The great historian, Arnold Toynbee, has expounded his theory of challenge and response, a cycle which goes on endlessly. assuming different guises and postures to fit the times. Very few would seriously question the proposition that our whole way of life is being challenged daily on many fronts. The area which concerns us here today is the challenge to American corporate management posed by our growing exposure to an increasingly competitive world. My thesis here today is that so far American corporations have been able, in the words of the title of a Broadway musical, to succeed in their international business without really trying, but that the time has come to reexamine some of our own concepts if we are to capitalize on growing world markets.

At the end of the Second World War the industrial plant in the United States was still intact in a world that was starved for goods. Products moved almost effortlessly into the vacuum created by pent-up wartime demand. Almost anything made in the U.S.A. could be sold because there was no effective organized competition. Today the markets are not so easy, the competition is skillful and determined, the latest technological advance does not always lie with us, and our position as the world's largest exporter is being challenged. To many businessmen some Europeans seem more competitive overseas because of their long colonial trading experience in exploiting foreign markets. Our response to this challenge of heightened international competition can shape a significant part of our future as a nation. And the response of American business to this changing world pattern must be a positive one. Problems usually also present opportunities, and these are no exception. World markets are growing with the population explosion and require only corporate effort and skill to exploit them. Since we have done as well as we have without really trying, I have no doubt that we can more than hold our own if we put our backs into it.

The world of overseas business has come a very long way since Queen Elizabeth granted a charter to the East India Company in 1601, which proclaimed, among other things, that persons other than the East India Company trading or trafficking without permission from the company "shall incur our indignation, and forfeiture and loss of the goods, merchandise, and other things which so shall be brought into the realm of England." Other international corporate fringe benefits granted to the East India Company included the privilege to rent the entire city of Bombay, India, for ten pounds sterling a year and the privilege of appointing their own admirals. In the event that the company needed some assistance, it was directed that all British admirals, vice admirals, and subjects assist the governor and company at land or sea whenever thereto required. If the East India Company had rights, privileges and legal protection totally unknown in our time, it may encourage you to know that they also had their problems. One of their servants in the East wrote that in some places "the people would not suffer them to come ashore or have any transactions with them, but in the night by stealth they would bring them victuals and money."

By contrast to this period of total trade monopoly, our corporations today look abroad at a world which is changing under forced draft. Mr. Thomas Aitken in his book, "Foreign Policy for American Business," wrote about a country which underwent the following changes in policy, politics and economics in the last fifteen years:

-Its currency was devalued twenty times.

-It ran out of foreign exchange and stopped profit remittances.

-It cut off imports of luxury goods and non-essential raw materials.

-It moved from a democracy to a dictatorship and back to a democratic government.

-It moved from pro- to anti-Americanism and back again.

-It took over the banking system -- then returned it.

-It moved from an agricultural toward an industrial society.

-It is now attempting to restore its agriculture.

-It legalized the Communist Party and then it outlawed it.

-It took over total control of imports, exports and foreign exchange and is now divesting itself of it.

During this fifteen year period Mr. Aitken studied the ways in which American companies reacted.

-Warner Lambert increased its line from eight to sixty-four products and added a cosmetic division.

-Squibb having lost its franchise for penicillin moved into the veterinarian market.

-General Motors shut down its assembly plant and manufactured office furniture and is now back producing Chevrolet trucks.

-duPont reinvested blocked funds in one of the largest plant expansions in the country.

-Wilson, Swift and Armour turned part of their meat canning capacity to packing fruits and vegetables and took on a local distributorship for wine and champagne.

-Hiram Walker developed a local bourbon, now its best profit item.

-Standard Oil expanded its refinery, Mobil Oil closed up.

-Kaiser came in with a vehicle manufacturing plant.

-A number of companies withdrew and are now studying reentry at a higher cost.

-First National City Bank survived all these changes and is still very much in business.

This capsule history of a few American companies in one country, while perhaps not typical of overseas business, cannot be called wholly unique either. In thinking about really trying to succeed in overseas business, the first basic decision to be taken by a corporate Board of Directors is that the corporation is going into the international business to stay. It is not a short-range business, but one which must be carefully planned with the certain knowledge that over a long period of years troubles will develop, but also with the expectation that since the market is likely to grow twice as fast abroad as it is at home, the intelligent implementation of your long-term commitment will be favorably reflected in your profit and loss statement. The cultivation of this attitude of mind from your senior director to your junior clerk is of vital importance in assuring the success of an overseas venture.

News travels so fast today, bounced off Telstar or the ionosphere itself, that we are surfeited with detail often about events which have little or no basic influence on the historical trends. We are expected to know instantly the problems of nations which did not exist five years ago at the risk of being called an international illiterate. We can listen to the heartbeat of a man in orbit around the earth at the same time that we learn that some tribes in Africa do not yet know the use of the wheel. We all tend to make long-range decisions on a short-range set of facts. In the overseas business this can be a fatal error. This is the first lesson for corporate management to learn. We must cultivate the patience to wait out the short-term swings if our basic faith in the area is secure. If the essential trend of events is indeed sweeping a country or an area towards disaster, this must be sensed and commitments reduced, but if the trouble appears to be only a temporary interruption in an otherwise upward curve, it would be folly to withdraw. No man or management can always be right about the sweep of events. This fact leads us to the second prerequisite of a profitable overseas business, which is the concept of wide geographic diversification of markets and foreign based assets.

In the year 1962 people tend to believe that the world has reached some kind of stability, that all continental currencies are like Caesar's wife above suspicion and that boundaries and economic trade patterns are stabilizing. I remember with great clarity buying a World Atlas in 1941 which included a promise to send me new maps when the boundaries of the world were finally changed and stabilized after the War! Anyone who has lived through the years since the Second World War will realize the scope of this guarantee. At the end of the Second World War, India, Pakistan and Ceylon were British. Indo-China and much of North Africa were French. Indonesia was Dutch. China was free. Since the end of the War over 600 million people have achieved independence, an event unparalleled in the history of the world. As recently as ten years ago every country in the European Common Market had exchange control on both current and capital accounts. Only six years ago France torpedoed the European Defense Community, and many said that the concept of united Europe was dead forever. Hitler, as you may remember, stated on many occasions that he would settle the history of the world for a thousand years. While I believe in the Common Market, I am always mindful of the fact that two powerful personalities in two powerful countries are approaching the twilight of their lives, and few people can state with certainty who their successors might be or how they might feel about tomorrow's problems. All of these things are merely illustrative of the point that no man can predict tomorrow, and that a wide geographic dispersion of markets and foreign based assets is the only true protection in a changing world.

The third corporate problem -- the most important and difficult challenge in the overseas business -- is, of course, people -- getting them, training them, keeping them. As you well know, good men are hard to find. Good men who want to live and work abroad are sometimes harder to locate than men content to stay at home. In days gone by a mediocre person could sometimes make an outstanding business success abroad as the difference in technology was so great and the colonial attitude so well established that the way was easy. In today's world corporate management must recognize that it must have its best men abroad. It is no longer sufficient for a man to have only a mastery of your product or its production. He must also represent not only your corporation but your country in a community which may be initially hostile to both. It is self-evident that the American abroad must know the language, but it is also true that he should have a basic knowledge of the host country's history and culture as well. He must become a respected part of the foreign community without losing his integrity as an American. It is no longer sufficient that a foreign subsidiary make a good profit; it is also on trial every day as to whether or not it makes a constructive contribution to the economy of the host country. The concept which has been called "good corporate citizenship" here in the United States is doubly important abroad where a suspicion of your motives may run deeper than at home. These are not simple relationships that can be bent and shaped by you alone, but are often dictated by swiftly moving events on the world stage. It takes a first-class man to walk the often delicate path required of a foreigner while at the same time building your business soundly and profitably.

These thoughts lead to the problem of compensating Americans serving abroad. A great deal of corporate time and effort has been expended upon devising compensation plans designed to hold outstandingly able men on the domestic side of the business,. but not as much effort has been concentrated on compensation plans for Americans living abroad. You may look back with nostalgia at the early records of the East India Company listing the qualifications of a British merchant in India which read as follows, "A grave and discreet merchant, one which has the Arabian, Spanish and Portuguese languages ... content to be employed without salary, to be left in the country of the East India to the second voyage and learn the language." I suggest to you that in thinking about the problem of compensating Americans overseas, the objective of such a program should be to reward a man for the job that he is doing for the corporation, while at the same time isolating him so far as possible from the economic climate in which he lives.

As the conditions around the world are all different and are changing rapidly, it is obvious that any equitable overseas compensation program must be based on a series of variable indices which are readily available and impartially compiled. These indices would cover such things as housing costs, cost of living and educational opportunities. The rate of exchange applying to these indices must, of course, be studied with care. The construction of a fair compensation program for Americans abroad is one of the most important keystones in a successful overseas business. The time to implement such a program is the day you start into the foreign business, as the longer you wait and the more areas you penetrate, the more difficult it will become. This is true because as separate programs are devised for each area of the world, each one will tend to be different, and it will become increasingly difficult to move men from one area to another without increasing financial hardships. If individual adjustments can be made on the computer working with indices and not around the President's desk working with unfamiliar conditions in far-off lands, you will save untold management time and have better morale abroad.

The fourth corporate challenge can be summed up in one line from the Broadway hit, "The Music Man," in which they sing "You gotta know the territory." The problem of starting businesses in what Barbara Ward has described rather starkly as the, poor nations is legend. In her book, "The Rich Nations and the Poor Nations," she pinpoints one problem in the following terms: "In ex-colonial lands it is not unusual to find leaders who are highly suspicious of all forms of private foreign investment on the grounds that it must entail foreign control and could even involve the territory in war." It is vital to understand the basis of their feelings if it is to be combated successfully. Nationalism is often strongest in the newest countries but can grow in any country as witness Canada's recent outbursts about yankee capital. The lesson that capital goes where it is wanted and stays where it is well treated is lost upon many nations which need it the most. The problems of survival in such a climate are worthy of study by the best minds in your organization.

Quite apart from nationalistic problems, each country is a separate market which may require the quotation of different terms; each may require a slightly different product. The twelve cubic foot refrigerator which is commonplace in your kitchen is twice or almost three times as big as is required in many overseas markets. If the product is not tailored to the community, it is not sold. The willingness to sell abroad the things they really want to buy instead of attempting to sell them what we want in the United States is one of the keys to success. In saying this I do not mean that the American nature of the product should be disguised, since the fact that it is an American product often in itself attracts a good deal of buying. In my travels around the world I still see many instances where American products bear English labels in Spanish speaking countries, while our foreign competitors inevitably label their products in the language of the country in which they are sold. This is just one small illustrative facet of the basic point that you have to know the territory. Language, customs, currency, traditions -- make the list as long as you will --all vary between nations. The corporate management which takes the time to know and understand this often gets the sale.

All of the foregoing suggest another fundamental principle in penetrating the overseas market: your international business cannot be run with corporate management time left over from your domestic operation. You are not competing against amateurs but against some of the largest and most skillful merchants in the world -- indeed, 32 of the world's 100 largest corporations are foreign firms -- to whom exports and foreign trade are life blood and not a peripheral activity. For example, thirty-five percent of Holland's gross national product is exported, and this must be so if that nation is to survive economically, while less than four percent of our GNP finds its way abroad. The success of many foreign corporations can spell survival to some nations as their commercial exports earn the foreign exchange so necessary for their balance of payments. Nations which live by trade are cognizant of the contribution which the private sector makes to their national welfare, and their laws reflect this basic fact by encouraging exports and foreign investment. Our own government, on the other hand, has recently sponsored legislation which, if passed, would deter American foreign investment, while at the same time professing that they wish to encourage Americans to invest abroad, particularly in underdeveloped countries. This dichotomy of policy on the part of our government adds another baffling dimension to the building of a foreign business.

All of these things suggest that an international business cannot be run with the left hand, but requires a well-staffed, experienced organization thinking and working only on international business. The planning of corporate relationships between the foreign and domestic operations should be thoroughly thought out, and in many instances it has been found that an international division reporting directly to the president in the same manner as a domestic division is often the best way to organize such a venture. The problems of domestic business are difficult and diverse, but abroad several new dimensions are introduced. There is often a language barrier. There is usually a cultural difference, sometimes of immense proportions. There are currency problems. There are nationalistic problems and a host of others. The number of ways in which a foreign market can be penetrated are almost numberless and range from an attempt to sell products abroad through an import-export house to establishing sales branches with full time personnel, accounting, invoicing services, warehouses and service staffs abroad. You may move from there to licensing arrangements. While licensing provides a steady income from royalties with little capital outlay, unless you pick your licensee with care you may find the quality of your product slipping, or perhaps the licensee is making marketing mistakes which might make your product acquire a poor reputation. You may choose to go into manufacturing through a branch, a wholly owned subsidiary or in partnership with local businessmen. The corporate structuring of a foreign operation is not a simple problem and involves tax, legal and nationalistic problems which are worthy of the best corporate planning which is available.

More and more companies are moving toward a management concept in which all of their senior executives are oriented to thinking in terms of world markets, concerned equally with selling at home and abroad. The borders on the map which used to also represent the dividing line in an executive's mind between a domestic sale which he understood and a possible foreign sale which seemed distant and complicated, are slowly fading, and the modern corporate executive is now looking at a total free world market in much the manner that his European counterpart has learned to do before him. More and more corporate executives are not asking where the sale can be made but on what terms and with what profit. This attitude of mind of corporate management as a business becomes more and more internationalized is reflected not only in marketing, but also in all other phases of corporate policy. In thinking about financial problems such a management automatically checks money rates and availability in a dozen different countries around the world as naturally as they would check the money centers in the United States. They inquire of themselves what currency would be the most appropriate to borrow for the purpose and area they have in mind, in which market it should be obtained, and upon what terms. In examining plant locations such a management as a matter of course checks many areas throughout the Free World in the same manner as they would investigate a plant location in this country. There are many nations eager to attract capital, and your way may be smoothed by devices which vary from an outright ten-year tax holiday and the free construction of factory buildings to minor concessions on the granting of import licenses. In thinking about their personnel problems and attempting to fill some gap in their organization, such a management instinctively looks for the best qualified man without inquiring too closely as to his native land. All of these things start with an attitude of mind and once initiated becomes second nature.

The foregoing thoughts are a capsule summary of some of the problems that American corporate management faces in an increasingly competitive world. Whether we like it or not, the world is pressing in around us and the competition flowing over our lowered tariff barriers is forcing us to sharpen our own skills. At the same time as we are being pushed from without, all of us must feel the allure of the fast growing foreign market, and the realization grows that we must react positively to these challenges in order to survive. It would be nice perhaps to live in a world such as that keen observer of America, de Tocqueville, described in 1835 when he wrote, "United States is a nation without neighbors. Separated from the rest of the world by the ocean, and too weak as yet to aim at dominion of the seas, it has no enemies and its interests rarely come into contact with those of any other nation of the globe." Today anything that happens anywhere in the world affects our nation one way or another, and the market in which American business must compete stretches far beyond our own shores. Those American corporations which have expended real time and energy on their international business have generally prospered and amply repaid the faith of their shareholders. I have absolutely no doubt in my mind that if American corporations generally organized and oriented themselves towards a world market in the same way and with the same effectiveness that they have zeroed in on the American market, we have no cause for concern.

These thoughts bring us full circle back to my basic premise. American business has put in place almost $35 billion of direct foreign investments on which we earn almost $4 billion a year, and has become the world's largest exporter even though only 4% of the manufacturing concerns in the United States export any part of their production. Over 275,000 manufacturing concerns produce only for the domestic market and have never turned their attention to overseas areas. I suggest to you, therefore, that if we have done so well without really trying, that if we concentrate our energies and skills on this new and exciting market, American business can meet any competitive threat on a positive basis in the same manner that we have survived in the world's most competitive market at home.