Business Goes Global As Investment Booms
BOSTON — Breakfast at Dunkin' Donuts. Lunch at Burger King. Grocery shop at Giant Food. Sleep at the Holiday Inn. It all sounds very American. But every one of these companies is British-owned.
Business has gone global - quicker than many realize. In Europe, American companies are among the largest employers. In China, investors from Japan, the US, and Europe are scrambling to open factories. In America, millions are working for Japanese, German, Dutch, and British firms.
Sir John Kerr, Britain's ambassador to the US, jests: "The American way of life - we have just taken it over."
Worldwide foreign direct investment surged 40 percent in 1995 to $315 billion. "Globalization is no longer rhetoric. It is a fact," notes Douglas Gregory, senior adviser of IBM Canada Ltd.
And globalization is continuing at a rapid pace, with major implications for business, governments, and ordinary citizens. Business faces wider competition and takeover threats from foreign companies. Many governments in both rich and poor countries are trying to attract foreign investors by liberalizing their economies and their investment regulations. More and more workers - about 5 million in the United States alone - work for foreign-owned firms.
"The modern economy cannot be understood without tackling the role of this investment," says Joerg Weber, an economist at the United Nations Conference on Trade and Development in Geneva. UNCTAD compiles global statistics on world investment in an annual report.
On the ground, the effects of the investment push include:
Spate of mergers. Just a few weeks ago, British Telecommunications made a deal to buy MCI Communications Corp., America's second-largest long distance company, for more than $20 billion. That has been followed by more British-US deals: Invesco PLC agreed to pay $1.6 billion for AIM Management Group, a mutual-fund company. Dominion Resources, a Richmond, Va., power company, plans to buy East Midlands Electricity PLC, one of five remaining independent electric companies in Britain, for $2.15 billion.
Meanwhile, Dutch bank ABN-AMRO agreed to buy the Standard Federal Bancorporation of Troy, Mich., for $1.9 billion on Friday, Nov. 22.
A networked economy. Production increasingly is a cross-border, often cross-ocean, affair. One-third of world trade occurs within "transnational companies" - as the UN terms companies operating in more than one nation. This mainly means shipments between a parent company and its foreign affiliates. Another third of trade, Weber says, is between companies and some sort of non-equity affiliation - a strategic alliance, a supplier of parts, a subcontractor.
All told, foreign affiliates of transnational firms now generate annual sales well in excess of $6 trillion. That's equal to about 20 percent of the world's entire economic output.
Tough issues for governments. The growing economic ties can leave governments in awkward positions. President Clinton, for example, faces enormous pressure from business interests not to let human rights and other concerns interfere with America's growing ties in China. And on Nov. 26, survivors of the Bhopal gas-leak disaster protested outside India's Parliament. In October, India's Supreme Court barred a manslaughter suit against executives of America's Union Carbide Corp. Thousands died in the 1984 tragedy.
Progress for developing nations. Transnational companies bring fresh capital to these nations, thereby creating jobs. They employ modern managerial and organizational practices, setting an example. And they introduce the latest technologies, training employees in the use of new machines and techniques.
UNCTAD's Mr. Weber finds some evidence that transnationals, because of their high visibility in host nations, are often better corporate citizens than many domestic companies. They may pay better, do less damage to the environment, and adhere better to industrial codes. Reebok, for example, recently announced steps to ensure that its Pakistan-made soccer balls are not produced using child labor.
Industrial nations remain the biggest target for foreign investment.
Foreigners have $560 billion in direct investment in the US on a historical-cost basis, $638 billion at current costs, and $1 trillion at stock-market value.
British firms are the biggest investors in the US, with about 1 million Americans employed. Traditional US-British ties in the area of defense, intelligence, and nuclear might are "now complemented by a deepening economic relationship," Sir John says.
Worldwide, the US has somewhat more direct investment in other countries than vice versa. At the end of 1995, these assets were worth $711 billion on a historical-cost basis, $880 billion on a current cost basis, and $1.3 trillion by their stock market value.
International deal sought
The transnationals have become so vital to the world economy that the 27 industrial nations belonging to the Paris-based Organization of Economic Cooperation and Development are negotiating a Multilateral Agreement on Investment.
The deal's adherents will agree to treat foreign-owned companies the same as domestic companies. They will abide by rules protecting foreign companies from expropriation without compensation or similar actions. The agreement will likely set up provisions for settling investor disputes, for fair taxation, and for stock investments related to direct investments in plant and equipment.
"We are very happy with what we have heard so far," says Steven Bate, executive director of the OECD's business and industry advisory committee. He says the "essential elements" of an agreement are in place, with some controversial points still to be hammered out.
The target date for the deal is May 1997. If approved by OECD ministers, it must then be ratified by national parliaments. Many non-OECD countries, including developing nations, are expected to accede to the treaty over time.
"There are still developing nations that see transnational corporations as a threat to their economies," says Mr. Gregory. But the view of transnationals as exploitative, evil entities is rarer than it was 20 years ago. Now, most countries are now competing for foreign investment. He says they understand that liberalization of their economies to encourage foreign investment "enhances their capacity to provide for their citizens."