States, Firms and Diplomacy

Author(s): Susan Strange

Source: International Affairs (Royal Institute of International Affairs 1944-), Vol. 68, No. 1
(Jan., 1992), pp. 1-15
Published by: Wiley on behalf of the Royal Institute of International Affairs
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 States,firmsand diplomacy

SUSAN STRANGE

Susan Strangereports on herrecentworkon relationsbetweenstatesandfirms,and

proposesa new research relations:thestudyoffirmsas
agendain international
andfirm-firm
actorsin worldpoliticsand ofstate-firm bargainingas twonew
dimensions to diplomacy.She arguesthatgovernments, likeacademics,mustwake
up to thestructuralchangesin worldpoliticsandpay properattention to the
increasingimportance offirms.

Four stops on the London Underground will take you from the London
Business School in Regent's Park to the London School of Economics offthe
Strand. Yet for 30 years the two institutionsmighthave been separatedby a
Berlin Wall, so minimalwas the communicationbetween them,so divergent
the mattersthat interestedtheirprofessors,so diverse the discoursesof their
students.Each was openly dismissive,but secretlyjealous, of the other.'
This articlepresentsthe findingsof a rare venturein collaborationbetween
writersfrom both institutions,a professorof internationalbusiness and a
professorof internationalrelations,resultingin a recentbook.2 Our researchled
us to sharedbeliefsthatwent beyond the primaryfocusof thebook to identify
structuralfactorsin the world economy. Three propositionswill be advanced
here. First,thatmany seeminglyunrelateddevelopmentsin world politicsand
world businesshave common roots and are the resultin large partof the same
structuralchanges in the world economy and society. Second, that partlyin
consequence of these same structuralchanges, therehas been a fundamental
change in the natureof diplomacy. Governmentsmustnow bargainnot only
with othergovernments,but also with firmsor enterprises, while firmsnow
bargain both with governmentsand with one another.As a corollaryof this,

This intellectualapartheid can also be found, perhaps in less acute form,in other European countries
besides Britain. In the United States, where business schools have always been more highly valued by
universities,the focus has often been largely confined to US-based firmsand theirexperiences
overseas, which can be very differentfrom those of Japanese,European or Asian firms.
2 John Stopford and Susan Strange, Rival states,rivalfirms:competitionfor worldmarketshares
(Cambridge: Cambridge UniversityPress, I99I). John Stopford is Professorof InternationalBusiness
at the London Business School; Susan Strange was Montague Burton Professorof International
Relations at the London School of Economics 1978-88.

International
Affairs68: I (1992), I-IS
1-2

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Susan Strange

the nature of the competition between states has changed, so that macro-
economic managementand industrialpolicies may oftenbe as or even more
importantforgovernmentsthanconventionalforeignpoliciesas conventionally
conceived. The thirdpropositionfollows from the second, and concernsthe
significanceof firmsas actors influencingthe futurecourse of transnational
relations not least for the study of internationalrelations and political
economy.

Structural change
Most commentatorson internationalaffairshave in our opinion paid far too
littleattentionto structuralchange, particularlyto change in the structureof
productionin the world economy.3 Our recentwork argues thatmost of the
recent changes in world politics,however unrelatedthey may seem on the
surface,can be tracedback in large partto certaincommon rootsin the global
politicaleconomy. We see common drivingforcesof structuralchange behind
theliberationof CentralEurope, thedisintegration of theformerSoviet Union,
theintractablepaymentsdeficitof the United States,theJapanesesurpluses,the
rapid rise of the East Asian newly industrializedcountries,and the U-turnsof
many developing country governments from military or authoritarian
government to democracy, and from protection and import substitution
towards open bordersand export promotion.
These common drivingforcesof change, in brief,are the acceleratingrate
and cost of technological change, which has speeded up in its turn the
internationalizationof production and the dispersion of manufacturing
industryto newlyindustrializedcountries;increasedcapitalmobility,whichhas
made thisdispersionof industryeasier and speedier; and those changesin the
structureof knowledge that have made transnationalcommunicationscheap
and fast and have raised people's awareness of the potential for material
bettermentin a marketeconomy. These common roots have resulted,at the
same time and in many countries,in the demand for democraticgovernment
and for the economic flexibilitythatis impossiblein a command economy.
This perception of the power of universal structuralchange came from
looking in detail as we did at the processes of bargaining between host
governmentsand foreignfirmsin threedeveloping countries,Brazil, Malaysia
and Kenya. The bargainingin question relatedmainlyto the termson which
the firmscould operate and would investin a particularventurewithin the
country. We interviewedgovernmentofficialsand corporate executives of
foreignfirmsin the threecountries.

3 Peter Drucker is the most notable exception, with The new realities(London: Mandarin, I989).
Among others,note C. Freeman, ed., Technologyand thefutureof Europe: global competition and the
environmetnt(London: Pinter, I99I); G. Dosi and C. Freeman, eds., Technologicalchangeand economic
theory,part vi (London: Pinter, I988); K. Ohmae, Triadpower: thecomingshape ofglobal competition
(New York: Free Press, I985); John Dunning, Multinatiotnal economicstructuire
entterprises, and
international (Chichester: Wiley, I985); and P. Cerny, The changitng
competitiveness architectture
ofpolitics
(London: Sage, I990).

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States,firmsand diplomacy

The firmswe interviewedwere working in a varietyof sectorsof business

and were of various national origins. Though the study was based on case-
studiesand attentionto detail at the micro level, while we were struckfirstby
the diversityof states'responsesto global changes,certaincommon trendswere
ratherclearlyvisiblein therelationsbetweenstatesand firms,especiallyforeign
firms.The pressureson both firmsand governmentsappearedto be verysimilar
across all three countries. These pressures were forcing both the host
governmentsand the foreignfirmsto compete more and more activelyfor
world marketshares,and in so doing to reach new modes of accommodation
with one another.4 It seemed clear to us that these pressuresarose from
structuralchangesin the global marketeconomy thatwere not always obvious
eitherto area specialistsor to writerson corporatemanagementor development
economics.

communications
change,mobilecapital,transborder
Technological

Most obvious of the structuralchangesactingas the drivingforceon firmsand

governmentsalike were those in the technologyof industrialand agricultural
production; related to them were changes in the internationalfinancial
structure.The acceleratingpace of technological change has enhanced the
capacity of successfulproducers to supply the market with new products,
and/or to make themwith new materialsor new processes.At the same time,
product and process lifetimes have shortened, sometimes dramatically.
Meanwhile, the costs to the firm of investmentin R & D, researchand
development and thereforeof innovation have risen.The resultis that all
sortsof firmsthat were until recentlycomfortablyensconced in theirhome
marketshave been forced, whether they like it or not, to seek additional
markets abroad in order to gain the profitsnecessary to amortize their
investments in timeto stayup withthecompetitionwhen thenexttechnological
advance comes along. It used to be thought that internationalismwas the
preserveof thelarge,privatelyowned Western'multinational'or transnational
corporations.Today, thanksto theimperativesof structuralchange,thesehave
been joined by many smallerfirms,and also by state-ownedenterprisesand
firmsbased in developing countries.Thus it is not the phenomenon of the
transnationalcorporationthatis new, but the changed balance between firms
working only for a local or domesticmarket,and those working for a global
marketand in partproducingin countriesotherthantheiroriginalhome base.
Besides the acceleratingrate of technological change, two other critical
developmentscontributedto the rapid internationalizationof production.One
was the liberalizationof internationalfinance,beginning perhaps with the
innovationof Eurocurrencydealing and lendingin the I960s, and continuing
uncheckedwith the measuresof financialderegulationinitiatedby the United
The notion of ntationalcomparative advantage in much currenteconomic analysis tends to obscure the
fact that,in the real world today, comparative advantage tends to be firm-specificmore than state-
specific.Moreover, the nature of the comparative advantage is apt to vary considerablyfrom sector to
sector.

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Susan Strange

Statesin the mid-I97os and early I98os.5 As barrierswent down, the mobility
of capital went up. The old difficulties of raising money for investmentin
offshoreoperationsand moving it acrossthe exchangesvanished.It was either
unnecessaryforthetransnational corporationsto findnew funds,or theycould
do so locally.
The thirdcontributingfactorto internationalization has oftenbeen over-
looked the steady and cumulativelowering of the real costs of transborder
transportand communication.Without them,centralstrategicplanningof far-
flungaffiliateswould have been riskierand more difficult,
and out-sourcingof
componentsas in car manufacturewould have been hampered.

Broaderperspectives

These structuralchanges have permeatedbeyond financeand production to

affectglobal politics at a deep level. They have, for instance,significantly
affectedNorth-South relations.The so-called Third World no longer exists
as a coalition of developing countries ranged, as in UNCTAD (the UN
Conferenceon Trade and Development), in opposition to the rich countries.
Developing countriesare now acutelyaware thatthey are competingagainst
each other,thelaggardsdesperatelytryingto catchup withthesuccessfulnewly
industrializedcountries.The transnational corporations'searchfornew markets
was often a major factor leading them to set up production within those
markets.Sometimes thiswas done for cost reasons. Other times it was done
simply because the host government made it a condition of entry. The
internationalizationof productionby themultinationals has surelybeen a major
factor in the accelerated industrializationof developing countriessince the
I95os. For it is not only the Asian newly industrializedcountries whose
manufacturingcapacity has expanded enormously in the last two or three
decades, but also countrieslike India, Brazil, Turkey and Thailand.
At the same time, the internationalization of productionhas also played a
major part in the U-turn taken in economic policies by political leaders in
countries as diverse and far apart as Turkey and Burma, Thailand and
Argentina,India and Australia.Structuralchange, exploited more readilyby
some thanothers,has alteredthe perceptionof policy-makersin poor countries
both about the natureof the systemand the opportunitiesit opens to themfor
thepresentand thefuture.In thespace of a decade, therehas been a strikingshift
away from policies of import-substitution and protection towards export
promotion,liberalizationand privatization.
It is no accidentthatthe 'dependency school' writersof the I970S have lost
so much of theiraudience. Not only in Latin America (where most of this
writing was focused), we see politicians and professorswho were almost
unanimousin the I970S in castigatingthe multinationalsas agentsof American
5 See S. Strange, International relations,vol.
monetary 2 of A. Shonfield, ed., International
economicrelations
of the Westernworld1959-1971(Oxford: Oxford UniversityPress for Royal Instituteof International
Affairs,1976); also S. Strange, Casino capitalism(Oxford: Blackwell, I986).

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States,firmsand diplomacy

imperialismwho now acknowledge them as potential allies in earning the

foreignexchange badly needed for furtherdevelopment.
Nor, we would argue,is the end of the Cold War, the detentein East-West
relationsand the liberationof Central Europe from Soviet rule and military
occupationto be explainedby politicsor personalitiesalone. Here too thereare
ways in which structuralchangehas acted,both at thelevel of governmentand
the bureaucracy,and at the popular level of consumersand workers.
In the production structure,even in the centrallyplanned economies,
industrializationhas raised living standardsfrom the levels of the I930S and
I940S, at leastfortheprivilegedclassesof society.Materialprogresshas not been
as fast as in the market economy, but in the socialist countriesas in Latin
America or Asia, the ranks have multipliedof a middle class of managers,
professionaldoctors,lawyers,engineersand bureaucrats,many of whom are
significantly bettereducated than theirparents.With thisembourgeoisement has
come greaterawareness of what is going on in other countries,and of the
widening gap between living standardsin the affluentWest and theirown.
In the world marketeconomy, competitionamong producershas lowered
costs to consumersand widened theirchoice of goods, while raisingtheirreal
incomes. Under the pressuresof shorteningproductlife-cycles,heaviercapital
costs and new advances in technologies, rivalry among producers has
unquestionablycontributedto material wealth for the state as well as for
consumers.Witness the spread down throughincome groups of cars, colour
TV, washing machines, freezers, video recorders, telephones, personal
computers.In any Westernhome, a high proportionof theseconsumergoods
carrythe brandnamesof foreignfirms.
By contrast,the Soviet consumerhas suffered the deprivationconsequenton
the economy's insulation from the fast-changingglobal financial and
productionstructures.But the informationabout what othersenjoyed in the
West could not altogetherbe kept frompeople even in the Soviet Union, let
alone in Central Europe. The revolutionin communications,and thusin the
whole global knowledge structure, helped to reveal the wideninggap between
standardsof living forsimilarsocial groups under global capitalismand under
socialism.
At the same time, the new bourgeoisie, aware of the inefficiencies of the
command economy, saw that economic change was being blocked by the
entrenchedapparatusof centralizedgovernmentand could only be achieved
throughpoliticalchange and wider participation.While the burdenof defence
spendingcertainlyplayed a part in both East and West in furthering detente
and making possible the liberationof Central Europe, political change was
acceleratedwithinthe socialistcountriesby the rise of a new middle class and
theirperceptionof the gap in living standardsand of the apparentinabilityof
centrallyplannedsystemsto respondto the structuralchangein technologiesof
production.
We would argue thatsimilarstructuralforcesalso lie behind the worldwide
trendto democraticgovernmentand therejectionof militaryand authoritarian

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Susan Strange

rule. In short,people have become better off and better educated and are
makingtheirmaterialdissatisfactionand theirpoliticalaspirationsstronglyfelt.
We would argue thatthiswave of politicalchangehas thesame universalroots,
whether in Greece, Portugal or Spain, in Turkey, or in Burma, Brazil or
Argentina.
Structuralchange has also played a major part in the much discussed
relationshipbetween the United Statesand Japan. Americanmultinationalsin
the I95os and I960s were the firstto respond in large numbers to the
opportunitiesopened up by the internationalizationof production. Indeed
much early analysis Servan-Schreiber'sfamous dejfi ame'ricain
for example6-
even perceivedthe move as an essentiallyAmericanphenomenon.The natural
resultof moving so much productionoffshore was thedeclineof manufacturing
as a source of employmentin the territorial
United States,togetherwith a rise
in theAmericantradedeficit forwhich manyfirmsbased in theUnited States
but locating productionoffshorewere no less responsiblethan firmsbased in
Japanor Europe. Twenty yearslater,in the I970S and I980s, theJapanesefirms
began a similarexodus to the United States and to East Asia, ratherless to
Europe until I992 loomed on the horizon.
Once understood in terms of structuralchange, it looks as though the
imbalance in US-Japanese paymentsmay be due more to a differencein the
timing of the exodus of firmsgoing abroad to expand production than to
inherentor cultural differencesbetween Americans and Japanese. If so, the
imbalanceis likelyto be much more temporarythansome commentatorshave
suggested.AlreadyMalaysia, aftera period in which heavy importsofJapanese
capitalgoods produced a markeddeficitin tradewithJapan,is findinginJapan
its best marketfor manufacturesproduced by Malaysian affiliates of Japanese
firms.

Two new sides to diplomacy

State-firm
diplomacy
The net resultof thesestructuralchangesis thattherenow is greatlyintensified
competitionamong statesforworld marketshares.That competitionis forcing
states to bargain with foreign firmsto locate their operations within the
territoryof the state,and with national firmsnot to leave home, at least not
entirely.We observed from our case-studiesat the micro level in three
developing countriesthat this bargaining produces partnershipsor alliances
between host-stateand firm,which may be of long or short duration,but
which are based on theexchangeof benefitsand opportunitiesto enhanceeither
party'ssuccessin the competitionfor world marketshares.This bargaining,
which was the main focus of our research,constitutesa new dimension of
diplomacy.
Again and again we found that the transnationalfirmhas command of an
arsenalof economic weapons thatare badly needed by any statewishingto win
6
See J.J. Servan-Schreiber,Le defiame'ricain(Paris: Denoel, I967).

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States,firmsand diplomacy

world market shares. The firmhas, first,command of technology; second,

readyaccessto global sourcesof capital; third,readyaccessto major marketsin
America,Europe and, often,Japan. If wealth for the state,as forthe firm,can
be gained only by sellingon world markets forthe same reasonthatnational
marketsare too smalla sourceof profitforsurvival thenforeignpolicy should
now begin to take second place to industrialpolicy; or perhaps,more broadly,
to the successfulmanagementof societyand the efficient administrationof the
economy in such a way as to outbid otherstatesas the preferredhome to the
transnationalfirmsmost likely to win and hold world marketshares.
While the bargainingassets of the firmare specificto the enterprise,the
bargainingassets of the state are specificto the territoryit rules over. The
enterprisecan operatein thatterritory even ifitjust sellsgoods or servicesto
people living there-only by permissionand on the termslaid down by the
government.Yet it is the firmthatis adding value to the labour, materialsand
knowhow going into the product. States are thereforecompetingwith other
statesto get the value-added done in theirterritoryand not elsewhere.That is
the basis of the bargain.

Firm-firm
diplomacy

A thirddimension,equally the productof the structuralchangesnoted earlier,

is thebargainingthatgoes on betweenfirms.This too may lead to partnerships
or alliancesin which, while they may be temporaryor permanent,each side
contributessomethingthat the other needs, so that both may enhance their
chancesof successin the competitionfor world marketshares.Firmsinvolved
in thisthirddimensionof diplomacy may be operatingin the same sector (as
in aircraftdesign, development and manufacturing)or in differentsectors
(where, forinstance,one partymay be contributingits expertisein computer
electronics,the otherin satellitecommunications).
For scholarsof internationalrelations,both new dimensionsare important.
The significanceof the state-firmdimensionis thatstatesare now competing
more forthe means to createwealth withintheirterritory thanforpower over
more territory.7 Power, especiallymilitarycapability,used to be a means to
wealth. Now it is more the other way around. Wealth is the means to
power notjust militarypower, but the popular or electoralsupportthatwill
keep presentrulinggroupsin theirjobs. Withoutthiskind of support,even the
largestnuclear arsenalsmay be of littleavail. Nowadays, except perhaps for
oilfieldsand water resources,thereis little materialgain to be found in the
control of more territory.As Singapore and Hong Kong have shown, world
marketshares and theresultingwealth can be won with the veryminimum
of territory.Even where, as in Yugoslavia or the Soviet Union, there is a
recurrenceof conflictover territory, the forcesbehind it are not solely ethnic
nationalismof the old kind. Many Slovenes, Croats, Russians or Georgians
7 On this see S. Strange, 'The name of the game', in N. Rizopoulos, ed., Sea changes(New York:
Council on Foreign Relations, I990).

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Susan Strange

want to wrestcontrolover theirterritory

fromthe centralpower because they
believe theywould be able to compete betterin the world economy on their
own thanunder the controlof theirold federalbosses. Autonomy is seen as a
necessaryconditionfor economic transformation and progress.

Successfully
managingsocietyand economy

Having got controlover territory, governmentpolicy-makersmay understand

well enough what is needed to bargainsuccessfully with foreignfirmsto locate
with them.But theymay not always be able to deliver.For though the forces
of structuralchange affecteveryone,even the old centrallyplannedeconomies,
the capacityof governmentsto respond are extremelydiverse.
We were struckin our researchby the wide variationbetween our three
countriesin the policies they felt willing and able to follow. There was no
denyingthe multipleconstraintson any Kenyan governmentattempting,for
example, to overcome the handicap of Africanilliteracy,or even to effect
radicalreformof an inflatedand featherbedded bureaucracysufficientlyto make
the countryattractiveto new foreignfirms.Existing firmsin Kenya were
hanging on only so long as they were protectedfrom competition,whether
local or foreign.But at that point the absence of tough competitionitself
became a handicap. Meanwhile, debt problems and political constraints
sometimesmade it hard even to adopt the obvious policies of reform,such as
abandoning price controls.
Brazil, by comparison,thoughit has had biggerdebt problems,has a bigger
home market,and when it came to negotiatingwith foreignfirmsit had more
room to manoeuvrein shiftingfrommarket-reserve protectionismto export-
promotingpragmatism.It has been able to play chicken-gameswith the IMF
in a way no African country,dependent on officialgovernmentloans and
supportfromthe internationalorganizations,has been able to match.
It is Malaysia, curiously,which has the best record of growth of the three,
and which also has been most liberalin its policies toward many (though not
all) foreigninvestors.8This liberality,we found,was not wholly due to Asian
sagacity.Historicalaccident,now all but forgotten,played a part. Recall that
for five years afterI948 Malaya (as it was then stillcalled) was under attack
from Chinese-backed communist guerrillas. Though this civil war was
eventuallywon, Tunku Rahman's senseof the country'svulnerabilityled him
to make a unique bargain with Britain. In returnfor Britishmilitaryaid and
protection,independentMalaysia would remain in the sterlingarea, making
substantialcontributionsto the common pool of monetaryreserveswith its
dollar-earningexportsof tin and rubber.With this monetarydependence on
London went a cautious and conservativestyleof monetarymanagement,and
a liberal attitude to British businessesin the country. From that time on,
8
In those sectors where, for political reasons, the government wished to encourage Malay-owned
enterprisesin order to counterbalance the economic dominance of Chinese, regulation either kept
foreignfirmsout or laid down very strictrules about ownership and employment. Such sectors were
mostly where production was for the local market.

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States,firmsand diplomacy

Malaysia never once put controls on the right of foreignfirmsto transmit

profitsor even capital abroad. Nor did it impose punitivetaxes,even though
both profitsand capital gains were high. These terms,added to the reassuring
presenceof Britishtroops,meant therewas no exodus of foreigncapital after
independencesuch as Kenya experienced,nor any wild indulgencein foreign
borrowingsuch as Nkrumah'sGhana wentin for.Malaysia carriedon withthis
open, liberal policy long afterthe demise of the old sterlingarea in the late
I960s, even thoughthe beneficiaries
in the I970S and I980s were mostly
Japaneseor American ratherthan British.
There can be little doubt that these policies contributedsubstantiallyto
comparativelyhigh ratesof investmentby foreignfirms,and in turnto high
rates of economic growth: 7.3 % a year in the period I965-80. (Though less
than Brazil's average of 8.8% in the same period, Malaysia's growth was less
vulnerableto thehardtimesof the I98os: while Brazil's averagethenfellbelow
3 %, Malaysia's held up at over 4.5 %. Exports continued growing at a
phenomenalrateof over 9 % a year,and by I988, 45 % of theseby value were
manufactures.
This is not to say, of course,thatpolicies towardsforeignfirmswere or are
the only factor. Malaysia's wider range of policy options compared with
Kenya's was certainlyhelped by a high rateof domesticsavings 36 % of GDP
in I988 and by past moderation in foreignborrowing. The exigencies of
debt-servicingsufferedby Brazil and Kenya made it harderfor them both to
fightinflationand to resistthe fatal temptationto resortto distortingand
ineffective price controls.
So thediversityof governmentresponsesto structuralchangeusuallyreflects
the policy dilemmaspeculiar to the governmentof thatsociety.But precisely
because of increasedintegrationin the world marketeconomy, it is more and
more difficultfor governmentsto 'ring-fence' a particularpolicy so that
implementingit does not directlyconflictwith, perhapsnegate, some other
policy. For instance,it is no good Kenya luring foreigninvestorsinto a free
export-processing zone ifat thesame timetheadministration of importlicences
to economize on foreignexchangepreventspotentialexportersfromreplacing
spare partsquickly enough to keep up the flow of output.
Contemplation of the diversity of host-countrypolicies in monetary
management,tradeand competitionpolicy verysoon bringshome thefactthat
thereare no shortcutsand no magic tricksin wooing foreignfirms.However,
some generaladvice is stillpossible.One piece of advice is obviouslyto pinpoint
the policy dilemmas where objectives clash. Another is to cut out the
administrative delaysand inefficienciesthatbedevil thework of local managers.
In Kenya, for example, one reallystrikingsuccessstorywas to be found in a
sectorwhere governmentinterventionand controlshad been minimal,in the
growing and export of flowersand pot-plants.Anothergood piece of advice,
alreadystressedin the growing literatureon the managementof international
business,is to breakup monopolies and enforcecompetitionamong producers.
Michael Porter, for example, has rightlystressedthe importance of fierce

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Susan Strange

rivalrybetween local firmsunprotectedby trade barriersfrom competing

imports.9On the basis of our work we would agree thatBrazilian growthhas
certainlybeen hamperednot only by featherbeddedstatemonopolies,but also
by the power given to the big business associations of local and foreign
producersin some key sectorsof industry.
But usefulas such analysesas Porter'shave been, theyhave ratherleftout the
political element, both domestic and global. The diversityof government
responseswhich so struckus is surely due not only to mulish stupidityor
ignoranceof thekeysto success.Governmentsare,afterall, politicalsystemsfor
the reconciliationof conflictingeconomic and social, and sometimesethnic,
interests.Moreover, theglobal structural changesthataffectthemall do so very
differently, sometimesputtingsnakes,sometimesladders in theirpath. Some
small boats caughtby a freaklow tide in an estuarymay escape groundingon
the mud by alertand skilfulmanagement;othersmay be saved by luck. Our
researchsuggeststhatthe crucial difference between statesthesedays is not, as
the political scientistsused to think,that between 'strong' statesand 'weak'
ones, but between the sleepy and the shrewd. States today have to be alert,
adaptable to externalchange, quick to note what other statesare up to. The
name of the game, for governmentsjust as for firms,is competition.

Firms as diplomats
Our thirdgeneralpoint the importanceof firmsas major actorsin the world
system will be obvious enough to leadersof financeand industry.They will
not need remindingthat marketsmay be moved, governmentsblown off
courseand balancesof power upsetby thebig oil firms,by thehandfulof grain
dealers, by major chemical or pharmaceuticalmakers. It will come as no
surpriseto them that the game of diplomacy these days has two extra new
dimensionsas well as the conventionalone between governments.
But while I have scratchedthe surfaceof one of these-the bargaining
between firmsand governments I have not said much about the third,
bargainingbetween firms.This deserves to be the subject of a whole new
researchprogramme.Examples have recentlymultipliedof firmswhich were
and may remaincompetitorsbut whichunderthepressuresof structural change
have decided to make strategicor even just tacticalalliances with other firms
in their own or a related sector of business.10In the study of international
relationsit is accepted as normal thatstatesshould ally themselveswith others
while remainingcompetitors,so thatthe bargainingthattakes place between
alliesis extremelytough about who takeskey decisions,how risksare managed
and how benefitsare shared.
The implicationsforinternationalrelationsanalysisof the three-sidednature
9 M. Porter, The competitive advantageof nations(New York: Free Press, I990). See also a recent report
for the National Bureau of Economic Research, Washington DC: J. Levinshon, 'Testing the imports-
as-market-disciplinehypothesis', using data from the experience of Turkish firmssince the liberalizing
policies adopted after I984.
a See, e.g., L. Mytelka, Strategicparttnerships:states,firmsand international
competition
(London: Pinter,
I 99 I).

I0

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States,firmsand diplomacy

of diplomacy are far-reaching.The assertionthatfirmsare major actorsis at

odds with the conventionsof internationalrelationsas presentlytaughtin most
Britishuniversitiesand polytechnics.The standardtextsin thesubjectsubscribe
to the dominant'realist' school of thought,which holds thatthe centralissue
in internationalsociety is war between territorialstates, and the prime
problematictherefore is themaintenanceof orderin therelationsbetweenthese
states.11This traditionalview of internationalrelationsalso holds thatthe object
of studyis thebehaviourof statestowardsotherstates,and theoutcome of such
behaviourforstates:whethertheyare betteror worse off,lessor more powerful
or secure. Transnationalcorporationsmay be mentionedin passing,but they
are seen as adjunctsto or instruments of statepolicy.12
Our contentionis thattransnationalcorporationsshould now be put centre
stage; thattheircorporatestrategiesin choosing host countriesas partnersare
already having great influenceon the development of the global political
economy, and will continue increasinglyto do so. In common with many
contemporarypoliticaleconomists,our interestis not confinedto thebehaviour
of statesor theoutcomesforstates.Who-gets-whatquestionsmustalso now be
asked-about social groups,generations,genders,and not least,about firmsand
the sectorsin which theyoperate. Ten yearsfromnow we anticipatethatthe
conventionsand limitationsof what has sometimes been called the British
school of internationalrelations will be regarded as impossibly dated, its
perceptionsas demode as I950S fashions.This is not to say,of course,thatthere
are no lessonsto be learned by economic ministriesand corporateexecutives
from the diplomatic historyof interstaterelations.Only that the study of
internationalrelationsmust move with the times, or be marginalizedas a
narrow specialism.
There are threeissues,in our understanding,in the state-firmrelationship
thatdeservemuch closer expertattentionthan theyhave so farreceived. One
issue is how and why governmentschoose firmsas partners;a second is the
specificsthatare bargainedover, and who is likelyto have the upper hand on
any one of them; the thirdrelatesto thenationalityof firms.The questionhere
is not so much what internationalized productiondoes to the state,but what it
does to the national identityand behaviour of the transnationalfirm.

1. choosefirmsas partners
Whygovernments

As to the first,not the leastattributeof the shrewdstateis the abilityto choose

the rightpartnersamong firms.Depending on sectors,marketsand circum-
stances,thismay be a leading firmor a follower.There are pros and cons either
way. Similarly,firmshave difficult choices to make about which marketsto
" Hedley Bull's The anarchicalsociety:a studyof orderintworldpolitics(London: Macmillan, I977) is
explicit on the point. See also Bruce Miller, The worldof states(London: Croom Helm, I98I), and a
much used text,Joseph Frankel, International anidharmony(London: Penguin, I969).
politics,conflict
12 Some well known texts on internationalpolitics-K. Holsti, International politics(New York: Prentice
Hall, I972), for instance-do not even mention multinationals.Even Robert Gilpin, in The political
economyof international relations(Princeton, NJ: Princeton UniversityPress, I987), devotes less than 30
out of 400 pages to them.

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Susan Strange

contest,where to locate what elementsof production,researchand financing,

and how to manage theiroffshoreoperations.Our point simplyis thatbefore
eithergovernmentor firmgets to the point of bargainingover the termsand
conditionsunderwhich the firmoperates,both have to make strategicchoices
about theirpartners.Governmentsthereforeneed to be well advised on the
relativestrengthsand weaknessesof different firms.As much attentionshould
be paid to thecorporatehistory,characterand decision-makinghabitsof major
transnationalfirmsas internationalrelationsspecialistshave been used to paying
to nation-states.

2. Knowingyourallies

Second, the advice 'Know your enemy' applies also to allies and partners.In
bargainingover specificissuesbetween host governmentsand firms,each side
needs a clearerunderstandingthan they oftenhave of the other's long-term
objectives,its bargainingstrengthsand weaknesses.Thus in order to achieve
your own prime objective,it may be well worthwhilemaking concessionson
some othersubjectivelyminor issue.
A recurrentissue, for example, is exports. So many countriesare either
burdened with debt-servicecharges or have ambitious development pro-
grammesneeding importsof foreigncapital goods thatfirmsthatmake extra
effortsto increaseexport sales will be especiallywelcome. Subsidies-such as
Brazil offersunder its Befiex cheap-credit,low-tax programme-are an
indicationof such a wish. On the otherhand, subsidiesare rarelydecisive in
corporate strategies.When General Motors, to the fury of the US Trade
Representative'sOffice,took a Brazilianexportsubsidyfora particularproduct
line, its objectivewas to undercutlabour costsin Detroit and to consolidateits
position in the potentiallyvery large and competitiveBrazilian market.The
subsidywas just an added bonus.
Anothercommon issue-witness the Franco-Britishsquabble over whether
Nissan cars made in Britainare Britishor Japanese is domesticcontent:what
proportionof thefinalproductis made up of locallyproducedcomponents.For
developing countries,this determinesthe importantquestion of how much
spilloveramong small local enterprises can be expected fromthe presenceof a
multinational.But it is not only developing countriesthatbargain hard with
foreignfirmson whetherthe local contentof a product should be 6o or 75 %
of the value added. A major US concern in the US-Canada Free Trade
Agreementwas to make surethatJapanesecarsproducedin Canada conformed
to (higher)Americandomesticcontentrequirementsif theywere not to incur
tariffbarriers.
The industrializedcountriesare less concerned about how much foreign
firmsare prepared to spend on traininglocal workers. But for developing
countries-especially those who have experiencedthe exploitationof young
girls on the assembly lines of export-processingzones-it is an important
question. Even though managersmay suspectthatnot all workersthey train

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States,firmsand diplomacy

will staywith the company, it may be a price worth paying to gain access to
the market.If the marketis potentiallylarge and theglobal competitionsevere,
a trainingprogrammemay reap long-termdividendsthatexceed the cost.
The same may be said of firms' willingnessto throw into the package
substantialcontributionsto local health services or environmentalclean-up
programmes. One Italian constructioncompany operating in Africa auto-
maticallysends out a small fieldhospital,properlystaffedand supplied,with
every constructionjob it undertakes.To thisare welcomed not only its own
local workers,but anyonein need. Presumablyit has foundthispracticea good
investmentin government-firm diplomacy.
Japanesecompaniesare sometimespraisedand envied by Europeansfortheir
more open, less class-riddenstylesof management.But theirexclusivist,not to
say racist,habitsof restrictingseniormanagementjobs toJapaneseand keeping
out the indigenousworkforcemay prove a handicap in thelong run. In Brazil,
some Japanesefirmsreportedlywould not considereven BrazilianJapaneseas
foremen.They were perceivedas having 'gone native'.
In CentralEurope and theformerSoviet Union, as in Asia, anothercontested
issue will be thelocation of researchcentresand the employmentforeignfirms
are prepared to offer to locally trained and educated science workers.
Companies thathave come to thinkthat'not inventedhere' rulesout research
work by their overseas affiliatesmay be losing importantopportunitiesfor
beating the competition.
All the issues brieflyoutlined here pose questions for research on the
bargaining process between governmentsand foreign-and sometimes also
domestic-firms; and most of them are rathermore significantfor the firm
than the value of tax breaks or subsidies.

3. and transnationalfirms
Nationalidentity

The thirdand rathermore abstractissue concernsthe nationalityof firms,and

thereforethe validityof policiesbased on discrimination
between 'one of ours'
and 'one of theirs'. While it is true that US-based firmsrarelyadmit non-
Americansto theirmain board-they are more likely to appoint a statutory
woman or a black American-neverthelessthe behaviour of firmsand their
vital interestscannot always be predictedfrom the countrywhere they are
registeredand have theirheadquarters.NorthernTelecom is Canadian based
and controlled,but itsUS operationsare more importantthanitsoperationsin
Canada. In firmslike General Motors or Volkswagen, their geographically
dispersedoperations create tensionswithin the company that are essentially
politicalratherthaneconomic and which alterthe relationsof managementto
thehome state.Academicswho are interested in thephenomenonofnationalism
should pay much closer attentionto currentchange affectingmultinationals.
For governments,and forthe way theyare organizedand staffed, both new
dimensionsof diplomacy have far-reachingimplications.Governmentsmay
findthattheyneed to make radicalchangesin theirforeignministries-or else

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Susan Strange

drasticallyto cut themdown in size and importance.They may need to be more

open to short-termentrantsfromindustryor finance,and to recruitnew staff
with businessexperienceor technicaland scientificqualifications.The British
governmentin particularmay need to think hard about the lessons of its
relationshipwith Nissan,Honda and Sony. While Britishfirmswere axingjobs
and cuttingback in the summerof I99I, Nissan was expanding,offeringnew
job opportunitiesin a formerlydepressed region. The prejudices of Mme
Cresson, of some American congressmenand of some Britishtrade unionists
againstJapanesefirmscannot bear rationalassessmentof the national interest.
A European state'sbest ally among firmsmay just as easily be American or
Japaneseas European.

To sum up. Much more analyticalwork is needed on firm-firm bargainingas

well as on state-firmbargaining in all its multivariantforms. It needs
recognizingthat both types of bargainingare interdependentwith develop-
mentsin state-statebargaining (the stock in trade of internationalrelations),
and thatthisin turnis interdependent withtheothertwo formsof transnational
diplomacy. In the disciplineof managementstudies,corporate diplomacy is
becoming at leastas importanta subjectas analysisof individualfirmsand their
corporate strategiesfor finance,production and marketing.In the study of
internationalrelations,an interestin bargainingis alreadybeginningto supplant
analysisof internationalregimes.13
the still-fashionable
A focus on bargaining, and the interdependenceof the three sides of
diplomacy that togetherconstitutetransnationalbargaining,will necessarily
prove more flexibleand betterable to keep up with changein global structures.
No bargain is for ever, and thisis generallywell understoodby anyone with
hands-onexperienceof negotiation.The politicalart forcorporateexecutives,
as for governmentdiplomats,is to devise bargains that will hold as long as
possible,bargainsthatwill not easily be upset by changesin otherbargaining
relationships.This is true for political coalitionsbetween parties,or between
governmentsand social groups, such as labour; and it is equally true for
bargains between governmentsand foreign firms,and between firmsand
other firms.The multiplicityof variables in the patternof any one player's
interlockingseriesof bargainsis self-evident.
A finalpoint about the interlockingoutcomes of transnationalbargaining
relates to theories of internationalrelations and political economy. Social
13
See, for example, R. Grosse, Multinationials
intLatin America(London: Routledge, I989). In our view,
regime analysis has always been weak on dynamics. This approach sees chanigein international
regimes, whether in trade, money, ecology or any other issue-area,as taking place only periodically
and in steps,not progressivelyand continuouslyall the time. And far too much weight is attached to
rules and codes agreed (but not always observed) by governments.In trade, for example, the
investment-relatedflows generated by the firmswe talked to will carry on unaffectedby the ultimate
fate of the Uruguay Round negotiationsbetween governments.Yet scholars and journalists continue
to pay undue attentionto inter-governmentalnegotiations. In monetary matters,though the IMF
certainlyhas a role as far as debt-trappedgovernmentsare concerned, its 'regime' has been
undergoing perpetual change since the I960s and it bears littlerelation now to the blueprintof
Bretton Woods.

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States,firmsand diplomacy

scientistslike to think that the accumulation of more and more data, the
perfectingof analytical tools and their rigorous application according to
scientificprincipleswill some day, somehow, produce a general theory to
explain politicaland economic behaviour.They are a bit like peasantswho still
believe thereis a pot of gold buried at the end of the rainbow despite their
repeated failuresto track it down. Today, the complexity of the factors
involved in each of the three forms of transnationalbargaining, and the
multiplicityof variables at play, incline us to deep scepticismabout general
theories.Not only are economics-pace the economists-inseparable fromthe
real world of power and politics,but outcomesin theglobal politicaleconomy,
the product of this complex interplayof bargains, are subject to the great
divergencesthatwe have observed.

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