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Every team member would prefer a team in which no one, not even himself, shirked.
Alchian and Demsetz (1972: 790)
Virtually everyone agrees that working in hierarchies is at times unpleasant. Yet most people in the twentieth century spend most of their time in hierarchical organizations – supervising subordinates or being supervised by their own superiors.
This was not always the case. In the early nineteenth century, most economic activity was carried out in small cottage industries consisting of individual tradesmen and a small number of apprentices. Even our largest federal bureaucracies were only loosely hierarchical, with most postmasters and land agents working as individuals miles from the nearest “supervisor” and showing a marked tendency to set their own policies (Crenson 1975). Most economic activity took place among individual farmers, buyers, wholesalers, importers, and exporters (Chandler 1977).
Today, most of our goods are produced by large corporations instead of individual wheelwrights or weavers, and even our food is produced in large part by agribusiness. Law enforcement is provided by a large hierarchy instead of the night watchman, and education is provided by another bureaucracy instead of the individual in a one-room schoolhouse (Knott and Miller 1987). Yet there is a good deal of unhappiness with hierarchy, centering around doubts concerning both its efficiency and its effect on individual autonomy or liberty. While concerns about government efficiency and intrusions on individual liberty are an ongoing theme in U.S. society, similar doubts have begun to be voiced about corporate bureaucracies.
Corporate culture … accomplishes just what the principle should – it gives hierarchical inferiors an idea ex ante how the organization will “react” to circumstances as they arise – in a very strong sense, it gives identity to the organization.
Kreps (1984)
Barnard (1938) argues that encouraging cooperation is a central role of management; however, he does not claim that cooperation is inevitable:
It is readily believed that organized effort is normally successful, that failure of organization is abnormal. This illusion from some points of view is even useful. … But in fact, successful cooperation in or by formal organizations is the abnormal, not the normal, condition. … most cooperation fails in the attempt, or dies in infancy, or is short-lived. … Failure to cooperate, failure of cooperation, failure of organization, disorganization, disintegration … are characteristic facts of human history. This is hardly disputable. (4–5)
But why shouldn't the evolution of cooperation be inevitable? As long as the relationship is guaranteed to be long term, and the participants have a shared expectation of reciprocated cooperation, then cooperation should be sustainable as a long-run equilibrium by rational, self-interested players.
Unfortunately, even when the conditions for cooperation are fulfilled, cooperation is not a unique, determinate outcome of long-term social interaction. The folk theorem proves that, in any repeated Prisoners' Dilemma game, there are an infinite number of outcomes that are sustainable as longrun equilibria by rational, self-interested actors.
This is the fundamental message of the theory of repeated games of complete information; that cooperation may be explained by the fact that the “games people play” – i.e., the multiperson decision situations in which they are involved – are not one-time affairs but are repeated over and over.
Aumann (1981: 13)
For managers of business firms, the evidence described in Chapter 8 offers only cold comfort. It suggests that there are, to greater and lesser extents in different industries, competitive pressures on managers to achieve the greatest levels of efficiency they can. Markets may “discipline” managers who fail to achieve efficiency; but the literature on capital markets does not tell managers anything about how to elicit greater efficiency in the hierarchies they manage.
From the standpoint of evolutionary economics, academics can maintain that those organizations that are not driven into bankruptcy are probably managed in a “better” way than those that are; managers who are not replaced by takeovers are presumably more able than those who are. Individual managers, however, would like to know what characterizes those more efficient firms, so that their firms can be among the “survivors” in the evolutionary competition. Are the survivors those firms that delegate decision making according to certain social choice rules? If so, which rules? Are the survivors those firms that adopt certain forms of incentive systems? If so, which incentive systems? The literature on efficient markets is silent on this subject.
In order to study the investment patterns of the MNCs and the impact they have had on the ASEAN-3, the authors felt that one way was to focus on MNCs with operations in at least two of the three countries and compare their operations in each location. These were identified from a questionnaire survey of 570 MNCs operating in Singapore. The companies were all in the manufacturing sector and from a cross-section of industries — food, chemicals, electronics, fabricated metal products, precision engineering, and so forth. The MNCs, the majority of whom were from the United States, Japan and Europe, were asked if they had manufacturing operations in Malaysia and Thailand, and if so, to provide details on: the date they established operations in the ASEAN-3; the products they made; the number of staff they employed in each location; and the linkages between their operations. From the responses, thirty MNCs were selected for a more detailed study, based on a further questionnaire survey and interviews with key personnel in the three countries.
Initial Questionnaire Survey Findings
From the initial survey of 570 MNCs, a total of 510 (89-5 per cent) responded to the questionnaire. Of these, 128 companies (25 per cent) indicated that in addition to their Singapore operation they also had operations in Malaysia and/or Thailand. An analysis of the sequence of their investments yielded the following result:
• 91 of the 128 (or 71 per cent) started production in Singapore before establishing operations in Malaysia and/or Thailand;
• 30 companies (23 per cent) started operations in the other two countries before coming to Singapore;
• the remaining 7 companies (6 per cent) started operations in the ASEAN-3 at about the same time.
The ninety-one MNCs which started operations in Singapore before moving to Malaysia and/or Thailand formed a large enough group from which a sample could be drawn for further detailed study. They also formed a broad spread in terms of origin — mainly Japanese, American and European companies and 100 per cent foreign-owned in almost all cases.
Since the mid-1980s, the economic strategies of Singapore, Malaysia and Thailand (or the ASEAN-3 in short) have shown a remarkable degree of convergence in one important respect: all three have adopted export-led, foreign investment-driven growth strategies. They rely chiefly on multinational corporations (MNCs) to develop export-oriented industries in the non-resource-based sector. Although Singapore is often grouped with the “little dragons” of East Asia — the newly-industrialized economies (NIEs) of Hong Kong, Taiwan and South Korea — it differs from the NIEs in that its export orientation does not depend on local entrepreneurs or local capital inputs but on MNC investments. In this respect, Singapore now has more in common with Malaysia and Thailand.
This convergence of economic strategies among the ASEAN-3 raises a number of interesting questions. The first is: what factors brought about this convergence? The answer is by no means clear, especially since the convergence was a recent phenomenon. Singapore was the first among the ASEAN-3 to welcome MNCs in large numbers in the early 1960s. This was at a time when the wisdom of such a strategy was often questioned. In fact, much of the literature on development economics at the time was distinctly anti-MNCs and full of foreboding about the dangers of dependency on MNCs and of neo-colonialist exploitation. While Singapore, with its tiny domestic market, adopted the strategy out of necessity, Malaysia and Thailand had larger domestic markets and initially took the more prevalent route of import-substituting industrialization. It was only in the mid-1980s that the latter made decisive policy shifts away from import substitution. This raises a further question: what part did the MNCs themselves play in bringing about these policy shifts? Put another way, did MNC investment patterns in Southeast Asia, and in particular the benefits they brought Singapore, influence the governments of Malaysia and Thailand to reshape their policies?
The reliance on MNCs also raises another set of questions. In the past, each country focused on activities that made best use of its natural resources.
Southeast Asia's relationship with foreign companies go back a long way, at least to the colonial era of the British and the Dutch. In the case of Singapore and Malaysia, the British East India Company played a major economic role in the 1800s. Although Thailand was never colonized, it too had extensive dealings with foreign companies. However, the activities of foreign companies in those days were primarily exploitative, the aim being to source spices and other raw materials for consumers in their home countries. Following independence from the colonial powers in the post-World War II period, governments in the Southeast Asian countries had to draw up their own economic strategies. These strategies, and the circumstances and factors they had to take into account, are well documented. This chapter focuses in particular on the strategies adopted by the ASEAN-3 to promote foreign direct investments (FDI) and woo MNCs to set up export-oriented factories in their countries. It outlines the strategies adopted by each country and the changes they made, and highlights the results achieved. The chapter concludes with an analysis of the impact of these strategies in terms of the growth of manufactured exports and the countries' overall economic performance.
THE ECONOMICS TRATEGIES OF THE ASEAN-3
Singapore: A Pioneer in MNC-led Industrialization
Singapore's blueprint for export-oriented industrialization; drawn up immediately after separation from Malaysia in 1965, called for internationalization of almost all its economic activities. The key strategy was vigorous promotion of foreign direct investments to achieve rapid export-oriented industrialization. This was a bold move at the time, untried elsewhere; its long-term effects could, therefore, not be foretold. Nevertheless, the legal and institutional framework for this policy was quickly laid within the first few years.
Responses from the thirty MNCs shortlisted for the detailed study indicated that labour supply and the training and development of manpower were critical factors in their investment decisions. All cited Singapore's superior work-force as one of their chief reasons for investing in Singapore. At the same time, however, they cited Singapore's shortage of labour, particularly at the operator level, as the reason why they had moved out some of their operations. Their main reason for choosing Malaysia and Thailand as the preferred new location was precisely the availability of a large pool of low-cost trainable workers.
Based on the responses from the thirty companies interviewed as well as additional research, this chapter reviews the labour supply situation in each of the three countries. It also covers the important but often neglected role of manpower training and development, particularly in technical disciplines. In addition, it surveys the quality of the work-force in each of the ASEAN-3 and their wages and benefits. The conclusions, presented at the end of the chapter, assess whether labour constitutes a competitive factor in the ASEAN-3, or whether the differences in labour resources have instead led to greater complementarity among them.
THE LABOUR SUPPLY SITUATION
Singapore
Following the strong recovery of the Singapore economy from the 1985/86 recession, companies have faced a tight labour market at all levels of the work-force — from production operators to post- graduate researchers. With a total work-force of only 1.25 million, demand for labour has outstripped supply, especially after the economy bounced back strongly from the 1.6 per cent decline in GDP in 1985 to 11 per cent growth in 1988.
The MNCs indicated that the most serious labour shortage in Singapore occurred at the operator level. Shortages at other levels exist but are not as critical.
Singapore's experience with industrialization, as well as the more recent experiences of Malaysia and Thailand, has proven that an MNC-led industrialization strategy can lead to rapid ascent up the technology ladder. This experience disproves the Marxist-inspired development economics of the 1950s and 1960s which harped on the dangers of exploitation by MNCs and a dependency on foreign agents. What the early development economists failed to foresee was the global nature of MNC operations and the tremendous opportunities provided by the international division of labour.
Although it cannot be denied that the ASEAN-3 are dependent on MNCs to generate growth, this dependency has proven to be mutually beneficial. While MNCs benefit from low-cost production bases, the host countries have found that, through MNCs, they have ready access to capital resources, technological know-how, up-to-date products, modern managerial and technical expertise, and global markets. This chapter analyses the manner and extent to which this was achieved in the ASEAN-3. Apart from examining the flow of technology from the more advanced countries to the host ASEAN countries, an assessment will also be made of the intra-ASEAN technology flows based on the experience of the MNCs studied.
Technology is defined here in its broadest sense to include knowledge of modern scientific methods that can be applied to the production and distribution of goods and services. Defined this way, technology is embodied both in the hardware of machinery and equipment and in the “software”, that is, the people who operate, maintain, adapt and develop these machines.
A number of studies on technology transfer in ASEAN have been done by Nathabhol, Osman-Rani et al., Ng et al. and Chng et al. Chng et al. lists three distinct components of technology that can be transferred:
1. physical assets, such as plant, machinery and equipment;
2. information, both technical and commercial, relating to such matters as process know-how; choice of technology; engineering design and plant construction; organization and operating methods; quality control; and market characteristics;
3. human skills, especially those possessed by specialized professionals and engineers.
POLICY SHIFTS AND SINGAPORE'S “DEMONSTRATION EFFECT”
The recent foreign investment boom in Malaysia and Thailand has brought the economies of the ASEAN-3 much closer together, at least in their openness to foreign investments and in their reliance on MNCs as agents of export-led development. All three countries now welcome foreign companies and offer a roughly similar range of tax incentives and other privileges. In Malaysia's case, the policy changes of 1986, after the shock of the 1985-86 recession, were a major factor. The main change was to allow MNCs 100 percent ownership of their subsidiaries, which led to a deluge of foreign investments. In the case of Thailand, the boom appears to be the result of active promotion at a time when Japanese companies were increasingly looking for low-cost offshore production bases. Of the ASEAN-3, Thailand has been the biggest beneficiary of the recent outflow of investments from not only Japan but also the United States, Europe and the NIEs, in particular Taiwan.
There is also evidence that Singapore's earlier experience with an MNC led policy played a part in the convergence of the ASEAN-3's strategies. In fact, this was a factor behind the policy shifts by the Malaysian and Thai authorities who had to look for new engines of growth and new ways to diversify their economies. By the mid-1980s, the benefits of Singapore's policy of playing host to MNCs were unambiguous. It had rapidly acquired the latest technology and a capability to produce up- to-date and high-value products and services. For two decades its economic performance surpassed that of Malaysia and Thailand which had adopted inward-looking policies that relied on their own resources and inputs. In other words, Singapore's policy had a “demonstration effect”: it proved that a dependency on MNCs did not result in a one way outflow of benefits to foreign agents but instead led to benefits that were mutual and considerable. It also showed that through MNCs, a developing country could readily plug into world markets, tap managerial and technical expertise, and have access to foreign capital.
The quality of infrastructure was cited by MNCs as being a big factor in their investment decisions. This includes: utilities and telecommunications; land and industrial estates; seaports and airports; and land transport. This chapter compares the adequacy of infrastructure in the ASEAN-3 and the part this played in the investment decisions of MNCs. The results are based on interviews with the thirty selected MNCs and other independent research. The conclusions are presented at the end of the chapter.
UTILITIES AND TELECOMMUNICATIONS
Utility supply in Singapore was rated as well-developed and reasonably priced. Breakdowns or disruptions in the supply of power and water are infrequent and this has helped to ensure smooth factory operations. Statistics compiled by the Public Utilities Board show that Singapore's electricity rates are comparable to those in Malaysia and cheaper than those in Thailand.
Singapore's water supply situation is, however, an area of concern. A large portion of Singapore's potable water is sourced from Johor. Large industrial consumers of water, such as refineries, and paper and pulp factories, indicated that this might impose constraints on their long-term growth. Companies said that where feasible, they tried to recycle water to optimize its usage.
Singapore's telecommunications facilities were rated as excellent, with international direct dialling (IDD) facilities to almost all countries. The outgoing IDD rates charged by the Telecommunication Authority of Singapore (Telecom) are generally lower than incoming rates. Several MNCs indicated that they were considering setting up regional data and communications centres in Singapore to co-ordinate the electronic transmission of data and information to their various operations in the region.
In the case of Malaysia, its utility supply and telecommunications facilities were considered adequate. The need is for continual upgrading and expansion of these services, especially with the large number of new operations coming on-stream.
In the 1960s and 1970s, Singapore was one of the very few Third World countries to welcome multinational corporations (MNCs) to set up business. The conventional wisdom at that time, as explained in a torrent of academic literature, was that MNCs represented the power and wealth of the rich nations, the First World. Their purpose in investing in Third World countries was to exploit them.
This attitude had two consequences. First, governments in Third World countries discouraged MNCs from direct investment. Next, they grouped themselves into international alliances to confront the rich countries. The most famous of these groups came into being under the auspices of the United Nations in UNCTAD (United Nations Conference on Trade and Development). The purpose of UNCTAD in time became no less than the establishment of a New International Economic Order (NIEO) in which rich countries would share their wealth with poor countries in a more just world order. NIEO did not take root.
In the meantime, Third World countries which welcomed MNC direct investment prospered. Singapore was the first country in Southeast Asia to adopt this policy in the manufacturing, financial and tourist industries. Soon, MNCs spread their operations to our neighbours, first Malaysia, then Thailand and later Indonesia. All these countries have benefited from MNC operations. There are indications that some Third World countries which previously opposed MNC direct investment are changing their minds. For example, Vietnam, once the most militarist and xenophobic country in Southeast Asia, has opened its doors to MNCs.
This study traces the operations of MNCs in Singapore, Malaysia and Thailand. The data collection in field studies was done by two officers of the Singapore Economic Development Board, Mr Tan Juay Miang and Mr Suresh Natarajan. Their write-up was reviewed and edited by Mr Patrick Daniel.
In Part V the concepts of cognitive complexity, personal control, and self-esteem developed in Parts II and III serve as criteria for assessing the role of work in a market economy. On the one hand, that role may be said to be the scandal of the market. In the world of work, we find uncertainty, anxiety, authoritarianism, waste of talent, and many lost opportunities that could have made work more fruitful. On the other hand, even now work is the market's principal contributor to both happiness and human development.
It is in work, not in consumption and, as research reports show, not even in leisure, where most people engage in the activities that they find most satisfying, where they learn to cope with their human and natural environments, and where they learn about themselves. The economists' ideas that work is the sacrifice or disutility that earns for workers the benefits or utilities of consumption is, I believe, quite false. But the idea that market forces systematically degrade work to increase profits is also false. What is true is that market forces systematically undermine worker satisfactions and learning in order to advance the interest, not so much of owners but of consumers. Consumers may not represent a ruling class, but they are sovereign and those who work are their subjects.
In the name of “efficiency,” consumer benefits are purchased by the burdens laid on workers. It is a “purchase” without a purchaser. The implied tradeoff between consumer welfare and worker well-being is not chosen. One reason is that the market cannot weigh many of these sacrifices because they are unpriced.
As stated in the introductory chapter, there are two maximands in economic life as there are in other aspects of life: a sense of well-being (happiness and satisfaction with life-as-a-whole) and human development. Whereas Parts II and III dealt with the relation of the market to the three elements of human development we have identified (cognitive development, a sense of autonomy and personal control, and self-esteem), Part IV begins the analysis of market effects on the other desideratum, a sense of well-being, with references to ethical problems and human development along the way.
The substantive features of the market experience that are given attention here are human relations and work, these two features representing the subjects that (in addition to the ethics of distribution) have been most severely criticized by market critics. The criticisms of friendship and work have different validities. In Part IV we find that the criticism of market influences on human relations is largely unjustified, whereas in Part V we will discover that the criticism of work in a market economy is trenchant and well conceived. Partly for that reason we will spend much more time on work than on human relations.
Chapter 11 takes up the specific arguments about how an institution whose central feature is exchange influences our interpersonal relations. I point out that in many ways the choices people make in market transactions are no different from other choices made in the ordinary course of social life, but there is a set of specific differences between market and other choices that helps to account for the alarm over exchange as a way of life.
In this penultimate Part VII we explore the concepts of utility, satisfaction, and happiness. Our target is the relation of these moods and thoughts to market institutions and practices. Koopmans reports that economists study “the satisfaction of human wants in human society,” and “the best ways of satisfying human wants.” Mises claims that there are no boundaries to economics, for “economic action consists in the endeavor to remedy the state of dissatisfaction” wherever it is to be found. Pigou states: “In the deepest sense, economic reality comprises states of mind – the satisfactions and dissatisfactions of human beings – and nothing else.” To this may be added the catechism of an economics text: “What is the economic system supposed to do? The answer that it should contribute to human happiness is as good a start as any.”
Certainly the market makes a contribution to the satisfaction of human wants, but as pointed out in the introduction to this part, there are reasons to doubt the effectiveness of the market in maximizing happiness. In order to clarify both the contributions and the failures of the market in these respects, we must first examine the nature of happiness and utility, explore their relationships to each other and to the market, and only then can we assess the claims of the economists.
I start this chapter with an exploration of the conditions necessary for the development of a theory of happiness as a contribution to understanding the strange association between economics and what we may call hedonics. The second major theme in this discussion deals with skepticism about both the possibility of happiness and the possibility of our knowing anything about it.