what is the meaning of regional
Let’s assume that your firm has a significant international presence. In that case, it probably has something called a “global strategy, ” which almost certainly represents an extraordinary investment of time, money, and energy. You and your colleagues may have adopted it with great fanfare. But, quite possibly, it has proven less than satisfactory as a road map to cross-border competition.
Disappointment with strategies that operate at a global level may explain why companies that do perform well internationally apply a regionally oriented strategy in addition to—or even instead of—a global one. Put differently, global as well as regional companies need to think through strategy at the regional level.
Jeffrey Immelt, CEO of GE, claims that regional teams are the key to his company’s globalization initiatives, and he has moved to graft a network of regional headquarters onto GE’s otherwise lean product-division structure. John Menzer, president and CEO of Wal-Mart International, tells employees that global leverage is about playing 3-d chess—at the global, regional, and local levels. Toyota may have gone furthest in exploiting the power of regionalized thinking. As Vice Chairman Fujio Cho says, “We intend to continue moving forward with globalization…by further enhancing the localization and independence of our operations in each region.”
The leaders of these successful companies seem to have grasped two important truths about the global economy. First, geographic and other distinctions haven’t been submerged by the rising tide of globalization; in fact, such distinctions are arguably increasing in importance. Second, regionally focused strategies are not just a halfway house between local (country-focused) and global strategies but a discrete family of strategies that, used in conjunction with local and global initiatives, can significantly boost a company’s performance.
In the following article, I’ll describe the various regional strategies successful companies have employed, showing how they have switched among the strategies and combined them as their markets and businesses have evolved. I’ll begin, though, by looking more closely at the economic reasons why regions are often a critical unit of analysis for cross-border strategies.
The Reality of Regions
The most common pitch for taking regions seriously is that the emergence of regional blocs has stalled the process of globalization. Implicit in this view is a tendency to see regionalization as an alternative to further cross-border economic integration.
The surge of trade in the second half of the twentieth century was driven more by activity within regions than across regions.
In fact, a close look at the country-level numbers suggests that increasing cross-border integration has been accompanied by high or rising levels of regionalization. In other words, regions are not an impediment to but an enabler of cross-border integration. As the exhibit “Trade: Regional or Global?” shows, the surge of trade in the second half of the twentieth century was driven more by activity within regions than across regions. The numbers also cast doubt on the idea (held implicitly by advocates of pure global strategies) that economic vitality is promoted more by cross-regional trade. It turns out that regions whose internal trade flows are the lowest relative to trade flows with other regions—Africa, the Middle East, and some of the Eastern European transition economies—are also the poorest economic performers.
Country-level numbers also suggest that foreign direct investment (FDI) is quite regionalized, which is even more surprising than the regionalization of trade. Data from the United Nations Conference on Trade and Development show that for the two dozen countries that account for nearly 90% of the world’s outward FDI stock, the median share of intraregional FDI in total FDI was 52% in 2002, the most recent year for which data are available.
The extent and persistence of regionalization in economic activity reflect the continuing importance not only of geographic proximity but also of cultural, administrative, and, to some extent, economic proximity.1These four factors are interrelated: Countries that are relatively close to one another are also likely to share commonalities along the other dimensions. What’s more, those similarities have intensified in the past few decades through free trade agreements, regional trade preferences and tax treaties, and even currency unification, with NAFTA and the European Union supplying the two most obvious examples. Ironically, some differences between countries within a region can combine with the similarities to expand the region’s overall economic activity. For instance, we see U.S. firms in many industries nearshoring production facilities to Mexico, thereby arbitraging across economic differences between the two countries while retaining the advantages of geographic proximity and administrative and political similarities, which more distant countries, such as China, do not enjoy.
Evidence from companies’ international sales also points to considerable regionalization. According to data analyzed by Susan Feinberg at Rutgers Business School, among U.S. companies operating in only one foreign country, there is a 60% chance that the country is Canada. Even the largest multinational corporations exhibit a significant regional bias. A study published by Alan Rugman and Alain Verbeke in the Journal of International Business Studies shows that around 88% of the world’s biggest multinationals derive at least 50% of their sales—the weighted average is 80%—from their home regions. Just 2% (a total of nine companies) derive 20% or more of their sales from each of the triad of North America, Europe, and Asia.