Foreign and Domestic Firms:

What is different about them, and why and

how it matters

Bureau of Economic Analysis,

Dept. Of Commerce

Lilac NachumProfessor, Globalization and Multinational Companies

My Intellectual World as of 2015

‘Translation’ [terminology/measurement]

Economics IB/IMFactor intensity Capital

Labor skills Labor [employees] skills [wages]

Productivity Performance [sales/employee]

Upstream/downstream linkages

Inter firm linkages

Global production networks

Intra-firm linkages

Imports/exports Cross-border inter-firm linkages

Firms’ Heterogeneity:The Heart of Management Scholarship

• Management theory – firms are inherently different• RBV: different resources and capabilities

• Strategy: different choices, different behavior

• International Business (IB)• Ownership advantages – the difference

between multinational/local firms

• Heterogeneity across multinational firms.

The focus of my talk

What is Different about Multinational Companies?

Ownership:Foreign/domestic

• Legitimacy challenges

• Local embeddedness

• Local knowledge

• Foreignness – assets or liability.

Geographic scope:Multinational

• Multi-unit network spread geographically

• Internal resources

• Internal coordination and pressure.

OECD proposal

BAE Proposal

Granulated Split of the Local Population

Domestic

single-units

Global single unit

(e.g., single unit trading companies)

Domestic

multi-units

(e.g., domestic chains)

Global multi-units

(e.g., local MNEs)

Domestic Global

Geographic Scope

Organizational structure

Single U

nitM

ulti U

nit

Inter-Organizational Relationships

Advertising Agencies in the US

Benchmark local sample:N

(agencies/years, 2002-6)

Foreign/domestic(significance)

All local agenciesBilling >$25mil.

2375 **

Domestic single unit 965 **

Global single unit 315 ***

Domestic multi-units 745 **

Global multi-units 350 n.s.† p < .10; * p < .05; ** p < .01; *** p < .001.n.s. = not significant.

N foreign = 395

L. Nachum, Foreignness, Multinationality, and Inter-Organizational Relationships. Strategic Organization, 2010

Additional Advantages of BAE Proposal

• OECD proposal export/non-export firms

• 80% global trade intra-firm. UNCTAD, Global Value Added Chain and Development, 2013

• Under-estimate actual MNE control

• Basis for policy responses: • Separation of the local sample into MNEs/non-

MNEs: impact of MNEs on home economies; impact on local firms becoming multinationals

• Differentiated policies?.

Suggestions for Extensions of BAE

Proposal• US parents:

• Deeper inquiry into value creation by US parents

• US affiliates:• Tenure• Entry mode• Ownership level

• Trade:• Inter/intra-firm

• Memorandum items:• Number of establishments/firms in each

category.

Comparing Like with Like?US parents US Affiliates

Role within the organization

Representing the corporation as a whole

Part of a portfolio

Functional mandate

Management corporation: resource allocation, synergies

Value creation (production, sales, etc.)

Skills Global overview Country-specific specialization

Maximization

Global performance Country performance

Exit ‘Death’ Strategic considerations related to the entire portfolio

Trade links Mostly intra-firm [Import from affiliates]

Inter- + intra-firm Import intermediaries [unrelated parties]

What functions US parents perform?

Changes over time (reshoring)Rethinking BAE preliminary

results

Affiliates Tenure

Foreign affiliates in the City of LondonTenure in London

16 years(Zaheer/

Mosakowski)

10 years(Sample’s

mode)

9 years 

8 years

  Young Old Young Old Young Old Young OldAdj. R2 .44 .53 .36 .39 .38 .42 .47 .31F 8.62** 10.21*** 6.72* 6.97** 7.25** 8.11*

*10.72*** 7.29

**F-Test   3.20   4.07   6.23   7.98

***

N 143 150 93 200 81 212 70 223

L. Nachum, What Constitutes the Costs and Advantages of Firms Investing Overseas? Managerial and Decision Economics. 2011

† p < .10; * p < .05; ** p < .01; *** p < .001.

F-Test - significance of difference between the models

Entry Mode  Means (S.D.) of the compound

variablesa

(t-tests) [Mann-Whitney] equality of means

Acquisition GreenfieldAffiliates own advantages: Intangible assets, liquidity ratio, total assets, industrial scope

.20 (.39) .10 (.35)*

Affiliates advantages via MNE networks: Linkages with parents, size of parents

.07 (.32) .16 (.28)*** [**]

Affiliates local embededness: links with local service suppliers, pay levels, share activity in £

.30 (.57) .35 (.89)

Affiliates MNE interaction: Geographic and cultural distance from parent

.18 (1.19) .37 (.91)

N 115 66*** p<.001; ** p<.01; * p<.05aCompound variables = average of the standardized values of individual dimensions

L. Nachum, When is Foreignness an Asset or a Liability? Journal of Management 2010

Ownership

  Means (S.D.) of the compound variablesa

(t-tests) [Mann-Whitney] equality of means

  Minority<50% foreign Majority>50% foreignAffiliates own advantages: Intangible assets, liquidity ratio, total assets, industrial scope

.29 (.61) .45 (.53) (*)[*]

Affiliates advantages via MNE networks: linkages with parents, size of parents

.41 (.29) .57 (.60) (**)

Affiliates local embededness: links with local service suppliers, pay levels, share activity in £

.42 (.28) .25 (.47) (**) [**]

Affiliates MNE interaction: Geographic and cultural distance from parent

.24 (.76) .37 (.82)

N 103 78

L. Nachum, When is Foreignness an Asset or a Liability? Journal of Management 2010

*** p<.001; ** p<.01; * p<.05aCompound variables = average of the standardized values of individual dimensions

Trading with Ourselves or with Others Make a Difference

Inter-firm trade Intra-firm trade

Trading with whom? un-related bodies sub-units tied by ownership

Trade relationships? market relationships

ownership-based relationships

What is being traded? Finished goods Intermediaries, services

Value added activity? Sale Production

Driving force? Demand, consumer needs

Supply, production factors

Where to trade? Size, wealth of markets Production and trade costs

US trading partners? Similar: wealthy (large) Different: poorSeparation location and ownership!

Interpretation of BOP; of global competitiveness guide for

policy

US Advertising Agencies:Inter/intra relationships

• Internal MNE [translation = intra-firm ‘trade’] impact on inter-firm relationships

• Characteristics of the MNE: • Size and geographic disparity – significant positive

• Affiliates’ position within the MNE:• Shares of total billings – significant negative

• Interaction affiliate – MNE:• Hierarchical levels, weighted cultural distance – not

significant.

GVCs and Inter/Intra Trade

• TiVA rationale – GVCs blur location of:

• Production

• Sales

• Benefits realization

• Ownership/location differences GDP/GNP [GNI].