02 Sep 2002  Research & Ideas

Foreign Multinationals in the U.S.:
A Rocky Road

Why do many of the world’s leading multinationals experience managerial and performance problems in the United States? The answers, as offered by Harvard Business School professor Geoffrey G. Jones, provide lessons for all companies operating on foreign soil.

 

Editor's Note— What can companies today take away from the experience of myriad multinationals in the United States? A lot, says HBS professor Geoffrey G. Jones, a specialist in business history and international business. In the following e-mail interview, Jones explains the origin of a new volume of essays he co-edited with Lina Gálvez-Muñoz, a scholar and lecturer at the University of Reading and University of Seville. The essays in their book, entitled Foreign Multinationals in the United States: Management and Performance, describe the unique experiences of a variety of foreign multinationals that have crossed the American border.

HBS Working Knowledge: As you and Lina Gálvez-Muñoz write in the first chapter of your new book, the word "multinational" usually conjures up images of American firms. You have chosen to focus on foreign firms in the United States at the micro level. How did this volume of essays come about? What surprised you most in the array of research and insights you were able to assemble from your colleagues?

Jones: The origins of the project lay with my current research on the worldwide evolution of the Anglo-Dutch consumer goods manufacturer Unilever. Unilever is currently the world's largest ice cream and tea—and one of the largest home and personal care—companies, with a portfolio of brands including Lux, Dove, Pond's, Calvin Klein, Lipton, Hellmann's, and Ben & Jerry's.

Foreign firms during the post-war decades lived in awe of the alleged superiority of U.S. managers.
— Geoffrey Jones

Unilever was one of the world's earliest and most widespread multinational firms, and already had a large U.S. business by the interwar years. During the research, I was surprised to discover that the company experienced decades of falling market share, declining profits and managerial problems in the United States between the 1950s and the 1980s.

It seemed important to ascertain whether this was a problem unique to one firm, or part of a more general pattern. The upshot was a conference organised by Lina Gálvez and myself to which we invited leading European, Japanese, and U.S. scholars to discuss the experience of foreign firms in the U.S. over the last fifty years.

The most striking conclusion of the volume was that Unilever's problems were not unique, and that many of the world's leading multinationals have experienced acute managerial and performance problems in the United States.

This seems surprising at first sight. The United States is by far the world's largest host economy for multinationals. Foreign firms hold large, and sometimes commanding, positions in such major industries as chemicals, pharmaceuticals, petroleum, electronics and automobiles. Unilever and Nestlé account for 40 percent of the entire U.S. ice cream market. Yet quantitative data suggests that the return on assets of foreign-owned companies in the U.S. is consistently lower than U.S.-owned firms.

While a favourite explanation for this underperformance has stressed transfer pricing, this present study pointed to acute problems of control and managing U.S. affiliates as an important factor.

Q: What are the key themes you have discovered among foreign multinational companies in the United States? What particular issues have they encountered in the recent past?

A: Many of the case studies in the volume identified the issue of control at the heart of the management problems experienced by foreign firms in the United States. For considerable periods of time, European firms such as Unilever, Shell, and Renault had large operations in the United States that they had problems controlling in a purposeful fashion.

There were at least four reasons. The first, which was especially important between the 1950s and the 1980s, was reluctance to become too closely involved in the affairs of U.S. affiliates through fears of anti-trust legislation, and its possible extension to their worldwide businesses. These fears were exaggerated, but reflected alarm about the unpredictable ways in which the U.S.'s unique legislation was enforced.

Secondly, there was a widespread belief that the U.S. market was unique, and so could not be integrated with operations elsewhere.

Thirdly, foreign firms during the post-war decades lived in awe of the alleged superiority of U.S. managers, and it was not until the 1980s that European firms began to feel sufficiently confident to intervene and take greater control over underperforming U.S. affiliates.

Fourthly, there was a problem persuading high quality U.S. managers, accustomed to being at the center of decision making, to work for foreign companies where decisions were made elsewhere, especially as few Americans were prepared to live outside their country for extended periods to work their own ways up the hierarchies of foreign firms. American managers in general exhibited a strong emphasis on autonomy and independence that made them resistant to control from elsewhere, especially by foreigners.

Q: Which issues do you see as most important for the coming decade and beyond?

A: The United States will remain a highly attractive host economy over the following decade. There are major acquisition opportunities in, for example, the fragmented U.S. banking sector, and the probable further weakening of the dollar over the medium term will make U.S. assets cheaper for foreign companies.

The U.S. market might be seen as an "American dream" ... but in practice it is one of the toughest in the world.
— Geoffrey Jones

However, the U.S. business environment seems to be becoming more unpredictable and hence riskier for foreign corporate investors. Acquisitions will need to be more carefully scrutinized in view of the evidence of failures in U.S. corporate governance. U.S. legislators and others have become more prone to unpredictable and sometimes unilateralist measures. The sudden removal of foreign-owned companies from the S&P 500 provides one instance. The extra-territorial nature of the Sarbanes-Oxley Act is another.

Q: What noteworthy differences do you see between the way multinationals operate in the United Kingdom as opposed to the United States?

A: There has historically been a considerable difference between U.S. and U.K.-owned multinational firms in their management and organization. U.S. firms have typically been more centralized on the U.S., more professionally managed and [have had] more formalized bureaucracy. They have generally been seen as more aggressive and results-oriented.

U.K. firms placed more emphasis on relationships rather than formal controls, and appeared "amateurish" compared to their U.S. counterparts. Recent years have seen a considerable convergence of U.K. management styles with those of the U.S. Many of the largest British multinationals, such as GlaxoSmithKline and BP, have merged with or acquired large U.S. firms, and almost all leading U.K. companies derive substantial proportions of their revenues from the U.S.

The differences in management style and culture have become far more nuanced. Large British multinationals probably remain more international and cosmopolitan in their outlooks than their U.S. counterparts, slower to act and less inclined to adopt the latest management fads, and less ruthless in dealing with failure and underperformance. However, there are vast industry and firm differences.

Q: For those HBS Working Knowledge readers who work in multinational firms that would like to gain a foothold in the United States, what questions would you recommend they ask themselves before proceeding?

A: The most important thing that any executive considering an investment in the United States can do is to ponder the evidence of recent business history. There have been, and continue to be, regular examples of large and successful companies with good track records in their own countries experiencing acute problems with U.S. affiliates, which are sometimes fatal.

The U.S. market might be seen as an "American dream," to cite the name of our book's first chapter, but in practice it is one of the toughest in the world, both because of its size and because of the highly aggressive behavior of competitors.

An inward investor must have the strong capability to survive in such an environment. This capability must include high quality managers. As U.S. managers are highly mobile and motivated primarily by material rewards, the staff acquired in an acquisition cannot be relied on to stay. The greatest care is needed also if entry is through an acquisition, as many corporate problems have arisen from foreign firms paying too much for a poor company in order to gain a foothold in the United States.

Q: What aspects of the foreign multinational experience in the United States would you like to see studied more closely in the future?

A: Case studies of single firms over long periods of time can provide a powerful means to explore central issues such as knowledge transfers and cross-cultural learning processes within multinational firms. For example, there is evidence that foreign firms, and perhaps U.S. ones also, find it easier to transfer knowledge within their boundaries from the United States to elsewhere, than from the outside world to the United States...These are the kind of issues that cannot be satisfactorily explained using aggregate techniques, but a great deal can be learned by in-depth studies over time. That's one reason why business history can be so important in understanding the really fundamental issues in business management.