Canadian Corporate Strategy in a North American Region

Abstract

Introduction In content and impact, the North American Free Trade Agreement (NAFTA) is much more than a trade agreement. The Agreement contains a set of regulating a wide range of international trade, investment, economic, and other activities among the parties, and includes innovative provisions for dispute settlement, institutions for ongoing governance, and incentives for further policy harmonization and cooperation among the three members (Kirton and Soloway 1996). Moreover, North American economic integration was substantially underway prior to NAFTA. Thus NAFTA's ultimate significance lies in the fact that it provided of policy continuity to investors and traders under a generally predictable set of rules (Weintraub and Gilbreath 1996, 1). Together, these features of the and the assurance it provides have the potential to make a significant impact on corporate strategy for Canadian firms. This article analyzes the corporate response to the policy environment created and affirmed by NAFTA. It concludes, somewhat paradoxically, that the overarching nature of Canadian corporate strategy was determined well before NAFTA, and that the origins of a North American regional strategy for Canadian firms even predates the Canada-U.S. Free Trade Agreement (FTA) of 1989. The first section defines and outlines the five dimensions which comprise the NAFTA regime (Kirton and Soloway 1996). Through this analysis, those elements of are identified which could have significant effects on corporate strategy and government policy. The second section reviews the corporate response to North American integration at an economy-wide level. Through an examination of North American trade and investment patterns--comparing both the pre- and post-NAFTA periods--this section examines how Canadian firms operate on a continental basis. This analysis confirms the existence of a North American regional marketplace, where national borders are increasingly blurred and where, to reflect this fact, most multinational firms have adjusted their strategies. This finding is supported generally in the literature on globalization (Dunning 1993) and has been identified in a North American context by Rugman (1990) and Weintraub (1994a). The analysis of these broad patterns provides only half the story, however. Focusing on the firm level, the third section of this paper thus examines strategic responses to the dynamics unleashed or confirmed by the regime. The focus of this section is the Canadian firm, unique in its overwhelming dependence on access to the U.S. market in order to be competitive. The strategy of the typical Canadian firm is benchmarked through its relationship to the United States, since there exist large asymmetries of trade, investment, and corporate strategy between Canadian and U.S. firms. Canadian firms have responded to this new environment by forming regional business networks in order to secure or maintain a competitive advantage. The Five Partners Network Model developed by Rugman and D'Cruz (1991, 1994) explains the strategic response of Canadian firms to the North American regional marketplace. This model is then illustrated through its application to the Canadian chemicals industry. I. The Regime There exist five distinct dimensions of the regime, shaping both corporate behavior and the North American policy environment. When examining the impact of the policy environment, a dynamic analysis is required to capture the spirit of as an ongoing framework under which deeper and even broader economic and policy integration will occur. Regionalization will thus increasingly be strengthened by the regime, although the major economic restructuring changes occurred prior to the passage of the FTA in 1989. The five dimensions of the regime, each taking effect in sequence, are: the debate; NAFTA's changes to economic rules; NAFTA's three dispute settlement mechanisms; NAFTA's fifty intergovernmental institutions; and NAFTA's incentives for policy harmonization. …