CANADA: ECONOMIC DEPENDENCE Al\D POLITICAL DISINTEGRATION

IMPERATIVES OF DIRECT INVESTMENT

Unlike portfolio investment, direct investment appears not to be particularly sensitive to earnings differentials; nor does it move to those sectors and countries where by the aggregative reckoning of textbook economics, capital is the scarce factor and profit rates alleged highest. The reason for this lies in the fact that the “lending” aspect of direct investment is in an important was incidental to the purposes of the operation.

Since the borrowing subsidiary and the lending parent are the same corporation, the loan is best regarded as a convenient fiction. Behind it lies a real transfer of corporate resources, an extension of the corporation’s productive apparatus and the creation or strengthening of an organic connection between the productive structures of the two countries concerned.

Safarian’s researches have reminded us that it is in transfer of productive factors that the corporations are above all interested:

“Access to the parent’s store of knowledge, as embodied in everything from its research and managerial skills to its production techniques and the products themselves, is at the heart of the process of direct investment. The emphasis so often given to the transfer of monetary capital is frequently and simply a direct and immediate accounting counterpart to the transfer of knowledge embodied in equipment and services from the parent.”

To focus on these aspects of the transaction is to appreciate that production abroad has become the typical response of producers to opportunities in foreign markets. The gains from the growth of the international economy are being realized increasingly through the development of production facilitates overseas. This is particularly true of the United States. In 1950, when production abroad by U.S. subsidiaries was $23 billion, U.S. commodity exports were $10 billion, a ratio of under 2.5 to 1. By 1964, the value of U.S. production abroad had risen to $89 billion, while U.S. exports had increased to 25 billion, n ratio of close to 4 to I.

Tn the words of the National Industrial Conference Board:

“the returns from international trade are now achieved primarily by development of production facilities, not by trade in products. The classical economist’s assumption that factors of production do not move has become increasing1y less valid.”

The change in the degree of United States involvement in overseas production is in the logic of the response of the individual corporation to the requirements of survival. Direct investment abro.1d is therefore largely a matter of market strategy. As the National Industrial Conference Board concluded from a survey of the motivation of foreign investment:

” marketing strategy was clearly the dominant element in investment decisions. This fact bears directly on the characteristic view of businessmen that normally invest, even where it appears as new or expansionary, is necessary to maintain competitiveness, and is made to strengthen the continued earning ability of the enterprise as a whole, not just to produce additional profits. Similarly, it accounts for the view that growth is organic, not incremental and can be arrested only at a cost of viability.”

Expansion through domestic investment, and exports and expansion through the estab1ishment of overseas faci1ities can then be seen as twin instruments in this strategy, to be employed singly or together as competitive conditions dictate.

“In the producers view, the familiar course of marketing on the usual basis of producing at lowest achievable cost for any potential market demand is first to export to a market, next to produce abroad as directed local circumstances abroad (of which cost is only one), then to export more as market opportunities are established then to produce more – and so on in a sequence alterable by changing circumstances but always in accordance with the principle of meeting market opportunities in the most suitable competitive manner.”

When the corporation undertakes direct investment the market expansion involved enables it to maintain and extend its technological initiative to research, design and taste formation. Increased sales permit the spreading of a larger volume of output over committed costs and with that bring larger profits out of which to influence further expenditures on re each and development. Even if in the corporate economy the individual entrepreneur has been replaced by u faceless technocracy, it is more than ever Schumpeter’s world: the rewards accrue to technological initiative and innovation. In this dynamic world the fixed element in costs is not the physical hardware of plant and equipment, which have traditionally pre-occupied economists. These have, indeed. become a relatively variable item of cost; the most “fixed” dement is now the specialized managerial, financial and marketing organization.

It follows that it is the location of the planning mid decision-making centre which is crucial.

It follows too. that the appearance of spare capacity in the hinterland and for, that matter, in the metropolis, is often an index of growth rather than of stagnation. Driven by the need to maintain and here possible to increase its share of the expanding market, and confident in the strength. the corporation can build ahead of the market. It can pre-empt new sources of supply and mov into new markets, even though there may be initial accounting losses on these investments.

This generalization is as true of manufacturing as it is of the resource industries. Indeed, the demand for the new industrial resources derives from the demands for the new manufactured goods. Both are the creation of modern technology. Initiative in industrial technology and strength in financial organization yields powerful advantage in carrying their operations to all comers of the “Free World”.

Competition by product differentiation and product design operates, as Galbraith has explained by making the consumer acquire “needs” for all sorts of goods and services lie did not even know existed. This Conn of competition creates a corresponding “product differentiation” in parts, components, and services necessary in the production of these final goods.

Barriers to the importation of finished goods are thus by-passed. Instead or imports of finished goods, there are imports of parts, components, capital goods. engineering and other professional services. The deliberate fragmentation of the market for consumer goods, well-known as a means of non-price competition, thus results in considerable fragmentation or the market for intermediate and capital goods as well. In addition to metropolitan exports or capital goods, raw material, supplies and partly finished manufactures, there are the so-called “indirect exports” generated by the “presence” of American business abroad.