MNEs
Importance of MNE Structure Models and Typologies and Empirical Evidence
2007///
The organization of modern MNEs is more complicated than the traditional organizational models in their pure form. As modern MNEs design and adopt new structures in order to optimize their ability to simultaneously achieve higher levels of global integration and local responsiveness, the traditional models no longer can be used accurately to characterize most MNEs. Despite this fact, the traditional models are still useful to characterize extreme/ideal (pure) cases in the global integration/local responsiveness matrix and to capture some of the most salient characteristics of MNEs during the early stages of internationalization and globalization. Additionally, empirical analysis corroborates the existence and usefulness of the multidomestic, global, and transnational models to characterize the most salient features of MNEs. For instance, Harzing (2000) studied 166 subsidiaries of 37 MNCs headquartered in 9 different countries and concluded that Barltett and Ghoshal's typology (developed based on in-depth cases studies of nine MNEs) can be confirmed in a large-scale empirical setting (Harzing.00).
There are many reasons why having a typology and models of organizational structures for MNEs is useful to academics, students, and executives (Dunning.01). Typologies provide a manageable framework that reduces complexity and enables practitioners to study, explain, and design organizational strategies for MNEs. To this end, in Table I, we propose a more general typology to model MNEs at different stages in their globalization cycle (Harzing.00), and provide representative examples for each organizational form. This typology includes the international exporter, traditional multidomestic, traditional global, modern multidomestic, modern global, transnational, and virtual.
In addition to the structures we already described in earlier posts, we add the "virtual" form in order to model a new type of MNEs emerging in the 21st as a consequence of the globalization forces. Specifically, the virtual form models ventures which focus exclusively on their core competencies and smartsource (outsourcing focused on value) to global companies optimally positioned to provide services such as R&D, manufacture, production, industrial design, marketing, localization, distribution, and information brokerage. The virtual form uses strategic alliances, external partnerships, mass collaboration, and dominant exchange strategies to achieve high levels of global integration and local responsiveness through co-operative strategies. On a first approximation, the virtual model resembles the transnational form but uses external partners, global experts, opinion leaders and collaborators instead of corporate subsidiaries. The virtual form tends to focus more on intangible assets rather than tangible/capital intensive assets. This form can be used to model some modern MNEs that do not fit the multidomestic, global, or transnational framework such as of the many recent US startups in professional services, manufacture (e.g. medical device manufactures), and dot-com firms (Porter.01).
There are many reasons why having a typology and models of organizational structures for MNEs is useful to academics, students, and executives (Dunning.01). Typologies provide a manageable framework that reduces complexity and enables practitioners to study, explain, and design organizational strategies for MNEs. To this end, in Table I, we propose a more general typology to model MNEs at different stages in their globalization cycle (Harzing.00), and provide representative examples for each organizational form. This typology includes the international exporter, traditional multidomestic, traditional global, modern multidomestic, modern global, transnational, and virtual.
In addition to the structures we already described in earlier posts, we add the "virtual" form in order to model a new type of MNEs emerging in the 21st as a consequence of the globalization forces. Specifically, the virtual form models ventures which focus exclusively on their core competencies and smartsource (outsourcing focused on value) to global companies optimally positioned to provide services such as R&D, manufacture, production, industrial design, marketing, localization, distribution, and information brokerage. The virtual form uses strategic alliances, external partnerships, mass collaboration, and dominant exchange strategies to achieve high levels of global integration and local responsiveness through co-operative strategies. On a first approximation, the virtual model resembles the transnational form but uses external partners, global experts, opinion leaders and collaborators instead of corporate subsidiaries. The virtual form tends to focus more on intangible assets rather than tangible/capital intensive assets. This form can be used to model some modern MNEs that do not fit the multidomestic, global, or transnational framework such as of the many recent US startups in professional services, manufacture (e.g. medical device manufactures), and dot-com firms (Porter.01).
Transnational Model
2007///
The transnational form is used to characterize MNEs that attempt to achieve high global integration and high local responsiveness. As already pointed out, the limitations of the multidomestic and global structures led to the concept of transnational corporation (high localization/high global integration) proposed by Bartlett and Ghoshal, and widely accepted by the research community (Bartlett.00,Bartlett.92,Bartlett.88,Bartlett.87,Bartlett.87b, Harzing.00,Yip.94). This organizational structure follows the N-form (network) as opposed to the M-form (multi-divisional) since it focuses on integration, combination, multiplication of resources and capabilities, and managing assets and core competencies as a network of alliances, as opposed to functional or geographical division. The ultimate objective is to have access and make effective and efficient use of all the resources the company has at its disposal globally, including both globalized knowledge and tacit localized knowledge. A potential limitation of the transnational company is the fact that it requires management intensive processes (Ohmae.06a). In any case, the transnational model is still primarily considered a mindset, idea, or ideal rather than an organization structure found on may MNEs, specially in manufacturing (Segal-Horn.99).
- Matrix Position: high localization / high global integration.
- Stage: developed stage of internationalization.
- Subsidiary role: local responsiveness, country/region specific strategies.
- Center role: global integration, coordination, resource allocation, R\&D, knowledge transfer
- Management Decisions: bottom--down (differentiation) and top--down (integration), matrix structures, N-form.
- Technology \& Knowledge Transfer: knowledge transfer across borders.
- Percentage of Foreign Sales: high.
- Example: McKinsey, Cap Gemini Sogeti.
- Matrix Position: high localization / high global integration.
- Stage: developed stage of internationalization.
- Subsidiary role: local responsiveness, country/region specific strategies.
- Center role: global integration, coordination, resource allocation, R\&D, knowledge transfer
- Management Decisions: bottom--down (differentiation) and top--down (integration), matrix structures, N-form.
- Technology \& Knowledge Transfer: knowledge transfer across borders.
- Percentage of Foreign Sales: high.
- Example: McKinsey, Cap Gemini Sogeti.
Modern Global Model
2007///
The modern global company follows the tradition of the old (pure) global form but it gives a more significant role to the country subsidiaries. The central authority is responsible for achieving high global integration by providing 1) low cost sourcing platforms, 2) efficient factor costs, 3) global scale, 4) product standardization, 5) quality assurance, 6) global technology sharing and IT, 7) brand name, and 8) global corporate strategy. Contrary to the traditional (pure) global model, the modern global MNE makes more effective use of the subsidiaries in order to become more locally responsive. As traditional global firms evolve into modern global enterprises they tend to focus more on strategic coordination and integration of core competencies worldwide, and protecting home country control becomes less important. Modern global corporations may disperse R&D, manufacture and production, and marketing around the globe. This helps ensure flexibility in the face of changing factor costs for labor, raw materials, exchange rates, as well as hiring talent worldwide (Segal-Horn.99, Yip.96,Yip.91,Yip.91a,Yip.89,Yip.00,Yip.97a,Yip.88,Yip.96a).
- Matrix Position: high global integration / medium localization.
- Stage: developed stage of internationalization.
- Subsidiary role: local responsiveness, country/region specific strategies.
- Center role: global integration, coordination, resource allocation, R\&D, knowledge transfer
- Management Decisions: bottom--down (differentiation) and top--down (integration)
- Technology \& Knowledge Transfer: knowledge transfer across borders.
- Percentage of Foreign Sales: high.
- Example: Gillette
- Matrix Position: high global integration / medium localization.
- Stage: developed stage of internationalization.
- Subsidiary role: local responsiveness, country/region specific strategies.
- Center role: global integration, coordination, resource allocation, R\&D, knowledge transfer
- Management Decisions: bottom--down (differentiation) and top--down (integration)
- Technology \& Knowledge Transfer: knowledge transfer across borders.
- Percentage of Foreign Sales: high.
- Example: Gillette
Modern Multidomestic Model
2007///
The modern multidomestic follows the tradition of the old (pure) multidomestic but it gives a more significant role to the corporate headquarters. As such, it is no longer a loose confederation of assets, but a MNE with a strong culture of operational decentralization, local adaptation, product differentiation, and local responsiveness. Having disperse national subsidiaries with significant autonomy, a strong geographical dimension and empowered country managers help the modern multidomestics to maintain their local responsiveness and their ability to differentiate and adapt to local environments. Contrary to the traditional multidomestic where the center had very little value added, in the modern multidomestic the center is critical to enhance the competitive strength of the multidomestic. While the role of the subsidiary is to be locally responsive, the role of the center triangle is to enhance the global integration by developing global corporate and competitive strategies, play a significant role in resource allocation, selection of markets, developing strategic analysis, mergers and acquisitions, decisions regarding R\&D and technology matters, eliminating duplication of capital intensive assets, and knowledge transfer. A representative example of the modern multidomestic is Nestle (Segal-Horn.99, Yip.96,Yip.91,Yip.91a,Yip.89,Yip.00,Yip.97a,Yip.88,Yip.96a). In summary:
- Matrix Position: medium global integration / high localization.
- Subsidiary role: local responsiveness, country/region specific strategies.
- Center role: global integration, coordination, resource allocation, R\&D, knowledge transfer
- Management Decisions: bottom--down (differentiation) and top--down (integration).
- Technology & Knowledge Transfer: knowledge transfer across borders.
- Percentage of Foreign Sales: high.
- Example: Nestle.
- Matrix Position: medium global integration / high localization.
- Subsidiary role: local responsiveness, country/region specific strategies.
- Center role: global integration, coordination, resource allocation, R\&D, knowledge transfer
- Management Decisions: bottom--down (differentiation) and top--down (integration).
- Technology & Knowledge Transfer: knowledge transfer across borders.
- Percentage of Foreign Sales: high.
- Example: Nestle.
A Modern Typology of MNEs
2007///
Given the limitations of each of the structures in terms of global competitiveness, most MNEs have re-evaluated their corporate and competitive strategies and re--structured in order to simultaneously become more globally integrated and locally responsive. As MNEs attempt to optimize their global integration/local responsiveness trade--off (i.e. adopting a more "glocal" strategy) there is a certain degree of convergence, and the old traditional organizational forms are too "pure" in nature to accurate model most modern MNEs. The inability of the traditional (pure) models of multidomestic and global models to accurately describe modern MNEs has led to the new models of modern multidomestic, modern global, and transnational. These models can be briefly summarized as follows:
Limitations of the Traditional Organizational Structures
2007///
As we pointed out in the previous posting, each of these organizational structures has limitations to compete in a global economy. Briefly, the international exporter (low global integration/low localization) is not well positioned to compete in situations where either economies of scale or local responsiveness are critical. The traditional multidomestic (low global integration/high localization) is not well positioned to exploit competitive interdependencies and global efficiencies, and consequently it is in significant disadvantage in situations where economies of scale and scope are critical. Additionally, their inability to extract value from its center headquarters significantly limits their competitive advantage in global setting where corporate strategy, global integration, coordination, and knowledge transfer play a significant role. Finally, the global company (low localization/high global integration) is not well positioned to compete in situations requiring critical local adaptation. Perhaps even more important is the fact that it does not extract value from their subsidiaries including knowledge transfer, coordination, and business strategy, enabling them to make good strategic and tactical decisions.
A Modern Typology of MNEs
2007///
The organization of modern MNEs is more complicated than the old models of international exporter, multidomestic (Porter, 86), and global (Yip.89). As a consequence of the intrinsic limitations of each of the pure structures as an optimal form to compete globally, MNEs evolved from these traditional forms into more sophisticated structures intended to combine the advantages of multidomestic and global structures. Initially these led to the concept of transnational corporation (high localization/high global integration) developed and widely studied by Bartlett, Ghoshal, and other scholars (Bartlett.92,Bartlett.88,Bartlett.87,Bartlett.87b, Harzing.00,Yip.94). However, the transnational model is still primarily considered a mindset, idea, or ideal rather than an organization structure found on many MNEs (Segal-Horn.99).
Traditional Global Model
2007///
The traditional global company is the antithesis of the traditional multidomestic company. The traditional global model is used to characterize MNEs with globally integrated operations designed to take maximum advantage of economies of scale and scope by following a strategy of standardization and efficient production (Yip.97,Yip.96,YYip.96a,Yip.98). By globalizing operations and competing in global markets these companies aim to: 1) reduce cost of R&D, manufacture, production, procurement, and inventory; 2) improve quality by reducing variance, 3) enhance customer preference through global products and brands, and 4) obtain competitive leverage (Segal-Horn.99). The power center, corporate strategy, resource allocation, and knowledge generation and transfer resides in the corporate headquarters. In terms of the global integration/local responsiveness matrix, the pure global company occupies the position of extreme global integration and low localization. Examples of pure global structures are found in Japanese MNEs during the 1970s (e.g. Sony, Hitachi, Sharp, Toyota) and US companies (i.e. Intel, TI, Coca-Cola, Gillette). As in the case of the international exporter and traditional (pure) multidomestic model, the traditional (pure) global company represents an extreme ideal and an early organization structure. In summary, the traditional (pure) global model can be characterized as follows:
- Matrix Position: high global integration / low localization.
- Stage: Early & more recent of internationalization, transitory.
- Subsidiary Role: minimal, distribution and operations
- Center Role: Global integration, corporate strategy, competitive strategy.
- Management Decisions: top--down (from corporate headquarters to subsidiaries).
- Technology & Knowledge Transfer: kept at the headquarters, minimal knowledge transfer across borders.
- Percentage of Foreign Sales: high.
- Example: Japanese (i.e. Sony, Hitachi, Shap, Toyota) and US companies (Intel, TI, Gillette).
- Model Limitations: transitory organizational form, ideal conceptualization, nowadays few companies fit perfectly the pure global structure, inability to compete in environments requiring high local responsiveness and adaptation.
- Matrix Position: high global integration / low localization.
- Stage: Early & more recent of internationalization, transitory.
- Subsidiary Role: minimal, distribution and operations
- Center Role: Global integration, corporate strategy, competitive strategy.
- Management Decisions: top--down (from corporate headquarters to subsidiaries).
- Technology & Knowledge Transfer: kept at the headquarters, minimal knowledge transfer across borders.
- Percentage of Foreign Sales: high.
- Example: Japanese (i.e. Sony, Hitachi, Shap, Toyota) and US companies (Intel, TI, Gillette).
- Model Limitations: transitory organizational form, ideal conceptualization, nowadays few companies fit perfectly the pure global structure, inability to compete in environments requiring high local responsiveness and adaptation.
Traditional Multidomestic Model
2007///
The traditional multidomestic model is used to characterize MNEs with a portfolio of independent subsidiaries operating in different countries as a decentralized federation of assets and responsibilities under a common brand name (Bartlett.87,Bartlett.87b,Bartlett.88). The old or pure multidomestic form models companies that adopt country--specific strategies with little international coordination or knowledge transfer from the center headquarters. The power center, business strategic decisions, resource allocation, decision making, knowledge generation and transfer, and procurement reside with each country subsidiary and the center adds very little value. In terms of the global integration/local responsiveness matrix, the pure multidomestic organizational structure represents the extreme case of local responsiveness and localization, and low global integration. Similarly to the international exporter form, the traditional multidomestic organizational structure is sometimes described as a historically early only, since this structure is not well--positioned to compete in a post--globalization environment where standardization, global integration, and economies of scale and scope are critical. However, the pure multidomestic structure is still viable in situations where local responsiveness, local differentiation, and local adaptation are critical (Douglas.87,Douglas.73,Wind.89,Wind.74,Wind.73), while the opportunities for efficient production, global knowledge transfer, economies of scale, and economies of scope are minimal (Bartlett.87, Segal-Horn.99). As in the case of the international exporter form, given the trends towards the globalization of markets (Levitt.84,Levitt.83), the pure multidomestic company may be considered a transitory organizational structure in most cases. An example of this structure and its limitations is Philips during the 1960 where its multidomestic organizational model made the autonomous country subsidiaries unable to effectively compete against global Japanese companies such as Sony, Sharp, and Hitachi. In summary, the traditional (pure) multidomestic model can be characterized as follows:
- Matrix Position: low global integration / high localization.
- Stage: Early & more recent of internationalization, transitory.
- Subsidiary Role: competitive strategy, tactical decisions.
- Center Role: minimal, cash dividends, global brand.
- Management Decisions: bottom--down (from subsidiaries to corporate headquarters).
- Technology & Knowledge Transfer: kept at the subsidiary level, little knowledge transfer across borders.
- Percentage of Foreign Sales: high.
- Example: UK companies during post-war, Philips (1960s).
- Model Limitations: transitory organizational form, ideal conceptualization, nowadays few companies are pure multidomestic, inability to exploit competitive interdependencies and global efficiencies, duplication of resources.
\end{itemize}
- Matrix Position: low global integration / high localization.
- Stage: Early & more recent of internationalization, transitory.
- Subsidiary Role: competitive strategy, tactical decisions.
- Center Role: minimal, cash dividends, global brand.
- Management Decisions: bottom--down (from subsidiaries to corporate headquarters).
- Technology & Knowledge Transfer: kept at the subsidiary level, little knowledge transfer across borders.
- Percentage of Foreign Sales: high.
- Example: UK companies during post-war, Philips (1960s).
- Model Limitations: transitory organizational form, ideal conceptualization, nowadays few companies are pure multidomestic, inability to exploit competitive interdependencies and global efficiencies, duplication of resources.
\end{itemize}
International Exporter Model
2007///
The international exporter is used as a model to characterize companies who are strongly dependent on their domestic sales and that export opportunistically. As such, some scholars in the research community do not consider these companies to be MNEs, since their foreign sales are typically very low compared to their percentage of total sales and their international operations are often limited to sales outfits in foreign countries.
International exporter companies have typically a well-developed domestic infrastructure and additional capacity to sell internationally. Consequently, these companies may have aspirations to become MNEs by evolving into multidomestic, global, or transnational companies. This organizational structure is generally considered to be unsophisticated, unsustainable, and transitory in nature. In the short term, this organizational form may be viable in certain situations where the need for localization and local responsiveness is very low (i.e. the home product can be sold internationally with very minor adaptations), and the economies of global standardization are also low. The international exporter model is used to characterize many American companies in the post--war period. Currently, the model may still be useful to characterize domestic companies in the early stages of internationalization (Vernon.66} that sell standardized products internationally where economies of scale and scope do not play a significant role, but it is important to recognize that this organizational form is transitory in nature and consequently can only be used to describe a given company for a limited period of time (Segal-Horn.99). In summary, the international exporter model can be characterized as follows:
-Matrix Position: low global integration / low localization.
-Stage: Early stage of internationalization, transitory.
-Subsidiary Role: minimal, distribution.
-Center Role: corporate and competitive strategy and tactical decisions.
-Management Decisions: top--down (from corporate to subsidiaries).
-Technology & Knowledge Transfer: from corporate center to subsidiaries.
-Percentage of Foreign Sales: low.
-Example: US companies during post-war.
-Model Limitations: transitory organizational form, inability to exploit competitive interdependencies and global efficiencies, inability to exploit local differences.
International exporter companies have typically a well-developed domestic infrastructure and additional capacity to sell internationally. Consequently, these companies may have aspirations to become MNEs by evolving into multidomestic, global, or transnational companies. This organizational structure is generally considered to be unsophisticated, unsustainable, and transitory in nature. In the short term, this organizational form may be viable in certain situations where the need for localization and local responsiveness is very low (i.e. the home product can be sold internationally with very minor adaptations), and the economies of global standardization are also low. The international exporter model is used to characterize many American companies in the post--war period. Currently, the model may still be useful to characterize domestic companies in the early stages of internationalization (Vernon.66} that sell standardized products internationally where economies of scale and scope do not play a significant role, but it is important to recognize that this organizational form is transitory in nature and consequently can only be used to describe a given company for a limited period of time (Segal-Horn.99). In summary, the international exporter model can be characterized as follows:
-Matrix Position: low global integration / low localization.
-Stage: Early stage of internationalization, transitory.
-Subsidiary Role: minimal, distribution.
-Center Role: corporate and competitive strategy and tactical decisions.
-Management Decisions: top--down (from corporate to subsidiaries).
-Technology & Knowledge Transfer: from corporate center to subsidiaries.
-Percentage of Foreign Sales: low.
-Example: US companies during post-war.
-Model Limitations: transitory organizational form, inability to exploit competitive interdependencies and global efficiencies, inability to exploit local differences.
Introduction to International Corporate Structures
2007///
The typology of international corporate structures is primarily based on the global integration/local responsiveness framework. Bartlett, Ghosahl, Prahalad, Stopford, Teece, Yip, Doz, and other scholars in international management have traditionally categorized the international corporate structure of multinational enterprises (MNEs) according to four possible models: international exporter, multidomestic, and --more recently-- transnational (Bartlett.88,Bartlett.87,Bartlett.87b,,Bartlett.92,94,Yip.91,Yip.91a,Yip.00}). These traditional organizational models of MNEs occupy well-defined positions in the global standardization/local adaptation matrix and are useful idealizations to describe and capture the most salient characteristics of each of the different organizational structures traditionally adopted by MNEs. In this paper we review the traditional organizational models for multinational enterprises (MNEs), discuss their usefulness as ideal models to study the possible organizational structures of MNEs according to the global integration/local responsiveness framework, and point out some of their limitations as accurate characterizations of modern MNEs.