Lecture 6                                                                                                                   27-11-18

Off-shoring = from country to country

Production and off-shoring is part of the functional area

Functional areas marketing, financing, accounting; topics you can specify on

They all fit in the framework presented in this course

All the sorts of FSAs and the fact that they can be transferred to another country makes them part of this functional area

How exactly does offshoring fit in the framework?

The framework so far has been Bartlett and Ghoshal’s with subsidiary roles. What particular role do they have? The subsidiary’s control depends on its resource base and strategic importance.

In black hole subsidiaries, the beachhead strategy is suitable. 

In implementer subsidiaries, production is located. Simple and probably cheap

In strategic leadersubsidiaries, R&D is located. Locate it where it is most crucial

Ferdows adds to this framework:

More important than the role of a subsidiary, how does this subsidiary add to the overall performance of the MNE?

Production subsidiaries get a new role: they have a connection to the other subsidiaries

àDifference with B&G: production subsidiaries not so boring

Subsidiaries react and respond to their environment, so they respond to the production subsidiaries.

Why the role of production subs has changes:

1. International tariffs went down

If prices increase in one area, that influences the price of products made from it all over the world

2. Production is more complex in terms of supply chain management and planning

if firms have split up their supply chain, as a result of globalization, downstream, whatever happens with the political level influences the production. Everything located in different countries, so supply chain affected by external factors

3. Time to go from manufacturing to marketing has become shorter

The product life cycle of products has shortened: the time to go through the whole supply chain from design to disposal.

Ferdows argues that if you have subs in each of the FDI types (strategic asset seeking, market seeking, efficiency seeking) in all, the process has been upgraded

In the first type you need input and output markets, the seconds only output markets, the last one input markets.

Examples:

Efficiency seeking seeks access to low cost production

If you have low access to cheap production you will take on an offshore strategy: no new FSA development, simple, no autonomy for the subsidiary. Just do what they are being told

Process of upgrading from offshore to source where fsas are developed simply because they have to. Because of life-cycle shortening you need more integrated process so subsidiary should be involved from R&D on. You cannot have R&D in one country, production in other and just demand

Ferdows argues that all subs go from left to right = upgrade

Because of the 3 reasons

Example 2

Market seeking FDI is server = serving particular local market

Has relatively low autonomy, sells in one country and is only responsible for that market

At the end of the supply chain, so complexity and shortening affects you. So the servers also need to develop an FSA to tap into the knowledge base that is elsewhere

The shift from left to right happens in three steps:

1. Enhancing internal performance

Matter of management

2. Accessing & developing external resources

More important

In a period of shortening life cycles you need to respond quickly, can only be done by cooperating. Balance risk of spilling knowledge but need to learn = learning ....

Integrate new knowledge into your supply chain

This is often not happening because:

• • • HQ’s get less autonomy as they give it to subsidiaries, but they find this difficult because there is a tendency for centralization
    • Tendency to treat subs as cash cows and neglecting long term investment

Incentives for companies to change strategy is often low as the revenues are still high, do not consider the changing environment that affects the long-term revenues

• • • It creates instability; exchange rates and wage costs when you change production
    • Government entices MNEs to locate in sometimes unattractive locations

For example, because there is a deal with foreign government 

Critique on Ferdows

1. Ferdows believes that management should upgrade all factories; not necessarily true
2. If FSA is the fact that you produce really cheap in locations, very good at producing cheap and mass abroad. What is wrong with that?
3. Some firms have FSA of moving permanently their production from location to location based on why its cheapest. A routine that you are able to immediately deal with the challenges that come with it, this could be your FSA

Example: Nike

Outsourcing is different from offshoring! 

Outsourcing means that you are using a company outside your own firm to perform services or produce goods that traditionally were performed by yourself

Has nothing to do with domestic or foreign

Benefits:

• Improve focus
• Reduce operating costs

Other companies have core competence in this area so will do better

• Improve quality
• Access to expertise
• Beat competition

Offshoring obtaining services or products from another country

Either take care of everything yourself in the process

Or outsource offshoring to another company and let them take care of everything

àoffshoring does not necessarily imply outsourcing:

Production in other country but it this factory is not owned by me, it is also outsourcing

If the production is offshored to another country to a subsidiary owned by same MNE, it is only offshoring

Reshoring bringing business back home

Economic: price of offshoring is going up when everything does it. Producing in home country might be as cheap at one point. Offshoring advantages are temporary

Political: bringing back home 

Advantages:

• If you concentrate on own FSAs there is more room for improvement and creativity, not bothered by noncore activities
• Reduce and control operating costs

R&D is also being outsourced and offshored in some cases because

• MNEs want to be present in different knowledge& innovation areas in the world; clusters of innovation: there are a few areas in the world that are responsible for almost all the innovations in the world (silicon valley) these areas exist as a result of the need for faceto-face contact

Firms want to tap into this knowledge and be part of this to not be outcompeted.

• Commercial pressure to move quickly form innovation to market
• Critical one: offshoring of advanced tasks is also possible because ICT revolution physical proximity no longer always needed

Need face-to-face contact to understand, but to do that you need to establish this conversation to communicate long-distance later. Technology reduces need for physical proximity

Criticism on Kuemmerle on R&D capabilities abroad

1. Ignores tension between host country lab and central HQ lab insetting research agenda: maybe HQ is not waiting for new initiatives. HQ needs to give subsidiary a lot of autonomy but risk of losing control. Might start to deviate from what HQ wants
2. He does not include the possibility of JV or SA as options to tap into foreign country’s knowledge. Only discusses doing it by yourself
3. Hidden (and rising) costs of offshoring: offshoring in peripheral regions

Developing knowledge by tapping into it is very complex and requires high coordination costs.