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Multinational supply chain

01 August 2014 By In Blogs


Globalization of business enterprises began to accelerate in the early 1980s. This was enhanced by improving transportation, technological innovations and improved communication system. Globalized businesses, then, since adopted the use of supply chains to distribute their goods worldwide. This has been accompanied by increased completion in oligopoly sectors that have also improved the quality of goods and services.

  In most Multinational enterprises (MNEs), it is the supply chains that enhances enterprise development and increased earnings. Companies producing their goods on-site such as hotels and mining companies can benefit more using supply chains than the usual payroll. Most companies have realized that supply chains outweigh by far the philanthropic investments. A well known company, Shell, tabled a report in 2007 which indicated that $17 billion were made from supply chains, compared to $170 million that they made while from social investments (Argitis and Pitelis, 2006).

            This paper will solely focus on the benefits MNEs can enjoy through proper Supply Chain Management (SCM) and how they can maximize these benefits. SCM is one of the essential elements that determine the efficiency of an organization’s operations. Controlling the supply chain can enhance customer or consumer satisfaction, cultural revolution, the company’s success among other many benefits. The paper will also discuss various theories on Supply Chain Management and their contributions to MNEs, including the theories explaining the Foreign Direct Investments (FDI) in relation to MNEs.

            Controlling the Supply Chain of every business is beneficial and exponential. One of the  benefits is maintaining services to the consumers. Supply Chain Management ensures good quality of the product, right product quantity and easy availability of the product in customers’ expected place. This management also ensures after-sale support to the customer. This will help build good customer relations; therefore, there will be a high yield on the global market. Management of Supply Chains also increases the company’s bottom line. They have to make sure that the quality  product meets the need of the consumer. In addition, they should create  awareness for consumers to have product information, this will enhance greater impact to the business. Managers ensure fixed assets such as transportation vehicle and warehouses are not over utilized in the supply chain. Good management also increases day to day product cash flow, therefore, general growth increase(Buckley 2006).

            Supply Chain managers also ensure proper planning of unexpected natural disasters that would affect the business as well as the cleanliness of the natural environment. Through well structured policies and regulations, the working environment is made safe for both workers and the globe as a whole. Proper disposal of the company’s waste is also necessary to prevent any form of pollution and fines usually charged for polluters. Edith Penrose (1960) believes MNEs’ rate of increase is not caused by the difference in the size of the plan, but by the increase of knowledge of the organization. This is explained in her "Theory of Growth of the Firm” (TGF). Through this theory, Penrose distinguishes between local and international firms in terms of the opportunities and costs of the firm produce (Penrose 1987).

            In her third edition book, Penrose states factors to be considered in the Direct Foreign investment. The listed factors include the administrative activities, the expansion theory, the business growth process, the purpose of learning and diversification in production (Penrose 1987). Her theory reformulates the cost function of the firm, theory argues that the output cost is inversely proportional to production scale, but increases progressively with the growth rate. This relationship forms a U-shaped cost curve with respect to the growth rate.

This theory does not encourage benevolence i.e. becoming a neighbor with good corporate skills. In simple terms, the theory does not judge those who shut down their own companies in their country and relocate to another country for the purpose of company growth. A known company, Apple, manufactures their products in the U.S but assemble them in China. This is because China has a bigger population that can work for the company. The former Apple supply manager, Jennifer Rigoni, commented that in Faxconn City, where assemblage occurs, the Chinese can work both day and night but are paid below U.S $17 per day. People may talk, but at the end of the day, the Apple Company continues to grow every day.

An example of an enterprise booming as a result of this theory is the Coca Cola Company. The Company has competitors but uses supply chains to distribute its products globally. The well managed supply chains are the contributors to increased growth of the company annual profit.

            Penrose also viewed enterprises to be a ‘number of resources’; this might be attributed by her observation of resources, particularly the human resource. According to her theory, keeping information concerning the company’s development plans and method's secret will sustain the overall growth of the business. The growth rate of the business is usually determined by the balance between the management team and the dynamics of entrepreneurship. Contrary to Penrose’s thinking, Dunning (1958) suggested the negative implications of MNEs and their FDI decisions. According to his OLI framework, where O represents Ownership benefits, L represents the Location of the plan, and I represent the internationalization advantage, the place (L) does not matter, but the difference in the state between countries producing the same goods that matter. The differences were already noted by Hymer (1976) on the extra costs incurred as one conducts business in another country/abroad. Hymer stated that the benefits of doing business abroad are insignificant.

            The Hymer’s view is applicable to the challenges facing the FDI today. In the United States, for example, external investors must register and report to the Securities and Exchange Commission (SEC). This is important in documenting the amount the outside investors pay to the American government for their services. Although the process promotes transparency, it increases the overall costs incurred on the foreign investment.

            There are  factors that hinder the ability of MNEs to maximize Supply Chains. First, MNEs depend highly on technology related benefits to maximize their Supply Chains. Technological knowledge is the key to success of MNEs and especially the foreign investments. There are emphasis on research and product innovations to improve the growth rate of the enterprise. The study criticizes Penrose’s work for believing in entrepreneurial capabilities only. According to them, research and development stimulates diversification; as such technological innovations lead to increased growth rate.

            Research and Development, technological information and marketing activities are crucial elements of foreign investment. The technological information can never be substituted by any means and therefore must be a company’s key priority. It is necessary to have product innovation, and geographic diversification to determine the growth rate. Although she did not emphasize on it, Penrose acknowledged the importance of Research and development and innovations. In her example of the case of Hercule's powder (Penrose 1960) where innovations caused unrelated diversification for unrelated activities. This caused a loss to the firm, and it took the time to recover. It is, therefore, necessary to research before applying.

            Ghemawat (2001) explained in his book that technology is hard to transfer from one country to another. This might act as an obstacle to the MNEs. This might arise due to economic factors, cultural beliefs and geographical distance from the enterprise’s home country to the country in which the investment is to be carried out. It is, therefore, necessary that MNEs considers the impacts of distance on internationalization. A case study of this is the research done by Rugman and Verbeke (2004). They realized that most of these enterprises face faster decay in new technologies that result in reduced growth rates in an attempt to expand away from home.

            In addition to the technological benefits, Rugman and Verbeke (2004) elaborate on the challenges facing organizational structures of the MNEs in the multinational markets. Their discussion is focused on the factors of information repositories such as Information technology, capital audits and the use of management systems. The level of technology and electronic communication will impact the usage of the above mentioned factors.

            Secondly, the dynamic capabilities approach can also determine the maximization of the Supply Chain benefits. Teece and Augier (2006) define these changing capabilities as being the significant capacities that enterprises and firms must form or reshape their assets to keep in balance with the changing markets and technologies. These capabilities determine the MNEs’ ability to adapt to changing environments and competences.

            Pitelis and Argitis (2006) suggests that Penrosean theory illustrates the major components of the capabilities approach. He argues that OLI paradigm does not form MNEs; rather the MNEs shape the OLI parameters themselves to link the external opportunities with internal strengths. First, the ownership benefit (O) determines whether the plan should remain locally or be expanded abroad. Second, the management determines the international location (L) for the plan. Attractiveness of the area and productive opportunities are analyzed in this step. Finally, resources and managerial services are used to determine the internationalization advantages (I).

            Steen and Liesch (2006) also support this notion by revisiting the model of Uppsala internationalization. The model argues that the expansion of the international business is not just ‘a process used to know more about the market and competitors, but also a learning process of the MNEs’ internal resources.’ It, therefore, recommends for higher capabilities in managing enterprise’s resources. The two authors propose that managers should infuse the Uppsala model with the Penrosean perspective of the capability approach. Augier and Teece (2006) however, note that Penrose did not advocate for necessity so as to beat competitors, but rather for the purpose of MNEs growth.

            As a case study, the United States had developed a ‘competition atmosphere’ making suppliers to be creative day by day. This puts consumers into a dilemma for the desire of new things (Penrose, 1960). The result is a culture of consumerism that has been adopted by many other countries; classes in the society have been defined (Low class, middle and the prestige), and the rich continue to consume more as the poor are limited to access.

            Thirdly, human resource management concept is very important for maximization of the Supply Chains. The Growth of Firm Theory recognizes purpose and quality of organizational human resources in diversification and growth. However, there is no sufficient information on the theory to address the key challenges affecting human resources in the current world. In relation to this, Verbeke and Yuan (,2006) came up with a new approach known as Multinational. They state that a multinational structure requires the higher quantity of managerial services, therefore, is hard to adopt. Verbeke and Yuan provided a detailed account of the quality of expatriates. Expatriate influences the awareness of human resource in their countries.

            It is important to determine the various expatriates that are sent to the countries abroad.

Managers differ from entrepreneur in that, managers are critical to MNEs growth, and increased viability of operations carried out in the foreign countries. The entrepreneurs are also needed to strengthen trade relationships and take advantage of productive opportunities. Most MNEs have adopted the Foreign Direct Investment in expanding the businesses. Most of these enterprises have witnessed the growth over time, although some fail at early stages. It is very important to understand the Foreign Direct Investment theories and how they relate to the choice of the Supply Chain Management.

            The monopolistic advantage theory developed by Hymer (1976) states that the enterprises enjoy a monopolistic advantage in the host country compared to the competition of the local market. This can be accounted for by advanced technology and experience. With intellectual skills, an enterprise can come up with unique ideas that help promote product differentiation. Technological know how is also needed for the labor intensive companies such as petroleum refineries, chemicals and pharmaceuticals. This explains  horizontal theory.

            According to this theory, many MNEs are disadvantaged when compared with local organizations. This is as a result of the liabilities of acquiring technical knowledge and lack of local know-how in those host countries. However, these liabilities are usually settled by the existing monopolistic benefits which allow companies to make even higher profits (Caves,1971).supports Hymer’s theory and suggests that in response to the difference in  its products, ownership benefit is obtained, and this encourages foreign investment.

            This explains the vertical theory. It is adopted by MNEs that have developed abroad and create barriers for competitors. The vertical DFI, enterprises capture and enlarge their market share into the global economy. Firms with oligopolistic nature are able to internalize the external economies of scale.

            Another theory explaining FDI is the Life Cycle model which analyses both the FDI and trade. The theory explains how an enterprise shifts from exporting and eventually to FDI. A firm innovates a product the export it for  international business. Once the product reaches the growth, product phase, the firm can choose to create a branch abroad and start exporting from there. The home competitors may also choose to invest in the same foreign country creating competition.

            The theory of Penrose may not have addressed all challenges facing the growth rate of Multinational Enterprises today, but it has a significant effect on the understanding and management of the Supply Chains. Company managers now need to focus their attention on Research and Development and improvement of technology-related activities and the dynamic capabilities. These elements are far beyond the growth theory and should be implemented to improve production. In spite of the views mentioned above, these recommendations will be effective in more generations to come. The theories express the international business and its expansion. The theories of Foreign Direct Investment are also relevant for practical application. They give alternative ways of carrying out investment abroad; this can help many practitioners.

            Both academics and research have made Foreign Direct Investment profitable. Other factors that the management team should always consider maximizing the supply chains are the tariffs; taxation levied on the products, exchange and transfer prices and a comparison of the countries’ securities. Well, Managed Supply Chains will always increase production, reduce cost of input, decreased product prices and high competition. It is important for every business to maximize its efforts on making workable supply chains (Verbeke, & Yuan, 2006).


            Companies that practice proper Chain Supplying Management has better chances of getting more profit than the rest. Businesses are increasing globally, and the rate of growth is declining. Unless MNEs invest in FDI and use Supply Chain Skills for faster growth, most companies will continue making ordinary profits, where input is equal to the output. The past theories should also be utilized since they apply to the current business situations.

Read 1460 times Last modified on Friday, 01 August 2014 21:40
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