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8/17/2019 multinational stretegic planning

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International Business

Strategy: Rethinking the

Foundations of Global

Corporate Success

Alain Verbeke

Cambridge University Press, 2013


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TABLE OF CONTENTS 1

! Introduction and overview of the book’s framework

! Part one. Core concepts

1. Conceptual foundations of international business

strategy

2. The critical role of firm-specific advantages

3. The nature of home country location advantages

4. The problem with host country location advantages

5. Combining firm-specific advantages and locationadvantages in an MNE network

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TABLE OF CONTENTS (2)

! Part two. Functional issues

6. International innovation

7. International sourcing and production

8. International finance9. International marketing

10. Managing managers in the multinational enterprise

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! Part three. Dynamics of global strategy

11. Entry mode dynamics 1: foreign distributors

12. Entry mode dynamics 2: strategic alliancepartners

13. Entry mode dynamics 3: mergers and acquisitions

14. The role of emerging economies

15. Emerging economy MNEs (EMNEs)

16a. International strategies of corporate social

responsibility16b. International strategies of environmental

sustainability4


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Chapter One: Conceptual

Foundations of InternationalBusiness Strategy

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Five learning objectives

1. To develop an understanding of the sevenconcepts of this book’s unifying framework .

2. To link specific types of transfers of firm-specific

advantages (FSAs) across borders with the four

corresponding MNE archetypes of administrativeheritage.

3. To describe the various motivations for foreign

direct investment (FDI) and to explain the linkagesamong non-location-bound (or internationally

transferable) FSAs, location-bound (or non- transferable) FSAs and location advantages within

each of the four MNE archetypes.6


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4. To define the ten often-observed patterns of FSAdevelopment and resource recombination ininternational business.

5. To explain the need for complementary resources

of external actors and the potential reasons forbounded rationality and bounded reliability whendoing international business.

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Definition of

international business strategy

! International business strategy means effectively andefficiently matching a multinational enterprise’s (MNE’s)

internal strengths (relative to competitors) with the

opportunities and challenges found in geographically

dispersed environments that cross international borders.! Such matching is a precondition to creating value and

satisfying stakeholder goals, both domestically and

internationally.

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The seven concepts of the

unifying framework

! Internationally transferable (or non-location bound)firm-specific advantages (FSAs)

! Non-transferable (or location-bound) FSAs

! Location advantages

! Investment in – and value creation through – resource

recombination

! Complementary resources of external actors (notshown explicitly in Figure 1.1)

! Bounded rationality! Bounded reliability

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10

Location advantages

home country

Non-transferable (or

location-bound) FSAshome country

Internationally transferable (or

non-location bound) FSAs

International

border

Figure 1.1 Core concepts

Stand-alone

FSAs

Routines

Re-combination

capabilities

Host

Country

Home

Country

Boundedrationality

Boundedreliability

The triangular shape in the model represents

the pyramidal nature of the firm’s advantages:

on the broad base of the location advantages

(LAs) of its home country (left) it builds a

smaller subset of FSAs that are location-

bound (LB; middle), and then a still smaller

subset that are non-location bound (NLB;

right). Bounded rationality and bounded

reliability influence the ability of these non-

location bound FSAs to be transferred across

the international border to the host country.


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The MNE

s unique resource base

! Physical resources (natural resources, buildings, plantequipment).

! Financial resources (equity and loan capital)

! Human resources (individuals and teams, entrepreneurial and

operational skills).! Upstream knowledge (sourcing knowledge, product and

process-related technological knowledge).

! Downstream knowledge (marketing, sales, distribution and

after sales service).

! Administrative knowledge (organizational structure, culture

and systems).

! Reputational resources (reputation for honest business

dealings). 11


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The MNE

s unique resource base

! Building upon its resource base, as well as its accessto location advantages, the MNE will develop stand-

alone FSAs (e.g., brand names, patents) and routines,

and will also engage in resources recombination.

! FSAs reflect the firm’s distinct strengths vis-à-vis

rivals, and are the source of competitive advantage in

the marketplace.

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Routines

! The distinct ability to combine further the firm’sresources, in unique ways valued by the firm’s

stakeholders.

! Routines are stable patterns of decisions and actions

that coordinate the productive use of resources, andthereby generate value, whether domestically or

internationally.

! The combination ability expressed in routines is ahigher-order FSA.

! Case example: Federal Express.

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Recombination

! Constitutes the heart of international business strategy.

! Artful orchestration of resources, especially

knowledge bundles, as a response to differences

between national and foreign environments, and to

satisfy new stakeholder demands in these foreignenvironments.

! Entrepreneurial judgment is at the heart of the MNE’s

recombination capability.

! Precondition to value creation and satisfying

stakeholder needs in complex international settings.

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International transferability of

FSAs?

! Paradox:

If the FSA consists of easily codifiable knowledge (i.e.,

if it can be articulated explicitly, as in a handbook or

blueprint), then it can be cheaply transferred abroad,

but it can also be easily imitated by other firms.

Though expensive and time-consuming to transfer tacit

knowledge across borders, the benefit to the MNE is

that this knowledge is also difficult to imitate. It is oftena key source of competitive advantage when doing

business abroad.

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Some FSAs are not transferable

abroad: location-bound FSAs

Four main types:

! Stand-alone resources linked to location advantages

(privileged retail locations).

! Local marketing knowledge and reputational

resources, such as brand names (may not be applicableto a host country context, or valued to the same extent).

! Local best practices (i.e. routines), such as incentivesystems or buyer-supplier relations (may not work

abroad).

! Domestic recombination capability (may not work in

foreign markets).

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Some FSAs are not transferable

abroad: location-bound FSAs

! Even if transferability of the relevant resources weretechnically possible, this does not mean the transfer of

the potential for profitable deployment , i.e., the

resource bundles that may be transferable from a

technical perspective (e.g., the way in which a product ismarketed at home), do not constitute an FSA abroad.

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Location advantages

! Entire set of strengths of a location, and accessible byfirms in that location.

! Should always be assessed relative to the strengths of

other locations.

! Instrumental to FSAs.

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Motivations for foreign expansion

! Natural resource seeking.

! Market seeking.

! Strategic resource seeking.

! Efficiency seeking.

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Stand-alone

FSAs

Routines

Re-combinationcapabilities

Location advantages

home country


location-bound) FSAshome country

Internationally

transferable (or non-location bound) FSAs


location-bound) FSAshost country

Internationally

transferable (or non-location bound) FSAs

Location advantages

host country

International

border Home Country Host Country

Figure 1.2 The essence of international business strategy

C o m p

l e m e n t a r

y

r e s o u

r c e s

The shading of the middle of the

host country triangle emphasizes the

importance of developing new, LB

FSAs in the host country. These LB

FSAs complement the FSAs the

firm has transferred from the home

country, and are critical to achieve

the firm’s goals, in terms of

accessing and benefiting from the

location advantages (LAs) of thehost country. If the firm commands

insufficient FSAs internally to

access and benefit from these LAs,

it may draw upon complementary

resources of external economic

actors to achieve its goals in the

host country.


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Four MNE archetypes:

1. Centralized exporter

! Standardized products manufactured at home embodythe firm’s FSAs (themselves developed on the basis of a

favourable home country environment, including local

clustering) and make the exporting firm successful in

international markets.! Case example: motion picture studios.

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Location advantages

home country


location-bound) FSAs

home country

Internationally

transferable (or non-

location bound) FSAs



host country

Internationally



Location advantages

host country

Internationalborder

Host Country

Figure 1.3 Centralized exporter

Home Country

The arrow cutting through dotted

areas represents the direct link

between home country NLB

FSAs, and the host country’s

LAs (i.e. the foreign market),

without development of new, LB

FSAs in the host country, or

formal transfer of existing NLBFSAs to the host country (the

NLB FSAs are embodied in the

centralized exporter’s products).


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2. International projector

! Knowledge-based FSAs developed in the home countryare transferred to subsidiaries in host countries. The

international projector MNE seeks international

expansion by projecting its home country success

recipes abroad.! Case examples: Ford, Disney.

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Location advantages

home country



home country

Internationally





host country

Internationally



Location advantages

host country

International

border Home Country

Figure 1.4 International projector

Host Country

The dotted area of LB FSAs in

the middle of the host country

triangle reflects the international

projector’s lack of development

of LB FSAs in the host country,

where operations simply clone

those prevailing in the home

country. Extant NLB FSAs

suffice to access and benefit

from host country LAs.


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Four MNE Archetypes:

3. International coordinator

! International operations are specialized in specific valueadded activities and form vertical value chains across

borders. The MNE’s key FSAs are in efficiently linking

these geographically dispersed operations through

seamless logistics.! Case example: BP.

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Figure 1.5 International coordinator

Host

Country B

Home

Country

International

border

Host

Country A

Host

Country C

The different sizes of the shaded

areas in the various host countries

reflect the different types and levels

of home country NLB FSAs to be

transferred to different host

environments in function of the LAs

the firm wishes to access. The circle

linking the various countries reflects

the international coordinator’sstrengths in putting together a value

chain based upon access to the

coveted LAs of each country where

the firm operates.


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4. Multi-centred MNE

! The multi-centred MNE consists of a set ofentrepreneurial subsidiaries abroad which are key to

knowledge-based FSA development. National

responsiveness is the foundation of the international

strategy. The non-location-bound FSAs that hold thesefirms together are minimal: common financialgovernance and the identity and specific business

interests of the founders or main owners.

! Case examples: Philips, Lafarge.

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Figure 1.6 Multi-centered MNE

Home

Country

Stand-alone

FSAs

Routines

Re-combination

capabilities

International

border

Host

Country B

Host

Country A

Host

Country C

The multi-centered MNE

transfers only key routines

from the home country to host

countries. The large, shaded

middle areas in the host

countries represent the

necessity to build new, LB

FSAs in each host country. The

double-headed arrows reflect

the close alignment the host

country operations must

develop between their own LB

FSAs and the host’s LAs.


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MNE strategy in practice

! Most large, established MNEs with sophisticatedinternational operations do not simply conform to a

single archetype, even if in-depth knowledge on their

foundation and early history will typically allow

positioning them as one of the four archetypes.! As firms grow internationally, several patterns of FSA

development and transfer can typically be identified in

single firms, see Figure 1.7.

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Generic FSA-type

Internationally transferable

(Non location-bound) FSAsGeographic

source

Home country

operation

Host country

operation

Network

Non-transferable (location-bound) FSAs

Internationally transferable (Non


Explicit headquarters’ control

Reflects FSA upgrading from LB to NLB

Reflects NLB FSA transfer

Reflects corporate headquarters’ control

Key:

II

III

IV

V

VI

VII

VIII

IX

X

I

Figure 1.7 Ten patterns of FSA development in MNEs

Non-transferable

(location-bound) FSAs

+

+


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Complementary resources of

external actors

! Needed from external actors (technology providers,licensees, local distributors, joint venture partners, etc.)

to be successful abroad.

! Reason: cultural, economic, institutional and spatial

‘distance’ (meaning: missing success ingredients).! Conditions: (1) attempts at internal development

would lead to lower NPV or are not feasible; (2) external

actors are able and willing to provide the resources.

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Bounded rationality

Scarcity of mind : managers responsible for makingdecisions and engaging in purposive action in the firm

always face information problems:

! One source is poor access to information sufficient in

quality and quantity.! Another source is the limited mental capability to

process complex information bundles.

! Example of Xerox and Fuji-Xerox .

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Bounded reliability

Scarcity of effort to make good on open-ended promises

! One source is opportunism (ex-ante false promises;

ex-post reneging on promises).

! A second source is benevolent preference reversal

(e.g., good faith local prioritization: distance in timefrom punishment; distance in space from the

headquarters’ monitoring apparatus; proximity to - and

intrinsic satisfaction from - focusing on local opportunitieswith immediate local rewards. Scaling back on

overcommitment ).

! Need for safeguards.

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Bounded rationality versus

bounded reliability

! Bounded rationality is about the imperfectassessment of a present or future state of affairs,

thereby leading to incorrect beliefs; bounded reliability is

about imperfect effort towards pre-specified goal

achievement, thereby leading to incomplete fulfilment ofpromises.

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Key questions in international

business strategy (2/2)

! Do we have the required resource recombinationcapability in-house?

! What are the costs and benefits of using

complementary resources of external actors to fill

resource gaps?! What are the main bounded rationality and bounded

reliability problems we will face when extending the

geographic scope of our firm’s activities, given thechanged boundaries of the firm, the changed linkages

with outside stakeholders and the changes in our internalfunctioning?

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Chapter Two: The Critical Role of

Firm-Specific Advantages (FSAs)

C.K. Prahalad and G. Hamel,

'The Core Competence of the Corporation',

Harvard Business Review 68 (1990), 79-91


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1. To describe the four characteristics of corecompetencies, which are higher-order FSAs.

2. To explain the importance of the firm’s ‘strategic

architecture’ in the context of core competencies.

3. To develop an understanding of influence of an

industry’s national environment on competitivepositioning strategies and firm-level core competencies.

4. To identify the bounded rationality problemsassociated with an MNE expanding internationally and

trying to transfer its FSAs across borders.

5. Based on the conceptual framework in Chapter 1, to

analyze the managerial implications of an ill-

conceived sole focus on core competences.38


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Focus on higher-order FSAs

! Firm is a portfolio of ‘core competencies’ : higher-orderFSAs, i.e., the firm’s routines and recombination

capabilities.

! A core competence ultimately takes the form of: shared

knowledge, organized into routines, ànd the ability tointegrate multiple technologies, reflecting the

recombination of internal resources.

! Routines/recombination abilities are at least parly'carried' by key employees (so-called competence

carriers) that can be deployed across business units.

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Characteristics of a

core competence

! Difficult for competitors to imitate (internal coordinationand learning).

! Provides potential access to wide variety of markets.

! Makes a significant contribution to perceived customer

benefits from the end products.

! We add a fourth characteristic: the loss of a core

competence would have an important negative effect onthe firm’s present and future performance, in terms of

value creation and satisfying stakeholder objectives.

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Organizational implications

!

Senior management should not just make strategic plans

with growth and profitability targets for the firm’s product

lines and SBUs, but it should also develop a ‘strategicarchitecture’ (road map) to guide the corporation in

building and acquiring core competencies.

!

Necessary to overcome the challenge of decentralized

SBUs acting in their own self-interest.

! Senior management should reallocate competence

carriers, with deep knowledge of routines and

instrumental to resource recombination across functionaland business units so as to yield the highest return forthe firm as a whole .

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Dangers of outsourcing

! The company must have a clear understanding of theFSAs it is trying to build through the outsourcing

partnership, and those it is seeking to protect from being

transferred to potential competitors.

! Outsourcing of e.g., key components in manufacturing,

as a shortcut to increase short-term profitability , may

lead to the loss of FSAs.

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Context – First complementary

perspective (1/2)

! William G. Egelhoff (SMR ): contrasts mainstreamJapanese and US approaches to strategy

(semiconductor firms).

! US firms: short-term profitability considerations lead to

frequent repositioning of products, the rapid move tolicensing standardized products, and exit from niches

with strong price competition.

! Japanese firms: focus on improving process technologyfor standard products and have a long-term perspective.

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perspective (2/2)

! US-approach effective in industries with fundamentaltechnological change and related commercial

breakthroughs: not fine-tuning strategy implementation

counts (as in Japanese firms), but the correct

anticipation of future dominant industry standards,and rapid profit building by attracting buyers tocustomized niches.

! Different industries require different FSA types

! Implication: Japanese firms may be better equipped to

adopt a core competence approach.

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Context – Second

complementary perspective (1/3)

Andrew Bartmess and Keith Cerny (CMR):

! Often two wrong assumptions when attempting to

access host country location advantages in

manufacturing.

! The validity of the two assumptions should be checked

when thinking about exploiting core competences

abroad:

1. Manufacturing knowledge is a stand-alone FSA.

2. This FSA can be effortlessly recombined with foreign

location advantages.

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Context – Second


Reality:

1. Knowledge in a single functional area (R&D or

marketing) is not a core competence: this involves

combining stand-alone knowledge bundles found in

different functions into routines. Thus: co-location isimportant.

2. There are complexities involved in successfully

exploiting and further augmenting FSAs abroad(importance of managing the required linkages).

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Five criteria to assess the need for co-locating activitiesinstrumental to further recombination:

1. Complexity of information to be transferred.

2. Required level of interaction: higher uncertainty and

need for two-way information flows (mutualadjustment).

3. Similarity of background and expertise of peopleinvolved at home and abroad.

4. Prior relationships affecting communication on

sensitive issues.

5. Concreteness of information (emotions, feelings,cultural values embedded?).

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Context – Second



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Management Insights

! Prahalad and Hamel: Limited to Pattern I in Figure 1.7

! Focus on bounded innovation and emprisoned

resources in SBUs.

! Essence of Prahalad and Hamel’s view: Figure 2.1.

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Generic FSA-type



source

Home country

operation

Host country

operation

Network








Key:

II

III

IV

V

VI

VII

VIII

IX

X

I

Figure 1.7 Ten patterns of FSA development in MNEs

Non-transferable


+

+


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Figure 2.1. Non-location bound (or internationally

transferable) FSAs as drivers of economies of

scope across markets and products

International

border

Home

CountryHost

Country B

Host

Country C

HostCountry A

The shading of the NLB FSA

area in the home country and the

dotted outline of the rest of the

home country triangle indicate

the emphasis on NLB FSAs and

the assumed irrelevance of home

country LAs and LB FSAs in this

model. The dotted middle section

of the triangle in each host

country reflects the lack of

emphasis on the development of

LB FSAs by host country

operations. Extant NLB FSAs

suffice to access and benefit from

host country Las.


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Five main weaknesses

1) Location advantages? FSA-transfer costs Location- bound FSAs? A strategic architecture alone will not

lead to successful exploitation of core competences

abroad.

2) Geographical embeddedness of competencecarriers? Co-location matters here too.

3) Naïve view of corporate headquarters versus SBU

relationships (idem versus subsidiaries). In practice,FSA transfer is very difficult (cf. concept of subsidiary-

specific advantage in Chapter 1).

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4) Naïve preference for hierarchical control andcentralized decision-making. In practice,

multidivisional governance economizes on bounded

rationality and bounded reliability.

5) Neglect to distinguish between the back end andcustomer end of the value chain. Especially the

latter needs adaptation in function of location; if not

core competences will become core rigidities.

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Five management takeaways

1. Identify and nurture your company’s corecompetencies, and differentiate their treatment from

that given to less critical FSAs.

2. Develop a ‘strategic architecture’ to guide yourcompany in building and acquiring core competencies.

3. Understand the economic potential and drawbacks of

acquiring FSAs through external strategic alliances.

4. Do not overestimate the transferability of your FSAsacross borders, and understand the costs of

successful resource recombination.5. Reflect on co-location requirements when expanding

internationally and investing abroad.53


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Chapter Three:The Nature of Home Country

Location Advantages

Michael E. Porter

‘The competitive advantage of nations’,



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1.

To describe the relationship between a firm’s strengthsrelative to international rivals and the competitiveness of

its home country .

2.

To explain ‘Porter’s diamond’ and the interaction among

the four diamond attributes.

3. To develop an understanding of the different

international expansion trajectories of newly

established firms.

4.

To identify the role of ‘diamond connectors’ in the

context of location advantages held by different countries.

5.

To discuss the managerial relevance of a ‘national

diamond-based’ analysis on the competitive advantage

of nations. 55


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Porter

s diamond

! Any company’s ability to compete internationally isbased on location advantages in its home country.

! Pressure in the home base pushes innovation and

upgrading, resulting in FSA creation.

! It is the interaction among four sets of parameters that

counts.

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Porter

s diamond

! Factor conditions: focus on created factor conditions(skilled labour, scientific knowledge and infrastructure)

that are specialized.

! Demand conditions: size and sophistication of

domestic demand.! Related and supporting industries (world class

suppliers).

! Firm strategy, industry structure, and rivalry : highlycompetitive domestic industry helps international

competitiveness.

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Porter

s diamond

! Home country diamond cannot be identified for anational or regional economy as a whole, but only for

specific industries.

! Industry-specific pressures lead to innovation and

productivity improvements.! Findings resulted from four-year study over 100

industry groups in ten nations (Denmark, Germany,

Italy, Japan, Korea, Singapore, Sweden, Switzerland,the United Kingdom and the United States).

! Empirical work was aimed mainly at validating , not

testing, the diamond framework.

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perspective!

Walter Kuemmerle (SMR): entrepreneur ’s‘path to

global expansion’.

! Early internationalization usually entails low-cost, low-

risk experiments in neighbouring countries, whereby thefirm’s mix of internationally transferable knowledge and

location-bound knowledge requires only incrementalchange.

! Two patterns of more aggressive internationalexpansion: exploitation of substantial cross-border

opportunities in output markets and tapping into foreign

input markets for resources such as (venture) capital.! More to competitive success than domestic diamond

conditions, even at the early stages of firm growth.59


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Context – Second


! David Teece (CMR): inward FDI in Silicon Valley .Porter-type, single diamond thinking breaks down

when foreign investors provide resources, instrumental

to domestic, firm-level sustainability and expansion.

! Foreign MNE activity through inward FDI acts as a

bridge between the location advantages of two different

nations.

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Context – Second


! Japanese investors bring FSAs derived from theJapanese diamond : ‘patient capital, engineering talent,

manufacturing excellence, and access to the Japanese

market’

! Japanese companies benefit from unique access to US

entrepreneurial capabilities, early-stage technology

developments in innovation-driven sectors, and a more

general window on new trends

! Japanese companies can take risks unacceptable in

Japan and gain privileged access to US distributionchannels

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Context – Second


! Effective melding of location advantages of US andJapanese diamonds through Japanese FDI in Silicon

Valley is not easy: long-term efforts required to

develop personal relationships between Japanese

and US actors as diamond connectors.

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Management Insights

! Porter has a narrow view on FSA creation: homecountry national diamond attributes determine a firm’s

innovation capabilities and related productivity

improvements.

! The MNE is either a centralized exporter or an

international projector .

! Porter implicitly rejects the relevance of a multi-centred

MNE or an international coordinator.

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LAs LAs LB FSAs Non-LB FSAsStrong domestic

diamond

Home

country

Host

country

A

B

C

D

LAs LAs LB FSAs

Weak

domestic

diamond A

B

C

D

A. Factor conditions

B. Related and supporting industries

C. Demand conditions

D. Firm strategy, industry structure, and rivalry

Figure 3.1 Domestic “diamond” determinants as drivers of

home-base location advantages, and subsequent FSAs

Where the domestic diamond

is strong (pictured here as a

large diamond), this model

predicts the creation of NLB

FSAs will be stimulated,

while this will not occur

where the diamond is weak

(pictured here as a small

diamond).

LAs LB FSAs

Figure 3 2 Porter’s analysis of FSA development in MNEs


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Generic FSA-type



source

Home country

operation

Host country

operation

Network

Key:

II

Figure 3.2 Porter s analysis of FSA development in MNEs

Non-transferable







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1. EU and NAFTA cases suggest a double diamond (ormultiple diamond): important to the FSA development

process.

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Figure 3.3 Porter’s single diamond model

and the double diamond model

Canada

Internationalborder

USA

NAFTA

LAs

Canada

The single diamond

The double diamond

LAsCanada

LAs

USA

LAsUSA

With the single diamond model, the home country LAs determine whatever FSAs a company may

develop. With the double diamond model, firms also draw on LAs of other nations than the home

country to strengthen their own FSAs. Trade and investment liberalization (as with NAFTA)

institutionalizes this possibility of freely accessing and drawing upon the resources present in a host

country diamond to strengthen FSAs. This is why the trapezoids representing Canadian and US

location advantages are shown as being similar in size, though NAFTA obviously does not eliminate

completely country borders.


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2. Inward FDI as a force for upgrading a local economyis neglected.

Porter neglects a country’s location advantages being

instrumental to inward FDI (rather than only outward

FDI).

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3. Porter ignores the need for location-bound FSAs inhost countries.

Assumes that FSA development depends initially on

domestic market factors, but can then be decoupled

from the home location, Pattern II in Figure 1.7.

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4. Porter ’s framework is tautological:

! Selective factor disadvantages may actually drive

domestic innovation and upgrading.

! Ex post , success follows from strong home country

determinants, unless some of these determinantshappen to be weak , in which case they are interpreted

as selective factor disadvantages that have pushed

domestic firms to overcome this weakness throughinnovation.

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5. Porter places too much emphasis on the country as theappropriate geographic level of analysis.

Wrong assumption that an MNE has unconstrained

access to location advantages in the home country

diamond and also host country diamonds are largelyoff-limits.

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72

Competitive performance

Local

State/provincial

NationalForeign

Global

Factor conditions Demand conditions

Related and supporting

industries

Firm strategy, industry

structure, and rivalry

Local

State/provincial

National

Foreign

Global

Local

State/provincial

NationalForeign

Global

Local

State/provincial

National

ForeignGlobal

Figure 3.4 A multi-level analysis of

the diamond determinants

Strengths

Weaknesses

Opportunities

Threats

Strengths

Weaknesses

OpportunitiesThreats

Strengths

Weaknesses

Opportunities

Threats

Strengths

Weaknesses

OpportunitiesThreats


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1. Apply the ‘diamond’ framework to evaluate the sectoralstrengths and weaknesses of your domestic industry.

2. Reflect on the relevance of national diamond

characteristics to explain the short- and long-term

competitiveness of your own firm.3. Define industry-specific pressures that can

strengthen your FSAs through absorbing – or building

upon – the complementary resources present in yourindustry environment.

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4. Analyze the economic potential of foreign diamonds,i.e., foreign input markets for providing resources to

your firm, and foreign output markets for absorbing its

end products.

5. Assess the suitability of the diamond framework foranalyzing your industry and adjust/add determinants

and sub-factors according to your firm-specific needs.

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Chapter Four: The Problem withHost Country Location

Advantages

Pankaj Ghemawat,‘Distance still matters: The hard reality of

global expansion’

Harvard Business Review 79 (2001), 147


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Distance components

! Cultural distance

! Administrative (or institutional) distance

! Geographic (or spatial) distance

! Economic distance

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Case study:

Tricon (now YUM! brands)

! When the four dimensions of distance are factored-into complement traditional country portfolio analysis, a

revised and more accurate picture of the

opportunities and risks becomes clear.

! Countries with lower distance vis-à-vis the United

States, such as Mexico and Canada become top

choices. Those that are seemingly attractive in terms of

market size and growth, including Japan and Germany,

become less so.

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Context - First complementary

perspective (1/2)

Vestering, Rouse and Reinert (SMR):

! Focus is on the benefits of accessing multiple, highdistance input markets. Ghemawat focused on the

risks of too many high distance output markets.! Large MNEs should compose a portfolio of offshoring

countries based upon a particular bundle of locationadvantages offered by each country.

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perspective (2/2)

! FSA in offshoring : strategic offshoring decisions are notleft to individual business units, but are taken centrally,

to create cost advantages by “pooling resources, jointly

developing new suppliers or expanding economies of

scale in low-cost countries”.

! Substantial investments in location-bound FSAs,including local logistics, engineering and manufacturing

capabilities, prior to actual local production.

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Context – Second

complementary perspective

! Schmitt and Pan (CMR) focus on cultural distance when

penetrating high distance Asian markets.

! Attention to selecting the right corporate and product brand

names e.g., realizing that characters are meaningfullinguistic units in Asian languages.

!

Much attention should be devoted to creating the right

corporate image. More important than the image for an

individual product.

! Quality perceptions are important and comparative

advertising is inappropriate.

!

Much sophistication is required of the Western

companies’ recombination capability to overcome

distance. 81


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Management Insights

! Ghemawat clarifies that the international exploitationpotential of FSAs depends upon the type and level of

distance among countries.

! Because of bounded rationality , managers often

overestimate the international profit potential of theircompanies’ FSAs, and underestimate the efforts

required to penetrate international markets.

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83

LAs LB FSAs Non-LB FSAs

Domestic base “Distance” to foreign markets

Non-LB FSAs

Non-LB

FSAs

Non-LBFSAs

Figure 4.1 The MNE’s diminishing stock of internationally

transferable FSAs as a function of “Distance”

Greater “distance” leads to

weaker transferability and

exploitation potential of

NLB FSAs, as indicated by

the smaller NLB FSA

triangles.


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84

Domestic base “Distance” to foreign markets

Figure 4.2 The need for LB FSAs as a function of “Distance”

LB FSAs

LB FSAs

LB FSAs


Greater “distance” leads

to higher investment

requirements in LB

FSAs, as indicated by

the larger size of the LB

FSA trapezoids


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85

Generic FSA-type



source

Home country

operation

Host countryoperation

Network

Key:

III

Figure 4.3 Ghemawat’s perspective of

FSA development in MNEs

Non-transferable






+


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Five limitations

1. Macro-level distance may be an important explanationfor lack of success in a foreign market, but only reflects

a macro-level reality .

Investments required to develop location-bound FSAs in

a foreign market will be different for each company (e.g.,US-based company with senior managers from Taiwan

expanding to Taiwan).

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Five limitations

2. Higher distance does not necessarily mean reducinggeographic scope:

! Design elements can foster a stronger recombination

capability, e.g., higher functional diversity of senior

management.! MNE should build into its human resources base and

key decision making routines a deep knowledge on

foreign markets.

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Five limitations

3. The impact of macro-level distance may be verydifferent in the various value chain activities, especially

input versus output markets, e.g., Levi Strauss.

Ghemawat’s analysis is appropriate for centralized

exporters and international projectors, but less so forinternational coordinators.

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Five limitations

4. With strategic asset seeking investment , a highdistance location, though creating high costs for the

firm, may also be instrumental to learning

opportunities unavailable in low distance locations.

Managerial prescription of reduced geographicscope is not equally valid for all foreign entry

motivations.

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Five limitations

5. Ghemawat’s model does not address cooperativeagreements to address the distance challenge.

Complementary resources may reduce distance.

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1. Pay attention to the four key dimensions of‘distance’ when evaluating the attractiveness of

foreign markets.

2. Analyze your company’s position in the realm of cost

leadership and thereby your potential (or need) todevelop an FSA in offshoring .

3. Consider the right corporate and product brand

names, the right image and the creation of the rightperception of quality when launching branded

consumer goods in high-distance markets.

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4. Reflect on the transferability, deployability and profitable exploitation of your FSAs across borders,

as well as on the need to create new FSAs, and on the

possibilities of resource recombination. Do not

overestimate the profit potential abroad of FSAs that

worked well at home.

5. Before making a final decision about entry in potential

host markets, do assess several firm- and host country-

specific characteristics, which amount to ‘distance’:evaluate whether strong but hypothetical profit

potential in foreign markets can actually be

achieved in practice, given the presence of distance.92


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Chapter Five: Combining Firm-Specific Advantages and Location Advantages

in a Multinational Network

C.A. Bartlett and S. Ghoshal

‘Tap your subsidiaries for global reach’

Harvard Business Review 64 (1986), 87-94.


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1. To describe the challenges of centralizing strategicdecision making and control in MNEs, and to highlight the

possible ineffectiveness thereof.

2. To develop a framework for classifying subsidiaries as

a function of the location advantages they can access and

the unique bundles of FSAs they command in specific

value chain activities.

3. To foster reflection on the ‘procedural justice’ concept

and its impact on organizational effectiveness.

4. To outline the strengths and weaknesses of prevailing,

Japanese MNE subsidiary management .

5.

To highlight the managerial implications of assigning

differentiated roles to MNE subsidiaries. 94


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Roles of subsidiaries

! Two common, wrong assumptions made by senior MNEmanagement:

1) United Nations model of multinational management:

treat each subsidiary in a similar manner.

Implies either subsidiary independence (multi-centered MNEs) or complete dependence (global exporters or

international projectors).

2) Headquarters hierarchy syndrome: corporateheadquarters rule (only valid in case of complete

dependence of subsidiaries).

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Dysfunctional effects on the MNE

! First assumption: important markets and subsidiaries

are treated in the same way as unimportant ones, and

therefore the opportunities they provide are not

optimally exploited.! Second assumption: subsidiaries with a distinct,

specialized resource base are unable to escape from an

implementer role, and loose their entrepreneurialmotivation.

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Solution 1

! An organizational model of differentiated rather thanhomogenous subsidiary roles and of dispersed rather

than concentrated responsibilities.

! Examples: EMI, P&G.

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Solution 2

! Simple normative model as a response to differentiatedsubsidiary role requirement:

1) Assess each market according to its strategic

importance.

2) Rate each subsidiary ’

s resource base in terms ofsales and marketing achievements, production

capabilities, research and development, or any other

strength contributing to competitiveness.

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99

Strategic

importance of

the local market

Resource base of

the subsidiary

Figure 5.1 A classification of subsidiary roles in the MNE

Low High

1High

Low 2

3

4

Context First complementary


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perspective (1/3)

! W. Chan Kim and Renée Mauborgne (SMR): MNEcorporate headquarters, faced with the need to make

difficult, centralized strategic management decisions,

often in the resource allocation sphere, frequently

demotivate subsidiary managers rather than bringing

out the best in them.

! Subsidiary managers attach substantial importance to

due process, i.e., to the way strategic decisions are

made, irrespective of the outcome.

100

Context First complementary


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perspective (2/3)

Five simple principles of procedural justice:

1. Corporate headquarters’

familiarity with the localsituation at the subsidiary level

2. Effective two-way communication between corporateheadquarters and subsidiaries

3. Consistency in decision-making across subsidiaries

4. Possibility for subsidiary managers to challenge the

dominant perspective at corporate headquarters

5. Transparent explanation of final decisions made by

corporate headquarters101



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perspective (3/3)

Rationale for procedural justice:

1. Due process is as an attempt to reduce boundedrationality.

2. The outcome of due process is a reduction ofbounded reliability problems.

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103

! Commitment

! Trust

! Compulsory

execution

Subsidiary facing

unfavorable resource

allocation decisions

Subsidiary benefiting

from favorable resource

allocation decisions

Procedural

justiceLow High

Low

High

Figure 5.2 The impact of procedural justice

Context – Second


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Context – Second


! Anant Neghandi, Golpira Eshghi and Edith Yuen(CMR): Japanese MNEs face serious problems in

subsidiary management.

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Context – Second


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Context – Second


Five main problems:

1. Japanese MNEs adopt a centralized, autocratic

approach vis-à-vis their foreign subsidiaries.

2. Japanese MNEs have little confidence in

subordinate, non-Japanese managers.3. Relationships of trust are confined to a few key

managers.

4. Japanese staffing policies are ethnocentric.

5. Japanese MNEs discriminate against women and

minorities.

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Context – Second


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Context Second


Conclusions:

1. Strong FSAs in technology, production and government

relations do not necessarily imply the MNE has strong

capabilities to manage a foreign subsidiary network.

2. United Nations approach and headquarters-hierarchysyndrome prevent many Japanese MNEs from

developing strategic leader subsidiaries.

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Management Insights

Bartlett and Ghoshal suggest that firms need to movebeyond the conventional global exporter, international

projector and multi-centred MNE models (they neglect

the existence of the international coordinator model).

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108


Domestic base Foreign markets

Figure 5.3 MNE resource base – subsidiariesas driving factor

Strategic leader

Contributor

Implementer

Black hole

Each type of subsidiary builds upon a

different configuration and level of

LAs, LB FSAs and NLB FSAs, as

reflected by the different sizes of the

segments in each triangle. The double-

headed arrows reflect cases where the

flow of NLB FSAs is two-way. Here,

subsidiaries can play a key role in

driving international FSA transfers

(which could also occur between

subsidiaries).

Figure 5.4 Bartlett and Ghoshal’s perspective on FSA development in MNEs


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109

Generic FSA-type



source

Home country

operation

Host country

operation

Network







Key:

III

IV

VI

I

Non-transferable


+


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Management Insights

Limitations

1. After subsidiary roles have been allocated ,

valuable subsidiary initiatives often arise in spite

of narrow charter.

Key challenge is not to classify subsidiaries in fourcategories, but to craft routines allowing valuable

initiatives to arise bottom-up and to provide support

for such initiatives.

In other words: the key challenge is to identify what

constitutes valuable knowledge?

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Management Insights

Best practices increase the likelihood that subsidiaryinitiatives will come to fruition:

a. Giving seed money to new initiatives.

b. Formally requesting proposals.

c. Using subsidiaries as incubators, avoiding. harassmentby the corporate immune system

d. Creating internal subsidiary networks.

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Management Insights

2) The importance of host country environments as inputmarkets and output markets are wrongly equated;

article’s focus is almost solely on output markets:

! For access to foreign input markets, the MNE must relyon subsidiary capabilities at the upstream end

(technology, sourcing).

! Many subsidiary roles are defined primarily by the

input market , not the output market in foreign nations,and by upstream FSAs, rather than downstream ones.

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113

Strategic

importance of the

local market as

market for inputs

Upstream subsidiary

competencies

Figure 5.5 Unbundling subsidiary roles in Bartlett and Ghoshal (1986)

Low High

1High

Low 2

3

4

Figure 5.5 A

Strategic

importance of the

local market as

market for outputs

Downstream subsidiary

competencies

Low High

1High

Low 2

3

4

Figure 5.5 B


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Management Insights

3) Bartlett and Ghoshal do not address fully subsidiaryrole dynamics, especially after regional integration

schemes:

a) Increase in overlap among markets as a result ofregional integration.

b) Increased internal competition among subsidiaries in

cases of strong regional market unification and

capability commodification.

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115

Regional

unification of

national

environments as a

market for inputs

Commodification of upstream

subsidiary competencies

Figure 5.6 The impact of regional integration on subsidiary dynamics

Low High

1High

Low 2

3

4

Figure 5.6 A

Low High

1High

Low 2

3

4

Figure 5.6 B

Commodification of downstream

subsidiary competencies

Regional

unification of

national

environments as a

market for outputs


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116

Locally managedBusinesses

Regionally managed

BusinessesGlobally managed

Businesses

Global Business Executive Officer

Market HeadZone Business Head/

Regional Business Head

Market

BusinessHead

Regional

BusinessHead

Global

BusinessHead

Product Unit

Manager

Country

BusinessManager

Business

ExecutiveManager

Division

Manager

Country

Manager Country Business Manager

Zone Executive Officer

Market Regional Business Market

Regional

Business

GlobalBusiness

Country

BusinessMarket Business Country

Country

Business

Figure 5.7 New organizational structure at Nestle proposed in 2004

Source: Nestle company website


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1. Assess the current organizational structure and decision-

making processes in your firm and reflect on the differentroles performed by your subsidiaries.

2. Classify your portfolio of subsidiaries as a function of thestrategic importance of each market where they operate and

the resource base they command.3. Respect the five components of due process in each

corporate head office decision that will affect subsidiaries.

4. Review the main problems faced by many Japanese

MNEs and learn from their mistakes.

5. Analyze best practices (inside your firm and industry) forFSA development in subsidiaries and reflect on the keydrivers of subsidiary roles and dynamics.

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TABLE OF CONTENTS 1

! Introduction and overview of the book’s framework

! Part one. Core concepts

1. Conceptual foundations of international business

strategy

2. The critical role of firm-specific advantages

3. The nature of home country location advantages

4. The problem with host country location advantages

5. Combining firm-specific advantages and location

advantages in an MNE network

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! Part two. Functional issues

6. International innovation

7. International sourcing and production

8. International finance9. International marketing

10. Managing managers in the multinational enterprise

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! Part three. Dynamics of global strategy

11. Entry mode dynamics 1: foreign distributors

12. Entry mode dynamics 2: strategic alliancepartners

13. Entry mode dynamics 3: mergers and acquisitions

14. The role of emerging economies15. Emerging economy MNEs (EMNEs)

16a. International strategies of corporate socialresponsibility

16b. International strategies of environmental

sustainability

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Chapter Six:International Innovation

Walter Kuemmerle

‘Building effective R&D capabilitiesabroad ’



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1.

To explain R&D decentralization and describe the

difference between home-base-exploiting and home- base-augmenting innovation sites.

2. To highlight the key stages in the development of foreignR&D units.

3.

To explain subsidiary initiatives in the innovation sphereand the functioning of the ‘corporate immune system’,

geared towards destroying such initiatives.

4. To foster understanding on how to access another firm’s

knowledge base and create upstream FSAs.

5.

To examine the potential conflicts between host countryresearch sites and the corporate office.

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Significance (1)

! Many MNEs are moving from centralizing R&D in the homecountry towards building international networks where

foreign R&D laboratories fulfill specific roles.

! Two main reasons:

- Need for presence in knowledge and innovation clusters

(input side), and

- Commercial requirement of moving quickly from

innovation to market (output side) so that MNEs must

integrate R&D facilities more closely with host country

manufacturing.

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Significance (2)

Kuemmerle observed the internationalization of the R&Dfunction:

! Two distinct types of R&D facilities: home-base exploiting

sites and home-base augmenting sites.

! Home-base exploiting sites “supporting manufacturing

facilities in foreign countries or to adapt standard products tothe demand there”, with “information flows to the foreign

laboratory from the central lab at home”.

!

Home-base augmenting sites have information flows “from

the foreign laboratory to the central lab at home”.

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Significance (3)

! Home-base exploiting labs: close to key markets and

MNE ’s foreign manufacturing units.

! Initial leadership in the hands of “highly regarded managers

from within the company intimately familiar with thecompany’s culture and systems to forge close ties between

the new lab’s engineers and the foreign community’smanufacturing and marketing facilities”.

! Bounded rationality problem reduced by these labs:lowering of distance between home-country R&D and

host-country manufacturing.

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Significance (4)

! Home-base augmenting operations in critical knowledge

clusters to tap into new sources of innovations.

! Initial senior managers “should be prominent local

scientists… to nurture ties between the new site and thelocal scientific community”.

! Main bounded rationality problem is the subsidiary cannot

access knowledge in foreign locations without becoming

an insider.

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Significance (5)

! Ideal profile of foreign R&D unit leaders, instrumental toknowledge recombination:

Four qualities:

(1) respected scientists or engineers and skilled managers;

(2) able to integrate the new site into the company’sexisting R&D network ;

(3) comprehensive understanding of technology trends;

(4) able to overcome formal barriers when seeking

access to new ideas in local universities and scientific

communities.

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Significance (6)

! Example of Xerox ’ home-base-augmenting site inGrenoble, France.

! Xerox hired a renowned French scientist instrumental to

recombining the firm’s existing FSAs with complementary

resources in the French environment.

! New staff visited other company R&D centers in order to

expedite the lab’s integration (transfer of NLB FSAs)

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Significance (7)

! Example of Eli Lilly ’s home-base exploiting lab in Kobe,Japan.

! Senior research manager with extensive knowledge of both

production and marketing activities was selected as leader.

! Existing R&D scientists were assigned to the new location and

new staff visited the other labs (resource recombination)

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Significance (8)

! Example of Matsushita: international R&D knowledgenetwork consisting of both knowledge exploiting and

augmenting labs.

! Units communicate directly with each other: facilitates andincreases knowledge transfer and resource recombination.

! R&D managers meet on a regular basis: international

transfer of non-location-bound FSAs in multiple directions.

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perspective (1/5)

! The combination of international transferability of FSAs and

international access to resources with the need to have

value added operations physically embedded in specific

locations to reap the full benefits of clusters is the sticky places in slippery space’ – paradox.

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perspective (2/5)

! Julian Birkinshaw and Nick Fry (SMR): focus on the driversof new development in large, established MNEs.

! Entrepreneurial managers in MNEs assume extended roles,

inconsistent with their unit’s formal charter.

! Subsidiary initiatives: “the proactive and deliberate pursuit

of a new business opportunity by a subsidiary company,undertaken with a view to expand the subsidiary’s scope of

responsibility, in a manner consistent with the MNCs strategic

goals”.

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perspective (3/5)

! Distinction between ‘internal ’ and external ’ subsidiaryinitiatives.

! Internal initiatives: attempts by subsidiary managers to

become the chosen location for new corporate R&D

investments.

! External initiatives: foreign subsidiary managers

autonomously identify an opportunity in their business

environment and act on it.

After some initial positive results, subsidiary managers may go

to corporate headquarters with a strong case for funding and

for the de facto upgrading of their original corporatecharter.

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perspective (4/5)

! Internal and external initiatives are attempts to earn home- base augmenting innovation charters.

! Senior management at corporate headquarters may provide

seed funds; invite initiatives through formal calls for proposals; allow initiatives to flourish in sheltered

circumstances; stimulate internal, social networking.

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perspective (5/5)

! Key problem: ‘corporate immune system’.

! Supposed to protect the MNE’s dominant logic but becomes

an instrument of powerful stakeholders.

! Great challenge for MNEs to create an environment

empowering subsidiaries while maintaining an appropriate

level of initiative scrutiny.

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Context – Second


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! Andrew Inkpen (CMR): demonstrates that distant

knowledge can sometimes be accessed in the home-base itself.

! General Motors (GM), learned about the Toyota ProductionSystem (TPS), especially its ‘lean manufacturing’ principles

through NUMMI. ! GM did not set up a home-base augmenting or exploiting

R&D site in Japan.

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Context – Second


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! GM needed to overcome several bounded rationality challenges: the routines that drove the TPS system had a

large, tacit component leading to causal ambiguity and

substantial resistance inside GM.

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Context – Second


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! Learning system adopted by GM included:

- Study teams at NUMMI learning a specific task and paying

attention to implementation and follow-up;

-

Experimental learning at NUMMI itself;

- Documentation (codification) of TPS knowledge;

- Preparation of staff at NUMMI to re-enter GM;

-

Extensive tours of the NUMMI plant for GM employees;

- Formal training programs and promoting ‘NUMMI-alumni’ to

senior positions at GM.

138

Figure 6.1 Home-base exploiting and augmenting foreign R&D units


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139

Old model

1

2

New model

International

border

Internationalborder

International

border

Home-base exploiting

foreign R&D units

Home-base

augmenting foreign

R&D units

LB FSAs in R&D

1

1

3

4

1. NLB FSAs related to R&D,

transferred from home to host

countries.

2. Internal links between host country

R&D and local manufacturing.

3. External links between host

country R&D and local output market.

4. Reverse transfer of new, NLB

FSAs related to R&D, from host

country operation to home.

M t I i ht (1)


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Management Insights (1)

! Traditional approach of R&D activities centralized in the

home-base reflects pattern I.

! Home-base augmenting: analogous to pattern VI

! R&D sites classified as home-base exploiting are more

representative of pattern III.

! Various host labs working directly together reflects pattern

VIII and pattern IX.

140

Generic FSA-type

Figure 6.2 Patterns of FSA development in home-base

exploiting and augmenting research centers in MNEs


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141



source

Home country

operation

Host country

operation

Network

III

VI

VIII

IX

I

Non-transferable








Key:

+

+

M t I i ht (2)


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Management Insights (2)

Two main limitations:1. Senior managers in the central lab face the challenge of

determining whether subsidiary initiatives in the R&Dsphere are compatible with overall corporate strategy.

2. Omits any discussion of the role of joint ventures and

strategic alliances:

! Especially for home-base augmenting R&D labs, MNE may be

unable to access autonomously host country location

advantages.

! Acquisitions could also eliminate the opportunity for

learning if the complementary specialization and resource

bundles of the firms acquired are destroyed.

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g y

1. Analyze your firm’s portfolio of international R&D

facilities, and categorize these according to their home-base-exploiting versus home-base-augmenting status.

2. Assess whether your knowledge-generating activities arelocated in the best possible knowledge clusters with

optimal access to specialized resources.

3.

When exploring the drivers of innovation inside the firm,examine the potential of subsidiary initiatives.

4. Reflect on the potential to partner in alliances, so as to

absorb new knowledge in your industry.

5. Align R&D initiatives in host country labs with overall

corporate goals and consider alternative paths to accessnew knowledge (e.g., acquisitions).

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Chapter Seven: InternationalSourcing and Production

Kasra Ferdows,

‘Making the most of foreign factories’,Harvard Business Review 75 (1997), 73-88


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Si ifi (1)


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Significance (1)

! Focus on key issues of location advantages, transferability of

home country FSAs & build-up of host country LB FSAs.

! Most successful manufacturing MNEs view their foreign

factories as sources of FSAs beyond the ability to savecosts .

! “How can a factory located outside of a company’s home

country be used as a competitive weapon not only in the

market that it directly serves but also in every market served

by the company?”

! Foreign factory senior managers’ attitude is critical.

146

Si ifi (2)


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Significance (2)

Changes in the international business environment drivingassignment of new foreign factory roles:

1. International trade tariffs declined substantially in the

second half of the 20th century, so foreign factories can be

more than branch plants.

2. Modern manufacturing increasingly technologicallysophisticated , so that location in sophisticated knowledge

clusters makes sense.

3. Shortened product life-cycles, requiring close linkages

between knowledge development and production.

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Significance (3)


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Significance (3)

Possible roles of foreign manufacturing facilities result from:

! Host country location advantages the MNE wants to

access.

!

Level of distinct FSAs held by the plant.

148

Figure 7.1 Six roles of foreign manufacturing plants


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149

Level of distinct FSAs

held by the plant

Strategic

purpose of

the plant

Access to

knowledge and

skills

Proximity to

market

Access to lowcost production

Weak Strong

Offshore

Server

Outpost

Source

Contributor

Leader


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Si ifi (5)


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Significance (5)

3. Outpost factory : gathers valuable information from

advanced, host country clusters, mainly on input side;

manufacturing combined with offshore/server factory role.

4. Source factory : accesses low-cost input production factors;receives resources; engages in resource recombination;

develops FSAs to build ‘best practice’ plant in MNE’s

network; more autonomy; in locations with good infrastructure

and skilled workforce; may be a strategic leader at input side;

narrow charter.

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Si ifi (7)


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Significance (7)

! Upgrading process for foreign plants is critical.

! End result : ‘robust network ’ of factories with FSA-

developing roles, able to adapt swiftly to changes in the

marketplace.

! In sharp contrast with the popular view that many MNEs

operate a footloose set of plants.

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Significance (8)


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Significance (8)

Common obstacles to upgrading of foreign factories:

! Fear of relying on foreign operations for critical skills.

! Treating overseas factories like cash cows andneglecting long-term investment.

! Creating instability by shifting production in reaction to

fluctuating exchange rates and costs.

! Responding to government relocation incentives tomove factories to new locations that possess minimal

potential for upgrading .

154


perspective (1/2)


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perspective (1/2)

MacCormack, Newman & Rosenfield (SMR) “The NewDynamics of Global Manufacturing Site Location”

! Senior managers under bounded rationality constraints,

often favour easily quantifiable variables to assesslocations, neglecting critical, longer run elements such as

local workforce knowledge and skills.! Regionalization trend : MNEs seek manufacturing presence

in each region to mitigate political and economic risks typically faced by international exporters.

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perspective (2/2)


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perspective (2/2)

! Emerging manufacturing technologies (FMS, JIT, TQM) place

heavy burden on host country workforce, which is viewedas an important location advantage.

! MNE’s recombination capabilities are crucial to access,

exploit and augment skilled human resources in sites selected

for manufacturing operations.

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Context – Second



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J.Galbraith (CMR) “Transferring core manufacturingtechnologies in high-technology firms”.

! Observed firms locked into a situation of ‘ profitless

prosperity ’ (e.g., scale advantages linked to price wars).

! Solution: move towards system of flexible, smaller

manufacturing plants that can easily adapt to changes, atdemand and supply sides.

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Context – Second



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! Problem: conventional manufacturing technology transfers

entail substantial resource costs (pre-transfer planning/

engineering, post-transfer management/control), as well as

productivity and know-how losses (start-up phase).

! Initial productivity losses averaged 34% and several months to

attain pre-transfer levels.! Bounded rationality problem: more pre-transfer training did not

reduce productivity losses.

! Bounded reliability problem: donor facility personnel refused to

provide long-term support to the recipient facility.

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Figure 7.1 Six roles of foreign manufacturing plants


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Level of distinct FSAs

held by the plant

Strategic

purpose ofthe plant

Access to

knowledge and

skills

Proximity to

market

Access to lowcost production

Weak Strong

Offshore

Server

Outpost

Source

Contributor

Leader

Generic FSA-type


(Non location-bound) FSAs

Figure 7.2 Ferdows’ analysis of FSA development in MNEs

Non-transferable


multinational stretegic planning

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