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X1. Journal of International Business Studies (2003) 34, 138-152
ll*~~tr-~ 0~?C) 2003 Palgrave Macmillan Ltd. All rights reserved 0047-2506 $25.00
www.jibs.net
Introduction
The first of the three postulates on which Buckley and Ca
(1976, 32) based their theory of the multinational enterpris
that 'firms maximize profit in a world of imperfect markets.'
structural insight has proved as fruitful in international bu
strategy as it has in 'mainstream' (single-country) business stra
where it has been in circulation for even longer. What is somew
odd, however, is that work in this vein in international business
strategy has tended to focus on the same sources of market
imperfections as mainstream business strategy: small numbers and,
often related, the business/usage-specificity of key activities,
resources, competencies, capabilities, knowledge, etc., or their
firm-specificity in the sense of being collectively held by the firm's
managerial hierarchy or employee pool and inalienable from it.
However, the obvious potential source of market imperfections
added by the international dimension - the possibly limited cross-
Received: September 2001
Revised: June 2002 border integration of markets or, more generally, the possible
Accepted: August 2002 location-specificity of key activities, resources, etc. - has received less
Online publication date: 27 March 2003 attention. Location-specificity of the specific sort wrought by
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Semiglobalization and international business strateqy Pankaj
I Ghemawat
139
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140
,-??i
10- increases less than one-half as large as total
8- unweighted decreases.
6' One interpretation of the historical patterns is
4-
that:
. . . . .
(1) trade had taken off in many commodities by the
1820 1840 1860 1880 1900 1920 1940 1960 1980
beginning of the 20th century;
Year
(2)
Source: 1820-1992: Angus Maddison, Monitoring the World Economy 1820-1992, OECD 1995 1993-1998: there were substantial increases in the trade of
World Trade Organization and International Monetary Fund data.
manufactures over the course of the 20th
Figure 1 Exports divided by GDP. Source: 1820-1992, Maddi- century, particularly its second half; and
(3) the service sector continues to be a very
son (1995); 1993-1998, World Trade Organization and Inter-
national Monetary Fund data. bottleneck for trade-related flows even thoug
is growing.
product markets: trade flows. It then looks at
foreign direct investment (FDI) stocks and, finally Irwin's (1996) comparison of the compositio
and very briefly, at cross-border price integration. US merchandise trade over a century is sugge
in this regard: see Table 2. While this neat order
of the globalization of commodities, manufac
Trade flows
and services is obviously an oversimplification, i
To begin with a very long-run perspective, consider
nevertheless useful.
data on world exports divided by world GDP (the So trade has clearly increased over the last 50, 100
usual normalization) over the last two centuries
and 200 years. But it is useful to supplement this
based on and updated from data in Maddison observation with some data about the absolute
(1995). As Figure 1 indicates, this ratio increased level of integration of product markets thro
from about 1% at the beginning of the 19th centurytrade. Economists who study international tr
to nearly 10% towards the beginning of the 20thgenerally do not regard trade intensity as very h
century, and, despite a period of stagnation and in absolute terms. In fact, they tend to find
decline bounded by the two World Wars, has sinceissue of why there is not much more trade m
managed to edge up towards 20%. Trade intensityinteresting than the new records being set. T
has clearly reached new heights in the last quarterthe room for increase, consider a hypothetic
of the 20th century. benchmark, suggested by Frankel (2001), in w
The increase in trade intensity over the course of
national borders did not affect buying pattern
the 20th century looks all the more remarkable all. In such a situation, buyers in a particular nat
when one accounts for the increasing share of GDP
contributed, especially in developed countries, by
two sectors that account for relatively little trade - Table 2 Commodity composition of US merchandise trad
services and government. One way of stripping out
Year Percentage distribution
the effects of these 'non-traded' sectors is to remove
them from the calculations and focus on the ratio
Exports Imports
of merchandise trade to merchandise value added.
Agricultural goods
This leads to striking increases in measured trade
1890 42.2 33.1
exposure, as illustrated by Feenstra's (1998) sample
1990 11.5 5.6
of 11 relatively developed countries between 1913
Raw materials
and 1990. Over this period, the ratio of merchan- 1890 36.6 22.8
dise trade to merchandise value added increased for 1990 11.6 14.8
nine of these countries; the median change was Manufactures
+22 percentage points, compared with an initial 1890 21.2 44.1
increases were close to 20 times as large as total Figures may not total to 100 due to rounding. Agricultural goods
unweighted decreases. The corresponding statistics includes processed foods. Source: Irwin (1996).
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Semiqlobalization and international business strateqy Pankaj
I Ghemawat
141
141
95-
90-
85
relations with each other, making theirs the
80-
largest bilateral trading relationship in the world
-_ 75-
70-
* BEL
I
C 55-
50- . NET I
domestic multiple by the mid-1990s, but only to 12
4 45- (and with the multiple remaining stuck at 30-40 in
40-
MEX
*CAN
WSWE
the case of services) (Helliwell, 1998, Chapter 2).
SWI -
SP
--: KOR
JK : GER
Cruder data suggest a multiple of about six for trade
RUS
AUS
. . o .. i.i.. FR
:::: CHi IT
within as opposed to between the member states of
the European Union (Helliwell, 1998, Chapter 3).
ARG I
10- US
p
5
IBR JAF
Given the regionalization of world trade that has
BR
I
0 I I I I I
Sources: GNP Rankings based World Development Bank's World Development Indicators. international economic exchange would obviously
2000.Import/Export Data from WTO.
be higher if one were comparing trade within
Figure 2 Actual vs perfect product market integration throughcountries with trade outside the regional blocs to
trade.
which they belong.
To sum up, trade intensity has clearly reached
would be as prone to obtain goods and servicesunprecedented levels, but still reveals significant
from foreign producers as from domestic ones, and impediments to the cross-border integration of
the share of imports in total domestic consumption product markets.
would equal 1 minus the nation's share of world
product. For example, as the US economy accountsForeign direct investment
for about one-quarter of gross world product, theTrade is not the only way in which the cross-border
US import/GDP ratio would, at this benchmark, integration of product markets might be accom-
equal 1 minus the US share of world production, orplished: FDI, which involves product-specific
0.75, as would, under the first-order assumption of investment across borders, is an obvious alterna-
balanced trade, the US export/GDP ratio. However,tive. To start with a long-run perspective, consider
the actual ratios are only about one-sixth as large as data on FDI stocks divided by GDP over the last
these hypothetical levels!2 century based on calculations in World Investment
The line with slope -1 in Figure 2 traces out thisReports issued by the UN Center on Transnational
hypothetical benchmark of perfect product market Corporations. As Table 3 indicates, FDI survived the
integration as national shares of world product interwar years better than trade (it even came to
vary. It also plots the position of the 20 largest substitute for the latter as tariff barriers rose), but
nations in these terms. Notice that most of the did not take off again quite as rapidly in the
nations cluster close to the origin, and all immediate
fall well postwar years. FDI has surged, however,
below the hypothetical maximum - including 1980
since the and, by 1997, had come to exceed the
two high-fliers, Belgium and the Netherlands.previous (prewar) peak in its share of gross world
While the hypothetical benchmark suggests GDP by a significant margin: 12% to 9%. Despite
sig-
nificant barriers to cross-border product the declines
flows, it in the ratio of outward FDI stock to
GDP exhibited
also embodies a number of extreme assumptions. A by the UK and France, the largest
real example that points in the same direction
foreignisinvestors prior to World War I, the aggre-
provided by Canadian provinces' patterns gate comparison is suggestive of an increase to
of trade
unprecedented
with each other compared with their trade with the levels. In sectoral terms, FDI has
USA. In addition to the fact that data for these
mirrored trade over this time period by shifting
patterns are available, they have the added away
advan-
from natural resources and raw materials (the
tage of involving (international) trading partners
'primary' sector) towards manufacturing and, more
that are close to each other along a number of services.
recently,
Obviously, such historical comparisons come
dimensions. As of 1988, trade linkages between
with
Canadian provinces were 20 times as large as some caveats. For one thing, they are affected
their
linkages with the 30 US states that traded theinmost
important ways by fundamental shifts in relative
exchange
intensively with Canada. This was true despite the rates (and purchasing power). For
fact that Canada and the USA share a common land
another, they are based on book values rather than
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Semialobalization and international business strateav Pankai Ghemawat
142 .142. . . ......
60.0
US FDI abroad and FDI in the USA. One could argue SWE
>, 50.0
" NET
that this omission leads to greater underestimation
a,
(5
.E
BEL
40.0' C~
30.0 UK
the 20th century than towards its beginning, BR
MEX 20.0 xCAN AUS
because of higher inflation rates (until relatively - " CH KOR ARG
RUS
swI 10.0 I + FR
recently) in the modern period and the increased IN; GER JAP & US SP-
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Semiqlobalization and international business strateqy Pankaj Ghemawat
143
data on local currency prices of identical products recent decades, but was higher still around the
across countries. The relatively few studies of beginning of the 20th century (see Table 4). Note
products and services that meet these objections that the impressive performance 100 years ago was
generally indicate substantial, sustained departures accomplished in spite of informational and con-
from LOP. Cross-country price dispersions tend to tracting problems. Such problems were, most likely,
be large and to die down at a slow pace, and there is much more severe given the lack of generally
little evidence of recent movement toward smaller accepted accounting principles and commensu-
dispersions or speedier dampening (Rogoff, 1996). rately weak reporting requirements.
In conjunction with the data presented earlier Of course, not all capital flows are equally
concerning integration through trade and FDI important from the perspective of economic globa-
flows, an overall inference that product market lization. In particular, the recent period has seen a
integration has increased significantly in recent surge in short-run flows, or at least transactions,
decades, while continuing to fall far short of that is most strikingly evident in the volume of
perfection, seems most plausible. foreign exchange transactions, which exceeds $1
trillion daily. Foreign exchange trading can, how-
Factor market integration ever, be regarded as a response to a source of
Product markets are not the only type of market volatility - exchange rate risk - that was mitigated
whose cross-border integration one might find significantly in the earlier period by the prevalence
of the gold standard. For this reason, and because
interesting; factor markets of various types are also
candidates for attention. This section presents and most trades of this sort seem to be purely spec-
discusses evidence on the extent of cross-border ulative, it is problematic to use the size of foreign
integration of markets for capital, labor, and markets today to infer a much greater
exchange
knowledge, in that order. Both quantity-based and level of cross-border integration of capital markets
price-based measures of integration are looked than atatthe beginning of the century.
wherever possible. This suggests focusing attention on long-run capital
flows, which include portfolio investment as well as
Capital FDI. Portfolio investment has increased significantly
The previous section's discussion of FDI can be in absolute terms in recent decades, but seems to have
broadened to look at international capital flows failed to keep pace with FDI, with its share slipping
over the last 100 years.3 Because of identities in from about two-thirds of total long-run cross-border
national income accounting, countries' net capital investment in the early 20th century to about one-
flows can be measured as the reverse of their half today (Bloomfield, 1968). Nevertheless, the range
current account balances. Data assembled by of securities traded today across borders is much
broader,
Obstfeld and Taylor (1997) on absolute net capital in type as well as in number - a shift that,
flows divided by GDPs for 12 countries suggest thatsome argue, has contributed to increased cross-border
this index of capital mobility has increased inintegration along this dimension.
Table 4 Size of net capital flows since 1870 (mean absolute value of current account as percentage of GDP, annual data)
All
Period Arg Aus Can Den Fra Ger Ita lap Nor Swe UK USA
1870-1889 18.7 8.2 7.0 1.9 2.4 1.7 1.2 0.6 1.6 3.2 4.6 0.7 3.7
1890-1913 6.2 4.1 7.0 2.9 1.3 1.5 1.8 2.4 4.2 2.3 4.6 1.0 3.3
1914-1918 2.7 3.4 3.6 5.1 11.6 6.8 3.8 6.5 3.1 4.1 5.1 a
1919-1926 4.9 4.2 2.5 1.2 2.8 2.4 4.2 2.1 4.9 2.0 2.7 1.7 3.1
1927-1931 3.7 5.9 2.7 0.7 1.4 2.0 1.5 0.6 2.0 1.8 1.9 0.7 2.1
1932-1939 1.6 1.7 2.6 0.8 1.0 0.6 0.7 1.0 1.1 1.5 1.1 0.4 1.2
1940-1946 4.8 3.5 3.3 2.3 3.4 1.0 4.9 2.0 7.2 1.1 3.2a
1947-1959 2.3 3.4 2.3 1.4 1.5 2.0 1.4 1.3 3.1 1.1 1.2 0.6 1.8
1960-1973 1.0 2.3 1.2 1.9 0.6 1.0 2.1 1.0 2.4 0.7 0.8 0.5 1.3
1974-1989 1.9 3.6 1.7 3.2 0.8 2.1 1.3 1.8 5.2 1.5 1.5 1.4 2.2
1989-1996 2.0 4.5 4.0 1.8 0.7 2.7 1.6 2.1 2.9 2.0 2.6 1.2 2.3
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Semiglobalization and international business strateqy Pankaj
I Ghemawat
144
1880 1902 1916 1922 1928 1935 1943 1952 1962 1974 1985 1993
tracks the standard deviation of differences in Source: Maurice Obstfeld and Alan Taylor, "The Great Depression As A Watershed:
returns in the two cities as an inverse measure of Capital Mobility Over the Long Run," NBER Working Paper 5960, March 1997.
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Semiglobalization and international business strategy Pankaj Ghemawat
145
China, and other Asian countries to the rest of the Taking a somewhat longer view, it is worth
world (Held et al., 1999, 293-295, 311). Adding in emphasizing that the 19th century apparently saw
other cross-border movements could push the total a divergence, rather than a convergence, of
past 45 million, or 3% of world population in 1900. incomes across countries that has been only
Higher migration rates 100 years ago are also evident partially reversed in the 20th century (Baldwin
in country-level data - for example, for the largest and Martin, 1999). So, over that kind of time frame,
receiver, the USA. Thus census data indicate that 14% the dispersion of incomes across countries
of the US population was foreign-born at the turn of increased, in net terms, instead of decreasing. This,
the century, compared with 10% today (Dune, 2001). along with the other data presented in this
subsection, would seem to imply skepticism about
Note that, through a substantial part of the earlier
period, a number of large receivers, including the the extent to which labor markets have integrated
USA, placed no restrictions on immigration. across national boundaries.
Turning from quantity-based to price-based mea-
sures, the most obvious indicator of cross-border Knowledge
integration of labor markets would be the cross- The other types of cross-border flows that have
border convergence of wages. Data on the evolu- been discussed already can carry knowledge across
tion of average per capita incomes (a rough and national borders as well, since it can be congealed
ready proxy for average wages) indicate that, while in products, embedded in capital equipment,
incomes in industrialized countries have tended to vested in skilled personnel, etc. Given the topics
converge over the last few decades, a few Asian already covered in this paper, this subsection will
'tigers' have been the only countries able to break focus on cross-border flows of knowledge in pure,
away from the rest of the developing world disembodied and form. In addition to rounding out the
catch up with the industrialized world (see coverage, this focus has the advantage of offering a
Figure 5).6 More sophisticated tests confirm this relatively simple benchmark: as disembodied
conclusion, and indicate that the failure of most knowledge has a 'non-rival' character - that is, as
developing countries to catch up can be reconciledits use in one market, whether defined in geo-
only with a weaker notion of convergence - graphic or product-related terms, should not pre-
conditional convergence (Barro and Sala-i-Martin, clude its application to others - perfect cross-border
1995). Conditional convergence allows for differ-integration in this context should imply that
ences in the steady-state incomes toward which knowledge, once developed anywhere in the world,
different economies are trending, based on differ-is available everywhere else as well.
ences along dimensions such as investment, educa- The conceptual simplicity of focusing on disem-
tion, and population growth. Human capital turns bodied knowledge flows does, however, exact an
out, in attempts to fit conditional convergenceempirical toll: because of their intrinsic intangibil-
models to the data, to have a particularly marked ity, such flows are particularly hard to measure. The
effect on the predicted extent of convergence. evidence presented in this subsection is corre-
spondingly sketchy. It tentatively suggests, how-
ever, that there have been substantial increases in
sO18,000
cross-border knowledge flows over time and, a bit
In(tlustrialized Countries
$16.000
,. Asian lTigers*
1950() 1953 1956 1959 1962 1965 196X 1971 1974 1977 1980 1983 1986 1989 1992 1995
significant component of James Watt's receipts
Source: Bruce Scott, Economic Strategies of Nations, adapted from the
from his steam engine patents in the early nine-
Penn World Tables and the World Bank.
teenth century, for example. However, the available
Figure 5 Convergence? GDP per capita across economic data, along with informational and contracting
groups, 1950-1997 (PPP-adjusted). Source: Scott (2000), problems that were even more acute early on than
adapted from the Penn World Tables and the World Bank). they are now, suggest that the voluntary transfer of
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146
knowledge across national borders is far more (Keller, 2000). The importance of locally dense
common than it used to be. Concerning more information flows is also evident in inter-
general managerial knowledge, the post-World War nationally successful geographic cluste
II period, in particular, has seen the development of perspectives remind us that, although th
new types of organizations and organizational ability of information transmission capac
forms that have also facilitated knowledge transfer. help knowledge to travel across national b
Franchising, which really emerged in its modern is far from sufficient to make knowledge p
form in the USA in the 1950s, is one example. And portable.
management consulting firms, which began their
international expansion at roughly the same time, Semiglobalization as a research program
are regarded as having evolved into major channels In summary, most measures of cross-border eco-
for the international diffusion of new managerial nomic integration have increased significantly in
techniques (Micklethwait and Wooldridge, 2000). the last few decades, but still fall far short of the
Of course, the spread of multinational enterprises, theoretical extreme of total integration. This
intent on applying the same technological and empirical conclusion of semiglobalization is valu-
managerial knowledge to more and more markets, able in and of itself given the ongoing debate
points in the same direction. So, arguably, does the between two polar perspectives: one maintaining
explosion in cross-border information transmission that we have achieved a state of (near) globality, in
capacity since the early 1980s. which there is so much integration across national
These increases in cross-border knowledge flows borders that the latter can, for many practical
notwithstanding, there are also numerous indica- purposes, be ignored, and the other professing
tions of the continued geographical localization of skepticism that there is anything fundamentally
knowledge. The survey evidence on the size of new about the levels of cross-border integration
knowledge transfer costs, although not altogether that have been achieved to date (Giddens, 1996;
satisfying, is suggestive. An influential study by Held et al., 1999). It seems possible to achieve some
Teece (1977) concluded that transfer costs closure to this debate, at least in the economic
accounted for an average of 19% of total project arena.
As of
costs - and ranged from 2 to 59% - in a sample a bonus, semiglobalization affords
alternate possibilities - room for inter
technology transfers in the chemicals, petroleum
refining, and machinery sectors. Outcome-based
business strategy to have content that is
perspectives that point in the same direction
fromare 'mainstream' (single country or
numerous. Through the 1980s, nearly 90% business
of the strategy or, for that matter,
US patents taken out by the world's 600 largest
strategy. To make this point as precisely
corporations listed the inventor as a resident it
of is
theuseful to classify the field of strateg
corporation's 'home base' (Patel and Pavitt,domains
1994). depicted in Table 5. Note the
paradoxical character of domain 1, mainstream
Patents whose inventors reside in the same country
are typically 30-80% more likely to cite each otherstrategy: by assuming total specificity, it
business
than inventors from other countries, and, on allots the least attention to understanding either
average, these citations come 1 year sooner (Jaffe
business/usage-specificity or location-specificity. As
a result, we have to look to domain 2, that of
and Trajtenberg, 1999). A recent study of R&D and
productivity spillovers across large OECD econo-
mainstream corporate strategy, for interesting ana-
mies estimated the average elasticity of such spil-
lyses of variations in the extent to which key firm
lovers with respect to distance as -1 to -2.4% activities, resources or knowledge are business-
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147
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Semialobalization and international
--l- -11--- -
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---=pi . -
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Pankai
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Ghemawat
148
148
Having
perfectly integrated, there would be one global said that K and L merit more attentio
pool
of capital available to fund ventures, and than they have historically attracted, it must
decisions
on whether to proceed with investments added thatbe
could this is not necessarily inconsistent wi
separated from decisions about how tothe focus of much of the relevant literature,
finance
them. Such separation of investment and including
financing Buckley and Casson (1976) early on, on
decisions, while often assumed domestically, knowledge, doesor as the key factor underlying the
not fare well in an international context. market imperfections that are most critical for
Foreign
investment is, to a significant extent,international financed business. Instead, what the discussion
locally in the host country. Thus Feldstein implies (1995)
in this regard is that claims of special status
concluded that only 20% of the value of assets for N as a factor in international business strategy
owned by US affiliates abroad was financed by (domain 3 in Table 5) have to be based on the
cross-border flows of capital from the USA, location-specificity
with an of N. Otherwise, international
additional 18% accounted for by retained earnings
business strategy and multimarket corporate strat-
and the rest representing financing with foreign
egy will be difficult to differentiate. Also note that
debt and equity. In such a context, it in is some
hard cross-border
to contexts, at least, considera-
believe that MNEs allocate capital globally to tions of location-specificity do seem to dominate in
equalize marginal returns on investment projectsknowledge-related decision making (e.g. Alcacer
wherever they are undertaken. Instead, firms' and Chung, 2001). Nevertheless, there would seem
investments in real assets seem to be affected byto be great demand for additional research on this
local financing possibilities - or wealth effects. And much-discussed topic.
the impact of financial variables on real ones may
be more than marginal: some major merger and Firm-level issues
acquisition waves, for example, seem to have beenIn addition to flagging factors/products subject to
driven, in large part, by changes in exchange rateslocation-specificity as being salient from the per-
(e.g. Blonigen, 1997). This is just one of many areasspective of international business strategy, the
for additional research related to semiglobalizationdiagnosis of semiglobalization sheds some light
- in this case, concerning segmented internationalon the content of such strategy at the firm (as
markets for capital and how they interact with real opposed to market) level. Most broadly, semigloba-
(non-financial) variables.9 lization significantly enriches the strategy space
The broader point that emerges from this discus- open to firms relative to the straitjacketing struc-
sion is that semiglobalization or incomplete inte-tural extremes of (1) complete isolation at the
gration is often underplayed because of inadequateborders, which would dictate localization, and (2)
attention to the location-specificity of L and K oncomplete integration, which would dictate standar-
the grounds that they are generic factors of dization. Cases intermediate to 'one country' and
production incapable of sustaining firm-specific 'one world' present decision-makers with more
advantages. Capital also seems to get pulled down, than one obvious strategy option. Therefore these
as markets for it are supposed to be subject to a highcases require some higher-level decisions about
degree of cross-border integration10 and laborhow their firms are going to compete to add value.
because it is seen to represent a 'low' basis for There are many specific ways in which firms
cross-border competition. In any case, whatever the might try to add value through cross-border opera-
precise reasoning, the effect is to devalue capital tions under conditions of incomplete integration,
and labor for being relatively non-specialized but they can be grouped in terms of two funda-
factors and to focus attention on knowledge. This mental economic functions - in the sense of
may seem a reasonable approach. However, recall mechanisms for adding value, as opposed to
that it is controverted by the evidence, summarized marketing, production, etc. - that organizations
in the previous section, that markets for capital and try to fulfill by crossing borders. The first function,
labor, just like markets for knowledge, exhibit aggregation, involves exploiting the similarities
significant barriers to cross-border integration. As across countries, while somehow side-stepping the
a result, even the apparently unspecialized factors differences among them, so as to tap increasing
of capital and labor are specialized at the level of returns to scale. The second, arbitrage, involves
location, if in no other sense. Thus they can assume exploiting differences among countries by taking
strategic importance in an international context advantage of variations in absolute costs or will-
and should be attended to. ingness-to-pay. The prototypical aggregator is a
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Semiglobalization and international business strateqy Pankaj Ghemawat
149
firm that takes advantage of (partly) locationally differences in the cost of capital. They can arbitrage
mobile resources subject to increasing returns to labor cost differences by relocating labor-intensiv
perform roughly the same activities in different activities to countries with low labor costs. And
countries (a 'horizontal' MNE). The prototypical they can try to harness knowledge differences and,
arbitrageur takes advantage of international differ- more broadly, geographically dispersed knowledge
ences by geographically separating activities in an by making asset-seeking (rather than asset-exploit-
integrated vertical chain (the vertical MNE). ing) investments in critical locations - a task that
Arbitrage was the function that dominated early involves detailed coordination across multiple
international economic activity, as evident in the locations rather than, as some would have it, the
operations of the trading companies chartered in death of geography.
the 16th and 17th centuries, the whaling fleets of The aggregation function also lends itself to
the 18th century, and the vertically integrated unbundling. Here, there are continua of possibili-
agricultural and extractive (mining) companies that ties ranging, as noted above, from the complete
emerged in the 19th century (Ghemawat, 2000). In localization of a business by country at one
contrast, aggregation first came to the fore - with extreme to complete standardization across coun-
the possible exception of a few international bank- tries at the other. Interestingly distinct - and
ing chains that emerged earlier in the 19th century progressively less researched - intermediate possi-
- with the manufacturing multinationals that bilities include:
began to appear in the second half of the 19th
century. Despite this late start, however, casual (1) adaptation, in which the business model origi-
evidence suggests that aggregation has comman- nated in the 'home base' becomes the basis for
deered researchers' attention to the point where the local modification;
arbitrage function is often ignored. The long- (2) platform or front-to-back approaches, in which
running discussion of the tensions between inte- certain core features of a business model (the
gration and responsiveness and their resolution is a 'platform') are preset globally, while others can
good example (Prahalad and Doz, 1987). These be altered in light of local conditions; and
issues are salient in the context of aggregation, but (3) clustering, which emphasizes grouping coun-
not in the context of arbitrage, which is often tries - regionalization is a subcase - in order to
passed over in silence as a result. Note that such a pursue commonalities more aggressively than
bias towards aggregation would lead to suboptimal would be possible with pure country-by-country
responses to conditions of incomplete integration adaptation.
because of an undue emphasis on treating impor-
tant differences across countries as sources of Developing a contingency theory of choice that
difficulty to be ignored or minimized (asoperates part thisof level of disaggregation would seem to
an aggregation approach) rather than as possible be a high priority.
sources of value (as part of an arbitrage approach). An additional assumption that is worth discuss-
To consider all possible levers of value, it is ing in this context is the textbook distinction
important to supplement horizontal approaches between horizontal MNEs that emphasize aggrega-
that emphasize aggregation with vertical tion and vertical MNEs that emphasize arbitrage.
approaches that seek to capitalize on (as opposed This dichotomy assumes that it is often possible -
to merely cope with) differences - that is, that and useful - to distinguish firms in terms of the one
emphasize arbitrage. function that is economically central, over long
Unbundling the two functions should help in of time, to their strategies for adding value
periods
this regard. To start with the one that tends to by getcompeting around the world.l1 If one accepts
overlooked more, arbitrage, the schema used earlier this, then it is clear that there are two mutually
in this paper to distinguish among markets for exclusive approaches to achieving geographic
products, capital, labor, and knowledge also sug- coherence or fit - the international business
gests a correspondingly broad array of arbitrage- analogue of mainstream business strategy's f
based mechanisms for (potentially) adding value. on internal and external fit at the level of the
Firms can arbitrage the incomplete integration individual
of business, and corporate strategy's focus
product markets across borders by becoming tra- on fit or coherence across businesses. But there also
ders. Capital market differences provide them with seem to be indications that large multinationals
a strong incentive to account for international engage, at least to some extent, in both aggregation
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Semialobalization
-
and international ---
..----
business strateav
-'
Pankai Ghemawat
150
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Semiqlobalization and international business strateqy Pankaj Ghemawat
151
international business. As Buckley (2002, 370) 5For further discussion of currency risk, see Frankel
recently put it: (1992).
6Note the caveat that the extent of catch-up by the
International business has succeeded because it has focused
on, in sequence, a number of big questions, which arise Asian tigers would look somewhat less remarkable if
from empirical developments in the world economy. The the data in Figure 5 were updated to take account of
agenda is stalled because no such big question has currentlythe Asian currency crisis.
been identified. This calls into question the separate 7The other (overlapping) reasons for the localization
existence of the subject area. It raises the old problem ofof international competitiveness identified by Porter
the relationship between international business and other
functional areas of management and social science.
(1990) are sophisticated local demand and the local
availability of specialized inputs and complements as
From this perspective, the issue is not whetherwell a as basic factors of production.
big research question is needed at this juncture in8This point can be demonstrated formally in the
the development of international business, but, context of standard supply-demand analysis. To start at
instead, what it should be about: semiglobalization /
one extreme, with complete insulation between two
location-specificity or something else? country markets, the price and quantity outcomes can
be pinned down (under the assumption of atomistic
Acknowledgements competition) at the intersection of supply and demand
This paper has benefited from research assistance bycurves in each market. At the other extreme, with
Jamie Matthews and Raluca Lupu, helpful comments complete integration - that is, zero extra costs of
by David Collis, Beulah D'Souza, Vijay Govindarajan,
trading, transporting, transacting and so on across
Mauro Guillen, Tarun Khanna, Walter Kuemmerle, national boundaries - one could still add up the supply
curves for the two markets on the one hand and their
Christos Pitelis, Ravi Ramamurti, Louis T. Wells Jr.,
George S. Yip and, especially, Bernard Y. Yeung, demand
as curves on the other and use the point of
intersection of the two aggregate curves to determine
well as from presentation of material at the AIB Panel
Session, in summer 2002, celebrating Buckley and the (common) prices and the quantities in the unified
market. But the continuum of situations between zero
Casson (1976). The Division of Research at the Harvard
Business School provided financial support. and complete economic integration that I refer to as
semi-globalization creates additional challenges. Given
Notes
semi-globalization, the analysis of prices and quantities
'While location-specificity can also operate in at the
thetwo markets cannot be reduced to supply-
demand analysis of an individual market. Instead,
local or (intranational) regional level, a full treatment
of it at all these levels of analyses is beyond the attention
scope has to be paid to distinct markets that are
of this paper, even though many of the analytical neither totally segmented nor totally integrated - an
issues that arise are similar. intrinsically more complex, and interesting, setup.
2The disparity is even greater if one recognizes that 9For further discussion along these lines, see Caves
the denominator of the ratio should really be (1998). a
measure of gross sales rather than a value-added '?Such integration would make access to a global
measure like GDP. pool of capital a 'given' for any worthy enterprise and
3Foreign direct investment currently accounts for thereby limit the scope for purely financial sources of
roughly one-half of total foreign investment, but itsadvantage or disadvantage.
share was significantly smaller at the start of the 20th"Caves (1996) also identifies a third, residual
category of multinational enterprise: international
century. See Bloomfield (1968, 3-4), cited in Bordo
et al. (1999). diversifiers whose operations in different countries
are neither horizontally nor vertically related to each
4Note that the spread of domestic safety nets does
other. These can be thought of as falling in domain 4
increase the likelihood that banking crises will turn into
currency crises. of Table 5 rather than domain 3.
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Semiglobalization and international business strateav
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Pankai Ghemawat
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152
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