Globalization and corporate strategy
Vladimir Pucik (2006) discusses the typology of Perlmutter’s three types of multinational companies. In 1969 Perlmutter described three types of companies and suggested that the geocentric firm would be the firm typology of the future:
“In an ethnocentric firm, each subsidiary is required to conform to the parent companies way of doing things regardless of local conditions. In a polycentric firm, each subsidiary is allowed to develop with minimal interference providing it remains profitable. In a geocentric firm, the subsidiaries are part of the world whose focus is on worldwide as well as local objectives, each making its unique contributions with its unique competence (Perlmutter, 1969; Pucik p. 85, 2006).”
A review in literature indicates that in later years the definition of the regiocentric organization has been added to these taxonomies of organizations. In their models, they have identified four stages of evolution…these stages would evolve from ethnocentric, to polycentric to regiocentric to geocentric orientation (Heenan & Perlmutter, 1979; Ayman et. al, 1994). A regiocentric organization is a demographic and a definition involving the evolution of organizations. Researchers, Moran, Harris, and Moran (2007) recognize that a regiocentric organization has as an operational paradigm that only regional insiders can effectively coordinate functions within the region. It was not until in the late 1980’s to the early 1990’s, those organizations were evolving into global corporations. A geocentric organization is an organization with a blend of “multiculturalism and geographic diffusion” (Kets de Vries & Florent-Treacy, 2002.) The evolution of geocentric firms became very popular and this geocentric concept is what defines a global organization. Kets de Vries and Florent-Treacy (2002) state that “in the past 15 years or so—a growing number of organizations have become geocentrically oriented (p.297)”. Businesses have entered markets by international joint ventures, alliance, mergers and acquisitions which cross international and cultural borders. These transactions have transformed multinational organizations (MNCs), (which are more polycentrically oriented) into global organizations. This distinction is the differences between multinational organizations (MNCs) and global organizations (GOs), including the business strategy and structure of the organization.
A multinational organization is defined as “a corporation that engages in production or service activities through its affiliates in several countries, maintains control over the policies of that affiliate and manages from a global perspective (Deresky, 2006).” Kets de Vries and Florence-Treacy (2002) suggest that astute leaders who recognize that the differences in opportunity, environmental constraints, competition, consumer sophistication and technological innovation, have shaped their organizations structure and processes accordingly an moved beyond polycentricism (p.297) Organizations who move toward a geocentric organization are “creating an integrated system with a worldwide approach” (Moran, Harris & Moran, 1997). Furthermore, geocentrism is a fundamental identifying element of a global organization.
Globalization and global strategy have emerged as key areas of inquiry within international business as technological developments continue to contribute to worldwide markets being formed (Levitt, 1983; Ohmae, 1985). This paper seeks to examine whether globalization is an effective corporate strategy in this era when almost every organization has realized its potential and strategic value.
Following the development of global markets, it has been recognized that the nature of competition has changed and companies are required to capture global-scale efficiency and develop worldwide learning capabilities that drive continuous innovation (Barlett & Ghoshal 1989). The other key variable beside global scale in driving cost and market share is standardization which has been widely acknowledged in the literature as one of the key drivers of global strategy (Levitt, 1983; Loyka & Powers, 2003). Together with the other variables identified as centralization, expanded strategic planning, long-term planning, global market development and organizational flexibility, the strategic importance of global strategy is examined on the foreign market development strategy of the firm.
Two articles in particular have influenced this paper. Kim and Hawang (1992 suggest that firms need to consider their overall global strategic position in formulating their foreign market development strategy. Yip and Johansson (1994) develop and test the strategic dimension of globalization and find that Japanese firms have more globalized strategies than U.S. firms and that this factors affects their performance favorably.
One of the earlier areas of inquiry in foreign market development strategy is the Stage Theory (Johansson and Wiedersheim-Paul 1975). The Stages Theory authors argue, based on their in-depth research on large international Swedish firms, that organizations tend to make incremental commitments to foreign markets along a risk curve. Firms begin their internationalization process by first engaging in the least risk activity of exporting. As their experience base grows, they progress to form contractual or agency relationships and eventually engage in direct investment in production and distribution capacity. Their model of internationalization suggests that the basic mechanisms of internationalization rest upon commitment decisions which are made based on the current knowledge of the market held by the firm, which results in market commitments being made. Globalization theory has not been without its detractors. Turnbull (1987a) concludes, based on data gathered on British companies from the Industrial Marketing and Purchasing Group (IMP), that the stages theory of internationalization inaccurately portrays the international expansion of British companies in Europe in the three industries studied (large marine diesel engines, motor vehicle components, and telecommunications equipments). A study of European forest products firms also failed to support the stages theory (Sullivan and Bauerschmidt, 1990). However, a study by McKenzie (1997) of Canadian oil and gas transportation firms in Latin America did find general support for the theory. The results of these studies suggest that there are intervening variables such as home country location, degree and number of foreign markets developed, industry, as well as a combination of these three affecting a firm’s stages in their internationalization process.
Foreign market development strategy
Dunning’s Eclectic Theory has been responsible for the development of a number of investigations relating ownership, location and internalization (OLI), as well as other factors, to foreign market development strategies. Two streams evolved within the eclectic framework. One body of literature focuses on the individual factors of ownership, internalization and location, and examines their impact on development strategy in isolation. The other stream that this study is positioned in examines development strategy as the combination of variables that make up these three factors.
In an empirical investigation of foreign market development strategy choice in U.S. service firms using the transaction cost theory, it was found that foreign market development behavior in the service sector is characterized by considerable diversity, especially in comparison with the manufacturing sector (Erramilli, 1990). One explanation advanced is the general inseparability of production and consumption, which essentially ruels out exports. Further findings of the study were generally in line with the predictions of transaction cost theory.
Transaction cost has been examined in terms of research and development, where it was found that firms technically sophisticated products are more likely to choose a high-control strategy to protect R&D investment (Bradley and Gannon, 2000). This line of inquiry continues, (Tsai and Cheng, 2002) where it is found that higher levels of firms asset specifically led to higher ownership levels, as the incentive for potential partners to take advantage of foreign firm proprietary know-how increases (Anderson and Gatignon, 1986; Kin and Hwang, 1992). Support has been found for an extended transaction cost model (Brouthers, 2002 which includes institutional and cultural context variables.
Other studies argued that the joined interaction of transaction cost and bargaining power further explained further development strategy choice by a group of Spanish multinationals (Palenzuela and Bobillo, 1999). The importance of transaction costs has been found less important in more particular situation (Burgel and Murray, 1999). For their large sample of UK international high-tech star-ups, they found that the firm’s organizational capability offers a better explanation of their development strategy decisions than does either Transaction Cost or Stage Theory. Organizational capabilities for these firms are defined as the necessary trade-off between resources available and the support requirements of the customer.
Size and experience has been examined in a number of studies (Agarwal and Rasaswami, 1992). Key findings include that size had little impact on foreign market development strategies (as hypothesized by Dunning, 1979) and that experience influenced only the export development strategy. The results further indicated that U.S. firms most prefer to develop foreign markets by exporting and least by direct investment I foreign manufacturing subsidiaries.
Using a behavioral theory approach that highlights the impact of market knowledge on international business decisions, (Erramilli and Rao, 1990) the role of market knowledge in the choice of foreign market development strategy by service firms is examined. As a proxy for market knowledge, they studied firms which followed clients into markets (client following firms) versus firms which developed market seeking new clients (market seeking firms). they reasoned that client following firms have greater market knowledge by virtue of the fact that they have existing customer relationships vs. their market seeking counterparts. As a result, they hypothesized firs, that client-following firms would, due to their greater market knowledge, seek higher involvement development strategies. Secondly, they hypothesized that market seeking firms would tend to pursue development strategies, that involve the participation of entities external to the firm. The results of convenience survey of 463 U.S. international service firms confirmed that indeed client-following firms did seek higher involvement strategies and that market seeking firms did tend to involve outside entities in their development strategies.