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Standing guard: Protecting foreign capital in the nineteenth and twentieth centuries
190
Book reviews
Charles Lipson, Standing Guard: Protecting Foreign Capital in the Nineteenth and Twentieth Centuries (University of California Press, Berkeley, CA, 1985) pp. xvii+332, $34.95 cloth, $11.95 paperback. Charles Lipson's interest lies in historical shifts in systems of international property rights, with particular reference to the case of investment by multinational corporations (MNCs) in the Third World. As a political scientist he is concerned with the way in which changes in the relations between nation states, and in the role of international institutions, have affected the place of foreign capital in economic development. With the rise and fall of hegemonic powers (Britain and then the U.S.A.), the strength of the protection of foreign capital in less developed regions has varied. However, there has also been a gradual longer term weakening in the effectiveness of the rules and restrictions that sustain international property rights. According to Lipson, changes in the security of private foreign investment in the Third World can be explained in terms of two essential factors. Firstly, the strength of international restraints discouraging expropriations, whether economic or military, and whether national or transnational. Secondly, the capabilities of host nation states, and their political ideologies. The strict enforcement of the property rights of foreign capital in the nineteenth century is thus explained by the existence of coherent and concentrated international restraints, coupled with the lack of administrative development in host nation states, and the absence of any ideology of state-directed development. By contrast, in the 1950s and 1960s the expansion of developing country state capabilities and their ambitions for nationally independent strategies led to a reluctant acceptance of wider state responsibilities. This accounts for the gradual weakening of investment security. Since the late 1960s international restraints discouraging the expropriation of foreign capital in less developed countries (LDCs) have been undermined and decentralised. In the immediate aftermath of the Vietnam war the U.S. government no longer had the same capacity to invoke military or economic sanctions, and with the breakdown of the Bretton Woods system it became less able to manipulate the relevant international organisations to bring pressure to bear on offenders. In any event, MNC investment increasingly emanated from Europe and Japan rather than the U.S.A. Lipson also tries to explain why international restraints and hence the security of foreign capital have not been affected in the same way in the case of financial as opposed to direct investment. As far as portfolio lending is concerned, the operations of banks are to some extent mutually organised (more so than MNCs in the same industry), and multilateral financial institutions have played a significant coordinating role. In Lipson's terminology, international restraints preventing the renunciation of debt for
Book reviews
191
political rather than economic reasons have remained more highly centralised. So much for the application of the author's two factor (international restraints and host nation state capabilities) 'model'. He assesses the implications for U.S. foreign policy and the making of international rules, but his discussion of the implications for MNC strategies and the broader course of economic development is more limited. He seems to suggest that where expropriations remove the property rights of MNCs in LDCs that an entirely new pattern of national economic development will result. Although the political regime is undoubtedly different in these circumstances, it is far from clear exactly what economic effects it is likely to have. In the post-war period most LDCs, like industrialised countries, have been increasingly integrated into the world economy. This greater international economic interdependence has been facilitated by the growth of MNC investment. However, it is argued by an economist such as Jenkins (1984) in the case of the internationalisation of Latin American industries, that even if nationalistic states had prevented the entry of foreign firms they could not have avoided a similar development outcome. In other words, indigenous LDC firms, some of whom have themselves become MNCs, are being compelled to adapt to the requirements of international competition, and the direct and local presence of MNC affiliates has simply increased the speed of this adaptation. Lipson does not consider explicitly how the economic factors pushing towards greater interdependence at the level of international industries may counter balance the political factors which have created more independent host nation states. It is unfortunate that he does not address this issue more directly. It would have been interesting to have considered how development patterns might be affected by such conflicting pressures. Other recent literature refers to the consequences for MNC strategies. Doz (1986), for example, looks at how economic imperatives have moved MNCs in the direction of globally integrated operations, while political imperatives have tended to make affiliates more nationally responsive to local goals and requirements. In his Preface, Lipson objects to those economists who have applied theories of industrial organisation and the firm to MNC investment without reference to political issues. He falls into the opposite trap, when in fact some combination of the two might have been more appropriate. Indeed, a more telling criticism from his perspective would have been to point out that analyses of MNC investment based on theories of industrial organisation [such as Hymer (1976)] or the firm [such as Buckley and Casson (1976)] have pushed to one side the determinants of the location of production. One aspect of such locational questions is the role of political factors; MNCs are more likely to locate production in a politically stable country, particularly if attractive incentives are on offer.
192
Book reviews
Perhaps the major objection to Lipson's general approach, even if it is sometimes qualified by the details of his discussion, is that he tends to consider relations between MNCs and their home country states on the one side and host country states on the other in terms of a necessary conflict of interest. His framework of analysis is one of bargaining between the parties, and the international distribution of property rights is supposed to alter as the relative strength of the two sides changes. The most recent example of this viewpoint is that the spread in the Third World in the 1970s of 'new forms' of involvement by MNCs (joint ventures and contractual arrangements with local partners) is explained as a strategic response to MNCs to a shifting balance of forces. This is surely only part of the story. There are food processing companies, for example, who prefer to be involved in most LDCs by means of management contracts rather than directly engage themselves in agricultural operations. There are soft drinks companies that prefer to franchise the use of their brand name rather than being involved in the costly business of establishing plant and equipment for a small market. These are 'first best' options, and not 'second best' strategies that the MNCs in question are driven to as a result of local political pressure [Cantwell and Dunning (1985)]. Indeed, there are also circumstances under which host nation states prefer a more rather than a less extensive ownership of local production facilities by foreign MNCs, for economic reasons. In view of the problems experienced recently by many countries in the areas of debt repayments and foreign exchange shortages, wholly owned direct investments may be more welcome than contractual arrangements with no foreign equity capital. Of course, Charles Lipson is aware of such economic influences, but he does not seem to appreciate that if they were to be integrated into his model he would be forced to modify his framework; they cannot just be 'added on'. Where production in LDCs depends upon continual supplies from and contacts with MNCs, political considerations may well be adapted to the economic. This may happen when MNCs transfer and train skilled labour, or where the technology in use is capable of being regularly upgraded, or in the case of investments by merchant trading companies. The realisation of such opportunities for mutual gains and worsening economic conditions have helped to move many LDCs away from confrontation and towards a reconciliation with MNCs in the last ten years. Lipson acknowledges this, but it does rather indicate the limitations of his framework of bargaining over property rights. The contribution of a political scientist such as Charles Lipson to research on MNCs and economic development is to be welcomed, but unfortunately it is unlikely that many economists will read his book. It can still be hoped that work of this kind will continue to push us in the direction of interdisciplinary research where it is appropriate.
Book reviews
193
References Buckley, P.J. and M.C. Casson, 1976, The future of the multinational enterprise (Macmillan, London). Cantwell, J.A. and J.H. Dunning, 1985, The new forms of involvement of British firms in the Third World, Report submitted to the OECD (Paris). Doz, Y., 1986, Strategic management in multinational companies (Pergamon, Oxford). Hymer, S., 1976, The international operations of national firms: A study of direct investment (MIT Press, Cambridge, MA). Jenkins, R., 1984, Transnational corporations and industrial transformation in Latin America (Macmillan, London).
John Cantwell University of Reading, Reading Walter P. Falcon, William O. Jones, Scott R. Pearson et al., The Cassava Economy of Java (Stanford University Press, Stanford, CA, 1984) pp. xvii +212. Cassava in Java is a much-maligned crop. A starchy root of low nutritive value, its use as a staple food in this rice-consuming society is typically viewed as a sign of abject poverty. Accordingly, there is a tendency to presume that, with increasing affluence, cassava should simply disappear. This book provides a useful corrective to many of the stereotypes surrounding cassava. The chapters on production systems (Frederick Roche), consumption (John Dixon), international trade and the domestic costs of different cassava products (Gerald Nelson), and marketing (Laurian Unnevehr) all contribute to our knowledge about the crop. Roche's study in three cassava-growing areas is particularly informative, and demonstrates important regional variations in cropping systems and production organization. In the sandy hills of South Central Java cassava is indeed a subsistence crop grown by desperately poor people, but in other areas it is predominantly a cash crop cultivated by relatively prosperous farmers with hired labor. Most cassava in these areas of commercial production is processed into gaplek (cassava pellets) for export as animal feed, although gaplek remains an important staple food for poorer rural groups. The project that culminated in this book was initiated in the 1970's at a time when Indonesia was the largest rice importer in the world. The original motivation was to investigate the technical and economic feasibility of increased cassava production, and its potential for reducing rice imports. Since then the Javanese rice economy has expanded beyond the wildest of expectations, producing unprecedented surpluses. Falcon, Jones and Pearson contend that cassava still has an important role to play in a more broadly-based food policy strategy, and indeed that cassava's potential role is greater than in eras when there were aggregate
Book reviews
Charles Lipson, Standing Guard: Protecting Foreign Capital in the Nineteenth and Twentieth Centuries (University of California Press, Berkeley, CA, 1985) pp. xvii+332, $34.95 cloth, $11.95 paperback. Charles Lipson's interest lies in historical shifts in systems of international property rights, with particular reference to the case of investment by multinational corporations (MNCs) in the Third World. As a political scientist he is concerned with the way in which changes in the relations between nation states, and in the role of international institutions, have affected the place of foreign capital in economic development. With the rise and fall of hegemonic powers (Britain and then the U.S.A.), the strength of the protection of foreign capital in less developed regions has varied. However, there has also been a gradual longer term weakening in the effectiveness of the rules and restrictions that sustain international property rights. According to Lipson, changes in the security of private foreign investment in the Third World can be explained in terms of two essential factors. Firstly, the strength of international restraints discouraging expropriations, whether economic or military, and whether national or transnational. Secondly, the capabilities of host nation states, and their political ideologies. The strict enforcement of the property rights of foreign capital in the nineteenth century is thus explained by the existence of coherent and concentrated international restraints, coupled with the lack of administrative development in host nation states, and the absence of any ideology of state-directed development. By contrast, in the 1950s and 1960s the expansion of developing country state capabilities and their ambitions for nationally independent strategies led to a reluctant acceptance of wider state responsibilities. This accounts for the gradual weakening of investment security. Since the late 1960s international restraints discouraging the expropriation of foreign capital in less developed countries (LDCs) have been undermined and decentralised. In the immediate aftermath of the Vietnam war the U.S. government no longer had the same capacity to invoke military or economic sanctions, and with the breakdown of the Bretton Woods system it became less able to manipulate the relevant international organisations to bring pressure to bear on offenders. In any event, MNC investment increasingly emanated from Europe and Japan rather than the U.S.A. Lipson also tries to explain why international restraints and hence the security of foreign capital have not been affected in the same way in the case of financial as opposed to direct investment. As far as portfolio lending is concerned, the operations of banks are to some extent mutually organised (more so than MNCs in the same industry), and multilateral financial institutions have played a significant coordinating role. In Lipson's terminology, international restraints preventing the renunciation of debt for
Book reviews
191
political rather than economic reasons have remained more highly centralised. So much for the application of the author's two factor (international restraints and host nation state capabilities) 'model'. He assesses the implications for U.S. foreign policy and the making of international rules, but his discussion of the implications for MNC strategies and the broader course of economic development is more limited. He seems to suggest that where expropriations remove the property rights of MNCs in LDCs that an entirely new pattern of national economic development will result. Although the political regime is undoubtedly different in these circumstances, it is far from clear exactly what economic effects it is likely to have. In the post-war period most LDCs, like industrialised countries, have been increasingly integrated into the world economy. This greater international economic interdependence has been facilitated by the growth of MNC investment. However, it is argued by an economist such as Jenkins (1984) in the case of the internationalisation of Latin American industries, that even if nationalistic states had prevented the entry of foreign firms they could not have avoided a similar development outcome. In other words, indigenous LDC firms, some of whom have themselves become MNCs, are being compelled to adapt to the requirements of international competition, and the direct and local presence of MNC affiliates has simply increased the speed of this adaptation. Lipson does not consider explicitly how the economic factors pushing towards greater interdependence at the level of international industries may counter balance the political factors which have created more independent host nation states. It is unfortunate that he does not address this issue more directly. It would have been interesting to have considered how development patterns might be affected by such conflicting pressures. Other recent literature refers to the consequences for MNC strategies. Doz (1986), for example, looks at how economic imperatives have moved MNCs in the direction of globally integrated operations, while political imperatives have tended to make affiliates more nationally responsive to local goals and requirements. In his Preface, Lipson objects to those economists who have applied theories of industrial organisation and the firm to MNC investment without reference to political issues. He falls into the opposite trap, when in fact some combination of the two might have been more appropriate. Indeed, a more telling criticism from his perspective would have been to point out that analyses of MNC investment based on theories of industrial organisation [such as Hymer (1976)] or the firm [such as Buckley and Casson (1976)] have pushed to one side the determinants of the location of production. One aspect of such locational questions is the role of political factors; MNCs are more likely to locate production in a politically stable country, particularly if attractive incentives are on offer.
192
Book reviews
Perhaps the major objection to Lipson's general approach, even if it is sometimes qualified by the details of his discussion, is that he tends to consider relations between MNCs and their home country states on the one side and host country states on the other in terms of a necessary conflict of interest. His framework of analysis is one of bargaining between the parties, and the international distribution of property rights is supposed to alter as the relative strength of the two sides changes. The most recent example of this viewpoint is that the spread in the Third World in the 1970s of 'new forms' of involvement by MNCs (joint ventures and contractual arrangements with local partners) is explained as a strategic response to MNCs to a shifting balance of forces. This is surely only part of the story. There are food processing companies, for example, who prefer to be involved in most LDCs by means of management contracts rather than directly engage themselves in agricultural operations. There are soft drinks companies that prefer to franchise the use of their brand name rather than being involved in the costly business of establishing plant and equipment for a small market. These are 'first best' options, and not 'second best' strategies that the MNCs in question are driven to as a result of local political pressure [Cantwell and Dunning (1985)]. Indeed, there are also circumstances under which host nation states prefer a more rather than a less extensive ownership of local production facilities by foreign MNCs, for economic reasons. In view of the problems experienced recently by many countries in the areas of debt repayments and foreign exchange shortages, wholly owned direct investments may be more welcome than contractual arrangements with no foreign equity capital. Of course, Charles Lipson is aware of such economic influences, but he does not seem to appreciate that if they were to be integrated into his model he would be forced to modify his framework; they cannot just be 'added on'. Where production in LDCs depends upon continual supplies from and contacts with MNCs, political considerations may well be adapted to the economic. This may happen when MNCs transfer and train skilled labour, or where the technology in use is capable of being regularly upgraded, or in the case of investments by merchant trading companies. The realisation of such opportunities for mutual gains and worsening economic conditions have helped to move many LDCs away from confrontation and towards a reconciliation with MNCs in the last ten years. Lipson acknowledges this, but it does rather indicate the limitations of his framework of bargaining over property rights. The contribution of a political scientist such as Charles Lipson to research on MNCs and economic development is to be welcomed, but unfortunately it is unlikely that many economists will read his book. It can still be hoped that work of this kind will continue to push us in the direction of interdisciplinary research where it is appropriate.
Book reviews
193
References Buckley, P.J. and M.C. Casson, 1976, The future of the multinational enterprise (Macmillan, London). Cantwell, J.A. and J.H. Dunning, 1985, The new forms of involvement of British firms in the Third World, Report submitted to the OECD (Paris). Doz, Y., 1986, Strategic management in multinational companies (Pergamon, Oxford). Hymer, S., 1976, The international operations of national firms: A study of direct investment (MIT Press, Cambridge, MA). Jenkins, R., 1984, Transnational corporations and industrial transformation in Latin America (Macmillan, London).
John Cantwell University of Reading, Reading Walter P. Falcon, William O. Jones, Scott R. Pearson et al., The Cassava Economy of Java (Stanford University Press, Stanford, CA, 1984) pp. xvii +212. Cassava in Java is a much-maligned crop. A starchy root of low nutritive value, its use as a staple food in this rice-consuming society is typically viewed as a sign of abject poverty. Accordingly, there is a tendency to presume that, with increasing affluence, cassava should simply disappear. This book provides a useful corrective to many of the stereotypes surrounding cassava. The chapters on production systems (Frederick Roche), consumption (John Dixon), international trade and the domestic costs of different cassava products (Gerald Nelson), and marketing (Laurian Unnevehr) all contribute to our knowledge about the crop. Roche's study in three cassava-growing areas is particularly informative, and demonstrates important regional variations in cropping systems and production organization. In the sandy hills of South Central Java cassava is indeed a subsistence crop grown by desperately poor people, but in other areas it is predominantly a cash crop cultivated by relatively prosperous farmers with hired labor. Most cassava in these areas of commercial production is processed into gaplek (cassava pellets) for export as animal feed, although gaplek remains an important staple food for poorer rural groups. The project that culminated in this book was initiated in the 1970's at a time when Indonesia was the largest rice importer in the world. The original motivation was to investigate the technical and economic feasibility of increased cassava production, and its potential for reducing rice imports. Since then the Javanese rice economy has expanded beyond the wildest of expectations, producing unprecedented surpluses. Falcon, Jones and Pearson contend that cassava still has an important role to play in a more broadly-based food policy strategy, and indeed that cassava's potential role is greater than in eras when there were aggregate