Study on National Structures and Multinational Corporate Behavior

Description
Structure is a fundamental, tangible or intangible notion referring to the recognition, observation, nature, and permanence of patterns and relationships of entities. This notion may itself be an object, such as a built structure, or an attribute, such as the structure of society.

National structures and multinational corporate behavior: enduring differences in the age of globalization
Louis W. Pauly and Simon Reich

Liberal and critical theorists alike claim that the world political economy is becoming globalized. If they are right, leading corporations should gradually be losing their national characters and converging in their fundamental strategies and operations. Multinational corporations (MNCs) should be the harbingers of deep global integration. In fact, recent evidence shows little blurring or convergence at the cores of ® rms based in Germany, Japan, or the United States. In contrast to expectations now common both inside and outside academia regarding the imminent emergence of a truly global economy, this article shows that MNCs continue to diverge fairly systematically in their internal governance and long-term ® nancing structures, in their approaches to research and development (R&D) as well as in the location of core R&D facilities, and in their overseas investment and intra® rm trading strategies. Durable national institutions and distinctive ideological traditions still seem to shape and channel crucial corporate decisions. Across the leading states of the three regions now commonly referred to
Much of the empirical material presented here originated in two reports commissioned by the Office of Technology Assessment: U.S. Congress 1993 and 1994. The authors were members of the original project team. William Keller led the team, and Paul Doremus was principally responsible for the research and development chapters and much of the statistical compilation upon which we rely in this article. Further empirical analysis related to the theme of this article can be found in the original reports as well as in the book, tentatively entitled Multinationals and the Limits of Globalization, which the four of us are now completing. For support that facilitated this article, Simon Reich thanks the Sloan Foundation and the International Affairs Fellowship Program of the Council on Foreign Relations. Louis Pauly is grateful for a sabbatical leave grant from the University of Toronto and a research grant from the Social Sciences and Humanities Research Council of Canada. Yoshiko Koda, Viktoria Murphy, and Arik Preis provided excellent research assistance. We are also indebted to many business executives, government officials, and scholars who commented, often critically, on various versions of the original Office of Technology Assessment reports as well as on the earlier drafts of this article, which were presented at the 1995 annual meetings of the International Studies Association and the American Political Science Association and at various university workshops. Special efforts were made by Alfred Chandler, Jonathan Crystal, Benjamin J. Cohen, Michael Donnelly, Kenneth Freeman, Lawrence Friedman, Robert Gilpin, William Greider, Peter Katzenstein, Stephen Krasner, Theodore Lowi, Michael Mastanduno, Helen Milner, John Odell, Alan Rugman, Richard Samuels, Harley Shaiken, Ulrike Schaede, Susan Strange, Raymond Vernon, and four anonymous reviewers, none of whom is responsible for the ® nal result. International Organization 51, 1, Winter 1997, pp. 1±30 r 1997 by The IO Foundation and the Massachusetts Institute of Technology

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as the ``Triad,’’ the foundations of corporate markets are not converging. Markets in this sense are not replacing political leadership and the necessity for negotiated adjustments among states.

Analytical context
The MNCÐ as empirical reality or as metaphor for the technological, ® nancial, and managerial sinews of convergence in the contemporary world economyÐ is central to a number of contemporary research programs in the ® elds of international relations and international political economy. One strand of that research involves specifying the forces fundamentally driving corporate behavior and reshaping the relationship between that behavior and government policy. Relying on the assumption that, at base, the logic of globally integrating markets ultimately drives corporate behavior, two important bodies of theory on the political implications of MNCs are now evolving. Although much more highly nuanced than their forebears in the 1960s and 1970s, recent studies within the liberal tradition suggest that increasingly mobile capital and the necessary responsiveness of ® rms to cross-national technological and ® nancial incentives are beginning to constrain even leading industrial states and their societies in broadly comparable ways.1 In complementary fashion, recent work in a more critical tradition explores the socioeconomic phenomenon of ``globalization’’ and generally supports the idea that a noose, woven in substantial part by the intensifying operations of MNCs, is tightening around the neck of traditional forms of national political organization.2 Only a small leap of imagination, a leap constantly made these days in scholarly circles, is necessary to draw central themes of these research programs together in the following terms. Important industrial sectors currently are in ferment. Multinational ® rms at the center of those sectors are de® ning their interests ever more clearly in a global context. As they pursue those interests, they themselves become more alike through their interaction in increasingly integrated markets. Across a widening range of industries, transnational or global forces are reshaping basic corporate structures.3 This is placing similar pressures on distinctive national institutions and policies. Consequent adaptations in those institutions and policies may not necessarily be ``liberal’’ in the classic sense of the term; they may, to the contrary, rationalize cartels and other antiliberal agglomerations of power. Nevertheless, deep structural convergence at the level of the ® rm is profoundly changing the political economy of the world. In light of the history of economic nationalism, liberals imply, this transformation is probably not a bad thing, but its associated costs should be better understood. In light of the history of capitalism, their critical interlocutors respond,
1. Milner and Keohane 1996, chap. 1. Compatible arguments are made in Milner 1988; Rogowski 1989; Frieden 1991; Goodman and Pauly 1993; and Andrews 1994. 2. See Group of Lisbon 1995, 68±77; Carnoy, Castells, and Cohen 1993, 4±5; Castells 1991; Barnet and Cavanagh 1994; and Gill 1995. 3. Cerny 1995, 621.

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this transformation may indeed be a bad thing for a substantial portion of the world’s population, but it is, in any case, inevitable. This article cuts into the middle of this stylized synthesis and explores the counterintuitive proposition that leading MNCs are not converging toward common patterns of behavior at their cores. In positive and more speci® c terms that lend themselves to comparative empirical testing, the proposition may be restated as follows: the institutional and ideological legacies of distinctive national histories continue signi® cantly to shape the core operations of multinational ® rms based in Germany, Japan, and the United States. If basic insights behind current liberal and critical research programs are plausible, empirically oriented analysts should be able to cast serious doubt on such a proposition by ® nding fairly unambiguous evidence of basic structural and strategic convergence inside multinational ® rms themselves. Using a different terminology in his magisterial Scale and Scope, Alfred Chandler sketched the rise before the 1940s of three fundamentally different kinds of industrial enterprise in Britain, Germany, and the United States.4 In his conclusion, he asked whether such national patterns endure. Our research was motivated by the desire to contribute to an answer and to raise new theoretical and policy questions concerning its implications. We acknowledge at the outset that tracing the causal arrowÐ between the legacies of distinctive national histories, the core structures of ® rms, important ® rm strategies, and speci® c governmental policies responding to or seeking to affect corporate behaviorÐ is not a simple matter. The empirical analysis of this article concentrates on the ® rst three items and on the linkages among them.5 This analysis convinces us that those linkages remain very strong. A related but theoretically distinct body of thought has a long pedigree in the realist literature on MNCs. Some twenty years ago, to cite the most prominent and in¯ uential example, Robert Gilpin related the global spread of American ® rms after 1945 to the security interests and international political dominance of the United States.6 U.S. Power and the Multinational Corporation represented a response to research that came to the fore in American academic circles from the 1960s onward, some of which left the impression of an impending split between corporations and the states that originally chartered them.7 In the aftermath of oil, currency, and debt crises in later years, analysis of state±® rm relations became more re® ned as states apparently returned to center stage.8 In Europe, meanwhile, a substantial body of research developed both on diverse host country reactions to multinational corporate expansion as well as on distinctions between American and British MNCs and their emerging Continental counterparts.9
4. Chandler 1990. Also see Chandler 1962, 1964, and 1977. 5. For an analysis of broad national structural variations that, unlike the present analysis, focuses on national and corporate competitiveness, see Porter 1990. 6. Gilpin 1975. Also see Hymer 1976 (based on a Ph.D. dissertation from 1960). 7. See Ball 1967; Cooper 1968; Morse 1970; Vernon 1971; Keohane and Nye 1972; and Wilkins 1974. 8. See Vernon 1977; Keohane and Nye 1977; Bergsten, Horst, and Moran 1978; Kudrle 1985; Robinson 1983; Ostry 1990; Dunning 1992a and 1992b; and Moran 1993. 9. See Dunning 1958; Servan-Schreiber 1967; Reddaway 1968; Turner 1970; Franko 1976; Stopford and Turner 1985; Hertner and Jones 1986; and van Tulder and Junne 1988.

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In¯ uenced by such work, research also commenced on the evolution of MNCs in Japan as well as in parts of the developing world.10 In the 1990s, the revival of the European Community’s single-market program stimulated new research in Europe. Although they noted behavioral discrepancies between European ® rms, these studies began to speculate about the emergence of new regional (as opposed to national or ``Anglo-Saxon’’ ) corporate identities.11 At the same time, U.S. scholars were again debating the question of whether the era of the global corporation, prematurely heralded in the 1960s, had ® nally arrived.12 The world had indeed changed a great deal since Gilpin’s 1975 book ® rst appeared.13 Systemic power had become more diffuse, and national economies had become much more open. At the same time, intra® rm trade was accelerating and cross-border direct and portfolio investments were mushrooming. In certain industrial sectors, such as pharmaceuticals, semiconductors, and telecommunications, cross-border mergers and acquisitions, strategic alliances, and trumpeted international redeployments of corporate resources suggested a qualitative change in the nature of multinational corporate behavior. Careful comparative business studies suggested that receding national divergences might still be important in industries characterized by ``regulated competition.’’ 14 In many industrial sectors, however, the global corporation seemed a caricature no more.15

Argument
This article takes a different position. Certainly ® rms must continuously adapt to dynamic markets in order to survive, and certainly that adaptation must now take place in a world where short-term capital is highly mobile and where certain technologies are changing quite rapidly. But we argue that the underlying nationality of the ® rm remains the vitally important determinant of the nature of its adaptation. That nationality is not necessarily given by the location of corporate headquarters or the addresses of principal shareholders, although it usually still is. More fundamentally, it is given by historical experience and the institutional and ideological legacies of that experience, both of which constitute the essential structures of states. Because of them, we hypothesize, there remain systematic and important national differences in the operations of MNCsÐ in their internal governance and long-term ® nancing, in their R&D activities, and in their intertwined investment and trading strategies. We chose these operations for analysis because they provide a window on the very core of the MNC. They shed light on how MNCs are ultimately controlled and on the nature of their basic funding; where they locate and how they maintain the critical
10. See Tsurumi 1983; Campbell and Burton 1994; Wells 1983; and Lall et al. 1983. 11. See Franko 1991; and Jones and Schro È ter 1993. 12. Associated debate came prominently into public view, for example, in Reich 1990 and Tyson 1991. 13. For his own later re¯ ections, see Gilpin 1987, chap. 6; and 1994. 14. Yoffie 1993. 15. The rising prominence of ® rms as political actors is highlighted by Stopford and Strange 1991; and Eden and Potter 1993.

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mass of their R&D operations; and how they manage the linkage between trade and investment as their international expansions proceed. Obviously, this is an ambitious agenda, especially within the con® nes of a short article. We nevertheless consider it important to take this initial step, especially in the context of the larger debates currently under way in the ® eld of international political economy. With regard to the ultimate political implications of multinational ® rms, empirical research has tended to focus on the more obvious aspects of their behavior: where they place production facilities, how they market their products, and how they use and deepen short-term ® nancial markets. Although the technical barriers to cross-disciplinary and broadly comparative analysis are daunting, scholars of politics must probe more deeply. In the end, our analysis supports the view that national structures remain decisive. For scholars interested in the broader implications of corporate behavior, they do not just ``matter.’’ In analytical terms, they retain their priority with respect to other factors currently reshaping the world of the modern corporation.16 The evidence we marshal below to test this argument strongly suggests that the domestic structures within which a ® rm initially develops leave a permanent imprint on its strategic behavior.17 To assess the extent to which we are really dealing with lagging indicators or something more fundamental, we adopt a theoretical stance more subtle than orthodox realism. Stephen Krasner recently captured some of this subtlety. When states are understood as institutional structures or polities, Krasner suggested, then the basic institutional structures of MNCs may be in¯ uenced or even determined by the characteristics of states. ``In this perspective, institutional structures, not actors, are the units of analysis.’’ 18 Our approach has much in common with this understanding, but we go two steps further. First, the institutions worth emphasizing in such a conceptualization should be seen as embodying durable ideologies that link states and ® rms in distinctive ways. Second, those institutions and ideologies may be viewed as dynamic, but they change much more slowly than the ® rm-level operations rooted within them. Although corporate activity is not simply a product of internal organizational logic, the dominant causal arrow in such an analysis runs from slowly changing national structures through corporate structures and strategies to the actual behavior of ® rms in the marketplace.19
16. Our argument and evidence are not incompatible with a constructivist theoretical agenda, but they do challenge scholars probing the connection between global economic transformation and political identity to make clearer distinctions among states. See Ruggie 1993. 17. Adapting a term from electromagnetics, economists label such a process of marking ``hysteresis,’’ by which they typically imply a lagging effect after a causal force has been removed. See Krugman 1986; and Grossman and Richardson 1985. Business analysts refer in the same way and with the same implication to ``corporate inertia’’ and ``path dependence.’’ Yoffie 1993, 17. Our argument and evidence raise strong doubts about the inevitable erosion of the effects of history. 18. Krasner 1996. Also see Sally 1994. 19. Philip Wellons’s study of international banking provides an example of the plausible outcome of such causal reasoning. In one of the most ``global’’ of industries, Wellons shows how banks from different home states do not behave alike in the face of similar opportunities and challenges. See Wellons 1987. Also see Wellons 1986; Biersteker 1987; Murtha and Lenway 1994; and Kapstein 1994.

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In essence, we modify what the theoretical literature of international political economy labels the domestic structures approach. The ideological dimension was not usually stressed in early theoretical work along these lines. We are not referring here, however, to what the older literature on MNCs called ``economic nationalism,’’ a concept that is too general to be of much analytical use. Adapting Emanuel Adler’ s terms, we see ideologies as providing broad orienting frameworks or belief systems that, when combined with national institutions, de® ne ``collective understandings’’ of roles, beliefs, expectations, and purposes. Richard Samuels, whose use of the term ``technonationalism’’ we adapt below in the Japanese case, provides an exemplary model of how ideology and institutions can be mutually constitutive and mutually reinforcing.20 Although such an approach can accommodate the fact that the core strategies and structures of corporations can and do change, it sees such developments as constrained by permissive changes in underlying institutional and ideological structures. The novelty of our analysis is to link such institutional and ideological structures not to governmental policy outcomes but to the most fundamental behavior of MNCs in a broadly comparative context. Where much related literature examines the in¯ uence of domestic structures on public-sector actors and policies, we probe their in¯ uence on the largest private-sector actors, actors that theorists of the internationalization/globalization phenomenon now commonly depict as increasingly autonomous. Our empirical analysis deliberately focuses on leading MNCs from leading states. Firms from small home markets, often viewed as harbingers of a truly global economy, have long had to demonstrate high levels of external adaptability. There is nothing new in Swiss companies compensating for a small home market by expanding externally. Among the ranks of the world’s largest public ® rms, however, the number of prominent ® rms from small home markets remains quite small. In terms of market valuation in 1995, Germany, Japan, and the United States accounted for seventy-® ve of the world’s top one hundred ® rms. Britain accounted for eleven, but no other country accounted for more than ® ve.21 Moreover, although some of our evidence draws on the larger industrial base of the European Union, we view the German base as distinctive enough and regionally dominant enough to be the central analog to the American and Japanese cases. Of Europe’s top one hundred ® rms, twenty-seven are German. They account for the largest share of European industrial production and sales, and, across key technology-intensive sectors, German ® rms hold a much largerÐ and risingÐ share of world production than ® rms based in any other European country.22

20. See, respectively, Katzenstein 1977; Adler 1987, 17; and Samuels 1994, 33±78. Other work in this tradition includes Krasner 1978; Zysman 1983; Gourevitch 1986; Hall 1986; Samuels 1987; Katzenstein 1984; Krauss and Reich 1992; Steinmo, Thelen, and Longstreth 1992; Hart 1992; Garrett and Lange 1995; Katzenstein 1996; and Markovits and Reich forthcoming. 21. Wall Street Journal, 2 October 1995, p. R32. 22. See Commission of the European Communities 1993, 27; and OECD 1994. Grieco 1990 employs a similar logic.

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National differences that condition corporate structures and strategies
TABL E 1 .

United States Political institutions

Germany

Japan Developmental democracy; strong bureaucracy; ``reciprocal consent’’ between state and ® rms

Liberal democracy; divided Social democracy; weak government; highly bureaucracy; corporatist organized interest groups organizational legacy

Economic institutions

Decentralized, open Organized markets; tiers of Guided, bifurcated, markets; unconcentrated, ® rms; bank-centered dif® cult-to-penetrate ¯ uid capital markets; capital markets; markets; bank-centered antitrust tradition universal banks; certain capital markets; tight cartelized markets business networks/cartels in declining industries Free enterprise liberalism Social partnership Technonationalism

Dominant economic ideology

In Table 1 we summarize the kinds of domestic structures in the United States, Germany, and Japan that we ® rst suspected might exert a signi® cant shaping in¯ uence on corporate behavior. Each of the structures is clearly an ideal type and can be unpacked. Indeed, a great deal of comparative research and contentious debate is devoted to just such a task.23 As it reminds us, hard and fast demarcation lines are difficult to draw in the real world. Nevertheless, a critical mass of that research now associates these labels with recognizably different and relatively enduring patterns of economic and political organization. It also provides a basis for the central inference guiding our own more limited study. The weight of the evidence presented below strongly suggests that the putative relationship between such domestic structures and core aspects of multinational corporate behavior is not spurious. It would obviously be simpleminded, however, to argue that one explanation captures the essential reality for all ® rms all of the time. The chemical industry, for example, is clearly subject to high transportation costs and particular hazards, which cannot help but in¯ uence some aspects of the behavior of all chemical companies regardless of nationality. Nevertheless, in basic corporate structures and strategies across a range of industrial sectors, striking differences of an aggregate nature remain. Market-led explanations, whether emphasizing the determinative force of product maturities, sectoral idiosyncrasies, or broad technological changes, are ultimately unsatisfying. The enduring institutional and ideological foundations within which leading ® rms remain most deeply embedded offer more plausible explanations.
23. See, for example, Berger and Dore 1996.

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Empirical evidence
To examine our central proposition we collected and analyzed a wide range of empirical evidence, including aggregate and sectoral statistical data, case studies, relevant secondary literature, and information culled from an series of con® dential interviews undertaken between 1992 and 1994 with senior executives from MNCs in Europe, Japan, and the United States. The following is a summary of our ® ndings. Corporate governance and ® nancing U.S. corporate managers are highly constrained by dynamic and deep capital markets; their Japanese counterparts are effectively bound by complex but reliable networks of domestic relationships; and the managers of German MNCs retain a relatively high degree of operational independence. The circumstances of individual ® rms vary, but across the board such differences re¯ ect the fact that corporations continue to govern themselves quite differently across the three home countries.24 Those differences persist and are re¯ ected in the varying priorities German, Japanese, and American MNCs assign to the maximization of shareholder value, to the autonomy of their managers, and to the stabilization of employer±employee relations. The term ``corporate governance’’ refers broadly to the rules and norms that guide the internal relationships among various ``stakeholders’’ in a business enterprise, including owners, directors, managers, creditors, suppliers, employees, and customers. For comparative purposes, our emphasis here is on the central relationships between the managers of a corporation and the owners of voting shares. Those relationships are intermediated by boards of directors and focused on respective rights and obligations that are either speci® ed in law or legitimated by long-standing custom and practice.25 They are the products of unique national histories. Since MNCs span a number of legal jurisdictions, their governance often seems more complicated than it is for local ® rms. The core internal structures of almost all MNCs are nevertheless still clearly associated with prevailing norms in the jurisdiction within which their head offices are located. It is here that we observe the most direct in¯ uence of deeper institutions and ideologies. Patterns of shareholding provide a starting point for understanding key differences. In the early 1990s, nearly 90 percent of the voting shares of publicly listed corporations in the United States were held by individual households, pension funds, and mutual funds. In Japan, that number was closer to 30 percent and in Germany closer to 15 percent. Conversely, banks held less than 1 percent of publicly listed shares in the United States but nearly 10 percent in Germany and 25 percent in Japan.
24. For accessible overviews of the issue, see Fukao 1995; and U.S. General Accounting Office 1993. 25. Inspired by Williamson 1988, much of the current and relevant analytical literature refers to the owners as ``principals’’ and the managers as ``agents.’’

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At the same time, non® nancial ® rms held a negligible number of such shares in the United States but 25 percent in Japan and nearly 40 percent in Germany.26 The dispersion and mobility of shareholders in the United States help to ® xate the managers of American corporations on short-term ® nancial performance, a ® xation that may ultimately bolster competitive strengths by forcing rapid adjustments.27 Over the long run, however, such imperatives can complicate life for ® rms that face direct competition in their home markets from rivals capable of longer-term planning because of their higher degree of insulation from capital market pressures. A few U.S. MNCs sometimes demonstrate similar capabilities but always within clear limits. The Ford Motor Company and MotorolaÐ both of which have long-term shareholders with signi® cant stakes derived from their original foundersÐ are two examples of such American companies. German and Japanese MNCs, however, continue to demonstrate a general capacity in this regard. As Jay Lorsch and Elizabeth McIver put it, ``In contrast to the United States’ primary focus on shareholder value, these other countries’ corporations are seen as durable national assets that serve a broad base of constituents. Quality products, market share, and employment are just as legitimate as goals as return on shareholder investment. While some US top managers and directors prefer this perspective themselves, they are swimming against the dominant national tide.’’ 28 More subtle differences in the character of relationships between banks and corporations also persist. In the United States, banks provide MNCs mainly with secondary ® nancing, cash management, selective advisory work, and various other ® nance-related services. The historical trend, moreover, has been for corporations to reduce their reliance on commercial bank ® nancing and to fund their long-term investments from retained earnings or directly from the capital markets. Conversely, in Germany and Japan and across leading industrial sectors, banks perform a steering function. This function has evolved considerably as national industrial development has proceeded but nevertheless remains important. Before the ® nancial bubble of the 1980s ® nally burst, commentators on Japan frequently argued that the centrality of banks was breaking down and that the long-term ® nancing operations of Japanese MNCs were converging toward the American norm. Despite considerable weakness in bank balance sheets, such a proposition looks less plausible today. In Germany, it looks even less plausible. In the United States, the ratio of bank loans to corporate ® nancial liabilities, a rough measure of the relative importance of banks in the ® nancing of corporations, fell into the 25±35 percent range from the early 1980s through the early 1990s. In both Germany and Japan, the comparable ratio stayed consistently in the 60±70 percent range. The numbers for bank deposits as a proportion of corporate ® nancial

26. Data are from Deutsche Bundesbank, Tokyo Stock Exchange, ProShare, and Federal Reserve Board, cited in Kester 1993. 27. Roe 1994. 28. Lorsch and McIver 1992. Also see Lorsch and McIver 1989.

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assets show similar levels of divergence.29 But such broad comparisons can oversimplify differences in deeper corporate structures. Throughout the postwar period and in various high-technology sectors, most notably in electronics and transportation systems, Japanese MNCs became famous for pursuing aggressive strategies keyed to market share, not return on investment. Even recently, for example, the U.S. market share of Japanese auto manufacturers barely budged from 1993 (22.8 percent) through 1995 (22.4 percent), despite remarkable shifts in the relative value of the yen.30 Probing the factors that continue to sustain this capacity has itself become something of a growth industry. Numerous studies have highlighted the linkage between such strategies and corporate governance and ® nancing structures back home. Those structures appear to facilitate the sharing of information and the management of business and ® nancial risks across allied ® rms in a manner that varies considerably from the American norm. Michael Porter encapsulated the distinction by labeling the Japanese system ``patient capital,’’ although it is unclear whether corporate owners or consumers constitute the more patient party. The distinction, however, is more complicated than the label implies.31 In Japanese MNCs, institutional cross-shareholding caps a complex system of corporate control. Large volumes of minority equity claims commonly are spread among lenders, customers, suppliers, and affiliates, and even small holdings can signify an important relationship. Despite some recent ¯ ux associated with an enormously wrenching economic restructuring, our research unearthed no evidence that such arrangements are now changing in a fundamental way. Indeed, in the course of an extensive series of interviews with senior corporate executives in Japan, we were repeatedly told that the reverse is true. A number of our interlocutors suggested, for example, that much of the widely reported turbulence experienced in the Japanese corporate equity market in the early 1990s re¯ ected the exceptional efforts of some shareholders, mainly troubled ® nancial institutions, to increase dividend ¯ ows at a time when the routine capital gains of the past could no longer be assured.32 Certainly, as Table 2 shows, within the largest Japanese corporate networks changes in cross-shareholding arrangements over the past decade have been marginal. Many of the executives we interviewed believed that successfully charting their way through the difficult 1990s depended on maintaining the essential structure of their equity bases and, more important, of the relationships thereby signi® ed. Moreover, the prospect of punishment for breaches in network solidarity clearly exists. Bankers as well as their corporate clients explained to us repeatedly that all members of industrial groups understood that any ® rm contemplating appreciable sales of shares in related banks or companies would elicit immediate retaliation. The

29. IMF 1992, 3. 30. New York Times, 2 February 1996, C6. 31. Porter et al. 1992. See also Orru, Hamilton, and Suzuki 1989; Prowse 1992; Kester 1992; Pauly 1994; Johnson, Tyson, and Zysman 1989; Gerlach 1992; Aoki and Patrick 1994; Tilton 1996; and Uriu 1996. 32. Con® dential interviews, Japan, 20 September±2 October 1993. Also see Lichtenberg and Pushner 1992.

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Average cross-shareholdings within major Japanese corporate networks, in percentagesa
TABL E 2 .

Mitsui 1980 1985 1988 1991 1992 1993 17.62 17.87 17.09 16.58 16.58 16.77

Mitsubishi 29.26 25.18 26.87 26.37 26.33 26.11

Sumitomo 26.74 25.01 24.42 24.67 24.65 24.45

Fuyo 16.26 15.79 15.29 15.62 15.62 14.90

Sanwa 16.78 16.84 16.38 16.67 16.72 16.41

DKB 14.12 13.33 12.24 12.16 12.19 11.92

a Average of the ratios of stocks in one member company owned by other companies within the group. These are the largest of the networks of affiliated companies characteristic of the Japanese industrial economy. Commonly referred to as keiretsu, they are more accurately called kigyo Å shu Å dan, or enterprise groups. These six groups cross a diversity of markets, and each has a trading company and/or major commercial bank at its center. The banks are now Sakura Bank (after the merger of Mitsui Bank and Taiyo Kobe Bank), Mitsubishi Bank of Tokyo, Sumitomo Bank, Fuji Bank, Sanwa Bank, and Dai Ichi Kangyo Bank. Source. Kigyo Å Keiretsu So Å ran 1987, 1990, 1993, and 1994. Tokyo: Toyo Keizai Shinposha.

consequent sense of responsibility for collectively managing difficult processes of restructuring within tight traditional constraints is palpable.33 Within Japan’s leading industrial groups, furthermore, and especially during periods of crisis, managers continue to be constrained effectively and directly by their bankers and by the ® rms to which they supply key components. Affiliates are crucial, and arm’ s-length relationships still are not the norm. Hopelessly weak affiliates tend to be quickly and quietly liquidated or merged. Even apparently informal supplier ties can be decisive in such instances. Obvious parallels exist in the case of Germany, although observers have often overemphasized the coordinating role of banks in the German industrial system. Especially in elite German MNCs, however, and most evidently during crises, the lead bank remains critically important. Although economists continue to debate the implications of this phenomenon and to underline the declining role of banks in small and medium-sized German ® rms, the evidence supporting its endurance in the largest and most outwardly oriented German ® rms remains convincing.34 The supervisory boards of German MNCs reinforce the functions of banks both directly and indirectly.35 Bankers hold nearly 10 percent of the seats on the supervisory boards of the one hundred largest industrial corporations in Germany. By contrast, insurance companies hold approximately 2 percent of the seats; trade
33. Also see Lincoln, Gerlach, and Takahashi 1992. 34. See Edwards and Fischer 1994; and Baums 1994. 35. See Wever and Allen 1993; Ziegler, Bender, and Biehler 1985; and Coleman 1994.

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unions, 12 percent; employees, 36 percent; other industries, 25 percent; individual investors, 10 percent; and governmental agencies, 5 percent.36 In the largest German corporations, however, the lead bank also provides the board chairman. Since three banks dominate the corporate ® nancing market, this means that many supervisory boards are interlocked. Underpinning such linkages are cross-shareholding arrangements, albeit to a lesser extent than in Japan. The bankers’ role is further enhanced by peculiarities of Germany’s proxy voting system, which in the case of MNCs often leaves banks effectively in control of over 50 percent of voting shares. Our interviews provided no support for the increasingly common view that the power of banks in corporate Germany is broken. Similarly, despite talk about bold American moves toward German-style universal banking, long-standing sensitivities concerning ® nancial concentration, a now-institutionalized decentralization and ``vesting’’ of particularistic interests in the ® nancial sector, and attendant difficulties in designing new risk-management techniques militate against deep-seated change in the U.S. system. For different reasons, we noted a similar reticence inside Japanese MNCs on the subject of fundamental change in patterns of corporate ® nancing. Prominent analysts commonly herald the dawn of a ``Darwinian’’ global contest among competing corporate systems. As Franklin Edwards and Robert Eisenbeis put it, ``Legal and institutional impediments that fail this test will cease to exist.’’ 37 In such a context, it is ironic that we did not ® nd evidence for, or credible expectations of, substantive convergence in core structures of corporate governance and basic ® nancing across Germany, Japan, and the United States. Research and development The world’s leading MNCs remain ® rmly rooted in distinctive national systems of innovation. Science and high technology±oriented American MNCs are somewhat more willing than others to invest in overseas R&D facilities, but on an annual basis such spending still represents less than 15 percent of their total R&D budgets. With an emphasis on the commercialization of production in technology-intensive sectors, Japanese ® rms conduct remarkably little R&D abroad, even in the United States where they have a very large production and sales presence. Mainly in certain sectors and in line with their own process-oriented traditions, German MNCs have made signi® cant R&D commitments in the United States but limited investments elsewhere outside of Germany. Across the board, the vast majority of corporate R&D spending abroad is employed in efforts to customize products for local markets or to gather knowledge for transfer back home. R&D sows the seeds for corporate futures. How much, how consistently, and where such activity takes place are therefore all vital questions, both for individual corporations and for the economies within which they operate. To move beyond the simpli® ed portrait painted by aggregate statistics, our analysis differentiated between
36. Based on data from the Federal Association of German Banks in Schneider Lenne  1994, 303. 37. Edwards and Eisenbeis 1992.

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basic activities and product customization facilities. Our ® ndings indicate that convergence of a sort is taking placeÐ but not the kind liberal analysts might anticipate. Leading ® rms from Germany, Japan, and the United States behave comparably in that they tend to maintain their basic R&D operations at home. Those operations comprise important building blocks for national systems of innovation that, though not completely autonomous or unchanging, do remain remarkably distinctive.38 Signi® cant variances are also re¯ ected in overall corporate spending patterns, in the nature of R&D facilities abroad, and in the willingness to transfer key technologies outside the home base. Differences in corporate R&D strategies have existed across the leading industrial states for many years. Japanese business spending on R&D as a percentage of gross domestic product (GDP), for example, rose rapidly throughout the 1980s and eclipsed that of the United States in 1989 before peaking in 1990 at 2.2 percent. Comparable U.S. spending fell consistently after peaking in 1985 at 2.1 percent, increased temporarily in 1991, and then resumed its pattern of decline. German ® rms, for their part, reduced their R&D spending precipitously in the late 1980s and early 1990s. At 1.7 percent of GDP in 1993, their spending was well below the levels registered by their Japanese and U.S. competitors.39 Beneath such statistics, other national patterns remained distinctive. In contrast to their U.S. counterparts, for example, Japanese chief executive officers typically note that when their ® rms are under duress, real cuts in R&D spending (as opposed to trimming back growth rates) are a last resort.40 They view only the avoidance of cuts in permanent employment as more important than maintaining R&D budgets. This is re¯ ected in relevant data. Before their widely noted troubles at the start of the 1990s, Japanese ® rms had increased their R&D spending by an average of 8 percent per year for an entire decade. Comparable ® gures for British, French, German, and U.S. ® rms were 1.6, 4.6, 3.9, and 3.9 percent, respectively.41 Sustained national differences are also re¯ ected in patterns of corporate R&D spending abroad. Even though an absolute increase in R&D spending by foreign MNCs in the United States occurred during the last decade, an increase that appeared to be partly related to acquisitions in such R&D-intensive sectors as chemicals, U.S. ® rms remained more likely than their competitors to conduct R&D abroad. Even in their case, however, the scale of expansion from a low base was modest. In 1982, R&D spending by majority-owned foreign affiliates of U.S. manufacturers accounted for 8.7 percent of total corporate R&D budgets. One decade later, that amount increased only to 12.7 percent, despite a 43.2 percent expansion in total corporate R&D budgets. In addition, the manufacturing R&D intensityÐ that is, R&D spending as a percentage of total salesÐ is much higher for American MNCs in their home-based operations than it is in their foreign subsidiaries. In the early 1990s,
38. See Nelson 1993; Lundvall 1992; and Mowery 1994. 39. OECD (DSTI) 1994±95. 40. Con® dential interviews with senior executives of Japanese MNCs, 20 September±2 October 1993, Japan. 41. U.S. Congress 1994, 62.

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1.80% ± 1.60% ± 1.40% ± 1.20% ± R&D/sales 1.00% ± 0.80% ± 0.60% ± 0.40% ± 0.20% ± 0.00% 1983 FIG URE 1 . 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 German affiliates French affiliates British affiliates Japanese affiliates All affiliates

Research and development (R&D) intensity of foreign affõ liates in the United States, 1983± 93
Source. U.S. Department of Commerce, Bureau of Economic Analysis, Foreign Direct Investment in the United States (Washington, D.C.: Department of Commerce, annual surveys).

U.S. manufacturers reported an average R&D intensity of 2.1 percent at home, while their foreign subsidiaries registered 0.8 percent.42 Figure 1 graphs the ratio of R&D spending to sales for foreign ® rms in the United States. As the ® gure shows, R&D intensity has not changed dramatically over the past decade, and national patterns are consistent. German affiliates in particular were much more likely to conduct R&D in the United States than were their Japanese counterparts. In part, foreign R&D intensity in the United States correlates with the sectoral location of incoming foreign direct investment. German ® rms, and European ® rms more generally, have tended to invest proportionately more in manufacturing facilities in such sectors as pharmaceuticals. Japanese ® rms, as discussed below, have focused on wholesaling operations. All things considered, the behavior of Japanese ® rms in the United States differs strikingly from their European counterparts. Figure 2 graphs the R&D intensity of
42. U.S. Congress 1994, 7.

MNCs

15

2.00% ± 1.80% ± 1.60% ± 1.40% ± 1.20% ± R&D/sales 1.00% ± 0.80% ± 0.60% ± 0.40% ± 0.20% ± 0.00% 1989 FIG URE 2 . 1990 1991

R&D intensity, Germany R&D intensity, France R&D intensity, Britain R&D intensity, Japan R&D intensity, all countries

1992

1993

Research and development (R&D) intensity of U.S. affõ liates in foreign markets, 1989± 93
Sources. U.S. Department of Commerce, Bureau of Economic Analysis, U.S. Direct Investment Abroad (Washington, D.C.: Department of Commerce, annual surveys); and U.S. Department of Commerce, Bureau of Economic Analysis, Survey of Current Business, August 1987±August 1995.

U.S. affiliates in foreign markets. Looking at the two ® gures, German ® rms in the United States most closely replicate the R&D patterns of U.S.-based ® rms in Germany. In this regard, the data suggest a notable reciprocal interaction between U.S. and German MNCs. Conversely, the lower R&D intensity of Japanese MNCs in the United States and its incommensurability with the behavior of U.S. MNCs in Japan suggest a notable lack of reciprocal interaction. In general, Japanese ® rms are the most reluctant to shift R&D activities abroad. While they formed by the early 1990s the largest national group of foreign investors in the United States (based on historical cost values), their U.S. operations had by far the lowest R&D intensities. Although historical cost analysis skews the comparison

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8Ð 7Ð 6Ð 5Ð 4Ð 3Ð 2Ð 1Ð u 0 FIG URE 3 . u u

· · · · · · · · ·

·
u

U.S Britain Japan Germany France

Exports/imports

·

·

·

u Ð

u Ð

u Ð

u Ð

u Ð

u Ð

u Ð

u Ð Ð

Ratio of technology exports to imports for selected countries, 1982± 93

Source. Organization for Economic Cooperation and Development, Main Science and Technology Indicators, Economic Analysis and Statistics Division Database, no. 1 (1994) and no. 1 (1995).

by in¯ ating the value of the relatively new investment of Japanese ® rms and de¯ ating the value of older European investment, the fact that the overwhelming proportion of all inward ¯ ows of foreign direct investment into the United States occurred after 1980 tends to limit this effect. The outcome, in any event, is also re¯ ected in aggregate data for R&D spending by manufacturing ® rms in the United States, which show Canadian affiliates in 1992 accounting for 19 percent, German affiliates for 16 percent (a comparable level to Swiss and British affiliates), and Japanese affiliates for 10 percent, despite their much larger market presence.43 Finally, MNCs based outside the United States also demonstrate a distinct tendency to limit the export of their core technological competencies. In the United States, conversely, technology exports are ® ve times the level of technology imports. As Figure 3 shows, Germany, Japan, and other industrial economies have long maintained a ratio of less than 1 to 1. MNCs provide the channel for much of the ¯ ow of technology abroad, mainly from parents to affiliates. In comparative terms, the aggregate data suggest that U.S. MNCs are much more active in this regard than their counterparts in other countries.
43. Calculated based on data in U.S. Department of Commerce 1994, table H-4.

Ð

Ð

MNCs

17

Investment and intra® rm trade The foreign direct investment strategies of U.S. MNCs are broadly based on and re¯ ective of the expectation of competitive inward ¯ ows. Moreover, those strategies incorporate a relatively high willingness to outsource key parts of production processes. American MNCs, in other words, rely much less than their rivals on intra® rm and intra-affiliate trading (hereafter referred to as IFT) strategies. The investment strategies of Japanese MNCs, by way of contrast, exhibit both a strong outward orientation from a home base that is secure from external challenge and a heavy reliance on intra® rm trade. German MNCs also exhibit an outward orientation in their investment strategies. That orientation is more selective than that of Japanese MNCs and re¯ ects a narrower industrial base. Like Japanese corporations, however, German ® rms rely quite heavily on IFT. In short, the external investment operations of German and Japanese ® rms tend to enhance the prospects for overall exports from their home bases, while comparable American operations tend to substitute for U.S. exports. Despite occasional ¯ uctuations, the United States has long been the favored destination for new foreign direct investment in¯ ows. In terms of outward ¯ ows, Japanese ® rms led all others during the latter years of the 1980s, but U.S. ® rms regained the leading position in 1991.44 Aggregate comparison, however, fails to capture the markedly diverse corporate strategies that underpinned those ¯ ows. Foreign investments undertaken by U.S. ® rms tend to be ``trade-displacing.’’ Their Japanese and, to a lesser but increasing extent, their German analogs tend to be ``trade-creating.’’ 45 In short, new overseas plants built by Japanese and increasingly by German MNCs tend to create conduits for increasing trade ¯ ows, speci® cally imports from their own home bases and affiliated networks.46 For this reason, analysts have convincingly argued that such investment should be understood as ``strategic.’’ 47 The hypothesis that Japanese and, to a lesser extent, German ® rms employ such a strategic approach is highly contentious, but aggregate statistical evidence continues to render it plausible. Across all of its manufacturing industries, for example, intra® rm exports as a percentage of total Japanese exports remained at about 40 percent from the late 1980s through the early 1990s.48 The issue can be examined more rigorously, however, by comparing the direct investment behavior of foreign affiliates in the United States with that of U.S.-based multinationals abroad. The reliability of direct comparisons of IFT on a national basis is, however, severely limited by the lack of comparability of national databases and the complete absence of other statistical data sources.
44. Data from OECD 1994. 45. The question of whether high-technology intra® rm trade will decrease as ® rms become more deeply embedded in advanced host economies is contentious. See Vernon 1966, 190±207; Dunning 1977; Wells 1972; Helleiner 1981; and U.S. Congress 1994, 144±48. 46. See Kojima 1978; and Gilpin 1989. 47. Encarnation 1992. Also see Lincoln 1990; and Encarnation and Mason 1990. 48. See MITI 1989, tables 1-19 to 1-24; and MITI 1991, tables 1-22 to 1-27.

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$120 ±

$100 ± Billions of U.S. dollars, historical cost Petroleum and other industries Services Real estate Finance Banking Wholesale trade Manufacturing

$80 ±

$60 ±

$40 ±

$20 ±

$0 1984 FIG URE 4 . 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994

Japan’s direct investment position in the United States, by sector,

1984± 94
Source. U.S. Department of Commerce, Bureau of Economic Analysis, Survey of Current Business, August 1987±August 1995.

We can avoid this difficulty by focusing on meaningful bilateral comparisons within the same data set, such as the behavior of foreign affiliates in the United States compared with that of U.S.-based MNCs abroad. In 1992, Japanese ® rms as a group became for the ® rst time the largest foreign investors in the United States. As Figure 4 shows, in a largely unrestricted environment the biggest proportion of this investment went into wholesaling facilities and distribution outlets. This stands in sharp contrast to the investment position of American MNCs in Japan, which is shown in Figure 5. U.S. MNC investment was heavily weighted toward manufacturing facilities. Moreover, as a percentage of total foreign direct investment in the United States, Japanese investment in wholesaling operations in the United States rose from 41 percent of total incoming foreign direct investment in 1985 to 50 percent in 1993.49 Many have argued that this emphasis on wholesaling operations re¯ ects the relative youth of Japanese investments in the U.S. market by the standards of European ® rms and that over time it will fall to European levels; but the disparity is enormous. As a percentage of total foreign direct investment in the United States, the wholesaling operations of German ® rms fell from 15 percent in 1985 to 10.5 percent in 1993,
49. U.S. Congress 1994, 118.

MNCs

19

$40 ±

$35 ± Billions of U.S. dollars, historical cost

$30 ± Petroleum and other industries Services Finance Banking Wholesale trade Manufacturing

$25 ±

$20 ±

$15 ±

$10 ±

$5 ±

$0 1984 FIG URE 5 . 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994

U.S. direct investment position in Japan, by sector, 1987± 94

Source. U.S. Department of Commerce, Bureau of Economic Analysis, Survey of Current Business, August 1987±August 1996.

while comparable ® gures for British ® rms were 13.9 and 9.9 percent, and for French ® rms 1.5 and 2.7 percent, respectively. The intra® rm trading operations of Japanese ® rms in the United States also continued to grow during the 1990s in relative terms. By the end of the 1980s, for example, IFT imports in the U.S. automobile sector accounted for an estimated 40±50 percent of all imports. Between 1988 and 1990, the value of intra® rm imports by Japanese auto affiliates in the United States tripled to $4 billion. This represented an increase from 75 to 95 percent of total intra® rm imports in this sector.50 Japanese auto executives expected this level to drop as their suppliers moved their own operations to the United States, although this drop was likely to be due to the replacement of direct IFT imports with indirect imports through traditional affiliated networks.51 In 1993, affiliated companies accounted for 43 percent of all suppliers to Japanese auto transplants in the United States.52
50. OECD 1993, 20. 51. Con® dential interviews with senior executives of Japanese MNCs, 20 September±2 October 1993, Japan. 52. U.S. Congress 1994, 147.

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Foreign content of intermediate goods purchased by foreign affõ liates in the United States, by sector and country, 1990 and 1991
TABL E 3 .

All countries 1990 All industries All manufacturing Chemicals and allied products Primary and fabricated metals Nonelectrical machinery Electric and electronic equipment Motor vehicles and equipment Wholesale trade
a

France 1990 12.1 17.3 9.6 7.3 NAa NA NA 11.6 1991 10.7 16.2 9.5 6.9 20.3 37.5 NA 12.1

Germany 1990 21.6 21.4 18.4 20.0 25.9 43.7 NA 39.9 1991 19.9 20.9 18.5 21.4 25.5 39.2 NA 39.6

Japan 1990 30.2 28.4 5.1 6.6 48.5 41.4 49.3 34.6 1991 31.7 28.0 7.2 5.9 45.3 38.1 52.8 38.3

Great Britain 1990 9.6 9.4 11.6 7.2 12.9 11.3 NA 15.3 1991 9.2 10.0 13.2 7.3 9.5 14.3 NA 12.2

1991 19.6 17.3 13.2 14.1 30.4 28.6 45.1 33.9

19.4 16.7 12.1 14.0 31.0 30.7 40.4 32.3

NA 5 data unavailable (suppressed to avoid disclosure of individual companies’ data). Source. Adapted from U.S. Department of Commerce, Bureau of Economic Analysis, Survey of Current Business, October 1993, 64, table 10.

Is such a pattern con® ned to the automobile industry? Alternatively, is it a product of anomalies in statistical databases? Examining variations in the foreign content of intermediate goods purchased by foreign affiliates in the United States across differing sectors addresses such questions and, as Table 3 shows, indicates that indeed a pattern does exist. In this respect, not only Japanese but also German affiliates differ markedly from other major investors in the United States.53 While the Japanese behavior generates considerable, if not always publicly expressed, antipathy among American corporate executives, the German behavior does not. The reason seems to be that the bilateral U.S.±German relationship is widely perceived to be more or less balanced in key industries. Together with starkly divergent patterns of reliance on IFT by Japanese and German ® rms, such data suggest the importance not of investment maturity or governmental policies on the receiving end, but of purposive corporate strategies. As for the quite exceptional nature of the Japanese data, the overall emphasis of Japanese affiliates in the United States on IFT and wholesaling may help to explain
53. Con® dential interviews with senior executives and government officials in Germany and the United States, 1±12 November 1993 and February±April 1994, respectively.

MNCs

21

$20 Ð

0 Ð u Billions of chained 1992 U.S. dollars $±20 Ð

· · · · · · · · · · · · ·
u u u u u u u u u u u

u

$±40 Ð

$±60 Ð

·
Ð

u

$±80 Ð

France Britain Germany Japan All countries
Ð Ð Ð Ð Ð Ð Ð Ð Ð Ð Ð

$±100 1981 FIG URE 6 .

1982

1983 1984

1985

1986

1987

1988

1989

1990 1991

1992

1993

Merchandise trade balance of foreign affõ liates in the United States, by nationality of ownership, 1981± 93
Sources. U.S. Department of Commerce, Bureau of Economic Analysis, Foreign Direct Investment in the United States, table G-7/H-7 (Washington, D.C.: Department of Commerce, annual surveys); and U.S. Department of Commerce, Bureau of Economic Analysis, Survey of Current Business, October 1993.

the fact that they are alone among foreign investors in Europe and the United States in their strong preference for establishing new ® rms rather than acquiring existing ones.54 Some observers expected Japanese affiliates in the United States to begin reexporting from their new manufacturing facilities as they matured, but experience has confounded that expectation. The percentage of exports from Japanese affiliates as a proportion of their total sales actually fellÐ from over 12 percent in the early 1980s to approximately 6 percent in 1988 before rising marginally from that level in the early 1990s. Over the same period, IFT as a percentage of the value of all Japanese exports to the United States across all industries rose from 20 percent to over 50 percent.55 Again, as Figure 6 displays, this pattern contrasts markedly with the collective behavior of MNCs from other major industrial countries in the United States, with the partial exception of those from Germany.

54. Yamawaki 1994, table 3-3, 97. 55. MITI 1989, tables 1-19 to 1-24; MITI 1991, table 1-11 and 1-22 to 1-27; and MITI 1993, table 2-16.

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International Organization

More broadly, since much of the aggregate ¯ ow of world imports and exports now occurs through intra® rm and affiliated networks, IFT constitutes a much higher proportion of bilateral ¯ ows between the United States and Japan than between the United States and Europe. Between 1983 and 1992, IFT accounted for an average of 70 percent of all U.S.-Japanese merchandise trade each year, compared with 43 percent of U.S.±European trade. Furthermore, over that same period and regardless of the direction of ¯ ow, Japanese MNCs accounted for fully 93 percent of IFT between Japan and the United States. In the end, the evidence suggests that IFT accounts for an overwhelming percentage of all U.S. imports from Japan and that Japanese ® rms control almost all of it. In contrast, and notwithstanding the fact that German ® rms tend to behave more like Japanese ® rms when it comes to intra® rm and affiliated trade, U.S.±European IFT is much more balanced in the aggregate.56 Counterpressures are widely reported to be building on both Japanese and German ® rms that will reduce their ability to use overseas operations as conduits for exports from their own facilities or from long-standing networks of suppliers in their home bases. Fluctuating currencies and domestic labor costs frequently are mentioned in this regard. Although anecdotes abound, we found little hard evidence of fundamental shifts in the overseas investment and trading strategies of American, German, and Japanese MNCs.

Conclusion
This article examined evidence on the question of structural and strategic convergence at the cores of leading MNCs across the Triad. In contrast to liberal or critical theories, which lead to credible expectations that the fundamental structures and strategies of multinational ® rms are converging in meaningful ways, we sketched remarkably enduring divergence across Germany, Japan, and the United States in patterns of internal governance and long-term ® nancing. We also identi® ed a tendency for MNCs based in those countries to maintain an overwhelming share of their R&D spending at home, and we noted stark national differences in willingness to export new technology from the home base. Finally, we found divergence along national lines in the strategic linkages ® rms construct between their overseas investments and their intra® rm and intra-affiliate trading activities: Japanese and, to a lesser extent, German ® rms lie on one end of the spectrum and American (and British) ® rms on the other. Table 4 brie¯ y summarizes the most important patterns in the evidence. Set out in this schematic fashion, none of these patterns will come as a surprise to students of comparative business history. But their endurance into the 1990s does raise important questions for students of international political economy in light of contemporary debates on the causes and consequences of deepening cross-national economic integration. Our analysis supports the view that recognizable and patterned
56. U.S. Congress 1994, 136±37.

MNCs

23

TABL E 4 .

Multinational corporate structures and strategies

United States Direct investment Extensive inward and outward Intra® rm trade Research and development Corporate governance Moderate Fluctuating; diversi® ed; innovation oriented

Germany Selective/outward orientation Higher Narrow base/process, diffusion orientation

Japan Extensive outward; limited competition from inward Very high High, steady growth; hightechnology and process orientation

Short-term shareholding; Managerial autonomy Stable shareholders; netmanagers highly conexcept during crises; no work-constrained manstrained by capital martakeover risk; conservaagers; takeover risk only kets; risk-seeking, ® nantive, long-term strategies within network/aggrescial-centered strategies sive market share±centered strategies Diversi® ed, global funding; Concentrated, regional highly price sensitive funding; limited price sensitivity Concentrated, national funding; low price sensitivity

Corporate ® nancing

differences persist in the behavior of leading MNCs. The precise nature of those differences in turn suggests that we not rule out as an explanation what is popularly termed corporate ``nationality.’’ Even when other possible in¯ uences on corporate behavior (for example, governmental policy on incoming foreign direct investment) provide identical background conditions, striking differences appearÐ most commonly along national lines.57 In sum, the correlation between these patterns of corporate behavior and the domestic structures outlined earlier in this article is not likely to be spurious.58 Recall our orienting proposition on the link between basic domestic structures in the home base and core aspects of ® rm behavior. The evidence surveyed suggests a logical chain that begins deep in the idiosyncratic national histories that lie behind durable domestic institutions and ideologies and extends directly to structures of corporate governance and long-term corporate ® nancing. Those structures in turn appear plausibly linked to continuing diversity in the corporate foundations of national innovation systems and in the varying linkages between foreign direct investment and IFT strategies. Of course, the evidence only supports the claim of a causal link; it does not prove it. The evidence, however, comes from an examination of the three leading home states of contemporary MNCs and of a range of key industrial sectors. Additionally, we have examined core aspects of ® rm behavior in a comparative light. We conclude
57. For analysis of how domestic institutions in¯ uence and channel ® rm demands in the face of incoming foreign direct investment, see Crystal 1995. 58. Keller et al. forthcoming.

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International Organization

that a modi® ed domestic structures approach provides a better ® t for the patterns identi® ed in the data than do alternative approaches, which draw their understanding of multinational corporate behavior from the relevant liberal, critical, or realist literatures sketched above. Neither liberal nor critical alternatives lead one to expect the persistent divergence found at the ® rm level. A straightforward realist alternative would miss important variations in the degree of that divergence and, with its traditional emphasis on central policymaking authorities, could easily lead to a misunderstanding of what that divergence means. Consider several counterarguments. On the basis of the evidence, the contention that the particular mores evident in Japanese corporate technology development programs are becoming disconnected from the stabilizing in¯ uence of cross-held corporate equity bases and broader networks of managerial accountability in Japan seems implausible. Equally implausible is the argument that the investment behavior of German ® rms is becoming unhinged from the security provided by dominant banks back home. Finally, we consider it unlikely that the slightly more global behavior exhibited by U.S. ® rms in both their R&D and investment strategies is not related to deliberate efforts to compensate for the peculiarities of their highly dynamic and periodically unstable ® nancial foundations. In sum, we surmise that the behavior we have surveyed divides into three distinctive syndromes. Moreover, because the general lines of demarcation may credibly be labeled ``national,’’ the proposition that those syndromes are durably nested in broader domestic institutional and ideological structures cannot easily be dismissed. Such a conceptualization, we believe, is more precise and more useful in focusing further research than the much more amorphous concept of culture, which has been cited in recent work on the putative emergence of three increasingly integrated regional blocs.59 At a time when many observers emphasize the importance of cross-border strategic alliances, regional business networks, and stock offerings on foreign exchangesÐ all suggestive of a blurring of corporate nationalitiesÐ our ® ndings underline, for example, the durability of German ® nancial control systems, the historical drive behind Japanese technology development through tight corporate networks, and the very different time horizons that lie behind American, German, and Japanese corporate planning. The gulf between nationally diverse domestic structures may narrow in the future, but we cannot count on leading MNCs to drive such a process. Pending further research, our own answer to Chandler’s questionÐwhether differences like those sketched in Scale and Scope endureÐ must be in the affirmative. We have found little evidence to support the opposite view, namely, that such core patterns are inevitably eroding as a fully integrated global system of industrial enterprise and innovation emerges. The implications of our analysis are diverse, but four deserve to be highlighted here. First, since multinational ® rms are key actors in the development and diffusion of new technologies, their national rootedness appears to remain a vital determinant
59. For example, see Rugman 1993.

MNCs

25

of where future innovation takes place.60 In this regard, the main danger for political and economic theorists is not underestimating the impact of technological change but extrapolating the future on the basis of atypical industrial sectors or anodyne exceptions drawn from the experiences of a few large ® rms from small states, where the size of home markets and the limitations of local resources have long required externally oriented strategies. Second, the globalization template upon which much current theoretical and policy debate rests remains quite weak. German, Japanese, and U.S. corporations insert themselves into the home markets of their rivals, albeit with varying degrees of success. They then appear to adapt themselves at the margins but not much at the core. To the extent that fundamental differences in corporate structure and strategy create sanctuary markets or other difficult-to-surmount advantages, pressures will likely build from within corporations themselves for countervailing governmental responses. In Germany and Japan, for example, we consistently heard corporate decision makers heap derision on the idea that key technologies could ever be left to develop in markets organized around straightforward ``laissez-faire’’ principles. Our evidence suggests further that the increasingly common idea, that mobile corporations are ``arbitraging’’ diverse national structures and forcing deep structural convergence across diverse societies, is chimerical. Convergence may be apparent at the level of popular culture and perhaps not coincidentally in the sales reports and marketing campaigns of MNCs; but below the surface, where the roots of leading MNCs remain lodged, our research suggests durable sources of resistance. It also suggests the need for deeper analysis of the foundations of such apparently global markets as the oft-cited capital markets that link the interests of multinational intermediaries and their corporate clients.61 Third, and following on this latter point, our analysis is relevant to the growing debate over whether markets or, more precisely, huge sprawling commercial hierarchies are replacing states as allocators of public values. Our evidence does not speak directly to this debate, but it does imply that for leading societies any such shift is primarily an internal matter. To put the matter bluntly, power, as distinct from legitimate authority, may indeed be shifting within those societies, but it is not obviously shifting away from them and into the boardrooms of supranational business enterprises. Some of those societies may be structurally better equipped than others to deal with the consequences of internal power shifts. But none need to accept the now-conventional corporate line that such shifts are inevitable global phenomena. If certain domestic structures in leading societies are evolving in such a way as to render constraining corporate power more difficult, they should be adjusted internally. The situation would seem quite different, however, for societies not in possession of a large, diversi® ed, and rooted industrial base. From their point of view, power may indeed be shifting in the direction of a few leading states and increasingly concentrated commercial hierarchies embedded in those states. Such
60. See David 1985; Krugman 1991; and Schwartz 1994. 61. See Cohen 1996; and Pauly forthcoming.

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International Organization

perceptions may help explain the apparently increasing efforts of many smaller states to negotiate adjustments and seek redress through multilateral institutions. Finally, our reading of analytical literatures relevant to the contemporary study of multinational corporate behavior, together with our own initial empirical examination, leads us to conclude that further comparative elaboration and testing of a domestic structures approach to international theory at the level of the ® rm is worthwhile. At the center of important analytical and policy debates related to the themes of this article is the seminal work of American and British scholars, studying American and British ® rms, writing for American and British audiences, and exporting conclusions packaged as deductive theories to the rest of the world. The actual experiences of ® rms based in Germany and Japan, not to mention other industrialized and industrializing countries, are worthy of much deeper study as we try to understand the causes and consequences of multinational corporate behavior.

References
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