Regional or Global

 

  1. Introduction – Brexiteers’ Optimism
  2. Economic Liberalism – Adam Smith
  3. International Trading Blocks
  4. Most MNEs are, in fact, regional
  5. Global Impasse
  6. Failures of Tesco and Carrefour in Japan
  7. Reasons for most MNEs being semi-Global
  8. Concluding Observation – Post-Brexit Britain

 

  1. Introduction – Brexiteers’ Optimism

Many pro-Brexit pundits have talked much about overly optimistic views surrounding the prospect of global looking Britain. As the UK triggered the Article 50, Britain will leave the European Union in March 2019, which suggests that all the benefits that Britain has hitherto enjoyed as regards trading conditions will be likely reduced to the WTO rules unless otherwise negotiated. In the meantime, Britain will be freed from any restrictions that the EU imposes upon its members in terms of forging trade relationships with other countries around the globe. It means that Britain will be able to fully exercise the ethos of a free market economy outside the EU. Given the British history, it sounds somewhat understandable.

 

  1. Economic Liberalism – Adam Smith

It was over two and a half centuries ago when the Scottish moral philosopher Adam Smith famously advocated economic liberalism whereby the self-regulatory nature of the “invisible hand” will eventually guide a nation to prosperity, if everyone in the society pursues one’s economic interest by engaging in productive labour, as the aggregate of individuals’ prosperity amounts to the wealth of a nation as a whole (Smith, 1776). Conversely, if people were forced to do what a state coerces them to do as in a communist state, the aggregate of people’s productivity would naturally decline (Hayek, 1944). As Ray Dalio (2017), the founder of one of the largest investment firms in the world, also elucidated, the most important economic driver, in the long run, is productivity, running parallel to the financial alchemy often performed by central banks. Thus, people are better off left alone to pursue their love of labour and thereby optimise their productivity. Also, no central authority, not even the most sophisticated one, can ever orchestrate the intricate nexus of what a market naturally does (Hayek, 1944). As Smith (1776) famously claimed, even manufacturing a simple pencil, the countless number of people with different expertise are involved in the process, ranging from the procurement of raw materials, through manufacturers, to truck drivers that deliver them to retail stores. And surprisingly, no one quite knows each other in this highly complex supply chain, but only the market, the “invisible hand” guides the flow.

 

Predicated upon this premise, Smith vehemently opposed the protectionist school of thought in that a government’s imprudent intervention in the natural economic cycle tends to lead to unintended and often unpleasant consequences (Smith, 1776). The central tenet of Smith’s claim is that a free market economy is such an efficient self-regulatory system in its unobstructed state that its efficiency can be compromised at the expense of the unprivileged majority if external forces, monopolies, particular tax policies and other kinds of government interventions are brought about, which only privilege certain classes in the society, be they bureaucrats, aristocrats or technocrats.

 

Guided by this principle, in 1846, Britain repealed Corn Laws, and what led to the repeal illustrates Smith’s point. After the end of the Napoleonic Wars in 1815 due to the increase in the import of grains into England and intensifying competition as a result, the grain prices plummeted. In the early 19th century, particularly between 1815 and 1846, as the expansion of the Empire accelerated the process of globalisation and foreign trades, a series of laws were legislated to protect domestic landholders from foreign competition (Kranser, 1976, p.325; Williamson, 1990). The protectionist laws only allowed grain to be imported into the country after the price of indigenously grown wheat rose to a certain level. The tariffs and restrictions levied on imported grain made them too expensive for commoners to buy even in times of food shortages. Such state interventions represented British mercantilism, which aimed at maintaining and protecting the power of landowners dominant in the society during the era of feudalism. However, the imposed tariffs unexpectedly pushed up bread prices, and thus the common labour became unable to afford loaves. In other words, the privilege given to producer was passed on to consumers as a burden. The increased cost of living squeezed the poor, and the reduction in their disposable income slowed the economy and hampered the growth of the country (Kranser, 1976).

 

After the repeal, foreign trades boomed during the Victorian period, and Britain became the fervent advocate of free markets and liberal trade policies (Gilpin, 1987; Williamson, 1990). Adopting economic liberalism, the country prospered unprecedentedly in ensuing years. At its height, British Empire ruled the quarter of the entire globe, and Pound Sterling was on the gold standard. Throughout the 19th century, Britain was certainly the proponent of lubricating world trades while establishing various trade routes by sea. It was the golden era of Pax Britannica (Cox, 1981; Gilpin, 1987).

 

Revisiting this tradition, Brexiteers have been raving about opening up the country to a wider world beyond the EU economic block. In spite of their sanguine tone, what they seemingly fail to realise is that, in actuality, business cannot be as usual in foreign markets, and the following elucidates the reasons.

 

  1. International Trading Blocks

A former senior partner of McKinsey & Co. Kenichi Ohmae’s publication Triad Power captures the in-depth view of the globally integrated market, and albeit published in 1985, it still holds relevance today. According to Ohmae’s analysis, the global market in the 1980s comprised large regional trading blocks, such as North America, Western Europe, and Japan together with Southeast Asia. Ohmae (1985) refers to the three semi-global economic blocks as ‘economic triads.’ Today, the global market revolves around the expanded version of the ‘economic triads.’ They are: NAFTA, under which Canada, the US, and Mexico are in the free trade relationship; the EU with the newly added A10[1] countries; and Asia that includes China, Japan, South Korea and ASEAN nations.

 

  1. Most MNEs are, in fact, regional

Expanding on Ohmae’s claim, the researchers Rugman and Verbeke (2003, p.5) found that most multinational corporations (MNCs) are, in fact, not so global as the word “multi-national” implies. The scholars surveyed 380 MNCs, and it turned out that staggering 320 of them generated 80.3% of their total sales revenues in their indigenous triad. In other words, the vast majority of so-called multinationals are, in fact, not so global in the literal sense of the word, but rather regional. Given many commonalities underlying in each regional economic block, be they cultural, social, political, or legislative, it is certainly more efficient for large firms to operate regionally. Moreover, extensive market knowledge, lower transportation cost, and the intricately woven webs of supply chains amongst neighbouring countries are other incentives for this propensity.

 

  1. Global Impasse

Further, Ohmae (1985) argues that when firms attempt to replicate their home triad success in other triad markets, they often encounter what he calls “global impasse.” Indeed, upon entering a foreign market, unexpected situations often unfold so much so that the paradigm, which norms and long cherished beliefs are predicated on loses its currency (Cateora et al, 2011). In fact, only a handful of multinational firms have ever succeeded in becoming a truly global company, that is to say, having more than 20% of their sales revenue in all the three regional economic blocks. Such companies are only a few, the likes of Coca-Cola, Intel, Sony, Philips, Nokia and Canon in the 1990s (Rugman and Verbeke, 2003, p.8). And even though many firms are well aware of those hidden risks, not many ventures necessarily blossom into a success, and unsuccessful precedents tell us cautionary tales that we can draw lessons from.

 

  1. Failures of Tesco and Carrefour in Japan

For instance, the British giant Tesco ventured into Japan, the world’s third-largest grocery market, in 2003, which, however, turned out to be a dismal failure. Prior to then, the third world largest retailer has successfully expanded its business empire into Asian countries, such as “Korea, Thailand, Malaysia and China,” which generated £11billion in revenue in 2010 (Wood, 2011). Although the Japanese market had long been labelled as notoriously difficult to crack. By merging with the relatively small local grocery retailer Tsurukame, Tesco cautiously entered the samurai market. However, after investing over £250 million during its 8-year tenure, the British retailer reluctantly announced its withdrawal of the operation from Japan for good. In the previous year, Tesco’s effort was hampered by a £5 million operating loss despite the overall sales revenue of £476 million in the grocery market.

 

Subsequently, experts concluded that the causes of the difficulty often faced by foreign retailers are, first, “high operating costs, and second, extremely demanding” consumers (Wood, 2011). A similar experience was previously endured by the French multi-national retailer Carrefour (Nakamoto, 2011). Tesco’s precursor Carrefour miserably failed in Japan because the French retailer fatally misread Japanese consumers while intending to introduce the more sophisticated French shopping experience in a condescending post-colonial undertone. The supposedly refined French shopping experience was, in fact, not necessarily congenial to the needs of Japanese consumers, as the fastidious Asian consumers demanded rather a wide assortment of fresh products that can be bought in small quantities everyday (Nakamoto, 2011). Their way is more practical and perhaps rustic, but significantly differing from the sophisticated French style.

 

  1. Reasons for most MNEs being semi-Global

As implied in those cases above, depending on which market to operate, a firm’s market position differs quite significantly. That is to say, different competitive strategies should be employed according to the effectiveness of firm-specific advantages, which may change somewhat considerably depending on their market positions in different contexts. For this reason, the difference in roles being played needs to be reflected in the combination of non-location specific and location specific aspects of goods and services that a company offers. The fact of the matter is that, in actuality, becoming global for many MNCs means becoming only semi-global because the perfect integration of supply chains over a long stretch of geographic areas is not cost-effective and even culturally challenging. Hence, while local adaptation through joint ventures and M&A is usually viewed as the remedy for penetrating foreign markets, in reality, most multinationals capitalise on similarities and brand equities that are pertinent to locally based customer perceived values so that the strategies worked well in their home regions can be more readily repeated (Rugman and Verbeke, 2003, p.16).

 

This is possibly the reason why the vast majority of large Japanese firms have rarely succeeded in the European market, whilst they often capture growth opportunities in emerging markets in Southeast Asia and North America, where the Japanese brand equity is generally more appreciated. Simply put, trading with different countries across the globe is extremely difficult, certainly more complicated than many people would expect.

 

Further, cultural commonalities are vital for consumers as well. For instance, the EU has held certain standards as to how produce are grown in order to protect consumers in regard to food security and health. After Britain leaves the EU, cheap meats, vegetables and crops will be imported to the UK, which may help the poor. Yet, in exchange for reducing cost, the quality and the standards of how the agricultural products are grown and how livestock are treated may be immensely compromised. In consequence, the poor will possibly be exposed to health risks (Food Standards Agency, 2017; Lang at al., 2017).

 

  1. Concluding Observation – Post-Brexit Britain

Adam Smith was one of the prominent figures of the Scottish Enlightenment in the 18th century, and as mentioned earlier, he was a moral philosopher. Before writing the Wealth of Nations he wrote an important book on ethics called The Theory of Moral Sentiments (1759), which provides crucial underpinnings of his magnum opus the Wealth of Nations (1776). Perhaps as it was the mood of the time, Smith was an idealist as he believed that moral behaviour is more effectively demonstrated when it is self-motivated rather than enforced only by the rule of law because humans are naturally endowed with empathy that can counter the other innate and conflicting human quality of selfishness.

 

Despite Smith’s faith in humanity, the downside of laise-faire economies is found in its propensity to the deterioration of ethics, which the world has seen time and time again, and most notoriously, in 2008 in our recent memories. Until 2008, neo-liberalist policies had been favourably adopted in the majority of Western countries and thereby deregulation and privatisation were progressively carried out. And yet, the Great Recession proved that unless ethical conducts are legislated and institutionalised, high moral standards can be hardly maintained, although many financiers in the Wall Street today see regulations brought into effect after the Great Recession, such as Dodd-Frank Act as restrictive of economic growth. Be that as it may, the West’s dominance over the past centuries is largely owed to the systematic institutionalisation of ethics, contrary to Smith’s view of humanity in regard to morality. The EU has trade restrictions for reasons, and the ethical concern is certainly one of them. In the light of this propensity towards compromised ethical standards periodically observed in free market economies, many Brexiteers’ blind optimism will inevitably meet the harshness of reality, had the country continued to ignore advisory accounts from the experts.

 

Of course, a series of incidents and bad decisions have preceded their scepticism as the major catalysts for the loss of trust in the establishment and the elites. They include: the disastrous Iraq War; the epic failure in the subprime mortgage market exacerbated by large investment banks; and the expedient revival of Keynesian economics that has benefited, not commoners, but only banks and other financial institutions since 2008, which Hayek (1944) would call the “tyranny of a few.”

 

While those failures certainly made the integrity of the establishment highly questionable, it, nonetheless, did not mean that non-experts suddenly have the requisite knowledge and expertise to deal with the complexity of all the major economic and political issues that concern our society.

 

Parliamentary democracy is the intellectual and scholastic legacy of Britain, the country where Magna Carta was signed in 1215. Experts and non-experts must work together in an attempt to narrow the void of trust created between them for their mutual benefit.

 

When reality bites the naivety of those who made a bad decision will start seeking someone to blame, needless to say, not the populace themselves or the real culprits that peddled demagoguery and inflammatory populism, but probably some public figures for some unrelated reasons and those who are vulnerable. So long as the blame game perpetuates, it is impossible to make productive and rational decisions for the country as a whole. Instead of vitriol that fuels the further fragmentation of societies around the world, we need to rebuild solidarity and trust to one another.

 

[1] The A10: Cyprus, Czech Republic, Estonia, Hungry, Latvia, Lithuania, Malta, Poland, Slovakia, Slovenia

 

References:

 

Cateora, P.R., Gilly, M.C., and Graham, J.L. (2011). International Marketing. Fifth Edition. McGraw-Hill: Irwin.

 

Cox, R. (1981). Social Forces, States and World Orders: Beyond International Relations Theory. Millennium Journal of International Studies, 10 (2): 126-155.

 

Dalio, Ray. (2017). Economic Principles: How Economic Machine Works. Retrieved from: http://www.economicprinciples.org/wp-content/uploads/ray_dalio__how_the_economic_machine_works__leveragings_and_deleveragings.pdf

 

Food Standards Agency. (2017). Food Legislation: European Legislation. London: Food Standards Agency. Retrieved from:

https://www.food.gov.uk/enforcement/regulation/europeleg

 

Gilpin, R. (1987). The Political Economy of International Relations. Princeton: Princeton University Press.

 

Hayek, F. (2001) [1944]. The Road to Serfdom. Routledge Press.

 

Krasner, S. D. (1976). State Power and the Structure of International Trade. World Politics, Vol. 28, No.3, April, pp.317-347.

 

Lang, T., Millstone, E, & Marsden, T. (2017). A Food Brexit: time to get real. Discussion Paper. Science Policy Research Unit. Retrieved from: http://sro.sussex.ac.uk/69300/

 

Ohmae, K. (1985). Triad Power: The Coming Shape of Global Competition. The Free

Press: New York.

 

Ohmae, K. (1986). Becoming a Triad Power: The New Global Corporation. International Marketing Review, Vol.3, Iss3, pp.7-20.

 

Rugman, A.M & Verbeke, A. (2003) A perspective on regional and global strategies of multinational enterprises. Journal of International Business Studies, 35 (1), 3–18.

 

Smith, A. (2010)[1759]. The Theory of Moral Sentiments. Penguin Classics.

Smith, A. (2008)[1789]. An Inquiry into the Nature and Causes of the Wealth of Nations. Oxford World’s Classic.

 

Williamson, G.J. (1990). The Impact of the Corn Laws just prior to Repeal. Explorations in Economic History 27, pp.123-156.

 

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