International Networking and the Outcomes of Global Networking

The purpose of the research proposed is to examine international business economics and specifically the impact that global networking has had upon organizations and corporations that are global providers of products and/or services. Research questions in this proposed study include those which ask as the questions of: (1) What is the impact of global networking on international business economics both in the U.S. And in developing countries throughout the world? And (2) Does affiliation drive business growth and profit for international organizations?

International Networking and the Outcomes of Global Networking

According to the work of Contractor and Lorange (2002) entitled “Cooperative Strategies in International Business: Joint Ventures and Technology Partnerships Between Firms” there is increasingly acknowledgement that alternative forms of international business operations involving “negotiated arrangements between two or more firms.” (Contractor and Lorange, 2002) This model involves the collaboration and cooperation by and between companies that share “control, technology, management, financial resources and markets.” (Contractor and Lorange, 2002) Joint ventures are stated to be that which are the most “visible and common mode of inter-firm cooperation” although there are reported to be “several other institutional and legal forms, such as contractually defined joint programs or consortia, technology transfer or licensing agreements and management service and franchising agreements, to name only the major types.” (Contractor and Lorange, 2002) These types of “negotiated arrangements” are stated to be larger in number than the fully owned foreign subsidiaries “by a factor of at least four to one for U.S.-based companies…” (Contractor and Lorange, 2002) The ratio is reported to be higher for European- and Japanese-based companies” and this is stated to be likely due to the fact that they “have a higher propensity than U.S. companies to engage in international joint ventures and contractual arrangements.” (Contractor and Lorange, 2002) Fully owned foreign affiliates are reported to “continue to be the dominant and preferred vehicles for international strategy.” (Contractor and Lorange, 2002)

II. Purpose of Study

The purpose of the research proposed is to examine international business economics and specifically the impact that global networking has had upon organizations and corporations that are global providers of products and/or services.

III. Research Questions

(1) What is the impact of global networking on international business economics both in the U.S. And in developing countries throughout the world?

(2) Does affiliation drive business growth and profit for international organizations?

IV. Significance of Study

The significance of this study is the knowledge that will be added to the already existing base of knowledge in this field of inquiry.

V. Methodology

The methodology to be utilized in the proposed study is one of a qualitative nature and one that will be conducted through an exhaustive and systematic review of literature that is peer-reviewed academic and professional journals and articles published within the past seven (7) years.

VI. Literature Review

1. Two Contrary Trends

Contractor and Lorange (2002) note that there are two contrary trends in when the international strategies of companies are studied. The first is the “convergence of buyer preferences and technical standards in some industries” which are reported to “contribute to the ‘internalization’ advantages of conducting global operations under a single administrative entity.” (Contractor and Lorange, 2002) These firms are both centralized and exhibit control over affiliates and remain “unencumbered by the possibly variable objectives of partners” which is stated to be key in these firms so that extraction of the “efficiencies of global optimization” can be realized. (Contractor and Lorange, 2002) It is not always possible that the firms can invest and operate alone through subsidiaries, which are fully owned however, this is stated to be “optimal” yet sometimes unattainable. (Contractor and Lorange, 2002) Stated as the most common of all types is the joint venture and one that is “forced on a company because of government mandate, nationalism, or protectionism in that country.” (Contractor and Lorange, 2002) This is reported as the traditional rationale “for joint ventures in Japan, socialist countries, and several developing nations.” (Contractor and Lorange, 2002) Stated secondly, is that even when operating in a solitary manner is a strategy that can be realized, that operation may be “inferior to a strategy of cooperating or linking up with another firm.” (Contractor and Lorange, 2002) It is reported that during the 1980s that many of the “joint ventures, consortia, and technology-sharing agreements in the eighties were undertaken by a preference over a fully owned subsidiary option. Each firm had the choice of independent action.” (Contractor and Lorange, 2002) There is reported to have been the lack of a mandate by the government that required a linkup however cooperation was chosen by the firms over competition and it is that that is reported as the “countertrend in international corporate strategy.” (Contractor and Lorange, 2002)

2. Changes in the Environment of International Business

In recent years it is reported that the economic climate in international business has resulted in cooperation among several industries “more strongly than in the past.” (Contractor and Lorange, 2002) It is reported as well that firms in Europe and Japan have “regained the relative competitive position that they enjoyed in the first half of the century.” (Contractor and Lorange, 2002) Cooperation has been demonstrated to be “often superior to outright competition.” (Contractor and Lorange, 2002) Technology is stated to be key in the explanation of “the propensity to cooperate.” (Contractor and Lorange, 2002) In addition, “fragmentation and multiple spin-offs in a technology can provide further impetus to cooperative ventures.” (Contractor and Lorange, 2002) Policies of corporations have also shifted due to the change in the international business environment however, it is reported that firms in the United States tend to prefer the “go-it-alone strategy.” (Contractor and Lorange, 2002) There is reported to be, in the present “less neglect of incremental opportunities to selectively engage in a joint venture for a specific product or market, or to license technologies not at the core of the company’s business.” (Contractor and Lorange, 2002)

3. World Bank Report

According to the World Bank publication entitled “Changes in Global Business Organization” the organization of global business is “rapidly change in ways that affect the competitive opportunities open to developing countries.” (World Bank, nd) Changes in technology and most specifically technological progress “has tended to increase the demand for services connected with the production of goods and to facilitate the separation of goods production from services production.” (World Bank, nd) It is reported that the larger the scale of production “the greater technological sophistication of goods, and the increased trade in goods, and management of enterprises across large distances have all contributed to the greater demand for services.” (World Bank, nd) Additionally reported is that the importance of “management, marketing, distribution, and after-sale maintenance” has increased in relation to the value of the manufactured products. (World Bank, nd) Services that are information and knowledge intense including “research and development, engineering, design, computing and data processing, inventory management, quality control, design, accounting, legal services, and personnel services” are reported to have become an integral part of the production process in the manufacturing sector.” (World Bank, nd) In addition, it is reported that dependence has developed on the processing and dissemination of information by modern manufacturing and production and distribution.” (World Bank, nd) Also stated is that the “growing sophistication and variety of services, coupled with specialization emerging from economies of scale, have led manufacturing firms to rely more on outsourcing than on in-house departments to provide the services necessary for production.” (World Bank, nd) Income growth combined with technological process have served to drive up the “provision of services through various forms of cross-border relationships in the areas as follows:

(1) management and franchise contracts, hotels, restaurants and car rentals;

(2) joint ventures in some business services, in recreational activities, in some accounting and legal services, and in civil engineering in turnkey projects; and (3) services in which a local partner is required for marketing and distribution. (World Bank, nd)

It is reported that firms that make provision of services through subsidiaries instead of through other types of relationships are inclusive of the following:

(1) Financial institutions, in which much of proprietary knowledge is tacit, is expensive to produce and is complex and idiosyncratic;

(2) Firms that require control over production to maximize efficiency and to protect the quality of the end product for trademarks, advertising, market research, construction, business consulting, consumer-oriented services, and goods related services such as motor vehicle maintenance and repair; and (3) Trade-related service affiliates set up by non-service multinationals to obtain inputs for domestic activities or to supply markets. (World Bank, nd)

It is reported that multinational corporations have the potential to “enhance the efficiency of services industries in developing countries by providing services that are often subject to economies of scale and that have a much higher cost from a distance can generate important benefits to developing country firms.” (World Bank, nd)

4. Globalization of Production

The globalization of production is stated to have assisted in fueling the “growth in global trade.” (World Bank, nd) As well the growth in trade and foreign domestic investment flows are reported to have “reflected, in part, the expansion of production networks.” (World Bank, nd) Production, which generally was all completed in one location, has been broken down into separate steps and each step moved to locations where that step can be performed at the lowest of possible cots. Therefore, a great deal of international trade and foreign direct investment has “shifted from the exchange and production of final consumer goods to the exchange and production of parts and components.” (World Bank, nd) The rise in the share of trade accounted for by global networks is reported to be partly that which is reflective of the growing importance in global production of goods such as electronics, chemicals, and transport equipment and machinery, where trade in components is most important.” (World Bank, nd) There is a stated rise in those sectors in the world market from the 1986 27% to the 1997 43%. It is reported that the increase is further reflective of “a rise in components trade with the product classes.” (World Bank, nd)

Technology in the area of transport, communications and data processing is reported as that which has facilitated the growth in foreign direct investment and establishment of networked cross-border production with sea freight unit costs reported as declining by 70% from the beginning of the 80s decade through the middle of the 90s decade stated to be resulting from “a rise in the share of cargo carried in containers.” (World Bank, 1997 in World Bank, nd)

In addition the rates of long distance telephone calls have decreased as well as the addition of the fax machine as a regular business tool and finally, the Internet has enabled “multinationals to closely coordinate production at dispersed locations.” (World Bank, 1997) The result is that the costs of evaluation of potential suppliers have fallen in what are “more arms’ length transactions.” (World Bank, 1997) The increase in the information and data processing arena has enabled more effective management of global networks. (World Bank, nd, paraphrased) Electronic data interchange (EDI) systems are reported to result in a reduction of procurement costs in addition to production coordination becoming greatly improved among factories that are widely dispersed through use of automation in routine processing of transactions. (World Bank, 1997) Improvements in economic policies are cited including specifically the “decline in barriers to trade, have also contributed to formation of cross-border production networks.” (World Bank, 1997) It is reported that manufactured product tariffs were reduced through means of successive rounds of multilateral negotiations that took place for industrial countries from the 1980 of 10% down to the 1998 stated 5%. And it is also reported that there was a fall in the developing country average tariff rate “from between 25 and 30% in the early 1980s to 13% by 1998.” (World Bank, 1997) The World Bank report states that the work of Hanson, Mataloni and Slaughter (2002) state findings that tariffs are an important determinant of the size of intermediate inputs from parent companies relative to the total sales of U.S. affiliates” and states that this is a “direct measure of activity within production networks.” (World Bank, nd) Less production sharing is reported as “significantly correlated with less production sharing, with estimated elasticities in the range of 2 to 4.” (World Bank, nd) Multinationals are allowed to lobby for reductions on tariffs on their inputs so as to reduce the networks cost.” (World Bank, nd)

5. Structuring of Global Networks

The structuring of global networks is accomplished variously in a “range of ownership structures” which includes such as “arm’s-length transactions…establishing a subsidiary for production components that are custom-made for particular products.” (World Bank, nd) A wide range of choices are existent and each choice is inclusive of a relationship of some type between the purchaser and supplier. (World Bank, nd, paraphrased)

6. Intra-Firm Trade

The World Bank report states that ‘intra-firm trade’ has increased on a global basis. The following chart shows just how much intra-firm trade has actually increased in the United States and in Japan.

Figure 1

Source: World Bank Report (nd)

The following chart labeled Figure 2 in this study shows just how much intra-firm trade in services is becoming more and more important.

Figure 2

Source: World Bank Report (nd)

Intra-firm trade is reported to be inclusive of production that global networks share and trade in products that are finished for the purposes of “marketing and distribution in foreign countries.” (World Bank, nd) The World Bank report states that there is “some evidence that production through networks has become more important over time. The share of exports of intermediate goods to overseas manufacturing affiliates in total Japanese exports rose from 20% in 1994 to 29% in 1999. Products intended for further processing increased from 57% of U.S. multinationals’ exports to foreign-owned affiliates in 1989 to 68% in 1999 (Mataloni and Yorgason 2002). Trade among foreign affiliates of U.S. multinationals has also expanded, which probably indicates that networks have become more complex over time.” (nd) According to the World Bank report networks result in (1) a boost in the access to technology; (2) an increase in the supply and demand for skilled labor; (3) benefits contributing to growth and structural transformation. (nd)

VII. Summary of Literature Review

The literature review in this initial and brief study has demonstrated that there has been a very large impact on international business economics by global networking. Also found in this review of literature is the intra-firm trade has become increasingly important and that the importance of intra-firm trade is still increasing. Affiliation in production and manufacturing has also been shown to be an important indicator of FDI.

VIII. Recommendations

Arising from this brief study is a recommendation that more research is needed in examining the impact of global networking on international business economics.

IX. Conclusion

Because more research is needed in gaining a better understanding of the impact of global networking on international business economics this study concludes that such a study should take place in a qualitative methodology in the form of an exhaustive and systematic review of literature because the information gained in the study will contribute greatly to a better understanding of international business economics and specifically in the areas of production and manufacturing and global networking impacts on international business economics.

Bibliography

Changes in Global Organization (nd) World Bank report. Retrieved from: http://siteresources.worldbank.org/INTGEP/Resources/335315-1257200391829/gep2003chap2.pdf

Contractor, FJ and Lorange, P (2002) Cooperative Strategies in International business: Joint Ventures and Technology Partnerships between firms. International business and management series. Vol. 2 Cooperative Strategies and Alliances in International business. Rutgers University. Graduate School of Management, Wharton School. Emerald Group Publishing 2002. Retrieved from: http://books.google.com/books?id=BwfRrH5jEKgC&dq=International+Business+Economics&lr=&source=gbs_navlinks_s

Heinsz, WJ (nd) The Institutional Environment for International business. The Wharton school, University of Pennsylvania. Philadelphia, PA. Retrieved from: http://www-management.wharton.upenn.edu/henisz/papers/wiib.pdf

Mataloni, Raymond J., and Daniel R. Yorgason (2002) Operations of U.S. Multinational Companies: Preliminary Results from the 1999 Benchmark Survey.” Survey of Current Business. Washington, D.C.: U.S. Department of Commerce. March.