The Behaviour of MNEs and of Global Supply Chains - Essay Example

?The Behaviour of MNEs and of Global Supply Chains Introduction A multinational enterprise (MNE; also called a ‘transnational enterprise’ or ‘multinational corporation’) is defined as ‘an enterprise that engages in foreign direct investment (FDI) and owns or, in some way, controls value-added activities in more than one country.’ According to Dunning and Lundan (2008, p.3), this is the threshold definition of an MNE which is accepted by international institutions such as the Organisation for Economic Co-operation and Development (OECD), the United Nations Conference on Trade and Development (UNCTAD), governments and other organisations. A ‘value-added chain’ is defined as ‘the process by which technology is combined with material and labor inputs, and then processed inputs are assembled, marketed and distributed. A single firm may consist of only one link in this process, or it may be extensively vertically integrated…’ (Kogut, 1985, p. 15). It is the purpose of this brief discussion to explore some of the more salient views of economists on the behaviour of MNEs and global supply chains and how they affect the global economy. Effect of MNEs in emerging economies Theoretically, the MNEs fulfil a vital role in linking economies with each other, through the transfer of financial capital, knowledge and capabilities, ideas and value systems (Meyer, 2004). Controversy attends, however, the effects of MNE activities on the development of the local economy and the social welfare of the host country residents. It is acknowledged that MNEs may transfer advanced technologies and best practices to emerging economies where it has subsidiary operations, while local firms may benefit from positive knowledge spillovers from the operations of MNEs. Knowledge spillovers are different from knowledge transfers because the latter are intentional and are targeted at the local subsidiary, while spillovers are not deliberate, and the beneficiaries are the local firms other than the subsidiary. This positive development is tempered, though, but the possibility that the MNE may crowd out local firms, and cause a reduction in competitiveness in the market. Furthermore, MNEs may impose their strong bargaining position in relation to host country governments, in order to obtain concessions which minimize the social and economic benefits which should have accrued to host nations (Stiglitz, 2007; Bansal & Hoffman, 2012). Global standardisation versus national differentiation/ fragmentation in the supply chain At the centre of the debate concerning MNE’s impact on host countries and their environments is the pressure towards global standardisation as against the local tendency towards national fragmentation (Bansal & Hoffman, 2012). According to the integration-responsiveness framework developed by Bartlett and Goshal (1998, 2002), MNEs are compelled to integrate their operations globally because of customers across different countries have common needs, and it is by centralized decision-making and standardized products and practices that the MNE could more efficiently and economically meet the demands of its global market. Among external determinants of MNE global standardization are home and host country pressures as well as those influences that cross borders. Complications relating to the varying availability of materials, technology, skilled workers, and other resources across countries impacts upon the decision of MNEs whether and how far to standardize and integrate. Early in the development of the global economy, significant heterogeneity of host country regulations forced MNEs to adopt different policies to adopt to each country and culture. More recently, however, national governments have concentrated on attracting foreign direct investments (FDIs), raising concerns that developing countries would lower their barriers to trade and FDI, and to keep environmental regulations low to attract MNEs to set up production and infuse investment in the country (Bansal & Hoffman, 2012). There are also internal determinants of MNE global standardization, one of which is the ability of these large corporations to transfer skills, capabilities, technologies, and similar intangible assets from one host country to another, and to and from the home country. Where technology allows, its adoption into host country operations may increase efficiency and reduce materials use. The MNE’s possession of the more advanced technologies which it developed from the more restrictive countries will cost less to adopt to subsidiaries in developing countries rather than make use of the indigenous methods in the low-regulated countries (Bansal & Hoffman, 2012). The effect therefore is positive for the host country because of the transfer of superior technology inwards. Cammett (2006) observed that in the international apparel industry, developing countries are compelled to create regionalised production structures in order to take full advantage of local institutional assets. A crucial practice that has supported this trend is the tendency among multinational firms to disseminate and require compliance with standardised business practices and procedures among their principal suppliers in the various regions where they operate. The move towards standardization has been supported by the adoption of new, high-technology systems by which supply-chain management is implemented. Production for world markets shapes the manufacturing industries in developing countries (Linsu & Utterback, 1983). The emergence of standard systems have in turn created ‘clusters’ of interrelated institutions and firms in the locality or region which in turn causes retailers to source from them. Because multinationals would tend to replicate these patterns in different localities, it creates similarities in apparel contracting, assembly and delivery, which in effect undermines the logic of tapping diverse regions to acquire the benefits of their institutional assets, when their institutional assets . This study observes that local policymakers have observed the emerging similarities among MNE suppliers, and have scrambled to create their own clusters of complementary research and business institutions in order to differentiate their national territories (Cammett, 2006). Supply chain relationships in the global economy Supply chain relationships create significant value for MNEs (Crone & Watts, 2002). Growing competition in both domestic and international markets compels MNEs to search for means to increase efficiency and lower costs (Fueling, 2008). To accomplish this, MNEs tend to source inputs from more efficient producers, whether they are located locally or abroad. Enhanced efficiency can be realized from lower labour costs, increased availability of raw materials, and adoption of technically advanced manufacturing and service processes (Sisco, et al., 2010) Building supply chains also affords MNEs the opportunity to enter new markets (Carney, 2005). Robust growth prospects are provided by demographic shifts and fast growing emerging economies, thus MNEs will find strong motivation to branch out to and penetrate these markets (Bonaglia & Goldstein, 2007). By developing supply chain relationships in these economies, MNEs are able to build local presence in these markets, build brand awareness, acquire insights into both consumers and competitors, and reduce costs in delivering the final product to the domestic market. The MNE also gains access to skilled workers, technological expertise, and other strategic assets when it builds supply chain relationships (Linsu & Utterback, 1983; Sisco, et al., 2010). According to Gereffi, Humphrey and Sturgeon (2005), there are three types of supply relationships, depending on the degree to which they comply with standardized production processes and output. The first is the commodity supplier which creates standard products from arm’s length relationships with buyers. The second is the captive supplier which makes non-standard products with the use of machinery designed particularly according to the needs of the buyer. Last is the turn-key supplier which produces custom-made products with the use of flexible machinery in order to pool capacity for different buyers. The taxonomy draws implications concerning the complexity of information transmitted between firms (Bode, et al., 2011), and the level of asset specificity imputed into the production equipment (Gereffi, et al., 2005). The quasi-hierarchical relationship between buyers and suppliers are fashioned by the dynamics of the transactions between them. For instance, the turn-key supplier may be seen as an element in a modular production network, because of the ease with which highly competent suppliers may be engaged or disengaged depending upon the MNC buyer’s needs. On the other hand, a captive supplier is related to the MNC as its subordinate supplier, because the MNC strictly specifies the product specification and production process, to the point that the MNC invests in the machinery and capacity dedicated to this purpose. Furthermore, it the interest of the MNC itself, it may insist on being the dominant, or even the exclusive, client of the captive supplier (Gereffi, Humphrey & Sturgeon, 2005). The manner in which industry activities are connected within a value chain and how the firms involved relate to each other is referred to as the value chain governance structure. Gereffi (2011) proposed a more differentiated typology comprised of five instead of three value chain governance categories. These five structures are: (1) Market governance is characterized by simple, straightforward transactions between casual parties who have little or no formal collaborative arrangement between them. Cost of switching by either party is low, and information on product specification is easily transmitted between them due to the fact that suppliers determine the production process with little input from the buyer. The principal governance mechanism is price. (2) Modular governance involves more complex transactions than under market governance, but which are nevertheless easy to codify. The products are created according to client specifications, but the supplier retains full responsibility over the production process. The technology used employs generic machinery, enabling the supplier to spread its investment across a wider customer base. Since buyers are able to more closely detail the desired product specifications, information transfer is much more substantial and involved then in the market governance structure, but still easily transmitted. Since capital equipment are not dedicated, switching costs remain low. (3) Relational governance is in place when suppliers and buyers are mutually dependent upon each other, though lead firms continue to specify product requirements and therefore exercise a degree of control over the suppliers. There is frequent interaction and sharing of knowledge between parties, and information is of a complex nature not easily learned or communicated. The goods are more differentiated than under modular governance, and the differentiation is based on quality, geographic origin, or unique characteristics which create a competitive distinction for the supplier. The information linkages are such as would require trust and mutual respect based on reputation, social and spatial proximity, and ethnic and family ties. Such relational linkages take time to build, thus cost and complexities involved in switching suppliers is high. (4) Captive supplier governance usually exists when suppliers are several and small compared to the few, large buyers, and the latter exercise control over the former. Power asymmetry exists, with the dominant buyers setting the conditions and specifications catering to their particular needs. Lead firms help suppliers to upgrade their production capabilities because such would enhance the efficiency of the former’s supply chain. Strong ties are therefore created between parties that create high costs and difficulties in switching partners. For suppliers to be assured of fair treatment and a fair share of the market price, ethical leadership plays a strong role in the manner the lead firm relates to the captive supplier. (5) Hierarchical governance takes place when the supply chains are vertically integrated and managerial control vests in lead firms by virtue of their in-house development and manufacture. This type of governance is resorted to when product specifications are too complex and cannot be codified, and when finding competent suppliers become difficult. According to Gereffi (2011), hierarchical governance in light of vertical integration is less common than in the past, but remains a necessary and vital feature of the global economy (p. 42). Gereffi (2011) explains that global buyers are the main determinants of the formation of internationally dispersed production and trade networks. As a result, globalization has imposed a new international competitive order according to which industries worldwide are compelled to align with in an attempt to remain relevant. This new order comprises a global value chain framework which is used by international organizations among which may be counted the World Trade Organization, the World Bank, the International Labor Organization, and the U.S. Agency for International Development. This diverse range of actors in the global economy are capable of exerting strong influence on both demand side and supply side of production and distribution networks across the globe. The resultant global value chains significantly contributed to shaping the patterns of international trade, production and employment which, in turn, impacted on the evolution of developing nations and their level of competitiveness (p. 37-38). Codes of conduct of multinational enterprises (MNEs) Mariana (2008) pointed out that MNEs have exerted predominance of the global economy over national politics, that is, the ability of MNEs to override local political structures; likewise, Ahmad and Eijaz (2011) describe multinational corporations (MNCs) as behaving as ‘multinational governments (MNGs’ or ‘multinational states (MNS)’ which aim of creating monopolies to the detriment of the rest of humanity (p. 169). Auroi (2003) observes that despite the immense resources and potential power of MNCs, it is unlikely that they would be predisposed to using them even against weaker partners because such would result in unsustainable chain management that would work to the detriment of the MNC. For instance, a multinational corporation may engage in business with fair trade organizations founded on social causes such as cooperativism, women’s rights, or democratic procedures, not entirely out of altruistic design, but because MNCs would find it easier to negotiate its contracts with one organized entity rather than several small producers. Moreover, there is actually a smaller gap between the ethical principles of large corporations and smaller organisations than may be originally imagined. MNC importers tend to enforce more quality and sanitary requirements towards their suppliers in developing countries, in compliance with local and international laws. Observance of the same standards tends to enhance the organizational capacities of suppliers (Auroi, 2003, pp. 43-44). One of the more serious ethical concerns involving multinational enterprises is what Auroi (2003) calls the ‘democratic gap.’ A survey conducted by the Investor Responsibility Research Center (IRRC) among 122 large corporations in the USA, only 18 stated that their firm had a code of conduct that recognized the right to freedom of association, and only 12 took explicit cognizance of the right to union membership (p. 33). The host country environment plays a crucial role in the enforcement of these rights in the actions of suppliers to MNEs, and when functioning in developing countries, enforcement becomes more erratic. A classic case is the exploitation of child workers in the garment and carpet industries; suppliers often resist social clauses that prohibit such practices, precisely since the exploitation of underpaid women and children is how such suppliers keep their costs low (Arnold & Bowie, 2007; Foster et al., 2011). There are some codes of conduct imposed on MNEs by international organizations on the basis of multilateral agreements and treaties. Among these are the World Health Organization (WHO) that specify correct practices in certain specified sectors, the OECD, and the World Trade Organization (WTO). Proposed regulation of MNE activity in host countries Economists and policy makers have made the case that economic benefits may flow from MNE activity to the host country. Stiglitz (2007) observed, however, that because large MNEs with strong bargaining positions have a tendency to overshadow national governments particularly of emerging countries. There is therefore a need to regulate the operations of MNEs, in order to create a balance between the MNE on one hand and the host country on the other. Stiglitz suggests the following principles on which future international legislation should be based: (1) Multilateral and bilateral agreements should strengthen non-discrimination among host countries by MNEs; (2) During settlements of disputes, compensation should be limited to actual investments and not on ‘lost potential earnings’ which are speculative in nature; (3) The bilateral and multilateral agreements should not presume a right of establishment (i.e., they should not provide for pre-establishment rights), nor should they be allowed to go beyond domestic laws in the protection of property rights. They should respect domestic legislation particularly on the issues of environmental protection, labour relations, and affirmative action where this is relevant; (4) An international commercial court should be established to adjudicate international claims and disputes, pursuant to the laws of the host country. Although the subsidiary firms may have been incorporated domestically, it is still possible for legal action to be filed on the basis of investment treaties, placing it appropriately within the jurisdiction of the international commercial court; (5) In case there is no international commercial court to hear and decide international disputes, the adjudication should be done by host country courts. However, if the foreign corporations do not repose trust in the host country courts, adjudication should take place in the home country, except: when the dispute concerns damage to the environment, in which case the cash shall be heard in the higher of the prevailing standards of the home or host country; (6) Parties who have claims or have suffered injuries by the MNE or its subsidiary corporations should be allowed to bring legal action in the host country courts, under the higher of the standards of the two countries; furthermore, an agreement should be reached concerning compliance with the cross-border enforcement of judgements. (7) Corporate officials culpable for the injurious act of the MNE or its subsidiary corporation should be held criminally liable for the violation of domestic laws, and any bilateral investment treaty should provide for expedited extradition for corporate offenses (Stiglitz, 2008, p. 556). With the proper legal framework in place, the intended economic effects based on market forces should have a fair chance of materializing in MNE investments in host countries. Conclusion Since the prospects of globalization of the world’s economy began in 1962, many political economists and ideologues (including Immanuel Kant, Karl Marx, and Bertrand Russell) predicted the demise of the nation-state (Drucker, 1997). Apparently, this has not happened. While dire predictions may be disregarded, international business, through the workings of MNEs and global supply chains, has indeed redefined international relations and the global economy in its pursuit of resource accumulation, ‘the spatial dimensions of productions and the practicalities of profit, operational logistics, and competition’. MNEs now produce one-fifth of total global exports, and the largest 100 MNEs account for a full 25 per cent of all FDI (Jarvis, 2005, p.201). Despite their immense resources and over-reach, MNEs, and the global supply chain that support them, cannot act to the detriment of nation-states and national economies, for the simple reason that the collapse of national powers and entities is detrimental to their own existence. For instance, despite the power of the MNE to standardise and integrate, they cannot do so to the extent that they eliminate the cross-border differences that create competitive advantage and efficiencies. Nor can global supply chains cause unrelenting exploitation and deterioration of national environments because they are dependent on these resources and must operate sustainably to prevent their depletion or degeneration. This brief survey of existing literature on the behaviour of multinational enterprises and global supply chains serves to point out that, despite the seeming fixation to accumulate profits and apparent indifference towards the conservation of natural resources, MNEs are ultimately mindful of their own survival, and shall conduct their business, and manage the supply chains that support them, in a manner that will be in accordance with the mutual interests they share with nation-states and national economies. Bibliography Ahmad, R, & Eijaz, A 2011, 'Global Economy: New Actors and New Perspectives', Research Journal Of International Studies, 21, pp. 169-171, Academic Search Complete, EBSCOhost, viewed 26 November 2012. Arnold, D, & Bowie, N 2007, 'Respect For Workers In Global Supply Chains: Advancing The Debate Over Sweatshops', Business Ethics Quarterly, 17, 1, pp. 135-145, Business Source Complete, EBSCOhost, viewed 26 November 2012. 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An empirical study on supplier management performance with different outsourcing strategies', International Journal Of Production Research, 48, 7, pp. 2081-2094, Business Source Complete, EBSCOhost, viewed 26 November 2012. YEUNG, H 2009, 'Transnational Corporations, Global Production Networks, and Urban and Regional Development: A Geographer's Perspective on Multinational Enterprises and the Global Economy', Growth & Change, 40, 2, pp. 197-226, Academic Search Complete, EBSCOhost, viewed 26 November 2012. Read More