The web of inter-firm networks and the impact of internationalization on firm profitability.
This paper aims to analyze and discuss the complementarity-based nature of coopetition strategy, inter-firm relationships within a country-of-origin agglomeration, the web of inter-firm networks, and the internationalization process of financial services firms.
2. Inter-firm Relationships within an Industry FDI Agglomeration
Tan and Meyer explore the conditions under which foreign investors tap into country-of-origin agglomerations in search of local knowledge and resources. Foreign investors' need for local knowledge is acute in emerging economies. Good relationships among the firms within an agglomeration allow for the establishment of feedback mechanisms. Tan and Meyer compare industry FDI agglomerations and country-of-origin agglomerations as sources of local knowledge in an emerging economy. The capability gap between foreign and indigenous firms is typically wide. Country-of-origin agglomerations generate different kinds of inter-firm relationships. Country-of-origin agglomeration and industry FDI agglomeration provide access to different types of local knowledge and resources. Proximity to firms with the same country of origin facilitates learning about how to adapt to local environments and institutions. Foreign investors from the same socio-cultural backgrounds often have similar home business practices. In an industry FDI agglomeration, inter-firm relationships are typically competitive or strategically cooperative, enabling the sharing of knowledge that can be effectively protected by contracts. Tan and Meyer hold that firms may operate in different product markets and may not compete directly for inputs or customers. Inter-firm relationships within an industry FDI agglomeration are competitive or cooperative. Industry FDI agglomeration offers access to industry-specific knowledge and resources. The trust facilitates coordination and reduces uncertainty about business partners' actions. Imperfections in the effectiveness of market exchange due to shortcomings in the institutional framework are a concern in emerging economies. In industry FDI agglomerations inter-firm relationships are based primarily on contracts. Firms cannot rely on the legal system as an efficient default option for the resolution of conflicts. According to Tan and Meyer, knowledge sharing within country-of- origin agglomeration is less inhibited by institutional voids. Institutional voids are particularly pertinent in emerging economies. Experienced investors have a better understanding of local complexities. FDI firms that enter with local JV partners may gain access to their partners' suppliers and customers. Potential local partners likely lack knowledge about their resources and capabilities. A firm chooses to locate where it expects the highest profit, which is determined by the firm's demand and production functions. Tan and Meyer's focus is on how firm and environmental characteristics influence the impact of agglomeration on location choice. When institutional frameworks are well perceived, the location choices are different. Better institutional frameworks promote transaction and knowledge transfer among FDI firms. Foreign investors are more likely to trust their compatriots than their competitors. Tan and Meyer examine how foreign investors seek local knowledge in an emerging economy (Vietnam) through location choices: foreign investors tend to co-locate with other FDI firms of the same country of origin, and with those in the same industry. Country-of-origin agglomeration is relevant for investors who perceive extensive institutional voids, and for those who lack local knowledge. Institutional voids weaken the impact of industry FDI agglomeration on location choice. A firm's location choice is interdependent with its market entry mode and its local experience. Tan and Meyer argue that country-of-origin agglomeration differs from industry FDI agglomeration as a source of local knowledge, and is a way for newcomers to build local knowledge and reduce the liability of being an outsider. The building of local knowledge in an organization is a pivotal aim that drives the design of entry strategies. (1)
3. The Impact of IT on Firm Performance
Rhodes et al. examine the relative impact of key intangible factors on successful enterprise resource planning (ERP) implementation and its mediating effect between these intangible factors and organizational performance in China, deepening understanding of the optimal application of intangible resources in ERPS implementation and organizational performance in China. The effective execution of CSFs can enhance ERPS implementation. Firms in China have not adopted sufficient positive HR practices to influence successful ERPS implementation. Rhodes et al. posit that corporate values such as knowledge-sharing, trust, openness and innovation must be reflected in HR practices to support successful ERPS implementation. The positive corporate culture and HR practices resulting from "successful ERPS implementation" may provide the link to positive financial outcomes. (2)
Coltman et al. note that firms seek to improve their profits through longer-term relationships with customers, measuring customer relationship management (CRM) as an endogenously determined function of the firm's ability to harness and orchestrate lower-order capabilities. Three lower-order capabilities (IT infrastructure, human analytics (HA), business architecture (BA)) provide the basis for Coltman et al.'s measure of a superior CRM capability. Organizations are heterogeneous and will subsume their CRM activities within an overarching strategic imperative. Coltman et al. use the resource-centered perspective as the conceptual basis for their model, hypotheses and measures, and separate out the effects on performance of CRM strategy from those due to CRM capability. Complementary organizational and human resources mediate the impact of IT on firm performance. Firms pursue some combination of strategic, operational and analytic CRM to achieve their goals. Strategic CRM places greater emphasis on customer value through relationship building and service customization in order to enhance revenues. Coltman et al. examine key informant bias, non-response bias, common method bias and convergent and discriminant validity, analyzing the correlation between their subjective measure of performance and objective performance data when available. According to Coltman et al., the effects of IT infrastructure on superior CRM capability are mediated through the capabilities of human analytics and business architecture: IT effects are fully mediated by human and organizational capabilities. IT infrastructure plays an important role in enabling staff to convert customer data into knowledge, and in supporting customer-oriented incentives, training and goals within the business. Superior CRM capability is driven primarily by human analytics and appropriate business architecture. Individual capabilities are necessary but not sufficient for superior performance. As Coltman et al. put it, the contribution of IT to a CRM program is best measured as a higher-order combination of IT, human and business capabilities. CRM capability is potentially a source of competitive advantage. Firm performance is improved because the firm makes better use of its capabilities. A firm's performance is largely determined by its strengths and weaknesses relative to its competitors. An optimal CRM strategy should jointly emphasize revenue growth and cost reduction. (3)
4. The Complementarity-based Nature of Coopetition Strategy and the Way Financial Services Firms Internationalize
Osarenkhoe points out that each firm depends on the others in the channel to perform its tasks, highlighting the complementarity-based nature of coopetition strategy and its impact on collective strategies for value generation among actors. Dynamic models of competition view the nature of competition along dimensions of intensity. A firm with a superior position in its network is likely to learn about competitive opportunities sooner. Firms have been looking for alternative means to reinvent their business strategies for the purpose of remaining competitive, cooperating for the purpose of learning or sharing organizational expertise, indirectly competing in an attempt to enhance their reputation. On Osarenkhoe's reading, market/environmental sensing is needed in order to acquire resources for effective market position and superior financial performance. Successful cooperation is based on trust, commitment and voluntary and mutual agreement. Firms create conditions that enable competitive or cooperative relationships to coexist. There is a hybrid level of inter-organizational relationship between competition and cooperation: coopetition. Coopetition is fortified by the coexistence of market commonality and resource asymmetry between competitors. Coopetition strategy assumes a number of different forms and requires multiple levels of analysis. A coopetitive relationship encompasses both economic and noneconomic/social exchanges related to inter-organizational interdependence. Osarenkhoe emphasizes that organizations can interact in rivalry owing to conflicting interests, and cooperate owing to common interests. Coopetition creates value through cooperation between competing organizations. The firms cooperate with each other in a variety of ways such as standard-setting and developing the market. Coopetition strategy enhances the internal resource and market shares of competing actors. Inter-firm coopetition as an organizational strategy can bring benefits such as reduced costs, tolerance of risk-taking, pro-activeness in product development and anticipation of healthy competition. Coopetitive relationships often involve some degree of difficulty and risk to the participating firms. Osarenkhoe states that the adaptation required by participating firms is often accompanied by time and financial costs. Coopetition strategy has the potential to turn out to be a novel managerial mindset to guide inter-firm dynamics (cooperation and competition merge to form a new kind of strategic interdependence between firms). Coopetition as a strategic model supports the exchange of tacit and non-tacit knowledge. (4)
As Venzin puts it, there is no general law linking size or degree of international expansion to the performance of a firm. Less competitive firms are takeover targets by firms with superior resources and capabilities. Large multinational financial services firms believe in increased possibilities for profit from arbitrage and cross-border aggregation. Many management teams in financial services firms are facing a growth paradox. There is no general correlation between the size of the firm and its economic performance. The global subprime crisis and credit crunch has substantially damaged financial services firms. Banks and insurance firms increasingly seek profitable growth through geographical diversification. Venzin examines the actual strategies of the firms involved in cross-border consolidation. Firms can define their destiny and influence this relationship through sound decision-making and strategy execution. Multinational financial services firms are able to successfully transfer their superior resources and capabilities to other markets. There is no universal law that links the profitability of a firm and its degree of internationalization. Venzin claims that financial services firms face higher problems and costs when adjusting production capacity. Highly digitalized firms choose their locations according to government incentives and human resource availability. The liability of foreignness firms is a bilateral phenomenon with a focus on customer learning. Small firms operate internationally early in their existence despite limited resources and capabilities. According to Venzin, service characteristics substantially influence the way financial services firms internationalize. Internationalizing firms need to make initial investments in foreign markets. Internationalization allows firms to reconfigure their global value chains. Strategic decision-making capabilities in firms depend on the ability to process relevant information within the firm. Firms need to find their own way to increase the speed and quality of strategic thinking. Strategic thinking has the potential to add value to the firm. Strategic decisions have a long-term impact on the development of the firm. Managers in financial services firms need to identify or create their strategic autonomy. Firms need to think about value-creating activities in the production of strategy. Orientation comes from the specific resources and capabilities of the firm. (5)
Hoffmann and Markusen show how firm location depends on both relative country sizes due to scale economies and relative endowments. Investment liberalization increases the share of firms headquartered in the skilled-labor- abundant country. When investment is free, the choice for the location of firm headquarters depends only on factor prices. Hoffmann and Markusen focus on multinational firms and the effects of reductions in investment barriers. (6) Navaretti and Castellani assess how the home activities of manufacturing firms in Italy change following the setting up of foreign subsidiaries abroad: by transferring part of their production abroad, the firm may reduce unit costs and become more competitive. The switching firms are significantly different from the average firm in the control group. Size, productivity, and profitability are important determinants for becoming a multinational firm. The rate of growth of total factor productivity and output is higher for investing firms. (7)
This paper seeks to fill a gap in the current literature by examining contemporary inter-organizational markets as organized behavior systems, the endogenous formation of multinational firms, performance patterns of internationalizing firms, and international expansion processes of financial services firms.
(1.) Tan, D. and Meyer, K.E. (2011), "Country-of-origin and Industry FDI Agglomeration of Foreign Investors in an Emerging Economy," Journal of International Business Studies 42. Forthcoming
(2.) Rhodes, J. et al. (2011), "The Effects of Organizational Intangible Factors on Successful Enterprise Resource Planning Systems Implementation and Organizational Performance: A China Experience," Asian Business and Management 10. Forth- coming.
(3.) Coltman, T. et al. (2011), "Customer Relationship Management and Firm Performance," Journal of Information Technology 26. Forthcoming
(4.) Osarenkhoe, A. (2010), "A Study of Inter-firm Dynamics between Competition and Cooperation--A Coopetition Strategy," Journal of Database Marketing and Customer Strategy Management 17: 201-221.
(5.) Venzin, M. (2009), Building an International Financial Services Firm: How to Design and Execute Cross-Border Strategies. New York: Oxford University Press, 11-98.
(6.) Hoffmann, A.N. and Markusen, J.R. (2008), "Investment Liberalization and the Geography of Firm Location," in Brakman, S. and Garretsen, H. (eds.), Foreign Direct Investment and the Multinational Enterprise. Cambridge, MA-London: The MIT Press, 39-66.
(7.) Barba Navaretti, G.B. and Castellani, D. (2008), "Do Italian Firms Improve Their Performance at Home by Investing Abroad?" , 199-224.
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|Title Annotation:||CULTURAL INDUSTRIES IN CONTEMPORARY ECONOMY|
|Author:||Udrescu, Mircea; Coderie, Constantin; Nastase, Dan|
|Publication:||Economics, Management, and Financial Markets|
|Date:||Mar 1, 2011|
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