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Multinationals and Development$

Alan M. Rugman and Jonathan P. Doh

Print publication date: 2008

Print ISBN-13: 9780300115611

Published to Yale Scholarship Online: October 2013

DOI: 10.12987/yale/9780300115611.001.0001

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Multinational Enterprise Strategies and Development

Multinational Enterprise Strategies and Development

Chapter:
(p.32) Chapter 3 Multinational Enterprise Strategies and Development
Source:
Multinationals and Development
Author(s):

Alan M. Rugman

Jonathan P. Doh

Publisher:
Yale University Press
DOI:10.12987/yale/9780300115611.003.0003

Abstract and Keywords

This chapter focuses on the role of MNEs in economic development and examines the business strategies of MNEs as they affect economic development. It includes a discussion of the potential for capital and technology transfer, and the role of MNEs as knowledge-based organizations and in a developing-country absorptive capacity. The chapter explores the potential for developing countries to access capital and technology via the MNE, reviews the factors which facilitate and constrain that access, and discusses the evolving understanding of some MNEs as knowledge-based organizations that organize and deploy knowledge assets in various locations. It assesses the potential for developing countries to benefit from the knowledge-diffusion process and the constraints to their “absorptive capacity,” which may be overcome through MNE knowledge and managerial expertise. The chapter also explores how foreign MNEs enter developing economies, and help stimulate and foster economic development.

Keywords:   economic development, business strategies, technology transfer, knowledge assets, developing economies

In this chapter, we draw from literature in corporate strategy and international business across three dimensions. First, we review the competing perspectives on MNE strategies and operations in developing countries. Second, we introduce a framework for understanding the strategic choices of Western MNEs (from the triad) and the response to those strategies by firms in developing countries with small open economies. By small open economies, we mean all “non-core-triad” economies (where the core triad consists of the huge markets of the European Union, the United States, and Japan). Third, we discuss the ways in which MNE activities contribute to development.

Using the first framework developed in the last chapter, here we will focus on the nature of FSAs. As shown in the previous chapter, FSAs are often contingent upon, or interact with, CSAs. The basic argument follows two key steps.

First, the MNEs from North America, the European Union, and Japan tend to develop knowledge-based FSAs that depend on skilled labor, innovative technology, and marketing skills. The FSAs of such triad-based MNEs build on CSAs in both human capital research and (p.33) development (R&D), as well as a large domestic market. Most of the literature in strategic management has obviously been developed to explain and analyze the performance of the world's largest MNEs. Over 400 of the world's largest MNEs come from the advanced markets of the “core triad” of the United States, the European Union, and Japan. The theories of strategic management for these firms are applied here to explain the presence of MNEs in developing economies. But some new thinking is required to explain the other side of the coin, the presence of MNEs from developing markets in developed economies.

Second, firms in developing economies tend to lack knowledge-based FSAs. In general, developing economies do not have infrastructures that produce advanced human capital, technology, or large and sophisticated domestic markets. Even China lacks CSAs across these three areas. Instead, China's CSAs consist of relatively cheap and unskilled labor, natural resources, and an unsophisticated (but growing) demand in its domestic market. Aside from China, the vast majority of developing economies are small, characterized by relatively small and unsophisticated markets in economic terms. They lack home demand in terms of size and sophistication of consumers. They lack R&D and technology. They lack the infrastructure to produce firms with FSAs. These types of small but open economies need special consideration in the application of traditional strategic-management thinking, especially in consideration of the impact of MNEs on development.

Several interesting points will emerge in this chapter. The MNEs from the triad markets can contribute to economic development by indirectly transferring technology through the sale of products and services in developing economies. Such products and services are built on knowledge-based FSAs, so the consumption of these products and services helps provide the benefits of knowledge-based FSAs in developing economies. In this manner MNEs serve as vehicles for economic development. Of course, some MNEs are natural-resource seeking, and such a motive for FDI is based on the extraction and harvesting of the CSAs in a developing economy. In these situations it is necessary for the host government to bargain with the MNE to apportion equitably the potential rents available from resource exploitation. In general, foreign MNEs that are vertically integrated will retain proprietary FSAs in production and marketing. Thus, government bargaining in a host economy is limited to the potential rents available from the harvesting and extraction activities, not the other components of the FSAs of the MNE, although many host governments seek to leverage the access they provide to these resources to attain greater value-added investments.

(p.34) Another issue we explore in this chapter is how firms from small open economies can develop their own FSAs. This is incredibly difficult since most firms in developing economies start out to build on indigenous CSAs. Many are small entrepreneurial firms. The firms from small open economies tend to be natural-resource based (in mining, forestry, or energy production), or they develop businesses based on cheap labor. Inevitably the growth of such firms is limited by the relatively small size of the home market. When these firms seek to internationalize, they face severe competition since they lack sustainable knowledge-based FSAs.

One strategy to overcome this lack of FSAs is to develop a sustainable niche. Firms in small open economies can specialize in a new product or service category and attempt to grow it internationally. In doing so, they suffer from entry barriers to the advanced triad markets. Government-imposed barriers to entry, in the form of tariffs and nontariff measures, can make entry even more difficult. It is hard to overcome the liability of foreignness without a strong FSA. The MNEs from developing economies will lack knowledge-based FSAs, and so they must rely on economies of scale in CSA-related natural-resource products, or on products and services based on cheap labor. In other words, the MNEs from developing economies will tend to exploit their home-country CSAs when going abroad. Few of them will have sustainable FSAs, except in niche markets.

We now turn to a review of the literature in strategic management as it applies to economic development. We focus on theories that are relevant for MNEs from the large triad markets, and also attempt to develop some new thinking about the potential activities of MNEs from developing markets.

Multinationals in Developing Economies

Firms in developing economies, many of which have been isolated from the world economy, may urgently need restructuring after any move toward trade-and investment-liberalizing policies. Some countries can serve as interesting models of transition, such as Mexico, which prepared for entry into the managed trade of NAFTA with a brief period of internal market liberalization and privatization under President Salinas and his predecessor. Today Mexico is developing competitive MNEs with access to the large U.S. market, especially in such sectors as cement and glass. The Mexican model is, in many instances, replacing the import-substitution policies of the 1960s and 1970s. Mexico's market-access (p.35) policies provide opportunities for domestic firms to develop global best-practice technologies and processes, whereas “shelter-type” strategies do not develop such long-run competitive advantages (Rugman and Verbeke 1990).

In this chapter, the unit of analysis is the firm, and the literature to be incorporated is from business policy and strategy. Virtually all this literature has been developed for analysis of decision making by managers in triad-based firms. The “core triad” consists of the United States, the European Union, and Japan. MNEs from these triad markets account for over 80 percent of the world's stock of FDI (Rugman 1996b, 2000, 2005).

The most influential work on business strategy is that by Michael Porter (1980, 1990). In particular, his “diamond” framework of international competitiveness demonstrates how a triad-based firm can build on the four domestic diamond components (factor conditions, home demand, rivalry and market structure, and related and supporting activities) to enhance the country's international competitiveness. Government and chance also affect competitiveness but are not central determinants. According to Porter (1990), the firm is the vehicle through which a country can achieve competitiveness. The company uses the home-country diamond as a staging ground to develop new technology, products, and processes, and then it exports these on a global basis. In the Porter framework (1990), inward FDI is not a source of competitive advantage, but outward FDI by strong home-based MNEs is a way to expand to supplement exports from the home country.

These ideas have been modified and adapted to the strategies of firms from small open economies such as those of Canada, Norway, and New Zealand by Rugman (1996a). In comparison with the core triad markets, all other economies, including those of Canada, India, Korea, and China, are “small” (see Rugman 2000). By definition, all developing economies are “small” (although some—like China, India, and Brazil—are larger) and are also becoming “open,” so the adapted “small open economy” double-diamond is particularly relevant to this chapter.

Two points are especially important. First, non-triad firms will need access to one or more of the triad markets if they are to build a successful global business. Thus, political factors governing market access become vital, including the successful completion of the Doha Round of multilateral trade negotiations. We take up these issues in the next chapter. Second, much of the modern literature on FDI contradicts Porter's implied assertion (1990) that inward FDI does not promote competitiveness. Rather, a substantial portion of this literature finds (p.36) that inward FDI serves to transfer technology, increase productivity and employment, and, arguably, provide overall net social benefits (Dunning 1958, 1998a; Caves 1996; Rugman 1981, 1996a; Rugman and Verbeke 1998b). We take up these points as they apply to the Asia in chapters 7, 8, and 9.

The literature on strategy for MNEs, for both large and small open economies, as well as the FDI literature, has focused on advanced economies. Therefore, it is necessary to reevaluate and apply this literature from the perspective of a firm in a developing country (developing economy). Some recent work has done this, such as that of Barclay (1998). She has applied the eclectic paradigm of Dunning (1980) and other FDI models to analyze the strategies of all the MNEs in the three Caribbean countries of Trinidad, Jamaica, and Barbados. The interaction between strategy and FDI literature is a rich feeding ground for writers, and some of the more useful ideas need to be surfaced.

MNEs, whether foreign or domestic, are not the whole answer, but modern business-school research demonstrates that they are usually at the hubs of business networks and clusters of successful industries. As briefly mentioned in chapter 2, the MNE is often a “flagship” firm, and its presence in a cluster offers opportunities for key suppliers and customers to act as intermediaries and partners in the promotion of growth and development (Rugman and D'Cruz 1997, 2000). The role of government and other parts of the “nonbusiness infrastructure” is also important, since these too could potentially form partnerships with MNEs and other businesses to develop flagship relationships.

The flagship framework is particularly useful for developing countries since it explicitly incorporates the role of government in facilitating the development of competitiveness. The government sector is included with other services in the nonbusiness infrastructure in the model of Rugman and D'Cruz (1997, 2000). It is possible for agents in the nonbusiness infrastructure to become network partners with flagship firms. However, government itself does not act as a flagship, a point also made by Porter (1990). The role of government in facilitating competitiveness is perhaps the most important insight to be drawn from the application of business-school research to issues of developing economies.

Business Strategy in Developing Economies

Business-enterprise strategy has been usefully synthesized by Porter (1980, 1990). He suggests (1980) that there are three type of generic strategies: cost, differentiation, and focus. A firm can compete on price by being the lowest-cost (p.37) producer. Internationally, this requires that economies of scale be achieved through high levels of worldwide sales, using at least one triad market as a base. In developing countries, firms in the minerals, forestry, and energy sectors are positioned as seeking a competitive advantage in cost. However, the danger is that sectors like these can become commodities (with no proprietary competitive advantage) rather than products. A second strategy is to differentiate, for example, with brand-name products. Not many MNEs from small open economies have succeeded here (except perhaps for Hyundai, Samsung, and LG from Korea, and Acer from Taiwan). Certainly, few small and medium-sized businesses from small open economies have any hope of building global brand recognition. The third strategy, niching, is used much more by small and medium-sized businesses and other firms from developing countries. But again, achieving a global niche is difficult.

Under Porter's framework of three generic strategies, an “offensive” strategy could incorporate either the cost, differentiation, or focus strategies, with managers of the firm using global benchmarks and best available practices across the value chain as reference points for their strategic decision making. A “defensive” strategy could be viewed as one that seeks shelter from foreign competition and worldwide best practice, through government protection. This option is assumed to be unavailable, given the market-liberalization measures facing small open economies. It is also assumed that government institutions wish to support efficiency-seeking firms with modern offensive strategies, rather than inefficient and protected firms with shelter strategies.

Porter (1980) also advocates the use of entry barriers to maintain competitive advantage. In his “five forces” model he argues that a firm needs to gain competitive advantage by holding market power over its suppliers, buyers, rivals, potential entrants, and potential substitutes. It is a competitive framework where entry barriers are erected by scale, capital (financing) requirements, differentiation, cost of switching from both suppliers and buyers, and government. There has also been extensive discussion in the business-strategy literature about the nature and relevance of core competencies (Hamel 1991; Rugman and Hodgetts 2003).

With its drivers of competition and strategic entry barriers, Porter's five-forces model is basically incompatible with the “five partners” long-run cooperative framework of international competitiveness developed by D'Cruz and Rugman (1992a, 1992b, 1993), and D'Cruz Rugman and (2000). It is not necessary to dwell here on the different approaches of these two models, since useful insights into management strategy in small open economies can be obtained by (p.38) adapting Porter's five-forces framework (1980) to a relevant framework for managers in small open economies. To do so requires that a basic aspect of competitive strategy be modified and extended for developing countries. Porter's three generics must be transformed into truly global strategies, which leads to five generics.

Porter's three domestic generic strategies can be extended to take into account the issue of geographic scope in a global industry. The original three domestic generic strategies have been transformed into a set of five global generic strategies (Rugman and Verbeke 1993b); see figure 3.1. This is a relabeling of Porter's work, where global cost leadership, global differentiation, and global segmentation represent the global versions of overall cost leadership, overall differentiation, and focus.

There are two main issues associated with this extension of Porter's framework of five generic strategies, as shown in figure 3.1. First, in practice it is very difficult for managers, especially in developing countries, to identify patterns in decisions and actions that are associated with only one of Porter's types of competitive advantage. The strategic intensity (and related economic performance) of a dual focus on cost leadership and differentiation is much more important than choosing between the pursuit of a cost or differentiation advantage (Reit-sperger, Daniel, and Tallman 1993). For example, the three largest automobile manufacturers in the world, General Motors, Ford, and Toyota, all pursue a combined cost leadership—differentiation strategy; that is, economies of scope are relevant. A dual focus on both cost leadership and differentiation is often required across the various segments of the value chain.

A second issue, and one that is much more important for public policy purposes, is that Porter's strategy of “protected markets” does not fit with his other four strategies. In each of the four other cases (excluding protected markets), cost or differentiation advantages remain important, although, as discussed, these do not appear to be mutually exclusive in the cases of global segmentation and national responsiveness. In each of these four cases, efficiency (as measured by relative output-input differentials throughout the value chain) determines a firm's economic performance in terms of survival, profitability, and growth. In contrast, as Porter (1986, 48) recognizes himself, protected-market strategies are not efficient in economic terms, since their choice depends on government behavior. Thus, even the extended framework of five generic strategies is not able to incorporate the protected-market strategy properly, despite its being considered one of the five generics by Porter himself.

A final problem for international management in small open economies is (p.39)

Multinational Enterprise Strategies and Development

Figure 3.1 Rugman and Verbeke's Five Generic Strategies

Adapted from Rugman and Verbeke 1993a, p. 5, fig. 1.

Porter's peculiar treatment of “national responsiveness.” In defining this term, he states correctly that a firm aims to “focus on those industry segments most affected by local country differences” and meets “unusual local needs in products, channels and marketing practices in each country, foregoing the competitive advantages of a global strategy” (Porter 1986, 48). However, he also uses the term “national responsiveness” to describe the behavior of “domestic firms without the resources to become international as well as multinationals who lack the resources or skills to concentrate/coordinate their activities worldwide” (Porter 1986, 48). But properly interpreted, national responsiveness is a strategic alternative to other strategies based on globalization and integration; it builds on firm-specific strengths (Rugman 1981, 1996b; Baden-Fuller and Stopford 1991, 1993).

National responsiveness is certainly not the result of a firm's internal weaknesses. Porter's view is in sharp contrast to most of the mainstream international business literature, such as that of Bartlett (1986), Bartlett and Ghoshal (1989), and Rugman (1992a), which describes national responsiveness as a strategy that builds on location-bound FSAs and MNEs. The “administrative (p.40) heritage” of a firm that leads to national responsiveness is just as valuable as one that leads to global scale economies. Porter's definition of national responsiveness is inconsistent with international business literature and is misleading for policy purposes in developing countries. Firms in small open economies should consider national responsiveness as a separate efficiency-based strategic option on its own merits.

Many authors, including Bartlett (1986), Bartlett and Ghoshal (1989), Doz (1986), Ghoshal (1987), Kogut (1985a; 1985b), Prahalad and Doz (1987), and Roth and Morrison (1990), have established the intellectual foundations that distinguish between two fundamentally different types of FSAs. Verbeke (1991a, 1992a, 1992b) have developed this framework in some detail. There is an important distinction between location-bound FSAs and non-location-bound FSAs. The former benefit a company only in a particular location (or set of locations) and lead to benefits of national responsiveness. In the context of international business operations, these location-bound FSAs cannot be effectively transferred as an intermediate output (for example, a tangible or intangible asset) or embodied in the final outputs of the organization, to be sold across borders. In contrast, non-location-bound FSAs are easily transferred and exploited abroad, whether as intermediate outputs or embodied in final outputs. They lead to benefits of integration in terms of economies of scale and exploitation of national differences.

Rugman and Verbeke (1993a) have demonstrated that a firm may actually have several home bases contributing substantially to the development of new FSAs and improving international competitiveness. Birkinshaw (1996) has extended this point with research on “subsidiary initiatives.” It is important to distinguish between the existence of a single home base or multiple home bases in the pursuit of international competitiveness, because it reflects the impact of the CSAs of specific locations on strategic behavior. A single home base implies the dominating impact of one set of national “diamond” characteristics on the firm's overall competitiveness. In contrast, with multiple home bases, competitiveness, both now and in the future, depends crucially on decisions and actions taken in various locations, as well as on the characteristics of these locations. Firms in small open economies need to be in the latter camp; then they can be more “nationally responsive” to the triad markets.

To the extent that the development and exploitation of non-location-bound FSAs require coordination of decisions and actions across borders, a single home base requires only direct, centralized control of all foreign operations. This is unlike the case of a global subsidiary mandate, where the “corporate (p.41) headquarters” role shifts toward managing a dispersed federation of subsidiaries while ensuring that their strategies are aligned with overall corporate goals. In that case, typical home-base activities are concentrated in the various nations where subsidiaries have received global subsidiary mandates.

Business Enterprises in Small Open Economies

This section bridges the gap between Porter (because of the missing ingredients in his work) and making strategy operational for firms in small open economies. The missing link discussed here is the nature of truly generic strategies; they generate efficiency-based rather than shelter-based FSAs. Efficiency-based FSAs can be non-location-bound or location-bound, with the latter encompassing the national-responsiveness strategy that is of interest to developing countries.

Firm-specific Advantages as Generic Strategies

FSAs include proprietary know-how (unique assets) and transactional advantages with potential cost-reducing or differentiation-enhancing effects. In a number of cases, it may be difficult to assess the actual impact of an FSA in terms of cost reduction or differentiation enhancement. Rugman and Verbeke (1991a) have suggested that in such cases, the contribution of an FSA to a firm's organizational learning should be considered. All strategies that build on such FSAs or aim to develop new advantages can be classified as efficiency based.

In contrast, strategies that do not build on FSAs to achieve a satisfactory economic performance in terms of survival, profitability, growth, or any other goal considered relevant by managers are classified as non-efficiency-based or shelter-based strategies. If the economic performance of a firm or set of firms does not result from FSAs with cost-reducing, differentiation-enhancing, or infrastructure-building characteristics, such performance must result from shelter-based behavior. Many policies in developing countries can lead to such inefficient firm strategies, as is now discussed.

Shelter-Based Strategies

Shelter-based behavior by firms takes two main forms: an attempt to impose “artificial” costs or barriers to differentiation on (foreign) rivals through government regulation (such as by tariff and nontariff barriers); and an attempt to (p.42) reduce the market incentives for cost reduction, differentiation enhancement, or infrastructure building themselves (for instance, by collusive behavior and cartel formation aimed primarily at exploiting the consumer) or to limit the potential effects of these incentives (for example, by government subsidies). In both cases, such strategies reduce competition and efficiency.

Shelter-based strategies are often pursued in the context of international business and developing countries, where firms located in a particular nation may convince policymakers that protectionist measures will lead to higher output in terms of value-added production, or to a special type of public good in terms of the creation of domestic control over strategic sectors, technological spillover effects, and so on. This occurs even where such public good may, in reality, be nonexistent or where shelter leads to a substantial reduction in consumer welfare. Rugman and Verbeke (1991b, 1991c) have demonstrated that such shelter strategies can actually subvert policies aimed at achieving a level playing field and fair trade, even in the United States and the European Union, let alone in developing countries. In a similar way, recent international economic literature on strategic trade policy represents a relatively small set of mathematical cases under suboptimal conditions with questionable relevance to reality; it is not the basis for a successful long-run trade policy, as argued by Krugman (1993) and Rugman (1996a).

This distinction between an efficiency-based strategy and a shelter-based strategy is fundamental to strategic management, because each strategy builds on a different intellectual premise as to what constitutes the source of success. In the case of an efficiency-based strategy, consumer sovereignty ultimately determines whether the firm will be successful (except in the case of natural monopolies, few of which exist in an international context). Strong economic performance reflects the successful creation of value for consumers. In contrast, shelter-based strategies reflect behavior that reduces value for consumers.

It is important to distinguish between these two types of strategies, because different “weapons” are used and different “rules” are followed in each case. More specifically, firms in small open economies that are pursuing a conventional efficiency-based strategy, but that are faced with shelter-seeking triad rivals, may suffer in the short term, compared with a situation in which all competitors are engaged in efficiency-based behavior. In the short term, triad shelter-based behavior will reduce the possibilities for rivals from small open economies that are not engaged in such behavior to exploit their FSAs or develop new ones. There is a strategic asymmetry in the short term that a national responsiveness policy by small open economies can minimize. In the long term, (p.43) shelter obviously works against the triad firms that build their economic performance on it. Thus it is always advisable for firms in small open economies to follow efficiency-based strategies, in both the short and the long term; however, these strategies should be paired with government policies designed to reduce or eliminate trade protections.

Rugman (1993b) have outlined several reasons shelter-based strategies may fail in the long term, leading to corporate inefficiencies and political dependence. For these reasons, and because of the size asymmetry between small open economies and the triad, it is not useful for firms in small open economies to use shelter as a strategic alternative. Porter's protected-market strategy (1986) is both inefficient and irrelevant for managers in small open economies. Unfortunately, firms from developing countries must compete with triad firms. Managers of firms in developing small open economies must recognize that triad asymmetries exist. Until this is widely understood, much triad-based, and especially U.S.-based, strategic management thinking will be inappropriate for small open economies. The firm and public policy implications of the asymmetry in power and size of large triad markets versus small developing country markets is explored further in the next section.

Market-access Issues for Firms in Small Open Economies

The brutal reality of global business today is that enterprises in small open economies are in a very weak bargaining position vis-à-vis MNEs from the triad. Five major types of enterprises in small open economies must be considered:

  1. A: Domestic firms selling all of their output at home

  2. B: Local firms who export a major part of their output

  3. C: Local subsidiaries of an MNE, where the MNE exercises head-office control

  4. D: Local subsidiaries of an MNE, where the MNE operates in a decentralized way, giving local autonomy to the subsidiaries

  5. E: Local firms that become MNEs

In general, only the last two of these five types of enterprises offer much hope for sustainable development in sovereign small open economies. Yet these are the very types of enterprise structures that are in short supply in developing countries. We know of no example of a type D network-type subsidiary in any developing country, at least in terms of the organizational structure of the 500 (p.44) largest MNEs in the world, over 85 percent of which are triad based. These MNEs tend to develop type D networks across the triad, but not in developing countries.

A similar problem exists for type E enterprises. Other than a few state-owned businesses, especially in the petroleum and mineral-resource sectors, only a score of large MNEs come from developing countries. In 2001, only 11 of the Fortune 500 MNEs (which account for over 80 percent of the world's stock of FDI) were from China, and few others came from other developing countries (see table 3.1). These Chinese firms generate well over 90 percent of their sales in Asia (Rugman and Verbeke 2004). One MNE from each of India, Malaysia, Venezuela, and Singapore was on the list. Again, these are all regionally based. Of the more established newly industrialized countries, Mexico had 2, Taiwan 2, Brazil 4, and the Republic of Korea 12. Overall, 20 of the world's 500 largest firms were from less-developed economies (mostly China with 11) and another 15 from the East Asian Tigers (mostly Korea with 12).

Table 3.1 confirms that the focus of international business is in the core triad of the United States, the European Union, and Japan. This has been the situation for the last twenty years. These three blocs are the home bases of 85 percent of the world's 500 largest MNEs, and these MNEs conduct the majority of their business within their home regions of the triad (Rugman and Verbeke 2004). In other words, most developing countries are not yet significant players

Table 3.1 The world's 500 largest firms

Country

1981

1991

1996

2001

United States

242

157

162

197

European Union

141

134

155

143

Japan

62

119

126

88

Canada

9

6

16

Republic of Korea

13

13

12

China

3

11

Switzerland

10

14

11

Australia

9

5

6

Brazil

1

5

4

Others

55

48

11

12

    Total

500

500

500

500

    Triad total

445

410

443

428

Source: Adapted and compiled from various annual publications of the Fortune 500 by Fortune magazine.

(p.45) in FDI, although to the extent that they have become more active, it is primarily within the regions in which they operate.

Tables 3.2 and 3.3 list the twenty-five largest MNEs overall, and the largest MNEs from developing countries, ranked by international assets. What is striking about these data is that despite having significant assets outside their home countries, the largest MNEs overall and those from developing countries are not very international on a relative basis. That is, their ranking in the Transnationality Index (calculated as the average of the following three ratios: foreign assets to total assets, foreign sales to total sales, and foreign employment to total employment) and the Internationalization Index (calculated as the number of foreign affiliates divided by the number of all affiliates) is surprisingly low. This further confirms that the largest MNEs are highly concentrated in a few regions and countries, and many are still not particularly international.

Enterprises in developing small open economies are usually type A, B, or C. Type B firms are the classic resource-based, or cheap-labor, exporting firms. In all sectors they face declining terms of trade and ever-limited market access to the triad. Again, future prospects are not good unless niche areas can be found. Despite efforts at trade liberalization through the General Agreement on Tariffs and Trade (GATT)—WTO process, and preferential treatment for developing countries in such agreements, it is clear that most economic activity is conducted through FDI rather than through trade. Multilateral rules for “deep integration” via FDI have not been developed, and the “shallow integration” achieved by tariff cuts under the GATT-WTO has not helped developing countries bridge the efficiency and managerial gap between them and the triad leaders. Type C firms are often resource-based or labor-intensive subsidiaries of MNEs. Little transfer of technology takes place, and the upgrading of skills and managerial practices is minimal. Branch plants are not associated with R&D and rely on the parent's managerial and marketing know-how. Finally, type A firms are often small or medium-sized enterprises, and their growth is limited by the relatively small domestic market and its slow growth rate.

Against this gloomy background for business enterprises in small open economies, what prospects are there for development? We do not believe that there is any significant evidence that conventional proposals to tinker at the margins with technology transfers will work. Instead, enterprises in small open economies need to choose between two corporate strategies:

  1. 1. Become niche suppliers and develop global marketing skills

  2. 2. Become network partners of MNEs and develop managerial skills (p.46)

    Table 3.2 The world's top 25 nonfinancial MNEs ranked by foreign assets, 2004

    Ranking by

    Assets ($ millions)

    Sales ($ millions)

    No. of employees

    No. of affiliates

    Foreign assets

    TNIa

    IIb

    Company

    Foreign Total

    Total

    Foreign Total

    Total

    Foreign Total

    Total

    TNIa(%)

    Foreign

    Total

    IIb

    1

    68

    55

    General Electric

    448,901

    750,507

    56,896

    152,866

    142,000

    307,000

    47.8

    787

    1,157

    68.02

    2

    4

    93

    Vodaphone Group Plc

    247,850

    258,626

    53,307

    62,494

    45,981

    57,378

    87.1

    70

    198

    35.35

    3

    67

    65

    Ford Motor

    179,856

    305,341

    71,444

    171,652

    102,749

    225,626

    48.7

    130

    216

    60.19

    4

    90

    71

    General Motors

    173,690

    479,603

    59,137

    193,517

    114,612

    324,000

    34.0

    166

    290

    57.24

    5

    10

    44

    British Petroleum Company Plc

    154,513

    193,213

    232,388

    285,059

    85,500

    102,900

    81.5

    445

    611

    72.83

    6

    38

    37

    Exxon Mobil

    134,923

    195,256

    202,870

    291,252

    52,968

    105,200

    63.0

    237

    314

    75.48

    7

    25

    88

    Royal Dutch/Shell Group

    129,939

    192,811

    170,286

    265,190

    96,000

    114,000

    71.9

    328

    814

    40.29

    8

    62

    91

    Toyota Motor Corp.

    122,967

    233,721

    102,995

    171,467

    94,666

    265,753

    49.4

    129

    341

    37.83

    9

    20

    48

    Total

    98,719

    114,636

    123,265

    152,353

    62,227

    111,401

    74.3

    410

    576

    71.18

    10

    66

    47

    France Telecom

    85,669

    131,204

    24,252

    58,554

    81,651

    206,524

    48.7

    162

    227

    71.37

    11

    49

    60

    Volkswagen

    84,042

    172,949

    80,037

    110,463

    165,152

    342,502

    56.4

    147

    228

    64.47

    12

    16

    22

    Sanofi-Aventis

    82,612

    104,548

    15,418

    18,678

    68,776

    96,439

    77.6

    207

    253

    81.82

    13

    61

    54

    Deutsche Telekom AG

    79,654

    146,834

    47,118

    71,868

    73,808

    244,645

    50.0

    266

    390

    68.21

    14

    60

    62

    RWE Group

    78,728

    127,179

    23,636

    52,320

    42,370

    97,777

    50.1

    345

    552

    62.50

    15

    19

    59

    Suez

    74,051

    85,788

    38,838

    50,585

    100,485

    160,712

    75.2

    546

    846

    64.54

    16

    81

    79

    E.ON

    72,726

    155,364

    21,996

    60,970

    32,819

    72,484

    42.7

    303

    596

    50.84

    17

    13

    6

    Hutchison Whampoa

    67,638

    84,162

    17,039

    23,037

    150,687

    180,000

    79.3

    94

    103

    91.26

    18

    39

    49

    Siemens AG

    65,830

    108,312

    59,224

    93,333

    266,000

    430,000

    62.0

    605

    852

    71.01

    19

    3

    4

    Nestle SA

    65,396

    76,965

    68,586

    69,778

    240,406

    247,000

    93.5

    460

    487

    94.46

    20

    92

    28

    Electricite de France

    65,365

    200,093

    17,886

    55,775

    50,543

    156,152

    32.4

    240

    299

    80.27

    21

    29

    87

    Honda Motor Co. Ltd

    65,036

    89,483

    61,621

    79,951

    76,763

    137,827

    68.5

    76

    188

    40.43

    22

    52

    73

    Vivendi Universal

    57,589

    94,439

    11,613

    26,607

    23,377

    37,906

    55.4

    245

    435

    56.32

    23

    48

    83

    Chevron Texaco

    57,186

    93,208

    80,034

    150,865

    31,000

    56,000

    56.6

    121

    250

    48.40

    24

    34

    23

    BMW AG

    55,726

    91,826

    40,198

    55,050

    70,846

    105,972

    66.9

    124

    153

    81.05

    25

    93

    80

    Daimler Chrysler

    54,869

    248,850

    68,928

    176,391

    101,450

    384,723

    29.2

    324

    641

    50.55

    Source: UNCTAD 2006.

    (a) The Transnationality Index (TNI) is calculated as the average of the following three ratios: foreign assets to total assets, foreign sales to total sales, and foreign employment to total employment. Ranking is based on 100 MNEs.

    (b) The Internationalization Index (II) is calculated as the number of foreign affiliates divided by the number of all affiliates (only majority-owned affiliates are counted). Ranking is based on 100 MNEs.

    (p.47) (p.48)

    Table 3.3 The 25 nonfinancial MNEs from developing countries ranked by foreign assets, 2004 (millions of U.S. dollars and number of employees)

    Ranking by

    Assets ($ millions)

    Sales ($ millions)

    No. of employees

    No. of affiliates

    Foreign assets

    TNIa

    IIb

    Company

    Foreign Total

    Total

    Foreign Total

    Total

    Foreign Total

    Total

    TNIa(%)

    Foreign

    Total

    IIb

    1

    28

    4

    Hutchison Whampoa Limited

    67,638

    84,162

    11,426

    23,080

    150,687

    182,000

    70.9

    84

    93

    90.30

    2

    80

    30

    PetronasPetroleum Nasional Bhd

    22,647

    62,915

    10,567

    36,065

    4,016

    33,944

    25.7

    167

    234

    71.40

    3

    32

    24

    Singtel Ltd.

    18,641

    21,626

    5,396

    7,722

    8,676

    19,155

    67.1

    23

    30

    76.70

    4

    54

    14

    Samsung Electronics Co., Ltd.

    14,609

    66,656

    1,524

    79,184

    21,259

    61,899

    44.7

    75

    87

    86.20

    5

    86

    71

    CITIC Group

    14,452

    84,744

    1,746

    6,413

    15,915

    93,323

    20.4

    14

    59

    23.70

    6

    30

    27

    Cemex S.A.

    13,323

    17,188

    5,412

    8,059

    16,822

    26,679

    69.2

    42

    56

    75.00

    7

    11

    13

    LG Electronics Inc.

    10,420

    28,903

    36,082

    41,782

    41,923

    32,000

    84.5

    32

    37

    86.50

    8

    62

    66

    China Ocean Shipping (Group) Co.

    9,024

    14,994

    4,825

    11,293

    4,230

    70,474

    36.3

    40

    134

    29.90

    9

    75

    55

    Petroleos De Venezuela

    8,868

    55,355

    25,551

    46,589

    5,157

    33,998

    28.7

    30

    65

    46.20

    10

    37

    1

    Jardine Matheson Holdings Ltd

    7,141

    10,555

    5,830

    8,988

    57,895

    110,000

    61.7

    83

    88

    94.30

    11

    66

    23

    Formosa Plastic Group

    6,968

    58,023

    6,995

    37,738

    61,626

    82,380

    35.1

    14

    18

    77.80

    12

    96

    72

    Petroleo Brasileiro S.A. Petrobras

    6,221

    63,270

    11,082

    52,109

    6,196

    52,037

    14.3

    23

    103

    22.30

    13

    94

    33

    Hyundai Motor Company

    5,899

    56,387

    15,245

    51,300

    4,954

    53,218

    16.5

    13

    20

    65.00

    14

    33

    12

    Flextronics Internation Ltd.

    5,862

    11,130

    8,181

    16,085

    89,858

    92,000

    67.1

    100

    114

    87.70

    15

    45

    82

    Capitaland Limited

    5,231

    10,545

    1,536

    2,328

    5,277

    10,668

    55.0

    4

    23

    17.40

    16

    63

    46

    Sasol Limited

    4,902

    12,998

    5,541

    10,684

    5,841

    31,100

    36.1

    1

    2

    50.00

    17

    90

    75

    Telmex

    4,734

    22,710

    1,415

    12,444

    15,616

    76,386

    17.6

    6

    28

    21.40

    18

    55

    47

    America Movil

    4,448

    17,277

    5,684

    11,962

    13,949

    23,303

    44.4

    17

    34

    50.00

    19

    79

    69

    China State Construction Engineering Corp.

    4,357

    11,130

    2,513

    11,216

    21,456

    130,813

    26.0

    4

    16

    25.00

    20

    43

    22

    Hon Hai Precision Industries (Foxconn)

    4,355

    9,505

    7,730

    16,969

    140,518

    166,509

    58.6

    32

    41

    78.00

    21

    19

    2

    Shangri-La Asia Limited

    4,209

    5,208

    571

    726

    14,013

    18,100

    79.0

    29

    31

    93.50

    22

    77

    89

    New World Development Co., Ltd.

    4,202

    15,567

    891

    2,865

    12,687

    47,000

    28.4

    7

    57

    12.30

    23

    27

    7

    Sappi Limited

    4,187

    6,150

    4,351

    4,762

    8,936

    16,010

    71.8

    33

    37

    89.20

    24

    100

    95

    China National Petroleum Corp.

    4,060

    110,393

    5,218

    68,952

    22,000

    1167,129

    4.4

    4

    242

    1.70

    25

    60

    87

    Companhia Vale do Rio Doce

    4,025

    16,382

    9,395

    10,380

    2,736

    36,176

    40.9

    6

    48

    12.50

    Source: UNCTAD 2006.

    (a) The Transnationality Index (TNI) is calculated as the average of the following three ratios: foreign assets to total assets, foreign sales to total sales, and foreign employment to total employment. Ranking is based on 100 MNEs.

    (b) The Internationalization Index (II) is calculated as the number of foreign affiliates divided by the number of all affiliates (only majority-owned affiliates are counted). Ranking is based on 100 MNEs.

    (p.49)

(p.50) In option 1, an indigenous firm must find and exploit a niche of no particular interest to a potential rival MNE. Just as the MNEs have the threefold skills of research, production, and marketing, so too must an enterprise in a small open economy develop these three skills in the niche area. Marketing skills are the most difficult to learn—especially global marketing skills. With option 2, modern management skills are the critical factor. Managers in developing countries will need MBA-type skills, plus deep practical experience with different countries and cultures, to become entrepreneurial network partners in an MNE's decentralized federation.

Business Strategy and Economic Development

Lall (1987) argues that technological capabilities can be classified into the following three categories:

  • Investment capabilities: the planning, entrepreneurial, and financial-assessment skills required to start up a project

  • Production capabilities: the engineering and manufacturing skills to operate, maintain, and upgrade the plant

  • Linkage capabilities: the ability to develop networks and maintain supplier-buyer relationships

The model of the East Asian Tigers has been to use cheap labor and low-technology exports as a basis for shifting competitive advantage toward higher-technology indigenous production. This has been furthered by selected government-determined industrial policies, improving international competitiveness. In this context, the successful development of Korea and Singapore was noted by Porter (1990), although the contribution of government-led industrial policies is still controversial, especially after the Asian financial crisis of 1997–1998 undermined the East Asian Tigers.

Wignaraja (1998) finds that the acquisition of technological capabilities by export–oriented firms in Sri Lanka over the 1977–1991 period is a mixed bag. Although these firms do not develop new process–centered R&D, or interfirm linkages, they do upgrade their production capabilities to best-practice levels, which has helped increase and maintain the exports of Sri Lankan garment firms. Wignaraja examines firms in three sectors: garments, electronics, and light engineering. Across these sectors, the firms tend to acquire investment capabilities, (p.51) “typically at the simpler end of the technological spectrum” Wignaraja (1998, 192).

Similarly, few production capabilities are transferred, as Sri Lankan firms concentrate on process modification rather than new product development. Finally, the firms “display little evidence of inter-firm linkages or linkages with technology institutions and universities” Wignaraja (1998, 206). The failure of Sri Lankan firms to develop new indigenous products has linked them to a cheap-labor, export-led strategy, making them vulnerable to external changes, such as the abolition of the WTO's Multifiber Arrangement in 2004.

There would appear to be obvious parallels between the Sri Lankan focus on cheap garment exports under the Multifiber Arrangement and the Caribbean banana exporters' reliance on the E.U. protocol, which has been found to violate WTO procedures. The failure to diversify into other value-added production and service activities in Sri Lanka and the Caribbean makes both regimes dependent on resource-based exports within the quasi-protectionist WTO regime and the European Union, respectively. As movement toward government trade liberalization continues under the WTO and regional agreements, these small open economies will become more vulnerable to world market forces and will need to follow the models of Chile and Mexico, absorbing major adjustment costs in order to restructure and reinvest in new, globally efficient, businesses.

Barclay's research (1998) is the first work using the modern theory of international business to assess empirically the contribution of FDI to the developing Caribbean economies of Trinidad, Barbados, and Jamaica. Examining a full sample of FDI in these three economies, Barclay also conducted interviews with managers of foreign-owned MNEs in this area. The findings are also relevant to the smaller economies of the Pacific and Africa, and possibly to the developing economies of Eastern Europe. All of these economies are similarly preoccupied with the benefits and costs of FDI, and most of them lack Barclay's understanding of modern theory.

Barclay includes all the MNEs involved in FDI in the Caribbean in her study: 139 foreign MNEs (in Jamaica, Barbados, and Trinidad and Tobago), 25 of which operate in at least two of the three countries. She sent out questionnaires and also conducted interviews with a large number of managers and other stakeholders. Barclay used these impressive and comprehensive data to test the modern theories of FDI as they apply in the Caribbean. Of particular interest are her findings on the robust nature of internalization theory ( (p.52) Rugman 1981) and the eclectic paradigm (Dunning 1980). She finds that a version of the “double diamond” model (Rugman and D'Cruz 1993) is a very useful explanation of FDI in these three Caribbean countries. Barclay's work (1998) is one of the most detailed and rigorous studies published in the field of international business, and it sets new standards for research work on the economics of developing nations.

The application of strategic management thinking to the economic development experience of East Asia is well known. As demonstrated by analysts of Asian business systems such as Amsden (1989), Whitley (1992), Gerlach (1992), and Rugman and Boyd (1999), the “group” system has been the predominant and successful mode. In Japan it is the keiretsu system; in Korea, the chaebol; in China and the overseas Chinese economies of Singapore and Hong Kong, it is a looser “family-clan” system of enterprise control.

From the viewpoint of internalization theory, all three systems can be explained by a transaction cost approach. If internal markets for capital, labor, and intermediate products (such as knowledge) are less than perfect, then there is an economic rationale for the firm (or “group” system in this institutional context) to replace the market. The first writer to apply this Coase-Williamson-type thinking to the group system in East Asian countries was Nathaniel Leff (1976). The interesting variance from internalization thinking, which argues that international market imperfections lead to the MNE (Rugman 1981), is that the groups result from imperfection in internal domestic markets rather than in international ones. The international aspect, in terms of management strategy, comes into play as these groups (in small open economies such as Korea, China, or even Chile) seek access to triad markets. This takes us back to the critical strategic issue of asymmetry in market access for small open economies, relative to triad-based MNEs.

We now turn to an evaluation of the literature on the economic contribution of MNEs to developing countries. This will help us make generalizations about the appropriate role of strategic management thinking as it relates to public policy, using the empirical evidence cited above in this section.

Mnes as Economic Agents for Development

A basic premise is that the theory of the MNE applies equally well to MNEs based in developing countries as to those based in the triad. It has been demonstrated elsewhere (Rugman 1981) that the MNE is explained by internalization (p.53) theory. Although this statement was made for large triad-based MNEs, it is just as appropriate for the MNEs based in small open economies.

The MNE is a producer of goods or services; it employs local workers; it may or may not use local capital; and it markets its output mainly in the host nation. Yet all of these purely economic activities are the result of normal cost-conscious business decisions; they are not directly related to the economic goals or political aspirations of the host nation. The MNE's primary interest as a good corporate citizen is keeping a good business partnership with stakeholders such as local consumers, producers, and (in today's regulated world) political figures, as well as civil society and NGOs.

MNEs in small open economies have the same responsibilities to their shareholders as do their counterparts in the United States, Europe, and Japan. The MNE is obliged to operate in an efficient manner, that is, to maximize profits, subject to relevant local cost conditions. It can use its internal market to exploit an FSA abroad, and it cannot neglect the risks of alternative contractual arrangements when it makes a foreign investment decision. If the host nation chooses to impose excessive regulations on the MNE, the firm is forced to consider alternative locations in order to minimize costs.

The social and political objectives of the host nation, as reflected in its controls and regulations on the MNE, may sometimes force the MNE to an alternative site or cause it to cancel or postpone its foreign investment. To that extent, there is a potential conflict of interest between the nation-state and the MNE. Yet the MNE is a regulation taker, not a regulation maker, and its dependence on the whim of local political leaders will make it risk averse in its choice of location. Thus, political risk and the perception of social, cultural, or psychic distance are the major elements in the information cost set of the MNE. We take up these issues in chapter 6.

It can be hypothesized that the key FSA of MNEs in small open economies lies in resource management. The full array of management skills starts with the choice of cost or niche strategy but also expands along the value chain to include production and global marketing skills. The traditional reliance on the extraction of minerals or the harvesting of agricultural products is not enough to generate an FSA. Rather, these are CSAs, or location factors, using Dunning's terminology (1980). This new FSA builds on the efficient utilization of technology required for resource-based industries and links it to sales and marketing skills. Thus the largest set of MNEs is in the resource sector or in a cluster related to this sector. The core skill of the MNE lies in its ability to assemble a package of FSAs in resource management and to use them for worldwide (p.54) sales, overcoming obstacles placed in the way of distributing these resources. Such obstacles are usually created by government regulations, tariffs and non-tariff barriers, effective tax-rate differentials, and other market imperfections. Market access (and overall marketing and management skills) is critical to the success of firms in developing countries.

Recent management research on the role of MNEs in developing markets has examined the role of “groups” in Korea, Chile, India, Indonesia, and other countries (Ghemawat and Khanna 1998). The theoretical basis for this work goes back to the pathbreaking article by Nat Leff (1976) on the nature and organization of groups in East Asia. Testing this theory across Korea is work by Khanna and Palepu (1997), which found that the Korean chaebols emerged because of the market imperfections that existed in the Republic of Korea in the 1960s, when it was a developing economy. These imperfections existed in the markets for labor, capital, and intermediate goods (such as knowledge). Business groups offer risk diversification benefits in response to such market imperfections.

This thinking is a straightforward application of internalization theory, as proposed also in Rugman (1981). Khanna and Palepu (1997) also found that the chaebol is an efficient organizational form and that it has been an engine for the economic development of the Republic of Korea. Their findings are broadly consistent with those of Amsden (1989) and Whitley (1992), who note that large business groups dominate in the developing markets of Asia.

Business groups exist not only in Korea but also in Chile, Indonesia, and South Africa. The role of business groups in Chile and India is discussed in Khanna and Palepu's work (1999a, 1999b). The role of business groups as agents for risk diversification and intermediation did not decline over the 1987–1997 period in Chile, nor over the 1990–1997 period in India. One interpretation is that despite government movements toward both deregulation (in primary markets) and trade liberalization, many market imperfections remain in these economies, and thus there is a continuing need for intermediation by business groups.

One basic part of their work is the finding that the institutional context matters. Economic development does not depend just on economics. The successful business enterprises that emerge will be embedded within the social, political, and cultural context of their countries and regions. This is the focus of the next three chapters. The profits of MNEs in small open economies are in line with those of MNEs from other nations such as the United States, Japan, and many European countries (Rugman 1981). The distinctive feature of MNEs in (p.55) small open economies is that they are resource intensive, but their embodiment of this CSA does not permit them to earn excessive profits.

In the process of operating as MNEs, firms provide indirect economic benefits to their home countries. The economic impact of U.S. multinationals has been studied by many authors. One of the earliest comprehensive studies is that of Bergsten, Horst, and Moran (1978). Frank (1980) extended this work. A similar study by Langdon (1980) examined the impact of Canadian MNEs on developing nations. One of the indirect economic benefits of MNEs is that they substitute for free trade, which is otherwise denied by tariffs and related market imperfections. In this manner, MNEs help the balance of payments. Similarly, there are indirect effects on employment, tax revenues, industry structure, competition, and so on. These effects can be measured only by a social benefit-cost analysis; yet, as argued elsewhere (Rugman 1980), such an analysis itself confuses equity with efficiency considerations.

Internalization theory predicts that the MNEs are transferring their newest technologies overseas through affiliates (where the risk of dissipation is reduced) and using licensing or joint ventures only at a later stage in the life of the technology, when it is becoming a more standard product. Internalization theory also predicts that the newer technologies will go first to developed countries, since they may well be inappropriate or costly to adapt in developing countries. Only at a later stage is it profitable for MNEs to transfer technology to developing nations; yet such transfers do indeed take place and the MNEs' internal markets achieve this worldwide transfer of technology without any help from governments (Rugman1981).

Traditional economic-based public policy toward MNEs sometimes confuses efficiency and equity objectives. The governments of other advanced, and most developing, nations also fall into this trap. All governments have a propensity to favor protective devices such as tariffs, quotas, exchange controls, export subsidies, and so on for some particular pressure group within their society. In this world of government-imposed market imperfections, the MNE is an organization with enough market power to bypass many of the regulations imposed by governments. Its success in arbitraging the imperfections of national markets is remarkable. The emergence of MNEs in developing small open economies is entirely predictable given the imperfect nature of today's world economy.

MNEs in developing small open economies are responsible for some alleviation of the loss of world welfare that might otherwise be experienced by the continuation and even extension of protective measures and restrictions by (p.56) most nations. The MNE is not a complete substitute for free trade, but it is an organization with a remarkable degree of adaptability. The creation of internal markets by MNEs, to some extent, makes up for the closed markets imposed by restrictive government policies. These efficiency aspects of MNEs represent the underlying focus for their strategic management.

Asymmetric Business Strategies

In this chapter, we identify an operational paradox in prior characterizations of the concept of national responsiveness. The asymmetrical strategic framework suggests that managers in small open economies can rarely achieve success in the triad markets without being nationally responsive, whereas triad managers, on average, can get by without national responsiveness when doing business in small open economies. The reason, of course, is that triad managers can choose a cost or differentiation strategy and beat the average competitor on a triad basis, virtually ignoring the marginal impact of the small open economy, which is of relatively trivial economic size. A successful triad business rolls out the product across various regions in sequence, and it treats a small open economy as a minor end-of-production-line region. The WTO reinforces this strong single-diamond, home-base, strategic vision.

None of this is as easy for small open economy managers doing business in the triad. Not only do they still need to beat the average competitor on cost or differentiation margins, but they also need to overcome discretionary entry barriers to the triad markets. Such entry barriers can arise when discriminatory measures are introduced by triad governments, often at the behest of triad-based private sector rivals; examples are the petitions for the use of WTO trade-law remedies against alleged subsidies of Caribbean bananas and related agricultural products.

Firms in small open economies will find it becomes essential to develop a strategy of national responsiveness. Indeed, a firm that lives by the Porter cost or differentiation strategy alone will invite retaliation by its triad rivals, and if triad firms lose home market share to a firm from a developing country, then the application of punishing trade laws becomes almost inevitable (Rugman and Anderson 1987).

A related issue is whether the competitiveness of companies in small open economies is weakened or enhanced by relocating critical value chain activities to the triad. Porter (1990) would argue that the core competitive advantage of such a company must be drawn from the small open economy cluster of the (p.57) home-base diamond. Although it would be theoretically simpler if this could occur, in practice we observe that virtually all resource-based manufacturing and service companies in small open economies rely on access to the triad markets for the success of their businesses; for example, on average, the great majority of sales of resource-based and labor-intensive products occur in triad markets. Given this dependence on the triad markets, the contingent location of production and distribution in the triad, instead of in small open economies alone, can never weaken the performance of firms in small open economies, since the alternative is to lose access to the triad markets and go out of business.

This is why the neoclassical economics framework of social benefit-cost analysis to evaluate FDI process is of limited value from the viewpoint of strategic management. The correct counterfactual is not investment, jobs, R&D spillover, profits, or other economic attributes in the triad as opposed to the small open economy. Instead, it is a competitive business operating in a home cluster, or across the oceans (in both cases with the majority of sales in the larger triad markets), versus no business operating in the small open economy at all.

Summary Points

In this chapter we explored five major themes: first, the strategies of indigenous small and resource-based MNEs in developing economies that need triad market access; second, the asymmetries in the strategies of firms in developing economies compared with the strategies of managers of MNEs with a large triad home base; third, the consequent modifications in strategies required by managers in developing small open economies; fourth, the role of FDI and the contributions of foreign-owned firms to developing economies, with particular reference to firm strategies and flagship firm linkages and networks; and fifth, the importance of potential business-government relationships, within the complex managerial nature of flagship and business networks, business groups, and clusters in developing economies, that may have positive impacts on the status of the MNE in developing economies and the development process itself.

We examined the business strategies of MNEs and the relationship of MNEs to economic development, with a special focus on firms in small open economies, using the logic of the basic FSA-CSA matrix of figure 3.1. In the next three chapters, we turn to the implications of figures 3.2 and 3.3, which consider the “social triangle” in which governments and NGOs appear as key actors affecting development, as well as MNEs. This chapter has provided the (p.58) foundation for such work on the complexities of the multiple interactions among the three actors. It will allow us to consider why corporate social responsibility is a win-win strategy for all three actors: MNEs, NGOs, and government. In general, the business strategies of MNEs are determined in an interdependent manner, along with the actions of governments and NGOs. Subsequent chapters on MNEs (specifically chapters 7, 8, and 9) will reflect these complexities.