Contemporary Challenges to the International Business Paradigm
For several decades, businesses have expanded their operations beyond national borders to capture value by relocating value chain activities abroad. In doing so, companies have extracted value from international business activities in many ways, including achieving less costly inputs, paying less taxes, profiting through labor arbitrage, expanding market opportunities, gaining resource access, etc. This phenomenon has been so pronounced that it has led many to believe in the primacy of companies conducting business in international markets over state actors. As early as 1968, Vernon famously coined the phrase “sovereignty at bay” and devotees of the idea proposed that the nation state was in peril, to be replaced by the multinational enterprise.
The growth of international business has clearly led to dramatic increases in standards of living across the globe. However, we are now starting to see dents in the armor of the idea of supranormal market returns through relatively unfettered access to global markets. Workforce displacement has been a noticeable externality that has not been successfully addressed through workforce retraining initiatives. Increased global consumption has put a strain on resources and exacerbated environmental concerns. Extreme specialization has led countries like India to struggle to gain access to ordinary items such as medicine and tools during a tsunami disaster (Enderwick & Buckley, 2020).
Now, for the first time in quite a while, long-standing notions of the primacy of the multinational firm in a globally connected marketplace are being challenged. Supply chains have proven to be much more fragile than previously anticipated throughout the Covid-19 pandemic. Restrictions on basic inputs have continued to put upward pressure on inflation. Even our foundational business assumption of maximizing shareholder value is being challenged, as state actors and other nonmarket stakeholders place tremendous pressure on corporate activities. Chinese businesses are inextricably intertwined with the politics of the state. Political influence on the market is not merely limited to autocratic regimes, however, as has been shown in the Western sanction-heavy response to Russia’s invasion of the Ukraine. McDonald’s decision to close operations in Russia – after receiving so much fanfare when it opened in 1990 - is stark evidence of the changing international business landscape and its inherent risks. It appears obvious that our current models for understanding international strategy need to be augmented to incorporate state actors and other nonmarket stakeholders.
Perhaps more than ever, it is also important for companies to invest in political capabilities in order to make adroit strategic decisions in the international arena. To be successful in the changing global economy, firms need to develop decision frameworks and feedback mechanisms that provide rich information for selecting foreign investment. Companies should also proactively consider anticipatory political strategies and invest in defensive strategies to mitigate the risk of investment loss. Over time, firms have become adept at overcoming liabilities of foreignness in the global economy and at making decisions about where production is best optimized. They have been less effective, however, at considering factors that extend beyond the bounds of the traditional economic objectives of maximizing shareholder value. The changing landscape of international business requires that they begin to do so.
Enderwick, P., & Buckley, P. (2020). Rising regionalization: Will the post-Covid-19 world see a retreat from globalization? Transnational Corporations Journal, 27(2): 99-112.
Vernon, R. (1968). Economic sovereignty at bay. Foreign Affairs, 47: 110.