International Trade and Finance Association. Transnational Strategy and the Creation of Shareholder Value: Any Correlation?

Transcription

1 International Trade and Finance Association International Trade and Finance Association Working Papers 2008 Year 2008 Paper 16 Transnational Strategy and the Creation of Shareholder Value: Any Correlation? Darryl G. Waldron Trinity University This working paper site is hosted by The Berkeley Electronic Press (bepress) and may not be commercially reproduced without the publisher s permission. Copyright c 2008 by the author.

2 Transnational Strategy and the Creation of Shareholder Value: Any Correlation? Abstract Empirical evidence suggests that companies tend to employ four generic strategies to enter and exploit foreign markets: an international, multidomestic, global, or transnational strategy (Hill, 1999). Of the four, Bartlett and Ghoshal (1989) argue that in a world characterized by globalization, there are forces driving a growing number of firms to embrace the transnational alternative. The research undertaken here examines the extent to which pursuing a transnational strategy contributes to a firm s ability to create value for its shareholders, and at whether being more or less transnational might influences the rate of growth in shareholder value. For purposes of this analysis, a firm s strategic profile was defined in terms of its transnationality and internationality indices. This paper was presented at the 18th International Conference of the International Trade and Finance Association, meeting at Universidade Nova de Lisboa, Lisbon, Portugal, on May 23, 2008.

3 Introduction The creation of shareholder value has become the standard by which all companies are judged and one of the greatest strategic challenges managers face in growing shareholder value is to balance the need for global cost efficiency with the countervailing need for local market familiarity and responsiveness. At one extreme are firms pursuing a strategy designed to achieve global cost efficiency through the centralization of manufacturing, product standardization, and the amortization of the higher fixed costs characteristic of such a strategy over industry leading volume in order to minimize per unit costs. At the other extreme are firms pursuing a market segmentation and product differentiation strategy that necessitates a strong local market presence to leverage national differences that are of significance in the design of its value chain. Here, manufacturing efficiency depends on taking full advantage of economies of scope, where the relatively higher perunit costs are offset by the higher returns to flexibility, customization and local market responsiveness. In a very real sense, the theory of transnationalism is an extension of the resource- based theory of the firm. In fact, Furrer, Krug, Sudharshan, and Thomas (2004) draw on resource-based theory in arguing that a multinational, and by extension, transnational firm s worldwide performance is a function of the extent to which its portfolio of intangible assets is congruent with its foreign market entry strategies, partner relationships and worldwide organizational structure. In turn, each of these dimensions is linked to the firm s worldwide strategy and the characteristics of the industry. What distinguishes the transnational model of organization is the unique contribution it makes to optimizing the strategic allocation and utilization of a firm s competitively determinant resources and relationships. This process is discussed in greater detail below. Empirical evidence suggests that multinational companies tend to employ four generic strategies to enter and exploit foreign markets: an international, multidomestic, global, or transnational strategy (Hill, 1999). Of the four, Bartlett and Ghoshal (1989) argue that in a world characterized by globalization, there are forces driving a growing number of firms to embrace the transnational alternative: In today s environment, competitive conditions are so intense that to survive in the global marketplace firms must exploit experience-based cost economies and location economies, they must transfer distinctive competencies within the firm, and they must do all of this while paying attention to pressures for local responsiveness (p. 13). Rather than rely on structural configurations that are more precisely defined and rigid, which tends to be the case where an emphasis is placed on protecting the integrity of time-honored principles of organizational management, a transnational strategy is designed to balance global efficiency with local market responsiveness by optimizing the allocation of value adding activities geographically and anatomically. By viewing the allocation process as one would a multidimensional puzzle, elements of the firm s value chain are scattered around the globe in a manner that allows for the maximization of value added on an element by element basis while simultaneously taking advantage of global economies of scale and location achieved through system design economies and synergy. The firm ends up being organized around activities where Hosted by The Berkeley Electronic Press

4 it has a core competence and around centers of excellence that provide access to outside suppliers with core competences that can be used to fill gaps in the firm s value chain. The objective is to create an overall level of competence that produces more value added than would be possible given any other configuration of organic and non-organic value chain activities. Put more precisely, what management is faced with is solving a globally distributed constraint optimization problem that leads to the overall maximization of value added. Perhaps the best test of success in creating a value chain that is optimal is the extent to which the firm is able to grow shareholder value over an extended period of time at above market and industry rates. Such performance would not be possible on a sustained basis if the firm were wedded to a value chain and strategy that were suboptimal. This is true because free cash flow to the firm, which drives intrinsic and in turn market value, is a function of value added. The research undertaken here examines the extent to which pursuing a transnational strategy contributes to a firm s ability to create value for its shareholders, and at how being more or less transnational might influence this capability. Here strategic success is treated as a function of a firm s level of market capitalization and the extent to which a firm is transnational is measured in terms of its transnationality index, a broadly utilized measure of a firm s organizational anatomy that is discussed below in greater detail. For purposes of analysis, a transnational corporation (TNC) is formally defined as follows: A transnational corporation (TNC) is generally regarded as an enterprise comprising entities in more than one country which operate under a system of decision-making that permits coherent policies and a common strategy. The entities are so linked, by ownership or otherwise, that one or more of them may be able to exercise a significant influence over the others and, in particular, to share knowledge, resources and responsibilities with the others (UNCTAD, 2002). A transnational strategy allows for the attainment of benefits inherent in both global and multidomestic strategies. The overseas components are integrated into the overall corporate structure across several dimensions, and each of the components is empowered to become a source of specialized innovation. It is a management approach in which an organization integrates its global business activities through close cooperation and interdependence among its headquarters, operations, and international subsidiaries, and its use of appropriate global information technologies (Zwass, 1998). This study is based on a cross-sectional analysis of the firms comprising the UNCTAD top 100 transnational corporations (TNC) for the year 2004 (i.e., the most recent year for which data were available). These companies satisfy the formal definition of a TNC set out above and the sample size was sufficient to produce a ratio of observations to variables beyond the minimum requirement of at least 10 (Hair, Anderson and Tatham, 1987). The data were subjected to a simultaneous multiple regression analysis, where market capitalization (V 0 ) was treated as a function of the firm s (1) transnationality index (TNI), (2) internationalization index (II), and the interaction of transnationality and internationalization (TNI)(II). The TNI is calculated as the average of a firm s foreign to total assets, foreign to total sales and foreign to total employees, while II is calculated as the ratio of foreign to total affiliates and measures the extent to which a firm s TNI is derived from a broad international presence. Finally, (TNI)(II) provides one with a single mathematical measure of the intensity of a firm s foreign presence and its geographical breadth. Specified in this fashion, the model allows one to test both the

5 separate and combined effects of transnationality and internationalization on a firm s market value. Market capitalization (V 0 ) was derived on a year-end basis by multiplying the firm s closing share price by the year-end number of shares outstanding. Put otherwise, the purpose of this research was to test the following hypotheses: H 1 : There is a statistically significant relationship between a firm s level of transnationality and its ability to create shareholder value. H 2 : There is a statistically significant relationship between a firm s level of internationality and its ability to create shareholder value. H 3 : There is a statistically significant relationship between the interaction of transnationality and internationality and a firm s ability to create shareholder value. The fully specified regression model may be expressed as follows: where: V 0 = a ± b t (x tn ) ± b j (x jn ) ± b k (x kn ) + e b t = beta coefficient for transnationality b j = beta coefficient for internationalization b k = beta coefficient for interaction x tn = predictor of transnationality for ith firm, TNI i x jn = predictor of internationalization for ith firm, II i x kn = predictor of interaction effect for ith firm, (TNI i )(II i ) e = unexplained variance This study makes two unique contributions to the literature pertaining to transnational strategy: First, unlike earlier studies, this analysis focuses on the extent to which being more or less transnational contributes to the creation of shareholder value. Again, this is important because the creation of shareholder value is the standard by which a firm s strategy is ultimately judged (Rappaport, 1998). Earlier studies have considered a wide range of criterion variables, but growth in shareholder value has largely been ignored. Second, (TNI)(II) is a composite measure of transnationality that no other study has considered and it addresses one of the criticisms of earlier studies; that taken separately, neither (TNI) nor (II) adequately measure transnationality (Przybylska, 2006). In today s highly competitive global economy, firms must successfully compete for both relative market share and capital. As part of this process, the creation of shareholder value is a Hosted by The Berkeley Electronic Press

6 necessary but insufficient condition to attract investment capital. To compete effectively for capital on a sustained basis requires that management demonstrate an ability to consistently grow shareholder value at above market rates. The issue here is whether transnationality is a strategic advantage in this endeavor. Review of the Literature This review focuses on the literature pertaining to transnational strategy and avoids industry and functionally specific discussions of transnationalism. In their introduction of the transnational concept, Bartlett and Ghoshal (1989) took what they described as an administrative point of view, relying on a surprisingly limited number of case studies (Harzing, 2000), nine to be exact, in specifying just what they meant by a transnational company. The notion of a company being transnational in nature evolved from Bartlett and Ghoshal s (1989) definition of a multinational enterprise (MNE); a company with substantial direct investment in foreign countries that is actively managed and regarded as an integral part of the company, both strategically and organizationally. In this regard, the distinguishing characteristic of such an enterprise is the active, coordinated management of operations located in various countries and the internal organization established to manage cross-border flows of information and resources. Transnational management as envisioned by Bartlett and Ghoshal (1989) represents a way of conceptualizing and, as a consequence, actualizing the process of international management. The firm is seen as evolving as management s view of overseas operations changes with changes in the role of foreign investment and markets. More specifically, investment strategy has changed to better enable firms to take advantage of increasing scale economies, rapidly shortening product life cycles, increasing returns to R&D and innovation, and the growing importance of a global scanning and learning capability (Vernon, 1980). In this regard, Bartlett and Ghoshal (1989) argue that management has four generic strategic options: international, multinational, global, and transnational. The resulting challenge for management is to select that strategy that will allow the firm to more effectively leverage location specific advantages that may attach to specific foreign markets, strategic competencies that distinguish the firm and organizational capabilities that allow the firm to leverage its core competencies. Heidrick and Struggles (2005), a well-regarded executive placement and consulting firm, has acquired considerable experience working with firms at various stages in the process of evolving from international to transnational. In describing the strategic options firms have, Heidrick and Struggles (2005) argue that transnationalization occurs in stages and the rate at which firms evolve is largely determined by whether the CEO has successfully managed a company at more advanced stages of operations. International companies tend to pursue a strategy dependent on the systematic exploitation abroad of competitive advantages gained at home, relying largely on exports and both direct and indirect channels of distribution. Too often top managers of these companies are accustomed to working only within a well-defined job scope and their core competency tends to be generating current sales rather than allocating and managing strategic resources. Multinational companies require leadership capable of effectively transferring the firm s R&D, manufacturing and other core competencies abroad in order to fully exploit local market opportunities. On the business level, the challenge for country GM s at the multinational stage is not only to grow revenue but also to grow the local team and retain star employees (Heidrick and Struggles 2005, p. 3). Correspondingly, a truly transnational company builds on elements of both international and multinational strategy by blending into a seamless

7 whole the concepts of global-scale efficiencies and local market responsiveness. Competitive advantage comes from simultaneously managing corporate interrelationships along both local and global dimensions in order to create a value chain that is optimal (2005). Leaders of such companies are intent on maximizing value added on a firm-wide basis and tend to thrive on the discontinuities and ambiguities that characterize global markets. Research undertaken by Rugman and Verbeke (2004) relies on the UNCTAD World Investment Report and the Fortune Global 500 to identify those firms with the highest foreignto-total sales ratios (F/T) among the world s most internationalized companies. The resulting sample of 20 multinational enterprises was subsequently positioned on a two-dimensional globalization matrix defined in terms of the locus of decision making power and actual product characteristics. Companies pursuing a centralized approach to strategic planning and selling world products, were assumed to be pursuing a global strategy, those employing a regionally centered approach to strategic planning and selling region-based or adapted products were assumed to be pursuing a regional strategy and those companies organized around national units and selling nation-based adapted products were assumed to be pursuing a national strategy. The two-dimensional nature of this model lends itself to a simple conceptualization of a transnational company but in so doing, many of the important distinguishing characteristics of the transnational concept are ignored. Consequently, many of the distinguishing features of a truly transnational company are ignored, particularly the notion of allocating strategic resources and critical organizational relationships around an optimally configured value chain. Earlier research by Rugman and Verbeke (1992) examined the extent to which Bartlett and Ghoshal s (1989) transnational model of strategic management is consistent with the transaction cost-based theory of international production. As part of this effort, transaction cost theory was extended to incorporate some of the complexities of real world global strategic management and the empirical data gathered by Bartlett and Ghoshal (1989) was reassessed through a transaction cost lens. Finally, the relationship of transaction cost theory to the transnational solution of Bartlett and Ghoshal as an explanation of multinational strategic management was discussed and established. Subsequently, Verbeke (2003) chronicled the work of Kogut and Zander's (1993), which he describes as an evolutionary view of the MNE, and particularly important to the field of international business for three reasons: First, it opened the path to more eclectic conceptual and empirical studies in the realm of MNE expansion and internal functioning; second, it usefully suggested the elimination of the opportunism concept as a key focus in Williamsonian TCE-based analyses of MNEs; and third, it provided new avenues for the renewal of internalization theory, thereby ensuring this theory's continued relevance in the decades to come. In some respects, the work of Kogut and Zander (1993) went a long way in establishing an avenue of exploration for the research being undertaken here. More specifically, Kogut and Zander argue that by focusing to such a great extent on the minimization of transaction costs, internationalization theory has largely ignored the role of organizational design and market entry in creating shareholder value. Alternative designs, entry modes and technology tend to contribute different levels of incremental value, and to totally rely on the minimization of transaction costs as an explanation for such strategic choices ignores the important contribution of other value drivers such as growth, profitability, reinvestment rates for working capital and plant and equipment, and the firm s cost of capital. Verbeke (2003) underscores this notion: Hosted by The Berkeley Electronic Press

8 The need to focus on value creation is a credible point, which has been addressed to some extent in the literature, by adding a joint focus on production costs, though overall cost minimization is clearly not the same as value (or profit) maximization (p. 499). Others have also argued for a multifactor solution (Buckley and Chapman, 1997; Riordan and Williamson, 1985; Buckley and Casson, 1998; and Madhok, 1997), recognizing that there is much more to foreign entry than narrow transaction cost considerations. The research being undertaken here does, in fact, posit such a solution. Hennart (1994), pursuing an alternative research stream, examined the extent to which a firm s organizational routines and corporate governance structure might play a significant role in promoting superior performance. Of particular interest was whether a company s capabilities to efficiently combine its core competencies with the optimal organization of critical transactions relative to major competitors might lead to superior performance. Related conceptual analyses were undertaken by Madhok (2002) and Birkinshaw et al. (2002). Research Design and Methodology Again, this research is based on a cross-sectional analysis of the firms comprising the UNCTAD top 100 transnational corporations for the year This group of companies was chosen because they satisfy the formal definition of a TNC established by UNCTAD and they constitute a sample of sufficient size to produce a ratio of observations to variables beyond the minimum requirement of at least 10 necessary to justify utilizing a multivariate parametric technique (Hair, Anderson and Tatham, 1987). As previously mentioned, the data were subjected to a simultaneous multiple regression analysis using SPSS ENTER. All of the explanatory variables were simultaneously introduced and, as a consequence, the resulting discriminant model was derived from total variance as opposed to residual variance, which is the case when one relies on either step-wise or hierarchical regression analysis. Such a research strategy is clearly most appropriate when there is no practical or theoretical basis for considering one variable to be more important than any other variable and where the objective of the research is to explain as much of the total variance as possible; the dominant objective where the research undertaken here was concerned. By treating total market capitalization (V 0 ) as a function of transnationality (TNI), internationalization (II) and the interaction of transnationality and internationalization (TNI)(II), one is uniquely positioned to assess the role foreign asset, revenue and staffing intensity play in the process of creating shareholder value. If Bartlett and Ghoshal (1989) are correct in their assumptions, higher levels of intensity would be associated with a higher level of market capitalization. Finally, the approach used to calculate the interactivity between transnationality and internationality is consistent with the approach utilized by Geringer, Tallman and Olsen (2000) in their examination of the combined effect of business and market diversification. In fact, the same methodology has been used in a number of empirical studies of the interactive effects on firm performance of business and market diversification (Goerzen and Beamish, 2003; Christophe, 1997; Christophe and Pfeiffer, 1998; Franko,1989; Kim, Hwang and Burgers, 1989; Hitt, Hoskisson and Kim, 1997; and Geringer, Tallman and Olsen, 2000). The regression model produced here allows one to test both the separate and combined effects of transnationality and internationalization on a firm s market value. Market capitalization (V 0 ) was derived on a year-end basis by multiplying the firm s closing share price

9 by the year-end number of shares outstanding. If pursuit of a transnational strategy is an avenue to the creation of shareholder value, one would expect to see a statistically significant positive relationship between the indices used to specify the model and a firm s market value. The nature of the underlying relationship between a firm s strategy and the creation of shareholder value is well understood and well documented in the finance literature (Rappaport, 1998), but virtually no effort has been made to do the same thing in the literature pertaining to transnational strategy. To grow shareholder value on a sustained basis, the firm must earn a return on invested capital that exceeds its cost of capital and that is sufficient to create enough economic value to attract investment. Here economic value derives from a firm s ability to maximize the present value of free cash flow to the firm by simultaneously combining revenue growth with higher levels of operating profit, lower marginal tax rates, lower reinvestment rates for both working capital and plant and equipment, and a lower cost of capital. Given this paradigm, being more transnational (i.e., having a higher TNI) would have to lead to growth, profitability, reinvestment, tax minimization, financing, and staffing opportunities unique to its foreign presence, where the potency of this transnational advantage is proportional to the incremental gains in competency associated with geographical breadth (i.e., having a higher II). The objective is to create a level of organizational competence that produces more value added than would be possible given any other configuration of organic and/or non-organic value chain activities. Put more precisely, what management is faced with is solving a geographically distributed constraint optimization problem that leads to the overall maximization of value added. Correspondingly, the best test of success in creating such a value chain is the extent to which the firm is able to grow shareholder value over an extended period of time at above market and industry rates. Such performance would not be possible on a sustained basis if the firm were wedded to a value chain and strategy that were suboptimal. This is true because free cash flow to the firm, which drives intrinsic and in turn market value, is a function of value added. Average market capitalization (V 0 ) for the sample firms was $64.4 billion, ranging from a low of $3.7 billion to a high of $387.9 billion. The mean TNI was.5682, and the range was.0610 to.9730, while the mean II was.6588, with a range of.0685 to.9606, and the mean (TNI)(II) was.3864, with a range of.0042 to Median market capitalization was $38.95 billion and median values for TNI, II, and (TNI)(II) were.5565,.7033 and A majority of firms, 68.4 percent, had market capitalizations below $64.4 billion, with fully one-half having valuations under $38.95 billion. When viewed in conjunction with transnationality and internationality, one is led to conclude that a majority of the firms making up the UNCTAD 100 have less capital at risk abroad than revenue. Put otherwise, their broader global presence reflected in a relatively high average II, owes to marketing related investment (i.e., sales and service oriented activities) than to more capital intensive manufacturing related investment. It is abundantly clear, however, that among the top 25 percent of transnationals measured in terms of market capitalization, there are extraordinary levels of foreign investment in both capital and revenue, and the potency of the interactive effect is significantly above what one sees among smaller transnationals, as the statistics from Table 1 suggest. Hosted by The Berkeley Electronic Press

10 Table 1 Descriptive Statistics Statistics V 0 ($) TNI II (TNI)(II) Mean B Std. Error Median B Mode B Std. Deviation 65.80M Minimum 3.73B Maximum B Percentiles B B B Table 2 presents the results of the linear multiple regression analysis where transnationality (TNI), internationality (II) and interactive effect of transnationality and internationality (TNI)(II) were regressed on market capitalization (V 0 ). Predictor variables were simultaneously entered into the multiple regression analysis. Where there is a statistically significant relationship between one or more of the predictor variables and the dependent variable, the standardized regression coefficient(s) can be used to identify which variables account for significant amounts of the variance in market capitalization and to explain or describe the nature of that variance. A conventional t-test was used to evaluate the explanatory power of the predictor variables, using criterion values of below -2 and above +2 and a significance level of.05 or below. While a variety of statistical tests are available to evaluate the explanatory power of the regression model, this analysis relied on a criterion F-ratio of 3.54 and level of significance of.05 or below. The assumption of linearity was tested for and satisfied through diagramming. As suggested earlier, the sample size was sufficient to produce a ratio of observations to variables well beyond the minimum requirement of at least 10 (Hair, Anderson and Tatham, 1987). The resulting Durbin-Watson statistic of suggested the presence of some autocorrelation, a result that is not uncommon where one or more of the predictor variables is interactive in nature. When this effect was tested for by dropping the interactive variable (TNI)(II) from the equation, evidence of autocorrelation disappeared. The interactive variable was reintroduced, however, because the purpose of the analysis was to explore and explain, not forecast.

11 Table 2 Multiple Regression Analysis Correlations V 0 TNI II (TNI)(II) V TNI II (TNI)(II) Model Summary V 0 = dependent variable R R 2 Adj. R 2 Std. Error F Sig Regression Coefficients β Unstandardized Std. Error β Standardized t Sig. (Constant) TNI II (TNI)(II) Because of the parsimonious nature of the regression equation, R 2 as opposed to the adjusted R 2 was used to evaluate the model s explanatory power. Referring again to the hypotheses being tested here: H 1 : There is a statistically significant relationship between a firm s level of transnationality and its ability to create shareholder value. H 2 : There is a statistically significant relationship between a firm s level of internationality and its ability to create shareholder value. H 3 : There is a statistically significant relationship between the interaction of transnationality and internationality and a firm s ability to create shareholder value. The results of the regression analysis did not support acceptance of H 1, H 2 or H 3. More specifically, the regression results suggest an absence of a statistically significant relationship between the level of a firm s transnationality (TNI), internationality (II), or the interaction of the two (TNI)(II), and the creation of shareholder value (V 0 ). The resulting coefficient of multiple determination (R 2 ), which measures the percentage of the variance in shareholder value (V 0 ) explained by the regression equation, was very low (.009) and, as one would expect, the accompanying F-ratio of.279 was statistically insignificant. Correspondingly, none of the predictor variables had t statistics approaching significance, and the counterintuitive nature of the sign accompanying the beta coefficient for interactivity served to confirm the presence of at least some autocorrelation. Since none of the earlier work pertaining to transnational strategy has Hosted by The Berkeley Electronic Press

12 looked at the extent to which such a strategy, defined in terms of transnationality and internationality, is likely to contribute to the creation of shareholder value, it is impossible to assess these results relative to closely related research. Nevertheless, the distributive characteristics of the data, combined with the seemingly unambiguous nature of the results, raises some interesting questions that might well serve as a basis for future investigation. When combined with the somewhat illusive nature of just what is meant by a transnational company, a number of questions arise that are relevant to the consequences of the research undertaken here and to future research. Summary and Conclusions Once again, the purpose of this research was to examine the extent to which pursuing a transnational strategy contributes to a firm s ability to create value for its shareholders, and to consider how being more or less transnational might influence this process. Important to this purpose, of course, is having a working definition of a transnational company that produces a homogeneous population from which to sample. This analysis used the formal definition of a transnational company established by UNCTAD (2002). However, when contrasted with Bartlett and Ghoshal s (1989) description of a transnational company, one cannot help but be struck by the differences between the two in terms of tone and points of emphasis. These differences may well be germane to the results this analysis because of the role they played in shaping the nature of the UNCTAD sample. It is also difficult to find any significant differences between UNCTAD s definition of a transnational company and their definition of a multinational company. This notion is underscored by Jones and Wren (2006) in their discussion of foreign direct investment: The term multinational applies when the international operations of a firm begins to involve actual production in another country. The term transnational company is used when the firm becomes globally active to such an extent that its identity becomes detached and independent from its home or any other particular country. In practice, the terms multinational and transnational corporations are often used synonymously. Formal definitions of multinational enterprise are given by the Organization for Economic Cooperation and Development and by UNCTAD in the World Investment Report. The OECD classifies MNEs as companies or other entities established in more than one country, and so linked that they may coordinate their operations in various ways (OECD 2000, p.17). The term entities covers the parent and other related entities of the company, although the former will be the main source of influence. A similar definition is issued by UNCTAD, although its definition refers to transnational corporations rather than multinational enterprises (pp ). In order to clearly underscore the non-trivial nature of these definitional inconsistencies and their significance for the analysis undertaken here, the two definitions Jones and Wren (2006) allude to, with common elements underlined, appear below. In this regard, it is worth noting that Jones and Wren (2006) do essentially the same thing in identifying the key aspects of either a multinational or a transnational company: First, it must be present in two or more countries; second it can be of private, public or mixed ownership; third, it consists of several

13 entities within its structure, although only one of the entities will be the main source of influence over the others; and fourth, it will coordinate its resources and operations between the various entities. A multinational enterprise is a parent enterprise with its foreign affiliates. Among the incorporated affiliates we can distinguish between subsidiaries and associates. In associates the foreign investor should own no less than 10 and no more than 50 percent of the equity capital stake. In the case of a subsidiary, the parent enterprise controls over half of the shareholders voting power. It has the right to appoint or remove the majority of members of an administrative, management or supervisory body. In unincorporated branches, the parent enterprise must hold an equivalent of 10 percent ownership rights or voting power (UNCTAD, 2000; Stolarski, 2003). A transnational corporation (TNC) is generally regarded as an enterprise comprising entities in more than one country which operate under a system of decision making that permits coherent policies and a common strategy. The entities are so linked, by ownership or otherwise, that one or more of them may be able to exercise a significant influence over the others and, in particular, to share knowledge, resources and responsibilities with the others (UNCTAD, 2002). It seems clear that UNCTAD created its sample of top 100 transnationals using essentially the same definition that it has used to identify the top 100 multinationals when there is clear evidence of important fundamental differences between the two models and their defining strategies. In fact, it is strategy and policy that are truly determinant in distinguishing between transnational and multinational companies. In this regard, a transnational strategy allows for the attainment of benefits inherent in both global and multidomestic strategies. The overseas components are integrated into the overall corporate structure across several dimensions, and each of the components is empowered to become a source of specialized innovation. It is a management approach in which an organization integrates its global business activities through close cooperation and interdependence among its headquarters, operations, and international subsidiaries, and its use of appropriate global information technologies (Zwass, 1998). Furthermore, the fact that empirical evidence suggests that multinational companies tend to employ four generic strategies to enter and exploit foreign markets: an international, multidomestic, global, or transnational strategy (Hill, 1999), underscores the notion that multinational is less than determinant in establishing the underlying nature of a company engaged in cross-border trade and commerce. As the results of this analysis clearly show, when the UNCTAD top 100 transnational firms are viewed collectively, growth in shareholder value does not derive from higher levels of transnationality (TNI) and internationality (II). However, among those firms comprising the upper quartile of the UNCTAD top 100 transnationals, the average transnationality (TNI), internationality (II) and interactivity (TNI)(II) measures are significantly higher than the corresponding averages for middle and lower quartile firms (see Table 1). When this statistical discontinuity is considered in conjunction with the definitional inconsistencies cited above, one is left to question whether all of the companies selected for inclusion in the UNCTAD top 100 transnational firms are truly transnational in terms of strategy, policy and implementation. Given Hosted by The Berkeley Electronic Press

14 close scrutiny, the underlying nature of the transnational concept as it is commonly understood (Bartlett and Ghoshal, 1989; Zwass, 1998), is plainly inconsistent with the UNCTAD definition of a transnational company. It is easy to see how a significant number of multinational companies could have crept into the UNCTAD sample of top transnational companies and, in so doing, compromised the sample s homogeneity. It is also easy to see how a truly transnational company could have been overlooked in the sampling process. Regarding the study s limitations and possible directions for future research, an attempt should be made to establish a working definition of transnational that derives from the unique and distinguishing features of such a firm s strategy, policies and methods of implementation rather than from its anatomical characteristics and legal underpinnings. Until this is accomplished, academics and practitioners will continue to live with the uncertainty of not really knowing whether the standards they use and the judgments they make obtain from truly homogeneous sets and are therefore meaningful or whether they obtain from heterogeneous sets and are therefore meaningless. A second avenue for future research might well entail more thoroughly examining the validity of TNI and II as measures of transnationalism and internationalism. Here TNI is calculated as the average of a firm s foreign to total assets, foreign to total sales and foreign to total employees, while II is calculated as the ratio of foreign to total affiliates and measures the extent to which a firm s TNI is derived from a broad international presence, where the expansiveness of that presence is treated as a function of geographical density. Finally, (TNI)(II) provides one with a single mathematical measure of the intensity of a firm s foreign presence and its geographical density. While a strong theoretical argument can be made in support of the relevance and importance of accounting for the significance of foreign revenue as a determinant of the extent to which a firm is transnational, one is harder put to posit a similar defense for total assets or foreign employees as determinants of transnationality, however these metrics might be cast, particularly if one embraces the notion of a transnational company being more clearly defined by its strategic character than by its anatomy. For example, a more virtual approach to marketing and/or operations, a common characteristic of transnational companies, tends to produce far leaner and less capital intensive organizational configurations and, one might reasonably expect, correspondingly lower measures of TNI and II. While the results of this research did not support acceptance of the study s hypotheses, the results do appear to raise questions of sufficient importance to justify further research pertaining to a firm s level of transnationality and the creation of shareholder value.

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