Lecture 4 Summary: Globalisation and Global Factory

Globalisation refers to the growing economic independence amongst countries and is

essentially a process driven by economic forces, with multinational enterprises being the major
actors. Globalisation creates convergence within markets including the goods/product
markets, with prominent examples being the Association of Southeast Asian Nations (ASEAN)
and North American Free Trade Agreement (NAFTA), as well as capital and labour markets.
However, differences remain in the degree of convergence between these different markets
with the labour market still regulated at national levels with visa and immigration controls.

The global factory model coined by Prof. Peter J Buckley provides a framework through
which MNEs can organise their innovation, distribution and production activities to exploit the
differences that remain in in the international integration of markets. According to Buckley
(1996) MNEs are large enough to exploit the similarities and differences in economic
activities across the world, unlike smaller firms which might not possess the necessary
resources to exploit these economic variations. The model consists of five building blocks
which help MNEs make key decisions on location and ownership/control, i.e. where an
activity is best located and what the best means of control of each activity?

The recommendation of the first building block focuses on the assets and core competencies
of MNEs. It proposes that MNEs should invest in core functions/competencies and intangible
assets, such as R&D, brand equity and distribution networks, while non-core functions, such
as ownership of productive assets should be decreased. Building block two recommends the
exploitation of the value benefits of globalisation/localisation of markets between countries,
which can be achieved through the use of hub strategies- wholly owned subsidiaries, and
spoke strategies- international joint ventures, as these strategies allow MNEs to gather local
market knowledge in different locations/countries. Outsourcing and offshoring to specialised
firms/optimal locations can enable MNEs to maximise value as they provide alternative
methods of completing less important production/supply local tasks, which is the
recommendation of building block three.

Building block four emphasizes the importance of effective knowledge management as

crucial in a MNEs ability to control and coordinate its globally distributed operations. It
describes two key knowledge types, firstly, technological know-how which is product or
process related and is developed through R&D; and secondly, market knowledge or market
intelligence which involves an understanding of consumer preferences and is developed
through market research. The dynamics of knowledge management include the generation,
accumulation, learning and the transfer of knowledge either from headquarters to subsidiary
or between subsidiaries.

The global factory creates, develops and exploits networks. The building block five
recommends a successful integration and configuration of MNEs internal and external
network. Internal network involves relationship between HQ and subsidiary, and subsidiary
and subsidiary. External network refers to relationship with the MNEs partners in the supply
chain, which includes suppliers of raw material and intermediate goods, outsourcing
contractors/producers, and distributors of goods and services in market. Here, it is important
to note that the global factory uses hub and spoke strategies, as explained earlier, to exploit
the global local contrast.

Successful value creation in the global factory is recognised by the Stan Shih Smile Curve
which classifies the internalisation of high value adding activities and outsourcing and
offshoring of low value adding manufacturing activities in the firms value chain.