Chapter 9: Multinationals and Home Economies PDF

Chapter 9: Multinationals and home economies © 2019, University of Cyberjaya. Please do not reproduce, redistribute or share without the prior express permission of the author. 9.1 Multinationals and nations This chapter explores the relationship between multinationals and their home...

Chapter 9: Multinationals and home economies © 2019, University of Cyberjaya. Please do not reproduce, redistribute or share without the prior express permission of the author. 9.1 Multinationals and nations This chapter explores the relationship between multinationals and their home economies. ❖The organization of knowledge by firms is forged by the interplay of national institutions and entrepreneurship. ❖As a result the firms of different countries developed distinct capabilities and organizational forms. This was reflected in the strategies and organization of firms from different countries. This chapter examines the long-term differences between the firms of different nationalities in their propensities to invest, and the geographical and sectoral distribution of their investments ❖ It then turns to examine the impact of multinationals on their home economies. Finally the issue of whether nationality still matters is discussed. © 2019, University of Cyberjaya. Please do not reproduce, redistribute or share without the prior express permission of the author.  9.2 Home economics over time 9.2.1 The geographical distribution of multinationals This ownership pattern reflects strong national differences in the timing of international business activities. In a historical perspective, three(3) categories of home economy can be identified Persistent Erratic Latecomer investor investor investor United States Switzerland's Germany Italy Singapore France Britain Sweden Spain Brazil Japan Netherlands Hong Kong Taiwan © 2019, University of Cyberjaya. Please do not reproduce, redistribute or share without the prior express permission of the author.  The geographical distribution of multinationals Persistent investor persistent investors began to invest in the nineteenth century, and continued on a substantial scale despite shifts in the political and economic environment. The United States belongs firmly to this category. Even more striking was the propensity of British companies to invest abroad which persisted in the face of relative economic decline and the end of the Empire. © 2019, University of Cyberjaya. Please do not reproduce, redistribute or share without the prior express permission of the author.  The geographical distribution of multinationals Erratic investor The second category of home economic is erratic investors which is France and Germany.This both country were major capital exporters before 1914, and their firms were active direct investors. Japan is also been an erratic category.Japan’s late industrialization and low incomes,by the interwar years the worldwide activities of Japanese trading and However, thereafter the collapse of the bubble other service sector companies as well as investments economy and the acute difficulties of the by Japanese cotton textile and mining companies in banking system led to much slower growth and the markets and resources of asia especially china even at times stagnation resulted in the creation of a complex international business system © 2019, University of Cyberjaya. Please do not reproduce, redistribute or share without the prior express permission of the author.  The geographical distribution of multinationals Late comer investor This category includes southern European countries such as Italy and spain The latecomer category included firms from the emerging economics of Asia and latin America ,particularly Hong Kong,Singapore,South korea,Taiwan And Brazil, whose outward FDI began on a small scale in the 1960s and grew rapidly from the 1980s. © 2019, University of Cyberjaya. Please do not reproduce, redistribute or share without the prior express permission of the author.  1. Evolutionary Model 5.Firm,nations 2.Diamond model of and firms international The home competitive country advantage impact on multinationals 4. Wars and 3. The role chance of culture © 2019, University of Cyberjaya. Please do not reproduce, redistribute or share without the prior express permission of the author.  The home country impact on multinationals Evolutionary Model Number of models have related the national differences in multinational investment to the stage of a country’s economic development. In the investment development path model, a country's international investment position is related to its level of development as measured by its GNP(Gross National Product) per capita. A developing economy passes through Evolutionary Model Stage 1 - pre-industrialization there is no inward or outward FDI. Stage 2- if the economy has developed, the country will begin to attract inward FDI as domestic markets increase and the variable costs of servicing those markets reduced. Stage 3- country's net inward investment per capita begins to fall four(4) stages. Stage 4- is a net outward investor, with its investment flows abroad exceeding those of foreign-owned firms in its own country © 2019, University of Cyberjaya. Please do not reproduce, redistribute or share without the prior express permission of the author.  Evolutionary Model Stages 3- country's net inward investment per capita begins to fall This may be because the original ownership advantages of foreign firms has declined, Local firms have begun to improve their competitive capacity, Local firms have developed their own comparative ownership advantages which they have begun to exploit through FDI Stage 4- is a net outward investor, with its investment flows abroad exceeding those of foreign-owned firms in its own country This reflects the development of strong ownership advantages by its firms and/or an increasing propensity to exploit these advantages internally from a foreign rather than a domestic location These evolutionary models work best at explaining patterns of multinational investment over the very long period, especially in the capital goods manufacturing sector employing frontier technologies. They have little to contribute towards understanding the impact of exogenous shocks, whether wars or regime changes, which have resulted in major shifts in investment patterns © 2019, University of Cyberjaya. Please do not reproduce, redistribute or share without the prior express permission of the author.  2. Porter Diamond model of international competitive advantage The continuing significance of the home country environment in even the most globalized of industries was the theme of Porter's ‘diamond’ model of the so urces of international competitive advantage Porter argued that Four(4) sets of attributes of a home economy are critical for the competitiveness of its firms: Determinants which may affect The level and composition of natural and created the primary four attributes resources The quantity and quality of demand by domestic consumers Government The extent to which its firms are able to benefit from agglomerations or external economies by being grouped in clusters of related activities Chance Firm strategy , structure and rivalry. © 2019, University of Cyberjaya. Please do not reproduce, redistribute or share without the prior express permission of the author.  The level and composition of natural and created- Porter Diamond model The existence of natural resources in home economies helps to explain national variations in the sectoral distribution of the FDI. The existence of natural resources provided companies with access to skills which could be exploited abroad in mining or agriculture, and sometimes in manufacturing. Examples included the Swedish multinationals which grew out of that country's raw material base of iron ore and forest products, and the Swiss companies which reflected the importance of that country's dairy products industry. © 2019, University of Cyberjaya. Please do not reproduce, redistribute or share without the prior express permission of the author.  Created resource endowments became progressively more so over time The origins of Sweden's international competitiveness in advanced engineering products rested on the heavy investment in technical schools and literacy in that country even when—in the nineteenth century—it was still a poor county. The combination of human capital and institutional arrangements which facilitated knowledge acquisition from abroad seem to have given that country a high ‘absorptive capacity’ (Lundgren 1995). During the second half of the twentieth century US leadership in computer and information technology industries reflected not only the size of the US market and US d efense spending in particular, but the web of relationships and information flows between companies and universities, and between venture capitalists and entrepreneurs, which provided a unique environment for creativity and innovation. © 2019, University of Cyberjaya. Please do not reproduce, redistribute or share without the prior express permission of the author.  Porter Diamond model -Government and chance The influence of both governments and chance was much more pervasive than the diamond model might suggest. Home country laws exercised important influences on international business. US antitrust laws discouraged over a long period much of the collaborative behavior which was frequently seen in the international operations of both European and Japanese firms. On a number of occasions, antitrust rulings reshaped the corporate landscape of US multinationals. Examples included the shift of control over the tobacco company BAT from the United States to Britain before 1920, and Alcoa's loss of ownership of its Canadian affiliate, Alcan, after World War II © 2019, University of Cyberjaya. Please do not reproduce, redistribute or share without the prior express permission of the author.  Porter Diamond model -Government and chance Government regulations and trade barriers have shaped outward multinational investment. After 1945 the considerable advantages derived by US firms from the US defense budget were bolstered by the fact that foreigncontrolled firms were not eligible for the security clearance required to bid on US defense contracts (Safarian 1993). Japanese consumer electronics and automobile industries grew to a large scale within a Japanese market protected by import controls and strict limits on inward FDI. © 2019, University of Cyberjaya. Please do not reproduce, redistribute or share without the prior express permission of the author.  Porter Diamond model -Firm strategy , structure and rivalry The industrial structures of the economies was probably among the most important such variable. Small countries have more ‘unbalanced’ industrial structures than large ones—some industries proportionately large, others missing. Depending on its particular complement of industries, it can therefore be predicted that a small nation will have either a very large amount of FDIor a very small one (Caves 1996). The industrial structure in turn resulted in differences in concentration levels. It was the small economies with high concentration levels which were the most active in outward FDI. In contrast, low European investors such as Denmark and Norway were the ones where the role of small andmedium-sized companies was considerable (Jones and Schröter 1993). © 2019, University of Cyberjaya. Please do not reproduce, redistribute or share without the prior express permission of the author.  Porter Diamond model -Firm strategy , structure and rivalry The significance of concentration levels is not limited to the small economies. The United Kingdom's continued prominence as an outward investor may be in part explained by the growing importance of large firms in its economy. Beginning in the interwar years, and gathering pace in the 1950s and 1960s, concentration levels in British industry rose rapidly. By 1970 the share of the 100 largest enterprises in manufacturing net output was considerably higher in the United Kingdom than in the United States, while the small or medium-sized enterprise sector had shrunkChannon 1973). British companies may have possessed advantages in capital-raising derived from their large size, as well as the large size of the British capital market (Clegg 1987). In contrast concentration levels remained lower in Germany, France, and especially Italy. © 2019, University of Cyberjaya. Please do not reproduce, redistribute or share without the prior express permission of the author.  3. The role of culture The strong differences between countries in the organization of their firms and the behavior of their managers can be said to derive in part from national cultural values. However, because the influence of culture is diffuse and hard to demonstrate, analysis of the home-country cultural influence on multinationals remains difficult. The impact of culture was seen in several different areas. Differences in levels of outward investment may have elected wider differences between outward- and inward-looking cultural orientations © 2019, University of Cyberjaya. Please do not reproduce, redistribute or share without the prior express permission of the author.  The role of culture- outward orientation Colonial and mercantile traditions of Switzerland and Sweden were not colonial , but had a long tradition of international Britain and the Netherlands resulted in a trade and exposure to foreign cultures strong outward-looking commercial Both countries became noteworthy for tradition in their business cultures. their multilingual abilities. Outward orientation was often reflected in composed of three language groups migration flows —German, French, and Italian Britain (including Ireland at that time), the Netherlands, Switzerland, and Sweden were major sources of emigrants in the nineteenth century. German and later English were widely understood The United States—to which most of these people emigrated—was a country of immigrants. © 2019, University of Cyberjaya. Please do not reproduce, redistribute or share without the prior express permission of the author.  The role of culture-inward orientation Cultures developed more inward-looking orientations also. Japan emerged from the long Edo era of national seclusion with little knowledge of the rest of the world, and a strong sense of the uniqueness of Japanese culture. Modern Japan developed as outward-looking in some respects—for example, in the acquisition of foreign technology—but with a distinctly arm's-length attitude to the people and firms of foreign countries. © 2019, University of Cyberjaya. Please do not reproduce, redistribute or share without the prior express permission of the author.  The role of culture The ownership of world FDI has historically The particularly prominent role of English- been correlated with cultures identified by speaking countries as sources of FDI in natural Hofstede as being individualistic, a preference resources might be explained in such cultural terms. for equality and a willingness to tolerate uncertainty. The United States, Britain, and Mining and petroleum were high-risk the Netherlands shared these characteristics. businesses. Cultures in which entrepreneurs It might be hypothesized that international were willing to act independently and take risks provided a competitive advantage in such an business, as it is more risky than domestic environment. business, would be favored by cultures which were more individualistic and less risk-averse than others. © 2019, University of Cyberjaya. Please do not reproduce, redistribute or share without the prior express permission of the author.  4. Wars and chance The low level of German FDI between World War Iand the 1970s, and the low Japanese FDI between 1945 and the 1970s, can only be understood in the context of the sequestrations of those countries' foreign assets as a result of the world wars, even if other important variables were also at work.. Treaty of Versailles is one of the most controversial armistice the treaties in history. The treaty’s so-called “war guilt” clause forced Germany and other Central Powers to take all the blame for World War I. This meant a loss of territories, reduction in military forces, and reparation payments to Allied powers. Delegates signed the Treaty of Versailles in the former palace's famous Hall of Mirrors, ending World War I © 2019, University of Cyberjaya. Please do not reproduce, redistribute or share without the prior express permission of the author.  4. Wars and chance In contrast, the high propensity of Sweden and Switzerland to invest abroad can be related to their neutral status during both the world wars. The Netherlands was neutral in World War I. Although Swedish firms suffered from the Neutrality left foreign assets intact destruction and loss of property in Russia following the Communist Revolution and in eastern Europe following World War II—while their business at home was spared from the destruction seen elsewhere in Europe. © 2019, University of Cyberjaya. Please do not reproduce, redistribute or share without the prior express permission of the author.  Wars and chance British and Dutch firms remained persistent foreign investors despite momentous changes in their environment. World War II, decolonization, and the growth of nationalism in developing countries had a serious impact on both countries Britain may have lost 40 percent of The end of the Dutch colonial empire in Indonesia in its total overseas business assets 1949, followed by the nationalization of Dutch between 1938 and 1956 through property a decade later, was a climactic event for sequestration, wartime destruction Dutch FD of property, and obligatory sales Yet, in both the British and Dutch cases, such massive external shocks did not result in a diminution of their desire to invest abroad. This probably reflected the strength of the international investment horizon which had become embedded in their firms and entrepreneurs © 2019, University of Cyberjaya. Please do not reproduce, redistribute or share without the prior express permission of the author.  5. Firm,nations and firms Home country characteristics provide only a partial explanation of the dynamics of multinationals. There are strong country commonalities in the strategies pursued by firms from the same country, but firms of a particular nationality do not share equally the resources of their home countries. There has always been a wide range in performance among firms headquartered in the same country. During the 1980s and 1990s the Japanese automobile industry as a whole was very internationally competitive, but there was a wide divergence between the three leading firms, Toyota, Honda, and Nissan. The latter(Nissan) performed so poorly that it was ultimately acquired by France's Renault. © 2019, University of Cyberjaya. Please do not reproduce, redistribute or share without the prior express permission of the author.  Firm,nations and firms The growth of the largest multinationals of the twentieth century—Shell and Exxon, Ford and GM, Unilever and Nestlé, Matsushita and Sony—reflected distinctive firm-specific experiences which differentiated them from numerous less successful national competitors These experiences ranged from individual entrepreneurial decisions at crucial moments, to the development of a particular management or production system which turned out to be very effective. The growth of these global giants can be regarded as resting on certain aspects of their home economies, but their individual histories demonstrate great diversity in management, strategy, culture, and performance. Firms sometimes remained prominent in an industry long after their home country lost the comparative advantage which stimulated their growth initially. First-mover and incumbency advantages proved very strong in many industry © 2019, University of Cyberjaya. Please do not reproduce, redistribute or share without the prior express permission of the author.  Thank you Address Telephone Website University of Cyberjaya 03 - 8313 7000 www.cyberjaya.edu.my Persiaran Bestari, Cyber 11, 63000 Cyberjaya, Facsimile Email Selangor Darul Ehsan, Malaysia. 03 – 8313 7001 [email protected]