To what extent and in what ways are the strategies of multinational companies influenced by the country of origin?

The origin of the multinational, without doubt, does influence its strategies and presence in the host country. As to the extent of this influence, we shall examine this in further detail. To enhance our understanding of this, we will look at various theories put forward by leading academics in this field.

• Yao Su Hu

It is advocated by Yao-Su Hu, in his publication ‘Global or Stateless Organisations are National Firms with International Operations’, that there is no such thing as a transnational/multinational company. There are only “global firms with international operations” (Yao-Su Hu, Global or Stateless Organisations are National Firms with International Operations’). This myth of the multinational corporation is slowly fading. This is not to say, however, that he argues that the origin is of no influence. He distinguishes between the two. His argument is based on four prominent assertions;

1. geographical spread and scope
2. ownership and control
3. the people and the legal nationality
4. taxation

Looking at each, we can see why Hu adopts a paternalistic view with reference to a multinational’s strategy. All the above features are developed in the homeland. It is the flagship of the business; its epicentre. We will focus on two of the four validations, ownership and control and the people and the legal nationality.

1. Ownership and control is, predominantly, enforced and rested in the - “national hands” (Yao-Su Hu, Global or Stateless Organisations are National Firms with International Operations’) of the flagship/parent enterprise. A direct result of this is a deeply embedded set of values, cultures and practices which are woven through all the subsidiaries. Big global organisations, such as Ford, have no foreign higher tier management. Those that do, however, make sure that those employed have a similar style which tows the line of the national parent company. This is an approach which allows a balance to be drawn between the multinational and its shareholders. This is because most of the shares are held by those in the host nation. One should also question how ownership and control affects ‘Binational’ companies. Based on the fact that AAB have two parent organisations, it is argued to be amongst the most international, owned equally by Asea AB in Sweden and BBC Brown Boveri in Switzerland. Nestlé limits its non-Swiss voting rights to only three percent. Ownership and control is enforced by the parent company. Companies such as IBM, tend to own all their subsidiaries. Thus, all profits are accrued to the home nation and local influence is severely limited.

2. Another factor that links the multinational’s strategy with the country of origin is that “companies can only be formed under national law, and they acquire the nationality, citizenship, or domicile of the country under whose law they are incorporated” (Yao-Su Hu, Global or Stateless Organisations are National Firms with International Operations’). This suggests, therefore, that the parent and subsidiary company belong to their individual nations, respectively. International law requires legal nationality to obtain diplomatic protection of the respective State, establishing “a real and effective link between the corporation and the State” (Yao-Su Hu, Global or Stateless Organisations are National Firms with International Operations’).  This strong legal link is harmonised with that of taxation. Only locally generated earnings of foreign-based multinational are taxed while, as earnings accrue to the parent company of home-based multinationals, their entire worldwide revenue is taxed. The strong affiliation of multinational with their country of origin stems from the argument that they have a legal and fiscal nationality.  

• Stephen Hymer

A main form of strategy is finding and obtaining a competitive advantage. There are three main levels at which advantages can be identified down the ‘value chain’.

1. The ‘downstream level’, considers the relationship between the firm and its customers where ability to win price wars, superiority of products, reputation and supplier service provision are examples of advantages possessed by the firm.
2. The ‘intermediate’ level focuses on the increased levels of a firm, including its skills, attributes, assets and internal and external relationships.
3. The ‘upstream’ level reflects on dynamic advantages such as being a learning organisation, innovation and the ability to take a long-term view.

Therefore, industries involving rapid technological progress will have multinationals with dynamic advantages whereas; stable business environments will focus on downstream advantages. (Yao-Su Hu, The International Transferability of the Firm’s Advantages).

Further to this, enterprises that succeed at a local level, often feel they can use the same strategy at a global level. Unfortunately, this is not the case, as seen from the example below; HSBC (Hong Kong Shanghai Banking Corporation). HSBC is very much a leading bank in Asia. Although it came up against severe losses when trying to expand west, HSBC managed to acquire Midland Bank. Only 31 percent of its assets are based in Hong Kong, yet, 45 percent of its pre-tax profits originate in Hong Kong, too. This illustrates that HSBC’s operations are still more successful in Hong Kong. It does lean weight to the level to which strategy is based from the origin. (Yao-Su Hu, The International Transferability of the Firm’s Advantages).

• Pauly and Reich

(1997) conducted some research which focuses on how American, Japanese and German transnational companies operate with respect to their individual/ national approaches; and how this ‘convergence’ to a single model of global management, ‘structure and behaviour’ (Dicken, Global Shift) is not necessarily the case. Focusing on corporate governance and financing, research and development, foreign investment and intrafirm trade practices, they found that multinationals from the Americas, Germany and Japan had “durable national institutions and distinctive ideological traditions [that] still seem to shape and channel crucial corporate decisions…” (Pauly and Reich, 1997). They also argue that “domestic structures within which a firm initially develops leave a permanent imprint on its strategic behaviour” (Pauly and Reich, 1997).  

• Howard Perlmutter

According to Howard Perlmutter (1969), Multinational companies may pursue policies that are home country-oriented or host country-oriented or world-oriented. Perlmutter uses such terms as ethnocentric, polycentric and geocentric. ( – ‘Multinational Corporations)

An ethnocentric multinational is one that will adapt their local strategies to the international market, as we saw from the HSBC example. Subsidiaries play an operational role rather than one of autocracy. The multinational’s flagship will specialise in the upstream, or dynamics of the operation, whilst the subsidiary focuses on the downstream activities.

A polycentric firm is one that is further down the spectrum of development. The foreign business has become more dominant and we see collaboration in efforts from the subsidiaries and the flagship. The firm becomes more host-nation oriented in terms of management style.

A geocentric enterprise is one that is a stage further in its development. It allows for interdependence between the subsidiaries and the firm. The strategy focuses on competitor behaviour and the search for strategic alliance. The centralised control of the flagship is noticeable, however, subsidiaries are “parts of a whole whose focus is on worldwide objectives as well as local objectives, each part making its unique contribution with its unique competence” (‘The Hypermodern MNC – a heterarchy?’ , Ghauri P. and Prasad S. (1995)).  Therefore, between subsidiaries, there is specialisation in upstream and downstream activities along the value chain.

• Bartlett and Ghoshal (Tutorial 5).

We must not omit the work of Bartlett and Ghoshal, two leading academics in this field. Before entering their typology work, we must first understand what drove it to be designed? Bartlett and Ghoshall point to four key problems that face multinationals;

1. The problem of ‘Multiculturalism’ and local responsiveness or ‘local differentiation’.
2. Achieving economies of scale based on constant technological advancements.
3. ‘Global Integration’.
4. ‘Worldwide innovation’

All of the above create pressures for operating multinationals in creating international strategy. The work of Bartlett and Ghoshal identify different organisational forms that are suited to competing demands.

1. The Multinational Form.

Overview:

• ‘Multi Domestic Era’
• high call of local responsiveness
• high protectionism

The multinational, or collection of national companies managing their local business, manages with minimal direction from the flagship. Local responsiveness is high and is comparable with the polycentric firm.

The implications from this model are, firstly, the level of influence exerted by other parts of the firm on the subsidiary is likely to be minimal. The management is also likely to be made up of locals, not expatriates. As well as this, knowledge and expertise to be spread across boarders will be less, as all parts of the production process are carried out in one location.

2. The Global Form: 1950 - 80.

Overview:

• decreasing costs in transport
• increasing importance in economies of scale and trade becoming less regulated
• multinationals focused on growth in FDI and concept of ‘mini replicas’ and the ability to maximise on economies of scale

This model is similar to that of Perlmutter’s ethnocentric model – an integration of production to produce standardised products in a highly cost efficient way. Home values predominate and the peripheries are managed as a cultural extension of the flagship.

We can se that there is an implementation of home tactics or practices, particularly in relation to the organisation of work and production. We find that expatriate managers are used as ‘enforcers’ of policies and strategies. The problem with this is that the host often feels as it is to be used as a production plant or ‘screwdriver’, dealing mainly with low skilled labour, as all the research and development will remain in the home region.

3. The International Form.

Overview:

• This typology was to deal with the increasing pressure in innovations and spreading them across the firm, transferring and adapting the “parent company’s knowledge or expertise to foreign markets” (Tutorial 5 (Bartlett Ghoshal, 1998:17)).
• A hybrid of the polycentric and ethnocentric firms

As for the implication of the management, it is about implementing the knowledge correctly. They don’t have the same autonomy as Global firms. Nonetheless, those in an international firm act as key points of contact between the parent and its subsidiaries. Some see this group as a mechanism for, solely, spreading the technologies or products. This can have unwanted effects with the locals with regard to national responsiveness.

4. The Transnational Form.

Bartlett and Ghoshal argue that this typology is the ‘solution’ to the never ending competing pressures. Although a decentralised method of operating, each periphery has a distinct role. The use of networks allows for true global integration and the movement of knowledge and expertise. The two argue that this is the only model in which all the prevailing pressures can be beaten.

The implications for the management are that practices in the plant will reflect innovations in other parts of the network, not just those of the home country. Knowledge will be passed on by free moving managers. Characterised by five dimensions, this framework of networks is to increase the competitive advantage in any way possible. Creating a new breed of learning organisation seems to be the aim.

A firm’s strategy is firmly embedded in its particular economic and social context, also known as its ‘Administrative Heritage’. These are the ‘existing organisational capabilities as shaped by various historical and structural factors’. It preserves the role of the founders in the history of the firm.  

The further along the spectrum of development we go, we find that the level of influence from the origin declines. Referring back to Perlmutter, we can see that when a geocentric multinational is created, there is a loss of influence from the multinational’s origin. Is there a convergence to a single global strategy, as Bartlett and Ghoshal argue? To argue in favour of this would be naive. There is a host of complicating factors that will never subside; political, cultural and social. What we find instead is a mixture of the home practice with that of the host nation. Pauly and Reich are probably correct in observing that although multinationals originate from different home bases they “appear to adapt themselves at the margins but not too much at the core”. The strategy will always be effected the enterprises place of origin, the extent in the only variable factor. Depending on the stage of the company, it will either be completely autonomous or on a falling level of autocracy.

BIBLIOGRAPHY.

• Tayeb, M. (2000) International Business, London: Prentice Hall, pp 423-435.
• Dicken, P. (2003) Global Shift, London: Sage, pp 212-236 – 4th edition.
• Ghoshal, S. (1987) ‘Global strategy: an organising framework’, reprinted in International Management: A Reader. London: Dryden. By Ghauri, P. and Prasad, S. (1995) ch 4.
• Hedlund G. (1986) ‘The Hypermodern MNC – a heterarchy?’ reprinted in International Management: A Reader. London: Dryden. By Ghauri, P. and Prasad, S. (1995) ch 6.
• Hu, Y. (1992) ‘Global or Stateless Corporations are National Firms with International Operations’ California Management Review, 34 Winter, pp 107-126.
• Hu, Y. (1995) ‘The International Transferability of the Firm’s advantages’ California Management Review, 37, pp 73-88. 
• Lecture and Tutorial Weeks 1, 2, 3 and 5
•  ‘Multinational Corporations’.