Multinational Firms

The Global-Local Dilemma

John Dunning, Jean-Louis Mucchielli

• Publisher: Taylor & Francis
• Year: 2001
• Print ISBN: 9780415270540
• eBook ISBN: 9781134489688
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

At the turn of the century, questions about multinational firms' strategies as regards the forces, on the one hand, of globalization and, on the other hand, of the regional and local dimensions are very much to the fore. What are the new constraints and the new theories to explain global-local multinationals' strategies at the beginning of this new

Part I
WHERE DO WE STAND?

1
MULTINATIONAL ENTERPRISES AND THE END OF GLOBAL STRATEGY

Alan M. Rugman

1.1. 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, European Union (EU) 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 past thirty years. In the 1950s and 1960s it was US FDI that led the postwar 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 market performance. In contrast, US 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 1996/8 period, Japanese MNEs had an average return on foreign assets of 1.25 per cent. That dismal return compared with 6.24 per cent for MNEs based in the United States and 5.49 per cent for European MNEs, including 7.78 per cent for British ones. These key data for the Templeton Global Performance Index are reprinted in Table 1.1. 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 1.1 Average annual returns on foreign assets (ROFAs) by MNEs 1996–7

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

1.2. 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 per cent of the world’s stock of FDI. 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, EU and Japan. They all operate in each other’s 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, Nestl´e, 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 per cent of products produced in each of the triad regions is sold within that region. There is no global car. Instead, there are US, 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 per cent of MNE manufacturing is intra-regional rather than global (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 per cent 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 have 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, EU 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 US and Japanese MNEs, and perhaps less so for British ones, although most European MNEs sell mainly within the EU, e.g. German MNEs. Smaller firms, such as the German Mittelstand, have virtually all of their sales within the EU.

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 the North American Free Trade Agreement (NAFTA), using a Mexico–US 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 NAFTA is a mixed blessing. While tariffs are eliminated and the national treatment principle is applied to FDI, 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 US 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 EU. 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 EU 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 EU, 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 EU bloc due to the political lobbying of ‘insider’ firms and organizations. Indeed, the use of environmental regulations and health codes as a trade-related barrier to entry is one of the major anchors of regional (EU, NAFTA) policy (Rugman et al. 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 (APEC) forum. 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.

1.3. 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 MNEs. In turn, an MNE is defined as a firm with production and/or distribution facilities in two or more countries. This is an economic 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, 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 and Dawn 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.

1.4. International political economy: Strange views

A central tenet 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 MNEs undertaking 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 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 on 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...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Contributors
• Acknowledgements
• Introduction
• Part I: Where Do We Stand?
• Part II: Globalization and Regional Integration
• Part III: Location Strategies