2 nd Reading IB Conference

1. Panel 1: “What are ownership advantages?” 2nd Reading IB Conference Chair: Sjoerd Beugelsdijk, Univ. of Groningen Lorraine Eden, Texas A&M Teresa da Silva Lopes, Univ. of York Alain Verbeke, Univ. of Calgary Paul Nightingale, SPRU, Sussex

2. Panel Outline Is Dunning’s typology of transaction ownership advantages (Ot) and asset ownership advantages (Oa) sufficient? Yes No Lorraine Eden Dunning’s existing typology of O advantages is still valid and does not need replacement. Dunning’s typology should be.. Substituted: Teresa da Silva Lopes Alain Verbeke Complemented: Paul Nightingale

3.  Type 1: advantages that do not arise from multinationalitybut are advantages that any firm may have over another producing in the same location; i.e., advantages stemming from size, monopoly power and better resource capability and usage. These enable the firm to achieve more technical or cost efficiency or more market power than another firm. Type 2: advantages from being part of a multi-plant enterprisesuch as economies of scale in non-production overheads (e.g., centralized accounting) and access to internal resources at lower cost than on the external market (e.g. internal borrowing). Type 3: advantages that come specifically from multinationality, such as wider opportunities and the ability to exploit differences in factor endowments and markets across countries; such advantages increase along with the number of foreign countries in which the MNE has operations and the diversity of their economic environments. ‘O’ mark I

4. Responding to the Internalization Critics: Oa: Asset-based ownership advantages that derive from the firm’s privileged ownership of or access to income-generating assets. Ot: Transaction-based ownership advantages that derive from the firm’s ability to coordinate its assets with other assets across national boundaries. Advantages that arise from operating in multiple countries – from being a multi-market and/or a multi-plant firm. Advantages of common governance. ‘O’ mark II

5. Incorporating asset seeking into Ownership Advantages – alliance based capitalism: The MNE is an “organizer of a collection of created assets, some of which it generates internally and others which it accesses through alliances with other firms.” Seeing the firm as a collection of asset bundles implies that the O advantages consist not only of internally generated assets but also the firm’s “competence to seek out, harness and influence the innovation, price and quality of assets of other institutions with which they have an on-going cooperative relationship” (Dunning 2002). ‘O’ mark III

6. More recent attempts to revise Ownership Advantages to incorporate: Incorporating RBV & Evolutionary theory of MNE (Dunning 2000) Relational assets (Dunning 2002) E-business (Dunning and Wymbs 2003) Institutions (Dunning and Lundan 2008) ‘O’ mark IV: continuing to extend ‘o’ Dunning and Wymbs (2003)

7. Those relating to the possession and exploitation of monopoly power, identified by Bain (1956), Hymer (1960), Caves (1971, 1982), Porter (1980, 1985). These advantages stem from or create barriers to entry to final product markets by firms not possessing them. • Those relating to the possession of a bundle of scarce, unique and sustainable resources and capabilities, which essentially reflect the superior technical efficiency of a particular firm relative to those of its competitors.These advantages stem from or create barriers to entry to factor or intermediate product markets by firms not possessing them. Their identification and evaluation is in the resource based (Barney, 1991) and evolutionary theories (Kogut & Zander, 1993) of the firm. • Those relating to the competencies of the managers of firms to identify, evaluate and harness resources and capabilities on a worldwide basis and coordinate them with the firm’s existing resources and capabilities so as to advance the long term interests of the firm.These advantages, closely related to those in (2) are stressed by Prahalad and Doz (1987), Doz, Asakawa, Santos and Williamson (1997) and Bartlett and Ghoshal (1989, 1993). They tend to be management, rather than firm, specific. • Dunning ( “Eclectic Paradigm as Envelope, IBR 2000) ‘O’ mark IV: From advantages to assets - rbv

8.  Asset-based Ownership (Oa) advantages Tangible assets Intangible assets Intellectual assets – property based Relational assets - facilitating assets that had to be used jointly with the relational assets of another actor. Private assets Social assets ‘O’ mark IV: incorporating relational assets Dunning (“Relational Assets, Networks,…..2002)

9.  Broadening the ‘O’ tent – attempts to be the “reigning paradigm’ and ‘relevant to today’s international business’ -- has benefits and costs. Worry that the costs of continually updating ‘O’ means that clarity is lost. Has ‘O’ lost its meaning for IB scholars? conclusions

10. Addressing ‘O’ CRITIques

11. Addressing ‘O’ CRITIques Reconciling Internalization Theory and the Eclectic Paradigm Alan Rugman (2009) Addressing the Issues raised in:

12. Addressing ‘O’ CRITIques Does O focus on OFDI? The main reason for misalignment is that Dunning focused on outward FDI into host countries (why FDI?) whereas Rugman’s FSA-CSA matrix focuses on both home and host countries. (Rugman 2009)

13. Addressing ‘O’ CRITIques Are Dunning’s O advantages too eclectic? One of the problems with Dunning’s eclectic paradigm is that it is too eclectic. Indeed, in many ways each of the three motives for FDI is over determined. This is especially true for O advantages. According to Dunning these include not only the firm’s intangible assets such as knowledge, brands, organizational structure and management skills, but also natural factor endowments, manpower, capital and the cultural, legal and institutional environment, as well as industry market structure. Rugman (2009)

14. Addressing ‘O’ CRITIques Can O advantages exist without being internalized? Indeed, without the institutional form of the MNE it is difficult to see how O advantages could exist on their own without being owned (internalized) by the firm. In their essence, intangible knowledge assets are an example of the firm replacing the market; see Williamson (1975), Buckley & Casson (1976), Rugman (1981), and Hennart (1982). Dunning seems to argue that the I advantage only relates to transaction costs such that an O advantage is needed to explain organizational, financial and institutional advantages. Rugman (2009)

15. Addressing ‘O’ CRITIques What about Oa vs. Ot? The OLI paradigm adds in Hymer advantages to the efficiency-based FSAs of internalization theory. These Oa advantages need to be distinguished from Ot advantages of internalization theory. The distinction between Oa and Ot is potentially misleading to IB scholars. Dunning sees internalization theory as only dealing with the transaction as the unit of analysis whereas internalization theory takes the firm as the unit of analysis. This is why FSAs, which are firm level, are defined as the relevant advantages in internalization theory. Rugman (2009)

16. Addressing ‘O’ CRITIques Did Dunning confuse O and L advantages? The key difference between internalization theory and the eclectic paradigm occurs due to O advantages by Dunning (1981). Dunning defines O advantages to include not only firm level capabilities but also the resources and capabilities of the home country. Dunning explicitly states that O advantages include intangible firm specific assets (knowledge, organizational and managerial skills, brand names) but also includes home country institutional factors such as the cultural and legal environment and also tangible assets such as labor and natural resources. Obviously such institutional and tangible assets should not be defined as O advantages but as L advantages. (Rugman 2009)

17. Addressing ‘O’ CRITIques Are O advantages unable to include RBV? One conclusion to be drawn from the mistreatment of O advantages by Dunning, 1981, 1993, is that the eclectic paradigm is inconsistent with the resource based view (RBV) of the firm. The RBV requires a focus upon firm level capabilities, i.e. the FSAs of internalization theory. The RBV would not regard country level attributes such as labor, natural resources and the institutional environment as firm specific capabilities. (Rugman 2009)

18. Addressing ‘O’ CRITIques Should O advantages be abandoned? How can the eclectic paradigm be reconciled with internalization theory? The simplest solution is to abandon O as a separate category in the eclectic paradigm. Instead, the firm specific components of O should be incorporated with “I” and the country level O should be better treated as “L”. (Rugman 2009)