Multinational Management and Global Business: International Production - Literature review Example

International Production: A review of theories Global business is now driven by in excess of 60,000 multinational enterprises (MNEs) with over 800,000 subsidiaries in foreign countries. International production may be of resource-based, import-substituting, export-platform or globally integrated kind. Companies want to expand their business base aboard for mainly "efficiency seeking" and "strategic asset seeking" reasons. Multinational companies expand their business base in other countries through Foreign Direct Investment, Merger, and Acquisition and so on. After establishing its subsidiary in other countries, multination companies transfer their technical know-how and knowledge to its subsidiaries for achieving their targets. Multinational companies willing to expand their operation in overseas have to face quite few challenges like regulatory environment of the host country, culture and so forth. In general, the advent of the modern Multinational companies was largely because of the fast industrialization in the western society. The industrial revolution accelerated new technologies of production and distribution that necessitated larger operations than firms had managed before. Conversely, mass production technologies demanded a constant and dependable stream of input, and the pursuit for new economical long term sources of materials and supplies was the incentive that drove many companies in the foreign countries.1 In fact, firms choose to operate in different countries of the world for a good many reasons, as an example, to reap the benefit of economies of scale, cheap labor cost etc. We can see today that extensive number of companies like Coca Cola, Volvo etc. are operating in different parts of the globe. In this paper, the author attempts to shed light on the activities of the multinational companies in relation to various international production theories. Companies want to expand their business base aboard for mainly "efficiency seeking" and "strategic asset seeking" reasons. Efficiency seekers intend to rationalize prevailing structures to attain economies of scale and scope. As per John Dunning, efficiency-seeking FDI takes two principal forms: 1) the first is intended to capture the benefits of disparity in the availability and cost of traditional factor endowments in different countries of the world 2) the second sort is that which takes place in those countries which have largely comparable economic structures and income levels and is intended to reap the benefits of the economies of scale and scope, and of distinction in consumer tastes and supply capabilities. For instance, many U. S. companies transferring production to lower-cost Mexico and then exporting finished products back to the USA. An example of the second is American investment in European countries. Europe's stable move toward economic integration over the preceding years has given U. S. firms bigger opportunities and scope for attaining increased efficiencies and rationalization. Among all the purposes for foreign direct investment over the 1990s, strategic asset seeking was amongst the most significant. The aim of the strategic asset seeker is to increase company's prevailing portfolio of assets in such a way that strengthens the firm's existing competitive advantage. Examples of strategic asset seeking investment include Ford's acquisition of Volvo of Sweden and Jaguar of the United Kingdom, and Land Rover from BMW in early 2000, three acquisitions that helped boost the Ford's product niche in the luxury automobile market.2 Global business is now driven by in excess of 60,000 multinational enterprises (MNEs) with over 800,000 subsidiaries in foreign countries. The world's top 100 non-financial MNEs are the main drivers of global production. Their foreign assets amounted to $2 trillion in 2000, with over 6 million employees across the world. They focus mostly in electronics and electrical equipment, automobiles, petroleum, chemicals, and pharmaceuticals. The top ten MNEs in 1999 ranked by foreign assets are General Electric, Exxon-Mobile, Royal Dutch Shell, General Motors, Ford, Toyota, Daimler-Chrysler, Total Fina (France), IBM and BP. FDI (foreign direct investment) is the major medium for MNEs to expand globally. When a firm decides to enter a new market, it has to adjust itself in the regulatory environment in that market alongside the local competitive forces. Entry strategies concern where (location selection), when (timing of entry), and how (entry mode selection) international companies should enter and invest in a foreign territory during international expansion. These entry strategies are significant because they determine an MNE's investment environment, operation treatment, resource commitment. For instance, DuPont considered China as its strategic location in terms of not only the principal offshore market but also the key manufacturing center of products sold in other countries. Although it came across uncertainty in early 1980s, DuPont decided to enter this market as an early mover with a view to being market leader there. In reality, DuPont started with exports to China, consequently by minority joint ventures, then majority joint ventures, and in the end, wholly-owned subsidiaries.3 According to international trade and capital movement theory, economically superior countries, because of having profusion of capital and shortage of labor, have low rates of profit or interest but lofty wage rates before international transaction. They consequently tend to export good requiring capital-intensive production method to less advanced, labor-abundant countries or to export capital directly through FDI in developing countries. As we can see today, a good many companies are setting up or relocating their production plants in countries like China, Vietnam where labor is cheap. Attention is paid to the determinants of international competitiveness and the possible reasons why some firms doing better and growing faster than other firms. Central to this idea is the theory technical competence as regulator of competitive success or failure. The theory suggests that firms that operating in the international market with a greater level of technical competence will grow faster than other firms. And as a result will have a bigger market share.4 East Asia's progression in the electronics industry during the late twentieth century is a classic example of the catalytic role that connection with overseas firms can play in industrial expansion (for Eexample, Borrus, Ernst, and Haggard 2000; Ernst 1997b; Ernst and Guerrieri 1998): an early incorporation into global production networks provided Asian producers with access to the industry's major markets that helped to compensate for the primarily small size of the home markets. Network participation also offered new opportunities, pressures, and incentives for Asian network suppliers to improve their technical and managerial skills. (Ernst and Kim 2002). Consequently, East Asia emerged as the overriding base of global manufacturing for the electronics industry, particularly for assembly and parts producton.5 Globalization of business has been one of the central characteristics of the last two decades. Many corporations from both developed and developing countries have become multinational players to grab market opportunities across the globe. The consumers of the world are now exposed to an extensive range of commodities. When customers in different countries demand products and services for better living, companies endeavour to meet such needs caused by globalization of consumer behaviour. Resultantly, giant multinationals like Proctor & Gamble, Unilever are now delivering their products to all four corners of the world. According to Hitt and his colleagues, the new competitive business landscape is shaped by technological changes and the global economy. Likewise, D'Aveni termed the rapidly changing character of new competition "hyper competition, which is an outcome of dynamics of strategic manoeuvring among international and inventive competitors. While hyper-competition happens among competing firms, cooperation occurs between or among rival and complementary firms. This collaboration at times results in merger and acquisition. For example, Arcelor and Mittal, two steel producing companies, have recently merged to form ArcelorMittal for reaping the strategic advantages. After the merger ArcelorMittal is now the biggest settle producing firm in the world which is the only firm to produce the full spectrum of steel products for all kinds of industries.6 Transaction cost economics (TCE) perspective can be summed up as follows: markets and hierarchies (organizations) are alternative instruments for completing a related set of transactions, and whether a set of transactions should be executed between firms (across markets) or within a firm depends on the relative efficiency of each mode. An extension of transaction cost theory to multinational corporations (MNCs) is known as the internalization theory, which assumes that an MNC possesses some rent-yielding, firm-specific advantage (primarily some form of know-how). Consequently, an MNC often internalizes its operations by way of engaging in FDIs through its subsidiaries.7 As we can see in real world that the Japanese firm Marubeni Corporation has invested in a fertilizer factory called KAFCO in Bangladesh through its subsidiary. The eclectic approach to the theory of international production may be summed up as follows. A local firm catering to its own market has a variety of avenues for growth: it can diversify horizontally or laterally into new product lines, or vertically into new activities, including the production of knowledge; it can take over existing firms; or it can exploit overseas markets. When it makes good economic sense to prefer the last option, the firm becomes a global firm (defined as a firm which services overseas markets). Nevertheless, to be able to produce alongside native firms located in these markets, it must possess additional ownership advantages adequate to offset the costs of serving an unknown or distant environment (Hirsch 19761). "Congruence" or "fit" can be explained as "to extent to which the needs, demands, goals, objectives and or structure of one component are consistent with the needs, demands, goals, objectives and structure of another component" (Nadler and Tush, 1980: 40). Congruence theorists suggested that a greater whole degree of fit between the environmental and organizational components will result in more effectual organizational behaviour at multiple organizational levels (Chandler, 1962; Galbraith, 1977; Lawrence & Lorsch, 1967; Nadler & Tushman, 1988; Woodward, 1965). MNCs must deal not only with the cross-cultural environment, but also with the cross-national environment, which includes the social, legal, and political landscape of different overseas markets in which they operate (cf. Adler, 1986). Some particular elements of the cross-national environment comprises the nature and history of the labor unions and management, national entry barriers (tariffs, quotas, and other border restrictions), local national government effects (preference in terms of purchasing arrangements, subsidies, research expenditures, etc.), and industry regulations and associations (Leontiades, 1985). Therefore, a decisive factor in global firms encompasses the extent to which MNCs visibly seek to comprehend the host-country's culture and socioeconomic environment (Milliman & Von Giinow, 1991).8 Organizational learning is viewed as routine-based, history-dependent and target-oriented. Organizations are considered to be learning by way of encoding inferences from history into routines that subsequently direct behaviour. Within the perspective of organizational learning, issues covered include how firms learn form direct experience, how organizations learn from experience of other firms and how organizations build up conceptual framework or paradigms for understanding that experience. Routines and beliefs change in response to direct organizational experience through two major means. The first is trial-and-error experiment. The second method is organizational search. Research on aircraft production, first in the 1930s (Wright 1936) and later during Word War II (Asher 1956), pointed out that direct labor costs in constructing airframes decreased with the cumulated number of airframes manufactured. If Organizations gather experience of other firms through the transfer of encoded experience in the form of technologies, codes, procedures, or similar routines (Dutton & Starbuck 1978).9 Knowledge is considered to be the most strategically significant resource among all the resources of an organization (Grant, 1996). Knowledge renders the ability for organizational action and new knowledge gives the ability for organizational renewal (Inkpen, 1998). Successful knowledge transfer requires the transferor's capability and willingness to transfer knowledge on the one hand (e.g.,Gupta & Govindarajan, 2000; Tsang,2001), and the recipient's capability and willingness to gain knowledge on the other hand (e.g., Cohen & Levinthal, 1990; Hamel, 1991; Lane, Salk, & Lyles, 2001).10 In the real world, we see that multinational companies operating in different parts of the globe are engaged in transfer of knowledge. Multinational enterprises transfer knowledge in a number of ways. For example, work attachment of employees of the subsidiary in the parent MNC. The employees who work for a certain period of time at the parent company exerts his acquired knowledge earned at the parent company when he or she returns to the subsidiary. Knowledge can also transferred from the parent multinational companies to the subsidiaries aboard through provision of training. References Books Bartlett C. A., Doz Y. L and Hedlund G., (eds) 1990, Managing the Global firm, Routledge, pp. 2 Luo, Y., 2002, Multinational Enterprises in Emerging Markets, Copenhagen Business School Press, p.1, 181 Quinlan, J. P. 2000, Global Engagement: How American Companies Really Compete in the Global Economy, McGraw Hill Trade, p. 47-48 Refik, C, 2002, Global Business Alliances : Theory and Practice, Greenwood publishing group, pp. 5, 44 Articles Cantwell, J, 1994 Transitional corporations and innovatory activities, The United nations library on transitional corporations, vol. 17, p. 108 Levitt, B and March J. G, 1988, Organizational learning, Annual Review of Sociology, Vol. 14 p.319 Milliman J., and Glinow, M N V, 1991,Organizarional life cycles and strategic international human resources management in multinational companies: Implication for congruence theory, Academy of Management Review, Vol. 16, No.2 Wang P., Tong T. W and Koh, C. P. 2004, An integrated model of knowledge transfer from MNC parents to Chinese subsidiary, Journal of World Business, Vol. 39, p. 168 Yusuf, S., (editor), 2004, Global Production Networking and Technological Change in East Asia, World Bank Publications p.89 Read More