International Network Corporations in a Global Economy1. The International Corporation and Global IntegrationIn the last forty years a profound transformation of the international economy has been under way, with far-reaching implications for the international division of labor, the welfare of populations, the governance of corporations and the autonomy of nation-states.Not only has trade between nations greatly expanded, at a rate faster than the growth of the global economy as a whole, and to the great advantage of a handful of countries that based their development strategies on exports, but the primary actors in international trade are no longer mainly corporations of one nation transacting at arm's length with corporations of another, but increasingly International Corporations whose transactions are largely conducted with their own affiliates or subsidiaries distributed around the globe. Furthermore, a considerable (and increasing) proportion of the sales of these affiliates is derived from their local operations. In fact, by the UN's estimate, the sales of international corporations accounted for one quarter of the world's GDP in 1991 (and a higher proportion of private sector output) 1 (Table 1). According to this source, there were some 36,600 international corporations active in 1991, whose operations encompassed 170,000 subsidiaries worldwide. The sales of these international corporations ("ICs") 2 in 1991 were estimated at $US 5.5 trillion, of which inter- affiliate exports represented one third or $1.3 trillion. The world total exports of goods and services in the same year was $4.0 trillion. ICs' operations in host countries are thus already considerably more important than arm's length international trade, exceeding world exports by a factor of 38%. For some countries this ratio is much higher: as noted below, for the U.S. the ratio of total IC sales to exports is 4.1. The inter-affiliate transfers noted above are an important manifestation of the high degree of economic integration practiced by ICs in their search for worldwide efficiency and growth. In fact, in manufactured products, international transactions internal to ICs (ie. between affiliates) account for 75% of world trade. ICs transfer materials, components and finished products between affiliates, sourcing where most appropriate for each subsidiary and distributing through their operating units in each country. In manufactured goods, arm's length trade now has the minority role in international transactions. Measured by share of ownership of foreign direct investments, the U.S. was still the leader in 1991, with 24% of the world-wide stock of FDI. But this ratio is not much greater than would be implied by the importance of the U.S. in the world economy. Japan, with 12.9% of the stock, has leaped to prominence, just behind the U.K. (13.3%), while France (7.7%) has also grown rapidly (Table 2). Since the investment data are based on the book values of equity held, they understate the leadership of the U.S. in terms of the current value of total assets or sales. But it is clear that the stock of investment by ICs from the five major developed countries has doubled in the last five years and that the greatest growth has come from Japanese and French ICs (Table 2). German and British ICs have held their share, while the U.S. share has slipped, reflecting a slower rate of growth of its outward investment. The strength of Japan's thrust into foreign economies can be seen in the increase in the value of its FDI stock, which grew by $US 173 billion between 1987 and 1992. While British investment grew by $124 billion in the same period, the U.S. stock grew by only $135 billion. The Japanese urgency to become insiders in foreign markets is clearly reflected in these figures. German firms have also increased their production activities in foreign countries. Yet, by comparison with the foreign presence of U.S. ICs, Japanese and German firms still have a long way to go. In 1989 U.S. ICs registered $4.10 in total sales for every dollar of exports, whereas for Japanese ICs the figure was $2.60. It was even lower for German companies, at $1.50, and this reflects the over-dependence of German ICs on Germany as a source, with damaging consequences in the current climate of weak domestic demand, high costs and a strong Deutschemark (Table 3). The foreign operations of ICs are concentrated in the developed world, particularly in the "Triad" of rich countries (Western Europe, Japan, the U.S. and Canada). 3 In 1991, for example, developed countries as a whole harbored 80% of the world's total of foreign direct investment. Western Europe was host to 41%, North America 32% and other developed countries 7% (Table 4). For the size of its economy, Japan hosts a considerably smaller fraction of the world's foreign investment than the other countries of the Triad (Figure 1).
2. Spheres of InfluenceICs have tended to gravitate toward zones of traditional influence. Investment by Japanese ICs in East Asia as a whole is relatively more important than that by European and U.S. ICs in that region. European ICs are better represented in South Asia than are U.S. and Japanese ICs. And Japanese and U.S. ICs have under-invested in Western Europe relative to European firms.Conversely, however, Japanese firms are relatively more active in North America than European firms, and this has important implications for their future success. Experience in establishing operations in the U.S. has strengthened the competencies of Japanese ICs for entry into the U.K. and other countries of the EU. These competencies include better understanding of customers, establishing supplier networks, dealing with unions and more individualistic employees, and setting up distribution systems. The U.S. has been a useful proving ground for Japanese firms intending ultimately to operate in Europe, as the examples of Honda, Nissan and Toyota confirm. By contrast, the difficulty experienced by the other Triad countries in establishing insider positions in Japan has reduced their opportunity to reap the benefits of Japan's strong growth. Just as important, they have had fewer opportunities to test and improve their organizational competencies in a difficult environment where adaptation is a requisite for success. They are consequently less equipped to succeed in other testing markets, such as the fast-growing East Asian economies. The recent recession in Japan has called into question the special strengths of the Japanese corporation and the extent to which the Japanese management model will endure in the face of contraction. Because U.S. firms faced the latest recession earlier, on top of fierce competition from East Asian ICs, they were earlier to take the necessary measures to deal with the crisis. Some, of course, are still struggling, but many of them have undertaken the wrenching upheavals of re-structuring, cutting the workforce, thinning out middle management, embracing Japanese techniques of lean production and rapid product development, and streamlining operations across functions through "re-engineering". They are well ahead of European firms in this process and, since less constrained by tradition and long-term contractual relationships with employees, also ahead of some Japanese firms. Chrysler, Ford, Johnson and Johnson and Motorola come to mind as examples of successful U.S. adaptation, in contrast to Volkswagen, Philips and Bridgestone. Furthermore, in mid- 1994 the U.S. Dollar was at a reasonable level against the Yen and the Deutschemark, so that U.S. firms were again in a position to compete strongly. It is too early to say whether or not Japanese firms will recover quickly from the current malaise. Toyota, the father of lean production, appears to have rebounded, increasing its already strong share in the domestic market and launching new products internationally. For many others, the position is less rosy. My view is that the fundamental ideas on which the Japanese management system is built include certain enduring principles which are continuing sources of organizational advantage. These include:
Japanese ICs will probably have to adapt their management processes to gain greater flexibility to handle severe economic fluctuations. Certainly, they will move to diversify further geographically in order to be less dependent on their domestic market. European companies, likewise, will need to shift more firmly into foreign operations, particularly Asia, as they surmount the present difficulties. U.S. firms, despite the renewed strength of the domestic market, will need a much more determined approach to the growth opportunities of East Asia. Let us turn briefly to those opportunities.
3. Opportunity in AsiaICs invest in other countries with three primary motives, as Stopford 6 notes:
(b)resource-seeking (to lower costs through access to raw materials or labor) (c)efficiency-seeking (for example, to concentrate production and achieve economies of scale)
Two other regions deserve consideration: the North American Free Trade Area and Eastern Asia. Tariffs against Mexican or Canadian goods entering the U.S. market have been low for some years (averaging some 4% ad valorem, although higher on specific goods). A number of ICs have positioned investments in Mexico to serve that growing market, with an eye to supplying the huge market to the north. With the signing of the NAFTA, Mexico has become an even more attractive source for the whole region, provided ICs are prepared to satisfy requirements for local added value. A new foreign investment law strengthens ICs'' investment rights. The labor force is capable and adaptable, and a growing number of firms report satisfaction with the efficiency and quality attained there. While the perception of risk has been exacerbated by political events in 1994, it is unlikely that Mexico's progress in economic liberalization will be derailed. For European and Japanese ICs, Mexico should be an attractive source for more mature products. As noted earlier, U.S. and European firms are not as strongly represented by investments in the East Asian region as Japanese ICs. Yet Asia in total represents 32% of the global market, much more than Eastern Europe and the CIS (9.3%) or Latin America (7.7%). 8 Within Asia, of course, there are big income disparities between and within countries. Japan alone accounts for a third of the Asian market, and 9.8% of the world total, but China (9.4%) has been growing much faster in the last few years. India (4.9%) has also begun to grow more quickly under the spur of liberalization. South Korea (1.5%) Indonesia (1.3%) and Taiwan (0.9%) are the other major fast-growth Asian markets.9 The opportunities for ICs differ markedly among these countries. Taiwan and Korea are richer markets, with concentrated per caput purchasing power, at roughly half the level of the U.S. or Japan, whereas individual purchasing power in China is no more than 5% of the U.S. and in India it is perhaps 2%.10 Indonesia is somewhere in between. Despite these low average levels of individual purchasing power, each of these three countries is large enough to include a sizeable middle class with higher incomes. For example, 90% of households in the largest three cities of China (Beijing, Guangzhou and Shanghai) are reported to have incomes above $73 per month. 44% of households in Bombay, Delhi and Calcutta have comparable incomes, and the middle-class population of India is estimated to number 100-150 million.11 These households can increasingly afford non-traditional consumption. For example, the Chinese market for packaged food is thought now to exceed 100 million people. Asian nations have enormous infrastructure developments under way which can be accessible to ICs. The Long-Term Credit Bank of Japan estimates the value of projects planned for the next ten years at $1 trillion. China plans to build 40 airports and 14 subway systems and the $30 billion Three Gorges Dam. Taiwan intends to invest $135 billion under its current six-year plan, and India and Indonesia each plan infrastructure developments of $100 billion. For individual firms, national market size is significant, not in gross terms, but in terms of specific products and services. Recognizing and seizing such opportunities demands a strong commitment to Asia from a marketing organization on the ground, backed by local operations. For large infrastructure projects where critical items may be exported from an IC's Triad operations, local representatives are needed to work closely with government. There is usually a demand for local procurement. Fabrication operations, local design and (ultimately) research facilities strengthen an IC's bargaining position against regionally-based competitors. In manufactured goods, a local factory producing for export may be critical for access to the local market, and in the case of consumer products, it permits the corporation to be more responsive to local needs.12 Asian markets are not without difficulty and risk. Western-style governments are scarce, corrupt practices are commonplace, and government influence on business transactions is pervasive. As Stopford points out, Japanese firms are advantaged in the region by the financial assistance provided by the Japanese official aid program and by the Japanese International Development Organization, partly funded by government.13 These problems exacerbate the market risk firms have to face in a new environment. But the potential of Asia is so great, that ICs cannot afford to ignore it. By the World Bank's purchasing power parity estimates, China's economy is closer to one-third as big as the U.S. economy, rather than one- fifteenth, as the current exchange rate indicates. Not only in China, but for many countries in the region, economic growth is expected to be strong in the next few years, in contrast to Japan's near-term difficulties. The conclusion of this part of the paper is that a transformation of the international economy is well under way, toward a system of globally integrated networks controlled by international corporations. ICs from Europe and North America need to be more active investors in Asia, to gain positions for long-term growth in the largest and fastest-growing region of the world. This strategy will place greater demands on them to manage effectively in a more complex environment. In the next section I outline some of the challenges to be overcome.
4. The Challenge of Multinational Competition: Environmental ComplexityAmong the challenges international managers describe when asked about their world, "increased complexity" is often mentioned. I believe managers intend by this something more than "having to do more with less." Complexity can be conceptualized, as Yuji Ijiri has proposed, in terms of three dimensions:
DiversityInternational managers have always faced diversity in dealing across countries with foreign customers, suppliers and distributors, with governments and legal systems, with competitors and with employees. Today, however, as discussed earlier, ICs are far more deeply integrated into foreign countries than before. As they seek opportunities to exploit proprietary technology, brand names, capital resources and managerial competencies, particularly in newly opened or emerging markets of Asia and Eastern Europe, the spectrum of national diversity has greatly increased. The presumption that the demand for many of their products or services will be "global", i.e. undifferentiated across countries, and the need to follow (or preferably preempt) foreign competitors, are forces which have propelled ICs into a wider variety of markets and national cultures.Although the essential nature of many products and services may be the same across the globe (jet aircraft, VCRs, Swatch timepieces and retail banking, for example), adaptations to national differences are essential, particularly in those operations which are close to the customer, such as marketing, sales and service. Managing multiple foreign marketing, sales and service organizations staffed mainly with local nationals has always required sensitivity to national cultures. These issues are rendered more complex, not only by the increased diversity of cultures encountered as firms diversify, but also because most of the new markets are in a weaker state of development and under quite diverse systems of government. An international corporation simultaneously attempting to enter markets in Russia, Poland, Indonesia and China faces a gamut of customer preferences, distribution and supply problems, work practices and managerial attitudes, in addition to governments ranging from neo-democratic to autocratic. The problem of increased diversity originates at the local level, but its effects are systemic. International corporations depend on the creation, transfer, and protection of knowledge throughout their worldwide network. Increasing diversity threatens the effective communication of this competence. As Herbert Simon notes, the IC's multicultural network throws into sharp focus the tensions between the loyalties of individuals toward national versus corporate cultures 14. This tension is a barrier to effective communication. ICs have traditionally coped with the problem of diversity in a variety of ways which have as their objective the establishment of the corporate culture as the over-riding value system. Their approaches have differed according to their home countries. U.S. firms have tended in the past to rely on comprehensive planning systems, emphasizing achievement of quantitative goals--especially financial targets. Japanese firms have relied in large part on expatriate managers imbued with parent company cultures, reporting through a strong formal hierarchy, and interconnected through carefully nurtured and long-standing informal relationships. European companies have more commonly relied on the socialization of home country and foreign managers to the corporate culture and objectives, achieved through careful selection, training, indoctrination, job rotation and frequent communication.15 These stereotypes are contradicted, of course, by individual cases: ICs from the U.S. which seem more like Japanese companies (Caterpillar in the 1960s to 1970s, for example), or affiliate companies or joint ventures operating with so much regional or national autonomy as to have distinct cultures (Rank-Xerox, for example, or North American Philips). In each case, however, the corporate culture is intended to provide the unifying force to override national cultural differences. Almost inevitably, the corporate culture is also suffused with the national culture of the parent corporation, and this sometimes works against integration by inhibiting the flow of information from the periphery. Today, as national cultures are giving way in many parts of the world to a more diverse set of cultures based on ethnicity, race or religion, the international manager's world appears to be not only more diverse, but shifting more rapidly. Greater diversity has appeared, not only in customers, competitors and governments, but also within the IC's workforce. International corporations, irrespective of where the parent is domiciled, will need to tap the creativity and skill of increasingly diverse front-line workers and managers. Benefiting from this increased diversity will depend on changing the attitudes of managers, which requires adopting new organizational processes. This issue is developed later in the paper.
Rapidity of changeThe pace of change in a corporation''s environment is a critical variable, but one which has been largely neglected, until recently, in discussions of strategy. A characteristic of all organizations is inertia, the tendency for the organization to resist change. If the task of the corporate strategist is to shape the firm's strategy to the demands of its environment in the quest for above-average profitability, then inertia is the strategist's enemy. Inertia blinds managers to the need for change and when the need is recognized, resists implementation of the necessary actions.Environmental change in an industry has been characterized as "fast cycle", "standard" and "slow cycle", according to the rate at which the market prices of the industry's outputs change. Slow cycle environments, according to Williams 16, are markets in which prices rise slowly over long periods; in standard cycle environments, they remain stable; and in fast cycle environments they fall rapidly. The pace of change is a reflection of the sustainability of the competitive advantages of incumbent firms. The strategy and actions needed by a firm to fit a fast cycle environment are, needless to say, different from those needed in a slow cycle environment. In a slow cycle environment, the firm's competitive advantage depends on control over local resources, or "isolating mechanisms" which protect it over the long-term (as seen in public utilities, or Microsoft's MS-DOS operating system). Standard cycle industries are traditional oligopolies, where the firm's competitive position depends on efficiency, economies of scale and brand loyalty (automobiles, domestic appliances, paper products). In fast cycle industries (such as consumer electronics, digital PBXs and personal computers 17), competitive strength depends more on innovation and speed to market. Business history is replete with examples of companies which failed to recognize a major environmental shift in their industry, and particularly shifts which increased the pace of change. The competencies which fit a corporation for a slow cycle industry are not right for a fast cycle industry. The difficulty lies first in recognizing that an environmental shift is underway, and second in making the organizational transformations needed. Organizational inertia tends to oppose both actions. It is a common perception that all industries are now "fast cycle" environments. This is not the case. Where the isolating mechanisms are strong, a slow cycle industry may remain slow paced for some time. Hospitals are an example. International industries have often been standard-cycle industries, where competition is oligopolistic and often based on product differentiation.18 International corporations have always depended in the past on certain special competencies (proprietary product or process technology, brand names, logistic skills, organizational expertise) which have enabled them to overcome the complexities of international operations and to compete against local competitors. Brand names and marketing skills still provide enduring advantages, as the international success of companies such as Coca-Cola and Procter & Gamble shows. While competition is intense in the soft beverage and packaged goods industries, the pace of change in prices is relatively slow, and the special competencies these companies have developed continue to support their world-wide success. But even within such industries, entry into a new country can expose a company to a faster pace of change. When Procter & Gamble entered Japan in 1972, it faced not only the increased diversity of a new set of customer requirements, but an environment in which the pace of change was more rapid due to the innovatory capacity of the local competitors. The company's difficulty in surmounting these twin challenges required a recognition of the more rapid pace of change in the Japanese market, and hastened the development of an R&D organization in Japan. Painful as the Japanese experience was for P&G, it may have had long- term value by forcing a shift in the firm's perception of the dynamics of its industry, to the benefit of its competitive strength world-wide. Many ICs depend largely on technological competencies for their success in foreign markets. A few of these industries also retain the characteristics of a slow cycle business. Large jet aircraft is perhaps an example where economies of scale, the financial strength to bear enormous risk, and understanding of customer needs well into the future are sources of competitive strength which greatly limit the entry of competitors, isolating incumbents from additional competition. In many other industries, however, ICs deal with rapid technological change, which includes changing product technologies and changing process technologies. The more rapidly changing environment is partly due to the adoption of new process technologies, particularly the techniques which gave the Japanese electronics and mechanical assembly companies their long run of successes. The response of U.S. and European companies to this change has been a process of necessary catching-up, rather than innovatory change. Adopting these techniques does not confer a competitive advantage, but rather allows the firm into the international competitive arena. Newer technologies of design and manufacture, such as rapid prototyping, provide early adopters with a temporary edge, as there is an advantage to be gained by firms which develop the competence to recognize, assess and implement quickly new techniques. Likewise, in fast cycle industries such as personal computers, consumer electronics and (increasingly) pharmaceuticals, speed of change equates to rapid cost reductions and new product introductions. In such industries the speed at which an organization can capture learning efficiencies to reduce cost and at the same time speed its product development, is a critical determinant of success. International corporations which have been preoccupied in the last few years with restructuring and reducing head-count may have lost expertise which will be needed for these two challenges. Those which have concentrated more precisely on "re-engineering" to improve cross-functional efficiency and cycle time, and on fostering entrepreneurship and integration (as discussed below) will be the stronger competitors in the future. For many ICs, therefore, a dynamic pace of change will be commonplace in the future. Competitive positions in individual products will be transitory, so firms in fast cycle industries will need the capacity for continuous product renewal. Overcoming organizational inertia in order to succeed in this environment is still a major task for many firms. I believe the keys to making the adjustment are:
Density of RelationshipsAn international corporation can be viewed as a network of interpersonal relationships, both internal and external to the firm. These relationships transmit information, elicit behavior and conduct transactions. As ICs grow and diversify, the number of possible inter-connections expands exponentially. Individuals face growing complexity in processing information, understanding its meaning, and acting appropriately. The quality of information may also deteriorate as the variance in sources and the number of intervening filters grows.Of course, no individual has to transact with every other individual in a corporation. But consider the IC with multiple product divisions and multiple foreign countries of operation. Each geographic operation within a product division is potentially important to every other, whether through material flows or through information flows--about product variations, process improvements, marketing concepts, new technologies, and so on. Likewise, although product divisions are distinct, there may be core competencies which support several divisions. So for most managers, there will be important actual or potential linkages within their division, within their country, across countries, across functions and for some, across divisions. These potential linkages increase as the firm grows. The traditional response to the density of relationships is a structural one. The corporation develops a structure of formal reporting relationships which are intended to portray the transactional connections. Job descriptions describe and circumscribe the expected behavior of each individual and the responsibility for action. International corporations have adopted well-known archetypal organization structures in an attempt to manage the complexity resulting from the twin dimensions of product and geographic diversity. In businesses where the market is homogeneous worldwide and the strategy is "global", the structure is based on one or more world-wide product divisions. For the "multidomestic" strategy, where markets differ greatly from country to country, a regional or area structure is more common. For businesses where the pressures to gain the benefits of global concentration are as strong as the need for country-by-country responsiveness, a matrix structure is sometimes used 19. These structural archetypes are rough frameworks, and in specific cases are modified by factors such as the extent of the firm's international production activities, as well as the importance of its international sales compared to its home country business. The problem with formal organization structures, as John Hunt notes 20, is that the formal structure does not recognize the realities of the informal organizational relationships, and in particular, the power or social influence exerted by each of the participants. Hunt, following Reve, describes the organization as a "nexus of treaties", both internally between individuals (concerned with incentives in exchange for work, rules of conduct, etc.) and externally between the firm and other organizations. These "treaties" are the real relationships that govern how the firm functions, and they are greatly influenced by the social power of individual managers. Social power is not determined by the formal structure alone: it is also determined by the skill of an individual in performing his or her function. As Hunt argues, the power relationships in the informal network are the means by which the organization performs its tasks, and "reorganizations" which ignore the real power relationships are destined to fail. The informal network in an organization can be mapped with individuals as nodes connected by communication links. The density of the linkages to a node or individual is an indicator of his or her importance and power in the network.21 Such a map is a more accurate depiction of the linkages in an organization than the formal organization chart, and Hunt argues that top management should attempt to determine what this map looks like (an "audit"of the actual power relationships). Since the reality is complex and changing, however, there is a need to simplify, to set out a vision and a structure which can be readily understood (Hunt's "Simple Case"). The formal structure may thus be one of the structures outlined earlier, or a mix of them. But the structure is not the key to the success of the organization. More important, as Bartlett & Ghoshal 22 propose, is the behavior of managers. Ideally, every manager should behave as if the "matrix is in the mind". In other words, every manager makes the compromises between the conflicting pressures of global and local forces mentally and through every action. Every manager should "think globally, act locally" (and I would add, "think strategically, act tactically"). The increasing density of linkages can be met, then, by changing managerial behavior toward reconciliation of conflicting transactional demands on a routine basis. Simplifying the vision or strategic intent, rationalizing information, and encouraging entrepreneurship, as I propose in the next section, are means to this end.
5. Managing Diversity, Change and Density of LinkagesAs outlined in the previous section, the pressures of increasing diversity, pace of change and density of organizational linkages, are forcing international corporations to rethink their organizations. Traditional approaches which depend primarily on structure are not able to cope with the intensity of the pressures on ICs. It is not yet clear what approach will be most effective in this new environment. It is clear, however, that an effective approach will depend much less on structure and much more on process.Managing the three elements of complexity in the new international network corporation depends, in my view, on:
Information is critical to planning and control in all international corporations. It is the necessary tool of top management in measuring performance. But in the network organization, it takes on an ever greater importance, if it is used to provide front-line and middle managers with the data they need to cope with complexity. If the purpose of vision is to simplify and guide initiative at all levels of management, front-line and middle managers need appropriate information to make the vision operational and to clarify the actions they need to undertake. In the re-engineering of business processes, for example, access to a common data base is used to reduce unnecessary interactions and speed decision-making. Exchange of information in common data bases is already enhancing cooperation among R&D groups located thousands of miles apart. It routinely enables global treasury managers to pool foreign currency exposures from subsidiaries and reduce hedging costs. For ICs to operate efficiently as networks, however, we can expect that data-sharing will need to become much more commonplace in areas such as benchmarking between affiliates, new product testing, marketing and promotion campaigns, and logistics. ICs with increasingly multinational shareholders may also find value in adopting a "global currency" for reporting and internal control 23. Likewise, automated language translation, today a reality only under narrowly constrained conditions, may become commonplace as an aid to communication. While it is too early to predict precisely the pattern of uses information will take, it seems clear that it will be far more important in providing ICs with a competitive edge. How best to arrange access, who should have access, and what data should be available, are problems to be resolved. Certainly, at the operational level, the rapidly falling cost of communication by voice, electronic mail and video will make it even easier for managers to communicate directly. We can expect video conferences between managers from desk-top PC to PC to be a matter of routine in the future. In a recent paper, Bartlett and Ghoshal 24 describe the managerial processes in a company many observers consider to be "transnational", namely Asea Brown Boveri. They examine the company from the differing perspectives of three theories of organization: Chandler's account of the adoption of the divisional form of organization structure by U.S. firms,25 Cyert and March's behavioral theory of the firm, 26 and Bower's model of the strategic resource allocation process in diversified corporations.27 They conclude that the managerial processes they observed in ABB are only partially described by each of these theories. This is not surprising, since only one of them (Cyert and March) was comprehensive enough to be considered a theory of the firm. Bartlett and Ghoshal find, however, elements in each which help to understand ABB's management processes which they discuss in terms of three levels of management. To summarize, they observe that top management's task is to set an organizational context encouraging initiative and creativity, collaboration and learning: its role is "creator of purpose and challenger of the status-quo." Top management in ABB establishes the strategic mission and performance standards, and nurtures organizational values. Middle management's role is reviewing and supporting initiatives, linking skills, knowledge and resources across the network, and creating and maintaining trust. Front-line management has both an entrepreneurial and an operational role: creating and pursuing opportunities, managing personal networks and operational interdependencies, and reconciling long-term goals with short-term performance. Since international networks depend on lateral communication more than on vertical flows, companies such as ABB rely far less on centralized staff than the traditional IC. This means that middle management needs to place more emphasis on facilitating information flows and mediating lateral conflict rather than decision-making in a vertical chain of command. In ABB, as Bartlett and Ghoshal describe it, their efforts are mainly directed towards internal benchmarking, technology transfer and identifying and encouraging best practice, rather than in filtering information or reviewing vertically-flowing decisions. A broad information base, accessible to all managers, puts important information in the hands of front-line managers. Middle level managers, without large staff groups, and lacking superior information on operational matters, are thus freed to focus on integration. Their information set should be oriented towards data which help to explain differences in market opportunities, performance and resource use across the firm's operating units, which can be used to drive exchange of useful ideas and practices. For network firms to be successful, the information base needs to be designed to suit this different approach to the control of information. Information is power, and the power of a network to operate quickly depends on its information set.
EntrepreneurshipA necessary characteristic of firms in rapidly changing environments is the ability to recognize or anticipate changes in the marketplace and make decisions quickly. The flatter structure of the network is designed to reduce the time delays inherent in bureaucratic vertical information flows, delegating to front-line managers greater responsibility to run their business in an entrepreneurial manner. This places many demands on companies attempting to transform themselves. A well-articulated vision, or strategic intent, made concrete in strategic plans agreed between front-line division managers and top management, sets the framework. Middle managers whose role is to facilitate information exchange and to reinforce cultural norms, play a supportive, rather than deciding, role. Changing the behavior of middle managers, accustomed to being gatekeepers and controllers of access to information and top management support, is a major cultural task in which the role of top management in forcing the shift is critical.Just as important, front-line managers need to understand the vision, to have full information access, and to be fully involved in setting operational targets. Incentives need to be oriented towards achieving a sensible balance of short-term profit targets and long-term goals of innovation and growth. As Bartlett and Ghoshal observe, the front-line managers in ABB are able to operate as entrepreneurs only because the vision is made concrete and explicit for each business through the planning process; because strategic planning and major decisions are transparent and participative; and because upper management creates a climate of confidence and trust through its behavior and communications. The important difference in such an IC is the different set of assumptions on which it works. These are:
It is certainly not a trivial matter to shift a firm's culture to these norms. Learning and initiative can be encouraged by incentives appealing to individual benefit, and are more likely to flourish in individualistic societies. Trust is developed over time from the experience of consistent positive behavior in others and is more likely to be easily developed in communitarian societies such as Japan than in highly individualistic ones such as the United States or Britain. If trust is in fact a critical determinant of success in a network organization, corporations whose majority culture is individualistic will face more difficulty in adapting to the new form. However, I suspect that other qualities may be more important, such as acceptance of change, or tolerance for uncertainty. U.S. and West European managers tend to be relatively flexible on this dimension; Japanese, Taiwanese, and Korean managers less so. Clearly, more needs to be known about the cultural problems of encouraging and developing entrepreneurship in international corporations. Burgelman's studies of internal corporate innovation, 29 conclude that successful U.S. firms are characterised by an environment that provides funds for experimental innovation outside the mainstream, support for those developments which promise to be viable, and recognition and reward for the successful innovators. These processes are concerned mainly with the context for innovation, and are consistent with the view of the network organization outlined above. The focus is on the organizational context, rather than on the capabilities of individuals to respond--and particularly, on differences in capabilities across countries. This is where a better understanding is needed.
ConclusionThe recent great surge of transnational integration, during which the world-wide stock of foreign investment doubled in five years, coupled with recessionary economies in the developed countries, has intensified competitive pressures on ICs. In response, they have focussed on their organizations and work methods and found ways to create value for customers by deploying fewer resources more efficiently. Japanese corporations based their global expansion on innovative processes for managing mass manufacturing and rapid product development, providing tangibly higher quality to their customers. U.S. ICs began catching up ten years ago and many have reached parity with the Japanese ICs in these two areas. European companies have been trailing, but are also now making strong efforts to improve. From manufacturing and product development, the competitive arena has shifted to other business processes and to the structure and culture of the firm. U.S. firms have been leaders in restructuring activities, which have included layoffs, organizational streamlining and the re-engineering of business processes. Some U.S. companies are ahead of their Japanese counterparts in this undertaking, while European companies have further to go. For many international corporations, all of these changes have been necessary, but not sufficient to deal with the increased complexity of the environment. The network organization is an adaptation which seems to be better suited to this new context. The characteristics outlined above--vision, information and entrepreneurship--are likely to be important to the success of this organizational form. Firms that succeed in modifying their organizational processes in this direction could prove to be the most adept at meeting the challenge of multinational competition.
Table 1. Foreign investment and international trade$ US billions, 1991 % All countries FDI outflows 180 FDI stock 1,800 Foreign sales of Ics 5,500 Gross domestic product 21,500 Gross domestic investment 4,900 Total Exports of goods & services 4,000 ICs inter-affiliate exports (est.) 1,320 For. sales of ICs as % of World Exports 138 Sales of ICs as % of World GDP 26 FDI flow as % of gross domestic investment 3.7 Developed countries FDI outflows 177 (1992 est: 145) Gross domestic product 17,200 Gross domestic investment 3,800 Exports of goods & services 3,000 Developing countries FDI inflows 39 (1992 est: 40) Gross domestic product 3,400 Gross domestic investment 800 Exports of goods & services 930Source: UNCTAD, Programme on Transnational Corporations, TNCs and Integrated International Production, 1993.
Table 2. Outward foreign direct investment, by major source$ US billions Stock of FDI owned Outlow of FDI Source country 1987 1992 1991 1992 FRANCE 41 151 24 17 GERMANY 91 186 21 17 JAPAN 78 251 31 16 UNITED KINGDOM 135 259 18 15 UNITED STATES 339 474 29 36 WORLD 1000 1949 183 150Source: UNCTAD, Programme on Transnational Corporations, TNCs and Integrated International Production, 1993
Table 3. Affiliate Sales and Exports of International Corporations, 1989Country of domicile Sales Exports a Ratio of sales to exports U.S. 1,266 307 4.1 Japan 534 203 2.6 F.R. Germany 372 251 1.5(a) Excludes inter-affiliate sales Source: UNCTAD, Programme on Transnational Corporations, TNCs and Integrated International Production, 1993
Table 4. Inward foreign direct investment, by host regionInward FDI Stock Flows of FDI % of world total $US billions Outflow Inflow By host region 1987 1991 1991 1992 1991 1992 Developed countries 78.7 80.1 177 145 108 86 W. Europe 35.7 41.1 N. America 34.2 31.8 Other 8.8 7.2 Developing countries 21.2 19.8 5 5 39 40 Africa 2.2 2.0 Lat America & Caribb 8.4 7.5 Asia 10.6 10.2Source: UNCTAD, Programme on Transnational Corporations, TNCs and Integrated International Production, 1993
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