SC accommodation Flashcards
Why is it important to accommodate SC to global realities?
Bhattacharya and Michael. “How local companies keep multinationals at bay”
• A substantial number of local companies in emerging markets have managed to hold their own—or better—in the face of competition from global giants. This article identifies 50 of these homegrown winners
• Smart local companies have used the benefits of globalization to close gaps in technology, capital, and talent with their rivals from the developed world.
• The secret is to adopt most, if not all, elements of a six-part strategy.
1. One, the homegrown winners customize products and services to meet local needs and initially go after economies of scope.
i. These local leaders develop offerings tailored to several niche markets and learn to create a large variety of products or services cost-effectively.
2. Two, they develop business models to overcome market-specific obstacles (such as bad infrastructure) and gain competitive advantage or first-mover advantages in the process.
3. Three, they create or buy the latest technologies and use them effectively.
i. This keeps operating costs low and enable companies to deliver good quality product and services.
4. Four, they find ways to benefit from low-cost labor and train workers in-house to overcome shortages of skilled employees.
5. Five, they scale quickly by going national before regional rivals
can challenge them in order to reap the benefits of scale.
i. Often entail M&A
6. Six, they invest in management talent in order to sustain rapid growth, which multinational firms underestimate.
→ No element on its own is groundbreaking, but the homegrown champions cleverly weave at least four of them—sometimes all six—into a tight strategy in order to gain competitive advantage.
• Global companies would do well to study these models of achievement and, armed with acquired wisdom, rethink their own strategies before local rivals shut them out of lucrative emerging markets.
Problem
• Why don’t the strategies of the biggest and brightest corporations work well in developing countries?
o Part of the problem is that many transnational enterprises mistakenly believe that emerging markets are years behind developed nations’ and that the former’s markets will eventually look like the latter’s.
o Multinational corporations assume it’s merely a matter of time before their existing business models and value propositions start delivering results in developing countries. These misconceptions are deadly—for several reasons.
o The emerging markets are different, behind in some ways and advanced in others.
Findings
• The strategy for multinational companies to succeed against the local companies in the emerging markets is to fight on two fronts:
• →First, they must match some of the local companies’ strategies,
• →Second, they must develop other strategies that local companies cannot easily copy
• Globalization is clearly a double-edged sword. The advantages of being a transnational corporation in emerging markets have declined dramatically in recent times. S
• After all, it often takes only one strong homegrown champion to shut a multinational out of an emerging market.
What is the eclectic paradigm of international production?
How can we undertand the internationalisation process of the firm?
Why do firms engage in international business?
The way MNCs operate has changed over the past few decades.
• They disintegrate their production processes; and locate them in different destinations to add value and competitiveness. → The question is now what, not only why, where and how.
• ‘What’ (motive) has also become important
• The basic objective is to understand the factors underlying the process of global value or supply chains’ creation and performance.
In order to answer this question we must use the framework provided by Dunning, 2001
The eclectic paradigm is a theory that provides a three-tired framework for a company to follow when determining if it is beneficial to pursue FDI.
o Explains the internationalisation process of firms based on significance of firm-specific advantages.
• The question of why and where..
• Concerning international production, i.e. production financed by FDI and undertaken by MNEs, the paradigm asserts that, at any given moment of time, this will be determined by the configuration of three sets of forces:
o Ownership advantages: The (net) competitive advantages which firms of one nationality possess over those of another nationality in supplying any particular market or set of markets. These advantages may arise either from the firm’s privileged ownership of, or access to, a set of income-generating assets, or from their ability to co-ordinate these assets with other assets across national boundaries in a way that benefits them relative to their competitors, or potential competitors.
• Advantages: trademark, production technique, entrepreneurial skills, returns to scale
o Location advantage: The extent to which firms choose to locate these value-adding activities outside their national boundaries
• Advantages: Existence of raw materials, low wages, special taxes or tariffs
o Internalisation advantages: The extent to which firms perceive it to be in their best interests to internalize the markets for the generation and/or the use of these assets; and by so doing add value to them. Occurs when the firm perceive the benefits to exceed the costs. When this leads to foreign investments the firm may incur political or commercial risks due to unfamiliarity with the foreign market (this is known as the cost of doing business abroad, arising from the liability of foreignness)
• This is linked to transaction costs, which covers the direct cost of managing relationship such as search and information costs, bargaining and decisions, and thus monitoring and enforcing arrangements, but also the opportunity cost of making inferior governance decisions such as asset specificity, bounded rationality (no complete information) and opportunism (self-interested behaviour).
• Advantages: Own production rather than through partnership arrangements: like JV or licensing
• The eclectic paradigm is not static in its nature; while there is no interdependence between OLI variables, there is dynamic relationship (change over time), which affects the firm’s strategy over time.
• Dunning acknowledge that the eclectic paradigm, as originally conceived is uncomfortable in dealing with the dynamics of international production. However, he argue that it can help to explain why an industry’s or country’s international investment profile may be different in two points of time. To link these two points, one needs to introduce changes in the exogenous or endogenous variables, including strategy and how these in turn affect the OLI configuration. He illustrated from the IDP how this may be done at a macro level.
o IDP stages
o Stage 1. Pre-industrialization
• No inbound investment, due to insufficient locational attractions
• No outbound investments, due to few or no ownership advantages
o Stage 2
• The improvement in the L advantages of countries → may also help indigenous firms to upgrade their own competitive advantages.
o Stage 3
• As countries move along their development path, the OLI configuration facing outward and inward investors continues to change. Some foreign (and domestic) firms, which earlier found a country attractive to invest in because of its low labour costs or plentiful natural resources, no longer do so. In other cases, its L advantages have become more attractive → This, in turn, makes it possible for domestic firms to develop their own O advantages and begin exporting capital.
o Stage 4
• Next, as countries reach some degree of economic maturity
o Final Stage
• A fluctuating balance between outward and inward direct investment. This arises when there is some degree of convergence between the level of development and the economic structure of countries, and also where firms engage in FDI, not only to exploit their existing O advantages in a foreign location, but also to augment these advantages by acquiring complementary assets or new markets.
At this stage too, the role of government is often of critical importance in influencing the quality of L-specific advantages; and in setting the competitive environment for their own firms to effectively exploit the opportunities offered by the global economy.
What is the economic perspective on globalisation?
How do firms decide the mode of doing business?
In order to answer this question we must use the framework provided by Guisinger, 2001:
• Aim of the paper:
o As focus of the significant literature moves away from only analysing multinational firm activity, e.g. mode of entry or location, towards including profitability of the firm the eclectic paradigm has to be revised and modified to remain relevance, and to explain why two firms of the same industry entering the same country have different rates of profitability.
o The aim is to merge the view of economic with organisational theory to modify the OLI paradigm with both, the environmental accommodation and adaption.
o In regard to conceptualising the environmental influences relevant for multinational cooperation (MNC), Guisinger introduces relevant literature from the organisational theory that aim to explain structural components (complexity) of the firm that are shaped by their environment. This is called environmental adaption
o Subsequently the author draws the attention to economic theories, which explain the MNC with a view on a firm’s interaction with their environment. This is called environmental accommodation by the author
o The suggested modified eclectic paradigm consists of M (mode of entry) instead of I, as there is more entry modes than simply FDI and is extended with an A (adaption).
o In order to proof the relevance of this suggestion, Guisinger first introduces a better definition of the international business environment (IBE) and relates this definition to the environmental accommodation and adaption
o The proposed improved definition is based on institutional theory and is built around ‘organisational fields’, which are key actors in the institutional life of MNC. Those are divided in ‘interactors’ and ‘geovalent component’.
• While ‘interactors’ are easily explained as organisations, who interact directly with the firm, ‘geovalent components’ are more challenging to define.
• In this paper they are explained as all environmental forces that have an impact on the firm but are not themselves an organisation.
o Geovalant elements:
• Econography: climate, proximetry to major markets, physical size etc.
• Culture: values, beliefs and attitudes
• Legal system: Common vs. civil law
• Income profile: Income inequality and growth of GNP
• Political risk: Government instability, corruption etc.
• Tax systems: Effective tax rate for MNEs
• Exchange rates: Variability and overvaluation/undervaluation
• Government restrictions: Tariffs, quotas or investment controls
o The paper demonstrates that by merging economic and organisational theory and enhancing it with the geovalent components of the international business environment there is a way to study performances if MNC in the future.
