International Upstream Operations

Essential summary

One of international managers’ most crucial value chain decisions is the width of the product range their company should offer. At one extreme, MNEs can opt for a standardised high-volume production of a narrow range of goods. At the other, they can emphasise adaptation and offer a wide range of items capable of pleasing a diverse international clientele. Generally speaking, manufacturing companies ‘prefer the former, which enables economies of scale helping them achieve their operational goal of making goods cheaply and efficiently. Downstream specialists tend to support a wider and more customised product range facilitating sales into different markets. These contradictory interests cause tension within MNE value chains and explains why upstream and downstream interests (Chapter 9) are indissociable.

Knowledge as the first step in production

Business performance starts with a company’s ability to transform knowledge into processes and products. Clearly, knowledge management (KM) is important across the value chain. Even so, many top MNEs have built their success on production advantages specifically by transforming intangible bundles of knowledge into new products or services.

International KM can be apprehended at both the macro (national) level and in terms of MNEs’ research and development (R&D) efforts. Regarding the former, an economy’s overall level of technological advancement largely depends on the quantum of “knowledge spillovers” between companies, universities, research centres and government, conceptualised altogether by French economists Robert Boyer and Michel Freyssenet as the “national innovation system”. Markets vary widely in terms of “R&D intensity”, or the percentage of GDP spent on R&D. Much international business is driven by MNEs’ desire to gain knowledge by entering environments where they can nurture and/ or access knowledge — and by national governments’ desire to attract MNEs capable of enhancing local knowledge.

From a corporate perspective, one of R&D’s main characteristics is its costliness. There is rarely any certainty that a product innovation will sell well enough globally to justify initial R&D outlays, which are enormous in certain sectors. Many MNEs spend so much on R&D that they cannot afford the commercial networks needed to distribute their innovations worldwide — even though global sales are the only hope of recouping the substantial upfront investment. Strategic alliances often involve rival MNEs forced into co-operation due to the cost of R&D. This applies particularly to SMEs.

Since knowledge is key to international competitiveness, MNEs strive to protect intellectual property rights, often through exclusivity arrangements. A distinction is commonly made between whether a particular type of knowledge constitutes a public good or not. Confidentiality is difficult to maintain when a company internationalises and MNEs may choose to only transfer less strategic categories of knowledge, relating for instance to management practices instead of product characteristics.

A final distinction can be made between "push R&D”, where MNEs force innovations on the market, and “pull R&D”, where the company is responding to market signals. Push R&D is often concentrated on a single site, usually global headquarters, to maximise confidentiality and reduce overheads. This means, however, that researchers are working at a distance from the various markets that their new product will affect. They might therefore be tempted to impose a single global standard instead of catering to different market preferences. Pull MNEs, on the other hand, tend to run multiple R&D centres to keep researchers in contact with the customers affected by their innovations — a phenomenon further explored in Chapter Il’s analysis of international talent management trends. Of course, duplicating operations in multiple centres is costly.

It is impossible to overstate the importance of knowledge management as an international production factor. Decisions taken at the early stages of a value chain will have crucial knock-on effects as products or services evolve into their final shape. Managers must always consider the ripple effects of the upstream decisions they take.

Global supply chain management

Supply chain management (SCM) refers to all operations sourcing, producing, transporting, assembling and finalising a product or service. Global SCM is when firms are in a position to purchase, deliver or take delivery of raw materials, components and modules anywhere in the world.

The first dividing line in global SCM (see Figure 8.1) is whether an MNE sources raw materials and components from an external supplier

Figure 8.1 International supply chain systems.

or from a foreign unit that it owns. The latter solution, involving vertically integrated MNEs’ “offshoring” configuration, raises a number of logistics and production location issues. The former refers to international “outsourcing”, a leading driver of international business today.