A Multilateral Strategy
by Richard Eliot
Challenges in American Business
American business is meeting an unprecedented challenge in the international marketplace, a challenge well defined in a number of economic, managerial and legal issues. Extensive analysis of issues relating to trade imbalances, fiscal and external debt, and foreign direct investment, contributes to the high level of attention directed towards the internationalisation of American business.
The internationalisation of American business is evident in three distinct categories:
- The level of foreign direct investment in wholly-owned subsidiaries and joint ventures with businesses in the United States;
- The acquisition of existing U.S. businesses, real estate, and commercial property by foreign businesses; and,
- The transfer of operations by U.S. based companies from the United States to other countries.
These issues are closely associated with direct economic development and the effects on employment, the balance of trade, and the attraction of foreign capital.
Internationalisation is also affected by indirect actions originating from both internal and external sources. The indirect impact of borrowing by private U.S. organizations provides a major funding source for conducting merchandise trade with other nations. Moreover, monetary capital flows into the United States, which are directed into portfolio holdings of equity securities and debt instruments, contribute to elevated spending levels in the private and public sectors. Decisions by foreign entities to transfer capital into either economic or monetary holdings in the United States largely reflect the market conditions created by the dual deficits in the current account and fiscal spending.
The interrelationship of fundamental macro-economic phenomena with business internationalisation has contributed to extensive restructuring in American industry during the past decade. Deficits in fiscal spending correlate with deficits in merchandise trade, while the magnitude of capital inflow correlates with both merchandise trade and fiscal spending.
Economic expansion from recurring fiscal deficits generates a demand for goods and services in excess of domestic production, causing an increase in merchandise imports to satisfy current expectations. Borrowing to finance the expansion creates a demand for foreign monetary capital while generating increasing external payments for debt service. As the current account widens and the debt service liabilities increase, domestic capital resources are diverted from reinvestment in economic development.
International Capital Flows
The extent of international flow of capital into the United States is analyzed in the following table:
|
Foreign Lending and Investment in the United States 1982 vs. 1987 (US $ Billions) | ||||
|---|---|---|---|---|
| Total Increase | ||||
| 1982 | 1987 | Amount | % | |
| External Liabilities Reported by US Banks | $ 228 | $ 539 | $ 311 | 136.4% |
| Investment in US Commercial Equity and Debt Instruments | 93 | 344 | 253 | 269.9% |
| U.S. Government Notes Held by Foreign Entities | 158 | 297 | 139 | 88.0% |
| Direct Investment in the United States | 125 | 262 | 137 | 109.6% |
External liabilities reported by U.S. banks amounted to $311 billion over the five years from 1982 to 1987; these liabilities, consisting primarily of cash deposits, represent 51.2% of the cumulative merchandise trade deficit of $607 billion incurred during the same period.
Meanwhile, foreign monetary investment is shown to be directed primarily towards equity and debt instruments issued by U.S. corporations and the U.S. government; these are investments which are readily marketable and which can be extracted within a relatively short period.
Direct investment in economic activity, while also increasing at a relatively swift pace, ranks fourth in order of preference for foreign investment in the United States.
Numerous short-range solutions have been proposed for these developments. More popular remedies have generally centred around increased intervention by national governments in the area of trade relations. Others insist that there is minimal impact on the American economy due to external debt and capital flow.
Long-range solutions are rare enough. Market oriented policies emphasize open economies, fluctuating exchange rates, and the free flow of monetary capital as long-range, automatic adjustment mechanisms to imbalances in international trade.
In an event, these positions propose to meet current expectations and the demand for goods and services by maintaining the current level of expenditures. A laissez-faire policy prevails.
Sound economic management to resolve the issues surrounding the internationalisation of American business require three basic circumstances; namely:
- To continue to engage in international trade to the fullest extent while ensuring national market sovereignty;
- To maintain the existing foreign capital base which has helped to finance the cumulative aggregate deficits, and to attract additional capital for future economic development; and,
- To preserve and expand domestic production capabilities and its inherent benefit to the level of employment.
Market Sovereignty
The world has known a number of similar situations where nations become dependent on foreign direct investment and loans from external sources in order to generate domestic development.
Most economic development policies use the incentives of investment tax credits for plant and equipment as well as credits for creation of skilled employment in order to attract capital investment to developing regions. Decisions to stimulate a domestic economy by either fiscal or monetary methods require capital from external sources to augment reluctant or insufficient domestic resources. This trend leads to an increasing level of domestic economic decisions being undertaken by foreign entities.
The massive inflow of capital from other nations is strong evidence that political as well as economic issues are at stake. There are many instances where nations which experience massive external liabilities have resorted to extreme measures of protectionism, financial and industrial expropriation, and debt service interruptions in order to prevent economic collapse. The process usually begins with the liquidation of direct investment in other nations in order to repay external liabilities.
When American leadership steps down from their soap boxes, they achieve remarkable success in implementing a coherent program for domestic economic development; a program which is consistent with the reality of an open international market.
The international economy has changed considerably from the collapse experienced during the 1930's. Global markets no longer fall into the provenance of one or another colonial power. Trade patterns have evolved from a bilateral structure to a more complex one involving multiple players. Raw materials from diverse geographic sources are supplied to manufacturing facilities in an increasing number of industrialized regions from which final products are shipped to an even greater number of end markets.
This shifting dimension and growing complexity of international trade has out paced the ability of national systems to unilaterally control domestic economic variables. Domestic fiscal and monetary policies are tempered by their effects on external trade and capital flows to a far greater extent than in previous decades. Domestic economic decisions have become inseparable from their international implications.
Multilateral Frameworks
While external implications of domestic economic decisions are a major consideration in policy determination, they have generally been ignored by policy makers, concerned primarily with their own constituencies.
The hard lessons of protectionism and competitive currency devaluations during the global economic collapse of the 1930's may help to prevent a resurgence of relying on unilateral action for singular objectives.
This realization led to the establishment of a number of international agreements in the wake of the devastation wrought by the Second World War. From the ashes of a world economy decimated by war, famine, and disease, rose a long period of prosperity and cooperation. The Marshall Plan for Europe recognized that international cooperation to ensure peaceful economic development was the most amenable alternative to national confrontation.
A new vision emerged with the creation of international economic agreements. Establishment of the World Bank and the International Monetary Fund sought to ensure greater stability by reducing the disparity among nations and the excessive reliance on static measures such as the gold standard. The World Trade Organization, as did its predecessor the General Agreement on Tariffs and Trade, brings together trading partners in every stage of development to provide a forum for constructive exchange. These, and other international treaties, have achieved a multilateral economic framework covering many areas of common concern to the world economy.
Agreements at the regional level have also been effective in coordinating national incomes policies. Free trade agreements, economic unions, and monetary accords have contributed to the economic growth of participating nations by expanding access to markets for goods and services. Expanded markets enable nations to produce at a greater level in industries where optimal production levels exceed the domestic demand.
Progress towards multilateral cooperation has been painfully slow for some and has generated tense resistance by others. Disparity in economic development clearly remains an ominous threat to continued global prosperity, while wide fluctuations in relative currency valuations have undermined long-term trading arrangements and short-term stability. Protectionism and monetary controls remain the mainstay of national responses towards international imbalances.
Does this mean that international agreements are ineffective and superfluous? Aside from the natural reluctance of nations to yield sovereignty in economic issues, there remains the sense in every nation that responsibility for economic decisions must reside in domestic constituencies and that external relations are the peregrine concern of national governments. Unilateral advantage is therefore the primary consideration in the formulation of economic policy.
Effective international cooperation requires the assent of every participant. Multilateral agreements first require a consensus to establish a common point of agreement; any one signatory holds peremptory power over its successful implementation. The task of persuasion to reach and implement a satisfactory agreement becomes exponentially more difficult with each additional participant.
Once agreement has been achieved on any number of issues, the task of implementation rests entirely on the good faith of each sovereign participant. Unless the respective governments exercise direct control over national commerce, the advantage gained through international cooperation is dependent on the ability of domestic businesses to respond to the measures underscored in a multilateral agreement.
The question remains whether the efforts to reach international understanding in multilateral negotiations can be justified in terms of their beneficial economic results. The answer is twofold:
- The practical results of international economic cooperation and free trade are achieved only with the responsive actions of national commercial enterprise; and,
- International business relations based on interdependence must be superseded by relations based on mutual synergy.
Commercial Applications
The challenge in achieving the benefits of international agreements involves the concurrent development of commercial enterprise structured for multiple sourcing and multiple end markets. Such enterprises comprise businesses of many nations, linked by mutual agreement and unfettered by unilateral direction. They serve to provide a catalyst for progress and are the beneficiaries of global economic development espoused in international agreements.
The development of multilateral business relations is grounded in the "offer curve" and "terms of trade" arguments of international economists. Multilateral business represents an additional dimension to traditional economics and business management, by considering a multitude of international transactions within a related enterprise. An enterprise comprising businesses of many nations represents the leading edge of international management since its effectiveness requires the transcendence of nationalism in organizational ability.
Each national affiliate supplies elements to the multilateral enterprise where the terms of trade indicate a favourable exchange, as determined by the comparative advantage of its products. Elements of exchange include most raw materials, components, semifinished goods, labour, capital equipment, and technical expertise. An affiliate with an absolute advantage in one of these elements may benefit from importing this same element from another national affiliate, should the transaction cause a shift along the offer curve in favour of another component essential to the operation of the entire enterprise. The comparative advantage of each affiliate determines the scope of its participation in a multilateral enterprise. A strategy of multilateral exchange among autonomous affiliates of a single enterprise differs from more traditional multinational business operations with the establishment of local production facilities by each participating affiliate to support the respective end market. These facilities range from assembly and finishing lines to full scale manufacturing plants. Each national affiliate supplies specific components to other affiliates according to its comparative advantage, while affiliate production facilities draw upon the resources of the entire enterprise to support the respective local end market.
A multilateral strategy is not an expansion of traditional trade relations. It is instead a redirection of international trade designed to enhance the competitiveness of individual national affiliates by capitalizing on those elements where the affiliate enjoys a comparative advantage. All national affiliates benefit from the optimum utilization of the specific production elements. In contrast to unilateral imports and exports or to a bilateral exchange of trade, this strategy garners strength from diversity while supplying final products and customer service are tailored for the local end market.
Multilateral business organizations have developed internally to only a handful of large corporations based in the United States. One large automobile manufacturer implemented this practice for the production of its highly successful model. This model is assembled at several plants around the world and distributed to many national markets, while the vehicle's components are supplied to each of the assembly plants from a number of different sources. This mode of operation is more common among companies doing business within the European Economic Community where international cooperation is an effective business strategy.
The amount of resources required to initiate this mode of operation in a global operating environment has restricted the practice to large, well-financed organizations. It requires substantial risk in capital investment to build a completely new organization, while planning and implementation require a substantial lead time. These factors, combined with the trend towards consolidation of capital and management resources, have prevented many small to medium size businesses from engaging in multilateral business operations.
Yet it is the small to medium size firm which stand to benefit the most from establishing international business partnerships. It is the emerging enterprise which must provide the vision and leadership necessary to develop the multilateral business relationships as a viable alternative to established trade and management practices.
Traditional methods of international business management often result in the short term optimisation of local enterprises, requiring them to be fully contained subsidiaries, prepared and packaged for eventual divestment. Long term economic growth and expansion fall prey to centralised corporate planning and centralised allocation of resources.
Existing businesses with the potential for further expansion and development are most likely to benefit from international affiliation. Their counterparts in other nations are suppliers, customers, and businesses engaged in the manufacture of similar products; access to these additional markets is achieved through established business relations. These relations are consistent with the objectives of protecting national market sovereignty by ensuring that domestic management decisions are represented in the operations of the enterprise; they are also consistent with the objective of attracting additional capital investment in production facilities to support both domestic and export markets.
Attracting capital investment into industrial operations has the greatest beneficial impact on the level of employment, capital formation essential for continued development, and the amortization of external debt.
International cooperation in business ventures transcends the national barriers erected to inhibit free exchange among nations. It recaptures the leadership role once enjoyed by American business in global economic development by recognizing the strengths of each participant.
All participants benefit from expanded markets for their products, leading to greater levels of national income and capital formation. Improved cooperation and understanding among nations transforms interdependence into mutual synergy.
