States, Firms and Diplomacy Author(s): Susan Strange Source: International Affairs (Royal Institute of International Affairs 1944-),

Vol. 68, No. 1 (Jan., 1992), pp. 1-15 Published by: Blackwell Publishing on behalf of the Royal Institute of International Affairs Stable URL: http://www.jstor.org/stable/2620458 . Accessed: 19/10/2011 16:13
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firms and diplomacy States,

SUSAN

STRANGE

and on herrecent workon relations between states andfirms, Susan Strange reports thestudy offirms as relations: a new research agendain international proposes as twonew andfirm-firm and ofstate-firm actors in world bargaining politics wake that likeacademics, must She argues to diplomacy. dimensions governments, attention to the andpay proper in world changes politics up to thestructural offirms. increasing importance Four stops on the London Underground will take you from the London Business School in Regent's Park to the London School of Economics offthe Strand. Yet for 30 years the two institutions mighthave been separatedby a Berlin Wall, so minimalwas the communicationbetween them,so divergent theirprofessors, so diverse the discoursesof their the mattersthat interested but secretly students. Each was openly dismissive, jealous, of the other.' of a rare venturein collaborationbetween This articlepresents the findings a professorof internationalbusiness and a writersfrom both institutions, in a recentbook.2 Our research led of international relations, resulting professor us to sharedbeliefsthatwent beyond the primary focusof thebook to identify in the world economy. Three propositionswill be advanced structural factors in world politicsand here. First,thatmany seemingly unrelateddevelopments world businesshave common roots and are the resultin large partof the same structural changes in the world economy and society. Second, that partlyin changes, therehas been a fundamental consequence of these same structural mustnow bargainnot only change in the natureof diplomacy. Governments while firmsnow with othergovernments, but also with firmsor enterprises, and with one another.As a corollaryof this, bargain both with governments
This intellectualapartheid can also be found, perhaps in less acute form,in other European countries besides Britain. In the United States, where business schools have always been more highly valued by the focus has often been largely confined to US-based firmsand theirexperiences universities, from those of Japanese,European or Asian firms. overseas, which can be very different rivalfirms:competitionfor worldmarket shares John Stopford and Susan Strange, Rival states, (Cambridge: Cambridge UniversityPress, I99I). John Stopford is Professorof InternationalBusiness at the London Business School; Susan Strange was Montague Burton Professorof International Relations at the London School of Economics 1978-88. I-IS
1-2

International 68: Affairs

I (1992),

Susan Strange the nature of the competition between states has changed, so that macroeconomic managementand industrial policies may oftenbe as or even more important forgovernments thanconventional foreign policiesas conventionally conceived. The thirdpropositionfollows from the second, and concernsthe of firmsas actors influencing the futurecourse of transnational significance relations not least for the study of internationalrelations and political economy. Structural change Most commentators on international affairs have in our opinion paid far too to change in the structure of littleattentionto structural change, particularly productionin the world economy.3 Our recentwork argues thatmost of the recent changes in world politics,however unrelatedthey may seem on the can be tracedback in large partto certaincommon rootsin the global surface, change behind politicaleconomy. We see common drivingforcesof structural of theformer theliberation of CentralEurope, thedisintegration Soviet Union, the theintractable payments deficit of the United States,theJapanesesurpluses, rapid rise of the East Asian newly industrialized countries, and the U-turnsof many developing country governments from military or authoritarian government to democracy, and from protection and import substitution towards open bordersand export promotion. These common drivingforcesof change, in brief,are the acceleratingrate and cost of technological change, which has speeded up in its turn the of production and the dispersion of manufacturing internationalization to newlyindustrialized whichhas industry countries;increasedcapitalmobility, easier and speedier; and those changesin the made thisdispersionof industry of knowledge that have made transnational communicationscheap structure and fast and have raised people's awareness of the potential for material in a marketeconomy. These common roots have resulted,at the betterment in the demand for democraticgovernment same time and in many countries, thatis impossiblein a command economy. and for the economic flexibility This perception of the power of universal structural change came from looking in detail as we did at the processes of bargaining between host and foreignfirms in threedeveloping countries, Brazil, Malaysia governments and Kenya. The bargainingin question relatedmainlyto the termson which the firmscould operate and would investin a particularventurewithin the and corporate executives of country. We interviewedgovernmentofficials in the threecountries. foreignfirms
(London: Mandarin, I989). 3 Peter Drucker is the most notable exception, with The new realities and the Among others,note C. Freeman, ed., Technology and thefuture of Europe: global competition changeand economic environmetnt (London: Pinter, I99I); G. Dosi and C. Freeman, eds., Technological shape ofglobal competition theory, part vi (London: Pinter, I988); K. Ohmae, Triadpower: thecoming structuire and economic (New York: Free Press, I985); John Dunning, Multinatiotnal entterprises, architectture ofpolitics international competitiveness (Chichester: Wiley, I985); and P. Cerny, The changitng

(London: Sage, I990).

States, firms and diplomacy The firmswe interviewedwere working in a varietyof sectorsof business and were of various national origins. Though the study was based on caseby studiesand attention to detail at the micro level, while we were struckfirst common trends were the diversity of states'responses to global changes,certain and firms, especiallyforeign rather clearlyvisiblein therelations betweenstates appearedto be verysimilar firms. The pressures on both firms and governments across all three countries. These pressures were forcing both the host governmentsand the foreignfirmsto compete more and more activelyfor world marketshares,and in so doing to reach new modes of accommodation with one another.4 It seemed clear to us that these pressuresarose from structural changesin the global marketeconomy thatwere not always obvious to area specialists or to writers on corporatemanagement or development either economics. communications Technological change, mobile capital,transborder and Most obvious of the structural changesactingas the drivingforceon firms alike were those in the technologyof industrial and agricultural governments production; related to them were changes in the internationalfinancial structure.The acceleratingpace of technological change has enhanced the capacity of successfulproducers to supply the market with new products, or new processes.At the same time, and/or to make themwith new materials product and process lifetimes have shortened, sometimes dramatically. Meanwhile, the costs to the firm of investmentin R & D, researchand of innovation have risen.The resultis that all development and therefore ensconced in theirhome sortsof firmsthat were until recentlycomfortably marketshave been forced, whether they like it or not, to seek additional markets abroad in order to gain the profitsnecessary to amortize their when thenexttechnological investments in timeto stayup withthecompetition was the advance comes along. It used to be thought that internationalism of thelarge,privately owned Western'multinational'or transnational preserve of structural change,thesehave corporations. Today, thanksto theimperatives and been joined by many smallerfirms, and also by state-ownedenterprises firmsbased in developing countries.Thus it is not the phenomenon of the transnational corporationthatis new, but the changed balance between firms working only for a local or domesticmarket,and those working for a global otherthantheiroriginalhome base. marketand in partproducingin countries Besides the acceleratingrate of technological change, two other critical to the rapid internationalization of production.One developmentscontributed was the liberalizationof international finance,beginning perhaps with the innovationof Eurocurrency dealing and lendingin the I960s, and continuing initiated uncheckedwith the measuresof financialderegulation by the United
The notion of ntationalcomparative advantage in much currenteconomic analysis tends to obscure the more than statefact that,in the real world today, comparative advantage tends to be firm-specific specific.Moreover, the nature of the comparative advantage is apt to vary considerablyfrom sector to sector.

Susan Strange went down, the mobility Statesin the mid-I97os and early I98os.5 As barriers of raising money for investment in of capital went up. The old difficulties offshore operationsand moving it acrossthe exchangesvanished.It was either forthetransnational to findnew funds, or theycould unnecessary corporations do so locally. The thirdcontributing factorto internationalization has oftenbeen overlooked the steady and cumulativelowering of the real costs of transborder Without them,centralstrategic transport and communication. planningof farwould have been riskier and more difficult, and out-sourcing of flungaffiliates would have been hampered. componentsas in car manufacture Broader perspectives These structural changes have permeatedbeyond financeand production to affectglobal politics at a deep level. They have, for instance,significantly affected North-South relations.The so-called Third World no longer exists as a coalition of developing countries ranged, as in UNCTAD (the UN Conferenceon Trade and Development), in opposition to the rich countries. Developing countriesare now acutelyaware thatthey are competingagainst each other,thelaggardsdesperately to catchup withthesuccessful trying newly The transnational industrialized countries. corporations' searchfornew markets was often a major factor leading them to set up production within those markets.Sometimes thiswas done for cost reasons. Other times it was done simply because the host government made it a condition of entry. The internationalization of productionby themultinationals has surelybeen a major factor in the accelerated industrialization of developing countriessince the I95os. For it is not only the Asian newly industrializedcountries whose manufacturing capacity has expanded enormously in the last two or three decades, but also countrieslike India, Brazil, Turkey and Thailand. At the same time, the internationalization of productionhas also played a major part in the U-turn taken in economic policies by political leaders in countries as diverse and far apart as Turkey and Burma, Thailand and Argentina,India and Australia.Structural change, exploited more readilyby in poor countries than has the of policy-makers some others, altered perception it opens to themfor both about the natureof the systemand the opportunities In thespace of a decade, therehas been a striking shift thepresent and thefuture. and protection towards export away from policies of import-substitution promotion,liberalizationand privatization. It is no accidentthatthe 'dependency school' writers of the I970S have lost so much of theiraudience. Not only in Latin America (where most of this writing was focused), we see politicians and professorswho were almost unanimousin the I970S in castigating the multinationals as agentsof American
5 See S. Strange, International vol. monetary relations,
2 of A. Shonfield, ed., International relations economic of the Western world1959-1971(Oxford: Oxford UniversityPress for Royal Instituteof International Affairs, 1976); also S. Strange, Casino capitalism (Oxford: Blackwell, I986).

States, and diplomacy firms imperialismwho now acknowledge them as potential allies in earning the foreignexchange badly needed for further development. Nor, we would argue,is the end of the Cold War, the detentein East-West relationsand the liberationof Central Europe from Soviet rule and military occupationto be explainedby politicsor personalities alone. Here too thereare ways in which structural changehas acted,both at thelevel of government and the bureaucracy,and at the popular level of consumersand workers. In the production structure,even in the centrallyplanned economies, industrialization has raised living standardsfrom the levels of the I930S and classesof society.Materialprogress has not been I940S, at leastfortheprivileged as fast as in the market economy, but in the socialist countriesas in Latin America or Asia, the ranks have multipliedof a middle class of managers, professional doctors,lawyers,engineersand bureaucrats, many of whom are bettereducated than theirparents.With thisembourgeoisement has significantly come greaterawareness of what is going on in other countries,and of the in the affluent West and theirown. widening gap between living standards In the world marketeconomy, competitionamong producershas lowered costs to consumersand widened theirchoice of goods, while raisingtheirreal incomes. Under the pressures of shortening productlife-cycles, heaviercapital costs and new advances in technologies, rivalry among producers has unquestionablycontributedto material wealth for the state as well as for consumers.Witness the spread down throughincome groups of cars, colour TV, washing machines, freezers, video recorders, telephones, personal computers.In any Westernhome, a high proportionof theseconsumergoods carrythe brandnamesof foreignfirms. the deprivation By contrast, the Soviet consumerhas suffered consequenton the economy's insulation from the fast-changingglobal financial and But the information about what othersenjoyed in the productionstructures. from be kept West could not altogether people even in the Soviet Union, let alone in Central Europe. The revolutionin communications, and thusin the whole global knowledge structure, helped to reveal the wideninggap between of living forsimilarsocial groups under global capitalismand under standards socialism. of the At the same time, the new bourgeoisie, aware of the inefficiencies command economy, saw that economic change was being blocked by the entrenched apparatusof centralizedgovernmentand could only be achieved While the burdenof defence throughpoliticalchange and wider participation. detente spendingcertainly played a part in both East and West in furthering and making possible the liberationof Central Europe, political change was acceleratedwithinthe socialistcountriesby the rise of a new middle class and and of the apparentinabilityof theirperceptionof the gap in living standards of to respondto the structural centrally plannedsystems changein technologies production. forcesalso lie behind the worldwide We would argue thatsimilarstructural and authoritarian trendto democraticgovernment and therejectionof military 5

Susan Strange rule. In short,people have become better off and better educated and are makingtheirmaterialdissatisfaction and theirpoliticalaspirations strongly felt. We would argue thatthiswave of politicalchangehas thesame universal roots, whether in Greece, Portugal or Spain, in Turkey, or in Burma, Brazil or Argentina. Structuralchange has also played a major part in the much discussed relationship between the United Statesand Japan. Americanmultinationals in the I95os and I960s were the firstto respond in large numbers to the opportunitiesopened up by the internationalization of production. Indeed much early analysis Servan-Schreiber's famous dejfi ame'ricain for example6even perceivedthe move as an essentially Americanphenomenon.The natural result of moving so much productionoffshore was thedeclineof manufacturing as a source of employmentin the territorial with a rise United States,together in theAmericantradedeficit forwhich manyfirms based in theUnited States but locating productionoffshore were no less responsiblethan firmsbased in Japanor Europe. Twenty yearslater,in the I970S and I980s, theJapanesefirms began a similarexodus to the United States and to East Asia, ratherless to Europe until I992 loomed on the horizon. Once understood in terms of structuralchange, it looks as though the imbalance in US-Japanese paymentsmay be due more to a difference in the timing of the exodus of firmsgoing abroad to expand production than to inherentor cultural differences between Americans and Japanese. If so, the imbalanceis likelyto be much more temporary thansome commentators have a period in which heavy importsofJapanese suggested.AlreadyMalaysia, after in tradewithJapan,is finding inJapan capitalgoods produced a markeddeficit its best marketfor manufactures of Japanese produced by Malaysian affiliates firms. Two new sides to diplomacy State-firm diplomacy The net resultof thesestructural changesis thattherenow is greatlyintensified is forcing forworld marketshares.That competition competition among states states to bargain with foreign firmsto locate their operations within the of the state,and with national firmsnot to leave home, at least not territory entirely.We observed from our case-studiesat the micro level in three or alliances developing countriesthat this bargaining produces partnerships between host-state and firm,which may be of long or short duration,but which are based on theexchangeof benefits to enhanceeither and opportunities party'ssuccessin the competitionfor world marketshares.This bargaining, which was the main focus of our research,constitutes a new dimension of diplomacy. firmhas command of an Again and again we found that the transnational arsenalof economic weapons thatare badly needed by any statewishingto win
6

See J.J. Servan-Schreiber,Le defiame'ricain (Paris: Denoel, I967).

States, firms and diplomacy world market shares. The firmhas, first, command of technology; second, readyaccessto global sourcesof capital; third, readyaccessto major markets in America,Europe and, often, Japan. If wealth for the state,as forthe firm,can be gained only by sellingon world markets forthe same reasonthatnational markets are too smalla sourceof profit forsurvival thenforeign policy should now begin to take second place to industrial policy; or perhaps,more broadly, to the successful managementof societyand the efficient administration of the economy in such a way as to outbid otherstatesas the preferred home to the transnational firmsmost likely to win and hold world marketshares. While the bargainingassets of the firmare specificto the enterprise, the it rules over. The bargainingassets of the state are specificto the territory enterprise can operatein thatterritory even ifitjust sellsgoods or servicesto people living there-only by permissionand on the termslaid down by the Yet it is the firmthatis adding value to the labour, materials and government. knowhow going into the product. States are therefore competingwith other statesto get the value-added done in theirterritory and not elsewhere.That is the basis of the bargain. Firm-firm diplomacy A thirddimension,equally the productof the structural changesnoted earlier, is thebargainingthatgoes on betweenfirms. This too may lead to partnerships or alliancesin which, while they may be temporaryor permanent, each side contributes somethingthat the other needs, so that both may enhance their chancesof successin the competitionfor world marketshares.Firmsinvolved in thisthirddimensionof diplomacy may be operatingin the same sector (as in aircraftdesign, development and manufacturing) or in different sectors its expertisein computer (where, forinstance,one partymay be contributing the otherin satellitecommunications). electronics, For scholarsof international both new dimensionsare important. relations, The significance of the state-firm dimensionis thatstatesare now competing thanforpower over more forthe means to createwealth withintheirterritory more territory.7 Power, especiallymilitarycapability,used to be a means to wealth. Now it is more the other way around. Wealth is the means to power notjust military power, but the popular or electoralsupportthatwill keep present rulinggroupsin their jobs. Withoutthiskind of support,even the largestnuclear arsenalsmay be of littleavail. Nowadays, except perhaps for oilfieldsand water resources,thereis little materialgain to be found in the As Singapore and Hong Kong have shown, world control of more territory. wealth can be won with the veryminimum marketshares and theresulting of territory. Even where, as in Yugoslavia or the Soviet Union, there is a the forcesbehind it are not solely ethnic of conflict recurrence over territory, nationalismof the old kind. Many Slovenes, Croats, Russians or Georgians
7 On this see S. Strange, 'The name of the game', in N. Rizopoulos, ed., Sea changes(New York: Council on Foreign Relations, I990).

Susan Strange want to wrestcontrolover theirterritory fromthe centralpower because they believe theywould be able to compete betterin the world economy on their own thanunder the controlof theirold federalbosses. Autonomy is seen as a necessaryconditionfor economic transformation and progress. Successfully managing society and economy Having got controlover territory, government policy-makers may understand well enough what is needed to bargainsuccessfully with foreign firms to locate with them.But theymay not always be able to deliver.For though the forces of structural change affect everyone,even the old centrally plannedeconomies, the capacityof governments to respond are extremelydiverse. We were struckin our researchby the wide variationbetween our three countriesin the policies they felt willing and able to follow. There was no on any Kenyan governmentattempting, for denyingthe multipleconstraints example, to overcome the handicap of Africanilliteracy,or even to effect radicalreform of an inflated and featherbedded bureaucracy sufficiently to make the countryattractiveto new foreignfirms.Existing firmsin Kenya were hanging on only so long as they were protectedfrom competition,whether local or foreign.But at that point the absence of tough competitionitself became a handicap. Meanwhile, debt problems and political constraints sometimesmade it hard even to adopt the obvious policies of reform, such as abandoning price controls. Brazil, by comparison,thoughit has had biggerdebt problems,has a bigger home market, it had more and when it came to negotiating with foreign firms room to manoeuvrein shifting frommarket-reserve protectionism to exportIt has been able to play chicken-games with the IMF promotingpragmatism. in a way no African country,dependent on officialgovernmentloans and has been able to match. supportfromthe international organizations, It is Malaysia, curiously,which has the best record of growth of the three, and which also has been most liberalin its policies toward many (though not This liberality, we found,was not wholly due to Asian all) foreigninvestors.8 sagacity.Historicalaccident,now all but forgotten, played a part. Recall that for five years afterI948 Malaya (as it was then stillcalled) was under attack from Chinese-backed communist guerrillas. Though this civil war was led him eventuallywon, Tunku Rahman's senseof the country'svulnerability to make a unique bargain with Britain. In returnfor Britishmilitary aid and protection,independentMalaysia would remain in the sterlingarea, making substantial contributions to the common pool of monetaryreserveswith its dollar-earning exportsof tin and rubber.With this monetarydependence on London went a cautious and conservative and styleof monetarymanagement, a liberal attitude to British businessesin the country. From that time on,
8

In those sectors where, for political reasons, the government wished to encourage Malay-owned in order to counterbalance the economic dominance of Chinese, regulation either kept enterprises foreignfirmsout or laid down very strictrules about ownership and employment. Such sectors were mostly where production was for the local market.

States, firms and diplomacy Malaysia never once put controls on the right of foreignfirmsto transmit profits or even capital abroad. Nor did it impose punitivetaxes,even though both profits and capital gains were high. These terms,added to the reassuring presenceof Britishtroops,meant therewas no exodus of foreigncapital after independencesuch as Kenya experienced,nor any wild indulgencein foreign borrowingsuch as Nkrumah'sGhana wentin for.Malaysia carriedon withthis open, liberal policy long afterthe demise of the old sterlingarea in the late
I960s,

Japaneseor American ratherthan British. There can be little doubt that these policies contributedsubstantially to comparativelyhigh ratesof investment by foreignfirms, and in turnto high rates of economic growth: 7.3 % a year in the period I965-80. (Though less than Brazil's average of 8.8% in the same period, Malaysia's growth was less vulnerableto thehardtimesof the I98os: while Brazil's averagethenfellbelow 3 %, Malaysia's held up at over 4.5 %. Exports continued growing at a phenomenalrateof over 9 % a year,and by I988, 45 % of theseby value were manufactures. This is not to say, of course,thatpolicies towardsforeignfirms were or are the only factor. Malaysia's wider range of policy options compared with Kenya's was certainly helped by a high rateof domesticsavings 36 % of GDP in I988 and by past moderation in foreignborrowing. The exigencies of debt-servicing suffered by Brazil and Kenya made it harderfor them both to and fightinflationand to resistthe fatal temptationto resortto distorting ineffective price controls. of government to structural So thediversity responses changeusuallyreflects the policy dilemmaspeculiar to the governmentof thatsociety.But precisely because of increasedintegration in the world marketeconomy, it is more and more difficult for governmentsto 'ring-fence' a particularpolicy so that it does not directlyconflictwith, perhapsnegate, some other implementing into a free policy. For instance,it is no good Kenya luring foreigninvestors of importlicences zone ifat thesame timetheadministration export-processing to economize on foreignexchangeprevents fromreplacing potentialexporters spare partsquickly enough to keep up the flow of output. Contemplation of the diversity of host-countrypolicies in monetary tradeand competition management, policy verysoon bringshome thefactthat thereare no shortcutsand no magic tricks in wooing foreignfirms. However, some generaladvice is stillpossible.One piece of advice is obviouslyto pinpoint the policy dilemmas where objectives clash. Another is to cut out the administrative thatbedevil thework of local managers. delaysand inefficiencies In Kenya, for example, one reallystriking successstorywas to be found in a sectorwhere government intervention and controlshad been minimal,in the growing and export of flowersand pot-plants.Anothergood piece of advice, in the growing literature on the managementof international alreadystressed business, is to breakup monopolies and enforcecompetitionamong producers. Michael Porter, for example, has rightlystressedthe importance of fierce 9

even thoughthe beneficiaries in the I970S and

I980s

were mostly

Susan Strange rivalrybetween local firmsunprotectedby trade barriersfrom competing imports.9 On the basis of our work we would agree thatBrazilian growthhas been hamperednot only by featherbedded statemonopolies,but also certainly by the power given to the big business associations of local and foreign producersin some key sectorsof industry. But usefulas such analysesas Porter'shave been, theyhave rather leftout the political element, both domestic and global. The diversityof government responseswhich so struckus is surely due not only to mulish stupidityor ignoranceof thekeysto success.Governments are,after all, politicalsystems for the reconciliationof conflicting economic and social, and sometimesethnic, interests. Moreover, theglobal structural changesthataffect themall do so very differently, sometimesputtingsnakes,sometimesladders in theirpath. Some small boats caughtby a freaklow tide in an estuarymay escape groundingon the mud by alertand skilful management;othersmay be saved by luck. Our researchsuggeststhatthe crucial difference between statesthesedays is not, as the political scientists used to think,that between 'strong' statesand 'weak' ones, but between the sleepy and the shrewd. States today have to be alert, adaptable to externalchange, quick to note what other statesare up to. The name of the game, for governments just as for firms, is competition. Firms as diplomats Our thirdgeneralpoint the importanceof firms as major actorsin the world system will be obvious enough to leadersof financeand industry. They will not need remindingthat marketsmay be moved, governmentsblown off courseand balancesof power upsetby thebig oil firms, by thehandfulof grain dealers, by major chemical or pharmaceuticalmakers. It will come as no surpriseto them that the game of diplomacy these days has two extra new dimensionsas well as the conventionalone between governments. But while I have scratchedthe surfaceof one of these-the bargaining between firmsand governments I have not said much about the third, bargainingbetween firms.This deserves to be the subject of a whole new researchprogramme.Examples have recently which were multipliedof firms of structural and may remaincompetitors but whichunderthepressures change make alliances with other firms have decided to or even just tactical strategic In the study of international in their own or a related sector of business.10 relationsit is accepted as normal thatstatesshould ally themselves with others while remainingcompetitors, so thatthe bargainingthattakes place between alliesis extremely how risks are managed tough about who takeskey decisions, and how benefits are shared. The implications forinternational nature relations analysisof the three-sided
9 M. Porter, The competitive advantageof nations(New York: Free Press, I990). See also a recent report for the National Bureau of Economic Research, Washington DC: J. Levinshon, 'Testing the importsas-market-discipline hypothesis', using data from the experience of Turkish firmssince the liberalizing policies adopted after I984. a See, e.g., L. Mytelka, Strategic firmsand international competition (London: Pinter, parttnerships: states, I 99 I). I0

States, firms and diplomacy The assertionthatfirmsare major actorsis at of diplomacy are far-reaching. of international relations as presently taughtin most odds with the conventions The standard British and polytechnics. textsin thesubjectsubscribe universities to the dominant'realist' school of thought,which holds thatthe centralissue in internationalsociety is war between territorialstates, and the prime of orderin therelations betweenthese problematic therefore is themaintenance view of international relations also holds thatthe object states.11 This traditional towardsotherstates, and theoutcome of such of studyis thebehaviourof states states: whethertheyare better or worse off, lessor more powerful behaviourfor or secure. Transnationalcorporationsmay be mentionedin passing,but they of statepolicy.12 are seen as adjunctsto or instruments should now be put centre Our contentionis thattransnational corporations in choosing host countriesas partners are stage; thattheircorporatestrategies already having great influenceon the development of the global political to do so. In common with many economy, and will continue increasingly our interest is not confined to thebehaviour contemporary politicaleconomists, or theoutcomesforstates. of states Who-gets-whatquestionsmustalso now be and not least,about firms and genders, asked-about social groups,generations, the sectorsin which theyoperate. Ten yearsfromnow we anticipatethatthe conventionsand limitationsof what has sometimes been called the British school of internationalrelations will be regarded as impossibly dated, its as demode as I950S fashions. This is not to say,of course,thatthere perceptions are no lessonsto be learned by economic ministries and corporateexecutives from the diplomatic historyof interstate relations.Only that the study of international relationsmust move with the times, or be marginalizedas a narrow specialism. in the state-firm There are threeissues,in our understanding, relationship thatdeservemuch closer expertattention than theyhave so farreceived. One choose firmsas partners;a second is the issue is how and why governments thatare bargainedover, and who is likelyto have the upper hand on specifics of firms. The questionhere any one of them; the thirdrelatesto thenationality is not so much what internationalized productiondoes to the state,but what it firm. and behaviour of the transnational does to the national identity 1. as partners choose Whygovernments firms

not the leastattribute of the shrewdstateis the abilityto choose As to the first, the rightpartners among firms.Depending on sectors,marketsand circumthismay be a leading firmor a follower.There are pros and cons either stances, choices to make about which marketsto way. Similarly,firmshave difficult
"

12

worldpolitics(London: Macmillan, I977) is society:a studyof order int Hedley Bull's The anarchical explicit on the point. See also Bruce Miller, The worldof states(London: Croom Helm, I98I), and a anidharmony (London: Penguin, I969). politics,conflict much used text,Joseph Frankel, International Some well known texts on internationalpolitics-K. Holsti, International politics(New York: Prentice Hall, I972), for instance-do not even mention multinationals.Even Robert Gilpin, in The political relations (Princeton, NJ: Princeton UniversityPress, I987), devotes less than 30 economy of international out of 400 pages to them. I I

Susan Strange contest,where to locate what elementsof production,researchand financing, and how to manage theiroffshore operations.Our point simplyis thatbefore eithergovernmentor firmgets to the point of bargainingover the termsand conditionsunderwhich the firmoperates,both have to make strategic choices Governmentstherefore need to be well advised on the about theirpartners. relativestrengths and weaknessesof different firms. As much attention should be paid to thecorporatehistory, character and decision-making habitsof major firms as international relations have been used to paying transnational specialists to nation-states.
2.

Knowingyourallies

In Second, the advice 'Know your enemy' applies also to allies and partners. and firms, each side bargainingover specificissuesbetween host governments needs a clearerunderstanding than they oftenhave of the other's long-term and weaknesses.Thus in order to achieve objectives,its bargainingstrengths your own prime objective,it may be well worthwhilemaking concessionson some othersubjectivelyminor issue. A recurrent issue, for example, is exports. So many countriesare either burdened with debt-servicecharges or have ambitious development programmesneeding importsof foreigncapital goods thatfirms thatmake extra efforts to increaseexport sales will be especiallywelcome. Subsidies-such as Brazil offersunder its Befiex cheap-credit,low-tax programme-are an indicationof such a wish. On the otherhand, subsidiesare rarelydecisive in corporate strategies.When General Motors, to the fury of the US Trade took a Brazilianexportsubsidyfora particular Representative's Office, product line, its objectivewas to undercutlabour costsin Detroit and to consolidateits position in the potentiallyvery large and competitiveBrazilian market.The subsidywas just an added bonus. Anothercommon issue-witness the Franco-British squabble over whether Nissan cars made in Britainare Britishor Japanese is domesticcontent:what of thefinalproductis made up of locallyproducedcomponents.For proportion developing countries,this determinesthe importantquestion of how much can be expected fromthe presenceof a spilloveramong small local enterprises But it is not only developing countriesthatbargain hard with multinational. on whetherthe local contentof a product should be 6o or 75 % foreignfirms of the value added. A major US concern in the US-Canada Free Trade was to make surethat Agreement Japanesecarsproducedin Canada conformed if theywere not to incur to (higher)Americandomesticcontentrequirements tariff barriers. The industrialized countriesare less concerned about how much foreign firmsare prepared to spend on traininglocal workers. But for developing countries-especially those who have experiencedthe exploitationof young zones-it is an important girls on the assembly lines of export-processing question. Even though managersmay suspectthatnot all workersthey train
I2

and diplomacy States, firms will staywith the company, it may be a price worth paying to gain access to severe, large and theglobal competition the market.If the marketis potentially a training programmemay reap long-termdividendsthatexceed the cost. The same may be said of firms' willingnessto throw into the package to local health services or environmentalclean-up substantialcontributions programmes. One Italian constructioncompany operating in Africa autoand supplied,with maticallysends out a small fieldhospital,properlystaffed To thisare welcomed not only its own every construction job it undertakes. local workers, but anyonein need. Presumablyit has foundthispracticea good in government-firm diplomacy. investment Japanesecompaniesare sometimespraisedand envied by Europeansfortheir not to more open, less class-ridden stylesof management.But theirexclusivist, seniormanagement jobs toJapaneseand keeping habitsof restricting say racist, out the indigenousworkforce may prove a handicap in thelong run. In Brazil, would not considereven BrazilianJapaneseas some Japanesefirms reportedly foremen.They were perceivedas having 'gone native'. Soviet Union, as in Asia, anothercontested In CentralEurope and theformer issue will be thelocation of research and the employmentforeign firms centres are prepared to offer to locally trained and educated science workers. Companies thathave come to thinkthat'not inventedhere' rulesout research work by their overseas affiliates for may be losing importantopportunities beating the competition. All the issues brieflyoutlined here pose questions for research on the bargaining process between governmentsand foreign-and sometimes also for the firm domestic-firms; and most of them are rathermore significant than the value of tax breaks or subsidies. 3. and transnationalfirms Nationalidentity

of firms, and The thirdand rathermore abstract issue concernsthe nationality between 'one of ours' the validityof policiesbased on discrimination therefore and 'one of theirs'. While it is true that US-based firmsrarelyadmit nonAmericansto theirmain board-they are more likely to appoint a statutory woman or a black American-neverthelessthe behaviour of firmsand their vital interests cannot always be predictedfrom the countrywhere they are and have theirheadquarters.NorthernTelecom is Canadian based registered but itsUS operationsare more important thanitsoperationsin and controlled, Canada. In firmslike General Motors or Volkswagen, their geographically dispersedoperations create tensionswithin the company that are essentially of managementto thaneconomic and which alterthe relations politicalrather in thephenomenonofnationalism thehome state.Academicswho are interested to current multinationals. should pay much closer attention change affecting For governments, and forthe way theyare organizedand staffed, both new dimensionsof diplomacy have far-reaching implications.Governmentsmay findthattheyneed to make radicalchangesin theirforeignministries-or else I3

Susan Strange drastically to cut themdown in size and importance. They may need to be more open to short-term entrants fromindustry or finance,and to recruit new staff with businessexperienceor technicaland scientific qualifications. The British governmentin particularmay need to think hard about the lessons of its with Nissan,Honda and Sony. While British firms relationship were axingjobs and cuttingback in the summerof I99I, Nissan was expanding,offering new job opportunitiesin a formerlydepressed region. The prejudices of Mme Cresson, of some American congressmenand of some Britishtrade unionists againstJapanesefirmscannot bear rationalassessment of the national interest. A European state'sbest ally among firmsmay just as easily be American or Japaneseas European. To sum up. Much more analyticalwork is needed on firm-firm bargainingas well as on state-firmbargaining in all its multivariantforms. It needs with developrecognizingthat both types of bargainingare interdependent mentsin state-state bargaining (the stock in trade of international relations), withtheothertwo formsof transnational and thatthisin turnis interdependent diplomacy. In the disciplineof managementstudies,corporate diplomacy is a subjectas analysisof individualfirms and their becoming at leastas important for finance,production and marketing.In the study of corporate strategies in bargaining international an interest relations, is alreadybeginningto supplant the still-fashionable analysisof international regimes.13 A focus on bargaining, and the interdependenceof the three sides of diplomacy that togetherconstitutetransnational bargaining,will necessarily and better able to keep up with changein global structures. prove more flexible No bargain is for ever, and thisis generallywell understoodby anyone with hands-onexperienceof negotiation.The politicalart forcorporateexecutives, as for governmentdiplomats,is to devise bargains that will hold as long as possible,bargainsthatwill not easily be upset by changesin otherbargaining This is true for political coalitionsbetween parties,or between relationships. governmentsand social groups, such as labour; and it is equally true for bargains between governmentsand foreign firms,and between firmsand of variables in the patternof any one player's other firms.The multiplicity seriesof bargainsis self-evident. interlocking A finalpoint about the interlocking outcomes of transnational bargaining relates to theories of internationalrelations and political economy. Social
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int Latin America(London: Routledge, I989). In our view, See, for example, R. Grosse, Multinationials regime analysis has always been weak on dynamics. This approach sees chanigein international regimes, whether in trade, money, ecology or any other issue-area,as taking place only periodically and in steps,not progressivelyand continuouslyall the time. And far too much weight is attached to rules and codes agreed (but not always observed) by governments.In trade, for example, the investment-related flows generated by the firmswe talked to will carry on unaffected by the ultimate fate of the Uruguay Round negotiationsbetween governments.Yet scholars and journalists continue to pay undue attentionto inter-governmental negotiations. In monetary matters,though the IMF certainlyhas a role as far as debt-trappedgovernmentsare concerned, its 'regime' has been undergoing perpetual change since the I960s and it bears littlerelation now to the blueprintof Bretton Woods.

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and diplomacy States, firms like to think that the accumulation of more and more data, the scientists perfectingof analytical tools and their rigorous application according to scientific principleswill some day, somehow, produce a general theory to explain politicaland economic behaviour.They are a bit like peasantswho still believe thereis a pot of gold buried at the end of the rainbow despite their repeated failuresto track it down. Today, the complexity of the factors bargaining, and the involved in each of the three forms of transnational about general us to deep scepticism multiplicity of variables at play, incline theories.Not only are economics-pace the economists-inseparable fromthe but outcomesin theglobal politicaleconomy, real world of power and politics, the product of this complex interplayof bargains, are subject to the great divergencesthatwe have observed.

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