Explain the impact of foreign multinational enterprises on the British economy? Essay

Britain’s position as the birth place of the industrial revolution in the late 18th century gave it a unique importance in the world economic system (Jones, 1996). Britain also had a geographical advantage which enabled access for multinationals to other markets. There were many corporations which established production bases in Britain from the 1850s onwards. The first of these the Colt gun manufacturing corporation and the North British Rubber Company which established its first base in Britain in 1853 and 1868 respectively (Jones, 1988). Although they did not continue to manufacturing for very long it did pave the way for further FDI in Britain.

MNCs had a considerable impact on the British economy, be it positive or negative. The main sector that FDI has shaped over the years has been manufacturing. In terms of industries, foreign MNC have been particularly influential in electrical equipment before 1914 (Jones, 1988). Also the motor car industry was dominated mainly by companies such as Ford until the 1920s and by 1939 about a quarter of British production was controlled by Ford and Vauxhall (Jones, 1988). New technologies, management and stock control have been the main factors which have been shaped by MNCs.

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Multinational corporations in Britain provided much employment to the British population. By 1932 manufacturing subsidiaries of US MNCs provided employment for around 65000 people and by the early 1960s this number rose to around 450000 (Jones, 1996). Even the retail MNCs such as Woolworths became the largest employer in the retail sector employing over 60000 people by 1961 (Godley, 2003).The British government attempted to control where MNCs could set up manufacturing bases in order to distribute employment equally.

This was especially true in the case of investment outside of the South East and London which most MNCs favoured (Chick, 1990). MNCs were encouraged to set up in areas of high unemployment such as Scotland and the Midlands and many Germans MNCs before and after the First World War favoured these regions (Chick, 1990). However, MNCs did not just create job directly but also indirectly in the form of ancillary firms, suppliers and subcontractors (Jones, 1988). This was particularly true in the case of the car industry which would provide parts which would be cheaper to buy rather than produce by the large car manufacturers (Jones, 1996).

MNCs might have provided much employment in Britain but the quality of that employment must also be taken into account (Jones, 1996). Foreign companies tend to place nationals of their country of origin in higher management positions, however this varied between companies (Jones, 1996). This could have potentially limited the possible ‘spin off’ effects of managerial techniques (Jones, 1988). However by the interwar years British management in US subsidiaries was not uncommon; perhaps due to cultural similarities and the common language (Jones, 1996).

For example many US MNCs such as Gillette employed only British staff (Jones, 1988). Foreign MNC also tended to use differing conditions of employment in Britain which is commonplace even to this day (Jones, 1988). Employers associations were often shunned and trade unions ignored. This seriously undermined worker and business representation and often left trade unions and employers associations weakened by the lack of participation by MNCs (LivingLogic AG, 2000-2009). Huge chunks of the working population were not represented, although now this has changed as in house procedures have become more commonplace with advent of more advanced HR procedures (LivingLogic AG, 2000-2009).

A significant ramification of MNCs presence within Britain was the transfer of technology and managerial skills. This is particularly important as technological advances play a serious role in the economic growth of a country especially Britain (Jones, 1996). Although Britain was the birthplace of the industrial revolution its competitiveness was slowly dwindling due to lack of investment and innovation (Jones, 1996). In the case of transfer of management skills, companies such as Ford, introduced line production and Kodak, which were famed for their spending on research, were companies which changed the landscape of management in Britain (Jones, 1988). US MNCs were also the first to introduce the M-form organisation into the British economy forcing other local companies to restructure and rethink (Dicken, 1998).

The uptake of the M form of business organisation only began to diffuse into the British economy from the US only after World War Two (Jones, 1996). Although companies such as Ford were not particularly well managed they did introduce methods such as work study which could have increased the efficiency of many other businesses (Jones, 1988). Japanese MNCs such as Toyota introduced production methods and stock management systems such as Just In Time production and kaiban (Jones, 1988).

MNCs did import management methods and technology but the extent to which this information was shared freely was quite limited (Jones, 1988). It would have been foolish for MNCs entering the British market which possessed a clear lack of managerial innovation and a gap in technological knowledge to share this information freely with its competitors (Jones, 1988). An example of this was when H. J. Heinz set up a production facility in 1905 with advanced canning technology which far surpassed its local competitors (Godley, 2003). There was considerable lack of MNC technology transfer pre 1950 especially in the manufacturing sector (Jones, 1996).

The location of research and development might have also been a factor in the lack of technological transfer. Areas such as Scotland suffered from ‘branch plant syndrome’ or a concentration of low skill and low value jobs while MNCs located their R and D departments in the home country or elsewhere (Jones, 1988). This deprives locals of high skilled high value jobs which could have advanced the skills of the local population. One of the few companies which invested heavily in R and D within Britain was Kodak but this was an anomaly (Godley, 2003). MNCs can also hinder the technological development of smaller local industries (Jones, 1988). Smaller industries tend to be fairly innovative in order to stay competitive.

MNCs also tend to aid in domestic capital formation. They provide an additional investment on top of domestic investment which could potentially stimulate an economy (Jones, 1996). There was evidence that MNCs provided capital to firms which British banks would not fund (Jones, 1988). In 1890 Levingstein of Manchester, a dyestuffs manufacturer obtained capital from German MNCs such as Bayer and Agfa (Jones, 1988). On the other hand many MNCs tended to borrow from local financial institutions in order to fund newer developments (Jones, 1996).

French automobile manufacturers Renault and Citroen borrowed from British banks to fund their British subsidiaries in the 1920s (Jones, 1996). Another method of acquiring funding for expansion was the ploughing back of profits which was extensively used by Singer which used it profits to build its new factory in Clydebank in 1885 (Jones, 1988). Many MNCs also tended to sell off a substantial percentage of its equity in its British subsidiaries in order to fund expansion (Jones, 1996). Ford used this method of capital acquisition in 1928 to fund the construction of its Dagenham plant (Jones, 1988). During the interwar period this was common maybe due to financial pressure placed on the parent company or maybe to create a more local image for the MNC in question (Jones, 1996).

Due to their sheer size MNCs tend to have an effect on the trade and balance of payments of a host country. This was particularly pertinent within Britain as many MNCs tended to choose Britain as a hub for international trade. Although breaking into the local market is of importance to MNCs, involvement in international markets is essentially what they were designed for (Jones, 1996). In the 1930s at least one third of foreign owned subsidiaries exported (Jones, 1996).

This could have been due to the vast British Empire at the time which allowed MNCs to export to these countries with reduced tariffs (Jones, 1988). This benefited the British economy in many ways as numerous companies placed the charge of international sales with its British subsidiaries (Jones, 1996). For example in 1928 Ford handed over control of operations in the Middle East and Europe to its British subsidiary (Jones, 1996). This created opportunities for British management to be more geographically mobile and gain international management experience (Jones, 1988). Japanese firms were also big players in the way of exporting as they created a major exporting industry in colour televisions (Jones, 1996).

The market structure of a host economy can be influenced by MNCs and impact the competitive environment and effect local industry (Dicken, 1998). Many industries in the British economy tended to be fairly stagnated in terms of innovation however the arrival of significant competition in the form of MNCs was the jump start that the economy needed. They could have reduced industry concentration and increased competition. Due to their sheer size MNCs tended to be formidable competition as they had the advantages of huge capital backing and more or even different management and operational styles. For example Ford which set up its first assembly plant in 1911 accounted for almost a quarter of British car production (Jones, 1996). However this was not a particularly long term phenomenon as in the case of Ford and interwar Europe (Jones, 1996).

The impact of MNCs on smaller local firms was prominent as the sudden increase in the early 1900s forced many smaller firms out of business (www09). However this was not all bad as many MNCs created partnerships with smaller suppliers especially in the automobile industry (www09). MNCs tended to create a ‘Demonstration effect’ on locally owned firms which forced them to innovate (Jones, 1996). Workers or managers trained by MNCs may change jobs and might transfer the learned skills and attitudes from their foreign employers (Jones, 1996). This was predominant within the British Pharmaceutical industry after World War Two (Jones, 1996).

US MNCs invested heavily in this industry and established R and D facilities in Britain. This resulted in local competitive stimulus and enabled smaller firms to obtain equipment and technology from foreign firms under license (Dicken, 1998). This paved the way for British pharmaceuticals and created such companies as Glaxo (Jones, 1996). After the advent of the National Health Service many MNCs involved mainly in pharmaceuticals invested heavily in this (Nelson, 1993). Major players such as Glaxo Smith Kline and Pfizer invested in research and development leading to Britain becoming one of the main international producers and developers of new drugs (Nelson, 1993). On the other hand competitive stimulus can be too dominant and place too much pressure on smaller local firms.

Another factor which affected the British economy was how MNCs affected its sovereignty and culture. MNCs have much influence over then host countries government in terms of their potential investment and stimulus to the economy. Host country governments could find it difficult to control the subsidiaries of MNCs. This is usually because any decision made by the subsidiary ultimately lies with the parent company (Jones, 1996). If the terms of an MNC entering a country are not favourable they often simply threaten to pull out. This might not have been particularly pertinent in the case of Britain as the imperial nature of MNCs would have been tackled effectively by the government.

Between 1897 and 1902 there was much investment by US MNCs in Europe which lead to a wave of anti-American sentiments (Jones, 1996). Later in the 1920s the same topic was discussed in terms of how US firms were taking over local British firms. There were negative feeling as smaller firms were being driven out of business by massive MNCs with their new technology and more efficient practices. This could have lead to extensive job losses as MNCs tended to rely more heavily on machinery rather than the more traditional labour intensive practices of local industry (Jones, 1996). In terms of culture there was a minor issue relating to the British diet. US MNCs introduced the processes of canning, freezing and drying or at least made them more accessible to the lower income families (Jones, 1996).

MNCs entrance into the UK was a mixed blessing. It certainly did have a massive impact on the economy as a whole. They provided extensive employment especially in the automobile industry and a significant number in the manufacturing sector. They also brought about much new technology in the production, distribution and mass marketing of food stuffs. Although the provision of high skilled jobs did not take place until later MNCs were still encourage to locate in areas of high unemployment bringing prosperity to those areas. MNCs impact on the British economy only became particularly prominent post the Second World War. MNCs also, through sustained investment caused the advent of a booming pharmaceuticals trade which has place the UK on the map in terms of drug innovation.

However MNCs were not all good for the British economy and have caused many firms to go out of business and many job losses. There influence on culture has also not been a particularly positive one with the creation of booming fast food trade which affects many negatively to this day. The answer to the question is not as two dimensional as one might think. MNCs have had a positive and negative long term effects on the economy and culture of Britain however we must ask a further question. Would Britain have been the financial and economic hub of the world if MNCs had not arrived to show us the way?

References

[Online] // www.statistics.gov.uk. – March 20, 2009. – http://www.statistics.gov.uk/statbase/Product.asp?vlnk=9614.

Chick Martin Governments, Industries and Markets [Book]. – Aldershot : Edward Elgar Publishing Limited, 1990.

Dicken Peter Global Shift [Book]. – London : Paul Chapman Publishing Limited, 1998.

Godley Andrew Foreign multinationals and innovation in British retailing,1850-1962 [Journal] // Business History. – 2003. – pp. 80-100.

Jones Geoffrey Foreign multinationals and British Industry before 1945 [Journal] // Economic History Review. – 1988. – pp. 429-453.

Jones Geoffrey The Evolution of International Business: An Introduction [Book]. – London : Routledge, 1996.

LivingLogic AG [Online] // Innovations Report. – 2000-2009. – March 21, 2009. – http://www.innovations-report.com/html/reports/economy_finances/report-87826.html.

Nelson R. R. National Innovation Systems: A comparative context [Book]. – Oxford : Oxford University Press, 1993.

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