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Contents
1. Introduction: Globalisation (Nature, Evolution, Perspectives) 2. Why Multinational Corporations (MNCs) and Foreign Direct Investment (FDI)? 3. Strategy and Strategic Options of MNCs 4. MNCs, Government Policy and (Inter)national Competitiveness - Overall Conclusion and the Future of MNCs
POLICYSTRATEGY
THEORY
International Business (IB) deals with the nature, strategy and management of international business enterprises and their effects on business and national performance (e.g., efficiency, growth, profitability, employment). IB is interdisciplinary. It draws, among others, on economics, politics, sociology, marketing, management (human resources, strategic).
Origins of IB (i)
IB is the result of the internationalisation of production and the emergence of the multinational corporations (MNCs), the subject matter of IB. Internationalisation of production (globalisation) involves international capital flows, international trade of commodities (exports-imports) and Foreign Direct Investment (FDI) by MNCs.
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Origins of IB (ii)
Until the 1980s, there has been a tendency towards concentration of industry, and oligopolistic market structures. Firms have observed a law of increasing size consisting of four stages: First, the owner managed and controlled small firm (nineteenth century). Second, the public limited national company (limited liability, separation of ownership from management). Third, the multidivisional (M-form) organisation (division- based), separation of strategic (long term) and operational (day-to-day) decisions. Fourth, multinational corporations (MNCs) with production activities outside (and including) their home-base.
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Production Development
Personnel Department
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Division A
Division B
Division C
Division D
Division E
Functions
Functions
Functions
Functions
Functions
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History
(U-form) Firm, Competitive Industry Growth Organic (Internal)-Vertical integration, External-Mergers and Acquisitions National (Public Limited) Company, Industry Concentration, Oligopoly (M-form) Firm, Diversification (Related, Unrelated-Conglomerate) Foreign Direct Investment, Transnational Corporations (TNCs), Global Firms
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Main perspectives
(Market) Power: Firms pursue profit and/through (market) power. Efficiency: Firms pursue profit through reduction of production and transaction costs. Hybrid: Firms pursue profits through efficiency and (market) power.
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Theories (i)
Neoclassical: Firm is a production function, a black box; it is concerned with the industry price-output equilibrium, which maximizes profits. Price-output equilibria depend on market structure, e.g., perfect competition, monopoly. Managerial: Firms maximize utility of managers, e.g., sales revenue, growth. Based on alleged separation of ownership from control. Transaction Costs: Firms are multi-person hierarchies which result from, and give rise to reduced market transaction costs, resulting in efficient industry structures.
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Theories (ii)
Resource-Based: Firms are bundles of human and non-human resources under administrative co-ordination. There are internal and external stimuli to growth which lead to industry concentration. Behavioural: Given bounded rationality and different objectives of groups within them, firms do not maximize, they satisfice.
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Theories (iii)
Austrian - Chicago School - Schumpeterian: Alert, profit seeking entrepreneurs, enhance market coordination and give rise to ephemeral monopoly profits, eroded through competitive process of creative destruction (innovations).
Marxist: Firms produce commodities for sale in the market for a profit, under hierarchical control of capital over labour. Dialectic link between competition and monopoly, for maintenance of monopoly (power).
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Industry Structure (IS): The extent of industry concentration, barriers to entry, etc, leading to competitive, imperfectly competitive, oligopolistic, or monopolistic industry structures.
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PM
LAC = LMC PC
QM MR
QC
[End of Background 1]
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Globalization: causes
Firm growth because of Use of excess internal resources at near zero marginal cost Sale of products to new markets at high profit rates (due to high fixed costs).
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Globalization: facilitators
Reductions in transportation costs. Improvements in information and communication technologies.
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Exhibit 5: Industrial Organisation (IO) and the SCP M odel S(tructure) - C(onduct) - P(erformance) model
IO Defined: Branch of economic theory analysing structure-conduct and performance (SCP) of oligopolistic industries (set of firms producing similar products). SCP Model: Suggests there exists a (initially unidirectional) link between structure (S), conduct (C) and performance (P) of industries. Feedback relationships from conduct and/or performance to structure later allowed for. Main Focus: The concentration (S) Profitability (P) relationship assuming profit maximisation (C). New IO analyses impact of conduct on structure and performance in oligopolistic games.
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1. Limit Pricing
Assumes constrained profit maximisation (maximum profits subject to no entry), barriers to entry (minimum efficiency scale) and that incumbents leave post-entry output at pre-entry levels and entrants know this.
Result: Limit price derives from limit output found by subtracting the minimum efficient scale level of output from the perfect competition level.
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PL PC LAC
Q
0
Q QL
QC
PL is determined by QL, i.e. the level to which, if the MES was added, the competitive output would result, thus PC, thus no ENTRY.
RULE: QL QC Q
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Assumes blockaded entry and joint profit maximising price-output levels (Monopoly). Entry is blockaded through strategic entry barriers, e.g., investment in excess capacity.
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3. Contestable markets
Assume free entry and costless exit. This ensures perfectly competitive price-output levels, even in the presence of economies of scale and oligopolistic market structures, as any departures from perfectly competitive prices lead to hit-andrun entry and exit.
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IO models compared
Main issue is the nature and importance of entry barriers, both innocent/structural (scale economies) and strategic (conscious actions by incumbents designed to deter entry), e.g., excess capacity, product proliferation. Well analysed strategic entry deterrence strategy, the investment in excess capacity. In the limit even monopoly pricing is sustainable if incumbents have excess capacity sufficient to produce full perfect competition output. To be credible, excess capacity investment should be optimal post-entry.
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, minimum efficient scale P QS, strategic capacity output P PM monopoly price P PL limit price PC perfect competition price
LAC = LMC
C
QS
Q D
QM
QL MR
QC
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Oligopoly, crucial for (competitive) strategy, which is absent in cases of both perfect competition and monopoly. Emergence and effects of oligopoly analysed by theory of Industrial Organization (IO), which is based on and extends the Cournot/Bertrand models of oligopoly.
M-Form organisation is important condition for development of corporate strategy (existence of multitude of business units).
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Firm = a collection of resources bound together in an administrative framework, the boundaries of which are determined by the area of administrative co-ordination and authorative communication (Penrose, 1995, p xi). Focus on the internal resources of the firm, then the external environment. Latter is different for each firm depending on its specific collection of human and other resources. Environment can be manipulated by firms to serve their objectives.
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Rate of firms growth limited by growth of knowledge within it, and a firms size by the extend to which administrative effectiveness continues to reach expanding boundaries.
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Firm strategies result of differential capability, e.g., Vertical Integration, due to ability of firms to serve their own needs better. Diversification, due to growth and multiple applicability of resources. Mergers and Acquisitions; to acquire managerial resources for expansion. MNCs, due to differential ability e.g., in transferring tacit knowledge (Kogut-Zander).
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In Nelson and Winters evolutionary theory of the firm, routines, search (changes in routines) and competition are economic analogues to genes, heredity and struggle for existence in biology.
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[End of Background 2}
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Choice of FDI over market-based alternatives due to control potential and oligopolistic interaction. Collusion allows reduction of conflict and maintenance of monopoly profits. Conclude: Structural market failure => MNCs => (international) structural market failure
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Existence of firms => Economising in transaction costs => Firms more efficient than markets In case of MNCs, choice is between market transactions, e.g., exporting, licensing and nonmarket transactions, i.e. Foreign Direct Investment (FDI).
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Williamson: asset specificity => hold-up problems => need for fully owned subsidiaries (FDI). Buckley & Casson: intangible assets exhibit public goods attributes, thus result in appropriability problems => market failure. Hennart: internalization of markets due to differential ability to control (overseas) labour.
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Builds on Marglin-Hymer Focuses on labour markets. He suggests that a reason for MNCs is their ability to divide labour (unions) in country specific groups => Reduce their bargaining power => increase their profits.
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MNCs are due to endogenous growth and differential capabilities vis--vis market and other firms. Growth can be national (diversification) or geographical (MNC). MNCs are better in transferring internationally tacit knowledge than markets.
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Synthesis (i)
Context: Oligopolistic interaction
Endogenous growth (Penrose) => monopolistic advantages (Hymer). MAs are an inducement to innovation and further growth (Penrose); they can help firms outcompete foreign rivals (Hymer). Domestic diversification due to pull factors, e.g., multiple use of resources (Penrose), or push factors, e.g., the product life cycle (Hymer).
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Synthesis (ii)
Geographical diversification also due to national-regional business cycles (all weather company). Mode of expansion due to differential firm capabilities (Penrose, Teece, Kogut & Zander), (dynamic) transaction costs (Teece, Buckley & Casson) and overall control advantages (Hymer). Locational factors explain the choice of location. No general theory possible, but a general framework within which each case can be examined.
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For Hymer (1972), the operations of MNCs tend to globalize the tendency towards concentration; generate an uneven development between the centre (developed countries) and the periphery (less developed countries); erode the power of labour unions and the nation state, and tend to shape the world to their image by creating superior and inferior countries. They are responsible for the dependent industrialization of the Newly Industrialized Countries.
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All such strategies involve future cash flows, thus require capital budgeting.
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Threat of substitutes
SUBSTITUTES
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Competitive scope
Broad N arrow
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Value chains: firms primary and support activities that generate value (margin) primary: firm infrastructure, human resource management, technology development, procurement support: inbound logistics, operations, outbound logistics, marketing and sales, service Rule: align value chain to generic strategy
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Inbound logistics
Operations
Outbound logistics
Service Margin
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Corporate Strategy
Portfolio models - Boston Consulting Group, etc. Porter Resources-capabilities
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Cash cows
Dogs
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Time
Exhibit 3.7: The product life cycle and the Boston matrix
Product life-cycle Introduction Growth M aturity / Saturation Decline Boston M atrix Question marks Stars Cash cows Dogs
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Rule: select sharing activities or, if not possible, transfer of skills. Other two hard to implement with success.
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Diversification strategies are the result of availability of resources with potential for common use by apparently unrelated activities. Conglomerate diversification results from problem of appropriating rents from intangible assets and/or differential capabilities in transferring knowledge.
[End of Background 3]
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Global
Transnational
Pressures
Low
International Low
Local Responsiveness
Multidomestic High
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No
No
Horizontal FDI
Yes
Licence
Competitiveness: definition
Differential productivity, value-added wealth creation, relative to other economic units (firms, regions, nations) Can be achieved through
Business policies
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Main claim that large firms can exploit economies of scale and scope, therefore can compete with large firms from other countries. Idea particularly prevalent is 1960s and 1970s in Europe, in part as response to the American Challenge, e.g., Servan-Schreibers claim that US multinational corporations dominate technologically European markets. If large size increases competitiveness (thus export surpluses) these could offset any static losses. The international competitiveness idea is in part responsible for the permissive (and even encouraging) attitude of European countries to mergers and large size.
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Schumpeters Differential Innovations Hypothesis, that large firms are large because they have been more successful innovators to start with.
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i) Competition policy to correct market failure due to monopoly (power) and its abuse: e.g., Treaty of Rome, US Anti-Trust policies
ii) Trade through (static) comparative advantage, lenient or encouraging attitude to multinational corporations (MNCs)
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But in 1960s Recognition in Europe of the international competitiveness advantages of large size (American challenge thesis) Relatedly, 1970s Lame Ducks policies
National Champions Policy (e.g., UK, France, Italy) Nationalizations of strategic sectors
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1980s Return to the market (privatisations etc) and focus on Government Failure. 1990s Entrepreneurship and small firms Horizontal measures, technology and education, tangible and intangible infrastructure, efficiency of public sector.
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Grant Theory but no industrial strategy including adhocity, discontinuity, undue focus on (dis)advantages of size and static comparative advantagebased (free) trade.
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Question: Can we exclude role of industrial strategy? Is it unrelated to the other factors?
New theories
1. 2. 3. 4. 5. New Trade Theory New Competition New location economics New (Endogenous) Growth Theory MNCs, deindustrialisdation and Competitive Bidding
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Traditional focus of Western industrial policy, the welfare effects of monopoly and the theory of (static) comparative advantage. According to this countries should specialize and trade in products in which they enjoy a comparative advantage. Benefits from trade arise when each country pursues such a strategy. Presence of monopolistic competition, economies of scale, positive externalities and first mover advantages led to conclusion that focus on high return industries can affect the distribution of benefits (and even lead to losses, Krugman) Strategic Trade.
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Based on observation of successful industrial districts, in North Italy, Germany, USA, Cambridge UK, etc. Such districts consist of small and medium sized, highly innovative, customer oriented firms, with a hands-on approach to management, which cooperate on issues of infrastructure, technology etc and compete in the market for customers. Often rely on support by state/local authorities, are based more on trust than hierarchical relations, try to exploit the dispersed knowledge of their labour, suppliers etc and use new production methods such as Just-in-Time, etc.
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Success of industrial districts questions benefits of large size and provides a different (Post-Fordist) model of industrial development. However, such methods are also adopted by major, particularly Japanese, MNCs, through e.g., subcontracting.
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Link between multinational corporations and deindustrialization questions link between large size and international competitiveness Main idea is that countries like the UK which suffer from deindustrialization tendencies are home bases of privately successful MNCs. This questions the benefits of large size for the case of MNCs home base. In era of multinational corporations name of the game that of competitive bidding, i.e., attempt by governments to attract investments by home and foreign firms (MNCs).
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MNCs give rise to multinationalism, centipetalism and short termism. Needed is a shift of power to communities and regions, e.g., through appropriate flexible specialization policies.
Preliminary Conclusion
Possibility for Machiavellian scenario i.e., adaptive industrial strategy (in partnership with corporate sector) including
i) dynamic comparative advantage ii) managed competition and co-operation iii) managed trade iv) playing the competitive bidding game and/or v) tackling the challenge of MNCs vi) considering alternative forms of competitiveness, like flexible specialization
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Developing countries
Some common features: small internal size of market, lack of large national MNCs (over-) reliance on small family run businesses, and foreign MNCs, relatively underdeveloped industry. Possible Strategy:
i) follow the four tigers and ii) consider appropriate focus on small and medium sized enterprise, flexible specialization, clustering.
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Main problem of implementation, government failure. Although a general problem, often more acute in developing countries. Indeed underdevelopment may be the effect of inefficient property rights, and incentive mechanisms? (North) Culture, consensus, other institutional constraints. Need for promoting an institutional framework conducive to development. This includes addressing the problem of capture of the state by MNCs.
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Government can be enabling (reduce private sector transaction and production costs) to increase output. It can also be developmental, i.e., try to improve the revenue side. Analysis of the state suggests that problem of capture reduced through pluralism of institutional forms (large and small firms) and competition in the political market. Capture effects support a competitiveness strategy favouring smaller firms (potential competition to established giants).
Conclusions (i)
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Possible and necessary to devise a competitiveness strategy which learns from economic theory and international practice and addresses the issue of implementation (e.g., institutions and capture of the state) and for the EU its declared needs to promote Competition and Convergence
Conclusions (ii)
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Developing countries should consider their policies in the above framework, striving for an emphasis on dynamic competition, value creation and supply-side convergence. Internally they should address the issue of the institutional constraints. Identification and development of distinct capabilities and competencies of a nation and governments important condition for effective, implementable strategy.
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A common expository diagrammatic framework for neo-classical Austrian and Marxist approaches to industrial organization.
Pm
QS
Qm
QL MR
QC
, minimum efficient scale; QS, strategic capacity output, p, monopolists disincentive to invent; E, efficiency gains; Pm monopoly price; PL limit price; PC perfect competition price
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Competitiveness (i)
The Japanese approach ? High knowledge intensive sectors
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Knowledge-intensive industries (computers, instruments, heavy machinery)
Japan (1959)
100%
Unskilled-labour-intensive industries
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Competitiveness (ii)
Porters diamond Factor and demand conditions, clusters
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FACTOR CONDITIONS
DEMAND CONDITIONS
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Infrastructure
Productivity-ValueWealth
Human Resources
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Large firms and (through) foreign direct investment (FDI) can improve determinants of productivity, yet:
Hard for developing countries to attract FDI Risk of FDI flight, given options, and flexibility of operations
Clusters have advantage over large firms and FDI because of local base and co-opetitive nature. Clusters attract FDI and embed it in localities.
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SMEs, Clusters
Productivity-Value-
Human
Wealth
Resources
Government
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Clusters can be upgraded at the individual, regional or national levels. This presupposes cluster identification, (diagnosis), audit, upgrading, control-evaluation, re-diagnosis
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According to the Productivity-Competitiveness model all the following measures can improve productivity and competitiveness
horizontal measures (soft and hard infrastructure) inter- and intra-firm sectoral restructuring for innovative value for money products and services clusters of SMEs
Regions of Excellence (mega-clusters) can encapsulate all three aspects, thus serve as Strategy for Productivity and Competitiveness.
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Conclusions
Possible and desirable to identify and develop (mega) clusters, for productivity, competitiveness, regional development, convergence and deepening of democracy. The state can be a catalyst and facilitator. Method and tools developed can help in this direction.
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Conclusions
Value creation, through
firm productivity and competitiveness government enabling policies, national productivity and competitiveness
Under conditions, MNCs and FDI, SME clusters and government policy can help achieve this objective
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The Future
The MNC, like competition and co-operation itself, is both god and devil. MNCs will be a great force of economic growth, yet a threat to diversity, equity and democracy. Policy and polity should aim at identifying routes that deliver the goods at least cost this can include painful trade-offs.