Ford and the Global Strategies of Multinationals

The North American Auto Industry

Maria Isabel Studer Noguez

• Publisher: Routledge
• Year: 2003
• Print ISBN:
  9780415205795
• eBook ISBN:
  9781134626328
• Topic: Business
• Subtopic: Business General
• Index: Business

Today, the Multinational Enterprise (MNE) is seen as a leading agent in the process of globalization. As they adopt global strategies, MNE's are seen to be creating stronger, deeper and more lasting links amongst countries, thus shifting the balance of power inexorably in their favour, to the detriment of the state. This book interrogates this idea by undertaking a historical analysis of the global strategies of Ford.

1 Introduction

Economic integration and globalization are processes that describe the fundamental changes taking place in the international system. A reduced role for the State in economic affairs, both internationally and nationally, and an increasing centrality of non-State actors appear as concomitant developments of those changes. Very little can be discerned about these changes without understanding the role of the multinational enterprise (MNE).

Although hardly a new actor in the international scene, today the MNE is perceived as having acquired a growing relevance that makes it a leading agent in restructuring the international economy. While it is generally accepted that it does not replace the nation-state as the main actor in the international system, in some extreme views the MNE has actually seized some of the traditional functions of the State. As they adopt global strategies, MNEs are seen to be creating stronger, deeper, and more lasting linkages among countries and gaining tremendous power to shape outcomes in the so-called global economy. From this perspective, the balance of power has shifted inexorably from the State to the MNE.

Paradoxically, despite the pre-eminence that MNEs have gained in a more open world economy, mainstream theories of international relations and international political economy, which have largely centered on the State, have failed to incorporate the study of the MNE as a purposive actor. Also, despite the role of the MNEs in creating globally integrated systems of production, most explanations for cross-border integration tend to emphasize government actions in the form of either changes in the regulatory frameworks or formal free-trade negotiations. One could assume that at least in industries where MNEs hold a powerful position, those actors are responsible for creating the conditions that make cross-national integration an option for governments. This book suggests the need for studying MNEs as purposive actors, with goals, strategies, and organizational structures. It then looks at the factors that determine and influence the strategies of MNEs, and explores the conditions under which they contribute to the creation of cross-border integration.

While assuming that the MNE has become a power broker with which States must contend, this book argues that economic cross-border integration, which is allegedly promoted by the global strategies of the MNEs, does not necessarily imply a shift in the balance of power between MNEs and States in favor of the former and to the detriment of the latter for at least two main reasons.

On the one hand, MNEs face formidable barriers to create “global economic networks that are increasingly free of territorial, national borders” and even to reach high levels of co-ordination among a company’s worldwide subsidiaries. National borders, culture, institutions, economic, and physical conditions continue to matter in the strategic planning and decisions of major multinational enterprises. From a one-firm perspective, the uncertainty and risk associated with political and economic disruptions in different national locations is an important deterrent to the pursuit of a globally integrated system of production. This is particularly true in strategic industries, such as the automobile industry, that exhibit heightened levels of competition and where governments tend to be concerned with large trade imbalances. From this point of view, limited regional integration and inter-regional co-ordination appear as a second-best solution to global integration.

On the other hand, industry outcomes, including cross-border economic integration, reflect a kaleidoscope of power relationships between MNEs and States, as they result from a more complex bargaining process that involves the reciprocal effects in three sets of interactions: between the strategies of MNEs and the policies of States (either home country or host country policies), between MNEs and other MNEs, and between States and States, as Strange’s concept of ‘triangular diplomacy’ (or Vernon’s notion of ‘multiple jurisdictions’ in MNEs– States relations) suggests. This is not a zero-sum gain, where what one actor loses the other gains. Rather, industry outcomes depend on the specific States and MNEs which are involved in the negotiations and the distribution of gains depend upon the bargaining dynamics. Also, MNEs’ strategies are but one set of factors affecting the power relations between MNEs and States.

The empirical analysis presented in the following chapters shows that the integrated system of automotive production in North America is the result of a complex, three-level negotiation between the multinational auto makers and governments that lasted for over three decades. The outcomes in one negotiating table, for example between the multinational auto makers from the United States, Japan and Europe (efficiency-seeking strategies), affected (or are affected by) what happened in the others, either between the multinational and the governments of the United States, Canada and Mexico (the negotiation of domestic subsidies in exchange for new investments for the industry’s modernization) or between any pair of these three governments (the negotiation of bilateral or trilateral free-trade agreements) and vice versa. In this integration process, some actors, whether firms or States, have gained while others have lost. Thus, predictions about the balance of power between MNEs and States in a context of cross-border integration are ill-fated.

The need for new theoretical frameworks for MNEs–States relations

Except for the transnationalist approach of the 1970s and some recent efforts, mainstream theories of international relations (IR) and international political economy (IPE) have generally disregarded the study of non-State actors, even powerful ones such as MNEs, as relevant actors in the international scene. Instead, those perspectives have considered the nation-state as the main actor in the international system and the principal unit of analysis. To be fair, some critical perspectives in IPE [such as the Dependencia school (A.G. Frank 1969; Cardoso 1972; Sunkel 1972; Amin 1977) or research on the new international division of labor (NIDL) (Fröbel et al. 1980)] have included MNEs in their analytical frameworks, but they appear as part of broader structures and not as purposive actors whose strategies could have an impact on policy or international outcomes.

With the exception of Susan Strange’s eclectic approach (see below), those IPE perspectives that have studied MNEs as relevant actors in the international scene, which overlap with those in the field of international business, also have failed to focus on MNEs as purposive actors. Raymond Vernon’s “Sovereignty at bay” and “Obsolescing bargaining” and other negotiating approaches have analyzed how MNEs affect the power of home and host countries, but they do not sufficiently account for the strategies of particular MNEs. They tend to be largely industry-level analyses that center on the bargaining of MNEs and governments on specific project investments, and mostly focus on how domestic factors, including bureaucratic politics, shaped State policies.

It is the literature on strategic management (Porter 1980; Hedlund 1986; Doz and Prahalad 1987; Hood and Vahlne 1988; Lecraw and Morrison 1993) that has been mostly devoted to the study of MNEs as purposive actors, as well as the impact of their strategies on the competitive advantage of nations. Some analysts have studied the ways in which governments affect the MNEs’ strategies and activities. But, in contrast to most IPE approaches, this literature has not explored the impact of those strategies on government policy or the MNEs– government power relationship. Nor has it studied those enterprises in their structural, cultural or institutional environments (Doremus et al. 1998).

As already noted, the study of MNEs as purposive actors is the more relevant given the pre-eminence that these enterprises have gained in the “global” economy. The growing importance of the MNE has been associated with changes in the locus of power/authority and in the scope of economic decisions. As more and more cross-border exchanges and economic activities become internalized under the common governance of MNEs, the “scope for globality of decisions increases” (Ietto-Gillies 1992: 162). Since the Second World War, MNEs have not only multiplied, from about 7,000 to 390,000 in the last two decades,¹ but they have also become “genuinely multinational” and more diversified in their origin (Strange 1995: 50). It is estimated that MNEs directly govern as much as one-third of world output, with a much higher level of indirect control if nonequity agreements or new forms of investment (mergers and acquisitions, joint ventures, and other alliances) are taken into account (Oman 1984; Mytelka 1991).

MNEs also control a large and growing share of merchandise and financial trade, with sales of foreign affiliates surpassing exports as the principal means of distributing goods and services to foreign markets.² In addition, a rising proportion of trade takes place within these multinational networks, as exhibited by a substantial increase in intra-firm trade in the last decades – from one-fifth of world trade in the 1970s to about one-third today.³ Foreign direct investment (FDI) generates linkages across countries that transcend the initial transaction, thus fostering deep integration, which is essential for the emergence of a global system of production and is more difficult to reverse (Strange 1988, 1996: Ch. 4; Julius 1990: 36; UNWIR 1994: 118, 129–31, 1996: 7). By gaining control over cross-border exchanges and national industries, MNEs are seen to have acquired significance in determining “who gets what” in the world system (Strange 1996: 54).

For other analysts, the distinctive feature of the MNEs’ activities today is also qualitative: the new ways in which they are organizing and managing their multinational networks. “The type of strategy adopted by [MNEs] matters very much to the nature of deep integration and, by implication, to the way in which deep and shallow integration interact to establish a wider globalization process” (UNWIR 1994: 137). According to this view, the adoption of global integration strategies (GIS) by MNEs in the last decade or so is the distinctive feature that makes the multinational networks and their impact on governance, the world economy, and the nation-state qualitatively different from the past.

Global integration strategies

By adopting GIS, MNEs have allegedly generated new patterns of specialization between countries and a new “global” division of labor in production and trade (Gereffi 1996: 64). By enhancing the co-ordination of decentralized production locations, MNEs have created, for the first time, a truly global production system, rather than just “a collection of independent national economies linked primarily through markets” (UNWIR 1994: 140). In fact, according to some analyses, MNEs are in the process of replicating at the international level the degree of integration of production achieved at the national level (UNWIR 1994: Ch. III, 1996: Ch. IV). MNEs’ decisions in one country affect decisions elsewhere (Strange and Stopford 1991: 69), thus increasing economic interdependence and integration among countries.

Supposedly, these GIS contrast with strategies that prevailed in the past (multidomestic or simple FDI strategies), when foreign affiliates were selfcontained production units identified with (or more responsive to) the host country needs or demands. They were merely an agglomeration of discrete units that either replicated the entire value-chain of the parent company – probably with the exception of technology and finance – or undertook only a limited range of activities and supplied parent firms with certain outputs in which they were competitive. Instead, under global integration strategies, foreign affiliates are interdependent members of a global network or system of value-added activities (Dunning 1993: 357–8; UNWIR 1994: 138–40, 1996: 99–103).

A presumed corollary of the emergence of these new global systems of production, governed by core corporations, is that they are divorced from local or national conditions and therefore form the basis of a new economic global structure that escapes (or should escape, Ohmae 1990) national and even international regulatory powers (OECD 1992: 209; UNWIR 1994: 136–7; Cox 1996: 22–3; Mittleman 1996: 231). It is the MNE that co-ordinates its worldwide operations and has control over the entire product and production process: single countries do not have such control (Ietto-Gillies 1992: 162). But do these strategies explain changes in the balance of power between MNEs and States? If so, how?

There has been little research on the topic to provide answers to these questions, but some are found in the strategic management literature. According to some studies, with multidomestic strategies, the competitive advantage of MNEs was determined by conditions within each country where the operations were performed; with GIS, competitive outcomes depend more on how the firm performs those activities on a worldwide basis: “economies of scale, proprietary learning, and differentiation with multinational buyers are not tied to countries but to the configuration and co-ordination of the firm’s worldwide system” (Porter 1986: 38).

Against the view that MNEs become more footloose when they adopt GIS, a number of studies have suggested that those firms become increasingly dependent on the performance and stability of national economies. Once capital has been invested, the assets acquired by firms become less geographically mobile (Doz 1986: 36; see also Keohane and Milner 1996: 250), except for activities such as light assembly. This makes it difficult to maintain the argument that, with GIS, there is a divorce of the company from its national context, whether the host or the home country (Buckley and Casson 1992: 101; see also Krasner 1995; Doremus et al. 1998).

If we were to accept the idea that MNEs are in fact transforming their operations into global integrated systems of production, then those different national production units would become more interdependent among themselves. As this happens, the companies become more vulnerable to disruptions in any part of the system, and this threatens the overall system. The host government or other local groups – labor unions – have the power to bring down at least part of the MNC system “by paralysing or disconnecting one of its critical components” (Doz 1986: 234). At the same time, more coordination of those geographically dispersed activities, which is facilitated by new technology, might also enhance the MNEs’ leverage with local governments, as long as the firm is able to grow or shrink activities in one country at the expense of others (Porter 1986: 3).

Government and other national factors are also important determinants of MNEs’ strategies, and particularly global integration strategies, because MNEs’ demand for certainty and stability increases as their operations become more interdependent. It is paradoxical that, while many scholars in IPE have raised concerns about the retreat of the State and the narrower range of policy options for governments in their bargains with MNEs, in the international business and strategic management literature government is seen as having increased its role in the MNEs’ ability to create and sustain their global strategies. With their free-trade policies, for instance, governments have an enhanced role in creating the comparative advantage of localities, especially, but not exclusively, of those that have become global platforms for MNEs. More and more governments are key in creating competitive advantage, affecting transaction and production costs (through their role on education, training, technology policies, transportation and communications, environmental and fiscal policies, etc.), providing certainty in an increasingly uncertain and unstable international environment, and influencing the institutional framework and economic milieu for value-added activities. In sum, governments continue to affect directly or indirectly the competitive advantage and the strategies of MNEs (Dunning 1993: 67–74, 347–8; see also Porter 1986; Jenkins 1992).

Although some studies in the field of international business have incorporated the government and other political factors as relevant variables in the analysis of MNEs (Kindleberger 1969; Behrman 1970; Kobrin 1982; Robinson 1984; Boddewyn 1988; Panic 1991; Safarian 1991; for a review see Doz 1986; Boddewyn 1992), there is a growing recognition that research on the relationship between MNEs and governments and on the specific effects of MNEs’ strategies and behavior on government policies is needed (Dunning 1993: 220).

A new theoretical framework: industries as complex systems of power

In her eclectic approach to the study of IPE, Susan Strange emphasized the need to look at international relationships in terms of how power, wealth, and justice are distributed among actors. That approach also stressed the need to have a better understanding of the goals, strategies, and organizational processes of the firm (not only the MNE) in order to have a more complete picture of the sources and uses of power in international political economy. Strange’s main hypothesis is that the State has lost authority and is sharing it with other non- State authorities.

This metamorphosis can be attributed to a combination of State policies and market trends, management strategies, and changes in manufacturing, transportation, and information technology. It is these multiple interactions among actors that set the agenda and determine the rules of the game in deciding the who-gets-what issues of politics, both domestically and internationally (Strange 1991a: 34). From this perspective, views such as Ohmae’s “borderless world” are misconstrued, because no matter how great the global reach of their operations firms belong to a home base (Strange and Stopford 1991: 223; see also Doremus et al. 1998). Like Porter, Strange emphasizes the importance of the national competitive context of industries and firms and the key role of governments in shaping that context. Unlike Porter, she also insists on the need to move beyond industry structures and include international structures in that framework to analyze MNEs’ strategies and performance.

According to Strange, one of the two very profound changes that have taken place in the last two centuries was the gradual but inexorable change from a productive structure “geared primarily to serve national markets to one geared primarily to serve a world market” (Strange 1988: 62–3). This new global or regional productive structure has become increasingly dominated by MNEs, a trend which has created new opportunities but also new challenges to both firms and States. It has made it imperative for firms (not only MNEs) to look at world markets and adopt global strategies, a marked change because hitherto firms “were content to sell their goods or services locally” (Strange 1991a: 42). The adoption of these strategies implies, among other things, balancing two competing forces: worldwide integration and responsiveness to local demands. As they engage in international production and seek to secure a niche in global markets, firms are motivated not only by the maximization of wealth but, like States, also by the goal of achieving security and ultimately survival (Strange 1991a: 42). From this perspective, firms and States need to be studied as symmetrical actors.

Both firms and States face the imperative of fighting their competitors for world market shares. In the new game, firms have more influence on government policies than in the past, whereas States have lost control of their national economies not only to other States (which was the argument of the interdependence school) but also to other authorities that include large and small firms, as well as other non-State actors – mafias, drug cartels, etc. (Strange 1991a: 45, 1996). States face multiple policy dilemmas as they enter the new game. For instance, although they need to establish partnerships with MNEs to generate wealth, this may mean restrictions to autonomy and freedom (Strange and Stopford 1991: 134–5). In sum, in this new competitive game for world market shares, firms have the upper hand.

Consequently, it is important to analyze the role of firms as well as their relations with governments and other authorities. According to Strange, there is a need to study the firm in its transnational context – as a political actor developing and nurturing relationships with other hierarchies, whether other firms, political parties, governments, or international agencies. This perspective also proposes looking at specific firms, because generalizations at the industry level are difficult to make. Strange and Stopford concluded their study of different industries in three national cases,

The interaction between governments wanting to change firms’ behaviour and firms resisting or acceding to pressure throws up a kaleidoscope of responses … Industry averages thus provide poor guides for how sectoral policy should be implemented in firm-specific bargaining. The questions can only be answered at the level of the enterprise.

(Strange and Stopford 1991: 168)

In sum, Susan Strange offers a complex framework to analyze the interaction between MNEs and States as purposive actors that are, however, embedded in structures of the international political economy. It looks at MNEs’ strategies in the more comprehensive framework that analyzes MNE–government interaction. From this perspective, firms and States are symmetrical actors, each with both economic and political goals that compete to get a share of world markets and to achieve security and survival. In that approach, as a group, States have lost control over some of the functions of authority and are sharing them with other States and non-State authorities. Explanations for this decline in State power are found in the game of triangular diplomacy, or the firm-to-firm, State-to-State, or State-to-firm interac...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Figures
• Tables
• Acknowledgments
• Abbreviations
• 1 Introduction
• 2 Ford motor company’s multidomestic strategy
• 3 Ford of Canada
• 4 Ford of Mexico
• 5 The 1970s
• 6 Ford’s survival strategy
• 7 Ford’s global strategy
• 8 Successful bargaining in a situation of increasing interdependence
• 9 Export dynamism
• 10 A North American system of production
• 11 Conclusion
• Notes
• Bibliography
• Appendix 1
• Appendix 2
• Appendix 3