Multinational Corporations Operating Regionally

In a scenario of increased economic interdependence among nations, globalisation is an inadequately comprehended occurrence. This treatise focuses on the major players of the globalisation process, the firms that drive it – a comparatively tiny cluster of multinational corporations that carry out and manage most of the world’s trade and investment activities.

The numerous, and sometimes, divergent resources on regional multinationals (Rugman & Verbeke 2004/ 2005; Rugman 2005; Rugman & Hodgetts 2001) have intensified the discourse on globalisation and rekindled interest towards the relevance of current debates on this economic issue. While existing concepts of global strategy have taken their departure in the dichotomous local-global distinction (Prahalad & Doz 1987; Bartlett & Ghoshal 1989), it is now known that intermediate levels of geographical aggregation, specifically at the regional level, may now be the prevailing standard of many multinational corporations (MNCs).

Without doubt, the biggest 500 MNCs account for more than 90% of the globe’s stock of foreign direct investment and they carry out half of the world’s trade (Rugman 2000). However, these organisations are not “global” firms in the sense that they have an extensive and profound penetration of foreign markets across the world. In reality, many of them have the vast majority of their sales within their home leg of the triad, that is, in North America, the European Union (EU) or Asia. This fresh perspective on ‘globalisation’ is extremely disparate from the standard, middle of the road standpoint. The latter viewpoint centres principally on macro-level growth models in trade and FDI, and have these data compare with national GDP growth rates, but without ever taking into serious consideration the equivalent micro-level growth data for the MNCs responsible for the trade and FDI flows (United Nations, 2002).

FDI, Globalisation and MNCs

One of the main vectors of globalisation and has possibly grown in prominence and significance over the past decade is foreign direct investment or FDI (Jones, 2005; OECD, 2005). The multinational corporations from the industrialised countries that served as a conduit for most of the foreign direct investments have given a substantial infusion of resources, technology, promotion, and managerial capability and know-how that, under particular circumstances, have played a key role in the process of economic transformation and growth that many less developed and newly industrialised nations from all over the globe have undergone over the past twenty years. As a result, some firms from developing economies have accumulated adequate resources, knowledge and technological know-how to invest overseas on their own and profess the category as that of emerging multinationals.

The figure on Fortune 500 corporations based and have established headquarters outside the Triad (North Atlantic and Japan) and Oceania has increased from 26 in 1988 to 61 in 2005. A classic example is Samsung, which for less than a decade, ranks as one of the top 20 most valuable brand names in the world. It is logical to project that this drift will continue in the coming years. Another gauge is that the proportion of foreign assets of the biggest EMNCs to those of the world’s largest MNC has escalated to 6.92% in 2003 from 5.67% in 1999 (UNCTAD 2001; 2005a). Indeed, in 2006, Russian Gazprom outshined Microsoft to become number three in the world’s biggest companies of consequence. Likewise, China Mobile’s market capitalisation surpassed UK’s Vodafone telecom company.

Emerging economies’ MNCs first surfaced as a centre of interest approximately 25 years ago after some firms from a few countries initiated overseas expansion activities (Lecraw, 1977). As it is, the earliest and key developing-country sources of FDI in the latter years were a small group of economies that included Brazil, Argentina, Hong Kong, Korea, India, Singapore and Taiwan. Then in the late ‘80s, an increasing number of developing nations like Chile, China, Egypt, Malaysia, Mexico, Russia, South Africa, Thailand and Turkey, became important sources of FDI. In 2003, outward FDI growth rate from developing economies has surpassed the growth of companies from the industrialized nations. While OFDI from countries like Brazil, Russia, India and China obtained more attention other developing nations became home to new and significant global businesses (OECD 2005). For instance, a Mexican cement conglomerate Cemex, has utilized acquisitions to transform itself into the biggest cement producer in the United States or Tenaris of Argentina which is the world’s largest producer of seamless tubes due to its technological edge over its competitors. Likewise, CP Group in Thailand is the biggest singe investor in China and recently, the gargantuan deals which got substantial attention such as the sale of Wind of Italy by Orascom from Egypt, this is said to be Europe’s biggest ever leveraged buyout and of P&O by DP World of Dubai.

World of Regional MNCs 

A multinational corporation, as per definition, is an enterprise that produces and/or distributes products and/or services across national borders. They have repetitively been identified and recognized as the drivers of globalization, constantly in pursuit of geographic integration and coordination through facets of global strategy such international market participation, global products, international activity location, global marketing and international competitive moves (Yip, 2003).

Benefits of global strategy includes reduction in product standardization costs, cutting down on duplication of activities, relocation of business activities to lower cost sites, improved customer preference from global uniformity and consistency and substantial global competitive advantage. However, to fully accomplish the gains of global strategy, an MNC needs globally dispersed sales and internationally dispersed production and activities.

Regional strategy, as described, is one that seeks the benefits of geographic assimilation and synchronisation within a single region or within a collection of regions. Realistically speaking, such assimilation and synchronisation lines of attack are easier to engage in within a single region especially if the home-region government practices policies of an international market like cultural, social and political harmonization, as in the European Union, or economic assimilation, as with NAFTA and Asia.

As business organizations extend outside of their home regions, they then are confronted with greater liability of foreignness and other subsequent risks brought about by this international spreading out and development, the same way as they obtained additional gains and benefits of because of greater geographic scope. One risk faced by MNCs, a risk which they need to contend in order to survive, is the reality of inter-block business which is likely to be restricted by government-imposed barriers to entry. The EU and the United States are both in a struggle, fighting trade wars and are reactive to national petitions seeking for subsidies and/or protection like in the case of the steel and agricultural sectors.

Rugman (2000) asserts for a specific drift, over the last quarter century, towards regionalisation and increased intra-regional economic activity. As it is, only in a few sectors, such as consumer electronics, is a global strategy of economic assimilation feasible. For most other manufacturing, (automobiles, chemicals, energy, etc.) and for all services, (retail, banking, etc.) regional strategies are a great necessity. Undeniably, there is concrete evidence to prove that companies that execute global strategies perform better than those who focus on regional strategies, at least, as far as the automobile industry is concerned (Schlie & Yip 2000).

Rugman and Verbeke (2004) explored and probed into the triad/regional economic activity of the world’s biggest business organisations in the core triad of the United States, EU, and Japan. In 2001, of the world’s largest 500 firms, 428 were in these core triad regions, whereas back in 1981 it was 445. Data showed 380 firms reporting geographic sales distributions, based on information in the annual reports and web pages and these 380 firms were then categorised according to which ones are global, bi-regional, and domestic. There were no data for 120 firms (most of which were entirely domestic) and insufficient data for another 15 firms. The main results showed that the intra-regional average sales for each group were:

• 80.3% for the 320 home region oriented firms;
• 42.0% for the 25 bi-regional MNEs;
• 30.9% for the 11 host-region ranked firms;
• 38.3% for the nine global MNEs.

These figures confirmed the study of the 49 retail MNCs in the 500 (Rugman & Girod 2003). In that specific investigation, only one retail MNC was found to be global, namely LVMH. This result is evident across all industry sectors except for electronics, which includes seven of the nine global firms in the set. It is possible that the upstream “back end” production of the value chain is more globalised than the downstream “front end” of sales. Nonetheless, even there it was discovered that regionally-based production groups and networks, similar to the automobile sector are the norm (Rugman 2000/2005).

Based on such analysis, regional strategy is premised to have a direct impact on the performance of MNCs. However, it was suggested that this relationship is not linear. Regional strategy contributes negatively to MNC performance at early stages of regionalisation due to the costs linked to any international expansion. But once an MNC obtains a certain degree and level of familiarity with the whole region, further expansion contributes positively to its performance due to the learning benefits of multinationality, most of which can be achieved within the home region.

Regional MNCs and Various Theories

With the very influential and decisive work of Hymer (1976), a group of researchers have successfully presented an economic justification and validation for the cross-border expansion of the firm on the basis of transaction cost theory (Caves, 1996). The intrinsic principle of the theory is that markets and firms are alternative institutions for conducting transactions (Coase, 1937). Hence, the multinational company (the MNC) is seen and considered as an efficacious alternative to market transactions like licensing, to exploit firm-specific intangibles in a foreign country (Buckely & Casson, 1976; Dunning, 1988). With globalisation growing deeper and amplified in the world economy, there now arise a more interesting and interrelated question — how can business organizations maintain its existence, sustain survival and prosper in the international market?

The rationale of the MNC in transaction cost theory is to bypass market imperfections in international markets for firm-specific intangible assets. As to the question, therefore, this premise presents the insight that the growth of MNCs depends on how they can maintain and improve the economic values of their firm-specific assets over time (Caves, 1996). Despite this, the theory is static in nature and the level of analysis it employs is the transaction, not the organisation (Buckley, 1990). For the reasons given, the theory has limitations in fully explaining the dynamic growth of MNCs in the international market (Rugman & Verbeke, 1992). To prevail over the dilemma, researchers have sought new theories that can harmonise with the  dominant  standard.

Among them, the learning perspective is doubtless the most significant (Eriksson, Johanson, Majkgard & Sharma, 1997). Established upon the behavioral theory of the firm (Cyert & March, 1992), this framework underscores “experience” as the ultimate way to attain external knowledge that is by its nature difficult to learn (Huber, 1991). Through “learning-by-doing” experience, the firm accumulates prior knowledge which will contribute to its capability to comprehend and assess more complex and highly sophisticated knowledge in the focal area. Therefore, the corporation that has earlier learning experience can be in a vantage position to integrate and take advantage of the new knowledge (Cohen & Levinthal, 1990). In international expansion, this role of experience is imperatively critical, because most country-specific knowledge has the characteristics of “experiential knowledge” (Johanson & Vahlne, 1977).

Besides, another stream of research in international strategic management suggests “strategic alliances” as a significant way to overcome resource deficiencies in international expansion (Kogut & Chang 1991; Lu & Beamish, 2001). This collaborative network framework points to various benefits of alliances, such as low transaction costs, shared risks, reliable access to complementary assets, and organisational flexibility (Powell, 1990; Mowery, Oxley & Silverman, 1996; Gulati, Nohria & Zaheer, 2000). For these reasons, MNCs usually set up tactical alliances with host country firms as a way to secure country-specific resources and information. The local partners in those alliances not only provide necessary critical resources (Hennart, 1988; Tsurumi, 1976), but also serve as a primary source of local knowledge (Stopford & Wells, 1972; Franko, 1973; Beamish, 1985). Subsequently, this collaborative line of attack has the potential to help MNCs to overcome the liabilities of foreignness and achieve successful expansion in the host country (Lu & Beamish, 2001).

These two frameworks are valuable in exploring and probing into, for instance, the post-entry expansion of Japanese auto parts suppliers in the U.S. First of all, the difference between Japanese and U.S. culture is great (Hofstede, 1980), and there is not much commonality in management style between the two countries (Ouchi, 1981; Culpan & Kucukemiroglu, 1993). Hence, Japanese investors would have a great need to learn about local culture and business practices in the U.S. More than that, the U.S. automobile industry is highly oligopolistic, and the subcontracting practices employed by the U.S. automobile manufacturers are different from those in the Japanese industry (Cusamano, 1989; Dyer, 1996). These industry conditions signify that there would be significant entry barriers to Japanese transplant suppliers seeking new business relationships with host country-based manufacturers. Consequently, it can be expected that Japanese transplant suppliers will benefit greatly from their host country experience and alliances with local firms in the U.S. In addition, the organizational learning perspective points to a firm’s domestic business experience as a potentially factor that may enhance or constrain its capability to develop new international skills and expertise (Autio, Sapienza & Almeida, 2000).

According to learning theory (Cohen & Levinthal, 1990), the organisational norms and routines that have long been developed in the domestic context are difficult to unlearn within a short period of time, and would constrain the organisational capability of absorbing new foreign knowledge (Autio, Sapienza & Almeida, 2000). Such influence of domestic experience on international expansion is applicable again  in the case of Japanese auto parts suppliers. The firm-specific assets that caused their massive FDI in the 1980s were accumulated through their close collaborations with large automobile manufacturers in Japan (Lamming, 1990; Martin, Mitchell & Swaminathan., 1995/1998). Many scholars have reported such cooperative inter-firm relations as a distinctive feature of the Japanese business system (Dore, 1983, 1987; Casson, 1991; Kester 1991). Thus, it is possible that, for instance, the Japanese auto suppliers that are deeply embedded in domestic supplier relationships may develop organisational capabilities that are more suitable for the domestic business environment. Their home industry-oriented organisational capabilities may hamper their capacity and facility to explore new business relationships in foreign environments.

Theory and Evidence of Regional Multinationals

A vital precept in the investigations of regional multinationals is that international expansion and cross border assimilation is more expensive across regional blocks, for instance, between the US and Japan, than within them, like between the US and Canada. There are two principal contentions underlying this fact (Rugman & Verbeke, 2004/2005), first, environmental diversity is presumed to be higher when the MNC operates outside the home region than it is for countries within the home region, due to the wider and bigger economic and institutional differences across regional borders. Like for instance, issues of language and cultural norms will make it easier for Spanish corporations than for Japanese firms to penetrate the French market. Second, products, knowledge, people and capital have smoother flow between countries within the same region than between regions. Primarily, this is the result of policy-driven regional assimilation within the EU, NAFTA and ASEAN and partly because of geographical proximity.

Liability of Foreignness and Regional Strategy     While many studies of regionalism have underscored empirics, with significant exclusion of the studies done by Rugman and Verbeke, they absolutely establish upon and expand the concept of liability of foreignness, which originated from the work of Hymer (1976). Hymer depicted the disadvantages (such as foreign firm’s lack of information about the host market, host market discrimination against outsiders, and exchange rate risk) foreign corporations are confronted with when contending against purely national firms in their home market. Zaheer (1995) subsequently created the term ‘liability of foreignness’ and tested the concept empirically by comparing the performance of locally- and foreign-owned financial trading rooms, finding that the former did indeed outperform the latter (Zaheer, 1995; Zaheer &  Mosakowsky, 1997).

Although not explicitly demonstrated in the studies (each trading room was coded as being either foreign or local), the liability of foreignness is conceptualised as being triggered in part by “cultural, political, and economic differences” (Zaheer, 1995, p. 341). To put in plainly, the liability of foreignness should be seen not as a universal constant, but as related to the diversity and distance between the home and host country. In the framework of regional theory, it is therefore needed to make a distinction between the liability of foreignness inside and outside the MNC’s home region. As described by Rugman and Brain,  “When MNCs have exhausted their growth opportunities in the home-triad and go into other regions, they then face a liability of foreignness and other additional risks by this expansion” (Rugman & Brain, 2003, p. 7). This statement could mean two ways — one is that the MNC encounters liability of foreignness only when it endeavors and gambles outside its home region, because regional integration is adequately strong to permit firms the luxury of unconstrained internationalisation within the home region. Another meaning would be, though weaker but proves to be a more realistic assumption, is that the liability of foreignness exists also in the home region (except of course in the home country), but that it is significantly higher outside of it.

No matter which interpretation is chosen or adopted, the empirical implication is that MNCs’ international expansion should occur primarily within their home regions, and to a much lesser degree in other regions. On the macro-level, this pitch can be assessed through export data (Rugman & Hodgetts, 2001). On the firm level, it can be gauged by the geographic dispersion of employees, assets, or sales. Rugman and Verbeke define a “global” firm as one having more than 20% of its sales in each of the triad regions and no more than 50% in one single region, while the “home region oriented” firm has more than half of its sales in its home region. This leads to the classification of 320 of the firms in their Fortune 500 sample as home region oriented and only 9 as global. The finding has been replicated within several sub-samples, for example, the Japanese companies (Collinson & Rugman, 2006) and multinational retailers (Rugman & Girod, 2003).

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