John Dunning of Reading University was a friend, assessor and mentor; he helped me attain decent standards when I was professor of economics in the University of the South Pacific between 1973 and 1976. He had a theory of stages in foreign investment; in this column from Business World of 15 January 2004, I speculated on the stage India had reached.
Where is India on the path?
While I was a student in the
1958, John Dunning had come out with his path-breaking book, American
Investment in British Manufacturing Industry. It was timely –very useful
reading for my Tripos examination. But my interest in British investment did
not extend much beyond the examination; I moved on to nineteenth-century German
wages, livestock geography, technology transfer and such diverse subjects.
When I went to teach economics in
Fiji and Dunning was appointed assessor, the name rang a bell. But it was quite
a pleasant surprise when he actually came over. He was a handsome man – he had
a long austere face with a gentle smile. He was mild and polite in the English
fashion; but he managed to convey his views very clearly nevertheless. I
remember having given a couple of students firsts; he said the difference
between firsts and two-ones was not clear. The implication was clear: that the
standards were not set firmly enough. Fiji was a small place, and the University
of the South Pacific (USP) was not the last word in scholarship. Some of its
students might go abroad; universities elsewhere would want to know how good
the standards at the USP were. If they were comparable to those of universities
in Australia or Britain, the students might be admitted without further
scrutiny. I then pulled up my socks and raised standards.
I was keen to get John to meet my
students. Pacific students had a terrible reputation for getting drunk. But I
felt that I had inculcated some sense of sobriety in them; I wanted to prove
that they were as good as students anywhere else. So I organized a party in the
students’ club, with beer and scotch.
The party went just fine the
first year. Next year, the student I had placed in charge of the bar was a
footballer; without telling me, he admitted the entire football team in. They
gathered around the bar and started swigging. The beer disappeared alarmingly
fast. Then, in their collegial way, they started a fight.
I was appalled. I went up to
Sitiveni, my barman, and told him to get them out. I did not think he could do
it, for it was him against a dozen. But he went into action, beat up all of
them and threw them out. The operation was quick, but not entirely quiet; I
kept hoping John would not notice. He may have, but being an Englishman he
never raised an eyelid.
I moved from Fiji to Sussex to
Trivandrum to Delhi to Ottawa; I kept changing subjects every two years. But
John Dunning kept working on foreign investment year after year; although he is
now in his seventies, he continues to churn out papers. My days of flitting
across places are over. Now as a journalist I flit across subjects: I try to
write about something new every time. So I cannot say I have kept up with John.
But what I know is fascinating.
He has developed what he calls an
eclectic theory of foreign investment. Multinational enterprises invest abroad
for three reasons. First, they try to capture ownership-specific advantages
(O): for instance, patent rights, processes, and other strengths not available
to competitors. Second, they exploit locational advantages (L): for instance,
presence of natural resources, or cheap labour, or cheap inputs. Finally, they
exploit internalization advantages (I), which arise because some assets are
better owned or employed by the firm instead of being bought from the market:
for instance, a management structure, or an R&D outfit.
From these building blocks he has
developed a theory of the investment development path. Countries go through
through five stages. The poorest countries, in the first stage, have nothing to
attract foreign investment other than their L-advantage – location of natural
resources. As they get richer, a domestic market develops; it acts, or can be
used as, a magnet to attract foreign investment from multinational enterprises
with O-advantages. Eventually, domestic firms emerge that can exploit the
domestic market just as well as foreign firms, and start using their
O-advantages to invest abroad. In the fourth stage, outward investment comes to
exceed inward investment. In the last stage, reached by the countries with
highest incomes, inward as well as outward investment is substantial and the
balance fluctuates. Where does India fit on this path? In the 1970s, India was
just emerging from the first stage. In the 30 years since, it has crossed the
second stage and is entering the third.
John Dunning is a great
networker. His work has absorbed advances as others made them; and he has
influenced many. Some of his friends, admirers and followers are getting
together, under the aegis of Lancaster University Management School, at India
International Centre on the morning of Saturday, the 17th January,
to celebrate his work. A lively tradition of research has grown up around him;
long may he continue to lead it.
