Pioneers for Profit: Foreign Entrepreneurship and Russian Industrialization, 1885-1913 9780226559926

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PIONEERS FOR PROFIT

Pioneers loneers for Profit

(md^uMA wMicm •

^_ JL • „

John P. McKay McKay THE UNIVERSITY OF CHICA.GO CHICAGO PRESS CHICAGO & & LONDON

International Standard International Standard Book Number: 0-226-55990-4 0-226-55990-4 Library of of Congress Catalog Card Number: 79-103932

The University of of Chicago Press, Chicago 60637 The University of of Chicago Press, Ltd., London

® © 1970

by The University of Chicago All rights reserved Published 1970 Printed Printed in the United Stat.es States of of America

To Jo Ann Ann

CONTENTS V1U viii ix ix

LIST OF MAPS LIST ABBREVIATIONS ABBREVIATIONS PREFACE PREFAOE

Xl Xi

Part I. Dimensions of Entrepreneurship

11

33

INTRODUCTION INTRODUOTION

22

E N T R E P R E N E U R S : SOUROES SOURCES AND TYPES ENTREPRENEURS:

33

THE T H E BASIC STRATEGY

44

ADVANCED TECHNOLOGY IN I N STEEL STEEL AND OOAL COAL ADV ANOED TEOHNOLOGY

55 66 77 88

PATTERNS OF MANAGEMENT MANAGEMENT

40 40 72 72 112 112

158 158 201 201

THE T H E MOBILIZATION OF OAPITAL CAPITAL THE T H E PROBLEM OF LABOR W I T H STATE AND SOOIETY SOCIETY RELATIONS WITH

242 242 268 268

Conclusions Part II. Case Studies and Concfusions

99

A PIONEERING PIONEERING INNOVATOR: THE T H E JOHN J O H N OOOKCOCKERILL COMPANY IN I N SOUTHERN SOUTHERN RUSSIA, RUSSIA, ERILL OOMPANY

1885-1905

10 10

BOOM-TIME BOOM-TIME

297 297 SPEOULATION: SPECULATION:

THE THE

RYKOVSKII RYKOVSKn

OOAL COAL OOMPANY COMPANY

318 318

11 11

THE T H E HUTA-BANKOVA HUTA-BANKOVA STEEL STEEL OOMPANY COMPANY AND THE THE

12 12

TOWARD PASSIVE INVESTMENT: I N V E S T M E N T : THE T H E BANQUE BANQUE DE

337 337

BONNARDEL GROUP GROUP BONNARDEL L ' U N I O N PARISIENNE PARISIENNE AND AND THE T H E BOGATYR BOGATYR RUBRUBL'UNION COMPANY, 1910-1914 1910-1914 BER OOMPANY, 13 13

CONCLUSIONS OONOLUSIONS APPENDIX APPENDIX BIBLIOGRAPHY BffiLIOGRAPHY INDEX INDEX Til

368 368 379 379 391 391 397 397 417 417

MAPS European Russia in 1914 1. European 2. The The Southern Southern Industrial Industrial Region Region in in 1914 1914 2.

viii vni

45 45 115 115

ABBREVIATIONS USED ABBREVIATIONS USED IN IN FOOTNOTES FOOTNOTES Affaires EtranA.E., Brussels Archives du Ministere des Affaires geres, Brussels Archives A.E., Archives du du Ministere Ministere des des Affaires Affaires EtranEtranA.E., Paris Paris geres, geres, Paris Paris Archives A.N. Archives Nationales, Nationales, Paris Paris A.N. Archives Banque de B.U.P. Archives de de la la Banque de l'Union TUnion PariPariB.U.P. sienne, sienne, Paris Paris C.C. Correspondance Commerciale Commerciale (commercial (commercial Correspondance C.C. French consular series series of of the the French consular correspondcorrespondence) ence) Credit C.I.C. C.I.C. Credit Industriel Industriel et et Commercial, Commercial, Paris Paris Archives Archives du du Credit Credit Lyonnais, Lyonnais, Paris Paris C.L. C.N.E.P. Comptoir National d'Escompte C.N.E.P. Comptoir National d'Escompte de de Paris, Paris, Paris Paris Archives 'Ecole des Mines, Paris E.M. E.M. Archives de de 1TEcole des Mines, Paris P.R.MSS Company records of the Forges P.R. MSS Company records of the Forges de de la la ProviProvidence Russe, Marchienne-au-Pont, Belgium dence Russe, Marchienne-au-Pont, Belgium the order Note: All Note: All dates dates are are given given in in the order of of day-month-year; day-month-year; thus 3-5-1897 means 33 May 1897. thus 3-5-1897 means May 1897.

ix ix

P REFACE PREFACE This study investigates the role of foreign entrepreneurship neurship in in Russian Eussian industrialization industrialization between between 1885 1885 and and 1913. 1913. My My purpose purpose is is to to go go beyond beyond work work on on the the statistical dimensions dimensions of of large large external external investment investment in in statistical Eussian industry industry and and to to understand understand the the actual actual procprocRussian esses, mechanisms, mechanisms, and and contributions contributions of of active active forforesses, eign entrepreneurship. entrepreneurship. In In doing doing so so II have have focused focused on eign on three distinct distinct problems: problems: the the pattern pattern of of enterprise enterprise three and investment investment as as practiced practiced by by business business leaders leaders of and of the advanced countries of western Europe before the the advanced countries of western Europe before the First World World War; War; the the pattern pattern of of foreign foreign participaparticipaFirst tion in in Russian Eussian industry industry and and its its influence influence on on accelacceltion erated Russian Eussian growth growth in in this this period; period; and and finally finally the the erated nature of relations that existed between econominature of relations that existed between economically advanced advanced foreigners foreigners and and relatively relatively backward backward cally Eussians during during development. development. All All of of these these are are rereRussians lated to to vexing vexing contemporary contemporary problems, problems, and and theretherelated fore II have have gladly gladly run run the the risks risks of of didactic didactic history. history. fore My work work is is based based largely largely upon upon previously previously unutiunutiMy lized private private business business archives archives in in western western Europe, Europe, lized and of of course course public public archives archives as as well. well. These These archival archival and materials are discussed in the bibliography. They materials are discussed in the bibliography. They permitted me me to to study study aa large large number number of of French, French, permitted Belgian, and and German German firms firms operating operating in in Russia. Eussia. PubPubBelgian, lished Eussian material has proved to be less valulished Russian material has proved to be less valuable, but but it it has has been been carefully carefully examined examined and and imporimporable, tant on occasion. There are two obvious omissions tant on occasion. There are two obvious omissions which are are connected-most connected—most English English entrepreneurs entrepreneurs which and the petroleum industry. Originally had ininand the petroleum industry. Originally II had tended to analyze the petroleum industry, which was tended to analyze the petroleum industry, which was dominated by by foreigners, foreigners, and and particularly particularly EnglishEnglishdominated men. Finally Finally it it seemed seemed best best to to examine examine the the rapid rapid rise rise men. of the entire Tsarist petroleum industry in a sepaof the entire Tsarist petroleum industry in a separate study. study. II hope hope to to do do this this at at aa later later date. date. rate xi

xii

Preface Preface

Beginning of Beginning with the examination examination of of a large goup gonp of foreign foreign entrepreneurs, I have tried tried to find the forforeigner's performance and to respond thereby eigner 's average performance thereby criticism that that entrepreneurial entrepreneurial studies are are to the criticism often unrepresentative unrepresentative or irrelevant. The dimensions often of entrepreneurship entrepreneurship have been presented presented analytiof cally in in Part P a r t I. I. Part P a r t II I I consists consists of of four four carefully carefully cally chosen case case studies studies that that exemplify exemplify and and corroborate corroborate chosen key findings findings in in Part P a r t I. I. The The analytical analytical chapters chapters of of key P a r t II and and case case studies studies of of Part P a r t II I I are are thus thus meant meant to to Part reinforce each each other other and and sharpen sharpen our our understanding understanding reinforce of the the performance performance of of the the representative representative foreign foreign of entrepreneur. entrepreneur. A word of of explanation explanation concerning the problems of of Russian Eussian proper proper names and transliterations transliterations is necessary. Within "Within the text I have generally generally used the accepted cepted English English spelling for for place names, and I have transliterated proper transliterated proper names according to the Library of Congress system with slight modifications. modifications. brary of reader in identifying identifying different different enterTo aid the reader prises, I have added an appendix of of major major firms firms disappendix gives the original titles of cussed. This appendix of firms in either French French or Russian Eussian as well as the firms firm's English English equivalent equivalent as as found found in in the the text. text. firm's In In researching and writing this study study I have been aided and encouraged encouraged in many ways by many people. Although Although it is impossible to do justice to this support, a few acknowledgements may express my gratiacknowledgements may staff of of the Interlitude. I would like to thank: the staff brary Loan Service at the University University of California, California, brary Loan Berkeley, for tracking down many obscure volumes; various archivists and directors in Europe, and esof the Credit Credit Lyonnais and the Banque pecially those of 1'Union Parisienne; and the Foreign Foreign Area Felde l'Union Program and Dr. James Gould, for generlowship Program ously supporting supporting my my work work in in this this country country and and ously

Preface Preface

xiii

abroad. An earlier version of chapter nine first appeared Business History History Review, Review, whose peared in in Business whose editors editors me permission to use use it kindly granted kindly granted me permission to it here. here. In In the the academic world wish to single out out for for their aid: academic world II wish to single their aid: Professor Olga Crisp Crisp of of London, London, my colleagues ProProProfessor Olga my colleagues fessors Ralph and Benjamin Profesfessors Ralph Fisher Fisher and Benjamin Uroff, Uroff, Professor Gerald Gerald Feldman Peldman of of Berkeley, Berkeley, and and Professor Professor sor David Landes, Landes, my thesis advisor, advisor, who gave me me ininDavid my thesis who gave valuable aid and criticism, as did Professor Henry valuable aid and criticism, as did Professor Henry Eosovsky. Professors Professors Landes Landes and and Rosovsky Eosovsky first first Rosovsky. stimulated and and then then channeled channeled my interest in in ecostimulated my interest economic They may claim aa large large measmay rightly rightly claim measnomic history. history. They ure of whatever whatever credit credit this study deserves, deserves, without, without, ure of this study of course, course, being in any any way way responsible for its its shortshortof being in responsible for comings. Lastly, Lastly, II am am very very grateful grateful for for JoAnn's Jo Ann's comings. constant help help and and encouragement. encouragement. constant

1 1 INTRODUCTION INTBODTTCTION 1 1 In the latter part of the nineteenth century the ever In the latter part of the nineteenth century the ever widening waves of the Industrial Revolution widening waves of the Industrial Eevolution Britain aa century launched launched in in Great Great Britain century earlier earlier broke broke upon economically backward agrarian Russia with upon economically backward agrarian Eussia with great Military defeats great force. force. Military defeats and and economic economic stagnastagnation tion in in the the 1850s 1850s had had forced forced aa hesitant hesitant feudal feudal society society to begin in earnest the arduous task of modernizato begin in earnest the arduous task of modernizaThen in tion and tion and industrialization. industrialization. Then in the the 1860s 1860s and and early 1870s a whole series of developments-such early 1870s a whole series of developments—such as as the emancipation the serfs, of the emancipation of of the serfs, the the real real beginnings beginnings of aa railroad railroad system, system, an an expanding expanding internal internal market, market, and and the the creation creation of of aa considerable considerable banking banking system system -helped preconditions of eco—helped establish establish the the preconditions of modern modern ecoThe initial overall effect of these nomic growth. nomic growth. The initial overall effect of these changes limited, however, changes was was limited, however, and and it it was was aa generageneration before the tempo of industrial progress tion before the tempo of industrial progress quickquickproportions in ened ened to to revolutionary revolutionary proportions in the the 1890s. 1890s. After decAfter the the Russian Eussian industrial industrial revolution revolution of of that that decto use ade ade (or (or "big "big spurt" spurt" or or "take-off," "take-off," to use somewhat somewhat analogous current terminology), the analogous current terminology), the pace pace of of inindustrial development marked time during the dustrial development marked time during the seriseriBut it ous ous depression depression from from 1900 1900 to to about about 1908. 1908. But it recovered impressively and was probably recovered impressively and was probably "self"selfsustaining" the second sustaining" in in the second surge, surge, which which lasted lasted from 1909 to the outbreak of W orld from 1909 to the outbreak of World War War I. I. The The pattern of two great booms broken by a long depre~­ pattern of two great booms broken by a long depression sion may may be be seen seen in in table table 1. 1. The rate of growth The rate of growth for for Russian Eussian industrial industrial producproduc-

4

Dimensions of of Entrepreneurship Entrepreneurship Dimensions

tion compares favorably favorably with rates of industrial industrial growth in other countries during both their respective industrial revolutions and the years at the turn turn Eussia's rate of of the century. Indeed, in the 1890s Russia's Table 1 ANNUAL GROWTH GROWTH RATES RATES OF OF RUSSIAN RUSSIAN INDUSTRIAL INDUSTRIAL ANNUAL PRODUCTION, 1885-1913 1885-1913 PRODUCTION, (In (In Percent) Percent) Years Years

Growth Rate Rate Growth

1885-1889 1885--1889 1890-1899 1890-1899 1900-1906 1900-1906 1907-1913 1907-1913

6.10 6.10 8.03 8.03 1.45 1.45 6.25 6.25

Average Average

5.72 5.72

SOURCE: SOURCE: Alexander Alexander Gerschenkron, Gerschenkron, "The "The Rate Rate of of Growth Growth of of Industrial Industrial Production EconomicHistory History 77 SupSupProduction in in Russia Russia Since Since 1885," 1885," Journal Journal of of Economic plement plement (1947): (1947):149. 149. NOTE: NOTE: For For the the years years 1894-99 1894-99 the the growth growth rate rate was was approximately approximately 99 percent; percent;for for 1910--13, 1910-13,approximately approximately 7.5 7.5percent. percent.

industrial industrial growth growth was was perhaps perhaps the the highest highest in in the the world. world. Even Even after after 1900 1900 itit was was still still higher higher than than rates rates in in the the major major European European countries, countries, as as table table 22 shows. shows. At the the same same time time the the weight weight of of the the large large and and At backward agrarian agrarian sector, sector, the the rapid rapid rate rate of of populapopulabackward tion increase, increase, and and the the very very low low level level of of industrial industrial tion development in in1860 1860 (or (or 1890 1890for for that that matter) matter) meant meant development that Russia Eussia remained remained far far behind behind other other industrial industrial that nations in in 1913 1913 in in all all per per capita capita comparisons comparisons of of nations income or or consumption consumption in in spite spite of of its its industrial industrial income achievement after after 1885. 1885.In I n 1913 1913per per capita capita income incomein in achievement Eussia was was only only 101.4 101.4 rubles, rubles, as as opposed opposed to to the the Russia equivalents of of 300.4 300.4rubles rubles in in Germany, Germany, 460.6 460.6rubles rubles equivalents in Great Great Britain, Britain, and and 682.3 682.3 rubles rubles in in the the United United in

Introduction

5

States.11 That rapid rapid growth left left Russia poor in absolute and comparative comparative terms probably helps account account for judgments concerning for the great great divergency of judgments concerning the nature of the Russian Russian economy on the eve of the Table 2 Table 2 GROWTH GROWTH OF INDUSTRIAL INDUSTRIAL PRODUCTION PRODUCTION IN I N SELECTED SELECTED COUNTRIES, 1860-1913 1860-1913 (In Index Numbers: 1913 1913 = 100) Year Great Britain France Germany Russia U.S.A.

World

1860 34 34 1860 1870 44 44 1870 1880 1880 53 53 1890 1890 62 62 1900 79 1900 79 100 1913 100 1913

14 14 19 19 26 26 43 43 60 60 100 100

26 26 34 34 43 43 56 56 66 66 100 100

14 14 18 18 25 25 40 40 65 65 100 100

88 13 13 17 17 27 27 61 61 100 100

88 11 11 17 17 39 39 54 54 100 100

SOURCE: SOURCE:

Vierteljahrshefte Vierteljahrsheftezur zurKonjunkturjorschung Konjunkturforschung 31 31(1933): (1933):18. 18. NOTE: Industries included are mining, textiles, ferrous metallurgy, and food food processing. processing.

F i r s t World World War "War and related historical whatwhatFirst might-have-beens. Those drawing an essentially essentially opinterpretation stress (among other other things) things) timistic interpretation the relatively relatively high and sustained sustained rate rate of industrial industrial growth as decisive, while pessimists cite the low level of development development as symptomatic of fundamenfundamenlevel unaltered backwardness in 1913. Thus the artally unaltered guments of optimists and pessimists often often go past past refer to two different different sets of facts, facts, each other. They refer different fundamental fundamental conceptions of and perhaps to different of important in history. what is important In In analyzing this considerable Russian industrialindustrialization after after 1885 1885 many investigators investigators have focused focused 1. Olga Crisp, "Russia, 1860-1914," in Rondo Cameron et al., aI., Banking Industrialization (New Banking in the Early Early Stages Stages of Industrialization (New York, p . 184. 1967), p.

6

Dimensions Dimensions of of Entrepreneurship Entrepreneurship

on the primary primary influence influence of the state. As Professor Professor Gerschenkron puts it, "The " T h e strategic factor factor in the Gerschenkron great great industrial industrial upsurge of of the 1890s must be seen of the government. . . . Inin the changed policy of development became fact dustrial development became an accepted and in fact g o a l . ' ' 22 The centrality centrality of the state in the central goaL" Eussian economic economic development development in in the the last last years years of Russian of the nineteenth century century almost almost seems, seems, then, conthen, to to conthe nineteenth nect the the reforms reforms of of Peter Peter the the Great Great with with the the accomaccomnect plishments of of the the commissars commissars in in aa seamless seamless pattern: pattern: plishments Eussian economic economic development development was always directed directed Russian was always 38 by political political authority authority for for political political goals. goals. For F o r ananby other respected respected scholar scholar in in an an expansive expansive mood mood the the other finance minister, minister, Count Count Witte, Witte, who who was chief archiarchifinance was chief tect of of Russian Eussian economic economic policy policy in in the the 1890s, 1890s, even even tect becomes basically basically "a " a forerunner forerunner of of Stalin Stalin rather rather becomes than aa contemporary contemporary of of Nicholas I I " or, or, presumapresumathan Nicholas II" bly, John D. Eockefeller. And Eussia in the 1890s bly, John D. Rockefeller. And Russia in the 1890s becomes "the " t h e pioneer pioneer of of all all modern modern experiments experiments in in becomes 4 deliberate economic economic development. development.'' deliberate " 4 Certainly Certainly no one would deny the general imporof active governmental governmental involvement involvement in RusEustance of sian industrial industrial development development in the 1890s. Yet on the of Professor Professor Gindin's marvelous study on the basis of Bank from from 1861 to 1892, one might well argue argue State Bank that the decisive change in governmental governmental attitudes attitudes that occurred in the late 1860s and early 1870s.55 really occurred Similarly, one may well question whether whether Witte was in a civilized Stalin, and whether economic planning in today's underdeveloped underdeveloped countries countries is is derived derived from from today's 2. Economic ackwaf'dness in H istof'ical P ef'spective ((CamCamEconomic B Backwardness Historical Perspective bridge, Mass., 1962), pp.. 125. 3. Ibid., pp. p p . 145-51. Why Lenin' Leninf Why Why Stalin' Stalin? (New York, 4. Theodore Von Lane, Laue, Why p p . 52-53. 1964), pp. 5. 1. bank i ekonomicheskaia I. F. F . Gindin, Gosudaf'stvennyi Gosudarstvennyi bank ekonomicheskaia popogody (Moscow, 1960). Zitika pf'avitel'stva, 1861-1892 Utika tsaf'skogo tsarskogo pravitel'stva, 1861-1892 gody

Introduction Introduction

77

projects projects formulated formulated by a tsarist tsarist finance finance minister. minister. Indeed, one should. For F o r the role of the state in Rusdevelopment in these years is actually quite sian development And an understanding understanding of of that that role is exsubtle. And important for for any study on foreign foreign entretremely important preneurship. What "What in fact did the state do' do? Three activities activities stand stand out. First, it provided provided high tariff tariff protection protection for industry-very industry—very much like that associated associated with the contemporary contemporary governments of Meline in France, or McKinley in the United United States. Second, it acgreater part part of new railroad railroad concounted for the greater Russian system struction, which almost doubled the Russian from 1889 (18,600 miles) to 1901 (35,000 miles).6 miles). 6 The from government simultaneously simultaneously bought bought numerous prigovernment for top prices, so that by 1901 1901 govvate companies for ernment roads constituted constituted two-thirds of the total ernment government engaged engaged in aa rail network. network.71 Third, the government vast public relations campaign campaign to enlist support support for for vast industrialization at home and abroad. abroad. industrialization Of Of these three activities, only large-scale construction struction of of railroads by the government government might seem to be a radical departure departure from from the earlier earlier experience of of industrializing industrializing countries. Yet, as every every undergraduate has been taught taught for a long time, only undergraduate Britain built its railroads without without benefit benefit of of Great Britain continental railway railway extensive state aid. And several continental systems, like those of of Belgium Belgium or Imperial Imperial Geressentially state-owned state-owned and state-opmany, became essentially of the nineteenth century. 8 At At first first erated by the end of nineteenth century.8 6. P. Ekonomicheskoe rasvitie Rossii v XIX-XX P . A. Khromov, Ekonomicheskoe razvitie Bossii XIX-XX 'lJekakh vekakh (Moscow, 1950), p. 462. 7. Theodore Von Yon Laue, Lane, Sergei Sergei Witte Witte and the Industrialisation Industrialization of of Russia Russia (New York, 1963), p. p . 89. 8. For For example, Arthur Arthur Birnie's Birnie *s oft-printed oft-printed .An An Economic Economic HisHistory tory of of Europe, Europe, 1760-1939 1760-1939 (London, Methuen edition, 1962), pp. 41-44.

88

Dimensions Dimensions of of Entrepreneurship Entrepreneurship

glance the case for for radical government government experiment experiment and novel intervention intervention seems exaggerated. exaggerated. With With further further investigation investigation it becomes even more Surely the model for Stalin Stalin and future future planners planners so. Surely would have seen the state blazing some sort of trail trail industrial manager, complete with as producer producer and industrial pilot plants, quotas, and ruthless elimination elimination or conof possible Eussian state did trol of possible competitors. The Russian nothing of of the the sort. sort. In In fact, fact, with with the the exception exception of of nothing previously mentioned mentioned state-owned state-owned railroads, almost previously all of of Russian Eussian industry industry remained remained in in private private hands. hands. all Almost all all increase increase in in industrial industrial output output came came from from Almost private enterprise producing producing for for profit within aa relrelprivate enterprise profit within atively free market system. And when on occasion atively free market system. And when on occasion the state, state, as as banker banker of of last last resort, resort, came came to to hold hold an an the industrial enterprise, enterprise, like like the the Putilov Putilov Works Works in in the the industrial 1880s, or or the the Kerch Kerch Metallurgical Metallurgical Company Company in in the the 1880s, first decade decade of of the the twentieth twentieth century, century, it it did did so so relucrelucfirst tantly and and returned returned such such plants to private owners as as tantly plants to private owners quickly as as possible. possible. quickly One may argue of of course that that demand is almost always crucial in economic development: where it leads supply supply will follow. Accordingly, whether whether RusEussian demand came mainly from from large state purpurfrom some state demand demand combined with chases, or from propaganda and public relations adding up to an propaganda investment boom, remain crucial. investment boom, the state would remain Different societies and their Different their businessmen businessmen will invarrespond to increased increased demand and opportuniiably respond ties for for large large gain, gain, since since alleged alleged differences differences in in social social ties attitudes influencing business activity are largely attitudes influencing business activity are largely illusory or or inconsequential. inconsequential. 99 Yet Yet even even if if one one accepts accepts illusory 9. This states, admittedly a little baldly, the position of Alexander Gerschenkron in an extremely interesting discussion of of the development of entrepreneurial development entrepreneurial history, which is reprinted reprinted in Economic Backwardness, Economic Backwardness, ppp. p . 52-71. For For the other side, see,

Introduction Introduction

9

this argument, it is clear that the state only bought goods; it did not produce them. At most, the state state embarked upon an important important program program of public embarked effective works in an attempt to create adequate effective substituted for the the demand, a demand that could be substituted 10 market. 10 weak private market. In reality, this alleged substitution by the state state Western has also been exaggerated, at least among Western scholars. As a recent study of the period shows, " t h e specific criticism which can be brought against against "the part the Russian government is that only a minute part purof its budget expenditures went directly for the pursector.'' 1111 Thus Thus poses of developing the industrial sector." pridirect railroad construction and subsidizing of prigovernment's vate railroad construction, by far the government's most important important economically economically productive productive activity, activity, totomost taled little more than one billion rubles between 1880 taled little more than one billion rubles between 1880 and 1900, 1900, the the period period of of greatest greatest construction. construction. This This and sum did did not not exceed exceed government government custom custom revenue revenue sum from imports imports of of tea, tea, coffee, coffee, alcoholic alcoholic beverages, beverages, salt, salt, from 12 12 and herring in these years. Or, to put it another and herring in these years. Or, to put it another way, the the state state spent spent less less than than 55 percent percent of of its its budget budget way, 13 Yet during this this period period on on railroad railroad construction. construction. 13 Yet during this was by far the largest item for industrialization this was by far the largest item for industrialization purposes. Direct Direct subsidies subsidies to to industrialists industrialists were were not not purposes. 14 even aa close close second. second.14 even among others, others, David David S. S. Landes, Landes, "French "French Entrepreneurship Entrepreneurship and and among Industrial Growth Growth in in the the Nineteenth Nineteenth Century," Century," Journal Journal of of EcoEcoIndustrial nomic History History 99 (1949): (1949) : 45-61, 45-61, which which served served as as Gerschenkron's Gerschenkron's nomic point of of departure, departure, and and the the ensuing ensuing Landes-Gerschenkron Landes-Gerschenkron debate debate point in Explorations Explorations in in Entrepreneurial Entrepreneurial History, History, 1954. 1954. in 10. 10. Gerschenkron, Gerschenkron, Economic Economic Backwardness, Backwardness, p. p . 126. 126. See See chapchapters 33 and and 88 for for further further discussion discussion of of government government policy. policy. ters 11. Arcadius Arcadius Kahan, Kahan, "Government "Government Policies Policies and and the the IndustrialIndustrial11. ization of of Russia," Russia/' Journal Journal of of Economic Economic History History 27 27 (1967) (1967) :: 466. 466. ization 12. Ibid., Ibid., 466-67. 466-67. 12. 13. 13. Khromov, Khromov, Ekonomicheskoe Ekonomicheskoe razvitie, razvitie, pp. p p . 498-503. 498-503. 14. Kahan, Kahan, "Government "Government Policies," Policies," p. p. 467. 467. 14.

10

Dimensions of of Entrepreneurship Entrepreneurship Dimensions

Nonetheless, I would argue that government did have a key role in the crucial 1890s. That role was, however, very largely one of public relations, propaganda, and radiation of enthusiasm. If If "historians "historians tend often often to disregard the existing features of the reality reality of of government government policy policy and and to to pass pass judgment judgment on pronouncements,"1515 their on the the basis basis of of general general pronouncements,'' their failure is is understandable. understandable. The The public public relations relations camcamfailure paign was was well well organized organized and and resourceful. resourceful. And And it it paign had real real significance significance for for development, development, as as we we shall shall had see later. later. Yet Yet even even so, so, the the Witte Witte system system emerges emerges as as aa see wager, though though perhaps safe one, one, on on capitalists capitalists and and wager, perhaps aa safe Such aa strategy strategy would would seem seem private entrepreneurs.16 Such private entrepreneurs/6 to have have much much more more in in common common with with aa market market econeconto omy than than with with the the command command economy economy of of Stalin, Stalin, or or omy the planned planned economies economies of of parts parts of of the the underdevelunderdevelthe oped world, world, where where the the state state is is an an important important or or prepreoped dominant producer. producer. dominant private capital The The wager wager on on private capital was was of of course course anyanything but safe. The The nearly nearly automatic automatic supply supply of of creacreathing but safe. tive entrepreneurship entrepreneurship to to increased increased opportunity opportunity in in tive backward countries is is all all too too rare. rare. Many Many observers observers backward countries have noted, noted, for for example, example, that that the the price system often often price system have does not seem to to work in such such countries, countries, in in part part does not seem work in because large groups groups of of the the population refuse to to because large population refuse alter methods methods or or outlook outlook in in the the face face of of changing changing alter market conditions. conditions. Certainly Certainly Finance Finance Minister Minister market Witte believed Eussia lacked local businessmen who Witte believed Russia lacked local businessmen who had the the incentive incentive and and the the know-how, know-how, not not to to mention mention had the capital, capital, necessary necessary for for accelerated accelerated development. development. the He believed believed there there was was nothing nothing automatic automatic about about the the He supply of of entrepreneurship entrepreneurship or or knowledge, knowledge, but but that that it it supply could only only grow grow gradually gradually hand-in-hand hand-in-hand with with the the could growth of of industry. industry. And And since since industry industry itself itself was was growth 15. 464. 15. Ibid., Ibid., p. p. 464. 16. Von Laue, Witte, p. 300.

Introduction Introduction

11 11

dependent upon entrepreneurship, industrial industrial knowdependent how, and capital, which were all insufficient, insufficient, Russia Eussia was apparently apparently caught in the vicious cycle of of backwardness and slow change. Yet it was precisely precisely in the context of this analysis that Witte that the entire Witte from private private prosystem bet on a massive response from ducers. Or more precisely, it bet on private private foreign foreign entrepreneurship and its financial financial resources. Witte himpreneurship self matter in 1899 in a secret memoself summed summed up the matter randum for randum for Tsar Tsar Nicholas II.l1 II. 17 "The " T h e inflow inflow of of foreign foreign capital is, in the considered considered opinion of of the Minister of Finance [i.e., Witte], the only way by Minister of which our industry will be able to supply our industry supply our count r y quickly with abundant abundant and cheap products. Each Each try of capital, rolling in from from abroad, knocks new wave of down the excessively excessively high level of of profits profits to which businessmen are accustomed accustomed and our monopolistic businessmen profits through forces them to seek equal profits through technical improvements which lead to price reductions." reductions." 1188 improvements This believed it could content This suggests that that the the state believed itself with with creating creating some some real real demand demand and and great great itself investment enthusiasm enthusiasm because, although although the Rusinvestment sian market market was was very very imperfect imperfect and and its its entrepreentrepresian neurship inadequate, inadequate, the the international international market sysneurship market system of of capitalistic capitalistic Europe Europe and and its its businessmen businessmen was was tem highly responsive responsive to to new opportunities. Not only new opportunities. Not only highly would foreign capitalists capitalists enter enter Russia Eussia for for high profwould foreign high profits, but they would would continue continue to do so so even even as as profits profits its, but they to do 17. See Witte's secret memorandum tsar in March 1899 memorandum to the tsar for for the fullest fullest exposition of of his system, upon which the foregoing foregoing is based, in Akademiia Akademiia Nauk Materialy po Nauk SSSR, Institut Institut istorii, Materialy istoni SSSR, vol. 6: Dokumenty Dokumenty po istorii istorii SSSB, istorii monopolisticheskogo monopolisticheskogo kapitalisma'Vv Bossii Rossii (Moscow, 1959), pp. 173-95. (This very imkapitalizma portant translated by T. Von Laue in Journal portant document has been translated Journal of Modern History History 26 [1954]: of Modern [1954] : 60-75.) 18. Ibid., p. 184.

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Dimensions Dimensions of of Entrepreneurship Entrepreneurship

fell through through increased increased competition. Thus the sharp sharp demand would would not not result result only only in windfall rise in demand windfall for local local monopolists. Eather Rather it it would would elicit profits for profits and increase increase in in productive productive facilities such a response response and such facilities that that eventual eventual market market equilibrium equilibrium would would give both lower Therefore prices and and lower lower rates rates of of profit. profit. Therefore lower prices Eussia's great asset, which would allow it escape Russia's great asset, which would allow it to to escape the vast the fatal fatal dilemma dilemma of of underdevelopment, underdevelopment, was was aa vast external and external pool pool of of entrepreneurship, entrepreneurship, knowledge, knowledge, and capital tapped. capital waiting waiting to to be be tapped. Here indeed indeed Eussian Russian economic economic policy policy was was striking Here out out in in aa new new direction. direction. But But it it seems seems that that the the ensuing ensuing developmental had more more in in common common with developmental experience experience had those those of of contemporary contemporary Puerto Puerto Eico Rico or or the the Ivory Ivory Coast Coast than than with with those those of of Mao's Mao's China China or or even even NehNehrru's u ' s India. India. The The wager wager on on massive massive response response by by foreign to profit profit opportunities opportunities which which govgoveign capitalists capitalists to ernment ernment helps helps create create is is the the common common strand strand in in these these policies. The successes successes and and failures failures of of this this truly truly policies. The pioneering pioneering experiment experiment in in Eussia Russia are are the the subject subject of of our investigation. our investigation. 22 At this this point point itit isis necessary necessary to to pause pause and and consider consider At of the the general general theoretical theoretical questions questions related related to to some of some such First, there there isis the the quesquessuch aa developmental developmental plan. plan. First, tion tion of of definitions. definitions. In In the the quote quote cited cited above, above, Witte Witte spoke spoke of of "foreign "foreign capital," capital," which which might might include include all all foreign foreign investment investment and and not not just just foreign foreign entrepreentrepreneurial neurial investment. investment. At At the the same same time time itit seems seems clear clear that that he he isis referring referring primarily primarily to to investment investment in in priprivate vate corporations corporations and and excluding excludingforeign foreignloans loans to to the the Eussian Russian government. government. Tsarist Tsarist and and Soviet Soviet studies studies conventionally the same same distinction: distinction: analysis analysis conventionally make make the of of "foreign "foreign capital" capitaP' in in Eussia Russia focuses focuses on on foreign foreign investment in joint-stock joint-stock corporations; corporations; "foreign "foreign investment in

Introduction Introdudion

13

loans" l o a n s " to the Russian government government and its agencies agencies are discussed separately. The term term "foreign "foreign capital" t a l " is approximately approximately equivalent equivalent to foreign foreign corpooften in this rate investment, which will be used often study as a less ambiguous rubric. corporate There is second consideration. Foreign corporate investment does not necessarily mean foreign foreign deciinvestment for sion-making power, power normally prerequisite for effective foreign entrepreneurship. Thus the meanmeaneffective ingful distinction in current discussion between didiingful rect investment and portfolio portfolio investment in corporect rations operating operating in in foreign foreign countries. countries. The The former former rations concentrated forforexercises foreign control based on concentrated eign ownership; ownership; the the latter latter often often goes goes with with foreign foreign eign ownership that that is is small, small, or or fragmented, fragmented, or or passive, passive, ownership and this this ownership ownership pattern pattern may may be be quite quite compatible compatible and 19 In with local management and decision making. In the the with local management and decision making.19 real world world the the line line between between active active foreign foreign direction direction real and passive passive portfolio portfolio participation participation is is often often unclear, unclear, and but the the conceptual conceptual distinction distinction is is clear clear and and imporimporbut tant. F o r our purposes foreign entrepreneurship tant. For our purposes foreign entrepreneurship and direct direct foreign foreign investment investment are are roughly roughly analaanalaand gous. Both Both presuppose presuppose foreign foreign decision-making decision-making cacagous. pability. pability. Are there sound reasons supporting an industrialindustrialupon, ization policy which encourages, or even relies upon, foreign entrepreneurship and direct foreign investinvestment? Or is it more likely that foreign entrepreentreprement' unwitneurs exert a negative influence, promoting unwitbackwardness tingly (or intentionally) the same backwardness cure ? If If both positive and neganegathey are intended to cure? positive tive contributions are possible, how may the positive 19. See See Wilfred Guth, Capital Capital Exports Exports to Less Developed Developed 19. Countries (Dordrecht, (Dordrecht, Holland, Holland, 1963), 1963), particularly particularly pp. pp. 27-29; 27-29; Countries Raymond Mikesell, Mikesell, ed., ed., U.S. U.S. Private Private and Government Government Investment Investment Raymond (Eugene, Ore., Ore., 1962), 1962), pp. pp. 32-187. 32-187. (Eugene,

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Dimensions Dimensions of of Entrepreneurship Entrepreneurship

be maximized maximized and the negative minimized? To answer these questions fully fully would require an elaboof foreign foreign investment, economic develrate analysis of cultural change far far surpassing surpassing opment, and even cultural investigation and historical historical inclinaour empirical investigation tion. Nevertheless Nevertheless an an attempt attempt to to construct construct an an exextion. plicit conceptual conceptual framework framework should should provide provide tools tools to to plicit attack our our problem, problem, and and it it may may eventually eventually produce produce attack conclusions of of interest interest to to many many students students of of economic economic conclusions development and foreign investment, as well as to to development and foreign investment, as well as specialists in in European European economic economic history. history. specialists I t is often often claimed that direct foreign foreign investment investment It contributes to development development by employing idle reunexploited mineral deposits or unsources, such as unexploited deremployed deremployed labor, which usually abound in poor By putting putting idle resources to work foreign foreign countries. By investment adds to both output and income in the output investment explanation of of this host country. The most common explanation possibility of adequate capital for the possibility is the lack of development of existing resources.20 resources. 20 First, poor development of capital, and this countries have a limited stock stock of means that that even even aa high high rate rate of of savings savings provides provides only only means rate of of modest sums for investment. Second, the rate savings is is generally generally quite quite low low (Rostow's (Eostow's 5 5 percent), percent), savings and therefore therefore investable investable funds funds barely barely cover cover replacereplaceand ment of of existing existing equipment. equipment. Capital Capital available available for for ment new projects projects (net (net capital capital formation) formation) is is heartbreakheartbreaknew ingly inadequate. inadequate. Thus Thus an an inflow inflow of of foreign foreign investinvestingly ment can can supplement supplement insufficient insufficient domestic domestic savings savings ment and permit permit increased increased investment investment leading leading to to more more and rapid economic economic progress. progress. rapid I t seems likely, however, that that direct investment investment It 20. For For example, A. A. Fatouros, Government Government Gullf'antees Guarantees to Foreign Foreign Investors Investors (New York, 1962), pp. 11-15; Gerald Meier Eobert Baldwin, Economic Development: Theory, Theory, History, History, and Robert Economic Development: Policy (New York, 1957), pp. 419-27. Policy

Introduction Introduction

15 15

responds to more than a shortage of local capital. Albert Hirschman Hirschman has argued that in poor but developing countries there may may be less a lack of savings than a lack of of investment investment ability, which he depotentially fines as the ability to direct existing or potentially existing savings into productive investment. The shortage of of investing ability is often often so acute that that actually exceeds total investing capactotal savings actually 21 A variant frustrated savings.21 variant of of ity and results in frustrated argument is found found in recent historical studies of of this argument industrialization in continental Europe. These These early industrialization studies stress stress the the importance importance of of financial financial intermediintermedistudies far from from automatic linking of of savings savings aries in the far from the traditional agricultural agricultural and and commercial commercial from the traditional sectors with with farsighted farsighted entrepreneurs entrepreneurs in in the the ininsectors dustrial sector.22 sector.22 Thus Thus industrial industrial development development may may dustrial be limited limited in in part part by by an an entrepreneurial entrepreneurial failure, failure, the the be failure to join savings and investment opportunity. failure to join savings and investment opportunity. Foreign businessmen businessmen may may provide provide this this successful successful Foreign entrepreneurship—precisely the missing agent agent in in entrepreneurship-precisely the missing backward areas. areas. Then Then their their example example and and the the expanexpanbackward sion of of the the modern sector itself itself may may create create aa large large modern sector sion and previously previously missing missing supply supply of of local local entrepreentrepreand neurship. neurship. This is another another reason to believe that inadequate inadequate local entrepreneurship entrepreneurship is as crucial as inadequate inadequate local savings in direct foreign foreign investment. If If a shortshortage of of capital were the determining determining factor, domestic entrepreneurs entrepreneurs would borrow funds funds from from abroad abroad —either indirectly indirectly through through local banks with access -either foreign credit, or directly through the sale of of to foreign corporate securities-and securities—and carry carry out investment investment corporate 21. Albert Hirschman, The Strategy Economic Development Strategy of Economic Development (New Haven, 1958), pp. 35-39. 22. Cameron et a1., Banking in the Early Early Stages al., Banking Stages of of IndustrialIndustrialization, particularly ppp. ization, particularly p . 6-14 and 150-56.

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Dimensions Dimensions of of Entrepreneurship Entrepreneurship

themselves. Development Development would then advance with massive foreign foreign portfolio portfolio investment investment in stocks and bonds and very little foreign foreign entrepreneurship. The borrowing of of the United States during during large-scale borrowing nineteenth century, for example, would seem to the nineteenth pattern. follow this pattern. It I t is of of course true that that local businessmen businessmen might not have equal access to foreign foreign capital sources. But But better promotional promotional techniques, better better knowledge, better and better better results-in results—in short, better better entrepreneurentrepreneurship—can lessen this disadvantage. And this was ship-can probably truer truer in the nineteenth nineteenth century century than today, probably foreign capital then went abroad abroad as portsince most foreign folio rather rather than as direct investment. Similarly, a shift from from direct investment investment to portfolio portfolio investment investment shift continuing in a given country over time suggests a continuing for foreign foreign capital qua capital, (or developed) need for and the the formation formation of of adequate adequate domestic domestic investing investing and 23 Hirschman suggests.23 capacity, as Hirschman But But here we must add the fact that a large portion of of contemporary contemporary direct investment investment also flows between advanced countries, often often in both direcadvanced countries lack tions. Apparently, these advanced neither neither capital nor entrepreneurship. Capital marmarfinancial institutions function function actively; actively; kets and financial investment and net capital formation formation are are rates of investment high; and there is a large and growing pool of businessmen who who share share the the society's society's general general commitcommitnessmen continued development. Yet direct investment to continued ment takes takes place place on on aa massive massive scale; scale; witness, witness, for for exexment ample, American American investment investment in in Europe Europe in in the the last ample, decade. decade. In In these circumstances circumstances a principal principal cause and contribution tribution of of direct investment investment seems to be the establishment lishment of of superior superior technology in the host country. 23. Hirschman, Strategy, Strategy, pp. 38-39.

Introduction Introduction

17

Superior technology technology permits permits more efficient efficient use of of Superior employed employed resources, rather rather than than the use of of idle ones, so that from that any any given given output output per per capita capita is obtained obtained from smaller efficiency smaller inputs inputs of of resources. resources. This This greater greater efficiency frees frees some some resources resources to to boost boost output output in in other other activiactivities. By raising raising productivity, productivity, more more efficient efficient techtechties.2424 By niques also promote lower production costs and niques also promote lower production costs and hence hence lower lower prices. prices. This This in in turn turn means means cheaper cheaper products products for for consumers consumers and and obvious obvious welfare welfare benebenefits, fits, as as well well as as cheaper cheaper inputs inputs for for existing existing or or potenpotential tial manufacturers, manufacturers, which which may may result result in in aa whole whole new new 25 series series of of investment investment opportunities. opportunities.25 (Of (Of course, course, susuperior perior technology technology may may also also require require expensive, expensive, capicapital-intensive tal-intensive investment investment or or nonexistent nonexistent investing investing cacapacity, or both. both. But But this this need need not not be be the the case, case, pacity, or especially technical improvements improvements are are closely closely especially ifif technical guarded by a few powerful enterprises.) In general, guarded by a few powerful enterprises.) In general, itit would would seem seem that that the the greater greater the the gap gap in in techniques, techniques, the the greater greater the the potential potential benefit benefit from from improved improved technology technology through through foreign foreign investment investment for for the the capicapital-importing country. tal-importing country. by "bourgeois-liberal" "bourgeois-liberal" econoeconoMost discussions discussions by Most upon which which the the foregoing foregoing considerations considerations are are mists, upon mists, based, admit that these potential benefits of direct based, admit that these potential benefits of direct foreign investment investmentwhich whichwe we have have distinguished distinguished are are foreign far far from from automatic. automatic. AA country country runs runs real real risks risks in in accepting, much much less less courting, courting, foreign foreign businessmen. businessmen. accepting, One riskisisprimarily primarilyeconomic, economic,the theother otherpolitical. political. Onerisk there isis the the danger danger that that direct direct forforEconomically, there Economically, notintegrate integrateitself itselfinto into the the dodoeigninvestment investmentwill willnot eign but rather rather will will remain remain aa small small adadmestic economy economy but mestic 24. Eric EricLampard, Lampard,"The "The Social SocialImpact Impactofofthe theIndustrial IndustrialEevoRevo24. MelvinKranzberg Kranzbergand andCarroll CarrollPursell, Pursell,Jr., Jr.,eds., eds., TechTechlution,"ininMelvin lution," ftology inin Western Western Civilization, Oivilizatioft, 22 vols. vols. (New (New York, York, 1967), 1967), 1: 1: nology 305-6. 305-6. 25. Mikesell, Mikesell, U.S. U.S. Investment, Investment,ppp. 140-44. 25. p . 140-44.

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Dimensions of of Entrepreneurship Entrepreneurship Dimensions

vanced island in a sea of of backwardness. This is particularly particularly likely to occur with investment of the often concentrated concentrated in "colonial" type, which is often 26 26 mines and plantations. plantations. In the best of circumstances circumstances primarily the gains from such enclave investment go primarily the to the capital exporter and his country, since the enclave exists as an integral part of the capital exoutput porter's economy. The enclave exports its output and thereby provides cheap inputs for the indusI t gives the industrialized country country trialized country. It manufactured goods, and and an outlet for investment, manufactured It employs highly paid paid even agricultural products. It equipment, foreign technicians to run sophisticated equipment, and it it may may conscientiously conscientiously avoid avoid hiring hiring hard-tohard-toand the train local labor whenever possible. In short, the foreigner's failure failure is is colossal: colossal: there there is is no no fundafundaforeigner's mental change change in in the the backward backward local local economy. economy. mental In I n the worst of circumstances something happens, happens, but it it is mostly bad. Not only does foreign investinvestment ment establish establish aSLdual dualeconomy, economy,but butititmaintains maintains that that economy economy in in order order to maximize maximize its its profit.27 profit.27 The The more more advanced foreign foreign sector sector actually actually thrives on on pervapervaadvanced sive sive backwardness elsewhere, elsewhere, or or so so the the argument argument runs. For F o r example, example, local local tariff tariff protection protection to to foster foster runs. domestic manufacturing manufacturing could could threaten threaten the the enendomestic clave's source source of of cheap cheap equipment equipment and and would would therethereclave's fore be be unacceptable unacceptable to to foreign foreign investors. investors. Or Or the the fore training of of local local personnel personnel could could require require expensive expensive training 26. 26. H. H. W. W. Singer, Singer, "The "The Distribution Distribution of of Gains Gains between between InvestInvesting ing and and Borrowing Borrowing Countries," Countries," American American Economic Economic Review Review 15 15 (1950) (1950):: 473-85. 473-85. 27. 27. See, See, for for example, example, Maurice Maurice Dobb, Dobb, Economic Economic Growth Growth and and UnUnderdeveloped derdeveloped Countries Countries (New (New York, York, 1963), 1963), pp.17ff., pp. 17 ff., and and Ragnar Eagnar Nurske, Nurske, "International "International Investment Investment To-day To-day in in the the Light Light of of NineNineteenth teenth Century Century Experience," Experience," Economic Economic Journal Journal 64 64 (1954): (1954): 744-58, 744-58, for for aa Marxian Marxian and and aa non-Marxian non-Marxian discussion discussion of of the the probproblem of of dualism. dualism. lem

Introduction Introduction

19

and unwanted investment in education at the very least; more probably it would create attitudes critical of the traditional "feudal" "feudal" society or of the foreign presence. Or long-term planning might be impossible impossible because because the the economy economy is is lopsided lopsided and and dependent on violent fluctuations in commodity prices and and exchange exchange earnings. earnings. One One could could go go on on and and on. on. Thus direct foreign investment must do more than supplement supplement inadequate inadequate savings savings or or provide provide investing investing capacity, or even establish superior technology. All three three of of these these contributions, contributions, which which we we have have considconsidered, ered, are are compatible compatible with with enclave enclave investment investment and and limited total total development. development. This This means means that that really really limited beneficial beneficial foreign foreign investment investment must must powerfully powerfully affect affect the entire entire domestic domestic economy economy and and make make things things haphapthe pen there. there. To To realize realize its its full full potential potential it it must must theretherepen fore educate, educate, change change attitudes, attitudes, and and infuse infuse aa missing missing fore dynamism. Such dynamism goes beyond beyond "present "present dynamism. Such dynamism goes static comparative comparative advantage advantage and and this this is is perhaps perhaps static precisely why why manufacturing manufacturing industries industries are are so so uniuniprecisely versally desired desired by by underdeveloped underdeveloped countries; countries; versally namely, that that they they provide provide the the growing growing points points for for namely, increased technical technical knowledge, knowledge, urban urban education, education, the the increased dynamism and and resilience resilience that that goes goes with with urban urban civilicivilidynamism zation, as as well well as as the the direct direct Marshallian Marshallian external external zation, 28 economies." If this this tall tall order order were were met, met, foreign foreign economies. ,,28 If investment might might indeed indeed serve serve as as the the catalyst catalyst to to investment start or greatly accelerate development. Certainly it start or greatly accelerate development. Certainly it is with with such such expectations expectations that that conscientious conscientious officials officials is today, like like Witte Witte yesterday, yesterday, seek seek foreign foreign investinvesttoday, ment, and it is this ideal arrangement they hope to ment, and it is this ideal arrangement they hope to approximate. approximate. Such Such high high hopes hopes impose impose heavy heavy obligations. obligations. ForForeign eign businessmen businessmen will will probably probably be be required required or or exexpected pected to to make make large large and and perhaps perhaps unforeseen unforeseen exex28. Singer, "Gains," p. 476.

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Dimensions Dimensions of of Entrepreneurship Entrepreneurship

penditures of of the social-overhead social-overhead type for schools, transportation, etc., to make local manufachousing, transportation, manufacturing possible. Then initial difficulties turing difficulties of of construction and management management may well be complicated complicated by training tasks which are likely to postpone training postpone the payoff period unexpectedly large investoff period on already already unexpectedly If, on the other other hand, fortune fortune smiles quickly ments. If, unwritten (or written) code of of good and warmly, an unwritten conduct often often enters the picture. Profits Profits should be conduct reinvested to contribute to to further further domestic domestic capital capital reinvested to contribute formation and growth, and not simply be drained formation and growth, and not simply be drained away. Ideally, Ideally, subsequent subsequent investments investments would link away. would link backward substitute domestic domestic for for foreign foreign supsupbackward to to substitute pliers, or or link link forward forward to further processing of local local to further processing of pliers, output, as as the foreign impact impact continued continued to felt. the foreign to be be felt. output, then,. may one judge whether whether foreigners How, then, foreigners impact on the domestic econmake this beneficial beneficial impact manufacturing inomy¥ omy? The presence of of substantial substantial manufacturing vestment and the willingness to assume large sovestment cial-overhead investment investment would both suggest suggest such cial-overhead for these and other other indexes an impact. We shall look for if at first first technical and of impact in this study. Thus, if managerial domestically, managerial abilities were scarce domestically, greater of local personnel greater use of personnel in top top positions of of foreign firms could mean this key bottleneck was foreign firms could mean this key bottleneck was easing. Similarly, Similarly, an an increased increased supply supply of of domestic domestic easing. entrepreneurship would would be be another another telltale telltale sign sign of of entrepreneurship impact. Evidence Evidence for for this this could could be domestic busibusiimpact. be domestic nessmen rising rising to to meet meet new investment challenges challenges new investment nessmen and gently gently or or not so gently gently easing easing foreigners foreigners into into aa and not so subordinate role. role. (This (This might might go go with with the the shift shift from from subordinate direct entrepreneurial investment to passive portfodirect entrepreneurial investment to passive portfolio investment investment discussed discussed earlier.) earlier.) Beneficial Beneficial influinflulio ence upon the labor labor force, force, another another important important dimendimen- . upon the ence sion, might might raise increase the the level level of of skills, skills, raise wages, wages, increase sion,

Introduction

21

and create a more responsive labor supply. In In some or all of these ways harmful harmful enclave investment investment can be avoided. There is a second, essentially noneconomic set of of apprehensions concerning foreign foreign investment. ForForeign ownership and economic power must not curtail curtail the host country's effective effective political sovereignty. sovereignty. consideration is important important today, and it has has This consideration independent nations. It I t seems always been so for independent instinctively feel that that safe to say that nations today instinctively prerequisite for for real political independence is a prerequisite honorable and hence bearable modernization, a modernization including much more than the important important ernization component of of economic economic development. development. If If the the choice choice component must be be between between either either foreign foreign domination domination with with must rapid growth growth or or national national integrity integrity with with slower slower ecoecorapid nomic progress, progress, few few nations nations will will hesitate hesitate to to pick pick the the nomic latter. Honest differences of opinion over what actulatter. Honest differences of opinion over what actually constitutes constitutes effective effective sovereignty sovereignty are are possible, possible, ally but the the existence existence of of such such sovereignty sovereignty is is not not negotianegotiabut ble. ble. A related related noneconomic apprehension apprehension is that forforeign investment investment may exacerbate some of of the unavoidable problems of modernization modernization and industrialiindustrialization. Foreign participation participation might, for for example, zation.Foreign inject rabid xenophobia xenophobia into already difficult difficult labor inject hard-pressed local businessmen businessmen into relations, turn hard-pressed discontented radicals, foster foster dissension in the budiscontented In short, problems of of social stability stability reaucracy, etc. In would be be heightened. heightened. would This question of of social stability stability is probably probably more serious than that of political independence, but both foreign businessmen businessmen and local officials officials should underunderforeign stand stand why this is so. Industrialization Industrialization is profoundly profoundly revolutionary—one author author likens it to an earthearthrevolutionary-one

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Dimensions Dimensions of of Entrepreneurship Entrepreneurship

quake 2921_ and it demands sacrifice —and sacrifice and creates discontent content which can be minimized minimized but not avoided. If foreigners foreigners truly truly become agents of industrialiIf hostility—earthzation, they must expect some hostility-earthquakes are frightening. Thus the greater greater the impact therefore the potential and therefore potential long-term long-term benefits, the greater the immediate dislocation and the need for for greater intelligent official action. intelligent private and official To summarize, we have seen how foreign foreign entrepreneurship may preneurship may both aid and impede a country's country's economic development. Additional capital, increased increased investment investment ability, and superior superior technology are are major potential major potential contributions. At the same time eninvestment and political domination domination must be clave investment impact should inpowerful impact avoided, and ideally a powerful fuse a missing dynamism dynamism into the entire local econIf this goal is achieved, then unavoidable social omy. If tensions will require both sympathy sympathy and action. It I t is also possible and desirable to examine forforeign investment from a quite different investment from different viewpoint, the viewpoint viewpoint of of the individual foreign foreign firm. Such related to microtheory, or the theory of of analysis is related the firm just as our firm (in this case the foreign foreign firm), firm), just of direct investment investment in the total economy discussion of was related related to macrotheories of of general economic foreign indevelopment. How, we ask, does private private foreign vestment earn profits, profits profits essenvestment take place and earn tial whatever whatever the contribution contribution to the domestic econmay be? This microquestion omy may microquestion may may be crucial not firms but even for leaders for foreign foreign firms but even for political political leaders only for of the the host country. F o r once once these these leaders have of host country. F'or leaders have enterprise an important important place given private private enterprise place in their developmental policy, policy, in in the the belief that private private forfordevelopmental belief that eign investment investment in in manufacturing manufacturing is is normally normally benebeneeign 29. Robert Heilbroner, The Great Ascent Ascent (New York, 1963), pp. 128-32.

Introduction

23

ficial, ficial, their their principal principal problem problem becomes becomesthe the attraction attraction of such investment. (Occasional foreign irregularities can be disciplined as such cases arise.) To atinvestment requires better better understanding tract this investment of the behavior of foreign foreign enterprise. This is our of second area of concern. "foreign investA very suggestive analysis of the "foreign ment process" process" by by an an Israeli Israeli economist economist begins begins at at this this ment point: point: (well-behaved) (well-behaved) foreign foreign investment investment is, is, aa for an an independent independent developing priori, beneficial beneficial for priori, developing country; investment country; therefore, therefore, what what is is the the foreign foreign investment process, process, and and how how does does one one direct direct it it toward toward his his nation? That an an Israeli Israeli economist economist should should fasten fasten on on nation f 3030 That this understandable. this neglected neglected side side of of the the question question is is understandable. Similarities Similarities in in the the goals goals and and results results of of early early private private philanthrophy profit-orientated philanthrophy and and of of subsequent subsequent profit-orientated investment that investment in in Israel Israel clearly clearly exist. exist. One One suspects suspects that the the dangers dangers of of foreign foreign control control through through foreign foreign ownownership ership seem seem quite quite manageable manageable when when put put against against ininternational ternational political political realities. realities. But But in in other, other, less less spespecialized cialized cases, cases, countries countries (not (not to to mention mention lagging lagging regions regions of of the the domestic domestic economy) economy) are are more more conconcerned cerned with with securing securing outside outside investment investment than than with with evaluating evaluating its its performance performance in in terms terms of of unattainable unattainable perfection. Here Bussia's pioneering perfection. Here Russia's pioneering experience experience should should be be particularly particularly instructive. instructive. Foreign businessmen businessmen are are even even more more willing willing to to asasForeign sume own benevolence and to focus on practisume their their own benevolence and to focus on practical cal questions questions of of investment investment and and management. management. Their Their major major concern concern is is long-term long-term profit profit maximization maximization as as local local development development proceeds. proceeds. This This is is no no easy easy task. task. Thus Thus as as we we analyze analyze foreign foreign firms firms we we shall shall try try to to discover discover their their major major advantages advantages and and disadvantages, disadvantages, 30. Yair Yair Aharoni, Aharoni, The The Foreign Foreign Investment Investment Decision Decision Process Process 30. (Boston, (Boston, 1966). 1966). II found found this this book book stimulating stimulating and and helpful. helpful. There There is is aa good good bibliography. bibliography.

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Dimensions Dimensions of of Entrepreneurship Entrepreneurship

and to see how these change as the foreign foreign firm firm expands and the local economy goes forward. Then it may be possible to tie our micro- and macroanalsuggest to what what extent extent foreign foreign yses together, and to suggest private profit benefit are mutually mutually profit and local public benefit mutually interdependent. That That is the antagonistic or mutually ultimate question.

3 To return return to the case at hand, there is no doubt that foreign foreign investment investment in Russian Eussian industry industry was that throughout much of of the entire postreconsiderable throughout form period. Witte's predecessors and successors form generally encouraged encouraged foreign foreign investment, which generally began first intensive building of of began to quicken with the first from about 1865 to 1874 and culminated culminated in railroads from foreign surge into Russian Eussian banking before before the the foreign First World World War. Since the incidence of of foreign foreign First investment in Russia Eussia was always striking, a number investment of scholars scholars have have attempted attempted to to establish establish the the statististatistiof cal dimensions of these investments in Eussian incal dimensions of these investments in Russian in31 dustry. Such studies tell us surprisingly surprisingly little dustry.31 character and quality of of foreign foreign participaparticipaabout the character tion, but but they they do do at at least least quantify quantify foreign foreign stock stock ownowntion, ership. And they serve as a point of departure for ership. And they serve as a point of departure for an examination examination of of foreign foreign entrepreneurship. entrepreneurship. an P . V. 01', OP, Inostrannye kapit alt/ 17v 31. The principal studies are P. Inostrannye kapitaZy narodnom khoziaistve khoziaistve dovoennoi dovoennoi Rossii Bossii (Leningrad, 1925), and narodnom Inostrannye kapitaZy kapitaly v Bossii 1922);; L. la. Eventov, Inostrannye Rossii (Petrograd, 1922) Inostrannye kapitaly v rU8skoi russkoi promyshlennosti 1931);; Inostrannye kapitaZy promyshZennosti (Moscow, 1931) kapitaly v Rossii Bossii (Moscow, 1901); V. s. S. Inostrannye kapitaZy L. Voronov, Inostrannye Ziv, Inostrannye promyshlenInostrannye kapitaly kapitaZy v russkoi f'U8skoi gornozavodskoi gornozavodskoi promyshZennosti (Petrograd, 1917) 1917);; B. lschchanian, Ischchanian, Die ausliindischen auslandischen EleElenosti mente in der russischen russischen Volkswirtschaft Volkswirtschaft I. 1. I. (Berlin, 1913); 1. mente Germanskie kapitaly, kapitaly, 2d ed. (Petrograd, 1918); A. Crihan, Levin, Germanskie Le capital etranger Stranger en Russie Bussie (Paris, 1934); A. Krimmer, SocieSocieLe capital tes capitaux en Bussie imperiale et en Bussie sovietique (Paris, fes de capitaua: Russie imperiale Russie sovietique 1934).

Introduction Introduction

25 25

The best-known and most comprehensive examination of foreign foreign investment, or "foreign "foreign capital," capital," in Russian industry industry was made by P. P . V. 01'. OV. This reactionary statistician statistician and bitter Witte Witte talented reactionary quantification of foreign foreign ownership ownership critic made the quantification 82 Thus among industry his lifetime lifetime work. work.32 among of Russian industry foreign capital only 01' OP estimated estimated the students of foreign operating the flow of that capital into corporations operating foreign statutes statutes in Russia under either Russian or foreign scholars for the entire nineteenth century. Other scholars have contented themselves with stock estimates of participation for a given year. A Soviet Soviet foreign participation scholar, Eventov, subsequently added the yearly figfinance on total capital of all ures of the minister of finance after 1888. Thus Thus corporations, foreign and domestic, after ownership he determined the percentage of foreign ownership of common common stock stock of of corporations corporations in in Russia Russia from from of 1888 to 1916. These important estimates are com1888 to 1916. These important estimates are combined in in table table 3. 3. bined Assuming for the moment that estimates by 01' OP findings stand stand are fairly accurate, several initial findings out. First, foreign capital was important during the the less entire period to be covered by this study. Never less one-fifth of the total common stock capital of than one-fifth more all corporations operating in Russia, it rose to more two-fifths of the total on the eve of the First First than two-fifths half of the 1890s saw saw World War. Second, the latter half definite quickening quickening of the the tempo of foreign investinvesta definite total ment, which rose from about one-quarter of the total 1894 to three-eighths of the total in 1900. Third, Third, in 1894 32. Verstraete, the French consul at St. St. Petersburg, noted in in 1900 that 01', OP, who was part of "the clan of Witte opponents opponents 1900 ardor of of his attacks," had had where he distinguishes himself by the ardor The iniinifinished his study but doubted it would pass the censor. The OY was finally finally published in expanded and revised revised tial work of 01' Soviets in in the early twenties. twenties. A.N., FF 30, 30, no. no. 344, 344, form by the Soviets 4-1-1900. Verstraete to Delcasse, 4-1-1900.

Table 3 Table 3 FOREIGN FOREIGN CAPITAL CAPITAL IN IN CORPORATIONS CORPORATIONS AND AND BANKS BANKS OPERATING IN RUSSIA RUSSIA OPERATING IN (In (In Millions Millions of of Rubles) °

.~

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~r.:tt::j.

7.7 7.7 6.7 6.7 9.5 9.5 6.3 6.3 7.3 7.3 6.5 6.5 6.7 6.7 6.2 6.2 6.5 6.5 6.3 6.3 6.8 6.8 6.8 6.8 6.5 6.5 7.1 7.1 6.4 6.4 6.1 6.1 6.4 6.4 7.2 7.2 7.8 7.8 8.9 8.9 7.5 7.5 7.2 7.2 7.4 7.4 5.8 5.8 4.8 4.8 3.8 3.8 3.9 3.9 4.1 4.1 4.0 4.0 3.8 3.8 3.9 3.9

C3

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od

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rngj

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a ^g~ oa

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.....bX) f.g O ©

4.6 4.6 5.7 5.7 5.7 5.7 5.7 5.7 4.9 4.9 7.6 7 .6 12.2 12.2 14.2 14.2 16.2 16.2 17.3 18.9 28.5 28.5 32.6 33.9 35.2 35.3 35.3 36.1 47.7 47.7 63.3 63.3 87.3 117.8 149.1 161.0 167.1 178.8 171.6 187.8 183.2

9.7 9.7 16.3 26.5 78.7 78.7 97.7 97.7 115.3 125.7 137.9 144.5 159.5 173.3 177.1 177.1 195.6 198.3 214.7 214.7 230.8 230.8 235.5 235.5 238.5 238.5 245.0 245.0 280.1 369.1 442.2 442.2 563.7 563.7 761.9 911.0 975.3 975.3 982.2 982.2 1,007.3 1,007.3 1,022.4 1,022.4 1,037.4 1,037.4 1,088.3 1,088.3

662 662 704 704 734 734 791 791 831 831 850 850 900 900 954 954 1,200 1,381 1,538 1,879 2,030 2,030 2,192 2,192 2,281 2,281 2,304 2,304 2,432 2,432 2,391 2,391 2,517 2,517

w bI)"

~

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o ~

~r.:t

~

o~

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...B III

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!

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nded

0

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Total i Foreig

9.7 9.7 16.3 26.5 26.5 74.1 74.1 92.0 109.6 120.0 133.0 136.9 147.3 159.1 160.9 178.3 179.4 186.2 198.2 201.6 203.3 203.3 209.7 209.7 244.0 244.0 321.4 378.9 476.4 476.4 644.1 644.1 761.9 814.3 815.1 815.1 828.5 828.5 850.8 850.8 849.6 905.1 905.1

r.:trn

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Total Foreig

Foreig Stock i

1860 1865 1870 1875 1880 1881 1882 1883 1884 1885 1886 1887 1888 1889 1890 1891 1892 1893 1894 1895 1896 1897 1898 1899 1900 1901 1902 1903 1904 1905 1906

o~

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Divide j Foreig (In %

Year

..... ..!d CD c:.> ... 0

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27 27 25 25 25 25 25 25 25 25

24 24

23 23 26 26 27 27 27 27 30 30 34 34 37 37 37 37 36 36 36 36 35 35 35 35 36 36

Introduction

27

Stock

T a b l e 3-Continued 3—Continued Table

pital

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o

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Total Foreig

O d

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Foreig Debt*

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EUROPEAN RUSSIA IN 1914 EUROPEAN RUSSIA IN 1914

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