Global Corporate Strategy and Trade Policy

Alan M. Rugman, Alain Verbeke

• Publisher: Taylor & Francis
• Year: 2017
• Print ISBN: 9781138301917
• eBook ISBN: 9781351401357
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

At the end of the twentieth century, international business functioned in an environment dominated by the triad of economic power formed by the USA, Japan and the European Community. Multinational corporate strategies had to be formulated within the context of intense global competition between these three economic blocs. This book, first published in 1990, analyses the interplay between the trade policies adopted by the major powers and the competitive strategies of international corporations. With particular reference to trade relations between Canada and the USA, the effects of Japanese multinational dominance and the implications of European economic integration, this volume throws new light on the interaction between international business and government trade policies.

Chapter one

Introduction

The focus of this book is the interaction between government trade policy and corporate strategy within a global trading environment. The relationship between the formulation and implementation of trade policy and corporate strategy will be analysed. To provide a realistic perspective, the Canada–US Free Trade Agreement and other examples relevant to small, open trading economies, will be utilized. These serve to illustrate the realities of doing business in our integrated but regulated global trading system. We will extend our discussion of trade policy to include the economics-related issues of industrial policy in general. These will be examined from both a management and a public-policy perspective.

Triad power and corporate strategy

Several management scholars have discussed the increasing importance of global competition.¹ Of particular interest are the triad powers, which account for the vast majority of global trade and investment. The largest 500 multinational enterprises (MNEs) are mainly from the triad economies, and account for well over half of all the world’s trade.² Triad power has been identified as a major environmental determinant of corporate strategic management by Ohmae (1985). He has argued that the traditional view of the world economy being dominated by the United States should be replaced by a more realistic perspective which recognizes the existence of triad power, i.e. intense global competition between the firms of three economic blocs: the United States, Japan and the European Community.

For businesses located in small open economies, like Canada, which do not form a part of the triad, it is of paramount importance to secure access to the market of at least one of the triad powers. This is essential for the long-term survival, profitability and growth of the corporation and thus for the nation. In a world characterized by increasing protectionism it is vital for non-triad corporations to have access for their trade and investment to a triad market.

Yet US corporations have a new weapon to deny market access to foreign rivals. A key theme of this book is that US business planners may be acting in a rational manner (from the standpoint of their own self-interest) when they put pressure on government to erect barriers to import competition. But their action subverts trade laws that had been designed to serve the nation as a whole. Such action also does not work. It provides only temporary relief to companies and domestic industries that come to rely on government to shelter them from foreign competition.³

The view taken in this book is that all companies should normally aim to obtain competitive advantages by pursuing an efficiency-based strategy. US producers have traditionally been successful in maintaining their competitive ability. Yet many of them now appear to be turning away from the economic base of their success. They are becoming reliant on government action to put barriers in the way of imports.

Companies whose survival, profits or growth have been endangered by their failures on economic grounds often stop trying to pursue a strategy of low cost or uniqueness of products and services. A common tactic in this situation is to head to the seats of political power and argue for government protection in order to maintain employment and output in the face of ‘unfair’ (subsidized) foreign competition.

Most industrial countries now have enacted more rigorous anti-dumping and countervailing duty trade remedy laws following adoption in 1979 of the Subsidies Code under the General Agreement on Tariffs and Trade (GATT). Such procedures are generally acknowledged to be necessary to enforce fair trading practices. However, a number of US producers are using the trade remedy laws to obtain shelter from international competition.

Corporate strategists, through their active lobbying and interaction with government bureaucrats and politicians, have found ways to turn the political process to their own advantage. In this manner, trade policy moves from the pursuit of national goals towards a more commercial and self-serving set of competitive entry barriers.

Obviously, the best triad partner for Canada is its closest geographical neighbour, the United States. In this book, the view is taken that trade liberalization between Canada and the United States is the most efficient way for Canadian firms to circumvent US-administered protection. It remains necessary for Canada to work through multilateral trade forums to induce greater accord with the principles of trade liberalization. This multilateral route should not, however, ignore the urgent necessity of a bilateral trading arrangement with the United States.

Corporate strategy and trade policy

Another theme in this book is the close degree of interaction between business and government. In the formulation of trade and industrial policy, these two groups interact to an unprecedented degree. In terms of the formulation of industrial policy in general, and trade policy in particular, the private sector is now often a lead player. In some cases, as during the 1979 GATT round⁴ and the 1986–8 period of the Canada–US free trade negotiations, the private sector is also a partner in the process of public-policy formulation.⁵

In business schools today the analysis of environmental factors, including international ones, is a regular component of the curriculum in strategic management. In most well-organized triad-based corporations involved in trade and investment activities with each other, the precepts of global strategic management are used with an increasing degree of sophistication and relevance. Canadian-based MNEs have also taken on board these modem techniques.⁶ The result is a keener analysis of the interactive nature of business–government relations, especially in the international dimension.

The involvement of business with the various layers of government in the United States is probably even greater than in Canada, while the active partnership of the state and business in post-war Japanese economic development is already legendary. The picture is more complicated in Europe due to the melange of nations involved in the European Community, but the role of the state in international business activity is certainly important. Thus Canadian government and business, in dealing with the triad, must recognize these interdependencies. They need to work together to formulate policies which will promote Canadian economic prosperity through commercial progress.

Structure of the book

The second chapter considers corporate strategy and its relationship to government policy in general. A new framework (visualized through the use of a 2 × 2 matrix of corporate strategies) is introduced that distinguishes between two generic types of corporate strategies. These are efficiency-based strategies and non-efficiency-based strategies. The way in which these two types of corporate strategies are related to government policy, especially trade policy, is then analysed, again using a new matrix. The findings on policy implementation are generalizable to public issues other than trade policy. For example, the impact of corporate behaviour on subsidies for research and development (R&D), selective financial grants and other elements of industrial policy, is similar to its impact on trade policy.

Chapter 3 focuses on the primary topic of this book: trade policy. It will demonstrate, again through the use of a new matrix framework, how the ‘technical track’ of US trade remedy law investigations has become politicized and subject to influence by corporations seeking shelter from foreign rivals. The result is a form of ‘administered’ protection. This framework of trade policy objectives and instruments provides us with a new type of competitive strategy whereby shelter can be obtained by corporations if they lobby trade regulatory agencies. While this is currently a particularly US phenomenon we believe that this process will be adopted in many other countries, leading to a new type of corporate-led protectionism. We illustrate this problem through an investigation of the bilateral Free Trade Agreement between Canada and the United States, which came into force on 1 January 1989.

Chapter 4 extends the corporate strategy aspects of the new framework developed in the first two chapters. In particular, a new analysis is developed of the strategic alternatives available to Canadian managers faced with the non-efficiency-based strategies of US firms and the attendant increased US protectionism. These new conceptual ideas are then linked to the actual strategic behaviour of Canadian firms during the trade negotiations between Canada and the United States in the 1986–8 period. It is observed that the future survival of large Canadian companies in an integrated North American and interdependent global economy depends upon a thorough understanding of the linkages between public policy and corporate strategy.

Chapter 5 takes the Canada–US Free Trade Agreement as a specific example of environmental changes in trade and investment policy. We evaluate the methods by which Canadian-based corporations will adjust to the new trading environment. We examine the competitive strategies of two sets of multinational enterprises: first, those of Canadian-owned multinationals and, second, those of the subsidiaries of US multinationals in Canada. Throughout the analysis we consider the ways in which corporate strategies are influenced both by global trading patterns and by the changes in the more local bilateral trading arrangements.

Chapter 6 extends our model of the interaction between corporate strategies and government policies, especially trade policies, to a broader framework. In particular, the corporate strategies of corporations in the ‘triad’ economies of Japan, Europe and America are considered as are the trade policies of these blocs. This involves an extension of the public policy part of the new framework proposed earlier and the inclusion of more complex real-world examples, related to Japan and the European Community. This involves a series of linked 2 × 2 matrices which are developed in a sequential manner to provide insights into dynamic behaviour.

In summarizing the first half of the book, the point needs to be made that the Canada–US Free Trade Agreement and the Canadian experience with US-administered protection is a representative example of changing global trends. Both trade and investment policies are being reconsidered as the Japanese success in using an industrial policy becomes more apparent to Western nations. Other developments in the global trading system are also affecting corporate strategy. The European Community is speeding up its development of an integrated single market for 1992, the GATT is working to develop broader coverage of services and non-tariff barriers to trade, while the newly industrialized countries (NICs) are performing well in a world of triad power. The manner in which corporations from these various economies can use trade and industrial policies to their advantage is a global question of great interest. It is particularly relevant for managers since their future survival in an integrated and interdependent global economy depends upon such an understanding.

Chapter 7 relates the completed analytical framework of corporate strategy to current and future options for both public policy makers and corporate strategic planners. The way in which globalization and nationally responsive strategies need to be modelled together is applied to the investment and trade policy implications of the Canada–US Free Trade Agreement. Of particular interest are innovations such as the application of national treatment to services and the binational trade law review panels, both of which are examples of the trade-offs involved in today’s globally integrated yet nationalistic world. Such dual policy initiatives are already causing public officials and corporate planners to revise their attitudes towards corporate strategy and trade policy. This, in turn, leads to changes in the nature of strategic management and policy implementation.

In Chapter 8 we consider the issue of an optimal industrial policy for a small open economy. The different options available to Canadian public policy makers are examined and related to the earlier analysis. It is found that an industrial policy of ‘selective differentiation’ is the only viable option available to small open economies like Canada. This allows such nations to retain secure access to large markets and, at the same time, foster the future international competitiveness of domestic industries.

Finally, in Chapter 9 our thinking about industrial policy is applied to the real world example of the recent report of the Premier’s Council of Ontario. We consider whether or not policies to support industries on a selective and discriminatory basis are viable. The Premier’s Council study is somewhat similar to plans drawn up for other sub-national units and small open economies, so our analysis is relevant on a broader basis.

Chapter two

Corporate strategic management

Introduction

In this chapter a new framework is developed to analyse and assess strategies of firms towards their environment, especially government regulation. Four basic options are available to strategic planners as guiding mechanisms for firm behaviour. The nature of the strategies developed and the channels used to pursue them are analysed in relation to government trade policies. Emphasis is put on the interactions between firms seeking protectionism and government. It is shown that firms can obtain unintended trade policy outputs by influencing the process of government policy making. In this case objectives related to national economic efficiency may well be subverted and government agencies are stimulated to pursue distribution objectives. If firms are able to influence trade policy in this way, high costs are imposed on society at large as shelter from international competition invariably diminishes consumer welfare in the long run.

At the frontier between economics, political science and management, there is a new business literature being developed which addresses the issue of how a firm interacts with government policy makers. This literature has its roots in the industrial organization side of economics, the area of conflict resolution and lobbying activities in political science and the concepts of strategic planning in management. The ideas from this literature have a useful application in the world of international business, particularly in the case of trade policy.

Critical in this new literature is analysis of the manner in which the strategic planners of the firm react to environmental changes, such as new directions in government policy. Michael Porter, of the Harvard Business School, has developed a paradigm of three generic strategies which capture the essentials of the firm’s...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Contents
• List of figures
• List of tables
• Acknowledgements
• 1 Introduction
• 2 Corporate strategic management
• 3 Trade policy and corporate strategy
• 4 Corporate strategy for trade barriers
• 5 Global corporate strategy and the Free Trade Agreement
• Sources of competitive advantage
• 6 Trade and industrial policy in the triad
• 7 Globalization and national responsiveness
• 8 An industrial policy for a small open economy
• 9 Industrial policy and global competition: Ontario’s experience
• 10 Conclusion
• Notes
• Bibliography
• Name index
• Company index
• Subject index