Reinert/Windows on the World Economy, 2005 International Competition and Management CHAPTER 11

Reinert/Windows on the World Economy, Introduction Swedish forest and paper products firm Svenska Cellulosa Anktiebolaget (SCA) had a successful internationalization strategy  Based on FDI in corrugated box and recycled newsprint in many Western European countries However important questions remain  Was there anything characterizing the home base of SCA that contributed to its competitive success or competitive advantage?  When a firm such as SCA distributes its production facilities over many countries, does its management techniques need to change?  This chapter provides you with some initial answers to these questions

Reinert/Windows on the World Economy, The Porter Diamond and the Role of the Home Base A competitive firm can choose from a number of trade, contractual, and investment modes of foreign market entry Why can a particular firm in a particular home country develop and maintain its competitiveness as it moves through the trade, contractual, and investment modes of globalization?  Why do particular firms accumulate the tangible and intangible assets that support international competitiveness? Has a lot do with the home base of the firm

Reinert/Windows on the World Economy, The Porter Diamond and the Role of the Home Base Porter introduced a diagram—the Porter diamond— that has become very well known  Focuses on four central aspects of the home base, which Porter views as the determinants of competitive advantage Factor conditions Demand conditions Related and supporting industries Firm strategy, structure, and rivalry  Main argument: “Nations are most likely to succeed in industries or industry segments where the national ‘diamond’ is most favorable”

Reinert/Windows on the World Economy, Figure 11.1 The Porter Diamond

Reinert/Windows on the World Economy, Porter Diamond Factor conditions  Porter considers labor, land, natural resources, and physical capital to be basic factors that are largely inherited  More important from Porter’s point of view are advanced factors that are created which include Sophisticated infrastructure Labor educated and trained in very specific ways Focused research institutions  Porter also makes a distinction between Generalized factors—can be used in a number of different industries Specialized factors—tailored for use in specific industries

Reinert/Windows on the World Economy, Porter Diamond Demand conditions  Stresses three aspects in the home base Demand composition  Sophisticated, demanding, and anticipatory (anticipates trends in global demand) home demand contributes to firms’ success Demand size and pattern of growth  Large, rapidly-growing, and early home demand are positive aspects of the home base Degree of internationalization  The more home demand is synchronized with international demand trends, the more it contributes to firms’ competitiveness

Reinert/Windows on the World Economy, Porter Diamond Related and supporting industries  Supplying industries in the home base has several advantages in downstream industries Efficient, early, rapid, and sometimes preferential access to the most cost-effective inputs Ongoing coordination Innovation and upgrading  A competitive domestic supplier industry is better than relying on well-qualified foreign suppliers

Reinert/Windows on the World Economy, Porter Diamond Firm strategy, structure, and rivalry  One country differs from another with regard to managerial systems and philosophies and with regard to capital markets  Institutional environments that allow firms to take a long- term view contribute positively to competitiveness  Presence of a large number of competing firms or rivals in the domestic industry Competition among firms is necessary for allocative efficiency in a market system, but domestic rivalry contributes to dynamic, technological efficiency

Reinert/Windows on the World Economy, Porter Diamond Interactions Most important Interactions—all related to rivalry  Domestic rivals—particularly when clustered in a geographic region—contribute to the creation of factors Especially specialized, advanced factors  A group of domestic rivals contribute to the presence of specialized and sophisticated suppliers  Rivalry among domestic firms producing differentiated products enlarges home demand and makes it more sophisticated

Reinert/Windows on the World Economy, Figure 11.2 Interaction in the Porter Diamond

Reinert/Windows on the World Economy, Spatial Clusters in the World Economy Flexibility and home base concepts converge in spatial clustering  Interlinked firms/activities that exist in the same local and regional setting (in terms of economic, social, cultural and institutional factors)  AKA clusters, networks, centers of excellence, and industrial districts First noticed in Silicon Valley in the United States, in what is now known as the Third Italy, in Southern Germany, and in East Asia Much productive knowledge cannot be codified into explicit forms  Rather, communicated via a highly social process of face-to-face interaction over a relatively long period of time  Consequently, innovation and learning is a spatially-located, social and collective process among a group of firms

Reinert/Windows on the World Economy, Spatial Clusters in the World Economy Why do spatial clusters contribute to the productivity of firms?  Concentrated communication made possible by a cluster increases learning and innovation Contributes to the dynamic, technological efficiency of firms in the cluster  Trust increases over time which facilitates contracting and exchange among firms  Common business culture develops which reduces uncertainty

Reinert/Windows on the World Economy, Spatial Clusters in the World Economy A cluster exists within a milieu which consists of  Cluster’s firms  Knowledge embedded within the cluster  Institutional environment  Ties of the cluster’s firms to customers, research institutions, educational institutions, and local government  Milieu supports the cluster with rules and norms for business activity, social cohesion, business culture, and government support

Reinert/Windows on the World Economy, Figure 11.3 A Value Chain Within a Spatial Cluster

Reinert/Windows on the World Economy, Spatial Clusters and Milieus In its home base, a MNE obviously has the possibility of contributing to the local cluster and milieu Also possible that a MNE can tap into selected foreign clusters and milieus  In the local milieu where the (MNE) controls full-fledged operations Can be characterized as an insider Linked to other firms in both formal and informal networks Typically maintains close linkages to local research and education facilities, governmental bodies, etc.  Provide channels for rapid dissemination of knowledge and information  Provide a basis for co-operation leading to a continuous stream of improvements Spatial clusters are important in both the home base and in the foreign operations of MNEs

Reinert/Windows on the World Economy, Multinational Management: The Local-Global Paradox Ownership advantages offset the extra costs of doing business internationally As a firm globalizes its production system it must decide upon  Location of the components of the multinational value network  Coordination among these components  Summarize some issues raised in book Managing Across Borders: The Transnational Solution by Bartlett and Ghoshal (2002) A recurring theme relating to a creative tension between the local and the global—local-global paradox

Reinert/Windows on the World Economy, Multinational Management: The Local-Global Paradox Strategic challenges faced by MNEs  Global efficiency Obtained from economies of scale and scope  Local responsiveness Involves using local facilities and personnel to tailor goods and services to the needs and preferences of local consumers  Global innovation Refers to the combined and complementary use of innovations from many parts of the multinational value network

Reinert/Windows on the World Economy, Bartlett and Ghoshal (2002) “Multinational” Firm  Subsidiaries are distinct entities allowed to be very responsive to their local environments  Traditionally associated with European MNEs  Good at delivering local responsiveness, but lacking in the areas of global efficiency and innovation Global Firm  Subsidiaries are little more than means to deliver uniform goods and services to local markets  Home office of the global firm is very important in planning the realization of global economies of scale and scope  Traditionally associated with Japanese MNEs  Good at delivering global efficiency; less effective in the areas of local responsiveness and global innovation

Reinert/Windows on the World Economy, Bartlett and Ghoshal (2002) International Firm  Pursues a strategy concerned with disseminating the parent company’s knowledge to the foreign markets  Parent retains considerable influence and control, but less than in a classic global company National units can adopt products and ideas coming from the center, but have less independence and autonomy than ‘multinational’ subsidiaries  Traditionally associated with US-based MNEs  Good at delivering global innovation but not local responsiveness and global efficiency

Reinert/Windows on the World Economy, Bartlett and Ghoshal (2002) Argue in favor of a transnational model of global management  A “flexible centralization/coordination” or an “integrated network” Role of subsidiaries is differentiated throughout the multinational value network, differing among countries  One subsidiary might only be involved in sales, while another is involved in R&D Coordination of the multinational value network is achieved using multiple methods  Flows of goods are coordinated through centralization  Flows of resources are coordinated through formalization  Flows of information are coordinated through socialization  Bartlett and Ghoshal advocate the rotation of personel throughout the network Disparate elements of the MNE are tied together in a coherent mission through the use of vision and innovative human resource development policies

Reinert/Windows on the World Economy, Table Examples of Multi- Home-Based MNEs

Reinert/Windows on the World Economy, Schools of Thought on MNEs Home-based—originates from a strategic and environmental perspective of how MNEs develop and sustain international competitive advantage  Porter emphasizes the importance of the home base in the process of upgrading competitive advantage Heterarchical—originates from the field of organization and management of the MNE A common theme  MNE builds increasingly complex organizational structures and management processes

Reinert/Windows on the World Economy, Schools of Thought on MNEs Sölvell and Zander stress that the two models have a common ground  The mechanisms for fluid exchange of information and upgrading of competitive advantage which cannot be easily imitated by “outsiders” Home-based model—mechanisms are related to the country or regional level Heterarchical MNE—related to the organizational level, linking diverse influences from around the world through corporate culture Knowledge is an important connection among the OLI framework, the Porter diamond, spatial clusters, and the transnational model  Any understanding of the role of MNEs must include an understanding of the development, transmission, and application of knowledge

Reinert/Windows on the World Economy, Cultural Issues Another difficulty faced by MNEs is culture Adler (2002) argues that cross-cultural business activities typically tend towards either highly effective outcomes or highly ineffective outcomes Managing these sorts of relationships can involve a search for cultural synergy

Reinert/Windows on the World Economy, Cultural Issues Cultural dominance  MNE that imposes its own national or business culture on its foreign subsidiaries More powerful companies tend to use this approach Cultural accommodation  MNE tries to blend into their host country culture at all costs Cultural avoidance  Both MNE and hosts pretend as if there were no cultural differences Weak base on which to build long-term business relationships across cultures Cultural compromise  MNE and partners meet each other half way, sometimes literally, conducting business in a third country Another method  Look for ways in which the two cultures can reinforce each other or compromise in specific ways that benefit both sides

Reinert/Windows on the World Economy, Figure 11.4 The Search for Cultural Synergies