Existence of the Multinational Firm Course: Advanced Topics in Strategy and Organization of the MNC

Marie Ahlstrand, 0404082 Johannes Tichy, 9950237 Bernhard Zacherl, 9900971

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

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

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

Introduction

Today

35% 25%

20%20%

USA Europe Japan Rest

Introduction

Today ~ 50.000 Multinational Organizations, but is getting fewer due to Fusions or Abbroachement

Transactions Costs EconomicsHistory

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 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

Transaction Costs Ex-ante costs

Costs for the acquisition of information (e.g. research service, newspapers)

Initiation costs (e.g. approach) Agreement costs

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)

Transaction Costs - Examples

Research Initiation Information Attribution Negotiation Decision Agreement

Processing Safeguarding Enforcement Control Adaptation Completion

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

Transactions Costs Economics Economize on the costs of business

transactions over time Alternative governance structures:

Firms Markets Hybrid mixed models

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

Transactions Costs Economics The theory assumes:

Limited rationality Lack of information The will to maximize individual profit Opportunistic behavior

Transactions Costs EconomicsWilliamson

Assumption of behavior: Limited rationality Opportunism

Assumption of environment: Insecurity / complexity Degree of the uniqueness of the asset

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

Transactions Costs Economics Example: Transfer of Know-How

Difficult to transfer without permanent contact May involve: teaching, demonstrating,... One-time contract

Transactions Costs EconomicsIntrafirm transfer Advantages:

Better disclosure Earlier agreement Better enforcement More efficient transfer results

Transactions Costs Economics

Relationship: Host country – multinational enterprise

After the investment the bargaining positions change

The multinational enterprise becomes vulnerable

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

Transactions Costs Economics 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) 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.

Stage 1 –New Product Produce in the home market Uncertain level of demand &

not standardized product Figure 1

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

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

International Product Life CycleThe 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 USA is not the only innovator Products are introduced simultaneous in

different markets Many companies are set up in an international

market

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)

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

Eclectic Theory Main Topics:

Ownership Advantages

Internalizing Advantages

Local Advantages

Eclectic Theory Ownership Advantages:

Common Ownership Advantages: Patents Management Know-How

Subsidiary Economics of scale

Multinationality Risk dividing

Eclectic Theory Internalizing Advantages

Transaction Cost Advantages

Local Advantages Political Advantages Infrastructure Wages

Eclectic Theory Market Entry Strategies

Portfolio Resources Transfer Licenses, Management Contracts…

Export

Direct Investment

Eclectic Theory

Ownership Advantages

Internalizing Advantages

Local Advantages

Portfolio YES NO NO

Export YES YES NO

Direct Investment

YES YES YES

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)

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

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

Internationalization International extension

extends its network Penetration

penetrates networks International Integration

integrates its activities that take place in different countries

Internationalization Categories

Degree of internationalisation of the market (production net)

  

Degree of internationalisationof the company 

  Low High

 

Low 

The Early Starter 

 The Late Starter

 

High 

The Lonely International

The InternationalAmong Others

The Early Starter company low internationalization

production net low internationalization International extension third part abroad Penetration production abroad

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

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

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.

Case Study

Degree of internationalisation of the market (production net)

  

Degree of internationalisationof the company 

  Low High

 

Low 

The Early Starter 

 The Late Starter

 

High 

The Lonely International

The InternationalAmong Others

Case 1An Early Starter

KOMMUNDATA‘S entry into the Middle East Degree of internationalisation of

the market (production net)

  

Degree of internationalisatio

nof the company

 

  Low High

 Low

 The Early Starter

 

 The Late Starter

 High

 The Lonely

International

 The International

Among Others

KOMMUNDATA The company and the product

Swedish software company Software concepts for hospitals Agreement with IBM Expanding – contracts in Ireland and Finland

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

KOMMUNDATA Network at that time:

DoHMS Dubai Police GAC (Gulf Agency Company) Hardware suppliers G&W

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

KOMMUNDATA Comments on the case:

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 2A Late Starter

KABI VITRUM‘S entry into the US Degree of internationalisation of

the market (production net)

  

Degree of internationalisatio

nof the company

 

  Low High

 Low

 The Early Starter

 

 The Late Starter

 High

 The Lonely

International

 The International

Among Others

KABI VITRUM The company and the product

Medical company 1955: 2000 employees (600 abroad) 4 business areas:

Nutrition for intravenous nutrient solution Hematology for blood products Peptide hormones for growth hormones Parma

Product: INTRALIPID (fat emulsion for intravenous use)

The entry process (1) 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

The entry process (2) 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

Comments on the case: 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

KABI VITRUM

Case 3An International Among Others

SCANIA‘S entry into Australia Degree of internationalisation of

the market (production net)

  

Degree of internationalisatio

nof the company

 

  Low High

 Low

 The Early Starter

 

 The Late Starter

 High

 The Lonely

International

 The International

Among Others

SCANIA The company and the product

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 The entry process (1)

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 The entry process (2)

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 Comments on the case:

Firm and environment are highly internationalized

Company uses position in one network to bridge over to other networks

The Nature Of Foreign Market Entry Orientating

Enter a network Get an understanding of the positions

Positioning Develop a position in the network

Timing Seeing opportunities Being able to react

Thanks for your attention!