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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 WES DOZ 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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108 WAS DOZ 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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110 WES DOZ 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.

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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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112 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. REFERENCES Allen, T. A. 1977. The Flow of Technology. Cambridge, Mass.: MIT Press. Bartlett, C. 1985. Komatsu Limited. Harvard Business School Case Study. HBSCS ~385- 277. Bems, R. A. 1984. Dresser industries and He Pipeline. Southem Methodist University Case Study. Bornstein, M. 1985. East-West Technology Transfer: The Transfer of Western Technology to He USSR. Pans: Organization for Economic Cooperation and Development. Casson, M. 1979. Altematives to the Muldnabonal Enterpnse. London: Macmillan. Dekker, W. 1985. The technology gap: Western conies growing apart. Speech presented at He Atlantic Institute for Intemabonal Affairs, Pans, December 5, 1985. Doz. Y. 1978. Brown Boven & Cie. Harvard Business School Case Study, DISCS 378-1 IS. Doz. Y. 1986. Government policies "d global competition. In M. E. Porter, ea., Com- peduon in Global Industries Boston: Havard Business School Press. Doz. Y., and C. K. Prahalad. 1981. Headquarter influence and strategic control in mul- ~ational companies. Sloan Management Review 23(1). Doz. Y., and C. K. Prahalad. 1986. Quality of management: An emerging source of global competitive advantage? Lb N. Hood and J. E. Vahlne, eds., Strategies in Global Com- petition. London: John Wiley & Sons. Dunning, J. 1979. Explaining changing patterns of international production: In defense of the eclectic theory. Oxford Bulletin of Economics and Statistics 41(November):269-296.

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INTERNATIONAL INDUSTRIES 117 DuMing, J. H., and R. D. Pearce. 1985. The World's Largest Industrial Enterprises, 1962- 1983. New York: St. Ma0's Puss. Fischer, W. A., and J. N. Beh~man. 1979. We coordination of foreign R&D activities by transnational corporations. Journal of International Business Studies 10-3(winter):28-35. Franko, L. G. 1976. The Europe Multinationals. Stamford, Conn.: Greylock. Guys~ger, S., et al. 1984. Investment Incentives and Performance Requirements. Wash- ington, D.C.: The World Baulc Mimeographed Report. Hamel, G., and C. K. P=halad. 1985. Do you really have a global strategy? Harvard Business Review (July-August):139-148. Helleiner, G. K. 1981. Intra Fum Trade and He Developing Counmes. New York: St. Mardn's Press. Hirschey, R. C., and R. E. Caves: 1981. Research and die Transfer of Technology by Multinational Enterprises. Oxford Bulletin of Economics and Statistics 43(2):115-130. Hochmuth, M. S. 1974. Organizing the Transnational: The Experience with Transnational Enterprise in Advanced Technology. Cambridge, Mass.: Harvard University Press. Hochmuth, M. S., and W. Davidson. 1985. Revitalizing American Industry. Cambridge, Mass: Ballinger. Hood, N., and S. Young. 1980. European Development Strategies of U.S.-Owned Man- ufacturing Companies Located in Scotland. Edinburgh: Her Majesty's Stationery Office. Hymer, S. 1976. The International Operations of National Firms; A Study of Foreign Investment. Cambridge, Mass: MIT Press. Kane, M. J. 1985. A Study of the Impact of Transborder Data Flow: Regulation on Large U.S.-Based Corporations Using an Extended Information Systems Interface Model. Ph.D. dissertation. College of Business Administration, University of South Carolina. Lall, S. 1978. The pattern of intra firm exports by U.S. multinationals. Oxford Bulletin of Economics and Statistics 40(3):209-223. Levitt, T. 1983. The Globalization of Markets. Havard Business Review (May/3une):92- 102. Millstein, J. E. 1983. Decline in an expanding industry: Japanaese competition in color television. In J. Zysman and L. Tyson, eds., American Industry in International Com- petition. Ithaca, N.Y.: Cornell University Press. New Scientist. 1985. IBM begins its Japanese assault. (17 October):22-23. Orldan, A. 1986. "L'inseriion dans les echanges internationaux: comparison de cinq grands pays developpes. Economic et Statistiques 184(Janvier):25-39. Owen, N. 1983. Economies of Scale, Competitiveness and Trade Patterns Within He European Community. Oxford: Clarendon Press. Prahalad, C. K., and Y. Doz. 1981. An approach to strategic control in multinational companies. Sloan Management Review 22(4):5-13. Prshalad, C. K., and Y. Doz. 1987 (forthcoming). The Multinationals'Mission. New York: The Free Press. Rugman, A. M. 1981. Inside the Multinationals: The Economies of Internal Markets. London: Croom Helm. Stoplord, J. M. 1983. The World Directory of Multinational Enterpnses, 1982-83. London: MacMillan. Teece, D. J. 1977. Technology transfer by multinational firms: The resource cost of ~ans- femag technological know-how. The Economic Journal 87(June):242-261. United Nations Center on Transnational Corporations. 1982. Transnational Corporations and Transborder Data Flows: A Technical Paper. New York: United Nations. United Nations Center on Transnational Corporations. 1983. Transnational Corporations in World Development: Third Survey. New York: United Nations.

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118 YVES DOZ U.S. Bureanof Economic Analysis. 1986. U.S. Dir~ctInves~ent Abroad: 1982 Benchmark & Survey Data. Washington, D.C.: U.S. Govemment Printing Office. Vernon, R. 1977. Stonn Over the Multinationals. ~bndge, Mass.: Harvard University Press. Vernon, R. 1979. The product cycle hypothesis in a new National environment. ford Bulletin of Economics and Stadistics 41(4). Vemon, R., and W. H. Davidson. 1979. Foreign Production of Technology-Intensive Products by U.S.-based Muldn~onal Enterprises. Harvard Business School Wowing Pa - , BS 79-5. van Eppel, E. 1982. Appropoability of innovation benefit as a predictor of the functional locus of innovation. Research Policy 11~2):95-115. Zysman, J., and L. Tyson, edls. 1983. American Industry in L0temational Competition. Ithaca, N.Y.: Cornell University P=ss.