Academic journal article Management International Review

How Do We Capture "Global Specialization" When Measuring Firms' Degree of Globalization?

Academic journal article Management International Review

How Do We Capture "Global Specialization" When Measuring Firms' Degree of Globalization?

Article excerpt

Abstract and Key Results

* The IB literature informs us of several ways to measure firms' degree of globalization. In this paper we make the argument that in fact none of the existing indices really measure firms' degree of "global specialization", that is, to what extent their allocation of resources is multidomestic or global.

* In order to remedy this we introduce a complementary index measuring how firms are configuring their value chains--whether they are replicating value chain activities from country to country or locating them in globally specialized units in order to exploit an international division of labor. We then test this "global specialization" index empirically on a sample of Danish MNCs.

* We find that the index is able to identify a distinct group of firms with significantly higher degrees of global value chain configuration. The firms in this group do not necessarily score high on conventionel internationalization measures.

Key Words

Globalization, Internationalization, Specialization, Value Chain, Metrics, Multinational Corporations

Introduction

What is meant by the internationalization or globalization of firms and how do we measure the phenomenon? The questions have aroused the curiosity of most IB scholars, and the many different approaches found in the literature indicate that there are no simple answers. The measuring of firms' internationalization may have a phenomenalistic justification of its own (see e.g., Benito/Welch 1997), but usually, measurements are made in order to establish the interrelationship between firms' degree of internationalization and financial performance (see e.g., Stopford/ Dunning 1983, Daniels/Bracker 1989, Geringer et al. 1989). For that purpose, firms' foreign sales as percentage of their total sales have been widely used (Sullivan 1994), and--to a lesser extent--the proportion of foreign to total assets and of foreign to total employees (Geringer et al. 1989). Since these dichotomous (home vs. abroad) internationalization indices do not capture the spatial spread of the foreign activities, IB scholars (e.g., Ietto-Gillies 1998, Fisch/Oesterle 2003) have developed various spread/diversity indices to supplement dichotomous indices. In combination, the dichotomous and spread/diversity internationalization indices are good indicators of how expansive firms are in terms of generating revenue in foreign markets, and also in terms of measuring the magnitude of firms' international value added activity. Moreover, the data requirements of these types of measures are moderate: most often, researchers can compile the needed data from secondary sources, such as industry directories and annual reports.

However, the dichotomous and spread/diversity measures are of little help if one wants to establish to which degrees firms are following multidomestic or global strategies (Porter 1986, Prahalad/Doz 1987, Bartlett/Ghoshal 1989, Yip 1989). This is regrettable inasmuch as the integration/responsiveness discussion is pivotal in the current international management literature. The renewed interest in global sourcing and offshoring among international firms have further exposed the inadequacies of the dichotomous and spread/diversity measures separately or combined, since in reality they are completely insensitive to how firms configure their global value chains and hence fail to capture one important aspect of globalization. This dimension, which could be called "global specialization", is the degree to which MNCs exploit differences in comparative advantage through international division of labor, by letting geographical units specialize and become global suppliers of different activities within the internal network of the MNC. The ability to do this has long been recognized as one of the inherent advantages of internationalization (e.g., Kogut 1985, Ghoshal 1987, Yip 1989). While other advantages of internationalization, such as scale and scope economies, are adequately captured by existing indices of MNC scope, global specialization arguably offers distinct benefits (and costs) and therefore warrants independent measurement. …

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