current and future changes in corporate attitudes to national identity

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COMMENTARY

Current and Future Changes inCorporate Attitudes to NationalIdentity

Thomas Harris

Executive Summary

This commentary is a revised version of a speech that was delivered by the Honorable ThomasHarris to the Thunderbird community at the Glendale campus on February 6, 2001. Althoughthe speech was delivered in 2001, its attendant concerns and arguments endure and are germanein today’s global business considerations. Ambassador Harris is presently Her Majesty’s ConsulGeneral and Director General of British Trade and Investment in the United States. Followinghis graduation from Cambridge University, Ambassador Harris joined the Board of Trade in1966, and subsequently the British Diplomatic Service. His diplomatic career included stints inTokyo, Washington, and Lagos. He has also held various appointments in the Foreign andCommonwealth Office. His most recent overseas posting was as British Ambassador to Koreabetween 1993 and 1997. He was later appointed Director General for Export Promotion in theDepartment of Trade and Investments (now known as British Trade International), before tak-ing on his present assignments in New York. As Director General of British Trade and Investment,he has overall responsibility for the promotion of British trade throughout the U.S. and for securinginvestment by U.S. firms in the United Kingdom. In 1995, Ambassador Harris was appointedby Her Majesty, the Queen of England, to be a Companion of the Order of St. Michael and St.George (CMG). © 2002 Wiley Periodicals, Inc.

INTRODUCTION

ational identity is an issue that has attracted growing interest over the years.Researchers have, for example, closely analyzed the degree to which consumersare influenced by perceptions of national origin. The outcome of that researchwill not be repeated here. Suffice to say, however, that there is clear evidence

Thunderbird International Business Review, Vol. 44(2) 165–174 • March–April 2002

© 2002 Wiley Periodicals, Inc.• DOI:10.1002/tie.10009

Thomas Harris is the British Consul-General in New York, and Director General of Trade andInvestment in the U.S. The views expressed in this article are his own, rather than those of theBritish government.

This is a revised edition of a speech that was delivered at Thunderbird, the American Graduate School ofInternational Management on February 6, 2001.

All “commentaries” are articles intended to stimulate discussion and do not represent editorial opinion.

that, all other things being equal, there can be a significant advan-tage, in some circumstances, for a firm to be associated in the mindsof a consumer with a particular country of origin. The classic exam-ple is in consumer electronics where, over a period of years, Sony,Mitsubishi, Hitachi, and other Japanese firms have succeeded intransforming international attitudes from an assumption that theirproducts were cheap and inferior to associating the Japanese labelwith quality and advanced technology.

Indeed, in this example, the national identity association was sostrong that it led one major British retail group to label its own brandof electronic products “Matsui” in an attempt to persuade consumersthat its products had Japanese levels of quality, whereas they wereactually made in Malaysia and the Philippines.

Examples abound whereby companies have tried to take advantage ofthe reputation of German engineering, Italian design, and Britishquality. These perceptions of country of origin identity are deeplyembedded in the minds of consumers in most countries, and tradepromotion organizations still seek to reinforce positive attributes inan effort to expand their exports. Such efforts, of course, presupposethat brands, or rather the companies which lie behind brands, have anational identity.

What has been less deeply researched and the subject of this com-mentary, is the obverse question. Not how consumers attach anational identity to firms, but how firms themselves perceive theirown national identity. That may be because it is only in the last fewyears that we have begun to witness the emergence of some very sig-nificant changes. Companies, particularly larger companies, are nolonger thinking about their own national identity in the traditionalway and it is likely that we have seen only the beginning of a majorchange of approach to this issue. Before exploring these possiblefuture changes, let us look briefly at the way in which corporatenational identity has already changed in character over the last 30years or so.

Back in the 1960s, there was no question about corporate attitudestowards national identity. Virtually every company, even if it operat-ed in a number of countries, was clearly anchored in one single homecountry where it had headquarters (HQ) and was domiciled for legaland tax purposes. With just a few exceptions, such as Unilever andShell, which had a curious Anglo-Dutch dual nationality, every multi-national was clearly American, German, Japanese, British, and so

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166 Thunderbird International Business Review • March–April 2002

Back in the1960s, there wasno questionabout corporateattitudes towardsnational identity.

forth. Indeed, the very names of many of the renowned corporationsof the time such as US Steel, Deutsche Bank, British Petroleum, andJapan Air Lines, celebrated this national identity. No matter howinternational the scale of its operations, each was managed byemployees of a single nationality, raised capital in its domestic mar-kets, and was clearly identified with the country of its historic origin.Indeed, the question of a national identity barely arose.

The first challenge to this situation came with the early stages ofglobalization, facilitated by the reductions in trade barriers as a resultof the successful General Agreement on Tariffs and Trade (GATT)rounds of trade liberalization. Increasingly, large firms were able toexpand their international sales operations and were forced to con-sider how best to position themselves in new markets abroad.

This led, of course, to some of the most famous business blunders, asmarketing techniques which had proved so successful at home wereexported abroad. When Coors went into Latin America, for example,its slogan “Turn it Loose” was translated into Spanish, where it read“Suffer from diarrhoea.” Likewise, Clairol introduced the “MistStick,” a curling iron, into Germany only to find that “mist” is slangfor manure. It was, therefore, not surprising that not too manyGerman consumers had any use for manure sticks. Pepsi’s “ComeAlive with the Pepsi Generation” translated in Chinese into “Pepsibrings your ancestors back from the grave.” Frank Purdue’s chickenslogan “It Takes a Strong Man to Make a Tender Chicken” was trans-lated in Spanish as “It takes an aroused man to make chicken affec-tionate.” When Parker Pen marketed a ballpoint pen in Mexico, itsadvertisements were supposed to read “It won’t leak in your pocketand embarrass you.” Apparently, the company thought that the word“embarazar” meant embarrass; when in actuality it meant “impreg-nate,” so that the advertisement read “It won’t leak in your pocketand make you pregnant.”

But the problems companies faced went further than just difficultieswith selling techniques and translations. For many firms and brands,such as IBM, Gucci, Sony, Mercedes, or Rolls Royce, their clear iden-tification with a single national identity posed no problem. Eachexploited the cachet derived from different perceptions of nationalstrength. But for other companies, particularly in the service sector,market entry overseas forced them to reconsider their identificationwith a single national identity. America Online, for example, foundthat its full name was not necessarily an advantage in wooing cus-tomers outside the U.S., and soon adopted AOL as its preferred des-

Current and Future Changes in Corporate Attitudes to National Identity

167Thunderbird International Business Review • March–April 2002

ignation. British Telecom shortened its name to BT while BritishAirways not only tried to abbreviate its name to BA, but alsolaunched a massive re-branding exercise in an effort to downplay it’sBritish origins and thus reflect the fact that more than 50% of its cus-tomers were now from other countries. More and more firms arebeing forced by their expansion abroad to readdress their globalimage. The advertising industry makes a fortune out of companiesseeking to reposition their identity.

But these changes to corporate national identity are essentially mat-ters of marketing and branding. What I want to argue in this com-mentary is that we are now on the verge of a much more fundamentalshift in that process. To understand why, it is important to considerthe issue in the broader context of the revolution in investment pat-terns that has being going on for the last few decades. Globalizationhas many facets but I would like to focus on the extent to which wehave seen a remarkable explosion in the flow of foreign direct invest-ment (FDI) and its impact on the self-identification of companies.Consider the following basic facts:

• According to the United Nations Conference on Trade andDevelopment (UNCTAD), global flows of foreign directinvestment (FDI) in 2000 reached US$1,270 billion, com-pared with U$865 billion in 1999, which was itself 25% high-er than in 1998. International production in 2000 equalledmore than 10% of world gross domestic product (GDP) ormore than double the 5% level in 1982.

• Global sales of foreign affiliates in 2000 reached overUS$14,000 billion or twice the total of world exports of goods.

• 3 September 2001, UNCTAD forecast that global flows ofFDI in 2001 would be US$760 billion, a decline of 40% from2000. But this compares with global FDI in 1985 of onlyUS$50 billion.

There are three points I would like to make about this phenomenon:

• A growing proportion of FDI over the last decade has takenthe form of mergers and acquisitions (M&A), rather thangreenfield investment. International M&A grew at 42% annu-ally between 1980 and 2000. In 1999, there were 6,000 cross-border deals worth US$636 billion (i.e., three-fourths of totalFDI) compared with US$481 billion in 1998.

• The explosion in international investment flows was not con-fined to multinational enterprises (MNEs). The fastest growth

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in overseas activities was actually among small and mediumenterprises (SMEs). The United Nations DevelopmentProgram (UNDP) estimates that there were 63,000 transna-tional corporations (with 800,000 foreign affiliates) in 2000,compared with 7,000 in the 1960s.

• The U.S. and the UK have dominated the process in recentyears. In 1999 and 2000, the UK overtook the U.S. to becomethe largest foreign investor with outflows of US$212 billionand US$250 billion. The U.S. was the biggest recipient inboth years with inflows of US$276 billion. Over the last fewyears, flows of FDI have looked like an Anglo-Saxon globalmarketplace, with roughly 70% of all cross-border M&Asinvolving UK and U.S. firms. The implications of this trend areparticularly important to the UK which is unique among themajor developed economies in the extent to which it hasbecome internationalized.

Following are three examples:

• The total stock of FDI in the UK in 2000 reached US$467 bil-lion, up 42% from 1999. This was second only to the U.S. andwas way ahead of China.

• The total stock of outward UK investment in 2000 reachedUS$635 billion (compared with $435 billion in 1999). As notedabove, this meant that Britain was the world’s largest foreigninvestor.

• In the UK, FDI accounts for 40% of research and development(R&D) (U.S. 12%), while FDI represents 4% of GDP (U.S.2.3%), and 33% of manufacturing output (U.S. 16%).

My first hypothesis is, even if we see a downturn in the U.S. or glob-al economy this year and the next, the long-term factors drivingmultinational companies to expand through trans-national M&As aremost unlikely to diminish. The pressure to achieve economies of scaleand significant cost reductions in many sectors is likely, if anything, toincrease rather than decrease, as CEOs are held to even higher stan-dards of performance by their stockholders. We have already wit-nessed these pressures in the oil industry with such mergers asExxon/Mobil, Chevron/Texaco, and BP/Amoco, but there are sim-ilar pressures on major consumer goods manufacturers, such asUnilever and P&G.

Secondly, it seems inconceivable that the steady and relentless processof global deregulation will be reversed despite the recent electricity



. . . it seemsinconceivable

that the steadyand relentless

process of globalderegulation willbe reversed . . .

utility fiasco in California. One only has to look at the way in whichthis has forced concentration in the domestic U.S. market for tele-coms, banks, or airlines to realize how much more significant thepressures will become as global barriers to cross-border operationsare eased. Thirdly, a downturn in the market is bound to expose sig-nificant degrees of over-capacity in certain sectors. Again, we havealready seen this process at work in such industries as defense equip-ment, bearings, or paper where there has been a wave of M&As in theface of a downturn in demand.

In short, I see nothing on the horizon that is likely to lessen the pres-sures on managers to enhance stockholder value by rationalizing andseeking growth through international acquisitions. This can onlyexacerbate broader trends we are already witnessing in larger multi-national firms.

Globalization means that instead of being anchored in a home coun-try by an HQ covering all core functions, with a senior managementpredominantly of that nationality with primary reliance on local capi-tal markets for equity, we are now witnessing the emergence of whatare increasingly truly global enterprises. Their senior staff are recruit-ed from all over the world, key management decisions and functions,such as design and R&D can increasingly be delegated from theirglobal HQ to local business units spread across the world (e.g., withthe treasury located in London or New York, a design office in SanFrancisco or Milan, and back office functions in Bombay or MexicoCity). It is no longer unprecedented or strange for a foreigner to be aCEO of a Japanese corporation or for an Australian to head up a majorU.S. corporation, or for a French manager to run a British operation.

These pressures to internationalize and the growth in cross-borderM&As are increasingly forcing large firms to consider not just whereto place future investments, but where to locate what remains of theirglobal HQ and where to place their legal incorporation. In short,globalization is leading to a steady process of denationalization ofmultinational corporations.

So far, the most dramatic examples are the result of cross-bordermergers. ABB the Swiss–Swedish engineering firm; Firestone-Bridgestone, the Japanese–U.S. tire firm; the EADS of the Airbusconsortium that links aerospace companies from three Europeancountries; and Pharmacia-Upjohn, the U.S.–Swedish pharmaceuti-cal group, were all forced to decide their country of incorporationafter the creation of the firm. The last of these examples chose to

Thomas Harris


base its headquarters in a neutral country, the UK, beforeMonsanto later acquired it. Other firms have deliberately changedtheir domicile and national identity as a result of political factors.Hong Kong and Shanghai Bank (HSBC) relocated its HQ toLondon and Jardine Matheson to Bermuda because of the transferof sovereignty in Hong Kong to China. Anglo-American, one ofthe world’s largest mining corporations, transferred its domicilefrom South Africa to the UK to gain better access to capital mar-kets but also, one suspects, because of concerns about long-termpolitical stability at home.

But even where legal incorporation remains in one country, manyother MNEs are already moving critical HQ functions overseas with-out changing their domicile. For example, the operational headquar-ters of Electrolux has moved from Sweden to the UK, Glaxo KB wentfrom the UK to the U.S., and Caltex from the U.S. to Singapore. Ifthis trend continues, more and more firms involved in major cross-border mergers are going to be forced to consider similar choicesabout incorporation and domicile.

For the UK, precisely because of the high degree of internationaliza-tion, this process is of growing importance. At present, the UK has adisproportionately large number of global HQs. Of the 400European multinational firms with revenues in excess of US$1 bil-lion, roughly 140 are headquartered in the UK. At present, the UKbenefits from a domicile cluster in London. It would be surprising ifBritish policy makers did not, therefore, ask themselves whether thatposition could be maintained. For policy makers in London, there arethree key sets of questions:

• Is the nationality of a company still an important considerationat a time when internationalization of equity ownership isdiluting the national identity of some of our largest firms? IsBP, for example, with roughly 37% of its stock now held byU.S. investors, still considered a British firm?

• If globalization is going to lead more MNEs to reconsiderdomicile, has the UK still got an edge? What are key factors forcorporate leaders—availability of professional services, the taxregime, or the macro-economic climate? Will the Euro changethe equation for London-based MNEs?

• Does it matter if UK-based firms switch domicile? For example,ICI now does 40% of its business in the U.S. and only 10% in theUK. Would it matter if it shifted HQ to the U.S.? Would it weak-en our self-perception of the UK as a pivotal economic power?



On balance, I think the consensus in London is still that we shouldnot skew UK economic policy to enhance our attractiveness forBritish-domiciled MNEs. To do so would run counter to our long-standing policy of non-discrimination against foreign-owned firmswhich has stood us in remarkably good stead over the years. One hasonly to look at the incredible success of the City of London as a glob-al financial center to see the positive advantages to us of not seekingto favor UK-domiciled firms over foreign-owned companies.Secondly, it is doubtful whether such a policy would in any case suc-ceed. One only has to look at the plethora of so-called Europeanheadquarters of some foreign companies in Brussels (where they areco-located with the European Union’s [EU] institutions) to realizethat the advantages of focusing solely on attracting the legal incor-poration of the headquarters of organizations is no longer of suchmajor economic significance. Thirdly, such a policy would runcounter to long-standing British support for the Organization ofEconomic Co-operation and Development (OECD) principle ofnational treatment, which holds that foreign firms should be treatedexactly like domestic firms.

Of course, many observers/analysts here may feel that such policyconcerns are of little relevance to the U.S. The sheer size of the U.S.domestic market and the depth and liquidity of its capital marketsmeans that this country will always remain a very attractive locationfor the headquarters of global enterprises. If multinational companiesare really losing their national identity, one may well argue that theU.S. is as likely to benefit as is to be disadvantaged by the process.The very factors driving forward the process of globalization arerooted in the liberal economic principles espoused in the U.S. Onemay therefore, well argue that the U.S. has little to fear.

But I should like to conclude by recalling what happened when theU.S. went into a recession over a decade ago. The late 1980s andearly 1990s saw a major debate over the national identity of corpo-rations. The issue then was what constituted an “American” firmand it was debated vigorously in response to political fears overwhether the U.S. was going to be swamped by the then wave ofJapanese direct investment. Furious efforts were made in Congressto differentiate between “American” and “foreign firms,” to estab-lish eligibility criteria for various forms of state aid, such as partici-pation in government sponsored research projects. At that time, itwas thought that the U.S. was losing the competitiveness race, butthere was no consensus over what constituted the identity of an“American” firm.

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If multinationalcompanies arereally losing theirnational identity,one may wellargue that theU.S. is as likelyto benefit as is tobe disadvan-taged by the process.

• Some groups argued for a test of ownership or control—buteven then stock ownership was being increasingly diversifiedacross national boundaries and could be hidden by investmenttrusts and changed over time.

• Others suggested a reciprocity test to determine whether for-eign-owned firms should participate in U.S. government-sponsored R&D projects.

• Yet others argued for a test of commitment to the U.S. econo-my. Did the firm with a foreign domicile, have a substantialU.S. operation employing U.S. citizens?

• Still others argued that the U.S. should apply the non-discrim-ination “national treatment” principle espoused by the OECD.

Both the Bush Sr. and Clinton administrations eventually concludedthat the policy of “national treatment” was the only one which wasconsistent with U.S. policies for protecting U.S. investments over-seas. That, however, did not stop Congress from passing a raft of leg-islation which was in clear breach of the non-discrimination principle.

For example, both the 1986 Federal Technology Transfer Act and the1990 Commerce Department Appropriation Act made participationin Federally-funded programs such as the Advanced TechnologyProgram (ATP), available only to firms with an established record ofinvestment in R&D, manufacturing, and significant employment inthe U.S. Foreign-owned firms had to agree to “promote” the manu-facture of the results of the programs in the U.S. and faced a series ofreciprocity tests, clearly designed to prevent access by Japanese firms.

Indeed, at present, there is no consistency about U.S. domestic law orpolicy in this area. In OECD negotiations, the U.S. eloquently backsthe principles of non-discrimination, which will facilitate the global-ization of MNEs, but its domestic legislation is still littered with pro-visions which are in clear breach of those principles. In aviation,shipping, television, and offshore oil and gas exploration for example,ownership rules are still being used to restrict foreign participation. Intechnology transfer, commitment to the U.S. economy and reciproc-ity rules are applied. In public procurement, different definitions offoreign firms are used at federal and state levels. In the defense sector,complex criteria of ownership, physical location, and citizenship of keypersonnel are used to define, on a case-by-case basis, whether or notfirms operating in the U.S. are foreign-controlled and should, there-fore, have access to U.S. defense technology. The definition of thenational identity of firms is not simply determined by incorporation ordomicile. Hitherto policy in this area has been driven by a combina-



tion of interest group lobbying, and by the state of the domestic econ-omy at the time, rather than by any consistent definition of what con-stitutes a foreign firm or how it should be treated.

One only has to note the relative calm with which the Daimler-Chryslermerger was accepted to see the connection with the economic cycle. Ivery much doubt if it would have been accepted so easily if the auto-motive industry had been in recession. We may well see, therefore, areversion to the debates of the late 1980s over the next few years.

I would argue, however, that whatever the short-term pressures, evenwithin the U.S., such concerns are likely to be made increasinglyirrelevant by the broader global trends discussed above. Cross-bordermergers, growth in FDI, the internationalization of equity ownershipand senior management, are trends which will lead to novel forms ofmultinational corporate governance and an enhanced ability to shiftnational domicile. Given this greater mobility, I would suggest thatthose economies most likely to benefit from the emergence of thenew, more rootless global firm, are those which offer the most flexi-ble and competitive markets. As cross-border international M&Areach into even the most highly regulated and protected sectors ofthe U.S. economy, such as defense and aviation, it will becomeincreasingly difficult for American politicians or regulators to main-tain obsolete restrictions on the operation of markets which arebecoming truly global in scale. I also predict that the denationaliza-tion of the multinational corporation will force an increasing degreeof convergence in accounting and tax regimes.

If correct, the U.S. and the UK still look to be among the best betsfor retaining what remains of global multinational HQ functions.Most British and American firms enjoy a comparative advantage bybeing located in their respective jurisdictions and the relative easewith which they can tap the capital markets of London and NewYork. But we will only retain our lead if we continue to adapt ourpolicies to facilitate the international transfer of staff, retain compet-itive international tax regimes, and maintain the drive to removethose remaining restrictions on non-discriminatory treatment. Ibelieve it will be a challenging world both for those running largecorporations and for governments.

Thomas Harris


current and future changes in corporate attitudes to national identity

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