Overseas Affiliates Research Articles

Global knowledge flow and Japanese multinational firms’ offshore R&D allocation and innovation

This paper examines whether allocating more research and development (R&D) activities to a country-industry pair with a higher intensity of knowledge flows improves the innovation performance of multinational enterprises (MNEs). We use firm-patent-matched data for Japanese manufacturing MNEs, including data on MNEs’ offshore R&D expenditure and information on patents filed by both parent firms and overseas affiliates. Moreover, as a proxy for the intensity of knowledge flows, we use the eigenvector centrality of each country-industry pair in the global knowledge flow network, utilizing patent citation information.We find that the quality-adjusted number of patent applications tends to be higher for MNEs that allocate more R&D activities to country-industry pairs that are more central in the network of global knowledge flows. However, we did not find any significant relationship between the country and industry distribution of offshore R&D and the number of patent applications.

Territorial Tax System Reform and the Financial Behavior of Multinational Firms

We investigate whether the move from the worldwide tax system to the territorial tax system in Japan in 2009 affects the financial behavior of overseas affiliates of Japanese multinational companies. The reform substantially reduces the tax costs of profit repatriation in the form of dividends for Japanese overseas affiliates. We use this reform as a quasi-natural experiment to investigate whether and how the tax system affects multinationals’ cash holding and financing policies. Findings from our study sheds some light on possible outcomes of similar tax reforms in countries such as the United States. Based on a sample of Japanese overseas affiliates located in both Europe and Asia, we do not find a robust link between the tax costs of dividend repatriation and the cash-asset ratio for Japanese overseas affiliates before the territorial tax system reform. Moreover, we do not find that Japanese overseas affiliates reduced their cash-holdings since the territorial tax reform, no matter whether they are located in countries with high tax costs of repatriation or in countries with low tax costs of repatriation. We further conduct Difference-in-Differences analysis to compare Japanese overseas affiliates with similar US overseas affiliates located in the same host countries. The comparison between the Japanese and US overseas affiliates are reasonable as the tax system on foreign profits were similar in the two countries before Japan moved to the territorial tax system. We do not find significant difference in the cash-holding patterns and capital structures between Japanese and similar US overseas affiliates. While the territorial tax system reform did not change multinationals’ financial behavior during our sample period, the reform can enhance the competitiveness of Japanese firms in foreign countries by reducing their tax burden of repatriation.

The Rise of the Global Corporation and the Polarization of the Managerial Class in the US

ABSTRACTThis article seeks to understand the sharp divergence in the earnings of top managerial executives in the US since the 1980s, within the historical context of the evolution and transformation of the corporate landscape through the 20th century. In particular, as US multinational corporations expanded their reach to the global market at the end of the 20th century and offshoring increased, globally dispersed US multinational corporations began to draw a rising share of their surpluses from their overseas affiliates. The article argues that this development is key to understanding the growing disparity between the earnings of the executives at the top of the managerial hierarchy and those lower down. The disproportionate rise of top managers’ wage income reflects their claim to a larger share of globally produced surplus. Discussions of the rising earnings of the managerial elite in the US need to take this historical process into account.

An Analysis of the Investment Environment of Asian Major Cities: Questionnaire Survey for Korean Overseas Affiliates

An Analysis of the Investment Environment of Asian Major Cities: Questionnaire Survey for Korean Overseas Affiliates

Reverse international knowledge transfer in the MNE: (Where) does affiliate performance boost parent performance?

We examine the extent to which the knowledge or technological capability of foreign affiliates actually enhances the performance of their parent companies. Our results draw on a firm-level panel of more than 1600 multinationals and more than 4000 of their overseas affiliates, covering 46 home and host countries. We find considerable evidence of enhanced parent productivity as a result of their affiliates’ performance, which we interpret as evidence of reverse knowledge transfer from affiliates to parents. This effect is robust to different tests including IV estimation and a falsification exercise based on unconnected ‘matched’ affiliates. We find that both physical and strategic location markedly affects the affiliate-parent relationship, and that distance reduces the positive impact that affiliate performance has on that of the parent.

Bulletin 16: China Makes a Pre-Emptive Strike against BEPS

The authors consider recently introduced measures that could be used by Chinese tax authorities to deny income tax deductions for certain service fees and royalties paid by Chinese companies to their overseas affiliates. Potential strategies are also suggested for multinationals to safeguard their tax interests in China.

How does overseas labour quality affect multinational performance? A value chain perspective

The traditional view of the multinational corporation (MNC) envisages knowledge flowing from the parent company to the overseas affiliates to the benefit of the latter. But recent research has suggested that there may be a reverse knowledge transfer effect through which MNC parent companies may benefit from the activities of their overseas affiliates. In this paper, we consider whether the labour quality in overseas affiliates has an impact upon the productivity of MNC parent companies. We test empirically for this relationship using a firm-level panel of more than 1,600 manufacturing MNCs and more than 2,400 overseas affiliates, covering 30 home and host countries in the period 2004-2012. Our main results indicate that highly- skilled labour in overseas affiliates has a significant impact upon the productivity of parent companies, suggesting the existence of a strong reverse knowledge transfer effect - a finding robust to a large set of different specifications. In addition, we also establish that this knowledge transfer effect is greater (1) when the overseas affiliates are in related, rather than unrelated, industries; (2) when the overseas affiliates are downstream, rather than upstream, in the MNCs global value chains; (3) when the overseas affiliates involve horizontal, rather than vertical, FDI; and (4) when the overseas affiliates are wholly-owned subsidiaries, rather than joint ventures.

The Importance of Boundary Spanners and the Processes for Improving their Function in the Management of Overseas Affiliates

The Importance of Boundary Spanners and the Processes for Improving their Function in the Management of Overseas Affiliates

Transferring the Toyota lean cultural paradigm into India: implications for human resource management

This paper argues that the successful international transference of Japanese lean manufacturing practices in general, and the Toyota Way and Toyota Production System (TPS) in particular, is in varying degrees contingent upon the sociocultural, historical and environmental context of the host nations into which such transfer occurs. This has significant implications for human resource management policies and practices. The paper contends that lean manufacturing is not simply a set of concepts, techniques and methods that can be implemented by command and control. In the course of transferring lean practices from Japan into overseas affiliates, either an absence of due consideration or disregard for a host nation's unique sociocultural and environmental factors could lead to unproductive organisational outcomes for the parent company. This viewpoint is examined through a case study analysis of the Indian affiliate of the Japanese automobile industry giant Toyota Motor Corporation, namely Toyota Kirloskar Motors, located at Bidadi, near Bangalore, India.

Outsourcing and Offshoring: Key Trends and Issues

This paper provides a discussion of key issues which emerged from a review of the debate on offshoring and outsourcing. Although offshoring is not a new phenomenon, the current phase of offshoring is marked by the increased tradability of services enabled by ICT. The paper puts forward a clear definition of offshoring - defined as a combination of trade flows, FDI, and employment shifts - before doing three things. First, official statistics on international trade and FDI were examined to gauge the extent of offshoring in services. Second, the paper analyses the causes and consequences of different types of outsourcing seen as strategies for corporate restructuring. Third, the impact of outsourcing on jobs and professions is assessed in terms of the repackaging of tasks, skills and knowledge. Our challenge in having an informed debate about offshoring is (a) to articulate the benefits and costs of offshoring by linking the three areas, namely trade and FDI, corporate strategy, and employment; and (b) to collect better data – both official statistics and private surveys - that enable us to link micro-level business decisions on outsourcing and offshoring to sectoral and economy-wide outcomes. Even with inadequate data, however, this paper provides pointers to answer such questions as: *Why is outsourcing and offshoring happening now? *What is the impact of outsourcing/offshoring on home and host economies? *What policies should be devised to address the causes and consequences of offshoring? The key points raised in this paper are as follows. 1. Definitions: Offshoring happens when private firms or governments decide to import intermediate goods or services from overseas that they had previously obtained domestically. It is therefore about sourcing decisions which involve (a) imports, (b) displacement of domestic production and associated jobs, and sometimes (c) foreign direct investment (FDI) outflows if sourcing happens from overseas affiliates. It is difficult to combine three separate sources of data to measure the precise extent of offshoring defined in this way. 2. Trade and FDI: Bearing in mind the limitations to official statistics, they indicate that offshoring of services is quite small, relative to that in manufacturing. In particular: *World trade in services, valued at $1.8 trillion in 2003, is still only a fifth of that in manufacturing. *Only 10% of services output enter international trade, whereas 50% of manufacturing does, indicating that offshoring of services is small relative to outsourcing within national borders. 4. Despite this small size, the tradability of services is expected to grow, especially in business services (including IT and professional services) which make use of ICT. *The top two exporters of computer services are Ireland and India, but the top two exports of other business services are the US and the UK. Unlike in manufacturing, the US and the UK maintain a trade surplus in business services. *In part because of such trade surplus, job losses embodied in offshoring is quite small, at 2.4% of total employment in the US in 2003. *For emerging markets, the Indian model of promoting export-platform FDI in software and business services provides one, but not the only, template for promoting them as offshore locations. 3. Corporate Strategies: Growth in outsourcing and offshoring of business services depends on the nature of corporate strategy and business models. Corporate strategies to outsource business services became established only in the late 1990s, driven primarily by the ICT revolution and the Anglo-American shareholder value business model, in which CEO/CFO takes a lead to reduce costs and improve return on assets. Asset sales are therefore just as important as relocating to low-cost areas. *The current phase of outsourcing and offshoring is marked by two distinct types of outsourcing: first, the unbundling and re-centralisation of corporate functions, and second, vertical dis-integration of inputs. The former affects all sectors of the economy, including manufacturing and the public sector. *These two distinct types of outsourcing offer emerging market suppliers different opportunities to upgrade their capabilities and to create higher value added. In particular, these suppliers that entered markets via the provision of low value added standardized services may move up the supply chain (e.g. in software) or deepen their functional knowledge in business services. 4. Jobs and Professions: The movement of service jobs from developed economies to low cost emerging market locations is being accompanied by significant repackaging of tasks, skills, and knowledge into a job, occupation, or profession. This is leading to changes in occupational and professional identity, and is creating new challenges for governments formulating their policies for education and training, and for professional associations thinking about the upgrading of capabilities.

The Unofficial Commonwealth Relations Conferences, 1933–59: Precursors of the Tri-sector Commonwealth

One of the unique features of the Commonwealth as an international association is the width and depth of its non-political manifestations. At recent Commonwealth conferences political and official consultations have been held in parallel with large civil society, business and youth forums and, in some cases, inter-faith dialogues. Growing collaboration between the political, civil society and business elements gives rise to the notion of the ‘tri-sector Commonwealth’. The concept of an ‘association of peoples’ as well as one of nations, does, however, have a long pedigree. Between 1933 and 1959 a series of Unofficial Commonwealth Relations Conferences, organised by Chatham House and its overseas affiliates, were held at roughly five-yearly intervals to analyse the implications of the most recent Imperial Conferences. Politicians and civil servants joined with lawyers, academics, editors, military men, agriculturalists and trade unionists. In contrast to the political Commonwealth, women had a part in the unofficial conferences. And among more than 400 participants at Toronto 1933, Lapstone 1938, London 1945, Bigwin 1949, Lahore 1954 and Palmerston North 1959 were fifty-five academic historians and other writers of history, who included most of the leading authorities on the Commonwealth of the 1930s and 1940s.

Intra‐industry Trade, Reconsidered: The Role of Technology Transfer and Foreign Direct Investment

This paper investigates novel determinants of intra‐industry trade (IIT) of late 1990s Japanese trade. Our empirical analysis shows that IIT is increased not only by the similarity of GDP and factor endowment but also by technology transfer via Japanese FDI. In particular, the current high proportion of Japanese IIT with Asian countries can be explained by technology transfer (licensing between headquarters and overseas affiliates) via FDI.

The politics and economics of offshore outsourcing

This paper reviews the political uproar over offshore outsourcing connected with the release of the Economic Report of the President (ERP) in February 2004, examines the differing ways in which economists and non-economists talk about offshore outsourcing, and assesses the empirical evidence on the importance of offshore outsourcing in accounting for the weak labor market from 2001 to 2004. Even with important gaps in the data, the empirical literature is able to conclude that offshore outsourcing is unlikely to have accounted for a meaningful part of the job losses in the recent downturn or contributed much to the slow labor market rebound. The empirical evidence to date, while still tentative, actually suggests that increased employment in the overseas affiliates of US multinationals is associated with more employment in the US parent rather than less.

Exporting and FDI as Alternative Strategies

Exports and overseas production are alternative modes for serving foreign customers. Empirical studies usually find that foreign markets are served through both modes and that countries receiving high levels of exports also host large amounts of foreign direct investment (FDI). This paper evaluates several possible ways to reconcile the facts about FDI and exports with the standard theory of multinational corporations. We argue that coexistence and correlation of FDI and exports are consistent with models where the two modes are substitutes. This substitutive relationship finds collaborative evidence in the results of several papers. Nevertheless, a significant body of evidence suggests that FDI sometimes complements exports through the mechanism of stimulating exports of intermediate goods for use by overseas affiliates. Copyright 2004, Oxford University Press.

Mass production is alive and well: the future of work and organization in east Asia

This paper reviews the extent to which multinational corporations from developed economies and newly industrialized economies1 in east Asia (Japan, Korea, Taiwan and Hong Kong) are hollowing out their mass production of standardized goods and transferring such production to the emergent economies of China and Malaysia. Jos Gamble, School of Management, Royal Holloway, University of London, UK (E-mail: J.Gamble@RHBNC.ac.uk). Jonathan Morris, Cardiff Business School, Cardiff University, Wales, UK (E-mail: MorrisJL@Cardiff.ac.uk). Barry Wilkinson, School of Management, Bath University, UK (E-mail: mnsbw@management.bath.ac.uk). Based on data from sixty-one mini-case studies in two industries, garments and electronics, it argues that the HRM practices and policies being utilized in those overseas affiliates are functions of a number of factors, including corporate business strategies, corporate control mechanisms and host-country institutional HRM capacity. The research finds remarkable similarities in HRM policies and practices between the two countries, the two industries and between different corporate ownerships. The use of Taylorist forms of work organization and low-trust/low-investment HRM policies are part of corporate strategies of hollowing out, of poor host-country HRM capability and of tight control over affiliates.

Incorporating the Multinational: Socio-technical Interfaces between the MNC Affiliate and the Host Country

This paper begins by describing an attempt to evaluate the contribution of the overseas affiliates of 20 European parent multinational enterprises (MNEs), based in four South-East Asian countries; Malaysia, Singapore, Brunei Darussalam and Thailand. This was done through semi-structured interviews carried out by the author in parent headquarters, regional offices and affiliated plant locations, together with state institutions in the host nations. The visits were repeated over a 2-year period from 1997 to 1999. The resource-dependency model used to structure the research focused on two characteristics of the affiliates. The first was whether the contribution of the affiliate was to high-value-added locally designed products or to low-value, low-design products. A second dimension was provided by the place held by the plant on local/global supply chains. An initial hypothesis was that distinctively different modes of organizational learning would emerge from the conjunction of nationally differentiated parent MNEs and the institutional context of the host country and would, therefore, shape the manner in which dependencies were operationalized. In practice, two factors seemed more important in shaping the business strategy and style of the affiliate. The first was the nature of the operational technology, particularly the sunk costs of local investment, and the degree to which these ‘captured’ the MNE for the national economic development strategy of the host government. The second was the political economic context of both the parent and affiliate, and the manner in which these caused the dissipation or enhancement of managerial and technical capabilities. In essence, the focus of the study shifted from one in which the MNE and host state were treated as holistic actors interacting along a single common dimension, to one in which the political incorporation and social embeddedness of the former within the context of the latter was accomplished through multiple and socially segmented networks. The question of the extent to which the MNE can act autonomously to shape either its internal or external structure might, therefore, be taken as a matter for political and ethical judgement as much as for market forces.

Why Do US Firms Choose Global Equity Offerings?

This study examines the economic motivation for global seasoned equity offerings made by US firms. We find that firms announcing global offerings have significantly less negative market reactions than had they limited the issues to domestic only. The extent of the reduced price drop at issue announcement is found to be negatively associated with pre-announcement price run-up, firm size, and market-to-book equity, but positively associated with unsystematic risk. We also find that global issuingfirms outperform their domestic counterparts for up to three years following the offerings. As an increasing number of foreign companies have raised equity capital in the US capital market, many US companies are seeking global dissemination of their new equity through a procedure that commonly sets aside a proportion of the total shares for targeted foreign investors (global tranche) with simultaneous issue of the remaining shares in standard registered form in the US domestic market (domestic tranche). Although the two tranches are marketed separately by two syndicates of underwriters, the global tranche is usually led by the overseas affiliates of the lead US underwriters of the domestic tranche to ensure tight control over the allocation of shares. The offer price is the same to all investors, regardless of nationality, because the Rules of Fair Practice of the National Association of Securities Dealers (NASD) do not allow price discrimination. Since there is generally no obstacle to foreign investors purchasing shares directly in the US market, one might wonder about the motivations for and potential benefits of global issues. We develop three hypotheses regarding the motivations of global offerings. The name recognition and accessibility hypothesis suggests that global issues enhance investor recognition and participation in both the primary and the secondary markets. The alleviation of asymmetric information hypothesis posits that the ability to issue global shares may serve to validate firm quality, reducing the information asymmetry between insiders and investors. The window of opportunity hypothesis postulates that firms may switch to global offerings when domestic demand for their new shares is weak. We examine the economic effect of global issues by comparing a sample of global seasoned equity offerings made by US industrial companies from 1985 through 1995 and a domestic control sample that includes all purely domestic offerings during the same period.

Multinational enterprises, regional economic integration, and export-platform production in the host countries: An empirical analysis for the US and Japanese corporations

Multinational Enterprises, Regional Economic Integration and Export-Platform Production in the Host Countries: An Empirical Analysis for the US and Japanese Corporations. — This paper analyzes determinants of export orientation of overseas affiliates of US and Japanese MNEs for the 1982–1994 period. The author contends that production geared to MNEs’ home market and that production oriented to third-country markets are determined by different factors. The empirical analysis finds the home-market-oriented production concentrated in countries that offer low-cost workforce, enjoy geographical proximity or preferential access to the home market. The location of third-country-market-oriented exports is influenced more by strategic factors such as participation in regional trading blocs and preferential access to major markets than factor costs considerations.

International Economic Transactions: Issues in Measurement and Empirical Research.

This paper summarizes a forthcoming book that describes issues and recent innovations in the measurement of international transactions. A number of distinguished authors assess data measuring trade in merchandise, services, and foreign-direct investment claims. Others assess international prices and data measuring comparisons of inputs and outputs internationally. (International financial data are not assessed.) The chapters in many cases tabulate the data and illustrate their application to recent research questions. U.S. international data are emphasized, but those of other countries are frequently highlighted as well. Growing international interdependence and structural and technological change raise a number of important theoretical and measurement issues that are explored here with regard, for example, to computer prices, productivity, international convergence of income, service provision from overseas affiliates, and proper valuation of direct investment stakes.

THE EXPORT PERFORMANCE OF U.S. AND SWEDISH MULTINATIONALS

While the U.S. and Sweden both lost more than 20 percent of their shares of world and developed countries’ exports of manufactures between the mid‐1960s and mid‐1980s, the export shares of their multinational firms stayed fairly stable or even increased. The multinationals raised the proportion of their worldwide exports that they supplied from their overseas affiliates. These developments suggest that the declines in the trade shares of the US. and Sweden were not due mainly to deterioration in the innovativeness or inventiveness of American and Swedish firms, their management ability or their technological capabilities, but rather to economic developments in the firms’ home countries.The finding that firms have done better as exporters than their home countries is strengthened when we look at different industry groups. In both the U.S. and Sweden, and in all industry groups, with one exception, the multinationals’ export shares increased relative to those of their home countries. The margins were often wide, and were mostly larger for Swedish firms than for U.S. firms.Part of the explanation for the growth of each country's exports and those of its multinationals is the initial composition of exports, or the comparative advantages of the countries and their firms. These were skewed, in the mid‐1960s, to industries that were to enjoy rapid growth in the next decade or so. Despite these initial comparative advantages, the exports of both countries fell far behind world export growth.The comparative advantages of both countries’ multinationals were even more biased toward fast‐growth industries than those of the countries. That fact partly accounted for the better export performance of the multinationals relative to their home countries, but the multinationals outperformed their countries within each industry as well as for manufacturing as a whole.