Transnational Firms

1
Transnational Firms

• Models of growth and development
• In what sense global corporations?
• Webs of enterprise internal organization
• Organization structures
• Restructuring and rationalization
• Geographical organization of production
• Webs of enterprise external relationships
• Japanese keiretsu structures
• Supplier links and subcontracting

2
Models of TNC Growth Development

• Last Thursday we examined different theories of
  FDI the development of the TNC or as Dicken says
  Why internationalize?
• Macrolevel and microlevel approaches
• Now lets reconsider the graphic models of TNC
  development that we discussed last Tuesday

3
Sequential process

• Flow chart from domestic firm to TNC
• Except that there are no true prerequisite steps!
• Source Dicken 1998 191

4
Schematic Model

• Iconic model
• Emphasizing spatial/ regional expansion
• Stages of growth
• Importance of trade barriers
• Source Hakanson (1979)

5
Grid model

• A way of conceptualizing two fundamental
  dimensions
• Static typology or classification OR
• Dynamic model showing development pathway?

6
A Typology of Enterprise From Domestic to Global
I

• Domestic Company
• Most revenues in home market
• Products and processes are primarily for serving
  domestic customers
• International Company
• Significant percentage of revenues in
  international activities
• May have separate international division
• Significant distinctions in products and
  processes made between domestic and foreign
  customers

7
A Typology of Enterprise From Domestic to Global
II

• Multinational or Multidomestic Company
• Extensive international revenues and activities
• Strong country organizations and many value chain
  activities duplicated around world
• Decisions focused on local customer and local
  markets
• Limited coordination across borders
• Global Company
• Makes key strategic decisions on globally
  integrated basis
• Value chain is geographically specialized and
  networked
• Products and processes are designed to be global
  with capability for local adaptation at minimal
  cost

8
A Typology of Enterprise From Domestic to Global
III

• Source "The Challenge of Global Customer
  Management" Marketing Management Chicago
  Winter 2000 David B. Montgomery, George S. Yip.

9
Are TNCs Truly Global and Stateless?Criteria
for Identifying Global Firms

• Where are the bulk of assets?
• Where are most employees?
• Where is the parent company owned and controlled?
• What is the nationality of the senior executives?
• What is the nationality of subsidiary managers?
• Where would firm turn for diplomatic protection?
• Where are worldwide earnings taxable?
• Source Hu 1992 California Management Review

10
Measuring Global Scope

• Ra Rank by total foreign assets
• Ri Index of transnationality average of three
  ratios (proportions)
• Foreign assets/total assets
• Foreign sales/total sales
• Foreign employment/total employment
• Lets look at how they rank!
• (Table 6.2)

11
Organizationstructures ofTNCs
12
Locational adjustment rationalizationin a
multiproduct TNC
13
Organizingproduction in space
14
Organizingproduction in space trade links
Exported finished product
15
External Networks

• Transactions between firms
• Supplier linkages
• Parts, components, subassemblies
• Subcontractors
• Local to global scale linkages
• Web of trade, transactions, relationships
• Deep integration

16
Keiretsu

• Stable, long term, exclusive affiliations which
  form identifiable groups
• Families of related companies based on mutual
  obligations
• Ties are based on familial relationships,
  friendship, interlocking directorships, financial
  links
• Reminiscent of Japanese feudalism

17
Keiretsu Schematic Diagram
18
Horizontal keiretsu

• Groups centred on banks
• manufacturing
• trading companies - sogo shosha
• life insurance
• other financial
• Nested satellites within satellites
• shitauke

19
Horizontal keiretsu, some with origins to the pre
1945 zaibatsu
20
Vertical keiretsu

• Centred on large parent firm in one industry
• e.g.
• Toyota (automotive)
• Sony (electronics)
• Kirin (brewing)
• Smaller suppliers are nested satellites within
  satellites
• shitauke

21
Vertical keiretsu, focused on industries and
vertically linked to satellite firms (not shown)
22
Webs of Enterprise! Links between horizontally
and vertically structured keiretsu
23
Focus on major automobile producers as vertical
keiretsu Note mainly exclusive links to
banks, hence to other manufacturing industries
and suppliers
24
Subcontracting Relationships

• Principal firm
• Subcontractor
• Industrial
• processes (chrome plating, polishing, painting,
  bottling)
• components (supplier or subcontractor)
• Commercial
• whole products to spec
• food services on university campuses!

25
Motivation for Industrial Subcontracting

• Specialized processes
• Cost-saving
• Complementary or intermittent sub-contracting
  (buffering)

26
Types of relationship between principal and
subcontractor

• Long or short term
• Principal or subcontractor may be responsible
  for
• Material/components
• Design/specification
• Finance
• Machinery/equipment
• Technical assistance
• Principal always markets finished products
• But retailing could be viewed as an exception!

27
Geographical dimension of subcontracting

• Traditionally viewed as local relationship
  creating an industrial cluster or industrial
  complex
• Increasingly global in scope, the web of links
  articulates regions, countries and continents

28
Nike

• Owns no factories
• Produces no sneakers
• Large scale, vertically disintegrated and
  subcontracts all production
• Designs and markets sneakers

29
Nike Subcontracting Model
30
What would Dunning say?

• Ownership specific advantage
• that Nike chooses not to exploit in its own
  factories (externalization in lieu of
  internalization) and
• location specific advantages of Asian LDCs