Chapter 11: Managing
International Production
An Introduction to International
Economics: New Perspectives on the
World Economy
© Kenneth A. Reinert, Cambridge University
Press 2012
Analytical Elements
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Countries
Sectors
Tasks
Firms
© Kenneth A. Reinert, Cambridge University
Press 2012
Organizing the MNE
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Every MNE faces the two-fold decision regarding
that tasks in which countries to include within its
corporate boundaries
In the case of Intel, these corporate boundaries are
illustrated with solid lines in Figure 11.1
Within solid lines, intra-firm trade can take place
Within dashed lines, inter-firm trade can take place
Organizing the MNE involves both intra-firm design
and inter-firm relationship considerations
© Kenneth A. Reinert, Cambridge University
Press 2012
Figure 11.1: Intel’s Global Production
Network for Semiconductors
© Kenneth A. Reinert, Cambridge University
Press 2012
Intra-Firm Design
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As suggested in Table 11.1, before a firm begins the
process of foreign market entry, it might consist of
functional divisions
With foreign market entry into a few countries, the firm
might begin to set up a foreign division
As foreign operations mature, there is a tendency to
locate greater numbers of functions abroad
One option for single-product, multi-country MNEs is
country/regional divisions
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Each country or region covered by the MNE has its own division
responsible for all functions
© Kenneth A. Reinert, Cambridge University
Press 2012
Table 11.1: Generic Types of Intra-Firm
MNE Design
MNE Characteristics
MNE Intra-Firm Design
Singe product, single country
Functional division
Single product, few countries
Single, foreign division
Single product, multi-country
Country/regional divisions
Multi-product, few countries
Product divisions
Multi-product, multi-country
Mixed structure based on matrix
management or “heterarchy”
© Kenneth A. Reinert, Cambridge University
Press 2012
Intra-Firm Design
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Another option associated with multiproduct, few country
MNEs is that of a product division
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The most complicated case is that of the multi-product,
multi-country MNE, and here, a standard approach is
that of matrix management
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Each of the firm’s products has its own corporate division for
global production and sales
There are both product and country/regional dimensions to
reporting lines
Each of these are possibilities summarized in Table 11.1
© Kenneth A. Reinert, Cambridge University
Press 2012
Intra-Firm Design
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From the above, we can identify two general tendencies
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First, the narrower the range of its products, the more likely the
MNE will adopt a country/region divisional structure
Second, the wider the range of its products, the more likely the
MNE will adopt a product divisional structure
However, there is no complete set of principles that can
guide MNE organizational design
This lack of principles leaves MNEs pursuing heterarchy
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Heterarchy involves information sharing and informal ways of
circumventing the limitations of formal organizational design
© Kenneth A. Reinert, Cambridge University
Press 2012
Inter-Firm Relationships
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With regard to inter-firm relationships, an important issue
is that of vertical connections to supplying firms
As Gereffi, Humphrey and Sturgeon (2005) emphasized,
MNEs with firm-specific assets (e.g., intangible assets)
might engage in certain kinds of relationships that we
can describe as contractual plus
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Market- market contracts are augmented by trust and normality
achieved via repeated transactions
Modular- suppliers organized around breakpoints in GPNs
Relational- mutual dependence due of proximity or ethnic ties
Captive- an asymmetric relationship in which the MNE is
dominant over its suppliers
© Kenneth A. Reinert, Cambridge University
Press 2012
Conclusions on Organizing the MNE
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MNE management in both it intra-firm design and
inter-firm relationship components is a relatively
complex and difficult task
There is no single approach that can be grasped as
the “answer” to multinational management
There is an ongoing learning process that takes
place, with varying degrees of success, within the
historical trajectories of MNEs
© Kenneth A. Reinert, Cambridge University
Press 2012
Joint Ventures
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Joint ventures (JVs) pose a set of challenges not
generally encountered in merger and acquisition (M&A)
and greenfield FDI
The motivation for a JV usually reflects the presence of
complementary firm-specific assets in the two firms
involved
JVs also occur in large, resource extraction FDI projects
where both firms are interested in risk sharing and
achieving large scale economies
In some circumstances, the foreign-country government
chooses to require JVs to ensure profit-sharing
© Kenneth A. Reinert, Cambridge University
Press 2012
Joint Ventures
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Despite advantages in some circumstances, JVs are
difficulty to negotiate, notoriously unstable and relatively
short-lived
The irony of JVs is that they tend to form due to
differences between the firms involved, but these very
differences make them difficult to manage
Despite these difficulties, JVs remain an important
component of international production
© Kenneth A. Reinert, Cambridge University
Press 2012
The Home Base
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Home bases are more than convenient addresses
The home base of an MNE is in almost all cases the
location of corporate headquarters
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Headquarters are important from the point of view of
intra-firm design
Home base environments can be important for the
competiveness of MNEs
Finance, corporate control and R&D tend to be
centralized in home bases
© Kenneth A. Reinert, Cambridge University
Press 2012
The Home Base
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It is possible for these home bases to support the firmspecific assets that drive MNEs into international
production
This was the argument made, for example, by Michael
Porter in The Competitive Advantage of Nations (1990)
Porter identified four determinants of competitive
advantage related to the home base
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factor conditions
demand conditions
related and supporting industries
firm strategy, structure, and rivalry
© Kenneth A. Reinert, Cambridge University
Press 2012
The Home Base and Firm Competitiveness
According to Porter
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Factor conditions
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Demand conditions
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Sophisticated, demanding, and anticipatory home demand
contributes to firms’ success
Related and supporting industries
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Sustained competitive advantage has its basis in the creation of
advanced and specialized factors
Supplier relationshipis can provide the MNE with betterdeveloped inputs and support innovation and upgrading
Firm strategy, structure and rivalry
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There is an association between domestic rivalry and competitive
advantage in an industry
© Kenneth A. Reinert, Cambridge University
Press 2012
Spatial Clusters
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Malmberg, Sölvell, and Zander (1996) defined a spatial
cluster as “a set of interlinked firms/activities that exist in
the same local and regional milieu, defined as to
encompass economic, social, cultural and institutional
factors”
Spatial clusters contribute to the productivity of firms
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The concentrated communication made possible by a cluster
increases learning and innovation
Trust increases over time, and this facilitates contracting and
exchange among firms
A common business culture develops, and this reduces
uncertainty
© Kenneth A. Reinert, Cambridge University
Press 2012
Research and Development
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There is a tendency to centralize R&D functions in the
home base country or even in the corporate
headquarters
Given MNEs’ involvement in approximately three fourths
of global, civilian R&D, the way in which MNEs configure
R&D within their GPNs matters enormously to global
technological capabilities
The order of magnitude of R&D expenditures can be
seen in Figure 11.2
© Kenneth A. Reinert, Cambridge University
Press 2012
Figure 11.2: R&D Expenditures (Source:
UNCTAD)
© Kenneth A. Reinert, Cambridge University
Press 2012
Research and Development
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A few considerations have motivated MNEs to begin
decentralizing their R&D
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Advances in information and communication technology (ICT)
The rise of emerging markets and the need to better tailor
products to these markets
New sources of talent and creativity for effective R&D, especially
in China and India
MNEs that want to tap into new sources of talent can
either recruit it by bringing it to their home bases and
other R&D sites or begin to relocate their R&D
Many MNEs have chosen to relocate some aspects of
their R&D
© Kenneth A. Reinert, Cambridge University
Press 2012
Research and Development
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Relocating R&D to new sources of scientific and
engineering talent can make a great deal of sense
Many MNEs are rethinking the role of R&D in their
GPNs, choosing to locate specific kinds of R&D outside
of the home base and developing regional R&D facilities
that they link together in coordinated networks
If a trend can be identified, it is for basic research (the R
in R&D) to remain in the home base, with more applied
research (the D in R&D) moving abroad
The R&D element that is most likely to be dispersed
throughout MNEs GPNs is the support laboratory
© Kenneth A. Reinert, Cambridge University
Press 2012
US MNE Donaldson Testing Lab in Wuxi
China
Source: Aggregates Manager (www.aggman.com)
© Kenneth A. Reinert, Cambridge University
Press 2012