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OCR for page 96
International Industries:
Fragmentation Versus Globalization
YVES DOZ
Since World War it, grown in international trade has exceeded world
economic growth by a substantial margin, and national economies have
become increasingly dependent on world trade. Up to 50 percent of Me
gross national product (GNP) of small European counties is faded in-
temationaBy, whereas only about 25 percent of GNP in larger European
colmtnes and 10 to 15 percent of GNP in We comparatively isolated large
economies of Me United States and Japan is traded internationally. Markets
for many industrial goods have become increasingly homogeneous. Si-
multaneously, foreign investment has grown rapidly, both in developed
and in developing countnes. ~ Not only has the total stock of capital grown
rapidly, but, more significantly, Mere has been grown in Me number of
subsidianes of multinational companies (MNCs); grown in the number
of countries in which specific firms were active; and increasing diversity
in the products manufactured and sold abroad Trough subsidiaries of
MNCs (Vernon and Davidson, 1979~.
As bow international trade and inves~anent grew rapidly, international
competition became more intense, and many national industries became
global industries. Similarity of markets in different counties and intense
global competition drove international competitors to coordinate Weir mar-
ket and competitive strategies between counties more actively. The rel-
evant scope of strategy thus shifted from discrete national markets to global
markets, and coordinated worldwide competitive actions between Me var-
ious subsidiaries of MNCs became more important.
As national competition shifted to global competition, foreign invest
96
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I=ERNATIONAL INDUSTRIES
97
ment also stifled. Protectionism in Me 1930s, We trauma of World War
it, and national reconstruction policies led We early mulunahonal investors
to fragment Weir operations into discrete market-senricing, self-sufficient
~nvesOnents wig little interdependence between operations In separate
countries. The developing countries' import substitution policies had sun-
ilar effects. Win freer trade and more intense compenhon, both the pos-
sibility of, and the need for, sourcing ~nvesunents In manufacturing arose:
hnternation~ corporations started to specialize and rationalize their plants
to exploit national comparative advantages. Even where economic and
technical conditions prohibited such specialization for example, for ce-
ment, glass, or ~ndustnal gases competitive actions became coordinated
across subsidiaries as We companies realized they were competing in a
very concentrated global oligopoly. As a result, portfolio foreign invest-
ments, where only intangible assets areleveraged, gave way to strategically
coordinated Integrated operations worldwide, exploiting comparative ad-
vantages of different countries for venous types of activities. Labor-in-
tensive activities were sited in locations where labor costs were low and
from which We world markets were served. Such advantages were most
often exploited by owned subsidiaries-Trough "internalization"-rawer
Tan Trough subcontracting or licens~g.2 This, in turn, led to the de-
velopment of ~nuafirm international made. Such trade may be intraindushy
(e.g., the processing of semiconductors overseas for renuport into the
Umted States) or ~nhafirm but ~ntenndustry (e.g., General Electric "off-
set~ng" the sale of jet engines to Me Canadian Armed Forces win exports
of consumer goods from Canada).
With some significant exceptions-usually government imposed the
trend toward industry globalization and toward MNC integration has af-
fected most countries and most internationally traded goods. The propor-
tion of internationally traded goods in the GNP of countries also increased
substantially, so that by 1980 internationally traded goods win substantial
Lade levels comprised more than 80 percent of the industrial sectors in
Westem Europe (Orient, 1986~. This trend was particularly strong between
1968 and 1978.
Since the late 1970s, however, three sets of factors have come to limit
such globalization. First, the technology no longer always drives toward
globalization: New manufacturing techniques may reverse the mend to-
ward '~vorld-scale" plants and allow differentiation and segmentation win
smaller cost penalties. Second, protectionism is on Me rise and limits
the strategic freedom of global competitors. Protectionism applies not
only to trade in goods, but also increasingly to trade in knowledge, tech-
nology in particular. Third, the organizational and strategic capabilities
of global competitors often lag the competitive opportunities available
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98
WE:S DOZ
to ~em, and many firms are less Can fully successful in exploiting Heir
opportunities.
The impact of Be Wee sets of limiting factors mentioned above deserves
more attention. This chapter reflects this interest, beginning with a selective
review of Me abundant, if still fragmentary, evidence on He trends toward
market homoge~zabon, ~ndus~y giob~abon and fit ntegration, and
He underlying forces Hat Hive ~em. These issues are discussed at Free
complementary levels of aggregation: the mtemadonal economic relations
framework; individual industries and Heir compeubve dynamics; and the
logistics, organizational structures, and management processes of m~i-
v~dual firms. Finally, He recent evolution of He three sets of moderating
factors-technologies, government policies leading to growing protec-
tionism, and the limited organizational capabilities of Arms and what
Weir effect may be on the fragmentation or globalization of international
ndustnes are analyzed.
GLOB ALl7ATION OF INDUSWES
Enabling Conditions
Globalization is rooted In several key enabling conditions: He ho-
mogeriization of markets, He decreasing costs of transport and com-
mun~cahon, decreasing made biers, and He compete Frcss~s from
new competitors. First, national markets have become increasingly s~m-
ilar in taste as income distributions in industrialized nations have equal-
ized. The result has been He development of relatively homogeneous
market segments that cross borders (I-evitt, 1983~. Though national Inar-
kets may have been more similar In He past Han was generally rec-
ognized (Helleiner, 1981), the media (mainly television), intemabona
travel, and the action of active multinational marketers have contnbu~
to He homogenization of markets across national boundaries. Fu~er-
more, global market segments appear in industries as different as au-
tomobiles (to the advantage of BMW or AMC's "jeep") and beer (to He
advantage of Heineken and a few others). Higher disposable incomes
also encouraged the development of a market for fashionable "world
products" in a number of countries, be these products such as Bndsh
raincoats, Italian sweaters, Swiss watches (Rolex or Swatch), French
wines, or Japanese consumer electronics.
Lower communication and transportation costs He second enabling
condition-also made serving these homogeneous markets from cen~al-
sized locations economical, even for relatively bulky products such as cars.
Real-time low-cost communication also made the coordination of a com
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INTERNATIONAL INDUSTRIES
99
plex worldwide logistics system feasible. The globalization of manufac-
turing in certain industries where products are complex and differentiated
might not have happened without the drastic reductions in transportation
and telecommunication costs between 19SO and 1980.
That trade barriers were removed between the 1950s and the 1980s is
wed known and needs no detailed analysis here. The remove of these
barriers provided a third enabling condition for the globalization of in-
dustnes. Only in some industries where government-controlled customers
predominate, and where national defense considerations are relevant, did
trade bamers stay in place (Doz. 1986~. Specific trade agreements (e.g.,
Me Lome convention), as well as the extension of credit to developing
counties, aBowed these counuies to participate in this move toward free
Lade, initiated by traditional industrialized counties. The recognition that
across-~e-board import substitution measures usually fail, and the suc-
cessful example of the newly ~ndus~ialized counmes Epics), also provided
an incentive for developing countries to participate actively In the world
economy.
A fourth enabling condition, usually at Me level of individual firms,
was Me existence of the organizational infrastructure for globalization.
Me m~d-1960s, when trade liberalization was initiated and national
markets started to converge visibly, many MNCs were already in place,
wad Weir inhas~uc~re of sales subsidiaries and foreign plants. This gave
them Me capability both to gather data worldwide and to respond
quickly at least In theory to globalization ~ends. Global information
networks and means of global market reach were already in place, de-
creas~ng Me cost of transition from national to global competition for We
major competitors. Experience in handling foreign manufacture, new
product introduction, and technology transfer facilitated a prompt re-
sponse to industry globalization by MNCs (Vernon, 19791. Where such
networks and means did not exist, helping hands could be found. Ini-
t~ally, for example, Japanese exporters relied on Japanese trading com-
panies, nmporOng counmes' mass merchandisers (e.g., Sears in Me
United States), mass buyers (e.g., TV rental companies In the United
Kingdom), and onginal equipment manufacturer (OEM) customers (e.g.,
for computer penpherals). This allowed Me new competitors to skip bow
Me market intelligence tasks (Sears, for instance, specified the TV sets
it wanted) and Me initial market access cost and delay. More complex,
more fragmented, less transparent, and less willing distribution struc-
tures would have been a formidable bamer to globalization and, where
present, remain a source of asymmetry in giabal~zation (witness the
painful efforts of many European and American firms to establish a sig-
nificant market presence in Japan).
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100
WAS DOZ
Driving Forces for Sourcing and Marketing Globalization
The enabling conditions summarized above were necessary, Cough not
sufficient, for industry globalization to take place. They had to be exploited
by firms Ming to gain a permanent competitive advantage. Ibe intense
competition created by these firms was in most cases the main Skiing
force for integration and giobal~zabon to actually take place. Intense com-
petition itself depended on the opportunity for substantial gems through
globalization, the existence or the creation of destabilizing conditions, and
He presence of competitors wig Be strategic intent and capabilities to
exploit destabilizing conditions to their advantage.
Growing economies of scale in R&D and in production provided Me
most frequent opportunity for increased profits Cough globalization.
Changes in product and process technology have increased Me minimum
efficient size of production in a variety of industries, such as cars, chem-
icals, consumer electronics, semiconductors, and machinery. Comb~ned
wig the emergence of smaller differentiated global segments, this is a
powerful incentive to pool demand from a variety of national markets and
serve such demand from large, optimally sited specialized plants. New
product development costs have also risen considerably in a range of
industries, He best-known of which are aircraft, telephone switching, cars,
and semiconductors. These higher costs have created a strong incentive
for industries to serve He world market to spread R&D costs over a larger
production. There is a furler incentive to serve He world market quickly
to minimize the financing cost of the initial investment and the competitive
risk of technological obsolescence (Hamel and Prahalad, 19851.
In some capital goods indusmes, such as papermaking machinery, elec-
tncal equipment, and railroad equipment, the cyclicality of domestic de-
mand and the uncertainty of future domestic orders have led to chronic
overcapacity and to the need for national finns to diversify their customer
base by selling abroad. Intense competition, though, is the key driving
force. ~ Europe, following He European Economic Communities (EEC)
lowering of trade barriers, little change toward a more efficient industry
structure took place unless triggered and stimulated by intense competition
(Owen, 19831.
The emergence of a period of intense competition was facilitated by
technological or market discontinuities that destabilized the existing market
and industry structures. Increases in energy costs, for example, destabilized
He structure of such industries as automobiles and papennaking machinery,
making it possible for new global competitors to emerge. Shifts from
electromechanical to electronic technologies in industries ranging from
watches to digital switching systems and avionics have similarly allowed
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INTERNATIONAL INDUSTRIES
101
new competitors to establish themselves and occasionally to render a whole
industry obsolete (e.g., Me mechanical Swiss watch industry). Wide fluc-
tuations in exchange rates have occasionally had significant effects, helping
new competitors to penetrate mature ~ndusmes, even in Me absence of
new technology or changing economies of scale. In 1983 and 1984, for
example, the overvaluation of Me U.S. dollar helped Komatsu gain over-
seas customers at the expense of Caterpillar (Bartlett, 1985~.
Ambitious competitors, win a vision of how to turn situations to Weir
advantage, were also needed to make competition more intense. These
competitors, such as Komatsu, have Me long-tenn strategic intent to dom-
Nate Weir ~ndus~y, and they are able to exploit opportunities as Key anse.
While Me new competitors have usually been Japanese, Key are also
occasionally European (e.g., Leroy Somer in small electric motors) or
Amencan (e.g., Otis in He small-elevator industry). Confronted win
mtense compei~bon from new competitors intent on exploiting economies
of scale, new product and process technology, and other destabilizing
factors such as exchange rate fluctuations, established competitors have
typically reacted in two complementary ways: (1) reducing costs Trough
Me exploitation of economies of scale or through economies of location;
and (2) gaming worldwide market access Trough their own efforts or
through networks of partnerships arid coalitions.3 First, many companies
attempted to reduce costs by exploiting potential economies of large scale,
typically by integrating and rationalizing production in a region (e.g.,
Philips rationalizing its television tube and receiver plants in Europe and
Ford doing the same with cars). Companies also searched for lower factor
costs and over locational advantages (e.g., the moves offshore in Be U.S.
electronics ~ndus~y in Be late 1960s and 1970s, or the relocation of the
aluminum smelting industry). Demands for cost competitiveness led to
sourcing globalization. This practice was sometimes encouraged by gov-
ernments, either through factor subsidization (small open counmes such
as Ireland or Singapore) or by Be imposition of export performance re-
quirements in exchange for access to local markets, typically in large
"promising" counmes such as Spain, Brazil, and recently India (Guysinger
et al., 19841.
Managing costs is not enough, however, as companies have also come
to recognize He value of worldwide market access (Hamel and Prahalad,
19851. Such access is becomung critical not only as a response to rising
R&D costs but also as a Ray of providing potential for competitive re-
taliation. Goodyear responded to Michelin's inroads into the U.S. tire
market by competing more actively in Europe, where Michelin was dom-
inant, Bus depriving Michelin of He cash flow it needed to continue its
invesunents to gain market share in He United States. A fight confined
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102
WES ooz
to Me U.S. market would have been more costly for Goodyear than for
Michelin. Similarly, IBM fights Japanese computer manufacturers not so
much In the United States, where it would hurt itself, as In Japan, where
IBM hurts its Japanese competitors most at the least cost to itself (New
Scientist, 1985~. U.S. makers of consumer electronics had no such option
and fell almost defenseless to the Japanese and to Philips.4
Where fines were not yet global enough and could not establish market
presence quickly Geiger because of government restricdons, or because
dis~ibudon channels are hard to penetrate, or body, strategic partnerships
and conli~aons developed In mousses that were becoming global. The
primary motive of most partnerships and coalitions is to shore up market
presence and technological competence to establish quickly a defensible
position in a global industry. While these do provide a viable option, the
sharing of strategic condor over compete actions by several partners
usually results in tensions as soon as the external technological and market
conditions evolve or the relative strategic importance of the jount activities
to the venous parmers changes. This is probably the single largest cause
of mortality in collaborative agreements. Even when the collaboration
endures, conflicting pnoniies may result in delays Mat blunt its compet-
i~veness (e.g., Me 2-year delay in the launch of Me A-320 airplane by
Airbus Industries and the continuing tensions between Me main partners
on future product policy and on acceptable financial performance).
Empirical Evidence
Although anecdotal evidence of industry globalmanon and MNC ~nte-
grabon abounds, systematic measurable data on Weir extent remain scarce
and fragmentary. Some industries are well documented (e.g., automobiles,
textiles, electronic components, aerospace) Trough numerous industry
studies, but most others are much less well analyzed.S Aggregate statistics
using proxies such as intIafi~m trade also suggest that integration of ok
orations within MNCs is important, with 20 to 30 percent of the inter-
national trade of countries such as the United States, Me United Kingdom,
and Sweden being intrafirm made. Infirm trade seems to be more prev-
alent in it&D-intensive industries, with high wages and large plants, which
is consistent with Me driving forces hypothesized above (Dunr~g and
Pearce, 1985; Lall, 1978; United Nations Center on Transnabonal Cor-
porabons, 19831. Yet, even Me most detailed studies are fraught with
problems in the availability and interpretation of data (Hood and Young,
1980~. There is a convergence between findings from studies Hat start
win trade statistics (e.g., based on He U.S. Department of Commerce
Annual Survey of U.S. corporations), those Hat start win a survey of
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l~TERWATIONAL INDUSTRIES
103
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104
WE:S DOZ
labor cooperation. Where unions succeeded in gang a say, as Hey did
win the German codeterm~nation laws, Weir re~neat~ves quickly aligned
then positions on Pose of management.
Economically weak but politically strong national industrial compares
could also be ba~ner;s to globalization, but by and large they fell to com-
petitive pressures in Europe. Only ~ a few partly competitive but largely
government-controlled sectors, such as electrical equipment for Byroads,
do the old industry structures survive largely unchanged. Even in some
of these industries, Mere are encouraging signs of possible raiionalizadon,
such as the investments by Compagn~e Generate d'Electncite into Ateliers
de Constructions Electriques de CharIeroi. Computer manufacturers are
victims of probably the worst stalemate along these lines in Europe. Bntain,
Gennany, and France each have their "national champion," hopelessly
small for global competitiveness, and unable to renew its product tine
without much outside help-usually Japanese. Yet each of these national
champions is well enough ensconced in its national political and economic
environment to survive, to prevent its merger into a transnational alliance,
and to block Be development of new, more entrepreneunal national or
international competitors. First-cIass customers desert European sum
pliers- mainly to IBM despite Be switching costs involved, and Be
technical capability of European computer companies is withered by Weir
Japanese partners, who provide Rem with components, critical subsys-
tems, and peripherals. The continuation of this stalemate threatens the
European computer industry with extinction. In Europe, though, this is
more the exception than the rule, and in most industries aerospace,
chemicals and plastics, pharmaceuticals, and even now automobiles-are
taking on die challenge of global competition win a fair measure of
success.
Research and Development
Unlike marketing and manufactunug, research and development have
not been significantly affected by globalization and have remained pnn-
cipally home-country activities. In a world of sequential market devel-
opment, where new products and new processes were first developed and
put to use on the domestic market or in the home plants, home-coun~y
R&D made good sense. As foreign markets developed to resemble Be
domestic markets, or as foreign plants were built, new products and tech-
nologies were transferred abroad once they had been proved domestically.
Foreign R&D was mainly devoted to the adaptation of transferred products
and processes to local conditions such as taste, product features, norms
and standards, and climate (Fischer and Behrman, 1979; Hirschey and
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INTERNATIONAL INDUSTRIES
105
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106
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are interdependent, which make the scattering of R&D laboratories costly
since they cannot be made self-conmined. Fourth, considerations of pa
lineal risk seem to have Ignited He willingness of major firms to be
dependent In their home markets on technologies developed abroad.
It is Bus no great suspense to obsene that, with a few notable exceptions,
the performance of He R&D function In cirrus has neither been giobalized
nor Integrated to any extent comparable to Hat of manufacturing and
marketing. The results of R&D are global, not He performance of the
R&D tasks. With a few significant exceptions, R&D remained cendaii~,
at least In the technology-intensive sectors. Foreign R&D labs do mostly
product development and adaptation to local conditions, or sometimes
basic research, but seldom have broad research mandates, except In some
of the most mature MNCs (e.g., IBM, Dow Chemical Company, and Ciba
Geigy). Furler, few firms seem to have developed systematic processes
for die coordination of R&D activities across regions of the world, again
with a few notable exceptions, such as IBM.
Yet, as the home market can no longer be equated win the lead market,
century performed R&D needs to be responsive to Be needs of distant
potential users. This may be easy to achieve for engineered commodities,
such as consumer durables, photocopiers, alla typewriters, but it is more
difficult where needs can be defined only In close conjunction until users
rawer Han through market research (von Hippel, 1982~. Whereas Japanese
successes have been confined maindy to engineered commodities, European
exporters and Arcs cover a wider spectrum of products. Large European
companies have particularly difficult problems win their U.S. subsidiaries.
Their products are often developed win too much of a "technology-push"
by central labs whose scientists and managers may have gained a sense
for European needs but are insensitive to U.S. needs. ~ some cases, they
seem to be following what they thinly is the "nght" path Tom a technological
rather Dan market standpoint without considering the lead users' needs.
As a result, it is not uncommon for U.S. subsidiaries of European groups
to avoid marketing products developed in Europe, Bus ensuring Hat Heir
volumes win be too low to break even. Instead, they develop new products
at great cost, take a license from a competitor, or buy the products direc~dy
on an OEM basis.
The issue is not who is right or wrong between He U.S. subsidiary and
headquarters, but the fact Hat a European group facing such a situation
gains little competitive advantage from being in the United States at all.
The converse example, of insensitivity by U.S.-based compares to non-
U.S. market needs in Heir product development, is better known and more
easily explicable, given He historical dominance in the operation of
most U.S. MNCs-of He U.S. market over smaller fragmented national
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need for a better integration of foreign subsidianes and domestic labs has
ansen. Evidence from specific product ~nnovadon smclies ~ He United
States and In Europe tends to suggest Mat this need for integration is not
well met. Conversely, Mere is little to suggest Mat MNCs successfully
apply iMovabons that originate in one subsidiary outside of Mat subsidiary.
The next section discusses Free sets of factors that suggest Me Mends
toward homogenization, globalization, and inegrabon may slow down or
even reverse ~emseIves in Me coming decade. Some of the underlying
conditions or Wiving forces win have run Weir course, and new Ants
may appear.
LIMITS TO GLOBALIZATION
Manufacturing Technology
The evolution of manufacturing technology in particular tile increase
in economies of scale In manufacture has been one of the key conditions
in favor of market glob~izadon and MNC integration In a number of
undus~ies. Several factors may now slow down this trend. First, new
tec}inology has been so successful at reducing manufacturing unit costs
that these costs now account for only a small proportion of total delivered
costs. Further reduction of manufacturing cost will be of lesser impact
than in We past, as other elements of cost play a much greater role, namely
overheads, R&D recovery, and distribution.
Second, economies of scale may no longer increase in the same way
as In Me past. Some new technologies may abruptly decrease economies
of scale. New multipurpose smaller processors in the chemical industry
are an example of this type of technology. Even in the absence of genuinely
new technology that would reduce economies of scale, the advantage of
manufacturing systems from to well-knou~ materials and resource
planning systems to the embryonic "factory-of-~e-future" concepts-are
based on cost reduction from better managing Me manufacturing system
rawer than from increasing Me plant size or tile length of the production
run. Better manufacturing processes allow more flexibility in production.
For instance, multiple car models can be produced in varying proportions
on the same assembly line with relatively little cost penalty. This could
allow car manufacturers to move back from large single-model factories
serving multicountry markets to multimode! factories serving single-coun-
~y markets. Although Mere may still be some cost penalty to setting up
a flexible factory rather Can a narrowly focused one, at least the ~ade-
off between increasing flexibility and decreasing costs can be explicitly
considered.
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lNTERWATIONAL INDUSTRIES
109
The impact of flexible manufacturing on the trade-off between ~ntegra-
tion and fragmentation of manufacturing is sdD unclear, however. Greater
flexibility allows producers to cater to shifts in consumer preference as
weir discretionary income increases from cheap standardized goods toe
ward customized products. Flexible manufacturing systems may allow
bow product custom~zabon-at least so long as such customization can
be achieved through featurization around a common core-and low cost.
These systems may shift the basis for cost advantage from scale to scope
and thus make it possible for an integrated manufacturer to serve differ-
entiated worldwide needs.
Third, He "just-in-t~me" manufacturing concept works best win the
colocabon of venous facilities into an integrated system. This polarizes
globalization and integration to the extremes: either a series of small "local-
for-local" plants, each by and large self-sufficient, or, at Me opposite
extreme, a single integrated source for everything (e.g., Toyota City, or
to a lesser extent, Boeing around Seattle, or Caterpillar around Peona).
A widely dispersed integrated manufacturing network (such as Ford of
Europe), where plants are distant and supply each other win components
and subassemblies, is least amenable to just-in-dnne manufacturing man-
agement. Buffer inventories must be kept to allow for transportation delays,
localized strikes and disruptions, and slowdowns in custom clearance. This
would suggest Cat the initial patterns of integration within MNCs, par-
ticul~rly in Europe, may not endure. Either the advantages of colocation
and flexibility win be such that we will witness a return to largely local
plants, or the advantages of focus and specialization will continue to exceed
those of flexibility, and the advantages of colBocation will lead to even
further cenhalizabon of manufactunng.
For, Me trends toward vertical Reintegration may allow more creative
combinations between independent firms at different stages in a value-
added structure. This would allow producers to continue to draw benefits
from economies of scale for components and to gain flexibility for end
products. Large-scale component manufacturing can be delegated to ~n-
dependent suppliers serving multiple smaller-scale assemblers, for in-
stance. This may lead to different balances between integration and
fragmentation at venous stages of the value-added chain In He same
ndus~y.
Most industries and finns are not yet affected by all of these trends,
but economies of scale in production are unlikely to be the opportunity
Hey were in He 1960s and 1970s. As a result, economies of scale will
no longer be a driving force toward globalization and integration. Choices
for MNC managers will be more complex than just building up the largest
plants win He aim of regaining competitiveness. Most companies are
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likely to end up with a mix of plants of venous sizes and locations, and
wad venous degrees of focus or flexibility.
Economies of location are also likely to become less important. Win
a few exceptions such as alum~m~nom~es of location derive mainly
from labor cost advantages. Several observations can be made. Not only
has manufacturing cost decreased in relation to delivered cost for a whole
range of industrial products, but also labor costs will decrease in reladon
to manufacturing costs with any shift toward more capital-~ntensive tech-
nolog~es. Stable or increasing real wages in Europe, despite the recent
recessions, have accelerated Me subsutunon of capital for labor. Even
web relatively low wages, the product quality provided by automanon In
consumer electronics, for instance, may lead to rapidly decreasing labor
content and to the repatriation and automadon of plants previously dis-
persed from developed counties.
Locations with low labor costs also tend to catch up with locations with
higher costs if ondy because skiDed labor is scarce and the general wage
structure moves up. Locanon advantages based on cheap labor are Bus
Often temporary. Although labor may remain cheap ~ countries where
politick risks, government policies, or financial problems deter foreign
investors and Bus limit He competition for labor~ountries such as
Singapore, Korea, and Taiwan, which have been hosts to massive foreign
investments, have often seen their real-term wage rates increase si~fi-
cantly. In some Trusties such as garment production-firms may shift
their manufacturing locations in a search for cheaper labor. Where de-
veloped counties' firms subcontract to local producers-a prevalent prac-
rice for garments shopping around for cheaper subcontractors is easy;
when Be foreign MNC sets up its own sourcing plants, however, closing
down and relocating elsewhere is a much more costly and difficult process
Differences in the cost of capital between countries also tend to decrease
as Me world's capital market becomes more integrated and as MNCs cross-
finance themselves on multiple markets and arbitrage between them. Al-
~ough domestic firms may still benefit from favorable insOtunona1 ar-
rangements, e.g., the inshtu~ona1 structure of Japanese capitalism, or
from specific government assistance, e.g., European exporters, these ad-
vantages are limited, not always accessible to MNC subsidiaries, and not
often sufficient to justify location.8
Finally, exploiting economies of location also entails certain risks, for
instance, exchange risks. If Be mix of manufacturing locations differs
significantly from that of selling locations, Be firm is exposed to currency
nsks. Whereas this can play in their favor occasionally (e.g., the hefty
margins made by European companies exporiing~to Be United States in
1984-1985), it can also play Be other way around as in Be plight of U.S.
OCR for page 111
INTERNATIONAL INDUSTRIES
111
exporters. Vanous hedging approaches can be adopted, but Hey usually
either run counter to the search for economies of location, or they result
in He creation of abundant "buffer" excess capacity. Instability of the
exchange rate only increases the difficulties and costs of these approaches.
Protectionism
Since 1975 protectionist pressures on the U.S. Congress have increased
largely as a result of the gIob~ization process. Outright protectionist bins
have been avoided only by successive administrations' careful negotiation
of selected "voluntary" protection. Examples include the "Orderly Mar-
keting Agreements" for TV sets and the "trigger pnces" for steed or other
commodities. Proposals such as the Burke-Hartke Act, which would have
considerably limited He opportunity for U.S. firms to import goods made
by their overseas sllbsidianes, have been turned down, but at an increasing
political price. The overvaluation of He dollar in 1983-l9SS, and the huge
U.S. trade deficit only made matters worse. In the fall of 1985, only He
shift ~ the U.S. position toward an active intervention policy to devalue
the dollar staved off strong protectionist measures.
Europe, while malting only slow progress toward a true free internal
market, has resort to protectionism toward a variety of ~ndus~ies, par-
bcularly those threatened by Japanese imports. Govemment purchasing
policies Hat favor national suppliers also endure and close whole industnes
to foreign suppliers. Whether the Japanese market is closed or just hard
to enter is an old debate, but it is clear that market access to Japan in
critical Industries is extremely difficult.
What is important here is not so much the exact extent of protectionism,
but that recent evolutions do not allow managers to make a safe assumption
about freer trade. The risk of a widespread return to protectionism puts a
damper on globalization strategies Hat imply high levels of trade and adds
fuel to strategies dial return to traditional foreign investment as a way of
overcoming trade barriers. Indeed, He purpose of many of tile Japanese
investments In Western Europe and in the United States is to overcome
trade barriers, or at least to serve as "insurance" against new trade bamers,
should they be implemented.
Among He less~bvious aspects of protectionism that may hamper MNC
mtegrat~on strategies are the issues of data flow across borders. Several
countries have argued that data should be likened to raw material and
processed locally rather than internationally. The issues are manifold and
vary from country to county. Among the most prominent are (1) the
importance of local data processing for stimulating the national demand
for electronic data processing hardware and services and for telecom
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WAS DOZ
munication services; (2) Me disadvantage of local firms and governments
in relation to MNCs and their access to global market information; and
(3) He threat of more centralization of decision making in MNCs, a process
directly related to integration strategies. Canada has clearly articulated
concerns about transborder data flows. Brazil and France have followed
suit, with somewhat different concerns and pnonties. Although policies
on data flow are often lent moral legitimacy by being amalgamated win
a series of regulations to protect Me privacy of individuals, economic and
political considerations Dive the development of such policies. Countries
do compete for Me location of data processing centers by MNCs, and dley
also compete for international data transmission and value-added services.
A few countries, including He United States and Bnta~n, have taken an
aggressive commercial position by lowering packet-switching charges, for
example, and opens try to regulate data flows. Although He current impact
of data flow regulations is limited, it is a concern for at least some firms.9
In Addison, regulation of data flows may also be a way to ensure Hat
critical knowledge exists within tile country. One widespread concern, for
instance, is Cat some U.S. suppliers of computers keep debugging software
at home, where it can only be accessed by telephone lines from Europe.
Should denial measures be taken by the U.S. government, whatever He
reasons (as was done in 1982 in the Dresser case), such critical software
might no longer be available.'°
More broadly, protectionism in technology has become a major issue.
In the 1980s He U.S. government, as well as severe U.S. firms, became
womed about He transfer of technology to Japan and to the USSR. This
concern arose as the extent and success of efforts by Japanese films and
He Soviet government to appropnate Western technologies became clear.
Win regard to Japan, the issue is competition, p~cularly in industries
such as semiconductors. In this industry, in particular, manufacturing
equipment is critical to success, and tile U.S. industry became concerned
that process technology was transferred too easily to Japan. The concern
was heightened as Japan came to be seen in the United States as an '`unfair"
competitor. Similar concerns have been voiced in over industries, such
as aerospace and computers, as evidenced by IBM's actions against Mit-
subishi and Hitachi.
Win regard to He USSR, the issue is twofold: first, to deny He USSR
access to die core technologies of military systems, a priority widely shared
in He West; and second, to limit the USSR's access to technologies Hat
may allow faster economic grown and thus make large military expend-
itures more affordable to He Soviets. The second point is a matter of
debate between U.S. government hard-liners and more liberal circles in
He United States and among European governments. The issue gained
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INTERNATIONAL INDUSTRIES
113
prominence with the discovery, probably by French counterespionage in
early 1982, of the magnitude of the Soviet effort to spy on the West, and
of the success of that effort. Later updates, based on captured Soviet
documents, kept the issue salient. Also giving prominence to the issue
were several ~nsmces of discreet reexport of classified U.S. equipment
Ma Sweden and Austria and several cases of Unusual espionage in major
West European and American compares, including MBB, Dassault, and
Hughes. Although studies suggest Hat He Soviets are not able to absorb
and finance He use of the new technology they obtain from He West,
legally or overwise, He Reagan adminis~abon took it to heart to stem
the flow of technology to the Soviet bloc (Bornstein, 1985~.
The Export Administration Amendment Act of July 1985 extends He
list of goods subject to U.S. export licenses to "dual-use" equipment,
civilian in pnnciple, but using technologies or components with potential
military use. The U.S. policy of reexport control also considerably limits
the mobility of components to be incorporated into systems assembled in
another county, and sold in yet another. European integrated MNCs, such
as Philips, suffer great logistic complications from this new set of laws
(Deldcer, l9SS). This leads Hem to substitute, where possible, non-U.S.
for U.S. components and subsystems. Although such substitution is a
boost to some European industries, it leads to an inefficient duplication
of effort between the United States and Europe.
Protectionism in technology-be it through limiting the transfer of data
or through restrictions on exports of goods possibly related to the man-
ufac~e of defense-related equipment makes it difficult for technology-
intensive MNCs to adopt integration strategies, since the venous parts of
He company need to be technologically autonomous. It also makes it
difficult for U.S. firms to cooperate with foreign partners on joint R&D
and casts doubt on He ability of European firms to use technology they
would have acquired Trough collaborative efforts with the United States
or wid1 U.S. government support. Although Japanese finns are more
strongly encouraged than their European counterparts to participate in U. S .
defense projects, the same issues arise between the United States and Japan
as between the United States and Europe. Conversely, IBM's or Texas
Instruments' access to the results of joint Japanese research projects is a
difficult issue.
These concerns have prompted Europe into action, first with the Eu-
ropean Strategic Program for Research and Development in Information
Technology (ESPRIT) and win specialized projects, such as Research in
Advanced Communications in Europe (RACE) and more recently win a
program called EUREKA. ESPRIT's relative success was a surpnse, but
by the end of 1985 about 195 projects shared 1.4 billion European Currency
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114
EVES DOZ
Units, and many of Hem looked promising. EUREKA, launched as a
civilian equivalent to the U.S. Strategic Defense Inidadve, is still em-
bryon~c and fuming is uncertain. Despite widespread skepticism, it may
take hold and lead to interesting projects. This direct subsidy approach
amasses only one facet of European competitiveness, however, and maybe
not Be most important: European firms show infenon~ not in the de-
velopment of new technology but in its exploitation. Technology may not
be the critical issue. Market structure and management are. Although
much attention in Europe is focused on making Europe a Rue "common"
market, remarkably little attention is devoted to managerial limits to the
successful exploitation of global technological and eomped~ve opportun-
ities.
Organizational Capabilities
The venous elements discussed above suggest that large mternanonal
competitors will face a world of neither fragmentation nor global mte-
grabon, but a manure of both, with many shades of gray and complex
patterns of international operations that are unlikely to fall neatly into any
category. Thus, there will be many trade-offs between industry fragmen-
tabon and globalization and strategies of integration and subsidiary au-
tonomy, and Hey will vary by function, coundy, and business. Differences
between ~ndusmes, between segments within He same industry, and even
between stages in He value-added chain are going to be important. This
will Produce considerable variety In the situations faced by MNCs. Fur-
~er, strategies will vary from free and competitive to negotiated and
collaborative Trough complex networks of collaborative agreements, co-
aliiions and joint ventures among firms, and occasionally between them
and governments (Doz. 1986).
Not all global competitors are able, organi7~honally, to cope wad such
diversity. Most started as national companies (e.g., most Japanese com-
petitors) or with fragmented organizational structures loosely "federated"
by headquarters. Such fragmented structures, leaving a lot of autonomy
to individual subsidiaries in venous countnes, fit well with He fragmented
environment faced by MNCs prior to He 1970s.
The initial transition from autonomous subsidiaries to coordinated ~n-
ternabonal strategies and integrated manufacturing and marketing networks
has been a traumatic experience for many compares. The process has
been slow (typically 3 to 7 years), painful, and not always successful (Doz
and Prahalad, 1981; Prahalad and Doz. 19811. For a while in He mid-
1970s, matrix organmadons were seen as the answer to complex trade-
offs between Integration and fragmentation. Though a matrix organization
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INTERNATIONAL INDUSTRIES
115
may achieve such ~ade-offs, it achieves them well only if a number of
conditions are met.
First, a matrix organization is not merely a different form of organ~-
zabon. Rather, it is a different mode of making decisions and ensunng
Mat relevant data and perspectives are brought to bear on the choices, that
tradeoffs are made explicit, and Cat weD-conside~ decisions are reached.
This requires bow a weB-developed management system infrastructure,
the involvement of top management, and much attention to Be quality of
Be executive process. Observations of many companies suggest Eat not
ad are able to meet these conditions. Hence the widespread disillusionment
with matrix organizations (Prahalad and Doz. 1987~.
Although Be "ideal" MNC organization is easy to speD out In principle,
it is difficult to put ~ place and make work. Yet, as discussed In Be
earlier sections, He conflicting demands for flexibility and responsiveness,
on the one hand, and for global competitiveness and integration, on He
over, call for complex ~ade-offs. Such conflicting demands thus further
Bit the capabilities of firms to succeed In global industries.
Moreover, In many industries, speed and interdependence in action
become increasingly critical. Product cycles are shorter, and He main-
tenance of competitive advantage requires coordinated policies across prod-
uct lines and business units, bow for technology development and for
market access (Hamel and Prahalad, 19851. The growing number and
variety of collaborative arrangements also make it more difficult for com-
panies to maintain conventional configurations of strategic control, as can
be more easily done win fully owned operations (Doz. 1986~. As a result,
a gap develops between the demands put on companies by global com-
petition and the capability of their organizations and management to meet
~em.
CONCLUSION
The Free sets of factors outlined above-manufacturing technology,
protectionism, and organizational capabilities may lit He growth of
integrated multinational companies and tilt the balance again toward frag-
mentanon. Collaborative agreements and strategic partnerships may in-
creasingly represent an alternative to direct ~nves~anent for gaining market
access, achieving volume production, or leveraging technology. These
may deeply modify the nature of global competition and international
indusmes by creating a series of intermediate positions between national
and global competitors.
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116
YVES DOZ
NOTES
1. For sublunary data, see Dunning and Pearce, 1985; S=pford, 1983; Vemon, 1977;
Franko, 1976. See also, for U.S. multinationals, U.S. Bureau of Economic Analysis,
1986
2. For a summary of the internali7~6on argument, see Casson, 1979; Rugman, 1981;
Dunning, 1979. Many authors draw on Hymer, 1976.
3. For a general argument on He dynamics of global competition, illustrated win He
example of color television sets, see Hamel and Prahalad, 1985.
4. See Hamal and Prahalad, 1985, for a summary argument. For a more detailed analysis,
see Milistein, 1983.
5. For ales of industrial studies, see Zysman end Tyson, 1983; Hochmuth end Davidson,
1985.
6. For an early analysis of these problems ~ collaborative ventures, see Hochmuth, 1974.
7. The argument cuts both ways, Cough, as it may be argued that local scientists or
technicians employed by MNCs develop knowledge, die economic benefits from which
may well accrue to another county where the MNC operates, whereas local Is
would have a greater propensity to export innovative goods and processes, thus creating
more value for the country.
8. For a more detailed discussion of He limits to the competitive advantage that can be
obtained from multinational resource deployment, see Doz and Prahalad, 1986.
9. For a summary analysis, see Kane, 1985, and United Nations Center on Transnational
CorE=abons, 1982.
10. For a detailed discussion of the Dresser case, see Beths, 1984
11. Although not publicly available, the venous CLK reports to the U.S. Congress did
much to increase the political salience of the transfer of technology to the Soviet Union.
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Representative terms from entire chapter:
international industries
