International Strategic Management and Government Policy

This book treats the two key elements of its title as interdependent. There is not one section on ‘international business strategy’ and another on ‘government policy’ as the two cannot sensibly be treated in isolation. Part I of the book examines this interaction directly and concentrates on the strategy of multinational firms with particular attention to foreign direct investment (FDI) and international alliances, but with appropriate attention to government policy responses. Part II examines these issues as they play out in two key economies of Asia: Japan and Vietnam. This region has been an important focus of my research since the early 1980s and its fascination continues with the rise of a third wave of ‘dragons’ or ‘tigers’ after Japan: the four little tigers of Hong Kong, Taiwan, Korea and Singapore; after them, Malaysia, Thailand, Indonesia; and then, perhaps, China and Vietnam. European investment in Japan has been a weak link within the flows of FDI between the Triad (North America, Europe and Japan) but it provides a continuing focus of interest. Part III examines the role of trade blocs in the world economy and the ramifications of the growth of supra-national groupings. The three pieces on Canada-UK bilateral economic relations illustrate the impact of NAFTA and the EU on cross-Atlantic flows. The final two chapters return to the strategy of the multinational enterprise (MNE) and focus on a cross-national comparison of the structure of their foreign market servicing strategies and on the vital question of transfer pricing.

This chapter examines foreign direct investment by multinational firms in the modern world economy, which is characterised by increasing integration across national markets. This process — often termed ‘globalisation’ — has radically altered firms’ approaches to direct foreign investment. The following section introduces a simple model of the world economy which traces the effects of different degrees of integration across various types of markets and examines the consequences for direct foreign investment, paying particular attention to cross-investment in the ‘Triad’ of North America, Europe and Japan. The next section examines strategic foreign direct investment and its crucial relationships with trade and GDP. This section introduces some key data on the role of foreign direct investment in world economic activity in both the long run and short run. It demonstrates the crucial role of foreign direct investment in achieving the firm’s strategic objectives, be they market access, control of key inputs or cost reduction. Then relationships among the Triad are examined in detail. International strategic alliances are introduced and analysed in a separate section and the conclusion brings various elements together.

The main actors in the world economy are firms. Firms seek to maximise world profits and thus to appropriate the rents arising from their proprietary assets. These include technology, management, knowledge, organisational abilities and other internalised proprietary assets (Buckley and Casson, 1976, 1985; Magee, 1977). By denying others access to these internalised assets, transnational corporations (TNCs) earn rents that enable them to reinvest in the next generation of proprietary assets, or ‘ownership advantages’ (Dunning, 1980), thus enabling a dynamic competitive path to emerge over time (Buckley, 1983).

This paper attempts to summarise the key issues involved in the international transfer of technology by small and medium-sized enterprises (SMEs). It focuses on what is new in the area and relies for its empirical evidence largely on the UNCTAD report on small and medium-sized transnational corporations (UNCTAD, 1993).

Since the early 1980s a new form of emerging market investment vehicle has appeared on the investment scene: the listed country fund. Buoyed by the thirst for exposure to the high-growth economies of the developing world, and the rapid spate of bourses opening up across the world’s community of emerging markets, fund managers and other major portfolio investors have welcomed the introduction of country funds as a means by which to gain — relatively efficiently — investment exposure to these high-performing equity markets.¹ Typically, these country funds have held a fluid portfolio of shares in listed companies of the relevant country — or, in some cases, group of countries/region — determined by the fund manager, for a fee (usually defined as a percentage of net asset value (NAV)). The country funds themselves are commonly listed (although some privately placed funds also exist), providing much-desired liquidity for investors in the funds. The perceived advantages of the country funds, as viewed by Michael T. Porter, are as follows:

In 1983–4 the authors, sponsored by The Japan Foundation, undertook a study of European affiliated companies operating in Japan.¹ The present study, also funded by the Japan Foundation, revisits most of the companies interviewed ten years ago (all but one of which are still in Japan) and includes a small number of additional companies subsequently added to the sample. The broad objective of the study was to examine the development of European direct investment over the last decade by tracking specific companies. This paper reports some of the findings.

CONCERN in the United States, and increasingly in Europe, with regard to barriers facing foreign companies in Japan has heightened interest in the trade and investment climate for foreign firms seeking greater access to the Japanese market.

International business is increasingly being shaped by the trend towards economic integration which has engendered the establishment of large trading blocs characterised by internal free trade and common competition policies. To this extent, the world arena is now dominated by three major trading regions — the Americas (including Canada and South America), Europe (including eastern Europe) and Asia Pacific — the ‘Global Triad’ (Ohmae, 1985). However, while liberalisation is the essence of internal regional business transactions, it is arguable that greater protectionism and a more restricted legislative régime dominate in inter-triad trade and investment. This has profound implications for firms’ international strategies where the affiliation of their domestic country to a particular economic grouping has ramifications for trade and investment in non-member countries.

Historically, Europe and North America have forged strong trade and investment linkages. With the increasing ‘regionalisation’ of these areas, ensuing from the Single European Act 1986 (the so-called ‘1992’ initiative) and the establishment of the North American Free Trade Agreement (1989), the future of these transatlantic flows has been called into question. The dominance of regional concerns and issues in both governmental and corporate decisionmaking has raised the spectre of ‘inwardness’, protectionism and the sidelining of GATT. This article looks at Canadian companies’ views and responses to the Single European Market initiative. Unlike national governments, which tend to view trade and investment issues in a somewhat parochial manner, multinational companies (MNCs) formulate their foreign market-servicing strategies on a broader scale, using cross-border exporting, strategic alliances (joint ventures etc.) and1 overseas investment to reduce costs and enhance their marketing effectiveness. From their perspective, the formation of regional blocs may cause some temporary ‘inconveniences’ (the need to adjust to revised product specifications, technical standards, environmental protection measures and overt discrimination against ‘outsiders’ in the form, for example, of local content rules), but they also create greater opportunities for business expansion through their trade-creation effects. Moreover, the flexibility accorded to the multinational company through its ability to select a market-servicing mode most appropriate to the new circumstances can be used to minimise or remove strategic disadvantages (for example, in the face of discrimination against imports, MNCs may replace exporting by investing in a local manufacturing plant).

Strategic alliances with foreign partners are one means which a company can adopt to internationalise its business alongside exporting and wholly-owned foreign production and marketing subsidiaries.

The purpose of this article is to compare the structure of foreign market servicing strategies of a number of the world’s leading trading nations. The total foreign sales (TFS) of any nation are made up of its exports (X), sales arising from that country’s foreign direct investments (I) plus licensed sales from exported know-how (L). Thus TFS = X + I + L.

In the past three years, the financial press has devoted a good deal of coverage to the alleged use of transfer pricing policies by multinationals to gain a tax advantage. Such a tax advantage accrues because different countries may constitute tax havens or because the overall tax may be lower for a variety of reasons, thus resulting in higher profits (and taxes) in the home country of the parent/holding company or a third country, which thereby benefit from the use of another country’s resources.