Location and Global Competitiveness of Firms - Essay Example

Location and global competitiveness of firms Introduction There has been a great change in technology and the society as a whole, resulting in a global even footing in terms of competitiveness. It is now not enough for a business to be in a good location because a region has to market itself in order to effectively compete internationally. It is also necessary for countries to develop and implement sustained international marketing strategies to position themselves as international class, premier locations for education, services, goods and generally business. Countries would do themselves a lot of good if they organised global business attraction and promotion campaigns including culture, arts, education, tourism and trade. Their global strategies should rest on innovations and skills built through out the countries and incorporating regional partnerships. They should use all the resources at their disposal to make their markets competitive globally, while at the same time reducing any international trade barriers and limitations. On their part, businesses need to make adjustments in order to compete effectively in the global market since they cannot purely rely on good location as was the case before this trend. They must heavily invest in information technology and adopt cost effective management practices to reach this new status. Moreover, they need to adopt international management practices and culture as well as develop a positive attitude for efficient management. Companies should also consider making regional and global partnerships and connections but taking into account all pros and cons of such ventures. This paper examines the role of location in global competitiveness of multi-national enterprises, MNEs. It then investigates why location has ceased to be the only factor in the success of international business. Role of location, competitiveness and advantage The geography of international business activities greatly depends on the entry mode and competitive advantages of the firms involved. This interdependence becomes clear when one tries examining the dynamics of the activities of knowledge intensive multinational enterprises, MNE (Dunning, 1998). The last twenty or so years have seen a gradual shift towards a world economy characterized by the emergence of intellectual capital as an important wealth creation asset, globalization of economic activities due to advancement in transport and communication technologies and the emergence of collaborative capitalism. These developments have had an impact on the geography of the activities of foreign direct investments, FDIs and MNEs (Dunning, 1998). The role of spatial transaction costs is slowly shifting, reflecting the liberalisation of cross border markets and the varying attributes of economic performance (Yip, 2002). This cost reduction caused the formation of more market-seeking FDIs and at the same time boosted a welfare enhancing division of labour and also favoured the spatial bunching of firms engaged in allied activities, so that each may gain from the existence of the other, and having access to localized support services, specialized factor inputs, custom-made demand patterns, distribution networks and shared service centres (Tallman and Yip, 2001). Complementary foreign asset and capability sought after by MNEs who wish to add value to their main competitive advantages are progressively more of a knowledge facilitating type and that is mostly the case as their affiliates become more firmly rooted in host economies. A good example is the increasing of value addition in Japanese manufacturing subsidiaries of Europe and North America. An exception to this is some low value-adding activities in the under developed areas of the globe (Tallman and Yip, 2001).As the calculated asset acquiring investment has turned out to be more essential, the location requirements of corporations have changed from the market-oriented or natural resource-oriented to those concerning access to knowledge intensive assets and learning experience, which boost their existing particular advantages (Tallman and Yip, 2001). A great deal of the new FDI in developing countries is driven both by traditional market seeking intentions and by the need to benefit from lower labour costs and the accessibility to natural resources. Nevertheless, even there, where companies have a variety of choices, the physical and human infrastructure and the macroeconomic atmosphere and institutional structure of the hosting country, play a more crucial function than they formerly did (Tallman, 2007). There is a growing significance of intangible assets, especially intellectual capital, in the wealth creation process, and the need of companies to harness and exploit these assets from a variety of locations. The function of location-bound assets, considered by investors as complementing their primary capability, is changing. There is a growing significance of created assets and also the benefits which spatial clusters offer whenever distance-related transactions and coordination costs are high (Tallman, 2007). To effectively integrate the activities of MNEs inside existing trade-type theories of global allotment of economic activity, more attention should be given both to the particular consequences, determinants and motives of the general governance of allied cross-border activities, and to the circumstances in which globalizing intermediary product markets may formulate for a more effective spatial organization of economic activities in the current global and innovative economy. Any concept of the geography of FDI, as contrasted to that of the investment of every firm, should be constructed on the same lines (Yip, 2002). Extra consideration should be given to the significance of location only as a variable that affects the worldwide competitiveness of businesses. This means that the location arrangement of a company's activities might itself be a benefit and also influence the modality through which it exploits its existing advantages. In trying to make the best use of the existing location bound assets within this jurisdiction, and to encourage the vibrant comparative advantage of their resource capability, government needs to provide extra attention to ensure that their activities help fashion, support, and harmonize those of efficient hierarchies as well as markets (Dunning, 1998). This involves a bigger appreciation both of the shifting location needs of mobile investments and of how, in the case of the markets where prevalent failure is largely widespread, governments might labour in partnership with companies to develop markets. With the increasing significance of knowledge-related infrastructure, and accommodating the idea of sub national spatial units as the nexus of untraded dependencies, this offers both fresh challenge and opportunity nationally and regionally in the macro-organizational and competitive enhancing policy (Dunning, 1998). The paradox of globalisation and geography Many large MNEs trade 80 per cent of their commodities in their home region, with just nine out of the prime 500 corporations being explicitly international. It is argued that these examples of international commercial victory should be viewed as greatest practices and benchmark to be cautiously studied and emulated by the rest of the MNEs, the majority of which are characterised by a narrower and shallower infiltration into host region markets (Tallman and Yip, 2001). Conversely, the observed frail market situation in the host territory, as compared with the home market might as well be interpreted as the result of a nationwide preference for regionally based activities, resultant from a cautious cost-benefit analysis. At this point, calculated interactions amongst big players might sway the global sales pattern and the choice of target markets (Rugman and Verbeke, 2004). In general, it can be argued that regional strategy of MNEs is entrenched in the broader organisational, institutional and competitive contexts at the regional level. In these circumstances, MNE local strategy choices develop interdependently with change in existing government regulations, genuine organisational forms, and existing industry practices. It must be acknowledged that regions themselves might vary with time, and consequently offer greater opportunity for MNE growth (Tallman and Yip, 2001). As globalisation takes place, it is limited to the upstream edge of the value chain. A number of the world's major MNEs master the art of linking internationally dispersed input in the form of financial capital, human capital, research and development knowledge, and components, and can be incorporated to better serve home region clientele. It is therefore possible to be global at the upstream end of the value chain, and a lot can without doubt, be learned from observation and initiation of the routine of global leaders in this proportion of the value chain (Tallman and Yip, 2001). This does not imply that MNEs must be self-satisfied as far as the downstream end is concerned and only focus on their home region. Top management must realize that extensive geographical diversification may also have managerial pitfalls like those of the usual drawbacks of product diversification. A clear focus is necessary in terms of scope and geographic extension, and the economic assessment of global growth plans must consider the costs of inter-regional distance and the risk of inter-regional foreignness (Tallman and Yip, 2001). There exist numerous basic paradoxes of global business that have escaped the attention of many scholars in this field. The downstream end, national sensitivity and local adjustments are nearly universally advocated as a solution for infiltrating the international markets, but practicality, a majority of MNEs tries to add value largely by capitalising on the similarity across markets. This is an aggregation scheme frequently met with victory in the home region (Rugman and Verbeke, 2004). At the upstream end, opportunity for scale as well as scope is more often than not considered more plentiful. However, practically, MNEs add value mainly via arbitrage, which involves exploiting difference across nations and regions. Successful incorporation so affects location specificities, entailing a procedure of internalisation arbitrage, referring to the combination of MNE's upstream FSAs, deployed in hosting nations with their location advantages (Porter et al, 2000). Today's world is that of semi globalisation where global trade research must rethink primarily the essence of aggregation and arbitrage opportunities. A new focus on MNE strategy, distinguishing between home and host countries, and between upstream and downstream activities, is a good start for such endeavours (Tallman and Yip, 2001). The base of competitive advantage Traditional trade theory, basing on comparative advantage, focuses on a country's factor endowment of capital, labour and land although this is not what is driving the current patterns of trade between nations. However, this has ceased to be the case since companies do not require their own domestic supply of capital for success. Capital is accessible on the global capital markets once a viable prospect has been recognized (Snowdon and Stonehouse, 2006). Regarding labour, it is not the amount of labour that affects competitiveness, but rather specialisation and the quality of the labour that is vital (Snowdon and Stonehouse, 2006). It is critical to know that advantages arise less from input in the usual sense, and more from technology and the effectiveness with which the inputs are utilised. The effective use of input is primarily affected by location and proximity of these resources. As globalisation occurs, there is additional division and specialization of clusters. For instance about two decades ago, there was a semiconductor cluster in America and an additional one in Japan. The one in Japan was greatly skewed towards memory chips, whereas the American one was skewed in the direction of microprocessors. Today there is a cluster that specializes in a narrow set of activities, based on manufacturing, for instance. If there are twenty manufacturing plants, it is not common for them to be spread across twenty countries, but instead tend to be in a cluster in one location (Snowdon and Stonehouse, 2006). Therefore specialisation is growing, and we discover that even a tiny economic region is able to become a world player although this cannot be done in one company, but a cluster providing the externalities and effectiveness gains. It is a great deal more effective for components, machines and back up services to be located at the same place (Porter, et al, 2000). There is rise in division and specialisation of clusters among the players. For instance, instead of having just three or four significant clusters worldwide, there are around ten if not more. There is an unstoppable process whereby economic effectiveness and productivity rules. The more trade barriers there are worldwide the more the other factors such as political connections, military issues, and the size of the home market rule instead of productivity. Since productivity currently rules, there is added specialisation and clusters (Snowdon and Stonehouse, 2006). Global strategy reflects extreme version of the market segmentation, size-related efficiency, market imperfection and great competition that are concerns in all strategies. Nevertheless, differences in technological, competitive, macroeconomic, currency, legal and political regimes are in greater global markets instead of domestic markets that they really symbolize in a new environment (Rugman and Verbeke, 2004). The escalation of regional mutual economic unions has formed a world of multi-tiered regulatory regimes that differ dramatically from region to region, exacerbating any difference and increasing the complication of the global trading environment considerably. Similarly, capability at managing extremely diverse clients in numerous places, coordinating production across an extensive and very diverse set of subsidiaries, funding operations in various currencies, and management of extensive and greatly independent subsidiaries go further than a plain scaling up of normal business practices (Snowdon and Stonehouse, 2006). The pressure of the new economy for the information age trade can only make this analysis extra difficult and more vital. Internet companies are born universal and are obliged to handle the strategic circumstances, choices and issues presented here for the big and veteran firm, despite the fact that they are new and lack experience. Similarly, their information base suggests a well-built language and cultural component to their content, and the resultant need to adapt from a market to another (Snowdon and Stonehouse, 2006). Furthermore, their vital attachment to technology that rapid universal organisational learning, from competitors in various markets and from flourishing lower units, is the key constituent and source of competitive advantage for such corporations. Segregation in a single market is a sure way to fail but this message is not easily adaptable to a sophisticated audience in numerous markets (Snowdon and Stonehouse, 2006). Comparative advantages: endowments, agglomeration economies, institutions. There is an emergent importance of company-specific and knowledge-intensive assets in the wealth generation process, and the type of tailored assets like skilled labour and public infrastructure, which required to be used together with these assets for effective harnessing and deployment. Furthermore, the decrease of many artificial and natural barriers, the increase of other spatially related transaction costs; and the increasing need and ease for companies to manage their cross-border activities and form alliances with alien firms. A number of these factors have influenced companies to have and concentrate specific kinds of value-added activities within a restricted number of locations; others have caused them to scatter such activities across a number of locations. Several have chosen a realignment of MNE activity in the direction of developed economies; others have preferred a location in emerging market economies. All are indicative of a shifting global division of labour, which, due to their growing role in the global economy and the need to capture economies of mutually dependent activities, MNEs have helped in fashioning. It has been acknowledged that location preference of FDIs will depend on the motive for the venture and whether it is new or sequential. Various types of investment incentives are required for attracting inbound MNE activities of an ordinary resource seeking firm (Porter et al, 2000). The location preferences of companies that make more conventional forms of FDI have changed and so have the attitudes of beneficiary countries to these investments. Given that foreign affiliates are more entrenched in these countries, it has caused their value chains to deepen and a tendency for them engaging in more advanced activities (Rugman and Verbeke, 2004). The location-specific assets perceived by MNEs as adding value to the competitive advantage they are exporting and changing as their downstream activities have become more knowledge based. Apart from a number of labour or resource investments in developing countries, MNEs are more and more seeking locations offering excellent economic and institutional amenities for their key competencies to be effectively utilize (Porter et al, 2000). Apart from market accessibility and growth, economic and institutional amenities were not only valued than the customary criteria for access to raw materials, cost of labour, and fear of protectionism, but in all cases, they were also considered to increase in importance from 1996 to 2001. The existence of other investors in a given country is becoming more important, both as an investment stalk or indicating influence to other alien firms less known within that particular country, and as an agglomerative magnet by which companies gain from being part of a geographical cluster of related activities and dedicated support services. There exist three agglomeration gains namely infrastructure quality, degree of industrialisation, and existing level of FDI (Rugman and Verbeke, 2004). Implications for MNE's strategy The majority global business actions are characterised by semi-globalisation, which falls between companies expanding worldwide as though it is an integrated market place and companies focusing chiefly on their home country and functioning quasi-autonomously in each particular host country, whereby state sensitivity is the only strategy required (Yip, 2002). The experimental proof for regionalisation suggests two points for its success. First, a good deal of the worldwide activity of MNEs appears to be conducted at the intra-regional as opposed to the inter-regional level. The triad of regions considered most appropriate are Asia, Europe and North America because these regions are the dwelling of an enormous majority of big MNEs worldwide and the geographic locus of many business innovations. Additionally, the regions greatly differ geographically and are very far apart from each other, and characterised by interior attempts to attain better regional unity, which is at the moment most advanced in Europe and least in Asia. Second, numerous MNE global operations are organized at the local level as opposed to global level (Drache et al, 1991). The scale and pervasiveness of the globalisation trend has been overstated and most are unable of exploiting and deploying their company-specific advantages globally in an unsystematic style. Even though the majority of big companies would like their goods and services to be used globally and to get high market shares internationally, the regrettable reality of global trade is that just a few firms have achieved a balanced delivery of their sales in Asia, Europe and North America (Jansson, 2007). For the majority of other firms, selectivity in countrywide and global expansion has remained important. A good deal of that selectivity has been guided by local considerations like the preference of Asian companies to grow their operations mainly in Asia; of European firms giving precedence to their territory; and of American firms exploring business opportunities first in America before considering other regions of the globe (Snowdon and Stonehouse, 2006). The major reason is that the risks involved in intra-regional expansion appear to a great extent lower than those of inter-regional expansion. The added costs of doing business in a foreign country are a lot higher when venturing into other global regions than when expanding in the home region. It is hard to run an international network across more than one region because of the distance separating these regions. This distance brings with it a mixture of economic, geographic, administrative and cultural roots which have their diverse consequences on the management of the firm (Jansson, 2007). Corporate level management is faced with huge bounded rationality constraints when running operations in the host regions (Snowdon and Stonehouse, 2006). Hence, a lot of the world's principal MNEs display a regional element in their operations, such as a regional headquarters. Several of these MNEs emerge to be home region bound as opposed to having an international operation and exploitation potential. This is particularly the case for FSAs at the downstream side of the value chain, where goods and services require intensive marketing to buyers (Yip, 2002). In case of markets in search of FDI, an MNE's resource allotment to the host market can be viewed as a single-sided commitment from likely buyers, and consequently carrying considerable risk, particularly in cases with a high liability of interregional foreignness. Conversely, other kinds of FDI, fixed on the upstream part of the value chain particularly sourcing and manufacturing, are frequently accompanied by resource commitments from other economic actors, thus reducing the challenge posed by the risk of inter-regional foreignness because these other actors are entrenched in the appropriate host region (Jansson, 2007). Particularly, if inter-regional FDI in sourcing or manufacturing is aimed at primarily facilitating home region sales, and is hence efficiency seeking, the risk of an inter-regional foreignness mainly does not represent a major risk, but such investment might not improve the MNE's situation in terms of sales in the host region (Snowdon and Stonehouse, 2006). Conclusion Global competitiveness is a reality that has caught many firms unawares and needs to be given be given the seriousness it deserves. Globalisation is the new trend and the sooner the countries and firms acknowledge this fact, the better for them. Some firms are location oriented and must have the right location for them to thrive well, even though this is not expected to be the case for long. The rest of the firms do not so much rely on their location and are taking advantage of the emerging trends in globalisation to expand their operations beyond their host country borders and hopefully go global. 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