LOCAL RESPONSIVENESS

To what extent should the need for 'local responsiveness' shape the way MNCs organise themselves?

Table of Contents

1. Introduction3

2. Linkage effects4

3. Strategies of MNCs4

3.1. FDI motives5

3.2. Value chain configuration5

3.3. Intra-MNC coordination7

4. Conceptual model and hypotheses8

4.1. Hypotheses related to FDI motives8

4.2. Hypotheses related to value chain configuration9

4.3. Hypotheses related to intra-MNC coordination10

5. Method11

5.1. Data collection12

5.2. Sample characteristics12

5.3. Operationalization of variables14

5.4. Model estimation16

6. Results and discussion17

6.1. Discussion and policy implications19

6.2. Limitations of the study20

7. Conclusions22

References23

To what extent should the need for 'local responsiveness' shape the way MNCs organise themselves?

1. Introduction

In recent years, we have witnessed a fundamental change in the way multinational corporations (MNCs) organise their international activities. In a move enabled by the removal of trade and investment barriers around the world, as well as by falling transport and communication costs, MNCs are changing strategies in order to exploit new opportunities for division of labour on a global scale. The surge in global sourcing and global integration within the multinational corporation is widely described by international business (IB) scholars, including Zaheer and Manrakhan (2001), Dicken (2003) and Kotabe and Murray (2004).

The implications of these changing MNC strategies for developing countries have received less attention in the IB literature. Are MNC strategies aimed at increasing global integration leading to higher entry barriers for firms and industries in developing countries or do global integration strategies provide opportunities for local firms to expand and upgrade their competencies? One platform for this debate is the literature on linkages between MNCs and local firms in developing countries (see [Altenburg, 2000] and [Velde, 2002]; Görg & Greenaway, 2002; Giroud & Scott-Kennel, 2006; Hansen & Schaumburg-Müller, 2006; Lall, 2002). Understanding the relationship between MNC strategies and local linkage effects is essential to those governments of developing countries that are designing policies aimed at generating maximum benefits from foreign direct investments (FDI) by MNCs ([Altenburg, 2000] and [UNCTAD, 2001]). Based on an extensive literature review, our study contributes to this understanding by developing hypotheses concerning the relationship between MNC strategies and linkage effects. Furthermore, we present unique empirical evidence of the strategy-linkage relationship on the basis of a comprehensive survey of 95 Danish FDIs in developing countries.

2. Linkage effects

A growing body of research has analysed the direct and indirect effects of FDI on developing countries (for overviews, see e.g., Blomström & Kokko, 2000; [Meyer, 2004] and [UNCTAD, 1999]). In the development context, many researchers see linkages between foreign investors and local industry as essential prerequisites for FDI to have a lasting and sustainable effect (Altenburg, 2000; Dunning & Narula, 2004; Giroud, 2000; Görg & Greenaway, 2002; Scott-Kennel & Enderwick, 2005; UNCTAD, 2001). Linkages - such as alliances, joint ventures, license agreements, franchise agreements, or OEM contracts - are seen as key mechanisms through which technology and know-how are transferred from MNCs to local partner firms in developing countries. Indeed, it has been argued that linkages constitute a “black box” in the discussion of when and how FDI induces economic development (Scott-Kennel & Enderwick, ...