Impact of Social Capital and National Innovation System - Case Study Example

Impact of Social Capital and National Innovation System on MNEs Strategies and Decision Making in the Context of Today’s Knowledge-Based Economy Name: University: Course Title: Instructor: Date: 1.0 Introduction The current world economy is knowledge based. Any organisation that is not able to fit within this context is likely to face stiffer circumstances. One of the core competencies that organisations require to be competitive in this globalised economy is innovative power. The path towards sustaining innovation is through knowledge management so as to produce industrially relevant technology. From a systems view approach, no one can claim to be highly knowledgeable in one area. The key is to accumulate and share this knowledge with various actors. For an international corporation this would be within internal boundaries and through external linkages. Apart from these, knowing the social environment is critical. This influences aspects like international human resource management. There are various theoretical propositions and models which have been used to explain how the flow of information and trust among the interested parties can be shared. The two critical concepts that comes in to forefront are social capital and national innovation system and how they are significant in strategy and decision making for multinational corporations in the context of today’s knowledge-based economy. The critical aspect is that national innovation systems examine ‘flow of technology and information flow among people enterprises and institutions so that they can be innovative’ (OECD, 1997, p.7). On the other hand, social capital theory argues that ‘the essence of organised action inheres in the capital creation, maintenance, and utilisation of relationship and from this relationship base emerges the potential for action and competitive advantage’ (Fussel et al., nd, p.98). Marketing is about building relationships. In this context, the ability of firms in knowing their social environment and build effective relationships becomes a resource. The nexus between the two and impact on MNEs is the flow/ communication within the structures. The aim of this discourse is to evaluate the impact of social capital and national innovation systems on MNEs strategies and decision making in the context of today’s knowledge-based economy. 2.0 The concept of Social Capital Various literatures points out how different people have conceptualised the term social capital. Ostrom (n.d, 176) sees it as “shared knowledge, understanding, norms, rules and expectations about patterns of interactions that group of individuals bring to a recurrent activity”. He notes that people engaged in joint venture accomplishes much per unit time. This statement is correlated with network building or relationship building, and then they form the basic requirements of the later. On the other hand, World Bank (1998 cited in Ramzi, 2012, p.450) sees it as “institutions, relationships, views and values that rule in act and interactions among people and have contribution in economic and social development”. This can also be viewed as a form of institution building outside the formal frameworks. The basis of social capital as being enshrined in structure of relationship is affirmed by Ponthieux (2004). Coleman (1988, p.188 cited in Ponthieux 2004, p.5) presents another interesting paradigm by stating that the concept can’t be defined, but can be seen when individuals act with social structures. Siisiainen (2000) reviews two important works of Robert Putnam and that of Pierre Bourdieu. Putnam (1993, p. 6-7 cited in Siisiainen, 2000, p. 2) understands the concept in terms of social allegiance and alignments. The basis of his inference is derived from the studies done in Italy whereby he looked at the preconditions for building prosperous society. The observation made by him was that civic society is the basis for a prosperous society as seen in Northen Italy which was successful as compared to the southern one. He postulates that engagement by citizens in public activity leads to mutual cooperation, vital social networks, equal political relations and citizen participation. Siisiainen (2000, p. 3) posits that social capital is like moral resources that is manifested through trust, social norms & obligations and social networks of citizens’ activity in voluntary associations. 3.0 National Innovation Systems Today’s economy is reliant on knowledge thus, managing that knowledge becomes critical. Knowledge is part of the human capital that is used to create new ideas. National innovation system examines the national linkages between various entities involved in innovation in terms of distribution and application of this knowledge (OECD, 1997, p.9). The innovative level of a country is significantly tied to how these actors relates. The reason why this concept becomes significant is because of the critical role knowledge plays in innovation (OECD, 1997, p.11) and the realisation that ‘technical change depends more on efficient diffusion than on being first in the world with radical innovations’ (Freeman, 1995, p.10 cited in Feinson, 2003, p.14). In another perspective, the same is conceptualised as ‘a set of institutions whose interactions determine the innovative performance of national firms’ (Nelson, 1993, p.4 cited in Godin, 2009, p.380). These institutions include firms, public laboratories, universities, financial institutions, the educational system and government regulatory bodies. The hallmark of the whole process is production, diffusion and use of new ideas (Godin, 2009, p.380). 4.0 Impact of Social Capital and National Innovation System on MNEs 4.1 Impact of Social Capital on MNEs Decision making is not done in isolation, but by considering various parameters. Availability of knowledge allows organisations to make informed decision about a particular issue. The same can be said of social capital. Taylor (2007, p.336) states that social capital occupies critical position in implementation of global strategies by MNCs. The ability to influence operational strategies becomes the key concern for the subsequent discussion with the key focus in this perspective being international human resource management practices and organisation’s global network. The impact of social capital is tied to the belief of seeing it as a resource to an individual or society at large. Coleman (1988, p.111 cited in Ponthieux 2004, p.4) notes that “The function identified by the concept ‘social capital’ is the value of those aspects of social structure to actors, as resources that can be used by the actors to realize their interests”. The impacts derived from the social capital are tied to the public trust among the individuals of a community and existence of social networks (Ramzi, 2012, p.448). The three key dimensions of social structure that acts as impact are structural, relational and communicative aspects. It is these that facilitate particular action of actors (weather person or corporate actor); (Fussell et al, nd. p.98). The leverages that can be enjoyed as result of SC and thus impact on strategy formulation include ‘increasing the knowledge of foreign market opportunities, access to technologies or resources that competitors do not enjoy, identification of competitive threats, ability to leverage joint venture relationships, ability to learn from alliances and the ability to leverage internal knowledge & aid in coordination & cooperation (Taylor, 2007, p.336 & 337). 4.1.1 Increasing the knowledge of foreign market opportunities Siisiainen (2000, p. 3) notes that “Individual actors do something for the general good not because they know other interactors but because they trust that their own action will be "rewarded" via the positive development of communal relations”. Voluntary association signifies the network people and individuals are able to build in their societies. The voluntary association contribute to increased potential cost to defectors in individual transactions, strengthens norms of reciprocity and enhances communication and information flow (Siisiainen, 2000, p. 4 & 5). The next important factor Siisiainen (2000, p. 7) is voluntary association and social integration. Bordieu (1986 cited in Siisiainen, 2000, p. 10) notes that the degree of social capital owned by an individual relies on the size of networks and connections that one is able to build and that the quality is determined by intra-relationship and not the overall quality (Bordieu 1986 cited in Siisiainen, 2000, p. 10). One way that MNCs have been able to build trust so as to gain in-depth knowledge of foreign market opportunities is through community social responsibility. For instance, the concept of social capital has been applied in corporate citizenship programme by various multinational corporations and thus, an impact on their strategies and decision making. Diageo has invested in the concept of corporate citizen as means of building positive reputation globally and as a means of helping the less fortunate. This approach to community social responsibility is tied to the marketing perspective of active presence through creation of long lasting impression in the minds of customers (Bek, Jones and Pollitt, 2005, p.28). Iamandi (2007, p.7) notes that CSR contributes towards enhancing the image of the globally in the public eye. From marketing, there is no important aspect as having a higher reputation among customers. With good brand image, a company is able to ride on the positive ranking to make higher sales and thus, the investment in CSR turns to be part of promotion strategy. 4.1.2 Ability to leverage internal knowledge & aid in coordination & cooperation The other impact of SC in terms of strategy is how it can influence information sharing within the organisations structure. Taylor (2007, p.337) notes that social capital influences the way employees engage in creation and sharing of knowledge. As had already identified earlier, knowledge sharing is important in ensuring competitive advantage. The role of social capital in this context is based on its ability to offer ‘well configured networks of relationships that span important networks in the MNC’s global operations’ (Burt, 1992; Kostova & Roth 2003 cited in Taylor, 2007, p.338). For instance, how the repatriates (in this context those posted at international headquarter of MNCs and then re-posted back to their home countries) engage in knowledge sharing is an example of SC impact. For instance, the interaction between the repatriate and other employees can be transferred to the local organisation (Reiche, 2011, p.373). This is a SC because that person is able to build various networks so as to gain knowledge and later transfer it (Mead and Andrews, 2009). 4.1.3 Access to technologies or resources that competitors do not enjoy As already stated, national innovation system is the linkages developed by various players so as to make information flow easier. The best way to examine how social capital impacts on MNEs are best conceptualised from the network theory approach. The assumption under this model is that knowledge is embedded in the network and hence social capital is an integral aspect. Having linkages imply having network of relationship and therefore mutual corporation. Wu & Hsu (2012, p.67) notes that one of the factors affecting the overseas subsidiaries innovation behaviour is the social capital. Ghauri (1992; Kumar et al., 2009 cited in Wu & Hsu, 2012, p.67) indicates that ‘structural analysis of the multinational enterprises should proceed with the network relationships respectively between subsidiary and parent company, subsidiary and other subsidiaries, and local government as well as subsidiary and local market. For instance, a subsidiary which is able to network well in the host community is able to gain in-depth information that can be transferred to headquarters so as to develop innovative product (local product adaptation); (Wu & Hsu, 2012, p.68). The basis of all this is tied to trust which is derived from social capital. When entities trust each other, they are able to build collaborative networks without fear (Tsai and Goshal, 1998, p.467). 4.2 Impact of National Innovation System on MNEs The impact of National Innovation System on MNEs can be best understood from the perspective of economies of scale. MNEs are likely to locate where operational cost and initial investment capital is low. National Innovation System contributes significantly to the reduction of cost in accessing technological information. This is likely to attract MNCs. The basis of the above is bas3d on the benefits that are derived from NIS. These include technology spillovers, human capital formation, international trade and integration, competitive environment and enterprises development (Baskaran and Muchie, 2008, p.1). For instance, countries that have invested in NIS in terms of producing graduates that are market driven are likely to attract Direct Foreign Investment (DFI). A case example is how Malaysia has been benefiting from Singapore developed economy. In this context, they have ensured that their graduates are those that are demand driven (Monroe, 2006, p.15). Such angle of argument is supported by Herstad & Jonsdottir (1997, p, 13 & 14). It is noted that NIS greatly influence localisation decisions of headquarters functions and other strategic approaches. 5.0 Conclusion The aim of the paper was to evaluate the impact of SC and NIS on decision making and strategies of MNC/Es. The study identified that SC is based on trust and it is this trust that an MNC can exploit to its advantage. For instance, it was established that SC influence the strategies/ decision making of MNE in terms of leveraging on local opportunities, knowledge transfer and innovation. The essence her is that once MNCs are able to build a close network with the locals, they are to know their preferences, behaviours and thus an ability to exploit these opportunities as a competitive advantage. On the other hand, the paper established that NIS is critical in dictating how MNEs local their subsidiaries. It is noted that MNEs are likely to locate where there is ease of technological knowledge sharing. References Baskaran, A., & Muchie, M. (2008). The impact of the national innovation systems on the flow and benefits of foreign direct investment to national economics. Bek, D., Jones, I. W., & Pollitt, M. G. (2005). How Do Multinationals Build Social Capital?: Diageo's Corporate Citizenship Programme. ESRC Centre for Business Research, University of Cambridge. Feinson, S. (2003). National innovation systems overview and country cases. Rockefeller Foundation, 13-38. Available at: http://www.cspo.org/products/rocky/Rock-Vol1-1.PDF. Fussell, H., Harrisson-Rexrode, J., Kennan, W. R. & Hazleton, V. The relationship between social capital, transactional costs, and organisational outcomes: A case study. Retrieved on 4 March, 2013 from: http://kdpaine.blogs.com/files/fussell-tangible-benefits-of- social-capital.pdf. Godin, B. (2009). National Innovation System: The System Approach in Historical Perspective. Science, technology & human values, 34 (4), 476-501. Available at: http://www.csiic.ca/PDF/Godin_36.pdf. Herstad, S. 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The concept of social capital: a critical review. 10th CAN Conference, Paris 21-23 January 2004. Putnam, R. D. The prosperous community: social capital and public life. Retrieved on 4 March, 2013 from: http://www.philia.ca/files/pdf/prosperouscommunity.pdf. Ramzi, M. J. (2012). A review of the effect of social capital on human development in Iran. International Journal of Economics and Financial Issues Vol. 2, No. 4, pp. 448-459. Reiche, B. S. (2011). Knowledge transfer in multinationals: The role of inpatriates' boundary spanning. Human Resource Management, 50(3): 365-389. Siisiainen, M. (2000). Two concepts of social capital: Bourdieu vs. Putnam. Paper presented at ISTR Fourth International Conference “The Third Sector: For what and for whom?” Trinity College, Dublin, Ireland, July 5-8, 2000. Taylor, S. (2007). Creating social capital in MNCs: the international human resource management challenge. Human Resource Management Journal, 17 (4): 336-354. Tsai, W. and Ghoshal, S. (1998), “Social capital and value creation: The role of intrafirm networks”, Academy of Management Journal, 41(4): 464-476. Wu, C. & Hsu, Z. (2012). Subsidiary innovation in multinational corporation: social capital perspective. The Journal of Human Resource and Adult Learning, 8 (2): 65-72. Read More