Strange - States, Firms, and Diplomacy

Susan Strange reports on her recent work on relations between states and firms, and proposes a new research agenda in international relations: the study of firms as actors in world politics and of state-firm and firm-firm bargaining as two new dimensions to diplomacy. She argues that governments, like academics, must wake up to the structural changes in world politics and pay proper attention to the increasing importance of firms. Four stops on the London Underground will take you from the London Business School in Regent's Park to the London School of Economics off the Strand. Yet for 30 years the two institutions might have been separated by a Berlin Wall, so minimal was the communication between them, so divergent the matters that interested their professors, so diverse the discourses of their students. Each was openly dismissive, but secretly jealous, of the other.' This article presents the findings of a rare venture in collaboration between writers from both institutions, a professor of international business and a professor of international relations, resulting in a recent book.2 Our research led us to shared beliefs that went beyond the primary focus of the book to identify structural factors in the world economy. Three propositions will be advanced here. First, that many seemingly unrelated developments in world politics and world business have common roots and are the result in large part of the same structural changes in the world economy and society. Second, that partly in consequence of these same structural changes, there has been a fundamental change in the nature of diplomacy. Governments must now bargain not only with other governments, but also with firms or enterprises, while firms now bargain both with governments and with one another. As a corollary of this, This intellectual apartheid 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 firms and their experiences overseas, which can be very different from those of Japanese, European or Asian firms. 2 John Stopford and Susan Strange, Rival states, rival firms: competitionfor world market shares (Cambridge: Cambridge University Press, I99I). John Stopford is Professor of International Business at the London Business School; Susan Strange was Montague Burton Professor of International Relations at the London School of Economics 1978-88. International Affairs 68: I (1992), I-IS 1-2 Susan Strange the nature of the competition between states has changed, so that macroeconomic management and industrial policies may often be as or even more important for governments than conventional foreign policies as conventionally conceived. The third proposition follows from the second, and concerns the significance of firms as actors influencing the future course of transnational relations not least for the study of international relations and political economy. Structural change Most commentators on international affairs have in our opinion paid far too little attention to structural change, particularly to change in the structure of production in the world economy.3 Our recent work argues that most of the recent changes in world politics, however unrelated they may seem on the surface, can be traced back in large part to certain common roots in the global political economy. We see common driving forces of structural change behind the liberation of Central Europe, the disintegration of the former Soviet Union, the intractable payments deficit of the United States, the Japanese surpluses, the rapid rise of the East Asian newly industrialized countries, and the U-turns of many developing country governments from military or authoritarian government to democracy, and from protection and import substitution towards open borders and export promotion. These common driving forces of change, in brief, are the accelerating rate and cost of technological change, which has speeded up in its turn the internationalization of production and the dispersion of manufacturing industry to newly industrialized countries; increased capital mobility, which has made this dispersion of industry easier and speedier; and those changes in the structure of knowledge that have made transnational communications cheap and fast and have raised people's awareness of the potential for material betterment in a market economy. These common roots have resulted, at the same time and in many countries, in the demand for democratic government and for the economic flexibility that is impossible in a command economy. This perception of the power of universal structural change came from looking in detail as we did at the processes of bargaining between host governments and foreign firms in three developing countries, Brazil, Malaysia and Kenya. The bargaining in question related mainly to the terms on which the firms could operate and would invest in a particular venture within the country. We interviewed government officials and corporate executives of foreign firms in the three countries. 3 Peter Drucker is the most notable exception, with The new realities (London: Mandarin, I989). Among others, note C. Freeman, ed., Technology and thefuture of Europe: global competition and the environmetnt (London: Pinter, I99I); G. Dosi and C. Freeman, eds., Technological change and economic theory, part vi (London: Pinter, I988); K. Ohmae, Triad power: the coming shape of global competition (New York: Free Press, I985); John Dunning, Multinatiotnal entterprises,conomic structuire and international competitiveness (Chichester: Wiley, I985); and P. Cerny, The changitng architectture of politics (London: Sage, I990). 2 States, firms and diplomacy The firms we interviewed were working in a variety of sectors of business and were of various national origins. Though the study was based on casestudies and attention to detail at the micro level, while we were struck first by the diversity of states' responses to global changes, certain common trends were rather clearly visible in the relations between states and firms, especially foreign firms. The pressures on both firms and governments appeared to be very similar across all three countries. These pressures were forcing both the host governments and the foreign firms to compete more and more actively for world market shares, and in so doing to reach new modes of accommodation with one another.4 It seemed clear to us that these pressures arose from structural changes in the global market economy that were not always obvious either to area specialists or to writers on corporate management or development economics. Technological change, mobile capital, transborder communications Most obvious of the structural changes acting as the driving force on firms and governments alike were those in the technology of industrial and agricultural production; related to them were changes in the international financial structure. The accelerating pace of technological change has enhanced the capacity of successful producers to supply the market with new products, and/or to make them with new materials or new processes. At the same time, product and process lifetimes have shortened, sometimes dramatically. Meanwhile, the costs to the firm of investment in R & D, research and development and therefore of innovation have risen. The result is that all sorts of firms that were until recently comfortably ensconced in their home markets have been forced, whether they like it or not, to seek additional markets abroad in order to gain the profits necessary to amortize their investments in time to stay up with the competition when the next technological advance comes along. It used to be thought that internationalism was the preserve of the large, privately owned Western 'multinational' or transnational corporations. Today, thanks to the imperatives of structural change, these have been joined by many smaller firms, and also by state-owned enterprises and firms based in developing countries. Thus it is not the phenomenon of the transnational corporation that is new, but the changed balance between firms working only for a local or domestic market, and those working for a global market and in part producing in countries other than their original home base. Besides the accelerating rate of technological change, two other critical developments contributed to the rapid internationalization of production. One was the liberalization of international finance, beginning perhaps with the innovation of Eurocurrency dealing and lending in the I960s, and continuing unchecked with the measures of financial deregulation initiated by the United The notion of ntational comparative advantage in much current economic analysis tends to obscure the fact that, in the real world today, comparative advantage tends to be firm-specific more than statespecific. Moreover, the nature of the comparative advantage is apt to vary considerably from sector to sector. Susan Strange States in the mid-I97os and early I98os.5 As barriers went down, the mobility of capital went up. The old difficulties of raising money for investment in offshore operations and moving it across the exchanges vanished. It was either unnecessary for the transnational corporations to find new funds, or they could do so locally. The third contributing factor to internationalization has often been overlooked the steady and cumulative lowering of the real costs of transborder transport and communication. Without them, central strategic planning of farflung affiliates would have been riskier and more difficult, and out-sourcing of components as in car manufacture would have been hampered. Broader perspectives These structural changes have permeated beyond finance and production to affect global politics at a deep level. They have, for instance, significantly affected North-South relations. The so-called Third World no longer exists as a coalition of developing countries ranged, as in UNCTAD (the UN Conference on Trade and Development), in opposition to the rich countries. Developing countries are now acutely aware that they are competing against each other, the laggards desperately trying to catch up with the successful newly industrialized countries. The transnational corporations' search for new markets was often a major factor leading them to set up production within those markets. Sometimes this was done for cost reasons. Other times it was done simply because the host government made it a condition of entry. The internationalization of production by the multinationals has surely been a major factor in the accelerated industrialization of developing countries since the I95os. For it is not only the Asian newly industrialized countries whose manufacturing capacity has expanded enormously in the last two or three decades, but also countries like India, Brazil, Turkey and Thailand. At the same time, the internationalization of production has 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. Structural change, exploited more readily by some than others, has altered the perception of policy-makers in poor countries both about the nature of the system and the opportunities it opens to them for the present and the future. In the space of a decade, there has been a striking shift away from policies of import-substitution and protection towards export promotion, liberalization and privatization. It is no accident that the 'dependency school' writers of the I970S have lost so much of their audience. Not only in Latin America (where most of this writing was focused), we see politicians and professors who were almost unanimous in the I970S in castigating the multinationals as agents of American 5 See S. Strange, International monetary relations, vol. 2 of A. Shonfield, ed., International economic relations of the Western world 1959-1971 (Oxford: Oxford University Press for Royal Institute of International Affairs, 1976); also S. Strange, Casino capitalism (Oxford: Blackwell, I986). 4 States, firms and diplomacy imperialism who now acknowledge them as potential allies in earning the foreign exchange badly needed for further development. Nor, we would argue, is the end of the Cold War, the detente in East-West relations and the liberation of Central Europe from Soviet rule and military occupation to be explained by politics or personalities alone. Here too there are ways in which structural change has acted, both at the level of government and the bureaucracy, and at the popular level of consumers and workers. In the production structure, even in the centrally planned economies, industrialization has raised living standards from the levels of the I930S and I940S, at least for the privileged classes of society. Material progress has not been as fast as in the market economy, but in the socialist countries as in Latin America or Asia, the ranks have multiplied of a middle class of managers, professional doctors, lawyers, engineers and bureaucrats, many of whom are significantly better educated than their parents. With this embourgeoisement has come greater awareness of what is going on in other countries, and of the widening gap between living standards in the affluent West and their own. In the world market economy, competition among producers has lowered costs to consumers and widened their choice of goods, while raising their real incomes. Under the pressures of shortening product life-cycles, heavier capital costs and new advances in technologies, rivalry among producers has unquestionably contributed to material wealth for the state as well as for consumers. Witness the spread down through income groups of cars, colour TV, washing machines, freezers, video recorders, telephones, personal computers. In any Western home, a high proportion of these consumer goods carry the brandnames of foreign firms. By contrast, the Soviet consumer has suffered the deprivation consequent on the economy's insulation from the fast-changing global financial and production structures. But the information about what others enjoyed in the West could not altogether be kept from people even in the Soviet Union, let alone in Central Europe. The revolution in communications, and thus in the whole global knowledge structure, helped to reveal the widening gap between standards of living for similar social groups under global capitalism and 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 entrenched apparatus of centralized government and could only be achieved through political change and wider participation. While the burden of defence spending certainly played a part in both East and West in furthering detente and making possible the liberation of Central Europe, political change was accelerated within the socialist countries by the rise of a new middle class and their perception of the gap in living standards and of the apparent inability of centrally planned systems to respond to the structural change in technologies of production. We would argue that similar structural forces also lie behind the worldwide trend to democratic government and the rejection of military and authoritarian 5 Susan Strange rule. In short, people have become better off and better educated and are making their material dissatisfaction and their political aspirations strongly felt. We would argue that this wave of political change has the same universal roots, whether in Greece, Portugal or Spain, in Turkey, or in Burma, Brazil or Argentina. Structural change has also played a major part in the much discussed relationship between the United States and Japan. American multinationals in the I95os and I960s were the first to respond in large numbers to the opportunities opened up by the internationalization of production. Indeed much early analysis Servan-Schreiber's famous dejfi ame'ricain for example6- even perceived the move as an essentially American phenomenon. The natural result of moving so much production offshore was the decline of manufacturing as a source of employment in the territorial United States, together with a rise in the American trade deficit for which many firms based in the United States but locating production offshore were no less responsible than firms based in Japan or Europe. Twenty years later, in the I970S and I980s, the Japanese firms began a similar exodus to the United States and to East Asia, rather less to Europe until I992 loomed on the horizon. Once understood in terms of structural change, it looks as though the imbalance in US-Japanese payments may be due more to a difference in the timing of the exodus of firms going abroad to expand production than to inherent or cultural differences between Americans and Japanese. If so, the imbalance is likely to be much more temporary than some commentators have suggested. Already Malaysia, after a period in which heavy imports ofJapanese capital goods produced a marked deficit in trade with Japan, is finding in Japan its best market for manufactures produced by Malaysian affiliates of Japanese firms. Two new sides to diplomacy State-firm diplomacy The net result of these structural changes is that there now is greatly intensified competition among states for world market shares. That competition is forcing states to bargain with foreign firms to locate their operations within the territory of the state, and with national firms not to leave home, at least not entirely. We observed from our case-studies at the micro level in three developing countries that this bargaining produces partnerships or alliances between host-state and firm, which may be of long or short duration, but which are based on the exchange of benefits and opportunities to enhance either party's success in the competition for world market shares. This bargaining, which was the main focus of our research, constitutes a new dimension of diplomacy. Again and again we found that the transnational firm has command of an arsenal of economic weapons that are badly needed by any state wishing to win 6 See J. J. Servan-Schreiber, Le defi ame'ricain (Paris: Denoel, I967). 6 States, firms and diplomacy world market shares. The firm has, first, command of technology; second, ready access to global sources of capital; third, ready access to major markets in America, Europe and, often, Japan. If wealth for the state, as for the firm, can be gained only by selling on world markets for the same reason that national markets are too small a source of profit for survival then foreign policy should now begin to take second place to industrial policy; or perhaps, more broadly, to the successful management of society and the efficient administration of the economy in such a way as to outbid other states as the preferred home to the transnational firms most likely to win and hold world market shares. While the bargaining assets of the firm are specific to the enterprise, the bargaining assets of the state are specific to the territory it rules over. The enterprise can operate in that territory even if it just sells goods or services to people living there-only by permission and on the terms laid down by the government. Yet it is the firm that is adding value to the labour, materials and knowhow going into the product. States are therefore competing with other states to get the value-added done in their territory and not elsewhere. That is the basis of the bargain. Firm-firm diplomacy A third dimension, equally the product of the structural changes noted earlier, is the bargaining that goes on between firms. This too may lead to partnerships or alliances in which, while they may be temporary or permanent, each side contributes something that the other needs, so that both may enhance their chances of success in the competition for world market shares. Firms involved in this third dimension of diplomacy may be operating in the same sector (as in aircraft design, development and manufacturing) or in different sectors (where, for instance, one party may be contributing its expertise in computer electronics, the other in satellite communications). For scholars of international relations, both new dimensions are important. The significance of the state-firm dimension is that states are now competing more for the means to create wealth within their territory than for power over more territory.7 Power, especially military capability, used to be a means to wealth. Now it is more the other way around. Wealth is the means to power not just military power, but the popular or electoral support that will keep present ruling groups in their jobs. Without this kind of support, even the largest nuclear arsenals may be of little avail. Nowadays, except perhaps for oilfields and water resources, there is little material gain to be found in the control of more territory. As Singapore and Hong Kong have shown, world market shares and the resulting wealth can be won with the very minimum of territory. Even where, as in Yugoslavia or the Soviet Union, there is a recurrence of conflict over territory, the forces behind it are not solely ethnic nationalism of 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). 7 Susan Strange want to wrest control over their territory from the central power because they believe they would be able to compete better in the world economy on their own than under the control of their old federal bosses. Autonomy is seen as a necessary condition for economic transformation and progress. Successfully managing society and economy Having got control over territory, government policy-makers may understand well enough what is needed to bargain successfully with foreign firms to locate with them. But they may not always be able to deliver. For though the forces of structural change affect everyone, even the old centrally planned economies, the capacity of governments to respond are extremely diverse. We were struck in our research by the wide variation between our three countries in the policies they felt willing and able to follow. There was no denying the multiple constraints on any Kenyan government attempting, for example, to overcome the handicap of African illiteracy, or even to effect radical reform of an inflated and featherbedded bureaucracy sufficiently tomake the country attractive to new foreign firms. Existing firms in Kenya were hanging on only so long as they were protected from competition, whether local or foreign. But at that point the absence of tough competition itself became a handicap. Meanwhile, debt problems and political constraints sometimes made it hard even to adopt the obvious policies of reform, such as abandoning price controls. Brazil, by comparison, though it has had bigger debt problems, has a bigger home market, and when it came to negotiating with foreign firms it had more room to manoeuvre in shifting from market-reserve protectionism to exportpromoting pragmatism. It has been able to play chicken-games with the IMF in a way no African country, dependent on official government loans and support from the international organizations, 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 liberal in its policies toward many (though not all) foreign investors.8 This liberality, we found, was not wholly due to Asian sagacity. Historical accident, now all but forgotten, played a part. Recall that for five years after I948 Malaya (as it was then still called) was under attack from Chinese-backed communist guerrillas. Though this civil war was eventually won, Tunku Rahman's sense of the country's vulnerability led him to make a unique bargain with Britain. In return for British military aid and protection, independent Malaysia would remain in the sterling area, making substantial contributions to the common pool of monetary reserves with its dollar-earning exports of tin and rubber. With this monetary dependence on London went a cautious and conservative style of monetary management, and a liberal attitude to British businesses in the country. From that time on, 8 In those sectors where, for political reasons, the government wished to encourage Malay-owned enterprises in order to counterbalance the economic dominance of Chinese, regulation either kept foreign firms out or laid down very strict rules about ownership and employment. Such sectors were mostly where production was for the local market. 8 States, firms and diplomacy Malaysia never once put controls on the right of foreign firms to transmit profits or even capital abroad. Nor did it impose punitive taxes, even though both profits and capital gains were high. These terms, added to the reassuring presence of British troops, meant there was no exodus of foreign capital after independence such as Kenya experienced, nor any wild indulgence in foreign borrowing such as Nkrumah's Ghana went in for. Malaysia carried on with this open, liberal policy long after the demise of the old sterling area in the late I960s, even though the beneficiaries in the I970S and I980s were mostly Japanese or American rather than British. There can be little doubt that these policies contributed substantially to comparatively high rates of investment by foreign firms, and in turn to 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 vulnerable to the hard times of the I98os: while Brazil's average then fell below 3 %, Malaysia's held up at over 4.5 %. Exports continued growing at a phenomenal rate of over 9 % a year, and by I988, 45 % of these by value were manufactures. This is not to say, of course, that policies towards foreign firms were or are the only factor. Malaysia's wider range of policy options compared with Kenya's was certainly helped by a high rate of domestic savings 36 % of GDP in I988 and by past moderation in foreign borrowing. The exigencies of debt-servicing suffered by Brazil and Kenya made it harder for them both to fight inflation and to resist the fatal temptation to resort to distorting and ineffective price controls. So the diversity of government responses to structural change usually reflects the policy dilemmas peculiar to the government of that society. But precisely because of increased integration in the world market economy, it is more and more difficult for governments to 'ring-fence' a particular policy so that implementing it does not directly conflict with, perhaps negate, some other policy. For instance, it is no good Kenya luring foreign investors into a free export-processing zone if at the same time the administration of import licences to economize on foreign exchange prevents potential exporters from replacing spare parts quickly enough to keep up the flow of output. Contemplation of the diversity of host-country policies in monetary management, trade and competition policy very soon brings home the fact that there are no short cuts and no magic tricks in wooing foreign firms. However, some general advice is still possible. One piece of advice is obviously to pinpoint the policy dilemmas where objectives clash. Another is to cut out the administrative delays and inefficiencies that bedevil the work of local managers. In Kenya, for example, one really striking success story was to be found in a sector where government intervention and controls had been minimal, in the growing and export of flowers and pot-plants. Another good piece of advice, already stressed in the growing literature on the management of international business, is to break up monopolies and enforce competition among producers. Michael Porter, for example, has rightly stressed the importance of fierce 9 Susan Strange rivalry between local firms unprotected by trade barriers from competing imports.9 On the basis of our work we would agree that Brazilian growth has certainly been hampered not only by featherbedded state monopolies, but also by the power given to the big business associations of local and foreign producers in some key sectors of industry. But useful as such analyses as Porter's have been, they have rather left out the political element, both domestic and global. The diversity of government responses which so struck us is surely due not only to mulish stupidity or ignorance of the keys to success. Governments are, after all, political systems for the reconciliation of conflicting economic and social, and sometimes ethnic, interests. Moreover, the global structural changes that affecthem all do so very differently, sometimes putting snakes, sometimes ladders in their path. Some small boats caught by a freak low tide in an estuary may escape grounding on the mud by alert and skilful management; others may be saved by luck. Our research suggests that the crucial difference between states these days is not, as the political scientists used to think, that between 'strong' states and 'weak' ones, but between the sleepy and the shrewd. States today have to be alert, adaptable to external change, quick to note what other states are up to. The name of the game, for governments just as for firms, is competition. Firms as diplomats Our third general point the importance of firms as major actors in the world system will be obvious enough to leaders of finance and industry. They will not need reminding that markets may be moved, governments blown off course and balances of power upset by the big oil firms, by the handful of grain dealers, by major chemical or pharmaceutical makers. It will come as no surprise to them that the game of diplomacy these days has two extra new dimensions as well as the conventional one between governments. But while I have scratched the surface of one of these-the bargaining between firms and governments I have not said much about the third, bargaining between firms. This deserves to be the subject of a whole new research programme. Examples have recently multiplied of firms which were and may remain competitors but which under the pressures of structural change have decided to make strategic or even just tactical alliances with other firms in their own or a related sector of business.10 In the study of international relations it is accepted as normal that states should ally themselves with others while remaining competitors, so that the bargaining that takes place between allies is extremely tough about who takes key decisions, how risks are managed and how benefits are shared. The implications for international relations analysis of the three-sided nature 9 M. Porter, The competitive advantage of nations (New York: Free Press, I990). See also a recent report for the National Bureau of Economic Research, Washington DC: J. Levinshon, 'Testing the importsas-market-discipline hypothesis', using data from the experience of Turkish firms since the liberalizing policies adopted after I984. a See, e.g., L. Mytelka, Strategic parttnerships: states, firms and international competition (London: Pinter, I 99 I). I0 States, firms and diplomacy of diplomacy are far-reaching. The assertion that firms are major actors is at odds with the conventions of international relations as presently taught in most British universities and polytechnics. The standard texts in the subject subscribe to the dominant 'realist' school of thought, which holds that the central issue in international society is war between territorial states, and the prime problematic therefore is the maintenance of order in the relations between these states.11 This traditional view of international relations also holds that the object of study is the behaviour of states towards other states, and the outcome of such behaviourfor states: whether they are better or worse off, less or more powerful or secure. Transnational corporations may be mentioned in passing, but they are seen as adjuncts to or instruments of state policy. 12 Our contention is that transnational corporations should now be put centre stage; that their corporate strategies in choosing host countries as partners are already having great influence on the development of the global political economy, and will continue increasingly to do so. In common with many contemporary political economists, our interest is not confined to the behaviour of states or the outcomes for states. Who-gets-what questions must also now be asked-about social groups, generations, genders, and not least, about firms and the sectors in which they operate. Ten years from now we anticipate that the conventions and limitations of what has sometimes been called the British school of international relations will be regarded as impossibly dated, its perceptions as demode as I950S fashions. This is not to say, of course, that there are no lessons to be learned by economic ministries and corporate executives from the diplomatic history of interstate relations. Only that the study of international relations must move with the times, or be marginalized as a narrow specialism. There are three issues, in our understanding, in the state-firm relationship that deserve much closer expert attention than they have so far received. One issue is how and why governments choose firms as partners; a second is the specifics that are bargained over, and who is likely to have the upper hand on any one of them; the third relates to the nationality of firms. The question here is not so much what internationalized production does to the state, but what it does to the national identity and behaviour of the transnational firm. 1. Why governments choose firms as partners As to the first, not the least attribute of the shrewd state is the ability to choose the right partners among firms. Depending on sectors, markets and circumstances, this may be a leading firm or a follower. There are pros and cons either way. Similarly, firms have difficult choices to make about which markets to " Hedley Bull's The anarchical society: a study of order int world politics (London: Macmillan, I977) is explicit on the point. See also Bruce Miller, The world of states (London: Croom Helm, I98I), and a much used text, Joseph Frankel, International politics, conflict anid harmony (London: Penguin, I969). 12 Some well known texts on international politics-K. Holsti, International politics (New York: Prentice Hall, I972), for instance-do not even mention multinationals. Even Robert Gilpin, in The political economy of international relations (Princeton, NJ: Princeton University Press, I987), devotes less than 30 out of 400 pages to them. I I Susan Strange contest, where to locate what elements of production, research and financing, and how to manage their offshore operations. Our point simply is that before either government or firm gets to the point of bargaining over the terms and conditions under which the firm operates, both have to make strategic choices about their partners. Governments therefore need to be well advised on the relative strengths and weaknesses of different firms. As much attention should be paid to the corporate history, character and decision-making habits of major transnational firms as international relations specialists have been used to paying to nation-states. 2. Knowing your allies Second, the advice 'Know your enemy' applies also to allies and partners. In bargaining over specific issues between host governments and firms, each side needs a clearer understanding than they often have of the other's long-term objectives, its bargaining strengths and weaknesses. Thus in order to achieve your own prime objective, it may be well worthwhile making concessions on some other subjectively minor issue. A recurrent issue, for example, is exports. So many countries are either burdened with debt-service charges or have ambitious development programmes needing imports of foreign capital goods that firms that make extra efforts to increase export sales will be especially welcome. Subsidies-such as Brazil offers under its Befiex cheap-credit, low-tax programme-are an indication of such a wish. On the other hand, subsidies are rarely decisive in corporate strategies. When General Motors, to the fury of the US Trade Representative's Office, took a Brazilian export subsidy for a particular product line, its objective was to undercut labour costs in Detroit and to consolidate its position in the potentially very large and competitive Brazilian market. The subsidy was just an added bonus. Another common issue-witness the Franco-British squabble over whether Nissan cars made in Britain are British or Japanese is domestic content: what proportion of the final product is made up of locally produced components. For developing countries, this determines the important question of how much spillover among small local enterprises can be expected from the presence of a multinational. But it is not only developing countries that bargain hard with foreign firms on whether the local content of a product should be 6o or 75 % of the value added. A major US concern in the US-Canada Free Trade Agreement was to make sure that Japanese cars produced in Canada conformed to (higher) American domestic content requirements if they were not to incur tariff barriers. The industrialized countries are less concerned about how much foreign firms are prepared to spend on training local workers. But for developing countries-especially those who have experienced the exploitation of young girls on the assembly lines of export-processing zones-it is an important question. Even though managers may suspect that not all workers they train I2 States, firms and diplomacy will stay with the company, it may be a price worth paying to gain access to the market. If the market is potentially large and the global competition severe, a training programme may reap long-term dividends that exceed the cost. The same may be said of firms' willingness to throw into the package substantial contributions to local health services or environmental clean-up programmes. One Italian construction company operating in Africa automatically sends out a small field hospital, properly staffed and supplied, with every construction job it undertakes. To this are welcomed not only its own local workers, but anyone in need. Presumably it has found this practice a good investment in government-firm diplomacy. Japanese companies are sometimes praised and envied by Europeans for their more open, less class-ridden styles of management. But their exclusivist, not to say racist, habits of restricting senior management jobs to Japanese and keeping out the indigenous workforce may prove a handicap in the long run. In Brazil, some Japanese firms reportedly would not consider even Brazilian Japanese as foremen. They were perceived as having 'gone native'. In Central Europe and the former Soviet Union, as in Asia, another contested issue will be the location of research centres and the employment foreign firms are prepared to offer to locally trained and educated science workers. Companies that have come to think that 'not invented here' rules out research work by their overseas affiliates may be losing important opportunities for beating the competition. All the issues briefly outlined here pose questions for research on the bargaining process between governments and foreign-and sometimes also domestic-firms; and most of them are rather more significant for the firm than the value of tax breaks or subsidies. 3. National identity and transnationalfirms The third and rather more abstract issue concerns the nationality of firms, and therefore the validity of policies based on discrimination between 'one of ours' and 'one of theirs'. While it is true that US-based firms rarely admit nonAmericans to their main board-they are more likely to appoint a statutory woman or a black American-nevertheless the behaviour of firms and their vital interests cannot always be predicted from the country where they are registered and have their headquarters. Northern Telecom is Canadian based and controlled, but its US operations are more important than its operations in Canada. In firms like General Motors or Volkswagen, their geographically dispersed operations create tensions within the company that are essentially political rather than economic and which alter the relations of management to the home state. Academics who are interested in the phenomenon of nationalism should pay much closer attention to current change affecting multinationals. For governments, and for the way they are organized and staffed, both new dimensions of diplomacy have far-reaching implications. Governments may find that they need to make radical changes in their foreign ministries-or else I3 Susan Strange drastically to cut them down in size and importance. They may need to be more open to short-term entrants from industry or finance, and to recruit new staff with business experience or technical and scientific qualifications. The British government in particular may need to think hard about the lessons of its relationship with Nissan, Honda and Sony. While British firms were axing jobs and cutting back in the summer of I99I, Nissan was expanding, offering new job opportunities in a formerly depressed region. The prejudices of Mme Cresson, of some American congressmen and of some British trade unionists against Japanese firms cannot bear rational assessment of the national interest. A European state's best ally among firms may just as easily be American or Japanese as European. To sum up. Much more analytical work is needed on firm-firm bargaining as well as on state-firm bargaining in all its multivariant forms. It needs recognizing that both types of bargaining are interdependent with developments in state-state bargaining (the stock in trade of international relations), and that this in turn is interdependent with the other two forms of transnational diplomacy. In the discipline of management studies, corporate diplomacy is becoming at least as important a subject as analysis of individual firms and their corporate strategies for finance, production and marketing. In the study of international relations, an interest in bargaining is already beginning to supplant the still-fashionable analysis of international regimes.13 A focus on bargaining, and the interdependence of the three sides of diplomacy that together constitute transnational bargaining, will necessarily prove more flexible and better able to keep up with change in global structures. No bargain is for ever, and this is generally well understood by anyone with hands-on experience of negotiation. The political art for corporate executives, as for government diplomats, is to devise bargains that will hold as long as possible, bargains that will not easily be upset by changes in other bargaining relationships. This is true for political coalitions between parties, or between governments and social groups, such as labour; and it is equally true for bargains between governments and foreign firms, and between firms and other firms. The multiplicity of variables in the pattern of any one player's interlocking series of bargains is self-evident. A final point about the interlocking outcomes of transnational bargaining relates to theories of international relations and political economy. Social 13 See, for example, R. Grosse, Multinationials int Latin America (London: Routledge, I989). In our view, regime analysis has always been weak on dynamics. This approach sees chanige in international regimes, whether in trade, money, ecology or any other issue-area, as taking place only periodically and in steps, not progressively and continuously all 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-related flows generated by the firms we talked to will carry on unaffected by the ultimate fate of the Uruguay Round negotiations between governments. Yet scholars and journalists continue to pay undue attention to inter-governmental negotiations. In monetary matters, though the IMF certainly has a role as far as debt-trapped governments are concerned, its 'regime' has been undergoing perpetual change since the I960s and it bears little relation now to the blueprint of Bretton Woods. '4 States, firms and diplomacy scientists like to think that the accumulation of more and more data, the perfecting of analytical tools and their rigorous application according to scientific principles will some day, somehow, produce a general theory to explain political and economic behaviour. They are a bit like peasants who still believe there is a pot of gold buried at the end of the rainbow despite their repeated failures to track it down. Today, the complexity of the factors involved in each of the three forms of transnational bargaining, and the multiplicity of variables at play, incline us to deep scepticism about general theories. Not only are economics-pace the economists-inseparable from the real world of power and politics, but outcomes in the global political economy, the product of this complex interplay of bargains, are subject to the great divergences that we have observed.

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