GLOBALIZATION AND REGIONAL BUSINESS STRATEGY

Recent research suggests that globalization is a myth. Far from taking place in a single global market, most business activity by large companies takes place in regional blocks. There is no uniform spread of U.S. market capitalism nor are global markets becoming homogenized. Government regulations and cultural differences divide the world into triad blocks of North America, the European Union, and China/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 economic 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 organizations. But their business strategy is triadic, or regional, in scope and are responsive to local consumers, they are not global and uniform.

Specialty chemicals and an automotive industry are triad-based, not global. There is no global automobile: more than 90% of all automobile 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 regional basis; unsuccessful ones pursue global strategies.

Some Common Global Misunderstandings

Globalization has been defined in business schools as the production and distribution of products and services of a homogenous type and quality on a world-wide basis. Simply put, it involves providing the same output to countries everywhere. 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 companies (MNEs) that are selling uniform products from Cairo, Illinois to Cairo, Egypt, and from Lima, Ohio to Lima, Peru.

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 most multinational enterprises. These are accurate statements but they fail to explain that most of the sales of so-called global companies are made on an intra-regional basis. For example, MNEs that are headquartered in North America average 77% of their revenues within NAFTA; the European MNEs average 63% of their sales in the European Union; the Asian MNEs average 74% of their sales in Asia. The world’s 500 largest companies average 72% of their sales in their home regions. Of these companies, only nine are global, whereas the vast majority are home-region based. 

Another misunderstanding about globalization is the belief that MNEs are globally monolithic and excessively powerful in political terms. Research shows that this is not so. MNEs are not monolithic; in fact, the largest 500 multinationals are spread across the triad economies. Of the world’s largest 500 companies, 198 are headquartered in NAFTA countries, 158 in the EU, and 125 in Japan/Asia.  Further, these triad-based MNEs compete for global market share and profits across the 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.

A third misunderstanding of globalization is the belief that MNEs develop homogenous 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 suppliers that provide steel, plastic, paint and other necessary inputs for producing the automobiles for their respective geographic triad regions.  Even pharmaceutical companies, which manufacture medicines that are often regarded as universal products, have to modify their goods to satisfy national and state 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 of exports and imports has grown over the last decades, but it continues to be dominated by the triad. The latest data show that in 2022 these broad regions accounted for about 60% of world trade. Most of the world’s trade is regional, not global. Within the EU, intra-regional trade accounts for 61% of all exports. Within NAFTA, intra-regional trade exports are 57%. In Asia, intra-regional exports are 50%. In contrast, only 15% of NAFTA’s exports go to the UE, and only 11% of EU exports go to NAFTA. Due to the large amount of Chinese manufactured exports to the United States, Asia has 25% of its exports going to NAFTA, with only 17% of NAFTA’s exports going to Asia.  These trade figures replicate the company-level sales data reported earlier – both data sets deny pure globalization and support the regional dimension of international business.

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