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Selling Globalization: The Myth of the Global Economy

Michael Veseth

Lynne Rienner Publishers, Inc.

1998

3. The Center of the Universe

 

Throughout history, gold was the currency that drove business, even though it was bulky and hard to distribute. But today, the currency that matters is information. That’s why we’ve designed our products to distribute information quickly and to make it accessible to the broadest group of people. And why the Internet—which can literally transfer information around the planet in seconds—makes it possible to expand that access even more.
—Microsoft Corporation 1  

The cover of Bill Gates’s bestselling 1995 book, The Road Ahead, shows him standing alone on a country road. 2   The road begins at Gates’s feet and runs arrow-straight to the horizon—and beyond for all we know. The Road Ahead communicates Bill Gates’s vision of the future, and most people see in the cover photo what they expect to find in the book: that the microcomputing and communications revolutions have joined to form that smooth white line that runs down the center of the information superhighway. It starts at your keyboard and leads away infinitely, in all directions at once. Wherever you are, you are in touch. You stand (or sit, probably, since the computer is involved) at the center of the universe.

This is not the first time that we can imagine someone standing at the center of the universe, doing business around the globe with confidence and ease. As mentioned earlier, John Maynard Keynes wrote of a similar time in Europe before World War I. Sitting in bed reading newspapers, connected to global markets by telephone and telegraph, Keynes felt himself a master of the universe, buying and selling without regard to time and place.

Perhaps the very first businessmen to sit at the center of the universe were the Italian merchants of the middle ages, the heads of the international businesses that produced what economic historians call the commercial revolution of the twelfth century. Like Gates and Keynes, these global traders benefited from advanced technology. Their global reach, however, was not based on electrical (Keynes) or electronic (Gates) innovations. Their vast empires were connected by an intellectual network called commercial arithmetic, which was imported along with spice and silks in trade with the Middle East. We call it double-entry accounting. Before the commercial revolution, businessmen conceived of each individual transaction as a separate event, evaluated on its own. Double-entry accounting, however, provided a way of thinking about business that linked transactions together and allowed the businessman to conceive of a global network. 3

It is easy to picture Bill Gates at the center of the universe, connected by a network that extends infinitely in all directions, the commercial heir to a legacy that runs arrow straight from Lorenzo de Medici to John Maynard Keynes to Bill Gates, and off to an infinite future. Thus we imagine the global business today.

The reality is much different, or at least Bill Gates seems to think so. While business writers and politicians imagine him at the center of the universe, he seems to see himself and his global business empire in a vastly different way. If you look for a discussion of global business strategy in The Road Ahead, you will be disappointed. Globalization does not even appear in the index, although GLOBE (an acronym for a global learning project) and global positioning system do. For Bill Gates, the road ahead is pretty much a continuation of the road behind, which is really the biggest surprise in the book. 4

The image of the future that Gates outlines in The Road Ahead is basically a picture of the world of the past but with reduced transactions costs. The road ahead, in other words, is pretty much the same as the road behind, but with the curves and bumps removed. Information (that’s the thing he focuses on here) moves at a lower cost, which means that more people have access to it and are more efficiently able to sift through its content to find what is important. The information revolution allows business to do what it has always done, but more efficiently.

Does this make business big and global? Well, no. In fact, Gates argues that small and local businesses are better able to carve out niches because the lower transaction costs make them more efficient. One size does not fit all. Micromarkets appear.

What Gates suggests is that instead of global business, the horizon holds a world that is multilocal. Businesses have the ability (and consumers the information) to focus markets at a very small level. Basically, if global business is a mainframe, then The Road Ahead is the notebook personal computer or, better, the personal digital assistant.

In short, Bill Gates’s vision of global business seems to have little in common with the general conception, especially the hyperglobal visions I criticized in the last chapter. This is truly unexpected, not only because most people think that Gates’s business empire, the Microsoft Corporation, is a perfect example of globalization at work but also because Microsoft software lies at the heart of the technology that people imagine is driving the globalization process. You would think that Bill Gates would actively sell the idea of globalization because he appears to have a commercial interest in its popularity. Not so. Why?

I propose that we reject quickly the idea that Bill Gates might be naïve and unaware of his own economic interests in economic globalization. If Gates is not wrong, then perhaps the common image of the global business is not right—or not entirely right. This chapter intends to raise doubts about the extent of economic globalization and expose some contradictions in the globalization process through a comparison of globalization in theory with case studies of actual globalization drawn from among the most global firms in my home region, the Pacific Northwest of the United States: Nike, Boeing, the Frank Russell Company, and of course Microsoft.

 

The Global Business in Theory and in Practice

What would a truly global firm look like? Like so many things, true globalization is easier to recognize than to define. I propose that we think of the truly globalized firm as being a business that exhibits both demand-side and supply-side globalization.

Demand-side globalization is the idea that a firm sells its product in a global consumption pool. A global business exists to satisfy a global demand for identical, or at least highly similar, goods and services. There is a lot of superficial evidence that these global markets exist. I am writing this chapter in Bologna, Italy, which is about as far away from my home in Tacoma, Washington, as you can get. Yet when I walk down the block to the Piazza Maggiore, I can see McDonald’s hamburger signs, Nike shirts and caps, and assorted Chicago Bulls paraphernalia. Businessmen pause beside the Neptune fountain and yell into their cell phones, just as they do at home. When we think of global businesses, we imagine an enterprise scaled to service a global market.

Supply-side globalization is the idea that a firm’s production function draws resources from global pools. Its goods and services are made wherever production is most efficient, drawing raw materials, labor, technology, and creative ideas from around the globe and shifting from source to source as competitive conditions apply. The output of the global business is the result of a global division of labor.

I propose that globalization means that a business firm both produces and sells in global pools—that it exhibits both demand-side and supply-side globalization. There is a qualitative difference between a global firm, as defined here, and a firm that produces in one place and sells everywhere (think Perrier) or has international production processes but essentially sells in distinct local markets (with distinct local character and competition). The former type of firm is multilocal and the latter is transnational. These are important and growing types of business arrangements, but they are not global in a meaningful sense. They are too tied to local resource pools of one kind or another.

A global firm, as defined here, is truly a creature of the markets. It floats in a virtual reality defined by its access to demand-side and supply-side resource pools—and is not encumbered by local attachments, loyalties, or obligations. 5   When globalization is sold, as either threat or opportunity, this is the kind of global firm that is conjured up.

This definition of a globalized business is not easy to satisfy. There are not many truly global firms, but some do exist. If any business is global in this sense, it is the Nike Corporation.

 

Nike and the Global Swoosh

Nike is the quintessential global firm. If the future is true globalization, then the future is Nike. It is worth taking a closer look at Nike for two reasons: to see what actual globalization looks like and to consider, perhaps, how rare a creature a truly global firm really is.

“Nike Corporation was born a globalized company,” according to Miguel Korzeniewicz, who has studied the company with the global swoosh as an example of a “global commodity chain.” 6   Nike’s famous roots are, of course, very local. Most readers of this book are probably already familiar with the legend of college runner Philip Knight (now 35 percent owner of Nike) and his University of Oregon track coach, Bill Bowerman. Bowerman’s invention of the running shoe “waffle” sole, which he made by putting rubber in a kitchen waffle iron, is the designated source of Nike’s success, but Knight’s marketing skills are probably more important overall. The first Nike shoes were made in Japan, and over the years more than 99 percent of Nike shoes have been imported through a global commodity chain that links Nike’s mainly core markets with its contract producers in the semiperiphery (e.g., South Korea) and the periphery (e.g., China and Indonesia).

Throughout its history, Nike has consistently combined technical innovation and aggressive marketing. Its business still includes running shoes but now includes a wide range of other products in both footwear and sports-related markets. I have not yet seen a Nike perfume or cologne, but it would not surprise me if one exists. Nike’s trademark is that well known.

Nike is everywhere. Here in Bologna, for example, both teenagers and adults wear Nike clothes and baseball caps as items of fashion. The older items say “Nike” in big letters; the newer stuff simply has the “swoosh,” the exclusive trademark. The shoes for some reason are not as visible, perhaps an indication that Italian style persists. The African street merchants on Via Independenza hawk cheap but authentic-looking swooshed baseball caps from which Nike will surely never receive a license fee.

Nike is truly global by my definition because it swims in both pools. It has helped create a global consumption pool for its sports-related products, which it makes by drawing resources from the global production pool. It works hard at making both production and consumption global, reaps enormous profits, and takes a good deal of criticism in the process.

Nike does not have many employees (only about 14,000 in 1995) for a corporation with almost $5 billion in sales (1995) and a market value of nearly $10 billion (1995). The key to this high productivity is that Nike’s core business employees do not make shoes: Their job is to make customers. To do this, they make images and icons. Shoes, I think, are almost an afterthought. Nike invests heavily in creating demand for its products by building its stable of celebrity endorsers and making the swoosh a symbol of their lifestyles. The well-publicized multimillion dollar signing of golf prodigy Tiger Woods in 1996 was only the most recent indication that Nike aims to associate the swoosh with success and celebrity in the global market.

Nike’s success at creating a global trademark makes it vulnerable to charges of cultural imperialism by people who argue that globalization is the end of culture. But I am unconvinced that my Italian students experience any profound cultural transformation when they put on a swoosh cap or root for the local soccer team that wears swooshed shoes and shirts. It is a fact, however, that wherever I go I see swooshes sprouting on sports team uniforms and footwear. Nike competes in all the sports and all the markets and faces considerable specific competition in each, although it is clearly the leader in the industrial sector overall. A global firm requires much attention to detail and local market conditions, but the creation and cultivation of global superstars like Michael Jordan is part of the game, too.

Nike’s global marketing strategy is postmodern, according to Miguel Korzeniewicz. He perceives a shift from the consumption of material goods to the consumption of symbols and signs. “In a sense, Nike represents an archetype of a firm selling to emerging postmodern consumer markets that rest on segmented, specialized, and dynamic features.” 7   “Image is Everything,” as the Nike ads themselves boldly assert. What Nike produces—where and how—depends most on the image Nike wants to sell—and the design, advertising, and marketing considerations that derive from that image. 8

If we associate the spread of swooshes with the cultural effects of globalization, then we also associate the production of swooshed products with the globalized production’s economic effects. Most Nike shoes and other products are made in Asia. Nike contracts with local firms to produce its products. It bargains effectively with local businesses and governments and has moved production (from South Korea to China and Indonesia, for example) when cost and labor market conditions have changed.

Nike does not own the factories that make its shoes. It typically forms partnerships with local firms or with Korean or Taiwanese investors. Nike pays wages that are usually high by local standards. In Indonesia, for example, factory wages of $2.28 per day are both legal (the national minimum wage is $2.28) and high enough to attract 120,000 workers to factory jobs making Nike shoes because so many other jobs do not pay even this legal minimum wage. 9   (The Nike-contracted factories in Indonesia therefore employ almost 100 times as many workers as Nike itself!)

The practice of mobile global capital paying workers a few dollars a day to make shoes that sell for over $100 a pair and are promoted by millionaire endorsers such as Michael Jordan and Tiger Woods naturally draws criticism. It isn’t hard to figure out that the cost of Nike products is determined more by marketing expense than by production costs. The cost of creating and maintaining a global consumption pool are apparently very high. In fact, Nike’s profit margins are not especially high: Income has historically been less than 10 percent of sales. It follows that Nike needs to keep production costs so low (and use the global production pool to do so) because its marketing expenses are so high.

Nike defends this arrangement vigorously. The company’s view is that globalization is part of the process of economic growth that benefits the low-wage companies where its products are manufactured.

“Whether you like Nike or don’t like Nike, good corporations are the ones that lead these countries out of poverty,” said Nike Chairman Philip Knight in an interview. “When we started in Japan, factory labor there was making $4 a day, which is basically what is being paid in Indonesia and being so strongly criticized today. Nobody today is saying, ‘The poor old Japanese.’ We watched it happen all over again in Taiwan and Korea, and now it’s going on in Southeast Asia.” 10

The people who write about the end of the state, the end of culture, and the end of geography are imagining a world dominated by Nike-style corporations, controlled by a few dozen Philip Knights, who sit in their equivalents of Beaverton, Oregon, and pull the strings that command resources from global production and consumption pools. Sitting at the center of the universe, they are the rich and powerful masters of both demand-side and supply-side globalization.

Maybe they are correct in this view of the future. But I suspect that they do not appreciate how unusual Nike is and how rare is the actual global firm.

 

The Economics of the Global Business

Nike is an example of where the process of globalization can lead, but there is good reason to think that truly global firms such as Nike might still be rare creatures. There are valid reasons why it is difficult to achieve both demand-side and supply-side globalization. In the next two chapters I introduce the idea that fundamental instabilities in the system of global finance creates a built-in limit to the globalization process. Here, however, I want to focus on four other factors that are easier to see and perhaps even more important.

First, I want to argue that states still exist and still matter. That is, the nation-state retains enormous power to shape the environment within which business operates. States can control critical aspects of individual markets. State power can be and is used to condition and shape both consumption and production resource pools. The resource pools for specific goods and services are a good deal less global than most people imagine, and state power is one reason why.

Second, local differences in language, culture, and history still matter. Local resource pools retain distinct characteristics that disappear when we look at them only at a high level of abstraction. Local markets are as different as they are alike. The international marketing textbooks are filled with studies of global strategies defeated by language, culture, or local practice.

In fact, the economic theory of the multinational corporation suggests that these factors generally put foreign firms at a decisive disadvantage relative to domestic firms with local knowledge. How, in general, can foreign managers hope to compete with local entrepreneurs who know the language, customs, laws, and practices? In general, it is argued, they cannot! An economic theory of multinational corporations has evolved to find explanations—abilities that a multinational might possess that would be sufficient to offset all the built-in disadvantages. 11   A successful multinational corporation must hold a special advantage, access to some resource not available on the market, that allows it to compete successfully with local firms. Special marketing or management skills or access to proprietary processes are possible sources of the “intangible” resources needed. In essence, the successful foreign firm must be a jump ahead of the domestic competition in some significant aspect of business, and it must have ways to keep the local competitors from catching up (such as patents, copyrights, trade secrets, etc.). The successful global firm must possess a special demand-side or supply-side resource, and it must be so potent as to overcome a world of local firms with local knowledge. 12

Nike’s special advantage is on the demand side. It brings special skills to its marketing efforts. Nike has consistently been able to associate itself with uniquely skilled athletes—Michael Jordan, Tiger Woods, Bo Jackson, and more. These associations, which Nike buys at high cost and uses with great skill, act as effective barriers to entry. There is really no way to compete with Michael Jordan when it comes to basketball or to celebrity associations. Nike makes the entry barrier all the more effective by signing unique talents in many individual and team sports. What Nike has done is to define a product based on personality as much as practical use and then exploit that market efficiently. As the Tiger Woods case makes clear, Nike must constantly find and invest in new personalities if it is to retain its intangible advantage. It is more expensive to make and keep the market (through personality investment) than it is to make the shoes and baseball caps themselves.

Nike makes good shoes (I wear them) and has also worked to achieve supply-side advantages. Its ability to manufacture products at low cost using global resources, however, is not in any way unique. Nike manages global production resources efficiently, but all competitive shoe manufacturers do this today.

Nike has used its research to improve its shoes, as with the patented “Air” insoles that cushion many of the more expensive shoes. The Air innovation is a good one, but other manufacturers have equivalent cushioning systems. Nike’s special skill was exploiting the Air trademark by first linking it with Michael Jordan (Air Jordan) and then using it to distinguish its other products.

Nike is a successful global firm, therefore, for two reasons. On the supply side, it does not try to compete with local firms with local knowledge. Rather, it employs them to make its products efficiently and at low cost and switches among local producers as demand and design factors change. On the demand side, Nike invests heavily in unique intangible resources in the form of athletes and trademarks and uses these effectively as sources of local competitive advantage and barriers to global market entry.

The third reason why globalization is limited is that people still matter. Much business is still conducted face to face, especially business in which trust must be established. One reason (certainly not the only one) why Japan remains an island in some global markets is that its business culture holds personal relationships to be so important. It is not clear that e-mail and Web pages can replace face-to-face contact in some important business transactions. Finally, I want to suggest that there are complex dynamics in doing “global” business that involve state power and policy, local market and resource environments, and personal business relationships. These seemingly small-scale factors can interact in ways that are far more important than access to global pools of consumers or workers. This idea—that local conditions can be more important than global reach—probably seems quaint and vaguely Victorian. It is a powerful idea, however, and it forms the basis of Harvard Business School professor Michael Porter’s book The Competitive Advantage of Nations. 13

Just a few miles down the road from here, northwest on the Via Emilia, is a small region where firms produce the best industrial ceramics in the world and dominate the international ceramics market. This was one of the industries that Michael Porter studied as he tried to understand what creates competitive advantage. He concluded that Modena’s success in ceramics was based on the dynamic interaction of highly competitive local firms, highly demanding local consumers, competitive and innovative markets, and a supportive local economic environment. The locally driven dynamic interaction of public policies, demanding buyers, and innovative producers was the source of global success, Porter concluded.

Nike is a global success story. It is deceptively easy to let Nike’s example lead us to believe that all successful international firms are global firms and that the globalization process is therefore moving ever closer to its logical extreme. The following brief case studies indicate how power of the state, individual relations, and local resource pools constrain global reach.

 

Boeing: The Sky is the Limit

My Nikes and I flew from Seattle to London to Bologna on Rolls-Royce–powered British Airways Boeing 747 and 757 jets. Every single country that we flew over was part of Boeing’s global strategy. Boeing sells its airplanes all over the world, as most of us know, but it also produces its products in a global workshop that extends from the factory floor in Renton, Washington, to village workshops in the Chinese periphery.

Consider the state of Boeing’s global business. Boeing exports greater dollar value in a typical year than any other firm in the United States. Boeing’s global commercial sales are so large that they alone can skew the balance of payments statistics of the rest of the U.S. economy. Boeing is almost big enough to be a nation in many respects, and a look at Boeing actually tells us something about both global business and the condition of the nation-state.

In November 1996, before its merger with McDonnell Douglas, the Boeing Company directly employed over 120,000 workers, most based in the United States. 14   This large workforce makes Boeing a completely different type of operation than Nike’s more “hollow” corporate structure. Boeing’s 1996 profits were more than $1 billion on revenues of more than $22 billion. 15   Both figures, but especially profits, are expected to grow exponentially in the future owing to a variety of factors, including the merger of Boeing and former rival McDonnell Douglas, the acquisition of Rockwell International’s defense and space operations, and increasing production of the computer-designed 777 commercial aircraft, which is expected to generate profits far earlier than previous Boeing products. High-volume production of the redesigned 737 aircraft will also generate higher revenues and profits. Boeing is in many lines of business, but here I focus on its commercial aircraft operations.

Boeing is big, but big does not necessarily equal global. Big can be national, producing and selling mainly in one country. Big can be international, operating from one country but selling in many. Big can be even multilocal, competing separately in many local markets in different nations. A firm can grow large in many ways and still not be global. Big business is not necessarily global business.

But Boeing is a global business, in my book, because its operations display both demand-side and supply-side globalization. Boeing’s commercial aircraft sales take place in a worldwide arena. Although only one serious competitor, Airbus, remains for the full range of commercial aircraft that Boeing sells, the two firms engage in apparently fierce competition for every sale. Boeing could not survive in its current configuration based on only the U.S. market. It is necessarily a global animal.

Boeing is almost equally global on the supply side. Although its main assembly plants are located in the United States, components and key subassemblies come from around the world, especially Europe and Japan but now also China. The pieces are brought together and assembled in the Pacific Northwest, but Boeing planes are actually produced one part at a time all around the world.

Boeing’s business is global, to be sure, but I want to argue that it is not a global firm in the same sense as Nike. Nike is a creature of the market. Boeing is a creature of the state. It almost is a state.

Many of the most important aspects of Boeing’s business are defined by state policy. The fact that Boeing operates as it does is an indication of the power that states retain in the world today—not their impotence, as the “end of the state” writers would have us believe.

No example so clearly illustrates the impact of state power on Boeing’s global business as does its relationship with China. In 1996 the Seattle Times published a chronology of Sino-Boeing relations. 16   Here are a few items from the Seattle Times list that indicate how closely tied are politics and economics in the case of Boeing and China.

1972   Nixon meets Mao Tse-tung in Beijing. Boeing sells 10 707s to Chinese.
1978   Deng Xiaoping launches “four modernizations” program. China orders three Boeing 747s.
1979   Washington and Beijing establish diplomatic relations; Deng visits U.S. and tours Boeing assembly plants in Renton and Everett, Washington.
1980   From 1980–1989, China orders 34 Boeing 737s, 33 757s and 10 767s.
1981   Xian Aircraft Co. signs contract with Boeing to supply machine parts for the 747.
1982   Xian Aircraft signs second contract with Boeing to produce 737 forward-access doors. That leads to further contracts for 747 trailing-edge ribs, 737 vertical fins and horizontal stabilizers. Boeing eventually signs supplier contracts with Shenyang Aircraft Co. to build 757 cargo doors and with Shanghai Aircraft Co. to produce 737 component parts.
1990   China places one of the largest commercial-aircraft orders in Boeing history: 36 airplanes and 36 options for a total value of $9 billion.
1994   Clinton “delinks” human rights from debate over granting most-favored-nation trading status to China. Xian Aircraft Co. wins contract to produce 100 tail sections for Boeing 737-300/500. China takes delivery of its 200th Boeing airplane.
1996   U.S.-Sino relations deteriorate over trade, software piracy, human-rights abuses and nuclear-proliferation violations. China delays an estimated $4 billion order for Boeing airplanes because of tensions in U.S.-Sino relations. Meanwhile, Xian Aircraft completes construction of new $600 million factory, signs contract with Boeing in March to build at least 1,500 737 tail sections. Northrop-Grumman, which builds Boeing 757 tail sections, announces in March it will subcontract a percentage of the work to Chengdu Aircraft Manufacturing Co. Boeing announces in April that it plans to hire 8,200 employees (6,700 locally), mostly production workers, to meet growing demand for new airplanes fueled largely by the rapid expansion of air traffic in China and Asia. To date, 17   Boeing has sold 252 airplanes to China and employs more than 100 company employees throughout the country.

Boeing competes in a world where national governments still have the ability to influence or determine the pattern and terms of the commercial aircraft sales. The notion that the nation-state is dead, the victim of global business power, would come as a surprise to executives at Boeing and Airbus. State influence is even greater in the market for military hardware, but that side of the business is not my concern here, although obviously it is Boeing’s concern. To market its products effectively, Boeing must be able to negotiate with foreign governments effectively. The global business of commercial aircraft is equal parts economics, technology, and politics.

Boeing has several bargaining chips besides the obvious market ones of price, quantity, and quality, which give it the power it needs in its relations with powerful states. Boeing can negotiate with foreign governments using the resources over which it has direct control, such as access to technology, contracts for parts and subassemblies, training, maintenance, and so forth. Boeing can provide jobs, technology, and resources for a nation that places a large order, and, in fact, the company finds itself increasingly under pressure to do so. These side payments and bargains are called offsets. More and more, powerful states make Boeing pay for new orders with offset contracts and investment.

The Seattle Times investigated Boeing’s increasing production in China, for example, and reported that

All three Western aircraft builders—Boeing, McDonnell Douglas and Europe’s Airbus—have concluded they must meet Chinese offset requirements to ensure their future. But critics see the export of Western aircraft production and technology to places like the Shaanxi Valley as a threat to the long-term interests of U.S. workers, their communities and even the companies themselves.

Boeing officials say they must enter these offset agreements or they will lose the business to their rivals. Aerospace companies have long acceded to offsets in military and weapons sales, but only recently have been faced with countries that demand offsets in commercial aircraft sales.

Boeing’s chief international strategist, Lawrence Clarkson, said the company’s strategy is “to do what it takes to remain the preferred supplier” for China, the world’s fastest growing market. The price has been giving up some production work and technology to maintain access to the Chinese market. 18

Offsets come in two flavors. A direct offset is very straightforward: In exchange for an aircraft purchase, the buyer nation receives subcontract work or access to production technology. A portion of the aircraft is produced under license from Boeing. Direct-offset deals with Japanese firms were key parts of the bargains that permitted Boeing to launch new aircrafts in the 1980s and 1990s.

Indirect offsets take many forms. In the 1970s they were countertrade—essentially barter arrangements in which aircraft producers helped their customers buy equipment by accepting part payment in locally produced goods unrelated to the aircraft business. These days, indirect offsets are more likely to take the form of technology transfer unrelated to the actual sale, 19   since nations are apparently more interested in acquiring advanced technology than in simply selling more of what they already have the know-how to produce. The competition for sales to China has been particularly intense and has generated high levels of offset investment. China sales are large now and may be huge in the future. The International Air Transport Association estimates that by the year 2000 half of all air flights in the world will take off or land in Asia. 20   Bidding for the Chinese share of this business, Boeing has invested $100 million in a flight safety program for China. McDonnell Douglas, however, agreed to the coproduction of aircraft in Shanghai. Airbus invested $50 million in a flight simulator center. 21   The offset bidding continues between Airbus and Boeing.

Offsets have obvious benefits to foreign governments, and they may also have indirect benefits for Boeing. Offsets “force” Boeing to shift some production to lower-wage countries, which may make business sense in some cases anyway. Boeing’s domestic unions clearly worry that foreign offset production weakens their domestic bargaining power with the firm. Offsets may also have some benefit in terms of insulating Boeing from foreign exchange risk, although this is probably not a very important factor in these decisions.

Boeing has to be very concerned, however, about offsets that involve technology transfer. Yesterday’s barter customer is becoming today’s subcontractor and may become tomorrow’s competitor (at least in the cases of China and Japan). The story is told—and apparently is true—that one of the first Boeing 707s sold to China was disassembled and “deengineered” to serve as a guide for a China-built plane. So far behind was Chinese technology in the 1970s that their 707 clone, built of steel instead of aluminum, was effectively unflyable. Technology transfer today is far more likely to result eventually in marketplace competition.

Boeing feels driven by competition to risk long-term technological advantages to gain current sales. Clearly Boeing must maintain a rapid pace of technological advance if it wishes to maintain its position in this bargaining environment.

Boeing’s second important bargaining chip is its potential ability to influence U.S. foreign policy to favor a customer-government. President Nixon went to China on Air Force One, a converted Boeing 707 (the President flies in a 747 today). And it is no accident that Boeing sales to China began almost immediately thereafter. It is probably also no accident that Henry Jackson, the influential anticommunist U.S. Senator who might have prevented the political and economic opening of Sino-U.S. relations—but didn’t—represented Washington State, where Boeing’s headquarters are located. “The sale of Boeing 707s to China was politically a very important, symbolic act and personally approved by President Nixon,” said former Ambassador Chas Freeman, Nixon’s China interpreter. “It was the Chinese who asked about Boeing aircraft.” 22

The foreign policy chip seems to be a less and less important factor in Boeing’s strategy, however, although U.S. foreign policy still matters. One reason is that foreign governments are motivated more by offset jobs and investment rather than by potential foreign policy benefits, reflecting the triumph of the market over international relations. Even more important is the fact that Boeing’s domestic political influence has diminished somewhat, and it is less able to deliver political goods for foreign governments.

With the end of the Cold War, Boeing’s strategic importance has declined. Boeing has become one of several important U.S.–based global firms competing in international markets. Its days of being given special preference in foreign policy politics seem to be over. The number of international firms seeking to influence U.S. foreign policy has increased, and some of these firms have interests that directly conflict with Boeing’s interests on specific issues. Microsoft’s “get tough” line with China about intellectual property rights, for example, clashed in 1996 with Boeing’s commercial interest, which was to pursue a policy of engagement and discussion with China on issues such as property rights and human rights, so as to minimize the risk of lost orders. Boeing is obviously less effective in advocating a foreign policy stance when it must compete with the likes of Microsoft than when it is unopposed by other “global” firms.

If it now sounds as though Boeing has its own foreign policy, that is because, essentially, it does. Every truly global firm has a foreign policy, I suspect, because each of them must negotiate with nation-states on the demand side, the supply side, or both. As yet, no global firm is more powerful than the nation-states with which it deals. The biggest difference between Boeing’s foreign policy and that of a nation-state is that the former probably has greater internal consistency. Boeing’s foreign policy is realist, taking state power and national interest into account in a direct and pragmatic way, as the previous comments on offsets indicate.

Boeing can also be used as a tool by foreign governments to influence (or attempt to influence) U.S. foreign policies. As a result, Boeing’s fate (or at least the fate of some of its aircraft sales) is out of its hands. In 1996, for example, Boeing lost a large Chinese sale to Airbus, an event that it blamed on the Clinton administration’s threat to impose trade sanctions on China if it did not more actively enforce its copyright agreements with the United States. (Microsoft, with much at stake, supported the hard line; Boeing obviously opposed it.) In all, Boeing estimated that it lost sales of ten 777 aircraft, five 747s, and as many as one hundred 737s—a huge blow. 23   No wonder Chinese pressure on Boeing translated into Boeing pressure on Washington.

In a revealing 1996 interview, Boeing Commerical Aircraft President Ron Woodard, frustrated at these lost orders, listed Boeing’s recent efforts on China’s behalf: 24

It is significant that the first two items were political—using Boeing’s clout to promote Chinese interests with the U.S. government and the World Trade Organization. That these efforts appear on the same list (and ahead of) millions of dollars worth of offsets and other investments indicates clearly the importance of politics in Sino-Boeing affairs.

China seems to have been a particularly effective bargainer in its relationship with Boeing, but perhaps I draw this conclusion too easily. China’s current market for commercial aircraft is large, its potential market huge, and the control that government has over orders is absolute. It may be more accurate to say that China has used Boeing and Boeing has used China. Japan has also bargained effectively with Boeing. Japanese airlines have been important early customers for Boeing’s new aircraft models, and Japan has received large offset contracts in return.

The political economy of the commercial aircraft industry in general and the Boeing Company in particular is fascinating, and I clearly have only scratched the surface here. But I hope I have made my point about globalization. Boeing is as unlike Nike as can be imagined. Boeing is a global firm, with enormous market power. But it is effectively as much a creature of the state as it is of the market, in the sense that its most important choices are heavily conditioned by the existence of state power and how that power can be used.

 

The Frank Russell Company: Tacoma as the Center of the Universe

Everyone reading this paragraph has heard of Nike, Boeing, and Microsoft, global firms with strong brand-name recognition. Only some of you, however, will know about the Frank Russell Company. Frank Russell represents a different aspect of globalization. It is the sort of firm that we imagine in the global dream: a high-tech financial firm with interests in every corner of the world. Frank Russell is the kind of company that can only exist in the world of postgeography globalization. What Frank Russell is and what it is not tell us a lot about the nature of globalization today.

The Frank Russell Company is amazing. It is the world’s largest consultant to pension funds, including the pension funds of many of the largest international businesses. Frank Russell’s main line of business is to advise these corporations about which investment advisors can most effectively meet their goals. The company directly manages about $26 billion of customer assets and provides advice that influences more than $600 billion in client assets. 25   Incredibly, about 1 percent of the New York Stock Exchange’s daily volume is initiated by brokers at the Frank Russell world headquarters office in Tacoma, Washington.

Tacoma? Well, yes. The Frank Russell Company has offices in New York, Toronto, London, Zurich, Paris, Sydney, Auckland, and Tokyo, but the home office is indeed located a 30-minute walk from my home in Tacoma. Now don’t get the wrong impression: Tacoma isn’t Mayberry RFD, but it also isn’t Seattle or San Francisco, or New York. Tacoma is a thriving port city on Puget Sound, with a population of 175,000, an active local culture, and the comfortable feeling of the blue-collar town it once was. Tacoma was built on trade, transportation, natural resources, and the financial services that go with them. As trade and transportation have become global, so has the local financial structure.

Tacoma is a nice place to live, especially if you enjoy the mountains and the sea. In fact, that’s why the Frank Russell Company has been headquartered in Tacoma, not New York, Tokyo, or London, since it was founded in 1936. CEO George Russell and his family prefer the quality of life on Puget Sound to any other, and they have constructed a global financial enterprise with Tacoma as its center.

Frank Russell’s 1,200 employees work in several areas of the investment business—investment strategy and research, and manager and capital market research, for example. 26   Investment and manager research is the company’s bread and butter and the areas where its reputation was made. Russell researches investment managers and makes recommendations to clients. It essentially manages investment managers rather than managing investments. The company’s site on the World Wide Web describes their core business in this way:

Frank Russell’s name is becoming better known as the company seeks to expand into related fields, where its knowledge and analytical abilities can be put to good use. Recently, for example, the company began to accept individual investment accounts of $50,000 or more, and it has quietly begun to advertise its services and try to develop greater name recognition among investment-minded individuals. One important element in this strategy has been the widely publicized Russell 1000®, Russell 2000®, and Russell 3000® stock indexes. Other indices track markets in Asia and in emerging markets. Index funds based on the Russell indexes are now an important investment vehicle in international finance. As of 1997, more than $100 billion was invested in these funds. 28

Global financial analysis is necessarily highly quantitative. Frank Russell has developed powerful computer tools to aid in its analysis. Now some of these tools are being offered to clients as products for their own use, including PC software programs Russell Performance Universes for Windows™, Russell Performance Attribution for Windows™, and Russell Style Classification for Windows™. Russell also combines its analytical tools and expertise to support clients with strategic planning, product positioning, marketing, reporting, and organizational structure. More than 1,000 clients worldwide use Russell’s analytical tools and services concerning investment performance. 29

Because the Frank Russell Company seems like the model global financial enterprise, it is convenient to attribute to it certain qualities that we associate with such firms. In particular, it is easy to imagine that Frank Russell is able to do global business centered in Tacoma, Washington, on the basis of telecommunications and microcomputing power. These are the standard explanations of business location in the End of Geography scenario. This view is right, when applied to Frank Russell, but it is also totally wrong.

The Frank Russell Company does rely on telecommunications systems to link its international offices together and to link them to their various clients. And it does also use advanced computer-based methods of technical analysis. So it does fit the current image of global finance, and if you are looking for these qualities, you will find them. But, in fact, these are qualities found in nearly all businesses these days, global or not, for the costs of telecommunications and computing are low enough that their use is no longer limited to high-tech global businesses. The technology we associate with globalization now finds mundane use. 30   The Frank Russell Company uses advanced technology and would be uncompetitive if it didn’t, but this is not the basis for its global competitive advantage.

Datamation, a specialized business publication, featured a profile of Frank Russell’s telecommunications system in a 1993 issue. 31   Interestingly, the focus of the article, “Building a global network on a shoestring,” was the company’s early ability to establish effective telecommunications with minimal investment. Although the company’s network today is state of the art, the company was able to do business effectively in 1985 with a 2,400 bits per second modem hooked up to ordinary phone lines—a communications system not far removed from the phone and telegraph lines that connected Keynes to his global investments in the pre–World War I era of globalized markets.

The Frank Russell company was a competitive global business long before advanced telecommunications became an important aspect of its operations. Neither computers nor telecommunications explain Frank Russell’s place at the center of the universe. The source of its global advantage is one of the least mobile, lowest-tech, and most valuable business resources: people. Walter Bagehot, the famous nineteenth-century political economist and editor of The Economist, was keenly aware of the importance of people and personal relations in international finance. In Lombard Street, his analysis of the City of London’s financial markets, he noted that finance is a business of risk and trust. Financial risk, he wrote, is offset by personal trust. Banking will always involve risk, he thought, but would always be fundamentally sound because it would always be based on face-to-face dealings and personal bonds of trust.

Bagehot was right on many matters, but wrong on this one. As we will see in Chapter 4, international finance today is anything but personal, and risk and trust are sold in turbulent financial markets. The lack of human contact may be one reason why these markets are so unstable. But where it is really important—where much is at stake, as in the case of enormous pension funds—face-to-face contact, personal evaluation, and trust are indispensable. These “people” services are at the core of the Frank Russell global web.

Underneath the stock indexes and the computer programs, Frank Russell’s core business is based on personal relationships among the firm, its clients, and the investment managers it evaluates. When talking with people associated with the firm in various ways, it is clear that personal contact matters. You of course do not invest $1 billion in employee pension funds with people you do not trust, nor do you recommend a pattern of investment of these funds among investment managers whose judgment you question. It is obvious that personal relations and judgment are the key factors in these transactions, and have been since the days of Keynes and Bagehot. But it is easy to overlook these factors in explaining global business; the example of the Frank Russell Company teaches us to avoid this mistake.

The power of people is perhaps best illustrated by an organization called the Russell 20-20 Association. It is an independent, nonprofit group of twenty major pension plan sponsors and twenty major money managers, who together represent more than $1 trillion in investable capital. 32   The 20-20 Association, organized by George Russell, the company CEO, travels as a group to emerging markets where relatively small amounts of investment capital can make a relatively large difference in local economic activity. The personal contacts that they make are apparently the key to making investment decisions in these markets. Their investments, secured by face-to-face contact and bonds of trust, are probably a good deal more secure than the faceless emerging market funds that so many individual investors now hold in their portfolios.

In a sense, then, global financial enterprises like Frank Russell are also local businesses, based on the same kinds of personal trust relationships that can be seen in the movie “It’s a Wonderful Life.” A firm like Frank Russell has global offices, but it also has important elements of an old-fashioned mom-and-pop operation. It succeeds globally because it knows how to do business locally, face to face.

Frank Russell’s globalization is based on personal relations, showing that people still matter in global markets. Globalization, at least in finance, remains a stable enterprise as long as it does not expand too far beyond the range of face-to-face relations. Globalization can go further, of course, driven by technology and profit, but it ceases to be backed by trust and becomes potentially destabilizing. 33   At some point, globalization crosses the line and becomes susceptible to crisis and chaos, which are the topics of the next two chapters.

 

Microsoft and the Global Software Market

This chapter began with Bill Gates’s not-very-global vision of the business world, so it is fitting that the last case study is Gates’s clearly global firm: the Microsoft Corporation. In fairness to BillG@microsoft.com, it must be said that The Road Ahead was written before Microsoft fully embraced the Internet and the vastly expanded communications possibilities it had made possible. In terms of its products and product development strategies, Microsoft is now as much an Internet company as it is a desktop PC company. But even in the pre-Internet days when The Road Ahead was being written, Microsoft was already a global company.

The unveiling of Windows 95 illustrates Microsoft’s global strategy. This powerful new personal computing environment appeared all at once in late summer 1995. A simultaneous worldwide product introduction occurred, with press events and product demonstrations beamed globally via satellite and accompanied by custom-tailored local publicity efforts. You had to be pretty far from a center of capitalist civilization to avoid hearing about Windows 95.

Much can be learned about the nature of actual globalization from Windows 95 in particular and the operations of the Microsoft Corporation in general. Generally, we think that Microsoft is in the software business, producing and selling shrink-wrapped boxes that contain diskettes and CD-ROMs. Although this is true, it misses the point. Microsoft is really in the intellectual property rights business. The diskettes, CD-ROMs, and Internet download sites are simple, more or less efficient product delivery systems. Microsoft is really selling services—the use of the ideas and innovations of its designers, software engineers, and “content editors.” The exact nature of these ideas is patented, copyrighted, or sometimes just kept secret so that Microsoft can earn an economic return on their use. Intellectual property rights are the legal instruments that guarantee Microsoft exclusive use of the ideas and innovations that it produces.

The problem with the services that Microsoft sells is that they are too easy to copy, a process called pirating in the software business. Even before Windows 95 was released, for example, it was available for purchase in many countries in pirated versions, which were usually illegal copies of the test or “beta” versions of the product available free over the Internet.

It is easy and relatively cheap to buy (or steal) one copy of Windows 95 and to produce thousands of pirated versions. In the early days of personal computing software, firms went to extravagant technological lengths to limit software pirating, but ultimately these efforts failed for both demand-side and supply-side reasons. On the demand side, customers did not much like their use of honestly purchased products limited by complicated passwords or other constraints. On the supply side, software pirates had a strong incentive to find ways around whatever barrier the software producers erected. Nothing stopped pirating. Today, software producers make few technological attempts to limit pirating of the popular software—the focus has changed to the legal system.

Microsoft’s efforts to protect its core business have shifted to the realm of international diplomacy. Microsoft seeks to encourage individual governments, particularly of less-developed countries where pirating is an epidemic, to commit to stronger laws and the enforcement of intellectual property rights. Microsoft also encourages the U.S. government to use its influence in international organizations such as the World Trade Organization and the Asian-Pacific Economic Cooperation forum to gain stronger international agreements on trade-related international property rights. It is not surprising, therefore, that these issues were highlighted in the final Uruguay round of General Agreement on Tariffs and Trade (GATT) negotiations, are currently a major concern of the World Trade Organization, and are subject to intensive international negotiations.

It seems that a global firm needs a foreign policy and must influence the foreign policies of the nations in which it operates. During the North American Free Trade Agreement (NAFTA) treaty debate in the United States, for example, Bill Gates himself appeared in industry-sponsored television commercials supporting ratification of the NAFTA treaty. One reason for this active approach was the notion that stronger trade links would allow stronger trade rules, particularly with respect to intellectual property rights.

Global firms need to have global advantages, which increasingly take the form of patents, copyrights, or other intellectual property rights. As the Microsoft case illustrates, protecting and enforcing these valuable property rights is expensive and difficult and, at the margin, limits the degree of true globalization that we can expect. This problem also illustrates an unexpected paradox of the nation-state and globalization. Although the received wisdom is that globalizing firms such as Microsoft diminish state power, in fact the success of these firms requires a strong state. A strong state is needed to enforce the intellectual property rights that are the basis for profitable global trade and to negotiate the international standards and agreements that are necessary to create the global environment within which these industries can prosper.

State power and a commitment to the enforcement of intellectual property rights are one limit to Microsoft’s global market expansion, but not the only one. For a global company, Microsoft is surprisingly multilocal, doing business in local production and consumption pools rather than in the global resource pools we found in the Nike case.

Microsoft’s products, for example, must be carefully tailored to local markets, especially in terms of language. English is the lingua franca of the software business, but not of the mass markets of end users that Microsoft aims to please. To market on a global scale requires that products be customized to take into account language differences, at a bare minimum. There is, for example, a Vietnamese version of Windows 95. Even the standard “English (U.S.)” that I am using to write this paragraph includes 25 other keyboard systems in the control panel to deal with language barriers I might encounter.

Since there is no global language, global products must be tailored to local lingo, which introduces a strong multilocal aspect to marketing, help texts, telephone product support, and instruction manuals. But the problem sometimes goes well beyond just language differences. One of my favorite Microsoft products is Encarta, a multimedia CD-ROM encyclopedia. Like any encyclopedia, Encarta is full of history. Now history wouldn’t seem to present any special problem for a global product, apart from the obvious problems of translating text from one language to another. But there is no history that is not someone’s idea of history, and the particular way that history is told has deep political consequences. You can imagine, for example, that the Japanese occupation of Korea during World War II is told differently in Korea than it is in Japan or that details of the U.S.–China trade and human rights discussions are told differently in China than in the United States. Encarta must therefore be sensitive not only to language but also to politics and obviously culture, religious views, and other important factors. Microsoft has been forced several times to alter Encarta’s local content in response to local outrage and threats of government sanctions.

The cost of localization is a problem. Although software prices are higher in Europe and Asia than in the United States, for example, this in part reflects higher costs. The fixed costs of customizing the product are spread over a smaller number of units, reducing profits. Higher prices are necessary to preserve profit margins. But a vicious cycle is present. Higher prices encourage pirating, which further reduces the number of legal sales, increasing average cost and pushing the price even higher. This provides an additional stimulus for pirates, and the vicious cycle continues. The costs of localization therefore help drive the dynamic of software pirating, making localization a costly process indeed.

Global products, even highly technical ones like Microsoft’s, cannot always be truly global. To a certain degree, each product is also a local product, modified and customized for the locality in which it is to be sold. This fact limits globalization, or at least limits the types of firms and products that can be truly global. It also creates opportunities for those local firms that better understand the local politics, customs, language, and culture. Demand-side globalization is deceptively difficult to achieve. Not even Windows 95 can truly claim to be a global product.

For an International Economics class project, one of my students, Jon Westerman, decided to find out where the code for Windows 95 was produced.34 Jon is majoring in international political economy, but his hobby is personal computing, and he wanted to try to bring his two interests together. He expected to find that Windows 95 was a global product, produced around the world and sold around the world, like the Nike shoes he and his cross-country teammates wear. His research technique, naturally, was to search the World Wide Web. Much of what he learned confirmed his expectations, but not all of it.

A lot of the computer code that is at the heart of Windows 95 was written in India. In fact, Microsoft and other major software firms draw heavily from local labor pools of highly skilled software engineers in India. To a surprising extent, Windows 95 is an Indian product.

Jon went Net surfing, trying to discover why. What he discovered were highly technical and advanced graduate programs in Indian universities designed, apparently, to produce the skilled software designers and engineers that were needed by a dynamic and globally competitive local software industry. At one point Jon searched the Internet site of the Indian Institute of Technology (Bangalore) and found the following list of recent (December 1993) thesis titles:

V. Nirmala. Thesis: Implementation of a Distributed Shared Memory Platform Across a Network of Workstations

E. S. Padmakumar. Thesis: Evaluation of Cache Configurations for Future Single-Chip Uni- and Multiprocessors

G. Sridhar. Thesis: Process Scheduling Policies for a Heterogeneous Computing Environment

In each case, Jon’s efforts to access further information—even an abstract of the thesis contents—was met with a firm refusal: “Access Denied.” Jon concluded, and he may be right, that at least some of this research was being produced under contract for foreign clients like Microsoft. He was impressed with the sophistication of the scope of the research he discovered.

The software industry in India is of such growing importance, in fact, that it has become the subject of a series of reports in the Financial Times. 35   One article reported that over 140,000 Indians were working on projects for foreign firms, including (in order of sales) Hewlett-Packard, IBM, ACER, INTEL, Digital, Compaq, Sun, Microsoft, Apple, and Citizen.

Body shopping, the industry term for cheap labor for keyboard entry, was once the basis for the Indian software business. But this has clearly changed. Some of the most sophisticated software development in the world now takes place in specific centers in India, supported by advanced technical education programs in an environment fostered by government development projects. Another Financial Times study emphasized the increasing autonomy of the Indian industry. 36   Only a few years ago Indian software engineers were brought to Redmond, Washington, and other U.S. centers to provide lower-cost short-term assistance to U.S.–based development teams. Now, however, the resource pool in India has reached a critical mass. Indian software development is coordinated with related efforts elsewhere but no longer takes a back seat.

In effect, India has developed a pool of productive resources that displays some of the characteristics that Michael Porter finds necessary for global competitive advantage. Windows 95 diskettes and shrink-wrapped boxes are produced in many places around the world, but the key elements of its production are very local, indeed, and are based on local resource factors in places like Bangalore, India.

The nature of its business forces Microsoft to be surprisingly multilocal on both demand and supply sides of the market. Despite the global property rights that it seeks to protect and enforce, Microsoft turns out to be a firm that draws from a few skill-specific local resource pools and tailors its products to the demands of a great many local consumption pools. Microsoft’s success is perhaps based less on global vision than on the ability to simultaneously make sound decisions in a number of local markets.

In other words, Bill Gates’s vision of The Road Ahead is probably correct, at least for the Microsoft Corporation itself. The road ahead is probably not a radical change in the way that business operates as it has become globalized. Rather, the road ahead probably is to become much more efficient in managing the local resource and consumption pools that have been the object of business attention for centuries.

 

Globalization Limited

This chapter has looked at four examples of actual globalization: Nike, Boeing, Frank Russell, and Microsoft. What we have found is revealing. Each of these firms is global in the general sense that the term is used in print these days. However, only Nike is global in the sense that I have defined this term (and even Nike’s marketing strategy has a strong local emphasis in terms of specific celebrity endorsers).

Boeing shows us that state power is an important factor in economic globalization. As much as we expect markets to shape states, it is in fact sometimes the other way around. How and where Boeing airplanes are produced, and how and by whom they are used are very political matters.

The Frank Russell Company teaches us that people matter more and that technology perhaps matters less than is often suspected in global businesses. Global finance cannot be entirely divorced from the face-to-face evaluations and local knowledge that have always been important in the financial services industry. Finance is less trustworthy, and perhaps less stable, when personal relationships have been eliminated. Frank Russell makes its living, and a good one too, by producing trust. Even so, I suspect that trust is undervalued in the market today.

The Frank Russell case suggests that geography still matters, for no other reason than that the people who are the critical assets of a global firm must live somewhere. The local environment therefore matters. For the Russell family, I guess it was the natural environment of Puget Sound that caused them to establish roots there. But there are many elements of the environment, broadly defined, that logically matter to the people who make up a global firm. Microsoft highlights several important aspects of globalization. The problem in which software pirating threatens intellectual property rights illustrates the high cost of globalization and the increasing importance of the state and state power, both in domestic market regulation and international negotiations. Windows 95 and other Microsoft global products turn out to be surprisingly local in their production and their sale. The truly global firm is rightly a rare animal, perhaps even an endangered one, with so many forces working against its infinite expansion in all directions.

Microsoft’s business operation also illustrates a final point, which provides a link to the next two chapters. When we look closely at Microsoft’s operations, we can see that they are multilocal in one more way: They are forced to deal with the problems of local currencies. Microsoft, as with Nike, Frank Russell, and Boeing to different degrees, earns revenues and experiences costs in dozens of currencies whose relative values change daily. The bottom line for each global firm, and the profitability of investments and operations in specific countries, therefore depends to some degree on developments in foreign exchange markets. For example, Microsoft’s 1996 annual report listed the following global revenues: 37

US / Canada 1996 $2.68 billion
Europe 1996 $2.02 billion
Other international 1996 $1.47 billion

with “Other international” revenues growing at the fastest rate. 38   The report noted that

The Company’s operating results are affected by foreign exchange rates. Approximately 40%, 37%, and 38% of the Company’s revenues were collected in foreign currencies during 1994, 1995, and 1996. Since much of the Company’s international manufacturing costs and operating expenses are also incurred in local currencies, the impact of exchange rates on net income is less than on revenue. 39  

Microsoft reported cash and short-term investments of $6.94 billion. Investment was mostly in dollar-denominated assets but also in foreign currency positions in anticipation of continued international expansion. The company engages in hedging and international cash management, although the technical ability to hedge against foreign exchange risk for such large amounts over long periods is still unavailable. Like it or not, Microsoft is also a global financial firm, forced to deal with exchange rate risks and to engage in costly hedging operations. The more unstable the currency markets, the more costly it is to operate a global firm.

In the next two chapters I present what I think is a strong case: that these foreign exchange markets are risky and unstable. These markets do not seek out the “apple in a bowl” equilibrium that is the basis for our understanding of economic market stability. Rather, they are at times subject to crises and may be affected by systematic chaotic disturbances that make their motions fundamentally unpredictable.

This instability, I argue, is another limit to economic globalization. Unstable movements in foreign exchange markets discourage businesses from true globalization, forcing them, on the margin at least, to operate as local, multilocal, or international firms. This limit to globalization is important and fundamental because the process of financial globalization that makes specific global firms such as Nike possible also contributes to global financial instability, which limits the degree of globalization in general. Globalization is a self-limiting process. It would be wise to shift our attention from global theories, visions, dreams, and fears to a more focused study—of which this chapter is still just a hint—of actual globalization. Globalization in practice, I think, is more Bill Gates than Kenichi Ohmae.

The case against globalization based on financial instability lies ahead in the next two chapters. But financial instability is not the only limit to true globalization. It is probably not even the most important one. The factors of state power, personal relationships, and local resource and consumption pools discussed in this chapter are probably more significant in defining the nature of individual “global” firms.

Financial instability is, however, an important limiting factor to the process of globalization generally. Meaningful large-scale economic globalization is impossible in the unstable and turbulent financial markets of today.

 

Endnotes

Note 1: Microsoft Corporation, 1996 Annual Report (Redmond, WA: Microsoft Corporation, 1996), p. 5.  Back.

Note 2: Bill Gates with Nathan Myhrvold and Peter Rinearson, The Road Ahead (New York: Viking, 1995).  Back.

Note 3: Schools of commercial arithmetic prospered in this time. Businessmen sent their sons to school, where they learned to master their account books and so master the business world. These schools also eventually taught the liberal arts and laid the foundation for the Renaissance. When the printing press came to Italy late in the fifteenth century, accounting books and bibles were among the most popular titles.  Back.

Note 4: I am not really criticizing the book here; at the end of this chapter you will see that I think that Gates is right. I find the book to be interesting as a history of the microelectronics revolution through Gates’s eyes. I focus here on the fact that, as indicated in this book, Gates views global business differently from the way people think of it and from the way, I imagine, they must think that Gates thinks of it.  Back.

Note 5: For the record, I do not think that my overall argument about globalization depends critically on this particular definition of globalization. One may disagree with my definition of the global firm and still have doubts about the extent of actual globalization, which is my point here.  Back.

Note 6: Miguel Korzeniewicz, “Commodity Chains and Marketing Strategies: Nike and the Global Athletic Footwear Industry,” in Commodity Chains and Global Capitalism ed. Gary Gereffi and Miguel Korzeniewics (Westport, CT: Praeger, 1994), p. 261.  Back.

Note 7: Ibid., pp. 258–259.  Back.

Note 8: Ibid., p. 263.  Back.

Note 9: An excellent survey of Nike’s relationships with its subcontractors and with the governments of the nations in which its shoes are produced is found in the series “Nike’s Asian Machine Goes on Trial,” which appeared in The Oregonian on November 9–11, 1997.  Back.

Note 10: Keith B. Ricburg and Anne Swardson, “Close Up: Nike’s Indonesia Shoe Plant: Boon or ‘Sweatshop’?” Seattle Times, August 28, 1996, world news section.  Back.

Note 11: See Leon Grunberg, “The Changing IPE of the Multinational Corporation” in Introduction to International Political Economy, ed. David N. Balaam and Michael Veseth (Upper Saddle River, NJ: Prentice Hall, 1996), pp. 338–359.  Back.

Note 12: Of course, it may be that the ability to manage production or distribution globally is itself a valuable intangible advantage.  Back.

Note 13: Michael Porter, The Competitive Advantage of Nations. (New York: The Free Press, 1990).  Back.

Note 14: The bigger Boeing that has resulted from its merger with McDonnell Douglas is expected to have 1997 revenues of $48 billion, backorders of $100 billion, and more than 200,000 employees. Profits are expected to increase, but it is too soon as of this writing to know for certain the impact of the merger on the bottom line.  Back.

Note 15: “Booming Boeing,” Business Week, September 30, 1996, p. 119.  Back.

Note 16: “China and Boeing Chronology,” Seattle Times, May 26, 1996, local news section.  Back.

Note 17: Mid-1996.  Back.

Note 18: Stanley Holmes, “How Boeing Woos China,” Seattle Times, May 26, 1996, local section.  Back.

Note 19: Ibid.  Back.

Note 20: Stephen H. Dunphy, “Air War Over Asia,” Seattle Times, June 16, 1996, business section.  Back.

Note 21: Holmes, “How Boeing Woos China.”  Back.

Note 22: Ibid.  Back.

Note 23: Stanley Holmes, “Politics Key to Boeing Sales in China?” Seattle Times, April 10, 1996, business section.  Back.

Note 24: Holmes, “How Boeing Woos China.”  Back.

Note 25: “Overview,” Frank Russell Company, Tacoma, Washington, http://www.russell.com, 1997.  Back.

Note 26: “The Frank Russell Co.,” The Seattle Times, August 25, 1996.  Back.

Note 27: “Overview,” Frank Russell Company.  Back.

Note 28: “Overview,” Frank Russell Company. I reproduce the ® sign here to emphasize that Russell sees its name and the names of its indexes as intangible factors to its global success and seeks to protect them, just as Nike does its swoosh.  Back.

Note 29: “Overview,” Frank Russell Company. Note the trademark protection.  Back.

Note 30: Sitting in a restaurant in a remote village in Provence, I was surprised to find that my American Express card was read by a wireless, handheld machine that connected to the main computer and approved my lunch bill. If I had used a debit card, I could have punched in a personal identification number (PIN) and debited my bank account without leaving the terrace. This high-tech story is told not because it is unique, but because it is commonplace.  Back.

Note 31: Dwight B. Davis, “Building a Global Network on a Shoestring,” Datamation (May 15, 1993), p. 59.  Back.

Note 32: “Overview,” Frank Russell Company.  Back.

Note 33: This point is made well by Matthew Valencia in “Banking in Emerging Markets: Fragile, Handle with Care,” The Economist (special survey section; April 12, 1997). Valencia stresses the importance of effective banking regulation in the age of high-technology global finance.  Back.

Note 34: Jonathan Westerman, “Microsoft Windows 95: A Product of India” (University of Puget Sound, Tacoma, WA, 1995, typescript).  Back.

Note 35: Paul Taylor, “Financial Times Review of Information Technology: India’s Software Industry,” Financial Times, November 6, 1996.  Back.

Note 36: Mark Nicholson, “India: Strong Growth for Software,” Financial Times, January 15, 1997.  Back.

Note 37: Microsoft Corporation, 1996 Annual Report (Redmond, WA: Microsoft Corporation, 1996).  Back.

Note 38: But other international revenues are also likely to experience the highest localization costs. My thanks to Aadip Desai for his work on this part of the analysis.  Back.

Note 39: Microsoft Corporation, 1996 Annual Report, p. 17.  Back.