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The History of Foreign Direct Investment in the United States to 1914.

The History of Foreign Direct Investment in the United States to 1914. The recent growth of research on foreign direct investment owes a great deal to Mira Wilkin's previous work on U.S. outward investment. This study of inward investment complements her study of The Emergence of Multinational Enterprise: American Business Abroad from the Colonial Era to 1914 (1970). The present work maintains the same meticulous standard of scholarship. As Wilkins states in her introduction, it is the first book of its kind on this particular subject. Others writers, such as Peter J. Buckley and B. R. Roberts, European Direct Investments in the United States before World War I (1984), have touched on various aspects of it, but this is the first systematic treatise.

With such a formidable volume of material, the structuring of the presentation requires particular care. Wilkins adopts a two-stage approach. She begins with a narrative of the period 1607-1875, during which chartered colonial investments were superseded first by portfolio investments in state debt, then by trade investment and by speculative investments in land and minerals, and finally by railroad investments and import-substituting manufacturing investments.

The period of most intense investment, 1875-1914, is analyzed on a sectoral basis in the second part of the book. There is excellent coverage of railroad, mineral, and agricultural investments as well as conventional manufacturing. The tricky area of service investments--banking, distribution, communications, etc.--is handled with particular success. A summary and discussion of the principal findings appear in the Epilogue.

Wilkins is at pains to emphasize the underlying continuity of foreign investment in the United States, and particularly the flows of capital mediated by the pre-eminent London market. She successfully rebuts the view that foreign capital was of limited significance for U.S. economic development after 1875. Although there were fluctuations in foreign involvement in the United States, notably around the mid-nineteenth century, there was far greater continuity than in other host countries, many of which witnessed only brief spurts of foreign interest when they were first opened up for development.

The study is well-informed by economic reasoning. It successfully avoids the pitfalls of business biography by concentrating on general themes throughout. Nevertheless, it is sometimes uncompromising in keeping the reader immersed in detail. The first page of the book, for example, plunges into the constitution of the Virginia Company--and the Plymouth Company, the New Netherland Company, and the Mississippi Company all follow in quickfire succession. Only a brief paragraph in the preface signposts the reader through the ensuing material.

The book does not contain an analytical introduction in which key concepts are defined, policy issues are delineated, and the major primary sources are critically reviewed. The key distinction between direct and portfolio investments appears as a commentary on (or a digression from) the discussion of trade-related investments in the period 1970-1803. Similarly, the crucial theoretical link between a proprietary technology and manufacturing direct investment is burried in chapter 5 between a discussion of non-British investments, 1875-1914, and an analysis of portfolio investment growth.

Wilkins also seems reluctant to relate her findings to wider issues. The breadth of literature coverage in the notes is most impressive, but this breadth is only spasmodically reflected in the text itself. Given that the United States was the world's greatest debtor nation throughout part of the nineteenth century, and its greatest industrial power by the end of the century, it is surprising that Wilkins does not touch at all on the broader issues raised by writers such as Charles Kindleberger and W.W. Rostow. She does not even use her own earlier work to relate inward to outward investment in a systematic way.

Although Wilkins seems to accept that the modern economic theory of the multinational enterprise can explain most, if not all, of her findings, she is remarkably reticent on this issue. The corroboration of theory is implicit rather than explicit in her analysis. Some of her greatest findings can certainly be explained quite elegantly in theoretical terms.

For example, the pattern of German chemical and pharmaceutical investment in the United States after 1875 accords well with the view that these firms used direct investment as an alternative to licensing in exploiting a monopolistic technological advantage. But what of those earlier monopolies--the chartered trading companies--which also exercised control at a distance to preserve their monopoly power? Do they fit the theoretical model too? The answer would seem to be yes. Once a monopoly has been created, for any reason, it is important to prevent undercutting by unauthorized producers. In the case of the colonial export trade, the possibility that goods could be smuggled out on "own account" and thereby spoil the export market required monitoring at the source of supply. Thus those controlling the marketing in London, say, had to exercise direct control over the procurement and loading of supplies in the colony. Once the monopoly principle was abandoned, as it was (largely) by the eighteenth century, the need for backward integration to monitor cheating was eliminated. Although competitive merchants still required correspondent relations to coordinate purchasing and sales, backward integration was not essential.

Another prediction of theory is that advances in communication promote direct investment because they reduce the problems of day-to-day management at a distance. The disastrous experiences of some of the early trading companies confirm the difficulty of managing at a distance when communication is dependent on annual summer sailings of the fleet. The growth of direct as opposed to portfolio investment in the last quarter of the nineteenth century coincides with improvements in telecommunications and trans-Atlantic passenger travel, as several writers have pointed out. The preponderance of portfolio investments in the intervening period testifies to the need for a "hands off" approach by investment when communications are poor.

The dynamics of foreign investment is frequently analyzed as a problem of combining access to a source-country asset such as technology with knowledge of the host-country environment. Foreign involvement is a learning experience, during which the firm progresses through various contractual arrangements, say from overseas sales agency to a marketing joint venture, to wholly owned host-country production. This pattern of progression is confirmed by Wilkins's results on manufacturing investment for the 1875-1914 period.

But interestingly enough, an analogous pattern can be discerned so far as mid-nineteenth century investment in railroads, minerals, and real estate is concerned. In this context the source-country asset is access to an international financial center enjoyed by reputable merchant bankers. The knowledge of the host-country environment is provided by people who have traveled in the United States--perhaps as engineers or mining consultants--and by expatriate relatives or business partners. The synthesis of these intangible assets is effected within an elite social group that may be formally constituted as a syndicate, trust, or "free-standing" company. The progression of contractual relations is often quite rapid, for once the financing has been effected, management quickly devolves to the host country. What began as a direct investment soon becomes a de facto portfolio investment as the control becomes "domesticated." Wilkins emphasizes at the outset that this domestication of control is a recurrent theme in inward investment in the United States.

Theory also suggests that porfolio investment should normally go in just one direction across the Atlantic (ignoring the diversification motive), whereas direct investment may go in both directions at once. This is because portfolio investment is concerned with the movement of financial resources from capital-rich countries to capital-scarce ones, while direct investment is based on the transfer of specific technologies, branded products, and management practices that can originate in differentiated forms in both countries at once. This result is also confirmed by Wilkins 's evidence, both in the present book and in the earlier Emergence of Multinational Enterprise. European financing of railroads and real estate through portfolio flows was largely a one-way affair, with limited U.S. investment in Europe at the same time. But when high technology direct investments assumed significance, direct flows tended to balance out--early U.S. investments in European consumer durables production were matched by European investments in the U.S. chemical and engineering industries, for example.

There are, however, some salutary lessons for theorists as well. The importance of informal social ties, the close link between human capital and financial capital in middle-class and professional immigration, and the significance of national differences in the mentality of speculative European investors are all points that emerge as important, but about which theory has so far relatively little to say. The problem seems to be not that existing theory is flawed, but that its scope is too narrow to do full justice to the range of empirical evidence now available. Over the past few years new theoretical work has helped to motivate empirical work, but now, with this landmark study, there is an opportunity for empirical work to motivate new theoretical work as well. Wilkins's book contains a wealth of new material or interest to both historians and economists, and it is to be expected that it will prove as influential as her previous books in encouraging future work on the subject.

Mark Casson is professor of economics at the University of Reading. His recent publications include The Firm and the Market (1987) and Enterprise and Competitiveness: A Systems View of International Business (1990).
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Author:Casson, Mark
Publication:Business History Review
Article Type:Book Review
Date:Mar 22, 1990
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