Abstract number: 020-0615

Title: Company globalization and the level of country economic development

Krisztina Demeter

CorvinusUniversity of Budapest

Fővám tér 8, Budapest, Hungary, 1093

+36-30-2489053

POMS22nd Annual Conference

Reno, Nevada, U.S.A.
April 29 to May 2, 2011

Abstract

For developing countries getting access to the most up-to date economic information and knowledge is to globalize. Globalization takes place through export-import activities and/or FDI. Thus the level of globalization in a given country and for companies can be identified through these activities. In this paper companies are typified on the basis of the distribution of import, export and manufacturing activities at local, regional and global level. Manufacturing characteristics of company types, such as their order winners, practices and performances, as well as their relation to the level of development of the hosting country are analyzed in order to give a full picture of internal and external factors of various types. Two databases are used: the IMSS V database with 750 companies from 21 countries and the Global Competitiveness report that contains economic data about the countries involved into the analysis.

Introduction

We can see a diversity of international activities of firms both in developed and developing countries. Start-up companies, and well-established giant multinationals work through international links integrating into internal and external company networks. It is difficult to follow why and how companies locate their new alliances in a given area, why some part of a product is replaced somewhere else to produce, or outsourced to an external partner. There must be logic behind these decisions which most probably stem from strategic considerations and strives for competitiveness.

SMEs usually start the process of internationalization by export-import activities to get knowledge first about their potential markets and suppliers (Johanson-Vahlne, 1977). After initial learning and enough financial background they can set up manufacturing establishments abroad or form formal relationship with foreign partners. Another typical way of internationalization is to become part of an existing international supply chain. The situation, nevertheless, is very similar to the previous way: they have to make contact with foreign partners, which in itself, is a large jump compared to domestic activities.

Many companies do not stop, however at this point: they establish more and more subsidiaries abroad to get access to low cost factors, to important markets or to skills and knowledge (Ferdows, 1997). Through this process they basically intend to match the double criteria of globalization and localization, or in other words, of efficiency and customer satisfaction. But these different drivers and criteria means that companies will have different competitive priorities and thus will implement different manufacturing programs. For example, efficiency requires low cost materials, high utilization of resources: people and technology, lean organization and practices. While satisfying local demand requires customization capabilities, flexible machines and working practices, and/or service orientation. Thus business strategy, or the strategy assigned to a subsidiary sets to objectives and requirements for the manufacturing function.

Any form of internationalization takes place, it happens through export-import activities, or through establishing foreign manufacturing facilities (Shi, 2003). Thus, in order to detect the status of internationalization we have to analyze these activities.

Globalization of companies takes place in national contexts: national culture, government policies, education systems, infrastructure, etc. has huge impact on companies’ decisions. Each nation strives for competitiveness in order to provide more wealth for their people (Garelli, 2005).

In this paper we exploreempirically the intersection of three aspects: the level of firm globalization, the economic development level of countries and manufacturing strategies/actions/performance. We focus but not limit our attention to developing countries. Two databases the International Manufacturing Strategy Survey and the World Economic Report is used for the analysis.

First the literature on internalization and globalization is reviewed shortly and we set hypotheses. It is followed by describing the research methodology and the used databases. After categorizing companies on theirimport–manufacturing–export combinations and nations on their level of developmenthypotheses are tested and discussed. The paper is closed with conclusions and limitations.

Literature review and hypotheses

The ultimate objective of companies is to make profit (Goldratt – Cox, 1984). In order to reach that, however, they have to satisfy customer needs. From a manufacturing point of view this latter means they have to provide better quality, higher dependability, higher flexibility, and lower prices than their competitors (Ferdows – De Meyer, 1990). If companies satisfy their customers more, they have more profit to reinvest. So they can go abroad to satisfy new customers. Today’s global companies have already tremendous experience how to operate abroad. As Johanson and Vahlne (1977) pointed out their knowledge about how to establish and operate new entities abroad is accumulated during the years.

More developed economies usually have better basic foundations for companies to operate. They provide better infrastructure, better education and health services for their people, and better public institutions to serve company needs. This provides an environment where companies can prosper. Many companies are established and competition becomes fiercer. Thus companies start to search for opportunities abroad: new markets to sell more products or opportunities to serve their home markets better.More competitive companies can accept the challenge of the liability of foreignness (Xu and Shenkar, 2002), the cost to go abroad and compete with local companies who knows their market, their suppliersand production factors better than any newcomer. Due to the better context more developed countries provide a better ground for companies to internationalize.

H1: In less developed countries the general level of globalization is lower.

Globalization has a history (Abele et al., 2008). Originally, companies had the motive to find new markets for their products. Due to protectionism of nations (Sturgeon, 2000), however, export activities were restricted in many countries, and companies started to establish manufacturing activities in protected markets to serve customers from inside. At this stage of development the driver still was to serve local customers. As protectionism was exchanged by freer flow of products almost everywhere in the world due to GATT efforts and other regional alliances (EU, NAFTA, ASIAN), there was no reason to locate subsidiaries in each country. Thus one subsidiary served a whole region instead of one single market to reach higher economies of scale. The increasing level of globalization led to more intense competition everywhere so companies focused on scale economies at all level and activities: they have produced in countries with lower factor costs, cheaper materials, better tax regulations and better environment for production. As a consequence, investments in developed low cost countries increased tremendously to reduce costs. Due to the “low cost” image companies in these countries have to serve their customers (many times their parent companies) with cheap products, or they have to provide relatively cheap products to the local market due to lower purchasing power in these countries.

H2: In less developed countries the price is a relatively more important competitive priority for companies irrespective of the level of globalization of companies.

Industries in less developed countries have become dualistic (Ernst, 2002). Well developed rich global companies face underdeveloped and underfinanced local companies. This dualistic nature is a characteristic of less developed economies, in more developed ones local companies usually find their way to compete and earn enough profit to prosper.

H3: In less developed countries the level of investments in manufacturing action programs depends on the level of internalization of companies.

Due to scale economies global companies are more competitive in cost terms, especially those who chose a cost leadership strategy.Differentiators, on the other hand, are able to be very flexible to react to macroeconomic changes (e.g. by relocating production in case of tax or demand changes) (Buckley, 2009), more flexible than their counterparts (DuBois et al., 1993).

H4: In less developed countries manufacturing performance (cost, flexibility)increases with the level of globalization.

Research methodology and databases

The research uses data from The Global Competitiveness Report 2010-2011 published by the World Economic Forum. The report computes the value of the Global Competitiveness Index (GCI) for 139 economies throughout the world, being the most comprehensive study in this field (Schwab, 2010). Data regarding the determinants/pillars of economic development is also available, since the GCI is computed as the weighted average of many different components, each measuring a different aspect of competitiveness on a 1-to-7 scale (Sala-I-Martin et al., 2010). Pillars of the GCI are listed in Table 1

Table 1: Pillars of the Global Competitiveness Index

Basic requirements / Efficiency enhancers / Innovation and sophistication
1) Institutions / 5) Higher education and training / 11) Business sophistication
2) Infrastructure / 6) Goods market efficiency / 12) Innovation
3) Macroeconomic environment / 7) Labor market efficiency
4) Health and primary education / 8) Financial market development
9) Technological readiness
10) Market size

On the other hand, data from the fifth round of the International Manufacturing Strategy Survey (IMSS V) were used to assess the competitive priorities, actions and performances of manufacturing companies. IMSS is carried out by an international network of researchers focusing on manufacturing strategies, practices and performance of organizations from all around the world. The fifth round of the survey was carried out during year 2009 and included responses from 19 different countries, supplemented with additional two countries in the first half of 2010. Data collection process was administered in each country by local coordinators and, where needed, English language questionnaires were translated by manufacturing strategy academics. Companies were chosen from a base of manufacturing organizations of each country, belonging to the ISIC Rev. 4 Division 25-30 (manufacture of fabricated metal products, machinery and equipment). Questionnaires were completed by Manufacturing and Operations Managers or the person with equivalent position in the company. Data were collected from 750 companies, altogether. The response rate for the total sample was approximately 20%. Table 2presents countries and number of companies for each country participating in the IMSS V research.

Table 2. Sample composition by country

Country / No. of companies / % / Country / No. of companies / %
Belgium / 36 / 4.80 / Korea / 41 / 5.47
Brazil / 37 / 4.93 / Mexico / 17 / 2.27
Canada / 19 / 2.53 / Netherlands / 51 / 6.80
China / 59 / 7.87 / Portugal / 10 / 1.33
Denmark / 18 / 2.40 / Romania / 31 / 4.13
Estonia / 27 / 3.60 / Spain / 40 / 5.33
Germany / 38 / 5.07 / Switzerland / 31 / 4.13
Hungary / 71 / 9.47 / Taiwan / 31 / 4.13
Ireland / 6 / 0.80 / UK / 30 / 4.00
Italy / 56 / 7.47 / USA / 73 / 9.73
Japan / 28 / 3.73 / TOTAL / 750 / 100.00

Set the scene: Clustering companies and countries

In order to find typical combinations of source-manufacture-sales directions a cluster analysis was made with IMSS data. The averages and standard deviations are summarized in Table 3.

Table 3: Means and standard deviations of sourcing – manufacturing – sales directions (%)

Direction / Source / Manufacturing / Sales
Mean / Std. dev. / Mean / Std. dev. / Mean / Std. dev.
Local / 58.43 / 33.001 / 87.66 / 22.368 / 49.5 / 35.418
Regional / 27.81 / 27.673 / 7.59 / 16.318 / 34.70 / 30.259
Global / 13.96 / 20.304 / 4.86 / 13.192 / 15.81 / 21.029
Sum / 100% / 100% / 100%

Standard deviations, especially at the source and sales side indicate large differences in company policies. In order to identify types a hierarchical cluster analysis was performed with Ward’smethod and squared Euclidean distance measure first. On the basis of agglomeration schedule coefficients far the most satisfactory solution is at 5 clusters. Till that point the differences between coefficients are certainly large (starting from the 2 cluster solution), but considering the number of observations (596 companies) those larger clusters would provide very rough picture. Then, from the five clusters solution upwards the difference between the coefficients drop to half. Next a k-means cluster analysis was performed with 5 clusters. Cluster means along source – manufacturing – sales directions are summarized in Table 4.

There are three stages between almost purely domestic (258 companies) and entirely global companies (31). Some companies turn to external links mainly at the sales side (136), while many companies open into both source and sales directions, but still operate in one country (122). Relatively few companies of the sample disperse manufacturing focusing on regional (49) or global level (31).

Table 4: Cluster descriptions

Domestic / Domestic
export / Domestic export-import / Regional / Global
Local source / 79 / 77 / 20 / 30 / 26
Reg. source / 12 / 17 / 61 / 55 / 22
Global source / 9 / 6 / 19 / 15 / 53
Local mfg / 96 / 92 / 96 / 38 / 47
Regional mfg / 3 / 5 / 3 / 48 / 10
Global mfg / 2 / 3 / 1 / 14 / 45
Local sales / 85 / 24 / 26 / 29 / 20
Regional sales / 10 / 50 / 63 / 47 / 25
Global sales / 5 / 25 / 11 / 23 / 55
Number / 258 / 136 / 122 / 49 / 31

We can characterize these clusters further in order to get more information about why they choose the given strategy.

Domestic companies: They do everything locally. They are usually locally owned SMEs, scoring higher in each competitive priority than their counterparts indicating how fierce they feel their competition is. Many of them operate in large countries (China, USA), and indicate growing markets, thus they can find enough room for their products without going abroad. They put relatively high emphasis on servitization, on quality improvement, on environmental and supply chain risk issues. This latter may come from their efforts to establish foreign links which usually is more risky in the lack of experience (DuBois et al., 1993).

Domestic export companies: They source and manufacture locally, but export the majority of their products. They have the highest cost ratio from outsourcing among the costs of production. These locally owned companies usually operate in small countries, where the market is not large enough to utilize scale economies. They indicate declining markets, which is another reason to search for new ones. They do not consider innovativeness as a key to their competitiveness. They put the least efforts into manufacturing improvement through action programs.

Domestic export-import companies: These companies operate locally, but have intense international sourcing and selling activities. They have the highest turnover ratio from selling of parts and subassemblies, and the lowest cost ratio from outsourcing among the costs of production.They are usually foreign owned. They have relatively smaller size. They place the lowest priority on service and innovation, which can also be detected at the level of action programs. In general they have similarly low investments in action programs than domestic export companies.

Regional companies: They do everything at regional level. They prefer to operate in more developed countries and make a lot of investment in manufacturing action programs. They place a bit higher emphasis on services, but that does not appear at the level of action programs.

Global companies: They do everything at global level. They prefer to operate in more developed countries and make the most investments in manufacturing action programs. They are usually larger companies. They consider fast delivery and manufacturing conformance as of lower priority than other groups, and innovative products are the most important in this group.

Countries are clustered with the same methodology based on the three main dimensions of GCI (see Table 1).We identified five clusters summarized in Table 5.

Table 5: Clusters of countries based on the level of economic development

Clusters* / Best / 2nd best / Non-linear good / 2nd worst / Worst
Countries / Denmark, Germany,
Netherlands,
Sweden / Belgium,
Canada,
Taiwan,
UK, Korea / Japan,
USA / Brazil, China, Estonia, Hungary, Ireland, Italy, Portugal, Spain / Mexico,
Romania
Number of companies / 138 / 163 / 101 / 300 / 48

In the first two and last two clusters the values of basic requirements, efficiency enhancers and innovation/sophistication dimensions of development decreases respectively in each clusters. In the middle cluster their values change in the opposite direction.

The five clusters can be re-clustered into two categories: more and less developed countries. The first three clusters belong to more developed countries, the last two to less developed countries.

Analysis and discussion

H1: In less developed countries the general level of globalization is lower.

This hypothesis was checked by Cross-tabulation analysis between the level of development and the five globalization clusters. According to the results there is significant difference (Pearson Chi square: 76.4, p=0.000) between the two groups (see Table 6).

Table 6: Relationship of the country level of developments and the level of internationalization in these countries

Development level / Total
Linear
best / Linear
2nd best / Non-linear
good / Second
worst / Worst
Company types - 5 clusters / domestic / Count / 29 / 43 / 60 / 106 / 20 / 258
Expected Count / 48.5 / 50.6 / 36.4 / 103.9 / 18.6 / 258
domestic export / Count / 28 / 27 / 12 / 63 / 6 / 136
Expected Count / 25.6 / 26.7 / 19.2 / 54.8 / 9.8 / 136
domestic exp-imp. / Count / 28 / 25 / 1 / 56 / 12 / 122
Expected Count / 22.9 / 23.9 / 17.2 / 49.1 / 8.8 / 122
regional / Count / 19 / 12 / 5 / 8 / 5 / 49
Expected Count / 9.2 / 9.6 / 6.9 / 19.7 / 3.5 / 49
global / Count / 8 / 10 / 6 / 7 / 0 / 31
Expected Count / 5.8 / 6.1 / 4.4 / 12.5 / 2.2 / 31
Total / Count / 112 / 117 / 84 / 240 / 43 / 596
Expected Count / 112.0 / 117.0 / 84.0 / 240.0 / 43.0 / 596

H2: In less developed countries the price is a relatively more important competitive priority for companies irrespective of the level of globalization of companies.

This hypothesis was checked in two steps. First the status of price was investigated. And then the impact of globalization is analyzed. In order to see the relative importance of price (as compared to other competitive factors, such as quality, flexibility, time, CSR) a relative measure was created. An average value of each competitive measures (including price) was calculated for each company to see how the importance of price is related to other priorities. Then this average was subtracted from price. Thus in case of positive number the price is more important than other priorities in average. The higher this number the more important price is. In case of negative value other competitive priorities are more important than price.

Table 7: Price priority depending on the level of country development

N / Mean / Std.
Deviation / 95% Confidence Interval for Mean / Minimum / Maximum
Lower Bound / Upper Bound
Linear_best / 131 / ,3123 / 1,28616 / ,0900 / ,5347 / -2,83 / 2,75
Linear_2nd best / 152 / ,3679 / 1,05333 / ,1991 / ,5367 / -3,42 / 2,75
Non-linear_Good / 95 / ,1342 / 1,04638 / -,0789 / ,3474 / -2,75 / 2,08
Second worst / 273 / ,2131 / 1,15882 / ,0750 / ,3511 / -3,58 / 2,75
Worst / 43 / -,1047 / 1,22759 / -,4824 / ,2731 / -3,58 / 2,33
Total / 694 / ,2352 / 1,15444 / ,1492 / ,3213 / -3,58 / 2,75

F = 1,795 (p=0.128)