Csac14[1].p

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14
Global Strategies and
the Multinational
Corporation

Globalization has changed us into a company that searches the world, not just
to sell or to source, but to find intellectual capital – the world’s best talent and
greatest ideas.
—JACK WELCH, FORMER CHAIRMAN, GENERAL ELECTRIC

OUTLINE

l Introduction and Objectives International Alliances and Joint
Ventures
l Implications of International
Competition for Industry Analysis l Multinational Strategies:
Patterns of Internationalization Globalization versus National
Implications for Competition Differentiation
The Benefits of a Global Strategy
l Analyzing Competitive Advantage in The Need for National Differentiation
an International Context Reconciling Global Integration with
National Influences on Competitiveness: National Differentiation
Comparative Advantage
Porter’s National Diamond l Strategy and Organization within the
Consistency between Strategy and Multinational Corporation
National Conditions The Evolution of Multinational
Strategies and Structures
l Applying the Framework: Reconfiguring the MNC: The
International Location of Production Transnational Corporation
Determinants of Geographical Location
l Summary
Location and the Value Chain
l Self-Study Questions
l Applying the Framework: Foreign
Entry Strategies l Notes

361

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362 PART V CORPORATE STRATEGY

Introduction and Objectives
Internationalization is the most important and pervasive force reshaping the competitive
environment of business. It has opened national markets to new competitors and created
new business opportunities for both large and small firms. Internationalization occurs
through two mechanisms: trade and direct investment. The growth of world trade has
consistently outstripped the growth of world output, increasing export/sales and import
penetration ratios for all countries and all industries. For the United States, the share of
imports in sales of manufactured goods rose from less than 4% in 1960 to 29% in 2005.
Trade in commercial services (transportation, communications, information, financial
services, and the like) has grown even faster than merchandise trade. The scale of direct
investment into the US is indicated by the fact that by 2006, the total stock of foreign
direct investment by all companies was $11.7 trillion, compared with total US GDP of
$12.8 trillion.1
The forces driving both trade and direct investment are, first, the quest to exploit
market opportunities in other countries, and, second, the desire to exploit production
opportunities by locating production activities wherever they can be conducted most
efficiently. The resulting “globalization of business” has created vast flows of international
transactions comprising payment for trade and services, flows of factor payments (interest,
profits, and licensing fees), and flows of capital.
The implications for competition and industry structure are far reaching. During the
1960s, local companies dominated most domestic markets. Now the leaders in most
industries are multinational players. Indeed overseas expansion is often viewed as a pre-
requisite for outstanding corporate success. For L’Oreal in cosmetics and toiletries, UBS
and HSBC in banking, and McKinsey in consulting, international expansion has provided
the foundation for profitability and growth. At the some time the risks too are great: for
Saatchi & Saatchi in advertising, Daewoo in automobiles, and Marks & Spencer in retail-
ing, overambitious internationalization marked the beginning of corporate decline.
For countries too, harnessing the forces of internationalization has been a prime deter-
minant of relative economic performance. Within the European Union, Ireland’s ability to
take advantage of international trade and inward direct investment has resulted in real
GDP per head increasing at an average annual rate of 7.6% during 1996–2006; Italy’s
increased a mere 1.3%.
This chapter examines the implications of the internationalization of the business
environment for the formulation and implementation of company strategy. We will recog-
nize that internationalization expands the market arena, bringing into competition firms
with very different national resource bases, and making it possible for firms to access
resources from outside their home country.

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CHAPTER 14 GLOBAL STRATEGIES AND THE MULTINATIONAL CORPORATION 363

By the time you have completed this chapter, you will be able to:

l Use the tools of industry analysis to examine the impact of internationalization
on industry structure and competition.

l Analyze the implications of a firm’s national environment for its competitive
advantage.

l Formulate strategies for exploiting overseas business opportunities, including
overseas market entry strategies and overseas production strategies.

l Formulate international strategies that achieve an optimal balance between
global integration and national differentiation.

l Design organizational structures and management systems appropriate to the
pursuit of international strategies.

We begin by exploring the implications of international competition, first for
industry analysis, and then for the analysis of competitive advantage.

Implications of International Competition for
Industry Analysis
Patterns of Internationalization
Internationalization occurs through trade – the sale and shipment of goods and ser-
vices from one country to another – and direct investment – building or acquiring
productive assets in another country. On this basis we can identify different types of
industry according to the extent and mode of their internationalization (see Figure 14.1):
l Sheltered industries are served exclusively by indigenous firms. They are
sheltered from international competition by regulation, public ownership,
barriers to trade, or because the goods and services they offer are more suited
to small local operators than to large, multiunit corporations. Industries left in
this category are primarily fragmented service industries (dry cleaning,
hairdressing, auto repair, funeral services), some small-scale manufacturing
(handicrafts, homebuilding), and industries producing products that are
nontradable because they are perishable (fresh milk, bread) or difficult to
move (four-poster beds, garden sheds).
l Trading industries are those where internationalization occurs primarily
through imports and exports. If a product is transportable, not nationally
differentiated, and subject to substantial scale economies, exporting from a
single location is the most efficient means to exploit overseas markets, which
would apply for example with commercial aircraft, shipbuilding, and defense

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FIGURE 14.1 Patterns of industry internationalization

INTERNATIONAL GLOBAL
High INDUSTRIES INDUSTRIES
l aerospace l automobiles
l military hardware l oil
l diamond mining l semiconductors
International Trade

l agriculture l consumer electronics

SHELTERED MULTIDOMESTIC
INDUSTRIES INDUSTRLES
l railroads l packaged groceries
l laundries/dry cleaning l investment banking
l hairdressing l hotels
l milk l consulting
Low

Low High
Foreign Direct Investment

equipment. Trading industries also include products whose inputs are
available only in a few locations: diamonds from South Africa, caviar from
Iran and Azerbaijan.
l Multidomestic industries are those that internationalize through direct
investment – either because trade is not feasible (as in the case of service
industries such as banking, consulting, or hotels) or because products are
nationally differentiated (e.g., frozen dinners, recorded music).
l Global industries are those in which both trade and direct investment are
important. Most large-scale manufacturing industries tend to evolve towards
global structures: in automobiles, consumer electronics, semiconductors,
pharmaceuticals, and beer, levels of trade and direct investment are high.
By which route does internationalization typically occur? In the case of services
and other nontradable products, there is no choice. The only way that Marriott, Star-
bucks, and Goldman Sachs can serve overseas markets is by creating subsidiaries (or
acquiring companies) within these markets. In the case of manufacturing companies,
internationalization typically begins with exports – typically to countries with the least
“psychic distance” from the home country. Later a sales and distribution subsidiary is
established in the overseas country. Eventually the company develops a more integ-
rated overseas subsidiary that undertakes manufacturing and product development
as well.2

Implications for Competition
For the most part, internationalization means more competition and lower industry
proﬁtability. In 1976, the US automobile market was dominated by GM, Ford, and

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Chrysler with 84% of the market. By 2006 there were 11 companies with auto plants
within the US; the former “Big Three” accounted for just 46% of auto sales; and the
industry was suffering from excess capacity, intense price competition, and massive
losses.
The impact of internationalization on competition and industry profitability can be
analyzed within the context of Porter’s five forces of competition framework. For the
purposes of our analysis, let us take our unit of analysis as national markets where the
relevant “industry” comprises the firms supplying that national market.

Competition from Potential Entrants Barriers to entry into most national
markets have fallen substantially. Tariff reductions, falling real costs of transportation,
the removal of exchange controls, internationalization of standards, and convergence
between customer preferences have made it much easier for producers in one coun-
try to supply customers in another. Many of the entry barriers that were effective
against potential domestic entrants may be ineffective against potential entrants that
are established producers in overseas countries.

Rivalry Among Existing Firms Internationalization increases internal rivalry
within industries in three ways:

l Lowering Seller Concentration. International trade typically means that
more suppliers are competing for each national market. I have already
noted how the dominance of the US automobile industry by domestic
producers has been destroyed by international competition. By 2006,
there were nine manufacturers with market shares greater than 2%. In
other countries and in other industries, the impact of internationalization
has been similar. The European motor scooter industry was once dominated
by the Italian firms Piaggio (Vespa scooters) and Lambretta. There are now
ever 20 manufacturers supplying the European market. In addition to the
Italians (Piaggio, Aprilia, Benelli), there are Japanese firms (Honda, Yamaha,
Suzuki), Americans (Baron), Taiwanese (Kymco), Chinese (BenZhou/Yiying,
Baotian, Kaitong/Yiben), and many more. Even in industries where global
consolidation has been rapid (e.g. paper, telecoms, oil, airlines, and
aluminum), Ghemawat and Ghadar show that global concentration has
declined as a result of national producers entering the global market.3
l Increasing Diversity of Competitors. The increasing international diversity of
competitors, implies differences in goals, strategies, and cost structures – all
of which cause them to compete more vigorously while making cooperation
more difficult.
l Increasing Excess Capacity. When internationalization occurs through direct
investment, the result is likely to be increased capacity. To the extent that
direct investment occurs through investment in new plants, industry capacity
increases with no corresponding increase in market size. The automobile
industry is a classic example of this – the investment by Japanese and Korean
manufacturers in the US and Europe, and by US manufacturers in Latin
America and Asia, added substantially to global excess capacity during the
1990s.

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Increasing the Bargaining Power of Buyers A further implication of the
internationalization of business is that large customers can exercise their buying power
far more effectively. Global sourcing provides a key tool for cost reduction by manu-
facturers. The growth of internet-based markets for components and materials
enhances the power of industrial buyers.

Analyzing Competitive Advantage in an
International Context
The growth of international competition has been associated with some stunning
reversals in the competitive positions of different companies. In 1986, US Steel was
the world’s biggest steel company; 20 years later, India-based Mittal Steel was global
leader. In 1986, IBM and Apple were world market leaders in PCs. By 2006, IBM
had exited the industry and Dell, HP Lenovo, and Acer were the new leaders. In 1986,
,
the world’s biggest banks (by assets) were Deutsche Bank and Bank of Tokyo. By 2006,
UBS and HSBC led the pack.
To understand how internationalization has shifted the basis of competition, we
need to extend our framework for analyzing competitive advantage to include the
influence of firms’ national environments. Competitive advantage, we have noted, is
achieved when a firm matches its internal strengths in resources and capabilities to
the key success factors of the industry. International industries differ from domestic
industries in their sources of competitive advantage. When firms are located in dif-
ferent countries, their potential for achieving competitive advantage depends not
only on their internal stocks of resources and capabilities, but also on the conditions
of their national environments – in particular, the resource availability within the
countries where they do business. Figure 14.2 summarizes the implications of

FIGURE 14.2 Competitive advantage in an international context

FIRM RESOURCES THE INDUSTRY ENVIRONMENT
AND CAPABILITIES Key Success Factors
l Financial resources
l Physical resources
l Technology
l Reputation
l Functional capabilities COMPETITIVE
l General management capabilities ADVANTAGE

THE NATIONAL ENVIRONMENT
l National resources and capabilities (raw materials;
national culture; human resources; transportation;
communication; and legal infrastructure)
l Domestic market conditions
l Government policies
l Related and supporting industries

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internationalization for our basic strategy model in terms of the impact both on
industry conditions and firms’ access to resources and capabilities.

National Influences on Competitiveness:
Comparative Advantage
The role of national resource availability on international competitiveness is the sub-
ject of the theory of comparative advantage. The theory states that a country has a
comparative advantage in those products that make intensive use of those resources
available in abundance within that country. Thus, Bangladesh has an abundant supply
of unskilled labor. The United States has an abundant supply of technological
resources: trained scientists and engineers, research facilities, and universities.
Bangladesh has a comparative advantage in products that make intensive use of un-
skilled labor, such as clothing, handicrafts, leather goods, and assembly of consumer
electronic products. The United States has a comparative advantage in technology-
intensive products, such as microprocessors, computer software, pharmaceuticals,
medical diagnostic equipment, and management consulting services.
The term comparative advantage refers to the relative efficiencies of producing dif-
ferent products. So long as exchange rates are well behaved (they do not deviate far
from their purchasing power parity levels), then comparative advantage translates
into competitive advantage. Hence, comparative advantages are revealed in trade per-
formance. Table 14.1 shows revealed comparative advantages for several product
groups and several countries. Positive values show comparative advantage; negative
values show comparative disadvantage.
Trade theory initially emphasized the role of natural resource endowments, labor
supply, and capital stock in determining comparative advantage. More recently em-
phasis has shifted to the central role of knowledge (including technology, human skills,
and management capability) and the resources needed to commercialize knowledge
(capital markets, communications facilities, and a legal system).4 The remarkable
economic development of the “tiger economies” of South Korea, Taiwan, Hong Kong,
Malaysia, and Singapore demonstrates how disadvantages in endowments of natural
resources are far outweighed by the development of these home-grown resources.5

TABLE 14.1 Indexes of Revealed Comparative Advantage for Certain Broad
Product Categories

USA Canada Germany Italy Japan

Food, drink, and tobacco 0.31 0.28 −0.36 −0.29 −0.85
Raw materials 0.43 0.51 −0.55 −0.30 −0.88
Oil and refined products −0.64 0.34 −0.72 −0.74 −0.99
Chemicals 0.42 −0.16 0.20 −0.06 −0.58
Machinery and transportation 0.12 −0.19 0.34 0.22 0.80
equipment
Other manufacturing −0.68 −0.07 0.01 0.29 0.40
SOURCE: OECD.

Note: Revealed comparative advantage for each product group is measured as: (Exports less
Imports)/Domestic Production.

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FIGURE 14.3 Porter’s national diamond framework

FACTOR CONDITIONS

RELATED AND
DEMAND
SUPPORTING
CONDITIONS
INDUSTRIES

STRATEGY, STRUCTURE,
AND RIVALRY

A large home market facilitates the development and exploitation of capital, tech-
nology, and infrastructure. Hence, in most capital- and technology-intensive industries,
large countries (such as the US) are at an advantage over small countries.6 A similar
logic motivates the creation of free trade areas such as the European Union, Mercosur,
and NAFTA.

Porter’s National Diamond
Michael Porter’s has extended our understanding of comparative advantage by exam-
ining the dynamics through which specific industries in particular countries develop
the resources and capabilities that confer international competitive advantage.7 Porter’s
analysis is summarized in his national diamond framework (see Figure 14.3).8

Factor Conditions Whereas the conventional advantage of comparative analysis
focuses on endowments of broad categories of resource, Porter’s analysis emphasizes,
first, “home-grown” resources and, second, the role of highly specialized resources.
For example, in analyzing Hollywood’s preeminence in film production, Porter
points to the local concentration of skilled labor, including the roles of UCLA and
USC schools of film. Also, resource constraints may encourage the development of
substitute capabilities: in post-war Japan, raw material shortages spurred miniaturiz-
ation and low-defect manufacturing; in Italy, restrictive labor laws have stimulated
automation.

Related and Supporting Industries For many industries, a critical resource is
the presence of related and supporting industries. One of the most striking of Porter’s
empirical findings is that national competitive strengths tend to be associated with
“clusters” of industries. One such cluster is US strength in semiconductors, com-
puters, and computer software. For each of these industries, critical resources are the
other related industries. In Germany, a mutually supporting cluster exists around
chemicals, synthetic dyes, textiles, and textile machinery.

Demand Conditions Demand conditions in the domestic market provide the
primary driver of innovation and quality improvement. For example:

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l The preeminence of Swiss watches may be attributed to the obsessive
punctuality of the Swiss.
l The dominance of the world market for cameras by Japanese companies owes
much to Japanese consumers’ enthusiasm for amateur photography and their
eager adoption of innovation in cameras.
l German companies’ (Mercedes, BMW Porsche) dominance of the high-
,
performance segment of the world automobile industry, as compared with
their much weaker position in mass-produced autos, may be linked to German
motorists’ love of quality engineering and their irrepressible urge to drive on
autobahns at terrifying speeds.

Strategy, Structure, and Rivalry National competitive performance in par-
ticular sectors is inevitably related to the strategies and structures of firms in those
industries. Porter puts particular emphasis on the role of intense domestic competition
in driving innovation, efficiency, and the upgrading of competitive advantage. The
success of the Japanese auto industry may reflect the presence of nine companies,
all of which compete fiercely within the domestic market. The same can be said for
cameras, consumer electronic products, and office machinery. Conversely, the weak
position of European companies in many hi-tech industries may be a result of
European governments’ propensity to kill domestic competition by creating “national
champions.”

Consistency between Strategy and National Conditions
Establishing competitive advantage in global industries requires congruence between
business strategy and the pattern of the country’s comparative advantage. In audio
equipment, it is sensible for Chinese producers, such as Dussun and Skyworth, to
concentrate on the low end of the market and supplies to western mass retailers
under their own brands. For Bose, international competitiveness requires exploiting
US strengths in basic research. For Danish consumer electronics maker Bang &
Olufsen, international competitiveness requires exploiting European strengths in
design and high-end marketing. Japanese producers such as Sony and Matsuchita
compete most effectively in the broad mid-market exploiting national strengths in
consumer electronics and process technologies.
The linkage between the firm’s competitive advantage and its national environ-
ment also includes the relationship between firms’ organizational capabilities and
the national culture and social structure. Stimulated by Max Weber’s analysis of the
impact of religion on enterprise,9 national culture has been shown to exert a powerful
influence on management practices in general and on the capability profiles of firms
in particular. The capabilities of Japanese companies in integrating diverse techno-
logies into innovative new products (electronic musical instruments, color copying
machines), and in quality enhancement through continuous improvement, owes much
to Japanese traditions of assimilating outside ideas and cooperative social behavior.
Similarly, the excellence of US firms in financial services and pioneering new industries
through entrepreneurship may link with US traditions of individualism and quest for
material wealth. We shall return to the implications of national cultures for strategic
management later in this chapter.

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Applying the Framework: International
Location of Production
To examine how national resource conditions influence international strategies, we
look at two types of strategic decision in international business: first, the decision
of where to locate production activities and, second, the decision of how to enter a
foreign market. Let us begin with the first of these.
So far, our discussion of the linkage between the competitive advantage of the firm
and its national environment has assumed, implicitly, that each firm is based within
its home country. In fact, an important motive for internationalization is to access the
resources and capabilities available in other countries. Traditionally, multinational
companies either concentrated production in their home country or located manu-
facturing plants to serve each of the countries where they marketed their products.
Increasingly, decisions as to where to produce are being separated over decisions as
to where to sell. For example, the biggest markets for Motorola’s wireless handsets are
the US and EU, yet handset manufacture is primarily in China, Singapore, Malaysia,
and Brazil.

Determinants of Geographical Location
The decision of where to manufacture requires consideration of three sets of factors:
l National resource availability. Where key resources differ between countries
in their availability or cost, then firms should manufacture in countries where
resource supplies are favorable. For the oil industry this means exploring in
Kazakhstan, offshore Angola, and the Gulf of Mexico. For Nike and Reebok,
it means locating shoe assembly where labor costs are low: China, Thailand,
India, and the Philippines. (Table 14.2 shows differences in employment costs

TABLE 14.2 Hourly Compensation Costs in US Dollars for Production Workers
in Manufacturing

1975 1985 1995 2000 2005

United States 6.36 13.01 17.19 19.76 23.17
Mexico 1.47 1.59 1.51 2.08 2.50
Australia 5.62 8.20 15.27 14.47 23.09
Japan 3.00 6.34 23.82 22.27 21.90
SOURCE: US DEPARTMENT OF LABOR, BUREAU OF LABOR STATISTICS

Korea 0.32 1.23 7.29 8.19 11.52
Taiwan 0.40 1.50 5.94 5.85 5.97
Sri Lanka 0.28 0.28 0.48 0.48 0.54
France 4.52 7.52 20.01 15.70 23.89
Germany (former West) 6.31 9.53 31.58 24.42 34.05
Italy 4.67 7.63 16.22 14.01 20.48
Spain 2.53 4.66 12.88 10.78 17.10
Sweden 7.18 9.66 21.44 20.14 28.42
Switzerland 6.09 9.66 29.30 21.24 30.26
United Kingdom 3.37 6.27 13.67 16.45 24.71

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between countries.) For semiconductor and computer companies, it means
establishing R&D facilities in California’s Silicon Valley where there is the
world’s greatest concentration of microelectronics expertise.10
l Firm-specific competitive advantages. For firms whose competitive advantage
is based on internal resources and capabilities, optimal location depends on
where those resources and capabilities are situated and how mobile they are.
Wal-Mart has experienced difficulty recreating its capabilities outside of the
US. Conversely, Toyota and Goldman Sachs have successfully transferred their
operational capabilities to their overseas subsidiaries.
l Tradability. The ability to locate production away from markets depends on
the transportability of the product. Production within the local market is
favored when transportation costs are high, local customers have
differentiated preferences, and governments create barriers to trade.
Services – hairdressing, medicine, and banking – need to be produced in
close proximity to the customer. However, even with some services,
communications technology permits remote production.

Location and the Value Chain
The production of most goods and services comprise a vertical chain of activities
where the input requirements of each stage vary considerably. Hence, different coun-
tries offer differential advantage at different stages of the value chain. Table 14.3
shows the pattern of international specialization within textiles and apparel. Similarly
with consumer electronics: component production is research and capital intensive
and is concentrated in the US, Japan, Korea, and Taiwan; assembly is labor intensive
and is concentrated in China, Thailand, and Latin America.
In principle, a firm can identify the resources required by each stage of the value
chain, then determine which country offers these resources at the lowest cost.11 For
example, Nike locates R&D and design in the US; the production of fabric, rubber,
and plastic shoe components in Korea, Taiwan, and China; and assembly in India,
China, the Philippines, and Indonesia.12
However, when companies are making decisions to shift certain activities outside
their home country – a process referred to as “offshoring” – it is important to look
beyond comparisons of current costs and consider the underlying resources and
capabilities available in different locations. Cost advantages are vulnerable to exchange

TABLE 14.3 Comparative Advantage in Textiles and Clothing by Vertical Stage

Fiber production Spun yarn Textiles Apparel

Hong Kong −0.96 −0.81 −0.41 +0.75
Italy −0.54 +0.18 +0.14 +0.72
Japan −0.36 +0.48 +0.78 −0.48
USA +0.96 +0.64 +0.22 −0.73
SOURCE: UNITED NATIONS

Notes:
1 Fiber production includes both natural and synthetic fibers.
2 Revealed comparative advantage is measured as (Exports − Imports) / (Exports + Imports).

CSAC14 1/13/07 9:26 Page 372


rate changes and wage inﬂation. Moreover, noncost aspects of operational perform-
ance may ultimately be more important:
[ W]estern companies are ﬁnding that offshoring locations such as China and India
offer access to world-class skills. For example, Jim Breyer, managing partner of
Accel Partners, a Silicon Valley venture capitalist, observed: “Taiwan and China
have some of the world’s best designers of wireless chips and wireless software.”
In certain types of precision manufacturing, including the processes that produce
magnesium alloy casing for notebook computers, companies such as Waffer in
Taiwan offer some of the most sophisticated technology in the world.
Most of the leading Indian IT outsourcing companies operate at level 5 –
the highest level of expertise – of the Capability Maturity Model (CMM), an
international measure of technical skill, while most internal IT departments in
western companies operate at level 2 or 3. Call centres, such as those operated by
eTelecare – a Manila-based outsourcing provider – offer better average handling
times and customer satisfaction relative to leading companies in the US.13
In the highly fragmented value chains of most electronic products, technology,
know-how, and speed are as important as cost in determining where different activit-
ies are located (see Table 14.4).

TABLE 14.4 Global Production: The Hewlett Packard Pavilion 8000 Laptop
Computer

Component/Process Provider and Location

Design HP, California; also, HP design studios in Taiwan
and China collaborate with third-party
manufacturers
Assembly Contracted to Quanta (Taiwan); assembled in
China by Quanta and by third-party contractors
Microprocessor Designed by Intel in California; manufactured at
Intel plants in Oregon, New Mexico, and Israel
Graphics card Designed by ATI Technologies in Canada;
manufactured in Taiwan
SOURCES: WWW.HP.COM; “THE LAPTOP TRAIL” WALL STREET JOURNAL (JUNE 9, 2005).

Screen Manufactured by LG Philips LCD Co. (a joint
venture between LG of Korea and Philips of the
Netherlands). Manufactured in South Korea
Hard disk drive By Seagate. Designed in California; manufactured
in Malaysia
Lithium ion battery Manufactured by Sony in Japan
Logistics Contracted to 40 third-party providers (some
global, such as Federal Express, DHL, and TNT;
others local)
Telephone sales and customer support Contracted to third-party providers in Canada,
UK, Ireland, and India

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FIGURE 14.4 Determining the optimal location of value chain activities

Where is the optimal location of X in terms
of the cost and availability of inputs?

The optimal location
of activity X considered What government incentives/penalties
independently affect the location decision?

What internal
WHERE TO LOCATE resources and capabilities does the firm
ACTIVITY X? possess in particular locations?

What is the firm’s business strategy
The importance of links (e.g., cost vs. differentiation advantage)?
between activity X and
other activities of the firm
How great are the coordination
benefits from co-locating activities?

The benefits from fragmenting the value chain must be traded off against the added
costs of coordinating globally dispersed activities. Transportation costs are one con-
sideration. Another is increased inventory cost. Increased time can be the most costly
consequence of dispersed activities. Just-in-time scheduling often necessitates that
production activities are carried out in close proximity to one another. Although the
labor cost of building an automobile in Mexico is only 20% of the labor cost in the
US, this cost advantage of Mexican production is almost entirely offset by higher costs
of components. The tradeoff between cost and time depends on the strategy of the
company. Companies that compete on speed and reliability of delivery (e.g. Zara and
Dell Computer) typically forsake the cost advantages of a globally dispersed value
chain in favor of integrated operations with fast access to the final market.
Figure 14.4 summarizes the relevant criteria in location decisions.

Applying the Framework: Foreign Entry Strategies
Many of the considerations relevant to locating production activities also apply to
choosing the mode of foreign market entry. A firm enters an overseas market because
it believes that it will be profitable. This assumes not only that the overseas market is
attractive – that its structure is conducive to profitability – but also that the firm can
establish a competitive advantage vis-à-vis local producers and other multinational
corporations (MNCs). We discussed the analysis of industry and market profitability
in Chapters 3 and 4. Our focus here is on how the firm can best establish competitive
advantage in a foreign market.
In exploiting an overseas market opportunity, a firm has a range of options with re-
gard to mode of entry. These correspond closely to the firm’s strategic alternatives
with regard to exploiting innovation (see Chapter 11). The basic distinction is

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FIGURE 14.5 Alternative modes of overseas market entry

Low Resource commitment High

between market entry by means of transactions and market entry by means of direct
investment. Figure 14.5 shows a spectrum of market entry options arranged accord-
ing to the degree of commitment by the firm. Thus, at one extreme there is exporting
through individual spot-market transactions; at the other, there is the establishment
of a fully owned subsidiary that undertakes a full range of functions.
How does a firm weigh the merits of different market entry modes? Five key issues
are relevant.

1. Is the firm’s competitive advantage based on firm-specific or country-
specific resources? If the firm’s competitive advantage is country based, the firm
must exploit an overseas market by exporting. Thus, to the extent that Hyundai’s
competitive advantage in the US car market is its low domestic cost base, it must pro-
duce in Korea and export to the United States. If Toyota’s competitive advantage is
company specific, then assuming that advantage is transferable within the company,
Toyota can exploit the US market either by exports or by direct investment in US
production facilities.14

2. Is the product tradable and what are the barriers to trade? If the
product is not tradable because of transportation constraints or import restrictions,
then accessing that market requires entry either by investing in overseas production
facilities or by licensing the use of key resources to local companies within the over-
seas market.

3. Does the firm possess the full range of resources and capabilities for
establishing a competitive advantage in the overseas market? Compet-
ing in an overseas market is likely to require that the firm acquires additional resources
and capabilities, particularly those related to marketing and distributing in an un-
familiar market. Accessing such country-specific resources is most easily achieved by
establishing a relationship with firms in the overseas market. The form of relationship
depends, in part, on the resources and capabilities required. If a firm needs market-
ing and distribution, it might appoint a distributor or agent with exclusive territorial

CSAC14 1/13/07 9:26 Page 375


rights. If a wide range of manufacturing and marketing capabilities is needed, the firm
might license its product and/or its technology to a local manufacturer. In technology-
based industries, licensing technology to local companies is common. In marketing-
intensive industries, firms with strong brands can license their trademarks to local
companies. Alternatively, a joint venture might be sought with a local manufacturing
company. US companies entered the Japanese market by joint ventures with local com-
panies (e.g., Fuji–Xerox, Caterpillar–Mitsubishi). These combined the technology and
brand names of the US partner with the market knowledge and manufacturing and
distribution facilities of the Japanese firm.

4. Can the firm directly appropriate the returns to its resources?
Whether a firm licenses the use of its resources or chooses to exploit them directly
(either through exporting or direct investment) depends partly on appropriability
considerations. In chemicals and pharmaceuticals, the patents protecting product
innovations tend to offer strong legal protection, in which case patent licenses to local
producers can be an effective means of appropriating their returns. In computer soft-
ware and computer equipment, the protection offered by patents and copyrights is
looser, which encourages exporting rather than licensing as a means of exploiting
overseas markets.
With all licensing arrangements, key considerations are the capabilities and reli-
ability of the local licensee. This is particularly important in licensing brand names,
where the licenser must carefully protect the brand’s reputation. Thus, Cadbury-
Schweppes licenses to Hershey the trademarks and product recipes for its Cadbury’s
range of chocolate bars for sale in the United States. This arrangement reflects the
fact that Hershey has production and distribution facilities in the US that Cadbury
cannot match, and that Cadbury views Hershey as a reliable business partner.

5. What transaction costs are involved? A key issue that arises in the licens-
ing of a firm’s trademarks or technology concerns the transaction costs of negotiat-
ing, monitoring, and enforcing the terms of such agreements as compared with
internationalization through a fully owned subsidiary. In expanding overseas, Star-
bucks owns and operates its coffee houses while McDonald’s franchises its burger
restaurants. McDonald’s competitive advantage depends primarily upon the franch-
isee faithfully replicating the McDonald’s system. This can be enforced effectively by
means of franchise contracts. Starbucks believes that its success is achieved through
creating the “Starbucks experience” which is as much about ambiance as it is about
coffee. It is difficult to articulate the ingredients of this experience, let alone write it
into a contract.
Issues of transaction costs are fundamental to the choices between alternative
market entry modes. Barriers to exporting in the form of transport costs and tariffs
are forms of transaction costs; other costs include exchange rate risk and information
costs. Transaction cost analysis has been central to theories of the existence of multi-
national corporations. In the absence of transaction costs in the markets either for
goods or for resources, companies exploit overseas markets either by exporting their
goods and services or by selling the use of their resources to local firms in the over-
seas markets.15 Thus, multinationals tend to predominate in industries where:

l firm-specific intangible resources such as brands and technology are important
(transaction costs in licensing the use of these resources favor direct investment);

CSAC14 1/13/07 9:27 Page 376


l exporting is subject to transaction costs (e.g., through tariffs or import
restrictions);
l customer preferences are reasonably similar between countries.

International Alliances and Joint Ventures
During the past decade and a half, one of the most striking features of the develop-
ment of international business has been the upsurge in the numbers of joint ventures
and other forms of strategic alliance across national borders. For the Russian gas giant,
Gazprom, alliances are the principal vehicle for Gazprom establishing a global pres-
ence. Gazprom is involved in pipeline alliances with Eni (Italy), CNPC (China), EON
(Germany), PDVSA (Venezuela), and MOL (Hungary). It collaborates with Petro-
canada and Sonotrach (Algeria) on liqueﬁed natural gas. General Motors is another
company that has used alliances to access markets, share technology, and exploit
economies of size. Figure 14.6 shows GM’s network of alliances with other
automakers.
The traditional reason for cross-border alliances and joint ventures was the desire
by multinational companies to access the market knowledge and distribution cap-
abilities of a local company, together with the desire by local companies to access the
technology, brands, and product development of the multinationals. Western banks
entering China’s booming credit card market have usually formed marketing alliances
with local banks, often reinforced with an equity stake.16 Host governments in China,
India, and other emerging market countries often oblige foreign companies to take a
local partner. In technology-based industries – computers, semiconductors, telecom

FIGURE 14.6 General Motors’ Alliances with Competitors

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CSAC14 1/13/07 9:27 Page 377


equipment, pharmaceuticals, and aerospace – the rapid growth of international
collaboration reflects companies’ desire to access other companies’ different techno-
logical capabilities and to speed the global rollout of new products. In the energy
sector, and other capital-intensive industries, joint ventures are important for shar-
ing risks.
The success of cross-border joint ventures and other forms of international stra-
tegic alliance has been mixed. The Sony–Ericsson mobile phone joint venture, the
Renault–Nissan alliance, and HP and Canon’s collaboration in printers have been suc-
cesses. BT and AT&T’s Concert alliance, the GM–Fiat alliance, and Swissair’s alliance
network were all disasters. Joint ventures that share management responsibility are far
more likely to fail than those with a dominant parent or with independent manage-
ment.17 The greatest problems arise between firms that are also competitors: recon-
ciling cooperation with competition is a challenge for executives who lack the strategic
insight or tolerance for ambiguity possessed by Bismark or Metternich.
Disagreements over the sharing of the contributions to and returns from an alli-
ance are a frequent source of friction. When each partner seeks to access the other’s
capabilities, “competition for competence” results.18 In several of the alliances
between Japanese and western firms, the Japanese partner was better at appropriating
the benefits of the alliance.19 However, in long-term partnerships there is the poten-
tial for the benefits to flow in both directions. When Xerox Corporation ran into
problems during the 1990s, it was saved by technology, product designs, and man-
agement techniques from its Japanese joint venture Fuji–Xerox.20
The effective strategic management of international alliances, argue Hamel, Doz,
and Prahalad, depends on a clear recognition that collaboration is competition in a dif-
ferent form.21 They argue that how the alliance benefits are shared depends on three
key factors:
l The strategic intent of the partners. The clearer a firm is about its strategic
goals in entering an alliance, the more likely it is to achieve a positive result
from the alliance. One of the problems of GM’s network of alliances with
foreign automakers was the lack of a coherent view of how each alliance
fitted with GM’s overall strategy.
l Appropriability of the contribution. The ability of each partner to capture and
appropriate the skills of the other depends on the nature of each firm’s skills
and resources. Where skills and resources are tangible or explicit, they can
easily be acquired. Where they are tacit and people embodied, they are more
difficult to acquire. To avoid the unintended transfer of know-how to
partners, Hamel et al. argue the need for a “gatekeeper” to monitor and
administer contacts with strategic partners.
l Receptivity of the company. The more receptive a company is in terms of its
ability to identify what it wants from the partner, to obtain the required
knowledge or skills, and to assimilate and adapt them, the more it will gain
from the partnership. In management terms, this requires the setting of
performance goals for what the partnership is to achieve for the company and
managing the relationship to ensure that the company is deriving maximum
learning from the collaboration.22 When a firm has a portfolio of alliances, a
systematic approach to monitoring and performance evaluation is especially
important.23

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Multinational Strategies: Globalization versus
National Differentiation
So far, we have viewed international expansion, whether by export or by direct
investment, as a means by which a company can exploit its competitive advantages not
just in its home market but also in foreign markets. However, international scope may
itself be a source of competitive advantage over geographically focused competitors.
In this section, we explore whether, and under what conditions, firms that operate on
an international basis are able to gain a competitive advantage over nationally focused
firms. If such “global strategies” have potential for creating competitive advantage, in
what types of industry are they likely to be most effective? And how should they be
designed and deployed in order to maximize their potential?

The Benefits of a Global Strategy
A global strategy is one that views the world as a single, if segmented, market. The late
Ted Levitt argued that companies that compete on a national basis are highly vulner-
able to companies that compete on a global basis.24 The superiority of global strategies
rests on two assumptions:
l Globalization of customer preferences. National and regional preferences
are disappearing in the face of the homogenizing forces of technology,
communication, and travel. “Everywhere everything gets more and more
like everything else as the world’s preference structure is relentlessly
homogenized,” observed Levitt. Nor is this trend restricted to technology-
based products such as pharmaceuticals and computers; it is just as prevalent
in branded consumer goods such as Corona beer, Adidas sportswear, and
McDonald’s hamburgers.
l Scale economies. Firms that produce for the world market can access scale
economies in product development, manufacturing, and marketing that offer
efficiency advantages that nationally based competitors cannot match
pharmaceuticals, consumer electronics, and investment banking, few
nationally focused firms have survived competition from global players.
Subsequent contributions to the analysis of global strategy points to benefits in
addition to scale economies.25 There are five major benefits from a global strategy:

Cost Benefits: Scale and Replication Levitt concentrated on the scale advant-
ages of global operation. In most global industries, the most important source of scale
economy is product development.
However, for most internationalizing firms, the major cost advantage from multi-
national operation derives from economies in the replication of knowledge-based
assets – including organizational capabilities.26 When a company has created a
knowledge-based asset or product – whether a recipe, or a piece of software, or an
organizational system – creating the original knowledge was costly but, once created,
subsequent replication is typically cheap. Thus, once Disney has built Disneyland,
Anaheim and Walt Disney World in Florida, a Disneyland theme park in Paris or Hong
Kong can be built at a fraction of the cost. Similarly with McDonald’s: its business
system was built in the US over several decades. Once created, the incremental cost
of replicating the system in another country is comparatively small.

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Exploiting National Resources Differences Global strategy does not neces-
sarily involve production in one location and then distributing globally. Global strate-
gies also involve exploiting the efficiencies from locating different activities in different
places. As we have seen, companies internationalize not just in search of market
opportunities but also in search of resource opportunities. Traditionally this has meant
a quest for raw materials and low-cost labor. Increasingly it means a quest for know-
ledge. For example, in the semiconductor industry, overseas subsidiaries are set up
primarily to access knowledge in the host country rather than to exploit their exist-
ing knowledge.27

Serving Global Customers In several industries – investment banking, audit ser-
vices, advertising – the primarily driver of globalization has been the need to service
global customers. Thus, the internationalization of auto parts manufacturers has
tended to follow the internationalization patterns of the auto assemblers.

Learning Benefits If competitive advantage involves innovation and the constant
deepening and widening of capabilities, then learning plays a central role in develop-
ing and sustaining competitive advantage. If learning involves communicating and
interacting with one’s proximate environment, then multinationals have the advantage
of working within multiple national environments. The critical requirement is that
the company possesses some form of global infrastructure for communication and
knowledge transfer that permits new experiences, new ideas, and new practices to
be transferred and integrated. A growing stream of research suggests that the most
important advantage of multinationals over domestic companies is their ability to
access knowledge in multiple locations, to synthesize that knowledge, and to transfer
it efficiently across national borders.28

Competing Strategically A major advantage of the Romans over the Gauls,
Goths, and other barbarian tribes, was the Romans’ ability to draw upon the military
and economic resources of the Roman Empire to fight local wars. Similarly, multi-
national companies possess a key strategic advantage over their nationally focused com-
petitors: multinationals can fight aggressive competitive battles in individual national
markets using their cash flows from other national markets. At its most simple, this
cross-subsidization of competitive initiatives in one market using profits from other
markets involves predatory pricing – cutting prices to a level that drives competitors
out of business. Such pricing practices are likely to contravene both the World Trade
Organization’s antidumping rules and national antitrust laws. More usually, cross-
subsidization involves using cash flows from other markets to finance aggressive
sales and marketing campaigns.29 Thus, Japanese, Korean, and Taiwanese electronics
firms financed their expansion in US markets with profits from their domestic
businesses.30
Strategic competition between MNCs presents more complex opportunities for
attack, retaliation, and containment.31 The most effective response to competition in
one’s home market may be to retaliate in the foreign MNC’s own home market. Fuji
Film’s incursion into Kodak’s backyard was symbolized by Fuji’s sponsorship of the
1984 Olympic Games in Los Angeles. Kodak responded by attacking Fuji in Japan.32
To effectively exploit such opportunities for national leveraging, some overall global
coordination of competitive strategies in individual national markets is required.
In industries that are dominated by MNCs – automobiles, semiconductors and
investment banking – conventional wisdom has been that companies should seek to

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position themselves in all three of the world’s major industrial centers: North America,
Europe, and Japan. Thus, in automobiles Daimler-Benz acquired Chrysler in the US
and Mitsubishi in Japan. Ford and GM augmented their strong positions in the US and
Europe with equity stakes in Japanese companies. McKinsey’s Kenichi Ohmae, argues
the case for triad power – that the need to access technology, develop customer prefer-
ences, and scale economies requires global players to become true insiders within all
of the world’s big three: the US, Europe, and Japan.33

The Need for National Differentiation
For all the advantages of global strategy, the evidence of the past decade is that
national differences in customer preferences continue to exert a powerful influence
in most markets: products designed to meet the needs of the “global customer” tend
to be unappealing to most consumers. Moreover, costs of national differentiation
can be surprisingly low if common basic designs and common major components are
used. Most auto firms have abandoned attempts to create global car models in favor
of common platforms.34 Flexible manufacturing systems have reduced the costs of
customizing products to meet the preferences of particular customer groups.
Domestic appliances provide an interesting refutation of the globalization hypo-
thesis. In washing machines, national preferences have shown remarkable resilience:
French and US washing machines are primarily top loading, elsewhere in Europe they
are mainly front loading; the Germans prefer higher spin speeds than the Italians; US
machines feature agitators rather than revolving drums; and Japanese machines are
small. In domestic appliances, the pioneers of globalization, such as Electrolux and
Whirlpool, have been outperformed by some national and regional specialists.35
Similarly in banking: most of the world’s most profitable banks – US Bancorp, Bank
of China, National Bank of Kuwait, and Anglo Irish Bank – are national rather than
global players.
Apart from customer demand, several other factors encourage national differentiation:
l Laws and government regulations. Governments are the most important
sources of obstacles to globalization. Legal and regulatory conditions create
distinct national markets in financial services, pharmaceuticals and health
services, alcoholic beverages, and telecommunications.
l Distribution channels. Differences between the distribution systems of
different countries are among the biggest barriers to global marketing
strategies. Procter & Gamble must adapt its marketing, promotion, and
distribution of toiletries and household products to take account of the fact
that, in the US, a few chains account for a major share of its US sales; in
southern Europe, most sales are through small, independent retailers; while
in Japan, P&G must sell through a multitiered hierarchy of distributors.
l Presence of lead countries. Countries differ in their levels of sophistication
and acceptance of innovation on a product-by-product basis. For consumer
products, Japan is the lead market; for computer hardware and software and
financial services, the US is the lead market; for automobile technology and
design, Europe tends to lead; for mobile telecommunications, South Korea
has moved into the lead. These differences in market progressiveness
encourage a sequential approach to global strategy in which products are
introduced first in the lead market, followed by a global rollout. Sequential

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product launches allow firms to learn from experiences in the lead market and
exploit that learning in subsequent country launches.
l National cultures. Underlying differences between countries in customer
preferences and business methods are typically the result of differences in
national cultures. Culture comprises assumptions, values, traditions, and
behavioral norms. At its most general, culture may be described as a shared
system of meaning within a group or society. Many of the problems of
international expansion encountered by companies – from Wal-Mart in
Germany and Korea, Disney with EuroDisneyland, and Marks & Spencer in
Europe and North America – can be linked to problems of cultural
adjustment. The need to adapt to local cultures may influence the mode of
internationalization chosen. Franchising is an attractive international
expansion strategy for service businesses because it utilizes the knowledge
and cultural identity of local partners. In outsourcing production, customer
support and administrative functions to Asia, most western companies have
relied on contracts with local firms rather than face the cultural challenges of
establishing their own overseas units. Strategy Capsule 14.1 examines
differences in national cultures.

Reconciling Global Integration with National Differentiation
Choices about internationalization strategy have been viewed as a tradeoff between
the benefits of global integration and those of national adaptation (see Figure 14.7).

FIGURE 14.7 Benefits of Global Integration versus National Differentiation

Benefits of
global
integration

Benefits of national differentiation

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STRATEGY CAPSULE 14.1

How do National Cultures Differ?

Do people differ between countries with regard l Masulinity/Feminitiy. Hofstede identifies
to beliefs, norms and value systems? The an- emphasis on work and material goals
swer from a series of research studies is “yes.” and demarcation of gender roles as
The best known study of national cultural “masculine”; emphasis on personal
differences is by Geert Hofstede. The principal relationships rather than efficiency and
dimensions of national values he identified were: belief in gender equality was viewed as
“feminine.” Japan, Austria, Venezuela,
l Power Distance – the extent to which
and Italy scored high on masculinity;
inequality, decision-making power in
Scandinavia and the Netherlands scored
particular, is accepted within organizations
very low.
and within society. Power distance was
high in Malaysia, and most Latin American Other studies have used different measures
and Arab countries; low in Austria and for characterizing national cultures. Fons
Scandinavia. Trompenaars (another Dutchman) emphasizes
l Uncertainty avoidance. Preference for “universalism” versus “particularism” in out-
certainty and established norms was high look (the US and Australia score highest on
in most southern European and Latin universalism); “neutral” versus “affective” rela-
American countries; tolerance for tionships (Japan and UK are highest in terms
uncertainty and ambiguity were high in of neutrality; Mexico and the Netherlands the
Singapore, Sweden, UK, US, and India. most affective); and achievement orienta-
tion (Australia and US very high; Venezuela,
l Individualism. Concern for individual over
Indonesia, and China very low).
group interests was highest in the US, UK,
Canada, and Australia. Identification with
groups and the collective interest was
Sources: G. Hofestede, Culture’s Consequences: Inter-
strongest in Latin America and Asia
national Differences in Work-related Values (Thousand
(especially Indonesia, Pakistan, Taiwan, Oaks, CA: Sage, 1984); F. Trompenaars, Riding the Waves of
and South Korea). Culture (London: Economist Books, 1993).

Industries where scale economies are huge and customer preferences homogeneous
call for a global strategy (e.g. jet engines). Industries where national preferences are
pronounced and where customization is not prohibitively expensive favor a “multi-
domestic” strategy (e.g. retail banking). Indeed, if there are no significant benefits
from global integration, then we may see these industries supplied almost entirely by
locally specialized firms (as in funeral services and hairdressing). However, some
industries may be low on most dimensions – cement and car repair services are fairly
homogeneous worldwide, but also lack significant scale economies or other major
benefits from global presence. Conversely, other industries offer substantial benefits

CSAC14 1/13/07 9:27 Page 383


from operating at global scale (telecommunications equipment, military hardware),
but national preferences and standards may also necessitate considerable adaptation
to the needs of specific national markets.
Reconciling conflicting forces for global efficiency and national differentiation rep-
resents one of the greatest strategic challenges facing MNCs. Achieving what Sony’s
former chairman described as “global localization”36 involves standardizing product
features and company activities where scale economies are substantial and differenti-
ating where national preferences are strongest and where achieving them is not
over-costly. Thus, a global car such as the Honda Civic (introduced in 1972 and sold
in 110 countries of the world) now embodies considerable local adaptations – not
just to meet national safety and environmental standards, but also to meet local pref-
erences for leg room, seat specifications, accessories, color, and trim. McDonald’s
too makes considerable efforts to mesh global standardization with local adaptation
(see Strategy Capsule 14.2).

STRATEGY CAPSULE 14.2

McDonald’s Goes Glocal

For antiglobalization activists, McDonald’s is l Switzerland – Shrimp Cocktail;
a demon of globalization: it crushes national Chickenburger Curry
cuisines and small, traditional family businesses l UK – Oat-So-Simple Porridge; Toasted Deli
with the juggernaut of US fast-food corporate Sandwiches
imperialism. In reality, McDonald’s global strat-
l US – Tortilla Wraps; premium salad range.
egy is a careful blend of global standardization
and local adaptation.
There are differences too in restaurant
McDonald’s menus include a number of
decor, service offerings (internet access in the
globally standardized items – the Big Mac
UK; home delivery in India), and market posi-
and potato fries are international features –
tioning (McDonald’s tends to have a more up-
however, in most countries McDonald’s menus
market positioning outside the US). In Israel
feature an increasing number of locally devel-
many McDonald’s are kosher – they do not
oped items. These include:
offer dairy products and are closed on Satur-
l Australia – Roast Beef and BBQ Sauce Deli days. In India neither beef nor pork is served.
Sandwich; Chicken Tandoori Sandwich A key reason that almost all of McDonald’s
l France – Croque McDo; McCroissant non-US outlets are franchised is to facilitate
adaptation to national environments and
l Hong Kong – Star-shaped Hash Browns;
access to local know-how.
Rice Burgers; Plum Drink with Aloe Vera
Yet, the principal features of the McDonald’s
l India – McVeggie Burger; McAloo Tikka business system are identical throughout the
Burger; Veg Pizza McPuff world. McDonald’s values and business prin-
l Saudi Arabia – McArabia Kofta; McArabia ciples are seen as universal and invariant. Its
Chicken emphasis on families and children is intended

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to identify McDonald’s with fun and family life initiatives with regard to sandwiches, salads
wherever it does business. Community involve- and information labeling as a basis for global
ment and the Ronald McDonald children’s learning.
charity are also worldwide. Corporate trade- Whether or not McDonald’s has the balance
marks and brands are mostly globally uniform right between global standardization and local
– including the golden arches logo and “I’m adaptation is open to debate. Simon Anholt, a
lovin’ it” tag line. The business system itself – British marketing expert, argues: “By putting
the franchising, the training of managers and local food on the menu, all you are doing is
franchisees through Hamburger University, removing the logic of the brand, because this
restaurant operations, and supplier relations – is an American brand. If McDonald’s serves
is also highly standardized. what you think is a poor imitation of your
Traditionally, McDonald’s international strat- local cuisine, it’s going to be an insult.” But
egy was about adapting its US model to local according to McDonald’s CEO Jim Skinner:
conditions. Increasingly McDonald’s is using “We don’t run our business from Oak Brook.
local differentiation as a basis for worldwide We are a local business with a local face in each
adaptation and innovation through transfer- country we operate in.” His chief marketing
ring new menu items and business concepts manager, Mary Dillon adds: “McDonald’s is
from one country to another. For example, much more about local relevance than a global
the McCafe gourmet coffeehouses within archetype. Globally we think of ourselves as the
McDonald’s restaurants were first developed custodian of the brand, but it’s all about local
in Australia. By 2003, McCafes had become relevance.”
established in 30 countries, including the US.
In responding to the growing tide of concern
Sources: www.mcdonalds.com; McDonald’s Localization
over nutrition and obesity in the developed Strategy: Brand Unification, Menu Diversification? ICFAI
world, McDonald’s has drawn upon country Case Study 306-316-1 (2006).

Reconciling global efficiency with appealing to customer preferences in each coun-
try also means looking at the globalization/national differentiation tradeoff for indi-
vidual products and individual function. In the banking industry, different products
and services have different potential for globalization. Credit cards and basic savings
products such as certificates of deposit tend to be globally standardized; checking
accounts and mortgage lending are much more nationally differentiated. Some of the
most successful international banks are those that have specialized in more global
products and services – for example, Capital One and MBNA in credit cards; UBS in
private banking for affluent individuals.
Different functions also have different positioning with regard to global integra-
tion and national differentiation. R&D, purchasing, IT, and manufacturing have
strong globalization potential because of scale economies; sales, marketing, customer
service, and human resource management tend to require much more national dif-
ferentiation. These differences have important implications for how the MNC is
organized.

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Strategy and Organization within the
Multinational Corporation
Managing business activities that cross national frontiers is complex. As a result, the
success of international strategies depends critically on the effectiveness with which
they are implemented. One of the greatest challenges facing the senior managers of
MNCs is aligning organizational structures and management systems and their fit with
the strategies being pursued.

The Evolution of Multinational Strategies and Structures
All companies are subject to organizational inertia. MNCs, because of their com-
plexity, face particular difficulty in adapting quickly to external change. As a result,
established MNCs are captives of their history: the strategy–structure configurations
adopted by today’s MNCs reflect the choices they made at the time of their inter-
national expansion. Radical changes in strategy and structure are difficult: once an
international distribution of functions, operations, and decision-making authority has
been determined, reorganization is slow, difficult, and costly – particularly when host
governments become involved. Bartlett and Ghoshal argue that this “administrative
heritage” of an MNC – its configuration of assets and capabilities, its distribution of
managerial responsibilities, and its network of relationships – constrains its ability to
build new strategic capabilities.37
Leadership in the internationalization of business has been held by companies from
different counties at different times. Bartlett and Ghoshal identify three eras (see
Figure 14.8). For the companies of each era, their management challenges today are
still shaped by their historical experiences.
l Early 20th century: Era of the European multinational. European companies
such as Unilever, Shell, ICI, and Philips were pioneers of multinational
expansion. Because of the conditions at the time of internationalization –

FIGURE 14.8 The development of the multinational corporation: alternative
TRANSNATIONAL SOLUTION (BOSTON: HARVARD BUSINESS SCHOOL PRESS, 1998). COPYRIGHT
© 1989 BY THE PRESIDENT AND FELLOWS OF HARVARD COLLEGE; ALL RIGHTS RESERVED.

parent–subsidiaries relations
SOURCE: C. A. BARTLETT AND S. GHOSHAL, MANAGING ACROSS BORDERS: THE

The Europeans: The Americans: The Japanese:
Decentralized Coordinated Centralized
Federations Federations Hubs

Note: The density of shading indicates the concentration of decision making.

CSAC14 1/13/07 9:27 Page 386


poor transportation and communications, highly differentiated national
markets – the companies created “multinational federations”: each national
subsidiary was operationally autonomous and undertook the full range of
function, including product development, manufacturing, and marketing.
l Post-World War II: Era of the American multinational. US economic
dominance was the basis for the preeminence of US multinationals such as
GM, Ford, IBM, Coca-Cola, Caterpillar, Gillette, and Procter & Gamble.
While their overseas subsidiaries were allowed considerable autonomy, this
was within the context of the dominant position of their US parent in terms
of capital, new product and process technology, management capabilities, and
management systems. US-based resources and capabilities were their primary
competitive advantages in world markets.
l The 1970s and 1980s: The Japanese challenge. Japanese MNCs – Honda,
Toyota, Matsushita, NEC, and YKK – pursued global strategies from
centralized domestic bases. R&D and manufacturing were concentrated in
Japan; overseas subsidiaries were primarily sales and distribution units.
Globally standardized products manufactured in large-scale plants provided
the basis for unrivalled cost and quality advantages. Over time, manufacturing
and R&D was dispersed – initially because of trade protection by consumer
countries and a rising value of the yen against other currencies.
The different administrative heritage of these different groups of MNCs continues
to shape their organizational capabilities today. The strength of European multi-
nationals is adaptation to the conditions and requirements of individual national mar-
kets. The strength of the US multinationals is their ability to transfer technology and
proven new products from their domestic strongholds to their national subsidiaries.
That of the Japanese MNCs is the efficiency of global production and new product
development. Yet, these core capabilities are also core rigidities. The challenge for
European MNCs has been to achieve greater integration of their sprawling interna-
tional empires – for Shell and Philips this has involved reorganizations over a period
of more than two decades. For US MNCs such as Ford and Procter & Gamble it has
involved nurturing the ability to tap their foreign subsidiaries for technology, design,
and new product ideas. For Japanese MNCs such as Nomura, Hitachi, and NEC the
challenge is to become true insiders in the overseas countries where they do business.

Reconfiguring the MNC: The Transnational Corporation

Changing Organization Structure For North American and European-based
MNCs, the principal structural changes of recent decades have been a shift from
organization around national subsidiaries and regional groupings to the creation of
worldwide product divisions. For most MNCs, country and regional organizations
are retained, but primarily for the purposes of national compliance and customer
relationships. Thus, Hewlett Packard conducts its business through global product
groups: Technology Solutions Group (comprising Enterprise Storage and Servers,
Services, and Software), Personal Systems Group (its personal computer and enter-
tainment business), and Imaging and Printing Group (printers and cameras). At the
same time, it maintains three regional headquarters: for the Americas (located in
Houston), for Europe, Middle East and Africa (located in Geneva), and for Asia Pacific
(located in Singapore).

CSAC14 1/13/07 9:27 Page 387


New Approaches to Reconciling Localization and Global Integration
However, the formal changes in structure are less important than the changes in re-
sponsibilities, decision powers, and modes of coordination within these structures.
The fundamental challenge for MNCs has been reconciling the advantages of global
integration with those of national differentiation. Escalating costs of research and new
product development have made global strategies with global product platforms
essential. At the same time, meeting consumer needs in each national market and
responding swiftly to changing local circumstances requires greater decentralization.
Accelerating technological change further exacerbates these contradictory forces:
despite the cost and “critical mass” benefits of centralizing research and new product
development, innovation occurs at multiple locations within the MNC and requires
nurturing of creativity and initiative throughout the organization. “It’s the corporate
equivalent of being able to walk, chew gum, and whistle at the same time,’ notes
Harvard’s Chris Bartlett.
According to Bartlett, the simultaneous pursuit of responsiveness to national mar-
kets and global coordination requires, “a very different kind of internal management
process than existed in the relatively simple multinational or global organizations.
This is the transnational organization.”38 The distinguishing characteristic of the
transnational is that it becomes an integrated network of distributed and interdepend-
ent resource and capabilities (see Figure 14.9). This necessitates that:
l Each national unit is a source of ideas, skills, and capabilities that can be
harnessed for the benefit of the total organization.
l National units access global scale economies by designating them the
company’s world source for a particular product, component, or activity.
l The center must establish a new, highly complex managing role that
coordinates relationships among units but does so in a highly flexible way.
The key is to focus less on managing activities directly and more on creating
an organizational context that is conducive to the coordination and resolution
of differences. Creating the right organizational context involves “establishing
clear corporate objectives, developing managers with broadly based
perspectives and relationships, and fostering supportive organizational norms
and values.”39

FIGURE 14.9 The transnational corporation

Heavy flows of
Tight complex controls technology, finances,
and coordination and people, and materials
a shared strategic between interdependent
decision process units

CSAC14 1/13/07 9:27 Page 388


Balancing global integration and national differentiation requires that a company
adapts to the differential requirements of different products, different functions, and
different countries. Procter & Gamble adopts global standardization for some of its
products (Pringles potato chips and high-end perfumes, for example); for others (hair
coloring products and laundry detergent, for example) it allows significant national
differentiation. Across countries, P&G organizes global product divisions to serve
most of the industrialized world because of the similarities between their markets,
while for emerging market countries (such as China and India) it operates through
country subsidiaries in order to adapt to the distinctive features of these markets.
Among functions, R&D is globally integrated while sales are organized by national
units that are differentiated to meet local market characteristics.
The transnational form is a concept and direction of development rather than a
distinct organizational archetype. It involves convergence of the different strategy
configurations of MNCs. Thus, companies such as Philips, Unilever, and Siemens
have reassigned roles and responsibilities to achieve greater integration within their
traditional “decentralized federations” of national subsidiaries. Japanese global cor-
porations such as Toyota and Matsushita have drastically reduced the roles of their
Japanese headquarters. American multinationals such as Citigroup and IBM are mov-
ing in two directions: reducing the role of their US bases while increasing integration
among their different national subsidiaries.
MNCs are increasingly locating management control of their global product divi-
sions outside their home countries. When Philips adopted a product division structure,
it located responsibility for medical electronics in its US subsidiary and leadership in
consumer electronics in Japan. Nexans, the world’s biggest manufacturer of electric
cables, has moved the head office of five of its 20 product divisions outside of France.
For example, the head of ships’ cables is based in South Korea – the world leader in
shipbuilding.40 Aligning structure, strategy, and national resources may even require
shifting the corporate headquarters – HSBC moved from Hong Kong to London,
Tetra Pak from Lund, Sweden to Lausanne, Switzerland.41

Organizing R&D and New Product Development Probably the greatest
challenges facing the top managers of MNCs is organizing, fostering, and exploiting
innovation and new product development. Innovation is stimulated by diversity and
autonomy, while its exploitation and diffusion require critical mass and coordination.
The traditional European decentralized model is conducive to initiative – but not to
its global exploitation. Philips has an outstanding record of innovation in consumer
electronics. In its TV business, its Canadian subsidiary developed its first color TV;
its Australian subsidiary developed its first stereo sound TV and its British subsidiary
,
developed teletext TVs. However, lack of global integration has constrained its
ability successfully to exploit its innovation on a global scale. During the 1980s and
1990s, Philips was on the losing side of a number of key standards battles: its V2000
VCR system lost out to Matsushita’s VHS system and its digital audio tape lost out to
other digital recording formats.
By assigning national subsidiaries global mandates it is possible for them take
advantage of local resources and develop distinctive capabilities while exploiting
globally the results of their initiatives.42 For example, P&G, recognizing Japanese
obsessiveness over cleanliness, assigned increasing responsibility to its Japanese
subsidiary for developing household cleaning products. Its “Swiffer” dust-collecting

CSAC14 1/13/07 9:27 Page 389


products were developed in Japan (using technology from Kao) then introduced into
other markets. Where local units possess unique capabilities, they can be identified as
centers of excellence as a means of assigning them specific responsibilities and signal-
ing this leadership to the rest of the organization.43

Summary
Moving from a national to an international busi- market by exporting, licensing, or direct invest-
ness environment represents a quantum leap ment? If the latter, should we set up a wholly
in complexity. In an international environment, owned subsidiary or a joint venture? Once the
a firm’s potential for competitive advantage is strategy has been established, then a suitable
determined not just by its own resources and cap- organizational structure needs to be designed.
abilities but also by the conditions of the national The fact that so many companies that have
environment in which it operates, including input been outstandingly successful in their home
prices, exchange rates, and a host of other factors. market have failed so miserably in their overseas
The extent to which a firm is positioned in a expansion demonstrates the complexity of inter-
single market or multiple national markets also national management. In some cases, the com-
influences its competitive position. panies have failed to recognize that the resources
Our approach in this chapter is to simplify the and capabilities that underpinned their com-
complexities of international strategy by applying petitive advantages in their home market could
the same basic tools of strategy analysis that not be readily transferred or replicated in overseas
we developed in earlier chapters. For example, markets. In others, the problems were in design-
in analyzing international expansion, the critical ing the structures and systems that could effec-
issue in determining whether a firm should enter tively implement the international strategy.
an overseas market is an analysis of the profit As the lessons of success and failure from
implications of such an entry. This requires an international business become recognized and
analysis of (a) the attractiveness of the overseas distilled into better theories and analytical frame-
market using the familiar tools of industry analy- works, so we advance our understanding of how
sis, and (b) the potential of the firm to establish to design and implement strategies for competing
competitive advantage in that overseas market, globally. We are at the stage where we recognize
which requires consideration of whether the firm the issues and the key determinants of competitive
can transfer its resources and capabilities from its advantage in an international environment. How-
home base to that overseas market, and whether ever, there is much that we do not fully understand.
these resources and capabilities can yield a com- Designing strategies and organizational structures
petitive advantage in the same way as they did at that can reconcile critical tradeoffs between
home. global scale economies versus local differenti-
However, establishing the potential for a firm ation, decentralized learning and innovation versus
to create value from internationalization is only a worldwide diffusion and replication, and localized
beginning. Subsequent analysis needs to design flexibilities versus international standardization
an international strategy: Do we enter an overseas remain key challenges for senior managers.

CSAC14 1/13/07 9:27 Page 390


Self-Study Questions
1 With reference to Figure 14.1, identify a “sheltered industry” (i.e. one that has been subject
to little penetration either by imports or foreign direct investment). Explain why the industry
has escaped internationalization. Explore whether there are opportunities for profitable
internationalization within the industry and, if so, the strategy that would offer the best
chance of success.

2 With reference to Table 14.1, what characteristics of national resources explain the different
patterns of comparative advantage for the US and Japan?

3 According to Michael Porter’s Competitive Advantage of Nations, some of the industries
where British companies have an international advantage are: advertising, auction trading of
antiques and artwork, distilled alcoholic beverages, hand tools, and chemical preparations for
gardening and horticulture.
Some of the industries where US companies have an international competitive advantage
are: photo film, aircraft and helicopters, computer hardware and software, oilfield services,
management consulting, cinema films and TV programs, healthcare products and services,
and financial services.
For either the UK or the US, use Porter’s national diamond framework (Figure 14.3) to
explain the observed pattern of international competitive advantage.

4 When Porsche decided to enter the SUV market with its luxury Cayenne model, it surprised
the auto industry by locating its new assembly plant in Leipzig in eastern Germany. Many
observers believed that Porsche should have located the plant either in central or eastern
Europe where labor costs were very low, or (like Mercedes and BMW) in the US where it
would be close to its major market. Using the criteria outlined in Figure 14.4, can you explain
Porsche’s decision?

5 British expatriates living in the US frequently ask friends and relatives visiting from the UK to
bring with them bars of Cadbury’s chocolate on the basis that the Cadbury’s chocolate
available in the US (manufactured under license by Hershey’s) is inferior to “the real thing.’
Should Cadbury-Schweppes PLC maintain its licensing agreement with Hershey or should it
seek to supply the US market itself, either by export form the UK or by establishing
manufacturing facilities in the US?

6 Has McDonald’s got the balance right between global standardization and national
differentiation (see Strategy Capsule 14.2)? Should it offer its franchisees in overseas
countries greater initiative in introducing products that meet national preferences? Should it
also allow greater flexibility for its overseas franchisees to adapt store layout, operating
practices, and marketing? What aspects of the McDonald’s system should McDonald’s top
management insist on keeping globally standardized?

CSAC14 1/13/07 9:27 Page 391


Notes
1 US Statistical Abstract (www.census.gov). 16 D. von Emloh and Y. Wang, “Competing for China’s
2 This process was proposed by J. Johanson and Credit Cord Market,” McKinsey Quarterly (November
J.-E. Vahlne, “The Internationalization Process of the 2005) www.mckinseyquarterly.com.
Firm,” Journal of International Business Studies 8 17 J. P Killing, “How to Make a Global Joint Venture
.
(1977): 23–32. See also L. Melin, “Internationalization Work,” Harvard Business Review (May–June 1982):
as a Strategy Process,” Strategic Management Journal 13 120–7.
(1992 Special Issue): 99–118. 18 G. Hamel, “Competition for Competence and
3 P Ghemawat and F. Ghadar, “Global Integration ≠
. Inter-partner Learning Within International Strategic
Global Concentration,” Industrial and Corporate Change Alliances,” Strategic Management Journal 12 (1991):
15 (2006): 595– 624. 83–103.
4 A key finding was that human capital (knowledge and 19 See R. Reich and E. Mankin, “Joint Ventures with Japan
skills) was more important than physical capital in Give Away our Future,” Harvard Business Review
explaining the pattern of US trade – the so-called (March–April 1986).
Leontief Paradox. See W W Leontief, “Domestic
. . 20 Xerox and Fuji Xerox, Case No. 9-391-156 (Boston:
Production and Foreign Trade,” in R. Caves and Harvard Business School, 1992).
H. Johnson (eds), Readings in International Economics 21 G. Hamel, Y. Doz, and C. K. Prahalad, “Collaborate
(Homewood, IL: Irwin, 1968). with Your Competitors – and Win,” Harvard Business
5 L. C. Thurow, Building Wealth: The New Rules for Review ( January–February 1989): 133–9.
Individuals, Companies and Nations (New York: 22 Ibid.
HarperCollins, 1999). 23 J. Bamford and D. Ernst, “Managing an Alliance
6 P Krugman, “Increasing Returns, Monopolistic
. Portfolio,” McKinsey Quarterly (2002, no. 3):
Competition, and International Trade,” Journal of 20–30.
International Economics 9 (November 1979): 469–79. 24 T. Levitt, “The Globalization of Markets,” Harvard
7 M. E. Porter, The Competitive Advantage of Nations Business Review (May–June 1983): 92–102.
(New York: Free Press, 1990). 25 G. S. Yip, Total Global Strategy II (Upper Saddle River,
8 For a review of the Porter analysis, see R. M. Grant, NJ: Prentice Hall, 2003); C. Baden-Fuller and
“Porter’s Competitive Advantage of Nations: An J. Stopford, “Globalization Frustrated,” Strategic
Assessment,” Strategic Management Journal 12 (1991): Management Journal 12 (1991): 493–507; “Rough and
535–48. Tumble Industry,” Financial Times ( July 2, 1997): 13.
9 M. Weber, The Protestant Ethic and the Spirit of 26 S. G. Winter and G. Szulanski, “Replication as Strategy,”
Capitalism (London: Unwin University Books, 1930). Organization Science 12 (2001): 730–43.
10 P Almeida, “Knowledge Sourcing by Foreign
. 27 P Almeida, “Knowledge Sourcing by Foreign
.
Multinationals: Patent Citation Analysis in the US Multinationals: Patent Citation Analysis in the US
Semiconductor Industry,” Strategic Management Journal Semiconductor Industry,” Strategic Management Journal
17 (December 1996): 155– 65. 17, Winter Special Issue (1996): 155–65. See the
11 The linking of value-added chains to national McDonald’s individual country websites, e.g.,
comparative advantages is explained in B. Kogut, www.mcdonalds.com (US), www.mcdonalds.co.uk
“Designing Global Strategies and Competitive (UK), www.mcdonalds.fr (France).
Value-Added Chains,” Sloan Management Review 28 A. K. Gupta and P Govindarajan, “Knowledge Flows
.
(Summer 1985): 15–38. within Multinational Corporations,” Strategic
12 Nike: International Context, HBS Case Services Case Management Journal 21 (April 2000): 473–96;
No. 9-385-328 (Boston: Harvard Business School, P Almeida, J. Song, and R. M. Grant, “Are Firms
.
1985); and Nike in China, HBS Case Services Case No. Superior to Alliances and Markets? An Empirical Test
9-386-037 (Boston: Harvard Business School, 1985). of Cross-Border Knowledge Building,” Organization
13 J. Hagel and J. S. Brown, “Thinking Global, Acting Science 13 (March–April 2002): 147–61.
Local,” Financial Times (August 9, 2005). 29 G. Hamel and C. K. Prahalad, “Do You Really Have a
14 The role of firm-specific assets in explaining the Global Strategy?,” Harvard Business Review
multinational expansion is analyzed in R. Caves, ( July–August 1985): 139–48.
“International Corporations: The Industrial Economics 30 H. Simon and Y. Eriguchi, “Pricing Challenges for
of Foreign Investment,” Economica 38 (1971): 1–27. Japanese Companies in the 21st Century,” Journal of
15 The role of transactions cost is explained in D. J. Teece, Professional Pricing 14, no. 4 (2005)
“Transactions Cost Economics and Multinational www.pricingsociety.com; B. Y. Aw, G. Batra, and
Enterprise,” Journal of Economic Behavior and M. J. Roberts, “Firm Heterogeneity and Export –
Organization 7 (1986): 21– 45. See also “Creatures of Domestic Price Differentials: A Study of Taiwanese
Imperfection,” in “Multinationals: A Survey,” Economist Electrical Products,” Journal of International
(March 27, 1993): 8–10. Economics 54 (2001): 149–69.

CSAC14 1/13/07 9:27 Page 392


31 I. C. MacMillan, A. van Ritten, and R. G. McGrath, 37 C. A. Bartlett and S. Ghoshal, Managing Across Borders:
“Global Gamesmanship,” Harvard Business Review The Transnational Solution, 2nd edn (Boston: Harvard
(May 2003): 62–71. Business School Press, 1998).
32 R. C. Christopher, Second to None: American 38 C. Bartlett, “Building and Managing the Transnational:
Companies in Japan (New York: Crown, The New Organizational Challenge,” in Michael E.
1986). Porter (ed.), Competition in Global Industries (Boston:
33 K. Ohmae, Triad Power: The Coming Shape of Global Harvard Business School Press, 1986): 377.
Competition (New York: Free Press, 1985). 39 Ibid.: 388.
34 The Ford Mondeo/Contour is a classic example of a 40 “The Country Prince Comes of Age,” Financial Times
global product that failed to appeal strongly to any (August 9, 2005).
national market. See M. J. Moi, “Ford Mondeo: A 41 J. Birkinshaw, P Braunerhjelm, U. Holm, and S. Terjesen,
.
Model T World Car?” Idea Group (2001); C. Chandler, “Why do some Multinational Corporations Relocate
“Globalization: The Automotive Industry’s Quest for a their Headquarters Overseas?” Strategic Management
World Car,” (http://globaledge.msu.edu/ Journal 27 (2006): 681–700.
KnowledgeRoom/FeaturedInsights/0018.pdf). 42 J. Birkinshaw, N. Hood, and S. Jonsson, “Building
35 C. Baden-Fuller and J. Stopford, “Globalization Firm-speciﬁc Advantages in Multinational Corporations:
Frustrated,” Strategic Management Journal 12 (1991): The Role of Subsidiary Initiative,” Strategic Management
493–507. Journal 19 (1998): 221– 42.
36 A. Morita, “Global Localization,” in Genryn (Tokyo: 43 T. S. Frost, J. M. Birkinshaw, and P C. Ensign, “Centers
.
Sony, 1996): Chapter 8. of Excellence in Multinational Corporations,” Strategic
Management Journal 23 (2002): 997–1018.

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