Managing the fragmented value chain of global business: exploitative and explorative offshoring toward emerging market economies

The fragmentation of the production process is a major theme of research in international business. Trade benefits arise from the “slicing up” of the aggregate value chain, as well as the entry of new countries bearing low labor costs. If, initially, multinational corporations (MNCs) relocated only standardized, low-value manufacturing activities in new emerging economies (exploitative offshoring), now they are also offshoring their knowledge-intensive activities (explorative offshoring). In the past, the literature on internationalization was mainly focused on the characterization of the MNC as a specific monolithic organization active in the international production. In the present, numerous analyses have discussed the international location of R&D activities, mainly in advanced countries. The foreign R&D subsidiaries are still tightly linked to the headquarters, maintaining a controlled position. Future research must address two orders of issues. The first is the progressive autonomy of the foreign subsidiaries, which are more and more developing new and independent lines of research. This process leads MNCs to mobilize and leverage untapped pools of knowledge scattered around the world. The second is the R&D offshoring toward emerging economies. This complex process can be characterized as a move from the smile model discussed extensively by Ram Mudambi (where emerging economies were considered as pools of low-cost labor tout court) to a new model, called here the λ (lambda) model (where emerging economies are also pools of skilled labor). This paper will explore these new trends using some illustrative cases: L'Oréal (FR), Pfizer (US), ST Microelectronics (CH), and Geox (I). The cases reveal the double orientation of MNCs toward emerging economies, where both explorative and exploitative offshoring takes place.