Global Networking and Its Impact on International Business Economics

Introduction

According to Contractor and Lorange (2002), in their work Cooperative Strategies in International Business: Joint Ventures and Technology Partnerships Between Firms, there is increasing acknowledgment that alternative forms of international business operations involve "negotiated arrangements between two or more firms." This model requires collaboration and cooperation between companies that share "control, technology, management, financial resources and markets." Joint ventures are described as the most "visible and common mode of inter-firm cooperation," although several other institutional and legal forms also exist, such as contractually defined joint programs or consortia, technology transfer or licensing agreements, and management service and franchising agreements.

These types of negotiated arrangements are reported to outnumber fully owned foreign subsidiaries "by a factor of at least four to one for U.S.-based companies." The ratio is reportedly higher for European- and Japanese-based companies, likely because they "have a higher propensity than U.S. companies to engage in international joint ventures and contractual arrangements." Nevertheless, fully owned foreign affiliates "continue to be the dominant and preferred vehicles for international strategy" (Contractor and Lorange, 2002).

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

Purpose, Research Questions, and Significance

The research questions guiding this study are:

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

Methodology

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

Literature Review

The significance of this study lies in the knowledge it will add to the existing base of understanding in this field of inquiry.

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

Contractor and Lorange (2002) note two contrary trends when the international strategies of companies are examined. The first is the "convergence of buyer preferences and technical standards in some industries," which contributes to the internalization advantages of conducting global operations under a single administrative entity. These firms are both centralized and exercise control over affiliates, remaining "unencumbered by the possibly variable objectives of partners" — a condition that is key to extracting the "efficiencies of global optimization." It is not always possible for firms to invest and operate alone through fully owned subsidiaries, which, while considered optimal, is sometimes unattainable. The most common arrangement occurs when a joint venture is "forced on a company because of government mandate, nationalism, or protectionism in that country" — the traditional rationale for joint ventures in Japan, socialist countries, and several developing nations.

The second trend holds that even when operating independently is possible, that strategy may be "inferior to a strategy of cooperating or linking up with another firm." During the 1980s, many joint ventures, consortia, and technology-sharing agreements were undertaken by preference over a fully owned subsidiary option, with each firm retaining the choice of independent action. Although no government mandate required cooperation, firms chose cooperation over competition — a development described as the "countertrend in international corporate strategy" (Contractor and Lorange, 2002).

In recent years, the economic climate in international business has resulted in cooperation among several industries "more strongly than in the past." Firms in Europe and Japan have "regained the relative competitive position that they enjoyed in the first half of the century," and cooperation has been demonstrated to be "often superior to outright competition." Technology is identified as key in explaining "the propensity to cooperate," and "fragmentation and multiple spin-offs in a technology can provide further impetus to cooperative ventures" (Contractor and Lorange, 2002).

Corporate policies have also shifted in response to changes in the international business environment; however, firms in the United States tend to prefer the "go-it-alone strategy." At present, there is reportedly "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).

According to the World Bank publication Changes in Global Business Organization, the organization of global business is "rapidly changing in ways that affect the competitive opportunities open to developing countries." Changes in technology — and most specifically technological progress — "have tended to increase the demand for services connected with the production of goods and to facilitate the separation of goods production from services production." 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, n.d.).

The importance of "management, marketing, distribution, and after-sale maintenance" has increased relative to the value of manufactured products. Services that are information- and knowledge-intensive — including research and development, engineering, design, computing and data processing, inventory management, quality control, accounting, legal services, and personnel services — have become integral parts of the production process in the manufacturing sector. Modern manufacturing, production, and distribution have developed a growing dependence on the processing and dissemination of information. 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, n.d.).

Income growth combined with technological progress has driven the provision of services through various forms of cross-border relationships in the following areas: (1) management and franchise contracts, hotels, restaurants, and car rentals; (2) joint ventures in some business services, recreational activities, some accounting and legal services, and civil engineering in turnkey projects; and (3) services in which a local partner is required for marketing and distribution.

Firms that provide services through subsidiaries rather than through other types of relationships include: (1) financial institutions, in which much proprietary knowledge is tacit, expensive to produce, and 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.

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, n.d.).

The globalization of production has assisted in fueling the "growth in global trade." Growth in trade and foreign direct investment (FDI) flows has "reflected, in part, the expansion of production networks." Production, which was generally completed in one location, has been broken down into separate steps, each moved to locations where it can be performed at the lowest possible cost. As a result, a great deal of international trade and FDI has "shifted from the exchange and production of final consumer goods to the exchange and production of parts and components" (World Bank, n.d.).

The rise in the share of trade accounted for by global networks is partly 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 significant. The share of these sectors in the world market rose from 27% in 1986 to 43% in 1997, with the increase further reflecting "a rise in components trade within the product classes" (World Bank, n.d.).

Technology in transport, communications, and data processing has facilitated the growth in FDI and the establishment of networked cross-border production. Sea freight unit costs declined by 70% from the early 1980s through the mid-1990s as a result of "a rise in the share of cargo carried in containers." Rates for long-distance telephone calls also decreased, the fax machine became a standard business tool, and the Internet enabled "multinationals to closely coordinate production at dispersed locations" (World Bank, 1997). Consequently, the costs of evaluating potential suppliers fell in "more arms'-length transactions," and increased information and data processing capacity enabled more effective management of global networks.

Electronic data interchange (EDI) systems resulted in a reduction of procurement costs, and production coordination among widely dispersed factories improved greatly through the automation of routine transaction processing. Improvements in economic policies — specifically the "decline in barriers to trade" — also contributed to the formation of cross-border production networks. Manufactured product tariffs for industrial countries were reduced through successive rounds of multilateral negotiations from 10% in 1980 to 5% in 1998. The average tariff rate for developing countries fell "from between 25 and 30% in the early 1980s to 13% by 1998" (World Bank, 1997).

The work of Hanson, Mataloni, and Slaughter (2002), as cited in the World Bank report, finds that tariffs are "an important determinant of the size of intermediate inputs from parent companies relative to the total sales of U.S. affiliates" — a direct measure of activity within production networks. Higher tariffs are significantly correlated with less production sharing, "with estimated elasticities in the range of 2 to 4." Multinationals are able to lobby for reductions on tariffs on their inputs in order to reduce network costs (World Bank, n.d.).

The structuring of global networks is accomplished through a "range of ownership structures," including arm's-length transactions as well as establishing a subsidiary for production of components that are custom-made for particular products. A wide range of choices exist, and each choice involves some type of relationship between the purchaser and supplier (World Bank, n.d.).

The World Bank report documents that intra-firm trade has increased on a global basis. Intra-firm trade encompasses production shared within global networks as well as trade in finished products for the purposes of "marketing and distribution in foreign countries." Evidence indicates 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 (World Bank, n.d.).

According to the World Bank report, networks result in: (1) a boost in access to technology; (2) an increase in the supply and demand for skilled labor; and (3) benefits contributing to growth and structural transformation.