Multinational Corporations and the Emerging Network Economy in Asia and the Pacific

Juan J. Palacios

• Publisher: Routledge
• Year: 2008
• ISBN:
  9781134081097
• Edition: 1
• Topic: Economics
• Subtopic: International Economics
• Index: Economics

Multinational Corporations and the Emerging Network Economy in Asia and the Pacific delves into the ongoing rise of a global economy anchored in a web of inter-firm production networks and the role played by multinational corporations in the process. It considers the strategies and business models corporations have adopted lately to face today's highly competitive global markets, especially outsourcing and offshoring, focusing on the modalities observed in Asia Pacific and the Pacific Rim at large.

Since their inception, corporations have undergone a series of fundamental changes; each has corresponded to a given era of industrial development and has given rise to a particular type of government policy response. The book addresses these timely issues and other such as the transformation of global production networks into global innovation networks, the link between corporate and national innovation strategies and movement up the global production value chain, and the fragmentation of production and the resulting increase in component and sub-assembly trade in the region. It also takes up the emergence of multinational corporations from developing countries and the efforts aimed at forging basic rules of corporate social responsibility and developing sound institutions for building a working framework of corporate governance in the Pacific.

Written by some of the region's most eminent and influential economists and political scientists, this volume will appeal to students and scholars working in the field of Asia Pacific studies as well as to businesspersons and policymakers taking decisions in the region.

1 Multinational corporations and the economy of networks: an overview

Juan J. Palacios

THE CORPORATION IN HISTORICAL PERSPECTIVE

Since its inception, the corporation has undergone a series of fundamental changes – in fact, complete metamorphoses – in its nature, legal status, institutional purpose, economic and social rationale, functional logic, and organisational structure, all as part of a dynamic and incessant process of corporate evolution that extends for more than four centuries. From the first joint-stock companies that started to emerge in the 16th century in England, beginning with the Company of the Mines Royal created in 1564 and the Company of Mineral and Battery Works constituted in 1565, corporations evolved into the more elaborate moulds of the large trading companies established in the 17th and 18th centuries, with the English East India Company, the Dutch West India Company, the Royal African Company and the Hudson Bay Company among the most important. These were the forerunners of the modern international enterprises that became a major symbol of the emerging industrial society of the 19th century, which in turn hatched what came to be the top economic icon of the 20th century, the multinational corporation. Multinational corporations (MNCs) started to take shape in 1914 and entered their maturation phase in the 1970s and 1980s (Gabel and Bruner 2003).

Each model of corporate organisation is qualitatively different from its predecessors from which, though, it stems. Sam Palmisano, CEO and chairman of the board of IBM, recently pointed out that ‘the MNC of the late twentieth century had little in common with the international firms of a hundred years earlier, and those companies were very different from the great trading enterprises of the 1700s’ (Palmisano 2006: 127).

The uninterrupted process of corporate evolution has intensified in the last two decades under the thrust of an unprecedented globalisation of communication signals, transport routes, and economic flows. Since the appearance of what Alvin Toffler (1984) dubbed the adaptive corporation in the early 1980s, a host of corporate creatures have emerged, including the hollow corporation, the network enterprise, the centreless corporation, the ad hoc corporation, the extended enterprise, the boundaryless organisation, the collaborative enterprise, the horizontal corporation, the minding organisation, and the knowledge-creating company (Palacios 2001b; DiMaggio 2001b). The latest exemplar is what Palmisano labelled as the globally integrated enterprise. A direct product of the spread of outsourcing, this new creature is said to differentiate itself from both the 19th century international firm and the 20th century MNC in that it inherently aims to supply the entire global market by integrating production and value delivery worldwide and in that it has become simply ‘an array of specialised components: procurement, manufacturing, research, sales, distribution, and so on’ (Palmisano 2006: 131).

In spite of their seeming diversity, though, all those corporate entities have come into being as a product of major changes along three lines of evolution: (a) a shift from rigid and clear-cut to blurred and porous boundaries between companies; (b) the flattening out of organisational structures and the related transition to more cooperative forms of management; and (c) the adoption of creativity, learning, and knowledge as firms’ most valuable assets (DiMaggio 2001c). Firm boundaries have been gradually diluted by practices such as strategic alliances, joint ventures, mergers and acquisitions, and project-based collaborations. As a result, the coordination of production has migrated from within the setting of self-contained individual companies to the collective environment of inter-firm networks. In the language of Ronald Coase (1937), those corporate transformations signal the transit from a world where relationships between firms were coordinated through direct market transactions to a new one where that coordination takes place through network links and strategic associations. The problem is that, as Reinier Kraakman noted, the firms affiliated into networks ‘are no longer governed by market transactions, but neither are they fully integrated into a single large firm’ (Kraakman 2001: 148).

THE RISE OF OUTSOURCING AND OFFSHORING

The classic make-or-buy dilemma posed by Coase in the 1930s thus seems to have been solved in favour of the buy option. Outsourcing has been adopted by corporations around the world as a convenient and in fact necessary strategy to cope with the needs, threats and pressures stemming from the economic, social and institutional environments of the current era of globalisation and swift technological change. Its force and pervasive influence are such that it has given rise to the creature that, as noted above, embodies the latest stage of corporate evolution, the globally integrated enterprise.

Outsourcing finds its rationale in the advantages of a social division of labour where basic production complementarities are established among firms in a given industry, which thus specialise in particular segments of the industry’s value chain. Such division of labour gives rise to horizontal corporate structures akin to flexible, segmented production schemes, while an internal division is consubstantial with vertically integrated and rigid corporate structures typical of mass production systems (Palacios 2005).

More specifically, the outsourcing of repetitive, non-essential operations enables companies to focus on their core competencies and thus make a more efficient use of costly assets; acquire manufacturing capabilities they do not have; reduce risks and costs by shifting heavy investments in a capital-intensive operation (manufacturing) to another company’s books; acquire a virtually unlimited flexibility in production, design, and logistics; develop wide economies of scope; improve time-to-market standards and thus successfully cope with shorter product cycles; and realise economies of scale in procurement, enhance their procurement capabilities, and reduce inventory turnover rates and costs (Palacios 2001b).

Therefore, outsourcing is by no means a simple, optional cost-reduction tool; it is a sound and profitable business strategy. Accordingly, it is now a practice common among large corporations and increasingly adopted by medium-sized and smaller firms, to the extent that by early 2004 as much as 90 per cent of US businesses were outsourcing some of their operations (BusinessWeek, 11 March 2005).

Outsourcing deals soon extended beyond national borders, leading to the emergence of offshoring as outsourcing’s most visible, and debated, modality. Offshoring has itself become a flourishing industry that accounts for about 15 per cent of the global information technology (IT) market (Betts 2006). Offshoring obtains when inputs and/or services are outsourced from providers located in overseas locations. In consequence, it is the vehicle through which corporations are building and/or hooking into continental and global production networks and even becoming global production networks themselves. Offshoring works on a global delivery model that allows companies to tap into competencies offered in offshore locations, providing them with unique advantages of time zones and ease of scaling up, in addition to significant savings stemming from differences in cost structure, wage levels, and economic environment (Palacios 2005).

The big dilemma now is not only whether to outsource or not, but also whether to do it onshore or offshore and whether to do it through a spin-off or through another company located in another country. Corporations have to look at every single activity in their entire value chain and ask whether they are the best at it in the world. If not, they have three options: invest to become the best in the business in question, outsource it to someone who is the best, or move it to a place where it can be done much more cheaply and with a higher quality (Gottfredson et al. 2005). In any case, the general rule is to source from the right source and on the right shore.

Therefore, the problem is, ultimately, to identify the functions that constitute the core of the firm – and even the core of the core – and that therefore must be kept in-house. In the last instance, the core of the core is the set of activities which a firm is the absolute best at, that is, functions that are highly proprietary and not common in the industry (Gottfredson et al. 2005).

In summary, as outsourcing practices have spread out, stronger linkages have developed among parent firms and their entire corporate ecosystem of partners, suppliers, and customers. This has resulted both in their integration along increasingly larger and more complex value chains and in the formation of more durable and extended production networks among the firms involved regardless of their geographic location. What is occurring ultimately is the gradual but seemingly inexorable replacement of freestanding, individual firms by inter-corporate business networks (Imai 1990; Castells 1996; DiMaggio 2001a) and, moreover, the transformation of the most advanced and forward looking companies into what Häcki and Lighton (2001) dub ‘network orchestrators’.¹

THE AGE OF NETWORKS AND THE NETWORK ECONOMY

All those trends and corporate transformations are key manifestations of the prevalence of a distinct economic order that is powered by microelectronics and information and communication technologies (ICTs) and predicated upon the adoption of flexible schemes of specialised and segmented production. More generally, those trends are part of an epochal shift that began in the mid-1970s and is still under way. It relates to the transition from the old industrial economy of mass production instituted by Henry Ford in the early 20th century to a new order that Alvin Toffler (1980) termed the third wave and others have dubbed the third technological revolution (Mandel 1978), the second industrial divide (Piore and Sabel 1984), the era of ‘systemofacture’ (Hoffman and Kaplinsky 1988), and even the Fifth Kondratiev (Amin 1994a). From a regulationist point of view, the shift in question corresponds to the transit from the old Fordist order to a post-Fordist regime governed by a new techno-economic paradigm that constitutes the foundation and working conceptual framework of the new economy of segmented production and flexible, demand-driven specialisation (Coriat 1979; Amin 1994b).

This epochal shift is taking place in the latest of the four ages into which human history can be divided according to Toffler (1980): nomadic, agricultural, industrial and informational. Unlike the industrial revolution, which engendered rigid bureaucratic organisational structures, the information revolution under way has given rise to networks as the dominant form of business and social organisation. This has occurred to such an extent that, as DiMaggio (2001c: 212) puts it: ‘Today, the network is the central trope of organisational change, just as the assembly line was at the beginning of the twentieth century’.

The world has thus witnessed the advent of what has been termed the ‘age of the network’ (Lipnack and Stamps 1994). The top organising imperative of this age is to connect people, institutions, companies and organisations, regardless of distance, an endeavour made possible by the ICTs available today. The name of the game now is then ‘to augment, amplify, enhance, and extend the relationships and communications between all beings and all objects’ by means of a ‘widespread, relentless act of connecting everything to everything else’ (Kelly 1997: 1). In this context, decision making is being pushed down and out toward employees and customers; hierarchical corporate structures are flattening out and becoming more participatory; and flatter, network-enabled hierarchies are emerging everywhere.

The current epoch was therefore ushered in by the establishment of a powerful IT paradigm and the ensuing configuration of an information-driven, knowledge-based economic order where agency migrates from companies to business networks (DiMaggio 2001a). The basic organisational form of this emerging order, which Manuel Castells (1996) refers to as the network society, is the complex networks of transnational production that are forming around the largest and most technologically advanced MNCs, which are themselves internally organised in intra-firm decentralised networks that are in turn connected to broader inter-corporate production schemes.

The emergence of this new order was perceived by Peter Drucker as early as in the late 1960s when he detected the birth of the knowledge worker and foresaw the crucial role both knowledge and information were to play in the creation of wealth in the years to come (Drucker 1969).² He conceived of it as the knowledge economy; therefore, others like the informational economy, the new economy, and the network economy are but synonyms of Drucker’s seminal term (Kenney 1997; Leydesdorff 2006).

This networked, knowledge-based economy is said to be governed by new rules that revolve around four realities of the present era: (a) wealth flows from innovation, not from optimisation (that is, it is gained not by perfecting the known but by imperfectly seizing the unknown); (b) the unknown is optimally cultivated by nurturing the nimbleness of networks; (c) the domestication of the unknown inevitably requires undoing the perfected; and (d) the find–nurture–destroy cycle occurs faster and more intensely than ever before (Kelly 1997). Accordingly, the rise of this new economy has been regarded as a revolution even more transcendental and far reaching than the information revolution itself, for it ‘represents a tectonic upheaval in our commonwealth, a social shift that reorders our lives more than mere hardware or software ever can’ (Kelly 1997: 1).

Acknowledging the already large and growing prevalence of this economy of networks and of the central role played in it by ICTs, the UN Secretary-General is calling for the development of a decentralised ‘network of networks’ on a world scale as the central goal of a ‘Global Alliance for Information and Communication Technologies and Development’ (Annan 2006). This initiative is part of the actions the international community is undertaking to build a working platform to carry out the immense, up to now unwieldy, task of governing the cobweb of production networks that are taking shape across the globe, that is, the task of managing globalisation.

MNCs AND GLOBAL PRODUCTION NETWORKS

The rise of a network economy is being driven ultimately by the powerful technologies in electronics, telecommunications and transport developed over the last two decades, which have induced an unprecedented increase in the geographic mobility of productive capital around the world. As noted earlier, the process is unfolding largely through the practice global companies are adopting these days of outsourcing and/or offshoring part of their operations. The resulting intensification of competitive pressures in international product and factor markets, particularly oligopolistic rivalry, in turn adds to the forces propelling the process.

Therefore, the agents guiding it all are the leading MNCs as the largest outsourcers, the primary sources of productive capital, and the top developers and users of leading-edge technologies in the world. Given such technological might and abundant productive assets, MNCs have been able to build a production infrastructure that cuts across national borders and can span the entire planet. In this way, they have become the main weavers of transnational production networks and the drivers and carriers of economic globalisation itself, which is in fact predicated upon the existence of a worldwide assemblage of cross-border, intercorporate production networks.

Global production networks are ‘reciprocal structures of co-operation and risk sharing’ that entail deeper and closer relationships among territorially non-adjacent, independent economic actors (Karlsson and Westin 1994). More specifically, these networks allude to complex and dynamic business schemes that are built along an integrated value chain, combine the scale economies of large transnational firms with the flexibility and efficiency of decentralised networked enterprises, and have internal matrix relationships coexisting with horizontal links with other firms in the network (Ernst 1997).³

Although transnational production networks potentially have a global reach, they tend in practice to take hold in regional settings. A distinct international division of labour is established in each region – mainly in North America, Europe and Pacific Asia (‘the Triad’) – with lead firms based in high-cost countries coordinating operations in affiliates based in low-cost locations (Ernst 1994; Linden 1998).

MNCs thus play a dominant role not only in the formation and shaping of cross-border production networks but also in the globalisation of world production. As early as the mid-1990s the United Nations Conference on Trade and Development (UNCTAD) observed that globalisation ‘is ultimately the product of decisions taken by [global] firms’ (UNCTAD 1994: 158). A decade later, Medard Gabel and Henry Bruner, both members of the ‘Mapping the Multinational Corporations Project’, whose advisory board includes some of the most noted specialists on MNCs,⁴ went further to assert that ‘Globalisation and global corporations are as interrelated as the chicken and the egg’ (Gabel and Bruner 2003: x).

In effect, MNCs have been one of the most influential players on the international economic stage at least over the last half a century. Their influence is not only economic but also technological, political, social and even cultural, so much so that they have been regarded by observers like Gabel and Bruner as the leviathans of our time. Major multilateral economic institutions like the World Bank and the International Monetary Fund, international agencies like UNCTAD and the United Nations Industrial Development Organization (UNIDO), major international non-governmental organisations, and large regional development banks (for example, the Inter American Development Bank and the Asian Development Bank) are highly influential but tend to play a coordinating, supporting role.

As the sources of the productive capital that roams across the globe igniting growth and creating employment, and as the foundries where leading-edge technological innovations are forged every year, MNCs have a pervasive presence and play a truly central role in today’s global economy. Of the world’s 100 largest economies, at least 53 are MNCs; these large corporations command more resources and exert a stronger influence than nearly three-quarters of the nation-states in place today (Gabel and Bruner 2003: vi). The three largest – General Electric, Vodafone, and Ford Motor Company – jointly ...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Figures
• Tables and Boxes
• Contributors
• Preface
• Abbreviations
• 1 Multinational Corporations and the Economy of Networks: An Overview
• 2 Eras of Enterprise Globalisation: From Vertical Integration to Virtualisation and Beyond
• 3 Innovation Offshoring: Root Causes of Asia’s Rise and Policy Implications
• 4 Information and Communication Technologies and Inter-Corporate Production Networks: Global Information Technology and Local Guanxi in the Taiwanese Personal Computer Industry
• 5 The Creation of Regional Production Networks in Asia Pacific: The case of Japanese Multinational Corporations
• 6 The Internationalisation of Firm Activities and Its Economic Impacts: The Case of South Korea
• 7 The Rise of Mexican Multinationals: Driving Forces and Limiting Factors
• 8 Emerging Transnational Corporations from East Asia: The Case of Mainland China
• 9 Multinational Production Networks and the New Geo-Economic Division of Labour in Pacific Rim Countries
• 10 Multinational Corporations and Pacific Regionalism
• 11 Governing Multinational Corporations in the Pacific
• 12 Corporate Social Responsibility and Capital Accumulation