7 THE COMPETITIVE ADVANTAGE OF MULTINATIONAL
COMPANIES
After discussing the competitive advantage of nations and its impact on the
international division of labour, we will now return to the level of the com-
pany. What can we say about the competitive advantage of multinationals?
According to Ghoshal (1987), there are three fundamental ways of building
global competitive advantage: to exploit differences in input and output mar-
kets in different countries; to exploit economies of scale; and to exploit
economies of scope.
Differences in input and output marketsPorter’s analysis, discussed in Section 5, is highly relevant when considering
the first source of competitive advantage, i.e. differences in input market.
Multinational companies have a unique advantage in that they can transfer
activities from one country to another. A multinational company must have a
clear home base for each product line, and that home base should be located
in the country with the most favourable diamond.
Nestlé has shifted the world headquarters for its confectionery
business to Britain. That is because Nestlé believes that in this
business the British home base is a more dynamic one because
of the advertising agencies, marketing environment, and a very
high per capita consumption of confectionery products in the
UK...In pasta, Nestlé‚ has made its Italian company, Buitoni, the
world centre of their pasta operations. (Porter, 1991)According to Porter, companies will make increasing use of this mode of opera-
tion. It is almost impossible to coordinate facilities for production, R&D,
marketing and product development when they are distributed among equivalent
subsidiaries in different countries. A company with a clear home base in a
dynamic location will be able to innovate faster than a company which is
trying to coordinate its dispersed activities. To use a popular term, companies
are creating ‘centres of excellence’ for each activity. It is important to realize that
this concept upsets the traditional notion of having one headquarters and many
dependent subsidiaries. The company becomes a kind of network with different
centres for different activities. We will see in later chapters that this approach is
particularly compatible with what is called the transnational company.
But national differences do not exist in input markets alone; they are
important in output markets as well. For one thing, consumer tastes and pre-
ferences may differ from one country to the next. Each country is likely to have
a unique distribution system, unique technical requirements and unique
28 International Human Resource Management