globalization and regional business strategy

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Globalization and Regional Business Strategyby Alan Rugman

Executive Summary Globalization is misunderstoodit 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 StrategyRecent research suggests that globalization is a myth. Far from taking place in a single global market, mostbusiness activity by large firms takes place in regional blocks. There is no uniform spread of US marketcapitalism, nor are global markets becoming homogenized. Government regulations and cultural differencesdivide the world into the triad blocks of North America, the European Union, and Japan. Rival multinationalenterprises from the triad compete for regional market share and so enhance economic efficiency. As aresult, top managers now need to design triad-based regional strategies, not global ones. Only in a fewsectors, such as consumer electronics, is a global strategy of economic integration viable. For most othermanufacturing sectors (automobiles, for example) and for all services, strategies of national responsivenessare required, often coupled with integration strategies.

The real drivers of globalization are the network managers of large multinational enterprises. But theirbusiness strategies are triadic, or regional, in scope and are responsive to local consumers; they are notglobal and uniform.

The specialty chemicals business and the automobile industry are triad-based, not global. There is noglobal automobile; more than 90% of all automobiles produced in Europe are sold in Europe, and regionalproduction and predominantly local sales are also the norm in North America and Japan. Successfulmultinationals 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 facilitatesthe 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 hasbecome increasingly common to hear business executives, industry analysts, and even university professorstalk about the emergence of globalization and the dominance of international business by giant, multinationalenterprises (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 than50% 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 UNCTADsWorld Investment Report.) These are accurate statements, but they fail to explain that most of the salesof so-called global companies are made on a triadic or regional basis. For example, most MNEs that areheadquartered in North America earn the bulk of their revenue within their home country or by selling tomembers 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:
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More than 85% of all automobiles produced in North America are made in North American factoriesowned by General Motors, Ford, DaimlerChrysler, 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 inJapan 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 excessivelypowerful in political terms. Research shows this is not so. MNEs are not monolithic; in fact, the largest 500multinationals are spread across the core triad. Of these 500 companies, 151 are headquartered in theUnited States and another 170 in the European Union. Sixty-four have headquarters in Japan, with a further29 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 acrossa wide variety of industrial sectors and trade services. And this process of regional competition erodesthe 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 forthe world market, and through their efficient production techniques are able to dominate local marketseverywhere. In truth, multinationals have to adapt their products for local markets. For example, thereis no global automobile. Instead there are regionally based North American, European, and Japanesefactories supported by local regional suppliers who provide steel, plastic, paint, and other necessary inputsfor producing automobiles for their respective geographic triad regions. Car designs that are popular inone region of the world are often rejected by customers in other geographic areas. The Toyota Camry thatdominates the US market is a poor seller in Japan. The Volkswagen Golf, which was the largest selling carin Europe, failed to make an impact in North America. Even pharmaceutical companies, which manufacturemedicines that are often referred to as universal products, have to modify their goods to satisfy national andstate regulations, thus making centralized production and worldwide distribution economically difficult.

World Trade Is Highly Regional

World trade provides a good example of just how regional MNEs are. The amount of trade in terms ofexports and imports has grown rapidly over the last decade, but it continues to be dominated by the core

triad of the United States, the European Union, and Japan.8

The latest data show that in 2005 these threegroups accounted for 51% of world exports and 59% of world imports. The percentage of exports that eachgroup sends to the others is quite small. For example, the United States exports approximately 21% of itstotal to the EU and 6% to Japan, but the largest export market for the United States is Canada, which takes23%, with another 13% going to Mexico. An analysis of imports reveals the same general picture. The UnitedStates receives 18% of its imports from the EU and 8% from Japan, but 17% from Canada and 10% from

Mexico. In 2005 the United States took 16% of its imports from China.

Simply put, with the recent exception of China, the core triad members do not rely on each other for mostof their exports or imports. So on whom do they rely? The answer is: On other members of their owntriad. For example, as shown in Table 1, over 66% of all exports by EU countries go to other members ofthat triad. The core triad members can be expanded by adding Canada and Mexico to the United States,which gives us NAFTA, and then constructing a group of countries for Asia. The Asian group consists ofJapan, Australia, New Zealand, China (including Taiwan and Hong Kong), India, Indonesia, Malaysia, thePhilippines, Singapore, and Thailand, along with the smaller Asian Pacific economies. This gives us thebroad triad. The results, shown in Table 1, confirm that the worlds trade is dominated by the triad.

Table 1. Intraregional trade in the triad, 19802005. (Source: Authors calculations based on the IMF,Direction of Trade Statistics Yearbook, 2006 and 1985)

Intraregional exports

Year EU NAFTA Asia
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2005 66.4 56.0 53.1

2000 67.2 58.1 42.4

1980 53.5 33.6 27.3

Cumulative average annual change19802005 0.01 0.02 0.03

20002005 0.00 0.01 0.06

Data for Asia were calculated using information for exports from Japan, China, India, Indonesia, SouthKorea, Malaysia, Singapore, Thailand, and Australia to the Asian region and the world. Data for the EU arefor intra-EU exports in 2000 and 2005 and intra-EEC exports in 1980.

According to data for 2005 in Table 1 66 % of EU exports are internal. The EU exports relatively less toNAFTA and to Asia. The internal NAFTA trade, at 56%, is surprisingly high, given that Canada is only one-twelfth the economic size of the United States and Mexico only about one-twentieth the economic size of theUnited States. Most Asian trade is also intraregional, at 53%.

In summary, the majority of world trade in the European and Asian triads is within their internal markets, andfor North America just over half of its trade is also intraregional. Most of the rest of world trade is betweentriad members. Given the dominance of the triad in world trade (and direct investment data show the samepicture), the appropriate strategies for individual multinationals need to be regional rather than global.

Conclusion

It is possible to offer some practical strategies for managers who want to increase their companysinternational revenues and profits. Some of the most useful lessons are these:

Be prepared to design strategies which take into account regional trade and investment agreementssuch as NAFTA and the single market of the EU.

Also learn to deal with different cultures and become nationally responsive when necessary. Develop new thinking and knowledge about regional business networks and triad-based clusters, andassess instead of always developing pure global strategies.

Make alliances and foster cross-cultural awareness in your senior managers. Develop analytical methods for assessing regional drivers of success rather than globalization drivers;

regional drivers may be more useful in the future in gaining and holding market share. Encourage all your managers to think regional, act localand forget global!

More Info

Books:

Friedman, Thomas L. The World is Flat: A Brief History of the Twenty-first Century. Updated andexpanded 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 theRealities 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. DCruz. Multinationals as Flagship Firms: Regional BusinessNetworks. Oxford: Oxford University Press, 2000.

Yip, George S. Total Global Strategy II. 2nd ed. Upper Saddle River, NJ: Prentice Hall, 2003.
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Article:

Rugman, Alan M., and Alain Verbeke. A perspective on regional and global strategies of multinationalenterprises. Journal of International Business Studies35 (2004): 318.

Website:

UNCTAD World Investment Report: www.unctad.org/WIR

Notes

1 See Rugman and Collinson (2009), Chapter 1. The definition of globalization is a subject of intenseacademic debate. Most business school scholars would adopt the definition of economic integration usedhere, where integration across national borders yields the potential for firm-level economies of scale and/orglobal brand name products. Contingent on this definition of pure economic globalization is the need forproducts to be uniform across markets. A much broader definition of globalization is used by other writers,such as Anthony Giddens, a sociologist. He defines globalization as the worldwide interconnection at thecultural, political and economic level resulting from the elimination of communication and trade barriers,

and he states that globalization is a process of convergence of cultural, political and economic aspectsof life Giddens (2003). Again, convergence (of cultures, tastes, regulations, etc.) is an extreme version ofhomogeneity of products and services. The thesis of this article is that such convergence and homogeneityhas not occurred; instead of globalization we observe regional/triadic production and distribution. Therefore,MNEs do not need global strategies; regional strategies are more relevant.

2 Yip (2003) and Friedman (2006).

3 For more on these firms, see The worlds top non-financial 100 TNCs, ranked by foreign assets, WorldInvestment Report, New York: United Nations, annual. Available from: www.unctad.org

4 NAFTA consists of the United States, Canada, and Mexico. The European Union is now made up of 27countries, but the data used here are for the EUs 15 members up to 2003, namely Belgium, France, Italy,Luxembourg, the Netherlands, Germany, Great Britain, Denmark, Greece, Ireland, Portugal, Spain, Austria,

Finland, and Sweden. The 12 major Asian economies included here are Australia, China, India, Indonesia,Malaysia, New Zealand, the Philippines, Singapore, South Korea, Taiwan, Thailand, and Japan.

5 Rugman (2001), Chapter 1.

6 Data adapted from The Worlds Largest Corporations (2008) Fortune, Vol. 158, No. 2, pp. 165182.

7 Rugman (2005) and Rugman and DCruz (2000).

8 This analysis is based on Rugman (2001), Chapter 7.

See Also

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Finance Library

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