Foreign investment in periods of globalization in a long-term perspective | Researcher: Álvaro Ferreira da Silva
The activities of multinational enterprises (MNEs) became the subject of systematic study through the pioneering work of Hymer and Vernon in the 1960s. The Uppsala model (1977) built upon these early explanations and advanced a “stages view” of firms’ internationalization, starting with exports and progressing to multinational operations. MNEs carried out a cumulative process of competitive advantages in the home economy before investing abroad.
Research on international entrepreneurship in the 1990s pointed out a new phenomenon: some firms had the intent to internationalize from their very inception, seeking to exploit a particular niche market, usually in the technology sector. Different labels arose in an effort to capture the absolute novelty of this business strategy, such as “global startups” and “born-global firms”.
The historical evolution of international business demonstrates the inadequacy of concluding that “born-global firms” were a new type of MNE emerging in the late 20th century. In fact, the period from the mid-19th century to the First World War was characterized by similar international ventures. The “free-standing companies” were created in one country to operate from their inception in another one, and were a specific type of MNE, as Mira Wilkins observed (1988).
This article argues that the free-standing firm was only one among other MNEs that differed from the “classic” Uppsala type. The formation and development of the largest Portuguese railway company in the mid-19th century provides the basis for an analysis of its ownership and control structures, strategy over time, and change in periods of conflict. This type of MNE was pervasive in infrastructure investments (railways, utilities, mining, for instance) with clusters of entrepreneurs based in Paris. They developed their operations in peripheral countries, offshoring management and services procurement in the capital home country. The claim by Wilkins that the free-standing firm was the most typical mode of British investment abroad before WWI suggests, by analogy, that French investment was embodied in another business configuration, such as the one analyzed in this article.
The relevance of this article goes beyond the identification of a new international business form, typical of the first global economy. It emphasizes the flexibility, complexity, and polymorphous character of foreign direct investment before WWI, much in the same way as similar flexible solutions are coping with today’s global economy. Networks of entrepreneurs, financiers, and engineers promoted those business ventures, creating a multinational business elite that was especially active at the time, only to disappear in the interwar period under the double blow of war and economic depression. It is therefore possible to relate both globalization periods in a common interpretative proposal: periods of larger capital flows at the scale of the global economy correspond to more flexible and complex organizational solutions supporting FDI, in both the late 19th century and at the present time.
The analogy between the two periods of globalization should not be pursued much further, at the risk of falling into anachronistic conclusions. The global economy of the late 19th and early 20th centuries had resilient institutional and informational impediments, which increased transaction costs to foreign investors in emerging and peripheral markets: non-standard accounting and auditing procedures; difficulties in evaluating credit and investment risks; agency problems in controlling management in international ventures. The “born-global firms” characteristic of this first age of world market integration tried to cope with these shortcomings, as it is explained in the article.
Publication details: Silva, Álvaro. 2014. "Organizational Innovation in Nineteenth-Century Railway Investment: Peripheral Countries in a Global Economy." Business History Review 88(4): 709-36
Photo: Flickr, Tony Hisgett