Industryweek 5974 14

The Growth Of Government

Sept. 21, 1998
National, and increasingly multinational, edicts impact corporate operations.

In any listing of chnges that have swetp through industry in the 20th century, some -- like globalization, the information revolution, the onrush of technology, and the quality metamorphosis -- are obvious. but another is not so  apperent: The dramatic growth of government.

Yet, no trend has had a more pervasive influence on manufacturers, says Robert W. Galvin, the legendary former chairman and CEO of Motorola Inc., Schaumburg, Ill. He should know. He has a unique perspective on how governments -- foreign and domestic -- increasingly have influenced one major corporation over a 70-year span. He remembers when his father, Paul, founded Motorola in 1928. He ran the firm with his dad for 10 years, then headed it alone for 30 more years until 1997. Now his son Christopher is CEO.

"I doubt if my father worried much about government regulation at all in 1928," Galvin reflects. "Although," he adds with a chuckle, "he was damn concerned about whether the banks would close in 1933."

During his own tenure at the top, Galvin (now chairman of Motorola's executive committee) found the avalanche of business-related legislation and regulation in the U.S. occupying increasing amounts of his time. Then, as Motorola entered international markets, his governmental dealings multiplied -- especially in trade-policy and market-access issues. And, as markets develop in still more nations, his son faces even more governmental regulation. "In the next 25 years," Bob Galvin ventures, Motorola, which now operates in 45 nations, "will have to get along with maybe 75 governments -- awfully well."

To be sure, the demise of centrally planned economies and the push for privatization and deregulation in most industrialized nations lately have slowed government growth. Still, the trend has been undeniable: Throughout the world, manufacturers are much more involved with government than they were at the beginning of the century.

Nowhere, ironically, has the trend been more pronounced than in the U.S., a nation founded on the very principle of limited government. In the first 150 years of the country's history, American companies basically were free to run their businesses with little interference from federal authority. Except for formation of the Interstate Commerce Commission in 1887 and the Federal Trade Commission in 1914, and Theodore Roosevelt's trust-busting binge in the early 1900s, the U.S. government's policy toward business was hands off.

That changed abruptly in the 1930s. "That's when the intrusion of government into private activity really mushroomed," reflects Murray Weidenbaum, who headed President Reagan's Council of Economic Advisors and now is chairman of the Center for the Study of American Business at Washington University, St. Louis.

Among the welter of new federal regulatory agencies created in that depression-ridden decade, he points out, were the Securities & Exchange Commission, the National Labor Relations Board, the Federal Communications Commission, and the Federal Deposit Insurance Corp. Another regulatory surge followed three decades later -- this time, Weidenbaum notes, dealing with "a social rather than an economic agenda." New agencies included the Equal Employment Opportunity Commission in 1964 and, in the early 1970s, the Environmental Protection Agency, the Occupational Safety & Health Administration, and the Consumer Product Safety Commission.

As a result of the two waves, "There is an overwhelming number of people in Washington who have their hands deep into the management of corporate America," observes James D. Johnston, resident fellow at the American Enterprise Institute (AEI), a Washington think tank, and former head of government relations at General Motors Corp. "The bureaucracy now influences products from their birth to their death." Auto manufacturers alone, he notes, must comply with some 1,400 car-safety regulations.

Meanwhile, government's presence was growing in other industrialized nations. After the global watershed of World War II, Communism swept across Eastern Europe; the United Kingdom nationalized much of its industry; and the rest of Europe was marked by strains of socialism. Japan launched a different model: a system of unprecedented government guidance of its industry.

Although many of these trends have been -- or are being -- reversed, dealing with national governments remains a dominant corporate activity. Thousands of bilateral trade agreements around the world (the U.S. alone has 135) not only set tariffs but also are laced with rules that affect company operations.

Increasingly, too, firms are finding they must relate to "government" on a supranational level. For as commerce becomes more globalized, so does government. For instance, some 100 regional trading blocs -- among them the European Union (EU) and the North American Free Trade Agreement (NAFTA) -- set rules that affect companies in their member nations as well as their trading partners.

On a broader level, decisions from global institutions are permeating corporate boardrooms. The most notable: the 132-nation World Trade Organization (WTO), which is expanding its power beyond trade regulation and in the process drawing fire from critics who fear it is threatening national sovereignty.

More recently, an explosion of international treaties is setting multinational rules that corporations must -- or may have to -- live under. Last December's controversial Kyoto Protocol on global climate change is seen as a forerunner of such accords. Scores of other international rule-making agreements -- ranging from pacts on intellectual property to international investment to bribery -- are being negotiated.

Government In Retreat?

Not so, say companies, despite the global deregulation trend.

Big Government may have had its day. So, at least, says the Organization of Economic Cooperation & Development (OECD). Campaigning for regulatory reform around the globe, the Paris-based group that promotes economic growth among major industrialized nations reports that more and more countries "have embarked on ambitious programs to reduce regulatory burdens and improve the quality and cost-effectiveness of regulations that remain."

Already, touts OECD, deregulation efforts in the U.S. have provided annual benefits to consumers and manufacturers of between $42 billion and $54 billion; in Europe, the movement to replace many separate national regulations with Europe-wide rules boosted European GDP by 1.5% between 1987 and 1993 -- a figure that is still growing; and in Japan, efficiency gains from deregulation are raising consumer income by an estimated $36 billion a year.

To many manufacturers, however, this retreat of government is a chimera.

In the U.S., industry leaders are quick to dispute the Clinton Administration's claim that it is "reinventing government" and becoming more industry-friendly. If that's the case, they ask, why has EPA toughened Clean Air Act rules? Why is OSHA trying to develop an ergonomics standard? Why is the Administration proposing to blacklist federal contractors and subcontractors deemed to have "unsatisfactory" labor practices? Why is the White House, knowing the Senate won't ratify the Kyoto global-climate protocol, trying to impose the pact's provisions administratively?

And why, asks John F. Smith Jr., chairman and CEO of General Motors, doesn't the U.S. "apply the same business planning and systematic decision-making tools to federal regulations that we apply in the private sector?" A crusader for regulatory reform, Smith charges that U.S. "regulatory decision-making is not consistently grounded by sound analytical techniques" and fails "to take into account risks, alternatives, costs, and benefits."

Similarly, in Europe industry leaders grumble about the steady stream of rules, in areas ranging from pollution control to weights and measures, flowing from the EU. "There is the danger that industrialists [will] find themselves spending as much time studying the latest rules from the EU's Brussels headquarters as managing their own businesses," frets Ernest-Antoine Seilliere, president of the French Industrial Federation, Paris. Adds Giorgio Fossa, president of the Rome-based Italian Industrial Federation, speaking specifically of Europe's wide-ranging environmental laws, "Industrialists ought to be trusted more to apply these standards without constant involvement of national governments and the EU."

"Certainly," observes a spokesman for Nestl SA, the giant Vevey, Switzerland-based food producer, "the bringing about of the EU single market has entailed an increase in regulations." The increase, he says, surpasses that of the U.S. Nestl sees a parallel regulatory rise in other regional trading blocs.

Even in developing nations, domestic regulation is on the march. In what could become a model, Vietnam, hoping to avoid the urban environmental problems plaguing Bangkok -- where massive automobile traffic has created world-class dirty air- --s considering requiring would-be foreign investors to adopt stringent antipollution measures as a condition for establishing production facilities.

Complaints by U.S. manufacturers about their regulatory millstone draw sympathy from Angela Antonelli, regulation expert at the Heritage Foundation, a conservative Washington think tank. "Although President Reagan succeeded in reversing the federal regulatory burden for a time, regulatory growth accelerated under President Bush and, by all accounts, has exploded under President Clinton," she says. Supporting her contention is the growth in the number of pages in the Federal Register, the government's daily publication of all new and proposed regulations and agency actions, during Clinton's presidency.

Still, there's been substantial deregulatory progress in America. Jerry Jasinowski, president of the National Assn. of Manufacturers (NAM), acknowledges that deregulation of airlines, trucking, telecommunications, and some energy sectors "has dramatically increased private-sector freedom. And the drive to balance the budget has brought a decrease in certain government activity." Yet, echoing Antonelli, he points to increased federal mandates on manufacturers, especially in the areas of the environment, health and safety, and tax compliance. (Some studies, he notes, show that costs to employers of complying with the U.S.' ever more complicated tax code now exceed the corporate tax revenue gained.)

Jasinowski also laments the growing tendency of Congress and the Administration to attach labor and environmental mandates to larger pieces of legislation, with little debate. The practice, he says, reflects "a decline in the debate about serious public-policy issues in exchange for symbolic sound bites in a campaign environment." Such politically motivated, feel-good legislation is being extended internationally through laws that impose unilateral economic sanctions on other nations, he and others note. These sanctions, 115 of which have been passed in the last five years, have well-meaning purposes-improving human rights, for instance. But often they shut U.S. exporters out of markets.

For U.S. employers, the costs of regulation are huge. Estimates vary widely, but one respected study -- by Thomas D. Hopkins, economics professor at Rochester Institute of Technology -- puts direct compliance costs of regulation at $700 billion in 1998 (in 1995 dollars). Hopkins projects that that figure, up from $642 billion at the beginning of the Clinton Administration, will rise to $721 billion in 2000.

And that's just federal regulation. State and local regulation has been growing, too, especially as many federal programs have been transferred to states. "State regulation can be even more burdensome than at the federal level," observes Antonelli.

States -- and cities, too -- now are beginning to extend their sway internationally. Pending legislation in Massachusetts, for instance, would bar the state from buying goods and services from, or investing state pension funds in, corporations doing business in Indonesia.

For all its Big Government tendencies, however, the U.S. remains a good place to do business. In a 154-nation "index of economic freedom" compiled by the Heritage Foundation, the U.S. is tied for fifth with Switzerland, trailing only Hong Kong, Singapore, Bahrain, and New Zealand. Among global economic powers, the next highest ranked are the United Kingdom (tied for 7th) and Japan (tied for 12th), despite its infamous nontariff barriers. European nations are further down the list.

The Difference 30 Years Make

Multinational rules, institutions explode on the scene.

When McDonnell Aircraft Co. proposed to merge with Douglas Aircraft Co. in 1967, it had little difficulty. For approval it had to go to only a single entity -- the U.S. government.

But last year when the firm -- renamed McDonnell Douglas Co. -- wanted to merge with Boeing Co., clearance proved significantly more complex. This time the merger also had to get a go-ahead from the EU, an organization that didn't exist in 1967. Only after Boeing agreed to shed some of its exclusive sales arrangements with U.S. airlines, which were hurting the European aerospace consortium Airbus Industrie, did the merger go through.

McDonnell Douglas' experiences attest to how much the business world has changed in the span of 30 years. Manufacturers increasingly find themselves dealing not just with their home governments, but with multinational bodies as well. The EU, in particular, "has become a powerful international regulator," notes Washington University's Weidenbaum. But it isn't alone. Compared with some 100 regional trading blocs today, only 25 existed in 1990. Major ones, besides the EU and NAFTA, are the Asia-Pacific Economic Cooperation group (APEC), the Andean Community of Nations, the Southern Cone Common Market (MERCOSUR), and the Caribbean Community & Common Market (CARICOM ).

Ironically, even as these regional blocs proliferate, their influence is being eroded by institutions more worldwide in scope. The most influential, no doubt, is the WTO. It establishes and administers trade rules for 132 nations -- 30 more are lined up to join, including China and Russia -- and can overrule the regional blocs. The Geneva-based body was formed in 1995 to replace the General Agreement on Tariffs & Trade (GATT), which in nearly 50 years of existence helped bring about a 10-fold reduction in average tariffs worldwide. Unlike its predecessor GATT, however, WTO has sweeping authority to settle disputes between members -- and has enforcement power.

The WTO, though, isn't the only supranational organization whose activities affect corporations. Often underappreciated is the regulatory clout of the United Nations (UN). The UN is home to such standards-setting agencies as the International Labor Organization, the World Health Organization, the International Maritime Organization, the International Telecommunications Union, the International Civil Aviation Organization, and World Intellectual Property Organization.

The UN and its agencies have launched a host of international treaties, among them the intellectual property accord signed by 160 nations last fall and the more controversial Kyoto Protocol in December. Earlier UN-fostered agreements include the Law of the Sea Treaty and no fewer than 25 environmental pacts.

Still other supranational organizations demand corporate attention. One major player is the OECD, which spawns international agreements of its own, including the current Multilateral Agreement on Investment. There's also the International Organization for Standardization, which has developed more than 11,000 international standards ranging from film speed, to freight containers, to quality management. The International Accounting Standards Committee is developing global accounting standards, and activities of the International Monetary Fund and the World Bank have global implications for companies.

Not unexpectedly, all this supranational rule-making often is a source of industry unhappiness. Most American manufacturers, for example, rail against the Kyoto Protocol. Many also are upset at the WTO. Even though the U.S. led the organization's creation, in three separate cases this year the WTO has ruled against American firms.

Such rulings have amplified charges -- not just in the U.S. -- that the WTO is infringing on national sovereignty. The criticism is growing as the WTO finds its trade-regulation authority overlapping such areas as antitrust, foreign investment, environmental protection, and workers' rights -- all traditionally considered domestic policy matters. Clinton gave momentum to the trend this spring by calling on the WTO to consider adopting core environmental and labor standards.

Despite the criticisms, the WTO has its boosters. Claude Barfield, a resident scholar at AEI, points out that the U.S. has won the vast majority of cases in which it has been involved in the WTO. On balance, he stresses, the "WTO is in the U.S. national interest" because it ultimately forces other nations to open their markets.

Barfield believes that the WTO gradually will "overtake" the regional trading pacts. Thanks to the Internet, he explains, "distances no longer make a difference in business transactions." Thus, as he sees it, regional trading will become less important.

Also agreeing that multinational rule-making is in the best interests of industry is Gran Lindahl, chairman and CEO of ABB Asea Brown Boveri Ltd. Traditionally, he points out, nations were "protective of their local business," citing the U.S.' 1933 Buy American Act as one example. But thanks to a "globalized environment," he says, "you don't have that [protectionism] very much today." Lindahl also praises globalized standards, which he says lead to lower costs for both manufacturers and customers "because you don't need to customize."

Looking Outside

Increased visibility, government dealings force firms to respond.

Once, perhaps, companies could go quietly about their business of manufacturing quality products, innovating, and making a profit without worrying much about the external world. No longer. As never before, firms today are publicly visible, influenced by an interconnected global economy, and at the mercy of multiple governments. A head-in-the-sand attitude no longer cuts it.

Ask the oil industry. It learned the hard way. When the Arab oil embargo in 1973 sent world oil prices soaring, created gasoline lines, and triggered a worldwide recession, oil companies were the instant villains. Their public-relations flogging translated politically into tough new government restrictions. But they weren't able to respond. Why? Because they'd always disdained public relations and lobbying.

Or ask Bill Gates. He and Microsoft Corp. stubbornly resisted establishing a Washington presence. But now that the Justice Dept. has hit the company with a massive antitrust proceeding, Microsoft's disdain for government relations is coming back to haunt it.

Most companies, though, have gotten the message: Like it or not, realities have forced them to look outward. Their external responses vary along a continuum, observes Craig Smith, senior fellow at the Conference Board, a business research organization in New York. "On one end," he explains, "is passive compliance to regulation, including such activities as ethics programs, environmental efforts, and minority-hiring practices. On the other end are 'corporate citizenship' programs that are proactive."

Either way, the response has given rise to public affairs departments as a critical corporate entity. Typically housing such functions as government relations, public relations, media relations, community relations, and philanthropy, such staffs proliferated and grew in size in the 1970s and '80s -- not only in the U.S., but around the world, reports Douglas G. Pinkham, president of the Public Affairs Council, a Washington-based association for corporate public-affairs executives.

Although the growth in the size of staffs lately has leveled off, Pinkham says, "Public-affairs staffs are becoming more sophisticated. And as issues become more complex, they're taking on more and more activities." For example, the devolution of federal programs to the states is causing firms to put more emphasis on state relations, he reports. "And as companies go after international markets, they're beefing up their international staffs."

If companies aren't already extending their government relations efforts internationally, they should, stresses NAM's Jasinowski. "The new economy is linked more globally than is fully understood by anybody," he comments. Whether companies merely export or whether they locate production abroad, he says, they're subject to rules of host nations or regions; often these rules are onerous. "The solution," he indicates, "is to work on a global basis to reduce regulation to achieve the maximum trade and investment flows." And that, in turn, involves working with international organizations.

Harald Malmgren, former deputy U.S. trade negotiator and now president of the Malmgren Group, a Washington consulting firm, agrees. "Companies now have to think about lobbying on a global basis, not just in their own capitals. It's a headache, another line-item expenditure for them."

But simply lobbying internationally may not be enough; corporations need to establish roots internationally, Malmgren stresses. "Throughout the world," he explains, "policy is in conflict. On the one hand, there's the rapid process of deregulation -- a movement toward less intrusive government. Completely counter to that is the growing interest in developing international rules and regulations. There's no coherence -- in Washington or in any capital. It's all very confusing for businesses to deal with."

Thus, Malmgren advises, companies "should aim to insulate themselves from these conflicting tendencies." For some small and midsized firms, that may mean focusing domestically for 10 to 20 years until the confusion is sorted out. But otherwise, the best strategy "is to position yourself in various parts of the world with a significant degree of autonomy in each place. Be agile. If regulations get too fierce in one place, shift the balance of corporate power to another." He notes, for instance, that Philip Morris Cos. Inc. "already has positioned itself legally" to move its headquarters to Switzerland "if the tobacco issues become too insurmountable in the U.S."

Power To The Corporation

Despite the current deregulatory trend, government surely will continue to be a factor for manufacturers in the 21st century. The question is: How great a presence will it have?

In the U.S., that's an open question. "Regulatory policy is at a critical juncture," asserts the Heritage Foundation's Antonelli. Observing that "there's a life cycle to regulation," she fears that the deregulation progress of the last 20 years -- which has helped offset the increase in social regulation -- may be ending. Already, she points out, Congress is threatening to re-regulate the airline industry. And if Vice President Gore, a regulatory activist, becomes President, she warns, "business will have a lot to be concerned about."

More optimistic is Washington University's Weidenbaum. He predicts that U.S. "economic regulation will go down, although not in a straight line." And he expects use of cost-benefit analyses and other efforts to improve regulatory efficiency, which "have had marginal effect," to continue. Yet he looks for social regulation to increase.

Internationally, manufacturers are bound to face greater regulation -- if for no other reason than more of them will be operating globally. In the U.S., observes NAM's Jasinowski, if companies hope to grow, their only choice is to globalize. "The nature of the numbers -- 96% of the world's consumers live outside the U.S. -- means more U.S. companies will be global," he explains. "As this trend continues, they'll inevitably have more global requirements to meet."

Increased globalization, too, likely means more multinational rules. Regulatory experts foresee even more international agreements emerging in the environmental area, plus new accords in such areas as crime, financial services, and international security. And more so than current pacts, they'll have enforcement teeth.

This trend toward multinational rule-making will lead eventually to "one-world" government, some futurists suggest. But that's not likely, believes AEI's Barfield. Twenty-five years from now, he predicts, "What you will see is a stronger commercial law for trade and investment that is worldwide. But even there, individual nations will have their idiosyncrasies. There will be more consolidations -- the EU will be larger, for instance. But there won't be anything like world government."

What about a stronger role for the UN? Observers don't see that as likely, either. It certainly wouldn't be in the best interests of manufacturers, asserts Malmgren, the ex-U.S. trade negotiator. "The UN is a political organization without meaningful business or financial competency," he says. "Its representatives are diplomats, environmentalists, development people, and relief people. Their interests have to do with social intervention."

Another expert, John Sweeney, trade analyst at the Heritage Foundation, sees 21st-century power flowing to a different entity -- multinational corporations. As commerce becomes more globalized, he explains, individual governments are increasingly powerless to deal with crises; Asia's economic woes are an example. "So we'll see more and more multinationals take on supranational characteristics," he argues. "For example, they'll deal with issues like corruption [themselves], train their own personnel, and handle their own communications.

It's not that they'll become a replacement for Papa State. They'll just do what they have to do to make a buck." It's not that much of a stretch. Already, Sweeney points out, the net worth of some multinational corporations is greater than that of more than half the countries of the world.

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