Why it pays to be global

In recent years, Britain has seen an invasion of foreign direct investment. First we had the American car makers. Next came the Japanese. Now we have the Korean giants such as Daewoo. Recently, American utilities have been buying up regional electricity companies and the Germans have bought Rover. British exports are now increasingly made by foreigners, and both Tony Blair and John Major have to visit the Far Eastern countries to pledge their reliability to foreign governments.

This change of ownership of the British economy has crept up on most people unawares. To the government it is a triumph of its industrial policy - cheap labour, flexible working patterns and government hand-outs. To Conservatives, workers have been priced back into jobs, many of them working for foreign companies. To others, it is much more worrying, indicating a loss of control over industry and hence a diminution of sovereignty.

But why can foreigners produce in Britain with British workers more effectively than British companies? Why have they come here? To try to answer these questions, we need to understand international business, and consider why it has developed so strongly in the 1980s and 1990s. That is the purpose of Geoffrey Jones's The Theory of International Business. Unfortunately, his survey of the theory and history of these kinds of business provides very few answers.

At the outset, what is needed is a theory to explain the advantages of multinational production bases. Why do companies that produce in several countries do better than those that stick to one home country base? Conventional economic analysis suggests at least three sources of ownership advantage: research and development leading to superior products; superior management; and financial benefits from geographical dispersion and size. To this may be added the work of Ronald Coase who explained the nature of firms as a trade-off between the reduction of transaction costs by doing things internally within an organisation and the alternative of coordinating production through markets. In addition, Jones puts considerable emphasis on the rather slippery concept of "entrepreneurship" and what he calls the "eclectic paradigm", which tries to put the alternative theories together under one umbrella.

As Jones indicates, having trawled through these theoretical explanations, "there remains no universally agreed theory of international business". He therefore takes "an evolutionary approach" which boils down to taking a look at the various waves of multinational development in a historical context. Not surprisingly, the motives and explanations vary: the big international push at the end of the 19th century and the beginning of the 20th century had rather different explanations from that currently taking place. To an economist this is to be analysed in terms of the fundamental building blocks of economies: the technology underlying production and the tastes of consumers. The nature of production a century ago was radically different from that pervading modern computer-driven factories and offices. The drive for natural resources, epitomised by the growth of the international oil industry, gave way to more complex requirements of market and technological access.

Ultimately, Jones's analysis provides few answers. The book reads like a textbook of others' theories rather than a new insight into the practical questions. Like many such eclectic approaches, the conclusions are that "it all depends". As Jones puts it: "The net balance of costs and benefits of inward investment have varied widely over time, between industries, and between different firms pursuing different strategies." He must be right, but that is little comfort to policymakers who have to decide whether to encourage the current wave of inward investment into Britain. To the question: Does the current transformation of the ownership of the British economy and the dominance of foreign investment matter? - Jones's answer is that "it depends on the exact nature of the package". Thus, the old British approach to economic policy - case-by-case, piecemeal, each on its merits - is endorsed in the absence of any theoretical framework.

Dieter Helm is fellow in economics, New College, Oxford.