The Changing Global Context of International Business

This collection of my papers, published between 1997 and 2001, concentrates on four key issues in the world economy: the changing context of international business, the continuing pace of economic integration, international joint ventures, and knowledge management. In exploring these topics, my main concern is their relationship with the strategies of multinational enterprises (MNEs).

John Dunning’s work has taken a distinctive turn in recent years. He has placed greater emphasis on policy, and addressed much wider issues than before (see, for example, Dunning, 1994). This is particularly evident in his book Global Capitalism at Bay? (2000). The title not only echoes Raymond Vernon’s Sovereignty at Bay (1971), but also conveys Dunning’s concern that capitalism’s survival depends not only on international trade and technology transfer, but also on the efficiency of the institutions that support them. Institutional efficiency depends in turn on the legitimacy conferred by moral systems.

The major agents of change in the world economy are corporations. Firms do not act in a vacuum and the context - set by the government, consumers, suppliers, the level of extant technology and the culture of the countries in which the firms operate - plays a key part in determining the outcome of the changes they initiate. Further, firms are reactive as well as proactive. They react to the context and to other firms. This chapter examines current controversies in comparative economic structure, including the nature of competitiveness, the nature of the ‘Asian miracle’, the public/private sector divide, the role of trade blocs and the notion of the competition of cultures. These issues are presented as ‘new stylized facts’ which need to be explained by successful models of multinational enterprises (MNEs) (Buckley and Casson 1976, 1985). Finally, extant models of multinationals are discussed and extended by questioning traditional notions of ownership, exchange, competition and information.

This chapter examines alternative strategies facing firms subject to decline, threat or scarcity. Four alternative strategies are suggested: exit, voice, loyalty and institutional reorganization. These strategies apply both to internal activities (within the firm) and to external relationships, most particularly with suppliers and customers.

This chapter seeks to tackle the issue of foreign direct investment (FDI) and Europe — in particular the European Union (EU)¹ — within a synoptic view of international business writings. The short-term economic factors are relatively well discussed, but the historical, cultural and political dimensions are rarely touched upon in mainstream international business. It is not our purpose to do this thoroughly here, but simply to take a step back and put the economic factors in perspective. It transpires that the familiar economic influences appear part of a more permanent and pervasive system. With this perspective; the issue of foreign direct investment and Europe appears part of the natural establishment of an interlocking economic system.

Firms today operate in a global economy best analysed as comprising a number of interacting regional subsystems, of which the European economy - and primarily the European Union (EU) - provides a key example. These subsystems are cemented by ties of history, culture and trade, and, notably in the second half of the twentieth century, by political institutions and initiatives. Within each subsystem, foreign direct investment (FDI) plays a central role, in both integrating the individual subsystem and in providing linkages between subsystems through the activities and policies of multinational enterprises (MNEs). Of growing concern, not only to the MNEs themselves but also to national and supranational policy-makers, is to what extent these regional subsystems and the integration processes by which they are created shape patterns of investment within and between them. The EU is an exemplary laboratory in which to investigate the interplay between FDI and regional subsystem development.

Two central decisions must be made by any firm seeking to enter foreign markets: what markets should it enter, and how should it service each market. In servicing a foreign market, a manufacturer may choose between three main entry modes: exporting; licensing to a local firm; and establishing a local production facility. Where firms choose to establish a local production facility they must decide whether to establish a new business or to acquire an existing one, and also, whether to pursue the venture alone or with a joint-venture partner. This chapter seeks to analyse these decision processes for Australian manufacturing firms located in the UK.

This chapter examines the link between globalization and the growth of trade blocs using the experience of the North American Free Trade Agreement (NAFTA). Globalization is interpreted as the differential pace of integration of national markets of different types. In comparison with other forms of international business (for example, trade in intermediate and finished products, technology licensing and so on.) foreign direct investment (FDI) is seen as the agent of ‘deep integration’ (UNCTAD, 1993).

Two contradictory trends characterized the world economy during the approach to the twenty-first century. First, the globalization of the economy, together with the successful conclusion of the Uruguay Round and the establishment of the World Trade Organization (WTO), brought about a steady decline in barriers to international business transactions. Second, however, as countries have lost their conventional powers to protect themselves from the outside world, they have grouped together, often on a pan-continental basis, into regional trading blocs. Regional economic integration, in the form of institutions such as the North American Free Trade Agreement (NAFTA), the European Union (EU) or the Asia-Pacific Economic Co-operation (APEC), represents the main way that remains accessible to countries in their attempt to maintain and promote their levels and shares of world investment, employment, income and growth.

The formation of international joint ventures between firms in developed market economies has increased markedly since the late 1970s (Anderson, 1990; Hergert and Morris, 1988; Glaister and Buckley, 1994). Firms have increasingly adopted joint ventures as a purposeful strategic response to changing market conditions, often with their direct competitors (Harrigan, 1988a; Vonortas, 1990). In the context of European industrial restructuring, Doz (1992) has argued that alliances will become more prominent as they are more effective than organic development, avoid some of the pitfalls of acquisitions and

represent a ‘softer’ approach more likely to bring the same rationalization and restructuration benefits as mergers are expected to provide. (Doz, 1992: 296)

A number of theoretical perspectives have been developed for joint-venture formation, the most prominent being those based on the transaction-cost approach (Hennart, 1988; Buckley and Casson, 1988), organizational learning (Kogut, 1988a; Hamel, 1991; Mody, 1993) and resource dependency (Pfeffer and Nowak, 1976).

Since the mid-1970s, the incidence of alliance formation between partners from advanced industrial economies has accelerated (Anderson, 1990; Hergert and Morris, 1988; Glaister and Buckley, 1994). A major driving force for alliance formation is the recognition by many managements that in, an intensely competitive international business environment, self-sufficiency alone will not bring success, but the ability to compete will be considerably improved with the help of partners (Inkpen, 1995: 1). Two contractual forms of alliance can be identified - equity joint ventures and non-equity joint ventures. Equity joint ventures (EJVs) involve the incorporation of a new company in which two or more partners each hold an equity stake. Each partner will expect to participate in the decision-making activities of the jointly owned entity, will anticipate a proportional share of dividend, and expect representation on the board of directors (Harrigan, 1985; Geringer, 1991). Examples include the 50-50 EJV established in 1988 between ICI of the UK and Du Pont of the USA in industrial paint products for the purposes of product development, production and marketing. From ICI’s perspective, the venture was particularly important in facilitating international expansion and to cope more effectively with a common competitor. From Du Pont’s perspective, the alliance was particularly important in terms of exchange of complementary technology, and enabling both product diversification and faster entry to the market. In 1989, the UK publishing group EMAP established a 50-50 EJV with Bayard Press of France, for the purposes of product development and marketing. The venture facilitated international expansion for Bayard Press, and was particularly important in enabling fast entry to the UK market.

The current explosion of interest in ‘knowledge management’ within firms (Nonaka and Takeuchi, 1995; von Krogh and Roos, 1996; Grant, 1997; Stewart, 1997; Boisot, 1998; Teece, 1998)¹ illustrates the strong linkage between the process of managing a firm’s knowledge assets and the global competitiveness of the firm. Gaining value from the intangible assets a firm possesses is a key component in achieving the strongest possible competitive stance. Techniques of knowledge management are transferable within the firm, but only at a cost. This cost will be lower the more permeable are the internal dimensions of the firm. Thus organizational and cultural barriers internal to the firm become a prime concern when the firm’s management is seeking the most effective use of its intangible knowledge assets. It is an arguable proposition that the ability to manage knowledge will have a culture-specific element, and therefore, to some degree, a nation-specific aspect. Knowledge management therefore provides a key link between a firm’s global competitiveness and the national attractiveness of particular locations and of the national ownership of successful global firms.

It has been known for centuries that the appropriate use of knowledge is a critical determinant of effective organization. During the 1990s however, discussion of knowledge in the management and economics literatures changed. Ideas concerning knowledge were once the concern of scholars seeking theoretical explanations of organizational structures and practices. We now see that practice is making use of theory in new and interesting ways. Ideas which explain strategic success are being used to design strategies to improve the firm’s ability to capture more of the potential value from the knowledge they and their members have, or can acquire.