More on Globally Integrated Enterprises

Stephen DeAngelis

October 14, 2008

One of the most repeated modern quotations is: “What’s good for General Motors is good for America.” At the time the remark was supposedly uttered, General Motors was, in fact, America’s largest employer. The real story, according to Wikipedia, is that in 1953, Charles Erwin Wilson, who was then president of GM, was nominated by President Dwight D. Eisenhower to be his Secretary of Defense. During the hearings on his nomination, he was asked if as Secretary of Defense he could make a decision adverse to the interests of General Motors. Although Wilson answered affirmatively, he added that he could not conceive of such a situation “because for years I thought what was good for the country was good for General Motors and vice versa.” The global economic situation has certainly changed over the past half century and GM is now struggling to survive. The nature of Fortune 500 companies has also changed. The list is now filled with multinational corporations (MNCs), including 62 from emerging market countries, mostly from the so-called BRIC (Brazil, Russia, India, and China) economies. The Economist magazine believes the rise of a new-breed of multinational corporation is a good thing (it likens it to IBM president Sam Palmisano’s Globally Integrated Enterprise — see my post Globalization and Resilient Enterprises) [“In praise of the stateless multinational,” 20 September 2008 print edition]. The sub-title of the article declares that the stateless multinational is “not without its flaws, but [it is] infinitely preferable to the state-bound version” that is well represented by the oft misquoted citation about General Motors. Multinational organizations are often the targets of criticism rather than praise. So why does The Economist like this new breed of MNC?

“If you hanker after the idealistic spirit of international co-operation, talk to the boss of an emerging-market multinational. Not the boss of Gazprom, perhaps, which has behaved like an arm of the Russian state. But try Chairman Yang Yuanqing of Lenovo, who has moved his family to North Carolina to deepen his appreciation of American culture, so as to help him integrate his Chinese and American workers. Or Lakshmi Mittal, the London-based Indian boss of Arcelor Mittal, who says his multinational team of executives get on so well that he forgets there are different nationalities in the room, and who believes his firm has no nationality, instead being ‘truly global’. Lenovo and Arcelor Mittal are at the leading edge of a new phase in the evolution of the multinational corporation. … At first companies set up overseas sales offices, to watch over the export of goods made at home. Then they built small foreign replicas of the mother ship, to cater to local demand. Today the goal is to create what Sam Palmisano, the boss of IBM, calls the ‘globally integrated enterprise’—a single firm in which work is sourced wherever it is most efficient.”

Critics of multinational corporations (be they globally integrated enterprises or conglomerations of separate companies), believe that MNCs are simply out to exploit cheap labor and generate huge profits. As I wrote in my post on Globalization and Resilient Enterprises, Palmisano admits that the bottom line for companies remains profits, but he also understands that economic growth depends on opening new markets as well as maintaining old ones. You create new markets by establishing a middle class in developing countries. That requires the kind of foreign direct investment about which Palmisano writes. The challenge, of course, is sustaining old markets when so many people believe that these new markets are being created with outsourced jobs. It is this tension between new markets and old that foment critics of globalization on both sides. Such critics, unfortunately, see globalization as a zero-sum game — it is not. The Economist goes on to note why creating a globally integrated enterprise is difficult.

“For business leaders, building a firm that is seamlessly integrated across time zones and cultures presents daunting obstacles. Rather than huddling together in a headquarters building in Armonk or Millbank, senior managers will increasingly be spread around the world, which will require them to learn some new tricks. How do you get virtual teams of workers to bond, for instance? The answer seems to be a lot of time spent talking—as well as the odd junket. MySQL, an online database firm, holds virtual Christmas parties, at which teams around the world play games and exchange virtual gifts. And what about overcoming all those awkward cultural differences? Lenovo, for example, has had to encourage normally reticent Chinese workers to speak candidly in meetings with American colleagues.”

The Economist also challenges some of the assumptions that critics have used to target multinational corporations.

“Some people assume that stateless multinationals inevitably compete away standards in a race to the bottom. It is true that multinationals tend to shop around for taxes, but in other ways they are usually sticklers for good behaviour. Encouragingly, firms from emerging markets are finding that a globally integrated company needs a single culture, and that the best way to foster this is to make the highest ethics anywhere in the firm the norm for everyone, wherever they are working. Anything less tends to corrode the culture. A globally integrated firm cannot allow corrupt practices by employees in some countries and not others, so it must outlaw them everywhere. On the other hand, it cannot enforce religious practices and holidays, or different ways of life, so it must preach tolerance.”

The article concludes that it is not the stateless multinational corporation that creates the greatest threat to the global economy but those with strong links to national governments.

“Although politicians may have been more comfortable in a world where what was good for General Motors was good for America, that tended to lead to protectionism and antiquated working practices. Firms in which loyalty to the state goes beyond the economic value it offers usually expect something in return—soft contracts and subsidies, perhaps, or standards conveniently set in their interest. In fact the sorry story of GM itself highlights the dangers of being a national champion. Rather than fear the stateless corporation, people would be wise to do all they can to make them feel at home in their country.”

The story of globally integrated enterprises is still being written. Whether they prove to be good corporate citizens remains to be seen. Undoubtedly, the tales will differ company by company and the experiences will differ country by country. Let’s hope that The Economist is correct in its prediction that the latest “multidirectional phase of globalization offers enormous potential for business to raise the living standards around the world.”