MULTINATIONAL CORPORATIONS IN LDCS: A REPLY
| DOI | http://doi.org/10.1111/j.1468-0084.1977.mp39003008.x |
| Author | DANNY M. LEIPZIGER,WILLIAM H. COURTNEY |
| Published date | 01 August 1977 |
| Date | 01 August 1977 |
MULTINATIONAL CORPORATIONS IN LDCS: A REPLY
By WILLIAM H. COURTNEY AND DANNY M. LEIPZIGER
The criticisms leveled by Mr. de Meza concerning the methodology and findings
of our 1975 paper in the BULLETIN can be examined within the framework he
lays out, namely, theoretical and practical issues.1 We were fully aware of the
conceptual issues he examines, but, unlike him, we were constrained by practical
research concerns as well.
Griliches and Ringstad (1971) preface the section on data problems in their
pioneering work on production function estimation by 'commenting on some errors
of measurement problems that plague more or less all empirical studies'.2 Cer-
tainly there are biases introduced by inadequate measures of capital, quality of
labour, simultaneity etc.; however, these are universally known and usually un-
repairable, especially in cross-country finn studies. The two biases singled out by
de Meza are capacity utilization, which Griliches and Ringstad could not adjust for
in the Norwegian study and which proved even more difficult to adjust for in a
cross-country study, and simultaneity bias between factor input values and output
values. This latter issue, which is of some theoretical interest, is misstated, how-
ever, since our dependent variable is value added and not value of output; thus
many of the price distortions in final product markets do not apply.
De Meza raises an interesting conceptual point in claiming that, with substantial
excess capacity, LDC firms would not alter factor proportions towards increasing
employment unless output were to increase. Although excess capacity is costly in a
fixed cost sense, it appears to us that capital-labour determinations depend more
on relative operating costs, since idle machinery does require energy to operate,
energy which in fact has become rather costly of late.
De Meza's diagram purports to demonstrate how a series of Eckhaus-type fixed
proportion production processes could conceivably be fitted with an erroneous
Cobb-Douglas production function. Of course, the homogeneity assumption is
always a concern; however, samples at the three-digit level of industrial disaggre-
gation do fit both Cobb-Douglas and Constant Elasticity of Substitution functions
rather well, and in no case is an Eckhaus-type function warranted. Our results are
much more consistent with the hypothesis underlying Figure 1 than with De
Meza's conjecture.
De Meza claims that we offer no explanation why MNCs should select more
capital intensive technologies in LDCs, ex ante, where in fact we explicitly stated:
'By standardizing operations, and reducing parts inventories, learning costs of
personnel, and administration, MNCs may be acting efficiently in selecting for their
LDC affiliates a relatively capital-intensive ex ante plant design identical or similar
to those used at home or in their DC affiliates. MNCs may be attempting to
maximize global profits. .
1 De Meza (1977), Courthey and Leipziger (1975).
2 Griliches and Ringstad (1971), p. 56.
Courtney and Leipziger, p. 298.
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