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The Statecraft of Business

How the frameworks of international relations can improve the debate about corporate strategy and globalization.

(originally published by Booz & Company)

The fall of the Berlin Wall nearly 20 years ago brought forth a chorus of toasts to the victory of a democratic world order and “the end of history.” Those looking ahead predicted greater simplicity in international affairs, with political considerations taking a backseat to free global markets.

These forecasts couldn’t have been more wrong. Rather, the post–Cold War world has turned into a battleground between old and emerging political and economic actors and ideologies, resulting in an ever more fragmented global marketplace. For multinational corporate leaders, the farrago of political and economic ideas, social aspirations, statism, and regional biases is disquieting and challenging.

To be successful, strategies pursued by corporate leaders must take into account the possibility of sudden fissures in global politics; strategies should also be consistent with the political environments in which the organizations operate. Managing under these conditions, executives must be knowledgeable about the world’s various political systems to nimbly adapt their companies to the preferences of governments, regulators, and global policymakers.

The field of international relations offers five alternative views of the structure of the global political environment. Each is accurate in its own way; each suggests a different strategic approach to international expansion; and each fits best with a different set of companies.

New Realism: Balance of Power
In a New Realism world view, power is spread among the world’s nation-states, which are constantly threatened by their fellow states, near and abroad, and continually struggle to maintain and enhance their standing. Although New Realism, with its numerous power centers, would seem to portend global uncertainty and war, the system can be fairly stable. Most of the time, states use their strength, either individually or in alliances, to balance each other out. With the Cold War over, adherents of New Realism assume that the current and emerging global powers, such as the U.S., the E.U., China, India, Japan, and Russia, will try to improve their positions on the worldwide chessboard, and several regional players — Iran, North Korea, and Venezuela, for example — will challenge the influence of global powers in their neighborhoods.

A New Realism corporate response requires self-sufficiency of operations within the various power centers. It assumes that the bulk of commercial interactions will take place within, rather than across, regions; hence, supply chains are developed within regional commercial centers, instead of spread across the world. A New Realism management structure is decentralized. A global headquarters provides limited corporate functions, and mediates the interests of business units operating in the different world regions. This ensures diversity throughout the corporation, which should reflect the regional characteristics of the hubs in which it operates. The marketing strategies of such organizations cater to the distinct cultural appetites of different markets and eschew unified worldwide brands.

The oil industry typically operates from a New Realism world view, forced to navigate the nationalist objectives of governments around the globe and their ever-changing rules regarding access to their natural resources.

Hegemony: Dominant States
Adherents of hegemony believe that the desirable goal of international stability requires a sole powerful state to articulate and enforce the rules of interaction among the most important members of the system. The hegemonic power imposes its rules on the international system — thereby determining political order — primarily through a large, growing economy, leadership in technological or economic sectors, and military strength. At the close of the Cold War, the U.S. in many respects took on the role of a global hegemon. But hegemonies can also exist at the regional level. For example, at different times Germany and France have played a dominating role in the European integration process, South Africa is the leading political player in Southern Africa, and Israel has the strongest military position in the Middle East.

A corporate strategy informed by hegemonic stability theory follows the lead of the hegemonic nation and maintains substantial parts of its operations inside its big consumer markets. The hegemon offers extra advantages for corporations located within it or protected by it, advantages not accorded by market forces but obtained through political pressure. A company following a hegemony strategy makes sure that its branding borrows heavily from the symbols and images that the hegemon displays around the world. Its management structure fits with the hegemon’s, employing an often dominating leadership style.

Many American corporations — Halliburton is the most visible example — sought to gain from U.S. hegemony in Iraq after Saddam Hussein was deposed. Similarly, Chinese natural resource companies are benefiting from their government’s expanding hegemony in parts of Africa.
Institutionalism: Global Rules
Institutionalists favor rules, negotiation, and strong governance. Instead of competing against each other, states settle for cooperative arrangements. Under this approach, the United Nations Security Council manages peace and war; the World Trade Organization enforces rules of free trade; the Kyoto Protocol guides climate change regulations; the World Bank fosters global economic development; and the International Monetary Fund, among other things, promotes currency stability and cooperation.

The institutionalist corporate organization prefers to play by rules established by strong international regulators. It is a strong proponent of multilateral trade arrangements, international protection of intellectual property rights, and standardization of labor and environmental regulations. This type of company has a global supply chain and standardized products throughout the world. Its management structure is based on strong central administration and command structures.

Pharmaceutical, bioscience, and high-tech industries, which depend on consistent innovation and rigorous intellectual property rights, tend to view the world through the lens of institutionalism. They participate in shaping and championing international rules.

Liberalism: Social Order
Liberal thought assumes that societies, pressure groups, trade organizations, corporations, innovative entrepreneurs, and all the other actors that constitute civil society play an important role in shaping the global order. Societies engage in complex transnational interdependencies, driven by decreasing transaction costs, while the use of military force and power balancing — the realm of government — becomes less important. Liberals argue that the decline of military might as a policy tool and the rise in economic interrelationships should improve the chances for cooperation among states, a cooperation supported by increasingly powerful societal actors. Indeed, the information revolution has had a substantial impact on how nonstate actors, such as NGOs, can readily influence the beliefs of people in other jurisdictions and thus affect the global order.

Liberal corporations could be viewed as loose-knit “movements,” usually with flat management structures in which managers act as visionaries, setting the principles, but letting colleagues negotiate the details. In these companies, workforce diversity, cultural diversity, gender diversity, and social diversity are considered strategic assets, en­abling the business to respond to the heterogeneous demands of a global society. Liberal corporations produce global brands targeted at customer segments based on in­come position, rather than cultural identity.

Google is an apt illustration of a liberal company, because it enables Web users from any national background to search a culturally neutral database for information that suits their specific needs. Interestingly, Google and other electronic content providers are being strong-armed into compromising their liberal principles when they operate in hegemonic environments, such as the censored Chinese Internet.

Postmodern Anarchy: Fatalism
In this chaotic world view, the nation-state as anchor for global order ceases to exist, and political disorder is endemic. Government fails because it can no longer meet its core responsibilities — controlling its territory, providing safety and security, managing public re­sources, delivering services, and protecting the poor. Fragile states abound. The rule of law is nonexistent and corruption is widespread.

The anarchic corporation looks into the eye of the storm and sees opportunity. It exploits markets wherever possible, converting huge transaction costs and collateral damages into commercial activities. This is a Hobbesian company, expecting the worst and planning accordingly. This approach requires a stoic, almost fatalistic sensibility: If life is to be nasty, brutish, and short, at least a company can be profitable in the near term.

Facing widespread instability, such organizations work around impotent national governments by bribing their way into new local markets, which they move in and out of quickly. Brand development is minimal because long-lasting customer loyalty is undesirable; rather, anarchic organizations compete by offering items at the lowest possible price and level of quality to generate significant revenue. Relationships with suppliers, financiers, employees, and customers are elusive; the company knows that alliances in an unstable world should be formed only on an ad hoc basis.

An anarchic environment is traditionally the bread and butter of organized crime, but is also familiar to companies that invest in unstable republics in Africa and Asia.

As these examples illustrate, there is value in bringing the frameworks of international relations into the debate about corporate strategy and globalization, if for no other reason than to help managers un­derstand the political environment they face and the political attitudes of their own companies. Corporate strategy must be responsive to the changing world order and anticipate its dynamics to be successful. The world view of most companies provides managers with room to adapt their strategy to any or all of these frameworks; however, most managers tend to focus on the framework that fits their own aspirations most closely. Corporations are not mere objects of the evolution of international affairs. They also help to shape that evolution.

Author profile:

Sven Behrendt (, head of the World Economic Forum’s Metals and Mining practice, is a specialist in international relations and negotiations. The views expressed in this article are his own.
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