Information Technologies and the Future

8/6/2019 Information Technologies and the Future

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Information technologies and the future of the

multinational enterpriseB

Rakesh B. Sambharyaa,*, Arun Kumaraswamyb,1,

Snehamay Banerjeea,2

aSchool of Business, Rutgers University-Camden, Camden, NJ 08102, United StatesbSingapore Management University, Lee Kong Chian School of Business, 469 Bukit Timah Road,

Singapore 259756, Singapore

Available online 12 May 2005

Abstract

In this paper, we highlight the pervasive influence of information technologies on multinationalenterprise (MNE) operations, strategies and structures. The democratization of information

technologies has diminished geographic distance and compressed response times for MNEs. In

turn, this has led to an increased and simultaneous emphasis on both global efficiencies and local

responsiveness. We explore the consequences of this change in emphasis for MNE strategic and

structural orientations as established by Bartlett and Ghoshals typology of MNE strategies. Our

conclusion is that the distinctions between the four strategic orientations are becoming increasingly

blurred and MNE structures are becoming more organic in nature. In addition to discussing these

changes, we also highlight emerging challenges that MNEs face in an increasingly borderless, time

compressed world.

D 2005 Elsevier Inc. All rights reserved.

Keywords: Multinational enterprise; Global strategy and structures; Information technology; Local responsive-

ness; Global efficiency

1075-4253/$ - see front matterD 2005 Elsevier Inc. All rights reserved.

doi:10.1016/j.intman.2005.03.005

B Paper presented at the 5th Annual International Business Research Forum, Information Technology and

International Business Theory and Strategy Development, Temple University, Philadelphia, March 2004.

* Corresponding author. Tel.: +1 856 225 6712; fax: +1 856 225 6231.

E-mail addresses: [email protected] (R.B. Sambharya),

[email protected] (A. Kumaraswamy), [email protected] (S.Banerjee).1 Tel.: +65 6822 0713; fax: +65 6822 0777.2 Tel.: +1 856 225 6587; fax: +1 856 225 6231.

Journal of International Management

11 (2005) 143161


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1. Introduction

Since the late 1980s, the world economy has undergone tectonic shifts due to two

interrelated yet distinct forces: globalization and information technology (IT). With the

globalization of the world economy, it became impossible for multinational enterprises

(MNEs) to survive only by leveraging economies of scale, size, command and control

management, multidomestic strategies, and an export orientation (Economist, 1995).

Instead, MNEs had to address the challenges of efficiency in current operations,

management of risks and the need for global learning and innovation (Ghoshal, 1987).

To face these challenges, MNEs adopted an organizational system consisting of (1) the

dispersal of the companys various activities and functions in the value chain and their

location in different parts of the world to take advantages of national differences, and (2) a

reintegration of the dispersed activities and functions to benefit from scale and scopeeconomies (Phatak, 1996). Correspondingly, MNEs responded by moving from a simple

integration system that was appropriate for a multidomestic strategy to a more complex

mode of integration that requires locating activities according to the logic of the market

and dispersing decision-making throughout the world.

In doing so, the MNEs have also become the primary vehicle through which the

diffusion of IT is taking place globally (Kogut, 2003). MNEs serve to diffuse IT through

two powerful mechanisms. First, they seek new opportunities both in terms of entering

new markets and fulfilling sourcing requirements. Second, they diffuse IT as part of their

communication networks in the worldwide coordination of far-flung subsidiaries,

suppliers, and customers (Kogut, 2003).Even though globalization and the diffusion of IT have gone hand in hand with the

growing market power and geographic reach of MNEs, the Internet and innovations in

various web related technologies (such as XML, SSL, digital signature, digital

watermarking) have changed the very rules by which these MNEs have to play. The

dnewT rules of the game include restructuring to foster a dglocalT outlook, nimbleness,

empowerment of local managers/employees and the management of knowledge. IT

enables MNEs to globalize production and finance by reducing the cost and time of

communications. In turn, globalization spurs technology by intensifying competition and

hastening the diffusion of technology through foreign direct investment.

What are the consequences of these mutually reinforcing cycles of globalization and ITdiffusion for MNEs? Specifically, how is IT influencing the strategies and structures of

MNEs? What are the new challenges and issues that MNEs face in an increasingly

borderless, time compressed world? These are the questions that we explore in this paper.

In doing so, we use the Bartlett and Ghoshals (1989) typology of MNE strategies as our

inquiry frame that provides the context for the changes that have occurred due to the

influence of IT.

2. Typology of MNE strategies in the pre-IT era

The integrative/responsiveness framework is the centerpiece of the theoretical

literature on MNEs (Prahalad and Doz, 1987). As the name indicates, the development

R.B. Sambharya et al. / Journal of International Management 11 (2005) 143161144


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of this framework lies in the two dimensions: responsiveness and integration. The

first dimension, local responsiveness refers to the extent to which subsidiaries

respond to local differences in customer preferences. The second dimension,

integration, refers to the extent of interdependencies within an MNE, i.e., the

degree to which the operations of various units of the MNE are dependent on one

another. The integration dimension revolves around the notion of global efficiency and

thus costs. In a landmark in-depth study of nine MNEs from 3 different countries,

Bartlett and Ghoshal (1989) proposed a typology of MNEs that builds on the

integrative/responsiveness framework. They identified the existence of four different

strategies adopted by MNEs: international, multidomestic, global, and transnational.

Table 1 presents the key organizational characteristics of the four strategies identified

by Bartlett and Ghoshal (1989).

Bartlett and Ghoshal based this classification on two underlying factors. First, an MNEmatches its capabilities to the strategic demands of its businesses. Second, the MNEs

administrative heritage influences the organization of its worldwide operations. The

combination of these two different but interrelated factors results in different organiza-

tional strategies and matching structures.

For instance, when local responsiveness is important, MNEs adopt a portfolio

approach to managing their subsidiaries. This results in the decentralized

bmultidomesticQ strategy that can take advantage of differences in markets around

the world. In those cases where global efficiency is more important, a more

centralized approach is taken with headquarters calling the shots. This centralized

bglobalQ strategy results in higher degree of interdependence among subsidiaries.Likewise, when transfer of knowledge is crucial, MNEs adopt an approach that can

leverage learning. This gives rise to the binternationalQ strategy. In addition to these

three strategies, there is a fourth and new type of strategy that Bartlett and Ghoshal

termed as btransnationalQ strategy, which involves both a high degree of local

responsiveness and integration. The transnational strategy is achieved by creating an

interdependent network of different but equivalent subunits, with the headquarters not

necessarily playing a dominant role.

Guillen (2002) expanded on this typology further by identifying the nature of goods

and services that would be most appropriate for each of the four strategies. According

to Guillen, multidomestic strategies are most relevant for blooknfeelQ goods thatrequire attention to local responsiveness, such as branded packaged goods, clothing,

used cars, collectible art, and auctions. A global strategy where cost efficiency is the

main goal is relevant for consumer electronics, books, CDs, videos, industrial goods

and components. International strategies are relevant for local commodities such as

produce, cement, and Internet dial-up services that do not require high integration or

high local responsiveness. Finally, transnational strategies, which require attention to

both local responsiveness and global efficiency, are relevant for products such as

wines, financial services, telecommunications equipment, and information oriented

products.

Fig. 1 represents the Bartlett and Ghoshal typology in the form of a 22 matrix, along

with Guillens (2002) adaptation to show the nature of goods or services most appropriate

for each of the four strategies. It should be noted here that several studies (Harzing, 2000;

R.B. Sambharya et al. / Journal of International Management 11 (2005) 143161 145


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Table 1

Key organizational characteristics of MNE strategies

Key organizational dimensions International strategy Multidomestic strategy Global strategy

Configuration of assets and

capabilities

Sources of core competencies

centralized, and others decentralized

Decentralized and nationally

self-sufficient

Centralized and globall

Role of overseas operations Adapting and leveraging parentcompany competencies Sensing and exploitinglocal responsiveness Implementing parent cocompetencies

Development and diffusion

of knowledge

Knowledge developed at the center

and transferred to overseas units

Knowledge developed and

retained within each unit

Knowledge developed

center and transferred t

overseas units

Organization structures Functional structure; International

division

Worldwide area or

geographical structure

Worldwide product stru


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Leong and Tan, 1993) have found empirical support for the Bartlett and Ghoshal typology

of MNE strategies.

3. The influence of IT on MNE operations

Empirical studies have established the importance of global IT in MNEs (Karimi and

Konsynski, 1991; King and Sethi, 1999, 2001; Ramarapu and Lado, 1995; Roche, 1996).

Other studies have discussed the influence of IT on MNEs strategy, geographic scope,

competitive position and performance (Bharadwaj, 2000; Croteau and Bergeron, 2001;

Dehning and Stratopoulos, 2003; Peffers and Tuunainen, 2001). Indeed, the relationship

between HQ and subsidiaries of an MNE can be modeled as a function of its IT

architecture (Ramarapu and Lado, 1995).

An MNEs IT architecture comprises of three dimensions: data architecture,communications architecture and technology architecture. Data architecture is defined as

the format of database content or the arrangement of an MNEs databases. Communi-

cations architecture relates to the integration of communications facilities between the

MNEs HQ and subsidiaries that allows unimpeded flow of information. Technology

architecture addresses the hardware and software configuration in the entire MNE (King

and Sethi, 1992). Table 2 presents a 3-way categorization of IT architecture and their links

to the strategy and structure of an MNE (cf. Alavi and Young, 1992; Keen, 1987; King and

Sethi, 1992; Ramarapu and Lado, 1995).

With rapid advances in Internet and communication technologies and their adoption in

MNEs, IT architectures increasingly rely on global standards. Such reliance on widely

accepted global standards has, in turn, led to what Friedman (1999) terms as the

democratization of information and technology. This has enabled MNEs to adopt a variety

High Global

(global commodities)

Transnational

(cultural, regulatedgoods and services)

Low International

(local commodities)

Multidomestic

(look n feel goods

and services)

Low High

Level of local responsiveness

Level of global

efficiency

Fig. 1. Typology of MNE strategies. Source: Adapted from Bartlett and Ghoshal (1989) and Guillen (2002).



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of information technologies as well as to integrate these various information technologies

and information systems into transnational information systems (cf. King and Sethi, 2001).

In the remainder of this section, we will discuss the consequences of this democratizationof IT for MNEs capability for global efficiencyi.e., its ability to integrate and manage its

globally dispersed value and supply chainsand enhance its capability for local

responsiveness. In doing so, our objective is to tease out the transformative effects of

IT on the two dimensions underlying the Bartlett and Ghoshal typology of MNE strategies,

and eventually on MNE strategies and structures themselves.

3.1. Influence on MNEs global efficiency

One consequence of IT has been the decreasing criticality of geographic scope or

distance to MNEs in their search for global efficiencies through greater coordination andcontrol of their far-flung activities. For MNEs, global efficiency is inextricably tied to the

optimal management of their internal value chains activities and business processes.

MNEs use a variety of ITfor instance, e-mail, corporate databases, wide-area networks,

intranets, video-conferencing, group ware and executive information systemsto

coordinate and control their distributed value chain activities and business processes.

This trend towards increasing linkages, standardization and centralization of data/

information for control/coordination is becoming more pervasive in MNEs. For instance,

Cisco Systems, made a concerted effort to globalize its Oracles databases and applications

including order entry, manufacturing, and financial systems. This project linked its 10

primary sites in North America and Japan and more than 100 sales offices to global usersacross the companys network. Likewise, Tricon Global Restaurants Inc., the US-based

MNE that owns Pizza Hut, Taco Bell, and KFC, standardized its back office operations at

all stores throughout the world, enabling the rationalization and streamlining of their

purchasing activities to substantially reduce inventory and related costs. Other MNEs that

have resorted to global integration of their IT systems for greater coordination and control

include Unisys Corp, Price Waterhouse Coopers and Lybrand, Electronic Data Systems

and KPMG (Stephens, 1999).

In addition to increasing the ability of the MNE to control/coordinate its internal value

chain activities, IT is also ensuring that transactions and activities are also seamless across

the MNEs entire supply chain. At the upstream end (i.e. inbound logistics and operations)

the MNEs value chain is linked to those of its various suppliers via real-time integration

scheduling, shipping, warehouse management and planning (Porter, 2001). On the

Table 2

IT architecture and MNE strategies

Dimensions of

IT architecture

Type of MNE strategy

Multinational Global Transnational

Data Decentralized Centralized Distributed/shared databases

Communications Direct HQsubsidiary Multiple networksHQsubsidiary Enterprise-wide linkages

Technology Local facility Central shared facilities Interdependent facilitiesHQ

and subsidiary

Source: Adapted from Karimi and Konsynski (1991) and Ramarapu and Lado (1995).



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operations side, IT aids in the integrated information exchange, scheduling, and decision-

making in in-house plants, contract assemblers and component suppliers. Similarly, at the

downstream end (i.e., outbound logistics, marketing/sales and service), IT helps in real

time transactions of orders that could be initiated by customers, salespersons, or channel

partners; automated customer-specific agreements and contract terms; customer and

channel access to product development and delivery status; and an integrated channel

management system that includes warranty claims.

Several examples exist of MNEs using IT to seamlessly integrate their supply chain

relationships and transactions with their internal value chain activities, thereby gaining

additional global efficiencies. For instance, Sealand Inc., a US-based shipping company,

implemented a new proprietary shipping management system that automated customer

transactions worldwide, including order taking and document management. This enabled

Sealand to integrate multimodal functions such as sea- and land-based shipment tracking, payment processing, and container movements at cargo terminals. Likewise, Nike, Inc.,

the US-based leader in athletic footwear and apparel, implemented a global electronic

supply chain in order to share information with partners around the world and facilitate

better decision making. Its competitor, Reebok International, too has utilized SAP

enterprise software to unlock valuable information resources, create strong customer

relationships and achieve supply chain efficiencies (Hecox, 2004).

A relatively recent consequence of the spread of electronic networks and large

investments in IT has been the slow disintegration of the MNEs value chain through

outsourcing (Kambil, 1991). The reduction in transaction costs between the MNE and its

suppliers enabled by ITespecially increased digitization and communicationmeans thatseveral activities that once were performed internally can be bought from others. Indeed,

MNEs can now focus just on their core competencies and outsource peripheral activities to

specialized and lower-cost providers.

In recent times, outsourcing has graduated from relinquishing peripheral or low-value

activities to outside specialists to the wholesale externalization of key business processes

including corporate treasury management (Wood, 2002), human resources (Calabro,

2003), administration (Financial Times, 2003), content development (Financial Times,

2003) and R&D (Business Week Online, 2003). This trend, aptly named Business Process

Outsourcing (BPO), involves much greater information/knowledge transfer and coordi-

nation between the firm and its business process supplier than traditional outsourcingarrangements. Depending on the extent of coordination and interaction required, BPOs

are classified as (a) collaborativeone carried out under a flexible relationship, but

nevertheless in the supplierbuyer format or (b) transformationalone that involves true

partnership and even joint venturing to perform high-value processes and activities

(Linder et al., 2002). Indeed, relationships that initially began as simple outsourcingfor

instance, the global IT relationship between UPS and Motorolahave evolved into

strategic partnerships involving higher value activities through the building of trust over

time (Zviran et al., 2001).

A more recent extension of BPO is offshoring, wherein the business process supplier,

instead of collocation with its buyer in the same country, is located in a different

geographic region to leverage differences in labor costs and time zones. For instance,

countries such as India and Philippines have now become prime locations for offshoring



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business processes such as call centers, back-office operations and even customer service

and help desk. Indeed, MNEs have begun moving even higher-value and more complex

activities to offshore locations as knowledge transfer and learning are driving the transition

of offshoring from just being a vehicle for cost savings to a more intense and careful

search for higher quality and productivity (Dossani and Kenney, 2003).

In summary, IT is causing the very disintegration of the MNEs value chain, with more

value chain activitieseven what used to be key internal processesbeing externalized to

become part of the supply chain. From a cost or efficiency perspective for a MNE, this has

resulted in a distinct change in emphasis. MNEs, irrespective of their strategic orientation,

are increasingly finding that the efficient management of boutsideQ or supply chain

relationships are just as important as the optimization of internal value chain activities

(such as manufacturing) to leverage national or regional differences in resource availability

and costs.

3.2. Influence on MNEs local responsiveness

Apart from increasing the potential for attaining global efficiencies, a second

consequence of IT is to make MNEs much more locally responsive than before. For

instance, the Internet allows the MNE to educate customers more intensely by providing

instant and detailed access to product information through their websites. The Internet also

enables the accurate and cost effective targeting of specific market segments and

customization of promotion schemes aimed at different market segments to a degree never

before imagined.IT can be of considerable help in the after-sales service area such as on-line support of

customer service representatives through e-mail response, billing integration, customer

account review, status of order, parts availability, and building and maintaining accurate

customer profiles (Porter, 2001). Indeed, in an in-depth study of six software firms and

their international marketing activities, Moen et al. (2002) found that the Internet was used

to search for customers, distributors, and partners around the world. They also found that

the most significant use of the Internet was for post-sales service and support activities and

that these activities generated additional revenues, enhanced company image and

improved customer relationships, thereby reducing the uncertainty of operating in

unfamiliar environments.The MNE can also obtain rapid consumer response to marketing initiatives such as

changes in product features or pricing. Software companies increasingly rely on the Internet

for giving a wide cross-section of their customers access to beta versions of their products

or services to determine the combination of features most appropriate for their needs. For

instance, Yahoo! introduces new websites and services using what it calls a bquietQ or a

bsoftQ launch (Iansiti and MacCormack, 1997). First, it puts up a new service on its website

without any links to popular pages so that only the most advanced users can find it. Yahoo!

also opens the new service to its large group of volunteer beta-testers to try the new service

and test its features for errors, utility and ease of use, before releasing the service to all its

users. Such instant feedback allows the company to fine-tune changes, thereby creating a

perception of faster responsiveness, more robust services and higher levels of customer

loyalty.



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The Internet can also alleviate the problems of responding to local concerns, tastes and

constraints. For example, E-bay has either established local subsidiaries or purchased local

companiesfor instance, Bazee.com in Indiaso that trading can take place between buyers

and sellers in local currencies governed by local rules and regulations concerning trade and

advertisements. Of course competitors can do the same things; therefore, execution of

localization strategies becomes very crucial.

An extreme form of such responsiveness is exemplified by mass customization where

the MNE is responsive to the idiosyncratic needs of each customer (cf. Gilmour and Pine,

2000). Mass customization has emerged as a solution to addressing the need to respond to

varying customer demands quickly (i.e., providing the customer with a product of his/her

choice) while at the same time capturing the efficiency advantage of mass production

(Drew and Smith, 1998; Kotha, 1995; Piller, 2003). Mass customization requires

substantial communication between the firm and its customers to define and translatetheir different needs. This process, in many cases, is much more than an elicitation and

exchange of information and frequently involves close cooperation and even co-creation.

The extent of integration with customers may vary from the simple configuration of a

computer from a set of predefined options such as Dell to real co-design of products as

Cmax offers in the footwear industry (see Piller et al., 2004 for several case studies on

mass customization). However, the extent of mass customization varies between countries

within the same industry. For example, in the automobile industry, locating cars to match a

buyers specification from among a network of dealers is considered customization in the

US whereas, in Europe, cars may actually be produced to buyers specifications.

IT has created avenues for customized interaction with internal subsidiaries as well ascustomers, vendors and partners. Specifically, the ability to digitize and remotely

manipulate digitally stored information has enabled such competencies and knowledge

to be generated in any location within an MNE and shared instantaneously with other

locations and with external partners. Possessing this kind of capability has become most

useful in the area of knowledge management. For instance, Skandia has utilized a global

area network (GAN) to enable any of its subsidiaries to access and use digitized systems

and knowledge created and stored in designated competency centers around the world

(Bartlett and Mahmood, 1996).

In this respect, many MNEs have already resorted to IT to implement a more locally

responsive bcommunities approachQ to the management and sharing of their knowledgeassets. For instance, Infosys Technologies, a global provider of software services based in

India, has adopted a bcentrally facilitated and organizationally distributedQ approach to

knowledge management (Garud and Kumaraswamy, 2005). Under this approach, a central

knowledge management group creates and maintains a consistent IT infrastructure for the

provision of knowledge management services, whereas the actual content in the various

knowledge databases are created and maintained by various internal communities and

project groups distributed around the world. Furthermore, Infosys is slowly creating a very

customizable categorization scheme for the content in its knowledge repositories so that

different user communities can categorize content using keywords and categories most

appropriate for their respective needs.

Another way MNEs can use IT to respond to local knowledge needs is by creating

virtual communities. Eli Lilly, the pharmaceutical giant, created an Internet-based business



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concentrating on R&D and engineering, resulting in the emergence of contract

manufacturers such as Flextronics. In what way does this potential bhollowingQ out of

the MNE affect its competitive strategy? Is such nimbleness obtained at the cost of control

and something else? What happens to the notion of internalizing markets (from Dunnings

(1988, 1995) OLI framework) to take advantage of market imperfections and gain control?

In other words, has the Internet or, more generally, IT changed the dynamics underlying

the OLI framework?

In order to answer these questions, let us first explore the enabling role played by IT in

an MNEs global quest for resources, markets or efficiencies. IT enables MNEs to get

quick access to resources in labor markets such as graphic designers and animation but

does not help much when resources are physical in nature (e.g. raw materials) (Zaheer and

Manrakhan, 2001). Market-seeking MNEs can utilize IT to maximize global reach via the

World Wide Web and open new channels of distribution. Efficiency-seeking MNEs canuse IT to lower operating cost via business process outsourcing.

The Internet also enables MNEs to optimize own resources, focus on its core

competencies and gain access to missing resources/competencies by entering into alliances

and partnerships with external actors (Peterson and Welch, 2003). Dunning (1995) has

addressed how his OLI framework is affected by the era of alliance capitalism. MNEs may

engage in foreign direct investment (FDI) and in cross-border alliances in order to learn

about, acquire or exploit foreign technology and markets. This view is also consistent with

the writings of Nelson and Winter (1982) and Cantwell (1989, 1994) who advocate the

role of technological accumulation and learning as ownership-specific advantages of the

firm. Secondly, MNEs are increasingly utilizing strategic alliances to improve theirdmarket positioningT as a location-specific advantage, thereby enhancing their ability to

collect information on risk and regulator environments (Samii, 2004). Thirdly, alliances

affect the boundaries of the firm in a profound manner by substituting internalization with

quasi-internalization through the reduction of transactions costs and enhancement of the

ability to control even external relationships (Samii, 2004). Thus, the Internet and more,

generally, IT accelerate all aspects of the OLI framework. Indeed, the very influence of IT,

which reduces distance while at the same time accelerating speed of operations, promotes

the use and effectiveness of alliances and partnerships. At the same time, however, the

increasing number of partners from various countries and locations presents daunting

cultural challenges, as is increasingly evident from the difficulties faced even by smallcompanies engaged in BPO (Wall Street Journal, 2004).

What may be the eventual consequence of the above events for MNE strategic

orientations defined by Bartlett and Ghoshal (1989)? It may be instructive here to explore

changes that have taken place during the past decade within MNEs in both the service

and manufacturing sectors. For instance, during the 1990s, the French MNE, Cap

Gemini, made a $40 million investment to shift to a transnational strategy. The French

MNE chose English as a common language for all correspondence and business

documentation and adopted common service offerings regardless of which country or

market it served (Stephens, 1999). Likewise, in the manufacturing sector, the Swedish

maker of appliances and outdoor products, Electrolux, embraced a transnational strategy

in place of its earlier multidomestic orientation. In an in-depth longitudinal case study of

Electroluxs Home Products Europe division, Manwani and OKeefe (2003) describe in



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detail how the company created an IT architecture to centralize key functions and

activities such as supply chain, product development, human resources, standards, and

shared services.

Thus individual MNEs as well as those firms involved in alliances and joint ventures

have leveraged IT to adopt transnational strategies. For instance, the global Renault

Nissan alliance in the automobile industry has integrated the respective IT operations of

two automakers, Renault and Nissan, to standardize infrastructure, manage global vendor

relationships and implement global business applications including computer aided design

software (RenaultNissan, 2004). Such integration and leveraging has led to greater

collaboration in all activities including purchasing, logistics, manufacturing and R&D

globally between Renault and Nissan sites located throughout the world (Yoshino and

Fagan, 2003). That this has been possible even in what has been a traditionally been an

industry requiring a multidomestic orientation is indicative of the sweeping trend towardstransnational strategic orientation.

Given these trends, it is our view that the traditional MNEs strategies such as

international, multidomestic, global, and transnational, will become blurred due to the

advent of the Internet and other new information technologies. MNEs employing global

and transnational strategies that emphasize upstream activities in the value chain can

utilize IT to become more efficient. Those MNEs using multidomestic and transnational

strategies that stress downstream activities in the value chain can exploit IT for greater

and more precise global research. MNEs that are better able to control the interface of the

value chain activities between themselves and their respective alliance- and outsourcing

partners may become more successful than others. As MNEs face a plethora of broad-based or niche competitors due to the IT-influenced lowering of entry barriers, all MNEs

will be pressured increasingly towards adopting the transnational strategy orientation

(Fig. 2).

4.2. Consequence for MNE organizational structure

Modern MNEs, as pointed out earlier in this paper, are characterized by complex

integration that requires close control and coordination of their globally dispersed

subsidiaries. In this context, IT enables decision-making to be elevated to higher levels in

organizations (Hagstrom, 1991) as operational data is easily and inexpensively available tosenior managers. Second, IT facilitates formalization as structured roles and job definitions

are easily stored and transmitted using IT (Hagstrom, 1991). IT reduces the scope of

idiosyncratic judgments in the work of subsidiary managers making worldwide mandates

possible (Child, 1984). Third, IT makes it possible to monitor subsidiary activities on a

much greater scale than ever before (Sewell, 1998; Zuboff, 1989).

In an empirical study of 150 MNEs from 20 countries representing 25 industries, King

and Sethi (1999, 2001) found that there existed a fit between MNE strategies, structures

and their IT systems. Specifically, they found that for each strategic orientation, the

organizational structural characteristics of centralization, dispersal and coordination

matched specific IT configurations.

At a more micro-level, Finnegan and Longaigh (2002) studied the specific effects of

IT on control and coordination relationships between MNE HQ and subsidiaries. In an



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empirical study of 15 MNEs subsidiaries based in Ireland, they found that MNEs used

a variety of IT tools to achieve global efficiency, local responsiveness, and transfer of

information and learningall hallmarks of a transnational strategy. They also found

that the prevalent use of IT changed the very nature of relationships between

headquarters and subsidiaries. Specifically, IT enabled headquarters to monitor

operational data from subsidiaries in real time and to directly control or establish

policies and guidelines for different activities within subsidiaries such as budgeting,sourcing, transfer pricing and production plans. At an extreme, IT even enabled MNE

headquarters to make changes to key business processes within subsidiaries. Similarly,

IT, through corporate databases and ERP systems, also made it possible for MNE

headquarters to ensure coordination between subsidiaries without any explicit

interaction among the different subsidiaries or with HQ.

This increasing ability of MNE HQ to control and coordinate its relationships with

subsidiaries is also being reflected in its relationships with external partners, suppliers

and customers. As IT enables MNEs to undertake numerous alliances and partnerships,

perform contract manufacturing, create B2B hubs, and deal with infomediaries, their

organizational structures are becoming amorphous, fast changing, and flexible. In otherwords, the traditional boundaries of the MNE (in general, the firm) are becoming

blurred too.

In our view, going forward, the underlying themes for emerging MNE structures will

be adaptation, flexibility, responsive to local needs, team-orientation, two-way

communication and decision-making and continual learning. In the Internet age, a

new type of manager and employee will emerge. Managers will need to acquire new

abilities such as the ability to work in and facilitate teams, general management skills,

and management of innovation. Employees will need to become dresearchers in practiceT

(Schon, 1983), wherein they reflect and innovate even as they learn to become more

efficient in performing their daily routine activities. The human relation function will

become more emphasized as the sourcing of highly skilled and knowledgeable

employees and managers amidst intense competition for their services become more

High Global Transnational

Low International Multidomestic

Low High

Level of local responsiveness

Level of global

efficiency

Fig. 2. Consequences of IT for MNE strategic orientation.



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critical to MNE competitive advantage. In other words, the traditional organizational

structures favored by MNEs such as functional, geographical or product/SBU may not

be appropriate any more.

What, then, will the new organizational structures look like? The new structures will be

a constellation of adhocracies or entrepreneurial organizations (Mintzberg, 1979) with a

very involved headquarters. More organic, hybrid structures such as the flexible matrix or

network structures will become the norm. These structures will mix traditional functional

specialization with new elements such as ever-changing task forces task-specific teams,

troubleshooting units and multiregionalmultifunctional teams as IT enables more

intense collaboration, coordination, responsiveness and learning opportunities.

In sum, the consequences of IT for MNEs have been that the distinct strategic

orientations of the Bartlett and Ghoshal (1989) typology are increasingly becoming

blurred with transnational strategies gaining in importance. Furthermore, MNE structuresare becoming more organic in nature, given the increasingly simultaneous emphasis on

both global efficiency and local responsiveness.

5. Challenges to MNEs in implementation of the strategic and structural changes

Aside from the enabling influences, the democratization of IT can also raise new

challenges and questions for MNEs both in terms of strategies and structures. Clearly,

the traditional command and control style of management was not a good model in a

rapidly changing environment. In that case, will the IT-driven centralization and control by headquarters in MNEs be harmful as well? Second, the interpenetration of

organizational boundaries creates an entirely amorphous, loosely defined organizational

structure. Also, innovation increasingly occurs in centers of excellence distributed

around the world and frequently involves alliance partners, suppliers and customers. Will

MNEs learn to manage boundary-spanning relationships to foster more open and trusting

relationships with suppliers, competitors, and consumers and also be willing to share

knowledge hitherto considered sensitive and proprietary? Third, due to outsourcing or

BPOs, jobs involving basic skills will continue to migrate to lower cost countries and

partners. Will MNEs be able to handle this bdeskillingQ through constant training and

education of their employees to perform more complex, value-added tasks andfunctions? Finally, will MNEs be able to develop a wholly new breed of managers

who have the ability to integrate and manage diverse people, cultures and technologies,

amidst continual change?

On the IT side, a different set of challenges is emerging. IT managers and executives are

becoming more concerned with regulatory, technological and country-oriented issues, in

addition to their traditional tasks of managing technology and networks (Lai and Chung,

2002). As higher value (and more complex) work is performed outside the firms

traditional boundaries or even goes offshore, the integrity and control of information also

become dominant issues. Digitized data and information can be copied, transmitted and

stored without being detected. The laws relating to data privacy are not universal and

victims of crimes from such data loss are not localized. While it used to be relatively easy

for MNEs to monitor and control offshore manufacturing activities, it is more difficult to



15/19

monitor and control databases and information-infused activities (e.g., financial, business

intelligence and customer information). Economic pressures and national politics will

determine some of these issuesfor instance, HSBC is under pressure in UK for moving

some of its operations to Indiaeven though good, competitive viable alternatives do not

exist.

A third set of issues have to do with policy and legal implications for MNE

operations around the world. For instance, consider the issue of corporate taxation, an

already complex burden for MNEs. Taxation is an important criterion for MNEs to

determine where to locate their headquarters and foreign subsidiaries. Earlier, taxation

was based on fiscal sovereignty, which traditionally has been based on two criteria

territorial jurisdiction and geographical autonomy (Kobrin, 2001). However, as

geographic boundaries become less relevant for trade and commerce, the old rules of

taxation are becoming difficult to impose. For instance, for tax purposes, how do MNEsaccount for Internet commerce that transcends geographic boundaries in a consistent

manner?

Governments will have a hard time determining income streams and even in

ascertaining whether a transaction has been completed (Kobrin, 2001). The geographical

location of both buyers and sellers may be ambiguous (Sawyer, 1999). For example, UK

announced in March 2000 that a server or web site within the geographic boundaries of

the UK is insufficient to constitute a permanent establishment. Many states in the US

are uneasy about loss of tax revenue from Internet transactions. The ability of suppliers

of goods and services to circumvent taxation will give rise to new tax concepts that

MNEs will have to adjust to. For instance, consider the bBit tax rateQ an idea fortaxation based on the volume of data traffic, with telecom companies serving as

collectors and distributors of taxes to relevant taxing authoritieswhich has been

considered and abandoned for the time being by the European Union ( Akdeniz et al.,

2000).

Finally, there are security and encryption issues that have significant implications for

MNE strategies. In the past, commercial and law enforcement agencies rarely debated on

the adoption of a policy that impacted both directly. However, in this age of cross-border

terrorism and fraud, encryption is becoming an increasingly critical issue that can both

enable and constrain global commerce. Stronger encryption increases data transfer

security but creates law enforcement problems. In other words, e-commerce and lawenforcement issues cannot be decoupled anymore. Here again, different countries have

different standards. Malaysia and Singapore have existing laws for legal and controlled

access to encryption. France too had similar laws, but dropped restrictions on

cryptography in 1999, whereas the US still has some restrictions in place on access

to cryptographic codes.

Adding to this confusing patchwork of global laws and regulations, respect for privacy

and free speech issues complicate the issue of commercial data encryption further. UKs

proposal to entrust third parties to monitor and enforce privacy/ protection/security issues

is in conflict with the laws of countries wherein the governments maintain greater control

on the flow of information. These issues will impact data collection, storage, and data

oriented service related decisions made by MNEs, especially for those offering digitized

products and services.



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Information Technologies and the Future