The Globalization of Business (Routledge Revivals)

The Challenge of the 1990s

John H Dunning

• Publisher: Routledge
• Year: 2014
• ISBN:
  9781317589891
• Edition: 1
• Topic: Business
• Subtopic: International Business
• Index: Business

In recent years economic activity has become increasingly globalized. One of the main instruments behind this process is the multinational enterprise. In The Globalization of Business, first published in 1993, John Dunning explores the latest issues in the world of international business and looks ahead at the remaining years of this century identifying the likely challenges of the future. What are the challenges posed by the technological, political and economic developments of the 1990s for international business? What are the implications of the opening up of new territories such as in Central and Eastern Europe and parts of China? To what extent are the competitive advantages of nation states increasingly coming to depend on the presence of multinational activity? What are the implications of the globalization of markets and production for the domestic economic policies of governments? This collection of essays will be vital reading to students of international business.

PART I

Challenges for teaching and research in international business

Introduction

In this first part of the volume, attention is given to the challenges now facing international business as an academic discipline. Chapter 1 traces the emergence and growth of teaching and research on international business since the 1960s, to the present day. It argues that all too little attention has been paid to those aspects of international business which are unique to the cross-border operations of firms; and that only by approaching the subject matter from an interdisciplinary perspective can this deficiency be properly remedied. The chapter concludes by setting out some of the ways in which individual scholars, university departments and graduate schools, and the professional body of international business teachers and researchers – the Academy of International Business – might best respond to these challenges in the 1990s.

1The study of international business: a plea for a more interdisciplinary approach¹

INTRODUCTION

It is almost a truism to say that the practice of international business (IB) is only as successful as the human and physical resources available to the practitioners and the way in which these are procured, organized and translated into marketable products. Likewise, the effectiveness of our scholastic efforts to study and teach international business is entirely dependent on our capability to marshal and organize the necessary human and other assets so as to supply a range of end products which are acceptable to the academic community of which we are part, our paymasters and the main purchasers of our products, viz., the business community. Of course, the determinants of success of the practice and study of IB are interrelated; and, in our particular pursuit for excellence, there is no unique or sure-fire recipe for success.

But, I observe, that in an ever increasingly complex world of international business, which is dominated by rapid and far-reaching changes in technology and by environmental turbulence, this is no less true of successful practitioners. Rarely, in seeking to identify the reasons for business achievement, is one able to find a single common denominator. Sometimes excellence is primarily based on innovatory ingenuity; sometimes on the access to or control of key inputs or markets; sometimes on aggressive or novel methods of advertising and marketing; sometimes on super-efficient capital budgeting; sometimes on dynamic and imaginative entrepreneurship; sometimes on the diversity of operational experiences and capabilities; and sometimes on an unusual aptitude to manage both intra- and inter-firm human relationships. But in most cases, success is founded on some amalgam of these, and it is the way in which these discrete – though increasingly interdependent – advantages are combined with each other and with complementary assets in different countries and cultures, which contemporary research suggests is the key competitive advantage of international firms. Call it what you will – e.g. a holistic and integrated approach to the creation and organisation of business wealth – the success of the modern international corporation is increasingly determined by the ability to organize natural resources, information, money and people across national boundaries, both within, and between organizations.

What’s new in this, one may ask. In principle, nothing. What is perhaps new, is the high degree of diversification of modern IB in its products, production processes and markets. Inter alia, this is revealed by the increasing role of transaction-related business activities. By transaction-related activities, I mean all activities other than those directly associated with the actual act of producing or consuming goods and services. In the case of single product firms competing in perfect markets, transaction costs are zero. As firms become multi-activity and markets become imperfect, transaction costs assume a greater significance, and, in some cases, the proficiency of transaction-driven activities may determine the success or failure of an enterprise.

Essentially transaction costs comprise the costs of organization and the costs of strategy. They include the functions of coordinating the procurement and disposition of inputs; those of production scheduling and inventory control; those of monitoring, controlling and inspecting performance and product quality; those of establishing networks of suppliers and managing industrial relations; those to do with the logistics of the movement of people, assets and materials; those to do with marketing and final product and post-sales activities; those to do with the acquisition and use of information; and those to do with the management of all kinds of risk. As these tasks become more important, so transaction, relative to production, costs will rise. As new cross-border alliances are concluded and networks formed; as generic technologies, which are capable of being put to multiple uses, become more important; and as markets and production outlets become culturally more sensitive, then the demands on organizational capabilities become dimensionally very different from those facing the single product firm. Multinationals both fashion change and are fashioned by it. But the prosperous firms are those best able to exploit technological advances and learning experiences to their own benefits; to adapt their strategic postures and ownership patterns to meet competitive pressures; to manage diversity and environmental turbulence; and to identify and seize new economic opportunities.

THE CHALLENGE TO INTERNATIONAL BUSINESS STUDY: MEASURES OF SUCCESS

So much for our brief excursion into the changing determinants of the success of IB. Let me now turn to some of the implications of these changes for the study, and particularly the organization of the study, of IB.

I believe that for the most part, the challenges and opportunities now facing the international business community are well acknowledged and understood by scholars. Ours is a pragmatically oriented discipline and, more than our colleagues in most other disciplines, we keep abreast of the most important developments in our subject. A high proportion of IB teachers act as business consultants. Many are regular contributors to journals, periodicals and newspapers, read (or at least purchased by!) the business community. Through our research activities, conferences, seminars, executive training programs and professional contacts, we are afforded a good insight into the workings of international companies and their interaction with the economies in which they operate. At the same time, I am not persuaded that the way in which we presently organize the study of IB is best suited to the needs of the 1990s. Let me explain what I mean.

Historically, the study of IB (IBS) has gone through two phases and is now entering a third. The first phase lasted from the mid-1950s to the late 1960s. This was a time in which the subject was taught and researched by a small group of senior scholars, most of whom played a key role in the formation and early development of the AIB (Academy of International Business). These scholars were primarily interested in IB per se, and although their initial training and professional orientation was rooted in one of the established functional fields of business, their perspective and vision was essentially cross-disciplinary. I am sure these scholars – most of whom are still active members of the Academy today – would be the first to admit that the tools and technical apparatus they brought to analyzing the behavior of international companies were relatively undeveloped and unsophisticated; but, in emphasizing the distinctive features of the international or foreign dimension of business, they were inevitably drawn into issues that were not only of interest to disciplines outside their own, but which needed to be approached and studied in a coordinated way. Since, at this time, there were few research-oriented business schools outside the US² (and what there were, were strongly American influenced), it was not surprising that these scholars were of US origin.

However, in the main, the efforts of these scholars met with only limited success. Partly, this was because, since most US businesses were largely domestically oriented, the study of their activities followed suit; and partly because the methodologies and techniques of IBS lacked analytical rigor. The authors addressed several functional issues from an international perspective; and their orientation of interest was primarily, though not exclusively, pedagogic. Trained usually in management economics or marketing, they argued for a more international approach to the teaching of business, but in so doing they did not hesitate to embrace an interdisciplinary perspective.

The second phase, which proceeded in conjunction with the first as IB became a subject in its own right, was more research driven. It was led by a rather different group of scholars who were interested in some international aspects of their particular subject. More often than not, these scholars were outside business schools, and were non-American. By and large, their research was policy-oriented. For example, the growth of outward direct investment from the US in the 1950s and 1960s triggered off a variety of host and home countries’ studies on the economic consequences of that investment,³ while the first major project of multinationals per se was conducted by Ray Vernon and his colleagues at Harvard.⁴ These studies were mainly undertaken by economists; and this discipline, and that of finance, also spawned a galaxy of theories – and, I might add, largely uni-disciplinary theories – about the motivation for, and determinants of, foreign direct investment and the multinational enterprise (MNE).⁵ But it is perhaps worth observing that, with one or two major exceptions, these scholars were not in the mainstream of international economics, industrial organization or the theory of the firm; and, indeed, they did not draw upon received theoretical constructs. The international textbooks gave short shrift to the subject of direct foreign investment until the 1970s. It was the fourth edition of Kindleberger’s International Economics in 1968 that gave the first attention to foreign direct investment; and even the 1985 edition of Caves and Jones allocated only 10 of 537 pages to the subject. The industrial organization literature paid even less attention to the structure, conduct and performance of international markets; and one would be hard put to find any reference to transaction costs and market failure in any textbook on the theory of the firm before the late 1970s.⁶ At the same time, the stirrings of discontent with existing paradigms in these branches of economics, and quite independently, the new thinking on organizational form and control, typified by the work of Alfred Chandler and Oliver Williamson,⁷ were providing the lynch pins for some of the most exciting theoretical advances of the later 1970s and early 1980s.

If most of the research on IB issues was being undertaken within particular disciplines, the period produced intense debates, both between and within disciplines, about the organization of IB study. For the most part, the argument centered on whether IB – and particularly the teaching of IB – should be developed as a new and self-contained discipline or whether each of the functional areas comprising business studies should be internationalized; a debate which is still very much alive today. The AIB, and its members, have taken the lead in analyzing the comparative merits of the alternative modalities without coming to any definitive conclusions as to which is the preferred one.⁸ So much seems to rest on university-or school-specific characteristics, the interests and the personalities of those involved, and the knowledge, motivation and leadership of the Dean. The arguments for and against organizing IB studies via an extension of the functional areas, compared with integrating these within a single IB department, are well known and do not need to be rehearsed here; except, it is perhaps worth underlining that the options are not mutually exclusive. But I think the fact that much of the research on IB in the 1970s was unidisciplined, and was US led, tended to favor the first rather than the second option, which, in any case, was easier to accommodate within existing organizational structures. In this sense, at least, the organization of IB study paralleled that of much of IB, which in the 1960s and 1970s grafted on the international dimension to an organizational responsibility based on product divisions. Thus most business schools carved up the teaching of IB by disciplinary area, while a few developed geographical specializations. As for the AIB itself – apart from gathering information and acting as a forum for debate, I do not think it advanced a particular view, even though individual members of the Academy did so.

As I see it, we have now reached a new watershed in the evolution of IBS. It has been brought about by changes in both exogenous variables and those endogenous to the profession. These changes are having, are likely to continue to have, widespread implications for IBS at all levels. They affect the training and career prospects of individual scholars; the composition of, and relationships between disciplines; the organization of schools or faculties; and the function of IBS as a whole. The question I now want to address is: What might be, or should be, the role of AIB not only in responding to these developments but helping to fashion them?

External factors

The main external factor influencing IBS has undoubtedly been the globalization of economic activity, and the realization, by the business community and governments alike, that both are competing for resources and customers in a market environment in which one’s own strategy both influences, and is influenced by, one’s major foreign competitors. In such a scenario, governments need to adopt globally oriented macro-organizational strategies, while firms, particularly in industries dominated by MNEs, need to adopt globally oriented micro-organizational strategies. This, in turn, requires a reappraisal of existing macro- and micro-economic policies, and a much greater understanding of both the workings of the international economy and the variables affecting the internationalization of business activity. And by internationalization I mean the totality of cross-border activities, be they production or trade in assets, goods or services; and be they within the same institution or between independent economic agents. An understanding of the forces making for Japanese direct investment in the US is just as relevant to our understanding of IB as how best non-resident firms might break into the Central and East European market, or react to the new investment policies introduced by the Indian government, or to the latest debt crisis in Latin America, or to the changes in the political climate in Mexico or the Middle East, or to the implications of the completion of Europe’s internal market at the end of 1992.

From the perspective of the student of IB, I believe the change required is a fundamental shift in the way in which we examine the foreign related variables affecting business. Initially, just as in the practice of IB, the study of IB – which, I repeat, was largely US dominated – took the study of domestic business and gave it an international dimension with the least possible change. If it was acknowledged that there were some differences in selling to or producing in Belgium, Peru or Thailand compared with selling to or producing in Kansas, Oregon and Louisiana, these were considered relatively minor. Or, to put it differently, the achievement of business goals was perceived to be a culture-free phenomenon. Such a perception led to ill-conceived attitudes and inappropriate behavior. For example, it encouraged a parochial and ethnocentric approach by both American business and the American government. The argument in the 1950s and early 1960s seemed to run something like this. US industry in the US is efficient; its technology, management and marketing skills are the best in the world. Therefore when US industry goes abroad, US products, skills and production methods should follow it. A similar rationale drove macro-organizational strategy, although, since the US was more or less a self-sufficient economy, such a policy was entirely domestically oriented. From the perspective of a hegemonic power, any reaction of other firms or governments to what the US firms or the US government did or did not do was assumed to be of negligible significance.

In the later 1960s and 1970s, micro-business policy was differently focused. There was an increasing recognition, earlier acknowledged by some older European MNEs, that, because of country-specific differences in factor endowments, consumer tastes, institutions, culture and government policies, foreign subsidiaries needed to be organized differently than their domestic counterparts. There was a move towards polycentrism and the development of multidomestic MNEs; increasingly decisions in such firms were decentralized and local managers appointed to manage local operations. A third phase of organizational development followed in the late 1970s and early 1980s. This was aided and abetted by regional integration, technological developments and the geographical diversification of MNE activity. It led to a geocentric strategy in which the operations of the various subsidiaries were geared to a common goal and coordinated by a central plan. Yet, initially at least, even this strategy, while accepting that the internationalization of an enterprise required some organizational modifications to allow for differences in institutional arrangements and political and ideological perceptions, presumed that, at the end of the day, these differences could be readily accommodated in the search for new markets and for greater efficiency.

In the late 1980s, this philosophy was being increasingly questioned; and, since that time, efficiency-seeking MNEs have increasingly accepted the need to adapt their strategies to meet the particular and specific needs of the countries in which they operate. It is not just that international transactions are more important to almost all national economies; the very character of trade and investment has undergone important changes. Let me identify just four of particular interest to the IB student. First, exchange rates are more volatile. Compare the 1960s with fixed exchange rates which could be considered exogenous. Firms could plan foreign operations. The gyrations of the major currencies since the mid-1980s have reinforced the importance of this extra-domestic variable which had huge repercussions for risk management.

Second, and even more pervasive, has been the growing role of government as a factor influencing the location of economic activity by international companies. I will not dwell in detail on this thesis here,⁹ but it is based upon three hypotheses. The first is that industry is becoming more footloose in its choice of location as its dependence on natural and, for the most part immobile, factor endowments is becoming reduced. Inter alia, this reduced dependence is shown by the decreasing proportion of raw material and unskille...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Original Title Page
• Original Copyright Page
• Table of Contents
• List of tables
• List of figures
• Preface
• Acknowledgements
• Part I Challenges for teaching and research in international business
• Part II Challenges for theorizing about MNEs and MNE activity
• Part III Challenges to established patterns of MNE activity
• Part IV Challenges to national and regional government policies
• Notes and references
• Index