SOURCING PATTERNS OF MULTINATIONAL SUBSIDIARIES IN EUROPE : TESTING THE DETERMINANTS INTRODUCTION

The paper investigates and tests empirically the determinants of sourcing patterns of foreign multinational subsidiaries in Europe. Starting with the notion that local sourcing constitutes one of the main defining elements of embeddedness and a critical factor in terms of local development impact, a conceptual framework of the main factors influencing local versus foreign sourcing is proposed, followed by rigorous quantitative treatment of such factors. Drawing on a large-scale cross-country, cross-industry dataset including 233 subsidiaries in four EU host countries (namely Portugal, Spain, Ireland and the UK), hypotheses on key determinants of the choice between local and foreign sourcing are tested. These include usually investigated variables such as home country, host country, sector, age of subsidiary and entry mode, but also include novel features such as testing the impact of economic integration and a specific link of MNEs’ sourcing decisions to the increasingly influential subsidiary strategy literature. Using foreign inputs and components as the dependent variable, econometric analysis highlights that economic integration, globalised industries, host country, incentive concession, and subsidiary roles (Rationalised Manufacturer and Product Mandate Subsidiaries) are associated with greater import propensities. A number of important policy issues are discussed. Regarding subsidiary roles, the position of Product Mandates, which are promoted and nurtured for their contribution to dynamic comparative advantage, is particularly noteworthy. The evidence presented is that globalisation and competitiveness pressures may be leading to increased international procurement in these quasi autonomous subsidiaries. If traditional targeting criteria (according to home country, age, entry mode, concession of incentives per se, stimulus to Product Mandates) do not seem to be effective (according to our results), probably the best way ahead for governments really committed to stimulate local sourcing linkages will be to focus on enhancing the capabilities of the local industrial fabric. Contact author: Professor Stephen Young Department of Marketing University of Strathclyde Stenhouse Building 173 Cathedral Street Glasgow G4 0RQ Email: stephen.young@strath.ac. uk Phone: ++ 44 (0)141 548 3146 Fax: ++ 44 (0)141 552 2802 SOURCING PATTERNS OF MULTINATIONAL SUBSIDIARIES IN EUROPE: TESTING THE DETERMINANTS INTRODUCTION The purpose of this paper is to provide explanations for the sourcing patterns of multinational (MNE) subsidiaries in four European countries (Portugal, Spain, Ireland and the UK). Specifically, the article focuses upon the influences on local and foreign input sourcing, and provides new evidence concerning both external and internal (particularly MNE subsidiary) environmental determinants. The topic continues to attract considerable attention from host country governments because of the importance of local linkages in generating externalities and technology spillovers and in supporting the agglomeration of industries (Young, Hood and Peters, 1994; Rodríguez-Clare, 1996; Markusen and Venables, 1999; Birkinshaw and Hood, 2000; Driffield, Munday and Roberts, 2001; Görg and Ruane, 2001). Furthermore, the globalisation of MNEs’ supply chains is creating major competitive pressures for local suppliers, as companies explore globaland single-sourcing options (Young, Hood and Firn, 2002). This paper adds to existing knowledge in isolating the influence of a range of subsidiary characteristics; and in studying input sourcing in four countries of differing characteristics in respect of size, industrial base and level of economic development, and countries which entered the European Union at differing periods. The study involves an econometric analysis of the determinants of local linkages, using imported inputs (rather than the conventional measure of locally-sourced inputs) as the dependent variable. Some explanation of the relationships between local and foreign sourcing is therefore necessary. Studies of local sourcing tend to focus upon sourcing from indigenous as opposed to MNE affiliates in the host country. This is because of the concern with embeddedness, the upgrading of the technological and other capabilities of domestically-owned enterprises and other spillover effects on economic development (Blomström et al., 1995; Hood and Young, 2000). However, the attraction of multinational suppliers may represent a route for the economy into higher value-added and technologyand knowledge-intensive production inputs, which would otherwise be imported. Some foreign-owned suppliers commonly move abroad and co-locate together with their multinational customers. When local sourcing is taken to include both indigenous and foreign-owned suppliers, it becomes effectively the mirror image of foreign sourcing. There are still likely to be quality differences between local and foreign inputs, with substantial evidence (UNCTAD, 2001) to show that locally sourced items include lower value, transport cost-intensive production and service inputs. A consideration of the import side of sourcing provides important and different perspectives for host country policy. For example, it leads to greater consideration of the international competitiveness of the local supply base and emphasizes the importance of international benchmarking. It also focuses attention more strongly upon the location of decision-making, since decisions on foreign sourcing will be commonly made at parent MNE level, as part of global supply chain management strategies; whereas the subsidiary is more likely to be an advocate of local sourcing. From an empirical perspective, information obtained on imported inputs may be more reliable than that on local sourcing because of the difficulty of distinguishing on occasions between indigenous and foreign-owned suppliers; and because some ‘local’ suppliers may simply be distributors of imported inputs. THEORY AND CONCEPTUAL FRAMEWORK The theoretical underpinnings for the subject derive, on the one hand, from concepts relating to the MNE, and, on the other, to perspectives from host country economic development. Although theories pertaining to the MNE have traditionally focused upon the parent group, recent work has increasingly recognised the importance of the subsidiary as the unit of analysis (White and Poynter, 1984; Bartlett and Ghoshal, 1986; Jarillo and Martinez, 1990; Birkinshaw, 1997, 2001). Transaction cost theory is most widely known through the work of Buckley and Casson (1976) and Dunning’s OLI paradigm (1977). Although originally emphasising ownership advantages accruing in the home country of the MNE, it is now recognised that ownership advantages may arise anywhere in the group (Hedlund, 1984; Rugman and Verbeke, 1992). In a similar manner, locational factors in the host country may generate ownership advantages for the subsidiary (that can be internalised by the group). The OLI paradigm is thus useful in understanding knowledge acquisition within the subsidiary, as well as decisions such as the choice of in-house v outsourced supply, and supply chain management locational choices. Much subsidiary level research has, however, inclined towards a Network Perspective on the MNE (Andersson, 1997; Birkinshaw and Hood, 1998; Gupta and Govindarajan, 2000). By this view the subsidiary moves from being highly dependent on headquarters decisions and corporate resources to becoming a node in a network, with links to internal and external actors and greater degrees of freedom. These network partners might include suppliers, customers and sister units within the MNE. This perspective helps explain why some subsidiaries become more important than others; and would suggest that MNE subsidiaries would gradually increase local sourcing, as their interactions with other parties and local competence inc reased. There are growing links between Network Perspectives and the Resource-based View (RBV). The latter suggests that a firm’s unique resources and capabilities can generate competitive advantage (Barney, 1991). Competence development may accrue from interaction with other parties and relationship building (Grant, 1996). Andersson et al. (2001) have further proposed that subsidiaries with critical corporate and market relationships will have higher levels of competence. Other relevant competence-based approaches include the dynamic capabilities view (Teece et al., 1997) and Cantwell’s (1989, 2001) work on technological development. All these notions are relevant to the topic of subsidiary evolution and hence to MNEs’ sourcing decisions. The literature in economic development and economic geography highlighting the positive impacts of input linkages on the local economy has a long history (Hirschman, 1958). The existence of input linkages has been shown to generate positive externalities which lead to the agglomeration of interrelated activities in particular regions (Marshall, 1920; Krugman and Venables, 1995). Such work has been incorporated into the MNE literature through studies of inter-firm linkages between multinationals and host country suppliers (Crone, 2000; Görg and Ruane, 2001), and more recently through the notion of regional clusters and the circumstances under which regions are able to remain as ‘sticky places in slippery space’ (Markusen, 1996). Host economy characteristics are thus critical in competence building within the subsidiary. Cantwell and Janne (1999) have distinguished between ‘higher order’ and ‘lower order’ regions, a characteristic of the former being general technological excellence which may generate substantial spillovers from the local environment for subsidiaries located in such regions. There have been numerous empirical studies on the subject of MNEs and backward linkages, reviewed recently in the World Investment Report 2001 (UNCTAD, 2001). This identified the following influencing factor