The Global Challenge

Few companies can afford to ignore the presence of international competition. Firms that seem insulated and comfortable today may be vulnerable tomorrow; for example, foreign banks do not yet compete or operate in most of the United States, but this too is changing. Thomson Reuters annually compiles a list of the world’s most innovative companies, using metrics that include patent activity, R&D investment, success rate, globalization, and influence. For the first time ever, Japan (39 percent) overtook the United States (36 percent) in 2014 as having the most innovative companies in the world. Top U.S. firms making the list included Apple, Lockheed Martin, Google, Microsoft, Intel, and IBM, whereas some top Asian companies on the top-100 list included Samsung, Fujitsu, Hitachi, Canon, and for the first time, a Chinese company, Huawei.

The U.S. economy is becoming much less American. A world economy and monetary system are emerging. Corporations in every corner of the globe are taking advantage of the opportunity to obtain customers globally. Markets are shifting rapidly and, in many cases, converging in tastes, trends, and prices. Innovative transport systems are accelerating the transfer of technology. Shifts in the nature and location of production systems, especially to China and India, are reducing the response time to changing market conditions. China has more than 1.3 billion residents and a dramatically growing middle class anxious to buy goods and services.

More and more countries around the world are welcoming foreign investment and capital. As a result, labor markets have steadily become more international. East Asian countries are market leaders in labor-intensive industries, Brazil offers abundant natural resources and rapidly developing markets, and Germany offers skilled labor and technology. The drive to improve the efficiency of global business operations is leading to greater functional specialization. This is not limited to a search for the familiar low-cost labor in Latin America or Asia. Other considerations include the cost of energy, availability of resources, inflation rates, tax rates, and the nature of trade regulations.

Many countries are quite protectionist, and this position can impact companies’ strategic plans. Protectionism refers to countries imposing tariffs, taxes, and regulations on firms outside the country to favor their own companies and people. Most economists argue that protectionism harms the world economy because it inhibits trade among countries and invites retaliation.

Advancements in telecommunications are drawing countries, cultures, and organizations worldwide closer together. Foreign revenue as a percentage of total company revenues already exceeds 50 percent in hundreds of U.S. firms, including ExxonMobil, Gillette, Dow Chemical, Citicorp, Colgate-Palmolive, and Texaco. A primary reason why most domestic firms do busi­ness globally is that growth in demand for goods and services outside the United States is consid­erably higher than inside. For example, the domestic food industry is growing just 3 percent per year, so Kraft Foods, the second-largest food company in the world behind Nestle, is focusing on foreign acquisitions. Shareholders and investors expect sustained growth in revenues from firms; satisfactory growth for many firms can only be achieved by capitalizing on demand outside the United States. Joint ventures and partnerships between domestic and foreign firms are becoming the rule rather than the exception!

Fully 95 percent of the world’s population lives outside the United States, and this group is growing 70 percent faster than the U.S. population. The lineup of competitors in virtually all industries is global. General Motors and Ford compete with Toyota and Hyundai. General Electric and Westinghouse battle Siemens and Mitsubishi. Caterpillar and John Deere compete with Komatsu. Goodyear battles Michelin, Bridgestone/Firestone, and Pirelli. Boeing competes with Airbus. Only a few U.S. industries—such as furniture, printing, retailing, consumer pack­aged goods, and retail banking—are not yet greatly challenged by foreign competitors. But many products and components in these industries too are now manufactured in foreign countries. International operations can be as simple as exporting a product to a single foreign country or as complex as operating manufacturing, distribution, and marketing facilities in many countries.

New research examined in Academic Research Capsule 11-2 sheds some light on how firms decide where to expand.

It is clear that different industries become global for different reasons. The need to amor­tize massive research and development (R&D) investments over many markets is a major rea­son why the aircraft manufacturing industry became global. Monitoring globalization in one’s industry is an important strategic-management activity. Knowing how to use that information for one’s competitive advantage is even more important. For example, firms may look around the world for the best technology and select one that has the most promise for the largest number of markets. When firms design a product, they design it to be marketable in as many countries as possible. When firms manufacture a product, they select the lowest-cost source, which may be Japan for semiconductors, Sri Lanka for textiles, Malaysia for simple electronics, and Europe for precision machinery.

How Do Firms Decide Where to Expand?

Considerable prior research has examined the relative attractive­ness of various countries to expand operations, quite often from a “need to exploit resources in host countries” perspective. A recent article focused on the nature of institutions, such as schools, laws, and health care, rather than resources, such as oil, gas, minerals, and labor, in the decision to expand operations to other countries. Arregle and colleagues report that it does indeed matter which region(s) are chosen for expansion. More specifically, Arregle and colleagues have found that companies seek to expand primarily to regions that have institutions similar to their own institutions, or at least similar to the institutions in other regions where the firm already has operations. The “institutions factor” may be more important than the “resources factor” in internationalization decisions.

Source: Based on Jean-Luc Arregle, Tuyah Miller, Michael Hitt, and Paul Beamish, “Do Regions Matter?” An Integrated Institutional and Semi­Globalization

Source: David Fred, David Forest (2016), Strategic Management: A Competitive Advantage Approach, Concepts and Cases, Pearson (16th Edition).