Academic journal article Management International Review

Reconsidering the Concentration of US MNE Activity: Is It Global, Regional or National?

Academic journal article Management International Review

Reconsidering the Concentration of US MNE Activity: Is It Global, Regional or National?

Article excerpt

Abstract and Key Results

* Several recent papers by Rugman and his colleagues have improved our understanding of the regional concentration in the activities of the world's largest 500 MNEs. The current paper extends this literature in two dimensions. First, a formal statistical analysis is undertaken to test whether patterns of US MNE assets, sales, income, and employment are consistent with a transactions cost interpretation. Second, this paper allows for the national dimension, defined as activities inside the home country, to be a possible explanation of regional concentrations of MNE activity.

* The evidence robustly shows that regional concentrations in US MNE activity are driven by the national dimension. The analysis also indicates that these national concentrations have not hindered US MNE access to important global markets-that is, US MNE managers have gotten it right. As such, there should be no attempt to increase US MNE activity globally stemming solely from a large concentration in the home region.

Key Words

US MNEs, Regionalization, Gravity Model

Introduction

In a purely global economy with no frictions to trade or the undertaking of foreign business activity--that is, no transactions and information costs, no transportation costs, tariffs or non-tariff barriers, including cultural and language differences--then one may expect MNEs (globally oriented firms) to have their activities distributed globally, perhaps proportional to GDP. (1) According to this view, therefore, a US MNE would be expected to sell 26 percent of its goods within North America in the year 2000 given that the North American economy accounted for 26 percent of the world's GDP in 2000. Since Europe represented 23 percent of the world's GDP in 2000, one may expect US MNEs to sell 23 percent of their output in Europe, and the similar figure is 20 percent for the Asia Pacific.

Recent evidence indicates that MNEs are far more regional than perhaps one may think (Rugman/Verbeke 2004, Rugman/Moore 2003, Rugman/Girod 2003, Rugman/Brain 2003, Rugman 2000). This evidence is based on the observation that a vast majority of MNE activities (sales, assets, and employment) are concentrated in their home regions. In other words, the data clearly reject the view that MNEs undertake activities globally on a wide scale. They do not. These results are based on a sample of the largest 500 global MNEs.

Given that the MNE is the organizational form that arises to allow firms to exploit firm-specific advantages in foreign markets, than it may seem surprising to find their activities are not global--after all, their mandate is to operate abroad. At first glance, therefore, the Rugman evidence showing a significant regional bias in terms of where MNEs sell their goods and services may seem somewhat paradoxical. This regional orientation of MNE activity is in sharp contrast to the public and even academic perceptions that MNEs are globally oriented.

The evidence of a strong regional concentration in MNE activity, however, is consistent with economic theory. There are many frictions that reduce the extent of trade and foreign business activity and hence move us away from any uniform distribution of business activity. For example, transportation costs make undertaking business further away more costly, and hence increase the concentration of a firm's business activity closer to home. Barriers to trade, including tariff and non-tariff barriers serve to further concentrate business activity locally. The costs to operating abroad, including communication costs, costs of penetrating foreign business networks, understanding foreign customs and regulations, including legal systems, and the costs of managing foreign exchange risk also increase the cost of doing business in foreign markets, and hence serve to further concentrate business activity in the home or regional market.

But there are other and perhaps more important reasons as to why MNEs are more regional than global. …

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