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Business Strategy Best Practice

Globalization and Regional Business Strategy

by Alan Rugman

Executive Summary

  • Globalization is misunderstood—it does not, and has never, existed in terms of a single world market with free trade.

  • Triad-based business is the past, current, and future reality.

  • Multinational enterprises operate within triad markets and access other triad markets; they have regional, not global, strategies.

  • National governments strongly regulate most service sectors, thereby limiting free market forces; the extent of regulation is not decreasing.

  • Businesses need to think local and act regional; they should forget global.

Introduction: The Myth of Global Strategy

Recent research suggests that globalization is a myth. Far from taking place in a single global market, most business activity by large firms takes place in regional blocks. There is no uniform spread of US market capitalism, nor are global markets becoming homogenized. Government regulations and cultural differences divide the world into the triad blocks of North America, the European Union, and Japan. Rival multinational enterprises from the triad compete for regional market share and so enhance economic efficiency. As a result, top managers now need to design triad-based regional strategies, not global ones. Only in a few sectors, such as consumer electronics, is a global strategy of economic integration viable. For most other manufacturing sectors (automobiles, for example) and for all services, strategies of national responsiveness are required, often coupled with integration strategies.

The real drivers of globalization are the network managers of large multinational enterprises. But their business strategies are triadic, or regional, in scope and are responsive to local consumers; they are not global and uniform.

The specialty chemicals business and the automobile industry are triad-based, not global. There is no global automobile; more than 90% of all automobiles produced in Europe are sold in Europe, and regional production and predominantly local sales are also the norm in North America and Japan. Successful multinationals now design strategies on a regional basis; unsuccessful ones pursue global strategies.

Some Common Global Misunderstandings

Globalization has been defined in business schools as a process of economic integration that facilitates the production and distribution of products and services of a homogenous type and quality on a worldwide basis.1 Simply put, it involves providing the same output to countries everywhere. And, in recent years, it has become increasingly common to hear business executives, industry analysts, and even university professors talk about the emergence of globalization and the dominance of international business by giant, multinational enterprises (MNE) that are selling uniform products from Cairo, Illinois, to Cairo, Egypt, and from Lima, Ohio, to Lima, Peru.2

To back up their claims, these individuals often point to the fact that foreign sales account for more than 50% of the annual revenues of companies such as Dow Chemical, Exxon, Hewlett Packard, IBM, Johnson & Johnson, Mobil, Motorola, Procter & Gamble, and Texaco.3 (For more on these firms, see UNCTAD’s World Investment Report.) These are accurate statements, but they fail to explain that most of the sales of so-called global companies are made on a triadic or regional basis. For example, most MNEs that are headquartered in North America earn the bulk of their revenue within their home country or by selling to members of the broad triad: The North American Free Trade Agreement (NAFTA), the European Union (EU), or Japan, and a small group of nations in Asia and Oceania.4 Recent research gives ample supporting data:

  • More than 85% of all automobiles produced in North America are made in North American factories owned by General Motors, Ford, Daimler–Chrysler, or European or Japanese MNEs. More than 90% of the cars produced in the European Union are sold in the EU. More than 93% of all cars registered in Japan are manufactured domestically.

  • In the specialty chemicals sector, over 90% of all paint is made and used regionally by triad-based MNEs. The same is true for steel, heavy electrical equipment, energy, and transportation.

  • In the services sector, which now employs approximately 70% of the workforce in North America, Western Europe, and Japan, business activity is all essentially local or regional.5

Another misunderstanding about globalization is the belief that MNEs are globally monolithic and excessively powerful in political terms. Research shows this is not so. MNEs are not monolithic; in fact, the largest 500 multinationals are spread across the core triad. Of these 500 companies, 151 are headquartered in the United States and another 170 in the European Union. Sixty-four have headquarters in Japan, with a further 29 in China, 15 in Korea, eight in Australia, seven in India, and six in Taiwan, giving some 129 in the largest economies of Asia.6 Further, these triad-based MNEs compete for global market share and profits across a wide variety of industrial sectors and trade services. And this process of regional competition erodes the possibility of sustainable long-term profits and the possibility of building strong, sustainable political advantage.7

A third misunderstanding about globalization is the belief that MNEs develop homogeneous products for the world market, and through their efficient production techniques are able to dominate local markets everywhere. In truth, multinationals have to adapt their products for local markets. For example, there is no global automobile. Instead there are regionally based North American, European, and Japanese factories supported by local regional suppliers who provide steel, plastic, paint, and other necessary inputs for producing automobiles for their respective geographic triad regions. Car designs that are popular in one region of the world are often rejected by customers in other geographic areas. The Toyota Camry that dominates the US market is a poor seller in Japan. The Volkswagen Golf, which was the largest selling car in Europe, failed to make an impact in North America. Even pharmaceutical companies, which manufacture medicines that are often referred to as universal products, have to modify their goods to satisfy national and state regulations, thus making centralized production and worldwide distribution economically difficult.

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Further reading

Books:

  • Friedman, Thomas L. The World is Flat: A Brief History of the Twenty-first Century. Updated and expanded ed. New York: Farrar, Straus & Giroux, 2006.
  • Giddens, Anthony. Runaway World: How Globalization is Reshaping our Lives. New York: Routledge, 2003.
  • Rugman, Alan M. The End of Globalization: Why Global Strategy is a Myth & How to Profit from the Realities of Regional Markets. New York: AMACOM, 2001.
  • Rugman, Alan M. The Regional Multinationals: MNEs and “Global” Strategic Management. Cambridge, UK: Cambridge University Press, 2005.
  • Rugman, Alan M., and Simon Collinson. International Business. 5th ed. London: FT Prentice Hall, 2009.
  • Rugman, Alan M., and Joseph R. D’Cruz. Multinationals as Flagship Firms: Regional Business Networks. Oxford: Oxford University Press, 2000.
  • Yip, George S. Total Global Strategy II. 2nd ed. Upper Saddle River, NJ: Prentice Hall, 2003.

Article:

  • Rugman, Alan M., and Alain Verbeke. “A perspective on regional and global strategies of multinational enterprises.” Journal of International Business Studies 35 (2004): 3–18.

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