THE GLOBALIZATION DEBATE
Canadian managers have recently witnessed the two sides of globalization pitted against each other—in April, in Quebec City, and in August, in Genoa. On one side were the protesters; on the other, the presidents and prime ministers with their finance and trade ministers. Undoubtedly, these divisions will again dominate the agenda when Canada hosts the G8 meeting in Alberta in June 2002. At the centre of the debate is globalization. Many suggest that globalization is well on the way to becoming a fait accompli; others, including President George W. Bush, seem to wish to ignore it. Yet, while globalization has become a contentious issue, we believe that much of the discussion has missed a very important point.
To put it simply, recent research suggests that globalization, as it has been presented, is a myth. The globalization debate presents us with two choices: our nation or the world. But that choice is no longer a valid one because it fails to acknowledge the role and reality of regions and clusters. This is an important point because the meetings in Quebec City were about a regional trade agreement, which will span the Americas, and because corporate executives will end up making bad decisions if they don’t understand what globalization is about. In this article, we will discuss research that shows that the debate on globalization has tended to ignore several very critical points. Beyond trying to explode some of the myths of globalization, we will also suggest what Canadian executives should do in the face of this confusing debate.
REGIONAL TRIAD ECONOMIC ACTIVITY
Let us first address the evidence on globalization. Far from taking place in a single global market, most business activity of large firms takes place in regional blocks. Governments, trade agreements like NAFTA, and cultural differences divide the world into the triad of North America, the European Union (EU) and Japan. Only in a few industries, consumer electronics, for example, is a global strategy superior. For most manufacturing and for virtually all services, taking a national or regional approach makes more sense.
We have seen the evolution from a national focus to a regional one in many multinational subsidiaries in Canada; they now report to a regional headquarters, which is responsible for the three NAFTA members. This occurs for bulk chemicals, automobiles, pharmaceuticals and so on. For a growing number of multinational enterprises (MNEs), a regional strategy works best, with national needs taking a back seat in many sectors. One key exception is Quebec, where responsiveness to the local culture is still important to success.
Globalization has been defined in business schools as the production and distribution of products and services of a homogeneous type and quality on a worldwide basis. However, reality is sometimes considerably different from classroom theory. For example, most MNEs headquartered in North America earn the majority of their sales within their home country or by selling to members of the triad—NAFTA, the European Union, or Japan and a small group of Asian and Oceania nations.
The facts tell the story: Over 85 percent of all automobiles sold in North America are built in North American factories; over 90 percent of the cars produced in the EU are sold in that region; and more than 93 percent of all cars registered in Japan are manufactured domestically. In the specialty chemicals sector, over 90 percent of all paint is made and used regionally by triad- based MNEs. The same is true for steel, heavy electrical equipment, energy and transportation. The most dramatic example is New Economy services, which now employ about 70 percent of the workforce in North America, Western Europe and Japan. These activities are all essentially local or regional. It is hard to overstate the fact that the vast majority of Canada’s activity is not, in any sense, global. Nevertheless, we certainly can improve these sectors by learning from the best foreign competitors, no matter where they are located and whether we directly compete with them.
REGIONAL CLUSTERS
The other entity which has also come to the fore in the last decade is the city or city region. Prominent global examples include Silicon Valley for high tech, and the area surrounding Milan for textiles. Examples in Canada are Hamilton and steelmaking, Calgary and energy, Ottawa and high tech, Montreal and aerospace. There is a realization that though companies can source goods, technology, information and capital from around the world, business today tends to be clustered in certain cities or city regions in a few parts of the world. If you want investment banking on a world-class level, you turn first to New York, London, Frankfurt and then to a second tier—Singapore, Sydney, Paris, Toronto and maybe Amsterdam.
It is the tight concentration of competitors, associations, suppliers, educational institutions, start-ups in clusters that makes it hard to replicate these very clusters in other places. Clusters take many years, even decades, to fully develop. The recognition of the importance of clusters has given city states more clout on the national and indeed world scene, as they battle with other cities for new R&D labs, plants and head office locations. Mayors and other government officials have not been slow to recognize their new-found clout and they use it at the negotiating table with other levels of government.
It is an intriguing paradox that as the world’s economy becomes more networked, the “local” becomes more important—for example, the knowledge, relationships and motivation that reside in a particular geographic area. Thus, though location remains fundamental to competition, it is quite different from yesteryear. Many of today’s most important cities in Europe and the Middle East rose to greatness and economic prosperity because of their location on seas and rivers or on caravan routes. These comparative advantages lasted for centuries. Today, competition is more dynamic and leadership more tenuous, unless capabilities are upgraded constantly. Firms can now use global sourcing to reduce input-cost disadvantages. In fact, the productive use of inputs is the new source of competitive advantage, the potent mix that fuels high productivity.
What exactly are clusters? Michael Porter of the Harvard Business School defines them as geographic concentrations of interconnected firms and institutions in a particular field. They include suppliers of specialized inputs such as components, production machinery, services and consulting. That definition can also include those demanding customers who keep pressing for the latest innovation; it can be extended to include makers of complementary products and firms in industries related by skills, customers, technologies or common inputs. Finally, clusters usually include government and other, more public-sector institutions, such as universities, community colleges, trade associations and think-tanks which provide vital specialized support to industry.
CANADIAN CLUSTERS
One prominent example of a Canadian cluster is the aerospace cluster in the Montreal area. The major corporate players are Bombardier for airplanes, Pratt & Whitney and Rolls-Royce for engines, and CAE for flight simulators. In education, The École Polytechnique has special programs to train aircraft manufacturing staff, and the CEGEPs (junior colleges) provide aerospace-specific welding courses Concordia University offers a special MBA for the industry and McGill University runs high-level executive programs. Industry associations include SIDA, the little-known but important agency which has a major operation in Montreal; its major mission is to provide the world’s largest network that helps airlines communicate with each other.
Both the federal and provincial governments have provided considerable support beyond their development of educational institutions. Most famously, Ottawa has provided loan guarantees to some of Bombardier’s biggest foreign customers, most recently Air Wisconsin and Northwest Airlines. This type of support may diminish in light of Canada’s and Brazil’s ongoing battle at the World Trade Organization. That support, however, symbolizes the importance of this sector to the city, provincial and national levels of government.
Bombardier is hardly the only success story in the sector in the Montreal area. CAE is a world leader in flight simulation hardware and software, Pratt & Whitney is one of the jewels in parent United Technology’s crown, and Rolls-Royce Montreal holds important world-product mandates. The entire cluster is a mix of related but generally non-competing firms, excellent educational facilities, a workforce willing to travel and change employers, and supportive governments. The success of the aerospace industry in Montreal has been central to the city’s economic renaissance in the mid- and late ’90s.
Nortel, though down for the moment, has in the past acted as a veritable launch pad for a fleet of medium- and small-sized suppliers across the world, but especially in the Ottawa, Toronto and Montreal areas. Nortel’s influence has been enormous in the development of the telecom sector in all three cities.
STRATEGY: GLOBAL OR LOCAL?
Another myth surrounding globalization is the belief that MNEs develop one global product for the world market and are then able, through their vast economies of scale, to dominate local markets everywhere. Again, hard reality intervenes. Multinationals have to adapt their products for the national market. For example, there is no global car. Rather, there are American, European and Japanese factories that are supported by local regional suppliers who provide steel, plastic, paint and other necessary parts for producing autos for the region. Also, cars popular in one region are often rejected by customers in other areas. The Toyota Camry that consistently tops the U.S. sales charts sells poorly in Japan. The Volkswagen Golf, in its heyday, the largest selling car in Europe, did not make an impact in North America.
During the last year, one of us took our family, including a five-year-old and a three-year-old, to the Disney theme parks in Paris, Tokyo and California. Though the parks can be considered a classic example of a global service with a uniform offering, the reality was quite different. Europeans want to sit down with their meals and take their time, preferably to enjoy a glass or two of wine or beer; too many smiles make them suspicious; and smoking is seen as relatively benign pleasure. In Japan, the rides were duplicates of the Anaheim original, down to the hippo which surprises customers by rising out of water on the Jungle cruise. But the spirit was absolutely Japanese, as was the food. Meanwhile, in California, it was American, down to the animated conversations that total strangers struck up in every line.
White-goods manufacturers have tried to sell North American clothes washers, refrigerators and the like, but they have done poorly, despite low prices. Culture still matters when we wash our clothes. Even pharmaceutical companies, which manufacture medicines that are often referred to as “universal products,” have to respond to national and state regulations, thus effectively stumping global production and distribution.
THE ROLE OF GOVERNMENT
What does all this mean for the governments of Canada and the United States? Simply this: As we recognize that the world is not a single global entity, but is in fact made up of three large regions, a regional agreement like the Free Trade Agreement of the Americas makes a great deal of sense, as did the NAFTA. We recommend that federal, provincial and municipal governments increase their focus on clusters and reinforce the existing clusters rather than try to start new clusters in remote areas. Yes, Canada may well boast some new clusters in 20 years, but the main drivers of the Canadian economy in 2020 will most likely be the same ones that are in place today.
The three levels of government must co-operate more effectively. While the great Canadian debate of whether it is a federal or provincial responsibility provides grist for the Royal Canadian Air Farce, it overlooks the role of the city government and is based on a dated view of the country. Can Ontario or Quebec be open to cross-provincial clusters such as aerospace in Toronto and Montreal, or is that Montreal and Toronto? Universities and community colleges are critical in an economy ordered on clusters. However, as they bask in their new-found importance, the educational institutions must also be willing to interact much more with business to help identify areas of need for well-educated and trained employees. This may require that student enrolment grow rapidly in some areas, but decline in others. This may be unsettling for certain educational institutions, but it will be necessary nevertheless.
THE ROLE OF THE CANADIAN MANAGER
Finally, let us turn to the most important group, the multinational managers. Governments and educators play pivotal roles in providing the appropriate infrastructure and macroeconomic climate, and in education. But little will come of that effort unless business plays its role well. We suggest that business fully and formally recognize that the world consists of four entities: city clusters, nations, regions and the world. Corporate strategies will be more successful if businesses become aligned with this new reality.
The end of globalization, as it has been presented here, requires new thinking by managers of MNEs and other organizations. Trying to design and implement a global strategy is no longer appropriate. Instead, a strategy based on a triad approach is required. This will include a large element of localization, as regional barriers to investment and trade make it difficult to grow outside of your home in the triad. Once managers realize that there is not a single global market, and that customers are not alike, then many decisions must be rethought. Distance matters. Geography matters. A region is a unit for decision making.
The executives of non-MNEs (typically smaller firms) also need to rethink their strategies. Smaller firms and entrepreneurs should be careful not to leap into foreign markets: They are risky and the risks need to be addressed. To reduce risk, smaller businesses should hook up with a regional triad producer. For example, it could become a key supplier to a Bombardier or a Pratt & Whitney, or a distributor and/or an intermediary in the health system for an MNE pharmaceutical producer. For these firms, we offer what is perhaps a surprising slogan: Think regional, act local, forget global.
CEOs of Canadian subsidiaries of foreign MNEs have a special role to play as they seek to enhance the role of the Canadian sub in the global network of their parent MNE. Take advantage of your cluster and develop subsidiary-specific advantages that allow your sub to win global or regional responsibilities within your worldwide parent. Keep in mind that the United Nations World Investment Report estimates that as much as 60 percent of the trade and investments in which Canada has a significant presence (e.g., autos, chemicals, petroleum, pharmaceuticals) is intrafirm.
Winning larger responsibilities within the parent firm has proven to be a powerful strategy for Canadian subsidiaries over the last decade. The most obvious first step is to earn the ability to compete for North American-wide responsibilities. Later, add other regions as your subs demonstrate their ability to record positive performance and demonstrate their competence. Don’t let the frequent anti-government rhetoric of our neighbours to the south impress you too much; rather, work with local, national and regional governments to secure your success in the Canadian market and have them help open up other triad markets.
For large Canadian-based MNEs, like Bombardier, Alcan, SNC Lavalin and Nortel, and smaller emerging MNEs, we recommend that they develop internal organizational structures that allow the top management team to develop on a cluster, national and regional basis. When expanding to another triad, use managers from that region and promote them quickly to the top management team. Their knowledge of the new triad’s culture and markets is likely to be the key ingredient for success in the new region. This may require that you hire more seasoned managers who have the background to handle bigger responsibilities rapidly.
Globalization, as many have presented it, does not exist, nor has it ever existed, in terms of a single world market with free trade. Today’s reality of triad-based production and distribution, we believe, will remain the reality long into the future. MNEs operate largely within triad markets and access other triad markets; they have regional, not global, strategies. The future for international business is more of the same. There is not a trend toward globalization, but rather strong evidence that the triad blocs are hardening. We offer these points in order to encourage Canadian executives to recognize today’s realities and work within them for a better future for their firms and their country.
