Multinationals' strategies and the economic development of small economies: a tale of two transitions.
| Verfasser | Pearce, Robert |
| Posten | RESEARCH ARTICLE |
Abstract and Key Results:
* The processes of globalisation open up new potentials for MNE participation in the development of small economies. Thus the pursuit of global competitiveness by MNEs, operating through a range of strategic motivations, can be supported by different types of affiliates that can be based on the potentials of small economies.
* Efficiency seeking operations of MNEs can benefit from cost-effective inputs of small economies (as, for example, in export processing zones) and activate their export potentials.
* Knowledge seeking by MNEs can be generated interdependently with the creation of localised systems of innovation that support bases of sustainable development in small economies.
Keywords: Subsidiary Development. Export Processing Zones * Creative Transition * Dynamic Clusters
Introduction
One important effect of the growth in economic liberalisation and internationalisation of markets in recent decades has been a significant impetus to the viability of self-sustaining development in the economies of small countries. The argument here draws together two elements of these processes. Firstly, the growing freedom in international trade has allowed an access to wider (regional or global) markets to facilitate development of a competitive industrial sector. Secondly, that liberalisation in domestic economies has allowed foreign direct investment (FDI) to provide vital inputs to the export-oriented industrialisation. Furthermore, it is then central to this argument that the freedoms and flexibilities facilitated by globalisation have led to MNEs generating networked strategies that allow them to pursue different aspects of a growing strategic heterogeneity in different locations worldwide. This, in turn, means that the strategic purpose of a MNE's operation in a particular location can evolve in ways that can embed it beneficially in the competitive progress of both the location and the firm. We here develop these themes in terms of the twin propositions that MNEs can find valid roles for operations in small-country economies and that these roles can evolve over time so as to be compatible with these countries' economic development.
It is innate to any development process that the competitive bases underpinning its achievement must change over time, normally in ways considered as an upgrading of capabilities. To relate this to the form of MNE involvement and its evolution over time we here elaborate two transitions that, firstly, secures the implementation of export-oriented industrialisation and, secondly, moves this towards a new more dynamic basis incorporating new knowledge and innovation. The next section, therefore, introduces the underlying view of the MNE as a dynamic differentiated network. Then the two transitions are described in detail, to emphasise how an increasingly embedded and self-sustaining development process can be derived from a creative interaction between MNE strategic diversity and the renewed sources of host-location competitiveness.
MNEs' Strategic Heterogeneity
The scope for international business to be involved, on a sustainable basis, in the development of small economies can be realistically found in the increased geographical dispersion and fragmentation of its operations over the past forty or so years, and the crucial interrelatedness of this with the growing internationalisation of most elements of MNEs' value-chains. Here we can discern this in a typology of three different strategic motivations that can be encompassed within particular affiliated operations. Also important in the emphasis on the economic development of individual locations is the scope for MNEs' operations to evolve through the different types of motivations, so as to play changing roles in companies' global networks and to expand (by encompassing emerging host-economy competitiveness) the parts of the value-chain embodied in their scopes. The three motivations (market seeking; efficiency seeking; knowledge seeking) can be seen as a plausible (though by no means immutable or irreversible) sequence, both in terms of the evolution of a subsidiary within the competitive scope of an MNE and in terms of how this interfaces with the development of its host location.
In the traditional articulation of the motivation typologies market seeking (MS) involves MNEs' producing significant parts of their mature product range in a country for supply, probably exclusively, to that country's market. (1) Though the adoption of MS supply would be perceived by MNEs as the best (albeit defensive or satisficing) means of realising adequate profitability from a viable market under particular constrained conditions, it is usually seen as involving endemic inefficiencies (Pearce 2001, 2006, Papanastassiou/Pearce 1999) that mean it does not represent part of a globally-optimal production structure for the firm.
By contrast, efficiency seeking (ES), responding to the absence of the constraints conditioning MS (notably moves to freer international trade), does allow for the attempt to build an optimal global supply network for the MNE's existing range of price-competitive goods. Thus an ES subsidiary focuses on production that utilizes those factor inputs that represent the host-location's current sources of static comparative advantage. This, taken with realisation of economies of scale through access to external markets (albeit usually internal to the MNE group) allow the ES subsidiary to target a distinctive position in its parent's supply network. Crucially, whereas MS would normally require a large host-country market to secure acceptable contributions to group profitability, ES can specialise on quite discrete parts of MNE supply programmes (individual products; specific components; stages in a vertically-integrated manufacturing sequence; assembly) that are not conditioned by the size of the host economy.
Both MS and ES represent contingent responses to a MNE's need to secure the best available profitability from its existing competitive assets as embodied in its current product range. But to fully address the needs of strategic competitiveness (Pearce 1999) the firm also has to be continuously and systematically addressing the need to regenerate these capabilities and renew the product range. The internationalisation of the pursuit of such sources of regeneration, in the form of knowledge seeking (KS), has been a vital element in the strategic evolution of MNEs in recent decades. (2) At the subsidiary level KS can be manifest in product mandates (PM) (Poynter/Rugman 1982, Crookell/Morrison 1990, Roth/Morrison 1992, Birkinshaw/Morrison 1995, Birkinshaw 1996, Papanastassiou/Pearce 1999) that are given, often quite autonomous, responsibility for the development of additions to the group's product scope. (3) The basis for this would be expected to derive from access to distinctive locally-available creative capabilities. Though the viability of KS may to some degree reflect national government policies (e.g., in science, technology, education), the specific creativity of a PM is likely to derive from internalisation of particular capacities of a much more individualised location, and to not otherwise depend on the size of the country.
First Transition: Efficiency Seeking
The first transition can be seen as being essentially exogenous to the economic development process itself. Firstly, in the sense that it was not directly provoked or triggered by the specific content of the development process; except in terms of being a response to the very absence of significant and sustainable change (4) in small economies when their limited size was exposed as a severe economic constraint in the absence of integration with external markets (and suppliers). Secondly, in the sense that whilst the logical pursuit of integration with international markets (export orientation replacing import substitution as a growth strategy) become clear in reflection of the previous constraints, it became most realistically viable in the context of an internationally-agreed movement towards free trade, economic integration and, ultimately, globalisation. Thus in small countries (even more than in larger ones) the sequence of GATT trade rounds beginning with the Kennedy Round, in the mid-1960s, and regional integration schemes (pioneered in Europe in the 1950s) provided a decisive external facilitating context to the realisation of previously thwarted sources of development.
The essence of the first transition is that the small economy does possess sources of potential competitiveness (positive location advantages); predominantly a labour supply and other complementary inputs (energy, raw materials) that can support its participation in significant export-oriented value-added operations. (5) The implicitly antecedent import-substitution context of protectionism, taken with the small local market (and low-income local demand patterns), meant that drawing of these sources of comparative advantage into competitive use had not yet been realised (in what would, for MNEs, have been MS operations). But alongside these existing macro-level potentials (i.e., the sources of latent comparative advantage), realisation of export-oriented competitiveness will also be dependent on access to micro-level, firm-specific, capabilities able to turn these inputs into internationally-competitive goods. These can include product technologies whose factor proportions require the input mix that defines the host-country potentials; management skills applicable to effective operationalisation of these inputs (notably abilities in organising and motivating a large labour force that is new to industrial employment practices); and, crucially, access to already established and receptive international markets. Both the low level of the small economy's development, and the forms taken by any existing economic activity, implies the likely absence of such...
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