7:46 AM Feb 1, 1996

FLYING GEESE OR HEADLESS CHICKEN ?

Geneva 31 Jan (Chakravarthi Raghavan) -- Transnational Corporations and the foreign investment and technology they might bring in could be useful to developing countries in their development, but it would be completely misleading to present a one-sided picture of cooperative relationships and TNCs as an instrument of development and brush aside an essentially conflictual situation.

In presenting this view at an UNCTAD seminar on East Asian Development, Robert Rowthorn of Cambridge University said it was one thing for developing countries to undertake liberalization, but quite another to be forced to sign an international agreement and compelled to undertake commitments for liberalized investments.

"This is what Sir Leon Brittan (European Union's Trade Commissioner) is pushing (at the World Trade Organization) and it is a policy to compel the governments of the South for the benefit of individual transnational enterprises," Rowthorn said at the seminar on the "flying geese" paradigm of East Asian development.

Such an approach by the powerful industrial countries to compel developing countries to provide foreign investment rights for the benefit of their corporations was more reminiscent of the 18th and 19th centuries (of colonialism), Rawthorn remarked.

Rawthorn in his speech outlined a paper he is presenting at a forthcoming meeting of an Eminent Persons Group at Kuala Lumpur on 29 February devoted to the East Asian experience and the state role in industrial policy for restructuring of economies and development and its lessons for other developing countries.

The Kuala Lumpur meeting, sponsored by UNCTAD, under a Japanese funded-project, and is part of the preparatory meetings for UNCTAD-IX and its outcome is expected to be fed into the process.

In his presentation Wednesday, the Cambridge academic who has done some studies on transnational corporations, questioned some of the claims about "flying geese paradigm" -- first presented in the early 1930s by Japan's Kaname Akamatsu, and revived in the 1970s and 1980s by Kiyoshi Kojima and by Terutoma Ozawa.

The flying geese paradigm as a catching-up process behind a leader (in this case Japan), and the transnational paradigm of development, has been presented in the World Investment Report, 1995 which has taken the neo-liberal approach and argued in favour of a multilateral agreement on investment.

But in commenting on Rowthorn's presentation, Zbigniew Zilmy of the UNCTAD department on TNCs that produced the WIR, agreed that FDI and TNCs were not a panacea for development and the WIR had not presented the "flying geese" paradigm as a conceptual theory for replication. A longer analysis in the text, he said, had been eliminated, and only a box about the flying geese paradigm had been included in the WIR.

Rowthorn, and a number of other participants, also suggested that it was quite misleading to describe any relationship between a domestic enterprise in one country and a firm in another -- whether in importing inputs, capital goods, buying technology, knowhow etc -- as a transnational one, and thus attribute all the development and progress whether in East Asia or elsewhere as due to TNCs.

"It has become fashionable in the 'flying geese' literature," Rowthorn said, to characterize any commercially motivated transfer of technology across national frontiers as a TNC activity. This was confusing. Firstly, many of the firms providing technology are not TNCs in any meaningful sense. The fact that a firm participates in the world economy by trading goods and services across a frontier does not make it a transnational corporation. To qualify for that term, it must a significant stake in the production facilities in more than one country... Moreover, even where the firms providing technology to a particular country are TNCs, it does not follow they are behaving in their capacity as TNCs when they do. On the contrary, they may be supplying technology in non-equity forms precisely because they are forbidden to behave as true TNCs and establish joint venture or production facilities of their own."

Rowthorn appeared to imply that the likelihood of technology transfer to a country would be less if a TNC is able to set up its own production facility (as it would be able to under an investment agreement), and any technology transfer would be firm specific to its subsidiary and not diffused inside a country.

The picture was is discernible of increasing regional integration through trade and investments in East Asia and a similar picture in Europe and North America. There was reason to believe that the advanced economies were developing a regional bloc structure in which manufacturing trade within the blocs is intense, but with only a limited trade between the blocs. Within blocs FDI and trade were to some extent complementary, but between blocs investment is more likely to be a substitute for trade.

"Although trade barriers are supposed to be down following the Uruguay Round, the major regional trade blocs, such as NAFTA and the EU, will still discriminate against third parties, and there will still be an incentive for outside firms to jump protective barriers by producing locally. Moreover, there is always the risk that economic and political forces may lead to a revival of protectionist sentiment in these blocs."

In the original flying geese paradigm, reflecting Japan's experience as a poor country, exports from the leading country to its followers would drive out local producers out of business because the imports would be either much cheaper or of a modern type which the local firms could not match. But the immediate result would be an impoverishment of the traditional producers in the follow-up country, with the situation being eventually reversed in course of time. With the help of their governments they would discover ways to produce modern goods themselves and drive out imports.

"This is not the harmonious 'recycling of comparative advantage' which more recent exponents of the flying geese paradigm talk about, but a genuine conflict in which local entrepreneurs are engaged in a 'death struggle' against imports and 'pour their hearts' blood' into copying foreign goods and inventing new ones to win the upper hand over imports," Rowthorn said.

The modification of the flying geese paradigm to allow for activities of TNCs is an obvious advance given their great important in the modern world. The role of TNCs may be exaggerated in recent versions of this paradigm, but to ignore their role would be absurd, the Cambridge academic declared.

While the transfer of technology via TNCs and otherwise has a cooperative dimension "it may also have a conflictual dimension which is ignored or played down in current versions of the flying geese paradigm."

There would be three types of conflicts: within countries, between countries and between countries and the TNCs. These would frequently overlap and in many situations all types would be simultaneously present.

Akamatsu in the original version recognized the conflict between and within countries. The initial penetration of imports into a follower country would benefit local consumers but impoverish producers. When local firms eventually develop and drive out imports, the follower country as a whole may benefit while the leading country as a whole may suffer.

"These dangers are scarcely recognized in more recent versions of the flying geese paradigm which ignore or seriously downplay the costs and difficulties of restructuring. Under present demand conditions many advanced economies are finding it difficult to replace jobs lost through competition from labour-intensive imports from low-wage countries. They are also facing competition in more sophisticated products from developing or newly developed countries. The result is a growing fear of these countries and their impact on security and prosperity of workers in the advanced countries.

The conflict between countries and TNCs could also take many forms and, in the present context, the most important concern transfer of technology to host countries and upgrading of productive activities.

But TNCs are profit-driven entities with global perspective, whose long-term interests do not automatically coincide with those of the host country. the later might wish to maximise local content of TNC production or induce TNCs to locate high value-added activities within its borders and maximise spinoffs to the national economy.

Such objectives may conflict with natural desire of TNCs to safeguard their technological advantages and maximise their flexibility to relocate production in line with the shift in their global priorities.

TNCs could be a powerful engine for 'recycling comparative advantage', but the extent and terms of this are variable. The more leverage a host country could exert over TNCs, the better deal it will get.

This obvious fact is largely ignored in modern versions of the flying geese paradigm which focus exclusively on positive measures such as educational and infrastructural investment which host countries could undertake to attract FDI.

"This leads to a neglect of the possible impact of the Uruguay Round on developing countries. There is considerable doubt surrounding what was agreed at the Uruguay Round since many of the wordings are rather unspecific, but it is conceivable that these agreements will be interpreted in a highly restrictive fashion, so that many of the trade-related measures traditionally used by East Asian countries in their dealings with TNCs will be outlawed.

"If this be the case, the bargaining power of host countries will be reduced and the role of TNCs as 'recyclers of comparative advantage' may decline," Rowthorn said.

It may perhaps be desirable that developing countries should liberalise their trade and investment, according to their particularities. It might even be sensible to provide that developing countries should observe contracts they enter into. But it was quite another proposition to say that they should be forced to accept foreign investments and TNCs, he said.

In decrying moves like that of the EU's Sir Leon Brittan for a compulsory WTO investment agreement that everyone should sign on and enforced through cross-retaliatory trade dispute settlement mechanism, Rowthorn appeared to agree with a participant who said that with such an agreement, far from developing countries being able to attract needed foreign direct investment and technology, the reverse could take place. The TNC investor, seeking to invest because of the "high capital accumulation" and low returns in the North, and using low-wage labour in the South to produce and export to other countries or home country to earn more profits, would in fact be transferring welfare from the host country to the home country.

In such a situation, "the flying geese could become headless chicken", the participant commented.

Other participants questioned the replicability in the kind of trading environment and limitations against new competition under the WTO, or of technology transfer and development through imitation, with the investing TNC securing rights against governmental restrictions.

The countries of the North and thee South, Rowthorn argued, have their own interests, and sometimes these involve some conflicts that have to be resolved through agreements. But this should not be confused with both the positive and negative aspects, and a conflictual situation, between a TNC firm and its operation in a host (developing country). The TNCs, he said, had their use in terms of the FDI they could bring in, or the technology they could transfer, but essentially firm specific, and any exports they might engage in.

But there were limitations and the view that TNCs would develop a country and help its industrialization would be quite misleading.

The implication of the "flying geese" paradigm with Japan as the leader, namely that Japan had been a leading market for labour-intensive exports from East Asian countries during their initial stages of development was also incorrect. In most cases, Japan as a destination was insignificant - the major exception being Korea where Japan took in Korea's clothing exports between 20-50 percent in the 1990s.

And while the flying geese paradigm presented a picture of what happened in East Asia -- the industrialization and development of Japan, followed by the first tier NICs (Korea, Taiwan, Singapore and Hong Kong) and now by a second-tier NICs (Malaysia, Thailand, Indonesia, China etc) -- with the leading country constantly going up the scale of industrialization (because of rising wages that reduce comparative advantage in simple labour-intensive ones), shedding industries that the followers pick up, it had its problems.

"It is easier for the leader to drop older industries and this being picked up by followers, but the leader going constantly up the ladder and engaging in more and more sophisticated industries, particularly the new information-intensive ones, or of the TNCs from the leader moving production to the 'geese' flying behind and following the export-led model and exporting to the major industrial economies, is full of conflicts", Rowthorn said.

It creates social conflicts in the home or leading countries, particularly involving unemployed labour, and more conflicts as a result of rising imports and such social disorders and tensions would give rise to high protectionist actions that could not survive a liberal trade order despite the World Trade Organization.

Even in terms of FDI for industrialization and development, foreign capital had not played such a role in Korea, though it had been useful for higher technology industries, Rowthorn noted. Singapore (in 1994) had a per capital foreign investment of $ 2500, among second tier NICs, Malaysia had $250, Thailand $45 and Indonesia way behind at $15.

China which has had an exceptional upsurge of FDI had a $30 per capita.

There was no source of foreign investment available of the scale of Singapore's or near that for the more heavily populated and poorer countries whether China or Indonesia: neither Japan, nor for that matter the US or Europe could. One had therefore to be realistic in propounding the theory of replicating the East Asia development through FDI and the TNCs.

Rowthorn also cited the Irish experience in Europe (which showed limitations of FDI and TNCs), and more recently, the advice pushed on east Europeans to deregulate and privatize, open their markets to foreign investment and goods, as a way of restructuring into a functioning market economy

Both the east Europeans and the West, he said, were now more realistic.

In his comments the TNC division's Zilmy, as well as the chairman of the seminar, Mr. Yilmaz Akyuz of UNCTAD's Global Interdependence Division (GID), appeared to acknowledge the differences between the firm-level approach of the TNC department and its WIR and the macro-economic development approach of the GID and its Trade and Development Report.

But the two senior economists also agreed that the mutual discussions and interactions had helped identified the commonality and differences and this could lead to a coherent development approach.

Others suggested that whatever the merits of the East Asia development and the 'flying geese' paradigm, the successful first and second tier NICs had achieved it, not through the neo-liberal laissez faire being advocated, but through active State role. The WTO framework had reduced some scope, but countries should and could more carefully look into the space and act by individual specific measures to get around the rules.

Akyuz said this was an aspect to be looked into in future seminars in the series -- the scope available under the WTO and how it could be used.

Meanwhile, the UNCTAD's Division on Transnational Corporations and Investment (DTCI) is organising another seminar on 12 February on Foreign Direct Investment in a Globalizing World Economy at Divonne, in neighbouring France. Its purpose is said to be informing delegations on the multilateral investment issues.

An earlier seminar in November, also at Divonne, organized by the same division saw the invited participants making presentations on the TNC mode of development promoted the idea of a multilateral WTO agreement for right to invest and investors rights, including a demand that the rights and the multilateral agreement should extend to short-term capital flows. But the comments of some of the key ambassadors participating and the questions raised by them, showed some sharply divided views.

The UNCTAD Secretary-General Rubens Ricupero, who chaired that seminar had then said that there was no consensus on the need for a treaty, the timing and the forum.

Ricupero's report to UNCTAD-IX on the new trade issues has also been more cautious and reserved and suggests that this is one of the issues that the Conference is expected to consider and give some mandate for the secretariat.

The organisers of the Feb 12 seminar say that it is in pursuance of a commitment at the earlier meeting to hold another session to enable other country-delegations who could not participate in the first seminar to be able to do so now, and that UNCTAD secretariat has no particular crystallized view, and that there was a need to bring the development dimension into the discussions.

However, the personalities invited to speak at Divonne II on the issues appear to belong mostly, if not wholly, to one side of the argument.

The WTO Director-General Renato Ruggiero, who is pushing this issue and favours decisions at the December 1996 WTO Ministerial meeting in Singapore is giving a luncheon address on FDI and the multilateral trading system. Recently he claimed at Accra that there was a consensus on a WTO investment negotiations, but when pressed by journalists about the opposition expressed by India and more recently by the Malaysian Prime Minister, said that only a couple of countries were opposing it. He claimed to be not fully aware of the reasons for their objections but that it seemed related to 'sovereignty questions'.

The speakers at the UNCTAD sponsored seminar on FDI include Karl Sauvant who heads the DTCI and leader of the WIR team and former GATT Director-General Arthur Dunkel on FDI and Development; John Stopford of the London Business School and Vincent Cable, Chief Economist of Shell International Petroleum on why TNCs invest where they do; Adrian Otten of the WTO's IPR and Investment division and Wolfgang Hantke of Germany who is heading the OECD Committee on Capital Movements and International Transactions to speak on present international arrangements on FDI.

Cable edited the WIR 1995, presumably when still at Chatham House before taking up his Shell job, which appears though to raise some issues of conflicts of interest.

Shell has been recently in the news over its investments in Nigeria, the environment issues.