The flow of skills and product offerings from foreign subsidiary to home country and from foreign subsidiary to foreign subsidiary.
Because of such developments, many international businesses are moving away from a system in which their foreign facilities were viewed as nothing more than low-cost production facilities and toward one where they are viewed as globally dispersed centers of excellence.22 In this new model, foreign sites may take the lead role for the design and manufacture of products to serve important national or regional markets or even the global market. The development of such dispersed centers of excellence is consistent with the concept of a transnational strategy, introduced in Chapter 12. A major aspect of a transnational strategy is a belief in global learning—the idea that valuable knowledge does not reside just in a firm’s domestic operations; it may also be found in its foreign subsidiaries. Foreign factories that upgrade their capabilities over time are creating valuable knowledge that might benefit the whole corporation.
Managers of international businesses need to remember that foreign factories can improve their capabilities over time, and this can be of immense strategic benefit to the firm. Rather than viewing foreign factories simply as sweatshops where unskilled labor churns out low-cost goods, managers need to see them as potential centers of excellence and to encourage and foster attempts by local managers to upgrade the capabilities of their factories and, thereby, enhance their strategic standing within the corporation.
Such a process does imply that once a foreign factory has been established and valuable skills have been accumulated, it may not be wise to switch production to another location simply because some underlying variable, such as wage rates, has changed.23 HP has kept its facility in Singapore, rather than switching production to a location where wage rates are now much lower, such as Vietnam, because it recognizes that the Singapore operation has accumulated valuable skills that boost productivity and more than make up for the higher wage rates. Thus, when reviewing the location of production facilities, the international manager must consider the valuable skills that may have been accumulated at various locations and the impact of those skills on factors such as productivity and product design.
• QUICK STUDY
1. Through what mechanisms might a foreign production site upgrade its skills over time?
2. What are the implications of upgraded skills for strategic decisions about where a company should locate value creation activities?