GLOBAL COMPETITION: THE NEW REALITY.
By Anil Khurana Assistant Professor of Operations Management
In the 1960s, the formula for global success, according to researchers at Harvard, Columbia, Wharton, and other business schools was that products had a predictable "international" life cycle. The introduction stage is domestic, having its orientation in the country where theproduct was developed, typically and industrialized country such as the United States. Exports to other industrialized countries may support scale economies (the more you produce, the lower your cost). During the growth stage, exports increase, and foreign investments in manufacturing plants and marketing organizations are made in countries with and expanding demand for the product. In the maturitystage, when major markets are saturated and the product is standardized, manufacturing is relocated to countries with low labor costs (generally newly industrialized countries - NICs - and developing countries). Finally, in the stage of decline, manufacturing, and in some cases, even demand, leaves the industrial country which was home to the original innovation. This "international product" lifecyclemodel was also acceptable to economists and finance experts who sought to predict the direction and extent of foreign investment; many of them advised large multinationals to make major foreign investments. The opinion of these experts was that multinational corporations (MNCs) needed to invest overseas primarily to realize immediate returns through advantages arising from location (e.g., accessto markets, natural resources, low-cost labor, transportation). As a result, they generally recommended locating overseas only if there were substantial market access or costbased advantages. And since this precept was based on some of the principles of classical economics, such as comparative advantage theory (some nations have inherent advantages such as available labor or mineral resources),both managers and academics felt they were on firm ground! The "truths" were false. These two "truths" of global competition - the international product lifecycle, and theory of foreign direct investment - appeared to hold true for a while, but the 1970s were not friendly to either academic theories or managerial intuition. First, Japanese production put U.S. industry into a defensive position, withthe result that many U.S. companies were forced to go overseas in search of low-cost labor. Naturally, this low-cost position was not defensible for long, as renewed innovations in quality and productivity by a select set of U.S. and Japanese companies made it even more difficult to compete. Furthermore, the "hollowing out" of the U.S. rustbelt - the heart of industrial America for more than ahalf a century - led to a further decline in U.S. competitiveness. Second, the reactive style or foreign investment by most American and European companies meant that the overseas factories in countries such as Taiwan, Thailand
Malaysia, Hong Kong, and Indonesia had few capabilities to sustain them, let alone contribute to the development and growth of the parent country. Even the hostcountries did not gain as much as they had hoped. Sure, foreign investors created new jobs, and many of them paid higher wages than traditional jobs. But, as any development economist would tell you today, the means of self-sustaining growth were lacking! The World Today. Today, the 60s model is looking rather tattered. Look at the most recent Fortune 500. Two facts stand out. First, there are severalnon-U.S., non-European, non-Japanese companies on the list. Korean, Hong Kong, and even a couple of Taiwanese companies are there. Second, if you research the foreign operations of some of these best companies, you'll find that they have truly invested in their foreign subsidiaries. Many of their research centers, leading-edge factories, innovative advertising, and best managers are in...