08 Apr 2010Working Paper Summaries

Multinational Strategies and Developing Countries in Historical Perspective

by Geoffrey Jones

HBS professor Geoffrey Jones offers a historical analysis of the strategies of multinationals from developed countries in developing countries. His central argument, that strategies were shaped by the trade-off between opportunity and risk, highlights how three broad environmental factors determined the trade-off. The first was the prevailing political economy, including the policies of both host and home governments, and the international legal framework. The second was the market and resources of the host country. The third was competition from local firms. Jones explores the impact of these factors on corporate strategies during the three eras in the modern history of globalization from the nineteenth century until the present day. He argues that the performance of specific multinationals depended on the extent to which their internal capabilities enabled them to respond to these external opportunities and threats. The paper highlights in particular the changing nature of political risk faced by multinationals. The era of expropriation has, for the moment, largely passed, but multinationals now experience new kinds of policy risk, and new forms of home country political risk also, such as the Alien Tort Claims Act in the United States. Key concepts include:

The strategies of multinationals in the developing world have changed over time. Initially they sought access to resources through exclusive contracts. As anti-globalization policies increased, they needed enhanced political contacts, and strengthened local managements. The pursuit of markets and lower cost labor is now the central focus. They still need local political and business contacts, but also have to respond to local competition and demands to incorporate local relevance into global products.
Multinationals initially enjoyed insider advantages in colonial regimes. With decolonization, political risk rose sharply. They were often expropriated, and many divested. Now multinationals face regular, adverse shifts in policy by host governments.
The recent period of globalization has also seen the growth of home country political risk. In particular, multinationals face criticism and legal action for real or alleged environmental or human rights abuses in developing countries.
Developing countries, or at least the larger and more fast-growing ones in Asia and Latin America, are increasingly seen as indispensable by multinationals in every industry. However recent decades have seen a sharp growth of highly competitive local firms, who can compete with frugal engineering, and are going global.

Author Abstract

This working paper offers a historical analysis of the strategies of multinationals from developed countries in developing countries. The central argument is that strategies were shaped by the trade-off between opportunity and risk. Three broad environmental factors determined the trade-off. The first was the prevailing political economy, including the policies of both host and home governments, and the international legal framework. The second was the market and resources of the host country. The third factor was competition from local firms. The impact of these factors on corporate strategies is explored during the three eras in the modern history of globalization from the nineteenth century until the present day. The performance of specific multinationals depended on the extent to which their internal capabilities enabled them to respond to these external opportunities and threats. 58 pages.