International Corporations: The Industrial Economics of Foreign Investment

Abstract

As trade follows the flag, so does applied economics follow the newspapers. Urgent issues of public policy have in the past decade or so called forth a great deal of new factual evidence on the international corporation, as the chief conduit for foreign direct investment.2 It has been studied as a channel for the international transfer of technology, as a business organization serving more than one national sovereign master, and as a force influencing the international financial flows recorded in a country's balance of payments. Yet relatively little emphasis has fallen on what might seem the two principal economic features of direct investment by the international corporation: (1) it ordinarily effects a net transfer of real capital from one country to another; and (2) it represents entry into a national industry by a firm established in a foreign market. This neglect is unfortunate, because recognition of these features lets one bring to bear on the causes and consequences of direct investment two important bodies of economic analysis-the pure theory of international trade and the conceptual structure and evidence of market behaviour reposing in the field of industrial organization. Briefly, the argument of this paper is that foreign direct investment occurs mainly in industries characterized by certain market structures in both the lending (or home) and borrowing (or host) countries. In the parlance of industrial organization, oligopoly with product differentiation normally prevails where corporations make horizontal investments to.produce abroad the same lines of goods as they produce in the home market. Oligopoly, not necessarily differentiated, in the home market is typical in industries which undertake vertical direct investments to produce abroad a raw material or other input to their production process at home. Direct investment tends to involve market conduct that extends the recognition of mutual market dependence-the essence of oligopoly-beyond national boundaries. Likewise it tends broadly to equalize the rate of return on (equity) capital throughout a