Managing the Multinational Subsidiary

Response to Environmental Changes and the Host Nation R&D Policies

Hamid Etemad, Louise Séguin Dulude

• Publisher: Routledge
• Year: 2018
• Topic: Business
• eBook ISBN:
  9781351189170
• Subtopic: Business General
• Index: Business

This book, first published in 1986, is concerned with the changing world environment for multinational business and the relationships between multinational parent companies and their subsidiaries which will be necessary to meet the challenges that are being faced. The study argues that key changes to the environment are: the revolution in manufacturing which has permitted cheap production in one location of complicated products for a world market; 'world product mandating', whereby all a company's country subsidiaries produce different product lines for the world market; pressure and incentives from host governments for technology transfer in their favour and for research and development facilities within their territory; the growth of highly efficient international trading and distribution intermediaries; and the complications of increased 'barter' trade arising from international debt problems and currency shortages. All this means that the management of multinational subsidiaries has to change. This book reviews the challenges and shows a way forward.

1 INTRODUCTION: MANAGING THE SUBSIDIARY

Hamid Etemad and Louise Séguin Dulude

The environment of international business has been going through a turbulent period of change that has greatly intensified during the past decade. These are not isolated or short-run fluctuations in an otherwise stable long-run trend that can be easily weathered. They are, rather, so radical as to have fundamentally challenged some basic understandings and standard assumptions about the nature of environment and the international business practices compatible with it.

This book is designed to enhance the understanding of these newly emerging patterns. It is not, therefore, concerned with the historic past and what it has entailed or implied, but with the new strategic responses that international business players are devising to cope with a fluid environment and a conflicting array of demands made on them. This changing array of demands and fluidity of environment are vivid manifestations of a fundamental and dynamic set of forces in the environment of international business that must be seriously considered. These forceful new currents of change are affecting various facets of multinational enterprises’ (MNEs) working environment, impinging upon the state of technology, institutional arrangements, governmental expectations, consumer demands and, above all, international competition. In response to the forces and demands of change MNEs have adopted, and continue to try, various postures. This book will cover some of these response patterns and their ramifications.

MNEs and their subsidiaries are important players in the international business game. But MNEs are not the only players that are subject to change; home and host countries are also affected. The governments of these countries have begun to take an active role. By changing the rules, host countries have made unprecedented and successful bids to control and shape their own domestic environment and, in turn, that of the international environment. In so doing, they are further changing the situation, which imposes a new set of demands.

Intense competition among MNEs, combined with an improved state of information and information processing, is forcing a similar degree of competitiveness on the host and home countries. One clear result of this intensified multilateral rivalry is that the successful practices and strategies of the past are being rendered obsolete, and the potency of newly emerging strategies is further heightening these changing patterns. There is a genuine need to study the emerging changes, to examine the possible options, and to contain the threat of potential harm to home, host and MNEs alike.

This book in fact deals with some of the pressures and forces that have been changing the environment and are challenging the efficiency, and hence the viability, of the old arrangements. For example, the familiar truncated subsidiary operations and the tariff factories of the past are being replaced by a range of new strategic arrangements which include, but are not limited to, rationalised but integrated operations, specialised but widely distributed products, and internally autonomous but still highly dependent MNE-subsidiary relationships. These were not among the desired features of the old types of arrangement. Except for those who are directly involved, the managerial, operational and policy implications of this new set of complex relationships have remained off-limits and, to a great extent, unexplored.

The complexity and the potency of new arrangements are changing past comparative advantages, rearranging old competitive forces and, more importantly, requiring new managerial practices and challenging almost everyone involved. This involvement includes, among others, the students of international business, managers who will eventually encounter them, and even the members of regulating agencies who are trying to increase the efficiency of particular operations. This book attempts to respond to the informational needs of these groups. It also aims to stimulate a process by which the widening gap between the newly emerging host country policies and corporate strategies and those of the past can be narrowed or closed altogether.

The Changing Environment of International Business

As just stated, the profound changes in international business within the past five years have reached a turbulent state. This turbulence has shaken the foundations of almost all of the accepted and standard rules. Past practices and established operating procedures have come under exceedingly increasing pressures, face radical attacks and require extensive modification. Consider, for example, the following states contributing to this turbulence.

Global Communication, and Shrinking Time and Distance

The rapid spread of the electronic age, especially in the area of communication, is encompassing every corner of the world in a trend toward a more homogenous world market and away from the heterogenous national and regional markets of the past. This trend, in turn, is increasing the acceptance rate of world products and reducing the need to produce locally adapted products. The old notion of distinct local product/market characteristics is disappearing; and, in a sense, time and distance are shrinking. Despite all the remaining differences, the concept of a global village is closer to reality than ever before. This has begun to pave the way for homogeneous product offerings and therefore points toward efficient world-scale production facilities and away from inefficient, small-scale, national and local production. In the absence of such development, national, commercial or industrial policies notwithstanding, the world product’s risk of being rejected would make the massive ongoing global rationalisation logically and economically untenable.

Computer Revolution in Manufacturing

There has been a revolution in manufacturing. Computer aided design and manufacturing have increased the possibility of incorporating variety (or options) into the original concept so as to meet more accurately the needs of end-users without greatly increasing incremental costs or incurring losses in the scale economies of production. The old industrial technology offered scale economies and lower unit costs through longer production runs. Unfortunately, it also entailed certain rigidities which made variety costly or impracticable in some particular cases.

The North American automobile industry offers a prime example of this phenomenon. For decades, it dominated both the North American and worldwide markets through mass production and low costs. The industry suffered, however, from a low rate of significant innovation. Thus, only cosmetic changes and minor improvements or options could be introduced without adding tremendously to costs. By contrast, in Japan and some European countries, a switch to robotics and computer aided production introduced certain flexibilities into the production line that not only allowed for a real satisfaction of consumer needs, but also provided a worldwide competitive edge in their favour.

Massive Investment Requirements

The viability of fragmented and local manufacturing of the past and its associated relatively low investments have also changed. The investment requirements for world-scale or highly advanced production are massive, and are having a radical impact on the way related strategic decisions are made. For example, without the rich and lucrative markets of North America and Europe, the Japanese and Europeans could not possibly justify the huge investment outlays required for building world-scale plants and bringing the new technologies on line.

Regardless of the investment criteria and expected returns, these massive commitments would not have been commercially viable, had worldwide marketing not been guaranteed. This dictated equally massive efforts in marketing. Conversely, once the markets were secured the investments were justified. The subsequent economies of scale, enhanced by the economies of scope because of the new technological innovation, facilitated sustained access and entry, reinforced consumer loyalty and created entry barriers for others. Should these developments be permitted to continue unchecked and unchallenged, a large share of world production would be supplied by these world-scale operations and their associates. But world markets cannot sustain a plethora of world-scale products or finance ever increasing waves of new technology or technological innovations. This trend is bound to disappear. Then the few lucky pioneers can expect to have the territory for themselves for some time. Soon, there may not be much choice left, because it may no longer be possible to establish a new world-scale operation or join an existing one, regardless of the cost or choice of strategy. This brings a sense of urgency to strategic options, as stakes are being raised all the time. This sense of urgency is further shortening the life of inefficient and small facilities, accelerating the actual rate of transformation and curtailing the transitional period from current arrangements to those suitable for future operations. In so far as the range of options is concerned, MNEs face a wide choice from rationalised-integrated arrangements at one extreme, to the world product mandate (WPM) at the other. Unfortunately, indigenous firms and, for that matter, their governments, do not seem to have much choice — at least not yet. Owing to this lack of choice, discussion and examination of the situation are gaining in importance and urgency in government circles as never before.

Increased Global Rationalisation

Armed with the competitive powers of new technologies, world-scale production and lower labour costs, producers from the newly industrialised countries (NIC) of Asia and Latin America have begun to march into the large and rich markets of older industrialised countries. These producers leave no market unexplored, nor are they stopped by tariff and nontariff barriers. They can easily outcompete relatively high cost producers by simply offering a much better range of prices, quality and choice.

Faced with these difficult realities, MNEs’ subsidiaries can no longer take any refuge in old truncated or tariff factories. They are forced to respond accordingly and recognise the need for rethinking, redesigning and reconstructing the past arrangements. Certain subsidiaries of US based MNEs seem to face a more urgent problem, as they can no longer rely on their parents’ more advanced technologies to come to their rescue. To their dismay, the technological lead has already shifted to others (i.e. in Europe and Japan). In some cases, the shift is more pervasive. Not only have these MNEs lost their technological lead, they are also on the verge of slipping from their once commanding position. This latter subject is cause for extreme concern. For those host governments or businesses (including subsidiaries) that rely on, or are already attached to these particular US based MNEs, a reexamination and reformulation of the technological strategy and environment are in order. For other host governments and businesses not so directly attached or technologically aligned, the question of technological alignment is becoming a more crucial issue. Some of these leading-edge technologies are not compatible with each other, and the cost of shifting from one to the other at a later stage may prove to be very high — if not completely unaffordable.

Intensification of Research and Development and Investment Incentives System

Faced with new developments in production technology and the resulting invasion of their markets, host countries have also started to reassess their technological requirements, reexamine their policies with respect to technology, and reformulate their research and development (R&D) infrastructure and environment to resist and arrest any further erosion of their subsidiaries’ viability. Although the range of choices (and their associated research commitment) is rather clear (e.g. from fully rationalised-integrated subsidiary with no R&D to a WPM with its own fully developed R&D), the MNE’s response to the host country signals for change has, for the most part, been mixed and, at times, noncommittal. In taking this stance, MNEs heighten the state of competition and raise the level of local support for such undertakings amongst the contending nations. This, in turn, forces the national government to apply an unprecedented level of scrutiny to the comparison of potential choices and/or candidates. As a result, the tables are turned. MNEs as suppliers of technology are induced to disclose and make commitments for larger undertakings than they initially foresaw. Thus, MNEs in concert with the host, and potential host, countries justify and pave the road for further rationalisation and globalisation of production, international trade and investment.

Emergence of NICs

The impressive success of NICs combined with ever mounting pressures from rather efficient low cost NIC producers have also started to play an influential role in the process. NICs’ relative success in solving most of their own economic problems serves as a model, and, hence, justifies other host countries’ demands for more potent technologies and highly favourable arrangements in order to catch up with these NICs. As a result, the push is on for better deals and for the transfer of more advanced technologies to combat the ongoing trade pressures, to improve the balance of payment crises that most developing nations face and, optimistically, to reserve these negative trends through future exports.

To enhance the future technological, and hence economic, viabilities, most host country governments have reformulated their new science, technology and R&D policies. These policies are not only quite progressive in terms of expectations and requirements, but also very competitive in terms of tax breaks, exemptions, grants and other financial and nonfinancial incentives. Therefore market pressures on the one hand and governmental pressures and incentives on the other are forcing new arrangements. MNEs, in turn, have come to realise that cooperation and a positive response to these signals may lead to access with favourable terms, and to an increase in their overall competitiveness, not only in the local markets but also in wealthy and lucrative markets elsewhere. Conversely, rejection or a negative response may not only shut them out of local markets, but also enhance their competitors’ overall state of viability and competitiveness. In sum, the MNE-host country’s once seemingly simple game of international business has recently begun to take on the complexity of multi-player and multipurpose games in which stakes and risks are high, but payoffs considerably higher. However, a real loss can still spell potential economic ruin.

The Fall of Trade Barriers and the Rise of Trade Intermediaries

Dramatic lowering of tariff barriers as a result of the Tokyo Round of the GATT is eliminating a substantial number of tariffs and reducing others. The average reduction is of 30 to 40 per cent. This has begun to threaten small and locally oriented producers. These producers must make a choice between increasing their scale to raise their efficiency to compete in the international market, or risk elimination. Their inexperience in international markets has given rise to the demand for international marketing related services. In response to these demands, a large group of small and medium sized intermediaries and trade agents have become rather active.

Parallel developments in the area of worldwide distribution through the advent of large-scale national and international trading companies are also changing the nature and composition of world trade in other ways. Through the facilities of these trading intermediaries, small but specialised companies are entering the international markets with a vengeance. These smaller companies are taking advantage of their market niches to reach their potential worldwide market segments in support of their ongoing quest for growth. This is done through further improvements in quality and variety, combined with product line expansion and further market penetration and expansion. There is strong evidence to suggest that this type of planned incremental and gradual growth has resulted in an increasing world market share for its practitioners, thereby changing the nature of competitiveness and source of competition, and intensifying the rate of change well beyond the reaches of past expectations.

Introduction of Nonconventional Procedures

The severe debt crises of developing countries, combined with the mismanagement or shortages of foreign exchange, is creating opportunities for innovative or nonconventional procedures. Some of these procedures have revived past practices. Countertrade is certainly one of these. Within the past five years, countertrade has started to assume an important place in international trade and transactions. Countertrade, or ‘offset’ transaction, as it is popularly called, was limited to the Eastern European and Communist countries for a long time. Shortages of foreign exchange and inconvertibility of their local currencies forced these countries to enter into a variety of ‘counterpurchase’ and ‘barter’ agreements when dealing with the rest of the world. The recurrence of similar problems, combined with a traditional lack of international marketing expertise, in the less developed and even developed countries, has revived barter agreements and is giving countertrade a new life. A large number of international transactions are reported to include an Offset’ component. Through countertrade, the seller of goods and services or the supplier of technology agrees to receive the other’s goods and services as partial payment instead of an outright monetary payment. Under such arrangements, even the simplest monetary transactions of the past take on a degree of complexity that most conventional subsidiaries are not equipped to handle. Consider, for example, the fact that Pepsi Cola was forced to accept foodstuffs and alcoholic beverages as partial payment, and thus became the supplier of these goods to international markets. Even more dramatic are the cases where lumber, coffee beans and primary metals are offered as partial payment for highly sophisticated products such as jet engines or aviation electronics. Countertrade has therefore introduced new opportunities and impediments. Although it is helping certain producers to enter international markets it is also adding new dimensions and complexities to international transactions. Simply, it is complicating the management of subsidiaries in general, and that of the headquarters in particular. The mastery of these complexities, however, creates market opportunities that would otherwise be considered closed or not viable.

The Scope and Coverage of the Book

Managing a subsidiary has never been an isolated affair. The additional interdependencies resulting from the above environmental changes have increased the need for a better understanding of the context within which subsidiary management is to be conducted. This context is not simple, nor is it set or controlled by an entity. In fact, there are many formal and informal entities exerting a multitude of influences which individually and collectively shape the environmental context. The interests of MNEs and home and host countries are factors of foremost and determining influence but a variety of other international institutions (e.g. international regulatory agencies, UN agencies, etc.) and nongovernmental organisations make their presence felt and also play a role in shaping and reshaping the overall environment and the subsidiary’s immediate operational context.

Growing competition between MNEs for a larger piece of the action in international markets intensifies the need for efficiency. The quest for ever more efficient operations makes it imperative that MNEs find ways within their own organisations to achieve such required efficie...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Contents
• List of Figures
• List of Tables
• Preface
• 1. Introduction: Managing the Subsidiary
• Part I: The Emerging Policy and Operational Context
• Part II: Managing the Subsidiary in a Changing Environment and Operational Context
• Part III: Some Empirical and Theoretical Evidence
• Index