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Chapter 10
FORDISM AND AFTER
(Fran Tonkiss)

Within the wider debates over globalisation, issues of ‘production’ play

a pivotal role. Key features of production include the dispersal of
industrial processes across international space, growth and economic
clout of multinational corporations and the increasingly immaterial
character of production based on knowledge. Within this context,
Fordism emerged as a system of production and had larger implications
on social and economic life.

A. Fordism – Concept and Features

According to David Harvey, Fordism started a mode of industrial
organization in 1914 when Henry Ford introduced the eight-hour,
five-dollar day for workers on his new car assembly line in
Michigan and produced Model-T car. This instituted in one move
the mechanized production of standard goods, a routinised labour
process and a set working day. The following are the main features
of Fordism as a concept:

 Mechanised Production: The assembly line signaled the

replacement of craft production in workshops with automated and
mechanized production on the factory floor. Piore and Sabel called
it the ‘first industrial divide’, as large scale production displaced
small-scale, more specialized and decentralized enterprises.

 Changes in Labour Processes: The shift to assembly line led to

changes in labour processes – the technical division of labour
simplified and routinised work, as the production process was
broken down into its parts and distributed among a number of
workers. This allowed for greater specialization and scientific
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management and made workers more productive. Michael Aglietta

analyses this effect as a shift from the production of ‘absolute
surplus value’ extracted via lower wages and longer working hours
to ‘relative surplus value’ achieved by increasing labour
productivity.

 Standardised Products on a mass scale: Mechanisation also

allowed for production of standardised goods on an expanding
scale, especially consumer goods. This was the basis for achieving
economies of scale; high volume production at low unit costs.
More than this, Ford integrated transport and distribution
functions under the direct management of the plant, economising
on overall production costs. Fordism thus refers not simply to
what happens inside the factory, but to the larger setting of work,
consumption and the socialisation of both workers and
consumers. Ford used the combination of force and persuasion
and employed mainly non-unionised immigrant labour.

 Spread of Fordism in the post-war period: In the post war

period, this model of mass production became more widely
generalised. The Fordist emphasis on efficiency, rationalisation
and productivity turned out to be well suited to growth industries
of the reconstruction - ship-building etc. Secondly, the stable
context of post war growth allowed for a brokered settlement
between capital and labour. In general, Fordist systems of
production proved compatible with a range of state and social
forms.

Fordist wage settlement was crucial to the larger stability of the socio
economic system. Fordism was after all, a mode of mass production
which depended on patterns of mass consumption. The Fordist wage
settlement rested on decent earnings for semi-skilled industrial workers.
This led to the emergence of a Fordist commodity aesthetic, where mass
production both fuels and in turn is fuelled by mass consumption.

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 Views of French Regulation School: The French Regulation

School provides an important reference for wider approaches to
capitalist restructuring within an inter-disciplinary framework. The
basic question asked is ‘How is it that capitalist economies, in spite
of their in-built contradictions and crisis tendencies are able to
reproduce themselves in a fairly stable way over extended periods?’
The answer is that this durability and resilience stems from the
following major aspects.

 Regime of Accumulation
The relative durability comes from the way that a complex of
production, distribution, exchange and consumption process hold
together as a regime of accumulation. Fordism is an example of
such a system which analyses things not only in terms of how they
are produced or how money gets made, but in the wider context of
economic life – in ordering practices and relations of work,
distribution and consumption.
 Mode of Regulation
The term describes the institutional setting of the government, law
and politics which underpins a given regime of accumulation. It
provides the formal regulatory framework within which capitalist
processes operate, as well as the political settlement between
different classes.
 Societal Paradigm
Certain theorists use the concept – ‘the social paradigm’ to refer to
the underlying social contract or mode of organization of social life.
This shapes social arrangement and identities beyond the
economic field.
Thus, ‘regime of accumulation, mode of regulation and societal
paradigm’ point to the way that the economy, politics and society
are integrated around a particular mode of capitalist development.

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B. The crisis of Fordism

External and internal pressures around mid-1970s led to the
appearance of cracks in the Fordist machine. A number of factors
were responsible.
» Economic relations became increasingly internationalized
from the early 1970s. While Fordism was based on the
system of production for domestic markets, the appearance
of transnational production arrangements with the advent
of multinational corporations upset the apple cart. It marked
a break between domestic production and domestic
consumption as imported goods became more available and
more attractive to consumer markets.
» There was also rise of new economic competitors – initially
West Germany and Japan followed by newly industrializing
economies of Southeast Asia. The entry of these players
transformed the export system to which Fordist economies
were accustomed.
» As incomes grew, demand became more heterogeneous and
standardization of goods became a bane rather than a boon.
People started preferring something different while only
black coloured cars were being produced by Henry Ford.
» Economic problems compounded when increasing
computerization and use of robotics along assembly lines
reduced the demand for workers to a great extent and led to
unemployment. This led to falling consumer demand and a
breaking up of the virtuous circuit of mass production and
consumption.

C. After Fordism
Piore and Sabel in their analysis of times after Fordism called it the
‘second industrial divide’, marking the move away from large scale
manufacture towards more flexible techniques of production. This
occurred in the 1960s and is termed as the shift to ‘neo-Fordism’ of
‘flexible specialization’. Production and labour became more

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responsive to changing condition of both supply and demand

geared to greater product diversity and ongoing innovation. Cost-
efficiency through economies of scale now gave way to more
flexible economies of scope. The following table neatly summarizes
the shifts.

FORDISM POST-FORDISM
Changes in production and labour
processes
- mass production - flexible or batch production
- standardized products - diversified products
- assembly line production - computer-controlled
Fordism was largely production
characterized by low diversity A more dispersed assembly line
and high volume production and had the potential to redistribute
rigidly structured firms. economic power. Flexible
specialization had the capacity
to increase workers’ skill levels
and offer them greater
autonomy over the labour
process.
Shifts in the spatial organization
of economic activity
-heavy (smokestack) industry - clean technology
-corporate hierarchies - horizontal networks
-semi skilled worker - polarization of skills
- focus on production of goods - Services like finance, research,
property became important.
Crisis in Fordism led to decline of The post-Fordist economic
industrial clusters like the geographies appear quite
Midwest rustbelt of US, the Ruhr diverse including advanced
in Germany etc. technopoles like Silicon Valley.
These models have horizontal
integration of firms, emphasis on
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skill and innovation and

competitive advantages arising
from co-location and economic
and social networks.
New patterns of consumption
-national economy - international economy
-industrial centres - new industrial districts
-mass consumption -differentiated markets
Fordist production was geared Post-fordist production focused
towards undifferentiated on customization of products
consumer markets and based on and differentiation of the market
uniform consumer preferences. If on the basis of a complex of
at all some product consumer practices, elective
differentiation was attempted it identities and cultural
was on the basis of standard associations – distinct life styles,
demographic variables like age, identities or market niches.
income, occupation, gender and
region.

D. Post-Fordist problems
The post-fordist problems are mainly analytical in nature that
raises critical questions concerning the application of Fordism to
contemporary economic conditions.

1. Production
The first issue is the primacy given to production in
accounting for socioeconomic change. Harvey believes that
it highly underplays the role of ever more flexible finance
capital in driving economic changes and overlooks the
extent to which the dispersal and reintegration of
production and exchange processes have been premised on
the idea of mobile money. It is not only ‘products and
production’ but workers that have become flexible.

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2. Labour Flexibility
The notion is open to contrary interpretations. Piore and
Sabel viewed the second industrial divide as potentially
reversing the centralisation and concentration of economic
power that marked the high modern period of industrial
production. In contrast, Fordism tried to forge a psycho-
physical nexus of developing automatic and mechanical
attitudes.
However flexibility can be interpreted in another way also.
When applied to labour, it implies casualisation and
weakened job security, heightened surveillance, lack of
control over or expertise within the labour process, erratic
hours and constant deadlines.
3. The issue of exploitation
At the same time, Fordisation in service sectors are
replicated in the growing outsourcing of routine service
work to developing economies where labour and other
costs were lower. However, this has led to exploitation of
labour in these countries where labour laws are not
stringent and Fordist mass production systems are able to
exploit extremely vulnerable women’s labour power under
conditions of extremely low pay and negligible job security.
Trigila calls this phenomenon as that of the ‘high’ and the
‘low’ road to flexibility where the high-tech worker in Silicon
Valley and the sweated worker in an off-shore factory exist
side by side.

Questions
1. What are the factors on the basis of which fordism and post
fordism modes differ on aspects of production, consumption
and organization of economic activity?
2. What is Fordism? In what sense does Fordism appear less as a
mere system of mass production and more as a total way of
life?

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Chapter 11
POST-FORDISM
(Ash Amin)

The post Fordist debate centres about the question of capitalism’s

future, its dynamics and its survival. It is a debate which gains fresh
impetus during periods of uncertainty and transition. The reading
summarizes three contrasting Post-Fordist perspectives and analyses
them in terms of their continued relevance in the current phase of
capitalist development.

1. NEO-SCHUMPETERIAN PERSPECTIVE

This perspective basically focuses on the role of technology and gale of

creative destruction in unleashing techno-economic paradigms causing
quantum leaps in industrial productivity. This is based on the Kondratiev
waves or K-waves theory which professes that supercycles are
phenomena in the modern capitalist world economy. Averaging fifty

years, the cycles consist of alternating periods between high sectoral

growth and periods of relatively slow growth.

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This view has been advanced by Freeman and Perez. According to this
view, the systemic nature of technological revolutions gives rise to the
notion of ‘techno-economic paradigms’ – qualitative changes in
capitalist production which usher in completely new worlds of work and
standards of efficiency, models for management, locational patterns,
new high growth sectors etc. Each techno-economic paradigm hinges on
a crucial input which plays a steering role:
a) Low and rapidly falling relative cost
b) Unlimited supply for all practical purposes
c) Potential all-pervasiveness in the production sphere (meaning
lots of backward and forward linkages)
d) Capacity to reduce costs and change quality of capital
equipment, labour inputs and other inputs to the system.
In this context, already four Kondratiev waves as shown in the
figure have already taken place – those steered by innovations
like steam engine, railways, electric equipment and
petrochemicals. Now, the post-fordist period is seen in terms of
the fifth Kondratiev wave steered by Information Technology
Revolution.

CRITICISM
However, this view is criticised on grounds of courting an excessive
degree of technological determinism. There is a predominant tendency
within the theory to accord a lot of importance to technology as a
dominant factor, while neglecting the socio-economic and institutional
system. This is essential a reflection of pre-existing reticence within the
Neo-Schumpeterian perspective to deal with social relations in general.
Tangible technologies have been given undue precedence over the less
palpable forces shaping economy and society.

Counter-example for N-S perspective

The Toyota paradigm in Japan is seen as that of ‘autonomation’ –
automation with a human mind. Japanese industry saw quantum leaps
in productivity. However it is extremely difficult to explain these

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advances in the neo-Schumpeterian sense. The reason is that Japanese

car production has been conceived to have more in common with the
running of a super market than the launching of a space rocket. There is
no inherent superior technology that is driving productivity here, but a
social innovation and managerial advance – ability to assure quality,
flexibility and continuity in production.

The basic aim of autonomation is an automatic control of defects

making it impossible for defective parts to pass unnoticed along the
production line. One example of the same is a spot welding station,
where a counter records the number of welds automatically and sounds
a buzzer if there is discrepancy between the numbers it has counted
and the number required. Therefore, in Toyota’s autonomated factories
smooth, faultless and flexible production is not typically guided by
advanced computer systems, but human discretion aided by an assorted
collection of buzzers and beams, multicoloured lights etc.

This example makes us conclude that allocating social innovations a

central role in the processes of technological change connected with the
post Fordist era means rejecting the neo-Schumpeterian preoccupation
with microelectronics as a key factor playing a ‘steering role’. Focus on
social innovations largely neutralises the hard and narrow technological
determinism view.

2. NEO-SMITHIAN PERSPECTIVE

This view has been advanced by Piore and Sabel who label the Post-
Fordist era as the ‘second industrial divide’. It is a new ‘branching point’
– a brief interlude of openness before the new technological trajectory
is established. Although P & S also take up the notion of technological
paradigms, but the emphasis is more on social innovation than on
technology. According to the theory, many competing technologies
inhabit the techno-economic landscape; it is the political forces and
exercises of economic power that decree which technological trajectory

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is to be followed. This is then overpowered by the emphasis on the twin

terms of ‘market forces’ and ‘market power’. However, this is subject to
criticism on grounds of advancing market determinism.

To understand the post-Fordist stance, we need to understand the

theory of industrial divides and dualism which explains the Fordist era. It
has been observed that a series of dichotomies exist spanning different
economic systems which include:
1. The dichotomy between a large, monopolistic sector and a
small, competitive sector
2. Between formal and informal sectors
3. Between high wage workers and low wage workers
The analysis of this dualism requires a move away from the basic tenets
of neo-classical economics to the realm of classical political economy
advanced by Adam Smith. This dualism can be largely explained in terms
of differing technologies. In the neo-classical analysis, technology is
treated as exogenous. However, Smith accounts for the development of
productive forces based on two postulates:
1. Productivity has a positive relation with the Division of Labour.
This is based on the following rationales:
a) Dexterity of workers increases as small number
of tasks lead to greater concentration
b) Time is saved as moving between tasks is made
unnecessary
c) There exist more opportunities for
improvements by concentrating on single tasks.
Division of labour is limited by extent of the market.
Thus both the postulates in totality imply that economic
progress is a matter of expanding markets and dividing labour.

2. The second postulate means that the division of labour rests on

the anticipation of the number of items produced and sold. If
the market for an item is small, the opportunities for an
extended DOL will be curtailed, if the market is large, the

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opportunities will be greater. The optimal market size will be

one that allows each worker to be fully employed executing a
single task. This ‘prefigurative’ (predictive) influence of the
market can be understood in terms of three crucial elements:
1. Standardization of output; that the reduction of complex
products to standardized parts greatly facilitates the
division of labour
2. Stability of market demand; that stability promotes
larger level of output and greater division of labour.
Instability, on the contrary promotes periodic
unemployment of capital which deters division of labour.
3. Uncertainty of market demand; in the face of instability
of demand, production schedules CAN be stabilized and
economies of divisibility realised however, inventory
investment will be discouraged when fluctuations are
unpredictable.

Thus, Piore provides a basis for explanation of the co-existence of large

and small scale producers in the same industry in developed economies.
A tendency for increasing economic concentration will become evident
as individual firms merge to gain a greater share of the market. Dualist
theory has also been used by Piore to explain the structure of industries
in developed economies which have failed to develop a large scale
monopoly sector. For example, in industries such as high-fashion
garment, the DOL has been curtailed apparently because demand has
been transitory and unpredictable.

Flexible Specialization
Post-Fordist period is the world of flexible specialization, according to
P&S. In the world of flexible specialization, further division of labour is
no longer an effective means for raising productivity- the greatest social
innovation of modern times is defunct. This is based on the notions of:
a) Saturation of mass markets
b) Break-up of mass markets

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These are seen as part of long term trend which offer a more
fundamental explanation. Just as ‘proto-industrialisation’ was seen as
referring to ‘industrialisation before industrialisation’, ‘flexible
specialization’ is seen as ‘industrialisation after industrialisation’. This
is a qualitatively different type of industrialisation where basic needs for
food, clothing and shelter have been largely satisfied and more ‘refined
wants’ can be expressed. Demand is much more heterogeneous and
diverse.

CRITICISM
» P&S claim that mass markets are reaching ‘saturation point’.
Karel Williams et al do not accept this and point to a large and
stable replacement demand for established consumer durables
and important product development by old mass producers.
» P&S fail to distinguish between extensive product
differentiation by established large-scale producers and market
fragmentation favouring new small scale producers. According
to Houndshell, the limits of archetypical Fordist mass
production were already reached in the late 1920s when
General Motors and Sloanism successfully challenged Ford’s
Model T. The early victory of Sloanism over Fordism in the
formative years of mass production paradigm represents the
early rule of marketing over pure production – it was pointless
to revolutionize the ways of producing cars without also
revolutionizing the ways of selling them.
» Although, politico-institutional forces and exercises of economic
power are introduced by P&S, their overwhelming attention to
market trends means that politics and exercise of power are all
too often brushed aside.

3. NEO-MARXIST PERSPECTIVE

Neo-Marxist perspective (also known as French Regulation School) is

based on two key concepts: Regime of Accumulation (systems of

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production and consumption) and Mode of Regulation (written and

unwritten laws of society which control the Regime of Accumulation
and determine its form). The French word ‘regulation’ refers to the
preservation of a set of norms and a ‘way of life’ than a process of
conscious adjustment.

The view emphasizes heavily on the social aspect, breaking the

compartmentalization of economic and politics. The result of this
marriage between Marxist political economy and institutionalist
tradition is a conceptualization of qualitative change within capitalism
which posits the existence of two fundamental dynamics forcing change
– regime of accumulation and mode of regulation.

At the same time, causality is attributed not to a single universal

dynamic but to specific cultural and political forms, the peculiarities of
national capitalisms take on a new significance. The regulation
perspective encourages greater faith in micro-level analysis to
conceptually inform problems that the other two perspectives still
phrase in term of macro concepts alone. Thus, it is said that during the
era of liberal capitalism, employers typically relied on coercion and the
economic whip of the market, now the shift is towards more diplomatic
means of guaranteeing sufficient labour.

Post-fordism is primarily considered to be the breakdown of ‘growth

compromises’ and the dissolutions of the protective frameworks
established in the post war period. Four tendencies have been identified
which have led to structural crisis within Fordism:
1. Increased division of labour became counter-productive.
2. Continued expansion of mass production and the pursuit of
even greater economies of scale have led an increasing
globalisation of production and sales. Competition has
intensified and domestic markets have penetrated, making
economic management at the national level increasingly
difficult.

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3. Fordism has led to growing social expenditure, leading to

imbalance and destabilizing inflationary pressures.
4. Consumption patterns of the affluent worker have gradually
changed and have diversified.

In general, the regulationists’ account of contemporary structural crisis

is broader and more politicized than that given by either the neo-
Smithian or the neo-Schumpeterian perspective. In this account, there is
no definite vision of the future. The shape of post-Fordism today is
considered to be ambiguous and the phase remains nameless within the
regulation perspective.

Questions (Tonkiss and Ash Amin)

3. What is Fordism? In what sense does Fordism appear less as a
mere system of mass production and more as a total way of
life?
4. Critically analyze the three contrasting post fordist perspectives
describing the nature of capital development.
5. What are the factors on the basis of which fordism and post
fordism modes differ on aspects of production, consumption
and organization of economic activity?

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Chapter 15
MULTI-NATIONAL CORPORATION AND THE
LAW OF UNEVEN DEVELOPMENT
(S. Hymer)

Introduction
Right from the Industrial Revolution, there has been a tendency for the
representative firm to increase in size. This growth has been qualitative
as well as
quantitative.

As the business
enterprises expanded,
they acquired a more
complex
administrative
structure to coordinate its activities and a larger brain to plan for its
survival and growth.

We are going to look at the evolution of corporations stressing the

development of a hierarchical system of authority and control.

Trends - Starting from MNCs from US, we now have the European
corporations, as a by-product of increased size and as a reaction to
American invasion of Europe. If the present trends continue, multi-
nationalization is likely to increase greatly in the next decade, and as a
result, a new structure of international industrial organization and a
new international division of labour will be born. However, this
evolution of the business enterprise has the tendency to produce
poverty as well as wealth, underdevelopment as well as development.

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We analyze the evolution of MNCs through two laws of economic

development –
 Law of Increasing Firm Size
 Law of Uneven Development.

PART – 1: The Evolution of the Multinational Corporation

(The Marshallian Firm and the Market Economy)

Giant organizations are nothing new in international trade. They were a

characteristic form of the mercantilist period when large joint-stock
companies, e.g. The Hudson’s Bay Company, The Royal African
Company and The East India Company, etc. organized long distance
trade with America, Africa and Asia.

Characteristics of the new form of business enterprise –

» The fore-runners of the modern MNCs are to be found in the small
workshops organized by the newly emerging capitalist class.
» The strength of this new form of business enterprise lay in its
power and ability to reap the benefits of cooperation and division
of labour.
» Rise in productivity
The reinvestment of these profits led to a steady increase in the
size of capitals, making further division of labour possible and
creating an opportunity for using machinery in production. A
phenomenal increase in productivity and production resulted from
this process and entirely new dimensions of human existence were
opened.
» Market and the Factory – Different modes of co-coordinating
Division of Labour
Market – Coordination is achieved through a decentralized,
unconscious and competitive process.
Factory – entrepreneurs consciously plan and organize
cooperation, and the relationships are hierarchical and
authoritarian

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» Capitalist system changed the structure at a micro-level :

Pre-capitalist system – The division of labour was hierarchically
structured at the macro level, i.e. for the society as a whole, but
unconsciously structured at the micro level, i.e. the actual process
of production. Society as a whole was partitioned into various
castes, classes and guilds, on a rigid and authoritarian basis, so that
political and social stability could be maintained and adequate
numbers assured for each industry and occupation. Within each
sphere of production, however, individuals were independent and
their activities only loosely coordinated.
Capitalist system – It turned the existing structure. The macro
system became unconsciously structured, while the micro system
became hierarchically structured. The market emerged as a self-
regulating coordinator of the business units (though, the State
remained above the market as a conscious coordinator to maintain
the system and ensure growth of capital). At the micro level,
labour was gathered under the authority of the entrepreneur
capitalist.

Marshall and Marx’s view

Both of them stressed that the internal division of labour within the
factory, between those who planned and those who worked, was the
chief fact in the form of modern civilization.

Marx – He emphasized the authoritarian and unequal of this

relationship based on the coercive power of property and its anti-social
characteristics. He focused on the irony that concentration of power in
the hands of a few and its ruthless use were necessary historically to
demonstrate the value of cooperation and the social value of
production. (Uneven development)

Marshall – He argued for the voluntary cooperative nature of the

relationship between capital and labour. In his view, the market
reconciled individual freedom and collective production. He argued that

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those on top achieved their positions based on their superior

organizational abilities, and their relation with their workers below
them was essentially harmonious and not exploitative. They obtained as
well as retained their authority by merit; for according to Marshall,
natural selection operating through the market constantly destroyed
inferior organizers and gave everyone (even workers) who had the
ability, a fair chance to rise to managerial positions. Capitalists earned
more than workers because they contributed more, while the system as
a whole provided all its members with improved standards of living and
an ever-expanding field of choice of consumption.

The Corporate Economy

The need for a new administrative structure

The evolution of the business enterprise from the small workshop to the
Marshallian family firm represented only the first step in the
development of business organization. In the 1870s, the US industrial
structure consisted largely of Marshallian type single-function firms,
scattered over the country. By the early 20th century, the rapid growth
of the economy and the great merger movement had consolidated
many small enterprises into large national corporations engaged in
many functions over many regions.

The administrative pyramid

To meet this new structure of continent-wide, vertically integrated
production and marketing, a new pyramid of administrative structure
evolved. Capital acquired new powers and horizons. The domain of
conscious coordination widened and that of market-directed division of
labour contracted.

Development of railways to meet the need

The Railways offered a model of new forms of business organization.
The need to administer geographically dispersed operations led the
railway companies to create an administrative structure which

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distinguished field offices from head offices. The field offices managed
local operations; the head office supervised the field offices.

Horizontal and Vertical Integration

The recently formed national corporations quickly picked up the existing
norm of vertical division of labour and faced the same problem of
coordinating widely scattered plants.

The administrative organ!

Business developed an organ system of administration.
Horizontal division of labour – The function of business administration
were subdivided into departments (organs) – finance, personnel,
purchasing, engineering and sales – to deal with capital, labour,
purchasing, manufacturing, etc. This horizontal division of labour
opened up new possibilities for rationalizing production.
Vertical system of control – There was a need for this to be devised so
as to connect and coordinate the departments. This was a major
advance in decision-making capabilities.
Head Office – It was created to co-ordinate, appraise and plan for the
survival and growth.

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Possibilities of growth
1. One possibility was to expand mass production systems very
widely and to make basic consumer goods available on a broad
basis throughout the world.
2. The other possibility was to concentrate on continuous
innovation for a smaller number of people and on the
introduction of new consumption goods even before the old
ones had fully spread.
The second possibility was chosen.
Unbalanced Growth
- A choice of capital-deepening was made instead of capital
widening in the productive sector of the economy.
- Business had to decide on the capital-labour ratio as the businesses
expanded,
- The ratio, capital per worker was raised and the rate of expansion
of labour was slowed down. As a result, a dualism was created
between a small, high-wage, high productivity sector in advanced
countries and a large, low-wage, low productivity sector in the less
advanced. (We have seen this during colonialism and imperialist
hegemony)

The uneven growth of per capita income implied unbalanced growth

and the need on the part of the business to adapt to a constantly
changing composition of output.

Product development and innovation

Producers’ goods sector – Firms continuously had to invent new labour-
saving machinery because the capital output ratio was increasing
steadily.
Consumption goods sector – Firms continuously had to introduce new
products since, according to Engel’s law, people do not generally
consume proportionately more of the same things as they get richer,
but rather reallocate their consumption away from old goods(cheap
ones!) towards new goods(expensive ones!).

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This non-proportional growth of demand implied that goods would tend

to go through a life-cycle, growing rapidly when they were first
introduced and more slowly later. Thus, if a particular firm was tied to
only one product, its growth rate would follow the same life-cycle
pattern and eventually would slow down (and perhaps even come to a
halt). If this corporation was to grow steadily at a rapid rate, it had to
continuously innovate and introduce new products.

Evolution of multidivisional structure

Product development and marketing replaced production as the
dominant problem of business enterprise. To meet the challenge of
constantly changing market, the business enterprise evolved the
multidivisional structure.

The new form was originated by General Motors and DuPont.

Corporations and were decentralized into several divisions; each
concerned with one product line and organized with its own head office.
At a higher level, a general office was to coordinate the division and to
plan for the enterprise as a whole.
- The new corporate form has greater flexibility. Because of its
decentralized structure, a multidivisional corporation can enter
a new market by adding a new division by leaving the old
divisions undisturbed.
- It can also create competing product lines in the same industry,
thus increasing its market share.
- It can plan on a much wider scale than before and allocate
capital with more precision.

Foreign Direct Investment

US corporations began to move to foreign countries as their new
administrative structure and great financial strength gave them the
power to go abroad. Also, their large size and oligopolistic structure

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gave them an incentive. Direct investment became a new weapon in

their arsenal of oligopolistic rivalry.
The first wave of US direct foreign capital investment occurred around
the turn of the century followed by a second wave during the 1920s.
The outward migration slowed down during the depression but
accelerated rapidly between 1950 and 69. Several important factors
account for this rush of DFI:
» First, the large size of the US corporations and their new multi-
divisional structure gave those wider horizons and a wider
outlook.
» Secondly, technological developments in communication
created greater awareness of the global challenge and
threatened established institutions by opening up new sources
of competition.
» A third factor was the rapid growth of Europe and Japan. This
combined with the slow growth of US economy in 1950s altered
world market shares as firms confined to US markets found
themselves falling behind in the competitive race and losing
ground to European and Japanese firms.
As a result, there was an outward thrust to establish sales and
production bases in foreign territories by the US corporations. This
strategy was possible in Europe since the government there provided an
open door for US investment, but was blocked in Japan, where the
government adopted a highly restrictive policy. European firms partly as
a reaction to US penetration of their markets and partly as a natural
result of their own growth began to invest abroad on an expanded
scale. US firms began to face a serious “non-American” challenge.

PART – 2: Uneven Development

Chandler & Redlich distinguished three levels of business administration

(decision making and policies), horizons, and levels of tasks:

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LEVEL I The top level, whose functions are goal determination and
planning. This level sets the framework within which the
lower levels operate.
LEVEL II It first made its appearance after the separation of head office
from field office. It is responsible for coordinating the
managers at Level III
LEVEL The lowest level, it is concerned with managing the day-today
III operations of the enterprise, that is with keeping it going
within the established framework

In the Marshallian firm, all three levels are embodied in the single
entrepreneur. In the national corporation, a partial differentiation is
made in which the top two levels are separated from the bottom one. In
the multidivisional corporation, the differentiation is complete. The
development of business enterprise can therefore be viewed as a
process of centralizing and perfecting the process of capital
accumulation.

LOCATION THEORY
The application of location theory suggests a correspondence principle
relating centralization of control within the corporation to centralization
of control within the international economy.
Location theory suggests –
LEVEL I Level I activities, the general offices, tend to be even more
concentrated than the Level II activities, for they must be
located close to the capital market, media and government.
LEVEL Level II activities, because of their for white collar workers,
II communication systems and information tend to concentrate
on large cities. Since their demands are similar corporations
from different industries tend to place their coordinating
offices in the same city, and Level II activities are
consequently far more geographically concentrated than
Level III activities.

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LEVEL Level III activities would spread themselves over the globe
III according to the pull of the manpower, markets and raw
materials. The MNC because of its power to command capital
and technology and its ability to rationalize their use on a
global scene probably will spread production more evenly
over the world’s surface than it is now. Therefore, in the first
instance, it may well be a force for diffusing industrialization
to the less developed countries and creating new centers of
production.

» Location of offices: The highest offices of the MNCs will be

concentrated in the major cities of the world. Lesser cities
throughout the world will deal with day-to-day operation of specific
local problems. These will be arranged in a hierarchical fashion: the
larger and more important ones will contain regional corporate
headquarters while the smaller ones will be confined to lower level
activities.
» Location of government officials: Geographical specialization will
reflect the hierarchy of corporate decision making and the
occupational distribution of labour in a city or region will depend
upon its function in the international economy. The best and most
highly paid administrators, doctors, lawyers, government officials
etc will be concentrated in or near major cities.
» Citizens of capital city: The structure of income and consumption
will tend to parallel the structure of the status and authority.
- The citizens of capital cities will have the best jobs and will
receive the highest rates of remuneration. The growth in the
hinterland subsidiaries implies growth in the income of capital
cities but not vice versa.
- Trickle-down effect: The citizens of capital cities will also be the
first to innovate new products. A new product is usually first
introduced to a select group of people who have discretionary
income and are willing to experiment with their consumption
patterns. Once it is accepted by this group, it spreads or trickles

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down to other groups via the demonstration effect. This is

called trickle-down or two-stage marketing.
In this process, the rich, the powerful gets more votes than anyone
else because:
1. They have more money to spend.
2. They have more ability to experiment.
3. They have high status and are likely to be copied.

» Relative position of the subordinates:

In each period, subordinates achieve the consumption standards of
their superiors in the previous period and are thus torn in two
directions:
1. If they look backward and compare their living standards
through time, things seem to be getting better
2. If they look upward they see that their relative position has not
changed. They receive a consolation prize which may serve to
keep them going by softening the reality that in a competitive
system, few succeed and many fall.

In the international economy, trickle-down marketing takes the form of

an international demonstration effect spreading outward from the
metropolis to the hinterland. The marginal profit on new foreign
markets is thus high and corporations have a strong incentive in
maintaining systems which spread their product widely. It is not
technology which creates inequality; rather, it is organization.

National Planning:
It is a public institution (unlike MNCs) that organizes many industries
across one region. This would permit the centralization of capital
(coordination of many enterprises by one decision-making centre) but
would substitute regionalization for internationalization. The span of
control would be confined to the boundaries of a single polity and
society and not spread over many countries.

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Advantages – The ability to remove the wastes of oligopolistic anarchy

(meaningless product differentiation and imbalance between different
industries within a geographical area). It concentrates all levels of
decision-making in one locale and thus provides each region with a full
complement of skills and occupations. This opens up new horizons for
local development by making possible social and political control of
economic-decision making.

MNCs reduce options for development in the following ways:

1. Lack of incentives to invest in education:
If an underdeveloped economy wishes to invest heavily in education
in order to increase its stock of human capital and raise the
standards of living then it would lead to brain drain
Brain Drain: In a market economy, it would be able to find gainful
employment for its citizens within its national boundaries. In the
MNC system, however, the demand for high-level education in low-
ranking areas is limited. An outward shift in the supply of educated
people in a country, therefore, will not create its own demand but
will lead to an excess supply and lead to emigration.

2. Discrimination based on ‘ethnic homogeneity’: The employment

opportunities for citizens of low-ranking countries are restricted by
the discriminatory practices in the centre. ‘Ethnic homogeneity’
increases as one goes up the corporate hierarchy. In part this stems
from the skill differences of different nationalities, but more
important is the fact that higher up one goes in the decision-making
process, the more important mutual understanding and ease of
communication become; a common back-ground becomes more
important.

MNCs are torn in two directions:

 They must adapt to local circumstances of each country –
decentralized decision making.

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 They must coordinate their activities in various parts of the

world and stimulate the flow of ideas from one part of the
empire to another.
SOLUTION
Division of labour based on nationality: (1) Day-to-day management in
each country is left to the national of that country who, because they
intimately familiar with local conditions and practices, are able to deal
with local problems and local government. (2) Above them is a layer of
people who move around from county to country, transmitting
information from one subsidiary to another and from the lower levels to
the general apex office. These people, more often than not, are citizens
of the country of the parent corporation. Hence, there is discrimination
based on nationality and very few will be able to get much higher.

3. Effect on Tax capacity: The extent to which a government can carry

out growth promoting, potential enhancing and productivity
increasing expenditure on infrastructure, education and health,
depends on availability of finance – tax revenue. However, a
government’s ability to tax MNCs is limited by the ability of these
corporations to manipulate transfer prices and to move their
productive facilities to another country. This means that they will be
attracted to those countries where superior infrastructure offsets
higher taxes.
» Government of an underdevelopment nation will find it difficult
to extract a surplus from MNCs to use for long-run development
programs and for promoting other industries.
» Government of the advanced countries can tax the profits of
the corporation as well as the high incomes of top
management, i.e., capture some of its surplus generated by the
MNCs and use it to further improve their infrastructure and
growth.
4. Tendency of the MNCs to erode the power of the nation-states:
Most government policy instruments diminish in effectiveness the
more open the economy and the greater the extent of foreign

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investment. This acts to reduce the sovereignty of all nation-states,

but again the relationship is asymmetrical as the flow tends to be
from the parent to the subsidiary and not vice versa.
» A regime of MNC would offer underdeveloped countries neither
national independence nor equality.
» It would turn the underdeveloped countries into branch plant
countries. The subsidiaries of MNCs are typically amongst the
largest corporations in the country of operation and their top
executives play an influential role in the political, social and
cultural life of the host country.
» It’s hard to expect such a country to bring about creative
imagination and innovations to apply science and technology to
the problems of eradicating poverty.

PART – 3: The Political Economy of MNCs

The viability of the MNC system depends upon the degree to which
people will tolerate the unevenness it creates. The dualistic growth
under the MNC system does not offer much promise for a large
segment of the society. At most one-third of the population benefits.
The opposition of the remaining two-third continuously threatens the
system. The survival of the MNC system then depends on how fast it
can grow and how much trickles down.
The Threat –
- The center is troubled as the excluded groups’ revolt and even
some of the affluent are dissatisfied with the roles.
- Nationalist rivalries between major capitalist countries also
remains a major divisive factor and hence a concern.
- There is the threat presented by the middle class and the
excluded groups of the underdeveloped economies.

Hence, the MNC system must solve four critical problems for the
underdeveloped countries, if it is to foster the continued growth and
survival of the modern sector:

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 It must break the foreign exchange constraint and must provide

the under developed countries with imported goods for capital
formation and modernization.
Solution: Restructure the world economy allowing the periphery
to export even manufactured goods to the centre.
 It must finance an expanded program of government
expenditure to train labour and provide support services for
urbanization and industrialization.
Solution: An expanded aid programme and a reformed
government bureaucracy
 It must solve the urban food problem created by growth.
Solution: Agribusiness and Green Revolution
 It must keep the excluded two-thirds of the population under
control.
Solution: Population control, either through family planning or
counter insurgency

Bottlenecks
- It is doubtful that the centre has sufficient political stability to
finance and organize the program outlined above. Hence, it is
hard to see that the advanced countries could create a system
of planning to make these extra hardships unnecessary, and the
MNC may not survive.
- It is difficult to imagine labour accepting such a re-allocation.
- It is not evident that the centre has the political power to
embark on such a large aid programme or to readjust its own
structure of production
- It is unclear if the West has the technology to rationalize
manufacturing abroad or modernize agriculture.

Conclusion
The MNC represent an important step forward over previous methods
of organizing international exchange. It demonstrates the social nature
of production on a global scale. It eliminates the anarchy of

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international markets and brings about a more extensive and productive

international division of labour. The MNC destroys the possibility of
national seclusion and self sufficiency and creates a universal
interdependence. But the MNC is still a private institution with a private
with a partial outlook and represents only an imperfect solution to the
problem of international cooperation. It creates hierarchy instead of
equality and it spreads its benefits unequally.

Questions
1. In what sense multi-national corporations reduce the option for
development. Discuss the tendency of multinational
corporations to erode the power of the nation state in the light
of different development experiences.
2. How does MNC system lead to unbalanced growth? On what
factors does the survival of MNC system depend? What are the
threats it faces and what are the solutions to them? Are these
solutions realistic?
3. Explain the Law of Increasing Firm Size and the Law of Uneven
Development in the multi-national corporations. How does the
Law of Uneven Development challenge the system itself?

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