Download - 2011 GCS_01 TNC
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?