The liability of connectedness for the Swedish economy

2020-04-28

There needs to be a serious discussion in Sweden once the corona crisis is over about how globalized multinational Enterprises (MNEs) should be. There is clearly huge risks and impact on their production activities if they have so much of their value chain outside it’s home country and cannot access component parts and resources. However, on the flip side to this the downstream activities of MNEs, such as innovation and R&D, has fared much better as these activities can continue largely uninterrupted and continued at a distance. If anything, there has been an increase in R&D activities evidenced in the joining of giants in the pharma industry like Roche and GSK or AstraZeneca in international collaborative R&D in testing therapeutics and creating vaccines against corona virus.

What is evident is that to overcome the pandemic and see a resurgence of economic growth, we will need global markets, global supply chains, and, importantly, global collaboration in R&D to catalyze globally dispersed innovative activities. We won’t emerge from the crisis with the same interdependent global value chain system as before, corrections in redundancies in the system are quite normal and unfortunately MNEs will disappear. There will undoubtedly be a significant reduction in upstream activities as MNEs take activities home or move them to new low-cost destinations but the downstream activities underpinning R&D are likely to increase.

The internalization process, a model of the foreign expansion of MNEs came into being in Sweden and spawned an linage of research interested in the intranational activities of MNEs. This is not surprising as Swedish MNEs have traditionally been very expansive in their international activities due to the density of MNEs in Sweden, their relative intactness after the second world war and the small size of the Swedish marketplace.

In many ways Sweden has been a major player through its MNEs in the global transition from the trade in commodities to the trade in activities and the emergence of global value chains. As a country of 10 million inhabitants Sweden has always punched above its weight when it comes to the formation and activities of MNEs such as Husqvarna, Ericsson, Volvo and ABB to name a few. These types of MNEs have been leaders in driving connectedness of global activities as they have increasing moved production and knowledge activities into foreign markets and despite the challenges of intermittent global and regional recessions their organizational connectedness is ever increasing. That is until recently when the global shut down caused by the corona virus took hold. In this new normal of global lock downs, it increasingly obvious there are certain liabilities of global value chain connectedness.

I worked for many years in the pulp and paper and then the defense industries before undertaking my doctoral studies in international business. In this capacity and the roles which I undertook I saw MNE orchestration of complex production and knowledge activities being orchestrated domestically and globally. It strengthened my believe that MNEs are the driving force of global economies in that they connect the value generating activities within and across economies in ways that no other entity can. This is evident in the ability of the present economic system lifting over a billion humans out of poverty and bringing them in to the workplace, in many cases for subsidiaries of Swedish MNEs.

My doctoral research was on managing value chain activities of foreign subsidiaries of Swedish multinational enterprises, 2018. It dealt with how headquarters and foreign subsidiaries of Swedish MNEs can develop and orchestrate value chain activities to give value to the MNE and the local environments it acts in.

The thesis showed that over the last 20 years Swedish MNEs have moved significant amounts of their sales, production and R&D overseas to destinations in Europe, China, India and Latin America. These MNEs now act as network organizations and the real motors of value creation in this process are the foreign subsidiaries. The thesis also provided illustration of the processes of resource mobilization among the global network of subsidiaries and the interdependencies of activities in the MNE network.

But, in the midst of this crisis there has emerged an opportunity to reopen a discussion of the over dependency on foreign markets for factors of production. There seems to be significant disruption in the upstream activities (production) of MNEs while the downstream activities (R&D) have been impacted less. Simply put there has been a lively discussion of the nature of global supply chains and the risks of MNEs being so globally disaggregated where companies source the majority of their activities and resources in foreign countries and can’t operate in crisis as the activities and resources are no longer available at scale.

To exemplify this Atlas Copco and Volvo to name a few MNEs have reduced or stopped production and are unlikely to emerge from the crisis with the same capacities, at least in the short term. At the same time countries, such as Japan, are underwriting the cost of MNEs bringing production activities back to the domestic markets. Another example from the present crisis was the need for increased numbers of ventilators, the re-purposing of companies to manufacture these machines has proved very tricky as a ventilator has 70 working parts which are sourced from over 50 countries. I we look at personal protective equipment (PPE), that it is sourced from abroad is nothing new in a liberal and open market such as Sweden. However, the fact that MNEs that manufacture PPE are struggling to get their hands on the parts to increase production is devastating and a failure of risk management and contingency planning on the part of these MNEs.

While global collaboration in R&D and innovation activities amongst MNEs continues and is quite likely to be the driving catalyst in allowing the world to emerge to some semblance of normality from the crisis. Production and more ‘screwdriver’ type activities are taking a massive hit and unlikely to emerge in the same form as before the crisis. The main question we should be asking of the MNEs as we emerge from this crisis is how will the MNEs go about managing risks of interdependence in upstream activities while letting the obvious benefits from downstream international collaboration flourish.