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Information technology and transnational integration: Theory and evidence on the evolution of the modern multinational enterprise

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Abstract

Reflecting amplified hazards in cross-border exchange and imperfections in markets for intangibles, internalization has been central in multinational enterprise (MNE) theory. This centrality notwithstanding, the fact is that internalization coheres with lower-powered incentives and carries an implicit drawback, namely, higher realized production costs. With the emergence and deployment of information and communication technology (ICT), modern MNEs are reshaping their transnational governance to address this cost. The modern MNE uses ICT to mitigate transaction costs, and evolves more to arm's length exchange to incentivize lower production costs. A testable prediction is that MNEs in industries more susceptible to and employing more ICT will exhibit a reduced propensity for transnational integration. We examine this hypothesis using available data from 1982 to 1997 for US MNEs across all manufacturing sectors. Regression results and robustness tests are strongly congruent with the prediction. This study, a first to explore empirically the role of ICT in the evolution of transnational exchange, suggests that MNE theory, until now founded primarily on transaction cost economics and a cross-border control theory of value capture, is more likely to keep pace with developments in MNE practice by opening up to incentive theories of exchange governance and a cross-border coordination theory of value creation.

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Notes

  1. As described in Dunning (1980), the O refers to firm-specific capabilities, including those in research, marketing, and managing; the L refers to location-specific factors, especially pertaining to the destination of foreign direct investment; and the I refers to the relative benefits of internalization.

  2. Separately, even where asset specificity remains high (because, say, it creates net value), the cost of achieving that specificity can decline markedly because of ICT. An illustration from Argyres (1999) is illuminating. Compared with client-specific prototyping performed manually by engineers employing traditional methods, the cost of computer-aided design and prototyping, equally client specific, is reduced, measured in terms of time and material investment, by an order of magnitude. In turn, the consequence of holdup in the same transaction is less daunting. It is much more difficult to be held up when the investment at risk is not large. This is to clarify that what matters is not asset specificity per se as much as the cost of asset specificity, which has also tended to decline owing to the development and deployment of ICT. This effect, too, is compatible with the model and logic outlined in Riordan and Williamson (1985).

  3. The 15 two-digit industries covered are: food and beverages; chemicals and drugs; primary metals; fabricated metals; machinery; electrical and electronic equipment; motor vehicles; other transport (mainly aircraft); textile products and apparel; lumber, wood, and furniture; paper and allied products; printing and publishing; rubber and miscellaneous plastics; glass, stone, clay, and nonmetallic mineral products; and instruments and related products.

  4. While some existing studies focus only on capital equipment (i.e., hardware), we include software, maintenance, and service expenditures, because the deployment and maintenance of software (e.g., billing systems, supply chain, and customer management) will affect the actual ability of firms to coordinate within and across organizational boundaries. Specifically, we use the following 15 ICT-related investment categories reported in BEA data: mainframe computers; personal computers; direct access storage devices; computer printers; computer terminals; computer tape drives; computer storage devices; integrated systems; prepackaged software; custom software; own-account software; communication equipment; instruments; photocopy and related equipment; and office and accounting equipment. In supplementary analysis, wherein we used only the last category, office and accounting equipment, as in Brynjolfsson et al. (1994) we found no sign reversals in any of the variables of interest.

  5. We follow Blonigen (2001) here in using US MNEs’ foreign to total employment ratio to proxy importance of international operations. This ratio is not only a good indicator of the “extent of multinationality” that Dunning and others proposed would increase transnational integration (see e.g., Siddharthan & Kumar, 1990), but also, unlike alternatives based on sales figures, it does not pose problems related to exchange rate and other nominal-to-real conversions.

  6. We also included an alternative operationalization of import competition wherein the numerator excludes intrafirm imports. Under this alternative specification, results were unchanged.

  7. Destination-specific data are not available for MNE intrafirm trade at the level of aggregation we are interested in. For our measurement purposes, developing countries include all countries except Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Iceland, Ireland, Italy, Japan, Luxembourg, the Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, Switzerland, and the United Kingdom.

  8. To cross-validate, we re-estimated all models by including year fixed effects. In these regressions, echoing the results of the above-mentioned pooling tests, when included, none of the year dummies was significant (separately or jointly), and, importantly, the inclusion of year fixed effects did not affect the sign or significance of any right-hand-side variable.

  9. To further establish the robustness of the results to potential simultaneity problem, we ran our regressions including a lagged DV on the right-hand side (see Greve & Goldeng, 2004). While inclusion of the lagged DV, which itself was highly significant, rendered some control variables insignificant, ICT investment intensity coefficient was still negative and statistically significant.

  10. As the dependent variable in this first stage, ICT investment intensity, is measured at the US (and not at MNE parent) level by industry, we accordingly measure knowledge intensity as US firms’ R&D spending as a percentage of their total sales, and MNE intensity as the percentage of US employees working for US multinational parents.

  11. Baker and Hubbard's (2004) study of the use of on-board computers for fleet usage optimization in the trucking industry is in this same spirit of superior capital “exploitation.”

  12. Zero-order correlations for computation power, total investment, and capital intensity are 0.32, 0.68, and 0.45, respectively, with the instrumented variable (ICT investment intensity), as opposed to 0.04, 0.35, and 0.19 with the error term.

  13. Three observations about the results of the first-stage regressions are in order (see appendix Table C1). First, all three instruments are significant, and, as expected, positively signed. (Given that computation power does not vary by industry, it is quite an indication that this variable is even moderately significant.) Second, most control variables (especially knowledge intensity) also have a statistically significant impact on ICT investment intensity. Finally, industry-fixed effects (not shown) tend to be significant, and account in good measure for the high overall R2.

  14. To check further, in supplementary regressions (not shown here), we included a three-way interaction term with ICT investment intensity, knowledge intensity, and internationalization. This three-way interaction term was positive and highly significant (but did not affect the sign and significance of other variables). This suggests that the two-way interaction of ICT investment intensity and knowledge intensity changes for the levels of the third factor, internationalization. More clearly, the ICT investment intensity × knowledge intensity interaction is less negative and more positive (in the direction hypothesized), the higher the internationalization of the industry.

  15. We also checked for a potential moderation effect of time trend on the ICT investment intensity – MNE transnational integration link. It has been suggested that complementary investments in new organizational processes (re-engineering) and in application software are necessary to derive the full benefits of ICT (Brynjolfsson & Hitt, 1996), and complementary “ecosystem” ICT investments by exchange partners are expected to boost the impact of ICT. Expecting that such complementary developments occurred gradually over the 1980s and 1990s, and given that processes and routines that are initially tacit become more explicit over time (Kogut & Zander, 1993), one might expect the effect of ICT investment intensity on MNE transnational integration to have increased over time. There was statistical support for this prediction too.

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Acknowledgements

For helpful comments during the development of this paper we thank Ron Adner, William Alterman, Gareth Dyas, Antonio Fatas, Javier Gimeno, Dominique Heau, Tarun Khanna, Bruce Kogut, Robert Lawrence, Christoph Loch, Catherine Mann, Ilian Mihov, Tomasz Obloj, James Rauch, Jeffrey Reuer, Daniel Sichel, Vanessa Strauss-Kahn, Timothy Van Zandt, Oliver Williamson, and Enver Yucesan; and Vit Henisz and three anonymous JIBS reviewers. We are grateful to the US Bureau of Labor Statistics and INSEAD for financial support of this research.

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  1. INSEAD, Fontainebleau, France

    Subramanian Rangan

  2. Boston College, Chestnut Hill, USA

    Metin Sengul

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  1. Subramanian Rangan
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Correspondence to Subramanian Rangan.

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Accepted by Witold Henisz, Area Editor, 18 June 2009. This paper has been with the authors for three revisions.

Appendices

Appendix A

Table A1

Table A1 US MNEs’ transnational integration ratios, by industry, selected years between 1982 and 1997 (percentages)
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Appendix B

Table B1

Table B1 US information and communication technology (ICT) investment per employee, by industry, selected years between 1982 and 1997
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Appendix C

Table C1

Table C1 First-stage regression explaining ICT investment intensity, 1982–1997
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Rangan, S., Sengul, M. Information technology and transnational integration: Theory and evidence on the evolution of the modern multinational enterprise. J Int Bus Stud 40, 1496–1514 (2009). https://doi.org/10.1057/jibs.2009.55

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