. 3
( 20)


country whose electric utility industry was entirely foreign-owned and
-controlled (such as Korea™s in 1915), this percentage is 100; if there was no
foreign ownership at all (such as Japan in 1929), the percentage is 0. If a
country had negligible electri¬cation in a benchmark year, this is indicated by
an ˜˜x.™™ The entries in the table often required a substantial amount of
judgment, and each carries an implicit standard error, sometimes large.
Source notes on each entry in the table are included in Appendix B.
The following chapters fundamentally are an extensive elaboration and
explanation of Table 1.4.

Multinational Enterprise and International Finance

When electri¬cation became a viable proposition in the late nineteenth
century, communications on a global scale were easy. People traveled.
Steamships and cables linked distant continents, making for ˜˜rapid™™
contacts “ not with the speed of today™s internet world, but faster than ever
in history. Railroads and telegraph lines stretched into interiors of inde-
pendent as well as colonized countries. Ideas, knowledge, and technology
could (and did) circulate through individuals, companies, and imperial
administrators. Capital was more mobile than ever. The modern multina-
tional enterprise, with coordination and control within the ¬rm, came of
age. So, too, did international banking acquire new dimensions. Stock
markets in the more advanced nations in Europe handled a greater quantity
of securities, domestic and international, than ever before, facilitating
¬nancial transactions throughout the world. The New York Stock
Exchange, while still fundamentally a domestic market, had begun listing
some foreign issues, even though it remained subordinate to London and in
international activities to the bourses on the European continent. This was
the very time “ the late nineteenth and early twentieth century “ that the
introduction and spread of electri¬cation had begun, varying in pattern and
swiftness from one country to the next.
Because the beginnings of the diffusion of light and power facilities
worldwide coincided exactly with the beginning of the age of globalization
and at the identical time when the modern multinational enterprise
emerged, the latter could and did assist in the international spread of
electri¬cation. Over the years, the world economy changed markedly, due
to World War I and subsequent events, and so did the operations of mul-
tinational enterprises. The United States, which was a debtor nation before

Authors: Mira Wilkins, H.V. Nelles, and William J. Hausman. Signi¬cant advice from Peter
Hertner, Ginette Kurgan-Van Hentenryk, Pierre Lanthier, Robert Lipsey, Kenneth Jackson,
and Luciano Segreto.

Global Electri¬cation

World War I, became a creditor nation, and in the process world capital
markets were transformed. During the interwar years and then World War
II, new forms of multinational enterprise became predominant as older
forms lost signi¬cance. Financial intermediation was affected in the short
term by wars and business cycles and in the long term by economic growth.
From the electricity supply sector™s very beginnings, but especially from the
1930s onward, public policies with respect to ¬nancial systems “ and more
speci¬cally electric utilities “ had a formidable impact on the ways business
was done and on the ownership and control of the businesses that furnished
electric light and power. After World War II, there was a dramatic shift in
the sources of capital and the operations of enterprise, with governments
playing an ever larger role.
This chapter seeks to abstract the diverse forms that multinational enter-
prises took as they contributed to the global diffusion of electric light and
power. We agree with Thomas Hughes that the management of networked
electric power systems cries out for attention, and we see the management
and ¬nancing as going hand-in-hand.1 Multinational enterprise can take
various forms, and the ones we delineate herein should help to guide the
reader through the chronological narrative that unfolds in Chapters 3
through 6. In the present chapter, we begin by establishing a framework
and vocabulary. Then we focus on the different actors and forms, including
a section on the impact of railroads (a sector with immense in¬‚uence on the
actors and forms previously presented). Next, we summarize the actors and
forms of business organization that multinational enterprises adopted. We
offer some general comments on the signi¬cant political dimensions of our
story line, 1878“1978. Finally, we conclude with a short Chapter 7 on how
circumstances have gone full circle in recent years.

the framework
Before we proceed, an understanding of the multinational enterprise is
required. First and foremost, it is a business or, as economists use the term,
a ˜˜¬rm™™“ a producer of goods and/or services. Second, it operates across
borders. It has a home, where it is headquartered, and it operates abroad in
one or many host countries. The home is typically a single country,
although it need not be. Most multinational enterprises operate in more
than one host country “ some, today, in as many as 150 (or even more) host
countries. Independent nations as well as colonies are included by us under
the rubric ˜˜hosts to foreign investment,™™ including those investments from
the mother country.2 In sum, the multinational enterprise is a business that
is an organized (administered) unit; it produces goods and/or services; and
it has a home of¬ce and business operations outside the home country
Chapter 2: Multinational Enterprise and International Finance 37

Multinational enterprises make foreign direct investments, which occur
when the investor intends to have some in¬‚uence or control over the foreign
activity in which the company is investing. Multinational enterprises have
strategic goals in their investment patterns. Their investments tend to be
long-run, and they are not volatile. The management of the multinational
enterprise expects a return not only from the capital invested, but from the
business ˜˜package,™™ including technology and its application. Multina-
tional enterprises are able to concentrate knowledge.3 Their investments
abroad are far more than ¬nancial ¬‚ows. They involve managed resources,
managed within the cluster of ¬rms that comprise the multinational
Nonetheless, because light and power facilities were capital intensive (as
shown in Figure 1.4 in Chapter 1), fundamental to their development was the
mobilization of ¬nancial resources, which could be domestic and/or inter-
national; if domestic resources were inadequate, money could be raised
abroad. In the late-nineteenth- and early-twentieth-century world economy,
at the beginning of our story, ¬nancial capital for the introduction of elec-
tri¬cation could be assembled by multinational enterprises and ¬nancial
institutions outside the location of the operations, collected where savings
were available, and directed to where they could be productively used “ at
home and abroad. With the demand for electricity and the presence of
business organizations to meet that demand, the new electricity supply
industry was able to obtain the available capital, although not always easily.
It was not uncommon for host nation nationals to participate with foreign
multinationals in ventures within their countries. This was the case in such
host countries as Germany and England, but also in China and Egypt. Ours is
the story of how capital was collected “ internationally and domestically “
through time for the purpose of global electri¬cation. We concentrate our
focus on the role of multinational enterprises in that process.4
Electric utilities that had, or could create, known and trusted reputa-
tions, were able to ¬‚oat bonds domestically and internationally and obtain
funds without foreign ownership and control. For others that required large
amounts of capital, they needed aid in creating business organizations
perceived to be trustworthy.5 Through different forms of multinational
enterprise, the reduction of economic (and political) risk occurred, so as to
facilitate the intermediation of capital internationally (and in the process to
attract local capital as well).
As with all long-term international investments, there are two funda-
mental ways of transferring capital for global electri¬cation. The ¬rst
(sometimes called ˜˜foreign portfolio investment™™) relates to international
¬nance, where lenders or securities™ owners take no direct interest in
management (unless things go wrong) and the corporate recipient of the
funding makes the fundamental decisions on the operations of the business.
The second (foreign direct investment), identi¬ed with multinational
Global Electri¬cation

enterprise, involves ownership and control, as de¬ned in Chapter 1.6
Academic research on these two types of investment has often been sepa-
rate, with the ¬rst set of researchers primarily concerned with governmental
and corporate ¬nance (along with banking), frequently with a more general
interest in ¬nancial systems and securities markets. For some writers, the
term ˜˜foreign portfolio investments™™ includes government as well as
private-sector securities; with this de¬nition, students of foreign portfolio
investments have considered not only corporate but also “ indeed, in large
part “ governmental debt (and credits).7 The second group of researchers
has studied multinational enterprises, focusing mainly on individual ¬rms
as they invest abroad.8 The literature on multinational enterprise (once
principally on manufacturing) now includes banks, other ¬nancial
intermediaries, and service providers as well as a range of other businesses
as they make foreign direct investments “ that is, as they extend as a ¬rm
over borders. In keeping with this body of works, we use the words
˜˜business™™ and ˜˜¬rm™™ to embrace enterprises in all sectors. The provision
of light and power is that of a service, so the enlarged literature is especially
germane and provides insights for our study. There have been attempts to
provide historical statistics on foreign direct investment, by sector, which
we have used with great caution.9
Although our emphasis is on the activities of multinational enterprises, we
found it imperative to consider foreign portfolio as well as foreign direct
investments, because we have found that the two were not mutually exclusive.
Moreover, throughout we have discovered a considerable number of ˜˜cross-
investments™™ (inward and outward foreign investments), especially among the
more advanced countries, accompanied by the highly uneven foreign direct/
foreign portfolio investment ratios.10 In exploring the associations between
multinational enterprise and international ¬nance, we often encountered
ambiguities. As Geoffrey Jones has put it, ˜˜[There is] a grey world between
direct and portfolio investment™™; we can add that probably in no sector is this
more evident than in the provision of light and power services.11 The reason
lay in the heavy capital requirements in this sector. We are compelled to look
at both direct and portfolio investments and their relationships.
Enriching our study on multinational enterprise and foreign ¬nance has
been a relatively new literature on corporate governance, a large part of
which has emerged as a direct offshoot from the ¬eld of corporate ¬nance.
While much of the published literature is still surprisingly narrow in that it
does not cover multinational enterprises, the questions dealt with do illu-
minate our understanding of the latter within the electricity supply sector.
This is especially true when authors on corporate governance confront the
complexities of pyramided business groups.12
Scholars considering corporate governance have argued that ˜˜different
countries™ economies are organized in very different ways, and corporate
governance “ decisions about how capital is allocated, both across and within
Chapter 2: Multinational Enterprise and International Finance 39

¬rms “ is entrusted to very different sorts of people and constrained by very
different institutions.™™13 By contrast, we have been wary of references to
national style, preferring instead to focus on how the national decision making
by ¬rms is transformed in an international setting.14 Yet there were clear
national differences in both home and host countries over time. These varia-
tions in home and host country experiences (juxtaposed by us into an inter-
national context) will emerge as our story unfolds; we accept (and endorse) the
view that there were varieties in the evolution of capitalist systems.15 But there
were also differences within countries, so, even more important, our focus is
on how what emerged inside particular countries crossed over borders to
provide the basis for the worldwide growth of light and power facilities.16
Although typically national in their discussions, the studies of corporate
governance cast light from the standpoint of home countries on the history of
the international networks associated with electric utilities. They highlight the
profound concerns of ¬nancial actors (shareholders and bondholders) as they
made investments or provided the underwriting of and placement of such
investments. The writings on corporate governance, integrated by us into the
literature on multinational enterprise, seem to add clarity to that ˜˜grey™™ area
between foreign direct and portfolio investments. A 2002 statement by the
president of the Federal Reserve Bank of New York captures the connection.
He associated ¬nancial stability with sound leadership at a ¬rm level: ˜˜Sound
leadership . . . begins with good corporate governance: capable and experi-
enced directors and management, a coherent strategy and business plan, and
clear lines of responsibility and accountability.™™17 And, of course, that was
what multinational enterprises hoped to accomplish.
When, historically, ¬nancial intermediaries “ whether they were
American, Canadian, British, Swiss, Belgian, or German “ looked to inter-
national investments in public utilities (as well as in other sectors), they
wanted to be assured of good governance. Most of the time, they did not
want to run the business, which was the prerogative of management. It is
here that the issues of control become important. Two corporate structures
may be identical, but the intended control over management, over admin-
istering the business, may be highly diverse. We will see this murkiness as we
monitor multinational enterprise and foreign ¬nancing of public utilities.
Early and many recent studies of multinational enterprise see the ¬rm as
starting business at home and then moving abroad and, in the course of
doing so, extending the ¬rm™s core competencies. In this generally accepted
pattern, the management of the ¬rm learned from its experiences at home
and developed international activities based on its accumulated knowledge.
This can be labeled the ˜˜classic form™™ of multinational enterprise.18 It was
present in the late nineteenth and early twentieth centuries (as well as more
recently). Before World War I, however, literally thousands of companies
were set up in the United Kingdom and to a lesser extent within Western
Europe (France and The Netherlands in particular) to undertake business
Global Electri¬cation

over borders.19 These companies had a head of¬ce at home, but they did
not have operations in the home (domestic) market. They assembled talent
at home and abroad to pursue their business in a foreign country (or
region). In a 1988 article in the Economic History Review, Mira Wilkins
called these ˜˜free standing companies,™™ a form of multinational enterprise
that did not ¬t the standard, classic model.20
The authors of the present volume wondered: To what extent were
electric utilities started as free standing companies? Were there other
variants to the classic model? In the writings on free standing companies,
scholars had grappled with issues on the line between foreign portfolio and
direct investments, with what constituted control, clusters of companies,
business groups, and informal networks.21 Jean-Francois Hennart ¸
expanded the thinking on free standing companies in an attempt to for-
mulate a theory of minority equity stakes.22 We found that such minority
interests were ubiquitous in international investments in the electric utilities
sector. Thus, while the literature on the classic multinational enterprise has
informed our inquiry, we have not been fettered to it. We found the
research on free standing companies particularly stimulating. Indeed,
remarkably many of the insights from the studies on free standing com-
panies coincided with the separate (and entirely independent) work on
corporate governance, both paying heed to clusters and business groups.
To be sure, multinational enterprises technically comprise clusters of
af¬liates (although we will not use the expression in this manner). A loosely
structured multinational enterprise is sometimes referred to as a ˜˜business
group™™ (and at times, we adopt that formulation). Close associations of
otherwise independent ¬rms have also been designated as clusters, business
groups, or networks. Often authors (including those writing this volume)
want to differentiate between what is ˜˜internalized™™ “ that is, owned and
controlled within a multinational ¬rm “ and what is ˜˜outsourced™™ to a
cluster of ¬rms that may constitute a business group “ what happens within
a ¬rm and across ¬rms.23
Writers on multinational enterprise consider manufacturing, banking,
and trading companies as multinationals.24 When we tried to de¬ne a
˜˜public utility multinational,™™ we discovered that we could not do so, at
least during the ¬rst century of electri¬cation (1878“1978). Multinational
enterprises were deeply involved in this sector, but with very few exceptions
public utility operating companies did not expand over borders. The closest
resemblance to a multinational public utility enterprise was the public
utility holding company that owned public utility operating (and holding)
companies at home and abroad; many of these had core competencies that
were extended internationally, yet this was only one way “ albeit an
important way “ by which global electri¬cation spread through multina-
tional enterprise. The categories (forms of multinational enterprise), out-
lined in this chapter are culled from historical evidence. Rather than
Chapter 2: Multinational Enterprise and International Finance 41

limiting ourselves to the classic multinational enterprise, or to the some-
times uneasy division between foreign direct and foreign portfolio invest-
ments, our sources have pushed us to probe the wide variety of conduits for
foreign investments.25 We hope the originality of our approach set out in
this chapter will not only steer our reader through what follows in subse-
quent chapters, but also contribute to the theoretical (as well as the
descriptive) literature on the history of multinational enterprise.
We identi¬ed a number of separate businesses and ¬nancial
intermediaries that marshaled capital and in the process accelerated the
spread of electri¬cation around the world. The story is complicated, not
only because of the many participants and how they interacted with one
another, but also by the confusion that occurs when the same company has
two or more names (one each in German, French, Italian, and English, for
instance). Short names and abbreviations of companies were differently
used by different authors.26 For the sanity of our readers (and of the
authors!), this volume contains an appendix that identi¬es companies with
two or more names along with alternative short names and abbreviations.
We do not want our reader to get lost in the forest of company names and
the jungle of business groups. In addition, it was not unusual for large
multinational enterprises to have so-called ˜˜paper companies™™ “ set up to
protect assets, to minimize tax burdens, and for a variety of other reasons.
We will “ as our text progresses “ encounter such corporate ˜˜shells.™™ They
add complexity “ and grief “ in the targeted task of understanding. We hope
our readers will bear with us as we make our way through the labyrinths
and that this chapter will provide guidance for what follows.
In writing this chapter, we found a muddiness in our group™s thinking
about such terms as ˜˜types,™™ ˜˜forms,™™ ˜˜styles,™™ ˜˜structures,™™ ˜˜modes,™™ and
˜˜patterns.™™ For clari¬cation, we arbitrarily use the term ˜˜type™™ to make the
broad differentiation between foreign portfolio and direct investments; and
we use the word ˜˜form™™ to designate the different business organizations that
we outline in this chapter. ˜˜Structure,™™ ˜˜style,™™ ˜˜mode,™™ and ˜˜pattern™™ are
employed rather more freely to cover the behavior of ¬rms: the way business
was done in the electric public utilities sector. On occasion, the words
˜˜form,™™ ˜˜structure,™™ ˜˜style,™™ and ˜˜mode™™ will be used as synonyms; the
term ˜˜pattern™™ is more general, including nationality prominence and geo-
graphical spread. ˜˜Strategy,™™ about which we found little confusion, relates
to broad long-term policies of ¬rms. ˜˜Conduits™™ are the channels through
which capital, technology, and knowledge are moved over borders.
In this chapter, we offer a framework for identifying and classifying the
conduits for foreign investments into electric utilities and how these con-
duits altered over time. In subsequent chapters, we will implicitly insert our
ideas into the actual chronological story, as tools for understanding. We
argue that not only were there technological applications, adaptations,
diffusion, and reverse diffusion, but there was a learning process in
Global Electri¬cation

international business as such and that it was this dynamic learning process
that assisted the expansion of electri¬cation on a global scale. Without the
managerial and ¬nancing structures, electri¬cation would not have spread
internationally as rapidly as it did. As we cover the companies that supplied
the management that accompanied the foreign investment, sometimes this
meant cutting through corporate veils, collapsing the legal architecture.
There was nothing static about the processes that we are considering:
Major changes occurred in the international investments from the late
nineteenth century onward, re¬‚ecting the growth and transformations in
the businesses participating, the new entries, and also the economic, tech-
nological, political, social, and general business environments. Ours is a
discussion not only on the nature of ¬rms and the organizational forms that
they take, but also on the growth of ¬rms, their changes through time, their
retreats as well as expansions, and on what motivated the enterprises.
As we study the investments of a multinational enterprise type “ that is,
those that carried ownership and control (management) across borders “ we
have always recognized the need to carefully de¬ne what we mean by, and
what the businesses that used the term meant by, ˜˜control.™™ The very notion
of control was too often elusive. Among our group, we found that de¬ning
˜˜ownership and control™™ resulted in ambiguous conclusions. In Chapter 1,
Table 1.4, we did our best to cut the Gordian knot and accept an operative
de¬nition of the phrase ˜˜ownership and control.™™ In this chapter and those to
come, we adopt the same de¬nition, but we take a more nuanced approach.
As we try to set forth the basis for systematic analysis, we have many
times found rough edges and intersections. Our taxonomy is compromised
by our identi¬cation of categories that are not mutually exclusive. Net-
works, alliances, webs, and minority interests comprising intricate inter-
connections were the norm, not the exception. Business groups overlapped.
The reader is forewarned that what we will be presenting is on chains,
imbrications, and associated clusters of ¬rms.
What then were the forms of enterprise used to provide electric light and
power over borders? Our tale is far from trivial. Private-sector international
capital was fundamental to the introduction and, for many decades, to the
spread of electri¬cation on a global scale. How, from an organizational
standpoint, did that capital cross borders? How were management and
capital linked?

manufacturers™ satellites and extended
manufacturers™ satellites
Although ours is a story about the supply of electric light and power, about
the provision of a service, we must start with the manufacturers. Electrical
manufacturing companies made foreign direct investments that initially
involved the installation of isolated plants and then the participation in the
Chapter 2: Multinational Enterprise and International Finance 43

establishment of public utilities.27 Electrical facilities set up abroad by
manufacturers, we have labeled ˜˜manufacturers™ satellites.™™
Here the pattern ¬ts a scenario familiar to students of multinational
enterprise. In the late nineteenth century, when our narrative begins,
numerous U.S. and European manufacturers with new technologies and
trademarked or branded goods not only sold these goods domestically but
exported and marketed them abroad. These manufacturers did outside
their domestic market what they did at home. They invested in marketing
organizations. They also invested in manufacturing plants in foreign
countries, when required, in order to ¬ll the foreign demand. This was
true, for example, of the American company Singer, which organized an
international sewing machine distribution network and then built facto-
ries in major markets abroad.28 British manufacturers, such as the then
large thread company J. & P. Coats, followed an identical pattern.29
Similarly, the principal U.S. and German electrical manufacturers invested
in marketing and manufacturing outside their home country. Today, this
has been the pattern for such companies as Toyota, which invested ini-
tially in marketing and then in manufacturing abroad. In each case, the
manufacturer developed competence at home and transferred technologies
In addition, and most important for our purposes, the very same elec-
trical manufacturers that exported, developed foreign marketing organi-
zations, and then manufactured abroad also aided in establishing and
participating in setting up electric light and power facilities at home and
abroad. When they did so, they were doing what all manufacturing ¬rms do
when they create a complementary basis for distribution. But whereas a
sales network designed to market sewing machines or thread “ or, for that
matter, soap, harvesters, elevators, automobiles, or electrical products “
linked the manufacturer directly (although perhaps through a vertical
wholesale and retailing chain) with the end consumer, the founding of an
electric utility was different.
The manufacturer of electrical goods had a dual relationship with the
electricity supplier: First, the supplier was the ¬nal customer for power
equipment, and second, there were consumers who required access to
electric power in order to use the products made by the electrical manu-
facturer (the more homes, factories, and communities with access to electric
power, the greater the sales by the manufacturer of electrical goods). Thus,
from the start, electrical manufacturers had a strong incentive to support
the emergence of light and power facilities.30 They did this at home, and
they did it abroad.31 While electrotechnical manufacturers were central to
this manufacturing story, there were also manufacturers of boilers, insu-
lated cables, and other equipment that perceived the development of elec-
tric utilities as key in their sales and would also participate in investments to
encourage the installation of light and power facilities.
Global Electri¬cation

Sometimes the manufacturer acted as a ˜˜contractor,™™ which might or
might not have an investment in the foreign public utility.32 When, as was
frequently the case, an electrical (or other) manufacturer took part in the
inauguration of or expansion of electric generation abroad and did make an
investment, we have called this form of multinational enterprise activity
˜˜manufacturers™ satellites.™™ As we follow the chronology on the spread of
electri¬cation worldwide, we will observe numerous cases where equipment
(particularly electrotechnical equipment) manufacturers, desiring to raise
exports, took the initiative and responsibility for the setting up, ¬rst, of
isolated stations and then on a broader basis electric utilities. They provided
the engineering talents and the technological know-how.
Often, when a manufacturer got involved in sponsoring a utility, it
would obtain only a partial interest in the newly established or acquired
electricity supply unit. Because electric utilities were capital intensive,
manufacturers looked for outside funding for them. Over time, the partial
interest of the manufacturer might be reduced or, indeed, not maintained.
New investors might be brought in. And these might or might not have an
arm™s length (totally independent) relationship to the manufacturer. For the
manufacturer, ownership was not always needed to ensure the continuation
of orders of machinery from the utility. (A utility designed to use a speci¬c
type of equipment would frequently buy from the same source when the
equipment wore out or needed to be updated or new equipment was
required for expansion.) Another reason why electrical manufacturers
wanted electri¬cation was that once a utility was in operation, consumers
would buy electrical lights and appliances irrespective of the ownership of
the utility. Indeed, the opposite side of the coin now took effect: The utility
wanted to encourage the purchase of electrical goods so that consumption
of electricity and revenues would grow.33
Sometimes, in a hierarchical fashion, an electrical manufacturer would
establish or acquire an interest in a foreign manufacturing af¬liate, which
would, in turn, invest in utilities. We have called this form the ˜˜extended
manufacturers™ satellite.™™ This was a typical ˜˜chain.™™ An example of an
extended manufacturers™ satellite was when General Electric held an
interest in the French manufacturer Thomson-Houston, which, in turn, had
interests in electric utilities in France and abroad. Note that the interna-
tional choices here involved a manufacturer™s exporting machinery with no
investment in its customer (a utility) or alternatively investing in the utility
(or possibly in an extended manufacturers™ satellite arrangement) in order
to enhance goods exports (or to build the business of its manufacturing
af¬liate abroad).
There is a large literature on manufacturing multinationals that con-
centrates on the trade-offs between exports and foreign direct investment in
producing abroad. There is also a literature on manufacturing multi-
nationals and their investments in supply-related manufacturing “ that is,
Chapter 2: Multinational Enterprise and International Finance 45

investments for purposes of gaining inputs into the production process and
importing these inputs back to the home country.34 For the history of
foreign direct investments in electric utilities such discussions of trade are
generally (but not always) irrelevant. Historically, power lines seldom
crossed national frontiers. Interestingly, however, when this did occur there
did appear to have been cross-border investments.35
For the electrical manufacturer that invested abroad, there was, how-
ever, an important trade and investment story that related to the manu-
facturer™s choices. While there was no neat association between the size of
direct investments by a manufacturer in an electric utility and the former™s
sales to that utility, clearly contacts by the manufacturer with a public
utility (formal or otherwise) added to the volume of that manufacturer™s
sales. Accordingly, minority interests or other sorts of relationships between
the equipment manufacturer and the public utility often were evident.
In thinking about the manufacturers™ choices on investments in electric
power supplies and the forms used, it is crucial to keep in mind the capital
intensity and ˜˜lumpiness™™ of investments in public utilities. And then there
was the matter of returns on investments. Often, an equipment manu-
facturer™s pro¬ts would come from equipment orders. The manufacturer
counted less on the return on its investment in the electric utility and more
on its equipment sales. Yet, the public utility had to be viable in order to
maintain those sales/exports.
Characteristic of international investment in the electric utilities sector
has been that while revenues are in the currency of the country where
these ventures are located, substantial costs may be incurred in a foreign
currency “ especially in the case of developing countries. This does not
matter if currencies are stable and readily convertible. In periods of cur-
rency ¬‚uctuations and blocked currencies, this could (and would) create
major risks. It meant that the manufacturer assumed considerable risk in
remaining involved in a public utility foreign investment whenever there
was no special advantage in doing so “ that is, if through contractual
˜˜deals,™™ through ˜˜friends,™™ or through small minority stakes, the manu-
facturer could continue to get assurance of equipment orders and if it was
possible to ¬nd alternative investors. In addition, as noted, equipment
orders tended to be cumulative. Once a light and power facility was
established, its corporate owner (or, alternatively, its management) often
continued to buy from familiar suppliers. If the manufacturer had been
involved in the engineering and the construction design of the public utility,
this might ensure a continuation of orders with no requirement for
investment by the manufacturer in the foreign public utility (which was
especially true with so-called ˜˜dedicated technology,™™ distinctive to the
particular activity). Remember, too, sales of end products of the electrical
manufacturer to the public were “ once the electric power plant was
established “ not dependent on the ownership of the utility.36
Global Electri¬cation

banks and other ¬nancial intermediaries
When many manufacturing companies went into international business in
the late nineteenth century, reinvested earnings were, for the most part,
adequate to ¬nance their expansion in marketing, assembling, processing,
and manufacturing abroad. By contrast, because the electricity supply
systems were so capital intensive, from the start banks and other ¬nancial
intermediaries were always involved. Thus, they become the second set of
important actors in the establishment of electric utilities abroad. There were
sizable capital costs before a utility was able to produce an output (or
revenues) to offset the costs. Manufacturers did not want to tie up capital
for this purpose; the needs of electric utilities surpassed their available
reinvested earnings.
The ¬nancing of electric utilities over borders meant not only (1) raising
the initial capital (and the ongoing recapitalization with growth), but
subsequently, (2) the usual commercial accommodation for deposits and
short-term borrowing associated with any form of commercial undertaking,
and (3) the continuous return ¬‚ow of funds from operating income to
provide the return on investment. And then there were the added invest-
ments to assist the introduction of new, changing technology, the replace-
ment of worn-out machinery, and new extensions as the business grew,
whether through mergers and acquisitions or through internal expansion.
Sometimes, these ¬nancial arrangements were intimately tied with equity
investments (multinational enterprise activities), and sometimes they were
exogenous to the operating ¬rm. Whether internalized or separate, the roles
of banks, a variety of other ¬nancial intermediaries (including insurance
companies, securities companies, investment trusts, and investment com-
panies), and individual promoters and brokers (separately or jointly) were
critical. The role could be internalized, by which we mean that the banks or
other ¬nancial intermediaries had representatives on the board of directors
of the parent of the electric light and power company and played an active
role in the latter. When technology changed from the late 1870s to the
1890s, there was a jump in the amount of capital required as new systems
emerged. As a consequence, the activities of ¬nancial institutions became
even more widespread in this sector.
At times, ¬nancial intermediaries saw opportunities and took the
initiative; at other times, they were followers, brought in by manufacturers
or other parties. Sometimes it is uncertain whether the manufacturer or the
bank (or another ¬nancial intermediary) took the lead in establishing new
enterprises abroad. Clearly, providers of capital desired to be assured of
sound direction at the ¬rm level. Sometimes the ¬nancial intermediaries
participated in introducing management; sometimes their associated com-
panies or the company in the host country took the lead. Arrangements
were different in different situations. As H. V. Nelles has written, enterprise
Chapter 2: Multinational Enterprise and International Finance 47

and ¬nance are two parallel supporting institutional systems. Both operated
at home and abroad. The identi¬able processes of multinational enterprise
investment in electric utility companies involved at the start the scouting
and negotiation of the franchise, the securing of the contract, engineering,
company promotion, underwriting, construction, operations and manage-
ment, and primary and secondary distribution of securities. Sometimes
these functions were performed within a single ¬rm, but sometimes they
were not internalized “ that is, they were performed outside the ¬rm that
was the initiator and operator of the public utility.37 If the latter, there were
frequently very personal networks of social relationships that facilitated the
raising of capital.
Sometimes, however, the international ¬nancial relationships were
entirely separated from multinational enterprises, and established nation-
ally owned and controlled utilities were able to locate underwriters and to
¬‚oat bonds in international markets; in many cases, ¬nancial institutions
within these host countries aided in the process. As we study the role of
¬nancial intermediaries in the spread of electric utilities worldwide, we will
make the distinctions.
Banks and other ¬nancial intermediaries had an interest in seeing to it
that not only were good ¬nancial returns forthcoming, but that there was a
solid productive activity to ensure that return in the future. Many ¬nancial
institutions, especially those heavily involved in electric utilities, employed
specialized talent, skilled individuals (engineers, for example) to evaluate
investments. To the extent that the ¬nancial intermediaries became directly
involved in the operations to make sure that the returns were forthcoming,
they became direct investors, furnishing contacts and information, so as to
lead the operation of the electric utility to success.
In this regard, it is useful to consider the dissimilarities between bank
¬nancing and capital market ¬nancing.38 The former often tended to be
short-term ¬nancing. As for the later, ¬nancial intermediaries (investment
banks, merchant banks, universal banks, af¬liates of commercial banks, or
brokers) were involved in arranging access to capital markets, underwriting
corporate bonds, and providing for the distribution of equity. They might
do this without an extension of operations over borders. Many, however,
had close relationships with other ¬rms over borders. Once the utility was
beyond the start-up phase and in operation, it had new requirements for
¬nancing that posed different problems, although often the same actors
were involved. Other ¬nancial intermediaries “ such as insurance compa-
nies, investment trusts, and investment companies “ also assisted in the
¬nancing of utilities abroad.
Banks (of all sorts), other ¬nancial intermediaries, and promoters aided
in accelerating the spread of electric utilities worldwide. Some of these
players were highly entrepreneurial. However, in different settings (de¬ned
by space and time) the mix of such ¬nancial actors varied widely, and even
Global Electri¬cation

the very term ˜˜bank™™ had distinct meanings in different national con-
texts.39 ˜˜Merchant banks™™ in the United Kingdom, such as J. S. Morgan &
Co. (and its 1910 successor, Morgan Grenfell), the Barings, and the
Rothschilds, were not called ˜˜banks,™™ although the phrase ˜˜banking
houses™™ was used. The line between a stockbroker and a merchant bank in
the United Kingdom often was tenuous.40
In the United States, Drexel, Morgan and its 1895 successor, J. P. Morgan
& Co., were ˜˜private banks,™™ which took deposits as well as carrying out
investment banking functions. As in the United Kingdom, so in the United
States, stockbrokers became investment bankers.41 National City Bank, New
York, was a ˜˜national™™ bank, regulated under federal law (yet before the
passage of the Glass Steagall Act of 1933, it had a subsidiary that handled
underwriting and securities™ sales). Deutsche Bank has often been called a
˜˜universal bank.™™ Laws that were distinctive to individual countries de¬ned
the spheres of ˜˜banks.™™ As Daniel Verdier writes, ˜˜Universal banking is
commonly believed to have existed before 1913 in Belgium, Germany,
Austria, Italy, whereas specialized banking was mostly encountered in France
and the Anglo-Saxon countries.™™42 Verdier recognized that this generaliza-
tion was overly broad. Within countries, regulatory regimes changed over
time, as did banking functions. Functions performed in one country by a
bank might be performed in another country by a differently designated
¬nancial intermediary. What was permissible in one era might be different
from what could be done in the next. Banking reforms in the United States
and Belgium in the early 1930s and in Italy in 1936 would radically alter
what ˜˜banks™™ could do. After 1933 (and all through the subsequent period
on which this book concentrates), in the United States there was a separation
of investment and commercial banking. In recent years in the United States,
this ˜˜wall™™ has crumbled. In Germany, there was never such a wall.
There were sharp country-speci¬c differences in rules and traditions on
bank branches. In the United States, branching was very limited; in Canada
there were a few big banks and a substantial number of branches.43 In the
United Kingdom, in the nineteenth and much of the twentieth century,
domestic commercial banks did not invest abroad, but there were important
overseas banks that had branch networks that supplied ¬nancial accom-
modations to British enterprises (including those in electric utilities) that
operated globally. Before the Federal Reserve Act of December 1913,
national banks in the United States could not branch abroad; there were no
similar constraints on the Bank of Montreal or on Deutsche Bank, which set
up branches and subsidiaries in foreign countries. On the other hand, after
1914 National City Bank could and did branch abroad, providing ¬nancial
services to U.S.-owned public utilities located in foreign markets. (Note that
while it could not branch across state lines, it was permitted to set up
branches in foreign countries.) The term ˜˜syndicate™™ had different meanings
in various contexts. ˜˜Promoters™™ could be bankers, but they need not be.
Chapter 2: Multinational Enterprise and International Finance 49

Peter Hertner and H. V. Nelles have described the entrepreneurial cha-
racter of certain Canadian investors in foreign public utilities. The
˜˜Canadian entrepreneurs understood the revolutionary effect hydroelectric-
ity had upon the cost structure of electric utilities. By greatly increasing the
scale of production and lowering operating costs, electric utilities could serve
a much larger market, at lower prices, and still make healthy pro¬ts. Indeed,
properly managed, a utility needed only a small fraction of its income to
cover operating expenses. The rest could go toward extensions, upgrades,
rate reductions, debt service, and ultimately dividends on common stock. Of
course, the capital costs of the new hydroelectric installations, long-distance
transmission, and extended distribution facilities increased dramatically. The
Canadian entrepreneurs did not see that as a problem, but rather as an
opportunity, for they were ¬rst and foremost ¬nanciers, investment bankers,
bond salesmen, and company promoters. The more debt the better, as it
meant higher commissions and more good ˜stuff™ (as they colloquially
referred to the stocks and bonds they created) to spread around. The new
economics of production meant that these companies could readily serve the
mountains of debt piled upon them and still perform adequately for the
shareholders™™ (our emphasis).44 Entrepreneurial behavior in the ¬nancial
sector in connection with public utilities was not uncommon.
Electrical equipment manufacturers (like many other manufacturers) had
special domestic relationships with banks (and other ¬nancial intermediaries)
that usually extended into the electric utilities sector, domestically and
internationally. While there were some ˜˜banks™™ (for example, Bonbright &
Co. in the United States) and some brokerage houses (Foster & Braithwaite
in England, for instance) that specialized in electric utilities at home and
abroad, and while there were certain ˜˜investment companies™™ that limited
themselves to public utility investments, many, probably most, of the ¬nan-
cial intermediaries that participated in stimulating the spread of electri¬cat-
ion worldwide did not con¬ne themselves to electric utility ¬nance. This was
true of insurance companies, which had an important role in ¬nancing cer-
tain public utilities, and also of many investment trusts and investment
In 1899, Canadian regulators removed certain restrictions on the kinds
of securities life insurance companies could hold; as Christopher Armstrong
and H. V. Nelles have written, this ˜˜suddenly freed up millions of dollars of
Canadian savings for placement in the relatively secure utilities sector™™ “ at
home and abroad.45 So, too, the vast British insurance companies™ resources
could be, and were, used for investments in public utilities “ at home and
abroad. British insurance companies became part of the cluster of partici-
pants in international investments. Indeed, as we explore the forms and
behavior of multinational enterprise taking part in the spread of utilities,
we can identify ¬nancial intermediaries active in a variety of roles. At the
same time as these ¬nancial intermediaries might take on a multinational
Global Electri¬cation

enterprise form, they might also participate directly or indirectly in expe-
diting purely ¬nancial transactions. Financial institutions ranked as key
actors in facilitating the process of spreading electricity around the world.
So, too, the very presence of stock markets was signi¬cant in mobilizing
funds and encouraging the global development of electric utilities. Securities
markets were part of the ¬nancial system, and their use came to be crucial
in the international ¬nancing of public utilities, both in relationship to
multinational enterprises and also vis-a-vis the domestic and international
¬nancial transactions of what were domestically managed utilities. In a
review, Richard Sylla commented on Ranald Michie™s ¬ndings that ˜˜the
value of securities in 1913 was three to four times greater than worldwide
deposits, which makes one wonder why banks and banking have received
such disproportionate attention from ¬nancial historians.™™46 The point
made by Sylla (and Michie) is well taken. Key stock markets were available
to aid in the assembly of capital for public utilities around the world. Yet,
here, too, change was very evident. The role of ¬nancial intermediaries and
stock markets altered through time. London was by far the most important
international securities market in 1913“1914, while in the 1920s the U.S.
stock markets took on new signi¬cance. An individual public utility might
be traded on a number of stock exchanges. The insights of Joost Jonker on
the ¬nancial systems of Britain, France, and Germany are very germane to
our story. In the ¬rst two countries, Jonker sees securities markets as
playing a vital, central role, while the German stock exchanges ˜˜¬rmly
chained to banking interests[,] . . . keen to protect the internalized markets,
remained rather listless considering the huge economy surrounding them
and would remain so until the 1980s.™™47 Canadians had very thin stock
markets, but they effectively used London and then New York, as well as
Brussels and Paris, in public utilities ¬nance. The New York stock market
was essential for public utilities ¬nance in the 1920s. For stock markets to
operate, there had to be actors to arrange the underwriting and the listings “
and stockbrokers to facilitate transactions. In sum, ¬nancial intermediaries “
banks, insurance companies, securities companies, investment trusts,
investment companies, individual promoters, and brokers “ were business
organizations that played a variety of roles in the spread of electric utilities.

the enclave form
From the 1880s onward, whenever a multinational enterprise set up a
company town associated with plantations, mining, or oil drilling, these
had some kind of electric power facilities. At the same time as electri¬cation
was taking hold and the world economy was being integrated by railroad
networks, new resources were being utilized on a global scale. As businesses
developed these resources and brought them into international trade, a
company would typically install power plants to meet the requirements of
Chapter 2: Multinational Enterprise and International Finance 51

the new, frequently remote, economic activity. Such light and power
facilities introduced the initial electri¬cation in diverse areas around the
globe, from Europe to Latin America, Africa, the Middle East, Asia, and
North America. We have called this international structure, an ˜˜enclave
form™™ establishment.
Before the First World War, companies such as United Fruit (in countries
washed by the Caribbean Sea), the Guggenheim™s Chile Exploration Co. (at
Chuquicamata in Chile), and R±o Tinto (in Spain) were multinational
enterprises in this category “ and there were numerous others. In the 1920s,
company towns multiplied around the globe, many with modern amenities,
including electric power.48 In terms of power generated, with some
important exceptions, these activities both within and outside of empires
probably added up to relatively small amounts of kilowatt hours, at least as
compared with urban electri¬cation. Yet some facilities were quite large,
and in consideration of the geographical spread of electricity, spurred by
international enterprise outside then-existing urban areas, all of them
brought standards from the most advanced countries to far-off locales
around the world. In time, with varying degrees of rapidity, these areas
would become urban. Even before World War I, and certainly by the 1920s,
as mining and oil communities were urbanized, the power plants would be
spun off and run not by the multinational enterprise, but by a local
(national) power company “ not foreign-owned. Or alternatively, they
might be spun off and continue to be foreign-owned. Sometimes, the power
facilities that related to a particular enclave form of activities were placed in
separately incorporated operating companies, and sometimes they were
not. If substantial additional ¬nancing was required, the separate company
was very likely. If not, the electricity supply system could be ¬nanced
through the plantation, mining, or oil-drilling enterprise. In certain locales,
where there were many mining companies, a single foreign-owned power
company might come to serve the community or region.
In addition, there was a comparable political (as distinct from economic)
enclave in the extension of electri¬cation: As European administrators of
empire went abroad, they came to expect to have electri¬ed homes and
of¬ces. Here, the provision of electricity seldom extended beyond the
European expatriates, and the linkages appear to have been less than with
the company towns. Nonetheless, this, too, was a form of spatial diffusion
of the supply of electric power on a global basis.49

large power consumers
As electri¬cation came of age, innovations in many industrial sectors cre-
ated new industries requiring substantial power “ for example, aluminum
production as well as some electrochemical processes. Paper and pulp
making came to be very energy intensive. Large power consumers were not
Global Electri¬cation

a subset of the enclave form. This form was distinctive. Enterprises in these
speci¬c industries took the initiative and invested at home and over borders
to obtain the required power; and at the same time, potential developers of
power resources in what were remote areas sought out large industrial
power users. These power consumers represented a further set of business
actors that participated in building up power sources outside a particular
home country. Whereas with the enclave form, the power facility was
located where the agricultural endeavor, the mine, or the oil well had been
or was being established, the large power consumers sought locations
where there were potentials for cheap power. The development here com-
bined ¬rms with huge power requirements with a previously undeveloped
source of power. After such facilities were built, they often served more
than just the founding enterprises; they would become public utilities. This
occurred from the late nineteenth century onward. Before (and after) World
War I, Canada and Norway “ with possibilities of hydroelectric power “
were particularly attractive to companies with heavy power requirements.
Switzerland, which was becoming rich in ¬nancial resources, also was
appealing (but more often than in Canada or Norway, Swiss activities could
draw on domestic ¬nance). In the post“World War II years, in almost an
encore, foreign aluminum companies in West Africa provided the stimulant
for the exact same development of power resources. But while the alumi-
num companies were participants in the arrangements, the ¬nancing of this
power generation was seldom provided by the aluminum producers.

holding companies
One very important set of initiators in spreading electricity around the
world were holding companies.50 A holding company was a pyramided
corporate structure that came to be an umbrella designation for highly
diverse underlying behavior. Some holding companies were rather ¬‚at and
extended. Others were highly layered, with one layer above another and
control concentrated at the pinnacle. Many combined these corporate
architectures. In a holding company structure, in a hierarchical manner,
af¬liates at home and abroad might themselves serve as holding companies,
owning securities in separately incorporated entities within the home, host,
and third countries. Most multinational enterprises had (and have) a
holding company edi¬ce, at least in a technical sense: The parent holds
stock in companies that operate abroad, and control is concentrated in the
parent company. Usually, however, these multinational enterprises have
not been described as holding companies, because the entire enterprise in-
tegrated the business operations.51
In the summer of 2001, the U.S. Department of Commerce noted that in
the ˜˜last two decades™™ U.S. multinational enterprises had been funneling an
increasing share of direct investments abroad through holding companies,
Chapter 2: Multinational Enterprise and International Finance 53

many of which were organized ˜˜primarily to coordinate management and
administration of activities “ such as marketing, distribution, and ¬nancing “
worldwide or in a particular geographical region.™™52 The use of holding
companies with this intent is far from con¬ned to recent decades.
In the electric utilities sector, from the mid-1890s both home-country
and third-country holding companies emerged in Europe with ef¬ciency
rationales.53 These engaged in international business: They organized and
managed new public utilities projects; they assembled engineering talent;
they arranged for equipping the utilities; they found management; and they
set up and combined existing operating companies in single, more ef¬cient
utilities. They also ¬nanced or arranged the ¬nancing of the utilities. Third-
country holding companies were frequently organized in Switzerland and
Belgium. They did what is described in German as Unternehmergeschaft “ ¨
that is, they served as entrepreneurial enterprises, and they behaved as
multinational enterprises.54
To what extent did the ownership interests (by manufacturers and
banks, for example) in these holding companies carry control? De¬nitions
of ˜˜control™™ are slippery. Obviously, one purpose of information that came
from ownership for a manufacturer was to be in an advantageous position
to sell equipment to the power stations. The manufacturer, through the
holding company, wanted to in¬‚uence this facet of the holding and control
the utility™s management.55 It certainly did not want to control the running
of the operating company™s business, except in a manner related to
equipment supply. So, too, did banks involved in the holding companies
have separate agendas.
Sometimes, the very same holding company did not exercise ownership
and control over some of its holdings; it was simply an owner of securities,
with special expertise in the public utilities sector that informed its ¬nancial
portfolios. The mix of the active and passive investments by holding
companies often changed through time. The legal structure was frequently
complicated by the varieties of interests. There were holding companies that
might be owned by other holding companies that were solely ¬nancial
in nature. There were cross-holdings within a holding company group.
Ginette Kurgan-Van Hentenryk has suggested that the Belgian group
Empain, up to the 1950s, might be analyzed as a Japanese zaibatsu, with
each having a ˜˜pyramid-like structure, with a family at the top, supported
by a holding company and by various joint stock companies.™™56
As in Europe, U.S. holding companies emerged in the 1890s57 in various
industries “ soon, particularly, in electric utilities. In 1913, Electrical World
commented (in the U.S. domestic context) that the weakness of holding
companies ˜˜lies in the temptation to use . . . [their] undeniable operating
advantages as a cloak to cover the issuance of more securities than the
properties should be required to support.™™ Historian Richard Hirsh added:
˜˜While recognizing the existence of opportunities for exploiting the holding
Global Electri¬cation

company structure, [U.S.] industry insiders preferred to focus on the
risk-reducing advantages offered by the new ¬nancing scheme, which
engendered investment bankers™ support for the new holding company
structure.™™ In the U.S. public utilities sector, domestic experience with
holding companies would subsequently be replicated in the international
context.58 As in Europe, many of the leading U.S. electric utility holding
companies, as Thomas Hughes has insisted, were to be ˜˜found rooted more
deeply in technology and management history than in ¬nance.™™ Key
holding companies were led by engineers and technically trained managers.
At the same time, these men were able to raise money, so technology and
management history were not divorced from ¬nance.59 The German word
Unternehmergeschaft was applicable to their activities.
So, too, holding companies took shape with Canadian-headquartered
¬rms to do business in public utilities outside the Dominion. Canadian
holding companies for international business were a later phenomenon than
those in Europe and the United States and had markedly different rela-
tionships with ¬nancial intermediaries (banks, brokers, securities compa-
nies, and investment companies). Yet, they, too, served the same functions,
organizing the business abroad in public utilities and raising money for
these capital-intensive projects. They also engaged engineering talent and
were part of ˜˜management™™ history.
In the United States, the holding company came of age in the public
utilities sector, both domestically and internationally, in the late 1920s.
Companies were stacked on top of other companies, and at each level there
was a gathering of new ¬nancial resources. Control at the pinnacle could be
achieved with only a small amount of equity, and this control was often
concentrated in the hands of a single individual or by a small group of
individuals. In North America, as in Europe, the holding companies that
took part in international investments ranged from entrepreneurial enter-
prises that organized and managed operations abroad to those with purely
¬nancial holdings (and some that mixed both sorts of holdings). A few
combined holding and operating company activities in the pinnacle
Electric utility holding companies that did international business can be
seen as structures for rationalizing the management of large, integrated
operations (integrated by knowledge and talents) of geographically dis-
persed companies, but they rarely physically integrated properties across
borders. But on occasion “ for example, over Swiss borders or over the U.S.-
Canadian border (as noted above) “ holding/operating companies might
integrate a power system.60 This was not, however, the typical pattern. The
largest public utilities holding companies in international business would
integrate the operations of what had been separate companies within par-
ticular foreign cities or regions inside a foreign country, but not across
national borders.
Chapter 2: Multinational Enterprise and International Finance 55

Sometimes (in the pre“World War II literature), holding companies were
seen as identical with ˜˜trusts.™™ Some holding companies were equated with
investment companies. And certain holding companies came to be known
as ˜˜power ¬nance™™ companies, or simply ¬nance companies. When U.S.
legislation in 1935 tore apart public utility holding companies, there were
long discussions of de¬nitions, and policy exceptions were made in the
international business arena.61 What is very apparent is that holding
companies differed from one another, and the same ones differed over time.
Pyramids and diagrams did not look alike. Were the differences based on
˜˜national™™ business systems? This does not seem to be the case. Within
individual countries, various sorts of holding companies coexisted. Also,
the term was often differently used in different contexts. As we studied
holding companies in the electric utility sector, we found distinctions
between direct and portfolio investments to be frequently muddy, and this
complexity had nothing to do with national business systems. In some
cases, the holding company seemed to be making direct investments “ that
is, planning its investments with more than purely ¬nancial aspirations and
having a representative on the board of the recipient company “ but when
the coin was turned over and the perspective of the recipient company was
considered, these same investments seemed to be portfolio rather than
direct ones “ for in these particular cases, there was no running or intention
to run the host country enterprise; the entrepreneurial activity was in the
host country. Is it conceptually possible for the home country enterprise to
be making a foreign direct investment, while within the host country the
same investment would be legitimately considered as a portfolio one? The
idea is a bit iconoclastic, but it clearly should be entertained.62

operating companies: holding/operating companies,
˜˜free standing companies,™™ and others
Operating companies would typically be established for a particular public
utility, at home or abroad. If a holding company, with existing know-how
and experience, set up or acquired the operating company abroad, this
operating company could be seen as ¬tting neatly into a model of a classic
multinational enterprise, emerging from existing competencies held by the
parent. The standard theoretical treatments that have seen multinational
enterprises evolving and going abroad, transferring their core competencies
to the foreign af¬liates, conforms perfectly to this pattern. Some operations
were ˜˜green¬eld™™ “ that is, set up anew. Often, there were takeovers
(acquisitions) of existing companies. That pattern, too, would square with
the classic multinational enterprise.
Sometimes, however, foreign-owned operating companies would be (or
appear to be) ˜˜free standing.™™ In the introduction to this chapter, we
introduced the reader to the term ˜˜free standing company,™™ which was
Global Electri¬cation

identi¬ed as a special form of multinational enterprise that did not arise
from the core competencies of an existing ¬rm, but was set up afresh to do
business abroad. A number of the enclave form of companies “ in agri-
culture, mining, and oil, where the electric power plant was built by the
agricultural, mining, or oil ¬rm “ began as free standing companies. More
important for our purposes, many operating electric utilities were initially
free standing companies. The latter were organized to channel advanced
country funds into a project abroad. Because of uncertainties and risk, money
did not automatically go to businesses, including public utility projects.
Investors wanted a company formed in a familiar setting and controlled by
reliable individuals to intermediate their investments.
This was the genesis of many free standing companies. Because they were
established anew and at origin had no operations at home, in order to
conduct business abroad these companies drew on the talents of outsiders.
There were clusters of individuals and other ¬rms that surrounded the free
standing companies, serving on the boards of directors and owning stock in
the company. Included, for example, were promoters, prominent individuals
with standing, solicitors (lawyers), accountants, engineers, men identi¬ed
with construction ¬rms, and those with trading companies. A manufacturer
that wanted to sell to the new electric utility might have a place on the board
of a free standing company. So, too, investment trust companies and other
¬nancial intermediaries that saw the free standing company as a good
investment might be involved. Sometimes, these categories were not mutually
exclusive: Promoters could be lawyers or engineers; prominent individuals
with standing could be identi¬ed with investment trust companies; and
engineers and men tied in with construction companies were sometimes one
and the same. With the free standing companies in electric utilities (as well as
in the general case), there were always clusters of individuals and companies
with different competencies and contributions that joined together to
undertake a set project. That these free standing companies had well-known,
responsible boards of directors made them easier than an unfamiliar venture
to ¬‚oat and to raise money at home or in the appropriate capital market(s).
Home country investors (the providers of capital) did not have to worry
about foreign exchange. When they invested in the free standing company
stock or debentures, they were making a ˜˜domestic™™ investment. It was the
company that made the foreign direct investments (and presumably exercised
control over the business abroad). In time, successful free standing companies
came to internalize many of the required talents and to look more like classic
multinational enterprises. Also, in time many such free standing companies
or groups of companies would be drawn into the investment orbit of larger
holding companies. Before that happened, free standing companies were an
important form in the public utilities sector. There were in Great Britain,
France, Canada and some other source-of-capital countries many free
standing companies set up to operate public utilities abroad. There were U.S.
Chapter 2: Multinational Enterprise and International Finance 57

free standing companies, but they tended to be less in evidence. Often, free
standing companies were sequential. A free standing company would be
formed to acquire assets. New ¬nancing might be needed and a new cor-
porate structure superimposed (a newly named free standing company
created); a merger or mergers might occur, and again a new corporate entity
would emerge. There were ˜˜sister™™ companies that might later be combined.
Operating companies were frequently formed to take over a prior activity or
company or to merge two earlier companies. In the public utilities sector
around the world, many foreign-owned operating companies began as (or
became) free standing companies.
When this was the case, we asked, Who took the initiative? Because these
companies were organized anew, the initiative had to come from some-
where. The clusters of participants became ever more signi¬cant. As the
operating companies “ with the goal of running an electrical facility abroad “
were set up in capital-rich countries (or in countries such as Canada with a
favorable legal system and the ability to tap British and other capital
markets), the initiative was speci¬c to the particular operation. A new
company would be constituted to represent a particular activity. (What is
key here is that the parent “ the company itself “ was not an operating
utility in the home country.) Home country registration might remain the
same over a period of time, but ownership could change as new actors came
to participate. Thus, a project set up by Britishers, registered in the United
Kingdom, might be taken over by German capital, with no alteration in the
U.K. registration. The activity itself might be in South Africa or Chile.
Free standing companies often were part of a loosely de¬ned business
group “ so the same people were frequently involved in a number of such
companies. There were overlapping clusters of companies. Many times, as
indicated earlier, the companies were sequential, often associated with
mergers, and with each new incorporation raising additional capital. With
free standing companies, this sequential pattern was common in many sec-
tors, but there was far more of it in public utilities. Because scale economies
came to be important, there was a tendency to want to suppress competition
in a particular market. Operating companies often merged rather than
competed. Accordingly, the business was then rationalized. Part of the
sequential corporate structure was directly associated with that push toward
consolidation. The aim was an organizational form that served that purpose
and became a means of obtaining new funding for the public utilities project.

operating companies: concessions and franchises
The clusters of participants that surrounded a free standing operating
company interacted with host country actors. Sometimes, the promoter was
an individual from the host country who was seeking ¬nancing abroad.
Around the world, municipalities (and sometimes other governmental
Global Electri¬cation

bodies) offered concessions to domestic or foreign ¬rms. Utility typically
required a concession from a public authority. Sometimes, the initiative
came from the municipality (or the province or other regional governmental
unit) and sometimes from the concession seeker, domestic or foreign.
Often, municipalities gave the initial concessions to a country national, who
discovered that he needed to go abroad for additional funding. This indi-
vidual was on the spot, often well-connected. Sometimes he believed he
could develop the concession on his own and discovered that he did not
have adequate funds or access to technology; sometimes from the start, he
planned to peddle the concession. Concessions that went to local people
within a host country might thus end up in foreign hands. The foreign
involvement might be purely ¬nancial. At times, a large power consumer
might be attracted to the opportunity. Very often, the free standing
company form would be used.
Sometimes, it is dif¬cult to determine the initiator of a free standing
operating company, whether it be domestic or foreign, for it was the
complex interactions between the outsiders, local individuals, and the
governmental unit that resulted in the power generation project being
undertaken. In addition, concessions were often linked with (developed on
the basis of) prior ones in gas, tramways, or water. Sometimes, they came to
include telephones. Gas preceded electricity, and existing gas companies
that supplied municipal lighting long before electricity was available would
often be transformed into gas and electric companies; international gas
ventures, in turn, were metamorphosed into international gas and electric
companies. Frequently, in the early days, electric companies competed with
gas companies and offered alternatives to them. Local authorities that
owned gas suppliers often made it dif¬cult for electric power companies to
enter markets, fearing the competition. With the gas companies, there
would be in the early period competition and then the co-opting of the new
It was very common for concessions for power facilities to be associated
with tramways, as indicated in Chapter 1. The ¬rst trams were not elec-
tri¬ed, but later ones were, and there came to be an intimate connection
between the electri¬cation of tramways (city transport) and electric light
and power, based on technological considerations. Light and power
facilities were also associated with other forms of urban transportation,
from elevated (and ¬‚at) electric railways to subways (the ˜˜underground™™ in
Europe). These public services required concessions and therefore political
Sometimes, gas, power, light, telephone, tramway, and, on occasion,
water and ice concessions were intermixed, all part of a ˜˜modern™™ urban
infrastructure. If waterpower was to be used for hydroelectric plants, there
were usually legal issues regarding industrial and commercial water
rights.63 Also included in infrastructure were ports and harbors, and often it
Chapter 2: Multinational Enterprise and International Finance 59

was the same actors involved in construction of these facilities as in the
electric utilities. And these, too, required governmental authorizations and
government contracts. Thus, from the earliest days, there was an admixture
of government, domestic, and foreign participation in different proportions
in individual countries in different parts of the world. Moreover, in the
provision of electric power, there were sometimes separate contracts for
generation and for transmission and distribution. although usually, they
were joined. Many of the foreign-owned operating companies, based on
concessions (or hopes for concessions), were set up initially (or very near
the start) as free standing companies.

the many business actors: clusters, networks,
and business groups
As concessions were granted, initiators of the process of global electri¬ca-
tion, home and host country participants, continued to interact. Some of
the foreign actors involved were representatives of independent ¬rms, and
some might be of¬cers or employees of the multinational enterprise that ran
the operating company. The line was not always clear for multinational
enterprises that outsourced “ that is, in many cases they engaged inde-
pendent ¬rms: ¬nancial intermediaries, lawyers, or engineers. Some free
standing electric utilities had men from manufacturing companies on their
board, men who expected export orders from the operating ¬rm. Because of
the capital needs of electric utilities, companies often planned to go to stock
markets for their ¬nancial requirements, and thus one could ¬nd on the
board important bankers, of¬cers of other ¬nancial intermediaries
(including securities companies, investment trusts, and insurance compa-
nies), and/or well-known promoters, who gave con¬dence to the investors
and helped with the procedures. The relationship between foreign-owned
operating companies and investment trusts is of particular interest. For a
public utility overseas, a free standing company would be ¬‚oated in
London. Investment trusts would guarantee that all or a large portion of the
equity would be picked up. On occasion, investment trusts also acquired
debentures of these companies. To assure its securities™ standing, a repre-
sentative of the involved investment trust(s) would serve on the board of the
company. And then there was the relationship of the free standing company
with banks. Bank branches, for example, frequently attended to the opera-
ting companies™ basic needs. Insurance companies also were part of the
¬nancing cluster.
It was not only manufacturers and ¬nancial intermediaries that played
important roles in the clusters involved with public utility companies abroad.
Other key individuals (and their ¬rms) included the lawyers (or in the British
case, solicitors). As a foreign investor negotiated with governmental entities,
it became essential for the multinational enterprise to be able to arrange an
Global Electri¬cation

appropriate concession contract. Lawyers ¬gured in the public utility story in
matters of patents, developing sound corporate structures (limiting liability,
tax considerations, meeting legal requirements, etc.), and maintaining
property rights, and they were often major negotiators with regulators. In
some cases, especially from the 1930s onward, they handled trade union
negotiations. In general, it does not seem that lawyers took the initiative in
the spread of light and power facilities “ although in Edison™s international
expansion, there is strong evidence that the lawyer G. P. Lowrey was a
principal participant, and there were other cases where men with a legal
background headed public utilities holding and operating companies. Law
¬rms came to specialize in, or employed specialists for, electrical public
utilities matters, and multinational enterprises required legal assistance when
they went into business internationally.64
Among the major players in the networks surrounding the globalization
of electricity were engineers and engineering ¬rms. Sometimes, the
involvement of engineers did not mean multinational enterprise participa-
tion. In Japan, for example “ where there were sizable foreign direct
investments by multinational enterprises in the electrical manufacturing
sector “ with the public utilities, Western engineers were hired, Western
equipment was purchased, and Western ¬nance was utilized, but neither the
engineers nor the ¬nancial institutions made or facilitated multinational
enterprise“type investments in any of the Japanese public utilities.65 On the
other hand, engineers and engineering ¬rms were obligatory for multina-
tional enterprise activities. Engineers could take the initiative (that is,
promote new projects) or, alternatively, be engaged to evaluate a potential
project. Even before a contract was negotiated “ sometimes even before an
operating company was set up “ engineers were brought in by foreign direct
investors (and sometimes by a lender) to determine the feasibility of a
particular proposal. Sometimes, the engineers (and their ¬rms) were inde-
pendent, playing an advisory role. And sometimes, an engineer might have
board membership in a number of different operating companies. Engineers
(or their ¬rms) were employed by (or became closely associated with)
groups of actors involved in the setting up and running of the utilities in a
foreign locale. The engineering function could be completely endogenous “
that is, the multinational enterprise would have a full engineering staff and
not use outsiders. There were holding companies engaged in international
business that were run by engineers. In Britain, the term ˜˜engineering ¬rm™™
had a different meaning from that used in the United States and Canada. (In
Britain, an engineering company included manufacturers, while in the other
two countries it referred only to professional engineering services.)66 The
legitimate confusion blurs further when both types of engineering ¬rms
were part of the clusters taking part in utilities abroad.
New and expanding public utilities required the efforts of construction
companies. At times, engineering and construction ¬rms were one and the
Chapter 2: Multinational Enterprise and International Finance 61

same (since engineering was required in construction), and sometimes the
¬rms were separate. In addition, a multinational enterprise sometimes
internalized the construction functions, while in other cases independent
outside companies were called on to undertake construction activities.
Some construction companies became important multinational enterprises
and initiated the process of developing public utilities, assuming ownership
and control.67
And then there were the accountants: men and their ¬rms that rarely
initiated new public utility investments abroad. However, they did serve to
verify records and to assure a wary public of the worth of certain ventures.
Many of the free standing operating companies established in England to
do business abroad had a close relationship with accounting ¬rms, which
helped facilitate international ¬nance by vouching for the recipient of the
Finally, trading companies took on vital roles in the formation of com-
panies in the public utilities sector. Trading company personnel typically
had unique knowledge of opportunities in particular regions. They often
¬lled equipment needs of companies abroad that imported machinery.
Some were borderline merchant bankers, handling securities. Some served
as managing agencies. On a number of occasions, trading houses partici-
pated in, or even initiated, particular light and power projects.
The presence on a company™s board of manufacturers, important
bankers, of¬cers of other ¬nancial intermediaries, well-known promoters,
lawyers/solicitors, engineers, construction companies, accounting ¬rms,
and trading company representatives “ in various con¬gurations “ attested
to the safety of a traded security, from the underwriting of the initial issue
onward, but it also served as a way of protecting the interests of the par-
ticular board member and his ¬rm. Various clusters of involvement and
network relationships were ubiquitous in projects in the electric utilities

enlarging our thinking on multinational
enterprise forms
The study of operating companies abroad in the electric utility sector has
expanded and clari¬ed key aspects of the original free standing company
model, which in turn helps us to understand the forms of doing business
abroad in this sector. First, research on free standing companies has
brought out the fact that many apparent free standing companies were not
˜˜free standing™™ at all, but rather were part of established business groups or
even af¬liates of particular multinational enterprises. One could not rely
solely on directories to count (or identify) free standing companies. With
electric utilities, as we looked at the various participants, it was often
possible to identify business groups and sometimes overlapping business
Global Electri¬cation

groups. Sometimes, the business group was associated with families; other
times, it was not. When there was a clearly de¬ned business group, it often
seemed inappropriate to call the operating companies free standing. In the
chapters that follow, we have tried to identify the groups, or groupings,
and, when present, the overlapping clusters.
Second, discussions of free standing companies had understood that a
particular free standing company set up in England might in fact be
German. There had been questions as to whether, for example, a free
standing company registered in Canada was really Canadian. What had not
been adequately grasped was that registration in a particular locale did not
need to be identi¬ed with that country™s capital markets. Thus, some
Germans used British registration but ran their business abroad. Registration
might, however, be identi¬ed with management: An operating company™s
registration in Canada gave the U.K. and other third-country investors
security. These companies, unlike the German ones that used a U.K. regis-
tration, were Canadian-run, even though the actual capital supplied to the
af¬liates abroad came from places other than Canada and other than the
nation that was host to the investment. The major ¬nancial contribution to
the Canadian-registered ¬rm might be from England or from continental
Europe. U.K. and Canadian registrations gave con¬dence not only to the
U.K. investor but to other investors as well. The notion of using a locale of
registration to reduce uncertainty extended far beyond free standing com-
panies. Holding companies that carried on operations abroad were registered
in countries that provided assumed assurances and special bene¬ts “ true, for
example, of Switzerland and Belgium. In short, ownership need not be in the
country of registration, whereever the registration was.68
Third, there was another similarity between free standing companies and
the holding company form. The clusters of participants involved in free
standing companies often resembled (in their functions) those in the holding
companies. Thus, on the board of the largest U.S. international holding
company in the 1920s, for example, there were key bankers, a law ¬rm
representative, and the chairman of a leading electrical manufacturing
company (General Electric).69
Fourth, while the literature emphasized that the free standing company
form of multinational enterprise was an advantage in reducing risk and
uncertainties, this is vividly illustrated in the electric utility sector.70 The
registration of operating companies in Canada and the United Kingdom, for
instance, created a sense of security, of trust; it lowered transaction costs;
and it created ef¬ciencies in the ¬nancing process. The registration of
holding companies in Switzerland and Belgium (at least before the outbreak
of World War I) achieved the same purposes.71 The free standing company
form, with its cluster of participants, each with its special interests and
competencies, furnished a mutuality of bene¬ts. In a sense, the free standing
company was a counterpart of the holding company structure, which
Chapter 2: Multinational Enterprise and International Finance 63

involved the same grouping of participants, albeit often internalized within
the holding company. The weakness of the free standing company was its
absence of an internalized technical staff, which many holding companies
Fifth, the clusters of ¬rms that were assembled and put into place with
the successions of free standing companies frequently had the same kind of
effect as, for example, the holding companies in Switzerland and Belgium.
The companies set up and managed under these holding companies™
initiatives were not free standing by any stretch of the imagination, yet the
Swiss headquarters gave access to third-country capital markets that would
not otherwise have been accessible. The Belgian holding companies
achieved the same goal. The companies set up by American & Foreign
Power and those purchased by that enterprise, once brought under the
holding company, were no longer free standing. So, too, over time, many
free standing companies were metamorphosed and rationalized into a
holding company structure and no longer were free standing.
Sixth, looking at the boards of directors of the operating companies
provides a good ¬rst step in considering the actors involved. Beyond that,
one has to delve deeper and look within the particular groupings to
understand the dynamics involved in the multinational enterprises™ role in
establishing electric utilities in foreign locations. Often there are ambigui-
ties in what constituted ownership and control that even careful readings of
corporate histories do not effectively resolve.

Before we complete this discussion of forms, there is one more private-
sector actor, whose role was indirect, yet crucial, especially at the beginning
of our narrative. The relationships between railroads and the spread of light
and power companies were several. Many of the banks and ¬nancial
intermediaries that took part in ¬nancing electric utilities gained their initial
experience in international transactions in railroad ¬nance. Some had
subsidiaries or sister companies engaged in railroad ¬nance. Prior to the
development of electric power, railroads had been the most capital-
intensive sector in history (see Figure 1.4, for the American example). There
was a somewhat similar gray area between foreign direct and foreign port-
folio investments in the railroad sector, as we found in electric utilities.73
Swiss holding companies were established in the 1870s for the control and
¬nancing of railroad companies.74 In Belgium, railroad ¬nance set the
precedent for electric power developments.
Some of the engineers and construction companies that were key in
electric utilities had a background of experience in railroad endeavors.
Often, once electri¬cation was possible, the process would follow the
railroad lines to the places where the lines extended. To the extent that
Global Electri¬cation

there was foreign ownership in the railroad sector, it might prompt foreign
ownership in related activities. The linkage effects could be foreign or
domestic. They could be internalized by the railroad company itself, or be
set up separately by foreign investors, or be entirely domestic.75
Train terminals were among the ¬rst places to be electri¬ed. Railroads
required signals, which required electricity. The requirements of running a
railroad motivated the initiation by foreign-owned railroads of their own
power facilities. Railroads made possible the development of global
resources. The enclave form of electri¬cation would not have occurred were
it not for the existence of steam-powered railroads. In addition, railroads
and urbanization were closely associated, as destinations on the railroad
lines were, or became, urban. Typically, railroads (especially foreign-owned
ones) had connections with port cities, which became electri¬ed. While
most electric tramways replaced horse-driven tramways, some had their
genesis in steam railroad construction and ¬nance.76
Often railroads required concessions, and the experience with negoti-
ating them, including rights of way, had carryovers into the electric utility
sector. Railroads offered critical infrastructure for modernization, as did
light and power facilities. Associated with this was the regulatory story,
which Hirsh has told in the U.S. context, but which had broader implica-
tions. Railroads were the ¬rst target for U.S. regulation; electric utility
regulation had the same antecedents in the United States.77 This was true
elsewhere as well: Typically, railroads often became government-owned
before electric utilities, setting a precedent.
There came to be many forms of competition for railroads during the
twentieth century: among them, cars, trucks, buses, and airplanes. Tram-
ways, one of the earliest uses of electri¬cation, met competition from
alternative forms of transportation. With electric lights and motors, how-
ever, there were no other satisfactory options. True, the way electric light
and power was generated changed over time “ for instance, different fuels
were used. But, electric lights and power did not follow the path of rail-
roads and become a declining industry. During the twentieth century and
continuing to today, worldwide, new end products have been developed
that use electricity, so the supply of electricity has become more rather than
less essential.

considering the actors and the forms: a summary
In terms of home and host countries, did one form of conduit in the
introduction of global electri¬cation by multinational enterprise exceed all
others? The manufacturers™ satellites (and extended manufacturers™ satel-
lites) were key forms where there were strong electrotechnical equipment
manufacturers, particularly in the United States, Germany, and Switzerland.
As for host countries, the manufacturers™ satellites (and extended
Chapter 2: Multinational Enterprise and International Finance 65

manufacturers™ satellites) that inaugurated the process of setting up utilities
on a large scale were global in their reach. Yet early on, manufacturing
companies became aware that integration into the light and power supply
business was not a good use of capital, nor was it a sensible use of orga-
nizational talents, either domestically or internationally. Manufacturers
retained minority interests at ¬rst, but often later not even that was nec-
essary.78 Manufacturers wanted to remain in an advantageous position to
sell equipment to the power stations. They did not want to control the day-
to-day running of the business (except in a manner related to equipment
supply). Clearly, in the expansion phase all the major electrotechnical
manufacturing multinationals had associations with the companies that


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