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The global confederation: lessons from 1783.

The era during which the U.S. was governed by the Articles of Confederation has much to teach about the international business climate today.

Some international business scholars view the late nineteenth-century American business climate as analogous to today's international business environment. Leontiades (1986), for instance, argues that the contemporary environment for multinational corporations, or MNCs, is similar to that of large American firms found in the late 1800s, particularly in the 1880s and 1890s. The premise of this perspective, echoed by Dunning (1988) and Root (1990), is that previously viable statewide firms were suddenly faced by larger and better-financed national competition. Local firms faced increasing competition from interstate American rivals. As the business climate changed, it became necessary for businessmen to alter their perspective of the competitive environment from a local or regional focus to the national level. Some firms failed to adapt to this new national business environment and disappeared, while others acclimated, grew, and prospered.

Today, it is argued that national firms are facing a similar situation. Global competitors have arisen and so, the argument goes, in order to become internationally competitive, companies need to develop a global perspective. In doing so they will face a plethora of problems similar to the ones faced by local and regional firms nearly a century ago.

The value of such historical analogies is that they offer some understanding of current events as well as point to potential solutions for current problems. Although the analogy presented and used by Leontiades, Dunning, and Root has some merit, like most analogies it suffers from a number of shortcomings.

The global environment of the 1990s is far different from the America of the late nineteenth century. Primary among these differences is the lack of a global judiciary, executive, legislature, or currency. In short, there is no dominant world government with the power to provide a stable and uniform climate in which to conduct international business.

Here we present an alternative historical model, one we suggest may more closely resemble the global business environment of the 1990s. Rather than use late nineteenth-century America, we turn to the U.S. states during the period of the Articles of Confederation (1783-1788). The problems faced by the states under the Articles, we argue, are similar to the problems faced by firms in the emerging global economy of the 1990s and therefore may help point to potential remedies. These problems include:

* trade barriers,

* lack of a dominant executive branch of government;

* lack of an effective legislature;

* lack of higher courts of transcendent jurisdictions;

* large, uncontrollable debts;

* numerous, volatile currencies; and

* nonuniform financial market regulations.

Following an explanation of the parallels between these eras, we discuss the ramifications of our historical analogy for business, describing firms whose success or failure in the emerging global economy has depended partly on whether they approached the business environment as if it were global and uniform rather than diverse and confederal. From this discussion, we draw three general implications for companies wishing to succeed in contemporary global commerce.

HISTORICAL PARALLELS

Many scholars suggest that to become competitive around the world, national firms need to develop a global perspective. Our alternative historical model presents several circumstances and problems, described below, faced by contemporary MNCs that parallel those encountered by the American states during 1783-1788, the period of the Articles of Confederation.

Lack of a Strong Central Political Authority

By the time the 13 original American states were formally joined within the Articles of Confederation, they had existed for over a century and a half and had long been in geographic community with one another. This parallels the rise of such modern nation-states as Germany, Italy, Japan, and even the post-Civil War American federal system. The American states had long histories of a fairly high degree of self-government, imperial colonies though they were, partially because of their distance from London. They were, in short, markedly more sovereign and independent from one another (hence, more like sovereign nations) than they were in the decades following the Civil War.

A career in state politics was considered more prestigious and powerful than in national politics--just as today, national leaders are much more powerful than international leaders. The presidents of the United States and Russia are universally acknowledged to have more power than the Secretary of the United Nations or a Minister of the European Union (EU). Despite the existence of a Congress representing the several states, the first Congress was weak and lacked coercive power over any recalcitrant state that objected to the legislation of the majority--much the same way the UN lacks coercive power over a recalcitrant United States. The glory of what was to be known as Independence Hall in Philadelphia, says Morris (1987), was not that framers of a potential new constitution were meeting there in 1787, but that the state legislature met in the same building when in session.

Trade Barriers

Under the Articles, Congress was unable to regulate commerce among the states. Before the adoption of the Constitution, the states' practice of laying tariffs on the goods of other states had an adverse effect on interstate trade. Similarly, in today's international economy, merchandise traveling between nations is subject to a variety of tariff and non-tariff barriers, including, but not limited to, local content rules, reciprocity requirements, and impenetrable distribution systems.

Trade wars erupted between and among the bickering middle and New England states as their economies foundered. A type of mini-mercantilism arose, threatening to stifle the booming interstate and interregional trade that had boosted state economies and fostered specialization in the century and a half before the War of Independence. Today, neomercantilism is certainly not unknown, and nations cling to the production of goods--Japan its rice, France its movies--that a free market would reduce or eliminate.

The rights of river and sea navigation and of fishing were also disputed by the various states. There was no agreed-on extent of state waters into the sea. Ships passing some ports were compelled to enter, register, and sometimes pay duty--even if they had no business interests there. Fishing rights were hotly contested. Such issues are found in global business news today as nations adjudicate the extent and nature of national waters and contest fisheries.

Lack of an Effective Executive

Under the Articles, there was no executive branch in America. An executive committee called the Committee of the States did exist, as did the office of "president." However, the former was ineffective and John Hancock, who was elected to the latter in 1785, never showed up to assume his duties. The other presidents of the United States (under the Articles) are forgotten, or else known for other achievements. Similarly, the UN is involved with numerous, ostensibly important, international economic bodies. However, says Rivlin (1995), member states send only low-level representatives to the meetings of these organizations.

Because the U.S. under the Articles had no executive authority to enforce its laws, Congress was unable to levy taxes and could only request money from the states. Although it could and did vote for such taxes, it lacked any coercive power by which to enforce such requests; indeed, it lacked the power to enforce legislation of any kind. In the same vein, the UN has no means by which to coerce countries such as the USA to pay their "assessments."

When Shays's Rebellion broke out in Massachusetts in 1786, the central government was unable to respond to the potentially disastrous situation. Instead, the state had to deal with the insurrection by calling out the militia. Similarly, the humanitarian effort and subsequent military intervention that took place in Somalia was authorized by the UN but implemented by the United States. This has had the effect, as described by Pellicer (1995), of "creating uncertainty concerning the `collective' nature of the action which had been authorized."

Lack of an Effective Legislature

Under the Articles of Confederation, all national power was to be exercised by Congress. However, because it was in essence a body of ambassadors from the states, its operations often bordered on the irrelevant. Not only did it lack the coercive power of an executive branch to carry out the laws, but it was hampered by the virtual veto power of single states. In effect, its attempts to create overarching public policy for the 13 states were stymied by the rules under which it operated. Informal obstacles to legislation also existed. For example, Congress had to consider what powerful states like Virginia would think of policy proposals. The frustrations it faced were not unlike those of the United Nations, in which security council rulings override the general assembly, or in which the UN needs to consider what a powerful nation-state like the United States thinks of policy proposals.

Lack of Higher Courts

A further hindrance to the growth of business under the Articles was the lack of a system of higher courts in which appropriate legal issues might be appealed. For example, which state's court ought to deal with crimes perpetrated on the high seas? In addition, disputes between states lacked a suitable court system above the level of the states involved. Today, the concept of jurisdictional extraterritoriality is a sore point between nations. Because the sovereign countries are not willing to submit to its decisions, the World Court is notable for its ineffectiveness and lack of cases. It has not settled any major international dispute because nations are unwilling to submit their vital interests to the court for resolution. In 1986, when Nicaragua won its suit against the United States in the World Court, the Court ordered the U.S. "to cease and to refrain" from attacking Nicaragua and stated that the U.S. was "under an obligation to make reparation to the Republic of Nicaragua for all injury" caused by its "attacks on Nicaraguan territory." However, the U.S. ignored the judgment phase of the court's proceedings and continued to support efforts to overthrow the Sandinista government.

Nonuniform Business Law

obligations of contract were not honored within and among the states, and state legislatures passed laws rendering enforcement of such obligations difficult. Hence, firms faced both political and monetary risks in conducting interstate business. It was precisely in response to these types of business difficulties that the Philadelphia Convention later included the famous contract clause prohibiting the state governments from committing similar obstructionist acts. It fell to the later national government to encourage and provide for the free flow of goods between states. MNCs today still find nations unable to agree on accounting rules, safety laws, labor laws, and patent and copyright laws.

Debt Crises

The gross public debt in the 1780s was vast for both the states and the federal government. By the time of the Philadelphia Convention, the figure was $79 million--a tremendous tally for the era. Before that, the continental army, fresh from its victory over the British forces, had not received its pay on time. When the federal government finally offered payment to the veterans of the War of Independence, the continental dollars were worth less than a penny in terms of previous value. A great amount of public debt was left over from the War against which very little headway was made. Foreclosures on private farmers' debts precipitated Shays's Rebellion, and many of the people settling the West were in default. Ultimately, many creditors were forced to write off loans.

Similarly, the policies implemented by the International Monetary Fund (IMF), a supranational organization charged with restructuring the economies of debtor nations, have had a negative effect on lower social and economic classes. Modern versions of Shays's Rebellion took place in many countries in the 1980s, when people unable to cope with severe and enforced economic austerity engaged in what came to be known as IMF riots. These riots, explains Chahoud (1991), constituted "spontaneous acts of resistance to the economic conditions dictated by the IMF." According to Hurtienne (1991), 15 people died in Zambia in the 1986 urban riots resulting from IMF-dictated economic policies that had raised the price of cornmeal 120 percent.

Congress could and did ask for funding from the states. The important matter of how they were to pay was then left up to the states to decide. Even in the periods of greatest crisis, such as during Washington's winter at Valley Forge, the states lacked sufficient collective commitment to contribute adequate funds for the war effort. Today, the United Nations, a quasi-sovereign entity, faces an ongoing financial crisis because member states are delaying or withholding their assessed contributions. Because of a lack of sufficient collective commitment, the unpaid reimbursements for UN peacekeeping troops and equipment by the end of 1995 reached the $1 billion mark. Even so, the chairman of the Senate Foreign Relations Committee has even suggested that the UN budget be decreased from its current level of approximately $1 billion dollars to $250 million.

Volatile State Currencies

State governments under the Articles made the environment for creditors and investors highly unstable by issuing their own volatile paper money. Rhode island was an extreme example of this. Whereas some states, such as Massachusetts, labored to cover war debts after the Peace of Paris, Rhode Island cheerfully printed and spent a huge amount of paper specie and declared its public debt paid. By the time of the Philadelphia Convention in spring 1787, inflation was rampant throughout the states and some currencies would not be honored. In response, the constitutional delegates declared that under the new Constitution, only the federal government would have the authority to coin money.

Since the breakup of the Bretton Woods world monetary system in 1971, the major currencies have floated against each other, notwithstanding attempts at European monetary integration. This similarity to today's global business situation contrasts with the example of the late nineteenth-century United States, in which a single currency prevailed. Businesses in the American states in the mid-1780s faced the same currency situation global firms face today. Many currencies to take into account, with several being of very dubious quality.

Lack of Uniform Financial Market Regulations

Under the Articles of Confederation, banks were considered to be outside the purview of the central government. Each state decided what regulations were to be enacted regarding financial institutions. It was at this time that the first standard demand-deposit check was written in the United States. As is true of Hong Kong today, private banks were allowed to issue their own money. States also issued their own notes. Sometimes money was issued with reserve backing, and sometimes not. The fraction of reserve also differed from place to place and from bank to bank. In the West, whiskey was sometimes used as commodity money because it lasted and its value was high relative to its bulk and weight. Stock exchanging was nascent in New York, but nothing like the securities and exchange commission existed.

Today, despite some efforts, a similar type of institutional smorgasbord exists. Banking and other financial market regulations differ across countries, presenting international corporations with complex financial problems when crossing borders.

IMPLICATIONS FOR BUSINESS

Viewing the international business environment as a confederal world system rather than as a global economy may help corporations deal successfully with myriad international business problems. These include the existence of trade barriers, weaknesses in supranational governing institutions like the World Trade Organization (WTO), and volatile currencies and market regulations. As mentioned earlier, several examples are provided that tie success or failure in the emerging global economy partly to how the firms approached the business environment: as global and uniform or as diverse and confederal.

Trade Barriers: Supercomputers and Women's Apparel

Non-tariff trade barriers present a serious threat to firms operating in a global confederation. They appear in a variety of forms, ranging from Japan's restrictive distribution system to India's corrupt licensing system. The latter, say Javalgi and Talluri (1996), is pervasive in state governments and public sector enterprises, despite reforms at the national level. If a company views the problem of non-tariff barriers from a confederal perspective, it can overcome these barriers by pursuing an entry mode strategy or maintaining a presence that is appropriate for each market it enters. In contrast, viewing non-tariff barriers from a global perspective will hinder the firm's success as it pursues inappropriate, uniform strategies for each market.

Global Failure. Cray Research, the supercomputer company, consistently displayed a global perspective in its approach to the international business environment, which led to its failure in Japan. Cray produced supercomputers that were ranked by independent contractors as the best machines in the world. Throughout the 1980s Cray dominated the market. However, because of keiretsu arrangements and structural impediments in public procurement practices, Cray's market share by the end of the decade stood at only 15 percent in Japan, compared to 84 percent in Europe and 81 percent in North America.

Cray's approach to Japan was representative of a typical global strategy, (1) it relied on its quality image; (2) it believed that trade barriers would fall as a result of international pressure; and (3) it believed its relationship with the Japanese government was mutually beneficial. However, although publicly committed to procurement obligations under GATT, the Japanese government was systematically ignoring requirements to publicize procurement competitions and performance criteria to all potential suppliers. An agreement was reached in 1987 designed to make Japan's procurement process more transparent. But the Japanese ended up buying a machine from the Japanese firm NEC, which managed to drop its list price by 80 percent in order to win the procurement contract--despite benchmark tests that determined the Cray machines were superior.

Cray did manage to sell a supercomputer to Nippon Telegraph and Telephone Corporation (NTT) in 1987, as well as two supercomputers, one in 1987 and one in 1989, to public agencies in Japan. NTT bought a Cray machine to "ease U.S.-Japan trade tensions" only after it was pressured to do so by the Japanese government. Similarly, the public procurement of Cray machines involved "managed" purchases that occurred only after the U.S. government leaned heavily on the Japanese. Thus the outcome, says Tyson (1991), was determined by political pressure, not by supranational trade agreements or superior product offerings. In 1996, after chronic financial difficulties, Cray was forced to merged with Silicon Graphics, Inc.

Confederal Success. The German mail order firm Otto Versand exhibits a confederal perspective in its successful Japanese operations. It has been able to overcome non-tariff barriers in Japan's retail sector by selecting an entry mode appropriate to the business environment in which it was operating.

Since the early 1980s, the international trade community has mounted an aggressive campaign against Japan's Large Scale Retail Law. Passed in 1974, this law represented corrective legislation of an earlier law designed to protect small retailers from department store competition. In 1982, amendments to the law required potential retailers to gain the unanimous approval of local boards before they were allowed to open for business. These boards were dominated by local business owners who made it extremely difficult for applicants to gain approval. Despite the efforts of the international community, the Large Scale Retail Law gave local retailers absolute veto power over foreign retailers throughout the 1980s and on into the early 1990s.

In 1986, Otto Versand formed a joint venture with Sumitomo Trade Company and began to market upscale women's clothing through a catalog. The effort, which bypassed Japan's impenetrable distribution system, was a resounding success, resulting in sales of $42 million in 1988. The managers at Otto Versand did not wait for pressure from the international community to change the Large Scale Retail Law before they acted. Instead, they were operating in a manner consistent with a confederal view of the international business environment.

Lack of Transcendent Courts: Airbus and Boeing

A global perspective runs the risk of perceiving the rule of law where none actually exists.

Global Failure. In the summer of 1997, the European airplane consortium Airbus Industrie acted in a manner consistent with a globalist view when it was placed in a difficult competitive position vis-a-vis the Boeing Corporation. American antitrust authorities had approved the merger of Boeing and McDonnell Douglas, creating a conglomerate that was large enough to threaten Airbus with extinction. From the global perspective of Airbus, only the European Commission stood between the consortium and a powerful new competitor.

Airbus's apparent strategy was to use the Commission to threaten Boeing with huge fines if it proceeded with the merger without Commission approval. Karl Van Miert, the EU's competition commissioner, promised to scuttle the merger deal between Boeing and McDonnell Douglas if Boeing did not make serious concessions that would lessen its dominant posture in the world market. Despite these threats, a final agreement was reached between the European Commission, American antitrust authorities, and Boeing. Airbus spokesman Alain Dupiech expressed extreme disappointment at what he perceived to be an unfair outcome.

The management at Airbus apparently had waited for an outcome consonant with European law in an environment that had no rule of law. It depended on the negotiating efficacy of a supranational entity, and it suffered as a result. In the end, the EU proved to be of little help. Airbus's approach to the problem was consistent with a global perspective, rather than a confederal understanding of the international business environment.

Confederal Success. In contrast to Airbus, Boeing displayed a confederal perspective in its negotiations with the European Commission. Realizing that it was negotiating from a position of strength, it was eventually able to come to terms with the EU and American antitrust authorities and was then allowed to proceed with the merger. The agreement hinged on Boeing's willingness to forgo previously defined contractual obligations with three U.S. air carriers. The corporation gave up an agreement stipulating that the airlines would buy only Boeing aircraft for the next 20 years.

By making what was seen as a major rhetorical concession (but only a minor concession in actuality), the global aerospace giant negotiated in a manner consistent with a confederal perspective. Boeing Chairman Philip Condit did not wait for arbitration through the WTO or allow differences between American government officials and the European Commission to escalate into a trade war. Instead, he made necessary but superficial concessions in his negotiations with the Commission and succeeded in merging the two aircraft manufacturers.

Nonuniform Market Regulations: Microsoft and Hennessy

Companies operating in a world confederation must beware of nonuniform regulations as well as irregular and inconsistent regulatory enforcement. The profit margins of many businesses operating overseas have been reduced dramatically because of global counterfeiting. According to Nill and Schultz (1996), monetary losses attributed to the theft of intellectual property rights added up to an estimated $200 billion in 1994.

A U.S. firm concerned about copyright protection is better off investing in Malaysia, where IPR legislation and enforcement are considered moderate to moderately good, rather than in the Philippines, where they are considered weak. This is particularly true if the firm is heavily involved in R&D. Companies that do sue pirates find themselves in costly and ongoing litigation with uncertain outcomes.

Global Failure. Firms that operate from a global perspective are at a great disadvantage in Asia. For example, Microsoft's reaction to the counterfeiting of its holograms for package technology by the Shenzhen Reflective Materials Institute was to litigate against the counterfeiter in Chinese courts. Shenzhen, a Chinese state-owned enterprise, counterfeited approximately 650,000 holograms at a profit estimated between $20 million and $150 million. But after lengthy litigation, Microsoft won a mere $5,000.

Confederal Success. Cognac producer Hennessy provides a good contrast to Microsoft's global perspective. In East Asia, Hennessy's brand equity is quite high. When it was threatened throughout the region with counterfeiting, it acted in a manner consistent with the confederal view. Hennessy could have pursued a strategy of property right enforcement through the WTO and other multilateral organizations, which would have been consistent with viewing the business environment from a global perspective. Instead, the firm's management initiated a marketing campaign designed to enable consumers to distinguish between Hennessy cognac and its counterfeit. This solution was consonant with a confederal view--and undoubtedly would have been praised by the antifederalists.

A Summary

Based on the above examples, three implications for businesses operating in the contemporary global environment can be drawn. First, central governing institutions, such as the WTO or the UN, are systemically weak. Because they are dependent on the cooperation of member states, which often have conflicting interests, these supranational organizations lack the capacity to enforce treaties, rules, or standards that are not widely perceived as advantageous. Despite the expansion and liberalization that occurred in previous years under the GATT system, for example, many trade problems faced by the U.S. in Japan, Germany, and South Korea--such as the need for antitrust protection, collusion between suppliers and manufacturers, a preponderance of regulations, and interlocking relations between companies designed to block the entry of foreign firms--are beyond the policy-making ability and enforcement capabilities of the WTO. Because of this, foreign leaders charge that the United States is making trade policy through the use of bilateral agreements rather than through the WTO even as it is charged with hypocrisy for dealing "bilaterally all the time" (Garten 1995). Thus, managers who are engaged in medium- and longrange strategic planning should not expect the WTO to play an important global role in creating a level playing field.

Second, in the continuing presence of what is essentially a world confederation, MNCs; should proceed with caution when considering the adoption of one-size-fits-all global marketing, distribution, and production strategies. The international economy, at least in terms of the policies promulgated by nation-states, is a misnomer at best. One market bounded by internal political instability and insufficient infrastructure may best be served though exports, whereas a different market exhibiting a tangled and ingrown distribution system may best be addressed through a wholly owned subsidiary. The point is, differences in entry mode and operations are likely to persist well into the next century despite overheated rhetoric about the global economy.

Third, the limitations of multinational institutions should be acknowledged by governmental and nongovernmental actors working in the international environment. Perhaps the reason institutions such as the UN, the IMF, and the WTO are so often ineffective is because they are expected to do the impossible. Just as the United States under the Articles of Confederation was unable to provide a stable and uniform environment for business, the global economy under the weak administration of international bureaucracies is unable to provide uniformity and stability to much of the global business environment.

Historical analogies are useful heuristic devices through which an understanding may be gained of current problems. By comparing the contemporary international business environment to the historical period of the American states under the Articles of Confederation, we have come up with analogies that carry lessons about trade barriers, the weakness of central governing institutions, uncontrollable debts, volatile currencies, and market regulations. The substantial number of similarities in these areas illustrate that both eras are characterized by weak governing entities, the absence of transcendent courts, and a lack of uniform laws and regulatory enforcement.

Companies operating in the global environment face daunting challenges, including trade barriers, intellectual copyright theft, and great variability in international laws and regulations. When facing these challenges, a confederal perspective can be used as a template through which managers can formulate effective competitive strategies.

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Lance Eliot Brouthers is a faculty member in the Division of Management and Marketing at the University of Texas at San Antonio. David G. McCalman is a faculty member in the Department of Management at Fayetteville State University, Fayetteville, North Carolina. Timothy J. Wilkinson is on the faculty at the Department of Public Policy and Administration at Boise State University, Boise, Idaho. The authors wish to thank Professor Dennis Organ for his helpful comments on an earlier draft.
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Author:Brouthers, Lance Eliot; McCalman, David G.; Wilkinson, Timothy J.
Publication:Business Horizons
Date:Mar 1, 1998
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