Multinational Organisations and Paradigms

Essential summary

Logically, Chapter 6’s analysis of the way MNEs enter foreign markets should be followed by discussions of how they then manage whatever international configuration they then design. The topic is particularly poignant given how challenging it is to coordinate geographically and culturally diverse entities whose adherence to group objectives may be at odds with their need to fit into the local environment. In international business as in other social sciences, structures and mindsets influence one another.

MNE organisations

Theories about how MNEs organise and control their configurations tend to highlight the distribution of power between headquarters and subsidiaries — replicating to some extent the centre—periphery analysis that the sociologist Immanuel Wallerstein first formulated in his seminal world-systems approach. When applied to international business, the two extremes of this spectrum are a simple nation-by-nation orientation where subsidiaries enjoy maximal autonomy, versus a globalised orientation characterised by all-powerful headquarters.

Traditional divisions

In 1960, a young economist named Stephen Hymer wrote a seminal text analysing how companies approach FDI. According to Hymer, most MNEs begin life under the tight control of a few key managers working out of a single location. At this early stage, the company tends to view its first foreign missions as add-ons to existing operations. Specific offshore activities like trade documentation or logistics are separated from the company’s existing structure and grouped into a new “international division”. This structure may seem appropriate to firms who transact most of their business domestically. But it has the flaw of creating a mindset where the group executive under-estimates national specificities. Few MNEs opt for it today.

Hymer went on to assert that companies internationalise to exploit their monopoly advantages, often through vertical integration. Usually this means that the group executive takes responsibility for the cross-border implementation of strategy. In turn, this often results in a division-based structure known as the “Unitary (U-form)”. For Hymer, this was the second organisational stage that MNEs implement once their capabilities reach a certain level.

The first configuration typifying second stage U-form MNEs is the “functional organisation”, with each division responsible for a corporate function like manufacturing, marketing or finance. Here, it is the “centre” (head office) that controls the “periphery” (subsidiaries), whose mission is to implement strategies and technologies that senior management wants to implement. This mainly suits MNEs characterised by relatively undifferentiated product ranges. An MNE’s main priority in this kind of structure is to ensure headquarters’ operational control.

As the international business environment evolved over the course of the 20th century, Hymer detected a third organisational stage, called the “Multi-divisional (M-form)”. To respond to global consumers’ increasingly differentiated demands, MNEs need more flexible “product organisations” where each division acts as an independent profit centre. The goal here is to empower divisions to pursue their own product policies, depending on specific market conditions.

A widespread variant of the M-form structure among MNEs that view responsiveness as a priority is the “geographic organisation” (see Figure 7.1). Where consumer markets (or production conditions) vary widely from one country to another, it makes sense to empower frontline units with the most knowledge about local circumstances. The emphasis on international differentiation shifts power from the centre to the periphery, with group headquarters performing little more than simple resource allocation, performance control and strategic coordination missions.

The MNEs who push this logic to the extent of adopting a “multidomestic” paradigm in which each country is managed separately tend to be characterised by fragmented power structures. Greater responsiveness to local circumstances is a strength but also a weakness due to the

“Geographic" MNE organisation

Figure 7.1 “Geographic" MNE organisation.

fact that it can blur headquarters’ role and cause wasteful duplications, increasing overheads while making it harder to achieve group-wide economies of scale. Organisations of this kind also struggle to transfer knowledge between subsidiaries, with employees often communicating solely within their immediate unit and ignoring colleagues in other countries — all of which explains why many MNEs have abandoned the multi-domestic paradigm in recent years.

Global vs regional focus

By 1983, observers like Theodore Levitt were proclaiming the convergence of many international markets, particularly ones dominated by branded consumer goods. This meant that for MNEs in many sectors, what mattered was no longer differentiation along national lines but the ability to service global customers. Facing rivals who were increasingly sized to compete worldwide, firms needed to maximise their economies of scale. This called for an appropriate organisational configuration, one where the re-assertion of headquarters’ power over subsidiaries would increase interdependency and maximise efficiency — explaining in turn many MNEs’ renewed interest in functional or product organisations, as opposed to geographic ones.

Within a decade, however, a number of thought leaders would view the revival of globalised organisations in a more negative light. One critique was that it leaves little room for independent thinking at the local level. This had the effect of de-skilling subsidiaries and sparking resentment. There was also the risk that knowledge is only transmitted vertically, from headquarters to subsidiary or vice versa, undermining the possibility of subsidiary—subsidiary information flows. Lastly, where global organisations serve local markets from distant centralised manufacturing locations, they tend to suffer higher trade costs that can only be justified if these costs are less than the benefits derived from a centralisation of global production on just a few sites.

The new hybrid consensus in the 21st century is that it makes sense to centralise some functions (particularly upstream ones) while decentralising others (especially marketing, where proximity to end users is key). MNE decisions about where to locate which function depend on whether the priority is internal cohesion or external adaptation. Indeed, many MNEs juggle global and multi-domestic orientations simultaneously by adopting intermediary solutions — first and foremost, as pointed out notably in studies by international business professor Alan Rugman, being at the regional level.

As noted in United Nations Conference on Trade and Development (UNCTAD)’s Transnationality Index, many of the world’s leading MNEs mostly do business within their home region. This means there is little advantage, hence incentive, for them to venture further abroad. Managers tend to feel more comfortable with a regulatory environment and general business culture that is more familiar to them — and where consumers resemble the ones they are in the habit of servicing. Transaction costs are also lower when companies operate closer to home. Indeed, much global production and R&D takes place in “clusters” organised along regional lines. In these cases, global headquarters usually do little more than oversee inter-regional transfers of assets and knowledge. The main power lies in the MNE’s regional head office.

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