1. Foreign and Domestic Firms:
What is different about them,
and why and how it matters
Bureau of Economic Analysis,
Dept. Of Commerce
Lilac Nachum
Professor, Globalization and Multinational Companies
3. ‘Translation’ [terminology/measurement]
Economics IB/IM
Factor intensity Capital
Labor skills Labor [employees] skills [wages]
Productivity Performance [sales/employee]
Upstream/downstream
linkages
Inter firm linkages
Global production
networks
Intra-firm linkages
Imports/exports Cross-border inter-firm linkages
4. Firms’ Heterogeneity:
The Heart of Management Scholarship
• Management theory – firms are inherently different
• RBV: different resources and capabilities
• Strategy: different choices, different behavior
• International Business (IB)
• Ownership advantages – the difference between
multinational/local firms
• Heterogeneity across multinational firms.
The focus of
my talk
5. What is Different about
Multinational Companies?
Ownership:
Foreign/domestic
• Legitimacy challenges
• Local embeddedness
• Local knowledge
• Foreignness – assets or
liability.
Geographic scope:
Multinational
• Multi-unit network spread
geographically
• Internal resources
• Internal coordination and
pressure.
OECD
proposal
BAE
Proposal
6. Granulated Split of the Local Population
Domestic
single-units
Global single unit
(e.g., single unit
trading companies)
Domestic
multi-units
(e.g., domestic
chains)
Global multi-units
(e.g., local
MNEs)
Domestic Global
Geographic Scope
Organizationalstructure
SingleUnitMultiUnit
7. Inter-Organizational
Relationships
Advertising Agencies in the US
Benchmark local sample:
N
(agencies/yea
rs, 2002-6)
Foreign/domestic
(significance)
All local agencies
Billing >$25mil.
2375 **
Domestic single unit 965 **
Global single unit 315 ***
Domestic multi-units 745 **
Global multi-units 350 n.s.† p < .10; * p < .05; ** p < .01; *** p < .001.
n.s. = not significant.
N foreign = 395
L. Nachum, Foreignness, Multinationality, and Inter-Organizational
Relationships. Strategic Organization, 2010
8. Additional Advantages of
BAE Proposal
• OECD proposal export/non-export firms
• 80% global trade intra-firm. UNCTAD, Global Value Added Chain and Development,
2013
• Under-estimate actual MNE control
• Basis for policy responses:
• Separation of the local sample into MNEs/non-MNEs:
impact of MNEs on home economies; impact on local
firms becoming multinationals
• Differentiated policies?.
9. Suggestions for Extensions of
BAE Proposal
• US parents:
• Deeper inquiry into value creation by US parents
• US affiliates:
• Tenure
• Entry mode
• Ownership level
• Trade:
• Inter/intra-firm
• Memorandum items:
• Number of establishments/firms in each category.
10. Comparing Like with Like?
US parents US Affiliates
Role within the
organization
Representing the
corporation as a whole
Part of a portfolio
Functional
mandate
Management corporation:
resource allocation, synergies
Value creation (production, sales,
etc.)
Skills Global overview Country-specific specialization
Maximization Global performance Country performance
Exit ‘Death’ Strategic considerations related to
the entire portfolio
Trade links Mostly intra-firm [Import
from affiliates]
Inter- + intra-firm Import
intermediaries [unrelated parties]
What functions US parents perform?
Changes over time (reshoring)
Rethinking BAE preliminary results
11. Affiliates Tenure
Foreign affiliates in the City of London
Tenure
in
London
16 years
(Zaheer/Mosako
wski)
10 years
(Sample’s
mode)
9 years 8 years
Young Old Young Old Young Old Young Old
Adj. R2 .44 .53 .36 .39 .38 .42 .47 .31
F 8.62** 10.21*** 6.72* 6.97** 7.25** 8.11*
*
10.72*** 7.29
**
F-Test 3.20 4.07 6.23 7.98
***
N 143 150 93 200 81 212 70 223
L. Nachum, What Constitutes the Costs and Advantages of Firms Investing Overseas?
Managerial and Decision Economics. 2011
† p < .10; * p < .05; ** p < .01; *** p < .001.
F-Test - significance of difference between the models
12. Entry Mode
Means (S.D.) of the compound variablesa
(t-tests) [Mann-Whitney] equality of means
Acquisition Greenfield
Affiliates own advantages: Intangible assets,
liquidity ratio, total assets, industrial scope
.20 (.39) .10 (.35)*
Affiliates advantages via MNE networks:
Linkages with parents, size of parents
.07 (.32) .16 (.28)*** [**]
Affiliates local embededness: links with local
service suppliers, pay levels, share activity in £
.30 (.57) .35 (.89)
Affiliates MNE interaction: Geographic and
cultural distance from parent
.18 (1.19) .37 (.91)
N 115 66
*** p<.001; ** p<.01; * p<.05
a
Compound variables = average of the standardized values of individual dimensions
L. Nachum, When is Foreignness an Asset or a Liability?
Journal of Management 2010
13. Ownership
Means (S.D.) of the compound variablesa
(t-tests) [Mann-Whitney] equality of means
Minority<50% foreign Majority>50% foreign
Affiliates own advantages: Intangible assets,
liquidity ratio, total assets, industrial scope
.29 (.61) .45 (.53)
(*)[*]
Affiliates advantages via MNE networks:
linkages with parents, size of parents
.41 (.29) .57 (.60)
(**)
Affiliates local embededness: links with local
service suppliers, pay levels, share activity in £
.42 (.28) .25 (.47)
(**) [**]
Affiliates MNE interaction: Geographic and
cultural distance from parent
.24 (.76) .37 (.82)
N 103 78
L. Nachum, When is Foreignness an Asset or a Liability?
Journal of Management 2010
*** p<.001; ** p<.01; * p<.05
a
Compound variables = average of the standardized values of individual dimensions
14. Trading with Ourselves or with
Others Make a Difference
Inter-firm trade Intra-firm trade
Trading with whom? un-related bodies sub-units tied by ownership
Trade relationships? market relationships ownership-based
relationships
What is being traded? Finished goods Intermediaries, services
Value added activity? Sale Production
Driving force? Demand, consumer
needs
Supply, production factors
Where to trade? Size, wealth of markets Production and trade costs
US trading partners? Similar: wealthy (large) Different: poor
Separation location and ownership!
Interpretation of BOP; of global
competitiveness guide for policy
15. US Advertising Agencies:
Inter/intra relationships
• Internal MNE [translation = intra-firm ‘trade’]
impact on inter-firm relationships
• Characteristics of the MNE:
• Size and geographic disparity – significant positive
• Affiliates’ position within the MNE:
• Shares of total billings – significant negative
• Interaction affiliate – MNE:
• Hierarchical levels, weighted cultural distance – not
significant.
Input to the work of the Balance of Payments Division as part of OECD/WTO’s TiVa initiative – method of trade statistics based on value added instead of production costs – vis the construction of a global input/output table.
BAE mandate – inputs on firms’ heterogeneity – one dimension of heterogeneity – foreign/domestic
My work vis a vis the work of the BEA. Where I hope to add value:
1) General - Insights from IB on issues of study – complement economic thinking; create a bridge
We asked similar questions, because our thinking is informed by the world that we observe around us.
Different audiences nuances of the answers we are looking for
Different terminology
2) Specific - Heterogeneity among firms in the strategy/management lit.
Foundations of IB theory – Hymer (Ray’s talk)
One dimension of heterogeneity – foreign/domestic
My credibility in this area.
Share insights based on my own research and that of others IB scholars in this area
The focus of my talk - domestic/international - One aspect of heterogeneity that is particularly pertinent to the BAE mandate
In support of the BAE proposal - Findings of my research – and of others – repeatedly show that when the local sample is split to domestic/local multinationals the differences with local multinationals disappears/lessen (references in the material I sent).
My study of financial and media firms in London – sent
The overall conclusion of this research - domestic or international, is the critical attribute that affects the differences. Local MNEs resemble foreign affiliates in many ways
Why is it important to tease out the two dimensions – they represent different issues – different aspects of heterogeneity. A major contribution of my work
Inter-organizational relationships - affinity with the BAE work – participation in Global Production Network – resources derived from the MNE (internally) versus via interaction with third parties. Possible substitutions/complementarities.
Findings: No difference from local MNEs nationality has no effect
Differences originate in organizational scope
The overall conclusion: the real difference is between multinationals and purely domestic firms, and not between foreign and all local firms. That it, it is not ownership per se that matters but rather the multinational scope of firms and their participation in a global network, which enables them to benefit from advantages of scale and specialization within the network and from access to tangible and intangible resources worldwide.
Beyond TiVC
Criteria for selection:
do not require additional data collection – OECD mandate
Relevance for GVC and TiVC:
US parents – making comparison parent/affiliates meaningful
US affiliates – varying levels/forms of integration in GVC – majority/minority; greenfield/acquisitions. Results hide variations that cancel each other. Challenge interpretations.
Provide means for explaining variations across industries/over time
Trade – trading with ourselves versus trading with others
Bases for grouping – aggregations meaningful for GVC
Additions?
Cross country variation and the ‘it depends on what’ question - What affects the variation
Parents = HQs?
US; other countries
Interpreting findings in light of functional differences parents/affiliates - Compensation, value-added, export, import
Split by year of establishment in London
Differences weaken over time and disappear after 9 years temporary in nature. particularly pronounced at the time of entry
Spillover, learning, imitation effects
Difference between this study/Zaheer Mosakowski – what explain the difference
Much of US investment very old
Interpreting findings in relation to the long tenure of foreign affiliates in London
Differences in relation to each of the four indices:
Affiliates owned advantages – how much changed with ownership change
Advantages via MNE network – acquisitions less integrated; less aligned less able to benefit
Affiliates local embededness – expected most differences. Results – probably sue to tenure in London
Affiliates/MNE integration – depends on level of integration – London affiliates fairly autonomous. Very powerful. Costs of conflicts between internal/external pressures
M&As about ~1/3 world FDI – UNCTAD. 2014 US companies a third of world M&As targets. Trigerred by the participation of private equity funds and SWFs in FDI – by default M&As?
Majority owned – more closely connected – receive more advantages via the parent need less local integration -> reduce costs of lack of local embeddedness; also subject to stronger pressure that increase costs of local integration
