BUSINESS SPECIAL ...................Entrepreneurship and Multinationals Drive Globalization

Entrepreneurship and Multinationals Drive Globalization
 

Why is the firm overlooked as a contributor when we identify the drivers of globalization? Geoffrey Jones discusses his new book, Entrepreneurship and Multinationals: Global Business and the Making of the Modern World.

In a new book on the origins and impacts of globalization, Harvard Business School's Geoffrey Jones focuses on the role played by a vital but often ignored actor in this conversation: business entrepreneurs and the multinational enterprises they create.

"There has been remarkably little concern with the role of firms in creating markets, shaping policies, and diffusing globalization," says Jones, the Isidor Straus Professor of Business History, and Faculty Chair of the School's Business History Initiative.

In this interview conducted over e-mail, Jones discusses the book, Entrepreneurship and Multinationals: Global Business and the Making of the Modern World, and his views on subjects ranging from whether globalism has been a force for good to what Nazi Germany tells us about the difficulty in planning for political risk.

Sean Silverthorne: Why did you write this book and what are its major themes?

Geoffrey Jones: I have long been interested in the causes of globalization and its impact on societies. Both questions are best answered by looking at lengthy periods of time, and this has been my focus. I have often published in the scholarly journals or academic conference volumes, and in the spirit of the whole being greater than the sum of the parts, I sought to pull together my research and conclusions in this book, in the hope of reaching broader audiences.

I address three key themes. First, I show that entrepreneurs and their firms have been important actors in the making of the global world over the last two centuries. Individual entrepreneurs and managers invented new products and shaped consumer demand. Firms created and diffused technologies and products, alongside the values in which they were embedded. They lit up the cities of the world with electricity and turned India into the world's largest tea producer during the nineteenth century. They built automobile industries in Latin America after World War II. And so on. 

Second, I wanted to demonstrate the relative importance of business compared to governments and other institutional actors in building global capitalism. In both the historical and economics literatures, firms are typically black boxes responding to exogenous factors such as government policies, institutions, or resource endowments. I show that firms have agency. When governments attempted to reverse globalization during the interwar years, firms redesigned their international businesses rather than abandon them. Multinationals preserved dimensions of globalization even as governments closed down flows of trade and capital across borders. Yet firms were rarely able to wholly dictate events. Their ability to transfer technology was constrained by the institutional, educational, and cultural conditions of host economies. Certainly after 1914, I show that governments were persistent constraints on the autonomy of firms. The book has several case studies that explore this issue. The instances when firms could really dictate to governments, as when the United Fruit Company orchestrated the CIA overthrow of the government in Guatemala in 1954, were exceptional.

Third, I explore whether, if business was a shaper of global capitalism, it was a force for good, or otherwise. I show that the heterogeneity of business enterprise renders this question challenging to answer, and perhaps misleading even to ask. In the broadest sense, the growth of global capitalism has been associated with enormous increases in wealth, as well as dramatic rises in the longevity, of humanity. Yet capitalism too has had its dark side. The book contains multiple examples of the amoral nature of global capitalism, from opium trading in nineteenth century China to the willingness of large networking firms in the United States to sell equipment enabling the Chinese government to censor the Web and identify political opponents. As the economist William Baumol has argued, entrepreneurship can be productive, unproductive, or destructive, and this is certainly evident in the history of global capitalism.

Q: You note that as the history of globalization continues to be written, the importance of the role of businesses enterprises in the process "has tended to be written out of the script." Why is this so?

A: This odd situation results from the idiosyncratic nature of academic disciplines which develop their own norms and conventions about interesting research questions and how to answer them.

For several decades mainstream academic historians, especially those based in the United States, have devoted almost no attention to business as such, as the profession focused on the role of culture, race, gender, and religion in historical developments. Economic historians, often in recent decades trained in economics, have done pioneering work in quantifying historical trends in the integration of world markets. However these scholars have been far more interested in markets and institutional structures than firms. Political scientists, although more interested in firms, have focused primarily on the politics and policy decisions which impacted and drove globalization. Sociologists, who have approached the subject of globalization from the perspective of organizations, have primarily focused on states and intergovernmental organizations.

The upshot has been that there has been remarkably little concern with the role of firms in creating markets, shaping policies, and diffusing globalization.

Q: An interesting paradox is that even as the West successfully created multinational enterprises around the world after the industrial revolution, an increasing wealth gap or "great divergence" between the West and the rest of the world, continued to widen. Why weren't developing countries more able to benefit from trade and to learn entrepreneurial skills from the West, which could have helped them bridge this divide?

A: The drivers of the stickiness of modern economic growth is one of the most important questions in economic history. The leading explanations focus on so-called institutional failure, inadequate human capital development, or a lack of value systems conducive to modern entrepreneurship. The particular focus in this book is why multinational firms were not better transferors of innovation and entrepreneurial capabilities from the West to the Rest.

The historical evidence makes clear that multinationals in general have never been a panacea for growth. During the nineteenth century, most multinational investment in developing countries went into natural resources and related services. These were often enclave investments, like mining towns, with few links to the local economy. Firms employed expatriates in skilled and managerial positions. Worse still, many businesses were based on concessions from local dictators. This had the effect of reinforcing local institutional constraints on domestic entrepreneurship rather than removing them.

There was the more general issue, still as relevant today, that the ability of multinationals to transfer technology was constrained by the institutional, educational, and cultural conditions of host economies. Multinationals do not do things to countries and societies; they interact with them. For better or worse, they have not transformed national institutions or radically shifted societal norms. Multinationals had their most positive impacts on countries which already had sufficient educational levels and developed institutional structures to benefit from them.

The lack of a straightforward correlation between multinational investment and economic success is highlighted in the chapter on the impact of multinationals on Asia. This shows that the economies which developed the most diverse, complex, and technologically dynamic industrial sectors—Japan, Republic of Korea and Taiwan—were precisely those with the least reliance on foreign firms, which were excluded by industrial policy and other measures. Of course this is not necessarily a policy prescription: other Asian countries with low levels of inward foreign direct investment, like Pakistan, Myanmar, Cambodia, and North Korea, did not flourish.

Q: The beauty industry is a terrific vehicle to study the impact of globalization over the long run. Did globalization homogenize beauty ideals and practices?

As the world globalized in the nineteenth century, there was an unmistakable homogenization of beauty ideals and practices around the world. In the age of imperialism, Western and white beauty ideals emerged as the global standard. This was historically contingent on the unique circumstances prevailing at that time, but once the standard was in place, the marketing and branding strategies of firms helped to make it reinforcing. The momentum behind this standard was reinforced by the impact of Hollywood and other drivers of an international consumer culture. Beauty companies formed an important component of a wider business ecosystem, which included movie studios, pageant organizers, and fashion magazines.

Yet the process of homogenization, powerful as it was, was never complete. The local was never entirely subsumed by the homogenized global. Convergence and homogenization was stronger in aspirations than in preferences for particular products or scents, which remained more persistently local, despite the spread of global brand names.

I think the more recent era of globalization over the last 20 years has coincided with a strong revival in interest in local traditions and practices, which is particularly noticeable in some of the fastest-growing emerging markets, such as China. As a result, the leading firms in the industry now find themselves struggling with the challenge of how to respond to consumers who require increasingly nuanced mixtures of the global and the local in the brands they buy. In beauty, as in many other things, globalization is no longer a one-way street. There is a new pluralism in beauty markets worldwide. Globalization is enabling alternative visions of beauty, whether Chinese or Brazilian, to be offered to consumers worldwide, both by local firms and by Western multinationals anxious to offer their consumers more choices. Whether Shanghai and Rio de Janeiro become as globally relevant as beauty capitals as Paris and New York have been in the past remains to be seen.

Q: After World War I, global firms turned much focus on protecting themselves from political risk. Given that political risk remains in many countries as strong today, what have we learned about companies that have done this successfully?

I argue in the book that after the outbreak of World War I, the management of political risk became a central concern for firms operating internationally. These risks were on many levels, from expropriation to exchange controls and other economic policies. The issue is explored in multiple chapters, but the chapter on the German health and skin care company Beiersdorf is the most dramatic. Beiersdorf faced the worst of all worlds in terms of political risk. It was a determined multinational investor before World War I, and then lost everything as the United States and other Allied governments expropriated German property. As a consumer products manufacturer whose brands and trademarks lay at the heart of its competitive advantages in international markets, the loss of these intangible assets was especially damaging. However, worse was to come. During the 1930s as a so-called Jewish business, the arrival of the Nazi's put the firm in harm's way in its home market.

Beiersdorf invested heavily in political risk management. In the wake of World War I, the company developed a "ring" organizational structure as a way for affiliates to disguise ownership, circumvent national regulations, or even adopt a different nationality. It used trust to support this organizational structure. The firm built a network of trustworthy individuals and business partners that enabled it, eventually, to separate the German parent company from its international affiliates. In circumstances when the rule of law was breaking down, the company switched from relying on formal contracts to relying on reliable local partners and friends. At home, during the 1930s it was able to circumvent attacks on its "Jewish" identity from competitors, whilst getting senior Jewish managers out of the country. The company's brand and marketing strategy was broadly aligned with the requirements of the Nazi regime.

The outcomes of these strategies show the strengths and limitations of political risk management. The company survived the Nazi regime and the destruction of World War II. The situation was more challenging internationally. A profitable business was maintained during the 1930s, despite a welter of exchange controls and other restrictions which handicapped German and other firms. In the longer term, the ring strategy failed to protect most of the firm's foreign assets from expropriation. Factories and key trademarks were lost in most markets. As the rule of law was reestablished in the international economy, deals done on the basis of trust unraveled. It was a striking testament to the damage caused to German business by World War II that Beiersdorf, which had so carefully invested in organizational structures to counter political risk, only recovered ownership of the Nivea brand in the United States and Britain in 1973 and 1992 respectively. Neither contracts nor trust could protect German firms from the consequences of the traumatic political events of these years.

The lesson from this, and other cases in the book, is that developing appropriate organizational structures and strategies to manage political risks can bring substantive benefits. However, in the event of a major military conflict or a revolution, even the most careful planning is unlikely to save the day. In less extreme situations, the case of Unilever is instructive. In India, Turkey and other developing countries, the firm was an early mover in appointing nationals to senior management positions, and in making broad social investments. It was still almost regulated out of existence in both countries during the 1970s by governments which simply disliked private capitalism in general, and foreign firms in particular, but it was able to survive until better times, in contrast to most multinationals which fled those countries.

by Sean Silverthorne http://hbswk.hbs.edu/item/7386.html