Multinational Enterprise, Political Risk and Organisational Change

From Total War to Cold War

Neil Forbes, Takafumi Kurosawa, Ben Wubs

• Editorial: Routledge
• Año: 2018
• ISBN:
  9781351692311
• Edición: 1
• Categoría: Business
• Categoría: Business History

Hitherto, the organization of international business has been studied mostly from a managerial point of view or by examining the relationship between firms and the economy. Yet, the development of the modern, multinational firm - the most important type of business organisation - has been strongly influenced by the conflicts that bedeviled the twentieth century. The volatile macroeconomic and political environments experienced by international business point to how important it is to study political risk. Consequently, Multinational Enterprise, Political Risk and Organisational Change: From Total War to Cold War breaks new ground: it argues that non-market elements and historical context are key to understanding the way international business has been organised. This edited volume offers an historical approach to analysing how multinational enterprise has developed over time and around the world, through a series of well-crafted chapters, on important topics in international economic and business history, written by authorities in their respective fields of study and research. The study is based on the underlying premise that the coming of the two World Wars, the devastating and long-term consequences of such total wars, and the ideological challenge of the Cold War acted as a pivot points in shaping the nature and character of multinational firms. By examining such phenomena, this study offers insights to anyone who has an interest in business, economic or political history, management and business studies, or international relations.

Chapter 1 of this book is freely available as a downloadable Open Access PDF at http://www.taylorfrancis.com under a Creative Commons Attribution-Non Commercial-No Derivatives (CC-BY-NC-ND) 4.0 license.

Part I
Geopolitical Risks and Organisational Challenges

1
Swiss and (Anglo)-Dutch Multinationals and Organisational Change in the Era of Total War

Takafumi Kurosawa and Ben Wubs

Introduction

It has been suggested that the two world wars were a part of the cause of the decentralised corporate structure of European multinationals and that companies in the neutral states (the Netherlands, Sweden and Switzerland) enhanced their international competitive advantage.¹ However, research into multinational companies, based in neutral states, that might have capitalised on the war to gain a competitive edge is still scarce. Considering the tendency of European companies to demonstrate adaptation to the local market and to manifest a more decentralised structure than their American counterparts, an in-depth analysis of the impact of the two world wars on European corporate structure, together with the exogenous condition of the division into small national markets, has yet to be made.

This chapter aims to explore organisational change as a result of political and security risks of four major European multinationals—Roche (pharmaceuticals), Nestlé (food), Unilever (non-mineral oil, fats, food and soap), and Philips (incandescent lamps, electronics)—originating partly or wholly from two relatively small neutral countries at the time, namely Switzerland and the Netherlands, Both countries had highly developed, open economies with a high density of multinational enterprises. The chapter is based on four company archives, government archives, research results of the Independent Commission of Experts (ICE),² as well as corporate histories of the four companies. It addresses the following questions: how did both wars and nationalistic economic policy affect the organisational structures of these four multinationals, and to what extent did these organisational changes have elements of duration and continuity?

Despite their worldwide presence, the Swiss companies have not been studied much, even in Switzerland, compared to companies in other neutral states. It was as late as the mid-1990s that the study of the period from the 1930s to 1945 intensified in response to the international debate; the result was the establishment of ICE, and yet still relatively few research works are based on a business historical perspective.³ The studies that do exist are hardly known outside Switzerland, and the amount of research on international comparisons is far from sufficient.⁴ With regard to the Netherlands, Ben Wubs explored the case of Unilever, but the scope is mostly limited to analysing the UK, and German-dominated continental Europe.⁵ Ivo Blanken published a study of Philips during the German occupation, but this research focusses particularly on the occupied Netherlands.⁶ Although the four companies studied here showed similar organisational responses, a closer look shows that political circumstances between Dutch, Swiss and Anglo-Dutch companies differed greatly. The moment when managements decided to reorganise the companies in response to political risk also differed. Sometimes several exogenous pressures played a role at the same time. Generally, increased levels of taxation are key to understanding organisational change during the inter-war period. Economic nationalism, and the threat of war and military occupation forced companies to take even more extreme measures. The four case studies focus particularly on the following significant themes: localisation (adaption to national circumstances), decentralisation, taxation, the formation of holding companies, twin corporate structures and geographical relocation of the businesses.

F. Hoffman La Roche in the Border City: From Foundation to the First World War

F. Hoffmann-La Roche & Co. was established in 1896 in Basel, a city at the junction of Swiss, German and French borders, a geopolitical fact which gave the company an international character from the beginning. German Patent Law called for the domestic exercise of a patent within three years of approval; this prompted Roche, since its founding, to locate its main plant in the nearby village Grenzach on the German side of the border. The company relocated successively most of its R&D function, sales organisation and patent management operation there by 1910.⁷ It also started exporting its product and establishing its export agencies in each country and, from the early 20th century, it also increased the number of local subsidiaries and pursued localisation of packaging and legal compliance. It started, before its competitors, highly personal sales activities in each market by using medical representatives. With its subsidiaries and agencies in 35 countries, it had become Europe’s second largest pharmaceutical enterprise next to IG Farben by 1929.⁸

For a company with such multinational characteristics, the First World War dealt it an unexpected major blow. The Swiss-German border was closed, the traffic between its biggest manufacturing base, Grenzach, and the headquarters was made difficult, and the supply of intermediate materials from Germany to Switzerland was disrupted. Since the company had its largest plant in Germany and a French name (after its founder), it was exposed to boycotts and the risk of blacklisting. Its French subsidiary tried to break through this deadlock by advertising its support of France. However, in July 1915, Emil C. Barrell, the then manager of the Grenzach plant in Germany and a future president of Roche, was detained and placed under house arrest in Berlin for the rest of the war, thereby undermining the company.⁹

Under these circumstances, Roche expanded its main factory at its Basel headquarters in Switzerland, renamed its subsidiaries, and kept a low profile in advertising. The German plant was restructured and given an independent corporate status—Chemische Werke Grenzach AG (Cewega)—in early 1916, under which Suddeutsch Diskont Gesellschaft became its shareholder, with an agreement that the shares would be bought back after the conclusion of a peace.¹⁰ The existing plant management led by the Swiss was maintained, but most of the members on the auditing committee and the board of directors were replaced with Germans, and the employees were reshuffled between the Basel headquarters and the German production base, according to their nationalities. It was an attempt to pursue localisation and dilute its Swiss character.¹¹

The company faced bankruptcy in 1919 because of difficulties during the First World War and the collapse of its foreign-currency asset value in the immediate post-war period. It was reorganised as F. Hoffmann-La Roche & Co. AG.¹² In the following year, after the demise of Fritz Hoff-mann, the company founder, Barell returned from Germany to assume the presidency. Likewise, in 1921, the US subsidiary experienced financial difficulties, but Barell managed to steer through these by a drastic reduction in headcount, consolidated his authority by dispelling veteran and family board members and instated corporate governance under professional management.¹³

The company’s penetration into the US market had begun with the establishment of a sales agency in 1895 and moved into higher gear with the founding of a subsidiary in 1905.¹⁴ Following the crisis directly after the First World War, its US subsidiary made a staggering recovery in revenue under President Elmer H. Bobst, an American, surpassing the performance of the German subsidiary in 1926, and that of the Basel headquarters in 1929. After 1921, it kicked off a fully fledged local production unit, and relocated the production base from New York to Nutley, New Jersey, in 1929.¹⁵

Conversion to a Twin Corporation, Great Depression and Readiness for Another General War

The pre-war international economic order did not return after the end of the First World War and multinational companies were forced to adapt themselves to the new situation, which could be characterised by a heightened tone of retribution, mutual distrust and economic nationalism. National tax authorities started targeting the profits attributable to the in-country operations of foreign-domiciled companies, and increasingly prioritised their homegrown enterprises through economic policies such as the protection of intellectual property rights. In addition, wartime disruption of transport and communication, seizure and boycott of foreign firms were still fresh memories. These factors had noticeable impact on corporate governance and corporate organisational structures.¹⁶

One of the countermeasures taken by multinationals in such an environment was to reorganise their headquarters as a holding company. At Roche, the headquarters in Basel had directly owned the shares of its foreign subsidiaries but, after 1927, the shares were gradually transferred to a holding company called Sapac, which was established in Lichtenstein.¹⁷ At that time, a Sapac share was deemed identical to a Roche share, and the Roche shareholders were assigned a Sapac share for every Roche share they owned. The two companies’ shares were deemed inseparable. Roche shareholders received the dividend from both companies, but the Sapac shares were set aside and managed by trust businesses, so that the possibility of direct disposal of shares by Roche shareholders was excluded. The Roche group businesses were now reorganised as identical twins, taking a unique form, with each independent of the other, with no capital ties but sharing the same shareholder composition by their articles of incorporation. This double corporate form was intended to avoid the risk of seizure of foreign subsidiaries, tax claims on the parent company, blacklisting due to filiation, while maintaining integrity as a single corporate entity and ensuring equitable distribution of the group’s profit to their shareholders.¹⁸

In March 1938, when Nazi Germany annexed Austria, Roche relocated Sapac to the Republic of Panama, away from Liechtenstein which now bordered the Third Reich. At the end of the same year, President Barell came back from the US and asserted that their business focus should be on the ‘West’, namely the Anglo-American world and Latin America. He made a decision to scale back the expansion plan of the research institute in Basel and to reallocate the resources to the UK and the US.¹⁹

The favourable setting of Panama can be seen in light of the fact that Nestlé had also chosen to set up its holding company there. Located at a geopolitically convenient setting between two oceans and two continents, it was not only far away from the warring states of Europe but, for a Latin American country, it also enjoyed a favourable political environment and an excellent economic infrastructure. It was virtually an American colony, with US sovereignty over the Canal Zone, and almost owing its independence to the interests of American capital.²⁰ During the Second World War, its political situation became temporarily destabilised, starting with the declaration of war against the Axis, and the advent of a short-lived, anti-American government. Nevertheless, Panama stayed within the American sphere of influence, both militarily and economically. Its company law and taxation system were extremely favourable to foreign holding companies, thus offering an ideal safe haven for companies originating in Switzerland, which, unlike the UK, France, Belgium and the Netherlands, lacked overseas colonies.²¹

Flight of Presi...