Multinationals Bring Their Culture With Them

And given that many countries have terrible cultures for growth, that’s great

Many countries are not doing so well. They are stuck in poor equilibriums of distrust and mutual suspicion. Can outside institutions change things for the better? The answer, it seems, is “yes”. Bloom, Sadun and van Reenen (2014) show that multinationals, while affected by the level of trust in the country they are operating in, are also affected by the level of trust in the countries they are based out of. Companies headquartered in high trust countries are more likely to decentralize their decision making, even in low trust countries. 

One of the ways in which trust matters is that it allows you to decentralize decisions. If the manager of a more efficient firm cannot trust his subordinates to make good decisions, or behave honestly, it reduces the size that firms can be. One of the striking facts about the developing world is that their firms are overwhelmingly small, poorly managed, inefficient, and informal. (Unfortunately, it is not sufficient to simply formalize the firms for them to be efficient. They’re doing the best they can, and experimental evidence on formalizing firms has had disappointing results. Some firms remain small and inefficient to avoid taxes — but the benefit of making them pay taxes is not that they adopt better practices, but that they are destroyed and replaced). There is a long tail of unproductive firms, which the more productive firms are unable to chase out of the marketplace. 

Multinational firms are able to get around this, because they import a culture with them. The authors give the example that, “in California, a multinational affiliate from Sweden (a high-trust country) would typically be more decentralized than a multinational affiliate from France (a relatively low-trust country)”. What’s more, the multinationals have distinct styles resembling their own countries. Some firms are better at giving incentives. Others specialize in monitoring. There are distinct company cultures, which leads to the adoption of things like IT across national boundaries.

They got this data through the simple expedient of just asking firms. Obviously, they did not tell why they were asking, though they received endorsements as to their seriousness from the reputable local economic authorities, and neither did they tell their survey takers how well the firms were doing, as that might prejudice their interpretation of the answers. They did not ask about financial information, which was gathered from outside disclosures. It’s a really cool data set.

So what should we do? In the developed world, efforts to “support local business” when importing from the third world are extremely misguided – most of them pay lower wages and have worse conditions than the big multinationals. In earlier work, I have emphasized informational spillovers — managers copy what those near them are doing, and someone investing in new management practices makes it cheaper for others to adopt them. Multinational firms face difficulties as they move to different legal systems. It goes almost without saying, but the standard advice is good — you shouldn’t have trade barriers, you shouldn’t give foreign firms special difficulties in court, and so on. Most of these are just good, pro-market and pro-competition policies which should be adopted on their own merits anyway. But there is a reasonable argument that, because of the informational spillovers, you need to go one further. 

Many developing countries have used special economic zones to kickstart growth – here, you go beyond just changes to the whole system. You give them exemptions from taxes. You give them exemptions from regulations. Often, this is not as bad as would seem – sure, you might be promising to collect at a lower rate than the one which is on the books, but you were never going to those rates to begin with. They were purely notional. Getting some tax collection, and greater economic growth, is much better than holding back growth to protect tax rates that were never going to be collected.

So that’s why I was especially disappointed in the recent changes which Honduras is trying to do to its deal with Prospera. Prospera is a sort of special economic zone, where the private company is in charge of local government, in exchange for fees. It was constitutionally guaranteed in the early 2010s, and is now being revoked by the new, socialist administration. The claimed reason is that allowing them to make governmental decisions — on the land they bought! — violates the sovereignty of Honduras.

The “anti-colonial” impulse in developing countries is profoundly self-destructive. The conduct of the company is no more than that of a real estate developer. There is no world in which it does not improve the standards of living for Hondurans, and add to the government's coffers. But, it violates their sovereignty, in the same way, I suppose, that foreigners buying property in America violates ours. If that is sovereignty, then a pox on sovereignty. We should care about making people better off, and favor sovereignty if it does that. Otherwise, not a whit of regard for it.