Operational Flexibility as Asset Stock: Theory and Evidence from Multinational Operations in the Triad

Business scholars are divided on whether manufacturing multinationals operate flexibly, i.e. shift production in response to currency changes. Flexibility optimists point to information and sunk cost advantages and predict sizeable responsiveness. Flexibility pessimists claim administrative heritage and internal opportunism will stifle flexibility. Empirical analysis spanning the 1977-1993 period supports the flexibility optimism view but in a qualified manner. Multinationals do systematically exploit currency shifts, but their responses are noticeably stunted. The findings are explained by re-characterising flexibility as a strategic asset stock. Flexibility in the current period needs appropriate investments in previous periods. But due to bounded rationality and a focus on regional responsiveness multinational managers in the 1950s, 1960s, and 1970s did not make such investments. This hypothesis is selected over the alternatives considered.