Multinationals, the State and Control of the Nigerian Economy

Multinationals, the State and Control of the Nigerian Economy

by Thomas J. Biersteker

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In this book Thomas Biersteker evaluates the sources of Third World economic nationalism and assesses the significance of the changes that have taken place between North and South since the early 1970s.


In this book Thomas Biersteker evaluates the sources of Third World economic nationalism and assesses the significance of the changes that have taken place between North and South since the early 1970s.

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Princeton University Press
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Princeton Legacy Library Series
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6.10(w) x 9.10(h) x 1.00(d)

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Multinationals, the State and Control of the Nigerian Economy

By Thomas J. Biersteker


Copyright © 1987 Princeton University Press
All rights reserved.
ISBN: 978-0-691-07728-4


Assessments of Indigenization: A Critical Review of Six Theoretical Approaches

There are as many different perspectives on indigenization and economic nationalism as there are people writing about these topics. However, six distinct theoretical approaches to contemporary international political economy can be identified as important in the discussion of these issues today. Each of these theoretical approaches has different ideas about what development is and what it should be. Each also has a different interpretation of the direction of change in the relationship between rich and poor in the world economy since the mid-1970s. The issue of control is central to many of their concerns, and different perspectives can be defined on the basis of how they deal with it as an issue.

Most North American scholars tend to assess different theoretical perspectives, if they deal with them at all, in isolation, outside of their context, and existing in the objective realm of theoretical social science. At most they see two, and occasionally three, perspectives on any issue, usually a liberal, a conservative, and a radical interpretation. I will attempt to redress this somewhat parochial imbalance by considering a variety of "radical" theories and situating each in its social and political context. There are at least three distinct schools within what is normally regarded as the radical approach that have something important to say about the direction and magnitude of the change between rich and poor in the contemporary world economy. Two of them are from within the dependency tradition and one represents a more classical interpretation of Marxism. And at least three distinct schools currently coexist with roots in the neoclassical economic tradition that also have significant statements to make about the issue. One is the perspective associated with international business and management training in U.S. business schools, the view of what I call "conservative neoclassical realists." Another is a view more commonly associated with the U.S. government, the perspective of liberal internationalists. Structuralist critics occupy a third position, occasionally mediating between radical and neoclassical traditions.

The following review of six theoretical approaches is structured to guide my analysis of the central question posed in the introduction, namely: What are the direction and magnitude of change (if any) in the control of firms or economic sectors, or the pattern of national development since 1970? I am not looking for a "correct" single approach, and do not intend to derive explicit hypotheses from them for a test of each theory. Rather, I am culling the theoretical literature for general guidelines, analytical distinctions, and methodological insights on an important question. In the empirical and theoretical discussions in succeeding chapters, I will construct a synthesis of non-contradictory aspects of these various approaches into an explanation of the sources and consequences of a concrete historical example of the struggle over control: indigenization in Nigeria. In many ways, the construction of this synthesis is the major theoretical and methodological contribution of this work.

Conservative Neoclassical Realists

Most American businessmen, and many of their counterparts in Europe and Japan, subscribe to the view that foreign enterprise is essential for the development and economic well-being of the countries in the world and that indigenization programs and other examples of "political interference" are a mistake. They are a mistake, to be sure, for multinational enterprises, but they are also a mistake for countries genuinely interested in development. This is not the view of a disinterested analyst, it is the perspective from which one of the major actors operates.

International-management courses and texts present a more generalized and qualified version of this argument than businessmen operating in a foreign environment on a day-to-day basis. Nonetheless, their basic assumptions, objectives, definitions, and arguments are the same. They are concerned with the problem of maintaining access to Third World markets, or production locations, and throughout the 1970s they were concerned with the growing tendency of governments to impose restrictions on the operations of foreign enterprises in their economies. More recently the attention of both business school analysts and multinational managers has been focussed even more on competition faced by multinationals from other countries and the relationship between business and government in other advanced industrial countries. This has, not surprisingly, been a particularly prominent concern among Americans.

Conservative neoclassical realists contend that the investment and other activities of foreign enterprises are highly beneficial to developing countries. Multinationals not only provide capital, skills, technology, market access, and employment, they also "mobilize local resources that would otherwise not be mobilized — or, at least release foreign exchange available to a country to do the same thing." Some conflict between host-country goals and multinational operations is inevitable, but on balance the trade-off between the costs and benefits to host countries is in favor of the benefits. Multinational executives are more candid and less guarded about their countributions to development. They are convinced that developing countries could not get along without them and that economic development is the creation of private foreign enterprise.

Development is always discussed, but rarely defined, by conservative neoclassical realists. It is an issue that daily confronts the executive of any multinational operation resident in a developing country abroad, whether it comes from the difficulty of getting a ministry to process paperwork or from the experience of getting to work on congested roads. International-management texts discuss development as an objective of host-country governments, but it is not their central concern and is accordingly not discussed explicitly. For the most part, development is equated with industrialization and rapid economic growth. When social development is considered, it is defined as modernization or Westernization. Most managers believe that the development of the local business and government elite can be judged by the extent to which they share the same values and operating procedures as the multinational manager. That is, the more modern they are, the more like us they become.

Conservative neoclassical realists do not think that the degree of change between rich and poor in the world economy has been significant during the last decade. That is one of the reasons they consider themselves realists. While it is certainly true that nearly every economy in the world today has imposed restrictions on the operations of multinational corporations (and the developing countries have usually been at the forefront of this process), the multinational enterprise "is not an unprotected, misused pawn of omnipotent nations; it is a powerful player in the international business game." As far as the multinational managers are concerned, they still control their joint ventures, even in cases where they have lost the majority of the equity involved. In response to the suggestion that they no longer control host-country economies, most neoclassical realists would respond that they never did control them. The North–South negotiations for a new international economic order are generally viewed with cynicism and most certainly as a failure, although some writers express concern that they came close, "even without being implemented, to damaging permanently the global economic machine that produced the wealth the Third World so much wants to share." However, by the beginning of the 1980s most individuals associated with this perspective began to think that the realists in the developing countries had prevailed. Economic nationalism, whether expressed through multilateral negotiations or through individual state actions, appeared to be on the decline. It appeared that the pragmatists among the elite in the developing countries had prevailed, and that they had begun to realize that they needed the multinational enterprises more than the multinationals needed them.

Having described the context, general perspective, some of the assumptions, and some of the central definitions of this approach, what can we say about its perspective on indigenization? In general terms indigenization is viewed as an example of host-country political interference, a nationalistic mistake with high costs and low returns to the indigenizing country. These costs are especially high in the case of developing countries, since they have more to gain from the presence of multinational enterprise than their more developed counterparts. Indigenization is an example of national policy enacted as "nations have become increasingly aware of the nature and growing importance of multinational enterprises with global horizons."

No general theory has emerged within this tradition to describe the sources of economic nationalism in developing countries. Most international-management texts are more concerned with elaborating business strategies to respond to economic nationalism than with analyzing its sources. Nevertheless, they do present a general argument about it. Political "interference" such as indigenization is likely "[wjhenever foreign-owned firms are perceived, rightly or wrongly, to operate in such a way as to inhibit host-country national economic, political, or social goals." Nationalistic pressures buildup to produce controls on foreign ownership, but these pressures do not come from a rationally acting or motivated state: "Few people would attempt to argue that countries act rationally. Pressure groups, coalitions, selective perception, and a range of other behavioral phenomena better explain particular decisions." The major groups or actors to monitor are the parliamentary opposition (if any exists), anarchist or guerrilla groups, students, labor, peasants, ethnic minorities, and occasionally local business groups whose vested interests may be challenged by the presence of multinational enterprise. Often, indigenization programs are enacted by a faltering government in an attempt to rally popular support. Because of their proximity to the issue on a day-to-day basis, most multinational managers are less cautious in their assessment of the sources of economic nationalism. According to a survey conducted of 212 corporate members of the Council of the Americas in 1970:

The businessmen felt that the major reason for the growing tide of economic nationalism in Latin America stemmed from frustration and dissatisfaction with the slow pace of economic development. These resentments were often encouraged by demagogues and ambitious politicians and then directed against the highly visible U.S. investor, who became the target or whipping boy, rather than at their own leaders who had failed to initiate meaningful reforms.

From the perspective of a conservative neoclassical realist, the objectives of indigenization measures are captured in the preceding quotation. Appeals to nationalism do much to save a faltering regime. They can also launch a self-serving opposition, trying to demonstrate its toughness to the public. Occasionally, indigenization may result from pressures brought by a local business group seeking protection from the competition of multinational enterprise. Although countries may not act rationally, state bureaucrats within them may attempt to promote their own objectives (such as improving foreign exchange position, monetary stability, defense, economic independence, or national prestige) by pursuing indigenization. More cynical observers would add personal aggrandizement to the list of objectives of state officials.

When they assess the outcome of indigenization measures, neoclassical realists see very little to be enthusiastic about. The more successful a country is at altering control of foreign enterprises, the worse off it becomes. Fortunately for both the multinationals and for the host countries, most multinationals have been able to retain control of their operations despite their loss of majority equity. And it appears that the pressures for economic nationalism abated somewhat during the global recession of the 1980s.

At the level of the enterprise, therefore, most neoclassical realists do not see significant change. To be sure, some foreign enterprises have been taken over, with dire consequences for the host country (since employment of local nationals as heads of subsidiaries reduces the efficiency of the firm and accordingly its value). However, the countervailing power of the multinational enterprise confronted with host-country nationalism can be considerable. Only the less capable multinational managers are unable to utilize the range of countervailing measures open to them.

Most international-management texts have chapters or sections describing "the means at the command of international firms for adjusting to controls and for exerting countervailing power." Companies can refuse to make new investments, induce home-country support, or deter host-country controls by stimulating local enterprise, developing local allies, sharing ownership through joint ventures, selectively divesting ownership, and acquiring multiple nationality or changing nationality. If a company has not yet established a subsidiary in the indigenizing country, it can choose from a wide variety of defensive entry and operating strategies. And there is always the option of resorting to legal defenses in host-country or international courts. Multinational managers rarely, if ever, admit that they might have lost control over the indigenized enterprises they manage. It would reflect badly on their capabilities if they were to do so. They rather elaborate the complex combinations of strategies they employ to retain control over their operations, strategies tailored to the specific context of their industry, host-country environment, and internal corporate organization.

The consequences of indigenization for particular industries or economic sectors vary according to the degree to which control at the level of individual enterprises has changed hands. There are obvious learning costs associated with indigenization of personnel or equity and these are likely to be reflected in the overall performance of an industry. Unless the technology is widely accessible or easily acquired, neoclassical realists contend that indigenization will lower productivity in an industry. By reserving certain industries or sectors for indigenous producers with a ban on further foreign investment or a takeover of existing foreign enterprises, indigenization can also begin "dulling the threat of competition" and leave indigenous producers with an unhealthy degree of protection. Although prohibitions on foreign investment may make sense in areas such as national defense, they are simply not justifiable in most industries.

At the national level, neoclassical realists argue that indigenization is likely to discourage foreign investment. Once controls on foreign ownership are instituted, "the inflow of investment will slacken, and if the controls are high enough, or the nationalistic pressures seem likely to produce such controls, the inflow may dry up altogether." This will have obvious adverse effects on development as defined by neoclassical writers, especially since the less developed countries have more to gain from foreign investment in their territory than any other country. Although countries periodically impose restrictions on the operations of multinational corporations in their territories, this trend is not a secular one. An optimal control model can be employed to explain swings in government policy. After controls have been introduced, "Interests from within the country that realize that investment is being forgone are then likely to begin advocating policies that will bring the country back toward its control optima, pointing out the national benefits from doing so." From the vantage point of businessmen operating in the contemporary Third World, the textbook language of optimal control may sound a bit unreal. Nevertheless, their outlook is very much the same. For them, indigenization is a manageable interference in their operations that is not in the best interests of the developing countries. It decreases productivity, retards development, and ultimately impoverishes the bulk of the population. Eventually, more realistic statesmen and policies prevail and more "sensible" programs are enacted.


Excerpted from Multinationals, the State and Control of the Nigerian Economy by Thomas J. Biersteker. Copyright © 1987 Princeton University Press. Excerpted by permission of PRINCETON UNIVERSITY PRESS.
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