Business Without Borders

The Borderless World, by Kenichi Ohmae, New York: Harper & Row, 223 pages, $21.95

The Competitive Advantage of Nations, by Michael E. Porter, New York: Macmillan, 855 pages, $35.00

Scale and Scope: The Dynamics of Industrial Capitalism, by Alfred D. Chandler, Jr., Cambridge, Mass.: Harvard University Press, 860 pages, $35.00

A year of political upheaval in Central Europe and the Soviet Union has forced intellectuals in the West to reflect on a word many had relegated to the dusty attics of their minds: capitalism. Large numbers of Poles, Czechoslovakians, East Germans, Hungarians, Lithuanians, Latvians, and Estonians who have mounted the barricades to demand freedom find that word very exciting. They may not have a thorough understanding of capitalism; it is sufficient in their view that it is very different from the socialism they know all too well.

Thus they are forcing Western thinkers to reconsider something many have treated with disdain. The peoples of the East are saying that they believe that private capitalism is more than just an expression of human greed. Their own experience, in countries that to one degree or another managed to extinguish property rights, tells them that what philosophers such as F.A. Hayek and Milton Friedman have argued is true, that private ownership of property and political liberty go hand in hand. A man's home or business is his castle, but only if he, personally, has a clear title to it. In a capitalist system, he also can buy a share of a private enterprise doing more business than all of Poland simply by phoning a stockbroker.

Since dramatic political change can hardly be ignored by the Western intelligentsia and since the message is so clear and emphatic, this is a good year for books about capitalism. In past years, with so much intellectual focus on socialist dialectics and statist economic nostrums, it has been easy to ignore the quiet evolution of capitalism. It evolves under the motive power of an internal dynamic. Individuals, voluntarily joining together in search of financial gain and psychological fulfillment, are a powerful source of energy and creativity.

As it happens, this revival year for capitalism has produced three new books that, in very different ways, offer insights into why modern capitalism is such a successful and important component of social and economic organization in the democracies. They also provide a sense of where capitalism now stands in its evolutionary development. All three are good antidotes to the noxious claim that capitalism is the enemy of social justice or that it simply is a method of work organization and therefore unfit for serious philosophical discussion.

All three also are antidotes to the notion that nation states should control and direct private economic development through what proponents choose to call "industrial policy." They conclude—two of them through detailed scholarly research—that capitalism works best under conditions of minimal interference from the state. The popular, and false, notion that Japan's economic success is a result of the all-knowing prescience of the Ministry of International Trade and Industry (MITI) does not fare well when these books are carefully read.

The most readable of the three is Borderless World, by Kenichi Ohmae, a management consultant with McKinsey & Co. in Tokyo who also finds time to write provocative books, op-ed pieces, and magazine articles. Ken Ohmae might be called a master of thoughtful exaggeration. That trait can be found in his assertion that global capitalism has transcended nationalism. Superficially, that is true. Money and capital in vast amounts are transferred each day from and to millions of bank accounts throughout the world. "World cars," tailored to different national tastes but with common components from around the globe, have become common.

But then big corporations have been international for a long time. What Ohmae is describing is simply further advancement and sophistication in global organization. By his own account, that sophistication requires an awareness of nationality and nationalism. Companies build plants abroad to be close to markets and minimize currency exchange risk. They staff them, to the extent possible, with managers who understand the local culture. Somewhere, in New York, Tokyo, or Eindhoven, there is a nexus of central management, responsible, in theory at least, to a large body of shareholders—or, more broadly, to beneficiaries of pension and mutual funds—who are also scattered throughout the globe.

Ohmae shines in his role as iconoclast. The United States, he writes, "has no 'foreign' trade." Trade statistics measure goods crossing national boundaries, but "because the money to buy these foreign goods is still denominated in dollars, buying them is no different from, say, buying California oranges or PCs from Texas." He strikes real pay dirt when he adds that if "policymakers lower the value of the dollar in the belief that doing so will boost trade competitiveness, sooner or later the dollar will no longer be accepted by America's trading partners as settlement currency." Somebody please print that in letters two feet high and paste it on the office wall of Treasury Secretary Nicholas Brady, who seems to be one of those politicians who believe that a country can devalue its way into prosperity.

For that matter, Ohmae's thesis about the disappearance of national borders shouldn't be treated lightly. Borders certainly still exist, but he has some very good points about the world's expanding economic interdependence. "In the interlinked economy, it does not matter who builds the factory or who owns the office building or whose money lies behind the shopping mall or whose equity makes the local operation possible. What matters is that the global corporations that, one way or another, do business within a set of political borders act as responsible corporate citizens. If they do, no matter what their home country, they will treat the people fairly, give them good work to do and provide them with valuable products and services. If they do not, the people will neither work for them nor buy what they produce.

"Today's global corporations are nationalityless, because consumers have become less nationalistic. True global corporations serve the interests of customers, not governments."

Beyond macroeconomics, Ohmae delves into a subject he knows quite well as a management consultant: how to develop a global corporate strategy. He emphasizes the increasing importance in today's competitive world of innovation and finding ways to differentiate a product from competing brands. He also stresses that, given big investments in automation, managers must learn to live with high fixed costs and adapt their worldwide operations accordingly.

For further word on how corporations succeed, turn to Michael E. Porter and The Competitive Advantage of Nations. This is a scholarly tome based on exhaustive studies looking for the secrets of industrial success in more than 100 different industries in 10 nations. Porter, who teaches at Harvard Business School, studies industries as clusters, a very useful approach for such an inquiry. Giant companies everywhere are highly dependent on the little guys who feed them parts, materials, and services.

He makes another important discovery—that adversity often breeds success. A shortage of land, for example, forced the Japanese to shorten production lines and, to cut down the need for storage space, pioneer "just-in-time" delivery of parts from suppliers. The result was greater manufacturing efficiency, and many American companies, with no such space problems, later copied the "just-in-time" system to save on inventory costs. The upward revaluation of the yen in the late 1980s, which in theory made Japanese products more expensive in world markets, also stimulated a drive for greater efficiency. (Again, Mr. Brady, please take note.)

Porter finds that Italy's comparative advantage comes in part from the major role of entrepreneurs in its industrial clusters. "Italians are risk takers," he writes. "Many are individualistic and desire independence.…Spin-offs to start a new company at the first possible opportunity are common in Italy, and a number of business magazines are full of nothing but profiles of successful entrepreneurs." It wouldn't be a bad idea for Hungarians, Poles, and Czechoslovakians to go to Italy to learn how to build an economy from the ground up. Italy's vitality derives from its entrepreneurial economy, not from the state-owned dinosaurs. The entrepreneurs have developed excellent tactics to keep themselves relatively free of the Italian government's dead hand.

Whereas Ohmae treats multinational corporations as largely stateless, Porter focuses on the countries where global firms are headquartered and thus treats companies as "American," "Italian," and so on. He stresses the importance of competition within home markets and seems to think that American companies in particular have lost some of their competitive edge, a finding that will no doubt gratify many of their critics. This he blames on, among other things, the merger boom of the 1980s, brought about in his view by a weakening of antitrust law that has reduced the intensity of competition. He also asserts that "defensiveness and a loss of confidence have crept into American industry and government." This has led, he says, to cries for government relief from competition, in the form of devaluations of the dollar, relaxation of regulation, removal of antitrust restrictions, and so on.

That's quite a mixed bag, however. Devaluation is a bad policy, while relaxation of regulation is often a good one. On the whole, Ohmae's evaluation of why companies succeed is more focused, stressing management techniques that spur innovation, whereas Porter, although he offers some useful insights, wanders around a great deal. American business does whine a lot, but it is by no means as feeble as he sometimes implies.

Indeed, Alfred D. Chandler, Jr., a veteran economic historian at Harvard Business School, finds advantages in the American form of corporate management. His study, too, is multinational, drawing distinctions between the corporate cultures of the United States and Germany on the one hand and the United Kingdom on the other. Scale and Scope suggests that the first two have succeeded better than the third because the United Kingdom held on too long to old-fashioned owner capitalism. The United States and Germany, by contrast, made a successful transition to professional corporate management.

"The failure of British entrepreneurs to make the investments, recruit the managers and develop the organizational capabilities needed in order to obtain and retain market share in many of the new industries often meant that they lost their markets not only abroad but at home," Chandler writes. He also mentions dividend policy, asserting that owner-managers often prefer large dividends and thus limit the ability of their companies to use surpluses for investments that increase efficiency and growth. Moreover, since top management positions in such firms are often reserved for family members, managers who are not members of the family have only limited incentives to do well, since they can never advance beyond a certain point.

While all this is plausible enough on the surface, Chandler actually is touching on several complex issues that he does not choose to explore deeply in this book. He obviously favors professional corporate management over owner management, and it is indeed hard to quarrel with the success so many American professionals and their German counterparts have had in running huge joint stock companies. Management has indeed become a profession, as Ohmae makes clear in his discussion of corporate strategies and management techniques designed to stimulate work effort and creativity.

But many other factors come into play in any examination of why U.S. and German companies have done well and British companies have not. For one thing, generalizations are tricky. Some owner-managed companies in all three countries have done well. Small and medium-sized entrepreneurial companies supply important vitality to both the U.S. and German economies.

Estate-tax laws have an important bearing on decisions to take companies public and make the transition to professional management. Taxes also affect dividend policy, whether the company is publicly or privately held. For years it has made more sense for U.S. professional managers to reinvest earnings rather than pay them out as dividends. That's because dividends are doubly taxed, once as corporate earnings and again as stockholder income. So shareholders often have preferred capital gains if managers could achieve them.

That is not an argument for double taxation, however. Many economists would prefer a payout of dividends, which shareholders would then reinvest based on their own judgments of what investments offered the best return. One simple reason that British owners and investors have not been good risk takers is that the country's frequent bouts with socialism and bad Tory government before the Thatcher era raised the risk threshold too high.

Owner vs. professional management has been a subject of debate since the early days of professional management in the United States. That was in the 1920s, when the corporate creations of turn-of-the-century tycoons were passing into broad public ownership. At the beginning of the 1930s, New Deal economist Adolph Berle argued that big, professionally managed business corporations were becoming governments within governments. A thoroughgoing statist, he was worried about encroachment on government power. A decade later, author James Burnham would attack professional managers from the opposite direction. He worried that professionals were not sufficiently imbued with capitalist ideology. They would be just as happy running a socialist enterprise as a private one, he feared.

Well, big business has proved to be remarkably adaptable. Large corporations have shown that they could be efficient even as they became private welfare states offering employees wide-ranging social benefits. Indeed, treating workers well contributed to their success. The professionals were sensitive to all kinds of pressures, particularly from government, customers, and employees. Berle had nothing to fear about the U.S. government withering away under pressure from big business. Quite the opposite has happened.

But Burnham's concerns linger. There remains the question of whether these corporations are truly private or quasi-public. Is capitalism still dominant in the U.S. economy, or has it evolved into a sort of free-floating ownership by professional fund managers who accept very few of the responsibilities of ownership? Who are the owners of big business? Perhaps no one in any truly functional sense. This doesn't bother Chandler much as he dwells on the evolution of big companies through periods of globalization and diversification.

But the issue is by no means dead. No doubt it is true that in the United Kingdom, which still retains many of the artifacts of a class system, owner-managers were sleepy and backward. Some of them operated under a sense of divine right that was almost medieval. Labor unions were noisy, troublesome, and largely ineffectual at representing the best interests of workers. The same was true of government, whether Tory or Labor. In other words, the entire problem was far more complex than is implied by a simple dichotomy between owner and professional management.

Yet it should be pointed out that owner management, certainly in the United States and even in the United Kingdom, has played an important role in the development of successful industries. Owner management is the seeding ground where individuals risk their savings and work long hours to make a business thrive. The narrow margin of safety these owners have disciplines their decisionmaking; without discipline their businesses are quite likely to fail and disappear. Their precarious situation also gives them a wholly realistic sense of the environment in which they operate, thus making them the most effective critics of misguided public policy and of political favoritism toward their competitors. No economy can really be vigorous and innovative without this vital sector, even though it often is overlooked by business writers and economists who focus on the big, professionally managed corporations.

So those would-be capitalists in Eastern lands shouldn't be too quick to discount the importance of owner management. They should keep in mind what Porter has to say about the vitality of entrepreneurship. They also should keep in mind what all three authors have to say, in effect, about industrial policy. In essence, these books make the case that business functions best when government doesn't try to direct it. It is a logical point. How can a bureaucrat possibly know more about how to run a company than the people actually running it?

The countries emerging from socialism are finding it very difficult to privatize broken-down state industries. (These too, of course, were run by something akin to "professional" management.) The makers of economic policy in such places, not to mention individuals in free countries who would like to learn more about capitalism, can gain a lot from these three books. The secret is to unlock human energy and creativity. That is accomplished by freeing individuals and the economic organizations they form from unnecessary state interference. It is a simple message, and yet it has taken a revolution in Europe to drive it home.

George Melloan is deputy editor (international) of the Wall Street Journal.