Fostering linkages between transnational corporations and small to medium-sized enterprises in Brazil.

Author:Botelho, Delane
Position:Report
 
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Introduction

Fostering TNC-SME linkages in Brazil

What can a host country expect from foreign corporations entering their market? Effects such as increased employment and exports are certainly important, but the development of domestic industries, transfer of technological and management expertise and sustained economic growth are among the foremost expectations. Social and economic development depends on several aspects, such as investments from both the private and the public sector in education, health, safety, infrastructure, and technological innovation. Private companies, whether large Transnational Corporations (TNCs) or local Small and Medium Enterprises (SMEs), play an important role. However, merely having companies set up in a given area is not enough to foster development. A TNC, for instance, may be attracted to a developing country due to tax incentives, lower labor costs and easy access to natural resources only, but import qualified labor and buy from non-local suppliers while barely contributing to regional development.

Promoting and tightening relationships between large companies, whether TNCs or not, and generally small local suppliers located in less developed areas may trigger regional development. The public sector may play an important role by fostering such Business Linkages (BL), by which TNCs establish a purchase relationship with local SMEs in the country where the TNC, or its affiliates, is established (Giroud, 2006). BL are non-equity based relationships between foreign affiliates and domestic firms that have the potential for spillovers (externalities that arise when the entry or presence of foreign affiliates leads to improvements in the capacity, productivity or efficiency of domestic firms by transferring, for instance, technology and managerial expertise). Through BL, SMEs benefit from the accelerated technology transfer, increase in business volume and greater commercial stability, while TNCs take advantage of lower production and distribution costs, a decrease in fixed assets, flexibility in their supply chain and a greater ability to deliver on time (Jenkins, Akhalkatsi, Roberts, & Gardiner, 2007).

This article was motivated by the growing attention in literature (Ivarsson & Alvstam, 2004) to the interaction between the level of economic development and the ability of companies and countries to absorb and disseminate competences. As BLs may promote local development, they may be of interest from the perspective of the Federal government as an agent of economic regulation and social development, especially when suppliers come from well-developed areas or from overseas.

The purpose of this research an extension of Bourguignon and Botelho (2009), is to understand the role of public policy programs that promote BL in order to foster development by: (a) analyzing actions and programs developed by public and private institutions to foster BL in Brazil; (b) discovering the participants' benefits from such actions and programs; and (c) identifying opportunities for public sector promotion of BL. The article is structured as follows: this introduction presented the purposes and relevance. Next we present the theoretical background, addressing in particular the buyer-supplier relationship, BLs and their fostering, public policies and the Brazilian effort to develop companies. This is followed by the empirical research method and discussion of results. We conclude with implications for public policies and suggestions for further research.

Theory

A key challenge for economic development often resides in the accumulation of technology and knowledge, and the capability enhancement of local companies in the country. This can be achieved by buying technology externally, by investing in firm's development programs, or by encouraging inter-firm linkages with firms that operate in high value-added activities and demonstrate high resources. In developing countries, TNCs are often perceived as benefiting from firm-specific advantages and resources superior to those possessed by locally-owned firms (Dunning & Lundan, 2008; Fortanier, 2007; Giroud, 2007a; Lall & Narula, 2004), and TNCs are also key providers of investment.

The value chain is a fundamental concept in this article, since it refers to the set of activities performed by an organization: from the relationship with suppliers, through the production and sale cycles, to the final distribution phase (Bornstein, 2003). Gefferi, Humphrey and Sturgeon (2005) define the value, production or supply chain as the process implemented by a company or a group of companies where technology is combined with labor and material inputs, organized for and oriented towards a given market, and then distributed. According to the value chain theory, and from the perspective of buyer companies, improvements to the chain performance are expected to be possible only when long-term commitments are established with their key suppliers (Krause, Handfield, & Tyler, 2007). TNCs generally have highly demanding consumers in regards to quality and process control, because they participate in the world's most competitive environments (Shen, 2008). Thus, they come to place demands and pressure backwards through the value chain. Such companies aim to reduce the number of suppliers and increase their efficiency; SMEs are not always prepared to meet their demands.

Another fundamental perspective in this article is the inter-firm network perspective: networks bringing together partners with complementary competences. Such partnership in this paper is focused on the TNC-SME relationship. With globalization of markets, firms have geographically expanded their activities and, therefore outsourcing, partnerships, alliances and different business arrangements have greatly developed. Markets in this case have no regional borders and firms are specializing in their core business while demanding international contractual relations, either to obtain their inputs or to distribute their products and services. Real networks are being developed, focusing on continuous and sustainable business linkages.

Also, cooperative marketing actions are receiving increasing attention and have been defended by marketing executives and academics. Cooperation may be vertical in a network (between players of technologically distinct stages--e.g.: suppliers and distributors), as well as horizontal, involving competitors and even firms presenting complementary products, with the same target-market. Figure 1 illustrates an inter-firm network, whose key elements are the focal company, suppliers, distribution channels, final consumers, facilitators, other companies/networks and competitors. They all interact to create value to the final customer.

[FIGURE 1 OMITTED]

It is important to focus on the network of partnership members and the links between the members. So, some structural aspects need to be considered when designing the network: (a) the members of the network; (b) the structural dimensions of the network; and (c) the different types of links. The first point assumes that members have some importance for the network. These primary members are usually profit-making units, such as autonomous companies or strategic business units. As shown in Figure 1, the structural dimensions must consider the number of tiers from suppliers to customers, the number of members in each tier and the position of the focal company within the network. When trying to understand and monitor spillovers from the strengthening of BLs, a network perspective is much useful, since the spillover may go beyond a more linear value chain model.

Indeed, BLs may be horizontal, between competitors; collaborative, with national partners for strategic, technologic or managerial purposes; or vertical, with suppliers, agents or domestic clients, including licensing and franchising agreements. Foreign affiliates may help domestic suppliers or clients increase their abilities through improvements to the production quality and efficiency standards, as well as by providing support of and resources for procurement, project management, quality control, training, and/or gathering market information. Such vertical linkages can be upstream (with suppliers and subcontractors), which is discussed in depth in this article; downstream (with clients and agents); or of contract nature (with domestic franchising and licensing) (Scott-Kennel, 2007).

There are relevant studies on value chain and inter-firm network in the context of the buyer-supplier relationship in developing countries. Kumar and Bergstrom (2008), for instance, analyzed a pattern of a long-term buyer-supplier relationship in South Africa, India, and Pakistan. They concluded that the more developed the buying market was, the better the local supplier was treated by the TNC, and the TNC-supplier relationship was stronger. Jeppesen and Hansen (2004) depicted the standards of management technology transfers from TNCs to their suppliers in developing countries, as divided into three main patterns: (a) identification of standards; (b) control and monitoring; (c) technical collaboration. Such patterns deliver a continuum ranging from low (determination of standards) to high (technical collaboration) interaction between companies. Client companies require products certified by internationally recognized authorities when determining standards, which forces suppliers' technological development. Control and monitoring are under client-imposed standards, and often introduce control mechanisms, such as the Michelin Certificate, which is provided to distributors in Brazil that meet the quality standards required by Michelin. Technical collaboration occurs when large companies offer technical support to their suppliers so that they reach the standards required by the former, usually involving specialized technical staff visiting the supplier, which tightens the relationship between the...

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