While corporate UK was strongly opposed to Brexit, their strategies tell a slightly different story, write Michael Mayer, Julia Hautz, Christian Stadler and Richard Whittington. In contrast to their European counterparts, British businesses have long looked for markets primarily outside of Europe.
Always good to start with a confession: we are what Brexiteers call Remoaners. As Michael Bloomberg says, “it is really hard to understand why a country that was doing so well wanted to ruin it.” Anti-immigration sentiments, a feeling of being left behind by many voters, an uninspiring campaign by the Remain side, and decades of ‘blame it on Europe’ by both Tory politicians (including David Cameron) and tabloids are obvious reasons. No plausible economic explanation, however, has been put forward so far.
This is where our research on European firms offers new insights. While corporate UK was strongly opposed to leaving the European Union, their strategies tell a slightly different story. To untangle fundamental differences in national patterns of organisation, we followed previous scholars who looked at changes in diversification and internationalisation – the two fundamental dimensions of corporate strategy. We collected 1993-2010 data for 5,415 firms in France, Germany and the United Kingdom, as well as the mid-sized northern and southern European economies of Sweden, Finland, Italy, and Spain. Our data covers all publicly listed non-financial firms.
The Gherkin, by Tom (CC-BY-NC-SA-2.0)
In a nutshell, UK firms follow the general European trend in diversification, namely reducing it. Their approach to internationalisation is, however, very different. In contrast to their European counterparts they look for markets primarily outside of Europe. Clearly, they are not as impressed by the opportunities created within Europe by the twin policies of market liberalization and harmonisation, which are intended to increase the global competitiveness of European firms.
Take the two defence contractors Thales and BAE Systems. The former is French, the latter British. State-owned Thales had an explicit European growth strategy dating back to the 1980’s. Thales was born when its predecessor Thomson-CSF took over the defence electronics activities of Philips and acquired UK’s Racal Electronics. Between 1993 and 2007, foreign sales in Europe jumped from 27 per cent to 57 per cent, while foreign sales outside Europe dropped from 39 per cent to 17 per cent.
BAE Systems seemed, at first, to go down a similar path. In 1995, British Aerospace and Germany’s DASA had plans to form a strong European champion to counter the dominance of U.S. defence contractors. Instead, the British company decided to merge with UK’s Marconi Electronic Systems in 1999. Growth in Europe was not rejected per se, but opportunities in the United States were simply too attractive. By 2004, further European acquisitions or joint ventures were ruled out altogether. Between 1993 and 2007, sales outside Europe hence increased from 38 to 66 per cent while those in Europe declined from 28 to 12 per cent.
Let’s take a look at the overall numbers. Between the early 1990s and the immediate aftermath of the global financial crisis, British intra-European sales fluctuated around 7 to 8 per cent of total sales. German firms doubled their intra-European sales from about 10 to 20 per cent. For firms from other European countries, the growth of intra-European sales was not quite so dramatic, but even Spanish and Italian firms were above 15 per cent, proportionally selling twice as much in Europe than British firms.
Rather than bringing British firms closer to continental Europe, European integration appears to have pushed them to look elsewhere. Although by 2010 the sales of British firms outside of Europe were similar to those of their German and French counterparts – at around 24 per cent – this involved some catching up from a comparatively low base of 13 per cent. For the 100 largest firms, the pattern was even more pronounced. Sales in Europe declined from 21 to 12 per cent of total sales, while they grew from 29 to 55 per cent outside Europe.
The distinctiveness of British internationalisation is, in a sense, Brexit foretold. History, as well as the images we associate with it, should not be underestimated here. While a British business tycoon will think of Rudyard Kipling’s India when a deal in the subcontinent is proposed, pictures of Stalin’s communist regime will cloud their thinking over a similar proposal stemming from Hungary.
A yet unanswered question is whether the distinct path that British business has taken since the early 1990s will help it to master the challenges of Brexit. A natural experiment in the making.
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Note: This post was originally published at our sister site, LSE Business Review. It is based on the authors’ published work.
Michael Mayer is Professor of Strategic Management and Head of the Strategy and Organisation Division at the University of Bath, School of Management. He has held appointments at the Universities of Glasgow and Edinburgh. He is interested in understanding how strategies and associated processes and practices interact with the wider societal and institutional context.
Julia Hautz is an assistant professor of strategic corporate governance and leadership at Innsbruck University, Austria. Her research interests are in corporate strategies: product diversification and international diversification; open innovation and open strategy; online communities and social networks; and quantitative methods.
Christian Stadler is a professor of strategic management at Warwick Business School. For the past decade he has investigated long-living corporations – how they grow, adapt, and consistently beat their competitors. He has been widely quoted in the media. His book “Enduring Success: What We Can Learn from the History of Outstanding Corporations” is the first one with a non-U.S. perspective on long-range success. Thinkers50 listed him as a future thinker in 2013.
Richard Whittington is professor of strategic management at Saïd Business School and Millman Fellow in Management at New College, Oxford. He is a leader in the field of strategy-as-practice research, having published the first paper in the field (1996). The strategy-as-practice movement has revitalised research on strategic planning. Richard’s own research is exploring the recent ‘opening’ of strategy. He has written two textbooks, and his research is widely featured in the news media.
All articles posted on this blog give the views of the author(s), and not the position of LSE British Politics and Policy, nor of the London School of Economics and Political Science.
situation where powerful individuals, institutions, companies or groups within or outside a country use corruption to shape a nation’s policies, legal environment and economy to benefit their own private interests”.
Actually it was the act of buying-out (not merging) the various business units of Marconi Electronic Systems with the tacit acquiescence of the Blair government, that created the monolithic entity called BAe Systems, which dominates the defence equipment market today – to the detriment of the proper functioning of the market and the interests of the UK taxpayer.
Blair’s successor Gordon Brown has just written a new book in which he discusses among other things, the financial crises which broke almost the moment he entered 10 Downing Street, and his government’s role in dealing with it, as it spread swiftly to engulf the economy.
Not surprisingly, there is no mention of one of most disgraceful actions of his government. It concerns state-sponsored protectionism, favouritism and failure to install genuinely independent regulatory authorities. This shameful episode, which marred Brown’s record in office, relates to the procurement of military equipment.
What has been clear for many years is that, public subsidies handed out to defence equipment manufacturers over several decades is the reason why they have failed so miserably, to deliver equipment to the Armed Forces which is fit for purpose, adequately sustained in-service and constitutes value for money through-life.
In the UK, as in many western countries, the means of defence production, distribution and exchange is exclusively in the hands of private interests, that is to say, the State is entirely dependent on for-profit organisations for the design, development, manufacture and delivery of new military equipment to the Armed Forces. Consequently, the government has no choice but to rely on the Private Sector for all its military equipment needs, including its subsequent upkeep when in-service with the user. The harsh reality is that, no department of state in Whitehall is as dependent on the Private Sector, as is the Ministry of Defence – putting it at serious risk of capture by private interests (if it already hasn’t been) which allows them to bend policy to their will, as it relates to the expenditure of public funds. Equally, these private interests are entirely dependent upon a steady flow of taxpayer funds for their very survival – no least, because they have not bothered to diversify.
For those not familiar with this concept of state capture, Transparency International, the anti-corruption watchdog, defines it as “a situation where powerful individuals, institutions, companies or groups within or outside a country use corruption to shape a nation’s policies, legal environment and economy to benefit their own private interests”.
As an example, consider the case of the Terms of Business Agreement on naval shipbuilding, signed by the Brown government with BAe Systems during the dying days of the 2005-10 Parliament, which left the incoming administration no room for manoeuvre at all, as it set about undertaking a comprehensive Strategic Defence and Security Review – for the first time in 12 years. In fact, this agreement was signed in secret, in 2009, precisely because it locked the government into an appallingly poor commercial arrangement for a period of 15 years which, if made public at the time, would have attracted criticism and negative publicity in the press and media during the run-up to the 2010 general election, potentially swinging the result in favour of the other party. The existence of the TOBA was only revealed to Parliament in 2011 by the Cameron government, when it was confronted with the undeniable truth that MoD finances were in pretty bad shape and needed to be declared publicly, to garner public support for deep cuts in the defence budget that followed.
It is an open secret that the even the most fiscally prudent people in government are prone to softening their stance, just before a general election when they are up for re-election, which makes them more likely to open-up the public purse. Equally, defence contractors are aware of this weakness in elite politicians and will take full advantage, by intensifying their lobbying efforts to apply clandestine political pressure (spliced with threats of massive lay-offs), timed to coincide with the electoral cycle, to maximise their take – which is exactly what happened with this TOBA.
So, instead of exposing defence equipment manufacturers to the full rigours of the free market, that is, not shielding them from ‘feeling the heat’ of competitive market forces, the then Labour government chose to engage in protectionism and favouritism by handing over uncontested, long-term shipbuilding contracts worth billions of pounds – with virtually no checks and controls, or even guarantees which has come to haunt this minority government. Nevertheless, it has decided to honour the TOBA because it simply has no choice.
What’s more, in a market such as that in military equipment, it has been long-standing policy to combine the role of the regulatory authority and sponsoring agency in a single department of state, the Ministry of Defence – which means that the crucial independent scrutiny function, free from political interference, is non-existent.
Worse still, people at the Ministry of Defence are, without exception, favourably disposed towards the defence industry because they are completely dependent upon it for their subsequent career choices, when their time in public service comes to an end, or their contract is terminated prematurely by political edict, as is happening right now. Indeed, it is very hard to find anyone at MoD who will aggressively defend taxpayers’ interests once they have enjoyed a cosy relationship with contractors. It is fair to say that they certainly know which side their ‘bread is buttered’!
It is precisely to overcome this disastrous state of affairs that the government should set the objective of pulling back from the defence equipment market and allow the Private Sector to take-over, so that it can make the necessary capital allocation decisions for itself, as it relates to the development of its own products – instead of continually looking to intervene in the market with public funds which, as history has shown, will always be squandered.
It stands to reason that if this TOBA hadn’t been entered into, the defence budget would not now be suffering from brutal cuts.
An innovative proposal on how to go about eliciting Private Sector investment capital in defence procurement programmes is set out in a written submission to the Business, Energy and Industrial Strategy Committee, which reported on its inquiry into Industrial Strategy in the last Parliament.
It introduces a modern Defence Industrial Strategy that puts financial security and the national interest first, not military equipment manufacturers’ commercial interests.
The pdf copy of the paper can be downloaded from here:
http://data.parliament.uk/writtenevidence/committeeevidence.svc/evidencedocument/business-innovation-and-skills-committee/industrial-strategy/written/36606.pdf
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