MANAGERIAL ECONOMICS

An Analysis of Business Issues

Howard Davies
and Pun-Lee Lam
Published by FT Prentice Hall

Chapter 5: The Multinational Enterprise

Ob e!ti"es: After stu#yin$ the !hapter% you shoul# un#erstan#: &' the #efinition an# history of the (ultinational enterprise )MNE* +' the "arious theories e,plainin$ MNE -' the i(pa!t of the MNE: benefits an# !osts
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Multinational Multinational Enterprise Enterprise

.efinition: /An enterprise that !ontrols an# (ana$es pro#u!tion establish(ents 0 plants 0 lo!ate# in at least t1o !ountries'2 )Ca"es% &334* Note that the MNE is in"ol"e# in 5orei$n .ire!t In"est(ent% not si(ply 6ortfolio In"est(ent
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An An outline outline history history of of the the (ultinational (ultinational

&' Early 19th century: Al(ost all European0base# )e'$' British A(eri!an Toba!!o% Le"er Brothers% Mi!helin an# Nestle*% refle!te# #istribution of !olonial influen!e an# (ost 1ere in"ol"e# in ba!71ar# inte$ration into a$ri!ulture an# (inerals in the !olonies' +' In the 1920s and 1930s: Establish(ent of international !artels in (any in#ustries for $lobal !o(petition'
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-' From the 1950s to the early 1970s: Le# by A(eri!an fir(s (o"in$ into the European (ar7et )The A(eri!an Challen$e*8 resear!h0intensi"e (anufa!turin$ in#ustries' 9' In the 1970s, 1980s and 1990s: E(er$en!e of the :apanese (ultinationals% /e,port0platfor(2 a!ti"ities in the ne1ly0 in#ustriali;in$ !ountries' More #i"ersity8 (ore host !ountries8 (ore ho(e !ountries8 (ore in an# out'
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E!ono(i! E!ono(i! theory theory an# an# the the (ultinational (ultinational Equi-marginal roducti!ity o" ca ital #ate o" #eturn $%&

M6B <A
Capital

M6A <B
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Equi-marginal roducti!ity o" ca ital

diminishing returns to capital investment capital will flow from countries (B) with lower rates of returns to those with higher rates of returns (A) until rates of return are e ual !ut this does not e"plain the #$%&owners of capital can simpl' invest in portfolios (!u'ing shares and !onds)( no need for foreign direct investment (setting up offices)su!sidiaries( involving management and control)

'he (ymer-)indle*erger ro osition

0 (ultinationals (ust fa!e so(e #isa#"anta$es relati"e to in!u(bents 0 they (ust possess so(e for( of offsettin$ !o(petiti"e a#"anta$e o"er the in!u(bents8 these a#"anta$es !an be e,ploite# by pro#u!in$ in o"erseas (ar7ets' Co(petiti"e a#"anta$es of (ultinationals: e'$' te!hnolo$y% !apital% (ana$e(ent sills% et!' But 1hy not pro#u!e in ho(e !ountry an# * e,port the $oo#s=

+ocational theory
The host !ountries possess so(e lo!ational a#"anta$es% other1ise the fir( 1oul# si(ply operate in a sin$le lo!ation e'$' so(e !ountries ha"e !heap resour!es: !heap an# abun#ant supply of lan# an# labour8 so(e are !lose to the !usto(ers' But 1hy not li!ense the !o(petiti"e a#"anta$e of (ultinationals=
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Internali,ation and transaction cost theory

>i$h transa!tion !osts in"ol"e# in usin$ (ar7etin$ transa!tions8 e'$' !osts in enfor!in$ li!ensin$ a$ree(ents' Bu!7ley an# Casson?s analysis: fi"e a#"anta$es that an internalise# transa!tion o"er the (ar7et: in!rease# ability to !ontrol an# plan the opportunity for #is!ri(inatory pri!in$ a"oi#an!e of bilateral (onopoly re#u!tion of un!ertainty a"oi#an!e of $o"ern(ent inter"ention ,-

'he -eclectic. "rame/or01 2+I

5or forei$n #ire!t in"est(ent )5.I* to ta7e pla!e% T>REE types of a#"anta$e (ust be in pla!e' )&* O: -2/nershi . 3d!antages The fir( (ust ha"e so(e proprietary !o(petiti"e a#"anta$e )+* L: -+ocational. 3d!antages There (ust be so(e reasons for the fir( to !han$e its lo!ation of pro#u!tion e'$' lo1er labour !ost8 tariffs or other proble(s of (ar7et a!!ess8 a#"anta$es of bein$ near to the !usto(er
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)-* I: -Internalisation. 3d!antages It (ust be (ore profitable to transfer the a#"anta$e insi#e the (ana$erial hierar!hy of the fir(% instea# of throu$h a !ontra!t )e'$' li!ensin$% fran!hisin$* 4ome theorists argue that -internalisation. in itsel" is a general theory o" the multinational

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It is then a part of the $eneral analysis of the /s!ope2 of the fir( an# the #eter(ination of the fir(?s boun#aries' The sa(e $eneral issues #eter(ine the out!o(e' If a fir( 1ishes to transfer so(e a!ti"ity to another lo!ation it has to #e!i#e 1hether the resultin$ set of transa!tions shoul# be !oor#inate# throu$h !ontra!t or hierar!hy% i'e' neo0!lassi!al or unifie# $o"ernan!e'
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The proble(s 1ith !ontra!ts arise fro(: 5ounded #ationality 2 ortunism 3sset-s eci"icity A (ultinational 1ill #e"elop 1here"er a* a transnational shift of a!ti"ities be!o(e profitable% i'e' lo!ational a#"anta$es' b* the resultin$ set of transa!tions in"ol"es boun#e# rationality% in"est(ent in spe!ifi! assets an# the threat of opportunis(% i'e' internalisation a#"anta$es'
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O1nership Internali;ation 5.I E,portin$ Li!ensin$

Lo!ation

5ro( the "ie1point of the MNE: 6hat are the ad!antages o" "oreign direct in!estment $78E& o!er e9 orting and ,5 licensing:

The The I(pa!t I(pa!t of of the the Multinational Multinational on on >ost >ost E!ono(ies E!ono(ies
Resour!e transfer an# te!hnolo$y transfer effe!ts Tra#e an# balan!e of pay(ents effe!ts Effe!ts on !o(petiti"e stru!ture an# perfor(an!e Effe!ts of so"erei$nty an# lo!al autono(y
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The The i(pa!t i(pa!t of of the the MNE MNE on on its its ho(e ho(e !ountry !ountry
So(e So(e !on!erns: !on!erns: Balan!e Balan!e of of pay(ents pay(ents effe!ts effe!ts E(ploy(ent E(ploy(ent effe!ts effe!ts The The loss loss of of te!hnolo$i!al te!hnolo$i!al lea# lea# Ta, Ta, a"oi#an!e a"oi#an!e an# an# loss loss of of so"erei$nty so"erei$nty
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Global Co(petition an# Corporate Strate$y

The

need for an analysis of global strategy: links between economic analysis and literature on global strategy diversity of definitions and rescri tions
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Global Co(petition an# Corporate Strate$y

!eneral frameworks for the analysis of global strategy: by Porter "1#$%&: configuration of the firm's activities coordination of those activities (Generic strategy) between cost leadershi and differentiation

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General fra(e1or7s for the analysis of $lobal strate$y:

*i "1#$#+ 1##,&: drivers and levers Drivers: The characteristics of the environment that determine the need for a global a roach to strategy:market factors+ cost factors+ com etitive factors+ technology factors+ environmental factors Levers: The actions firms can take to secure advantage from the drivers: global market artici ation+ roduct standardisation+ concentration of value-adding activities+ uniform marketing+ integrative com etitive moves2-

General fra(e1or7s for the analysis of $lobal strate$y:

.ou

and /avusgil "1##%&: an integrated conce tual framework for global !lobal strategy determines global business and is a res onse to the e0ternal organisational factors also constrained and determined by organisational factors
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.llustration ,
1ultinationals in the hotel industry ownershi -s ecific advantages: (brand image)+ (know-how) of standardised roduction and control difficulties arise from transferring ownershi advantages: im ossible to transfer across boundaries between organisations2 conflicts between the com any's global interests and its local interests2 difficult to fully (a ro riate) the returns

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.llustration 2

!lobalisation in the hard disk drive industry location decisions: driven by the balance among the level of technical difficulty+ the skill level needed and the cost of labour

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