BUSINESS IN EUROPE

ESSAY BY WILLIAM DAVID

September 2001

(Reviewed December 2016)

Topic:

The EU as a Globalised Business Force

Question:

In a globalised world, can we agree that the European Union’s cultural background gives the members states enough common interest to make them a unified economic and business force?

Abstract Sep 2001

In this essay, we explore whether the significant levels of social and cultural diversity within the EU, has enough homogeneity to unite the member states into a unified economic and business force or, are these individual cultural and societal values so ingrained in the individual states, that even the Single Market may struggle to reach its optimal potential? We consider whether the institutions of the EU are capable of overcoming the fiercely protected individual political agendas, to enable such things as a EU common industrial policy? Or, should they step aside from global business matters and concentrate their efforts on creating the internal structures to enable Member States to project their policy objectives into the global business arena through their industrial champions?

A fully Harvard referenced and linked copy of this essay can be found at Business in Europe

Cultural influence

Culture is a very interesting and complex word that is probably best defined in simple terms as “instilled in training and environment”. However, in reality it is a complex concept where the level of influences are evolving and infinite. Even if we confine our study to the context of the European Union (EU), we find that it is not just the depth and breadth of its diversity in its normal sense, but also the way it permeates through this body or society that we choose to label as the EU. The question we are attempting to answer is whether this collective cultural diversity, has a sufficient common identity and objective, to make it an effective economic global force. But what is globalisation? Is it a process of evolution from the nation state via regionalism? Is regionalism a platform for globalisation, or does globalisation make the nation state and regionalism redundant? Let us not delude ourselves, globalisation is not about the harmonious existence of man in the global village. It is about economic integration and it is driven by the agendas of large corporate powers. The danger here, as we have recently witnessed, is that the world is not driven by one single ideology. It is a mixture of often powerfully diverse cultures, which have evolved over many centuries and protected by the nation state. To fail to take culture into account in the process of globalisation, could be a monumental and costly error.

European economic integration provides us with an excellent case study from which we can analyse the economic efficiencies of cultural divergence and whether it is possible to create enough common interest at a regional level to become an effective global economic force. We must consider whether regionalism, often saddled with intense historical rivalry, is the right vehicle for creating global economic integration. In some respects, such as trade negotiations, the EU performs well on the global stage, but this is more to do with size than economic efficiency. When it comes down to global efficiencies, you only need to study the inefficiencies of the internal market, to realise that there is not enough common interest to make a unified economic and business force. The epicentre of this is cultural diversity. To support this view, it is necessary to consider the different elements of the internal market. The difficulties centre on industrial policy, which in itself touches many areas of the internal market, particularly competition policy. Linked to these two areas are the invisible or non-tariff barriers (NTBs) that go to the heart of the debate of political or cultural interests. It is from the study of the difficulties in these areas, that we may conclude that the EU’s cultural background does not give it enough common interests to make a unified economic and business force, but that it the best model from which to develop one.

Industrial policy

Industrial policy is an emotive and complex subject at EU level and this is probably best illustrated by the fact that the Commission does not officially have one. The Treaty of Rome included few provisions for intervention and under it’s revision in the Treaty of European Unity (TEU), the minimal extension of industrial policy was highly restrictive. The problem is that industrial policy is a vital part of a mixed economy. It is a tool of government that can be used to reflect different traditions and economic realities, as well as political and social preferences. These principles have evolved and are largely driven by historical perspectives and cultural influences. This desire to protect national interests and cultural identities is projected in many forms, the most common being defence or projection of national champions and the defence of the home markets against external competition. This protectionism comes in many guises, commonly referred to as NTBs and the most effective NTBs exist through the cultural dimension, which forms the basis for the regulatory framework.

But let’s first consider whether an EU wide industrial policy is appropriate. Although the Commission does not appear to have a specific industrial policy, it seems to have three objectives. Maintaining competition between firms, improving industrial performance in the global markets and easing adjustment to global competition for traditional industrial sectors. The Commission realised in the 80s, that the most effective “non-industrial policy” was a level playing field across the internal market and from this, the Single Market became the most important policy instrument of EU industrial policy. The purpose of the Single Market was because the community’s industrial performance was being adversely affected as a direct result of the fragmented internal market. The main thrust of this argument, is that individual domestic EU markets are simply too small to allow contemporary firms to produce at sufficiently large a scale to be competitive in global terms. Therefore the completion of the Single Market would through competition, root out the inefficient, producing economies of scale from trade creation and “x-inefficiencies”, resulting in less, but more competitive and efficient, larger firms, that will compete effectively in the global markets.

Merger & Acquisition policy

To achieve these objectives, the Commission needed to strengthen its position and break down the projectionist barriers, through greater control of merger and acquisition policy, more rigid interpretation of competition policy and avoiding the replication of waste by a more centralised research and technical development (R&TD) structure. The Commission finally achieved the power in December 1989 to become involved in cross border mergers and acquisitions that reached certain criteria. The problems here were twofold. The first was that the completion of the Single Market was likely and did in fact bring a rapid escalation of cross border mergers and acquisitions. Secondly it needed a redefinition of its role in order to give it a broader mandate. At the same time it wanted to address the divergence of merger and acquisition policies across the member states. Some were considered too lenient, some like Britain and Germany, too draconian. The problem that it faced, was that it was encroaching on an area of government policy tools, that not only form a strategic part for which the economic role of the state exists, but also symbols of national wealth and pride. And, often representing welfare issues, and basic values, which have developed through historical culture and perhaps, representing the very ethos of a people.

This is ably demonstrated by the failure, after twelve years of negotiations, of the EU take-over directive, in the European Parliament (EP). It is reasonable to conclude that had Germany not switched to oppose the directive, it would have been passed. It is clear that this decision contained a large element of protectionism, which was particularly influenced by the Vodafone (UK) take-over of Mannnesman (Germany). This successful take-over battle, not only shocked the German nation, it also highlighted the different cultural aspects of corporate structure and relations, which can vary across Europe along historic, national or social lines.

Competition policy

The most important area of this “non-industrial policy” is competition policy and it is also the best area to demonstrate the defence of national interests and cultural attitudes. This can be seen through the proliferation of NTBs which member states create through technical specifications and interpretations, often unique to a specific member state and justified by environmental, health and safety, or a multitude of other justifiable/ unjustifiable standards or reasons. Initially the Commission attempted to circumvent this blatant protectionism by the introduction of universal standards. But technology moved faster than their ability to produce these regulations and the only solution was found as a result of the famous “Cassis de Dijon” case, which basically ruled that what was an acceptable standard in one state, had to be accepted in all member states. But despite this ruling, in practice, many national governments are instinctively projectionist and have fought hard to keep certain barriers in place, worse, new barriers are still going up. But another element of this inbred cultural diversity that creates these invisible barriers are the fact that Germans like German products and the French prefer French products. It is really only the British, who having inherited a more global free trade perceptive, tend to have to be persuaded to buy British products.

R & D policy

Another important aspect of the Commission’s “non-industrial policy”, is its limited funding of R&TD, but even the attitudes towards this, highlight the underlying political philosophies. To a certain extent, this is reflected in the fact that the EU spends eleven times more on agricultural subsidies and nine times more on structural funding than on R&TD. The reasons and logic for the Commission to attempt to centralise and co-ordinate R&TD are fairly clear and difficult to argue against. Time after time, Europe has been left behind by a dynamic US, or an innovative Japan, in numerous technological fields. Originally, the Commission attempted to encourage senior business executives to pool resources by lowering some of the barriers to ensure that they would not be breaching competition regulations. In addition, specific programmes for co-operation were developed such as ESPRIT and BRITE, to name but two. Again, these were designed to give Europe an international edge, but still the volume of funding was completely disproportionate to he objective. Things have now changed a little, R&TD expenditure is now an important thrust in EU industrial policy and it now exceeds 4 billion Euro per annum. The last 15 years has seen an accumulated R&TD expenditure by the EU of some 46 billion Euro, which is roughly equal to that of the member states. Some of this expenditure has undoubtedly supported successful research such as telecommunications, but also embarrassing failures such as HDTV. However, as with all areas of the Commission’s industrial policy, we have to ask whether it is the right, or most effective means of achieving a globally competitive edge, given the influences that are brought to bear in the decision-making process.

Internal Market

In this brief analysis of the efficiencies or inefficiencies of the internal market, we have touch on two main areas. The first being the credibility or the desirability or the effectiveness of the Commission as a body, attempting to create and regulate certain policy areas, in order to achieve their objective of a globally competitive industry. The second, area is the barriers that stem from national or cultural interests that constantly and infinitely protect or generate new barriers, thereby frustrating the Commission’s objectives. The question that arises is whether the EU’s competence in some of these areas, is necessarily the most effective way of achieving these objectives. In dealing with the former first, we need to consider whether the big firm, big market solution is necessarily the right policy, whether there is sufficient political will to support a balanced industrial or merger and acquisition policy and whether the EU is the right vehicle for directing R&TD policy.

The size of the domestic market is undoubtedly an advantage, but if only the size of the population counted, then China and India would be the most prosperous, not among the poorest. Specifically in relation to the EU, there are other issues that play an equal or perhaps more significant part. This has more to do with the divergence of culture and the need to protect national identities and interests. Also, large domestic markets do not necessarily equate to large and efficient firms. In an artificially created environment, it is a fine line between optimum production and effective competition on the one hand and the desire to maximise a firm’s returns when faced by inadequate competition. There are plenty of examples of large dynamic global firms being born out of small domestic markets. These successful firms have always found their way around tariff and non-tariff barriers. What is more important is the attitude and effectiveness of the workforce. Such a large domestic market has undoubtedly helped US prosperity, but more important, is the willingness of Americans to work hard and the incentives and opportunities available in the US economy. Americans are essentially dynamic and are given ample opportunities to benefit by their dynamism. A countries economic philosophy is born out of and shaped by its cultural society and beliefs. As a general rule, in Europe, the Christian social market philosophies are not conducive to encouraging such dynamism. No matter how much the EU attempts to influence and regulate the internal market, the barriers for firms created by cultural society and diversity can only be overcome by dynamism generated internally.

In a similar vein, most people are able to grasp that the only way to effectively complete the internal market is to cede national control over industrial policy. But, this area is clearly taboo, most governments are concerned that they will lose control of a crucial policy instrument in the fight against unemployment and a number of other critical policy tools. And, as we have discussed, the policy framework is deeply rooted in the societal and cultural heritage. This really brings us to the last issue which is the effectiveness of EU sponsored R&TD. As these funds have increased, so the nature and orientation has changed to reflect the more social economic principles of the EU. This expenditure now covers a broad range of objectives, with less and less aimed at the competitiveness of European firms. Once again we see an area of EU policy being influenced more by political and therefore cultural objectives. We must now ask whether this important area of European competitiveness should be taken out of the political framework and handed over to the experts in the technological community who can seek fruitful partnerships, not just in Europe.

Cultural divergence

We can see how Europe’s cultural diversity permeates through the political and economic framework of the EU and how the detrimental effect of this diversity is illustrated in the inability to effectively formulate policy and in particular in relation to the internal market. But these examples of cultural divergence tend to reflect national identity, a desire to retain a sense of belonging. But the real question is, are we fundamentally different and incompatible, do we think differently? The first and most important cultural barrier and difference has got to be language, but this is not just limited to the spoken word. In the physical sense this can mean the distance between people during conversations, the reaction towards time in terms of punctuality or lateness. The Germans preferring the more distant and prompt relationship compared to the more relaxed and closer Mediterranean approach where there is a greater degree of tolerance towards lateness. In some countries, the social hub is the family unit and this type of hierarchical structure tends to be reflected in the business world. Another distinct area that is reflected throughout these different cultures is accountability. Some countries such as France and Greece have distinct structures or hierarchies and yet are more relaxed about accountability. At the other extreme, places like Denmark and Sweden have more relaxed horizontal structures and interpretations of rules and regulations and yet they expect people to be fully responsible and fully accountable for their decisions and actions.

It follows that it should be possible to identify similar relationships in terms of strong leadership and individualism or, equality, harmony and collectivism. This reasoning follows well in the case of Denmark and Sweden, who tend to display a low masculinity or equality towards each other, but in contradiction tend to favour high individualism. Similarly, while Greece and France tend to prefer high masculinity or strong leadership, Greece then has a preference towards low individualism or communitarianism, whereas France tends to favour high individualism. The reasons for these cultural similarities on the one hand and contradictions on the other, in general, can be traced back in the history or evolution of the different societies or ethnic groupings and principles. But, does this have a bearing on the way that as Europeans we react in a corporate climate? One example of this can be seen in the difference between an individualist or collective corporate structure. An individualist while conducting talks and negotiations, will frequently use “I and me”, he or she will be comfortable with making decisions on the spot and taking responsibility for those decisions. Those who work in a more collectivist corporate culture, tend to use the words “we” in discussions or negotiations. Decisions are more often deferred to report back to the group who will jointly make the decision and jointly assume responsibility.

It is important to grasp these subtle but significant variances that cultural diversity brings to the corporate arena, whether it be negotiating for business, attempting a take-over or merger, or integrating a multinational corporation. There will often be resentment when a foreign company, by take-over, suddenly becomes your employer. One of the major stumbling blocks to corporate integration, is the general feeling of superiority and more often derogatory view of another’s culture. It is also important when integrating a company through employee exchange, to bear in mind that it might be totally alien for a German employee to make decisions on his own and a French employee to accept that he cannot. As the single market has created a rapidly increasing volume of cross-border mergers and acquisitions within the EU, there is clear evidence of a greater harmonisation of cultural and business practices, but at a deeper level, differences in national identities and societal attitudes and values throughout Europe endure. However, successful firms will identify these cultural differences, adopt them into the corporate culture and develop effective business techniques that draw on this divergence as a strength and not as a weakness. While cultural differences may be regarded as a barrier to achieving a truly harmonised single market, they do not necessarily need to act as a barrier to doing business abroad.

Globalisation

Finally, we should consider the role of the EU in the process of globalisation. The member states benefit enormously from the combined power that the EU gives them in many spheres of negotiations. It now competes more or less on an equal basis with the US and Japan within the most powerful trade body, the World Trade Organisation (WTO). In fact the EU, US and Japan, known as the triad, totally dominate this organisation and effectively write the rules to suit themselves or each other. In addition the EU and US now have reciprocal agreements of veto on mergers and acquisitions, even when the firms concerned are based solely in one or the other. The EU recently vetoed the merger of the two US firms, Honeywell and GE, despite the deal previously being cleared by the US, such is the measure of the EU’s economic power today. Is such power healthy, are these organisations simply rich mens’ clubs that excludes and alienates some of the poorer countries of the world? Or, is it the neo-liberalist view of wealth for all, being generated from the wealth of the few, the whole process being driven by regionalism, the vehicle to the global village and wealth for all?

Globalisation is an economic principle and the EU was not born out of economic necessity. It has a political objective to bind together, using economic integration, the member states who have waged war on each other, primarily because they were different. The EU is a political objective and is not a result of the process of globalisation. In fact it could be argued that regional economic liberalisation is the platform for global economic liberalisation. The big question is, can this economic liberalisation help us to overcome the clash between some of the powerfully diverse cultures in the world, in a similar way that the member states of the EU, in part, are achieving? To answer this we must consider what is driving European and global integration. In the case of Europe, it is driven by political will and that is why the EU will survive. In the case of global economic integration, the governments or bodies who strive for global free markets and liberal trade policies are being pushed, not by a social conscience, but by the very powerful corporate lobbies that they so desire to create. From the global perspective this does not bode well for the future. However, there is an interesting question or contradiction that arises from this scenario and that is, who is more able to overcome the cultural divergences and prejudices, the institutions of government or the prodigious corporations?

Trade

As we conclude our considerations on the relationship between culture and trade, we should consider some of the actual figures relating to EU trade. From 1960 to 1998 trade openness, (exports plus imports divided by GDP), within the EU rose from 30% to 50%, but external trade remained fairly constant. Looking at it a different way, EU external trade at a little under 10% of GDP is more or less the same as the early 60s, but during the same period, US external trade has risen to the same from a little over 3%. This tends to suggest that EU growth over that period, not particularly healthy by world standards, has primarily been created by internal trade. This implies that in a relative sense the common market has been a success, but the fact that 73% of intra-EU trade is intra-industry tends to suggest that we have a long way to go before we win the hearts and minds of the people. To be fair, the primary building blocks of the Single Market have been laid for barely a decade, in addition, it could be argued that the necessary economic convergence has barely had time to make its mark. However, it cannot be denied, that the root cause of four decades of wasted opportunities, is national interests and cultural diversity.

In our brief analysis of the EU’s internal market, we can see that national interest and cultural diversity, permeates through the many facets of the body and functions of everyday EU life. This is readily demonstrated by the policy makers’ defensive attitudes. The best example of this being industrial policy, where member states have openly resisted any centralised function, in the knowledge that it goes deep to the heart of the question of sovereignty and the cultural framework of their society. Despite this, EU competition policy has come a long way in breaking down the invisible barriers to free trade, by removing some of the regulations and technical standards imposed on a broad range of products and services. In some areas it has not been as successful, and member states continue to generate new regulations and standards to defend their home markets. But the largest invisible or non-tariff barrier is the cultural one, the automatic in-built aversion to anything foreign, the need to feel and support the roots of our being, the need to protect our way of life. Integration or international trade theories and models are not sufficiently sophisticated to allow for the complexities of the mixed economy and the effect of cultural tariff barriers, particularly at the deeper level of economic integration. These barriers act as a brake on the efficiency of the internal market and the theoretical models of trade creation and competition, which are supposed to shape and produce our international giants. In this sense the EU’s cultural background is detrimental to its global trade effectiveness which, to some extent, is supported by the figures.

We can see that on the one level, the process of global economic liberalisation drives the EU agenda, but then it is often argued that in reality governments have little influence on the global markets and transferring power to the EU level would make little difference. This is returning to the debate about who drives the global economy. A neo-realist might say that globalisation is an evolutionary process, that the nation state has had its day and that regionalism is part of the evolutionary process. I would say, that the global economy is more of a corporate strategy, whereby governments and organisations help to iron out some of the creases. As corporate culture is more able to adapt and absorb cultural differences, albeit not completely, in this sense, there is enough common interests to make a unified economic and business force. The balance of this argument is that, from a nationalistic perspective, cultural diversity acts against the interests of EU global trade. But, the corporate environment appears better able to overcome these differences, giving its employees a single unified identity and sufficient common interests to be effective in the global economy.

Cultural convergence

While the overall conclusion has to be that cultural divergence within the EU, is on balance, detrimental to its international trade, there is evidence to suggest that there is an incipient EU cultural identity. The first clear and perhaps controversial evidence of this, is that English is becoming the de facto language of Europe and language is by far the largest cultural barrier. Secondly, the volume of EU socially orientated legislation, such as, workers and women’s rights, health and safety and environmental directives, are regularly impacting on the daily lives of all EU citizens. In these areas, the average person has a tendency to find a greater degree of security in the decisions made by the EU, even when it is at conflict with their own national government. Thirdly, and more of a continental perspective, the EU is now often seen representing its member states and citizens, on the international stage, in an array of arenas, often pitted against the US. As we pull these strings together, we can see the early formation of a common European identity. At present it is clearly subservient to national identities, but there is no doubt that in parallel or overlaying is a common European identity.

European history is littered with the failures of the misunderstanding and intolerance towards cultural diversity. The events of the 11th September in the US, it is hoped, will serve to remind us how delicate the balance is between the benefits of globalisation and cultural resentment. These events have been compared to the problems of the 1930s leading to the Second World War, which put a stop to the last attempt at global economic liberalisation. Professor John Gray at the London School of Economics has declared that the era of globalisation is over. But just maybe, the lessons learnt over the last half-century in Europe, might act as a beacon which shows that social obligations and cultural tolerance and harmony are integral parts of economic liberalisation. In this sense, the EU’s cultural background gives its member states and citizens, enough common interests to create a unified and humanitarian, global economic and business force.

A fully Harvard referenced and linked copy of this essay can be found at Business in Europe

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http://www.economist.com/library/Focus/index.cfm

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http://www.economist.com/library/focus/displayStory.cfm?story_id=656556&CFID=2833045&CFTOKEN=11418689

http://www.economist.com/displayStory.cfm?Story_ID=286410&CFID=2833045&CFTOKEN=11418689

Super Mario Europe’s competition commissioner, Mario Monti, wants to make the most of his considerable powers. He has the ideas, but not the resources to … Feb 24th 2000

http://www.economist.com/displayStory.cfm?Story_ID=666703&CFID=2833045&CFTOKEN=11418689

Merger muddle The EU is entitled to veto the GE/Honeywell merger—but its procedures need improvement… Jun 21st 2001

http://www.economist.com/displayStory.cfm?Story_ID=687740&CFID=2833045&CFTOKEN=11418689

Europe’s fearless diplomat Mario Monti has blocked the biggest-ever industrial merger. Now he needs to put his own house in order… Jul 7th 2001

http://www.economist.com/displayStory.cfm?Story_ID=304540&CFID=2833045&CFTOKEN=11418689

Mariage à la mode Why European companies are rushing to the altar… Apr 29th 2000

http://www.economist.com/displayStory.cfm?Story_ID=530353&CFID=2833045&CFTOKEN=11418689

Liberalise? Regulate? Both The European Union talks a lot about reform. Seen any lately?…Mar 10th 2001

http://www.economist.com/displayStory.cfm?Story_ID=685547&CFID=2833045&CFTOKEN=11418689

Pull up the drawbridge Efforts to make it easier for companies to be taken over in Europe have fallen at the last minute… Jul 7th 2001

http://www.economist.com/library/focus/displayStory.cfm?story_id=446125&CFID=2833045&CFTOKEN=11418689

EU take-over rules Poisoned? The EU’s take-over directive is in danger of being sent off track by some recent amendments… Dec 9th 2000