Competitiveness and the convergence of international business practice: North American evidence after NAFTA

One of the economic implications of globalization is increased competition. As competition in product markets increases, inefficient strategies are eliminated and successful practices are imitated by competitors. A source of globalization pressure is the reduction of trade barriers that previously protected some domestic sectors. In addition, globalization has also coincided with investors becoming more aware of foreign investment opportunities that directly compete with domestic demands for capital used in production. The increased global competition in both product and financial markets thus has the effect of defining “good” business practices as those that survive and prosper in the global economy. In this study, the hypothesis of a trend toward commonality of business practices is tested. As international competition in both product and financial markets increases, business practices should converge in the sense that acceptable deviations from the (unobservable) optimum decrease. Empirically, operating ratios, such as total asset turnover and inventory turnover, profitability ratios, such as return on equity (ROE), and growth to 1995 period, evidence of convergence in real asset management, is presented. In addition, there is no difference in profitability by country that supports capital market integration. This result suggests that (1) the North American Free Trade Agreement has economic substance and (2) gains to corporate international diversification within North America are decreasing.