foreign and domestic firms
TRANSCRIPT
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Foreign and Domestic Firms:
What is different about them, and why and
how it matters
Bureau of Economic Analysis,
Dept. Of Commerce
Lilac NachumProfessor, Globalization and Multinational Companies
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My Intellectual World as of 2015
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‘Translation’ [terminology/measurement]
Economics IB/IMFactor intensity Capital
Labor skills Labor [employees] skills [wages]
Productivity Performance [sales/employee]
Upstream/downstream linkages
Inter firm linkages
Global production networks
Intra-firm linkages
Imports/exports Cross-border inter-firm linkages
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Firms’ Heterogeneity:The Heart of Management Scholarship
• Management theory – firms are inherently different• RBV: different resources and capabilities
• Strategy: different choices, different behavior
• International Business (IB)• Ownership advantages – the difference
between multinational/local firms
• Heterogeneity across multinational firms.
The focus of my talk
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What is Different about Multinational Companies?
Ownership:Foreign/domestic
• Legitimacy challenges
• Local embeddedness
• Local knowledge
• Foreignness – assets or liability.
Geographic scope:Multinational
• Multi-unit network spread geographically
• Internal resources
• Internal coordination and pressure.
OECD proposal
BAE Proposal
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Granulated Split of the Local Population
Domestic
single-units
Global single unit
(e.g., single unit trading companies)
Domestic
multi-units
(e.g., domestic chains)
Global multi-units
(e.g., local MNEs)
Domestic Global
Geographic Scope
Organizational structure
Single U
nitM
ulti U
nit
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Inter-Organizational Relationships
Advertising Agencies in the US
Benchmark local sample:N
(agencies/years, 2002-6)
Foreign/domestic(significance)
All local agenciesBilling >$25mil.
2375 **
Domestic single unit 965 **
Global single unit 315 ***
Domestic multi-units 745 **
Global multi-units 350 n.s.† p < .10; * p < .05; ** p < .01; *** p < .001.n.s. = not significant.
N foreign = 395
L. Nachum, Foreignness, Multinationality, and Inter-Organizational Relationships. Strategic Organization, 2010
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Additional Advantages of BAE Proposal
• OECD proposal export/non-export firms
• 80% global trade intra-firm. UNCTAD, Global Value Added Chain and Development, 2013
• Under-estimate actual MNE control
• Basis for policy responses: • Separation of the local sample into MNEs/non-
MNEs: impact of MNEs on home economies; impact on local firms becoming multinationals
• Differentiated policies?.
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Suggestions for Extensions of BAE
Proposal• US parents:
• Deeper inquiry into value creation by US parents
• US affiliates:• Tenure• Entry mode• Ownership level
• Trade:• Inter/intra-firm
• Memorandum items:• Number of establishments/firms in each
category.
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Comparing Like with Like?US parents US Affiliates
Role within the organization
Representing the corporation as a whole
Part of a portfolio
Functional mandate
Management corporation: resource allocation, synergies
Value creation (production, sales, etc.)
Skills Global overview Country-specific specialization
Maximization
Global performance Country performance
Exit ‘Death’ Strategic considerations related to the entire portfolio
Trade links Mostly intra-firm [Import from affiliates]
Inter- + intra-firm Import intermediaries [unrelated parties]
What functions US parents perform?
Changes over time (reshoring)Rethinking BAE preliminary
results
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Affiliates Tenure
Foreign affiliates in the City of LondonTenure in London
16 years(Zaheer/
Mosakowski)
10 years(Sample’s
mode)
9 years
8 years
Young Old Young Old Young Old Young OldAdj. R2 .44 .53 .36 .39 .38 .42 .47 .31F 8.62** 10.21*** 6.72* 6.97** 7.25** 8.11*
*10.72*** 7.29
**F-Test 3.20 4.07 6.23 7.98
***
N 143 150 93 200 81 212 70 223
L. Nachum, What Constitutes the Costs and Advantages of Firms Investing Overseas? Managerial and Decision Economics. 2011
† p < .10; * p < .05; ** p < .01; *** p < .001.
F-Test - significance of difference between the models
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Entry Mode Means (S.D.) of the compound
variablesa
(t-tests) [Mann-Whitney] equality of means
Acquisition GreenfieldAffiliates own advantages: Intangible assets, liquidity ratio, total assets, industrial scope
.20 (.39) .10 (.35)*
Affiliates advantages via MNE networks: Linkages with parents, size of parents
.07 (.32) .16 (.28)*** [**]
Affiliates local embededness: links with local service suppliers, pay levels, share activity in £
.30 (.57) .35 (.89)
Affiliates MNE interaction: Geographic and cultural distance from parent
.18 (1.19) .37 (.91)
N 115 66*** p<.001; ** p<.01; * p<.05aCompound variables = average of the standardized values of individual dimensions
L. Nachum, When is Foreignness an Asset or a Liability? Journal of Management 2010
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Ownership
Means (S.D.) of the compound variablesa
(t-tests) [Mann-Whitney] equality of means
Minority<50% foreign Majority>50% foreignAffiliates own advantages: Intangible assets, liquidity ratio, total assets, industrial scope
.29 (.61) .45 (.53) (*)[*]
Affiliates advantages via MNE networks: linkages with parents, size of parents
.41 (.29) .57 (.60) (**)
Affiliates local embededness: links with local service suppliers, pay levels, share activity in £
.42 (.28) .25 (.47) (**) [**]
Affiliates MNE interaction: Geographic and cultural distance from parent
.24 (.76) .37 (.82)
N 103 78
L. Nachum, When is Foreignness an Asset or a Liability? Journal of Management 2010
*** p<.001; ** p<.01; * p<.05aCompound variables = average of the standardized values of individual dimensions
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Trading with Ourselves or with Others Make a Difference
Inter-firm trade Intra-firm trade
Trading with whom? un-related bodies sub-units tied by ownership
Trade relationships? market relationships
ownership-based relationships
What is being traded? Finished goods Intermediaries, services
Value added activity? Sale Production
Driving force? Demand, consumer needs
Supply, production factors
Where to trade? Size, wealth of markets Production and trade costs
US trading partners? Similar: wealthy (large) Different: poorSeparation location and ownership!
Interpretation of BOP; of global competitiveness guide for
policy
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US Advertising Agencies:Inter/intra relationships
• Internal MNE [translation = intra-firm ‘trade’] impact on inter-firm relationships
• Characteristics of the MNE: • Size and geographic disparity – significant positive
• Affiliates’ position within the MNE:• Shares of total billings – significant negative
• Interaction affiliate – MNE:• Hierarchical levels, weighted cultural distance – not
significant.
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GVCs and Inter/Intra Trade
• TiVA rationale – GVCs blur location of:
• Production
• Sales
• Benefits realization
• Ownership/location differences GDP/GNP [GNI].