The Strategic Development of Multinationals

A very pervasive characterization of Multinational Enterprises (MNEs) is that their operations are innately ‘footloose’, with limited embeddedness in individual host countries. From this can be derived the presumption that MNEs are unlikely to be able to provide support for sustained processes of national industrial development and growth. Thus many of those host-country characteristics that are normally believed to attract new ‘inward investment’ are also intended to change as the host economy proceeds through those processes of development whose initiation the MNE’s original commitment was designed to be part of.

This chapter views the Multinational Enterprise (MNE) as a differentiated learning network with subsidiaries playing a critical role in managing knowledge (Gupta and Govindarajan, 2000; Birkinshaw et al, 1998). Today, rather than accepting predetermined roles, subsidiaries are asked to actively engage in developing their operations and explore procedures that would increase the efficacy of the whole MNE network (Birkinshaw, 1996; Crookell and Morrison, 1990). Building on recent advances regarding the strategic evolution of subsidiary roles, we argue that the MNE is a vehicle for integrating knowledge generated internally and externally from its global operations (Bartlett and Ghoshal, 1989). There are many cases of subsidiaries that perform specific value-added activities, which are fundamentally ‘embedded’ in their respective host-countries’ knowledge systems (evidence is provided by Kuemmerle, 1999a; Dunning, 1996; Jarillo and Martinez, 1990).

Hymer introduces one of the key texts of his later analysis (Hymer, 1970, p. 441) by adopting Robertson’s view of firms as ‘islands of conscious power in an ocean of unconscious cooperation’. Thus he suggests that MNCs ‘are a substitute for the market as a method of organizing international exchange’. One mode of later analysis consonant with the latter view is, of course, internalization theory (Buckley and Casson, 1976; Hennart, 2000). As recent work has argued and documented (Horaguchi and Toyne, 1990; Pitelis, 2002; Casson, 1990), Hymer (1960/76, 1968) was himself fully cognizant of the issues raised by internalization analysis and of how Coase’s formulations could be co-opted to resolve this area of MNC theorizing. This, then, predominantly addresses reasons why MNCs reject various markets for intermediate goods. Hymer, we argue here, was also concerned with the adopted alternative, in the sense of analyzing and questioning how and to what ends the ‘conscious power’ was exercised. Two strands of the analysis of his later years address this, in ways that to some degree reflect ideas now seen as central to the conceptual breakthroughs of the PhD research (Hymer, 1960/1976).

One of the most significant journeys in our understanding of international business has been that from an essentially centralized view of innovation in MNEs towards one that encompasses an increasing range of decentralized inputs and strategic postures. This change in perspective can then be seen as decisively embodied within comparable changes in the way in which the effects of international business on individual host countries has been analyzed. Here we can see a refocusing from an FDI-based interpretation of flows of separate firm attributes (increasingly technology and other intangible assets rather than finance capital perse) towards a more MNE-strategy oriented evaluation of how firms position their operations in a specific location within wider globalized programs (Pearce, 2001, 2006). The aim of this chapter is, then, to generate a methodology for the assessment of the ways in which MNEs’ globalized strategies for innovation involve themselves with the attempts of national economies to generate and operationalize innovation competences as a source of growth and international competitiveness.

A key implication of the growth of decentralized R&D in MNEs has been a comparable increase in the extent and diversity of knowledge flows within these companies. Early views of the MNE saw knowledge flow as almost uniquely a matter of many separate and distinct, bilateral and unidirectional, routes from the home-country parent to individual subsidiaries. This provided the basis of the only role then perceived as routinely available for overseas R&D laboratories, in the form of helping to assimilate and operationalize those group technologies on which subsidiaries were essentially dependent. However, as the changing competitive environment imposed increasing strategic diversity on MNEs an important manifestation of this took the form of a notable growth in dispersed R&D, with this playing an enhanced range of roles within not just the application but also the generation of these companies’ core technologies. A crucial implication of this was, in turn, the ability of decentralized labs to supply as well as receive technology and, therefore, the growth of multidirectional knowledge flows in MNEs.1

The processes of globalization, within which the strategic evolution of MNEs analyzed in earlier chapters has occurred, involves not only increased integration between national economies but also an increasingly systematic policy emphasis on generating those individualized characteristics that define them. This then points again to the role of the generation and progression of differentiated sources of competitiveness at the core of national development strategies. Deriving from this another crucial factor of recent decades has been the increased commitment to technological change as a source of growth and development, for both firms and national economies. Here we can see an analogy for the process of creative transition, within the competitive evolution of MNE subsidiaries (see Chapter 2), operating at the level of national economic development. Thus, at early stages of their pursuit of industrialization as a source of development, countries may possess potential sources of competitiveness (latent static comparative advantages) which local enterprise lacks the capacities to operationalize effectively. Then inward technology transfer can provide the firm-level competences to secure early growth. But eventually policy will need to target indigenously generated sources of the firm-level drivers of competitive individualization and sustainable development. Building local technological change as an impetus to growth has resulted in the generation of national systems of innovation (see Chapter 8) and the pursuit of dynamic comparative advantage.