Alliance Capitalism and Political Advantage 14 May 1999

14 May 1999

1.5. Alliance Capitalism and Political Advantage

The power of governments to affect company strategies has been obvious for many centuries, and has been emphasised in some recent studies of MNEs and globalization. Most economists have seen governments in a negative light and this is the prevailing attitude in recent international business and strategic management research. “In sum, host governments often limit the scope for integration and co-ordination strategies, and they almost always modify the relative attractiveness of various strategic choices” (Prahalad and Doz,1987,p.68).  The “policies of home and host governments tend to distort competitive dynamics” (Prahalad and Doz,1987,p.5). Porter (1990) took a more positive line on the role of government. “Government’s proper role is to push and challenge its industry to advance, not provide “help” so industry can avoid it. At this time when much of the world is re-examining its economic structures, the need for proper choices has never been greater. National economic prosperity need not come at the expense of other nations, and many nations can enjoy it in a world of innovation and open competition. As globalization of competition has intensified, some have begun to argue a diminished role for nations. Instead internationalisation and the removal of protection and other distortions to competition arguably make nations, if anything, more important. National differences in character and culture, far from being threatened by global competition, prove integral to success in it” (Porter,1990,p.30). Yip (1992,pp.228-230) suggests a framework for the analysis of  “government globalization drivers” using tariffs, subsidies, non-tariff barriers, compatible technical standards, common market regulations and government-owned competitors and customers to measure the extent to which  a host country has a “favourable trade policy”.

Dunning (1993,p.330) points out that while there “have been many studies of the ways in which governments may directly affect the activities of MNEs”, “Few, however, have attempted to analyse the extent to which outward and inward direct investment – through its effects on the economics of investing and recipient countries – has led governments to modify their existing economic objectives and strategies, or, indeed, of the way in which governments, themselves, have sought to influence the level and pattern of MNE activity, as part of a package of policy instruments designed to advance a broader set of economic and/or social goals.” Dunning makes three main points in his chapter “Governments and multinational enterprises: from confrontation to co-operation?” (Dunning,1993,pp.330-353). Firstly that, “until recently, the actions of governments to influence the value-added added activities of MNEs have rarely been explicitly related to their wider economic management”. Secondly “that governments are being forced to look at the competitive advantages of the resources under their jurisdiction as a national economic objective in its own right”. Thirdly “the way in which governments are affecting the resource allocative decisions of MNEs is increasingly by actions to advance other economic or social goals, rather than by those directed specifically at these companies”.  Dunning holds that “governments (whether deliberately or not) are increasingly affecting the behaviour of MNEs through their impact on the transaction costs of organising economic activity, rather than on  the costs incurred and the revenue received from the direct production of goods and services.” Dunning goes on to suggest “that transaction costs reflect the degree and form of market failure” and that “in practice, both markets and hierarchies – and, indeed, the private enterprise system itself – are constrained in their ability to minimise transaction and production costs by the political and institutional framework, and the economic and social milieu within which they operate”. Dunning divides government actions into pro-market, symbiotic interventionism which reduce transaction costs, and anti-symbiotic interventionism which increase transaction costs. Dunning’s reflects that in the 1960s and 1970s the “actions taken by governments to achieve their goals were piecemeal and uncoordinated; and those directed at outward and inward direct investment were implemented quite independently of each other.” “These strategies generally led to confrontation between MNEs and governments, as, basically, the latter sought to affect the behavioural pattern of the former so as to increase their own share of the economic rent created by them.” Since the 1980s globalization has produced a “tremendous growth in international transactions” and “the increased participation of MNEs in almost all economies” forcing governments to reappraise not only their actions to influence MNEs but their general macro-economic and organizational strategies which might directly affect, or be affected by, inward and outward investment.”

Dunning forecasts that in the 1990s the focus on government/MNE relationships will be on co-operation to promote mutual economic goals in order to restructure resources and institutions to meet the challenges of the global marketplace. The conflicts and bargaining between the two will remain but these “ have now taken second place to the more pressing need of advancing competitiveness in international markets”. Dunning feels that many governments have not yet captured the messages. For example, he says that “at least until the change of leadership in the Conservative Party in November 1990, I for one found the faith in the invisible hand to solve all the economic problems of the UK both naïve and disturbing, and quite out of touch with the needs and realities of modern business. Even as this chapter is written (December 1992), one sees little evidence of any active coalition between the British government and the private sector in charting the future course of the UK economy.” The shift from confrontation to co-operation “ has only been fully manifested in the Asian economies, notably Japan”, “but, as things currently stand, the age of an integrated competitiveness-led economic strategy, jointly fashioned by the government and the private sector, has not yet come.” Dunning speculates that “all the major industrial economies will be forced to adopt – gradually or otherwise – more holistic and collaborative micro-economic strategies”. While this has happened on a macro-economic level it has not yet happened on a micro-economic level “because of the intra-governmental transactional costs – and, if and when it does, it will be between governments and firms and hierarchies within a country rather than between governments in different countries.” Dunning concludes  “only, I suspect, the full force of international competition – not only from the Far East but from Eastern Europe, as well as from a revitalised Economic Community – will compel governments to realise that they, as well as the constituents they represent, will either swim or drown together! And, part of this force will, undoubtedly, be the influence on, or the response of MNEs to, the changing shape of our global village.” It would seem churlish to add that less developed counties are even further away from Dunning’s utopia, except perhaps those who are still wedded to political and economic ideas developed in continental Europe during the 1930s! Clearly the concept of alliance capitalism needs further research and Dunning[i] while admitting that “it is possible that the basic contention of this paper, viz., that innovation-led production and co-operative inter-firm agreements are emerging as the dominant form of market-based capitalism, is incorrect”, suggests that “important changes -and, for the most part, irreversible technological changes – are afoot in the global economy; and, that these changes are requiring international business scholars to re-examine at least some of the concepts and theories that have dominated the field for the last two decades or more.”

Kanter(1995), has taken the concept of “world class” and applied it to the development of business and regions. This is a natural development of the globalization, home-base and alliance arguments, and is very pertinent to this study. MNE/GR relationships are examined across regions and the partnership  advocated is a form of alliance capitalism (although she does not use that term), or a form of MNE/GR strategic alliance. Here we have companies, not just trying to gain competitive advantage, but seeking to be the “best in the world”. The “best in the world” is defined not only for the companies and their suppliers, but also for the local community where those companies are (or might be) based. Thus a partnership, a long-term strategic alliance, is forged between a city or a region and a company or group of companies. The regions focus on developing their advantages, thinking skills like Boston, making skills like South Carolina or Newcastle,U.K., or trading skills like Miami. These core skills are the “magnets” for attracting companies to the area. The “glue” to keep them there is a world class infrastructure to make the lives of employers and employees as productive and fulfilling as possible. Cities or regions become global skill centres, where networking worldwide between people and companies is highly developed. Moss Kanter sets out action plans for local communities trying to gain and keep partnerships with global companies. The political alliance between cosmopolitan globe-trotters and the local community, without xenophobia and protectionism is a vital to political and economic stability. New regional forms of local community representation have been developed enhancing or circumventing local government. The Northern Development Company based in Newcastle, U.K. is the development catalyst for the region and has offices in the region and around the world. Such development enterprises are mirrored around the world. Moss Kanter used a Harvard research group to carry out a large-sample survey (2655 completed questionnaires), 150 company executive interviews in 100 companies, over 100 hours employee focus groups, telephone and desk research, and  business and civic leaders fora, etc., in five US metropolitan centres as the backbone of her research.

Moss Kanter’s study should have major implications for less developed areas of the world, struggling develop their economies. The textile industry plays an important part in this study. In the first half of the twentieth century South East USA became the home-base of the US textile industry. As textiles declined as an employer other manufacturing companies were attracted. Now Spartanburg-Greenville region of one million people on the I95 turnpike between Charlotte and Atlanta, has less than average US unemployment. In 1954 Roger Milliken followed the drift of the textile industry to the cheaper labour of the south, moving Milliken & Company from New York to Spartanburg. In the late fifties Milliken took the lead encouraging German and Swiss manufacturers, suppliers to the textile industry, to set up offices in Spartanburg, close to their US customers. Milliken brought “cosmopolitanism” to the “local” community in Spartanburg and both have thrived. Against the trend, Milliken and Company has grown to $3bn. sales and is a leader both in quality and in the community. The I95 “autobahn” has become the site of “the largest per capita diversified foreign investment in the United States”. “The modernization of the American textile industry here could not have taken place without the foreigners who brought machinery and helped revitalize the economy”, Olin Sansbury, Chancellor of the University of South Carolina in Spartanburg.

Miami is another Moss Kanter example from the textile industry, where cheap Caribbean and Central American labour and the trading skills in Miami have combined to make garment manufacture that city’s largest manufacturing employer. Is there a real connection between company success, using concepts, competence and trading in a global age with highly mobile capital, labour and ideas, and the development of local prosperous and caring communities? Is there anything significantly different about these developments and those in Europe two hundred years ago? Even if the underlying theory is the same, there is no doubt that the scale is unprecedented. The development of local communities and regions, often across existing national and local government boundaries, will significantly circumscribe and change attitudes towards nationalism and sovereignty, provided that relative peace can be maintained. Can local communities’ interests in partnership with world class enterprises, triumph over the local of political, religious or cultural prejudices and selfishness?  No company that has a global trading strategy can ignore the growing importance of regions and communities to its success in the  twenty-first century.

The shift from confrontation to co-operation “ has only been fully manifested in the Asian economies, notably Japan”, “but, as things currently stand, the age of an integrated competitiveness-led economic strategy, jointly fashioned by the government and the private sector, has not yet come.” Dunning(1993) speculates that “all the major industrial economies will be forced to adopt – gradually or otherwise – more holistic and collaborative micro-economic strategies”. While this has happened on a macro-economic level it has not yet happened on a micro-economic level “because of the intra-governmental transactional costs – and, if and when it does, it will be between governments and firms and hierarchies within a country rather than between governments in different countries.” Dunning concludes  “Only, I suspect, the full force of international competition – not only from the Far East but from Eastern Europe, as well as from a revitalised Economic Community – will compel governments to realise that they, as well as the constituents they represent, will either swim or drown together! And, part of this force will, undoubtedly, be the influence on, or the response of MNEs to, the changing shape of our global village.”  Is Dunning correct? Is there a new game? The concept of  “political advantage” goes far beyond political risk assessment or “shelter”. It could be broadened to re-examines the political dimension in all strategic activity and to question the whole division of market from non-market activity. If  the so-called non-market political activity secures a competitive advantage over rivals then it increases competitors cost and is a market activity. If an MNE makes an alliance with a government in order to secure political advantage and competitive advantage in what way should it be seen as distinct from MNE/MNE alliances.

Clearly the concept of alliance capitalism needs further research, and Dunning,(1995), while admitting that “it is possible that the basic contention of this paper, viz., that innovation-led production and co-operative inter-firm agreements are emerging as the dominant form of market-based capitalism, is incorrect”, suggests that “important changes -and, for the most part, irreversible technological changes – are afoot in the global economy; and, that these changes are requiring international business scholars to re-examine at least some of the concepts and theories that have dominated the field for the last two decades or more.”  The formation of  trade regions, the role of  such NGOs as WTO, the new dimensions which SAs have added to MNE activity and theory have all led to the need for a fundamental reassessment of the MNE/government(GR) roles and a deeper understanding of the concept of political advantage. In the past businessmen have tended to see government in black and white terms either as representing the people and a given, or representing personal intersets and therefore corrupt. Academics too have only recently accepted that bureaucrats often form alliances to further short-term career or personal advantage, just like anybody else. The acceptance of ordinary human motivation in politicians, bureaucrats and managers opens up the interfaces of MNE/Government(GR) to new and more realistic analysis.

The concept of political advantage needs to be taken out of the murky area to which it has often been consigned and given a clear and transparent place in the theory and practice of MNE competitive advantage and MNE/government relationships, within the developing global democratic political economy which is set to dominate the beginning of the twenty-first century.  If this is not achieved and no guideline theory is provided for such relationships the whole concept of democratic “alliance capitalism” may be tarnished. The next stage of market based capitalism cannot flourish unless it has broad public support. This support must come from wide, global, public acceptance. Nation states may both lead and follow these developments but in the end  MNE/government(GR) relationship will be judged by the people. If it is found to be wanting new political philosophies will emerge to attempt to change it. It is important to try to fit MNE/government(GR) relationships clearly into the theory now.