More and more firms and investors are realizing the potential profits of tapping into new foreign markets. At the same time, governments are working to create policies and establish agreements that encourage international trade. Wharton researchers examine issues related to both sides of the movement towards globalization.


Numerous regional trade agreements have been created over the last few years: The European Union has grown to 15 countries, NAFTA is solidly in place, and trade pacts are being discussed in the Asia Pacific region. Will these efforts at regionalization turn the world economy into a series of closed and competing regional blocs as in the 1930s? Or, are the agreements stepping stones that will lead to an open global economy?

Stephen Kobrin, professor of management and director of the Lauder Institute of Management and International Studies, argues that the emerging global economy reflects fundamental changes in the scale and complexity of international activity; it is here to stay. A future world economy divided into restricted regions is very unlikely for a number of reasons:

Regional markets are too small. As development costs rise and product life cycles shrink, many high-tech industries require global markets to stay technologically competitive. Regional blocs are too small to absorb the cost, risk, and complexity of late-20th century technology. In most high-technology industries, strategic alliances are trans-regional.

Regional borders cannot be closed. A world of closed regional blocs assumes that cross-border transactions can be controlled. But borders are almost irrelevant in today’s international financial markets, where $1 trillion worth of foreign exchange is traded daily. There are severe limits on any government’s ability to “defend its currency” now that huge flows of electronic transactions can be consummated in the blink of an eye, regardless of the distance. The border problem will only worsen as more and more businesses move into wireless data communications. Why should regional borders be less permeable than national borders?

Geography is no longer relevant as a basis for the organization of markets. The concept of a world organized by mutually exclusive territories came into being in the 1600s and has lasted for well over 300 years. All of this has changed in the last few decades. The international financial market of today no longer recognizes these national borders. Its domain is now electronic rather than geographic. When transactions consist of electronic impulses transmitted at the speed of light, borders and geography lose their meaning as organizational constructs. At the end of the day, regional markets are no more than national markets writ large.

“The emergence of an integrated global economy during the past decade is a result of basic structural changes, dramatic increases in the scale of technology, and the corresponding development of network forms of organization,” Kobrin says. “It is not a momentary outcome of a particular constellation of political forces.”

Stephen Kobrin, William H. Wurster Professor of Multinational Management: “Regional Integration in a Networked Global Economy,” May 1995


Globalization allows multinational corporations access to foreign markets, cheap labor, and other advantages. But foreign entry does not come without costs. Adjusting to a foreign culture can be an expensive process. Does the type of ownership affect a company’s ability to adapt to new cultures, and once established abroad, can a company use its experience in adjusting to new cultures?

Johannes Pennings, professor of management, and Harry Barkema and John Bell of Tilburg University in the Netherlands examined 225 foreign ventures of 15 European firms since 1966 and found that ownership structure is significantly associated with success in foreign markets.

The researchers found that a joint venture with a foreign firm or the acquisition of an existing company in a new country is more likely to fail than a wholly-owned subsidiary or start-up. Each entry into a new foreign market requires that the expanding firm adapt to a foreign culture. But in a joint venture, the firm must also become familiar with its partner’s corporate culture. In an acquisition, the company has to accommodate both the target firm’s national and corporate cultures.

Firms reduce cultural barriers over time as they learn from their previous expansion experiences, the researchers found. Firms that expand abroad acquire site-specific knowledge that ranges from local culture to institutional characteristics. A company that builds a strong base close to its home culture and gradually moves into regions whose cultures differ from that of its home country is less likely to fail than a company that precipitously enters a region with a different culture. A firm more likely to fail enters countries that have extremely different cultures than their recent expansion nations.

“The results show that expanding firms can move along a learning curve in such ventures, especially when they choose their expansion path so that they can exploit previous experience in the same country and in other countries in the same cultural block,” the study concludes.

Harry Barkema, John Bell, and Johannes Pennings: “Foreign Entry, Cultural Barriers, and Learning,” Strategic Management Journal, forthcoming


During the last 20 years, U.S. firms have substantially expanded their operations outside of the United States. In an effort to keep investors better informed, accounting regulators such as the Securities and Exchange Commission and the Financial Accounting Standards Board have mandated that firms provide data on foreign operations. To date, there hasn’t been much evidence on the value relevance of these foreign disclosures. Gordon Bodnar, assistant professor of finance, and Joseph Weintrop of New York’s Baruch College explored the question of whether earnings from an MNC’s foreign operations impact the value of the firm.

Bodnar and Weintrop examined the annual earnings of 457 firms from 1985 to 1992 and, based upon the financial statements, broke down their earnings in two categories: income earned domestically and income earned from foreign operations. The researchers found that changes in both areas of earnings had a significant impact on annual returns. However, the researchers found that news of strong earnings in overseas operations have a much greater impact on the firm’s annual stock return than a reported boost in domestic earnings. (If foreign and domestic incomes rise to the same levels, the impact of the increase in overseas profits on a firm’s change in value is more than twice that of domestic profits.)

Bodnar says his findings reflect a growth story. Since foreign operations have generally represented a small proportion of most U.S. firms’ total operations, and given the relative size of the potential foreign market, the overseas markets offer the potential for greater growth than the already more exploited domestic market. Because successful foreign operations suggest opportunities for greater growth abroad, they are interpreted by the market as a sign of high future foreign earnings. The expectation is often stronger than the expectation of high future earnings from successful domestic operations.

Gordon Bodnar and Joseph Weintrop: “The Valuation of Foreign Income: A Growth Opportunities Perspective,” January 1995


Leaders of countries that are shifting from socialism to capitalism are often ambivalent about foreign direct investment (FDI). They are concerned that foreign firms may displace national companies and that the objectives of the foreign investors may conflict with their own country’s development goals. They are also wary of transferring wealth or control to foreign owners. But does FDI actually help these countries in the long run? How can countries smooth the path for foreign investors?

Through statistical analysis and interviews with managers of foreign MNCs and government officials in Russia, Poland, East Germany and Latvia, Bruce Kogut, professor of management, has found that FDI has a potentially significant impact on transitional countries and on the governance of their firms.

FDI not only brings in new capital, new technology, and new ways of work organization; it can also provide examples of superior methods of supervision, authority, and incentive structures. Foreign firms also implement a superior method of organizing and external control.

Faced with increased competition from these foreign competitors, domestic firms must take steps to ensure their place in the changing marketplace, or else be squeezed out. In this way, FDI forces domestic companies to improve their business strategies and processes.

Kogut argues that governments of countries shifting to privatization should take steps to ensure the process moves ahead as smoothly as possible. Some of his recommendations involve:

Competition policy. Governments should create policies that always encourage competition. To avoid conflicts among its agencies, governments should not screen investment applications.

Privatization and ownership. Should a nation preserve ownership over a few key enterprises? Kogut argues that a nation shouldn’t preserve ownership in industry, as it can threaten reforms during a period of vulnerability. If the state must keep some control, Kogut says it should do so in industries where the nation has strong capabilities and from which it is able to borrow or buy technology easily from world markets.

Experimentation. Foreign companies can bring with them vastly different ways of organizing work, human-relations policies and other assets. In this sense, the subsidiaries of MNCs can act as templates for successful business practices to be replicated in the local environment. “Ill-conceived restrictions could hinder the adaptive learning process,” says Kogut.

Bruce Kogut: “Direct Investment, Experimentation, and Corporate Governance in Transition Economies,” in Corporate Governance in Central and Eastern Europe, The World Bank, forthcoming