Transnational Corporations and Business Networks

Henry Wai-Chung Yeung

• Publisher: Routledge
• Year: 2002
• ISBN:
  9781134826384
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

Drawing upon extensive field research in Hong Kong and Southeast Asia, this book focuses on networks of business and personal relationships as a key means of transnational operations. The book highlights the role of Chinese business networks in facilitating the emergence of transnational corporations from an Asian newly industrialised economy - Hong Kong. It is a timely theoretical and empirical contribution to the recent debate on the nature and operations of 'bamboo networks' within the global economy and their role in the rapid economic growth and regional integration among Asia-Pacific economies.

1

THE RISE OF THE NETWORK TRANSNATIONAL CORPORATION

An introduction

Multinational networks were not altogether unknown a century ago but they were curiosities, mainly a few giant oil and mining enterprises, some insurance companies and a handful of firms in chemicals and electrical products. By contrast, in the 1990s multinational enterprises have become ubiquitous, providing the principal channels by which goods, services and technology cross international borders.

(Vernon, 1993a: 12)

Today, nobody denies the significance of transnational corporations (TNCs) and their networks of operations in the global economy. More than half of world trade occurs within and among these corporate entities. The value of the foreign production of TNCs now exceeds that of world trade by a considerable amount. In 1993, the sales of the foreign affiliates of TNCs alone accounted for US

6 trillion, compared with that of trade in goods and services of US

4.7 trillion (UNCTAD, 1996a: 7). Some of the world’s largest TNCs (e.g. Royal Dutch Shell and General Motors) hold total capital assets and generate income comparable to the wealth of a number of national economies (e.g. Ireland or Colombia). From a humble beginning more than a century ago, many of today’s largest global TNCs have evolved and developed into dense spiders’ webs and highly sophisticated networks of cross-border operations. Their evolving corporate strategies and organisational capabilities have enabled them to transcend national boundaries and establish themselves in every corner of the global economy (Barnet and Cavanagh, 1994; UNCTAD, 1996b). Few countries in the world now do not host a diverse range of TNCs, for the cost of such ‘xenophobic’ behaviour and detachment from the world economy would likely jeopardise the welfare of the national economy.

In order to understand and to explain the intricacies of this phenomenon of the international operations of national firms and the emergence of TNCs, researchers from various academic disciplines such as economics, international business, international political economy and economic geography have pursued serious studies of the TNC since the 1960s. Stephen Hymer, in his 1960 doctoral dissertation, made the path-breaking point that the foreign operations of national firms must be understood in terms of their firm-specific monopolistic advantages. A few years later, Raymond Vernon (1966) brought our attention to the location-specific factors that had prompted American firms to locate their operations abroad through a series of product life-cycles associated with technological innovations. Another ten years down the road, Peter Buckley and Mark Casson (1976) conceptualised the TNC as a transaction-cost-economising entity. In other words, national firms operate abroad primarily to internalise the costs of engaging in transactions with foreign third parties. An almost parallel theoretical development in economics was John Dunning’s (1977) eclectic approach to explaining TNC activities. His approach combined the three major strands of the theoretical literature: Hymer’s market power approach, Vernon’s location-specific factor approach and Buckley and Casson’s internalisation approach. Since then, the mainstream economic literature on international production and the globalisation of TNC activities has been dominated by variants of these four leading economic approaches.¹

A rather later theoretical development occurred in American business schools, particularly associated with researchers from the Harvard Business School among whom Vernon was the leader. This group of business scholars relied substantially on developments in organisation theories. They argued that transnational operations constitute a form of organisational innovation and that they are dependent upon emerging corporate strategies and the organisational capabilities of national firms. Perhaps the most well-known proponent of this approach is Michael Porter, who, in his various works (1980, 1985, 1986, 1990), argues that TNCs succeed in operating abroad because of their competitive strategy and distinct competitive advantages. Later business scholars further developed the idea of ‘competitive advantage’ into such concepts as ‘core competencies’, ‘strategic capabilities’, ‘the transnational solution’ and so on (Prahalad and Doz, 1987; Bartlett and Ghoshal, 1989; Prahalad and Hamel, 1990; Hamel and Prahalad, 1994).

While these two major groups of theorists (i.e. industrial economists and business scholars) have done much to inform our understanding of TNCs, they fall short on two specific grounds. First, they tend to work in isolation from theoretical advances in other disciplines. Economic theories of international production, therefore, rarely borrow from organisation theories and vice versa (see Dunning, 1993b; Ghoshal and Westney, 1993a). Theoretical developments have been largely confined within disciplinary boundaries. Economic theories of international production are very much economistic in nature; they tend to explain only the economic mechanisms of TNC operations, representing an ‘under-socialised’ view of the reality of international business (Granovetter, 1985). Similarly, organisation theories of international business concentrate primarily on the structures of organising transnational activities. Despite claims of universality and generality, their interpretations of the foreign operations of TNCs are at best transient and context-specific.

Second, when these theories, based on the experience of American and British transnationals, are applied to emerging TNCs from the developing world, as manifested in the ‘Third World multinationals’ literature, the problem of Western-centric interpretations arises.² Whereas TNCs from developed countries are given the arbitrary status of ‘mainstream’, ‘Third World multinationals’ are regarded as ‘deviants’ and ‘unconventional’. The deviations of ‘Third World multinationals’ are explained away by established economic theories of international production. Genuine developments of TNCs from developing countries are subsumed under the overarching explanatory power of these theories. The net result of this academic exercise is the production and perpetuation of misleading stereotypes. For example, ‘Third World multinationals’ are often seen as very small in their assets and sales, labour-intensive in their operations, low in technological capabilities and restricted in geographical coverage (Yeung, 1994a).

This book aims to accomplish two specific objectives. First, by building the theoretical and empirical connections between TNCs and business networks, I aim to transcend disciplinary boundaries and draw insights from international business, organisational sociology, international political economy and economic geography in order to develop a network approach to the understanding of TNCs and their foreign operations. As elaborated further in the next section, networks have become not only an all-embracing organisational structure for transnational activities today, but also the defining characteristics of TNCs. Second, I aim to provide a non-Western-centric account of the emergence of TNCs from an Asian Newly Industrialised Economy (NIE) – Hong Kong (HKTNCs). So much of the literature on TNCs has been written in the theoretical traditions of American and British business schools. But when the ideas are applied to the context of those Asian economies in which the Chinese business system prevails, they fail to explain transnational activities other than at a superficial and economic level. The main reason for this failure is that these Western-centric perspectives dichotomise the ‘economic’ from the ‘social’ (see also Thrift and Olds, 1996). They tend to impose historically and geographically specific theories on to the experience of Asian economies. This book therefore intends to deconstruct existing Western-centric perspectives and to rebuild a generic network perspective to take account of time–space specificities in transnational operations.

Transnational corporations and business networks: some key issues

Diverse forms of activities by transnational corporations

In their early days of overseas operations (i.e. between the nineteenth century and the early 1960s), TNCs were typically engaged in foreign direct investment (FDI) as the main form of international involvement. Subsidiaries were largely wholly or majority-owned by parent companies in home countries. These overseas subsidiaries were oriented towards producing for local markets because one of the main reasons for their establishment was to circumvent import restrictions and protective tariffs. One exception was resource-oriented FDI through which foreign subsidiaries provided primary and intermediate inputs to production processes based in the home country. The organisational structure of TNCs in those days was rather simple, conforming to a multi-domestic structure (Dunning, 1993a). Joint ventures were sometimes used when local restrictions prevented full access by the foreign firm. Cross-border mergers and acquisitions occurred occasionally to facilitate industry-wide consolidation in response to emerging competition. By and large, however, majority-equity ownership was used by early TNCs as the major vehicle to establish their foreign presence.

Since the 1960s, two interesting developments in the global economy have transformed the ways in which transnational activities can be organised. Networks, as a distinct form of organisational structure, have become one of the most common means to coordinate and to configure the global operations of TNCs. Increasingly, we begin to witness the rise of the ‘network corporation’, the ‘network society’ and ‘alliance capitalism’ (Lewis, 1995; Castells, 1996; Dunning, 1997). First, the accelerated globalisation of economic activities and, subsequently, the arrival of global competition have meant that it is insufficient for any TNC to remain multi-domestic in its market orientation. Growing integration and interdependence of the global economy have brought TNCs together to compete with each other head-on. The benefits arising from a more refined geographical division of labour and production within the TNCs have begun to outweigh the costs of being less responsive to local market conditions. The only viable solution, it appears, is to integrate a company’s operations globally, as major TNCs have accumulated enormous organisational capabilities over the past few decades. This tendency towards global integration effectively forces TNCs to coordinate and to control closely their formerly local market-oriented overseas affiliates. The resultant form of organisational structure looks more like a ‘net’ than a loose confederation of corporate entities that used to be the main form of international operations. There is, therefore, a greater tendency towards the formation of strong intra-firm networks to exploit the core competencies of the corporate group as a whole through an internally coordinated and differentiated organisational structure. There are also economic advantages associated with multinationality per se such as global scanning and sourcing capabilities and cross-border subsidisation.

On the other hand, intensified global competition has not only squeezed the profit margins of existing goods and services provided by TNCs, but has also driven up the costs of producing new goods and services. Today, it costs up to several billions of dollars to produce new models of cars, passenger aircraft and other research-intensive products (e.g. pharmaceuticals). TNCs can no longer rely on their own resources to survive this ‘tyranny’ of global competition; they must pull together other firms, competitors or collaborators, to help them ride out unpredictable storms in the global economy. Again, this trend has led to the formation of a diverse range of inter-firm networks in the form of equity and non-equity arrangements (Contractor and Lorange, 1988; Buckley, 1994; Beamish and Killing, 1997). The proliferation of strategic alliances in the past two decades is perhaps the best testimony to this argument (Lorange and Roos, 1992; Gilroy, 1993; Faulkner, 1995). Other non-equity arrangements include cooperative agreements, international subcontracting, joint R&D collaboration and so on.

A second important development in the global economy is technological change. On the one hand, t...

Table of contents

• Front Cover
• Half Title
• Title Page
• Copyright
• Dedication
• Contents
• List of figures
• List of tables
• List of boxes
• Foreword
• Acknowledgements
• List of abbreviations
• 1 The rise of the network transnational corporation: an introduction
• 2 The emergence of transnational corporations from Asian newly industrialised economies
• 3 Conceptualising transnational corporations as networks of governance structures
• 4 Hong Kong firms in ASEAN: business organisation and corporate strategies
• 5 The social organisation of business networks
• 6 The political economy of Hong Kong firms in ASEAN
• 7 Competing in the global Triad: competitive advantage and business networks
• 8 Understanding transnational corporations and business networks
• Appendix 1 Attributes of parent Hong Kong transnational and their ASEAN subsidiaries
• Appendix 2 Profiles of selected Hong Kong transnational corporations
• Notes
• Glossary
• References
• Index