Transnationality and Financial Performance in the Era of the Global Factory

Abstract

ABSTRACT. Drawing on the core notions of knowledge augmentation and rational choice in internalization theory, the paper develops a theoretical framework to examine the relationship between transnationality and financial performance in the era of the global factory, and tests hypotheses against recent experience of leading transnational enterprises. The paper rejects a direct relationship between transnationality and financial performance, and supports a mediation model in which knowledge-based assets mediate the relationship between transnationality and financial performance conditional on R&D intensity. In making decisions on the transnationality of a firm, managers should not focus on whether it helps the firm achieve direct financial benefits because these are quickly offset by the costs in a competitive environment. Instead, they should focus on whether it helps the firm enhance knowledge-based assets and, through it, financial gains that can be long-lasting, and whether it is supported by R&D to augment such assets.

Global value chains: A review of the multi-disciplinary literature

“…Among these factors, favorable business regulations, IP protection, and significant education spending typically attract technologically and functionally sophisticated activities (Amendolagine et al, 2019;Ascani et al, 2016;Pipkin & Fuentes, 2017). Control of the GVC resides in the hands of technology and/or market leaders, which are typically (although not always) located in developed economies and extract value from their GVCs through global orchestration capabilities (Buckley & Tian, 2017). Countries with more advanced production technologies are naturally engaged more in the upstream segments of the GVC, and become key suppliers to other countries in the region, thus supporting regional integration of production (Amendolagine et al, 2019;Suder, Liesch, Inomata, Mihailova, & Meng, 2015).…”

“…He et al (2018), based on a case analysis of China's Times Electric-led GVC, argue that power relationships in the GVC seem to be more balanced when EMNEs, rather than AMNEs, are in lead positions. Buckley and Tian (2017) compare internationalization patterns of top non-financial EMNEs and AMNEs, and find that AMNEs are more likely to achieve profitability through global GVC orchestration, while EMNEs' ability to develop orchestration know-how is restricted by home institutions. Therefore, EMNEs are more likely to extract monopoly-based rents from internationalization, but to remain constrained to the periphery position in GVCs.…”

“…It follows, then, that control of the GVC is likely to remain in the hands of technology leaders (Buckley & Tian, 2017). Jacobides and Tae (2015) describe such technology leaders as ''kingpins,'' operationalized as firms with superior market capitalization and comparatively high R&D investment.…”

“…In their study of firms active in various segments in the US computer industry, the authors show that ''kingpins'' impact value distribution and migration through the value chain. Technological and R&D capabilities, however, need to be accompanied by global orchestration know-how in order for lead firms to achieve profitability from fragmented, globally dispersed operations (Buckley & Tian, 2017). We address GVC orchestration in the next section.…”

“…Studies focusing on lead firms are more likely to use financial performance measures as indicators of GVC success: for example, value capture as measured by comparative market capitalizations of various industrial sectors (Jacobides & Tae, 2015), sales and profit growth (Griffith & Myers, 2005), and return on assets (Buckley & Tian, 2017;Lampel & Giachetti, 2013). Other conceptualizations of lead firm performance include, inter alia, its ability to exercise control over independent partners and coordinate division of labor (Casson, 2013;Strange & Newton, 2006), ability to minimize the total sum of transaction costs (Buckley, 2009a), capability development (Eriksson et al, 2014), and corporate social responsibility (CSR) performance (Enderwick, 2018).…”