A Global Value Chain Analysis of the ‘Regional Strategy’ Perspective

• Author: Jonas Puck,Ram Mudambi
• Published date: 01 September 2016
• Date: 01 September 2016
• DOI: http://doi.org/10.1111/joms.12189

A Global Value Chain Analysis of the ‘Regional

Strategy’ Perspective

Ram Mudambi and Jonas Puck

Temple University; WU Vienna

ABSTRACT In this counterpoint paper we argue that the findings presented by the ‘regional

strategy’ literature do not capture the full array of global activities of the multinational

enterprise (MNE). While this literature makes an important contribution to the field by

showing that sales and production activities in the MNE are regionally structured, we argue

that this assessment is biased for two reasons. First, this approach overly focuses on

geographical location of downstream activities, while disregarding that of knowledge creation

and other relevant upstream activities in the MNE. Second, the approach associates the firm’s

value creation only with its internalized activities and does not capture the value created

through any activities that are externalized. Many MNEs rely to a significant extent on value

creation outside the firm’s legal boundaries. We argue that such omissions are likely to lead to

biased interpretations using different theoretical lenses, such as the knowledge-/resource-based

view, internalization theory and more general transaction cost economics. Based on our

reasoning, we provide recommendations for future research both within and beyond the

‘regional strategy’ literature.

Keywords: internationalization, global value chains, multinational enterprises, offshoring,

outsourcing, regional strategy

INTRODUCTION

Influential laymen see the world as ‘flat’, where centripetal, homogenizing forces are

grinding down national and regional distinctions (Friedman, 2006). Scholars, on the

other hand see a world where the globalized share of economic activity in virtually all

spheres is still a small fraction of the total (Ghemawat, 2001) and where the local context

is still the most important dimension of business (Meyer et al., 2011). Indeed, the differ-

ences between locations are so stark, that the world has been demonstrated to be ‘spiky’

along a number of crucial dimensions, such as innovation and local economic outcomes

Address for reprints: Ram Mudambi, Department of Strategic Management, Fox School of Business,

Temple University, Philadelphia, PA 19122, USA (ram.mudambi@temple.edu).

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C2016 John Wiley & Sons Ltd and Society for the Advancement of Management Studies

Journal of Management Studies 53:6 September 2016

doi: 10.1111/joms.12189

that remain extremely unevenly distributed across the globe (Florida, 2005). However,

within the academic international business literature there is a prevailing orthodoxy that

multinational enterprises (MNEs) – at least the largest ones – are able to overcome and

indeed leverage diversity and operate in a manner that is fully global.

This belief follows from the seminal work of Bartlett and Ghoshal (1988), who speci-

fied the focus of MNEs as ‘worldwide’ in their very title. However, the assumption that

MNE operations are global was rarely examined, and there was no generally accepted

definition of the term ‘global operations’. Both the questioning of things that everyone

takes for granted, as well as the incorporation of precision in the definition of terms, are

ambitious and valuable academic endeavours. Hence there is much to appreciate about

the original contribution of Rugman and Verbeke (2004) (subsequently RV), which

scores on both these counts. It both offers a precise definition for ‘global’ multinational

operations and questions the extent to which MNEs’ actual operations meet this defini-

tion. However, we contend that some of the core arguments of the ‘regional strategy’ lit-

erature do not match today’s business reality. They also provide a less than holistic

theoretical framework to underpin our understanding of internationally active firms.

Ohmae (1985) originally categorized the world into three leading economic regions

that he dubbed the ‘Triad’ – the USA, the European Community and Japan. The origi-

nal RV paper uses this basic approach, updating the Triad to NAFTA, the European

Union and (mainly East) Asia. The point paper (Verbeke and Asmussen, 2016) (subse-

quently VA) summarizes and updates the ‘regional strategy’ stream of literature that

highlights the relevance of the region for MNE decision-making. Specifically, propo-

nents of the ‘regional strategy’ perspective claim that most MNE strategies are built

around a regional locus, citing evidence from studies in this literature stream that show

that by far the largest proportion of sales (74.6 per cent) and assets (75.5 per cent) for

the Fortune Global 500 are generated/deployed in the company’s home region (Rug-

man and Verbeke, 2008). We do not dispute the empirical results presented in the VA

point paper and other major papers of the regional strategy perspective. However, we

contend that the conclusions that are drawn from these empirical results are at odds

with the reality of today’s complex international business world. We argue that these

conclusions arise from some unstated assumptions as well as from a rather narrow inter-

pretation of transaction cost theory and the resource-based view of the firm. In so doing,

the regional strategy literature does not holistically incorporate the workings of global

value chains (GVCs) inside and outside a firm’s boundaries.

Studies analysing the trade flows of intermediate products between nations show that

GVCs are ubiquitous. They are operationalized through business strategies that incorpo-

rate significant amounts of offshoring and offshore-outsourcing

[1]

(Contractor et al., 2010;

Mudambi, 2008). As an example, the most recent data shows that about 60 per cent of

overall trade flows in goods and services (amounting to more than 20 trillion USD) are

intermediate inputs primarily produced at offshore locations with favourable factor condi-

tions (UNCTAD, 2013). A key weakness of the regional strategy literature is that it fails to

incorporate this reality and merely focuses on the downstream part of a firm’s value chain

when analysing its degree of globalization. However it has been noted that traditional sales-

based approaches to measuring a firm’s international diversification ‘do not encompass the

full range of strategic choices that determine the nature and extent of a firm’s international

1077GVCs and the ‘Regional Strategy’ Perspective

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C2016 John Wiley & Sons Ltd and Society for the Advancement of Management Studies