Existence of the Multinational Firm Course: Advanced Topics in Strategy and Organization of the MNC...
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Transcript of Existence of the Multinational Firm Course: Advanced Topics in Strategy and Organization of the MNC...
Existence of the Multinational Firm Course: Advanced Topics in Strategy and Organization of the MNC
Marie Ahlstrand, 0404082 Johannes Tichy, 9950237 Bernhard Zacherl, 9900971
Overview Introduction Transaction Cost Economics The Product Life Cycle Eclectic Theory The Network Model Case Study
Introduction What is a Multinational Organization?
Continuous international Transactions Transfer of products, assets & employees Purchasing and Sales split up in different
countries Goods and Services made in different economics
Introduction - History 15. and 16. Century trading houses Middle of 19. Century first Multinational
Organizations (mainly England and Germany) 1960 USA: 3/5 of Worldwide foreign
Investments 1980 USA still over 50%, but Europe is rising
Introduction
Today ~ 50.000 Multinational Organizations, but is getting fewer due to Fusions or Abbroachement
Transactions Costs EconomicsHistory
1937: Ronald Coase, ‘The Nature of the Firm’ 1969: Kenneth Arrow 1985: Oliver Williamson, ‘The Economic
Institutions of Capitalism: Firms, Markets, Relational Contracting’
Transaction Costs Costs that are directly linked to the
transaction of goods Most common kind of a transaction: sale &
purchase Can be divided in:
Ex-ante Ex-post
Transaction Costs Ex-ante costs
Costs for the acquisition of information (e.g. research service, newspapers)
Initiation costs (e.g. approach) Agreement costs
Transaction Costs Ex-post costs
Processing costs (e.g. broker's fee, transportation costs)
Costs for control (e.g. receiving the delivery) Modification costs (e.g. claim)
Transaction Costs - Examples
Research Initiation Information Attribution Negotiation Decision Agreement
Processing Safeguarding Enforcement Control Adaptation Completion
Transaction Costs
Can prevent the whole transaction
Can prevent that the buyer or seller can find the most attractive offer for them
Can prevent the existence of a whole market
Transactions Costs Economics Economize on the costs of business
transactions over time Alternative governance structures:
Firms Markets Hybrid mixed models
Transactions Costs Economics
Internal governance structure Transaction is internalized The specialized governance structure shields and
protects the transaction Ensures full utilization of the specialized asset in
question
Transactions Costs Economics The theory assumes:
Limited rationality Lack of information The will to maximize individual profit Opportunistic behavior
Transactions Costs EconomicsWilliamson
Assumption of behavior: Limited rationality Opportunism
Assumption of environment: Insecurity / complexity Degree of the uniqueness of the asset
Transactions Costs Economics
The theory:
Extends the internationalization framework Enables managers to systematically analyze when
and where to internalize Assists in the analysis of the economic welfare
aspects of direct foreign investment
Transactions Costs Economics Example: Transfer of Know-How
Difficult to transfer without permanent contact May involve: teaching, demonstrating,... One-time contract
Transactions Costs EconomicsIntrafirm transfer Advantages:
Better disclosure Earlier agreement Better enforcement More efficient transfer results
Transactions Costs Economics
Relationship: Host country – multinational enterprise
After the investment the bargaining positions change
The multinational enterprise becomes vulnerable
Transactions Costs Economics Criticism
Neglect of the relevance of production costs Overemphasis of market failure Small emphasis of hierarchy problems Over-estimation of the selection power of the
market Reduction of power on economic dependence No theory of innovation
Transactions Costs Economics Conclusion
The multinational enterprise and foreign direct investment represent a response to high transaction costs by firms with unique assets
International Product Life Cycle (PLC) Raymond Vernon 1960s post war times High average income & high unit labor costs Follows the path of a good through its life
cycle to determine where it will be produced.
Stage 1 –New Product Produce in the home market Uncertain level of demand &
not standardized product Figure 1
Stage 2 –Maturing Product Demand increases Higher level of standardization Set up production facilities in countries with
the greatest demand Sell and produce in a few developing
countries Figure 1
Stage 3 –Standardized Product increasing competition lower price price-sensitive market cut production costs production in less developed countries Innovation country supplied by products
manufactured abroad Import from own subsidiaries and/or
competitors
International Product Life CycleThe theory states that a company will start with exporting its new developed product and that this export eventually becomes its imports.
Criticism of the International PLC USA is not the only innovator Products are introduced simultaneous in
different markets Many companies are set up in an international
market
Eclectic Theory What does eclectic mean?
“deriving ideas, tastes, style etc. from various sources, [...] attached to no particular school of thought.” (The Oxford dictionary, 2003)
Eclectic Theory Why “eclectic”:
The eclectic Theory combines different Theories
Goal of the Theory: Holistic framework – to identify significance of
the factors influencing both the initial act of foreign production and growth of such production
Eclectic Theory Ownership Advantages:
Common Ownership Advantages: Patents Management Know-How
Subsidiary Economics of scale
Multinationality Risk dividing
Eclectic Theory Internalizing Advantages
Transaction Cost Advantages
Local Advantages Political Advantages Infrastructure Wages
Eclectic Theory Market Entry Strategies
Portfolio Resources Transfer Licenses, Management Contracts…
Export
Direct Investment
Eclectic Theory
Ownership Advantages
Internalizing Advantages
Local Advantages
Portfolio YES NO NO
Export YES YES NO
Direct Investment
YES YES YES
Eclectic Theory Enhancement:
Theory of market failure“The higher the transaction cost of using the market (…), and the greater the efficiency of MNEs as coordinators of geographically dispersed activities, the more international production is likely to take place” (J. Dunning, 1988)
Eclectic Theory Criticism
Ownership advantages allow advantages in competition Ownership advantage had to internalize Inseparability between Ownership and Location
Important influencing factors like Industry and business competition were neglected
The Network Model Empirical studies “a market is a network of relationship
between firms “ (Johansson & Mattsson, 1998)
Stable and changing networks Micro-position and macro-position Networks degree of structuring Market asset and internal asset
Internationalization International extension
extends its network Penetration
penetrates networks International Integration
integrates its activities that take place in different countries
Internationalization Categories
Degree of internationalisation of the market (production net)
Degree of internationalisationof the company
Low High
Low
The Early Starter
The Late Starter
High
The Lonely International
The InternationalAmong Others
The Early Starter company low internationalization
production net low internationalization International extension third part abroad Penetration production abroad
The Lonely International company high internationalization
production net low internationalization International extension use its positions to
extend to new markets Penetration use its positions to penetrate
tightly structured nets International Integration co-ordinate
activities in different national nets
The Late Starter company low internationalisation
production net high internationalisation International extension enter a market
far away Penetration need a higher level of
co-ordination
The International Among Others company high internationalization
production net high internationalization International extension, and/or Penetration
using its positions to link different nets together.
International Integration increased co-operation between activities.
Case Study
Degree of internationalisation of the market (production net)
Degree of internationalisationof the company
Low High
Low
The Early Starter
The Late Starter
High
The Lonely International
The InternationalAmong Others
Case 1An Early Starter
KOMMUNDATA‘S entry into the Middle East Degree of internationalisation of
the market (production net)
Degree of internationalisatio
nof the company
Low High
Low
The Early Starter
The Late Starter
High
The Lonely
International
The International
Among Others
KOMMUNDATA The company and the product
Swedish software company Software concepts for hospitals Agreement with IBM Expanding – contracts in Ireland and Finland
KOMMUNDATA The entry process (1)
Contact in Dubai: Swedish consultary company – AB Teleplan
Collaboration with Teleplan on a project for the Department of Health and Medical Services, Dubai (DoHMS)
1982: First employees moved to Dubai
KOMMUNDATA Network at that time:
DoHMS Dubai Police GAC (Gulf Agency Company) Hardware suppliers G&W
KOMMUNDATA The entry process (2)
1984: DoHMS project completed Teleplan got new project for Oman police AGNC Kommundata works for the Ministry of Public
Health in Kuwait Kuwait Computer Company (KCC) was founded Contacts to Oman
KOMMUNDATA Comments on the case:
Few unimportant relationships Little knowledge about foreign markets Kummundata oriented itself to the existing
network The ‚invited‘ company often develops its own
position in the network
Case 2A Late Starter
KABI VITRUM‘S entry into the US Degree of internationalisation of
the market (production net)
Degree of internationalisatio
nof the company
Low High
Low
The Early Starter
The Late Starter
High
The Lonely
International
The International
Among Others
KABI VITRUM The company and the product
Medical company 1955: 2000 employees (600 abroad) 4 business areas:
Nutrition for intravenous nutrient solution Hematology for blood products Peptide hormones for growth hormones Parma
Product: INTRALIPID (fat emulsion for intravenous use)
The entry process (1) Successful launch in Sweden and Europe Company tried to launch the product in the US Introduction at exhibitions and symposia 1968: agency agreement with Cutter Laboratories 1975: FDA (Food and Drug Administration)
accepted the product Kabi Vitrum starts exporting to Cutter
KABI VITRUM
The entry process (2) Establishment of a production unit in the US 1981: patent run out Market share of other products went down Kabi Vitrum had to cut the product line Cutter withdrew from the joint venture agreement New partner: Baxtor Travenol With Baxtor Travenol – new clients prospecting
KABI VITRUM
Comments on the case: Suppliers, customers, competitors are
international Small firm has to be specialized Difficult to establish new positions Best distributors are often linked to competitors Important: great customer adaptation ability
KABI VITRUM
Case 3An International Among Others
SCANIA‘S entry into Australia Degree of internationalisation of
the market (production net)
Degree of internationalisatio
nof the company
Low High
Low
The Early Starter
The Late Starter
High
The Lonely
International
The International
Among Others
SCANIA The company and the product
Biggest of three divisions within Saab-Scania AB Main factory: Södertälje, Sweden Products: heavy trucks, buses, marine engines 1902: first truck produced 1957: internationalization – Brazil 1970: entry into the Australian market
SCANIA The entry process (1)
1966 first right hand trucks had been produced Interesting markets: Britain, Malaysia, Indonesia,
Australia Contacts: V.A.G., VW, Cylde Industries 1971: Clyde Industries was made general agent No success – Clyde withdrew from the venture Company moved to Melbourne
SCANIA The entry process (2)
Communication was improved Product adaptations Improved repair service Rationalizations within the sales force Contracts with: Mobile Oil Australia & Hockney
Alcon (tank producer) 1985: 542 trucks sold, market share of 8.9%
SCANIA Comments on the case:
Firm and environment are highly internationalized
Company uses position in one network to bridge over to other networks
The Nature Of Foreign Market Entry Orientating
Enter a network Get an understanding of the positions
Positioning Develop a position in the network
Timing Seeing opportunities Being able to react