GLOBAL CHOICE AND INNOVATION
Remarks prepared for a panel discussion at the 18th Conference on Baltic Studies, University of Maryland, Baltimore, June 6, 2002
Gundar J. King, Pacific Lutheran University
Conceptions and Misconceptions of Globalization
Economic globalization is about international business with emphasis on world-wide choice. It is driven by innovation to meet market demands. It is closely related to wider acceptance of already prevailing norms in international relations, ongoing innovation and new technologies, and greater cultural diffusion.
There are two popular notions of globalization. The first is that of the irresistible waves of universal adoption of business ideas, principles and practices of the West. It stresses benefits of consumer choice, and it attributes unusual efficiencies to multi-national corporations. The other view is that of an oppressive American imperialism forcefully exploiting less developed and disadvantaged nations. A closer look at the processes involved suggests that both notions are misleading. The first view minimizes value conflicts, but does not explain failures and considerable difficulties in manufacturing and marketing internationally. I believe that the second view has roots primarily in ancient and recent imperial experiences. Most recently, the unusual impact of American culture on other societies is widely perceived as undue dominant influence. In other words, real freely chosen relationships are not globally pervasive. Imposed hegemonies, however, seek to introduce and to maintain unacceptable ideas and alien practices.
There is some truth in both conceptions of globalization. Ever since Commodore Matthew Perry negotiated the opening of Japan to visits and trade in 1854, the single mostimportant American foreign policy demand is for access to international markets. This access does not provide control over all markets. Rather, globalization is maximal choice of opportunities and operational decisions from a world-wide selection. This policy of promoting access assures Americans a global array of various attractive and profitable markets to be considered (Akhter, 1995). Actually, admiral Perry’s naval diplomacy may be considered to have been less the opening of Japan to American trade and more the source of economic modernization of Japan. Access to markets and the goals of efficiencies are important to successful international trade. They shape, but do not dictate economic relationships. Opposition to them is largely resistance to change and fear of foreign dominance, even as foreign investors provide capital for economic growth and opportunities for work. Without going into details, it is obvious that the goods and services of advanced nations have a strong world-wide demand.
What we witness today is the expansion of international trade. There are, however, few really global operations. Airframe and automobile producers require both large capital resources and business alliances to succeed. The economics of information technologies makes international maximization of sales very attractive. Thus, the Baltic nations will not be players in making aircraft parts until they become, perhaps jointly, significant aircraft buyers. There are better opportunities to work as subcontractors with automobile makers. Indeed, an automobile seatbelt manufacturer gives us an example of an early Estonian venture in western markets. Other Baltic companies making of components for "Nokia" and writing programs for "IBM" are part of the expanding international trade among the entrepreneurs of large and small advanced nations.
The intense competition among suppliers of simplest products and raw materials keeps prices and profits down everywhere. Prospects for expanded Latvian timber industries are for this reason not very bright. Lithuanian exports of mushrooms and other organically produced foods do not face universal demand, and are best targeted to selective niche markets. Conversely, "McDonald’s" and "Coca Cola" companies find the Baltic markets limited for taste and cultural reasons.
Interestingly, international business does not bring poverty to any nation. Wealth comes with hard work, good education, and thoughtful innovations (Landes, 1998). As is evident also in the Baltic states, consumers are the silent beneficiaries of international trade, but most alarm is raised by workers in declining industries.
Foreign investors cannot exploit labor in relatively free markets. They cannot undercut local employers. They compete with them. To assure high quality and productivity, international companies improve working conditions and wages that tend to be on the high side locally. Information availability and technology transfers change all economies. Less advanced nations gain new skills and pick up new opportunities. On the other hand, employers in advanced nations find it increasingly difficult to compete internationally. Thus, Americans buy more internationally than they export. The usual complaint heard locally in America (or for that matter, everywhere) is that the country does not protect employment against change. As entrepreneurs in many countries learn new trades and new skills, participation in international trade grows. It raises incomes, labor standards and productivity. This is the most positive aspect of the trend toward economic globalization.
The major drawback of international trade is the increasing inability of western entrepreneurs to avoid conflicts with important political, social and cultural priorities (Huntington, 1996). Many consumer goods and services offered internationally do not always fit with the expectations of buyers. To illustrate this kind of priority conflict, here is a comment made to me some time ago by Prince Otto von Habsburg, a conservative Bavarian representative in the European parliament: "Oh, you American traders! You want us to buy your cheap chickens! You should know that we already eat well in Germany. Today, we are most interested in building a politically stable and socially healthy foundation for Germany and for Europe. To strengthen this foundation, we subsidize our family farms."
Professor Michael Hitt (2001) of the Arizona State University and his colleagues offer a reasonable concept of globalization. This concept refers to processes that help increase the spread of ideas, and the movement of goods and services, as well as people and their skills, across national borders. Even as restrictions of such exchanges decline, the globalization processes are complex and difficult. Almost by definition, globalization principles are limited in their application. It is premature, and perhaps unwise, to count on an unrestricted expansion and integration of international relations.
From a holistic, comprehensive business perspective, globalization is the diffusion of technological and economic innovation and related cultural and political adjustments in the widest sense. In practice, these trends are by no means universally accepted; the older concept of international business is actually more accurate. In all countries of choice, international business has emphasis on the marketing function. Manufacturing is less international. Thus, we can think of a large American company "Whirlpool Corporation" as almost global when it markets in 140 countries, and as international when it maintains 13 manufacturing facilities throughout the world. The single, most important, indicator of change is the recent news that one half of the company’s sales volume is outside the United States.
Even more significant is the great rise of American imports that far exceed exports. To use Professor Joseph Schumpeter’s famous concept, the destructive gales of innovation bring with them major structural changes. In other words, there are very many winners, many losers, and very few unaffected participants in international economic relations. All changes, even the most benign, are very stressful and demanding. Not surprisingly, they are opposed by advocates of a status quo, as well as those who lost their savings ten years ago. This stress is strongly felt in the Baltic states, where the Soviet rule promoted political and social stability. For many in the Baltics, progress is associated with stability, and is valued by many in the Baltic states; we even hear arguments for a status quo ante. Western progress is distrusted; it is perceived as the unplanned and uncoordinated building of as a tower of Babel.
Actually, international business is carefully coordinated across national boundaries. To stay in touch with local priorities and sensitive issues, companies of global ambitions may use different organizational approaches to improve their market positions. Nominally a French company, "Alcatel" is run by a son of Armenian refugees and a multinational board of directors as an international company that operates widely in Europe. The innovative "ABB" tries to avoid a home country label, and maximally decentralizes authority. The "ABB" companies in Latvia are not large, but they are part of a real globalization process. This process, to use Nobel laureate’s V. S. Naipaul’s words, requires "a million mutinies". According to another Nobel laureate, it is this stream of new innovations that gives real impetus and substance to adaptive economic growth (Lucas, 2002).
International business succeeds best where it resolves or minimizes local problems. Although buyer benefits are taken for granted, the maintenance of local economic vitality isis of paramount importance. In practice, high employment is the first priority for economic growth. In the Baltics, the uses of this priority are easily demonstrated by full employment, vigorous private and public investments, and modest increases in the standards of living before World War II. Moreover, the Baltic nations treasure minimal economic disruptions. On one extreme, we can hear the small Lithuanian retailer who seeks protection against international food market chains today. We also read Huntington (1996) about intercontinental conflicts of civilizations and cultures. In the center of Riga, near the Latvian Liberty Monument, it is fashionable to urge the boycott of a "McDonald’s" restaurant, alleged to be disgraceful invasion of a sacred site. In fact, the restaurant does a brisk business with tourists who trust "McDonald’s" name. Even as Estonian bookstores display translations of American pulp fiction and Estonian literature, they show that different aspects of globalization do attract both opposition and support. The balance of attitudes varies from one place to another, and from one period in history to another. Actually, Baltic cultures and value systems are not much in conflict with those of neighboring nations and other western countries. As evidenced by mostly successful adjustments made by Baltic refugees abroad, the close to home cultural conflict problems are minor. Moreover, Baltic cultural achievements can be cultivated, maintained, and even exported.
Attempts of economic globalization are not new. There are few international trade restrictions beyond imperial reach. Before World War I, the "Singer" company successfully introduces sewing machines to the Russian empire in a large scale, the Nobel brothers are active in Caspian oil business, and small savers in France provide funding for economic growth in Russia.
Today, international business seems to anticipate current findings of Kanter (1995). Science and technical inventions know no borders. International business develops along the lines of least resistance. Based on local work values and skills, international functional clusters of financing, making, and trading emerge.
A review of globalization in the past, does not suggest free trade of ideas and good, but imposed or restricted economic relationships. Looking back to well known hegemonies, we note the following detrimental characteristics:
Empires depend on a single leader or a small oligarchy with vested interests. A single leader’s wisdom may only accidentally fit the needs of a changing environment. Vested interests are especially resistant to change. Over time, stabilization is the main task of bureaucratic systems. According to the British professor C. Northcote Parkinson, such growth is stimulated by civil servants in a steady expansion of the administrative systems. The heavy burden of government in Latvia is periodically cited in international comparisons by such sources as the 2002 Index of Economic Freedom.
Up to most recent times, attempts at globalization come with imposed power. Alien ideas, beliefs, cultural values, ruling and administrative systems, and trading patterns may be introduced and maintained by force. Because this includes changes in political and social patterns, missionaries, traders and soldiers usually work together.
From Alexander to Augustus, and from Bishop Albert, the founder of Riga, to Augusts Voss, the Communist Party Secretary in a colonized republic, even the most powerful rulers and their satraps exert less than complete dominance to minimize what may considered to be an unimportant conflict by the ruling hierarchy or power elite. Because all change is resisted by someone, there always is at least a dormant conflict.
Expansion moves by routes of least resistance. Technological and military strengths, geographical proximity, common or compatible beliefs, and attractive trade opportunities, one or many, all favor the expansion of international relationships. Traditionally, technical changes of a pragmatic nature are very acceptable in the Baltics. Making things in a factory is more compatible with Baltic work values than trading.
Empires are seldom fully integrated. Invariably, some neglected minor aspect of social life gradually becomes important and changes the balance of power. Consequently imperial power declines. Because they are an imposition on many, true empires seldom last. For the same reason, even voluntary, commercial relationships decline over time, especiallz when they begin to be dominated by the use power.
Globalization today does not follow the historical patterns of imposed development. It has few rules imposed by conquerors or other autocrats. It is even more compatible with democratic processes that permit economic freedom. In Europe today, even the burdensome bureaucracy in Brussels, these processes are effective enough politically, and attractive enough economically to gain gradual popular support. Conversely, a rule from the top is both inefficient and ineffective, and resented in both civil societies and economic organizations. Rather than an outright conquest, globalization is a rolling adjustment in the ways markets are served. Without a centralized planning agency, business enterprises interpret the changes in public preferences on their own and act accordingly. Such market efficiencies, even though not perfect, permit globalization trends to continue, and to allow international companies to swim with the currents of changes.
The chief blocks to expansion of international business are the same that oppose large scale innovation and related upheaval:
Poorly chosen and incompetent managers. Even today, many future managers of Baltic companies are educated in an outdated environment, and are trained for yesterday’s tasks.
A rapid rate and volume of change. Acceptable to winners, high rates of change also increase the opposition by many fearful losers. Faster communications and technical knowledge transfer accelerates change. In the Baltics, where the general population has no accumulated resources for rainy days, the concerns expressed most are those about adequate and inadequate employment security.
Limited educational and skill acquisition opportunities increase the inability to change in what is rightly perceived as an unstable environment.
Expected behavior is in conflict with deeply embedded values. Much of the Baltic population treasures rural traditions learned on the family farm. As they move away from agricultural life, they believe themselves to be manufacturing other tangible goods. In Kanter’s concept, they can be world class manufacturers in a well identified place. Tomorrow, they may provide selected international services. The lack of this kind of ability to change is, I believe, is the most important block as international entrepreneurs find less and less attractive markets and encounter more social barriers. Abilities to operate internationally, such as we see in Denmark, Finland and Norway, do not endanger any country. These abilities should be developed.
Baltic markets, are, of course, small in terms of the declining population served and income available to consumers. Most prospective Baltic entrepreneurs have to look beyond their national borders for new markets. Catching up with new opportunities may be challenging. Fortunately, catching up is in many ways easier than to start entirely new ventures in a more advanced, high cost country. Following is easier and less risky than leading.
Basic Strategic Considerations for Entrepreneurs
The real key to economic development is found in innovation. Without innovation, both the exporters and importers can offer only minor improvements and unprofitable price reductions. With innovation, consumers benefit from expansion of trade and producers can put their ingenuity to work.
Assembled resources are important to all business. Far more important is the more difficult ability to shape and manage processes to make a unique, sui generis excellent contribution in a particular market. Such successful internal processes of a business enterprise increasingly depend not so much on the competent performance of established routines, as on helpfulness (Hofstede, 1980) in managing new ways of constantly changing business improvements. Internationally, opportunities are found and exploited in the same manner. Indeed, mutual cooperation and open exchange of views and experience are critically important in global exploration of opportunities and choices.
There are many books on global marketing and global management strategies. At this time, however, our discussion is limited to the most basic considerations. For practical purposes, the international manager usually begins with a domestic enterprise and expands gradually.
This incremental approach reminds me of "Transamerica" (well known for the pyramid shaped building in San Francisco where the whole firm occupies minimal space on the top floors), an investment company created by the unexpected liquidation of a conglomerate. Awash with money and with little diversified experience, the managers still decide to work their strengths and keep a conservative investment policy. This example is not international, but it illustrates well the desirable prudence in selecting new ventures and their locations at minimal risk.
"Transamerica" managers do not gamble on processes they do not know and do not understand. They count on population increases and personal income growth in the American Far West. They invest, taking one step at a time, in companies most likely to benefit from this kind of automatic growth. These investments include insurance companies in the West, as well as other firms linked to rising disposable incomes, such as entertainment, travel and transport, and other services.
They have a simple rule for selection. They invest only on top rated companies. The company grows in reputation and financial strength, and only when substantial experience is gained they expand their business. All business is risky. Therefore, even these choices are, of course, reviewed periodically. Panta rei! Everything changes.
In any case, in our days of incredibly fast communications and very complex relationships, it is well to remember some basic principles of strategy taken from military experience (Clark, 2001). They are:
Clear objectives, with the most careful examination of resources available and risks to be taken
Unity of responsibility and command
Simplicity in strategic and operational planning
Concentration of forces and resources in critical points
Allocation of only minimal resources to peripheral concerns
Although Baltic scientists and other agents of change are at work from New York to Frankfurt to Moscow and Tokyo, the best opportunities may be found closer to home, especially in the Nordic countries. Knowing markets well in neighboring countries enables the discovery of profitable market niches of interest. The geographic proximity also does keep the cost of transportation down, and may be important in marketing some products. More distant markets likely call for more specialized knowledge and investments. Let us look at some strategic variables, identified by Hitt and other scholars of business innovation and change:
Innovation requires deep pockets. Suppliers to aircraft industry face cyclical changes. Investors in pharmaceuticals benefit from the aging of population, but have a high rate of research failures.
The demographic aspect may provide for an automatic expansion of the chosen market. Together with income, demographics determine the size and the potential dynamics for growth. At a time when European birth rates are declining, Nordic populations look relatively healthy. Culturally similar, the Nordics experience few social and political stresses, and the equitable income distribution maintains a sizeable pool of affluent buyers.
Market institutions and structures need careful analysis. For example, consumer goods in Basle are more expensive than across the Rhine river in Germany. Consumers in Valka, Latvia make many purchases in Estonian Valga. Distribution costs are so high in Germany that "Amazon" in Berlin buys international books in London.
Technologically, some countries, large and small, lead other nations. Exporters from less developed countries with lower investments in research and education are more likely to be close followers rather than leaders. Given the agricultural and industrial traditions of the Baltics, they are a logical place for makers of both consumer and industrial goods of high quality. Outsourcing and subcontracting opportunities also offer promising international venues for suppliers located in smaller countries without strong proprietary products for export.
It may me concluded that the assessment of a firm’s own capabilities and the exploration of international markets should be closely linked with core competence and logical partners abroad, including alliances with traders or other logical arrangements for combined strengths in the market(s) selected. Once chosen, managers continue to develop further venture abilities to serve international markets better and better. Given the strong competition in all international markets, new improvements should be tested first in local and abroad only later. A company doing well in the domestic economy has probably developed core capabilities for serving international markets.
The challenge of International Innovation
Small countries are economically interdependent. They buy and sell internationally. They understand values other their own, they speak many languages, and they love and preserve their own cultures. Because they want to live better, they cannot isolate themselves. They cannot be self-sufficient in the manner of a 19th century farm.
Global choices of the Baltics are increased by innovation and through acceptance of change. These adaptive processes suggest further important role of greater internationalization of popular cultures and entertainment. The general acceptance of universal ideas and values, together with greater cooperation among states in regional blocks, leads to increasing adoption of free trade principles and practices. The use of international financial resources and services becomes more universal. For the Baltics, new opportunities for those who make, trade, or finance on a world class (Kanter) level, emerge mostly in Europe.
We can readily agree with Hitt that even in the European markets successful entrepreneurs will have to become more competitive. Their success depends on their ability, to use Finland’s "Nokia" as an example, to create new choices in the market, with new buyers and new jobs.
The well-being of Baltic nations can be raised only with innovations widely accepted for domestic and international business. Promising as expanding international economic relations are, is, this process involved is also risky and expensive. Considering the benefits, this expansion deserves public support. According to Henry Kissinger (2001), it consumes political assets and uses up what Fukuyama (1995) has chosen to call social capital. It must be replenished and built up by outstanding performance by political leaders who accept their obligations to help restructure economies and eliminate waste. Mutual trust and cooperation typical of reasonably open and cooperative economic environment described by Fukuyama, is also characteristic of large and small prosperous nations. Technologies may provide the engines for change. These engines are driven by private and public interests working together.
In the Baltics, especially in Latvia where the weight of government and corruption is heavy (O’Drscoll et al, 2001) timely reforms may include the virtual elimination of all regulation (other than public health, zoning laws, and tax-related paperwork) for what in the Baltics are seen as small and medium sized companies. Luttwak (1999) who urges such deregulation, also recommends that larger companies are allowed to make paperless computerized reports.
Benefits of international business are benefits of more choice globally and locally. They are most available to innovators and societies that support them. Most important are enhanced educational opportunities and preserved natural environment. The first help make Estonians, Latvians, and Lithuanians more productive, the latter strengthens the unique attraction for them to work and to live in their own countries. More innovation and international engagements should be at the core of Baltic competitive abilities. Both are needed.
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Prepared January 15, 2002 and submitted to the Baltic Studies Newsletter