placed--or are threatened to be placed---on the import of products to serve local needs. In addition, some countries are requiring ever-increasing local content. As one response to this, we have set up a special department at Caterpillar to monitor the nationalist pulse of nations around the world to prepare us to make timely and intelligent decisions as new problems arise that interfere with our desire to provide Caterpillar products to users in all countries of the world.
SERIOUS CHALLENGES TO MULTINATIONALS The growth of economic nationalism with all its barriers to free trade--tariffs, licenses, surcharges, quotas, even boycotts--is probably the most serious problem the MNC faces today. But there are others, too. Indeed, the role of the world trader is becoming much more complex due to fluctuations in the values of world currencies, shortages of foreign exchange, and the rise and fall of demand as business conditions or governments change. Technology transfer is another facet of this problem, and it is generating considerable discussion and debate throughout the world--particularly in the context of the transfer of technology from multinational to foreign enterprises. In the United States, the fear is expressed that such
190
transfers establish competing businesses outside our borders that jeopardize American jobs and our balance of payments. Outside the United States, many countries, particularly less-developed nations, complain that multinationals do not transfer their best technology to them, do not transfer it at all, or transfer it only at exorbitant prices. These concerns are strongly felt and they should not--and they cannot--be ignored. it is my belief that we should be supportive of LDCs self-development in the basic functions. It is with these skills and capabilities that they will offer society something to satisfy new requirements and needs, thereby fulfilling their own aspirations. Transfer of current technology appropriate to their needs can be the vehicle through which the basic skills are developed in a country. But such transfers can be and should be done under conditions that also stimulate U.S. industry and job production. We should reject the concept that someone has to lose in this struggle and focus on the fact that in any sound business relationship, both sides will benefit. The problems MNCs face today are difficult ones. And they are made more complex by the wide range of activities these companies conduct in a wide range of countries----everything from extracting valuable resources, to manufacturing, to providing a host of services. In addition to the diversity and complexity of the business world, multinationals have to reconcile a wide range of ideological attitudes, policies, and customs. All of us are familiar with the litany of charges being made in academic journals and Sunday supplements alike about "The Multinationals." These articles often lump every size, variety, and flavor of international business into one huge multinational pot. In the same way that different sized carrots, potatoes, onions, and meat all surrender their identity to the common stew, so, frequently, do individual companies of all kinds find themselves praised or condemned only by the impression made by the popular grouping in which they are recognized. We obviously have no problem when the word multinational evokes a positive response. But when the initial mental association with the word multinational summons up an impression of questionable business behavior and methods--because of several well-publicized lapses by some companies--then every multinational enterprise is penalized and our problems are increased. In the wake of international bribery scandals, there is little doubt that public spotlighting of these affairs has caused many individual enterprises to review their own operations. At the same time, it has probably caused
them to let their employees know that questionable business behavior is not only forbidden, but it is counterproductive and unprofitable as well.
INTERNATIONAL GUIDELINES It is appropriate to mention the "Declaration on International Investment and Multinational Enterprises," which was adopted in June of 1976 in Paris by 23 members of the Organization for Economic Cooperation and Development (OECD), and is to be reviewed in Paris this month. The OECD Declaration and an accompanying set of Guidelines for Multinational Business Enterprises established procedures for consultation and relations between host governments and multinationals. They also recognized the reciprocal rights and responsibilities of governments and multinational enterprises toward each other, and listed the incentives and disincentives that can affect international investment. The OECD Declaration and Guidelines can have broad and beneficial effects. In somewhat the same fashion that the General Agreement on Tariffs and Trade (GATT) established a code, the OECD Declaration and Guidelines provided business and governments with an internationally accepted set of principles on which to build economic relationships. They are the result of months of dialogue and drafting in which not only government, but also labor and business, played creative roles. The result is not perfection. But among many good things, the Guidelines do recognize the beneficial activities and impacts of MNCs. The Guidelines do apply to domestic as well as multinational enterprises. They do create a voluntary set of principles upon which to build sound international economic relations (rather than a stifling set of legal do's, dont's and the bureaucracy that would go with it). They have the virtue of fairness in that they speak not only to the responsibilities and actions of business firms, but also to the responsibilities and actions of governments. For example, they ask governments not to seek payoffs and illegal contributions, just as they ask companies to shun such practices. In the United States, the Secretaries of State, of the Treasury, and of Commerce sent letters to chief executives of 800 U.S. MNCs endorsing the Guidelines and recommending corporate observance of them. At Caterpillar, we compared and evaluated our operations against the Guidelines to determine how each provision
could affect Caterpillar, and whether our operating procedures and practices should be changed as a result. For the most part, we found that our practices and procedures are in accord with the OECD Guidelines and state this in our annual report to shareholders. We think these are matters of great importance. Any worthwhile relationship requires mutuality of commitment. This is true of any marriage and it is true of the relationship between a company and a country. At Caterpillar, we seek friendly, cooperative relationships with governments. To that end, we are willing to make some substantial commitments--not only in terms of capital, but also in terms of operating principles. These operating principles are spelled out in considerable detail in the Caterpillar Code of Worldwide Business Conduct, first published in 1974. In this Code, we also set forth our expectations of host governments: In terms of providing a climate conducive to business growth and success; avoidance of discrimination against us as "foreigners"; and fair treatment of the rights and properties of others. Although our Code has been in operation for 5 years, we often receive questions about it--usually regarding its purpose, and how well those purposes have been achieved. We at Caterpillar are convinced of the inevitability of the code and guidelines process, and are satisfied enough with the impact of our own Code on our own organization that we have expanded, updated, and reissued it.
CONCLUDING COMMENTS Admitting to an obvious bias, I am optimistic about the long-range future of MNCs. This is said with the full knowledge that there exists a rising tide of nationalism abroad and real signs of a trend toward isolationism in the United States. Consequently, we are working hard to increase the recognition by the U.S. State Department and by other elements of our government, at all levels, of the importance of less, rather than more, barriers to international business involvements. It is my view that business, more than any other institution, has contributed in greater measure to constructive relationships between nations. While the people of this earth are divided in many ways, they are united in their desire for a higher standard of living in a climate of peace and freedom. MNCs have a great deal to contribute toward that goal.
191
The author presents some thoughts about multinational corporations, traces the evolution of the multinational operations of his organization, and outlines some of the broad challenges ahead for multinational companies.
FACT AND FICTION ABOUT MULTINATIONALS Unquestionably, the multinational corporation has been attracting a growing amount of attention, which it should. Unfortunately, the perceptions of this form of business enterprise are as varied and inaccurate as those of the proverbial blind men examining the elephant. In the United States, the multinational corporation has often been portrayed by unions and union-oriented legislators as an institution exporting jobs and payrolls. Abroad, multinational companies are often portrayed as being beyond the control of governments--particularly in the less developed countries. These apprehensions about multinationals are being translated daily into laws and regulations that limit the undoubted benefits multinational companies bring to the world's economies. These constraints threaten to restrict international trade and investment just when expanding population and its newly
Address correspondence to: Lee L. Morgan, Chairman, Caterpillar Tractor Co., 100 N.E. Adams Street, Peoria, Illinois 61629.
identified needs and aspirations are requiring more production, investment, and economic activity. Multinationals are not, of course, the only vehicles available for mobilizing capital, technology, and human and natural resources. But there is nothing else in sight which can so efficiently and effectively do the job on a worldwide scale. Declining incentives and difficult operating environments encountered by multinational corporations could foreshadow a serious investment drought for the emerging nations. The effect of such a possibility becomes obvious when you realize that multinational companies today are responsible for over 15% of the world's production of goods and services. What is more, American companies are involved in more than 60% of that total. Unless there is more practical understanding by governments of the need for individual enterprises to produce profits as well as products, the 1970s could go down in business history as "the decade of dis-incentive" instead of the period of development and growth that it can otherwise be. This discouraging prospect will not be dwelled on except to observe that its negative effects would certainly be felt far beyond corporate balance sheets, corporate employment, or even local economies. It could obviously also effect political stability, social aspirations, and human opportunity in many countries. In an interdependent world, economic adversity in one country cannot be kept from those other countries with which it has ties.
© Elsevier North Holhmd, Inc., 1979 Industrial Marketing Management 8, 187-191 (1979)
187 0019-8501/79/030187-05/$01.75
On a more optimistic note, we observe that the growth in number, size, and value of U.S. multinational companies since World War II testifies to the attraction of profit opportunities around the globe and the ability of American business to respond to them. Since 1950, direct investment from the United States has risen more than tenfold, to $133 billion in 1975. The multinational opportunity is not a one-way street leading outward from the United States. By the end of 1975, foreign investors--sensing the opportunity--had directly invested more than $26 billion in the United States, i.e., about one dollar for every five that Americans invested outside our borders.
source of parts that could be bought in Britain for sterling, we established our first overseas subsidiary-Caterpillar Tractor Co. Ltd. in 1950. After establishing the parts procurement and warehousing operation, we learned that a British company and another U.S. company were planning to build track-type tractors in Britain. To meet these challenges, Caterpillar, with the consent of the British government, undertook the production of track-type tractors at Glasgow, Scotland, and the manufacture of related earthmoving equipment at Newcastle, England. Thus began the transition of Caterpillar from a midwestern U.S. company, exporting from its U.S. base, to a multinational corporation.
CATERPILLAR'S MULTINATIONAL ROLE
OVERSEAS MANUFACTURING
Caterpillar has had the good fortune to become the world's largest manufacturer of earthmoving, construction, and materials handling equipment. Last year, our sales were slightly over $7 billion, and our after-tax profit was more than $566 million. Among the multinational companies around the world, Caterpillar ranks about 53rd in size--and, in the United States, according to Fortune Magazine, we rank 24th in sales among all industrial enterprises. Caterpillar has been heavily involved in international trade since its incorporation in 1925, and today we are one of the leading U.S. exporters. After World War II, American companies saw inviting opportunities to sell products needed to rebuild Europe and develop the economies of other parts of the world. But Caterpillar, like most other American companies, quickly discovered we could no longer serve these areas solely with exports. Great Britain, for example, was struggling to conserve precious foreign exchange, and instituted tight restrictions on purchases from foreign countries. British users of Caterpillar-built machines could not import sufficient quantities of replacement parts--to say nothing of new machines. To provide a
Like most major American companies, we were faced with two alternatives--build plants abroad or forfeit the sales opportunity. It was usually with great reluctance that American companies committed their resources to direct investment abroad. Overseas projects were approved only after all other alternatives were reviewed and rejected. As Caterpillar began establishing plants overseas, the objective was to maximize sales in the reachable sales areas. In no case were lower wage rates--or any of the other motives often attributed to multinational business--a significant consideration in our decision. In most cases, lower wage rates were not a factor at all. We located abroad because it was essential to be in that area in order to sell our products there. Through our multinational operations we have been able to extend the availability and sales of Caterpillar products to parts of the world we could not have reached otherwise. By building some products abroad, we have usually been able to sell all of our products there due to the supplemental marketing force. As of today, we have 13 manufacturing plants located abroad: three in Great Britain, two each in Brazil and France, one each in Australia, Belgium, Canada, and Mexico, and joint venture companies in Japan and India. We have parts distribution facilities in Belgium, Great Britain, Mexico, Brazil, Canada, Australia, Japan, Singapore, and South Africa, and marketing subsidiaries in Geneva, Switzerland, and Hong Kong. Our U.S. facilities have increased from two in 1950--when we made our first foreign investment--to 14 manufacturing plants and 15 parts distribution facilities. Worldwide employment is about 88,000, excluding our affiliated companies. Of that total, about 70,000 are in the United States; 4,900 are located in Canada and Latin America;
LEE L. MORGAN was graduated from the University of Illinois. Having joined Caterpillar in 1946, he served in various marketing activities and administrative roles. Since 1977, he has held the position of chairman and chief executive officer. Mr. Morgan is a Director of the Minnesota Mining and Manufacturing Co. and Mobil Corporation. He is a member of the Policy Committee of the Business Roundtable; a trustee of The Conference Board and the Committee for Economic Development; and a member of the Council on Foreign Relations.
188
14,000 live in Europe, Africa, and the Middle East; and 800 are in Australasia. With the aid of our overseas operations, we have become one of the largest U.S. exporters. Last year, Caterpillar contributed $1.9 billion toward a favorable U.S. balance of payments and we estimate that 39% or about 25,000 of our U.S. jobs are the result of our exports. Nations where we have subsidiaries or affiliates benefit by the local employment we provide, the taxes we pay, the purchases we make from our suppliers, and a source of essential products for domestic use and for export.
GROWING ECONOMIC NATIONALISM For many years, the multinational corporation was a welcome tool in furthering the development of industrialized countries. These companies had the capital, technology, and strong market base that was needed, and they were large enough to assume risks. It is ironic that their very success has created grave concern on the part of many countries, as evidenced by the United Nations Report of Eminent Persons released in late 1974. In this report, multinational corporations were viewed as potential threats to the sovereignty and economic well being of their host countries---especially the developing countries.
"Multinational opportunity is not a one-way street." As a result of these fears, we now find more and more efforts directed toward limitations and restrictions on the operations of MNCs. Some of these involve: •
local participation in ownership and management decisions local content requirements high import tariffs and controls credit restrictions restrictions on foreign personnel dictated export requirements assorted other proposals to impose requirements and limitations on multinational firms that are not imposed on domestic companies.
We, therefore, see a new dimension to the nationalistic trend that goes beyond the economics of production, employment, and conservation of exchange. The growth of economic nationalism--particularly in the less developed nations--poses serious challenges to multinational corporations. The future of capital intensive industries could be increasingly affected by our ability to accommodate to this growing economic nationalism. The developing countries generally fall into two categories, those that have oil and those that do not. Countries that lack oil are demanding manufacture within their borders, not only for developmental purposes, but to earn and conserve foreign exchange to pay for imports of oil and other needs. The oil-producing countries are also demanding manufacture within their countries. They see it, principally, as a means of economic development-not as a source of foreign exchange. Their sudden wealth, of course, gives them great economic clout, and the rest of the world needs their buying power to recycle petrodollars. As more and more countries decide they want a "piece of the action" multinationals are forced to make additional decisions regarding whether to manufacture locally or to have their sales potential restricted. These decisions will become more difficult as countries increase pressure on foreign finns to share ownership in new ventures with local investors and to incorporate a higher percentage of locally manufactured components in the finished product.
REASONS FOR OVERSEAS MANUFACTURING In the past, many countries have invited Caterpillar to establish facilities--primarily factories--within their borders. We have usually declined to risk the considerable investment required. Production of some products may justify investment in a given country just to serve the country's customers. This is not the case with a capital intensive business like Caterpillar, whose manufacture of metallurgically sophisticated machines requires large investments in manufacturing plants along with the availability of an advanced supplier industry. Overall, our decision to decline such an invitation has usually been based on the fact that a whole range of conditions we consider favorable for investment are not present. Qualified supplier firms do not exist. Economies of scale would be lessened throughout the company. Return on investment would be unattractive. There may
189
be political instability in the country, making living conditions for U.S. foreign service employees unsatisfactory. The reason Caterpillar facilities overseas have been successful is that most of the factors just mentioned were favorable. In Europe, for example, the sales potential was large enough to provide economy of scale and to justify the substantial capital investment. Supplier industries were sufficiently developed or developable for certain parts of the product meeting Caterpillar's standards to be purchased at reasonable price and delivery. A trained or trainable work force was present. However, it is becoming extremely difficult--and perhaps impossible--for multinational firms to base their sourcing decisions on the traditional economic considerations. The reason for this is simple: Many of the LDCs are demanding localized manufacture and assembly of some products. If MNCs fail to respond, they are threatened with losing sales to others who are willing to meet the demands of the LDCs. So, MNCs are faced with the need to reevaluate their plans and philosophy. They are increasingly being asked to consider the possible manufacture of products in various countries. All of this is a direct result of economic barriers that have been placed--or are threatened to be placed---on the import of products to serve local needs. In addition, some countries are requiring ever-increasing local content. As one response to this, we have set up a special department at Caterpillar to monitor the nationalist pulse of nations around the world to prepare us to make timely and intelligent decisions as new problems arise that interfere with our desire to provide Caterpillar products to users in all countries of the world.
SERIOUS CHALLENGES TO MULTINATIONALS The growth of economic nationalism with all its barriers to free trade--tariffs, licenses, surcharges, quotas, even boycotts--is probably the most serious problem the MNC faces today. But there are others, too. Indeed, the role of the world trader is becoming much more complex due to fluctuations in the values of world currencies, shortages of foreign exchange, and the rise and fall of demand as business conditions or governments change. Technology transfer is another facet of this problem, and it is generating considerable discussion and debate throughout the world--particularly in the context of the transfer of technology from multinational to foreign enterprises. In the United States, the fear is expressed that such
190
transfers establish competing businesses outside our borders that jeopardize American jobs and our balance of payments. Outside the United States, many countries, particularly less-developed nations, complain that multinationals do not transfer their best technology to them, do not transfer it at all, or transfer it only at exorbitant prices. These concerns are strongly felt and they should not--and they cannot--be ignored. it is my belief that we should be supportive of LDCs self-development in the basic functions. It is with these skills and capabilities that they will offer society something to satisfy new requirements and needs, thereby fulfilling their own aspirations. Transfer of current technology appropriate to their needs can be the vehicle through which the basic skills are developed in a country. But such transfers can be and should be done under conditions that also stimulate U.S. industry and job production. We should reject the concept that someone has to lose in this struggle and focus on the fact that in any sound business relationship, both sides will benefit. The problems MNCs face today are difficult ones. And they are made more complex by the wide range of activities these companies conduct in a wide range of countries----everything from extracting valuable resources, to manufacturing, to providing a host of services. In addition to the diversity and complexity of the business world, multinationals have to reconcile a wide range of ideological attitudes, policies, and customs. All of us are familiar with the litany of charges being made in academic journals and Sunday supplements alike about "The Multinationals." These articles often lump every size, variety, and flavor of international business into one huge multinational pot. In the same way that different sized carrots, potatoes, onions, and meat all surrender their identity to the common stew, so, frequently, do individual companies of all kinds find themselves praised or condemned only by the impression made by the popular grouping in which they are recognized. We obviously have no problem when the word multinational evokes a positive response. But when the initial mental association with the word multinational summons up an impression of questionable business behavior and methods--because of several well-publicized lapses by some companies--then every multinational enterprise is penalized and our problems are increased. In the wake of international bribery scandals, there is little doubt that public spotlighting of these affairs has caused many individual enterprises to review their own operations. At the same time, it has probably caused
them to let their employees know that questionable business behavior is not only forbidden, but it is counterproductive and unprofitable as well.
INTERNATIONAL GUIDELINES It is appropriate to mention the "Declaration on International Investment and Multinational Enterprises," which was adopted in June of 1976 in Paris by 23 members of the Organization for Economic Cooperation and Development (OECD), and is to be reviewed in Paris this month. The OECD Declaration and an accompanying set of Guidelines for Multinational Business Enterprises established procedures for consultation and relations between host governments and multinationals. They also recognized the reciprocal rights and responsibilities of governments and multinational enterprises toward each other, and listed the incentives and disincentives that can affect international investment. The OECD Declaration and Guidelines can have broad and beneficial effects. In somewhat the same fashion that the General Agreement on Tariffs and Trade (GATT) established a code, the OECD Declaration and Guidelines provided business and governments with an internationally accepted set of principles on which to build economic relationships. They are the result of months of dialogue and drafting in which not only government, but also labor and business, played creative roles. The result is not perfection. But among many good things, the Guidelines do recognize the beneficial activities and impacts of MNCs. The Guidelines do apply to domestic as well as multinational enterprises. They do create a voluntary set of principles upon which to build sound international economic relations (rather than a stifling set of legal do's, dont's and the bureaucracy that would go with it). They have the virtue of fairness in that they speak not only to the responsibilities and actions of business firms, but also to the responsibilities and actions of governments. For example, they ask governments not to seek payoffs and illegal contributions, just as they ask companies to shun such practices. In the United States, the Secretaries of State, of the Treasury, and of Commerce sent letters to chief executives of 800 U.S. MNCs endorsing the Guidelines and recommending corporate observance of them. At Caterpillar, we compared and evaluated our operations against the Guidelines to determine how each provision
could affect Caterpillar, and whether our operating procedures and practices should be changed as a result. For the most part, we found that our practices and procedures are in accord with the OECD Guidelines and state this in our annual report to shareholders. We think these are matters of great importance. Any worthwhile relationship requires mutuality of commitment. This is true of any marriage and it is true of the relationship between a company and a country. At Caterpillar, we seek friendly, cooperative relationships with governments. To that end, we are willing to make some substantial commitments--not only in terms of capital, but also in terms of operating principles. These operating principles are spelled out in considerable detail in the Caterpillar Code of Worldwide Business Conduct, first published in 1974. In this Code, we also set forth our expectations of host governments: In terms of providing a climate conducive to business growth and success; avoidance of discrimination against us as "foreigners"; and fair treatment of the rights and properties of others. Although our Code has been in operation for 5 years, we often receive questions about it--usually regarding its purpose, and how well those purposes have been achieved. We at Caterpillar are convinced of the inevitability of the code and guidelines process, and are satisfied enough with the impact of our own Code on our own organization that we have expanded, updated, and reissued it.
CONCLUDING COMMENTS Admitting to an obvious bias, I am optimistic about the long-range future of MNCs. This is said with the full knowledge that there exists a rising tide of nationalism abroad and real signs of a trend toward isolationism in the United States. Consequently, we are working hard to increase the recognition by the U.S. State Department and by other elements of our government, at all levels, of the importance of less, rather than more, barriers to international business involvements. It is my view that business, more than any other institution, has contributed in greater measure to constructive relationships between nations. While the people of this earth are divided in many ways, they are united in their desire for a higher standard of living in a climate of peace and freedom. MNCs have a great deal to contribute toward that goal.
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