Global Corporate Strategy

Session 1

TransnationalCorporations

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Agenda1. Why firms transnationalize2. How firms transnationalize3. TNCs as networks4. Configuring the network5. TNCs´ externalized relationships6. How global are TNCs?

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Definition A transnational firm is a firm that has the

power to coordinate and control operations in more than one country, even if it does not own them (Dicken, 2010)

Elements: Geographical reach Power to control and coordinate Ownership or contractual arrangements

Other terms Multinational Enterprises Multinational Corporation

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Why firms transnationalize Competitive economy

Global competition One company’s gain is another company’s loss

E.g.: car industry In other cases companies may grow (internationally) but

not at the expense of others! E.g.: IKEA; Nike; Ferrari

Why not transnationalize? Motivations:

Market orientation Asset orientation

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Market orientation Horizontal expansion

Level of demand in other countries Indicated by GDP per capita

Structure of demand Income levels determine structure of demand

Low income countries send more on basic necessities

Accessibility Cost of transportation

Proximity Physical; geographical Cultural Political

Tariff barriers Non-tariff barriers

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Asset orientation Resource industries (e.g. oil) Vertical integration

Resources Processing may be done elsewhere

Location-specific factors Access to knowledge

Knowledge and technological innovation appears in geographical clusters Silicon Valley Bangalore, India (IT and software services)

Access to labor Knowledge and skills (literacy; education) Wage costs Labor productivity Labor controllability (unions)

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Hourly compensations Norway: 55 US$/hour Netherlands: 39 US$/hour United States: 31 US$/hour Singapore: 16 US$/hour Phillipines: 2 US$/hour

For standardized production, the hourly cost matters But productivity and controllability should be taken into

consideration! In the same vein: expected future costs are important

Rising wage levels in China Other costs may go up, like the cost of transportation

For non-standardized, knowledge-related and high value-added activities the wage is less relevant

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Flexible production Changes in cost over time

Natural disasters Political unrest Labor strikes Exchange rate volatility

Need for continuous supplies Flexible production systems

Negotiating power vis-à-vis governments

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How firms transnationalize Evolutionary sequence?

Hymer (1960s) Vernon’s Product Life Cycle model (1970s) Dunning’s eclectic paradigm

OLI Ownership specific advantages

Firms size; economies of scale Technological know-how Marketing know-how Access to finance; cross-subsidizing

Location specific advantages Integration

Link between TNCs and size (big) and age (mature)

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Life Cycle Theory

All production in US;

exports to many

countries

Production starts in Europe

Europe starts exports to

LDCs

LDCs produce and export

standardized products

US loses its leading position

Phase 1 Phase 2 Phase 3 Phase 5Phase 4

Net

exp

ort

er

Net

imp

ort

er

Time

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The PLC Examples

Singapore Attracting FDI

Route to technological spill-overs

South Korea Criticism

For many products the price is less relevant Continuous improvements

Source of innovation may be any country in the TNC’s network!

Most of trade and FDI is reciprocal

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Diverse trajectories and born globals

Serve domestic market only

Export to overseas markets through agents

Sales outlets in overseas markets

(a) Acquire local firm

(b) Set up new firm

Production in overseas markets

(a) Acquire local firm

(b) Set up new firm

Short cuts

Parallel paths

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Diverse trajectories All types of “by-passes” Growth through mergers & acquisitions

Lenovo of China bought IBM’s PC division Tata of India acquired Jaguar

Strategic alliances Franchising and licensing agreements Some firms are global from the outset

Born Globals Small companies in high-tech niches

Networked technology Through social networks

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TNCs as networks “Networks of networks” Boundaries of the firm

Of course they have to be registered in the jurisdictions where they operate

But firms that operate internationally, at the core the company has its internal mechanisms (there is no international legal framework!)

Functionally, TNCs are very complex: what goes on inside and outside the firm is not clear, and continuously changing

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Home country embeddedness Home country is important!

`The domestic structures within which a firm develops leave a permanent imprint on its strategic behavior` (Pauly & Reich)

Senior executives are recruited from the home country

Reliance on personal relationships Relationships between business and the state

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Japan Keiretsu

Transactions through affiliated companies Inter-firm relationships are long-term and stable Inter-firm relationships are complex: cross-

shareholdings and personal relationships Bilateral relationships between firms are

embedded within “families” of related companies Inter-corporate relationships have symbolic

significance which substitute for formal contracts

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South Korea Chaebol

Highly centralized Based on giant family-owned firms Oligopolistic structures became domiant over

small and medium sized firms Any SMEs are tied into the chaebol History: non-partible inheritance

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US/Europe Market based principles Even though family businesses are important Integration tends to be based on rational,

economic principles rather than on kinship

Globalization Does it lead to convergence, or differentiation?

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Configuring the networks The functional roles of the component parts

change More specialization More complex links

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Evolution Product divisions with separate international

division Global product division structure

Disadvantage: non-optimal use of geographic expertise

Global geographical division structure Disadvantage: non-optimal use of divisional

specialization Global matrix structure

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Separate international division

HQ

Division A

Production

Marketing

Division B

Production

Marketing

International

division

Area X

Production

Marketing

Area Y

Production

Marketing

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Matrix structure

HQ

A

Area X

Area Y

B

Area X

Area Y

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Bartlett & Ghoshal typologies Multinational (1930s)

Decentralized Portfolio of independent businesses Knowledge developed and retained within each unit

International (1950s) “Coordinated federation” Overseas units are appendages to central domestic corporation Knowledge developed at the centre and transferred to overseas units

Global (1900s, Ford; 1970s Japan) Centralized Overseas operations are “delivery pipelines” Knowledge developed and retained at the centre

Integrated networks Networks of resources and capabilities Integral parts of network; interdependetn units Knowledge developed jointly and shared worldwide

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HQs and Subsidiaries HQ/subsidiary relationships

The local implementer The specialized contributor The world mandate

Regional and corporate HQs Strategic location High quality external services Labor market skills (IT; R&D) Agglomerative forces

HQs are concentrated in major cities (NY; London; Paris; Tokyo) Geographical inertia: very few have moved out of their

home countries Regional HQs are moved more frequently

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Corporate R&D Three phases

Environmental scanning Applied scientific research Marketing research

Product design and development Adaptation to local environment

Four types of units Central R&D laboratory (often close to HQs) Internationally interdependent R&D laboratory Locally integrated R&D laboratory Support units

Trends in the organization of R&D “Open innovation”

Networks of external partners Huge supply of engineers in India and China

R&D is more concentrated than sales and production It pays off for creative engineers to be together Strategic “in-house” advantages Economies of scale: expensive equipment Tap into localized clusters

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Marketing and sales Considerations

Close to R&D Close to end markets Central data-bases and one-on-one marketing Online-sales Local regulations on products;

promotion/advertising Infrastructure and distribution channels vary Consumer preferences vary

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Production facilities

Globally centralized production

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Production facilities Host market production (“import substituting”)• Variations in customer demands• Barriers to trade

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Production facilities Product specialization• Scale economies• Flexible production• Political motivations

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Production facilities Product specialization (central assembly; regional distribution centers; production of components centralized)

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External relationships Trends in outsourcing

Focus on core competences In the process, suppliers have reached economies of

scale and levels of expertise that make it attractive Types of outsourcing

Commercial The manufacture of a finished product; the supplier plays no

part in marketing the product The principal can be a manufacturing company or a wholesaler Example: Nike

Industrial Specialty (car seats) Cost-saving (components) Complementary or intermittent outsourcing

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Outsourcing Need for proximity was the basis for

“industrial districts” Nowadays, there’s plenty of long distance

outsourcing Keeping stocks is costly

From just-in-case to just-in-time systems Toyota, in Japan

Driving forces Need for “lean production”

Rapid product turnover Speed to market Responsiveness to customer needs

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Just-in-case versus just-in-timeJust-in-case Large, infrequent batches Large buffers stocks Quality control by sample

checks Large number of suppliers Lack of flexibility High cost of holding stocks

Just-in-time Small, very frequent

batches Quality control built in, in

all stages Small number of selected

partners Close relationships between

customer and supplier Incentive to locate close

to customers! Riskier, with dependence

on suppliers

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New roles for suppliers (Andersen & Christiansen, 2004)

Local integrators Export base

Coordination of local networks of suppliers Add knowledge to the products of the customer

Import base Represent an international range of technologies to local customers

International spanner Global integrators

Control over (remote) suppliers is hard Who is responsible?

Legally? Ethically?

Reverse process takes place Finding suppliers closer to home

Mattel, and its toys delivered to Wal-Mart Take the process back in-house

British Airwas and its catering activities

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Types of networks Hierarchy

Vertical integration within a firm with governance of subsidiaries and affiliates based on HQ managerial control

Captive networks Small suppliers transactionally dependent on larger buyers;

suppliers face significant switching costs Example: Nike

Relational Complex interactions between buyers and sellers often creating

mutual dependence and high levels of asset specificity Modular

Production to customer’s specification Markets

May involve repeat transactions but switching costs low for both parties

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Types of networksCoordinatio

n mechanism

Complexity of

transactions

Ability to codify

transactions

Capabilities of potential suppliers

Degree of explicit

coordination and power asymmetry

Hierarchy (High) (Low) High

Captive

Relational

Modular

Market Low

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Strategic alliances Not new! But, what is new and intriguing is:

The scale and proliferation of SAs Between competitors SAs are central to strategies rather than

peripheral Types:

Research oriented Technology oriented Market oriented

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Framework of SA’sInternalization Externalization Arm’s length

Acquisition Merger SA

FormalInform

al

Research-oriented

Technology-oriented

Market-oriented

Cooperative R&DUniversity based cooperationUniversity/Government/IndustryVenhture capitalR&D corporations

Technology sharingCooperative production Licensing

MarketingService & maintenanceDistributionLicensing

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Advantages and disadvantages of SA’sAdvantages Access to markets; entry into new markets Cost sharing Risk sharing Access to technologies Speeding up (the use of) new technologies Synergies in development and use of technologiesDisadvantages Hard to manage SA’s Source of conflict Loss of key technologies and competitive

advantages

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How global are TNCs? “The myth of the global corporation” Measure: Transnationality Index (TNI)

Foreign sales Foreign assets Foreign employment

For 100 largest companies in the world: 1993: 52% 2007: 63%

By country: US companies increased from 36 to 57 Japanese companies from 30 to 50 Dutch companies from 65 to 80

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TNI Most of the increase in internationalization was

caused by more international business within “regions” EU NAFTA

As a consequence of the EU and its expansion, a lot of outsourcing has shifted back from Asia to Eastern European countries

In situ adjustment

Locational shifts

Expansion of existing capitalReplacement of capitalPartial disinvestment

Investment in new locationsAcquisition of plants from othersDisinvestment of existing plants

Relocation of entire plant and equipment

Most frequent Least frequent

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Case study WIPRO Questions to the case Plus:

How would you describe the network relationships between (hierarchical; captive; relational; modular; markets): GE and WIPRO WIPRO and its foreign operations

Evaluate the logic this type of network relationship!

Would a SA between GE and Electric have made sense? Why or why not?

Is GE’s internationalization market or asset oriented?

Is Wipro’s internationalization market or asset oriented?