A New Framework for Global Expansion

Management DecisionEmerald Article: A new framework for global expansion: A dynamic diversification-coordination (DDC) modelHwy-Chang Moon, Min-Young Kim

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To cite this document: Hwy-Chang Moon, Min-Young Kim, (2008),"A new framework for global expansion: A dynamic diversification-coordination (DDC) model", Management Decision, Vol. 46 Iss: 1 pp. 131 - 151

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A new framework for globalexpansion

A dynamic diversification-coordination (DDC)model

Hwy-Chang MoonThe Graduate School of International Studies (GSIS), Seoul National University,

Seoul, Korea, and

Min-Young KimDepartment of Business Administration,

University of Illinois at Urbana-Champaign, Champaign, Illinois, USA

Abstract

Purpose – The main purpose of this paper is to introduce a comprehensive model explaining theglobal expansion of firms and to find out viable strategies for firms to survive global competition.

Design/methodology/approach – Through the critical review over existing literature, this studyfirst introduces a new framework explaining the global expansion of firms at the level of functionalactivities in the value chain, and then empirically tests the predictions of the new framework with datain the motor industry.

Findings – Empirical findings confirm the new model’s predictions. First, each function in the valuechain has a unique way of global expansion: the global strategy is suitable for the production function,while the multidomestic strategy is applicable to the marketing function. Second, each function followsa dynamic path of global expansion from domestic to transnational via either global or multidomestic,according to the innate characteristics of corresponding function. Finally, the degree of globalexpansion of a firm is positively correlated with its financial performance.

Research limitations/implications – Focusing on developing a new framework on globalexpansion, this study utilizes a rather small number of data and, therefore, requires readers’ discretionwhen interpreting the results of statistical analyses.

Practical implications – With the dynamic diversification-coordination model, managers canrecognize the level and characteristics of their firms’ global expansion, not only at the firm level but alsoat the functional level. This allows managers to establish a global strategy tailored to each function, thusreconciling possible conflicts generated from different interests among different functions in the firm.

Originality/value – First, this article introduces a new perspective of analyzing the globalexpansion of firms by shifting the level of analysis from the firm level to the functional level where thenew framework can reconcile the constant debates on globalization. Second, this article suggests anintuitive and theory-based index measuring the degree of global expansion of firms.

Keywords Globalization, Marketing strategy, Functional management, Diversification

Paper type Research paper

IntroductionMultinational corporations (MNCs) globally expand their operations to takeadvantages in ownership, location, and internalization (Dunning, 1981, 1988, 2000),

The current issue and full text archive of this journal is available at

www.emeraldinsight.com/0025-1747.htm

The authors would like to thank anonymous reviewers for their constructive comments.

A newframework for

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Received May 2007Revised September 2007

Accepted October 2007

Management DecisionVol. 46 No. 1, 2008

pp. 131-151q Emerald Group Publishing Limited

0025-1747DOI 10.1108/00251740810846789

and try to maximize the benefits from global expansion by implementing a series ofrelevant strategies. Existing constructs and frameworks explaining these strategicprocesses, however, have shown contradictions. In particular, the constant debatesover the validity of “globalization” have brought fundamental doubts on the existingapproaches to the global expansion of a firm. This paper introduces a new frameworkof global expansion at the level of functional activities in the value chain and suggestsa new way of reconciling the confusing debates on the global expansion of a firm.

This paper begins with reviewing the existing models on global expansion and thenevaluates their relevance by introducing a new construct of functional division to theglobal expansion of a firm. Based on the evaluation, this paper brings forth a newframework of the dynamic diversification-coordination (DDC) model and empiricallytests the validity of the framework with statistical analyses. The results from theempirical analyses support the predictions of the DDC model. First, each function in thevalue chain has a unique way of global expansion: the Global strategy is suitable forthe production function, while the Multidomestic strategy is applicable to themarketing function. Second, in the process of global expansion, each function follows adynamic path from Domestic to Transnational via Global or Multidomestic, accordingto its innate characteristics. Finally, the degree of global expansion of a firm ispositively correlated with its financial performance.

For clear conceptualization, we employ a typology of global expansion as ametalanguage representing the increasing involvement of a firm’s activities in globalscale. As each typology used interchangeably in the literature such asinternationalization, globalization, multinaltionalization, transnationalization, andinternational diversification is actually introduced for its unique purpose in the specificcontexts and, consequently, may focus on certain aspects of the phenomenon more thanothers, we use global expansion in this study as a neutral typology that encompasses allthe intended meanings of the existing terms to avoid any confusion and misinterpretation.

Exisiting models on global expansionAmong many studies on the global expansion of a firm, theConfiguration-Coordination model (Porter, 1986) and the Integration-Responsivenessmodel (Prahalad and Doz, 1987) are the most popular and empirically supported(Taggart, 1997). Many studies have analyzed the phenomenon with theConfiguration-Coordination model (Collis, 1991; Roth, 1992; Roth et al., 1991; Yip,1992) and the Integration-Responsiveness model (Johnson, 1995; Roth and Morrison,1990; Rugman and Hodgetts, 2001). Some studies extended the original models bycorrecting the flaws in the models (Harzing, 2000; Moon, 1994; Rugman and Verbeke,2006) or shifting the level of analysis (Makhija et al., 1997). It is worthwhile to take alook over the details in these models and the histories of the extension for the betterunderstanding of fundamental characteristics of global expansion.

Prahalad and Doz (1987) explain the global expansion of a firm with two criteria:Integration and Responsiveness. Integration represents the extent to which a firmintegrates its functional activities in global scale. On the other hand, Responsiveness isthe level of the adaptation to the local differences in customer preferences. TheIntegration-Responsiveness model, however, cannot be said to be a general modelexplaining global expansion, because each of the two criteria has different orientations.As the main benefits of integrating activities in the value chain come from the

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economies of scales and scope (Benito, 2003; Farrell, 2004; Grant, 1998; Rugman andHodgetts, 2001), Integration in the Integration-Responsiveness model is rather aproduction-oriented criterion. Likewise, as the criterion of Responsiveness accesses thelevel of satisfaction of the customers in various locations (Benito, 2003; Harzing, 2000;Roth, 1992), Responsiveness is also a marketing-oriented criterion. Consequently, theIntegration-Responsiveness model is not a general model but a one-sided model withIntegration focusing on the production side and Responsiveness on the marketing side.

On the basis of the typology of Bartlett and Ghoshal (1989), Harzing (2000) extendsthe Integration-Responsiveness model and suggests a three-fold typology: Global,Multidomestic, and Transnational. Her analysis using data from 166 subsidiaries of 37MNCs empirically shows that these three typologies are significantly different fromeach other. Her model, however, is not a general one because it is based on the originalIntegration-Responsiveness model, thus inheriting the flaws in the model: though thelogic of her argument and the results of empirical tests are remarkable, Harzing (2000)cannot be free from the criticism that each of the two criteria in the model,Interdependence and Local Responsiveness, focuses on production and marketing,respectively, in the same way as Prahalad and Doz (1987).

Porter (1986) introduces two criteria of Configuration and Coordination into theexplanation of global expansion strategy. Configuration of a firm’s activities isgeographical deployment of each function in the value chain, while Coordination ismutual linkage or integration of the activities performed in different configurations. Heargues that a firm can enhance its competitive advantage with optimal combination ofthe activities in the value chain in global scale.

Extending the Configuration-Coordination model, Moon (1994) criticizes theConfiguration-Coordination model in two aspects and suggests a generalizedframework for global expansion strategy. He criticizes Porter’s (1986) model in twopoints. First, Porter mislabels the horizontal axis (Configuration). The horizontal axisshould measure the number of countries (one through many), not Configuration. Second,as a matter of fact, Porter’s framework is a specific framework, not a general one, for thesame reason that the Integration-Responsiveness model is. He asserts that Porter’s modelis geared toward manufacturing industry, with Configuration on the production side andCoordination on the marketing side. Toyota in 1970s can be a typical example. Therefore,in Porter’s (1986) model, Configuration is for the production side and Coordination for themarketing side. Like the Integration-Responsiveness model, theConfiguration-Coordination model is also one-sided.

Recognizing the shortcomings in the Configuration-Coordination model, Moon(1994) extends the model into a generalized one. He argues that both the productionside and the marketing side of global expansion should be considered in one model tofully understand the phenomena in global expansion, and shifts theConfiguration-Coordination model to a generalized one integrating three criteria intoa single framework: number of countries; production coordination; and marketingcoordination. The generalized framework is composed of two parts, one forproduction-seeking global strategies and the other for marketing-seeking globalstrategies.

Comparing the models discussed so far, we can find three implications. First, the twomodels, the Integration-Responsiveness and the Configuration-Coordination model,conceptually share same criteria. With consideration of integrating the activities in the

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value chain, it is clear that Integration in the Integration-Responsiveness model sharesthe same characteristics with Coordination in the Configuration-Coordination model. Ascoordination is to integrate different activities in an organization, they can be used assynonyms (Martinez and Jarillo, 1989). In addition, as Responsiveness is to satisfy theneeds of customers in various locations, it can also be understood within the category ofConfiguration. Therefore, the two models have the same criteria for the implementationof global expansion strategy. Second, each model, however, is focused toward differentorientations. As discussed, Integration is on the production side and Responsiveness ison the marketing side, while Configuration is on the production side and Coordination ison the marketing side. Last, the generalized model of Moon (1994) provides a betterframework for the explanation of global expansion. Integrating the two differentorientations of production and marketing into a single framework, the generalized modelcan explain the phenomena more comprehensively.

Moon (1994)’s generalized model, however, is not free from criticism, either. Thoughthe model divides the Coordination criterion in the Configuration-Coordination modelinto Production Coordination and Marketing Coordination, Number of Countries remainsundivided. In general, it is rare for a firm to have exactly the same number of countriesfor its production and marketing operations. Therefore, to be more precise inunderstanding the global expansion of a firm, along with Coordination, Number ofCountries should also be considered with regard to the production side and themarketing side, respectively: Production Number of Countries and Marketing Number ofCountries. In the meanwhile, the concept of Number of Countries actually represents thegeographical diversification of a firm’s activities. Therefore, the term Diversification issuitable to express the intended meaning of Configuration or Number of Countries.

As shown in Table I, a new model explaining global expansion of a firm should beequipped with the criteria of Diversification and Coordination in both the productionside and the marketing side.

The division of Number of Countries in Moon’s (1994) generalized model, however,would split the model into two different models explaining the global expansion of a

Configurationcoordinationmodel

Integrationresponsivenessmodel

Extended modelPorter (1986)

Prahalad andDoz (1987) Moon (1994) Harzing (2000) New model

Diversification:Pa Configuration z Number of

countriesz Production

diversificationMb

z Responsiveness Responsiveness Marketingdiversification

Coordination:Pa

z Integration Productioncoordination

Interdependence Productioncoordination

Mb Coordination z Marketingcoordination

z Marketingcoordination

Notes: a Production; b Marketing

Table I.Criteria of modelsexplaining globalexpansion

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firm in the production side and the marketing side, respectively, because it is Numberof Countries that joins the two parts of the model, production-seeking global strategiesand marketing-seeking global strategies, into a single framework. To resolve thisdilemma, we need a conceptual breakthrough from the fundamental characteristics ofglobal expansion of a firm. In the following section, a new concept of functionaldivision will be discussed.

Functional divisionLevel of analysisEach function in the value chain has a different role in the process of a firm’s globalexpansion and, consequently, the level of analysis in the study of global expansion of afirm should be the functional level, not the firm level. Porter (1986) insists that eachactivity in the value chain has a different level of optimal Configuration andCoordination and, therefore, activities in the value chain should be in an appropriateglobal combination to generate maximum competitive advantage. This implies thatcompetitiveness at the level of a firm comes from the way of deploying and linking thefunctions in the value chain over the world in consideration of the innatecharacteristics of each function.

Roth (1992) empirically tests Porter’s (1986) Configuration-Coordination model, andclearly demonstrates that firms coordinate and configure their activities in differentpatterns rather than all in the same way. Through the “selective globalization” inwhich global expansion strategy is defined around a narrow subset of the value chain,a firm coordinates or configures its activities in the value chain globally or locally,according to the nature of the activities. Therefore, he argues that aggregating twodimensions of Configuration and Coordination by setting a total level of Configurationor Coordination cannot fully describe the nature of global expansion of a firm.

There are other studies that insist that each function in the value chain has its owncharacteristics (Porter, 1996). Rugman and Verbeke (2004) expounds that each activityin the value chain has a different level of global expansion. Kim et al. (2003) also arguesthat each function in the value chain has its unique way of combination for the effectiveintegration. Therefore, we can find an implication that each function in the value chainhas its unique nature that differs from others’ in the process of the global expansion.

Moreover, Roth (1992, p. 546) emphasizes that “consistent with the case analyses ofCollis (1991), a firm must initially understand its distinctive competences and thenbuild its global strategy around the location-specific and firm-specific advantagesdeveloped through the functional activities associated with that distinctivecompetence”. These distinctive competences or core competences can be found in asubset of the value chain (Grosse, 2005; Hitt and Ireland, 1985; Hitt et al., 1982).Consequently, the global expansion strategy should be devised at the level of functionin the value chain, not at the level of the firm.

Global strategy for production and multidomestic strategy for marketingThere have been ceaseless debates on globalization, which have brought fundamentaldoubts over the validity of the existing models on global expansion. The pros onglobalization insist on the benefits of the global strategy. On the other hand, the consargue practicality of the multidomestic strategy. In some cases, globalization is better,while in others multidomestic strategy is more persuasive. A new perspective, however,

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reveals interesting findings. Table II shows the different focuses of the global strategyand the multidomestic strategy. If we regard the term of the production and themarketing as representing the upstream and downstream activities in the value chain(Porter, 1986), the focus of the global strategy mainly falls on the production function,while the main points of the multidomestic strategy are on the marketing function.

In addition, the original typology by Bartlett and Ghoshal (1989) also support thesefindings in that the main competitive edge of the global strategy comes from economiesof scale, cost leadership, and efficiency, while that of multidomestic strategy resultsfrom differentiation, responsiveness, and tailored products. The former can beclassified into the category of production and the latter into the domain of marketing.

Furthermore, in his empirical test of Porter’s (1986) Configuration-Coordinationmodel, Roth (1992) shows that among the five clusters except the “regional federation”,the production-related functions are more coordinated than the marketing-relatedfunctions, in the given number of countries. In Porter’s model, the global strategy canbe distinguished from the multidomestic strategy by the higher level of coordination.This kind of higher coordination or integration in the global strategy can also be foundin the results of Harzing’s (2000) empirical test, in which the characteristic of the globalstrategy is described with the focus on the production side, as shown in Table II.

From these findings, we can derive an important implication that there is a cleardifference or division among the activities in the value chain in terms of globalexpansion strategy, and that the Global strategy is suitable for the production function,while the Multidomestic strategy is appropriate for the marketing function.Consequently, we can now find an answer to the constant debates on globalization.As summarized above, pros and cons of globalization are talking about the samephenomenon from different perspectives. In other words, discussing global expansion,the global strategy and the multidomestic strategy are focusing on the differentfunctions in the value chain. Therefore, the conflicts on globalization can be easilyresolved by shifting the level of analysis from the firm to the functional activities in thevalue chain. While contradictory at the firm level, pros and cons on globalization arecomplementary at the functional level, because they are focusing on the different rolesof different functions. Both pros and cons on globalization are right, with their ownrationales and domains of explanation.

In the functional division approach, the “global firms” and the “multidomesticfirms” are classified based on the functions in which a firm has its core competence:firms with their core competence focused on the production function are what we call“global firms”, while others with focuses on the marketing function are “multidomesticfirms”. There is no congenitally global or multidomestic firm. It is decided by the wayof deploying and linking functions in the value chain globally. Those who find theircore competence in the production side implement global strategy, while those who getthe core competence in the marketing side employ multidomestic strategy.

The success of a firm lies in focusing its strategic capabilities on the functions thatare the sources of its core competence. Hence, the functional level is a strategicdifferentiator that decides the corporate strategy for global expansion. Malnight (1995)supports this by arguing that it is at the functional level where globalization takesplace, rather than the firm level. From this perspective, it can be easily explained thatthere are both global and multidomestic firms in an industry.

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FocusStudies Main points Production Marketing

Global:Levitt (1983) The point of the global

strategy is to produce astandardized productglobally and to sell them inthe same way

Product standardization z

Hout et al.(1982)

Economies of scale,preemptive position, andinterdependent managingare more important moves

Economies of scale throughglobal production

z

Harzing (2000) The core of the globalstrategy is to manufacturestandardized products withhigh cost efficiency

Standardized products z

Rugman andHodgetts (2001)

Globalization is worldwideproduction and distributionof products and servicesthat have a homogeneoustype and quality

Same products to allcountries

z

Benito (2003) The global strategy is toachieve worldwideefficiency with the lowestcost. Firms implementingthe global strategycentralize production

Manufacturingstandardized products forworld-wide sale

z

Contractor et al.(2003)

Global standardizationlowers the cost per foreignentry, with which the netbenefits of foreignexpansion can be reapedsooner

Product standardization z

Farrell (2004) Standardization is crucialin globalization. Globalproduction processes andsupply chains can reducecosts and increase revenues

Economies of scale andproduct standardization

z

Multidomestic:Hamel andPrahalad (1985)

Establish a broad productportfolio with numerousproduct varieties

z A broad productportfolio

Douglas andWind (1987)

International markets areheterogeneous, nothomogeneous

z Heterogeneous markets

Harzing (2000) In multidomesticcompanies, products areactively modified to meetdiffering local tastes andpreferences

z Adaptation of marketingto local circumstances

(continued )

Table II.Different focuses of

global and multidomesticstrategies

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The functional division takes a critical role in the successful implementation of theglobal expansion strategy. The existing models, however, analyze the phenomena atthe firm level, not at the functional level, without taking the functional division intoconsideration. Therefore, further discussion to develop a new general model on globalexpansion of a firm should be equipped with the criteria at the functional level, not atthe firm level.

DDC modelBy introducing a new concept of functional division into the model on the globalexpansion of a firm and its strategy, we can now solve the previous dilemma ofdividing Diversification and Coordination into the production side and the marketingside without splitting the single model. The answer of the dilemma is to set the criteriaof the model at the level of functional activity, not at the level of the firm. By dividingDiversification and Coordination into the production side and the marketing side at thefunctional level, we can have a new model that comprehensively explains thephenomena and the dynamic paths of the global expansion of a firm. This dynamicdiversification-coordination (DDC) model consists of the following features.

CriteriaTable III summarizes the criteria of all the models discussed so far. The study of theexisting models from the perspective of the functional division shows that a generalmodel should be equipped with Diversification and Coordination with clear division ofthe production side and the marketing side at the level of function. In theConfiguration-Coordination model, Configuration is on production and Coordination ison marketing, satisfying the two categories in Coordination and Diversification. Each

FocusStudies Main points Production Marketing

Rugman andHodgetts (2001)

The global markets do notbecome homogenized. Theviable strategy for currentMNCs is the one based onTriad or regional block andresponsive to localcustomers

z Adaptation to regionalmarkets

Farrell (2004) It can be risky for a firm togrow through globalexpansion. Therefore,adapt the best practices ofthe firm to local differences

z Adaptation to differentmarket conditions

Rigby andVishwanath(2006)

Growing diversity inconsumer segments,constraints on standardizedchain stores, andhomogenization of businesshave forced the retail tradeto customize products andstores to local markets

z Adaptation to localdifferences

Table II.

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Table III.Variables in models

explaining globalexpansion of a firm

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criteria of the Integration-Responsiveness framework, on the other hand, is on theopposite side while satisfying the same categories of Coordination and Diversification:Integration is for production and Responsiveness is for marketing.

In the extended models, the model of Harzing (2000) has the same variables with theIntegration-Responsiveness framework, thus showing the same results. The model ofMoon (1994), on the other hand, extends into both the production side and themarketing side by splitting Coordination into Production Coordination and MarketingCoordination. Number of Countries, however, remains undivided. In addition, there isno consideration of functional division in the model. Therefore, the extended modelsatisfies five out of the seven categories.

The DDC model extends Diversification and Coordination into both the productionside and the marketing side by taking into account the new construct of functionaldivision, thus having the four criteria of Production Diversification, ProductionCoordination, Marketing Diversification, and Marketing Coordination at the level offunction in the value chain and satisfying all the seven categories in the table.

TypologiesHarzing (2000) shows that there are three types of global expansion in the previousstudies and suggests the typology of Multidomestic, Global, and Transnational. Inaddition, she argues that the typology of International is not appropriate in theexplanation of the global expansion of a firm, because of the confusion in the literatureand the difficulties in empirical distinction (Harzing, 2000, p. 103). Based on theseanalyses, the DDC model incorporates the typology of Multidomestic, Global, andTransnational for the explanation of the different types of MNCs, and the typology ofDomestic is introduced as a starting point of global expansion where a firm has nointernational existence.

A recent introduction of the new typology called Glocal (Svensson, 2001, 2002; Hunget al., 2007) provides an interesting perspective to the phenomenon. The Glocalstrategy, a compromise between the Global strategy and the Multidomestic strategy,argues that MNCs have to maximize the benefits from optimizing the balance betweenstandardization of their products in global scale and customization to the different localneeds (Svensson, 2001). This insightful strategy, however, is also an eclectic approachat the firm level, not at the functional level, and, therefore, can provide more usefulimplications if it can incorporate the functional levels of analysis.

Three stages in global expansionBased on the previous studies (Bartlett and Ghoshal, 1989; Porter, 1980, 1985), the DDCmodel divides the global expansion process of a firm into three stages. The first stageis purely domestic with no international existence, located in the lower left corner ofFigure 1 with low Diversification and low Coordination. In this stage, firms implementthe Domestic strategy through export and import. From this stage on, firms employglobal strategy for the exploitation and exploration of competitiveness.

The next stage is the period of trade-off between standardization and customization.Porter (1980, 1985) argues that a firm should not implement cost leadership strategy anddifferentiation strategy at the same time, because it requires different resources andskills as well as functional differences. Due to the functional difference, i.e. functionaldivision, a function in the value chain cannot pursue Global strategy and Multidomestic

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strategy simultaneously: as discussed before, the production function implements theGlobal strategy and the marketing function employs Multidomestic strategy.

Global is Coordination-Focusing strategy that focuses the resources of a firm onincreasing Coordination, with which it can reap economies of scale (Bartlett andGhoshal, 1989; Farrell, 2004; Grant, 1998) until the unit cost comes to the minimumefficiency scale. At this point lies “Global”. On the other hand, Multidomestic isDiversification-Focusing strategy that focuses the resources of a firm on expandinggeographical diversification until the complex cost (Rommel et al., 1995) rises steeply.At this point lies “Multidomestic”.

In the process of global expansion, it is meaningless to increase Coordinationwithout expanding geographical diversification. If a firm is based in a single country(low diversification), there is “nothing to be internationally coordinated” (Rugman andVerbeke, 2006, p. 685). Likewise, it is not probable for MNCs to expand geographicallywithout increasing Coordination, because MNCs without coordination behave as localfirms in many countries (Tallman and Yip, 2003, p. 334). Therefore the points of Globaland Marketing should be located much closer to the center, rather than at the end of theupper left or lower right corner.

The final stage is the period of mutual complementation betweenCoordination-Focusing strategy and Diversification-Focusing strategy. In thisperiod, the production function and the marketing function pursue bothgeographical expansion to complement the Coordination-Focusing strategy and theaugmentation of Coordination to complement the Diversification-Focusing strategy,simultaneously. This kind of mutual complement has been impossible due to thelimited resources available within the firm. Once the firm reaches these points,however, learning and innovation enable the firm to make a strategic leap from thetrade-off between the Global strategy and the Multidomestic strategy (Porter, 1996) tothe mutual complement of Transnational in which each function can pursue bothstrategies at a time (Bartlett and Ghoshal, 1989; Benito, 2003). Therefore, there are twoinflections in the process of dynamic global strategy implementation: the points ofGlobal and Multidomestic. From each point of the inflections starts a new pattern ofglobal expansion with a different slope from the past one, complementing the currentstrategy to move toward Transnational with the help of innovation and knowledge. Asan ultimate goal of global expansion, a transnational company achieves global

Figure 1.DDC model and

conceptual illustration offunctional division

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efficiency and national responsiveness simultaneously by shifting the productivityfrontier outward, with which it can overcome the previous trade-off betweenstandardization and customization.

Dynamics of global expansionThe global expansion of a firm starts from the status of purely Domestic toTransnational via either Global or Multidomestic. Each function in the value chain hasits own way of expansion. The global expansion of the production-related functionsheads for Transnational via Global, while that of the marketing-related functions isbound for the same goal via Multidomestic. Therefore, the dynamics of globalexpansion can be clearly defined as a transitional movement toward Transnationalfrom Domestic via either Global or Multidomestic, according to the nature of eachfunction in the value chain.

Figure 1 illustrates the criteria, the typology, the stages, the dynamics of theDDC model (left), and the conceptual illustration of the functional division in theDDC model (right). Each of the two diagrams in Figure 1 focuses on differentaspects of the DDC model. The left-hand side diagram depicts the criteria, typology,stages, and dynamics of the global expansion of firms. Diversification andCoordination are employed in both the production function and the marketingfunction. Dynamics of global expansion is graphically illustrated as a transitionalmovement across three stages from Domestic toward Transnational, in which theproduction function takes the Global strategy while the marketing function passthrough the Multidomestic strategy.

The right-hand side diagram illustrates functional division at the level offunctional activities in the value chain. The confusing phenomenon of the globalexpansion of firms at the level of the firm can be clearly understood at thefunctional level from the perspective of the functional division: intermingled at thefirm level but clearly divided at the functional level into the production andmarketing sides.

New measurement for global expansionAs Transnational is the eventual goal of all the firms pursuing global expansion, thedistance between the current position of a firm in the DDC model and the idealTransnational that is located at the upper right corner of the DDC model can beintuitive and adequate measurement for the degree of the global expansion of a firm. Inaddition, as explained in the aforementioned discussion, the measurement should beconsidered in the two sides of production and marketing. Therefore, the DDC modelcan generate a new index, the DDC index, which measures the degree of globalexpansion of a firm as a summation of the production distance and the marketingdistance: the distance between a firm’s current position in the production function andthe ideal Transnational measures the degree of the global expansion in the productionside, and the distance between a firm’s current position in the marketing function andthe ideal Transnational measures the degree of the global expansion in the marketingside. The DDC index is calculated as a summation of “

ffiffiffi

2p

– the distance of a firm fromthe ideal Transnational in production” and “

ffiffiffi

2p

– the distance of a firm from the idealTransnational in marketing”[1].

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HypothesesThree hypotheses are suggested in the area of the division of function in globalexpansion, the dynamics in global expansion, and the relationship between the degreeof global expansion and financial performance.

Functional divisionThrough the literature review and deductive reasoning, we suggest that there is adivision of functions according to the nature of each function in the process of globalexpansion of a firm. Especially, it is argued that the Global strategy is suitable for theproduction function, while the Multidomestic strategy is appropriate for the marketingfunction. Based on this inference, the following hypotheses are derived:

H1a. There is a division of functions in the process of global expansion.

H1b. Firms take the Global strategy for the production function, while theyimplement the Multidomestic strategy for the marketing function.

Dynamics of global expansionAs Transnational is the eventual goal of global expansion, firms implementing globalexpansion strategy head for Transnational. On their way to Transnational, accordingto the new construct of functional division, functions in the value chain take differentpaths according to the characteristics of each function. The production functions areexpected to take the path of Domestic to Transnational via Global, while the marketingfunctions are via Multidomestic:

H2. A firm takes dynamic paths in the implementation of global expansionstrategy from Domestic to Transnational through either Global orMultidomestic in accordance with the nature of each function in the valuechain: production via Global, while marketing via Multidomestic.

Global expansion and financial performanceMany studies have employed single-item measurement in their study of therelationship between the degree of global expansion of a firm and its financialperformance (Farrell, 2004; Kumar, 1984; Rugman and Verbeke, 2004; Vernon, 1971,inter alia). The single-item measurement approach, however, can result in distortedestimation of global expansion (Sullivan, 1994), and cannot capture the full extent ofglobal expansion of a firm with each of the item in isolation (UNCTAD, 1995, p. 24). Inaddition, many other studies with the multi-item approach also lack in the academicrationale for their choice of criteria. In this light, considering that the core internationalbusiness theory argues positive relationship between the degree of global expansion ofa firm and its financial performance (Capar and Kotabe, 2003; Contractor et al., 2003),the DDC index is expected to have positive correlation with financial performance withhigher level of explanatory power, because it is derived from critical analyses on theexisting models and consequently organized in a more systemic and intuitive way: theDDC index is equipped with a theoretical rigor because the index, unlike other indicesmeasuring the degree of global expansion of firms, is incorporated into the DDC model,a model explaining the phenomenon in a more comprehensive way than existingmodels:

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H3. The degree of global expansion of a firm measured by the DDC index ispositively correlated with financial performance of the firm.

Data and methodologyFor the empirical test of the DDC model, we collect data from 15 global automakers inmotor industry because motor industry is one of the most globalized industries(UNCTAD, 2003, p. 5), and consequently will show clear and distinctive features ofglobal expansion of firms.

The DDC model needs Diversification and Coordination data in both production andmarketing sides. For Production Diversification and Marketing Diversification, dataare collected from 2002 World Automakers Directory: Global Vehicle ManufacturerDirectory, published by Automotive News Data Center. Production Coordination iscalculated as the ratio of world production to domestic production. Though intra-firmtrade may be a good proxy to measure the Production Coordination of multidomesticcompanies, the data are unavailable for individual firms (Westney and Zaheer, 2003,p. 355). For the optimization of the new model, it is assumed that the greater the ratio offoreign production to domestic production, the greater the intra-firm flows and therebythe greater the degree of Production Coordination. Data for world production anddomestic production are collected from 2003 Motor Industry, published by HyundaiMotor.

Marketing Coordination is also calculated as the ratio of world market share to thenumber of models that a firm provides. This is also based on the assumption that thegreater the degree of world market share per model, the greater the degree ofMarketing Coordination. Data for world market share and numbers of models aregathered from 2002 Market Data Book: 2001 Global Production by Region, and 2002Market Data Book: 2001 Global Production and Sales by Manufacturer, published byAutomotive News Data Center.

For the measurement of financial performance, nine financial variables are initiallycollected from Fortune the Global 500, Forbes the Global 500, and BusinessWeek theGlobal 1,000, among which we select revenues from Fortune (2002) and net incomefrom Forbes (2002) as major variables according to the statistical significance. Table IVlists standardized indices comprising the DDC model, the DDC index, and financialperformance of the 15 global automakers.

Multivariate analysis of variance (MANOVA) and discriminant analysis are usedfor H1 to test the functional division in the implementation of global expansionstrategy. MANOVA is a multivariate extension of the univariate techniques forassessing the difference between group means, and discriminant analysis is astatistical technique appropriate for identifying the group to which an object belongs(Hair et al., 1998). Two groups of the production function and the marketing functionare put into MANOVA to test the functional division, and a discriminant function isderived from discriminant analysis as a boundary line between the groups. In the testof H2 and H3, correlation analysis is employed.

ResultsFunctional divisionThe results of MANOVA analysis testing H1 are listed in Table V. The significantlevel of the statistical analysis is less than 0.01. This statistically supports that the

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production function and the marketing function have different characteristics fromeach other in the process of global expansion and, consequently, that there is functionaldivision in the implementation of global expansion strategy. Hence, H1a is supported.

The discriminant analysis results in the discriminant function of “y ¼ 1.004x –0.113”, which is a virtual line that divides the two functions of production andmarketing into two different groups. This virtual line is located very close to thediagonal line (y ¼ x) of the DDC model, supporting the validity of the model thatdeploys the production functions above the diagonal line and the marketing functionsunder the line. As expected, most of the production functions are located in theupper-left area of the discriminant function, while the majority of the marketingfunctions are in the lower-right area of the function. This shows that the Globalstrategy is appropriate for the production function, while the Multidomestic strategy isadequate for the marketing function, and supports H1b.

Firms PDa,h PCb,h MDc,h MCd,h TPe TMfDDC

IindexgRevenues

($ millions)Net income($ millions)

General Motors 0.762 0.733 1.000 0.532 1.057 0.946 2.003 177,260 601Ford Motor 1.000 0.683 0.750 0.692 1.097 1.018 2.115 162,412 276,543Toyota Motor 0.619 0.331 0.750 0.106 0.644 0.486 1.130 120,731 4,922Volkswagen AG 0.571 1.000 0.625 0.509 0.986 0.797 1.782 82,093 90,678Daimler Chrysler AG 0.429 0.321 0.375 0.522 0.527 0.627 1.154 136,798 182,415PSA/Peugeot-Citroen 0.238 0.359 0.250 1.000 0.419 0.664 1.083 45,000 48,950Honda Motor 0.476 0.700 0.500 0.327 0.810 0.576 1.387 58,841 2,899Hyundai Motor 0.333 0.000 0.625 0.324 0.212 0.641 0.853 17,432 14,763Nissan Motor 0.143 0.610 1.000 0.078 0.473 0.492 0.965 49,521 52,427Fiat S.p.A 0.429 0.383 0.000 0.264 0.573 0.173 0.746 51,521 88,541Renault SA 0.524 0.430 0.375 0.556 0.672 0.647 1.319 32,529 42,709Mitsubishi Motors 0.190 0.409 0.375 0.000 0.412 0.235 0.647 25,598 21,041Suzuki Motor 0.095 0.392 0.375 0.045 0.324 0.273 0.598 13,333 9,638BMW 0.095 0.174 0.500 0.218 0.189 0.486 0.675 34,418 44,447Mazda Motor 0.000 0.129 0.250 0.034 0.088 0.192 0.279 16,743 12,327

Notes: a Production diversification; bProduction coordination; cMarketing diversification; dMarketingcoordination; eTransnationality in production:

ffiffiffi

2p

– the distance from the ideal transnational inproduction; fTransnationality in Marketing:

ffiffiffi

2p

– the distance from the ideal transnational inmarketing; gTransnationality in production + transnationality in marketing; hStandardizedIndex ¼ (Xi – X min) 4 (X max – X min)

Table IV.Data for DDC model and

financial performance

Effect Value F Hypothesis df Error df Sig.

Pillai’s trtrace 0.259 4.017a 2.000 23.000 0.032Wilks’ Lambda 0.741 4.017a 2.000 23.000 0.032Hotelling’s ttrace 0.349 4.017a 2.000 23.000 0.032Roy’s largest root 0.349 4.017a 2.000 23.000 0.032

Notes: Two data are removed as outliers (PSA/Peugeot-Citroen, Fiat S.p.A); aExact statistic

Table V.Results of MANOVA and

discriminant analysis

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Dynamics of global expansionTable VI shows the result of correlation analysis between the distance from the origin(DO) and the distance from the ideal Transnational (DT) in both the productionfunction and the marketing function. If all the firms are located on the diagonal line ofthe DDC model, the DOs and the DTs of the firms have a correlation coefficient of 2 1.This means that any increase in Diversification would increase exactly the same ratioof Coordination and, consequently, an increase in DO would result in a decrease of DTin the same proportion, showing the dynamics from the origin to the ideaTransnational. Any line with a correlation coefficient close to -1 would follow similarpattern and the correlation coefficients of DOP-DTP and DOM-DTM listed in Table VIare close to -1, with high statistical significance. Together with the fact supported inH1a and H1b that the production functions pursuit the Global strategy with the globalexpansion path above the diagonal line and the marketing functions implement theMultidomestic strategy through the path under the diagonal line, this results show thatglobal expansion of the production function starts from Domestic and moves towardTransnational through Global, while that of the marketing through Multidomestic.Therefore, H2 is supported.

Global expansion and financial performanceTable VII lists the results of correlation analysis between the degree of global expansionof firms in the motor industry and their financial performance. Transnationality in boththe production and the marketing functions is considered together with the DDC index,for the better understanding of the impact of each function on the financial performancein global expansion. Transnationality in the production and the marketing functionsshows a similar level of correlation with financial performance, implying that bothfunctions have important effects on the financial performance. The DDC index alsoshows a high level of positive correlation with financial performance. In brief, all theindices have positive correlation with financial performance and all the results arestatistically significant, which supports H3.

ImplicationsResearch implicationsThere are three stages in the implementation of global expansion strategy of a firm, asdepicted in Figure 1. In the language of existing studies, the trade-off between global

DTPa DTMb

DOPc Pearson Correlationcorrelation 20.987 * 20.814 *

Sig. (two-tailed) 0.000 0.001N 13 13

DOMd Pearson Correlationcorrelation 20.727 * 20.848 *

Sig. (two-tailed) 0.005 0.000N 13 13

Notes: aDistance from the ideal transnational in the production function; bDistance from the idealtransnational in the marketing function; cDistance from the origin in the production function;dDistance from the origin in the marketing function; *p , 0.01, two-tailed test

Table VI.Results of correlationanalysis between DOand DT

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standardization and multidomestic customization in stage 2 can be mutuallycomplemented in stage 3 by taking a strategic leap as a firm enhances itscompetitiveness through learning and innovation and, consequently, plays a differentlevel of games from other competitors. The previous studies, however, have been silentover the debates on globalization. In the previous studies, the firm level has beentreated as an indivisible atom comprising the global expansion of a firm, which resultsin contrary views over the same phenomenon.

By introducing a new concept of functional division, the DDC model provides acomprehensive analytical tool that encompasses ways to utilize the different strategiccharacteristics of the production and the marketing functions, as well as the dynamics ofglobal expansion from trade-off to mutual complementation. By shifting the level ofanalysis to the function in the value chain, the DDC model clearly shows where to focus inthe stage of trade-off and what to implement to successfully migrate to the stage ofmutual complementation. In this light, the debates on the adequacy of stuck-in-the-middlein the previous literature can be understood with much more clarity. In addition, themodel suggests useful insight for the sophisticated understanding over the degree ofglobal expansion of each function, with which a firm can establish a series of competitivestrategies by balancing or leveraging the functions.

Practical implicationsThe DDC model can be easily applied to managerial decisions. Employing the DDCmodel, mangers can recognize the level and characteristics of their firms’ globalexpansion, not only at the firm level but also the functional level. At the firm level,managers can derive strategic implications by comparing the firm’s overall level ofglobal expansion to their competitors: with whom to compete? When to make astrategic leap and what to prepare for that? At the functional level, managers can makeboth within-firm and across-firm comparison: they can compare the level andcharacteristics of global expansion in one function with other functions in the firm, aswell as with those of competitors’. In this manner, the DDC model allows managers toestablish a global strategy tailored to each function, thus reconciling possible conflicts

Indices Revenues Net income

Transnationality in production:Pearson correlation 0.765 * * * 0.413 *

Sig. 0.002 0.080N 13 13

Transnationality in marketing:Pearson correlation 0.750 * * * 0.543 * *

Sig. 0.003 0.027N 13 13

DDC index:Pearson correlation 0.795 * * * 0.491 * *

Sig. 0.001 0.044N 13 13

Notes: *p , 0.1; * *p , 0.05; * * *p , 0.01; (Revenues: two-tailed tests, Net income: one-tailed tests)

Table VII.Results of correlation

analysis between degreeof global expansion and

financial performance

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generated from different interests among different functions in the firm. As eachfunction in the value chain shows different characteristics in the process of globalexpansion, managers can implement more effective strategy for the global expansionof their firm by integrating into the strategy process the different needs of eachfunction analyzed with the DDC model.

ConclusionAfter critical evaluation of existing studies on the global expansion of a firm, this paperintroduces the dynamic diversification-coordination (DDC) model as a new frameworkexplaining the global expansion of a firm, and empirically tests the validity of the newframework with statistical analyses. The empirical analysis supports threehypotheses. First, each function has its own strategy of global expansion: the Globalstrategy for production, while the Multidomestic strategy for marketing. Second, eachfunction takes a dynamic path in the process of global expansion from Domestic toTransnational via either Global or Multidomestic. Last, there is a positive correlationbetween the degree of global expansion of a firm and its financial performance.

The contribution of the paper can be summarized as follows. First, this paperintroduces a new model on the global expansion of a firm. With critical andcomprehensive integration of previous studies and a new construct of functional divisionby shifting level of analysis, the DDC model reconciles the contrary views on globalexpansion in the existing literature and suggests implications over the fundamentals andthe implementations of global expansion strategy. Second, this study provides the DDCindex as an intuitive way for measuring the degree of global expansion of a firm withinthe framework of the DDC model. The new index measures the degree of globalexpansion of a firm with simultaneous consideration of both the production and themarketing function in accordance with the structure of the DDC model and,consequently, suggests useful implications in understanding the current status of globalexpansion of a firm and establishing further competitive strategy. Finally, this paperempirically tests the validity of the constructs in the previous studies on globalexpansion of a firm. Contrary at the level of firm, the constructs in the previous studiesverify their validity with the shift of level of analysis to the level of function.

Research in its initial stage tends to focus more on the theoretical aspects ratherthan empirical analyses. In a same vein, this paper, as a first attempt to suggest a newmodel on global expansion from the level of functional activities in the value chain,emphasizes more on the theoretical aspects of the phenomenon and, consequently, isnot rich in its empirical data: the sample size of the empirical analyses is small and thedata is narrowly focused on the motor industry. As the main focus of this study is toderive a new theoretical framework of global expansion at the functional level andempirical data are employed not to statistically test the rigorousness of the model butrather to help readers understand more tangibly the abstract construct of theframework, the main contribution of this study should be attributed to the theoreticalaspects of the new model and the results of the empirical analyses should beinterpreted with much caution as preliminary findings.

Further studies adopting time-series analysis would enhance the level of appreciationof the phenomena in global expansion, especially that of the dynamics in the process ofimplementation of global expansion strategy. Employing a historical perspective,researchers can trace actual paths MNCs have taken in their global expansion and

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compare the results with the predictions of the DDC model. In addition, an in-depth studyover organizational structures or learning mechanism of the MNCs transgressing fromstage 2 to stage 3 would suggest what factors enable the MNCs to take strategic leapsfrom the stage of trade-off to that of mutual complement. An application of the DDCmodel to other industries would also test the predictions of the DDC model and enrich theunderstanding of the fundamentals in global expansion of a firm.

Note

1. As data comprising both Diversification and Coordination are standardized, the length ofboth the ordinate and the abscissa of the DDC model in Figure 1 measure to be 1,respectively, and, consequently, the length of the diagonal line of the DDC model, themaximum length in the model, is

ffiffiffi

2p

.

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Corresponding authorMin-Young Kim can be contacted at: [email protected]

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