Existence of the Multinational Firm

1. Existence of the Multinational Firm Course: Advanced Topics in Strategy and Organization of the MNC Marie Ahlstrand, 0404082 Johannes Tichy, 9950237 Bernhard Zacherl, 9900971

2. Overview • Introduction • Transaction Cost Economics • The Product Life Cycle • Eclectic Theory • The Network Model • Case Study

3. 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

4. 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

5. Introduction

6. Introduction • Today ~ 50.000 Multinational Organizations, but is getting fewer due to Fusions or Abbroachement

7. Transactions Costs Economics History • 1937: Ronald Coase, ‘The Nature of the Firm’ • 1969: Kenneth Arrow • 1985: Oliver Williamson, ‘The Economic Institutions of Capitalism: Firms, Markets, Relational Contracting’

8. 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

9. Transaction Costs • Ex-ante costs • Costs for the acquisition of information (e.g. research service, newspapers) • Initiation costs (e.g. approach) • Agreement costs

10. 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)

11. Research Initiation Information Attribution Negotiation Decision Agreement Processing Safeguarding Enforcement Control Adaptation Completion Transaction Costs - Examples

12. 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

13. Transactions Costs Economics • Economize on the costs of business transactions over time • Alternative governance structures: • Firms • Markets • Hybrid mixed models

14. 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

15. Transactions Costs Economics • The theory assumes: • Limited rationality • Lack of information • The will to maximize individual profit • Opportunistic behavior

16. Transactions Costs Economics Williamson • Assumption of behavior: • Limited rationality • Opportunism • Assumption of environment: • Insecurity / complexity • Degree of the uniqueness of the asset

17. 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

18. Transactions Costs Economics • Example: Transfer of Know-How • Difficult to transfer without permanent contact • May involve: teaching, demonstrating,... • One-time contract

19. Transactions Costs Economics Intrafirm transfer • Advantages: • Better disclosure • Earlier agreement • Better enforcement • More efficient transfer results

20. Transactions Costs Economics • Relationship: Host country – multinational enterprise • After the investment the bargaining positions change • The multinational enterprise becomes vulnerable

21. 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

22. Transactions Costs Economics • Conclusion The multinational enterprise and foreign direct investment represent a response to high transaction costs by firms with unique assets

23. 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.

24. Stage 1 –New Product • Produce in the home market • Uncertain level of demand & not standardized product • Figure 1

25. 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

26. 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

27. International Product Life Cycle The theory states that a company will start with exporting its new developed product and that this export eventually becomes its imports.

28. 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

29. 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)

30. 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

31. Eclectic Theory • Main Topics: • Ownership Advantages • Internalizing Advantages • Local Advantages

32. Eclectic Theory • Ownership Advantages: • Common Ownership Advantages: • Patents • Management Know-How • Subsidiary • Economics of scale • Multinationality • Risk dividing

33. Eclectic Theory • Internalizing Advantages • Transaction Cost Advantages • Local Advantages • Political Advantages • Infrastructure • Wages

34. Eclectic Theory • Market Entry Strategies • Portfolio Resources Transfer • Licenses, Management Contracts… • Export • Direct Investment

35. Eclectic Theory

36. 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)

37. 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

38. 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

39. Internationalization • International extension extends its network • Penetration penetrates networks • International Integration integrates its activities that take place in different countries

40. Degree of internationalisation of the market (production net) Degree of internationalisation of the company Low High Low The Early Starter The Late Starter High The Lonely International The International Among Others Internationalization Categories

41. The Early Starter • company low internationalization production net low internationalization • International extension  third part abroad • Penetration production abroad

42. 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

43. 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

44. 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.

45. Degree of internationalisation of the market (production net) Degree of internationalisation of the company Low High Low The Early Starter The Late Starter High The Lonely International The International Among Others Case Study

46. Degree of internationalisation of the market (production net) Degree of internationalisation of the company Low High Low The Early Starter The Late Starter High The Lonely International The International Among Others Case 1 An Early Starter KOMMUNDATA‘S entry into the Middle East

47. KOMMUNDATA • The company and the product • Swedish software company • Software concepts for hospitals • Agreement with IBM • Expanding – contracts in Ireland and Finland

48. 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

49. KOMMUNDATA • Network at that time: • DoHMS • Dubai Police • GAC (Gulf Agency Company) • Hardware suppliers • G&W

50. 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