Introduction

The impact of globalization and the rise in importance of transnational corporation (TNC) subsidiaries in both developed and developing countries is increasingly attracting research attention. For TNC subsidiaries involved in globalization, a critical question is how to integrate with the local market, firms or other relevant organizations, especially in terms of purchasing components and inputs locally. Greater integration with local markets and production facilities can often provide spill-overs to local firms in the form of technology, market know-how, management techniques and other important drivers of business and economic development. Particularly in developing countries, the degree of knowledge spill-overs is a critical question, as positive spill-overs can affect a country's development trajectory. One way to think of the spill-overs offered by TNC subsidiaries is that subsidiaries rely upon backward linkages to suppliers (ie backward linkages for the TNC subsidiary, which are forward linkages for local suppliers), in the sense that they actively link suppliers to pre-production parts of their supply chain; eventually, backward linkages may even lead to active collaboration in production.

TNC subsidiary presence in the Malaysian electrical and electronics (EE) industry has a long history, starting in the latter half of the 1960s with local export-oriented strategies being developed/initiated by US-, Japanese- — and European-based TNCs. Malaysia is an ideal country in which to study factors causing and affecting the breadth and diversity of backward linkages; specifically, the EE industry provides an opportunity for insight, given its importance in the Malaysian economy and the world in general. Despite the significant contribution of TNCs, several weaknesses have been identified in inter-organizational relationships between TNC subsidiaries and local suppliers. Although these have been identified in various studies that substantiate linkages between TNCs and local suppliers, there is some evidence of significant linkages in the Malaysian EE industry.¹ Therefore, we will explore these inter-organizational linkages between TNC subsidiaries and local suppliers, and the critical factors affecting them. In order to capture the dynamics of subsidiaries' activities and roles in a host country, we first discuss theoretical reviews of issues concerning TNC subsidiaries in host countries. The possibility of linkages between firms is explained and backward linkages identified as one of the crucial inter-organizational linkages between subsidiaries and suppliers. Using a statistical model, we examine factors affecting provision of backward linkages by TNC subsidiaries.

The roles of TNC subsidiaries in host developing countries

It is argued that the dynamic differentiated function of TNCs encompasses a global approach to competition through networks of differentiated subsidiaries with diverse responsibilities and degrees of functional scope (Pearce, 2001). Responsibilities of subsidiaries and the functional scope that subsidiaries have in the host country will vary depending on the nature of inputs available in the host country. This is invoked by a version of the scope typology originally generated in the analysis of US investments in Canada (White and Poynter, 1984; D'cruz, 1986). It distinguishes between subsidiaries in terms of geographical market scope, product scope and value-added scope. Pearce (2001) delineated these dimensions into three subsidiary types, namely Truncated Miniature Replicas² (TMR), Rationalized Product Subsidiaries³ (RPS), and World or Regional Product Mandates (WPM/RPM). However, since the typology has been developed from data focusing on the case of host developed countries, we have modified the subsidiary typology with particular reference to host developing countries like Malaysia (Iguchi, 2006).

Recent shifts toward liberalization have led to international divestments, rationalizations, mergers and acquisitions, which have in turn led to further changes in the role of TNC subsidiaries. The traditional academic view assumes that ownership-specific advantages are developed by the parent TNC and controlled overseas through the transfer of technology to a network of subsidiaries in different host countries (Vernon, 1966). Historically, the role of subsidiaries is to adapt products developed in the parent TNC's home country to local tastes or customer needs, and to adapt processes to the availability of local resources and production conditions. This type of traditional subsidiary was dependent on the competence of its parent TNC, and its role was competence-exploiting (Cantwell and Mudambi, 2005), as seen in TMR subsidiaries. However, due to changes in subsidiaries and their history of operations in host countries, subsidiaries became aware that the parent organization was not the sole source of competitive advantage for the TNC group. Therefore, increasing research attention was given to subsidiaries which reflected recent phenomena, specifically competence-creating subsidiaries such as product mandate (PM) types. The underlying rationale for global intra-TNC trade is the same as that for other global markets, that is, the increased specialization of subsidiary units made possible through reduced tariffs, and facilitated by more efficient communication and the reduced costs of transporting goods around the world. As a result, activities traditionally carried out within firms have been outsourced (as opposed to an internalization process) and parent TNCs have become decentralized by utilizing the most efficient specialist firms in a global market.

The WPM or RPM subsidiaries use local technology and creative inputs, including technology, to develop new products aimed at expanding the global marketing scope of their TNC group (Burgelman, 1983a, 1983b; White and Poynter, 1984; D'cruz, 1986; Cantwell, 1987; Pearce, 1992, 2001; Rugman and Verbeke, 1992; Dunning, 1996). PM subsidiaries have significant autonomy and creative scope, allowing some element of asset-seeking or knowledge-seeking behaviour based on their ability to affect TNC group competitiveness and the creative assets of the host or regional economy. The PM subsidiary becomes the international or regional centre for a product, responsible for all key inputs relating to its creation, production and marketing (Pearce and Papanastassiou, 1996). In order to function effectively, it must rely on the area in which it is located to obtain existing local technology, unique elements of research capacity in the local science base and sufficiency in human capital. Therefore, the emergence of PMs is a crucial manifestation of an increasingly decentralized approach to the generation and application of knowledge in contemporary TNCs.

The literature focusing on TNC group networks considers that ownership-specific advantages do not have to be tied to the home country (Rugman and Verbeke, 1992), but can instead be acquired or developed by the subsidiary itself. In addition, the TNC group is modelled as an 'inter-organizational network' (Bartlett and Ghoshal, 1991) of loosely coupled entities, rather than a singular hierarchy, which gives the subsidiary the necessary freedom to develop and shift its own unique resource profile, including human and technological resources, within the host country. This view provides a valuable perspective on the emergence of PMs, because it reflects the reality that many subsidiaries have specialized capabilities not possessed by other subsidiaries in the TNC group. Furthermore, the 'autonomous behaviour' defined by Burgelman (1983a, 1983b) in a subsidiary often occurs in the absence of top management levels of the TNC group, and sometimes in ways not actively encouraged by the top management of the group. Regarding the TNC subsidiary, the concept of autonomous behaviour is important, because it suggests a process of internal growth that is rarely controlled by parent TNCs, thus suggesting the possibility of enhancing the subsidiary's autonomy level. The idea that subsidiaries take the initiative to become PMs is highly consistent with Burgelman's theory. This approach attaches importance to the role of the capabilities of the subsidiary and emphasizes that the subsidiary is part of a network (Birkinshaw and Hood, 1998).

Concepts of backward linkages provided by TNC subsidiaries and previous work on backward linkages in Malaysia

It is commonly observed in the EE industry that firms rely on innovation passing along a supply chain that includes the conduct of R&D, development of new products, search for resources in the host economy and improved manufacturing processes. Final products are usually refined and marketed in the home or host economy or in the international market. Within this process, a subsidiary creates vertical linkages, both backward and forward. Backward linkages is the term that refers to all the relations established with supplier firms and which exist when TNC subsidiaries acquire goods or services from local suppliers, whereas forward linkages describe the relations established with the customers in the host country or in the global market. Lall defines backward linkages as 'the direct relationships established by firms in complementary activities which are external to "pure" market transactions (i.e. anonymous buyers and sellers exchanging goods in discrete transactions at prices determined in competitive markets.)'(1980: 204). Backward linkages are also defined as 'transactions that go beyond arm's length, one-off relations (as in buying standardised products off the shelf) and involve longer-term relations between firms' (UNCTAD, 2001: 127). Backward linkages are a channel by which TNC subsidiaries transfer technology and knowledge, and create spill-overs so that local suppliers can acquire modern technologies as well as new management or organizational practices from subsidiaries. By means of backward linkages, local firms can gain beneficial spill-overs from subsidiaries, as described in several studies (Halbach, 1989; O'Brien, 1993; Giroud, 2001, 2003; UNCTAD, 2001). Local suppliers are involved in the process of manufacturing at the level of either sourcing parts or components, or manufacturing under sub-contracting arrangements, according to the supplier's technological capability. The technological capability of a local supplier affects a subsidiary's decision whether to source components locally, or regionally or internationally. It is critical for local firms to be more technologically capable if they wish to participate in the industry, as TNCs can easily find other suppliers, in other regions or countries, with whom to interact. The development of local suppliers' capacities and capabilities is a key to both attracting FDI and increasing technological spill-overs from subsidiaries (Lall and Narula, 2004). Important aspects of backward linkages for local suppliers are acquiring spill-overs and gains through interaction with TNC subsidiaries. As suggested by Lundvall (1988) and von Hippel (1988), the accumulation of knowledge takes place not only by developing and employing local suppliers' internal capabilities, but through learning by interaction with a wide variety of sources. Local suppliers interact with several external organizations, such as technology producers and TNC subsidiaries. Backward linkages are particularly important for local suppliers in host developing countries because linkages provide opportunities for production and employment in local suppliers, and because they constitute a direct channel for knowledge diffusion.

Although we understand the existence of backward linkages is necessary for local suppliers' technological learning, we need to clarify mechanisms and forces behind their existence.⁴ To do so, the process through which TNC subsidiaries conduct backward linkages in host countries and the motivation of backward linkages provided by TNC subsidiaries are discussed. TNC subsidiaries' motivation for backward linkages is extended if and when they are expected to yield a positive (and competitive) gain, since we empirically observed that TNC subsidiaries are the ones who always initiate backward linkages.⁵ The breadth or strength of backward linkages depends on subsidiaries' motivations and their strategies on product range, market scope and sourcing activities, determined by either the parent TNC or the subsidiary, depending on its competence level. Subsidiaries' product ranges also change over time, depending on alterations in strategies and competence levels. Traditionally, subsidiaries internalize their production process for products technologically similar to their main production, simple products, or similar but very capital-intensive products. These will be outsourced as local suppliers' technological capabilities develop and the cost advantages of outsourcing become higher. In host developing countries, subsidiaries may find deficiencies such as technological, quality and managerial gaps in external markets. In order to overcome these deficiencies of pure market relationships, subsidiaries decide what forms of backward linkages they are going to engage in with local suppliers.

There are few studies on the spill-over effects of subsidiaries, and the impact of backward linkages on local suppliers in the Malaysian EE industry. Subsidiaries were found to have provided significant technical support to local suppliers (Ismail, 1999). Such support included solving specific technical problems (Capannelli, 1999) and assisting in factory layout, production planning and machinery installation (Ismail, 1999). Wong (1991) and Capannelli (1999) found that there was an initial lack of local supporting firms, which contributed to the lack of subcontracting linkages between Japanese TNC subsidiaries and local suppliers. Other authors also report the lack of 'local linkages' in Malaysia (Lim and Pang, 1991: 107; Anuwar, 1992; O'Brien, 1993). In studies based on a survey undertaken in the mid-1990s, Noor (1999) found that TNC subsidiaries encourage local firms to undertake technological activities; however, linkages are inadequately formed due to the nature of the industry, which depends heavily on imported components. Giroud (2003) found that TNC subsidiaries had an impact on Malaysia through backward linkages, although overall impact was small. Finally, Rasiah states that TNC subsidiaries in Penang tend to enjoy greater linkages with local firms due to better coordination with support institutions and higher local industrial cluster. The reasons for this include the fact that Penang has developed greater network cohesion and institutional coordination to support flexibility and technological interaction between firms, while Selangor suffers from truncated operations without much network cohesion (Rasiah, 2002). This implies that without the conditions for and existence of strong bonds between TNC subsidiaries and local suppliers in terms of sourcing activities, even originally well-concentrated EE clusters can weaken. These conditions can include the existence or establishment of institutions, which facilitate strengthened linkages between two different organizations, potentially even seeking possible linkages on behalf of an organization willing to link with another. TNC subsidiaries and a number of local firms have taken steps to develop critical aspects of flexible and mass production capabilities. It is evidenced that successful local firms in Penang enjoy strong linkages with TNCs in the state (Rasiah, 2002).

Measurement of backward linkages

In order to measure the extent of interaction between TNC subsidiaries and local suppliers, and the mutual effects of this interaction, using data collected from the interview survey, we constructed the backward linkages index (BLI),⁶ which measures linkages by breadth and diversity. We aim to construct an index that measures, in summary form, the breadth of linking activities, rather than an aggregate enumeration of activities linking subsidiaries and suppliers. This is because we believe that the phenomenon on which our research is focused depends primarily on the breadth of coverage of linkages, especially in the Malaysian case.⁷ The extent of the breadth of backward linkages from subsidiaries to local suppliers is likely to be greater the more committed they are to long-term relationships with their suppliers, the greater the technical complementarity between the activities of the subsidiaries and suppliers, and the more specialized or custom-made (rather than standardized) the components or products supplied are. It can also be argued that linkages increase over time as the skill level of local entrepreneurs grows, new suppliers emerge and local content increases (Gorg and Ruane, 1998; Driffield and Noor, 1999). It is necessary, therefore, to look not only at the basic form, but also to construct the duration-weighted BLI.⁸ We assume that greater breadth and increased duration of linkages are mutually reinforcing in their effects for local suppliers and subsidiaries.

As one of a variety of learning processes, learning through interaction (Lundvall, 1988; von Hippel, 1988) emphasizes the importance of external entities. As learning by interacting is by nature external to the firm, it depends on the environment in which a subsidiary locates, and the attitude and motivation which a focal subsidiary has. In the learning process, it is critical to accumulate a diversity of experiences among firms. For this reason, we focus on the diversity rather than level of linkages; a larger number of linkages create opportunities for diversity, with the possibility of a wider range of bonds between subsidiaries and local suppliers, which enhances the network of inter-organizational linkages. We assume that the broader the linkages in any firm, the more likely it is that benefits will accrue to the supplier and subsidiary. This would be true if the linkages are complementary to one another, allowing for synergies when they appear in combination. The basic BLI works on the idea that a wider range of linkages creates greater synergy between linkages, and hence makes each side more effective as learning devices. Both this synergy between linkages, and their effectiveness in the learning process, tends to increase with duration; a point which is also made in the internationalization process models (Johanson and Vahlne, 1977). We can also argue that the learning process usually involves both knowledge and experience. Learning by means of backward linkages is a long-term process, which cannot be measured solely by counting discrete forms of backward linkages. Therefore, the BLI is constructed by weighting duration in order to measure the benefits to suppliers of long-term relationship building and the exchange of information.

Subsidiary autonomy level and backward linkages

Accepting the argument that host-country characteristics influencing the extent of linkages are market size, local content regulations and the size and technological capability of local firms (Blomström and Kokko, 1997), we need to identify other factors increasing the breadth or intensity of backward linkages in the study. Subsidiaries increase the breadth or diversity of backward linkages when (1) they have a strong self-interest in developing their supplier base in a host country; (2) their traditionally internal production processes are to be outsourced, with the implication that local suppliers' technological capabilities have developed and the cost advantages of outsourcing increase; (3) home and host markets are relatively similar in terms of intermediate products, with the implication that the technological level of suppliers has been upgraded so that suppliers can produce relatively similar intermediate products (Rodriguez-Clare, 1996); (4) they focus supplier development efforts on key suppliers providing the most important inputs, especially at the beginning of their establishment; (5) they use intermediate goods intensively (Rodriguez-Clare, 1996); (6) they have to provide assistance to suppliers, with the implication that suppliers' technological levels require subsidiary support; (7) they receive larger and higher value-added orders, along with greater technical assistance and know-how, from highly ranked suppliers with respect to technological level; or (8) their efforts to upgrade supplier activities are part of a corporate strategy taking broader economic and social considerations into account.

On the other hand, subsidiaries will provide fewer or narrower or lower-intensity backward linkages when (1) potential suppliers lack the minimum base of skills and know-how needed to absorb technologies and management practices (and support institutions are lacking or weak) — subsidiaries may find it too expensive or risky to try and bring them up to the standards needed; (2) subsidiaries in host developing countries have already developed or acquired matured technology, so there is less need for the subsidiary to provide assistance to its suppliers (Supapol, 1995); and (3) the gap between subsidiary and supplier, with respect to technological or other levels, is too great (Lall and Narula, 2004).

We have presented theoretical reviews of inter-organizational linkages, roles of subsidiaries in host countries and existing studies on Malaysia. From these literature reviews, we derive our hypothesis on the relationship between intensity of backward linkages and a subsidiary's autonomy level. As discussed above, the breadth or intensity of backward linkages depends on subsidiaries' motivation and their strategies with respect to product ranges, market scope and sourcing activities, since backward linkages are subsidiary-driven. Therefore, our hypothesis on the relationship between subsidiaries autonomy and provision of backward linkages is that a subsidiary's autonomy level is positively related to the intensity of its backward linkages. In order to test the hypothesis, we will examine the following issues: (1) TNCs' corporate strategies regarding subsidiaries to determine subsidiary typology, and (2) The technological capability level of local suppliers to determine supplier typology. Thus we can look at inter-organizational linkages between subsidiaries and local suppliers, and examine determinants of backward linkages in Malaysia. In order to answer these questions, we use descriptive statistics and quantitative analysis based on responses obtained from interviews.

Methodology adopted and evidences from the survey

In Malaysia, firms are concentrated in a few major locations. Since most foreign subsidiaries are located in free trade zones provided by the government, the regional locations of subsidiaries are rather concentrated in the states of Selangor (33.6 per cent, including Klang Valley, Shah Alam, Bangi and Kuala Lumpur), Johore (17.9 per cent) and Penang (16.3 per cent, including Prai and Kedah area) (MIDA 2000). From the regional distribution index given by the Ministry of International Trade and Industrialization and number of subsidiaries offered by MIDA, the two states of Selangor and Penang were selected as the target locations for sampling.

The sample was drawn initially from the following secondary data sources: Foreign Companies in Malaysia Yearbook 2001 (The Commercial Intelligence Service, 2001), FMM Directory 2001, Malaysian Industries 32nd Ed. (Federation of Malaysian Manufacturers, 2001), the List of companies in the EE sector in Malaysia (MIDA), Directory of Approved Companies in Production as of 31 December 1999 by Industry Group (MIDA), Directory of Factories, Penang, Malaysia, 2001 (Penang Development Corporation, 2001) and Japanese FDI to Asia, 2001 (Toyo Keizai Inc., 2001). An attempt was made to contact, obtain information from and facilitate direct interviews with at least 10 subsidiaries from each nationality group, with the aim of selecting a sample of 40 firms. A request for an appointment for direct interviews by telephone, fax and e-mail was made.⁹ The result of this was that a total of 46 TNC subsidiaries were directly interviewed. We asked all interviewed TNC subsidiaries to introduce their three most important locally owned suppliers to us. This led to connections with a total of 120 local suppliers, although the role of some was not relevant to the study (eg they were not connected to the EE industry). Therefore, the final number of identified local suppliers was 112, of which 24 were directly interviewed (18 in Selangor and six in Penang). This research used direct interviews with managers in the purchasing department, engineers and company directors in order to (a) analyse TNC subsidiaries' production and outsourcing strategies, and (b) provide insights into the depth, timing, duration, mechanisms and determinants of backward linkages. The responses were qualitative in nature and were restricted to either binary, duration or five-point likert scales (eg response values ranged from 1 — high degree of control to 5 — no control at all, and so on), depending on the nature of the question.

Evidence of subsidiary categorization and existence of competence-creating subsidiaries

The key characteristics of the sample of TNC subsidiaries are in line with statistics from the secondary data, which show that they are targeting the global market with their high export ratio (mean=77 per cent). Their mean length of operation (20 years) is long enough to see some of the aspects of the dynamics of the subsidiaries' strategy and the lengthy relationship in the host economy. Their production scale was fairly large with a mean employment of 1,455. The results of the subsidiary categorization are presented in Table 1.

Table 1 - Subsidiary categorization by nationality and location.

Full table

Empirical results from the 46-subsidiary sample suggests that competence-creating (PM type) subsidiaries do locate in Malaysia (RPM=7, WPM=6) as their TNC groups' regional or global product centres. Out of 13 PM subsidiaries, six have lengthy experience in Malaysia from the late 1960s and early 1970s. Some newly established subsidiaries are strategically located in Malaysia to function as regional/global centres. Six PM subsidiaries have upgraded their roles from initial TMR to PM; through the evolutionary process from TMR to PM, these subsidiaries implemented sub-contracting arrangements for those products with standardized technological levels, or partially sub-contracted out their processes to an original equipment manufacturer (OEM).

Other products are treated as targeted products for subsidiaries in PM roles, and upgrading specifications were usually carried out in Malaysia for exporting their products in the worldwide (or regional) market. Thus, opportunities for subsidiaries to sub-contract or OEM are created as a result of the shift to PM. Some subsidiaries have the experience of acting as an RPS after being TMR and before becoming PM. In this case, the subsidiaries sub-contract for parts or OEM products during the process of shifting from competence-exploiting to competence-creating subsidiaries.

Background information on local suppliers with linkages with sampled subsidiaries

Breadth and diversity in backward linkages are measured by the responses of interviewed subsidiaries; how subsidiaries provide backward linkages to local suppliers. The responses of 24 sampled suppliers¹⁰ were carefully examined, resulting in the following categorization according to local supplier typology (Cantwell and Iguchi, 2005). Out of the 24 suppliers, there are three global suppliers actively exporting with their own export channel and with own-brand manufacturer (OBM) capability, followed by two independent suppliers with R&D capability to develop their own products. There are no own-design manufacturer (ODM) suppliers, but two sub-contracting suppliers actively manufacturing OEM products for subsidiaries, followed by five suppliers of subcontracting suppliers manufacturing OEM components. Twelve are parts suppliers, seven of these are multiple-parts producers and five are single-parts producers (Figure 1).

Figure 1.

Technological abilities of local suppliers.

Full figure and legend (31K)

Evidence of backward linkages provided by TNC subsidiaries

Based on our empirical survey from the sample, we evidenced that backward linkages exist in the Malaysian EE industry. As background information, we summarize how different subsidiary type provides different forms as well as different diversity of backward linkages in Table 2.

Table 2 - Average backward linkages index (BLI) provided by different subsidiary typology.

Full table

On average, RPMs engage in the greatest depth of backward linkages, followed by WPMs, RPSs and TMRs. Similar results are found for product-related and process-related linkages, although RPMs (0.64) and RPSs (0.59) have relatively broader linkages. This implies that RPMs and RPSs are more locally embedded while operating in Malaysia. In process-related linkages, RPMs (0.63) have wider linkages compared to the other types. In terms of training linkages, RPMs have the broadest linkages at 0.60 followed by 0.39 in the case of RPSs and WPMs. RPMs also have a high breadth of innovation-related linkages at 0.53. WPMs as well are involved in a side range of innovation-related linkages (0.37). Management-related linkages are not engaged in as strongly as others, but RPMs still record 0.43. Other links-related linkages are also low, but in this case WPMs have fairly high linkages at 0.28. Taken together, RPMs and WPMs provide stronger backward linkages than other types, since they also find benefit from linking suppliers.

Statistical analysis of determinants of backward linkages provided by subsidiaries

The duration-weighted (BLI) measures the breadth or intensity of linkages formed by each firm in the study, as discussed earlier. It is used as our dependent variable in the model and regressed on the subsidiary's role and other characteristics. The model uses data from interviews with the 46 TNC subsidiaries to analyse the determinants of the breadth and strength of backward linkages provided by subsidiaries, using parametric statistical methods. Subsidiary-related factors (eg subsidiary typology, length of operation, size of firm) and exogenous factors (eg location, governmental support) are introduced as control variables. On the conceptual level, we are referring to the model depicted in Figure 2 regarding the effect of a subsidiary's categorization by typology and strategy on the extent of its backward linkages.

Figure 2.

Construction of the model based on possible linkages between different subsidiary typologies and supplier typologies.

Full figure and legend (39K)

Dependent Variable of the Model

Our dependent variable for the model is duration-weighted BLI. To create a firm score for BL diversity, the share of possible linkages actually observed in any category is used as a summary measure or index of BL breadth or diversity. The approach adopted by this study distinguishes or classifies the various kinds of linkages with suppliers used by subsidiaries to support their sourcing of appropriate parts, components or products for final manufacturing. Thus, each subsidiary earns a score for each category of BL activity, which indicates the extent of the range of linkages that it holds in that category.

Explanatory Variables of the Model

The explanatory variables are subsidiary and environmental factors. Subsidiary factors represent the subsidiaries' internal factors affecting BL. Autonomy level is considered as a proxy for the results of the subsidiary typology (TMR, RPS, RPM and WPM), since it is one of the determinants of the subsidiary typology. The autonomy level consists of responses on the extent to which subsidiaries are allowed to carry out activities such as introducing new products and process, or decide their suppliers, without consulting subsidiaries. We expect that the higher a subsidiary's autonomy level, the higher the BL intensity. Total number of employees is used as a proxy of firm size. Firm size is expected to affect the business activities of subsidiaries, especially in export-oriented activities, since the size of a foreign subsidiary, the type of products manufactured and procured, and the subsidiaries' strategy also positively influence the extent of backward linkages (Halbach, 1989; Supapol, 1995; Giroud, 2000). As a proxy of one of the subsidiaries' strategy, we include the local sourcing rate as a subsidiary factor. It is determined by either a subsidiary located in a host economy or TNC parent. A subsidiary's duration of operation in Malaysia can contribute to BL diversity from the viewpoint that the longer it stays, the more linkages it builds, since subsidiaries tend to localize operation, manufacturing and sourcing over time. Linkages increase over time as the skill level of local entrepreneurs grows, new suppliers emerge and local content increases (Driffield and Noor, 1999; Gorg and Ruane, 1998). Therefore, the breadth of BL becomes higher the longer a subsidiary's operation in Malaysia.

We constructed an expatriate ratio as the number of expatriates from the parent TNC divided by the total number of employees' of a subsidiary. The expatriate ratio also provides a measure of TNC group strategy relating to a subsidiary's autonomy level. Therefore, we consider it as one of the TNC group factors, although it has the characteristic of a subsidiary factor as well. If a subsidiary is competence-creating with a higher autonomy level, there tend to be fewer expatriates from its parent TNC. Therefore, we expect that a lower expatriate ratio will be associated with higher BL diversity.

Environmental factors are also assumed to affect the range of backward linkages (Blomström and Kokko, 1997). The government offers various programmes and incentives for subsidiaries to have linkages with suppliers. We converted the level of participation in these programmes into indexes. They include the Vendor Development Programme, Industrial Linkages Programmes, Penang Skill Development Corporation programmes and the BL-related programmes of other organizations. In addition, a binary dummy variable is added to see whether significant differences exist between suppliers located in Selangor and in Penang.

Statistical Results and Hypotheses Test of the Model

Descriptive statistics of variables are shown in Table 3. Although some variables are significantly correlated, we can assume there is no problem with multicollinearity since variance influence factors (VIF) are all below 1.5. The results of OLS regression for control variables (Model 1) and all variables (Model 2) from these econometric investigations are presented in Table 4.

Table 3 - Means, standard deviations and cross-correlations of variables.

Full table

Table 4 - Results of OLS regression for duration-weighted BLI.

Full table

Model 1 shows that the coefficient of local sourcing ratio is significant at 1 per cent level and has a positive sign (0.434), and the locational factor is significant at 5 per cent level with positive sign (0.354). The sourcing ratio is determined by a subsidiary's motivation for sourcing locally. Motivations for sourcing locally are in turn decided by a subsidiary's strategy. However, its sourcing strategy may not be related to the categories of our subsidiary typology in this research. This is because as subsidiaries evolve toward competence-creating status, they do not necessarily need to become locally embedded so that their sourcing rate rises. However, in Malaysia, when subsidiaries evolve toward competence-creating status, they become locally embedded and so their motivation for local sourcing is increasing to develop new subsidiary-level capabilities in part through interactions with local actors. We also support the view that TNC subsidiaries located in Penang have a higher diversity of backward linkages than those located in Selangor, as the coefficient on locational factor has positive sign (0.354) and is significant at 5 per cent level.

When we introduce the main effect (autonomy level) discussed earlier in this study, results still show that local sourcing ratio and locational factors are both significant at 5 per cent level (0.378 for local sourcing ratio and 0.363 for locational factors). Moreover, the coefficient on autonomy level, which acts as a proxy for the categories of the subsidiary typology, is significant at 5 per cent level and has a positive sign (0.303), thereby supporting our hypothesis. Higher autonomy levels are associated with a higher diversity of backward linkages. This also implies that the RPM and WPM subsidiary types tend to have a wider range of backward linkages, owing to their higher degree of autonomy.

From both Model 1 and Model 2, we do not find any significant results on the diversity of backward linkages from subsidiary size (total number of employees), length of operation in Malaysia, expatriate ratio and government programmes participation rate. Statistical results support a view that to provide strong intensity of backward linkages, a subsidiary does not necessarily need to operate for a longer period of time or in a big plant with a large number of employees. They do suggest that critical factors are subsidiaries' higher autonomy level and higher motivation for outsourcing their input in the host country.

Conclusion

This research seeks to explore evidence of significant inter-organizational linkages between TNC subsidiaries and local suppliers, and the critical factors affecting provision of backward linkages by subsidiaries. In our study, we found that backward linkages exist in the Malaysian EE industry. TNC subsidiaries' motivation for providing backward linkages is extended if and when they are expected to yield a positive and competitive gain, since we empirically observed that TNC subsidiaries are always the ones who initiate backward linkages in the Malaysian EE industry. However, we found that some subsidiaries provide strong backward linkages, while others provide weak linkages.

As discussed, activities traditionally carried out within firms have been outsourced and subsidiaries in host developing countries gain greater autonomy. In the sample of 46, a total of 13 are competence-creating subsidiaries; seven of which are RPM and six WPM. Our study finds that competence-creating subsidiaries in our sample (RPM and WPM) provide stronger backward linkages compared to other types. RPM provide strong backward linkages on product, process linkages to innovation and management linkages as well. WPM also provide strong backward linkages on product, process, training and innovation linkages. In addition, we found that backward linkages created between a subsidiary and suppliers tend not to disappear even if subsidiaries change their roles into higher ones. This is also supported by our statistical finding that higher autonomy levels yield more intense backward linkages. This also means that RPM and WPM have strong influences on the intensity of backward linkages. The descriptive statistics as well as the regression analysis support the view that competence-creating subsidiaries (RPM and WPM) provide stronger backward linkages than TMR and RPS.

When we consider competence-exploiting subsidiaries, which have traditional subsidiary roles, they (TMR) provide weak linkages (except product and process linkages); this is because the technology used in TMR in 2001/2002 is available without cost due to the maturity or standardized nature of products. On the other hand, RPS, which are efficiency-seeking subsidiaries, usually provide backward linkages, especially in product, process and training, since they are looking for large-scale production with cost efficiency, and therefore sourcing from local suppliers is what they are most interested in.

We have argued that backward linkages have a strong relationship with different subsidiary types, and thus differing autonomy levels. Subsidiaries with higher autonomy levels give a higher intensity of backward linkages, which also suggest that RPM and WPM have strong influences on the intensity of backward linkages. We find that different motivations for sourcing can be understood indirectly from the positive effect of the sourcing ratio on the breadth of backward linkages, which positively affects the intensity of backward linkages, and subsidiaries with higher autonomy tend to increase local sourcing and linkages as a means of further developing subsidiary capability.

Although our empirical results suggest that government programmes do not affect subsidiaries' backward linkages, when we take an example from Penang, government institutes such as Penang Development Corporation are focusing on their roles as facilitators between TNC subsidiaries and local suppliers to encourage mutual benefit. We found that in every case we examined (46 subsidiaries and 24 suppliers), the documented linkages were always initiated by the subsidiary side. Therefore, as policy implication, we recommend government or local government in a specific region to specialize its facilitator or coordinator role, helping subsidiaries to intensify the backward linkages they offer. Backward linkages and government programmes are essentially complementary, with a proviso on whether government programmes are useful at all. Thus, programmes sometimes facilitate backward linkages and help to reinforce their effects, but sometimes also appear to be largely irrelevant. Although the government programmes are complementary, they can never be a potential substitute for backward linkages.

The main research focus recurring throughout this study is the importance of the roles of subsidiaries as a provider of backward linkages and a technological source for the industry. An in-depth treatment of the subject requires further investigation with a more extensive data set and more advanced analytical techniques. The survey undertaken for this study revealed the need for further research on Malaysian local suppliers. More data, especially from local suppliers, would be useful to investigate how well policies are functioning. It would also be beneficial to further develop the backward linkages intensity measures used in the study for future research on backward linkages.

This research recommends TNC subsidiaries to consider local embeddedness, as a result of developing business activities in a host country, as a crucial role for subsidiaries. This enhances not only their competence level, but also linkage with local suppliers, which in turn helps local suppliers' technological development from technological spill-overs by subsidiaries. If subsidiaries find mutual effects in a host country, they can seek cost competitiveness in an existing host country and avoid divestment that is costly for both subsidiaries and suppliers. Local embeddedness of subsidiaries and backward linkages also has important implications for the host government. For those governments seeking to promote further FDI and technological spill-overs from TNC subsidiaries to local suppliers, it is meaningful if government organizations focus on developing systems to promote backward linkages.

Notes

¹ Recent studies on backward linkage creation show a beneficial impact of TNC subsidiaries on local suppliers' capabilities (see Halbach (1989) and more specifically for Asia, O'Brien (1993), [32]Rasiah (1995), [37]UNCTAD (2001), [17]Giroud (2003)).

² TMR subsidiaries adopt a classic form of market-seeking strategy and supply significant parts of the parent TNC's established product range to its host-country market, usually aiming at overcoming tariffs or other trade barriers.

³ RPS produce established goods, but involve the manufacture of limited parts of the subsidiary's current range of final products, supply of component parts for assembly by other group subsidiaries, or performing a particular stage in a vertically integrated production process. In contrast with TMRs, the RPS is networked and becomes part of the TNC group's global strategy.

⁴ The importance of backward linkages for local suppliers' technological learning is discussed in, for example, Cantwell and Iguchi (2005).

⁵ From interviews in 2001 and 2002; see below.

⁶ The BLI is calculated based on potential backward linkages. For each firm i in activity category j; B_ij=A_ij/n_j, where n_j is the number of types of potential linkages that could be established in category j; B denotes the backward linkages index; A denotes actual number of activities in which linkages are observed; i denotes firms (i=1 to m for each grouping of surveyed firms); j denotes a category of activity (a grouping of activities in each of which linkages may occur); m denotes total number of firms under consideration in each context.
We then average across firms to obtain a mean value of BLI for each category of activity, as follows:where m denotes all firms under consideration. For the aggregate of all activities (across all categories of activity), we have. Thus, we obtain the basic form of the BLI.

⁷ Malaysia's second industrial master plan pays strong attention to the 'breadth' as well as 'depth' of the value chain to further strengthen industrial linkages (EPU, 1996: 30).

⁸ For the duration-weighted index we have the following adaptation:where D denotes the duration-weighted index; Y denotes the number of years for which any linkages have existed in any individual type of activity; k denotes specific individual activities (each of which belongs to one particular grouping j). Thus, Y_ijk=0 when there is no linkage in the individual activity k, while otherwise Y_ijk>0 (a positive integer). Once more we have the activity category average:. Finally, the duration-weighted index of backward linkages in the aggregate of all activities is given by:

⁹ Questionnaire survey was avoided, since we needed detailed qualitative as well as quantitative data. It was assumed that these types of qualitative data could not be obtained through questionnaires.

¹⁰ After interviewing subsidiaries, we requested that they introduce their local suppliers. On average the identities of 2–3 suppliers were provided. The interview process involved contacting these suppliers, and scheduling appointments for structural face-to-face interviews with managing directors.

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