The Role of Nultinational Corporations in the Global Economy

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The role of multinational corporations in the global economy is topical and raises questions which require considerable attention from academic and business management. Fitzgerald and Rui conducted a study on the rise and fall of Japanese Multinational Corporations (JMNC) to infer lessons and recommendations for Chinese Multinational Corporations (CMNC) and other emerging economies. To do this, the authors analysed how organizational strategies, firm-level capacities and federal policies influenced the emergence and collapse of JMNC and compared the impact of these aspects on the rise of CMNC. The purpose of this review is to critically evaluate the article by Robert Fitzgerald and Huaichuan Rui” “Whose fall and whose rise? Lessons of Japanese MNCs for Chinese and emerging economy MNCs.”

Firm-level Capabilities

There is a positive correlation amid internationalization and a firm’s performance. Studies reveal the impact of globalization factors on a company’s performance. For example, Schulze et al. conducted an empirical study on 9,026 firms based in China and India and established that this concept indeed influences a firm’s performance. Between the 1980s and early 2000s, the global economic environment was characterized by variations in the world’s economic conditions, government policies, diplomatic relationships and changes in world trade and investment flows which impacted foreign direct investment. For example, business trends shifted from the manufacturing domain to the service sector. Internalization therefore plays a vital role in improving an organization’s performance and modifying business-related practices within the marketplace.

The timeframe was also typified by the increased prominence of mergers and acquisitions, high investments in developing and growing economies and the entry and expansion of MNCs in emerging economies in the market. Japanese enterprises shifted their focus on business services and investment portfolios to become more profit-oriented. These changes impacted firm-level factors and affected the performance of CMNC and JMNC in the global economy. For example, while JMNC invested in established markets, CMNC opted to invest in emerging markets. The decision proved profitable for CNMC in the long-run as they demonstrated competence to exploit and maximize on needs of the emerging markets. CMNN utilized its internationalization strategies to leverage its low-cost products and attain strategic capabilities. The shift in low-cost production and the integration of the global production chain, on the other hand, negatively affected JMNC.

Business Strategies

The authors also noted that the economic achievements of JMNCs and CMNC during this period influenced the nature of the firm-level capabilities of each MNC. The aforementioned changes in business trends impacted the MNC strategic objectives, investment choices of host countries and parent company decisions and management practices. For example, the JMNC took a strategic and centralized internationalization approach with long-term goals while the CMNC approach was an opportunistic approach with short-term goals. The approaches’ outcome, at least for the JMNC, was a rapid internationalisation which was mainly facilitated by the top-down business relationships and centralized government. In their recommendations, Fitzgerald and Rui emphasized a balance between long-term and short-term goals. According to the authors, a long-term strategy can sustain the competitiveness of an MNC. In contrast, given that the conditions in the market are ever-changing, short-term goals might result in overlooking customers’ needs. CNMC goals were mainly short-term when compared to JMNC.

Government Support

The internal and external mechanisms of a centralized government can impact the correlation between a company’s performance and internationalization. The degree of centralized control can impact information exchange, institutional support, and privileges obtained from the affiliation with the government, all of which can influence globalization and firm performance. The authors suggested that the Chinese had managerial approaches that differed from the Japanese, which allowed them to benefit from internationalization differently. The CNMC had unique management practices, cost-effective products, and services in their host economies.

The researchers note that the success of the JMNC stemmed from government support rather than domestic politics. However, Japanese business leaders demonstrated scepticism for national politics. When interviewed, most of the leaders associated their international success with the business approaches and capabilities integrated into their firms’ operations. The JMNC leaders, however, did acknowledge the role government incentives played in their cross-border success. The Japanese administration provided financial, information, and administrative assistance to JMNC. Coupled with the JMNC management expertise and innovative technology, the vertical strengths gave JMNC a competitive advantage in horizontal expansions and strategic alliances. These factors significantly contributed to the rise and success of JMNC.

Despite the contribution of the centralized approach to JMNC’s success, the authors note that it proved to be problematic for the firms in the long-run. Many JMNC were inept at implementing their strategic goals in decentralized environments. According to the survey, centralization and the dominance of the parent companies constrain strategic change and the establishment of a ‘true’ global enterprise. No explanation was provided as to why centralized control constrains strategic growth. Nonetheless, there is a dearth of evidence to support the authors’ stance. A study by Sageder and Feldbauer-Durstmüller showed that centralized MNCs highly emphasize transferring corporate culture. The transfer capabilities of the Japanese represented one of the most prominent features of JMNC. Japanese leaders were able to transfer their experience and management methods from parent companies to the home economies.

Japanese leaders were also adept at effectively planning and seamlessly conducting the cross-border transfers. The Chinese, on the other hand, exploited their ownership advantages in developing countries to achieve a competitive advantage. Ownership advantage refers to intangible such as intellectual properties and property rights of a company. It is based on the argument that a firm with valuable assets can create a competitive advantage in the domestic market, which will influence the capability of the firm to penetrate cross-border markets.

Similar to JMNC, the CMNC sourced its strength from the centralized government. However, unlike JMNC, CNMC received limited, if any, government support. Chinese officials perceived the incentives as unsustainable and inconsistent. The Chinese government decisions negatively affected CMNC, especially those that required the help of the state to fill the gaps in ownership advantages. The lack of government support disadvantaged CNMC as they lacked the technological innovations that JMNC had. The centralized governance of CNMC was typified by a clear hierarchy which helped CNMC to meet the needs of the host economies.

Despite the competitive capabilities of CNMC, the authors note that the centralized management structure is a barrier to CNMC climbing the hierarchy of business systems. To that effect, the authors recommended CMNC strive for a balance between centralization and decentralization. Since decision-making is based on a top-down approach, the centralized system limits the decision-making rights of subsidiary management. In contrast, decentralized firms delegate decision-making to subsidiaries which allow for autonomy and more control. The freedom to make decisions can help the subsidiaries to adapt to a rapid-changing business environment effectively. Again, the authors do not explain why they think the centralized management is a barrier to CNMC growth and expansion. Perhaps, the inference was drawn from the long-term outcome of centralized JMNC. Although the authors acknowledge the importance of decision-making, they conclude that, ultimately, the centralization is resourceful, especially for global competitiveness.

I support the recommendations of the authors to balance between centralization and decentralization. While decentralization provides more autonomy and control to subsidiaries, it risks the viability of a business. Delegating major decisions to subsidiaries can lead to suboptimal decisions and fragmentation of benefits and resources across business units. Therefore, a balance between a decentralized system and a centralized system can help businesses to balance the negative and positive outcomes of each outcome effectively. Centralized systems should strive to integrate the internal factors of parent companies with that of the culture and market needs of the subsidiaries.

Conclusion

The article is well-written, insightful, educational, and provides relevant evidence to support the findings. The authors analysed the influence of firm-level capability, organizational structure, governmental support, and business strategies on the rise and fall of JMNC. The researchers also compared how various factors influenced the emergence of CNMC. The decline of JMNC was mainly attributed to the shift in business trends, which occurred between the 1980s and early 2000s. The decision to invest in emerging economies also proved to be beneficial for CNMC in the long-run. The survey further uncovered the impact of business strategies, government support, and the organizational structure of MNC on their performance in the global economy. They recommended the balance between CNMC short-term and long-term goals as well as an equilibrium between the centralized and decentralized government.

Reference List

Fitzgerald, R. and Rui, H. ‘Whose fall and whose rise? Lessons of Japanese MNCs for Chinese and emerging economy MNCs’, Asia Pacific Business Review, vol. 22, no. 4, 2016, pp. 534–566.

Sageder, M. and Feldbauer-Durstmüller, B. ‘Management control in multinational companies: a systematic literature review’, Review of Managerial Science, vol. 13, 2018, pp. 875–918.

Schulze, L., Douesnel, A., and Grégoire, O. ‘Internationalization and firm performance in Chindia: a meta-analytic review’, AD-Minister, vol. 29, 2016, pp. 5–22.

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