The Influence of Economic Geography on Transnational Organizations

• Economic geography research leans toward identifying the effect of the organization on the local and regional economic development; not the effect of regional economics on the organization’s structure.

• Organizational structure includes the transnational model for multinational organizations which invites the transfer of practices to, from, and within the affiliates. Parent organization and subsidiaries are aware of their own role as well as the role of others (Bartlett & Ghoshal, 1989).

• Key point: With the transfer of practices and roles, the structure may be influenced by the economic geography of the region; thereby, creating differences and tensions between the home office and host country locations.

• The objective is to identify practices (1) within the economic geographies of the multinational organization and (2) their effect, if any, on the transnational structure

Keywords: economic geography, organizational structure, multinational, transnational.Research Paper: http://independent.academia.edu/DonnaZeller

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Introduction

• Transnational Organizations • Are “simultaneously globally efficient; able to create their own knowledge and local competences;

and can diffuse these competences throughout the organization” (Colli, 2016, p. 200).• Particularly applicable to this study is that the controlling influences between parent and subsidiary

companies is based on the transnational corporation’s home region (Greer & Singh, 2000). • Nonetheless, the controlling influences may not necessarily flow in the prescribed direction

“between a branch and the headquarters; or between the home and host countries” (Holden, Michailova, & Tietze, 2015, p. 23).

• Economic Geography• Research leans toward identifying the effect of the organization on the local and regional economic

development; • Not the effect of regional economics on the organization’s structure. (See Storper (1997); Scott and

Storper (2003).• Influencing both perspectives is that economic geography plays out differently in diverse sectors;

such as automotive, food / beverage, and retail (Sturgeon, Memedovic, Van Biesebroeck, & Gereffi, 2009).

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Objectives

• Research has covered a variety of issues that influence organizational structures; e.g. business processes (Hong, Yonghyuk, Jinwoo, and Choi, 2012), organizational fluidity (Schreyögg and Sydow, 2010), and knowledge processes (Cordes-Berezinn, 2013);

• However, there is a gap with regards to the influence of economic geography on the organization.

• The focus in this paper is on changes to organizational structure from the perspective of economic geography.

• The question: Is there a relationship between economic geography and the transnational model depicted by Bartlett and Ghoshal (1989)?

• The objective is to describe the effect, if any, of economic geography on the transnational organizational structure

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Definition of Terms: Slide 1 of 2

• Researchers tend to interchange the terms ‘institutions’ and ‘organizations’; hence, the need to state the definitions to be applied in this paper (Bathelt & Glückler, 2014; Dale & Nilsen, 2000). • Institutions

• An “establishment, foundation, or organization created to pursue a particular type of endeavor, such as banking by a financial institution” (BusinessDictionary.com, n.d.).

• A “consistent and organized pattern of behavior or activities (established by law or custom) that is self-regulating in accordance with generally accepted norms; i.e. economic institutions (markets) that encourage and regulate production and distribution of goods and services” (BusinessDictionary.com, n.d.).

• Organizations • “A social unit of people that is structured and managed to meet a need or to pursue

collective goals. • All organizations have a management structure that determines relationships between the

different activities and the members and subdivides and assigns roles, responsibilities, and authority to carry out different tasks.

• Organizations are open systems—they affect and are affected by their environment” (BusinessDictionary.com, n.d.).

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Definition of Terms: Slide 2 of 2

• Organizational Structure• “The formal allocation of work roles and administrative mechanisms to control and integrate

work activities, including those that cross formal organizational boundaries" (Lin, 2011, p. 242).

• Multinational Corporation (MNC) • “An enterprise operating in several countries but managed from one (home) country”

(BusinessDictionary.com, n.d.). • The Transnational Model of the MNC (Bartlett and Ghoshal,1989)

• (1) High pressure for integration - high pressure for differentiation; (2) Strategy tries to maximize both responsiveness and integration, where knowledge and innovation is sought developed and dispersed within the entire network; (3) The structure of the MNC is regarded as a network, and each subsidiary is given responsibility compared to its capabilities and strategic mission; and (4) The MNC is controlled by the movement of people within the MNC that may facilitate the mutual development and dispersion of innovation and knowledge.

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Literature Review: Slide 1 of 2

• Economic Geography is “the study of the geographical distribution of economic resources and their use” (Dictionary.com, n.d.)• Institutional Approach in Economic Geography

• “Has expanded the notion of institutions to institutions as organizations”, • Sustains that the differences in regional economic development is “actually the result of

interregional differences in institutions” (Kusar, 2011, p. 42).• Through studies of those differences in regional development, researchers became

interested in using the theories of institutional economic geography to advance “new concepts in regional planning and policy” (Kusar, 2011, p. 43).

• Relational Approach in Economic Geography• From this perspective, the analysis of economic geography “is at the micro level—be it

related to specific actors or the social relations between them” (Bathelt & Glückler, 2014, p. 340).

• Relational economic geography acknowledges the differences in the practices and relationships of agents and organizations as influencing the differences in interregional development (Bathelt & Glückler, 2014).

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Literature Review: Slide 2 of 2

• The Influence of Interregional Differences on Organizations• The research of Warren (1967) and Emery and Trist (1965) looks at interregional differences and

their effect on organizational behavior (Marquis & Battilana, 2007).• The research of Lounsbury (2007) found that the structure and strategic objectives of an

organization are influenced by geographic proximity (Marquis & Battilana, 2007). • Tsai (2010) found that regional influences can begin from informal ‘bottom-up’ processes that

grow into formal processes; thus, creating change in the formal organizational structure (Bathelt & Glückler, 2014).

• Structures of Some Industries are Influenced by Globalization (Yeh, 2010). There are also Differences of Regional Integration by Industry.• In the global economy, the “different frames of reference and corresponding standards of

legitimacy that exist across locales…continue to give a multi-layered geographic shape to organizational behaviors” (Marquis & Battilana, 2007, p. 31).

• Alternatively, Organizational Theory has steered away from the influence of local environments; thereby, obscuring the influence of Economic Geography (Marquis & Battilana, 2007).

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Research Design and Methodology: Slide 1 of 2

• Characteristics and context are not clearly evident; therefore, the multiple case study approach is used (Yin, 2009). • For each case study, the historical events research design allows data to be included from

past events. • That data is then applied to identify subsequent actions that influence changes to

organizations; particularly structures.• Disadvantages of the historical events research design

• Reporting nature of information reviewed for analysis are considered to be eyewitness accounts; not necessarily based on facts.

• The disadvantages in historical research include “bias, inaccessibility, and incompleteness” (Reference.com, n.d.).

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Research Design and Methodology: Slide 2 of 2

• Internal Validity• Is determined by the results gained from “manipulation of the independent variable”; • However, the transnational organization is likely to be subject to a variety of local and

government regulations; thereby, limiting the manipulation of the independent variable (Adams & Lawrence, 2015, p. 71).

• Geographic regions may change over a period of time; thus, identification of national characteristics may produce different results in subsequent studies (p. 435).

• Transferability• “Is applied by the readers of research” when they make the connection between the study and

their experience (Writing@CSU, n.d.).• May be effected by the meaning of the information “in other languages or cultural contexts”

(Schutt, 2009, p. 446).

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Case Study #1: Automobile Industry: Toyota: Slide 1 of 3

• Overview: Automobile Industry• To meet the requirements at the operational level, local / regional suppliers are ‘nested’ within

the organizational structure. • These regional suppliers are necessary to provide parts for vehicles that are tailored to meet

the demands of the local markets (Sturgeon, Memedovic, Van Biesebroeck, & Gereffi, 2009).• Overall, automakers must comply with regional regulations, such as environmental regulation

for air emissions, safety standards, and waste management (Sturgeon, Memedovic, Van Biesebroeck, & Gereffi, 2009).

• Toyota, as a Transnational Organization • Has an organizational structure with a strict seniority hierarchy with centralized power;

“authority is generally not delegated within the company” (Saylor Academy, 2012). • Communication between units, particularly with the senior level management at the home

office level, is not a common practice. • Decisions from the senior level are generally not challenged (Saylor Academy, 2012).

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Case Study #1: Automobile Industry: Toyota: Slide 2 of 3

• Toyota Way Model • “Aims at controlling—and does control—the quality of all Toyota’s overseas bases around the

globe” (Camillo, 2015b, p. 30). • Toyota New Global Architecture (TNGA)

• Accords every line manager full trust to produce to the company’s quality standard. • Allows every overseas manufacturing branch of the company, to “become self-reliant

within the auspices of decentralization and localization in management” (Camillo, 2015b, p. 30).

• Revisions to Structure• Due to the delay in response regarding the safety issues of airbags, the Toyota hierarchy has

revised the organizational structure with the host regions to include “senior executives from North America” (Shmula.com, 2011).

• The revised organizational structure appears to be a model for including other regional executives in information sharing, communication and decisions on quality and safety issues.

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Case Study #1: Automobile Industry: Toyota: Slide 3 of 3

• Toyota’s transnational organizational structure did not develop and disperse information within the entire network, as promoted by Bartlett & Ghoshal’s (1989) model. • The influence of the regional differences in weather; i.e. high-humidity; was shared by the

United States NHTSA. • However, Toyota’s hierarchical model of the transnational structure did not share

communication and decision-making; thereby, contributing to the disregard for the host region’s climate alerts and delaying the response to recall defective airbags.

• Comparatively, Toyota does align with Bartlett and Ghoshal’s (1989) transnational model in that the structure of the organization is regarded as a network, and each subsidiary was given responsibility compared to its capabilities and strategic mission. • In this case, the delay in decisions to recall vehicles equipped with the Takata airbag may also

be a reflection of another area of Bartlett and Ghoshal’s (1989) model in that transnationals are controlled by the movement of people from within that may, or may not, facilitate the mutual development and dispersion of innovation and knowledge.

• Economic geography recognizes that regulatory structures, such as the NHTSA, “may force organizations to adopt specific managerial practices or organizational forms”; creating interregional differences in structure (Marquis & Battilana, 2007, p. 15).

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Case Study #2: Food and Beverage Industry: PepsiCo: Slide 1 of 3• PepsiCo, as a Transnational Organization

• The organizational structure has been revised several times to meet changing market requirements. Current revisions to the structure were completed with the aim to focus on global expansion and leadership (Thompson, 2015).

• Pepsico’s structure now includes a marketing division that is based on business and geography; global or corporate offices for business functions; and a hierarchy that oversees the global organization (Thompson, 2015).

• The hierarchy maintains strict leverage on communication, monitoring and control; thereby, minimizing any deviation from policies and strategies (Thompson, 2015).

• PepsiCo is presently being challenged with recent recommendations from the World Health Organization (WHO) to reduce the sugar content in beverages and to promote healthier snacks. • The goals of Indra Nooyi, PepsiCo’s CEO since 2006, include transforming the company

“from a purveyor of sugar laden bubbly beverages and salty snacks, into one that has healthier and more wholesome offerings” (Aguirre-Mar, 2013, p. 7).

• In contrast, there is a concern that Nooyi is focusing “too intensely on her strategy”; thus, ignoring the profitable North American soft drink market (Aguirre-Mar, 2013, p. 7). The hierarchy’s strict control to minimize any deviation from policies and strategies is creating tension between regions.

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Case Study #2: Food and Beverage Industry: PepsiCo: Slide 2 of 3

• Pepsico’s Mexico Business Unit• In Mexico, the distribution to the many small family-owned grocery stores is a key factor in

promoting sales; therefore, the regional unit requires an “efficient logistics system” (Aguirre-Mar, 2013, p. 10). • Major Competitors:

• Coca-Cola delivers to 1.2 million of these family-owned grocery stores. • The Bimbo Company, “the largest baking products manufacturer in the world”, is the

main competition for the market in cookies, crackers, chips, and candy (p. 9). • The “core of this strategic market battle is in distribution” (p. 10).

• To develop a distribution process that continually meets the needs of the nationwide market-base, Mexico’s national director of Consumer Strategic Insights (CSI), Jorge Rubio, developed a CSI center where qualitative consumer studies are carried out. • While qualitative consumer studies are somewhat of a ‘business as usual’ approach, Rubio

“made it clear that the department was to be more proactive and flexible, not limited to merely being a distributor of the information obtained from the customers” (p. 11).

• Moreover, the CSI has a flexible organizational structure that offers continual opportunities to promote change to maintain “their market leadership position in the future” (p. 11).

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Case Study #2: Food and Beverage Industry: PepsiCo: Slide 3 of 3• Pepsico’s Home Office: The agenda to respond to and integrate healthier food snacks and drinks

align with the premise in economic geography; i.e. the influence of regulatory structures, such as the World Health Organization (WHO), on organizational structures.

• Mexico’s Business Unit: The responsive strategy to enhance distribution / marketing, based on regional competition with Coca-Cola and Bimbo Baked Goods and consumer preferences, may operate in opposition to the home office (Holden, Michailova, & Tietze, 2015).

• The Transnational Model: strategy tries to maximize both responsiveness and integration (Bartlett & Ghoshal, 1989).

• Economic Geography: • Regulatory structures, such as the World Health Organization (WHO) are influential in that

they “may force organizations to adopt specific managerial practices or organizational forms”; thereby, creating tension between regions (Marquis & Battilana, 2007, p. 15).

• Regional influences, resulting in the development of Mexico’s progressive Consumer Strategic Insights (CSI) unit, also create change in organizational structure.

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Case Study #3: Retail Industry: Costco: Slide 1 of 3• Costco, as a Transnational Organization

• With Taiwan’s deregulation of financial investments, transnational organizations influenced changes to the country’s retail structure (Yeh, 2010).

• Some retail organizations that attempted entries into these markets failed due to legislation limitations and their own inflexible strategies

• Other transnational organizations, such as Costco, were successful; however, there were changes to their structure, as well.

• Transnational Model Viewpoint

• Costco aligns with the Transnational Model in that the home country maintains considerable influence over the host location (Bartlett & Ghoshal, 1989).

• Costco’s product strategy aligns with the transnational model in that it promotes integration with its main line of products as well as differentiation through its localized specialty products.

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Case Study #3: Retail Industry: Costco: Slide 2 of 3• Economic Geography

• With its increasing importance in the studies of economic geography, the Global Production Network (GPN) framework, illustrates the challenges to the retail transnational organization.

• Global Production Network (GPN), as defined by Henderson, Dicken, Hess, Coe, and Yeung (2002):

• Is “a conceptual framework that is capable of grasping the global, regional and local economic and social dimensions of the processes involved in many (though by no means all) forms of economic globalization” (Yeh, 2010, p. 6).

• Key to the GPN framework is the interrelatedness of three areas: • (1) Value: created by the conditions of the capital which is owned by the firm • (2) Power: refers to dominant control over the distribution and operation in production

networks• (3) Embeddedness: the way a firm responds to and is responded to by the different

market environments in which it expands (Yeh, 2010).

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Case Study #3: Retail Industry: Costco: Slide 3 of 3• Example: Costco’s Transnational Organizational Structure and GPN framework’s Embeddedness:• Social Embeddedness: refers to the transfer of cultural, institutional, and economic practices from the home

to the host country. • Transnational Model: the ‘home’ country has considerable influence over the host locations.

• Thus, the challenge is to localize Costco’s management strategies without losing the standardization of the home base (Yeh, 2010).

• Territorial Embeddedness: refers to the transnational’s adaptation to specific regulations, imposed by institutions, in the different regions / host locations.• Transnational Model: the structure is regarded as a network, and each subsidiary is given responsibility

compared to its capabilities and strategic mission.• The challenge for Costco’s management in Taiwan, the decision for the store site, crucial for

success in meeting the retailer’s goals, was influenced by Taiwan’s legislative guidelines that restrict the use of the land (Yeh, 2010).

• Network Embeddedness: identifies internal and external factors; i.e. governments, suppliers, etc. that must be considered. • Transnational Model: promotes a high pressure for integration and a high pressure for differentiation.

• The mainstay of the inventory is transferred from the United States to the stores located in Taiwan; “local products are shipped directly from the local supplier to Costco’s stores” (Yeh, 2010, p. 30, 64).

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Discussion Points• Economic Geography

• Based on the information reviewed for this paper, economic geography appears to influence the structure of transnationals; yet the focus of the economic geography theory is to identify the effect of the organization on the local and regional economic development and to advance new concepts in regional planning and policy.

• The research on the effect of the region on the organization’s structure is limited. • Nevertheless, the crux of this paper is not to argue which viewpoint is best; but to recognize

‘if, when, and why’ the regional economic geography requires adaptability or even change in the organizational structure.

• Influence on the Transnational Organizational Structure• The lack of regional adaptability may lead to organizations that are divided as well as

integrated; with some units and subunits operating in opposition to the headquarters (Holden, Michailova, & Tietze, 2015).

• That is, instead of achieving local stability, as promoted in the transnational model, critical delays in adaptability may lead to divisions and oppositions within the organization (Nirav, 2012).

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Recommendations for Further Research

• Additional industries that cover a range of areas; i.e. vertical / horizontal markets. • A variety of home / host countries. • Other types of multinational approaches, such as international and global. • As a comparison to Economics Geography, include theories, such as

• The Structural-Functional Systems Theory, • Which “describes the interrelatedness of all parts of the transnational organizations,

interacting with the environment, and how one change in one area can affect multiple other parts” (Keep, n.d.).

• The Contingency Theory • To provide a framework for understanding the relationship between organizational

structure and the contextual variables in economic geography (Chan & Cui, 2013)

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Conclusion• Liability of Origin

• Bartlett and Ghoshal (2000) recognize that “the liability of origin is regarded as a direct consequence of the national origins of the firm” (Camillo, 2015a, p. 207).

• Ramachandran and Pant (2010) point out that the liability of origin is regarded “as those disadvantages of multinational organizations that emerge as a consequence of where they originate” (p. 207).

• The Challenge • To balance the standards of the home office with the regional influences; while also

recognizing when the transnational organizational structure may need to adapt regionally in areas, such as: • Supplier relationships and regulatory agency requirements (Toyota); • Consumer preferences / retailer demographics and marketing / distribution (PepsiCo); • Site / product selection and legislative guidelines / consumer preferences (Costco).

• In the global context, economic geography is a dynamic, changing factor that influences the structure of transnational organizations.

• In conclusion, because of the rapidly evolving regional economic geographies; balance between home country, host countries, and organizational structure appears to be a fluid construct that needs constant monitoring.

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