Flexibility and Performance of MNEs: Evidence from Taiwan

Abstract

ABSTRACT Flexibility has become the key strategy of multinational enterprises (MNEs) to successfully operating in the currently turbulent environment (Kogut and Kulatilaka, 1994; Kuo et al., 2003). This research analyzes flexibility in terms of the three levels of operational environment that firms have to confront--external environment, task environment, and internal environment (Buckley and Casson, 1998). We adopt a resource base theory, treating flexibility as a special resource of an enterprise, and manipulate operating flexibility in order to perform an empirical study of whether flexibility can effectively reduce the impacts caused by environmental changes. The Asian financial crisis provides an appropriate opportunity to investigate whether operating flexibility functions during the shock of international environment. The empirical results show that flexibility has positive and significant effects on MNEs' performance. Furthermore, Chow test finds that the contribution of flexibility to MNEs' performance does not reveal a significant structure change following external shock. JEL Classification: F23, L25, L60, M19. Keywords: Flexibility; MNEs, Chow test; Asian financial crisis. I. INTRODUCTION The economy has been undergoing changes and, globalization has enlarged competition for almost every type of multinational enterprises (MNEs). Kogut (1985) posited that international competition results from the change in government policies, the uncertainty in the exchange rate, and the unforeseeable reaction of competing opponents. MNEs now have to be more flexible and more responsive to their environment. Volatility and uncertainty have characterized the international environment in recent decades. One of the reasons resulted from the increased speed and ease of transportation and communication. Hence, shocks are easily transmitted all over the world. Other reasons include a variety of market demands and keen competition among all competitors. These have made the international business environment fluctuate more vehemently than before. Therefore, the risks undertaken by MNEs are higher than those of domestic firms (Vernon, 1985; Ghoshal, 1987; Miller and Bromiley, 1990; Werner et al., 1996). Miller (1993) also addressed the fact that MNEs are exposed to a wide range of risks, such as the uncertainty of government policies, macroeconomic situation, resources and services, product market and demand, competition, as well as technology in the industry. Hence, MNEs have to take appropriate strategies to lessen the impact of environmental fluctuations on firms' operations. Since 1980s, the flexibility of an enterprise has become a pivotal factor for an enterprise to be competitive in the international market because of the speed of changes in product technology, a tendency towards free trade, deregulation in the capital market, and an increasing range of exchange rate fluctuation. Rangan (1998) postulated three different points of views concerning flexibility: flexibility optimism, flexibility pessimism, and flexibility realism. Flexibility optimism focuses on individual efficiencies and reaction to environmental changes and MNEs can react to a change in the international environment by their flexibility (Little, 1987). Flexibility pessimism begins from the viewpoint of the organization as a whole. It argues that the flexibility of an enterprise is likely to be rather tardy because of its large size and complexity. The flexibility of an enterprise is not necessarily able to function better (Kogut, 1985; Collis, 1991). Flexibility realism views flexibility as a kind of property of initial positions (Jones and Ostroy, 1984). Therefore, if a firm wants to ensure flexibility under a present condition, it must have invested in it in the previous period or it might not have an improved flexibility at the present time. Kogut (1983, 1985, 1989), Kogut and Kulatilaka (1994), and Kuo et al. …