Existence of the Multinational Firm o Course Advanced

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

Overview o o o Introduction Transaction Cost Economics The Product Life Cycle Eclectic Theory The Network Model Case Study

Introduction o What is a Multinational Organization? n n 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 o o 15. and 16. Century trading houses Middle of 19. Century first Multinational Organizations (mainly England Germany) 1960 USA: 3/5 of Worldwide foreign Investments 1980 USA still over 50%, but Europe is rising

Introduction

Introduction o Today ~ 50. 000 Multinational Organizations, but is getting fewer due to Fusions or Abbroachement

Transactions Costs Economics History o o o 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 o o o Costs that are directly linked to the transaction of goods Most common kind of a transaction: sale & purchase Can be divided in: n n Ex-ante Ex-post

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

Transaction Costs o Ex-post costs n n n 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 o o o o Research Initiation Information Attribution Negotiation Decision Agreement o o o Processing Safeguarding Enforcement Control Adaptation Completion

Transaction Costs o Can prevent the whole transaction o Can prevent that the buyer or seller can find the most attractive offer for them o Can prevent the existence of a whole market

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

Transactions Costs Economics o Internal governance structure n n n Transaction is internalized The specialized governance structure shields and protects the transaction Ensures full utilization of the specialized asset in question

Transactions Costs Economics o The theory assumes: n n Limited rationality Lack of information The will to maximize individual profit Opportunistic behavior

Transactions Costs Economics Williamson o Assumption of behavior: n n o Limited rationality Opportunism Assumption of environment: n n Insecurity / complexity Degree of the uniqueness of the asset

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

Transactions Costs Economics Intrafirm transfer o Advantages: n n Better disclosure Earlier agreement Better enforcement More efficient transfer results

Transactions Costs Economics o Relationship: Host country – multinational enterprise n n After the investment the bargaining positions change The multinational enterprise becomes vulnerable

Transactions Costs Economics o Criticism n n n 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 o 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) o o Raymond Vernon 1960 s 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 o o o Produce in the home market Uncertain level of demand & not standardized product Figure 1

Stage 2 –Maturing Product o o o 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 o o o increasing competition lower 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 Cycle The 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 o o o USA is not the only innovator Products are introduced simultaneous in different markets Many companies are set up in an international market

Eclectic Theory o What does eclectic mean? n “deriving ideas, tastes, style etc. from various sources, [. . . ] attached to no particular school of thought. ” (The Oxford dictionary, 2003)

Eclectic Theory o Why “eclectic”: n o The eclectic Theory combines different Theories Goal of the Theory: n Holistic framework – to identify significance of the factors influencing both the initial act of foreign production and growth of such production

Eclectic Theory o Main Topics: n Ownership Advantages n Internalizing Advantages n Local Advantages

Eclectic Theory o Ownership Advantages: n Common Ownership Advantages: o o n Subsidiary o n Patents Management Know-How Economics of scale Multinationality o Risk dividing

Eclectic Theory o Internalizing Advantages n o Transaction Cost Advantages Local Advantages n n n Political Advantages Infrastructure Wages

Eclectic Theory o Market Entry Strategies n Portfolio Resources Transfer o Licenses, Management Contracts… n Export n Direct Investment

Eclectic Theory Ownership Internalizing Local Advantages Portfolio YES NO NO Export YES NO Direct Investment YES YES

Eclectic Theory o Enhancement: n 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 o Criticism n Ownership advantages allow advantages in competition o o n Ownership advantage had to internalize Inseparability between Ownership and Location Important influencing factors like Industry and business competition were neglected

The Network Model o o o 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 o o o International extension its network Penetration networks International Integration integrates its activities that take in different countries extends penetrates place

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

The Early Starter o o o company low internationalization production net low internationalization International extension third part abroad Penetration production abroad

The Lonely International o o 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 o o o company low internationalisation production net high internationalisation International extension enter a market far away Penetration need a higher level of coordination

The International Among Others o o o 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 international isation of the company Low The Early Starter Low High The Lonely International High The Late Starter The International Among Others

Case 1 An Early Starter KOMMUNDATA‘S entry into the Middle East 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

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

KOMMUNDATA o The entry process (1) n n n Contact in Dubai: Swedish consultary company – AB Teleplan Collaboration with Teleplan on a project for the Department of Health and Medical Services, Dubai (Do. HMS) 1982: First employees moved to Dubai

KOMMUNDATA o Network at that time: n n n Do. HMS Dubai Police GAC (Gulf Agency Company) Hardware suppliers G&W

KOMMUNDATA o The entry process (2) n n n 1984: Do. HMS project completed Teleplan got new project for Oman police AGNC Kommundata works for the Ministry of Public Health in Kuwait Computer Company (KCC) was founded Contacts to Oman

KOMMUNDATA o Comments on the case: n n 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 2 A Late Starter KABI VITRUM‘S entry into the US 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

KABI VITRUM o The company and the product n n n Medical company 1955: 2000 employees (600 abroad) 4 business areas: o o n Nutrition for intravenous nutrient solution Hematology for blood products Peptide hormones for growth hormones Parma Product: INTRALIPID (fat emulsion for intravenous use)

KABI VITRUM o The entry process (1) n n n 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 o The entry process (2) n n n n 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 o Comments on the case: n n n 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

Case 3 An International Among Others SCANIA‘S entry into Australia 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

SCANIA o The company and the product n n n 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 o The entry process (1) n n n 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 o The entry process (2) n n n 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 o Comments on the case: n n Firm and environment are highly internationalized Company uses position in one network to bridge over to other networks

The Nature Of Foreign Market Entry o Orientating n n o Positioning n o Enter a network Get an understanding of the positions Develop a position in the network Timing n n Seeing opportunities Being able to react

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