oil where geological indications suggest it may be present. The location of refineries, distribution, and marketing outlets is determined basically by economic development since there is a close relationship between the degree of economic development of a country and the amount of energy it consumes. It is thus external factors of this kind which basically determine the location of investment by an oil company.

The Royal Dutch/Shell group of companies is large in its totality. But I do not believe that size can be equated with power as popular mythology would have it. These investments, in different countries, are individually of different sizes. In no sense, however, can they be added up as an aggregate of power and compared with GNP or national income. Nor are they mobile. Once an investment is made-in production, or refining, or pipelines, for example-it is nearly always there for a very long time and the policies and practices of companies must therefore be based on the need to be a good citizen who will prove acceptable over the years, not just in the short term. If anything, investments of this magnitude are hostages to fortune.

The differing conditions required by different host countries also mean that in a group of companies there will be a wide variety of arrangements within the host countries. Among Royal Dutch/Shell companies these arrangements vary from wholly-owned subsidiaries, to majority owned affiliates with local public shareholdings, to partnerships with government as the major partner, to supply and operating contracts.

These relationships are evolving and the evolution has become more rapid in recent years. But attention tends to be focused on tensions to the exclusion of the many examples of successful and enduring relationships. In the event of a dispute, for whatever reason, it must be apparent to all that the sovereign power of government is paramount. The many examples of expropriation, often by small sovereign states and sometimes with compensation which is inadequate by the criteria of existing international law, are ample evidence of the power of government and of the impotence of a company or its parents.

DECENTRALIZATION WITHIN COMPANIES

In the context of the reality of sovereign power, acceptability of behavior is a vital factor and I believe can only be achieved by the delegation of authority to the management of each company, whose actions can then match the requirements of their environment.

Part of the success of Shell managements in achieving compatibility can be attributed to the long standing policy of Shell companies progressively to substitute local nationals for expatriate personnel at all levels. Today, in the top executive group of company managements around the world, nationals outnumber nonnationals by 2 to 1.

Similarly in the social and industrial relations fields local management must have an awareness and responsibility towards local needs and requirements. This can be seen in the breadth of Shell companies' training programs which are by no means confined to providing oil technology skills. Individual companies train electricians, fitters, machinists, welders, motor mechanics, ships' deck and engineering officers, computer programers, accountants, geologists, and mechanical and civil engineers, among many other skills and professions. Where appropriate professional training facilities are not available locally the companies provide opportunities for study abroad for persons from schools and universities or make financial contributions towards the establishment of local academic institutions.

Conditions of employment are essentially matters which must be shaped by the environment in which a company works and industrial relations policies and bargaining can only be carried out within the existing national framework and cannot be dictated from a distant point. It is the clear policy and practice of Shell companies to recognize trade unions where they represent a majority of employees in a common interest group and there is little doubt in my mind that the spread of investment, far from inhibiting, has assisted the spread of trade unionism in the world.

PLANNING AND DECISIONS

In our business, planning starts in the market-with expected consumer demand which we have to meet. Success in meeting the demand for oil postulates a fully adequate authority for the operating company. One of the fears expressed

about multinational enterprise, however, is that decisions are made about significant parts of a country's economy from some distant foreign capital. To run a large organization in such a manner would be inefficient and courting local nonacceptance. It is, of course, true that expenditure of capital certain discretionary levels will require discussion with the shareholding company when the latter's finance, guarantee, or credit are involved. Even so it must be remembered that investment decisions are made in response to opportunities that are almost invariably locally generated by local management except where an investment is made for the first time. They will all arise for example, from the demand for certain products or from the suspected existence of resources and a company's perception of what it believes to be an opportunity for its skills. It is the opportunities in a given national environment which dictate the direction of investment, and these opportunities are open to all-whether national or foreign-who have the capacity to take them.

While each company reflects the needs of the country in which it is operating there are understandably matters where uniformity of practice is strength in the units of our industry. There are many examples in the field of safety. Another important field is that of conservation of the environment. Pollution is not a respecter of national frontiers and international solutions have to be sought for international problems.

MISCONCEPTIONS ABOUT MNC'S

I should now like to turn to three problems which arise because of the false belief that multinational enterprise exists beyond the law and can evade jurisdiction of a sovereign state: first, through the supposed flexibility to make and move investments at will; secondly, through the alleged freedom to switch profit-centers from high to low tax areas; and, thirdly, through opportunities allegedly existing to increase profits by the manipulation of transfer prices.

Where physical assets are small it may be possible for the foreign investor to remove them at whim; but it is clearly impossible to remove a refinery or a production operation at will, and once such a venture has been embarked upon the investor is the prisoner of his investment. The only real power of the investor is the power not to invest, knowing that in a competitive industry someone else may well take the opportunities he turns down.

The fear is often expressed that transactions between affiliates can be such as to move profits at will from high tax to low tax areas and to evade the fiscal regulations of the host countries. This is a genuine source of anxiety which governmental action in achieving some uniformity of tax law and practice and a wider network of double taxation agreements with antiavoidance provisions would help to allay. In practice, however, one of the disadvantages of foreign investment is the possibility of being taxed twice on the same profit.

As regards transfer prices, in the oil business any manipulation would almost certainly be detected and challenged because of the growing transparency of transfer prices and the availability of a third-party market, which gives a good indication of values as a yardstick for pricing transactions between affiliates. Moreover, government authorities have the power and, since oil imports are an important charge on foreign exchange earnings, have a powerful incentive to exercise it, to be fully aware of the transactions of a company and to satisfy themselves that transactions are commercially based and on an arm's-length basis. Such power is now in the process of being institutionalized through the International Energy Agency as a result of the information requirements of that body.

A further charge is that companies in multinational groups can increase the pressure on a weakening currency or on a strengthening currency by moving their liquid resources to their greatest advantage during such a period of strain. This charge, although difficult to quantify either way, appears to be greatly exaggerated. An efficient company will maintain its working capital at the minimum level consistent with the requirements of the business. The retention of unneces sary liquid cash resources for the purpose of speculating on foreign exchange would, in a competitive industry such as oil, rapidly make any company uncompetitive. The likelihood of individual companies, or companies in groups, indulging in such activity is therefore remote. It must at the same time be recognized that a good manager will do his best to husband the value of the financial resources of a company and that the aggregate impact of such husbanding by all companies-whether foreign or nationally owned-that have or need foreign cur

rency may (though this remains unproven) have some impact on swings in foreign currencies, though it is likely to be very much less than the operations of banks or other institutions which deal in money.

SOME CONCLUSIONS

What we stand most in need of at the present time is a greater understanding between foreign investors, the governments of host countries and those of home governments, a spread of the climate of confidence, and a strengthening of relationships between them.

At the same time it must be recognised that the fears which arise in relation to foreign investment are genuine, even if largely unjustified, since they are based on an underestimation of the power of national sovereignty and an exaggeration of the powers of companies. It is therefore important that companies should help to dispel such fears by a greater flow of information and that Governments should acquire a better understanding of the nature of the problem and of their own strength.

The growth of multinational business has coincided with a period of progressive political development-the growth of the number and importance of nationstates, the desire for independence, and the necessity of economic interdependence. This is one of the principal reasons for tensions in international economic relationships. Fear arises that joining a system of international economic interdependence, characteristic of the world economy, may endanger national economic independence. Nonetheless it is also worth noting that state companies are today playing a growing role in the ranks of multinational enterprise and that we are beginning to see multinational enterprises based on developing countries.

The provision of guidelines is, I believe, in principle a helpful development so long as they are based on the realities of the situation, and so long as they are conceived as being "an instrument of moral persuasion" (as recommended by the group of eminent persons) rather than as compulsory in character which could imply an unrealistic restriction of national sovereignties.

I believe that better analysis and improved knowledge are beginning to lay the foundations for a more objective understanding of these matters. I have every confidence that if we build on these foundations we will find that many of the problems we face are susceptible of solution.

Mr. CHANDLER. First and foremost, the phenomenon of the multinational enterprise is basically the phenomenon of direct foreign investment, this has expanded enormously since the war, but has only been possible with the agreement and indeed with the encouragement of governments. In the developing world in particular, there has been competition between countries to attract the scarce resource of investment.

MNC'S ALREADY UNDER LAW

Second, when we talk of multinational enterprise we are not talking of something that exists outside the law or outside territorial boundaries. We are talking of groupings of individual companies each one of which is subject to the laws, customs, and regulations of the country in which it works. It has no privileged position, and the opportunities that may be taken by such foreign investment are equally open to nationally owned companies. It is therefore important that any rules or guidelines that are devised should be common to national as well as to foreign companies.

Third, and I think this may be clear from the difference between the motor industry and the oil industry, there is an immense variety of activity that is commonly discussed under the heading of multinational enterprise. Without analyses of this variety I believe we are liable to make grave errors of diagnosis and propose solutions which are wrongly based.

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As regards decisionmaking, investment decisions in the oil industry are made in response to external factors, for example in the possibility of the existence of oil which geology dictates or in response to a demand for oil products which economic development dictates. The oil industry cannot influence these factors.

INVESTMENTS BECOME HOSTAGES

Once such investments are made they become commitments or hostages to the country in which they are made. In no sense can they be aggregated and described as a unified source of power in any way analogous to the sovereign power of government. This is easily demonstrable by the many nationalizations of subsidiaries of international groups which have taken place in recent years.

Further, I would emphasize that these are long-term investments and the only sure basis of their survival is the acceptability of the company's behavior to the country in which they are made. This requires maximum autonomy for the local management in particular in such matters as conditions of employment which must be shaped by the environment in which a company works and cannot be dictated from some distant point. I should add that it is the clear policy and practice of Shell companies to recognize trade unions where they represent a majority of employees in the common interest group and I have no doubt that the spread of foreign investment has led to the spread of trade unionism in the world.

THREE COMMON MISCONCEPTIONS

Finally, I will comment briefly on three of the most common misconceptions about multinational enterprise. That investment can be moved at will, that there is freedom to switch profit centers, from high to low tax areas, and that profits can be increased by the manipulation of transfer prices.

In regard to the first, it will be obvious that a refinery or a production operation cannot be switched at will, in fact it cannot be moved at all. Second, while it is true that so long as there is no uniformity of tax law and practice and an insufficient network of double taxation agreements, attempts will be made to avoid tax or minimize it, the real anxiety for groups of companies in practice is the possibility of being taxed twice on the same profit.

Third, as regards transfer prices I believe that no student of the oil industry would believe this to be a major problem today since there is a significant third party market. Moreover, in a commodity as important as oil, governments whether exporting or importing make it their business to have full knowledge of the transactions carried out.

I believe that this international investment has been a significant factor in postwar economic development. What is needed therefore, is a clear analysis of the real problems and then propose solutions on the basis of analysis. And it is in this context, Mr. Chairman, that I would like to turn to Mr. Lange's working document which unfortunately I received after I had submitted my written statement.

USEFUL ROLE OF GUIDELINES

I fully agree with Mr. Lange's allusions to the danger of creating misunderstanding and I believe that some sort of guidelines could well be valuable as a means of dispelling these. I would again, however, emphasize that analysis must be the foundation of policies and proposals and I will illustrate this in two ways, one general and one particular.

Mr. Lange, and, sir, if you will forgive me, you asked for candidness, goes on to say that multinational undertakings "occupy such a strong position in their dealings with economically weak states, that the relationship between state and undertaking has been virtually reversed." I feel the observable facts are contrary to this statement.

NATIONALIZATIONS CITED

Companies of the Royal Dutch Shell group have been nationalized in South Yemen, Ethiopia, Somalia, Zaire, Central African Republic, Guinea, Congo Brazzaville, and Morocco, to mention some of those which cannot conceivably be ranked as the more powerful countries of the world. In many cases, this was done without adequate compensation and with no opportunity of redress by the individual company or its parents. A specific example of analysis leading to the removal of misunderstanding lies in the European Commission's recently completed report on the international oil industry's pricing of oil products during the recent oil crisis. This report indicates contrary to the prevailing mythology that the oil industry neither sought nor obtained additional profit from the crisis.

I should then like to turn to Mr. Lange's concept of a general agreement on multinational undertakings, I believe speaking from a company point of view that if such an agreement could provide a legally secure framework for the activities of multinational groups of companies and carry with it appropriate rules and codes of conduct this would be a most welcome development. However, I believe the problem here does not lie on the side of companies which do not enjoy anything comparable to the power of sovereign government, but with the governments themselves. These I believe would be unwilling to restrict their sovereign right to act of matters arising from the activities of foreign investments in the way they think best in the national interest. This does not mean that there may not be areas such as taxation where some consistency or even uniformity of policy may be achieved, and it is to the specific areas listed in Mr. Lange's paper that I now turn.

COMPETITION POLICY

In regard to the comments under competition policy, I'm not entirely clear what Mr. Lange has in mind, restrictive practice legislation, is of course applicable to the relations between parents and subsidiaries as much as to an independent company. Insofar as the comments made may also embrace the question of transfer prices I would emphasize the need for these to be established on an arms-length and transparently commercial basis and that the fiscal authorities of the