Why the Multinationals that Influence the World Are Born
POLITICAL SCIENCES |

Why the Multinationals that Influence the World Are Born

A SERIES OF TRADEOFFS DETERMINE THE CHOICE TO CREATE A GROUP OF COMPANIES INSTEAD OF MANAGING OPERATIONS WITHIN A SINGLE COMPANY, ACCORDING TO A STUDY BY ALTOMONTE, OTTAVIANO AND RUNGI

Business groups rule the global economy. Data show that about 70% of the global international trade is linked to multinational groups and about a third is linked to companies belonging to the same multinational group. These large groups with hundreds of subsidiaries all over the world influence macroeconomic phenomena. But why do they decide to perform their activities through subsidiaries? And which hierarchical structure do they choose?
 
Carlo Altomonte (Department of Policy Analysis and Public Management) and Gianmarco Ottaviano (Department of Economics) provide an answer in the paper co-authored with Armando Rungi Business Groups as Knowledge-based Hierarchies. The choice to organize economic activities as a business group rather than an integrated entity is driven by a series of trade-offs between competitive advantages and knowledge dispersion. The authors provide an empirical support exploiting a dataset including 270,000 parent companies controlling more than 1,500,000 subsidiaries worldwide. “The make-or-buy decision is usually studied in relation to outsourcing”, Altamonte says. “We applied it to parent companies performing their activities through legally autonomous companies under their control. We found that it is more likely that a company will organize itself through subsidiaries when it operates in a context where intellectual property rights are protected. However, given the risk of knowledge dispersion, the same company does not use independent external subcontractors”.
 
The authors also investigate business groups’ hierarchical structure. “A vertical group is more likely to emerge than an horizontal one if the parent company faces lower communication costs between its hierarchical layers. Routine production problems are dealt with by subsidiaries lower in the group’s hierarchy. The activities become increasingly complex as we get near to the parent company”. This is the case of Alphabet Inc, the multinational conglomerate that owns Google. The most innovative companies such as Deep Mind (artificial intelligence research and application) and Waymo (the self-driving car project) are hierarchically closer to the parent.

Read more about this topic:
At the Center of Political Workings, article by Lanny Martin
The Theory of Secession. Article by Massimo Morelli
The New Silk Road Can Be Understood by Looking at the Past. Article by Andrea Colli
Behind Western Intervention in the Fall of Regimes
In Europe the obstacle is not culture
How a Sentence Can Affect International Agreements
 

by Claudio Todesco
Bocconi Knowledge newsletter

News

  • How COVID Has Changed the Way We Live and Work

    At the end of its first year of activity, Bocconi's SUR Lab publishes a position paper on the new living and working models emerging from the pandemic  

  • How to Predict a 5 Star Review

    Wordify, an online tool developed by Bocconi Data and Marketing Insights Research Unit, helps discover relations between the words used in texts, like online reviews, and their labels, like ratings  

Seminars

  December 2021  
Mon Tue Wed Thu Fri Sat Sun
    1 2 3 4 5
6 7 8 9 10 11 12
13 14 15 16 17 18 19
20 21 22 23 24 25 26
27 28 29 30 31    

Seminars

  • Attila Lindner: Firm Heterogeneity and the Impact of Payroll Taxes
    Development Labor Political Economy

    for further information contact patrizia.pellizzari@unibocconi.it

    Room 24, floor 2, Via Sarfatti 25

  • A platform for change? The impact of core component innovations in a platform-based ecosystem on complementor actions
    A platform for change? The impact of core component innovations in a platform-based ecosystem on complementor actions

    RAM RANGANATHAN - UT Austin

    Room AS02 (-1 Roentgen)