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International Business Economics & Strategy

International Business Economics & Strategy. The Multinational firm. Where to get more information. Caves, 96, Multinational Enterprise and Economic Analysis, Cambridge University Press Dunning, 92, Multinational Enterprises & Global Economy, Addison Wesley, London

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International Business Economics & Strategy

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  1. International Business Economics & Strategy The Multinational firm

  2. Where to get more information.. • Caves, 96, Multinational Enterprise and Economic Analysis, Cambridge University Press • Dunning, 92, Multinational Enterprises & Global Economy, Addison Wesley, London • Journal of International Business Studies, Symposium Multinational Enterprise and Economic Analysis, 1998 • Roberts & Berry, Entering new businesses, Sloan Management Review, 1985.

  3. Multinational integration • Traditional Eclectic OLI Paradigm (Dunning) • Ownership advantages : Proprietary technology - Brand name….. • Internalisation advantages : Transaction costs,….. • Location advantages : Low labour cost, taxation...

  4. Strategies of MNE • Traditional OLI • National Resource Seeking • Market Seeking • Efficiency Seeking • Trend towards Technoglobalisation • Strategic Asset Seeking :geographic diversification becomes itself an ownership advantage

  5. Strategic Asset Seeking Innovation requires increasingly more global sourcing: sensing new market and technology trends worldwide, while adequately responding to them through generating new ideas which are then implemented around the world Implications for the • role of subsidiaries • organisational structure of the MNE

  6. Changing innovative strategies of transnational companies; MNEs as a result of knowledge creation • R&D centralization vs decentralization • “center for global” “local for local” • control, economies of scale, close to demand/supply Know-how flows from HQ to SUB MNEs as a source of knowledge creation • “locally leveraged” and “globally linked” innovations • More active role of subsidiaries (depending on technological capabilities, strategic importance of market…) Know-how flows between HQ and SUB: from home-base exploiting to home-base augmenting

  7. Multinational decisions to leverage superior “knowledge base” (O) • Transfer of know-how: own vs market: licensing/franchising vs own control (=10%) (I) • transactions costs • monitoring, asymmetric info to assess value, small number bargaining….. • Competitive considerations

  8. Multinational decisions to leverage superior “knowledge base” (O) • Which markets to supply • size, willingness to pay, relatedness • follow customers/competitors • Which markets to locate : locational advantages (L) • availability, quality, price of inputs (raw material, labour, know-how, taxation… • follow customers/competitors

  9. Multinational decisions to leverage superior “knowledge base” (O) • Buy inputs or produce internally: international subcontracting • transaction costs, resource access.. • Mode of foreign operations : acquisition vs de novo vs joint venture • speed, resource access, capacity control, synergies...

  10. Mode of foreign operations: trade-off control/commitment

  11. Selecting the mode of entering new businesses in general:trade-off control/commitment Less commitment modes in uncertain/unfamiliar markets

  12. Different dimensions of uncertainty: familiarity matrix Market Change New, unfamiliar New, familiar Base Base New, familiar New, Unfamiliar Technology change

  13. Familiarity and commitment/control If changes are Choose internal development; acquisitions small joint ventures; collaboration moderate significant initially venture capital; educ acquisitions & jvs, then use acquired know-how to leverage new modes

  14. Options and familiarity Market new; unfam JV with familiar partner VentCap; Educ Acq VentCap; Educ Acq Internal Venture; Acquis new; fam Internal D; Acquis; JV fam par Vent Cap; Educ Acq Internal D; Acquis Internal D; Acquis; Licensing base JV & Alliances Technology base new; fam new; unfam

  15. Uncertainty • Real Options Theory stress advantage of waiting in uncertain environments • Low commitment modes to allow for switching: alliances • Information gathering modes : alliances

  16. Importance of competition: Strategic motives • Pre-emptive investment (to deter local entry, rival MNEs) • Follow the leader (vs First Mover) • Mutual forbearance with foothold entry (multi-market contact) • Issue of TIMING/COMMITMENT

  17. Strategic FDI models: Competition with local firms (Smith (1987))

  18. Strategic FDI: competition with locals Note: A: MON-EXP; B:MON-FDI; C:DUO-EXP; D:DUO-FDI FDI requires G; DOM E requires F+G Given s,t : B>A, DF>CF, CD>DD Foreign EXP FDI Domestic Domestic NE E NE E (A , 0) (CF, CD - F- G) (B - G , 0) (DF - G , DD - F - G) Foreign firm moves first Source: Smith (1987)

  19. Strategic FDI: competition with locals Dominant choice of FDI DF-G > CF and B-G>A Strategic choice of FDI CD-F-G>0 & DD-F-G <0 (DOM: E if EXP; NE if FDI) B-G>CF (FOR: FDI because DOM: NE; even if B-G < A Foreign EXP FDI Domestic Domestic NE E NE E (A , 0) (CF, CD - F- G) (B - G , 0) (DF - G , DD - F - G) Foreign firm moves first

  20. Strategic FDI models: Competition among MNEs

  21. Strategic FDI models: Competition among MNEs

  22. V(D,D) V(D,D) V(D,M) V(M,D)-R V(M,D)-R V(D,M) V(M,M)-R V(M,M)-R Strategic FDI Models:Competition among MNEs FIRM 2 DOM MNE DOM FIRM 1 MNE

  23. Importance of governments: Public Strategy IS FDI wanted ? • local producers’ interests • consumers, employment, gov revenue, spillovers How to induce FDI ? • Trade policy t: Tariff-jumping FDI • Incentives : Obsolescing bargain

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