International Business Economics Lecture Notes

Christos Pitelis January 2004

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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

International Business Economics Session 1 Introduction: „Globalisation‟ (Nature, Evolution, Perspectives)

4 Exhibit 1. Competitive) POLICYSTRATEGY GOVERNMENTS (Competition. Industrial) THEORY .1: A Framework (INTERNATIONAL) COMPETITIVENESS FIRMS (Business.

employment). strategy and management of international business enterprises and their effects on business and national performance (e. sociology. It draws. efficiency. among others. politics. management (human resources.. • IB is interdisciplinary. marketing. profitability. . on economics.g. strategic). growth.The Nature and Scope of International Business 5 • International Business (IB) deals with the nature.

„organization and knowledge‟). • Globalisation refers to the increasing integration of markets (exchange) and production. FDI is the defining feature of the multinational corporation (MNC).6 Some definitions (i) • FDI is the control of production which takes place in one country („host country‟) by a firm based in another country („home country‟). . to include the mobility of resources (capital. labour.

• An MNC is a firm which controls production in countries other than (and including) its home base. .7 Some definitions (ii) • A firm is an organisation which produces commodities for sale in the market for a profit. and allocates resources (such as capital and labour) without direct reliance on the price mechanism (the market) on the basis of internal entrepreneurial decisions (hierarchy).

8 Some definitions (iii) • The market (price mechanism) is an institution of resource allocation. based on voluntary exchanges (transactions) by individuals. • The state is an institution which allocates resources and influences the organization of economic activity through a legal monopoly on force. motivated by preferences and market prices. .

• Internationalisation of production („globalisation‟) involves international capital flows. international trade of commodities (exports-imports) and Foreign Direct Investment (FDI) by MNCs. the subject matter of IB.9 Origins of IB (i) • IB is the result of the internationalisation of production and the emergence of the multinational corporations (MNCs). .

Firms have observed a „law of increasing size‟ consisting of four stages: – First. multinational corporations (MNCs) with production activities outside (and including) their home-base. there has been a tendency towards concentration of industry. separation of strategic (long term) and operational (day-to-day) decisions. separation of ownership from management). – Fourth.10 Origins of IB (ii) • Until the 1980s.based). – Second. the owner managed and controlled small firm (nineteenth century). the multidivisional (M-form) organisation (division. – Third. and oligopolistic market structures. the public limited „national‟ company (limited liability. .

2: The unitary (U-form) firm Chief Executive Production Development Sales and Marketing Department Financial and Accounting Department Personnel Department .11 Exhibit 1.

g.3: A multidivisional (M-form) structure Head Office Central Services (e. Finance) 12 Division A Division B Division C Division D Division E Functions Functions Functions Functions Functions ..Exhibit 1.

Exhibit 1.4: A holding company structure Parent Company Head Office 13 Company A (wholly owned) Company B (wholly owned) Company C (90% owned) Company D (75% owned) Company E (25% owned) .

14 Some facts and trends in IB (i) • International trade inside the world‟s largest 350 MNCs accounts for almost 40 per cent of world merchandise trade. General Motors. • The world‟s largest MNCs (e. Microsoft etc) have annual sales higher than the annual gross national product (GNP) of all but around 15 nation states..g. nearly half of manufacturing exports and around two thirds of imports were flowing within MNCs (intra-firm trade). . • In the early 2000s in the USA. Exxon.

around 33 per cent by developing countries and just over 3 per cent by Eastern European countries. China receives the lion‟s share of FDI.15 Some facts and trends of IB (ii) • FDI increased by over 20 per cent between 1985 and 2000. • In the period 1991-2000. twice the growth rate of exports or output. . • Among the developing countries. 63 per cent of global FDI flows was received by the developed countries (DCs) (down from almost 80% in 1989).

• Since 1960 the relative importance of the US and the UK as sources of outward FDI has been declining. Japan). the UK. • European FDI is largely due to M&As. the largest drop in 30 years). the US. Canada. . USA. • In the „Triad‟ (Europe. 2002 and 2003. • FDI declined sharply in 2001 (over 50%. France and Germany are leading players. total FDI between US and the EU was almost one third of global FDI in 2000.16 Some facts and trends of IB (iii) • Within the DCs.

17 Some issues in IB (i) • The main issues which arise from the facts and trends of FDI concern the following: – Why international production. FDI and MNCs? – How do (should) MNCs conduct their business strategies? (competitive and corporate strategies) .

nation states (in developed and developing countries) and international organisations and what is the impact of MNCs on growth and development? • What is the link between MNCs and international competitiveness? .18 Some issues in IB (ii) • What is the relationship between MNCs.

starts here): Firms & Industries .Background 1 (pp 20-28.

Industry Concentration. Diversification (Related. Transnational Corporations (TNCs). Competitive Industry Growth Organic (Internal)-Vertical integration. External-Mergers and Acquisitions ‘National’ (Public Limited) Company.History (U-form) Firm. Oligopoly (M-form) Firm. Global Firms 20 . Unrelated-Conglomerate) Foreign Direct Investment.

clusters. • „Hybrid‟ (networks. joint ventures. • Foreign Direct Investment (FDI) and MNCs. • Conglomerate diversification: operations-expansion of firms in „unrelated‟ products-markets. • Mergers and acquisitions (M&A): coming together of two or more firms. strategic alliances …) .21 Firm integration “Strategies” • Vertical Integration (VI): Backward (raw materials) and forward (distribution).

• Efficiency: Firms pursue profit through reduction of production and transaction costs. .22 Main perspectives • (Market) Power: Firms pursue profit and/through (market) power. • Hybrid: Firms pursue profits through efficiency and (market) power.

it is concerned with the industry price-output „equilibrium‟.g. sales revenue. e. monopoly.. growth. . and give rise to reduced market transaction costs. e. a „black box‟. perfect competition.23 Theories (i) • Neoclassical: Firm is „a production function‟. which maximizes profits.g. resulting in efficient industry structures. – Managerial: Firms maximize utility of managers. – Transaction Costs: Firms are multi-person hierarchies which result from. Based on alleged „separation of ownership from control‟. Price-output equilibria depend on market structure..

There are internal and external stimuli to growth which lead to industry concentration. they „satisfice‟.24 Theories (ii) • Resource-Based: Firms are bundles of human and non-human resources under administrative co-ordination. . firms do not maximize. • Behavioural: Given „bounded rationality‟ and different objectives of groups within them.

enhance market coordination and give rise to ephemeral monopoly profits. • „Marxist‟: Firms produce commodities for sale in the market for a profit.25 Theories (iii) • „Austrian‟ . profit seeking entrepreneurs. for maintenance of monopoly (power).Chicago School . eroded through competitive process of „creative destruction‟ (innovations).Schumpeterian: Alert. under hierarchical control of capital over labour. . Dialectic link between competition and monopoly.

in the form of a Demand Curve. oligopolistic. etc. leading to competitive. or monopolistic industry structures.Some critical elements for economic analysis (DISCO) (i) • Demand (D): The demand conditions firms face. barriers to entry. 26 • Industry Structure (IS): The extent of industry concentration. imperfectly competitive. . derived from „Theory of Demand‟.

Some critical elements for economic analysis (DISCO) (ii)
• Costs (C): The cost conditions faced by the firm, in the shape of a Cost Curve, derived from „Theory of Production and Costs‟. • Objectives (O): The firms‟ aim. It allows the derivation of price-output „equilibria‟. Usual assumption is profit maximization (Marginal Cost equals Marginal Revenue). Others are maximization of sales revenue or growth. Alternatives are „satisficing‟, „entrepreneuring‟…

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Exhibit 1.5: Monopoly versus Competition
P

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Q

, minimum efficient scale PM monopoly price PC perfect competition price

PM

LAC = LMC PC

D

0

Q

QM MR

QC

Q

[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).

30 „Globalization‟: facilitators • Reductions in transportation costs. . • Improvements in information and communication technologies.

International Business Economics Session 2 Why MNCs and FDI? .

licensing. • Question – Why MNCs as opposed to exports. ? . franchising.32 The Multinational Corporation (MNC) • Definition – MNC = firm which controls production across national boundaries through intra-firm (non-market) operations. etc.

Background 2 (pp 32-65. starts here): Perspectives on the theory of firm .

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The Neoclassical analysis (i)
Simple Market Structure Analysis (Perfect Competition vs Monopoly) • Perfect Competition defined: Market structure characterised by a large number of profit maximising buyers and sellers selling homogeneous products, and no entry barriers. • Result: Price taking behaviour, price at minimum long run average cost (LAC) curve  „normal‟ profits.

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The Neoclassical analysis (ii)
• Monopoly defined: market structure characterised by a single profit maximising producer and very high entry barriers (no entry). • Result: monopoly prices exceeding minimum LAC  „Excess‟ (monopoly) profits. • Conclusion: departures from perfect competition result in increases in prices and reductions in output. Also to „welfare losses‟ due to „monopoly power‟.

The Neoclassical analysis (iii) Oligopoly
• Defined: market structure characterised by interdependence of (usually a small number of) producers-firms. Duopoly is the case of two firms.

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etc ) • Performance (Profitability. R& D. 37 Structure (Concentration.etc ) • Conduct (Pricing. Efficiency.C(onduct) . Barriers to Entry. conduct (C) and performance (P) of industries. Advertising. etc ) • . SCP Model: Suggests there exists a (initially unidirectional) link between structure (S).Exhibit 5: Industrial Organisation (IO) and the SCP M odel S(tructure) . Main Focus: The concentration (S) Profitability (P) relationship assuming profit maximisation (C). Feedback relationships from conduct and/or performance to structure later allowed for.P(erformance) model • IO Defined: Branch of economic theory analysing structure-conduct and performance (SCP) of oligopolistic industries (set of firms producing similar products). ‘New IO’ analyses impact of conduct on structure and performance in oligopolistic games.

Unconstrained profit maximizing oligopoly 3. Contestable markets .Theoretical specification of industry structures 1. Limit pricing 38 2.

• Result: Limit price derives from limit output found by subtracting the minimum efficient scale level of output from the perfect competition level. barriers to entry (minimum efficiency scale) and that incumbents leave post-entry output at pre-entry levels and entrants know this. .39 1. Limit Pricing • Assumes constrained profit maximisation (maximum profits subject to no entry).

1: Derivation of the limit price P 40 PL PC LAC Q 0 Q QL Q D QC Q • PL is determined by QL. the level to which. RULE: QL  QC  Q . the competitive output would result. if the MES was added. thus no ENTRY.e. i. thus PC.Exhibit 2.

Unconstrained profit maximising oligopoly 41 • Assumes blockaded entry and joint profit maximising price-output levels (Monopoly). Entry is blockaded through strategic entry barriers. .2.g.. investment in excess capacity. e.

as any departures from perfectly competitive prices lead to hit-andrun entry and exit. . This ensures perfectly competitive price-output levels.42 3. even in the presence of economies of scale and oligopolistic market structures. Contestable markets • Assume free entry and costless exit.

excess capacity. 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.43 IO models compared • Main issue is the nature and importance of entry barriers. . e..g. both „innocent‟/structural (scale economies) and strategic (conscious actions by incumbents designed to deter entry). To be credible. product proliferation. excess capacity investment should be optimal post-entry. • Well analysed strategic entry deterrence strategy.

Exhibit 2. strategic capacity output P PM monopoly price P PL limit price PC perfect competition price M L LAC = LMC C QS Q D 0 Q QM QL MR QC Q .2: An expository diagrammatic framework to Industrial Organisation P 44 Q . minimum efficient scale P QS.

which is based on and extends the Cournot/Bertrand models of oligopoly. . Emergence and effects of oligopoly analysed by theory of Industrial Organization (IO). crucial for (competitive) strategy. • M-Form organisation is important condition for development of corporate strategy (existence of multitude of business units).Firm-industry structures and business strategy 45 • Oligopoly. which is absent in cases of both perfect competition and monopoly.

Markets and Hierarchies • Resource-Based and related perspectives 46 .Theory of Firms & Industries: Alternative Perspectives • Transaction Costs.

Markets & Hierarchies (i) • Origin: Coase (1937) • Assumptions i) Market is „original‟ means of resource allocation => ii) Existence of hierarchies (e. 47 .e. firms) due to market failure • Nature of market failure – Cognitive (natural) not structural.. i.g.Transaction Costs.. due to transaction costs and not monopoly power.

Williamson.): internalization of markets by hierarchies. the M-form. Markets & Hierarchies (ii) • (Market) Transaction Costs are costs of information. etc.e. policing and enforcing agreements. i. and conglomeration result from pursuit of transaction cost reductions. bargaining. • Horizontal and vertical integration. replacement of voluntary exchanges with hierarchy => savings in transaction costs => hierarchy (firm) more efficient way to allocate resources. • Main Proposition (Coase. 48 .Transaction Costs.. contracting.

Markets & Hierarchies (iii) • Policy Implications – In neoclassical approach departures from perfect competition => market failure (structural) => => need for government intervention. – In transaction costs approach hierarchies (including M-form conglomerates and MNCs) = efficiency improving solutions to (natural) market failure => => less need to interfere with the markets.Transaction Costs. 49 .

– Focus on „the internal resources of the firm‟. . the boundaries of which are determined by the „area of administrative co-ordination and authorative communication‟” (Penrose. Environment can be manipulated by firms to serve their objectives. 1995. p xi). then the external environment.Resource-based & related perspectives (i) • Early work by Penrose (1959) 50 – Firm = “a collection of resources bound together in an administrative framework. Latter is different for each firm depending „on its specific collection of human and other resources‟.

diversification as new markets become relatively more attractive than existing ones. ii) knowledge creation within firms. • Endogenous Growth.Resource-based & related perspectives (ii) • Dynamic interaction between internal and perceived external environment („image‟. which releases resources. results from i) resource indivisibility. • A firm‟s prospects are in terms of existing and new products. 51 . and „productive opportunity‟).

Resource-based & related perspectives (iii) • Knowledge is tacit. based on cumulative growth of collective knowledge in the context of a purposeful firm. • „History matters‟. and a firm‟s size by the extend to which administrative effectiveness continues to reach expanding boundaries. . growth is an evolutionary process. 52 • Rate of firm‟s growth limited by growth of knowledge within it.

.. to acquire managerial resources for expansion. e.Resource-based & related perspectives (iv) 53 • Firm strategies result of differential capability. due to ability of firms to serve their own needs better. in transferring tacit knowledge (Kogut-Zander). .g. due to differential ability e. – Mergers and Acquisitions. due to growth and multiple applicability of resources. – Vertical Integration.g. – Diversification. – MNCs.

routines. 1982) 54 • In Nelson and Winter‟s evolutionary theory of the firm. heredity and struggle for existence in biology.Resource-based & related perspectives (v) (Nelson & Winter. . search (changes in routines) and competition are economic analogues to genes.

• Rents in equilibrium.Resource-based & related perspectives (vi) (Capabilities-based) • Use and develop hard to imitate and costly to apply internal capabilities. 55 .

Resource-based & related perspectives (viii) (knowledge-based theories. transferring and developing knowledge.) • Firms better than markets in using. preserving. Penrose. etc. 56 . • Value creation – growth through knowledge and value appropriation.

Resource-based & related 57 perspectives (ix) (Richardson and cooperation) • “Dense network of co-operation and affiliation by which firms are inter-related.” • Markets. hierarchy and networks are a function of degree of complementarity and similarity of activities – weakly complementary activities => MARKET – complementary and similar activities => HIERARCHY – complementary and dissimilar activities => COOPERATION [End of Background 2} .

Location.Eclectic theory (or Ownership. Internalisation .Demand-side .Monopolistic – „ownership‟ advantage .Supply-side .Divide and rule .OLI paradigm) .58 Theories of the MNC • Two main types: .Other factors – “theories” • Supply-side theories.Resource-based . Mainly .Transaction costs and internalisation .

59 Supply-side theories: Monopolistic „ownership‟ advantage (i) • Origin: Hymer‟s 1960 PhD thesis • Assume: „Law of increasing firm size‟: Firms growth leads to concentration and acquisition of monopolistic advantages (MAs). – MNCs aim at reducing conflict. – Firms‟ pursuit of (monopoly) profit => seeking overseas markets. . – MAs allow firms to outcompete foreign rivals.

Supply-side theories: Monopolistic „ownership‟ advantage (ii) 60 • 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 .

licensing and nonmarket transactions.Supply-side theories: Transaction costs .e.internalization (i) 61 • Existence of firms => Economising in transaction costs => Firms more efficient than markets • In case of MNCs.g. i. Foreign Direct Investment (FDI). exporting.. choice is between market transactions. . e.

– Hennart: internalization of markets due to differential ability to control (overseas) labour. – Buckley & Casson: intangible assets exhibit „public goods‟ attributes.Supply-side theories: Transaction costs .internalization (ii) • Reasons for FDI 62 – Williamson: asset specificity => hold-up problems => need for fully owned subsidiaries (FDI). . thus result in appropriability problems => market failure.

63 .Supply-side theories: Transaction costs .internalization (iii) • Conclusion Internalization of markets through MNCs are efficient solution to intrinsic (transaction costsrelated) market failure.

64 . – O explains why firms are able to become MNCs. L(ocation). – L explains the choice of location. I(nternalization) paradigm. – I explains why they benefit from internalizing markets or advantages.Supply-side theories: Eclectic theory (or „OLI paradigm‟) • Dunning. not the MNC. combined a and b as well as location advantages to provide „eclectic theory‟ or O(ownership). • OLI explains internationalization of production.

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.Supply-side theories: Divide and Rule (Sugden) 65 • Builds on Marglin-Hymer • Focuses on labour markets. .

Teece.Supply-side theories: Resource-based (Penrose. • MNCs are better in transferring internationally tacit knowledge than markets. Kogut-Zander) 66 • MNCs are due to endogenous growth and differential capabilities vis-à-vis market and other firms. . • Growth can be national (diversification) or geographical (MNC).

. • As consumption decreases so does effective demand => going overseas for demand outlets.67 Demand-side theory (i) • Cowling & Sugden. Pitelis: increased concentration => increased profits => reduced consumers expenditure (because a lower proportion of profit is consumed than of wage income).

68 Demand-side theory (ii) • The MNC as an All Weather Company – Diversified national firms can ride the industry life cycle (Hymer). . becoming All Weather Companies. – MNCs can ride the national business cycle.

– Can motivate . • Competition between states – Nation states may promote their own MNCs to affect their international competitiveness – could explain some LDC MNCs. Graham). – Specifically oligopolistic interaction theories (e.. build on Hymer and emphasize role of threats and counter-threats. .shape firms‟ payoff matrix => crucial context within which decisions are taken.69 Other factors – „theories‟ • Oligopolistic rivalry – Present in most theories (except transaction costs).g.

. – MAs are an inducement to innovation and further growth (Penrose). they can help firms outcompete foreign rivals (Hymer).g. multiple use of resources (Penrose).g. or push factors. e.70 Synthesis (i) • Context: Oligopolistic interaction – Endogenous growth (Penrose) => monopolistic advantages (Hymer). – Domestic diversification due to pull factors. the product life cycle (Hymer).. e..

71 Synthesis (ii) • Geographical diversification also due to national-regional business cycles (all weather company). • No general theory possible. • Mode of expansion due to differential firm capabilities (Penrose. • Locational factors explain the choice of location. Kogut & Zander). Buckley & Casson) and overall control advantages (Hymer). . Teece. but a general framework within which each case can be examined. (dynamic) transaction costs (Teece.

Eclectic view => advantages and disadvantages => „trade-off‟. Divide and rule hypothesis => reduced workers welfare => (Pareto) inefficiency.72 MNCs impact on welfare • Monopolistic advantage theory => possibility of reduced competition due to MNCs => (Pareto) inefficiency  • • • • • Internalization hypothesis => transaction reductions => efficiency. Resource-based => efficiency and inefficiency may co-exist Synthesis => coexistence of efficiency and power => „trade-off‟. .

generate an uneven development between the centre (developed countries) and the periphery (less developed countries). the operations of MNCs tend to globalize the tendency towards concentration. They are responsible for the dependent industrialization of the Newly Industrialized Countries.The MNC and „Uneven Development‟(Hymer) 73 • For Hymer (1972). and tend to shape the world to their image by creating „superior‟ and „inferior‟ countries. . erode the power of labour unions and the nation state.

International Business Economics Session 3 Strategy and Strategic Options of MNCs .

Background 3 (pp 83-99. starts here) Business Strategy .

alliances clusters. thus require „capital budgeting‟. 76 All such strategies involve future cash flows. etc.Business Strategy (i) • Firms‟ evolution – strategies – – – – – Horizontal integration (mergers and acquisitions) Vertical integration (backward and forward) Multidivisional (M-) form (business units under central control) Conglomeration (unrelated business activities) Foreign Direct Investment . .multinational corporations (foreign direct investment) – Networks. joint ventures.

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Business Strategy (ii)
• Types of strategy – Competitive: Strategy of Business Units – Corporate: Strategy of firm as a whole

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Competitive Strategy Porter: based on IO
• „Five forces‟ model (rivalry of existing competitors, potential entrants, power of suppliers-buyers, substitute products). Rule: select and/or create „attractive industries‟ (with weak forces of competition) • Three generic competitive strategies (cost leadership, differentiation, focus). Rule: do not get stuck in the middle.

Exhibit 3.1: M. Porter‟s five forces model
POTENTIAL ENTRANTS Threat of entry Power of suppliers SUPPLIERS INDUSTRY COMPETITORS Rivalry among existing firms Power of buyers BUYERS

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Threat of substitutes

SUBSTITUTES

Porter‟s three generic strategies Competitive advantage Lower cost Differentiation 80 Competitive scope Broad N arrow Cost leadership Cost focus Differentiation Differentiation focus .2: M.Exhibit 3.

marketing and sales. technology development.Competitive Strategy Porter (cont‟d) 81 • Value chains: firm‟s primary and support activities that generate value (margin) – primary: firm infrastructure. human resource management. service Rule: align value chain to generic strategy . procurement – support: inbound logistics. outbound logistics. operations.

82 Exhibit 3. Porter‟s value chain Firm infra-structure Human resource management Technology development Procurement Margin Inbound logistics Operations Outbound logistics Marketing & Sales Service Margin .3: M.

83 Corporate Strategy • Portfolio models . • Porter • Resources-capabilities . etc.Boston Consulting Group.

84 .Corporate Strategy: Portfolio models . cash cows. question marks and dogs on the basis of industry growth rates and business units‟ relative market share Rule: cash-in cash cows. Liquidate dogs. to invest in stars and selected question marks. stars-to-be.The Boston Consulting Group (i) • Learning and experience gives rise to reduced unit costs as volume increases • Market share increases profitability • Portfolio matrix: to classify business units as stars.

growth-stars. General Electric 85 – same principle as BCG.Corporate Strategy: Portfolio modelsThe Boston Consulting Group (ii) • BCG matrix related to the industry product life cycle (introduction-question marks. different criteria and classifications . decline-dogs). • Portfolio Models: Shell. maturity/saturation-cash cows.

4: The experience curve Unit cost 0 Cumulative volume of output .86 Exhibit 3.

Exhibit 3.5: The BCG growth/share business portfolio matrix Relative market share position High (above 1.0) High (faster than the economy as a whole) Industry growth rate Low (slower than the economy as a whole) Stars Low (below 1.0) Question marks (or problem children) 87 Cash cows Dogs .

6: The life cycle model Industry Introduction Growth sales Maturity Decline 0 Time .88 Exhibit 3.

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 89 .

Corporate strategy: The approach of M. if not possible. Porter • Four types of corporate strategy – – – – portfolio management (as in BCG matrix) restructuring (restructure and sell-off) transfer of skills sharing activities 90 Rule: select sharing activities or. . transfer of skills. Other two hard to implement with success.

Teece. etc. • [End of Background 3] . • Conglomerate diversification results from problem of appropriating rents from intangible assets and/or differential capabilities in transferring knowledge.Corporate Strategy: The resources – capabilities perspective (Penrose.) 91 • Diversification strategies are the result of availability of resources with potential for common use by apparently unrelated activities.

requiring integrated strategy . requiring locally focused strategy – global (linked.92 Strategy of MNCs (i) • For Michael Porter industries are – multidomestic (nationally responsive). integrated).

low) transnational (high. high) global (high.93 Strategy of MNCs (ii) • For Bartlett and Ghoshal: four basic strategies emerge on the basis of cost pressures – local responsiveness matrix: – – – – international (low. high) . low) multidomestic (low.

94 Exhibit 3.2: Bartlett and Ghoshal‟s Options for MNCs High Cost Global Transnational Pressures Low International Low Local Responsiveness Multidomestic High .

95 Exhibit 3. solve intangible (Hymer) opportunism assets appropriability problems Foreign Direct exploit ownership high TC due to asset solve intangible assets Investment advantages (Hymer) specificityappropriability problems.9: A summary of theory and strategy IO-Porter Horizontal integration Vertical integration M-form reduce rivalry acquire (managerial) resources barrier to entry reduce TC differential ability for inhouse production facilitate unrelated internalize external facilitate unrelated diversification capital market diversification (Chandler) (Chandler) failures Conglomerate reduce dependence high TC due to asset exploit common resource diversification on product life cycle specificitybase. opportunism differential capabilities Networks facilitate market optimal use of Derive knowledge-related power market and benefits of co-opetition hierarchy Transaction costs (TC) reduce TC Resource-based .

Application: A simple decision framework Transport costs and tariffs High Suitability of know-how for licensing Yes Foreign operation requires tight control Yes Horizontal FDI No Horizontal FDI Low Export 96 No Know-how can be protected by licensing contract No Horizontal FDI Yes Licence Based on C. Hill (2003) .

Government Policy and (Inter)national Competitiveness .International Business Economics Session 4 MNCs.

industrial and competitiveness) policies .Competitiveness: definition “ Differential productivity. regions. nations…) “ Can be achieved through ” Business policies 98 ” Government (competition. value-added ” wealth creation. relative to other economic units (firms.

This includes analysis of i) Static effects (monopoly and reduced consumer welfare. due to high prices). monopoly and innovation). in particular the issue of the welfare effects of monopoly (power).g.Competition and Industrial Policy “ Early competition-industrial policies in West derive from IO theory. ii) Dynamic effects (e. 99 ..

Monopoly & international competitiveness (i) “ 100 “ “ “ Main claim that large firms can exploit economies of scale and scope. therefore can compete with large firms from other countries. e. in part as response to the ‘American Challenge’. Idea particularly prevalent is 1960s and 1970s in Europe. . Servan-Schreiber’s claim that US multinational corporations dominate technologically European markets.g.. 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.

Monopoly & international competitiveness (ii) “ Counter arguments are: ” i) higher X-inefficiency ” ii) may suppress major inventions if they result in major re-equipment ” iii) inflexibility 101 “ Schumpeter’s ‘Differential Innovations Hypothesis’. that large firms are large because they have been more successful innovators to start with. .

Evidence inconclusive. “ Focus on efficient resource allocation limited.Monopoly and Welfare Conclude “ An open question whether the dynamic gains offset the static losses. Concentrate on resource creation? 102 .

. lenient or encouraging attitude to multinational corporations (MNCs) .g. US Anti-Trust policies ii) Trade through (static) comparative advantage. Treaty of Rome.Practice ” The Western approach Theoretical Basis 103 i) ‘Competition policy’ to correct market failure due to monopoly (power) and its abuse: e.

1970s “ ‘Lame Ducks’ policies ” ‘National Champions Policy’ (e. UK.Practice ” The Western approach (EU) (i) 104 But in 1960s “ ‘Recognition’ in Europe of the ‘international competitiveness’ advantages of ‘large size’ (American challenge thesis) “ Relatedly. Italy) ” Nationalizations of ‘strategic’ sectors .. France.g.

Practice ” The Western approach (EU) (ii) 105 1980s “ Return to the market (privatisations etc) and focus on ‘Government Failure’. efficiency of public sector. . 1990s “ Entrepreneurship and small firms “ Horizontal measures. tangible and intangible infrastructure. technology and education.

clusters? Conclude 106 “ ‘Grant Theory’ but no industrial strategy including adhocity. . undue focus on (dis)advantages of size and static comparative advantagebased (free) trade.Practice ” The Western approach (USA) “ Hidden industrial policy in the form of defence policy? “ revival of 1990s. discontinuity.

Hayek. as in Schumpeter . with initial focus on internal competition. ii) Managed trade.Practice ” The Far Eastern approach (Japan) Basis: Industrial Strategy by Ministry of Trade & Industry (MITI) involving: i) Dynamic comparative advantage (created comparative advantage). iii) Management of competition (the ‘Golden Mean’) and co-operation. 107 . iv) Dynamic competition through innovativeness.

Taiwan. Practice ” The Four Tigers 108 . Hong Kong) (i) Basis: Similar to Japan.(Singapore. Taiwan). ii) Export promotion based on labour intensive manufacturing. iii) Promotion of high technology/high value added sectors. iv) Attraction of FDI (Singapore. technology transfer. adaptive industrial strategy involving i) Import substitution. South Korea.

Taiwan. new (strategic) management techniques. Hong Kong) (ii) “ Relative success of ‘Far East’ ” Result of multitude of complex factors which include culture. etc. high saving. Practice ” The Four Tigers 109 “ Question: Can we exclude role of industrial strategy? Is it unrelated to the other factors? .(Singapore. consensus. close relation between industry and finance. effective public administration. South Korea.

2. 5. ‘New Trade Theory’ ‘New Competition’ New location economics New (‘Endogenous’) Growth Theory MNCs. deindustrialisdation and ‘Competitive Bidding’ 110 . 3. 4.New theories 1.

Benefits from trade arise when each country pursues such a strategy. the welfare effects of monopoly and the theory of (static) comparative advantage. Krugman) ” Strategic Trade. According to this countries should specialize and trade in products in which they enjoy a comparative advantage. “ Presence of monopolistic competition. 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.1. . economies of scale. New trade theory (i) 111 “ Traditional focus of Western industrial policy.

. attempts by countries to create (not accept the existing) comparative advantages.1. New trade theory (ii) “ This led to concept of dynamic comparative advantage. i. “ Best known case of dynamic comparative advantage policy is Japan.e. 112 .

The New Competition (i) “ “ 113 Based on observation of successful industrial districts. highly innovative.2. etc. Often rely on support by state/local authorities. in North Italy. suppliers etc and use new production methods such as Just-in-Time. . which cooperate on issues of infrastructure. customer oriented firms. USA. Cambridge UK. technology etc and compete in the market for customers. Germany. with a hands-on approach to management. Such districts consist of small and medium sized. etc. are based more on trust than hierarchical relations. try to ‘exploit’ the dispersed knowledge of their labour.

subcontracting. particularly Japanese.g. such methods are also adopted by major. . MNCs. through e.2. The New Competition (ii) 114 “ Success of industrial districts questions benefits of large size and provides a different (‚Post-Fordist‛) model of industrial development.. However.

reducing transaction costs through trust.3. Porter) “ Importance of location in generating external economies. New Location Economics (Krugman. and further innovation. 115 .

116 . Romer) “ Importance of human resources and technological change in effecting (‘endogenous’) macroeconomic growth.4. New Endogenous Growth Theory (Lucas.

“ In era of multinational corporations ‘name of the game’ that of ‘competitive bidding’.e. MNCs. i. Deindustrialization and Competitive Bidding 117 “ 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. . attempt by governments to attract investments by home and foreign firms (MNCs)..5.

. through appropriate ‘flexible specialization’ policies. Needed is a shift of power to communities and regions. e.g. centipetalism and short termism. .Theory and Practice “ Question: New approaches support/explain ‘Far Eastern’ miracle? “ ‘New Industrial Strategy for Democracy’ (Cowling & Sugden) 118 ” MNCs give rise to multinationalism.

Preliminary Conclusion “ Possibility for Machiavellian scenario i.e. like ‘flexible specialization’ 119 . 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..

. relatively underdeveloped industry. 120 “ Main issue: selection.Developing countries “ Some common features: small internal size of market. transferability and feasibility of policies. clustering. “ Possible Strategy: i) follow the ‘four tigers’ and ii) consider ‘appropriate’ focus on small and medium sized enterprise. and foreign MNCs. lack of large ‘national’ MNC’s (over-) reliance on small family run businesses. suitability. flexible specialization.

The Importance of Institutions (i) 121 “ Main problem of implementation. Indeed underdevelopment may be the effect of inefficient property rights. ‘government failure’. . often more acute in developing countries. other institutional constraints. and incentive mechanisms? (North) “ Culture. consensus. Although a general problem. “ Need for promoting an institutional framework conducive to development. This includes addressing the problem of ‘capture’ of the state by MNCs.

“ 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. It can also be developmental.e..The Importance of Institutions (ii) 122 “ Government can be enabling (reduce private sector transaction and production costs) to increase output. . i. “ ‘Capture’ effects support a competitiveness strategy favouring smaller firms (potential competition to established giants). try to improve the revenue side.

g..Conclusions (i) 123 “ Possible and necessary to devise a competitiveness strategy which learns from economic theory and international practice and addresses the issue of implementation (e. institutions and ‘capture’ of the ‘state’) and for the EU its declared needs to promote Competition and Convergence .

“ Identification and development of distinct capabilities and competencies of a nation and governments important condition for effective. Internally they should address the issue of the institutional constraints.Conclusions (ii) 124 “ Developing countries should consider their policies in the above framework. striving for an emphasis on dynamic competition. implementable strategy. value creation and supply-side convergence. .

v) Fail to distinguish between policies that re-distribute resources and policies that generate resources. iii) Ignore distribution issues. intra-EU and between EU and ‘The South’. ii) Do not address the problem of MNCs (as a potential threat to competition). iv) Fail to provide supply-side incentives for convergence. which undermines sustainability. Need to move from competition to competitiveness policies 125 “ .‘Anti-trust’ today: some problems “ Potential problems with current policies i) Downplay lessons from the ‘Far East’ and the ‘new approaches’.

From competition to competitiveness policies: models of competitiveness “ Neoclassical model ” Competitive markets ” Free trade 126 “ ‘Japanese’ “ Porter’s ‘Diamond’ “ Productivity-Competitiveness Wheel .

QS. PC perfect competition price .Exhibit 4. Pm PL LAC1 = LMC1 PC E LAC2 = LMC2 QS Q D 0 Q Qm QL MR QC Q Q . PL limit price. p. Pm monopoly price. monopolist‟s disincentive to invent. minimum efficient scale. strategic capacity output. E. efficiency gains.1: Competitiveness – the127 neoclassical model P A common expository diagrammatic framework for neo-classical Austrian and Marxist approaches to industrial organization.

128 Competitiveness (i) • The „Japanese‟ approach ? – High knowledge intensive sectors .

Exhibit 4. instruments. plastics.and rawmaterial-intensive industries (Steel. fibers) Japan (1959) 100% Source: Best (1990) Unskilled-labour-intensive industries . motor cars) 129 Knowledge-intensive industries (computers. heavy machinery) 100% West Germany (1974) Japan (1985) Japan (1974) 100% Medium capital.2: Competitivenes s – the Japanese approach? 100% Medium capital-and labourintensive industries (light machinery.

130 Competitiveness (ii) • Porter‟s „diamond‟ – Factor and demand conditions. clusters .

3: The determinants of national competitive advantage (Porter‟s „Diamond‟) STRATEGY STRUCTURE AND RIVALRY 131 FACTOR CONDITIONS DEMAND CONDITIONS RELATED AND SUPPORTING INDUSTRIES .Exhibit 4.

• Absence of links between competitiveness at the firm-regional and national levels. • Insufficient treatment of the issue of sustainability. • Insufficient analysis of determinants of productivity and competitiveness. .132 Problems with existing models • Absence of commonly agreed upon conceptual framework.

policy mix • institutional environment .locational milieu • macroeconomic environment .Value Creation Determinants of Productivity .conduct and regional .Sustainable Competitiveness and 133 Development: a conceptual framework • • The Productivity-Competitiveness Model – Competitiveness <=> Productivity .governance mix .Value – Firm level • infrastructure • human resources • technology and innovation • unit costs economies – Regional and National levels: As above plus • Industry structure .

Regions and Nations Institutional context Governance mix Macroeconomic environment Policy mix .Effective demand Industry conduct .structure and regional-locational milieu Infrastructure Unit Cost Economies Productivity-ValueWealth Human Resources Technology & Innovativeness .Competitiveness134 Wheel” for Firms.“The Productivity .

135 Main routes to competitiveness • Firm size & FDI by MNCs • Clusters of Small and Medium-Sized Enterprises (SMEs) .

(and/or inter-) sectorally. in a facilitatory socio-institutional and cultural milieu. which compete & co-operate (coopete) in (inter)national markets.136 What are Clusters? • (Geographical) agglomerations of firms (and other organizations-institutions) linked horizontally (and/or vertically) intra. .

learning. etc.) – better human resources – strong regional infrastructure – more facilitatory institutional context (through co-opetition. external. scope. etc. transaction costs. diversity.137 Clusters and the Wheel • Clusters => – innovation – reduced unit cost economies (economies of scale.) .

productivity & competitiveness at the regional & national levels. they create employment and can lead to convergence.138 Despite problems. . clusters are important • Clusters improve innovation. strategies for sustained successful performance. • Problems include identifying nature. thus help deepen democracy. • Clusters are more bottom-up. boundaries.

yet: – Hard for developing countries to attract FDI – Risk of FDI flight. and flexibility of operations • Clusters have advantage over large firms and FDI because of local base and co-opetitive nature. given options. . • Clusters attract FDI and embed it in localities.Foreign Direct Investment and Clusters 139 • Large firms and (through) foreign direct investment (FDI) can improve determinants of productivity.

Effective demand Industry conduct – structure and regionallocational milieu 140 SMEs. Clusters (Infra)structure & Strategy Unit Cost Economies Productivity-Value- Human Wealth Resources Technology & Innovativeness Government .Three agents of productivity. FDI Institutional context Governance mix Macroeconomic environment Policy mix . value and wealth creation Large firms.

upgrading. and (thus) are hard to create „top-down‟. control-evaluation. • However. (diagnosis). regional or national levels. theory and international experience suggest that cluster development can be facilitated 141 – Clusters can be upgraded at the individual. – This presupposes cluster identification. audit.Cluster Creation versus Cluster Development • Clusters are mainly the result of history. re-diagnosis… .

Strategy for Sustainable Competitiveness 142 • 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. .

supply-side compatible – institutional framework – remove (anti)incentives – competition policy co-opetition for innovativeness – environment – distribution of income .143 Prerequisites and Mechanisms • Sustainability requires – macro-policy .

• Method and tools developed can help in this direction. for productivity. competitiveness. . • The state can be a catalyst and facilitator.144 Conclusions • Possible and desirable to identify and develop (mega) clusters. convergence and deepening of democracy. regional development.

International Business Economics Overall Conclusion and the Future of MNCs .

MNCs and FDI. through – firm productivity and competitiveness – government enabling policies. SME clusters and government policy can help achieve this objective .146 Conclusions • Value creation. national productivity and competitiveness • Under conditions.

• Policy and polity should aim at identifying routes that deliver the goods at least cost – this can include painful „trade-offs‟. yet a threat to diversity. is both „god and devil‟. • MNCs will be a great force of economic growth. . like „competition‟ and co-operation itself.147 The Future • The MNC. equity and democracy.