Academic journal article Multinational Business Review

The Strategic Development of Subsidiaries in Regional Trade Blocs

Academic journal article Multinational Business Review

The Strategic Development of Subsidiaries in Regional Trade Blocs

Article excerpt

1 Introduction

An important driver of the globalisation (or regionalisation) process is greater openness in trade and foreign direct investment (FDI), which leads multinational corporations (MNCs) to exploit and extend their firm-specific advantages by expanding their activities in international markets ([15] Buckley and Ghauri, 2004; [35] Lévy, 2007). Trade and investment liberalisation, in particular, the creation and development of regional trade agreements, has encouraged the development of MNC's operations across regional trade blocs to establish supply channels for home and third country markets ([68], [67] Young et al. , 1991, 1994). There are potential benefits in reducing the "liability of foreignness" from operating within a regional bloc. This lowers trade costs, thereby enabling subsidiaries to take advantage of cheaper and better quality inputs, reaping economies of scale and scope by concentrating production and distribution activities and developing new markets ([7] Balasubramanyam and Greenaway, 1992; [44] Oxelheim and Ghauri, 2003; [51] Robson, 1994). The literature has examined the effects of regional blocs on MNCs' globalisation and regionalisation strategies, as well as the impact on FDI ([13], [14] Buckley et al. , 2001, 2003). There has, however, been no significant investigation of the strategic development of subsidiaries and the supply of markets within a regional bloc in the context of autonomy and local embeddedness (use of local networks and domestic sourcing and location in industrial districts).

Trade and investment liberalisation in regional blocs should lead to the development of strategies to concentrate and expand activities in preferred locations to supply all or large parts of regional bloc markets. The trend toward more bilateral free trade agreements has contributed to the shift from a multilateral to a regional approach, and this has implications for MNCs' strategies. This shift is due, in part, to difficulties in reaching agreement on the World Trade Organization's Doha trade liberalisation process ([35] Lévy, 2007; [52] Rugman, 2000). The literature also argues that MNCs are regional, not global, entities and consequently they have strong regional strategies ([53] Rugman, 2005; [54] Rugman and Hodgetts, 2001). The strategic development of subsidiaries, in terms of autonomy and local embeddedness, is therefore an important issue in a world where regional trade blocs are enlarging and deepening their integration processes ([8] Benito et al. , 2003; [25] Fratianni and Oh, 2009), and where regional factors play an important role in MNCs' strategies ([56] Rugman and Verbeke, 2004).

The literature on the strategic development of subsidiaries normally examines firm-specific advantages, which are the drivers of multinationality, by using business network theories ([4] Andersson et al. , 2007; [24] Forsgren et al. , 2005; [28] Ghoshal and Nohria, 1997). Previous studies on the strategic development of subsidiaries have examined performance factors in relation to autonomy and local embeddedness ([2] Andersson et al. , 2005; [26] Garcia-Pont et al. , 2009; [32] Holm and Pedersen, 2000; [40] McDonald et al. , 2008; [56] Rugman and Verbeke, 2004) and with regard to domestic sourcing and location in clusters ([39] McDonald et al. , 2005; [65] Williams et al. , 2008). The literature, however, has not examined the relationships between the strategic development of subsidiaries and the supply of markets within a regional trading bloc. This paper applies the key subsidiary development factors of autonomy and local embeddedness to investigate the impact of these factors on intra-EU trade by subsidiaries located in the UK.

The EU is the most mature, highly integrated and established regional bloc. The period covered by the study (1998-2002) embraces the introduction of the euro, the extension and development of the Single European Market and negotiations on the enlargement of the EU to include eight central European economies. …

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