In addressing this question, it would be pertinent to make some preliminary observations about nature of the current phase of globalization which characterize the contemporary global economy. Although internationalization of economic activities like trade, investment and production started in a major way since the 16th century when European colonization spread out throughout Asia, Africa and Latin America, what we call globalization is completely new. The 'new' globalization involves the emergence of international trade and production networks characterized by the rise of intra-industry and intra-product trade, the ability of producers to break the production process into geographically separated steps, the fact that the geographic dissembling process has affected both goods (e.g. auto parts) and services (e.g. banking) and that global trade integration appears to be correlated with disintegration of production. (Gireffi, 2005)
The rising integration of markets through trade has also facilitated what is known increasing fragmentation or disintegration of production at the industry or firm level. In particular, there has been a dramatic reorganization of international production and trade in which the multinational companies (MNCs) or Trans-national Companies (TNCs) have been playing the role of movers and shakers. Companies are finding it profitable to outsource (domestically or abroad) an increasing share of their no core manufacturing and service activities. For instance Juan Alcácer states simply that, "dividing activities across locations is common in manufacturing industries and multinational firms. I argue that competition costs and agglomeration benefits vary in magnitude according to the value-chain activity performed. Competition is less threatening to activities that are distant from the product market" (Alcácer, 2004). She further backs up her theory in a later article where she says that firms are able to make a distinction between themselves and competitors when they do such activities in order to soften price competition.
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This represents a breakdown of the vertically integrated mode of production- the so-called Fordist model, originally exemplified by the automobile industry-on which U.S. industrial prowess had been built for much of the 20th century. The success of the Japanese model of "lean production" in the global economy since the 1980s, pioneered by Toyota in automobiles, reinforces the central importance of coordinating exceptionally complex inter-firm trading networks of parts and components as a new source of competitive advantage in the global economy (Jacque, 1995). The task of ensuring smooth and efficient movement of inputs, intermediate products, materials and information from one step to another, often over geographically sparse locations is done through a systems approach, known in International Business language, as global supply chain management (GSCM). The goals of GSCM are to reduce inventory, reduce cost and add value at each of the stages. The latter goal is known as value chain analysis (VCA).
According to Gary Gireffi, in value chain approach, value is added at different parts of the production and marketing process. Often, different firms in different geographic locales will take on different parts of the production and marketing process (many large western retail fashion stores, for example, produce none of their own goods (Alcácer, 2006).
In one sense, GSCM and VCA may be considered as two sides of the same coin. Yet this is not always the case when certain links in the GSC do not add much value. The links play a mechanical role of relay race without playing a substantive role of creating value or adding to the revenue stream. Therefore, the relation is not automatic. Rather, it should be a conscious strategy of the firm to make sure that each stage adds value. This happens mostly when management discounts the role of supply chain as a lower priority cost centre or back-office job. Thus, disjuncture, if any, between core strategy of the company and GSCM should be minimized. Hence, designing, sourcing, manufacturing/assembly or service generation, warehousing, marketing, delivery and after sales service should be viewed in an integrated whole rather than segmented operations. This may entail additional involvement in the value chain, particularly at stages where the firm is not currently involved. Managers should then determine what assets are required in order to perform these activities effectively (Craig & Douglas, 1996).
The question is, what strategies should be adopted by companies in order to maintain their positions at the top of the value chain, meaning, they slice up the production or service generation and marketing process in such a manner that they attain and retain competitive edge over the competitors and earn greater revenues and profits. The industry creation perspective holds the view that firms could alter the competitive dynamics of the industry with creative strategies (Tsang, 2003).
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To compete successfully in world markets, firms from emerging market and newly industrialized economies need to develop strategies to participate more broadly in the transnational value chain (Craig & Douglas, 1996). Moving up the value chain implies a continuous process of change, innovation and productivity growth. For example, an Indonesian contract manufacturer who produces athletic footwear for Nike is part of a transnational value chain that extends well beyond Indonesia. Its role focuses on sourcing and production, while Nike controls the transnational value chain and captures most of the "value" generated through its advertising, marketing, and distribution system. If the cost of goods supplied from Indonesia becomes too high, Nike can easily shift to a lower cost labor market without disrupting delivery of "value" to its customers (Craig & Douglas, 1996). Products and services that are currently regarded as among the most innovative and experimental ultimately end up as commodities that can be produced anywhere and by many producers. Developed economies can only grow by inventing new technology, by innovating products and processes and by designing new management methods. To foster and support the innovation process, several policy areas could be considered:
Policies might also aim at creating new areas of economic activity, in stimulating new firm creation and entrepreneurship, or in stimulating innovation and technology in new areas, e.g. through public procurement. Also making a country an attractive location for economic activities can help attract foreign direct investment and foster new areas of economic activities. Understanding what determines national attractiveness, building on national strengths and addressing weaknesses to the extent possible can help in drawing greater benefits from the globalization process.
In recent years a discussion has emerged about the need and desirability of more government action, based on the success of some countries in strengthening comparative advantages in certain areas. Policies improving the functioning of labor, products and financial markets are necessary but may be no longer sufficient for successfully moving up the value chain, since market failures and externalities exist especially in new activities that are risky and require large-scale investments. However, experience in several countries with old-style industrial (support) policies has not been positive. Until the 1970s no product or investment project from overseas could be sold or set up in Japan unless it suited the government's industrial policy, however hard foreigners tried. Now the administrative barriers are down but not the socio-cultural ones, which mean that FDIs into Japan have continued to follow the joint venture route (Jacque, 1995). The current policy debate in several countries is seeking to move beyond these types of policies, underscoring the need for well-functioning and competitive markets, but looking for actions that the government can undertake to strengthen the capacity of firms to compete in the global market.
Countries aim to achieve industrial upgrading, meaning that they move from low value to high value parts of global production networks. Success in upgrading may be the result of a combination of government policies, institutions, corporate strategies, technologies, and human capital. In production, companies may move from simple assembly, through original equipment manufacturing (OEM), to original brand name manufacturing (OBM), to original design manufacturing (ODM). In order to attain this, upward trajectory countries must attain upgraded capabilities. However, the other companies within the production chain may resist this up gradation, for example by withholding access to a full production process to avoid it being copied. (Gireffi, 2002).
To maximize strategic and financial results, every part in the supply chain must be aligned closely with the unique value proposition that the organization is proposing to offer to its customers (Craig & Douglas, 1996). The supply chain must support the top level strategy of the business so that key customer promises are delivered. For example, if the top strategy is shortest lead time, the entire supply chain is to be based on speed and accelerated supply or if the top strategy is to deliver innovative product, the GSCM should be based on R & D, product development and rapid market launch whilst if the strategy is to minimise customer inventory, a flexible delivery may be planned. Also, often companies follow a policy of outsourcing to too many suppliers or vendors, creating a long supply chain. To ride on the top of value chain, the number of links and networks in the supply chain should be reduced to bare minimum of outstanding and excellent ones who deliver quality on time.
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Business firms often focus on material and product inventory but do not look at human management and human inventory. The principle should be making an inventory of human skills in the company and match role with skills. In the process, often, unnecessary and unconnected skills may be culled to ensure excellence and efficiency.
A more innovative and productive economy sector may require more highly skilled workers or a different mix of skills. Standard production tasks can increasingly be carried out in the developing areas where labor costs are often considerably lower. Upgrading the workforce can support a shift of economic activity towards more high value-added areas that might remain in the developed countries. Addressing this through education and training policy requires a growing focus on life-long learning.
Alcacer, Juan. (2004) 'Location choices across the value chain: How activity and capability influence agglomeration and competitions effects', Academy of Management Best Conference Paper, pp. J1-J6
Alcacer, Juan. (2006) 'Location Choices Across the Value Chain: How Activity and Capability Influence Collocation', Management Science, 52(10), pp. 1457-1471
Gireffi, G. (2005) 'The Global Economy: Organization, Governance, and Development', The Handbook of Economic Sociology, 2nd ed., edited by Neil J. Smelser and Richard Swedberg, pp. 160-182
Gireffii, G. 'MNCs and Gloval Value Chain: Shifting Paradigm of Development', North Carolina: Center on Globalization, Governance and Competitiveness.
Craig, C. Samuel and Douglas, Susan P. (1997) 'Managing the Transnational Value Chain-Strategies for Firms from Emerging Markets' Journal of International Marketing, 5(3), pp. 71-84
Tsang, Denise. (2003) 'The Interaction between Supply Chain Strategy and Industry Environment: Industry Creation or Industry Evolution in European Microcomputers', The Marketing Review, 3, pp. 311-327
Jacque, Laurent L. (1995) 'The changing personality of U.S.-Japanese joint venture: A value chain mapping paradigm', The International Trade Journal, 9(1), pp. 67-84
Option 2: Why is the technology contribution of multinationals potentially so important for developing countries? What factors will determine whether or not the transferred technology actually provides net benefits for the host developing country?
The aim, no doubt, for a developing nation is to maximize its development process via boosting its economy. The problem lays within the process itself, where boosting the economy can only be achieved through certain processes that are not as easy as they sound. First and foremost within that list lies the creation of new jobs for a population, which, according to the development demography put forward by certain well known economists, is booming and expanding at alarming rates. Second in line comes increasing productivity, and achieving more with fewer resources, which in ultimate leads to the preservation of valuable and scarce resources. This requires the ability to adopt new and more efficient technologies, which, frankly put, most developing nations do not have. Hence the only way out remains in attracting foreign direct investment (FDI) through Multinational Companies (MNCs) into the country, which helps to serve all of the above purposes for a nation striving to solidify its economy. As the economy gradually expands, more money is generated and is available for purposes of making purchases for consumption, which in turn, results in a need for additional distributive outlets. MNCs assist in filling these needs by providing expertise and organization required for building and operating a complex wholesaling and retailing distribution setup. The evolving distribution system delivers the convenience and assortment of purchases which contribute to the education of consumers (Hill and Still, 2001).
Most governments try to attract new foreign investors by providing various kinds of incentives, ranging from help with information about local business opportunities to tax holidays, employment subsidies and land grants (Kokkoa and Kravtsova, 2008). The Government of Malaysia (GOM) encourages foreign direct investment (FDI) by providing a number of incentives, particularly in export-oriented high-tech industries and "back office" service operations (Malaysia, 2009). Eventually the main aim is that such FDI will add some value to the economy either through the anticipated job creation or via some kind of technology 'spillover' which can then be adopted by the local firms and industries. By 1970, the 200 largest MNCs operated more than 28,000 subsidiaries around the world, and these subsidiaries generated sales of $80 billion (Das, 2001).
Foreign firms with more advanced technologies enter a local market and introduce newer technologies to the industry. Through direct contact with foreign affiliates, local firms can watch and imitate the way foreigners operate and can therefore become more productive. This may also occur through a labor turnover from foreign to local firms (Kinoshita, 1998). Another influence that foreign firms can have on the local industry is that their presence may increase the competition in the local market and hence the local firms may be forced to adopt existing technologies in order to live up to the up scaling market quality of a product.
In fact, technology and productivity spillovers have sometimes been identified as the most important benefits of FDI, particularly for developing countries and transition economies where domestic technologies are less advanced than those employed by large foreign multinational corporations (MNCs) (Kokkoa and Kravtsova, 2008). The reasons for such identification are all too obvious, and are as has been mentioned before, a primary necessity for a nation to be able to utilize the available resources sustainable way. International technology spillover, which occurs mainly through import and FDI channels, offers great opportunities for economic growth to developing countries that do little, if any, R&D activity (Seck, 2009). These opportunities come mostly from international trade and FDI. International trade makes new goods available that carry foreign knowledge along with it, either in the product itself, or within the process of manufacture of that good.
These nations receive valuable knowledge transfer through these labors, when perhaps after working in an MNC, the labor transfers to a local firm, providing them the knowledge obtained from the foreign firm and also the technological advancement they need to increase the efficiency of their local firms and industries. When foreign firms employ high proportions of professional and skilled workers, spillovers to domestic firms are positive and significant (Marin and Bell, 2006).
Yet many factors determine the 'positive and significant' effect on domestic firms, and dealt with the wrong way, or simply ignoring them can mean a total loss for the host nation, and failure to utilize benefits. Among the host country characteristics, the most important determinant is probably the general development level of the host country. In particular, improvements in general market structure; infrastructure and education are likely to encourage upgrading of affiliates (Rugman and Douglas 1986, Walsh et al. 2002), and their ability to absorb technology and knowledge spillovers. It can be assumed that spillovers are more likely when the technological capability of local firms is not too inferior to that of foreign affiliates: in those cases, local firms can use existing knowledge to adapt and adjust foreign technologies to their own use. More generally, earlier studies have stressed the importance of local conditions, noting that high education levels, good infrastructure, a strong financial sector, protection of intellectual property rights, and other indicators of relatively high development promote spillovers (Kokkoa and Kravtsova, 2008).
Perhaps closely linked to technology spillovers is knowledge transfer of MNCs to the host nation. Some would even say that they are perhaps the one and the same. Tina C. Chini states in an article that to capitalize on knowledge as a resource, firms need organizational capabilities has already stressed the idea that firms have to develop routines that allow them to effectively develop, store, transfer and apply new knowledge on a systematic basis in order to create value. Such infrastructure includes business intelligence, collaboration, distributed learning, knowledge discovery, knowledge mapping, opportunity generation as well as security (Chini, 2005). Chini later stresses that regardless of the above mentioned factors, perhaps the one factor that may affect the procedure the most is cultural distance between the host nation and the MNC. Cultural distance more often than not tends to limit the effectiveness of knowledge transfer. Culture not only shapes the belief system and traditional ways of life within a nation, it also, in some cases, tends to translate particular messages in its own way. Communication as such presupposes that knowledge can be "translated" across cultures, but if the two cultural frameworks do not have sufficient commonality, the knowledge transfer may be less effective than when the symbolic cultural foundation is consistent (Chini, 2005).
Another very important aspect that has been stressed by many experts such as Ranjan Das on the adversities to positive impacts of technology transfer by MNCs is government policies and barriers. He gives the example of India where, MNC operations are affected by government regulations in three areas: the pattern of the ownership by the parent company affiliate; the direction and nature of growth of the affiliate; the flow of product, technology and managerial skills within the companies of the group (Das, 2001). In fact, Das stresses that MNC strategies in India are more now in response to government policies than market changes and so on. According to Birkinshaw and Hood (1998), emphasis should also be put on the role of government policies in the form of subsidies and tax concessions.
What seems to be noticeable though is that it is only those MNCs that have spent a good deal of time and money on R & D that seem to have had the most influencing technology transfers. Instead, the subsidiaries' own knowledge creation and accumulation seems to have been a significant source of the spillover potential. This study suggests that policy measures should focus on what MNC affiliates actually do in the host country (Marin and Bell, 2006).
To put focus on the host nation itself, perhaps a look at small scale businesses within a nation may tell us a bit more about the factors that influence the benefits derived from technology spillovers. No doubt, small scale businesses comprise a huge chunk of a nation's economy and hence a look into their capability necessities is perhaps more than necessary. One of the primary reasons small-scale businesses in developing countries have continued to face growth challenges despite significant support for governments and other organizations is their technological capabilities or lack thereof (Arinaitwe, 2006). Furthermore, more often than not, small scale businesses confuse financial growth with business growth and hence monitor the wrong scale. Having the advantage of low cost labor and available low cost resources, they more often than not employ medium to low budget technologies and in the process limit themselves to growth. Hence, even though they grow financially due to their advantageous positions, they fail to grow where, perhaps, it was more necessary. In the long run, this affects the transition of technological spillovers from MNCs, where such small scale businesses which comprise up a huge portion of the nation's economy, fail to take it up or adopt.