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for the Advancement of Management
International Management
.l989Conference
Society
AprÍì l3-.l5,
hl. Lee Hoski ns
President, Federal Reserve Bank Cìeveland
The Global Economy:
Impì
ications for
Today, industries face a more global economy than
turn of the century. At that time the world
it is now. One could traveì
papers.
Management
at any time since the
economy was much more open than
through most countrles without identification
in another to purchase
goods and services. But two l,lorld Hars and the economic collapse of the 1930s
And gold coins from one country cou'ld be used
led to a closing of the world economy.
The progress
of the past 45 years
towards the ideal economic organization, open markets, and the
goods, capi tal
free flow of
, and i deas i s i ndi sputabl e.
Many economists, myself
Íncluded, believe that markets are inherently
stable, and consequentìy, tend to gravitate back towards equilibrium after
political "shocks." This natural resiliency
of markets tends to build pressures to modlfy or sweep away institutions that
limit exchange and production opportunities. The alternative view is that
experiencing financiaì, real, or
markets are unstabìe and need the constant action and intervention of
government policymakers
to
smooth and
social objectives. This latter view
economics profession and
the outcome closer to poìitical
seems
to have lost credibility in
and
the
in political circles, at least during the last
decade.
shift in the worìd's thinking? Have
realized the benefits of relying on markets rather than
Has there been
policymakers
fit
a fundamental
interfering in them. From the
have praised the
days
of
Adam
Smith, economists and philosophers
glories of free trade. "No nation
vtas ever
ruined by trade,"
declared Benjamin Franklin three years after Smith pubìished his hlealth of
Nations. And, indeed, from an economic standpoint he is right.
-2Hìstorians have long noted the coincidence between economic growth and the
It is impossibìe to ignore the gains that the world
free fìow of resources.
has made
in the postwar era of
renewed
international trade. In the U.S., real
of poverty-level families
has been halved, and the percentage of the adult population that is empìoyed
is currently at historical highs. Recent votes of confidence have been
expressed in international and bilateral agreements such as GATT, and the
income and wealth have more than doubled,
the
number
U.S.-Canadian Free Trade Agreement. Even more encouraging, incì inations are
displayed
Mikhai
I
in the communist bìock by China's efforts to expand markets and
Gorbachev's perestroika.
Technological development might be the gravitational force toward
international markets. Technology opens up nevl opportunities for gain.
As
the Asian experience shows, the smaìlest countries can participate in these
gains, as producers and as consumers, with open markets. Large interrelated
self-reinforcing blocks of technological development require the existence
of ìarge, open markets. Consider the development of microelectronics. The
and
great increase in circuit-element density, leading to dramatic improvements in
the capabilities of an integrated circuit chip, has been inseparabìe from the
introduction of more compìex production equipment. But such developments are
expensive and
risky propositions. For exampìe, the processing equipment alone
raised the fixed costs of a wafer fabrication pìant from about $2 milìion to
.l970s. l^lhìle
$50 milìion during the
these plants are able to produce more
sophisticated chips with increased applicability at a cheaper price, they
the support of very ìarge
Poltical bodies wilj
need
markets.
aìways be tempted
to
assume
a certafn omnipotence and
take uncertainty and risk into their own hands. Shocks around the worìd cou'ld
lead to a closing
of the worìd economic order
intervention in economic
affairs.
and an ìncrease
in
state
Financial coliapse, lvars, ecological
3di sasters, world recessions
or
broad-based ideologicaì concerns could
be
catalysts. But while progress may not be as rapid or as even as I would like,
but the forces operating towards an international marketpìace are strong
wiìì
and
continue.
rightfuììy question
hle may
whether governmental gestures toward further
spirit. Are governments
doing enough? Are they doing the right things? Today I will argue that
reliance on market resources are being upheìd in
deregulation and actions to promote a freer exchange
businesses and the economy.
I
aìso discuss
some
of
resources are good for
of the implications that
gìobalization has had for management. Reaìizing that we have only scratched
the surface of the benefits arising from gìobalization of markets, what can tve
expect the future to hold?
Europe
I 992
The European Economìc Community (EEC)
remove
of
is initiating some 300 actions
to
physical, technical, and fiscal barriers to freer markets. The removal
these barriers to the free flow
of products, services, labor, and capital
promises enormous gains from specialization, competition, and economies of
scale.
Aìready
firms in
Europe are consolidating and
investing to take
of wider markets. Nevertheless, the removaì of barriers arnong
member states is not, in itself, enough to guarantee overa'll efficiency
gains. These require that the EEC go beyond the removal of barriers among ìts
advantage
individuaì
members and adopt more generaì
that alìow prices to
policies that ìiberalize markets
convey information about
relative scarcities.
Two wideìy
to do with the "ìeveìing up" of
reguìation and the creation of barriers to externaì trade.
discussed issues along these
lines
have
and
4Many
observers, especially the
British,
have expressed concern
the drive toward a unified turope, a pattern
subsidization
of
Instead
wi I
supplant the concept
breaking down
Community could
competi
I
"level
them
up," creating a
wi
thi n the
and
controls, the European
new bureaucracy and
Communi
ty.
Thi
in production,
s ki nd of pol i cy
employment, and
opportunities in Europe. Replacing l2 individual markets with
singìe market does not,
Common
and
of a single I iberal ized market.
coordination would I imit potentiaì gains
Europe's
supranationaì regulation
barriers, restrictions,
tion-stifì i ng patronage
exchange
of
that, in
in itself, diminish rent-seeking,
a
as we have seen with
Agri cuì tural Pol i cy.
of us from outside the European Community wonder whether
the Community will restrict external competition. Over the past 40 years, the
Similarly,
trading world
some
-- often led by the EEC --
has lowered
tariffs
and removed
quotas. But after substantial gains during the ì950s and 1960s, the
slowed. Although the overalì level
of import restraint
progress
might not be higher
now than 40 years ago,
trade restraints remain an important feature of
European and worìdwide
trade.
Moreover, these
restraints
have become more
sophisticated, more discretionary, less visible, and even less responsive to
market forces than the
All
traditional tariffs that they
repìaced.
current rhetoric aside, the trading world lacks a firm commitment to
the principles of free trade. He live in a neo-mercantilist environment
where
is more a function of bilateral, product-specific
negotiating skiìls than the result of competitive strengths. Such types of
market access often
policy coordìnation
have enormous costs.
-5Competitiveness
l^lhat does
of U.S. Firms
a more g'lobaì
economy mean
for the U.S.? Can America compete?
For the past several years we have been running very large trade deficits.
The U.S. has gone from
to a defic'it of
$.l53
a trade surplus of $7 billion (current account)
billion in 1987.
in l98l
Last year bre began to see some
in our trade situation, but we are still running a deficit. In
improvement
billion in merchandise, but exported only
$320 billion, leaving a trade deficit of $lz0 bÍllion. That is, imports
ì988, the U.S. imported over $440
exceeded exports by almost 40 percent.
Do these
figures indicate that the U.S. cannot
I don't think so.
early
.l980s
The trade
deficits
are prÍmarily the fault
compete
These economic pol
of
late .l970s, also
and equipment
to
made
icies,
markets?
we have been accumulating since the
poor economic policies
inflation, high interest rates, high exchange rates,
deficits.
in world
especlal
--
high
and large budget
ly the high inflation rates of
the
our firms less competitlve. Needed investments in plant
modernize operations were postponed because
rates, brought on by high
inflation.
The high exchange
of high interest
rates of the
1980s
greatly exacerbated the underìying problem.
The United States
trading nation.
economy
Each
is the largest
economy
in the world and also the largest
year, the U.S. imports more than the entire
produces. However, U.S. merchandise exports amount to only about 6
percent of our GDP. There are only two countries
ratio is as low as that of the U.S.: India
Germany
Some
is
30 percent, canada's
Belgium's
is 73 percent, Ireland's is
in the world
whose export
and Yemen. The export
is 28 percent,
of the world's smaììer countries
percent.
Canadian
and Japan's
ratio for
is l5 percent.
have even ìarger export ratios:
63 percent, and the Netherlands'
is
62
-6These data debunk
the myth that foreign markets are closed and that this
is a key trade problem facing the U.S.
that U.S. industry must be protected
the loss of jobs that would
Nevertheless, many Amerìcans argue
of our inability to compete and
result. According to recent polls, the American
because
public overwhelmingly believes that Japan
po!{er. t^lhat's more, Americans
is
the world's leading
economic
to believe that U.S. products rate behind
those of Japan and Germany. Fortunately, the poll found that government and
business leaders do not
successful
in
seem
agree.
European markets
American
firms like
for years.
Ford and IBM have been
The lmpenetrable Japanese market
has been cracked by IBM, ServiceMaster (contract hospital cleaning), 7-Eleven,
A.T. Cross (pens), and l^leaver Popcorn. The secret
is a strategy of longevity
in foreign markets, a commitment that takes time, effort, and money.
Today, pessimism about America's ability to compete is in vogue. I
believe that America's industries are able to compete worldwide, and we have
already seen some progress.
27 percent
in .l988.
In ì987, exports
[,le can do
better,
increased by 12 percent and by
and pol icymakers can
help; not
by
adopting protectionist measures, but by doing more to allow the markets to
work.
Rol
e of Governments
l'lhat roìe should governments play
in a global
economy? very simply,
governments should create an environment which
is
resource allocation
of free
managers and
decisions.
An environment
consistent with
good
exchange alìows
other market participants to rely on market principles and the
free fìow of resources and ìnformation to guide their decisÍons. In this
businesses and
expand
way,
entire economies can pursue their comparative advantage and
overalì output and weìfare. Governments wiìl always be called on to
-7-
set the ruìes of the game within which markets operate -- such as protect
property rights and other individual
liberties.
However, government poìicy
strive to supplant markets and limit their discipìine.
Inflation: A policy issue that has not received enough attention
should not
price-level stabi
resources.
It
I
concerns
ity. Infìation involves costs in terms of mi saì located
adds "noise"
relative scarcities
to prices, which distorts the information
conveyed through
about
price changes. Through interactions with
tax systems, inflation can affect firms' investment and financial decisions,.
is high and variable and
difficuìt to predict, they are aìso present at moderate levels of inflation.
Inflation also leads to the creation of socially inefficient institutions,
þlhile these costs are greatest when inflation
to protect individuals against inflation-induced losses on money
financial assets. In an infìation-free world we would see far fewer
designed
and
transactions in futures markets for exchange rates and interest rates.
Evidence from
a large set of countries, ulith very different institutÍons
and economic conditions, indicates
economic
growth.
The
inefficiencies and distortions associated with infìation
reduce resources availabìe
that
that persistent inflation erodes long-term
for capital
formation and encourage investments
have quick payback periods, rather than longer-term growth potentiaì.
Exchanqe
Rates:
Governments should
also avoid influencing capital flows
fixing exchange rates. Critics of floating exchange rates argue that the
volatiììty ìmpedes the free flow of resources. Exchange rate volatility, it
by
is argued, increases untertainty which raises the cost of doing business and
raises the requìred rate of return for undertaking risky projects. Exchange
rate changes, though, compensate for di fferences i n i nfl ati on, savi ngs rates,
producti vi ty growth, and costs of production between i ndi vi dual countri es. By
fixing
exchange
rates, or setting a narrow band, governments force adjustments
8-
to take other forms, including inflation in some countries. Exchange rates,
ìike prices, are indications of relative scarcÍties. In an uncertain,
changing þrorìd they must be aìlowed
Trade
Restrictions:
to adjust to
Governmental
new events.
restrictions on trade ìs another way of
stifling healthy resource flows. Although legal trade restrictions and
tariffs have declined in recent years, effective restraints have taken more
sophisticated, more discretionary, and less visible forms. Goods have
turned away from foreign markets through the enforcement
of various
been
product,
standards, packaging requirements and foreign government subsidies. l,le have
ìearned
that
such
policies can be extremely
damaging
for trade and growth.
Requlation: Finally, regulation is a form of intervention
where
marketplace
to guard against the normal risks of a competitive
and prohibit the most efficient use of resources. Such meddling
has adverse
effects on long-term decisionmaking and, ironically, tends to hurt
governments attempt
those
it
was intended
to help.
The examples are
plentifuì.
Railroads,
sheltered by rate-of-return regulation, eventually whithered into
near-complete
decay.
The U.S.
steel industry,
the worìd by a government-guaranteed price
in inefficiency. In
simi
Impoftance
of
floor,
to the insurance
Requlatory Reform:
to
ios.
minimum
from
fund.
ïhe
aì Industry
like a public utility, controììing
Fi nanc i
its activities through reguìation. Bank charters,
portfoì
soon became a world leader
of failure, only served to shift risk
For years the U.S. has treated banking
typicaììy call for
rest of
ìar fashion, deposit insurance, designed to protect
depositors and banks from the risk
bank management
once protected from the
capital holdings
Banks have been precìuded from
which screen new entrants,
and broad
restrictions
certaìn kinds
on
of activities deemed
be too ri sky, i ncì udi ng generaì i nsurance and securì ti es underwri ti
ng.
In
-9the past, competition was further limited because banks could not offer
interest on regular checking deposits and a ceiling was set on other deposits
(Reguìation
Q).
retail banking was limited
system is more fragmented and
Further, geographic expansion of
to state boundaries. As a result, our banking
compartmentallzed than
that of
any other country.
Legislated changes have ìoosened some restrictions on financial services
activity
and encouraged more competition
in the industry.
The abolìshment
of
the regulatory restraint on interest rate ceilings for bank deposits
(Regulation Q) recognized the compet'itive forces already
banks
to
compete
for funds.
One-bank holding company
in place
ìegislation cracked
door to product expansion by permitting a holding company to
broader set
advances
of products than its
and enabled
bank subsidiary could
the
offer a slightìy
offer dtrectly.
in the computer and teìecommunication industries also
Rapid
spurred
competition. Previously only available to banks, information essential for
financial intermediation
was made avai
lable widely and cheaply.
l'le have al so seen some i ncreased geographi
c
competì
tion.
Al
I but si x
of interstate banking. But whiìe we are
struggling with adopting nationwide interstate banking, the rest of the worìd
is alìowing their banks to compete gìobally. As a consequence, a smalì- or
medium-sized manufacturer in 0hio will not get the support from his local bank
states have adopted
some form
that he needs in his attempt to export. Contrast this situation with that
prevailing in Canada, England or Germany where the hometown banker will also
have branches and representative
These
offices in key cities
around the world.
offices are in place to support the internationaì trade efforts of their
a factory owner from a small German viìlage steps
domestic customers.
l^lhen
off
York, he
the pìane in
ready to
New
will be met by a representative of his own bank,
offer his services and advice on the American market.
l0_
if
Therefore,
we expect businesses,
large and small, to realize the
of trade, financial as well as real resources must be mobile. A
particular concept of Europe 1992, if adopted, could be a formidable hurdle
for the movement of American banks to Europe. The EEC is considering a
principle of "mutual recognition" which would allow a financial institution
exercise the same powers it has in its home country. Over time, pressures
wiìl develop to replicate the structure of the country that permits the
broadest powers. But before this can happen in the U.S., the deposit
benefits
risk
insurance system must be reformed. Market
insurance and the taxpayers back
uìtimately
must be
shifted from deposit
to the bank, its stockholders, managers, and
its depositors. In short, the domestic financial
allowed to be more responsive to the rapidly-changing needs
ïmplications For Business and
system must
be
of the marketplace.
Its Manaoers
Just as polÍcymakers can take
some
steps
to
improve American
competitiveness, American firms can aìso take some steps
competitiveness
to
Ín this growing gìobal
American industries are doomed
if
to
improve
their
economy.
they do not adapt to the new world
marketplace. Firms can no longer behave as they used to. Adapting to this
new marketplace
requires a more flexible organization. hle are beginning to
see new organizational configurations, new management
commitment by workers
finding
Rapid technological growth,
and knowìedge, and a change
caused some
in
it
necessary
to revise theìr
in the last decade have
firms to alter their strategies and resources. In response to
exi bì e and responsi ve.
view
freer exchange of labor, capitaì,
economic condÍtions
increased uncertainty, organizations are
fì
and an increased
to quaìity.
Businesses around the world are
of the world.
styìes,
finding
it vital to become more
It_
One way businesses
production
are increasing fìexibi
of products is
Ii
ty in the development and
through increased automation. The introduction of
microelectronics and sophisticated software has revolutionized the design
development
of
products and has made available much more
and
flexible
manufacturing systems. This streamlining helps Honda develop and manufacture
an auto twice as
fast as the American automakers.
also taught manufacturers that the workers are
However, automation has
still
the heart of any process.
Proper organizational structure and employee involve¡nent are aìso
important to fìexibi
ì
ity and increased responsiveness. Organizations are
finding that the quickness and nimbleness of a smaller, less hierarchlcal
structure
ls
paying
off.
Fìattening the traditional pyramid, though, may not
be enough. Like banks, firms are decentralizing
to
move
their
decisionmakers
is crucial in a rapidly-changing environment. The
declining costs and increased abilities of communication and transportation
closer to the market which
systems are making decentralization much more
A corporation
may
feasible than in the past.
that is interested in expanding into internatìonal
decentralize for other reasons. By locating
some
of its
markets
operations or
using subcontractors in foreign markets, the multinational reduces the
possibility that it will be shut out of that market; for example, the U.S.
Japanese
fear of being boxed out of
Europe
in 1992. In addition,
provide a "structural hedge," against adverse movements
However,
in
the firm
and
can
exchange rates.
the firm must be careful not to subcontract everything away.
A
it is globalizing or not, must identify the unique things
that it contributes to the creation of value - its higher margin activities.
company, whether
The successful
firm wìlì maintain proprietary control over those parts of
it in the marketpìace and use the broadest possible
inputs for the rest. In this vray, sourcing can be
product that distinguishes
array of standardìzed
the
shifted, dictated by market conditions
and
relative prices of
suppl
iers.
12-
In
such a market-driven, niche-oriented
excìusiveìy on
world, the corporation cannot reìy
its president or CEO for direction.
managers must become,
to
some
Rather, the firm's
extent, entrepreneurs. A manager must clearly
understand the business strategy and pursue
in the most effective (high-quality)
and
that activity or set of actlvities
efficient (low cost) way possibìe.
In a fast-changing international environment, the successful
abreast and even anticipate market developments. The focus
someone who knows
every detai
manager must keep
is
changing from
I of the operation to someone who has a broader
of the worìd and has the ability.to apply this view to plant operatlons.
A more decentralized structure poses probìems of coordination. Executives
and administrators high in the organization must surrender some control in the
view
running of operations. Organizations are finding that frequent flows of
information are
be the job
of
vital for the meshing of once centralized functions. It will
managers
to gather
and disseminate information
within
and
outside the organization. 1^lith increased autonomy, managers must understand
and communicate
the ìmpact that a
change
in one area, say production,
has on
the activities of other areas, like marketing. Corporate goals and objectives
must be understood and,
In
to
some
extent,
embraced by employees
at all levels.
of control, the employee is
the most important resource. Firms are more directly tying their business
strategy to the selection and continued development of their employees.
Instead of emphasizing the notion of "climbing the corporate ladder," firms
such a decentralized, market-driven system
are treating organizational growth and individual growth as partners.
Employers have experimented
with flexibìe working patterns (flexible hours,
part-time work, sabbaticals for further education and training, job rotation,
etc.)
pay
and
fìexible reward systems (for example, empìoyees can choose
between
raise, time off, particuìar benefits, etc.) in an effort to foster
long-term moti vation and productivi ty.
a
t3_
Thus the manager
organization.
Such
will
be the important
link
specific and tailor-made
between the employee and the
employee rewards and development
objectives must be integrated with corporate goals and objectives.
manager
will
most
The
often be the onìy indjviduaì with the knowledge to
mesh
these two needs together. The importance
of employee development is magnifled
in an industry of changing business strategy. For example, managers of AT&T
who wilì be responsible for a foreign market are deployed to that market to
accl imate them to locaì tradì tions, customs, and busi ness practi ces.
Conclusion
The internationaì trade
concerning,
industry.
if
statistics over the past decade reveal a
not alarming, development regarding the competitiveness of
U.S.
is that we cannot, and we must
protectionist legislatÍon. This, I believe, is nothing more
Can America compete? A popuìar view
respond through
than misguided patriotism. Indeed, through trade, rve as people gain through
technology, investments, and innovations, whether they occur abroad
Ci nci
nnati
.
initiated at
to adjust to those changes whether they are
l^le al
so have
home
or abroad.
f^le
to adjust and adapt better.
need
The United States and the worìd have and
rewards from
freeìy
moving
tion,
and economi es
will
continue to reap large
resources. A free fìow of products, services,
ìabor, capitaì, and knowìedge promises
competi
or in
of
scal
e.
enormous gains from special
t^lhi
the removal of explicit trade barriers,
le
ization,
some progress has been made wi th
much work
remains. Furthermore,
of the financial industry wilì play a ìarge role in international
expansion. Perhaps most important, is the acceptance of domestic monetary
poìicies of zero inflation. Simpìification of the economic decisionmaking
deregu'lation
process would boost productivity and growth through better resource
alìocation. But as long as the world
has a coìlection
of sovereign states --
14-
with the right to print
money and
different tastes for inflation, with
dìfferent abilities in the workplace, with different preferences for saving,
etc. -- exchange rates should be allowed to adjust and refìect the changing
reìative scarcities of currencies.
In such a world, the phrase "business as usual" wilì
Business practices and strategies
will
have
be obsolete.
to be constanily
reassessed and
updated. Technology wilì thrive in such an envÍronment, serving to expand the
edge
of production frontiers,
and making
our business world even
more
dynamic. Corporations, probably more than at any time in our history, will
have
to be forward-ìooking in their vision.
The
responsibility wiìl
she must be much more
assess
the impact of
must also be
of
fall directly on the manager's shoulders.
an entrepreneur, able
changes
-- organizational
a top communÍcator, able to
He or
to perceive opportun.ities and
and envirohmentaì. He or
convey messages from
she
the market to
the organization and within the organization. In a more market-driven world,
the manager will be the key component to a more flexible, successful
organ i zat i on
.
@FedFRASER