MULTINATIONAL ENTERPRISES AND THE END OF GLOBAL STRATEGY


by

Alan M. Rugman
Templeton College,
Oxford University

ABSTRACT

With the collapse of Asian economic growth in 1997 and the associated worldwide recession of 1998/99, we are witnessing the end of global strategy. New analysis in this paper shows that globalization never really occurred anyway. Instead, the vast majority of manufacturing and service activity is organized regionally not globally. Multinational enterprises (MNEs) are the engines of international business, but their strategies are regional.

INTRODUCTION

Multinational enterprises (MNEs) are the engines of globalization but they think regional and act local. My definition of globalization is that:- "Globalization occurs when multinational enterprises engage in foreign direct investment to create foreign subsidiaries which add value across national borders." The key actor on the stage of international business is the MNE. It operates from the triad-based home bases of the United States, E.U., or Japan. The MNE also operates at the hub of business networks in which clusters of value-added activities are organized. The process of globalization is therefore a triad and management-driven one. There are indirect fallout effects on politics, culture, law and related issues but these are second-order effects and such indirect outcomes should not be confused with the economic activities of the MNE.

Globalization has developed a bad name lately. The Asian financial crisis, with its contagion effects on the rest of the world, has turned many people off globalization. The perceived failure of global market-based capitalism is leading to calls for tighter financial regulation and capital controls. Yet, globalization actually has very little to do with recent world financial turmoil that has been caused by short-term investors in financial capital. Instead, the correct focus of globalization is on the activities of MNEs. The foreign direct investment (FDI) of MNEs is the engine that drives globalization. FDI is defined as equity investment by a parent firm to control the operations of a subsidiary corporation in another country. It is through the international operations of MNEs that the world's standard of living has been rising over the last 30 years. In the 1950s and 1960s it was U.S. FDI that led the post-war recovery in Europe and, later, Japan. By the 1980s Japanese FDI helped sustain growth in North America and Europe.

How will analysis of MNEs help to explain the current problems of globalization? It shows us that there is a temporary disequilibrium. The Japanese/Asian side of the triad reflects poor corporate and poor financial markets performance. In contrast, U.S. and European MNEs are performing relatively better. In recent research on some 200 of the world's largest MNEs, it was found that, in the 1996/98 period, the Japanese MNEs had an average return on foreign assets of 1.25%. That dismal return compared with 6.24% for MNEs based in the United States and 5.49% for European MNEs, including 7.78% for British ones. These key data for the Templeton Global Performance Index are reprinted in Table 1. These data reflect the slower pace of trade and investment liberalization in Japan compared with the other two parts of the triad. As a result of liberalization and deregulation the North American and European-based MNEs have been more successful.

Table 1: Average annual returns on foreign assets (ROFAs) by MNEs 1996-1997

Home country of MNE

Average ROFAs

Britain

7.78

United States

6.24

Rest of Europe

5.11

Canada

3.16

Germany

2.95

France

2.75

China

2.10

Japan

1.25

Australia

0.31

Source: Michael Gestrin, Rory Knight and Alan M Rugman, The Templeton Global
Performance Index (Oxford: Templeton College, University of Oxford, 1998).

In this paper I shall now proceed to elaborate on these points and apply them to more general issues of globalization. Next, I discuss the key role of MNEs and their strategies. Then, I define globalization and relate the issue of globalization to that of triad-based regional firm strategy and governance issues.

THE ROLE OF MULTINATIONAL ENTERPRISES

World manufacturing is dominated by a set of 500 very large MNEs. Although there are over 30,000 MNEs in the world, as identified by the United Nations (1997), the largest 500 account for over 80 percent of the world’s stock of foreign direct investment. These 500 MNEs also do over half the world’s trade, Rugman (1996).

These 500 MNEs have home bases in the "triad" of the United States, E.U. and Japan. They all operate in each others triad markets, a "regional" set of activities which is commonly confused with globalization. Ford General Motors, IBM, GE and du Pont all have hundreds of thousands of employees in dozens of country subsidiaries across the triad. Toyota, Matsushita, Sony and NEC have outsourced much of their component production to South East Asia and employ thousands of Americans and Europeans. The European firms like Unilever, Shell, Néstle, ABB, and Phillips are even more decentralized across the triad with a large degree of autonomy for subsidiary managers.

In short, these 500 giant MNEs are the hub of the engine of triad-based international business development. As a result of what they call globalization, various writers have argued that there is an emerging homogenization of world products and services. The collapse of communism and the triumph of market-based democracies has reinforced this viewpoint that Western (including Japanese) based consumerism is the dominant force behind the success of the MNEs. This is Fukuyama’s "the end of history".

While in some sectors (such as consumer electronics) this view of globalization is correct, in many others it is not supported by the evidence. For example, in both automobiles and chemicals, over 90 percent of products produced in each of the triad regions is sold within that region. There is no global car. Instead, there are U.S., European and Japanese bases for automobile production, supported by the paints and plastics business of the chemicals sector and regional triad-based steel producers. Indeed, most manufacturing activity is regional, not global. Data indicate that in terms of both output (goods and services produced and sold) and inputs (number of employees and financing) well over 90 percent of MNE manufacturing is intra-regional rather than global, see also Rugman and Hodgetts (1995).

In the service sectors the end of globalization is even more apparent. Except for professional service providers (such as consultants, film stars and business school professors) well over 95 percent of all employees in the service sector are local, not global. Regions have cultural attributes and political borders which are stronger than the economic forces of globalization. Managers of MNEs are likely to make major mistakes if they believe their business is global when it is regional. The managerial consequences of the lack of pure globalization has led to the need for regional, triad-based strategies.

The influential home country "diamond" model of international competitiveness, Porter (1990) is fully consistent with the triad/regional theme presented here. An MNE will build upon the strong home base diamond characteristics of the United States, E.U. or Japan and use the appropriate triad market as a staging ground for activities in other markets. But the great majority of production and sales of the MNE will be concentrated in its home triad. This is especially true for U.S. and Japanese MNEs, and perhaps less so for British ones, although most European MNEs sell mainly within the E.U., eg German MNEs. Smaller firms, such as the German Mittelstand, have virtually all of their sales within the E.U.

In terms of my "double diamond" model, again, the role of the triad is dominant. Smaller economies can develop MNEs only if these firms have access to a neighbouring triad market (Rugman 1996). For example, Canadian MNEs such as Northern Telecom, Alcan and Bombardier have developed double diamond relationships with the United States. Korean chaebols sell both to Japan and the United States, using two double diamonds. Mexico is developing MNEs within NAFTA, using a Mexico-U.S. double diamond approach. The double diamond and the single diamond theories do not support pure globalization strategies of MNEs, rather they help explain the reality of regional/triad production and sales.

The work of international institutions such as the GATT/WTO reinforces regional production, as most tariff cuts and investment liberalization are agreed upon bilaterally and thus regionally, rather than in a generic multilateral manner. The voluntary "club" membership of the GATT/WTO leads to mutual accommodations by trade partners, rather than agreement to sweeping new free market principles, Ostry (1997). The failure of the OECD’s multilateral agreement on investment (MAI) is the latest sign that both the trade and investment liberalization required for globalization is slowing up and even going into reverse, promoting regionalization.

Indeed, the imperfect nature of global markets has been reinforced by political developments and new institutional structures. The emergence of the North American Free Trade Agreement (NAFTA) is a mixed blessing. While tariffs are eliminated and the national treatment principle is applied to foreign divest investment these liberalization benefits are offset by the erection of new non-tariff barriers to trade. These include restrictive rules of origin affecting automobile and textile production in Mexico, which effectively deny entry to the U.S. market, Rugman (1994). In addition, many service sectors, including health, social services, education, transportation and financial services, are exempted from national treatment, leading to the institutionalization of discriminatory investment measures. The domestic laws protecting Canada’s medicare system are listed in the NAFTA Annexes as exemptions from the principle of national treatment, thereby retaining national sovereignty in the administration of health care. Using this analysis, NAFTA has emerged as a relatively closed regional bloc, though not as closed as the E.U. In particular, the local service sector (including health care) is now protected regionally as well as nationally against the forces of globalization and free markets.

The E.U. single market measures of 1992 and the single currency of 1999 are signals of an increase in inter-regional trade and investment in Europe, rather than signs of a movement towards globalization. The continued use of anti-dumping trade remedy law by the E.U., examined by Ostry (1997), plus protectionist trade measures in the form of, for example newsprint quotes against Canada and the discriminatory application of health and environmental regulations against "outsiders" is further evidence of the closing of the E.U. bloc due to the political lobbying of "insider" firms and organizations. Indeed, the use of environmental regulations and health codes as a trade-related barrer to entry is one of the major anchors of regional (E.U., NAFTA) policy, Rugman, Kirton and Soloway (1999).

The Asian financial crisis has slowed down the emergence of an Asian triad bloc led by Japan and also put ASEAN off the rails. ASEAN started as a political group but has moved slowly towards an economic bloc. The biggest problem is the lack of progress in the Asian Pacific Cooperation forum (APEC). The failed meeting in Malaysia in November 1998 indicated a lack of commitment to free trade and investment liberalization. Only if APEC moves ahead will globalization prosper; without it, regional blocs will persist.

THE ROLE OF THE FIRM AND THE STATE

The standard definition of "globalization", as stated earlier, is the worldwide production and marketing of goods and services by multinational enterprises (MNEs). In turn, an MNE is defined as a firm with production and/or distribution facilities in two or more countries. This is an economics and business strategy based definition. With this type of globalization MNEs can realize economies of scale and build dispersed production networks. They are able to produce and sell goods and products across national borders, often within their own internal networks of subsidiaries, or in close alliances with partner firms. I have no objection to this definition (and, indeed, have used it repeatedly, Rugman, 1996) but my point is that the very same definition describes the activities of triad-based MNEs operating "regionally". I advance the argument, here, that the data on MNE activities plus strategic management analysis, support a "regional" framework rather than a global one.

One reason is that MNEs are neither globally monolithic nor excessively powerful in political terms. They are not monolithic because the largest 500 of them are evenly based in the "triad" economies of the United States, the European Union (EU) and Japan. Across a wide variety of industrial sectors and traded services these triad-based MNEs compete for global market shares and profits. Yet the process of regional competition itself erodes any possibility of sustainable long-term rents of these MNEs. Research shows that the world’s largest 500 MNEs do not earn excess profits over time and that economic efficiency is enhanced by their activities Rugman (1996). In turn, the nature of triad-based competition faced by these MNEs limits their ability to pursue political goals, since they are forced to concentrate upon their ongoing operational efficiency and strategic planning in order to survive.

A common mistake is to associate the very large economic size of MNEs with political power, as is done by Strange (1988, 1996, 1998). While many of the largest 500 MNEs have total revenues greater than the gross national products of mid to small-sized countries, they have been observed to act within the parameters of regulations and rules set by governments and international organizations. The MNEs are preoccupied with survival, profitability and growth and, in general, are far too busy to deal in any meaningful way with the social, cultural, and related non-economic areas of government activity.

Some of the work by political scientists that is critical of globalization and "market forces" is extremely naïve. For example, former Oxford don, John Gray, argues that MNEs operate in a system of global free trade policed by the World Trade Organization (WTO), Gray (1998). In fact, the WTO has a small secretariat of around 300 professionals, mainly trade law lawyers. The role of the WTO is to be an appeal court for trade disputes between member countries. It is basically a reactive quasi-judicial body rather than a policy making and enforcement mechanism for free trade. Indeed, most of the disputes arise from the closing of markets by the misuse of trade remedy laws, rather than from market opening issues.

Where there is some conflict between MNEs and government is in the area of international political economy, which I interpret as the ability of MNEs to lobby and otherwise influence the policies of national (and sub-national) governments. This occurs in areas such as trade, investment, science and technology, and in the administration by bureaucracies of these policies. Yet, even here, the interests of MNEs are largely triad-based, by which I mean that, for example, Japanese MNEs will mainly help to develop Japanese competitiveness in their home base and only contribute peripherally to the public policies of the host countries in which they have subsidiaries. In summary, groups of MNEs can help to develop their home economies, but the nature of triad competition erodes any sustainable global market power of individual MNEs.

INTERNATIONAL POLITICAL ECONOMY: STRANGE VIEWS

A central tenant of the left wing critics of globalization (such as Susan Strange, 1986, 1998) is that the international financial markets are unregulated, leading to a form of "casino capitalism". Strange (1998) argues that world financial markets have gone "mad" as they are a casino beyond the control of governments. Central to Strange’s argument is that unregulated world financial markets are correlated with high volatility. She then argues that both the unregulated global financial markets and the high volatility influence the creation of new regulations and/or the replacement of out-of-date ones. Innovations in financial markets should lead to the creation of new regulations. She argues that the collapse of global financial capitalism is imminent due to the lack of a world regulatory body. Strange states that the emerging strategy of the BIS is to let the bankers regulate themselves, supported by technical advice. At the IMF there is more emphasis on arranging intergovernmental cooperation. If the BIS and IMF are not effective, regulatory bodies (and neither is the World Bank, WTO or any other international institution dealing with various aspects of trade and investment policy) then there is no realistic international institutional response to the perceived problems of volatility and deregulation of the world’s financial system. Strange has identified a problem which apparently has no solution.

Yet in this type of work we observe a one eyed coverage of the literature. For example, Strange (1998) equates financial market-based casino capitalism with globalization. Yet, virtually all economic and management writers hold that globalization is due to the activities of multinational enterprises (MNEs) undertaking foreign direct investment (FDI), in which equity control is exercised over the operations of foreign-owned subsidiaries. The data show that FDI is extremely stable and the major fuel for world economic development. Above all, it is not subject to speculation by hedge funds and it is subject to the performance-based competitive discipline of MNEs. In contrast, financial capital is, indeed, much more volatile, subject to speculation and is unregulated. To have managed to confuse FDI with financial capital over a lifetime of writing shows a remarkable misreading on the part of Strange of the literature in economics and management. Her basic argument is flawed once it is accepted that globalization is actually a result of FDI by MNEs, and that the data indicate that FDI is much more stable than financial capital flows.

Leaving this aside, there is one point with which I agree with Strange, namely that there is no effective world government or "regime". Instead, I would note that there are strong regional "regimes". My central theme is that globalization is really the triad-based activity of MNEs. In turn, strong regional governance is available. Susan Strange agrees with part of my regional thesis but her lack of understanding of the triad-based nature of FDI misleads her into a false conclusion about the lack of governance structures. These exist, but at the regional, rather than global, level. Strange argues that both Japan and the United States "are more international and engaged in their respective regional relations . . . . . than they are in global governance" (Strange 1998, p.54). She states that global governance is impossible since, "these days, no single hegemonic leader is strong enough or rich enough to fill the role unaided" (Strange 1998, p.55). My triad focus shows that the United States, Japan and the European Union are all preoccupied with a regional political agenda rather than a multilateral one. Such regional regulatory agendas spell the end of globalization.

The United States saw its best success in a trade and investment treaty in 1993 when President Clinton got the U.S. Congress to approve NAFTA on the "fast track" (ie with no amendments to the negotiated treaty). Since then, Congress has not authorized fast track authority for the President, so multilateral agreements, as in a new round for the WTO, have not proceeded. When the peso crisis of 1994 hit, the United States did respond quickly on a regional basis, as should Japan for an Asian crisis, or Germany for a European one. One of the problems with sovereign debt is that a country (like Mexico in 1982 and 1994) cannot be declared bankrupt by any credible multilateral or regional regime. Thus creditor nations (principally the United States) need to arrange bailouts. In 1982 the banks suffered; in 1994 the insurance and pension funds were at risk but were saved by the Clinton package of $US 42 billion. Strange (1998) says that NAFTA was at risk but, in reality, it dealt with FDI and tariffs and its structure was unaffected by the Mexican financial crisis of 1994.

In Japan, the recession of the 1990s, and the underlying economic problems associated with potential insolvency of the banking system have turned political attention inwards. The outward Japanese FDI of the 1980s has been replaced by retrenchment and a continued outward movement of production and assembly to cheaper Southeast Asia neighbourhoods. The result has been, in the 1990s, depreciation of the yen (especially against the U.S. dollar and European currencies). Japan has been forced to pull in its horns.

In the E.U. the launch of the single market for the euro in January 1999 and the move towards this as a common currency has preoccupied the Brussels bureaucracy. In essence, the euro is an extension of French-German economic diplomacy and it will take until 2003 to make it work. Until then expect a lot of volatility and speculation.

In all three regions the key political problems are domestic/regional rather than global/multilateral. In all three there are rising inward-looking protectionist forces at work, further reducing the chance of global free markets and investment liberalization. In the language of political scientists there is no global hegemon. In the 1830-1930 period Britain served as a hegemon, promoting world financial stability by being a lender of last resort. In the 1950-1980 period the United States provided hegemonic stability (Kindleberger, 1970). Japan had a chance to become a hegemon in the 1980s but failed, so today there is no single hegemonic leader. Perhaps a coalition of these three can, at times of grave financial crisis (as in the Mexican peso devaluation of 1994 or the Asian crisis of 1997/98) form a temporary coalition to react to problems. The G7 has achieved some success, but it is a reactive group, not an effective institution. Thus, it is very unlikely that a coalition can be formed to proactively promote globalization

The power of domestic politics and regulations to set an international agenda was earlier noticed in the development of the Eurocurrency market. Building on the pioneering analysis of the Eurocurrency market by Dufey and Giddy (1978) in Chapter 5 of Rugman (1981) it was argued that the rapid growth and expansion of the Eurocurrency market in the 1970s was due primarily to excessive regulations in the domestic U.S. financial markets. Regulation Q, for example, limited interest payments on U.S. deposits whereas the same currency deposits in the City of London could earn higher interest rates. The "spread" was also narrower in the unregulated Euromarkets as they operated more efficiently than the regulated domestic U.S. Markets. These domestic U.S. regulations led to the growth of offshore financial markets. Presumably, removal of these domestic regulations are a better alternative than attempts a global governance of the world financial markets.

This implies that all elements of Susan Strange’s thesis are incorrect: FDI matters, not financial flows; FDI is not as volatile as financial flows; globalization is regional not global; there is no world government but there are effective regional "regimes".

TRIAD-BASED PRODUCTION BY MNEs

Today MNEs dominate international production across major industries such as:- automobiles; consumer electronics; chemicals and petrochemicals; petroleum; pharmaceuticals, etc. In these sectors there is a very large amount of intra-industry, indeed, intra-firm trade and investment. The United Nations annual World Investment Report estimates that as much as 60 percent of trade and investment in these sectors is intra-firm. Of that, well over 90 percent of the world’s stock of FDI and over half of its trade is conducted by the very largest MNEs listed in Table 2.

Table 2: The World’s 500 Largest Multinational Enterprises

Country/Block

Number of MNEs in 1998

United States

185

European Community

156

Japan

100

Canada

12

Switzerland

11

South Korea

9

Australia

7

China

6

Brazil

4

Others

10

Total

500

Source: Adapted from Fortune, ‘The Fortune Global 500', August, 1999.
Note: The "triad" accounts for 441 (82%).

 

Advances in technology intensify the concentration of economic power in the hands of MNEs. It is not so much the creation of new knowledge that matters (as here smaller, innovating firms can do well) but in the application to mass production that the MNE has an advantage. Most of the manufacturing productivity advances in Japanese MNEs have occurred in incremental process improvements reflecting efficient organizational structures. When there is a perceived shortfall of pure research then the MNEs can buy it from abroad, as the Japanese MNEs have done through their activities in California’s Silicon Valley and other U.S.-based research centres. It is the proprietary internalization of technology that gives MNEs the edge in their worldwide production and marketing, Rugman (1996).

A second mistake in globalization thinking is to equate the innovative production and intensive global marketing of MNEs with the development of a homogenized global culture. While the very success of MNEs in producing goods and services will thereby increase worldwide consumption (or materialism) there is little evidence that the end result of triad-based MNEs is a global culture. Rather, we observe an increase in standards of living offering consumers greater choice of products and services as MNEs respond to the growth of divergent tastes with niched products and services.

Research by Professors Yves Doz (at INSEAD), Chris Bartlett (Harvard Business School) and Sumantra Ghoshal (London Business School) demonstrates that many MNEs are "nationally responsive" and/or are both scale economy driven and nationally responsive at the same time, Bartlett and Ghoshal (1989). In other words, MNEs do not all pursue global low cost or differentiation strategies (which could, perhaps, lead to homogenization of culture) but some are in a strategic space where they need to adapt their products and services to the different political, cultural and religious systems all too pervasive in the world today.

If there is anything to the homogenization argument it is that there may be strong "regional" effects, i.e. each of the triads may be spreading their influences regionally, rather then globally. In North America, the U.S. influence is apparent in Canada and Mexico (although the language difference in Quebec and Mexico is a strongly mitigating factor). In Asia, Japanese influence is widespread. In the E.U. there is relatively little cultural homogenization as strong national differences persist despite the success of the Brussels bureaucracy in developing E.U.-wide economic policies with common legal standards and practices.

 

REGIONAL PRODUCTION AND MARKETING

The MNEs in Table 1 are the vehicles for increasing global interdependence yet are also strongly based in the "triad" of North America, the E.U., and Japan, with 442 of the 500 coming from the triad. These triad blocs are in some danger of becoming even more protectionist since all of them adopt non-tariff barriers to trade and investment to limit access to their internal markets and/or give preferential access to certain partners in return for reciprocal advantages. Examples of non-tariff barriers include: rules of origin; discriminatory health and safety codes used to keep out agricultural products; new environmental regulations in the E.U. and NAFTA; exempted sectors from the principle of national treatment (such as culture, education, health etc.); poorly administered anti-dumping and countervailing duty laws, and so on.

The extent of non-tariff barriers in the triad serves to limit access to their home base markets. Many U.S. restrictions are aimed at Japanese and European competitors; and vice versa. Three strong "regional" trading and investment blocs have arisen. For example, the world automobile industry is not really globalized; instead well over 90 percent of production and sales take place in each of the three separate triad markets; using intra-bloc networks of suppliers and distributors. Agreements like NAFTA build on over 30 years of U.S.-Canadian automobile managed trade. The "regional" nature of the auto industry is replicated in chemicals, petrochemicals, steel and other major industrial sectors. Thus, the name of the game is market access on a regional, rather than a global basis. While this is good news for triad-based MNEs, it makes life difficult for MNEs from non-triad economies, since they have to have access to a triad market to even start global strategy.

This point is reconfirmed in Table 3, which reports the 20 most "transnational" MNEs. These are MNEs with over two thirds of their activities outside of their home base. The index of transnationality is a simple mean of the ratio of foreign to total activities for three indexes; sales, assets and employees. To some extent Table 3 is the inverse of the strong home base "triad" argument of Table 1. In this new table, the MNEs are usually from smaller, non-triad countries like Switzerland, or Canada and they need to have foreign sales to obtain globalization status. For example, Canada has a small market, only one tenth the economic size of the United States and E.U. and so Seagram, Alcan and Thompson will realize the great majority of their sales outside of Canada. Even the other MNEs in Table 3 that are in the E.U. are those from Britain, Holland, Sweden etc, i.e. they are MNEs whose "home" country market is small relative to the large aggregate market of the E.U. For these MNEs from smaller economies, access to the triad market is central to their success and they have all developed such regional market access strategies, sometimes in accord with regional trade and investment agreements like the E.U. and NAFTA.

Table 3: The World’s Most Multinational Enterprises

Rank

Company Name

Home Country

Index of

Transnationality

1

Nestle

Switzerland

94.0

2

Thomson Corporation

Canada

93.3

3

Holderbank Financiere

Switzerland

92.1

4

Seagram Company

Canada

89.7

5

Solvay

Belgium

89.6

6

ABB Asea Brown Boveri.

Switzerland

88.6

7

Electrolux

Sweden

88.3

8

Unilever

UK/Netherlands

87.1

9

Philips Electronics

Netherlands

85.4

10

Roche Holdings

Switzerland

85.1

11

SCA

Sweden

79.7

12

Northern Telecom

Canada

78.4

13

Glaxo Wellcome

UK

76.5

14

Cable and Wireless

UK

75.6

15

Volvo

Sweden

73.8

16

News Corporation

Australia

73.5

17

Shell, Royal Dutch

UK/Netherlands

73.0

18

Grand Metrolpolitan

UK

72.4

19

Petrofina

Belgium

70.4

20

Saint-gobain

France

69.7

Source: Adapted from United Nations, World Investment Report, 1997. Data are for 1995.
UK (5); Switzerland (4); Netherlands (3); Canada (3); Sweden (3); Belgium (2); Australia (1); France (1)

 

MNEs AS "FLAGSHIP FIRMS"

The leading role of MNEs in regional triad development is even greater when we note that these very large MNEs in Table 1 usually serve as "flagship" firms. By a flagship firm I mean an MNE operating at the hub of an extensive business network, or cluster. Usually the flagship has long term relational contracts with a set of five partners; key suppliers; key customers; key competitors and the non-business infrastructure. The non-business infrastructure includes network partners in research and educational institutes and it can also include efficiency-related aspects of government (rather than the regulatory and redistributional function of government.) An example of a network relationship with a University business school would be a customized executive course developed with an external organization in which the business school faculty develop new and specialized materials to improve the skills and/or strategic thinking of the organization’s managers. An example of a non-network relationship is the MBA programme, which is a general and not a customized programme.

In recent years, my colleague Joseph R. D’Cruz of the University of Toronto and myself have found that flagship relationships exist, to some degree, across the major triad-based industrial sectors such as in automobiles, chemicals, telecommunications, the agri-food business and in some of the service sectors such as banking. In these sectors we can identify the large 500 MNEs as flagship firms, competing globally. They now have strong linkages to independent key supplier firms (who in turn, are sometimes MNEs). For example, Du Pont is a key supplier of paint to General Motors, while Nortel is a key supplier to Bell Canada/Stentor, as is Alcatel to France Telecom, Rugman and D’Cruz (1997).

These large MNEs also have similar long term relationships with key customers and distributors. These organizations usually have skills in dealing with final consumers in foreign markets. With a successful key customer relationship the MNE need not internalize the sales and distribution functions and it can forego the costly development of skills in learning about foreign cultures and languages. A fourth partner of MNEs today is other MNEs, driven into key competitor relationship by the high costs of research and development, and the difficulty of securing access to new markets. These strategic alliances are more unstable than the key supplier/key customer linkages.

The key supplier relationship is built on both performance and trust. The key suppliers in the automobile sector are those that have been the swiftest to take on board the quality standards of the automobile MNEs. There now exists a much smaller set of key suppliers (with a large part of the value added in the component market) than the large number of other suppliers who still interact with automobile assemblers on a more variable and strictly price-driven basis. The key suppliers and flagship MNEs are mutually dependent and exhibit more trust in their long-term managerial relationships than would be normal between suppliers and MNEs.

The fifth and final set of partners is in the non-business infrastructure, usually service organizations. Today over seventy percent of people in the Western economies work in the service sector, compared to thirty percent in manufacturing. The productivity of these service sector organizations (which include health, social services, education, cultural industries as well as transportation and financial services) can be a major influence on competitiveness. The MNE serves as a vehicle to build bridges to the service sector, which also includes government. The logic of the flagship/five partners framework of international competitiveness is that various units of government (such as research groups, industry and agriculture specialists, etc.) can have efficiency-related linkages to the business sector, and, by interacting with MNEs gain a regional triad perspective, with better competitive benchmarks.

The implication is that MNEs provide the triad-based strategic perspective for the five partners and that each true partner does not need a separate international strategy except to be a "key" partner of the MNE. This is, of course, difficult for governments to accept, but their role as a facilitator (but not a determinant) of competitiveness is thereby clarified. The western flagship/five partner system is, of course, similar in many respects to the Japanese keiretsu and, to a smaller extent, with the Korean chaebols. Even the Chinese family/clan system which is a much looser "network" has strong elements of the tacit relationships at the heart of the flagship/five partners system. In all four types of business systems the MNE adopts a flagship role and has strong partners, including a more active role by governments and banks in the Asian networks.

KEY MANAGERIAL IMPLICATIONS

The MNE is the key actor on the stage of international business. It is the organization which leads globalization and it operates as the flagship firm for sets of regionally-based business networks and clusters. The MNE interacts with governments but is not powerful enough to pursue a separate agenda of world economic domination. Instead, the reality of regional triad power is that MNEs need to compete for market share and profits. The energies of their top managers are fully devoted to operational efficiency and the successful implementation of strategy decisions, and not to global political issues.

The literature advocating globalization is far too simplistic. While there are some economic drivers of globalization there are extremely strong cultural and political barriers preventing the development of a single world market. Only in a few sectors, such as consumer electronics, is there a successful firm-level strategy of globalization, with homogeneous products being sold on price and quality. For most other manufacturing sectors, and all service sectors, regionalization is much more relevant than globalization. The triad regions are characterized by heterogeneity more than homogeneity.

Managers need to change their thinking as the end of globalization is here. Managers must "think regional and act local", to paraphrase the work of Doz, Bartlett and Ghoshal. The implications for managers of the end of globalization are the following:-

a) design strategies to take account of regional trade and investment agreements (such as NAFTA, the Single Market of the EU , Mercosur, etc.) rather than multilateral agreements (such as the GATT/WTO, MAI, etc.);

b) design organizational structures which develop triad-based internal know-how capabilities and organizational competences rather than use international divisions or unworkable global organizational structures;

c) develop new thinking and knowledge about regional business networks and triad-based clusters, and assess the similar attributes of triad competitors, rather than develop so-called global strategies;

d) develop analytical methods to assess regional drivers of success, rather than globalization drivers;

e) think regional, act local; forget global.

CONCLUSIONS

I shall now list five key themes developed in this paper:-

  1. Global business is dominated by the 500 largest multinational enterprises (MNEs) out of some 30,000 MNEs in total; those top 500 MNEs account for 90 percent of all the world’s FDI and over half of its trade.
  2. Operating globally for an MNE really means operating "regionally" i.e. in the "triad" markets of North America, the E.U. and Japan. As an example, production and assembly in the motor vehicles industry is regional, and strategic perceptions should be regional but are often global.
  3. Most global trade and investment by MNEs is now intra-firm and is conducted within triad-based business networks or clusters, e.g. most vehicles/chemicals/electronics etc.
  4. Managers of large MNEs often serve as leaders of "flagships" in regional business networks; many other firms have roles as network partners, e.g. as key suppliers, key customers etc. Small and medium sized businesses are also partners in business networks led by the largest MNEs. Government can also be a partner in successful business networks (as in Sweden or the "old" Japan), but by acting as a facilitator to help improve competitiveness, not as a regulator.
  5. Regional trade and investment blocs are being reinforced by four political developments: 1) the discriminatory protectionist application of trade remedy law; 2) bilateral investment treaties with many exempted sectors; 3) the biased administration of health, safety and envionmental laws to benefit insiders at the expense of outsiders; and, 4) related bloc-specific institutional measures such as internal subsidies for export promotion programmes and conditional national treatment. The success of regional and bilateral agreements and the failure of multilateral agreements, such as the OECD’s MAI and the lack of progress at the WTO in setting set new agendas for trade and investment liberalization, are signals of the problems of globalization and the power of closed regional/triad blocs.

 

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