the growth of multinational firms virginie baron, stefan hinterberger
TRANSCRIPT
THE GROWTH OF MULTINATIONAL FIRMS
Virginie Baron, Stefan Hinterberger
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Introduction
control manufacturing establishments in at least two national jurisdictions
home or donor economy – host economy three main parts
general trends in direct foreign investment (DFI), branch plants, recognizing alternative ways
competitive or entry advantage to overcome problems of doing business in unfamiliar environments
how foreign firms behave in host countries following entry, DFI, equity investment
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Historical Background (1)
traced back 17th century ownership profit receiving risk taking decision making innovationconcentrated among a few individuals
beginning of the Industrial Revolution limited by the small scale nature of production customized or local nature of technology financing problems owner-management difficulties of transportation and communication
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Historical Background (2)
technological and institutional innovations facilitated the growth of international organizations increasing number of industries scale of production transportation networks communication systems
innovation of limited liability and the public corporation
separation of ownership from control organization and the managerial division of
labor became a factor of production
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Changes in the last 100 years branch plants created by
relocation of skilled workers and managers operated in a largely autonomous manner limited communication and integration with their parents
since 1950, branch plants closely integrated within the overall parent company strategy
centralization of policy making
integration of facilities across national boundaries
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Internationalization
Internationalization defined as "the process of increasing involvement in international operations” exporting selling licenses strategic alliances DFI procuring foreign sources of raw materials and other
inputs alternatives substitute for one another,
complement each other (significant between trade and DFI)
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Exports (1)
first internationalization exporting export wholesaler export association foreign based sales agent
little or not direct contact with the foreign market
limited understandings of foreign market dynamics such as arise from changes in taste and new competition
establishment of direct contacts in foreign markets and more control of sales channels
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Exports (2)
difficult process, contact with distant and unknown customers financing and insurance complete the necessary protocols and documentation arrange for transportation and distribution absorb the risks of costs incurred prior to payment
firms grow in size, markets must be enlarged exporting and DFI are alternatives, often
complementary exports prepare the way for DFI, establishing
business contacts, sources of information, better understanding of foreign markets
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UK, medium size and large tools and steel firms
substantial exports, as measured by the export-sales ratio
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Direct foreign investment (1) places the firm already has export or sourcing
connections secure inputs, designed to institutionalize
established trade links or create new ones complex learning and bargaining processes,
comprising long run strategic decisions DFI types
owned and controlled subsidiaries and branch plants share ownership and control with local firms,
governments, other international firms (joint ventures)
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Direct foreign investment (2) international firms grown massively
throughout the 20th century, by 1914 accumulated DFI was already substantial
comparing the major sources or host economies of DFI in 1914 with 1988 origins of DFI in 1988 remained highly
concentrated among leading industrialized countries, if slightly less in 1914
among leading industrialized countries, origins of DFI remained concentrated in 1988 but notably less than in 1914
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DFI by countries of origin
1914 - US, UK, France and Germany, 87% of DFI
1988 - US, UK, Germany and Japan, 65.6% of DFI
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DFI by countries of destination more diverse and developing countries
are important (20% of DFI) majority among already industrialized
countries
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Reasons for DFI
scale access to markets
primary manufacturing sectors, access
to resources
access cheap, pliable labor
country's vast market potential (China,
India)
historically firm based in OECD countries
most important foreign investors in
recent decades
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a theory of locational entry
firms internationalize their operations to exploit some internally generated entry or competitive advantages e.g. marketing, production or technological know-how
entry advantages are of sufficient strength to overcome various spatial 'barriers to entry,' defined ultimately by the problems of competing with local firms in foreign markets
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a theory of locational entry
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oligopolistic advantage/ advantages for geographical inquiry
general framework to understand the internationalization of
individual firms, learning or bargaining process
no a priori assumptions about the contributions of the
international firm to local development, efficient resource
allocators or as exploiters reinforcing local dependency
industrial location studies, behavioral and institutional
perspective, greater significance than is commonly supposed
explicitly incorporates alternative forms of
internationalization, notably the export behavior of firms
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Spatial entry barriers
entry or competitive advantage vis-à-vis potential local competitors, compensate for various spatial ‘barriers to entry’
local entrepreneurs – no communication problems across national boundaries, less costs for information pertaining to local legal, cultural, political, economic and physical conditions
spatial entry barriers are defined for behaviouralists by the costs, time and uncertainties involved in
attempts to reduce the ‘knowledge gap’ in making locational choices institutionalists by the costs, time and uncertainties in negotiating
locational choices practice, both information search and bargaining processes are
closely intertwined, e.g. managerial costs and the price of consultant studies
knowledge gaps cannot be defined precisely, behaviour of others cannot be controlled, locational search and bargaining processes are uncertain
a priori assessment of spatial entry barriers is necessarily judgmental, barriers should not be underestimated
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Psychological distance (1)
'psychological distance' defined as 'the sum of factors preventing the flow of information from and to the market, e.g. differences in language, education, business practices, culture and industrial development
different kinds of cultural, institutional and economic environments, differences have physical, social, political and economic foundations which are reinforced by varying degrees of geographic separation
distance 19th century – geographic distance recent decades – distances created by different languages and business
culture corporate preferences for investment in nearby similar
environments are not only ‘conservative’ but economically rational corporate support, free trade, common market agreements,
metrification and related measures – facilitating movement and reducing regional differences
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Psychological distance (2)
significant differences in language, culture and business philosophy widen the psychological distance, e.g. Chinese and Japanese economies formidable entry barriers
Japan – reverse engineering, indigenous enterprise, restricted opportunities for foreign firms, policy restrictions on DFI, distinctive culture, language and market preferences, most foreign firms face significant learning and bargaining costs, high tariff and non-tariff barriers, deeply embedded inter-firm relations and complex distribution systems controlled by powerful enterprise groups (keiretsu) and giant trading companies (sogo shosha)
China, welcomed DFI since late 1970s, western firms find the political, social and economic system, ways business transactions are conducted extremely difficult
Singapore government established an agency to help western firms and Chinese authorities negotiate with each other
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Method of entry
firms vary in competence and willingness to substitute a higher (lower) degree of uncertainty for lower (higher) costs of collecting information on new environments
spatial entry barriers facing firms vary wholly owned new site, branch plants joint venture with local firms acquisitions of existing firms
acquisition – fewer uncertainties compared to building new plant, foreign firms inherit both existing locations (accumulated capital resources) and existing management and workers (accumulated human resources)
‘instant’ and possibly cheap way of understanding local conditions especially if local owners of capital underestimate the importance of such geographical knowledge
local ‘know-how’ may well be underestimated, reinforced by fears among management and workers over job security
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Host government policy
governments vary in their openness to DFI Canada, Australia, UK, US favored relatively liberal ‘wide open’
door policies to DFI Sweden, South Korea, Japan limited the possibilities for DFI change, most significant China, former USSR its satellite east
European countries restricted DFI, allowing DFI, offering monetary incentives, other
forms of inducements, regional and local governments actively seek incentives, tax breaks, cash grants, low resource royalties, favorable
profit repatriation schemes, attractive investment depreciation allowances, range of services including provision of low cost buildings, free information on the local economy
influenced by political stability – for international business rules and regulations affecting business will not change in unanticipated ways
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Size of firm
barriers are greater for small compared to large firms international investment involves relatively high and
fixed planning costs, high level of uncertainty large firms are powerful because they are big economies of size, bargaining advantages, ability to
locate somewhere else, under-utilized managerial resources
large corporations dominant in domestic markets, enjoy broader spatial planning horizons, draw on past experience in adapting organizational structures to growth
DFI dominated by large firms, size of branch plants tends to be much larger than industry averages
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Spatial entry advantages
Strategic motivations to international expansion: Profitability and efficiency Control of markets & resources
Entry competitive advantages depend on the kind of integration (horizontal or vertical) of the firm
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Horizontal integration
When a firm expands in its existing line of business or a closely related one
The firm has its own internally developed expertise related to technique production organization marketing financing human skills
Associated entry advantages: less fixed (initial development) costs and distinctive assets hard to be imitated by local entrepreneurs.
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Vertical integration (1)
Investing in facilities which provide a market for existing products or supply inputs to existing activities
Associated entry advantages: supplanting the market mechanism (less cost and more control over linked stages in the production process in terms of timing, quantity, quality of flows of goods)
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Vertical integration (2)
Why vertical integration: Efficiency reasons: reducing the
transaction costs of utilizing markets (searching information about markets and supplies, negotiating contracts, costs of potential failures by independent subcontractor firms)
Reduce uncertainty in supply and marketing chains, greater stability & security of operation
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The American model
US-based multinational firms were a model form of corporations in the 1950s-1960s
Core assets: technology (product cycle model) marketing (market linkage model)
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First asset: technology (1)
Causes: large pools of scientists, engineers, skilled
labour huge & rich domestic market
Consequences: according to the product cycle model, shift to mass production, implying the need for unskilled labour and internationalization
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First asset: technology (2)
The product cycle model A firm exports to a rich country When innovations make it possible, they
rely on mass production and relocate to “poor” countries
Donor economy
Rich hostexportsManufacturing
Stage 1
Donor economy
Poor country Rich host
Manufacturing
Stage 2
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Second asset: marketing (1)
Market linkage model: the market knowledge comes first and directs the R&D investments (so that innovations meet the consumer expectations)…
… which in turn lead to investments in marketing (distribution channels, advertising…) to influence consumer demands
Over time, increase in exports and marketing infrastructures (and the higher market power and information it implies) prepare the way for international investments
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Second asset: marketing (2)
The market linkage model: DFI replaces previously established exports (the “rich host” becomes a manufacturing place)
Donor economy
Rich hostexportsManufacturing
Stage 1
Donor economy
Rich host
Manufacturing
Stage 2
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The German & Japanese model German and Japanese firms become a
model in the 1980s-1990s Firms organized as learning systems Most important characteristics:
Continuing development of worker skills More effective integration of workers in the
operation of factories
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Different ways: Apprenticeship system (Germany) on-the-job training (Japan)
Same aims: Enhance productivity High-quality work
Even more American-Japanese joint-ventures
Development of worker skills
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Integration of workers
Labour-management interaction (involvement of workers in supervision, monitoring, design, promotion of polyvalent skills)
Aims: thin management ranks, improved quality & design, enhanced workers motivation and morale, ability to serve quality-conscious markets
Recent difficulties to meet the costs of high skilled workforce (increased competition)
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Exports: barriers and need for specific advantages are the same as for DFI
Tendency to export first to the psychology closest country
Licensing: complement / substitute for exports and DFI
Causes: products expensive to transport (export) or small firms not willing to establish a branch plant abroad
Cross-licensing arrangements: two firms serving distinct but related market niches selling licenses to each other
Exports & licensing
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Independent or parents companies: organizational structures follow strategy
Foreign-controlled subsidiaries: strategy follows structure
Characteristics determining the degree of influence in strategy of the subsidiary: autonomy (decision-making discretion) and mandate (functions)
Post-entry behaviour of foreign-controlled activities
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Decision-making autonomy of branch plants
Depends on: Nature of equity ownership (wholly owned
subsidiary / joint-venture) Size of the subsidiary Nationality of the parent company Distance between parent and subsidiaries Degree of product specialization Stability of product markets
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Importance of autonomy
Too much autonomy: duplication, contradictory decisions, threat on the integrity of the corporation
Not enough autonomy: dampening of initiative, discarding of local opportunities, failure to recognize key trends
Forms of control of the subsidiaries: Flows of information (reports) Creation of a corporate culture Investments, budget… subject to parents
company control Changes over time
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The obsolescing bargain
Changing in the initial bargain negotiated between a host-country government and a multinational corporation
Before the investment: the corporation would be favored (it has more information about the profitability of the investment and alternative locations)
Once the investment is established: the host country gains information & experience and more bargaining power
Renegotiation: higher taxes, hiring more locals, higher share of domestic ownership…
Still, corporations have a know-how and worldwide marketing connections which ensure them a certain power over host countries
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The accumulating bargain
Spatial entry barriers become obsolescent while access to the parent-company expertise & resources remains
Growth can even be supported by domestic sources of funds (subsidies, banks, shareholders)
DFI are usually extremely profitable
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Conclusion
Enhanced mobility of capital But still new places to invest in (China,
Russia…) And still medium-sized firms investing
for the first time