The Role of Resources in Global Competition

John Fahy

• Publisher: Taylor & Francis
• Year: 2002
• Print ISBN: 9780415237116
• eBook ISBN: 9781134560172
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

Dramatic changes are taking place in the world of international business as we move forward in the twenty first century. Increasing levels of international trade and foreign direct investment, the growth of huge multinational corporations, and the emergence of new centres of economic prosperity are all evident. Businesses are faced with the challenge of having to survive and succeed in this competitive environment.This book looks specifically at the question of how firms attain a sustainable competitive advantage (SCA) in a global environment characterised by above average levels of geographic scope, marketing convergence and cross-national interdependencies.This work will be of essential interest to academics and researchers in the fields of international strategy and international business.

1 Introduction

In recent decades, the level of research attention being given to questions relating to why organisations work in the ways that they do has grown dramatically. But as our stock of knowledge grows and consolidates, so too, it appears, does the complexity of the tasks which managers face.
Conferences are convened and special issues of journals are dedicated to the search for new paradigms suitable for the modern competitive environment. It has become commonplace to talk about the information age, the post-industrial society and the new economy. Thinkers like Charles Handy talk about an ‘age of unreason’ (Handy 1989), which requires radical, ‘up-side down’ thinking and new approaches to solving business problems. A variety of terms have entered the business lexicon, including business process reengineering, downsizing and rightsizing, the knowledge organisation and core competencies, to mention but a few. The business of seeking answers to today’s and tomorrow’s business problems has become a booming industry worth some $20 billion a year (Economist 1997a). The emergence of these ‘new’ solutions has been greeted with scepticism in some quarters. For example, Hilmer and Donaldson (1996) argue that the seemingly endless flood of new fads serves only to undermine management theory by urging managers to cast aside well-established practices in favour of new ideas. Others have argued that it is time to get off the ‘verbal merry-go-round’ and return to an action perspective on management research where the value of research is measured by usefulness rather than by newness (Eccles and Nohria 1992).

Though the search for new management ideas may have been taken too far, the kinds of challenges facing today’s managers is aptly demonstrated by a recent special issue of the Strategic Management Journal. The editors describe a new competitive milieu that is forming as a result of a combination of ten different pressures, ranging from deregulation to environmental concerns to technological discontinuities (Prahalad and Hamel 1994). It is noteworthy that three of the proposed ten pressures for change all relate to the increased globalisation of business, namely, the decline in protectionism, the emergence of trading blocks and global competition. The globalisation of the business environment has been predicted for some time. For example, Toffler (1980) argues that the nation state is becoming obsolete in a global economy dominated by large transnational corporations, while Levitt (1983) has proposed that the combined forces of technology, communication and travel are helping to create markets that are increasingly homogeneous across countries.

Consequently, understanding the potential impact of a global environment on individual firms has become crucial. Opportunities present themselves in the form of new markets or the possibility of serving global markets from one or a few world centres. New competitors are emerging, often with different resource configurations or different perceptions on how the ‘game should be played’. Institutional and political developments at a supranational level are increasingly impinging on the operations of individual firms. From a strategic management perspective, a central task facing executives is to chart a course for the organisation that enables it to gain and maintain a position of advantage over its competitors. The question of competition between firms has historically captured the interest of scholars, most notably in management and economics, and several conflicting views have emerged. This book seeks to integrate perspectives from a number of streams of literature including organisation theory, economics, international business and strategic management to further our understanding of how firms attain a sustainable competitive advantage in a global environment. A model of competitive advantage in a global environment is developed and a set of propositions is tested on a sample of firms in a global industry. The findings are reported and assessed in the context of the extant literature. The following sections provide an outline of the background to the book, the objectives of the research and an overview of how it was conducted.

BACKGROUND

Some developments in world trade

World trade since 1945 has been characterised by dramatic levels of growth in both its scale and scope. Since the end of the Second World War, trade has been growing at a faster rate than world output. For example, since 1950, world exports of manufactured goods have risen by a factor of sixteen compared with output growth of around six (Economist 1998). Dramatic shifts can also be seen in the direction of world trade and investment. In 1993, developing countries attracted a then record $70 billion in foreign direct investment (FDI), nearly twice the amount they received in 1991 and almost as much as the world’s total FDI in 1986 (Economist 1995). This pattern has continued throughout the 1990s, with developing countries accounting for 45 per cent of foreign direct investment inflows in 1997 (Economist 1998). The geographical composition of trade has also shifted significantly with an increased percentage being accounted for by Japan and the other ‘newly industrialized countries’ of South and East Asia, while the relative importance of North America has declined and Western Europe has remained relatively constant (Grimwade 2000).

Important shifts in the industrial composition of world trade can also be observed. In 1955, over half of all world trade was in primary products, such as food, raw materials, ore and minerals, fuels and non-ferrous metals. By the mid-1990s, these products represented just 22 per cent of world merchandise trade. In contrast, manufactures have grown to account for the bulk of world trade and within this sector the biggest increases in trade shares have occurred in engineering products, which have grown from 21 per cent in 1955 to 38 per cent in 1995, while office and telecommunications equipment have grown from just under 1 per cent in 1955 to over 12 per cent in 1995 (Grimwade 2000). Trade in services has also grown dramatically, accounting for about 25 per cent of world trade in 1999 (WTO 1999). Equally important is the direction of trade within industries. In 1930, the United States held over 80 per cent of the world market for automobile production. By 1980, their share had dropped to just over 20 per cent, while Japan’s had grown from 0 per cent in 1930 to over 28 per cent in 1980, and this despite the fact that by the 1980s, much of the production of automobiles in US plants was foreign-owned (Aliber 1993).

These evolving patterns of trade have coincided with the growth of some very large organisations. The United Nations estimates that the 100 largest multinationals, excluding those in banking and finance, accounted for $3.1 trillion of worldwide assets in 1990, or about 40–50 per cent of all cross-border assets (Economist 1993). Significant levels of consolidation have taken place in many sectors, such as pharmaceuticals, financial services, automobiles, telecommunications and media enterprises, leading to the formation of many large, globally scaled conglomerates. However, not all international trade is conducted by giant corporations. For example, Germany has many small to medium-sized companies or Mittelstände that have large market shares in their particular sectors and account for the bulk of Germany’s trade surplus. These companies operate in businesses as diverse as measurement and control instruments for lengths and angles to cigarette machines to food for tropical fish (Simon 1992). These are typical of the international specialists identified by Mascarenhas (1999) that are resulting from falling trade barriers and corporate restructuring. Similarly, an analysis of US export statistics by Mahini (1990) found that the top 50 US multinational companies (MNCs) accounted for less than one third of all US exports in 1987.

The international business literature

The growth and diversity of world trade is mirrored by a growth in academic research addressing the management of firms operating across national boundaries. International business research is by no means a new field. It is possible to argue that it has its roots in trade theory (Ricardo 1817; Smith 1776) and although the focus of that research related to country competitiveness, it provided a foundation for later theorising on questions such as the location of international production (Dunning 1977). But it has been in the past three decades that the field has really begun to develop. Research by Nehrt, Truitt and Wright found that up to 1960, only sixteen research projects fitted their definition of international business research (Nehrt, Truitt and Wright 1970). By the time their study was concluded in 1968, over one hundred separate projects in the area were known to be under way. Since then the field has grown dramatically in terms of both breadth and diversity (Scholl-hammer 1994; Wright and Ricks 1994). Research activity has broadened across a greater range of functional areas and now also originates from a variety of geographic locations other than the United States (Thomas, Shenkar and Clarke 1994).

As the field has grown, four disciplines, namely economics, management, marketing and finance, have exerted a significant influence on its development (Chandy and Williams 1994). Consequently, two quite distinct paradigms can be observed. On the one hand, there is a well-established economics tradition, which has its roots in trade theory and has developed through contributions from industrial organisation economists (Caves 1971; Hymer 1960; Kindleberger 1969), transaction cost economists (Buckley and Casson 1976; Rugman 1981) and efforts by Dunning (1977; 1981) to develop an eclectic paradigm of international production. The primary focus of the economics paradigm has been on explaining the existence of the multinational company (MNC), though there has been little agreement on the issue between the different branches of economics. For example, industrial organisation economists have argued that MNCs exist to extend domestic monopolies across national borders in ways that overcome the inherent costs of doing business abroad. In contrast, transactions cost economists argue that MNCs exist because of the need to internalise value-adding activities in the absence of an effective external market mechanism.

The other major paradigm in the field, the management tradition, concerns itself less with the reasons why MNCs exist than with trying to understand how they can be managed effectively. For example, Porter (1986a), in what was perhaps a thinly veiled criticism of the economics tradition, commented that ‘we know more about the problems of becoming a multinational than about strategies for managing an established multinational’ (Porter, 1986a: 17).

Early management contributions concerned themselves with assessing how organisational structures change as firms internationalise (Chandler 1962; Fouraker and Stopford 1968) and with behavioural explanations of internationalisation (Aharoni 1966; Perlmutter 1969). Subsequent literature which has typically addressed core themes such as business strategy (Ghoshal 1987; Ohmae 1985; Yip 1989), organisational structure (Stop-ford and Wells 1972; Egelhoff 1982; Ghoshal and Nohria 1993) and the managerial processes of planning, coordination and control (Lorange 1976; Doz and Prahalad 1984; Hedlund 1986) represent initial efforts to inform the nature of management in multinational firms.

In summary, the international business literature is characterised by diversity in both its intellectual origins and in its focus of study. While such richness is desirable, it can also lead to problems. The simultaneous development of the economic and management paradigms has led to repeated calls for greater efforts to integrate perspectives within the field (Buckley 1991; Daniels 1991; Dunning 1989). The research to date adopting the management perspective has been criticised for its strongly functional orientation, reflected in contributions originating in disciplines such as finance, marketing, personnel and accounting (Wright and Ricks 1994). It is against this background of a rich but fragmented literature base that this research developed. The book seeks to deal with a core strategic issue facing firms, namely, how to gain a sustainable competitive advantage in a global environment, an issue which has to date received relatively little attention in the literature (Craig and Douglas 2000). And in doing so, it seeks to address the question in a way that takes account of both the management and economic traditions in international business.

OBJECTIVES OF THE BOOK

In virtually all economic analysis, differences between firms in the same line of business are repressed, whereas for researchers in the field of strategic management, firm heterogeneity is at the heart of their inquiry (Nelson 1991). One of the firm differences of central interest to management researchers and practitioners is that of performance. Why are some firms strong performers when measured along familiar dimensions such as sales growth, market share and return on investment while others struggle to survive or go out of business? Strategic management theory proposes that sustained superior performance is contingent on the ability of the firm to gain and retain a competitive advantage in the marketplace (Day and Wensley 1988; Ghemawat 1986; Porter 1985). While there is general agreement on the link between superior market/financial performance and the possession of a competitive advantage, there is somewhat less on what are the sources of advantage. For example, in the early 1980s, superior performance at the level of the firm was seen as contingent on the industry conditions in which the firm operated and how effectively the firm positioned itself within an industry (Porter 1980; 1985). However, by the second half of the decade, this view was being challenged by a number of authors who proposed instead that resource asymmetries between firms competing in the same industry is the key variable impacting on firm performance (Barney 1986a; Coyne 1986; Dierickx and Cool 1989). The rapid growth of this perspective in the early part of the 1990s led it to become known as the ‘resource-based view’ of the firm (RBV), a term originally coined by Wernerfelt (1984).

A review of the international business literature reveals that the question of sustainable competitive advantage in a global environment has been relatively neglected to date. Many of the issues of interest to international business researchers clearly can have a positive impact on performance, whether it be the transfer of domestic advantages to foreign markets (Hymer 1960), the effective arbitrage of financial and information opportunities in international markets (Kogut 1985a) or the development of effective coordination and control mechanisms between headquarters and subsidiaries (Doz and Prahalad 1981). But to date, the links between strategic action and superior performance have not been well delineated. In particular, there has been relatively little attention given to the question of sustained superior performance, which is somewhat surprising given that the sustainability of advantage and accruing returns have long been of interest in the field of strategic management. Sustainability of advantage is likely to be a particularly pertinent question in a business environment which is global, bringing with it greater levels of turbulence, uncertainty and complexity. Therefore, the primary focus of this book is on the question of how firms attain a sustainable competitive advantage in a global environment.

Underlying this overall objective are a number of sub-objectives. First, the term globalisation and its various connotations such as global strategy and global environment are used in a variety of ways by writers in the international business field. An initial sub-objective of the book is to propose a definition of what is meant by the term ‘global environment’ and to specify whether and how it differs from other frequently used terms such as the ‘international environment’. Second, as noted earlier, a great deal has been written about firms trading internationally from the perspectives of both economics and management. Consequently, this book seeks to integrate and assess what is already known about global competition in order to build a reliable foundation for further conceptual and empirical work. Third, this book adopts a resource-based rather than an industry-based view of sustainable competitive advantage. However, the resource-based view of the firm (RBV) draws insights from both economics and strategic management and is also undergoing continued development with the emergence of new insights and points of clarification. A third sub-objective is to synthesise the extant RBV literature to provide an integrated picture of its origins, insights and status. Of particular relevance to this study is that the RBV literature has, with a few exceptions (e.g. Collis 1991; Fahy et al. 2000; Tallman and Fladmoe-Lindquist 1997), been exclusively domestic in its focus. It has not taken account of how a firm’s resource configuration may be influenced by the country or countries in which it operates. A fourth sub-objective is to propose an extension of the resource-based view more accurately to describe the nature of competition in a global environment. Finally, one of the criticisms of the resource-based view is that, to date, its development has been largely conceptual rather than empirical in nature (Yeoh and Roth 1999). Some empirical contributions have begun to emerge, but its core propositions remain subject to verification, due in no small part to the difficulty inherent in measuring some of its key constructs (Godfrey and Hill 1995). A final sub-objective of the study is to develop a research design that facilitates an empirical test of propositions derived from the resource-based view of the firm. The objectives of the book are summarised in Table 1.1.

As academic disciplines grow and develop, it is argued that they should take stock of their progress from time to time (Thomas and Pruett 1993). In recent years, there have been several critical reviews of both the strategic management and international business fields. In a hard-hitting review, Bettis (1991) suggested that strategic management was caught in a normal science straitjacket, leading to what Daft and Lewin (1990) describe as ‘incremental, footnote-on-footnote’ research. Some of the problems identified within the field include research based on outdated concepts (what Bettis calls ‘studying organisational fossils’), an ethnocentric focus and a lack of managerially relevant prescription (Bettis 1991). In looking at competition in a global environment, this book concerns itself with an issue that is both of current relevance and is, by definition, non-ethnocentric. Indeed, the importance of global competition as an area of research is demonstrated in a study by Lyles (1990), who found that a sample of strategic management experts rated it as the area likely to have the most impact on strategic research over the next ten years and also as the topic likely to be of most relevance to practising managers. The passage of time has not disproved these predictions and the emergence of an information society has only served further to increase the global dimensions of modern business. Relevance in strategic management research has also been a concern for some time. By looking at the relationship between resources and advantage and the performance implications of this relationship for firms operating in a global environment, the book seeks to meet such criteria as timeliness, innovativeness, meaningfulness and actionability, which are among the dimensions of practical usefulness that have been specified in the literature (Shrivastava 1987; Thomas and Tymon 1982).

Table 1.1 The objectives of the book

Thomas and Pruett (1993) note that, by its very nature, the field of strategic management is routinely exposed to a variety of perspectives and consequently a fertile ground for multilectic inquiry. It is interesting to note that several reviews within the field of international business have stressed the need for more integrative and interdisciplinary approaches to research (see for example, Buckley 1991; Daniels 1991; Dunning 1989; Dymsza 1984a; Ricks 1985; Sullivan 1998a, b; Sundaram and Black 1992). Indeed, a review of twenty-seven years of Journal of International Business Studies scholarship by Sullivan (1998a) found that international business research activity has generated a significant downward trend in comprehensiveness, connectedness and complexity, further supporting the view that the field is suffering from a ‘narrow vision’. Calls for greater integration are not surprising given the multidisciplinary nature of the international business field, drawing as it does from the social sciences such as economics, political science, sociology, psychology, history and anthropology as well as from the functional fields of bu...

Table of contents

• COVER PAGE
• TITLE PAGE
• COPYRIGHT PAGE
• FIGURES
• TABLES
• ACKNOWLEDGEMENTS
• 1. INTRODUCTION
• 2. PERSPECTIVES FROM INTERNATIONAL BUSINESS
• 3. THE RESOURCE-BASED VIEW OF THE FIRM (RBV)
• 4. SUSTAINABLE COMPETITIVE ADVANTAGE IN A GLOBAL ENVIRONMENT
• 5. COMPETITIVE ADVANTAGE IN THE GLOBAL AUTOMOTIVE COMPONENTS INDUSTRY
• 6. CONCLUSIONS
• 7. APPENDIX: RESEARCH DESIGN
• BIBLIOGRAPHY