Competing with MNEs developing manufacturing capabilities or innovation capabilities

1、competing with mnes: developing manufacturing capabilities or innovation capabilitiesxudong gao*school of economics and managementtsinghua universitybeijing, 100084email: gaoxudongping zhang hisense group17 donghai xilu qingdao, 266071email: zhangpingxielin liu national research center for science,

2、technology, and development ministry of science and technologybeijing, 100038email: liuxlabstracta challenge facing local firms in china is the selection of effective technology strategies to compete against mnes in the era of globalization. the existing literature suggests two alternatives, develop

3、ing strong manufacturing capabilities or developing innovation capabilities, but provides no clear answer to the question of how to select one strategy or the other. this paper explores this issue by introducing two concepts: “barriers to appropriability” and “opportunities for improvement.” we deve

4、lop four propositions to specify the boundary conditions for local firms to choose their technology strategies and analyze two local firms technology strategies to illustrate two of the propositions. we find that development of strong manufacturing capabilities will not necessarily be an effective s

5、trategy for local firms competing against mnes. if there are opportunities for improvement, it might be possible for local firms to compete against mnes by developing innovation capabilities and core technologies. competing with mnes: developing manufacturing capabilities or innovation capabilitiesi

6、ntroductionchinas joining the wto has led to a new round of debate, in the past few years, over what types of technology strategies are effective for local firms (zhao, 2003; lu and mu, 2003; zhang, 2001). many people argue that the best choice is to develop manufacturing capabilities by buying tech

7、nology from multinational enterprises (mnes) and making china a manufacturing center for the world market. others argue that, to compete with mnes, it is critical to nurture innovation capabilities and develop core technologies, and that, in this era of globalization, local firms will not be able to

8、 develop competitive advantages by buying technology and developing manufacturing capabilities it is critical to nurture innovation capabilities and develop core technologies in order to compete with mnes. the existing literature on technological catch-up offers important insights but no conclusive

9、answers to this debate. for example, many studies find that it is possible for local firms to compete against mnes by developing strong manufacturing capabilities (westphal, kim, and dahlman, 1985; amsden and chu, 2003; amsden, 2001; kim, 1997, 1998). south koreas catching-up process is a typical ex

10、ample supporting this argument (kim, 1997). the development of the consumer electronics and home appliance industry in china also indicates that development of strong manufacturing capabilities is a viable choice when competition from mnes is not strong (xie, 2001; zhang, 2001). there are also studi

11、es in the existing literature on technological catch-up suggesting that, when there are windows of opportunity, it is possible for local firms to compete with mnes by developing innovation capabilities and core technologies (perez and soete, 1988). lee and kim (1998) show that some firms in south ko

12、rea actually have followed multiple technology strategies to catch up: path following, path skipping, and path creating. some firms in china are also able to compete against mnes by developing indigenous innovation capabilities. founder, great dragon, huawei, zte, and datang are some examples (wang,

13、 1999; shen, 1999; zhang, 2000).in effect, the existing literature on technological catch-up examines local firms technology strategies from a resource-based perspective (penrose, 1959; wernerfelt, 1984; barney, 1986; dierickx and cool, 1989; peteraf, 1993; prahalad and hamel, 1990; teece, pisano, a

14、nd shuen, 1997), and studies local firms technology strategies by comparing the technological resources of local firms with those of mnes. the basic argument is that local firms should choose to compete against mnes by developing strong manufacturing capabilities, because local firms do not have cor

15、e technologies while mnes do. only when there are windows of opportunity should local firms try to compete against mnes by developing innovation capabilities and core technologies.from a resource-based perspective, the existing literature on technological catch-up leaves several important questions

16、unanswered: the bulk of the existing literature has been conducted under the assumption that: mnes have knowledge-based assets, unique resources, and core technologies, while local firms do not. local firms are therefore advised to focus on developing strong manufacturing capabilities. however, we k

17、now little about the difficulties mnes face when trying to compete in a host countrys market. this is an important issue, given the accumulating evidence that mnes are unable to make full use of their superior technological resources in host countries (hymer, 1976; buckley and casson, 1976; zaheer a

18、nd mosakowski, 1997; wang, 1999; xu, 2002; gao, 2003). the existing literature generally has not examined systematically the potential for local firms to develop innovation capabilities and core technologies, although some authors have pointed out that local firms might be able to catch up in emergi

19、ng technologies (perez and soete, 1988; hobday, 1990; lee and lim, 1998). given the accumulating evidence that local firms can compete with mnes by re-inventing (not buying) mature technologies or by developing new technologies, it is important to explore in a more systematic way the opportunities f

20、or local firms to improve their technological resources and the effect of these opportunities on the choice of technology strategies (cusumano, 1985; shen, 1999; gao, 2003). a large portion of the existing literature has been conducted mainly in countries such as south korea and japan where, because

21、 of protection of the local markets, competition from mnes was limited, especially in the early stages of local firms development. we still have only a limited understanding of the impact of direct competition between local firms and mnes on local firms choice of technology strategies. developing a

22、better understanding of the real gap in core technologies between mnes and local firms is critically important to an examination of what the effective technology strategies are for local firms. in this paper, we explore this issue by introducing two concepts: “barriers to appropriability” and “oppor

23、tunities for improvement.” we define “barriers to appropriability” in terms of the difficulties mnes have in using their superior technological resources in a host countrys market. barriers to appropriability arise when there are factors that constrain mnes ability to fully utilize their superior te

24、chnological resources to compete with local firms. we define “opportunities for improvement” as opportunities for local firms to improve their technological resources. opportunities for improvement arise when there are factors helping local firms to develop innovation capabilities and core technolog

25、ies. our analysis is organized as follows: we first introduce the concepts of barriers to appropriability and opportunities for improvement. we then develop propositions that local firms can use to choose their technology strategies to compete with mnes. we also use two cases to illustrate two of th

26、e propositions. we conclude with a discussion of opportunities for additional research. barriers to appropriability and opportunities for improvementbarriers to appropriabilitythe existing literature has long recognized that there exist “l(fā)iabilities of foreignness,” and that mnes superior technologi

27、cal resources will not necessarily lead to competitive advantage when they globalize their businesses (hymer, 1976; buckley and casson, 1976; zaheer and mosakowski, 1997; lou, 2000). in this paper we introduce the concept of barriers to appropriability to further examine the difficulties mnes have i

28、n using their superior technological resources to compete with local firms. we identify five kinds of barriers to appropriability: regulatory, information, resource, coordination, and commitment. although there is overlap between the concepts of barriers to appropriability and liabilities of foreign

29、ness, the differences are crucial. the concept of liabilities of foreignness mainly covers two kinds of barriers to appropriability: regulatory and information. the other three kinds of appropriability barriers (resource, coordination, and commitment barriers) are not really covered by the concept o

30、f liabilities of foreignness. these three types of barriers to appropriability mainly arise from factors such as competition between mnes themselves, the huge size of mnes, and mnes low commitment to the specific host country market. these factors are not necessarily specific to operating in a forei

31、gn market. they could also influence mnes utilization of technological resources in regional markets of their home countries. we find it necessary to introduce the broader concept of barriers to appropriability in order to provide a better understanding of the difficulties facing mnes when they comp

32、ete with local firms in a foreign market. let us examine in detail the five kinds of barriers to appropriability. regulatory barriers (host or home country government regulations) are the most obvious barriers preventing mnes from using their superior technological resources in host country markets

33、(hymer, 1976; dunning, 1992). the development of the japanese automobile industry shows that regulatory barriers prevented u.s. and european automobile companies from using their superior technological resources in the japanese market. leading u.s. and european automobile firms had more advanced tec

34、hnologies than japanese automobile firms, both before world war ii and at its end. yet superior technological resources did not create competitive advantages for the u.s. and european automobile firms. before world war ii, japanese government regulations did not allow foreigners to be the major shar

35、eholders in japanese automobile firms. mainly because of this policy, ford and gm, the two dominant leaders of the japanese automobile industry before world war ii, had to leave japan. after world war ii, the japanese government basically prohibited the import of small cars until the early 1970s, wh

36、en local firms had developed international competitiveness (cusumano, 1985). information barriers arise from mnes relative unfamiliarity with the unique characteristics of a host countrys business environment. these characteristics include customers tastes, business customs, supporting industries, t

37、he culture, and the legal system (hymer, 1976; buckley and casson, 1976; dunning, 1992; zaheer and mosakowski, 1997). because of their unfamiliarity with customers tastes, its hard for mnes to customize their products to meet local market demand. similarly, mnes will find it difficult to work with w

38、holesalers and retailers if they are not familiar with the business customs of the host country. lack of familiarity with material or parts suppliers will also make it difficult for mnes to choose the most appropriate products and processes. resource barriers arise from resource constraints, especia

39、lly financial resource constraints, that face mnes when they try to employ their superior technological resources in a host country. although a commonly accepted view in china is that mnes have the advantage in financial resources, in many cases this is not true. in fact, many mnes face strong compe

40、tition, mainly from other mnes (mowery and nelson, 1999; lester, 1998; womack, 1991). the result is that many mnes often have low profit margins and have to operate on tight budgets. on the other hand, local firms actually might enjoy higher profit margins. for example, according to the state commis

41、sion of economy and trade, the 512 key local enterprises in china had much higher average profit margins in 2001 than the fortune 500. the profit/sales ration for the former is 6% compared to 2.8% for the latter. accordingly, it might be not easy for mnes to find the financial resources to invest in

42、 a host country, even through they have superior technological resources. coordination barriers arise from the complexity of coordinating activities within mnes (chandler, 1962; freeland, 1996; doz, 1986; bartlett and ghoshal, 1989; carroll, 1993; dunning, 1992; studer-noguez, 2002). for example, ch

43、andler (1962) has shown that a firm needs to create new organizational structures in order to effectively manage its geographic expansion and diversification. freeland (1996) further shows that it is not easy to make a multi-divisional structure effective. he points out that gm intentionally violate

44、d the axioms of efficient organization to create managerial consent. doz (1986) also shows that coordinating business units around the world is a complex and costly process for an mne. because of the great complexity of coordination, it is not easy for mnes to transfer superior technological resourc

45、es from one country to another. commitment barriers come from mnes low commitment to a host country market. for many mnes, the home country market is of strategic importance (studer-noguez, 2002; bartlett and ghoshal, 1989). home country markets might be the key sources of revenue and profits. also,

46、 superior technological resources might be developed mainly in the home country. in contrast, because a host country might be of peripheral importance in contributing to revenue and profits, or creating superior technological resources, mnes might have little commitment to the host countrys market.

47、this is supported by empirical studies (amsden, 2001; amsden and chu, 2003; zhang, 2000; gao, 2003). for example, amsden (2001) finds that foreign direct investment plays a trivial role in the early stages of many latecomer countries industrialization and development. amsden and chu (2003) also find

48、 that, though leading firms in taiwan have increased their market share in mature high-tech industries, these firms were nationally owned large-scale firms rather than mnes. gao (2003) finds that mnes in chinas telecom equipment industry chose to focus on the high-end market, operate in well-develop

49、ed big cities, and ignore the less-developed cities and regions. they also chose to focus on transferring superior technological resources developed in their home country, without sufficiently adapting them to meet local market needs. low commitment to the host countrys markets makes it hard for mne

50、s to effectively employ their superior technological resources. opportunities for improvement although the existing literature on technological catch-up emphasizes the huge gaps in technological capabilities between local firms and mnes, and the difficulties of local firms developing technological c

51、apabilities, there is evidence showing that local firms can compete with mnes by developing new technologies, re-inventing mature technologies, or transferring technologies. we introduce the concept of opportunities for improvement to further explore the potential for local firms to improve their te

52、chnological resources. first lets look at four kinds of opportunities for improvement in the development of emerging technologies: learning, cultural, incentive, and organizational opportunities.learning opportunities arise because entry barriers are low when a new technology is emerging. a key feat

53、ure of emerging technology is that the entry barriers are not high this offers opportunities for many firms to try many different ways of developing the technology (perez and soete, 1988; utterback, 1994; tushman and rosenkopf, 1992). for this reason, when technologies are just emerging, local firms

54、 might be able to develop equivalent or even better technologies than those developed by mnes (wang, 1999; gao, 2003; perez and soete, 1988; lee and lim, 1998; hobday, 1990). cultural opportunities are the corporate culture advantages that local firms might have over mnes in perceiving and developin

55、g emerging technologies. some studies have shown that a leading organization tends to develop the nih (not invented here) syndrome, believing that it has a monopoly on knowledge in its field and fails to consider seriously the possibility that other organizations might produce important new ideas (k

56、atz and allen, 1982; cohen and levinthal, 1990; hamel, doz, and prahalad, 1989). a typical example is ge. in the late 1970s, ges major appliance business group (mabg) did not believe that matsushita and other japanese firms could develop better refrigerator compressors, even when ges canadian subsid

57、iary was about to buy matsushitas products (magazine and patinkin, 1989). given that local firms are followers and are thus less established, they should be less subject to an nih syndrome. accordingly, local firms might be able to take advantage of mnes less favorable culture to perceive and develo

58、p emerging new technologies.incentive opportunities come from the greater incentives that local firms might have, compared to mnes, to develop and use emerging technologies. many studies have shown that incumbent firms are reluctant to develop and use emerging technologies because these technologies

59、 might cannibalize their existing businesses (foster, 1986; henderson, 1993). local firms, as followers, should be less worried about the cannibalization effects and should have greater incentives to develop and adopt new technologies. local firms can take advantage of mnes lack of interest in developing and adopting emerging technologies. organizational opportunities arise from t