Business School

Centre for International Business and Strategy

Four decades of International Business at Reading: Looking to the future

16 -17April, 2007 Reading, UK

Venue: Palmer Building

Abstracts

TRACK 1

IS THE MULTINATIONAL FIRM A DYING BREED? (1)

Of Ptolemy, Copernicus and Dunning Epicycles in International Business Theory

Andrew Delios

NUS Business School National University of Singapore

The Eclectic Paradigm is perhaps the dominant theoretical framework in international business for understanding the foreign value-added activities of multinational firms. It has enjoyed a long dynamic history, but this vary dynamism raises the important question of whether the Eclectic Paradigm has been modified to the point where it bears a poor semblance to the elegant, concise explanation of international business activity that it once had. Previous periods of paradigmatic thought have similarly faced an increasing weight of contradictory, non-substantiating theoretical evidence, that has led to a fundamental change in our core theory to explain a phenomenon. I raise the question, using past models of the solar system, as an analogy, of whether the weight of countervailing evidence to the Eclectic Paradigm and the subsequent modifications and additions that have been made to the model represent a fundamental refutation of the model that can only be addressed by developing new theories of the foreign value added activities of multinational firms. (2)

Internalization Trajectories Of Multinational Enterprises: 1990-2004

Fabienne Fortanier University of Amsterdam Business School

Amsterdam

Rob Van Tulder RSM Erasmus University

Rotterdam Despite the substantial amount of IB research, it remains remarkably unclear how, at the corporate level, firms expand and withdraw their international activities over time. The absence of longitudinal studies is not due to a failure to recognize the importance of such analyses, but rather the notorious difficulties in gathering reliable internationalization data over time. This paper addresses this empirical issue by using a dataset on the internationalization of sales, assets and employment of 233 firms between 1990 and 2004. These data were manually collected from corporate sources; to enable a substantial number of within-time-series corrections for a range of methodological problems, that otherwise would have resulted in large biases. Using factor and cluster analyses, the paper subsequently identifies six distinct internationalization trajectories – patterns over time with respect to the level, pace, variability and temporal concentration of international expansion. In addition to a first exploration of the antecedents of such strategies (focusing on sector and home country differences), a range of suggestions for further research on the determinants and performance implications of these trajectories is offered.

(3)

FDI in The Andean Countries: Trends, Data and Methodologies

Jimena Gonzalez Department of Economics

The University of Reading Business School The paper seeks first to reorganise and make sense of the official disaggregated FDI official statistics through what has been the long process of getting together all of the available data, and understanding the reasons behind gaps and mismatches. Secondly, the paper aims to gain further knowledge about the data by placing it in historical context and linking the leaps in the figures to the events that potentially generated them. The outcome of this work has been the creation of the strongest possible statistical foundation, based on official figures, on which further research can be based.

(4)

Determinants of Internationalization Levels Foreign Experience or Firm Specific Knowledge?

Niron Hashai

Jerusalem School of Business Administration The Hebrew University, Jerusalem

Seev Hirsch

Faculty of Management Tel Aviv University

Tamar Almor

School of Business Administration College of Management

This paper compares the major premises of two theoretical frameworks. The first, which we label the "Uppsala model", attributes internationalization levels to foreign experience. The second, is based on our interpretation of the OLI Paradigm, developed by John Dunning and his colleagues. It attributes levels of internationalization to firm specific knowledge. The two frameworks are shown to yield conflicting hypotheses regarding the internationalization levels of firms characterized by different foreign experience and by different levels of firm specific knowledge. An empirical test conducted on a sample representing a high proportion of Israel’s international firms indicates the superior predictive power of the variables depicting firm specific knowledge. (5)

An Evolutionary Stage Model of Outsourcing and Competence Destruction A Triad Comparison of the Consumer Electronics Industry

Masaaki Kotabe

Temple University

Michael J. Mol London Business School & University of Reading

Sonia Ketkar

Temple University Outsourcing has gained much prominence in managerial practice and academic discussions in the last 15 or so years. Yet, we still do not understand the full implications of outsourcing strategy for corporate performance. Until quite recently it was generally accepted that outsourcing, and especially outsourcing across borders, was primarily implemented to cut costs in order to uphold competitiveness. Of course, these lower production costs are offset somewhat by higher transaction costs, because of the difficulties associated with sourcing across borders. A recent core competency argument is that outsourcing leads to an increased focus on remaining activities. However, no general explanation has so far been provided for how outsourcing could lead to deterioration in a firm’s competence base. We analyze three cases of major consumer electronics manufacturers, Emerson Radio from the U.S., Japan’s Sony and Philips from the Netherlands, to provide build a model. Each of these firms faced a loss of manufacturing competitiveness in its home country, to which it responded by offshoring and then outsourcing production. When a loss of competences occurred, some outsourcing decisions were reversed. We develop an evolutionary stage model that relates outsourcing to competence development inside the firm and shows that a vicious cycle may emerge. Thus it is appropriate to look not only at how outsourcing is influenced by an organization’s current set of competences, but also how it alters that set over time. The evolutionary stage model helps managers understand for which activities and under which conditions outsourcing across borders is not a viable option. (6)

Economic Globalisation and Implications on Indian Market: Sector-wise Analysis

Justin Paul Indian Institute of Management

Tripti Udawat

Indian Institute of Management Debate abounds over whether globalization of the economy is good or bad for the self, the family, the nation, and the world. Globalization means integrating the economy with rest of the world, which involves dismantling of high tariff walls among the various countries. Some pessimists see the presence of globalization as increased interdependence, while optimists see a more diverse and better life for all. Globalization is used to describe the impact of removal of restrictions on foreign trade, investment, and innovations in communications and transport systems. People are link together economically and socially by trade, investment and governance. These links are spurred by market liberalization and information, communication as well as by transportation technologies. The present paper is an attempt to study the meaning & scope and phases & indicators of globalization in the present economy. The purpose of the study is to list down the paths to globalization, the issues faced and the current happenings and to integrate them with the current budget announcements. Its objective is also to assess the effects of globalization on India in light of nine different sectors or industries of Indian economy, which are

Telecom, Insurance, Banking and finance, Retail sector, Pharmaceutical, FMCG, Textiles, Agriculture, and Automobiles. (7)

Arne Lund (1944) On FDI – A Neglected Danish Contribution

Kurt Pedersen Department of Management

Århus School of Business University of Aarhus

Jesper Strandskov

Department of Management Århus School of Business

University of Aarhus A number of theories on the internationalisation of firms developed during the 1970s, including the “eclectic paradigm” as the leading approach to Foreign Direct Investments. After 30 years the paradigm, in spite of numerous challenges, still takes the centre position as the dominating FDI theory. Like other IB theories from the 1970s, the eclectic paradigm has roots in earlier economic theory developed by Coase, Schumpeter and others. Danish economist Arne Lund produced an insightful article on FDI in the economic journal “Nationaløkonomisk Tidsskrift” in 1944). The point of time, the language and possibly the fact that Lund never settled as an Academic have prevented a wider knowledge of the article. In our opinion it deserves recognition as an early and isolated piece of FDI thinking, and not least for its penetrating understanding of entrepreneurship and business dynamics. This note outlines his argument with a view to contemporary FDI literature. (8)

Multinationality and Regional Performance, 2001-2005

Alan M. Rugman Kelley School of Business

Indiana University

Chang Hoon Oh Kelley School of Business

Indiana University The traditional dependent variable in the multinationality and performance literature is the ratio of foreign (F) to total (T) sales, (F/T). This can now be supplemented by a new regional variable, the ratio of regional (R) to total (T) sales, ie. (R/T). Data are presented on both (F/T) and (R/T) for both sales and assets for a five-year period, 2001-2005. Implications are drawn for future research on multinationality and performance in the light of this regional phenomenon. (9)

The Costs of Governance in International Companies

Sverre Tomassen Department of Strategy and Logistics BI Norwegian School of Management

Gabriel R.G. Benito

Department of Strategy and Logistics BI Norwegian School of Management

Using foreign direct investments as a governance mechanism has a cost side that goes beyond mere production and input costs. The governance costs of foreign operations are often vague and underestimated, and sometimes even ignored by companies entering a foreign market. The effects of these costs have also largely been neglected in former empirical research. This study examines the governance costs effects on foreign subsidiary performance. Using data from a survey of 160 Norwegian multinational companies the study shows that there are significant and negative relationships between bargaining, monitoring, and maladaptation costs and subsidiary performance. Conversely, costs incurred due to bonding activities are positively associated with performance. Overall, this study indicates that governance costs play a significant role in explaining the performance of foreign subsidiaries: close to 40 percent of the variation in performance can be attributed to such costs. Dealing with such costs is hence of utmost importance for the management of multinational companies. (10)

Globalization and The Retreat from Federative Multinationality

Mo Yamin Manchester Business School

University of Manchester As an organization the multinational firm has an inherent tendency towards a federative rather than a unitary structure (Ghoshal and Bartlett, 1990). In federative systems subunits develop an autonomous knowledge base and thus a degree of strategic independence from the centre. In particular, subsidiaries develop ‘embedded’ relationships in (mostly local) business networks which significantly enhance their ability for strategic actions (Forsgren et al 2005). Thus there is a tension between the MNE as a managerial hierarchy and the MNE as an organisational structure. Whilst management scholars have implicitly recognised that the MNE’s federative nature is inimical to the MNE’s controlling elites they have overestimated the effectiveness of the softer, value or ‘culture’ based methods in overcoming the hurdles that the federative structure creates for control (Solvell and Zander, 1998: Forsgren et al 2005). Furthermore due to broader socio –political changes, notably the shift in the governance regime towards share holder value, the intolerance towards the federative tendencies in the MNE has probably been increasing. The crux of the control problem in the federative structure is the invisibility of subsidiary networks and the resultant knowledge ‘deficit’ for the centre. MNE restructuring has essentially had two more or less interrelated consequences. Propelled by pressures emanating from financial markets, and enabled both by radical advances in ICT, and the much greater locatioanl flexibility ( Buckley and Ghauri, 2004), MNE headquarters have sought either to destroy subsidiary networks and /or to ‘penetrate’ them thus overcoming their knowledge deficit via-v-via the subsidiary. Yamin and Foresgren (2006) explain the preponderance of regional rather than global MNEs in terms of the centre’s need for proximity to its important subsidiaries and as a manifestation of the network penetration tactic. The relative spatial proximity to important subsidiaries (which are mostly located in the same ‘triad’ region Rugman and Verbeke, 2004) allows the parent to be close to or to become a quasi member of the subsidiary’s external business network. Here we focus on the parent’s enhanced ability via the deployment of ICT and modularity (Sturgen, 2002) to effectively destroy the invisible structures around embedded subsidiaries. In the paper we focus on two aspect of this namely the drastic reduction in the value chain scope of subsidiaries and are two aspects to such restructuring:, namely the radical reduction the value chain scope of subsidiaries: and the development of outsourcing and externalization.

TRACK 2

THE GEOGRAPHY OF INNOVATION

(11) National Systems Of Innovation And The Attraction Of FDI

Does This Relation Matter?

Isabel Álvarez Instituto Complutense de Estudios Internacionales

Universidad Complutense de Madrid

Raquel Marín Instituto Complutense de Estudios Internacionales

Universidad Complutense de Madrid It is assumed that the motives of FDI differ according to the development level of countries. As a matter of fact, it is notable the concentration of FDI, outflows and inflows, in most developed countries. However, recent trends confirm certain shift in the direction of investment, and also developing countries are entering into the global scene. At the same time, the raise of M&A operations has been spectacular during the last decade. Taking into account the geographical reorientation of FDI flows as well as the different level of interaction with local economies, it is interesting to explore the conditioning factors of the FDI behaviour in a multi-country analysis. Therefore, this paper explores to what extent the shift in the types of FDI operations responds to a set of determinants already agreed in the economics literature and development studies. It can be thought that more advanced societies show higher education levels and that they are more advanced in science and technology, aspects positively related to their level of development. Consequently, the existence of a relationship between national characteristics, the nature of FDI and its temporal behaviour is expected.

(12)

Creating Competition? Globalisation and The Emergence Of New Technology Producers

Suma Athreye

Brunel Business School Brunel University

John Cantwell

Rutgers Business School & University of Reading Business School

This paper studies the role of globalisation (through trade, inward FDI and international migration) in the emergence of new countries as contributors to technology generation in the world economy. Increasing FDI is a factor causing the emergence of newer countries with the more sophisticated technology generation associated with patenting, but not in the recent surge of newer countries with the basic capabilities needed to become licensors in the world economy. Yet increases in the international spread of subsidiary research efforts in MNCs have tended on average to reinforce the position of established centres of higher grade technological activity. (13)

India and China: New Regions of Technological Advantage

Suma Athreye Brunel Business School

Brunel University

Martha Prevezer Queen Mary College University of London

This paper uses patent and publication data to assess the nature of technological advantages that is attracting R&D offshoring and outsourcing activities to India and China. We show that technological activity in both countries (as measured by US patenting) has shown an increase and that both countries show a growing share of patents in computing and communication technologies. Patenting by domestic firms and public sector research laboratories is more important in India while foreign firm technological activities are more important in China. The domestic science base (as measured by publication data) in India and China shows strong complementarities to the US science base, with specialisation being stronger in areas like Engineering, Physics and Chemistry where the US shows a lower specialisation than the world average. This suggests that it is the science base of these countries that

has attracted MNC R&D activities though our data also suggest that the location of international R&D activity in these economies from 1995 may not have strengthened the science base of these economies.

(14)

Global Technology and Knowledge Management Product Development in Brazilian Car Industry

Giovanni Balcet

University of Turin, Italy

Flavia Consoni University of Campinas, Brazil

The first part of the paper reviews relevant theories on the globalization of innovation processes, knowledge transfer and the international location of R&D activities by multinational corporations (MNCs). Multinational innovative strategies are likely to reflect the inter-action of industry-specific technological characteristics, firm-specific advantages and strategies, and context-specific factors, where agglomeration effects and technological clusters generate locational advantages. Two different types of strategies and innovative activities of multinational affiliates are identified in the literature. a. Adaptive knowledge-exploiting activities, pulled by demand, and mainly oriented to adapt products or processes to the specific features of local markets and regulations. Knowledge accumulation is contextual to local production, and it is expected to be incremental. b. Knowledge-seeking activities, integrated within international research networks, in order to develop distinctive knowledge assets and technological capabilities. Asset-seeking activities imply a multiplicity of locations of innovation centres within the MNC. In this paper, this analytical framework is applied to the case of foreign affiliates of carmakers in Brazil, a large emerging automotive market, where engineering activities and the accumulation of knowledge in product development have been growing significantly in the last decade. Product development and engineering activities are described and analysed within the context of the evolving automotive market and production, public policies and multinational strategies. This work sheds light on the limits of the knowledge seeking versus adaptive category, as the empirical evidence suggests that the multinational organisation of knowledge transfer is much more complex, and that an evolutionary approach is needed to appreciate the different trajectories of foreign affiliates. (15)

Intellectual Property Rights, Institutions and the Internationalisation Strategies of Firms

Peter J. Buckley

Centre for International Business University of Leeds

Jeremy Clegg

Centre for International Business University of Leeds

Adam Cross

Centre for International Business University of Leeds

Mark Rhodes

Centre for International Business, University of Leeds & School of Management and Business, University of Wales, Aberstwyth

This paper examines the entry mode choice of US firms using a 'new institutional theory' approach. Using royalty and fee data published by the US Bureau of Economic Analysis, we investigate the locational determinants of affiliate and non-affiliate transactions for the period 1984-1996. We find that different strengths of intellectual property rights protection impact differently on the amount of income generated depending on activity type. Furthermore, non-affiliate transactions are negatively related with greater power distance and individualism in the host country, relative to the USA, and with greater political stability, while affiliate licensing is positively associated with regional integration amongst host countries.

(16)

Survive Or Die? The Potential for Innovation and Adaptability in Corporate And Regional Systems

Simon Collinson

Warwick Business School University of Warwick

& the Advanced Institute for Management

This paper combines two distinct approaches to understanding processes of learning and knowledge integration for innovation. First, studies of intra-organization knowledge-sharing which focus on the integration of specialist knowledge and expertise for new product or process development. Second, studies of inter-organization knowledge-sharing across entrepreneurial networks, as a source of new business development at the regional level. Despite being largely separate these literatures show strong commonalities between the micro-level and macro-level routines, processes and networks through which specialist knowledge and capabilities are developed and combined for innovation. More specifically there is evidence at both levels that these same characteristics can either facilitate innovation, adaptability and regeneration or inertia, atrophy and decline. Building on recent research a unifying framework is presented which allows us to examine four specific elements of the ‘knowledge base’ of both organizations and regions: agency, routines, capabilities and knowledge. This is used to argue that the presence or absence of what we term latent agency, routines, capabilities and knowledge in organizations or regions directly affects their adaptability and innovative capacity in the face of change. Latency represents the potential for a system to adapt. A central aim of the paper is therefore to contribute to theory-building, partly by proposing a unifying framework to conceptualise the knowledge base and its components at the intra-firm and inter-firm levels of analysis. By building on past empirical studies by the author and others it also aims to identify similarities in studies of knowledge, learning and innovation at these different levels. This approach therefore takes the form of a meta-analysis encompassing several levels of analysis, rather than using a single, bespoke empirical study at one level. Together these can be linked to broader themes of adaptability, serial regeneration, growth and development, versus embeddedness, inertia and atrophy of organizations, regions and socio-economic systems in general. (17)

Does it Matter where Patent Citations come from? Investor versus Examiner Citations in European Patents

Paola Criscuolo

Tanaka Business School Imperial College London

Bart Verspagen

Eindhoven University of Technology & University of Oslo Patent documents contain citations to other patents and references to non-patent literature in order to comply with the legal requirement to supply a complete description of the state of the art upon which the invention described in the patent builds. Thus, citations limit the scope of the inventor’s claim for novelty and they represent a link to pre-existing knowledge upon which the invention is built. This latter notion has been used to justify the use of patent citations as indicators of knowledge spillovers. When an inventor cites another patent or a scientific article, this may indicate that the knowledge contained in the cited document has been useful in the development of the citing patent, and therefore the citation might be a proxy for knowledge flows. A large body of empirical studies has exploited this use of patent citations to assess the spatial nature of technological spillovers (Jaffe, Trajtenberg et al. 1993; Jaffe and Trajtenberg 1996; Jaffe, Fogarty et al. 1998; Jaffe and Trajtenberg 1999; Maurseth and Verspagen 2002). Here, the question is whether or not knowledge spillovers between firms, or from (semi-) public knowledge institutes to firms, depend on geographical distance, i.e., whether patent citations are, ceteris paribus, more frequent between two patents with inventors that are located closely to each other. These studies find that both in the US and Europe, such a relationship indeed exists. One of the criticisms of the use of patent citations as indicators of spillovers is that citations are a very noisy indicator of knowledge spillovers (Jaffe et al. 1998), i.e., they might be interpreted in different ways than pointing to an actual flow of knowledge from the cited to the citing inventor. A crucial factor in this issue is that citations may be added by the applicant (or his/her patent lawyer), as well as by the patent examiner who judges the degree of novelty of the patent. Obviously, when citations are added by the applicant there is more of a case for taking citations as indicators of spillovers, because it is more likely that the inventor actually knew about the cited patent. When the examiner adds the citation, the inventor may never have known about the cited patent, and hence no knowledge spillover has taken place. Most citation studies are not able to identify precisely those citations chosen by the inventor. Moreover, the role of examiner vs. inventor citations differs between patent systems. In any case, when the inventor proposes citations, the final decision on which documents to cite in the patent publication lies with the patent examiners. The examiner might decide to accept the ones proposed by the applicant and/or add new references, where the latter leads to the bias already identified above, i.e., that patent citations might not reflect an actual source of knowledge spillovers. A number of recent studies have investigated this issue in citations appearing in patents granted by the US Patent and Trademark Office (USPTO). These studies (Alcacer and Gittleman 2006; Thompson 2006) exploit the fact that, since 2001, the USPTO provides information on the source of the citations. Both these studies have found evidence that patent citations added by the examiner are more geographically concentrated than those added by the examiner. As found by Alcacer and Gittleman (2006), this effect is particularly strong at short distances (e.g., within-state or even at a smaller scale), and appears to be absent when the geographical coverage is extended beyond US borders.

In this study we explore the origin of patent citations in European Patent Office (EPO) data, where the source of the citations is available for all patents (i.e., since the start of the EPO in 1979). We are able to discriminate between the citations listed by the examiner and the ones proposed by the inventor and accepted by the patent examiner, by using information contained in the patentability search reports. The main objective of this paper is to test

whether inventor citations and examiner citations are similar with regard to their geographical concentration. Our primary data sources are the EPO database on patent applications (Bulletin CD), patent citations to other patents within the EPO, and patent citations from EPO patents to USPTO patents over the period 1985-2000. Our basic sample includes all EPO-to-EPO citations and EPO-to-USPTO citations, but the latter citation type is only included if both citing and cited patent have an inventor located in the US. Contrary to other patent office search reports, the one compiled by EPO examiners contains various categories of citation which grade the cited document according to its relevance. The category ‘D’ refers to those citations that were already mentioned in the patent application for which the search is carried out, i.e., were proposed by the applicant. This is our source for inventor citations. Note that we only observe those citations added by the applicant that the examiner believed relevant with respect to the patentability of the invention. In our sample only 9% of all citations are inventor citations and this figure is almost constant across different technological classes. We investigate the differences between inventor and examiner citations in an econometric model, in which the citation type (examiner or inventor) is the dependent variable. This is a binary variable that takes the value 1 if the citation was added by the examiner. We interpret this model as a prediction tool for whether a knowledge flow is actually observed (i.e., an inventor citation), or remains a potential linkage of two pieces of knowledge (i.e., an examiner citation). Our variable measuring geographical proximity is a standardized measure of regional distance in kilometers between the region of the citing and cited inventor. We calculate this variable both for EU-regions, and for US States (but not between Europe and the US). We also controls for a number of other factors, such as the technological relatedness of the cited and citing patent, the citation lag (time elapsed between the cited and citing patent), and the citation type (referring to state of the art, or citations that may compromise novelty), but not self-citation. We estimate models both for the European and US space. All econometric evidence points to a significant localization effect of inventor citations. Citations added by the examiner span larger geographical distances between cited and citing patent. In addition, we find that examiner citations more often involve citations that may compromise novelty, which points out that inventors may indeed have a tendency to omit relevant citations that may endanger their patent claims. We take the patterns of citation in the sample of examiner citations as somehow representative for the potential linkages between global R&D workers, and the inventor citations as the part of these potential flows that have indeed materialized. Interpreted in this way, our evidence suggests that the actual technology spillovers are more geographically concentrated than the potential flows, or in other words, that knowledge interaction is stronger at small distances than over long distance. Testing for potential non-linearity of this relationship, we find that an increase in distance has a stronger effect when citing and cited patent are close to each other, i.e., that the effect of distance is strong initially, but wears off when distance becomes large. (18)

Trade, FDI and Technology Diffusion in Developing Countries The Role of Human Capital and Institutions

Nigel Driffield

Economics and Strategy Group Aston Business School, Aston University

Michael Henry

Economics and Strategy Group, Aston Business School This paper examines the impact of inflows of foreign knowledge on economic development, in the context of different institutional development and differing levels of human capital. We employ threshold regression analysis based on Hansen (2000) to determine whether there is cross-country heterogeneity in the flows of foreign knowledge from advanced industrialised countries to a group of 57 developing countries based on the latter group’s absorptive capacity and institutional quality over the period 1970-1998. In contrast to previous researchers employing this framework we examine two channels of international knowledge spillovers, namely trade and FDI. Initial results for the trade channel show that the differing productivity effects accruing to groups of countries as a result of differing levels of absorptive capacity and institutional quality are small at best and non-existent at worst. (19)

The Strategic Technological Internationalisation of The World’s 100 Largest Food And Beverages Multinationals.

Fragkiskos Filippaios Kent Business School

The University of Kent

Ruth Rama Institute of Economics and Geography Spanish Council for Scientific Research

Robert Pearce

Department of Economics University of Reading Business School

Marina Papanastassiou

Department of International Economics and Management Copenhagen Business School

This paper explores the strategic internationalisation of Research & Development Activities of the world’s 100th largest Food & Beverages multinationals. We approach the internationalisation process using a typology developed and expanded in earlier studies (Pearce, 1999; Pearce and Papanastassiou, 1999) and investigate the role of the R&D oriented subsidiaries according to the external environment, the internal resources as well as the mandate of the subsidiary. From our data a common trend on decentralisation or centralisation of activities is not evident but the outcome rather relies on the country of origin of the MNE. European MNEs tend to centralise their activities, followed by the Asian ones, whilst North American MNEs demonstrate the most decentralised strategy. This trend is slightly different in recent years as the European MNEs adopt a more decentralised approach. On the other hand geographical spread explains the existence of a large number of technology oriented affiliates. (20)

Innovation Practices In Multinational’s Affiliates A Comparative Analysis Between India And Brazil

Eliane Franco

School of Organization and Management Faculty of Commerce and Economics

University of New South Wales

Pradeep Kanta Ray School of Organization and Management

Faculty of Commerce and Economics University of New South Wales

Sangeeta Ray

Faculty of Economics and Business University of Sydney

This paper seeks to identify Innovation-oriented Practices (IPs) and their main predictors in multinational’s affiliates located in two developing countries – Brazil and India. Using multivariate statistical techniques (factor analysis and chi-square tests), the results show affiliates in both countries have adopted different IPs to compete in knowledge economy. While foreign firms in Brazil have focused on ‘alternative technological strategies’, based on licenses acquisition, or capital goods investments, or internal R&D, the group of affiliates in India have showed more ‘complementary technological orientations’, based on combinations between different types of innovation inputs, specially local licensing acquisition and internal R&D. (21)

The Impact of Internal and External Networks on Innovation Performance Evidence from the UK Community Innovation Survey

Marion Frenz

School of Management and Organizational Psychology Birkbeck, University of London

Grazia Ietto-Gillies

School of Management and Organizational Psychology Birkbeck, University of London

The paper explores the impact of internal and external networks on the innovation performance of enterprises operating in the UK. It uses information from the UK Community Innovation Surveys 3 and 2. The national and international dimensions of the networks are explored and tested for their impact on innovation performance. We find that both internal and external networks are positively associated with innovation performance and that the effects are greatest when an enterprise belongs to an international internal network. (22)

Networking and R&D in Domestic and FDI Plants in Spanish Electronics Clusters

Adelheid Holl FEDEA Foundation for Applied Economics Studies, Madrid

Ruth Rama

Department of Applied Economics CSIC Spanish National Research Council

To fully understand affiliates’ behaviour in regional clusters (hereafter RCs), we argue, such companies should not only be studied in isolation; in order to take into account the environment in which foreign companies are

operating, the strategies of other co-located firms must also be analysed. To this end, we examine 184 electronics plants, domestic and foreign, in three Spanish RCs; the sample includes affiliates of some of the principal MNEs in this sector. Clustered FDI plants show cooperation levels similar to those of clustered domestic plants, with regard to joint R&D, outsourcing and other types of inter-firm collaboration. FDI plants are, in some respects, less embedded in RCs than domestic plants. Market-seeking FDI appears to be more prone to collaboration with regional partners than other types of FDI, probably as a strategy to obtain local knowledge, adapt products to the domestic market, etc. FDI plants consider within-group subcontracting relationships to be more important than do plants belonging to domestic multiplant companies. Nevertheless, the former appear to integrate both intra-firm and inter-firm subcontracting in their strategy. R&D-intensive FDI plants tend to avoid collaboration with other companies and remain vertically integrated, probably to avoid involuntary spillovers of knowledge. With regard to networkers, we find that FDI plants apparently place greater importance upon human capital than domestic firms do. Although foreign networkers are larger, they are not more innovative than domestic networkers. The latter appear to make more efficient use of the more limited resources for innovation available to them. (23)

Determinants of Backward Linkages: The Case of TNC Subsidiaries in Malaysia

Chie Iguchi Ritsumeikan University, Japan

This research focuses on the organisational linkages between Transnational Corporations (TNCs) subsidiaries and local suppliers in the Malaysian electrical and electronics (EE) industry. It is commonly observed in the EE industry that firms first conduct R&D, develop products, then find resources in the host economy, and finally start manufacturing. Final products are usually refined and marketed in the home or host economy or in the global market. Local suppliers, especially in host developing countries like Malaysia, are involved in the process of manufacturing either in terms of sourcing parts or components, or manufacturing under sub-contracting arrangements, depending on a supplier’s technological capability. The technological capability of a local supplier affects a subsidiary’s motivation whether to source locally in a host country, or to source regionally or internationally. Malaysia is an ideal country in which to study the factors causing and affecting the intensity of backward linkages, specifically, the EE industry provides anopportunity for insight, given its importance in the Malaysian economy, where TNCs in the EE industry are major players in Malaysia’s process of industrialisation. The presence of TNC subsidiaries in the EE industry has a long history which started in latter half of 1960s with export oriented strategies taken by TNC subsidiaries. Despite the significant contribution of TNCs, several weaknesses have been identified in inter-organisational relationships between TNC subsidiaries and local suppliers. Although the weaknesses have been identified in various studies, there is also some evidence of significant linkages between TNCs and local suppliers in the Malaysian EE industry. Therefore, we try to explore evidence of significant inter-organisational linkages between TNC subsidiaries and local suppliers. One of the purposes of this research is to clarify a subsidiary’s role in a host country. In order to capture dynamics of subsidiaries’ activities and roles in a host country, we first discuss the theoretical reviews of issues of TNC subsidiaries in host countries. Special attention is given to the roles of TNC subsidiaries including decentralisation of activities and strategies of subsidiaries in a host country. Through observing autonomy levels and performances of subsidiaries, we try to look at the motives behind subsidiaries’ global production networking. The possibility of linkages between firms is explained and the backward linkages are focused as one of the crucial inter-organisational linkages between subsidiaries and suppliers. Environmental factors are assumed to affect decision makings of subsidiaries and motivations on the backward linkages, thus we look at location-specific factors including specific factors of government. We try to configure factors affecting provision of backward linkages by TNC subsidiaries. We hypothesise that strong subsidiary’s autonomy affects motivation of providing higher intensity of backward linkages. In order to find out the relationship between existence of backward linkages and autonomy level of subsidiaries, we construct a model to test linear relationship of the intensity of backward linkages as dependent variables and other factors affecting subsidiaries’ behaviours as independent variables. Thus our empirical model tries to find out motivation of backward linkages offered by TNC subsidiaries through analysing factors affecting different strength of backward linkages. (24)

The Innovative Strategies of Foreign Subsidiaries in Spain An Evaluation of their Impact from a Sectoral Taxonomy Approach

José Molero

Universidad Complutense de Madrid

Antonio García Universidad de Sevilla

Innovation has experienced a remarkable change in recent years as a consequence of a number of factors including the advance of science and technology and the increasing globalisation of a number of markets and activities. The growing heterogeneity of sources affecting the process of firms’ innovation has led to the higher importance of knowledge created out of the companies themselves, and therefore to the central role to be played by the capacity of integrating inner and outer sources of technological capabilities with other competitive forces. Similarly, the acceleration of internationalisation in most economic and social levels has increased the necessity for exploiting

firms’ advantages at international (sometimes world) level and to seek new competitive (technological) assets in a multinational framework. Multinational Corporations (MNCs) are a major player insofar as they can extend internationally strategies able to exploit new advantages. In this transformation, the consequences affect not only MNCs themselves but economies and systems of innovation of both the country of origin of the headquarters origin and the one where the affiliate is located. Nevertheless, most of the research has been devoted either to analysing the impact on North-South relations of new MNCs activities or the implications for inter-developed-country relations. So far, cases of what can be called “intermediate countries” have received much less attention, probably because their particular situation makes it more difficult to elaborate a hypothesis adequate to their specificity; it can be the case of the role of subsidiaries and the intensity and direction of spillovers. The aim of this paper is to contribute to a better understanding of the situation of those countries by examining a relevant case study: the Spanish economy in recent years. To carry out this task, we shall investigate the innovatory behaviour of MNCs subsidiaries in Spain using microdata of the 2003 Innovation Survey. In the comparison, especial attention will be given to the relevance of the fact of belonging to a group of national and international companies. Moreover, as the literature has recently emphasised, sector of activity is probably a central factor for encouraging or otherwise the consolidation of “virtuous circles”; so, the analysis will consider sectoral specificities by constructing a sectoral typology using Revealed Technology Advantages (RTA) calculations.

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Mandates and Mechanisms: Reverse Knowledge Transfer in MNEs

Ram Mudambi Fox School of Business

Temple University

Lucia Piscitello Politecnico di Milano

Larissa Rabbiosi Politecnico di Milano

The mandates of multinational enterprise (MNE) subsidiaries’ vary widely ranging from low level assembly and to global responsibilities for entire aspects of the parent firm’s business, but can be broadly grouped into ‘competence-exploiting’ and ‘competence-creating’ mandates. Competence-creating subsidiaries are increasingly being used as sources of knowledge, generating ‘reverse’ knowledge transfers. Using data from 301 Italian MNE subsidiaries, we find that mandates are crucial in pinpointing the determinants of as well as the mechanisms used in reverse knowledge transfer. The effects of subsidiary-specific characteristics like age and entry mode differ significantly across the two types of subsidiaries. Low cost communication media explain knowledge transfer in competence-exploiting subsidiaries, while partnership mechanisms explain transfer in competence-creating subsidiaries. (26)

Catching Up With The Knowledge Economy: Is Biocluster Development

The Answer For Central And Eastern Europe?

Tomasz Mroczkowski International Business Department

American University, Washington DC

Heather Elms International Business Department

Kogod School of Business American University, Washington DC

This paper asks whether biotech cluster development is a potential avenue for knowledge economy growth in Central and Eastern Europe (CEE). It reviews the literature on factors contributing to the success of bioclusters and on measures of biotech success, and provides related data and comment on several CEE countries. It concludes that while still emergent, biotech may indeed hold potential for CEE—and begins to identify examples of relative success. (27)

The Dynamics of Cluster Evolution A Comparative Analysis of the American and Turkish Film Industries

Özlem Öz

Department of Management Bahcesesir University, Istanbul

Kaya Özkaracalar

Department of Film and Television Bahcesesir University, Istanbul

Historical geographies of the film industries in Hollywood and in Turkey’s cultural capital, Istanbul, are examined and compared in this paper, with the ultimate purpose of contributing towards a better understanding of the dynamics shaping the evolution of clusters. This comparison provides an opportunity for advancing theoretical debates ongoing in the relevant literature, particularly in respect of the patterns of interaction between clusters. Given that historical geographies of relatively less developed, non-Hollywood clusters remain understudied, the comparison of the experience of Istanbul’s film cluster with that of Hollywood fills some important gaps in literature. This comparison, for instance, allows us to comment on the factors accounting for the observed divergences in these two clusters’ ability to respond to exogenous shocks, especially with regard to how and why, in the face of a similar set of threats, Hollywood has proved so resilient and Istanbul’s film cluster so vulnerable.

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Multinational Firms, Global Value Chains and The Organization Of Technology Transfer

Federica Saliola

Univesity of Urbino, Italy Coppead Graduate School of Business

Federal University of Rio de Janeiro

Antonello Zanfei University of Urbino, Italy

This paper combines insights from different streams of literature to develop a more comprehensive framework for the analysis of technology transfer via value chain relationships.We integrate the existing literature in three ways. First, we consider value chain relationships as a multi-facet process of interaction between buyers and suppliers, involving different degrees of knowledge transmission and development. Second, we assess whether and to what extent value chain relationships are associated with the presence of multinationals and with their embeddedness in the host economy. Third, we take into account the capabilities of local firms to handle the technology as a factor influencing knowledge transfer through value chain relationships. Using data on 1385 firms active in Thailand in 2001-2003, we apply a multinomial logit model to test how the nature and intensity of multinational presence and the competencies of local firms affect the organisation of international technology transfer. We find that knowledge intensive relationships, which are characterized by a significant transmission of technology along the value chains, are positively associated with the presence of global buyers in the local market, with the efforts of MNCs to adapt technology to local contexts, and with the technical capabilities of domestic firms. By contrast, the age of subsidiaries and the share of inputs purchased locally appear to increase the likelihood of value chain relationships with a lower technological profile. (29)

Technological and Institutional Transformation The Biotechnology Industry in Taiwan

Yu-Shan Su

Chang Jung Christian University Department of International Business &

School of Management University of Texas at Dallas

David Deeds

University of Texas at Dallas School of Management

Mike W. Peng

School of Management University of Texas at Dallas

Biotechnology firms in Taiwan could be categorized into peripheral and core industries, respectively. The peripheral part of the industry includes the firms stemming from the diagnosis reagents and medical devices. They found niche points to enter this new industry and generated profitable returns. The core part of the industry referred to the firms with the capabilities of developing new drugs. These start-up companies will be important global partner and Asian hub in the global biotechnology value chain. (30)

Knowledge Transfer among Communities of Practice Dynamic Learning in MNCs

Stephen Tallman

Robins School of Business

University of Richmond Knowledge acquisition and transfer within the network of subsidiaries and affiliates that is the modern multinational corporation is the key source of competitive advantage of these firms. The extensive literature addressing this phenomenon describes a shift of understanding from a focus on center-to-subsidiary knowledge movement to recognition of the importance of subsidiaries as sources of new knowledge based on their ties to their own local business communities. What is not clear is the process of knowledge development and dissemination. This paper proposes a model built on the twin concepts of Communities of Practice as the key sources of know-how creation in firms and regions and of practice-based architectural knowledge as the key driver of absorptive capacity that permits or constrains successful learning across organizational boundaries. It uses these concepts to derive a symmetric framework that explains how knowledge is absorbed by subsidiaries and disseminated throughout the MNC, and offers guidance for managerial applications. (31)

Foreign Direct Investment and Clusters in China’s Pharmaceutical Industry A Typological Approach

Daniel Van Den Bulcke

University of Antwerp Management School & Centre for International Business & Strategy University of Reading Business School

Haiyan Zhang

Euro-China Centre University of Antwerp Management School

This paper uses aggregate and firm level data to emphasize the characteristics of the Chinese pharmaceutical industry in general and its geographical agglomeration in particular. The major research questions are 1) Are there geographical agglomerations in China’s pharmaceutical industry? 2) What are the specific features of these industrial clusters1 and can they be classified in a typology? and 3) What is the role of FDI in the cluster formation, development and upgrading of Chinese pharmaceutical industry? The paper consists of four major sections. The first section provides an overview of China’s pharmaceutical industry and a brief discussion of the characteristics and its changing patterns. The second part looks into the literature about the typologies and ‘life cycle’ of industrial clusters on the one hand and the role of FDI in the cluster development on the other hand. The third part presents the ownership structure of China’s pharmaceutical industry and its location patterns. The relative importance and specific characteristics of foreign invested enterprises (FIEs) are compared to domestic firms. The fourth section analyses the geographical agglomeration of the industry and its evolution. Different types of Chinese pharmaceutical clusters are identified and their specific characteristics are analysed on the basis of the literature review presented in the section two. The factors that shaped the characteristics of Chinese pharmaceutical clusters are referred to, but could not be submitted to a thorough examination due to the lack of relevant data. (32)

Innovation Generation within Multinational Corporations Global Network

Feng Zhang Management and Global Business Department

Rutgers Business School Rutgers University

At the beginning of 20th century, economists, such as Marx, Schumpeter, and Usher, have argued that technological change is central to profitability and growth. Nowadays, scholars in different disciplines widely recognize the importance of innovation and continue to study it using different perspectives. While the organizational management literatures focus on the micro level of innovation, the international business scholars more concern with innovation’s macro characteristics. Combining studies of these two disciplines would provide more insights for our understanding of innovation. This study links the multinational corporations (MNCs) network with innovation process. It proposes that different subsidiaries within the MNCs network have distinct strengths in executing innovation generation processes, and therefore, it is fruitful for MNCs to utilize the different competitiveness embedded in subsidiaries to benefit the whole group. However, whether this argument is a theoretical possibility or it does exist, and to what extent it exists, in the real world is a critical question that this study tries to answer. This paper takes the view that innovation as either an outcome or a process can be seen as complementary rather than competing areas of study (Gopalakrishnan and Damanpour, 1994). It views the multinational corporation as an intra-organizational interdependent network where subsidiaries play a critical role in knowledge sourcing and generating (Birkinshaw, Hood, and Jonsson, 1998).

This study bridges two streams of literatures, viz. innovation process, and capabilities of multinational subsidiaries. Both organizational management literatures and multinationals literatures use innovation processes to investigate MNCs research and development (R&D) activities. However, in the former group, innovation are divided into two categories - generation and adoption, and adoption is limited to the situation of adopting innovations newly imported into the adopting organization from the external environment; and a widely recognized innovation process among organizational management scholars – problem or opportunity recognition – is ignored in the latter group. Hence, this article comprises the problem/opportunity recognition process into the multinationals innovation study, deems adoption process as an integrated part of innovation generation, and includes the

adoption of innovations within a MNC network, not necessary from the external environment. Furthermore, literatures of multinationals distinguish the typologies of overseas subsidiaries based on their mandates and capabilities, which provide a context to integrate the innovation generation processes into the MNC global network. Consequently, this study proposes to investigate innovation generations within MNC global network from following processes: problem/opportunity recognition, basic research, applied research, product development, commercialization, and adaptation. The settings in this study unavoidably involve knowledge transfer and organizational design considerations. Conceptual and empirical studies (e.g., Hedlund, 1986, 1994, 1996; Prahalad and Doz, 1987; Bartlett and Ghoshal, 1990) have exploited these concepts by emphasizing the far-reaching integration and continuous knowledge exchange within the multinational network and the creation of significantly new technology through multinational operations. However, while dominant empirical studies are concentrated on the combining inputs from different sources and locations in generating innovation in a single location (either Headquarter or a subsidiary), case studies also do not reveal specific details on the innovation and knowledge-exchange processes (Zander and Solvell, 2000). To tackle these insufficiencies, this study proposes an empirical test to include the innovation processes and the interaction of geographical dimensions, the content of knowledge exchange, and processes of innovation generation into the consideration. In general, this study has two major propositions: Proposition 1: Subsidiaries and/or the Headquarter in a MNC group are important technology sources for different processes of an innovation generation because of their distinct strengths. Proposition 2: Generation responsibilities can be shifted among subsidiaries and/or the Headquarter along the advance of innovation generation process to utilize the dispersed distinct strengths. According to National Science Foundation survey, 1,122 companies had overseas R&D activities in 1997 with 13,107 million dollars overseas R&D expenditures. This study, therefore, starts with these 1,122 US companies, but the unit of analysis is the individual innovation of these companies between 2001 and 2005. This research is divided into two phases: Phase 1: The main target is to identify the sources for each process of innovation generation, and to what extent each source contributes for the innovation generation process. Information regarding the sample is proposed to be collected via a national wide postal survey through questionnaires. The Headquarter CTOs are selected to answer the questionnaire since they have the best and macro knowledge about the technological innovation activities in a MNC group. Phase 2: To explore the location/responsibility shifts among subsidiaries and/or the Headquarter, the subsidiaries in China of the sample companies in Phase 1 are chosen as the targets of Phase 2 study. Again, questionnaire survey is used. However, the subsidiary CTOs in China are the person who will answer the questionnaire. The results contribute to a better understanding of innovation complexities and innovative organization design within a MNC. Moreover, this paper also stresses the importance of distinguishing international structure from transnational process. Finally, studies, using patent citation data, show that companies invest into weak IPR protection countries or regions because such companies can appropriate the innovations invented there through internal organizations. This study, using the survey data, will not only inspect and verify the above argument, but also provide detailed information about how the internal organizations function if the argument above is approved true by this study. (33)

Multinationals’ R&D in China and the Implication on China’s National Strategy of Innovation

Si Zhang

Department of Economics University of Reading Business School

The paper uses preliminary results from an ongoing survey of MNEs’ subsidiaries in China to evaluate the motivation and roles of their R&D laboratories. The two major motivations of having subsidiary-level R&Ds are, firstly, adaptation group technology in accordance to local demand and taste in order to increase contestability of subsidiaries in the local market and within their MNE groups. Second motivation is to develop new technology and products either for the Chinese market or for MNEs’ global innovation programme. The main body of the paper starts with a presentation and analysis of the partial survey results mainly in terms of the existence and of R&D labs among Chinese labs, which provided some hints on the characteristics of respondents’ laboratories by their home countries. Then the paper carries on by discussing the motivation and roles of laboratories. The roles of laboratories largely depend on the strategic positioning of subsidiaries in China. Thus, the analysis related the evaluation of roles of laboratories to that of subsidiaries. In order to better understand to roles of labs, the last part of the main body of this paper is used to review some evidence on sources of technology of laboratories, especially the importance of in-house technology, which, to some degree, could be a reflection on the laboratories’ roles. The paper will conclude by using the results of MNEs’ R&D in China to draw out some preliminary insights on how foreign companies are involved with China’s national strategy of innovation, and on their implications for the generation of sustainable knowledge–based competitiveness in the Chinese economy.

TRACK 3

MANAGEMENT ACROSS COUNTRIES AND CONTEXTS

(34) Antecedents of Entry Mode Choice in Extra-Regional Markets

and Consequences on Performance A Test of a Contingency Model of the Extra-Regional Expansion of Retailers

Victor Almeida

Coppead Graduate School of Business Federal University of Rio de Janeiro

Angela DaRocha

Coppead Graduate School of Business Federal University of Rio de Janeiro

This study aimed at investigating the extra-regional expansion process of Brazilian apparel retailers. The literature on the geographic expansion of retailers does not provide a model to explain retailers’ strategic moves and their impact on performance. However, the literature on the internationalization of the firm offers a number of promising frameworks to investigate this phenomenon. The study adapted the eclectic approach of Hill, Hwang, and Kim (1990) and Kim and Hwang (1992), combined with Aulakh and Kotabe’s (1997) contingency approach, and contributions from other authors, to the extra-regional expansion of retailing firms. A survey with 68 Brazilian retail chains was used to test the research hypotheses. The ability of the general framework to explain the extra-regional expansion of retailers was first tested. Results gave empirical support to the proposed framework, showing that the choice of entry mode by retailers in extra-regional markets was simultaneously influenced by environmental factors, transaction-specific factors, strategic factors, and organizational capability factors. In addition, results suggested that, although the entry mode did not directly influence retailers’ performance, the fit between the entry mode and its antecedents is significantly related to retailers’ performance in extra-regional markets. The most important finding of the study was that internationalization theories can be applied to the national expansion of local firms within the borders of the same country.

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Relative Perceived Environmental Uncertainty, Perceived Resource Availability Degree Of Internationalization, Firm Performance

and The Mediating Role of Entrepreneurial Orientation

Pattana Boonchoo School of Management

Assumption University, Thailand Drawing from the literature in international business, strategic management and entrepreneurship, a conceptual model to investigate the mediating effects of entrepreneurial orientation (EO) on the relationships between relative perceived environmental uncertainty and degree of internationalization, and perceived resource availability and degree of internationalization is proposed. The relationships among these variables are based partially on the social cognitive theory (SCT). The relationship between degree of internationalization and firm performance will also be explored. It is hypothesized that EO strengthens the relationships between perceived environmental uncertainty, perceived resource availability and degree of internationalization and that higher degree of internationalization has a positive association with firm performance. Propositions for further empirical studies are provided. Suggestions for future research and the managerial and theoretical contributions are discussed.

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Social Networks As Drivers Of Internationalization Patterns: A Case Study On Fish Exports

Francisco J. L. Câmara

Universidade dos Açores Angra do Heroísmo, Portugal

Vítor Corado Simões

CEDE, Instituto Superior de Economia e Gestão, Lisbon

The aim of this paper is to analyse how business and social networks can foster and support SMEs’ internationalization process. The influence of such networks will be assessed for both internationalization initiation and development stages. The analysis will be based on a case study of an Azorean fresh fish exporter company. The paper makes two contributions to the existing body of knowledge on these issues. First, it highlights an important aspect of social and business networks so far omitted in SME internationalisation literature: the use of such networks by the focal firm to validate and check business proposals from third parties. Second, it suggests that social capital has not just an effect of deepening and extending the geographic scope of company internationalisation activities. Social capital may, at a later stage and, under conditions of limited input supply, lead to a ‘closure’ of the business network, making the establishment of new relationships increasingly difficult.

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Global Multinationals and Multibrand Strategic Management

Mark Casson Department of Economics

University of Reading

Teresa da Silva Lopes Queen Mary College

University of London There is a wide literature on the role of MNEs as drivers of globalization (Chandler et al, 1997; Kogut, 1997; Dunning, 1986, 2003; Jones, 2004). Yet, as recent studies have shown, very few of those MNES follow truly global strategies (producing the same products or delivering the same services), selling similar volumes evenly across all the continents. The MNEs that follow such strategies tend to operate in two main groups of industries: the computer, office and electronics industry, and the food, drugs and tobacco industry (Rugman, 2006). Drawing on data from the world’s largest MNEs in these two groups of global industries in different benchmark dates (from the 1960s until the present day), and defining ‘multibrand MNEs’ as those that create wide portfolios of brands through international mergers and acquisitions, this paper shows that the capacity of MNEs to hire highly skilled managers with ability to identify brands with global potential and to manage and protect these brands globally through trademark law is critical to success. Raising the discussion about global vs. regional strategies across different contexts, this study of global MNEs, contributes to the theme of the session on ‘Managing Across Countries and Contexts’ at the AIB/Reading conference. (38)

Global Strategies Of Nestle, Unilever And Inbev and Their Impact in The CEE Region

Yordanka Chobanova

Social and Political Science Department European University Institute, Firenze

Using interviews with the CEOs of Nestle, Unilever and InBev, the paper examines the impact of companies’ global strategies on their Central and Eastern European subsidiaries. It finds out that the global strategies strongly influence the behavior of CEE subsidiaries: local affiliates are fully integrated in the global production networks of the mother companies; the product portfolio is set up at the headquarters; suppliers and distributors are globally approved; there is a highly centralized approach of decision-making; R&D is conducted at home countries. (39)

Chinese Direct Investment in The United Kingdom An Assessment of Motivations and Competitiveness

Adam R. Cross

Centre for International Business Leeds University Business School

University of Leeds

Hinrich Voss Centre for International Business Leeds University Business School

University of Leeds

This study investigates the motivations driving Chinese outward direct investment to the United Kingdom. We assess distinctive sources of competitiveness of Chinese firms. Our findings, which draw on a survey questionnaire of senior managers of Chinese affiliates in the UK, support the proposition by Buckley et al. (2006) that the outward investment motivations of Chinese companies have changed over time. The study also provides partial support for the conclusions of Buckley et al. (2007a) that the international investment decisions of Chinese companies deviate from received models of developed country investors, and that a special application of the general theory of the multinational enterprise is necessary. In particular, our results question the extent to which Chinese investors possess conventional ownership advantages.

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Why does Home Country Influence wan in International Business Study The evidence from Distribution Channel Management in MNEs in China

Laszlo Czaban

Manchester Business School, University of Manchester

Qiuping Li Manchester Business School, University of Manchester

This paper reports a research on foreign firm – local distributor relationship in China, the way in which foreign firms design and manage their distribution system. By applying two different approaches to the analysis of the same empirical evidence, the paper attempts to contribute to the long-running debate on home and host country influences on MNC behaviours. We argue that the disappearance of the home country influence in international business studies is largely a result of the framing of the problem and the chosen methodology. Our argument is not that the conclusions advanced by the advocates of the host country influence are false or inappropriate, but that a further path leads from these results to a fuller, more general conceptual framework. In our view home country influence is a ‘built-in’ component of the MNC behaviour and as such not observable directly. However, its presence is deductible by analysing not what MNEs do, but how they do it, not by what MNEs set as objectives, but the way in which they set these objectives and the capabilities available to implement various types of measures to achieve these objectives. (41)

The Impact of Global Business Environment on Development of Global Strategies

Mika Gabrielsson Helsinki School of Economics

Paula Kilpinen

Helsinki School of Economics

Markus Paukku Helsinki School of Economics

Anna Salonen

Helsinki School of Economics

Jody Wren Helsinki School of Economics

Changes in the government, market, cost, and competitive factors have significantly impacted the global business environment of firms. A trigger for this development has been the improvement of the general international trade environment driven by global and regional economic integration, as well as country-level governmental activities. The globalization impact, however, varies based on the development stage of the firm. In the internationalization phase the globalization impact is twofold: on one hand the market drivers are pulling the firms to expand abroad, but on the other hand the level of competition dictates the speed of that process. That is, if the level of competition is low, the firm can afford to have a slower expansion speed. In the globalization phase the cost drivers become paramount as the firm seeks to optimize its value chain activities across the globe. A main theoretical finding of the study is that the impact of globalization is found to be dependent on the firm’s development stage. For managers struggling with how to deal with globalization the findings suggest that the firms should increasingly mirror their current state of global strategy levers against their industry’s globalization potential, and direct their strategy towards identified gaps. (42)

Re-aligning Organizational Competencies in the Pharmaceuticals Industry during the Wonder-drug era

Merck and the Introduction of the Product Management System

Andrew Godley Centre for International Business History

University of Reading Business School

David Leslie-Hughes The Huck Centre

University of Reading Business School

Merck rose to prominence in the United States pharmaceuticals industry through a series of great research breakthroughs in novel synthetic vitamins, sulfas (the precursors to antibiotics), antibiotics and anti-inflammatories during the 1940s. Its research laboratories were the pride of the American pharmaceutical industry

and by 1950 the company employed six Nobel Laureates in its network of in-house and externally supported researchers. Across the world, only the University of Cambridge could boast of a similar concentration of scientific expertise (the home of the British School of Physiology). Merck’s success largely followed from it being a pioneer in establishing close industry-university links in the U.S. Like at leading universities, research was pre-eminent at Merck, and research was focused on developing new products for the benefit of public health. ‘Medicine was,’ according to George W. Merck, ‘for the people.’ Get the products right and ‘the profits will follow’, was his mantra. The company prospered during the heyday of pharmaceutical innovation – the Wonder-drug era. Employees more than tripled from just under 2,000 in 1939 to 6,000 by 1950, 7,300 by 1951. Sales had climbed up from their mid-1930s trough to reach $20.1m by 1939, to $57.5m by 1946 and then to $139.2m in 1950 and $171.3m in 1951; or almost a fivefold growth in real revenues (from $71.3m in 1939 to $335m in 1951 at 1974 values). Superficially all seemed well. But in reality, the company was teetering on a precipice. There was only a very rudimentary managerial organisation in place and its marketing role was amateurish at best. As competitors entered the rapidly growing markets for vitamins, antibiotics and anti-inflammatories, revenues slumped in 1952 and 1953 and Merck’s market share collapsed. The immediate solution seemed to present itself in the proposed merger of Merck with Sharp and Dohme, a Philadelphia pharmaceuticals producer. As plans developed through 1953 it seemed the ideal solution. Merck had the advantage of enormous strengths in research reputation and its manufacturing facilities covering a broad range of specialty chemicals. Sharp and Dohme were a more traditional US pharmaceuticals company, like Parke Davis and Eli Lilly, with great strengths in over-the-counter branded products (like its Sucrets range of lozenges), in generic pharmaceuticals, in its sales and marketing techniques, and in its strong links with the principal distribution channel, pharmacists. But the merger very nearly flopped. While the newly merged Merck, Sharp and Dohme nearly doubled in size from 6,400 to 10,200 employees, revenues fell from $160m in 1953 to $145m in 1954, the first year after the merger and $157.9m in 1955, only rising slightly to $157.9m and then $172.4m in 1956 and 1957 respectively, a significant real-term decline from both companies’ 1951 sales. Yet this was at a time when the overall market for pharmaceuticals was growing rapidly. Prescriptions in the US rose from 350m in 1950 to 550m in 1959. In 1939 the value of the US pharmaceuticals market was $300m, by 1959 that had risen to $2.3bn (almost a four-fold growth in real terms). The problem was partly that the potential gains of the merger were very nearly squandered by a failure to rationalise the organisation immediately after the merger. The newly merged Merck, Sharp and Dohme simply replicated its offices at both constituent companies’ headquarters, and the Sharp and Dohme’s sales organisation was less of a key asset as initially thought. But the real problem was that neither Merck nor Sharp and Dohme had got to grips with a fundamental shift in the market from pharmacist-led to physician-led. Sharp and Dohme, like all US pharmaceuticals companies, focused its sales efforts on pharmacists; and for good reason. In the 1930s and 1940s 75 percent of all prescriptions were compounded by pharmacists. Druggists were the dominant gatekeepers to the enormous consumer demand for prescription medicines. Unable to advertise direct to the public, ethical pharmaceuticals companies therefore focused their marketing efforts on pharmacists. But during the late 1940s and 1950s the market was fundamentally changing as physicians began to issue more and more prescriptions. By 1950 only 25 percent of all prescriptions in the US required compounding by pharmacists. By 1960 well over 90 per cent of prescriptions were proprietary medicines issued by physicians. Pharmacists no longer compounded medicines, and so no longer purchased their constituent fine chemicals. A new gatekeeper to the market demanded a new approach. The Sharp and Dohme salesforce had, in fact, broadly failed to make that transition. Unsurprisingly the newly merged Merck, Sharp and Dohme continued to stall during the 1950s. Despite being the most innovative source of scientific breakthroughs in the world from the mid-1930s onwards, despite investing in a radical departure from the company traditions by merging Merck with Sharp and Dohme, the company was still teetering on that precipice by the late 1950s. In 1959 Merck, Sharp and Dohme was the fifteenth largest pharmaceuticals company in the US, probably around the 25th largest in the world. Yet by 1970 it was second only to Hoffman la Roche (later Roche). Such a marked turnaround in the company’s fortunes in what was one of the most research-intensive of all sectors in the world in the 1950s and 1960s (and continues to the present) was not any improvement in research productivity; indeed it would have been difficult to envisage how research productivity could have been bettered. But rather a transformation of the firm’s marketing outlook that led to an entire re-organisation of the firm, first in its domestic US operations, and then in its international division. The paper outlines the key organisational changes associated with Merck’s pioneering of a product management system in the pharmaceuticals industry, and how this created its remarkable and sustained competitive advantage in the global industry through the 1960s, 1970s and into the 1980s.

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Singapore Inc. Goes Shopping Abroad

Andrea Goldstein OECD Development Centre, Paris

Pavida Pananond

Thammasat Business School Thammasat University, Thailand

For more than three decades now, Singapore has recorded significant outward foreign direct investment (OFDI) flows. Indeed, Singapore is the fourth largest outward investor from developing countries (UNCTAD 2006), with S$

174 billion as OFDI stock at the end of 2004 (Singapore Department of Statistics 2006). Singapore’s OFDI has gone though three stages of progressive engagement. Initially, some timid attempts were made to delocalise production of labour-intensive goods such as clothing to lower-wage countries that benefited from quota-free entry into major Western markets under the Multi-Fibre Agreement. In a second phase, authorities identified overseas investment and the development of offshore opportunities as a long-term solution to the nation’s small scale and sluggish growth in demand and investment opportunities and drew a regionalisation strategy comprising several programmes (Pereira 2005). A third phase has started after the Asian crisis when Singaporean multinational enterprises (MNEs) also began to use mergers and acquisitions beyond Asia to enhance their competitiveness. Government-linked companies (GLCs) – most of them managed under the umbrella of Temasek Holdings (henceforth, Temasek) – spearheaded Singapore industrialization in the 1960/70s and then regionalisation through the so-called industrial township projects. In fact, the prominent role of the state is a distinguishing factor of the Singaporean economic miracle that is hard to reconcile with the oft-repeated mantra of the city-state as an oasis of unbridled capitalism. Over the pas few years, GLCs have played a very important role in the acceleration of Singapore’s internationalization, in Asia in particular. While some such projects have proven uncontroversial, in particular those carried out by the GLCs themselves, others have been met with considerable resistance. In particular, the Temasek purchase of a controlling stake in Thailand’s Shin Corp. (henceforth, Shin), owned by the family of the country’s then Prime Minister, provoked a deep political crisis that led ultimately to the military coup of 19 September 2006. The underlying reasons are partly beyond the GLCs’ control, but they still deserve to be analysed in order to understand the direction of change of the Singaporean economy. In this paper we start by summarising the main characteristics of Singapore OFDI and MNEs, i.e. motives, industrial and geographical distribution, competitive advantages. We point out that the existing literature has highlighted the limits of the regionalisation strategy, although it has not addressed the increasing resistance to Singaporean MNEs. Then we explore the Thailand case study to highlight why Temasek’s ventures in some countries have met with resistance. In the concluding summary, we point out the potentials and pitfalls of Singaporean GLCs and draw some implications on how these traits might have to change as Singapore Inc goes global. (44)

Political Resource and First Mover Advantage in Transition Economies A Longitudinal Case Study of Carrefour in China

Haiming Hang

Department of Management University of Reading Business School

Andrew Godley

Department of Management University of Reading Business School

Peter Miskell

Department of Management University of Reading Business School

Recently the growing importance of emerging economies in the world economy has attracted much academic attention as it provides a big challenge to conventional wisdoms that were developed by studying firms in more mature and developed economies (Wright, Filatotchev, Hoskisson and Peng, 2004). In particular, transition economies, a subset of the emerging economies, have witnessed fundamental and comprehensive changes introduced to the formal and informal rules of the game affecting firms when they moved from central planning to market economy (Meyer and Peng, 2005; Peng, 2003). As Meyer and Peng (2005) argued that these “new phenomena present a fascinating research laboratory in which to access the explanatory and predictive power of different theories”. Meanwhile, the concept of first mover advantages, which refers to that business pioneers could obtain positive economic profits due to the early entry into foreign markets, is not new one in international business (Lieberman and Montgomery, 1998). However, previous researches on whether political resources should be considered into firms’ first mover advantages are still inconclusive (e.g. Nakata and Sivakumar, 1997; Frynas, Mellahi and Pigman, 2006). In the case of transition economies like China where government’s intervention on business is still strong, political resource like access to a key government minister and experience in dealing with corrupt officials are unevenly distributed among different firms (Frynas, Mellahi and Pigman, 2006). Therefore, such resources could be used to creating first mover advantages, as they are rare and difficult to be imitated by others (Barney, 1997). Survey methods dominated current researches on first mover advantages (see Lieberman and Montgomery, 1998 for a review). However, as Meyer and Gelbuda (2005) argued that the ahistorical, aprocessual and acontextual character associated with these cross-sectional research limited their explanatory powers, particularly in dynamic contexts like transition economies. In order to fill this research gap, this research using a longitudinal case study by focusing on the development of Carrefour Group in China from 1995 to 2005, tries to demonstrate how foreign entrants could use firm-specific political resource as well as other local resources from informal institution to reduce transaction cost and gain first mover advantage in transition economy. (45)

Decision-Making Process Of Entry Mode Choice Case Of Finnish MNCs

Irina Jormanainen

Department of International Business Helsinki School of Economics

Entry mode choice is a critical decision which MNC makes when expanding its operations abroad. Although previous studies shed light on various determinants underlying entry mode choice including transaction cost, resource-based and institutional variables, the overall understanding of how managers incorporate them into a decision-making process of entry mode choice, and what is the decision heuristic still remains fragmented and incomplete. Acknowledging significance of the research gap this paper examines entry mode decision– making process, and on the basis of evidence from multiple cases of Finnish MNCs distinguishes several stages in the mode choice. Furthermore, the study identifies factors influencing managers’ decision on each stage of the process and analyzes the extent of their impact on mode selection. Therefore, the paper contributes to the entry mode literature by providing a thorough description of the rationales and assessment criteria adopted by managers in entry mode choice and illustrating how various theoretical perspectives, namely resource-based, transaction costs, and institutional theories are integrated in the process of mode selection. (46)

The Organisational Changes in Korean Firms Since the Financial Crisis In 1997 and their Impacts on Labour Productivity

Seungbae Lee

Department of Management University of Reading Business School

In 1997, the financial crisis erupted in Thailand was spread and swept over the S.Korea, whose economy had been regarded as the successful model of the economic growth after the Second World War. After the harsh negotiation, the Korean government reached an agreement with the IMF to introduce radical economic reforms into its economy, which triggered economic transformation of Korea from state-led Asian capitalism to Anglo-Saxon capitalism. From 1997 to 2000, a wide range restructuring programme was executed in all the areas of the Korean economy, which made a profound impact on industrial relations of Korea. The aim of this review is to examine the impact of the economic transition on industrial relations by focusing on labour productivity change. This paper argues that the transition process had been poorly managed, and this may be the reason of the decreasing labour productivity of Korea since the financial crisis. (47)

The Impact of Experience on Ownership Strategy in Emerging Economies

Peng-Yu Li Department of Business Administration

National Chenchi University, Taiwan Experience is important for developing international business activity, yet scholars disagreed on the importance of country specific experience. We argue that this disagree come from explained by the fact the country specific experience is important in the countries of emerging economies but less important in mature market economies. Our empirical study of Taiwanese FDI shows that country specific experience is important for entry into China but not into USA. On the other hand, general international experience has the similar effect in both countries. (48)

Toward an Integrated Theory of Multinational Evolution The Evidence of Chinese Multinational Enterprises as Latecomers

Peter Ping Li

College of Business Administration California State University, Stainslaus

This paper seeks to address two questions: (1) how much can we apply the extant MNE theories to the MNE latecomers from the developing countries; and (2) how much can the new evidence of the MNE latecomers from the developing countries offer to modify and enhance the extant MNE theories. The evidence of three comparative longitudinal cases from China suggests that the extant MNE theories require modifications and enhancements. (49)

The Internationalisation of Chinese Enterprises

The Analysis of the UK Case

Ling Liu The School of Management and Economics

The University of Edinburgh

Ying Tian

The School of Management and Economics The University of Edinburgh

The rapid increase of Chinese outward direct investment has been an outstanding phenomenon of recent years. More recently, Chinese enterprises, as late-comers, engaging in M&A activities in developed markets have drawn considerable attention and have presented a big challenge to conventional theory of internationalisation, which tends to assume that firms internationalise to exploit competitive advantages and prefer to invest in near ‘psychic distance’ markets. This paper examines the patterns of and the motives for internationalisation by Chinese enterprises with a particular focus on China’s investment in the UK. A survey of these enterprises indicates that driven by market and efficiency seeking, Chinese MNEs are investing in the targeted country in order to acquire competitive advantages. The empirical study also shows that in their infancy as foreign investors, Chinese MNEs are setting up subsidiaries as the main entry mode in the UK. (50)

Unmasking Inter-Unit Knowledge Flows

Kristiina Mäkelä Department of Management and Organization

Swedish School of Economics and Business Administration

Ulf Andersson Uppsala University

Tomi Seppälä

Helsinki School of Economics In the recent years, we have learned a great deal about knowledge flows within the Multinational Corporation (MNC). Previous research has established, for example, that the effectiveness of knowledge exchange is influenced by both the characteristics of knowledge and properties of the sender, receiver and the transmission channel. In addition, we have a good understanding of the facilitators and barriers of knowledge transfer between two organizational units. However, recent research has observed that knowledge is not always shared evenly throughout the corporation, but some units share knowledge regularly whereas others may become alienated from important knowledge exchanges. Indeed, Monteiro, Arvidsson and Birkinshaw (2004) maintain that there may be important and underplayed social and behavioral reasons influencing this unevenness. We suggest that disaggregating inter-unit knowledge flows into their constituent parts, namely interpersonal interaction between managers across the different MNC units, may bring us significant insight into the effectiveness of intra-company knowledge flows over and above what has been found in the aggregate unit-level of analysis. After all, as Brass et al. (2005) argue, “[w]hen two individuals interact, they not only represent an interpersonal tie, but they also represent the groups of which they are members. Thus, inter-unit ties are often a function of interpersonal ties, and the centralities of units are a function of their members’ connections.” Consequently, it could be argued that knowledge flows between units are in essence aggregates of interpersonal knowledge exchanges taking place in the context of the daily life of the MNC - whether it is meetings, telephone calls, e-mails or chance encounters. In fact, interpersonal knowledge sharing is increasingly being recognized as a fundamental means of how knowledge is mobilized within MNCs; however, we know relatively little of what is driving knowledge sharing in interpersonal level inter-unit interactions. This paper addresses this research gap. We argue that the characteristics of the relationship between interaction partners are central in determining the extent of knowledge sharing within the dyad. Applying a fixed term regression model on 461 interpersonal cross-border relationships, combined with confirmatory Lisrel analysis, we find that the structural, relational and cognitive dimensions of social capital embedded in interpersonal cross-border relationships are central determinants of the effectiveness of knowledge sharing within them. We also test the influence of geographical distance, cultural distance and shared language, and find that relationship level characteristics transcend them at the interpersonal level. Finally, we maintain that the interpersonal level perspective enables us to focus on significant aspects of inter-unit knowledge exchange, such as the importance of social factors over cultural differences, or the impact of a shared cognitive ground, which have been masked in aggregate level studies. (51)

Are Location Specific Variables An Influencer On Choice Of Mode Of Entry? A Study Of MNC FMCG Companies In India

Sundeep Manghat

Imperial College London

Dunning’s eclectic paradigm has dominated thinking about foreign market entry for many years. This suggests that the choice of mode of entry into a country is determined by the configuration of the Ownership-specific advantages (O), the Location-specific variables of the host country (L) and the Internalisation incentive advantages (I) available to the firms or industry. This paper presents an assessment of the importance of location-specific variables in the Indian context in influencing the mode of entry of MNC FMCG companies into India. Previous studies on location variables have focussed on market size and growth and have found location variables to be an important determinant of overseas investment (Agarwal and Ramaswami 1992). Our review of literature has

shown a lack of available research on India, and studies on the FMCG industry within the context of market entry and the OLI framework, and a lacuna on the topic of location and distribution. Our paper seeks to initiate research to fill in these gaps and also investigate the importance of location specific variables in the OLI framework India has a geographical area of 3.3 million sq. km. and is the largest democracy in world, with a population in excess of 1 billion with half of the population below 25 years. There is a consuming class of around 300 million, but around 35% of the population have incomes below the poverty line. The spending on food and consumer products, as a share of income is around 40%. The reform and liberalisation of the Indian economy which started in 1991 has increased pace. Over the last decade Indian GDP has been growing at an average rate of 6% (PricewaterhouseCoopers 2005) and has grown from INR 19,368 billion (1999-2000) to INR 27,600 billion (2003-04) (Businessworld 2006). India is expected to grow to become the third largest economy in the world by within the next 50 years (Wilson and Purushothaman 2003). FDI inflows into India were only $5 billion (2004) compared to $61 billion (2004) for China (UNCTAD 2005). Consumption is widely spread throughout the sub-continent. India has more than 12 million retail outlets (McKinsey & Company 2000)stocking FMCG products and therefore distribution is a critical factor for FMCG companies. Physical infrastructure, power and government regulation need to be improved drastically. These characteristics therefore present both opportunities and challenges to any organisation entering India. Qualitative research was conducted in two stages from October 2005 and August 2006 in the UK and India. The first stage was exploratory in nature and involved unstructured interviews with market informants to understand the Indian market. Interviewees included management consultants (Ernst and Young, PwC, IBM business consulting, BCG), market research organisations (AC Nielsen, KSA), industry associations (CII, Biscuit Cake Chocolate& Confectionery Association) retailers (Tesco, and ASDA/Wal-Mart in the UK, Food world, Pantaloon, Trinethra, Reliance retail in India) and representatives of the Government of India. The second stage involved preparation of formal structured questionnaires, based on Dunning’s list of location factors and insight garnered from the first stage, and administered in face-to-face interviews with a purposive sample of CEOs or CFOs of 13 MNC FMCG companies operating in India (Fonterra, Heinz, Wrigley, Lotte, Cookie Man, United Biscuits, Henkel, PepsiCo Frito Lay, Perfetti Van Melle, Nivea India, Sara Lee, Mars and P&G). The companies surveyed are from the UK, Germany, Italy, Australia, New Zealand, South Korea, and America. The industry sectors represented include detergents, dairy products, snacks, biscuits, confectionery, personal products and household products. Unlike some major multinationals, each of these companies have entered India post-liberalisation and therefore face similar market conditions. The preliminary results of our research have led us to believe that location factors are important to all companies in the survey but cannot explain the choice of mode of entry. Instead these factors seem to contribute more towards the decision to enter than the actual mode of entry. All the firms ranked the location factors as important (at least 3 on a scale of 1-5, where 1 being least important and 5 being most important) but have adopted instead various forms of entry ranging from exports to green field operations to acquisitions to joint ventures to incremental growth from exports to FDI to licensing to subcontracting. We feel therefore in the case of FMCG companies entering the Indian market the location variable in the OLI framework provides guidelines, or a checklist of factors to be considered before deciding upon entry but does not influence the choice of mode of entry. The latter is likely to be strongly influenced by idiosyncratic characteristics and strategies of firms wishing to enter. The relation and ranking of location variables, ownership advantages and internalisation incentive advantages on choice of entry mode has to be explored in greater detail by future research. The OLI model can however provide a starting point in the research but whether it will explain the choice of mode of entry in this particular context is yet to be investigated. (52)

Multinational Enterprise Strategic Response to Violent Conflict A Typology of Intervention Strategies

Jennifer Oetzel

Kogod School of Business American University, Washington DC

Kathleen A. Getz

Kogod School of Business American University, Washington DC

Stephen Ladek

International Solutions Group, Jordan The purpose of this paper is to examine how multinational enterprises and their subsidiaries (MNEs) can respond to violent conflict in the host countries where they operate, and how the characteristics of the conflict affect the types of intervention strategies that MNEs may adopt. Drawing on insights from the research on violent conflict and the risk it poses to the firm, we develop a framework and propositions that provide guidance to MNEs confronting violent conflict with respect to existing projects or facilities. (53)

Internationalization from a Small Domestic Base An Empirical Analysis of Foreign Direct Investments of Icelandic Companies

Ásta Dís Óladóttir

Department of International Economics and Management Copenhagen Business School

The internationalization process of companies has been the topic of widespread research efforts over the past 40 years, during which several theoretical approaches have emerged. New empirical studies of the internationalization process have challenged many findings in the traditional literature. The Uppsala model, for example, demonstrates that firms internationalize in incremental stages. More recent theories (i.e. Born global, International new ventures, Global startups, International firms, and Committed internationalist) assert that firms engage in international activities soon after their establishment. The overall objective of this paper is to describe and to gain a deeper understanding of the internationalization processes of firms from a small domestic base. The purpose is to demonstrate how Icelandic companies have invested abroad through foreign direct investments. This paper questions to what extent Icelandic firms have internationalized according to the commonly accepted stage theories; it also questions to what extent Icelandic firms have internationalized according to more recent theories.This paper will also investigate and attempt to explain the dramatic increase in foreign direct investment of Icelandic firms since 2000. Is there something unique about the Internationalization of Icelandic firms? Do Icelandic firms have something that others do not? (54)

Internationalisation and Regionalisation Over Time

Tom Osegowitsch University of Melbourne

André Sammartino

University of Melbourne In this paper we revisit the empirical findings of Rugman and coauthors concerning the overwhelming home-regionalisation among the world’s largest firms. Using a longitudinal research design and continuous measures of internationalisation we discover a number of secular trends. Among other, we find that sales growth beyond the home region is considerably faster than sales growth within the home region. We use our empirical results to critique and augment existing regionalisation theory. In particular, we raise doubts about the sharp distinction in the literature between expansion in the home region and expansion in host regions. It would seem that firms expand simultaneously within and outside their home region, targeting individual countries rather than entire regions. (55)

Creating the World in America’s Own Image? Private Equity, Corporate Governance

and “Flying-Geese” Theory of Financial Development

Terutomo Ozawa Department of Economics Colorado State University

Private-equity firms, especially for leveraged buyout funds, have suddenly arisen as the vanguards of global financial capitalism. They buy, transform, and sell companies. It is a new way of creating value for investors by motivating management to run more focused businesses for better corporate governance and by incurring debt to engender higher-risk, higher-return opportunities through creative financial engineering. This study explores the nature of private equity as a form of financial innovation (originated in the U.S.), and introduces a new analytical framework that can shed light on financial development in general—and the origination of private equity in particular—and the spread of such innovation to the rest of the world as a flow of capital in that particular format. (56)

Export Intensity, Innovation and Firm Size New Empirical Evidence in a Science Based Industry

José Pla-Barber

Department of Management Juan José Renau Piqueras

University of Valencia

Joaquín Alegre Department of Management

Juan José Renau Piqueras University of Valencia

The link between innovation, export intensity and firm size has been extensively examined in the literature. However, there is still an open debate on the kind of link that is to be expected among these three variables. As a matter of fact, previous empirical studies exhibit contradictory findings. We argue that this variability in previous

studies results is due to the choice of the indicators to measure innovation and the features of the industry. Therefore, the aim of this paper is to contribute to a better understanding of the relationship between export intensity, innovation and size focusing in a particular technological setting: a science-based industry. We will try to enrich the knowledge of the export behaviour of firms in a young, science- based industry such as the biotechnology industry. From a theoretical point of view, recent research has suggested that traditional theories of internationalization may not account for the special circumstances faced by firms in a science- based industry (Preece, Miles, & Baetz, 1998). Rather that evolving through a series of international stages, as is thought to be the case for many firms (Johanson & Vahlne, 1977), science-based firms are likely to encounter international pressures much earlier in their existence. In this sense, the biotech industry is especially interesting due to its specific global nature: the marketing of biotech products and services, the competition in the sector and the sources fuelling the biotech industry are international (i.e. finance, knowledge, human resources, legal advice, etc.). Furthermore, the international community closely scrutinise the scientific or industrial developments in biotechnology (Gurau & Ranchhod, 2007). Moreover, the demand for policies to encourage exports and innovation raises the need for further empirical analyses that clarify the relationships between exports, innovation and size since previous research shows some contradictory findings. Additional understanding needs to be developed, so that scholars provide policy-makers with some more reliable clues. (57)

Foreign Acquisitions by Chinese Firms: Theoretical Implications

Huaichuan Rui Brunel Business School

Since 2004, Chinese firms have started at a great pace to acquire well-known firms worldwide. This has aroused worldwide attention and even speculation and tension in strategic industries such as energy. In this paper, we focus on three prominent Chinese acquiring firms as illustrative cases to explicit the features of Chinese firms in the process of international expansion. These cases suggest that Chinese firms’ internationalization is not absolutely congruent with both conventional wisdom established in the international business literature, and the modern version of internationalization theory based on third world multinationals (MNEs) or emerging markets (EM). On the one hand, the Chinese MNEs we studied indeed seek to acquire advantages from their internationalization activities, which firs reasonably well with the modern version MNE theories. On the other hand, while modern version MNE theories emphasize the later comer MNEs’ internationalization are mainly to explore competitive advantage, our findings provide substantially new evidence that the Chinese MNEs do have various competitive advantages to exploit. This indicates the still validity of applying OLI model to the Chinese cases. (58)

Social Networks and Rapid Internationalization of INVs

Viveca Sasi Center for International Business Research

Helsinki School of Economics

Pia Arenius Turku School of Economics, Finland

This paper combines existing knowledge about social networks and social capital in the international context with the network perspective on internationalization. We propose that the social ties explain the rapid internationalization of new firms. In the empirical part of this paper we review existing work on rapidly internationalizing firms and find that relationships enable entering the international markets, but may become a liability to international growth. Only those firms that manage to complete the transition from dyadic relationships to multilateral network relationships achieve significant international growth. (59)

Foreign Subsidiaries Life Cycle Centers of Excellence versus Divestment

Vitor Corado Simões

CEDE Instituto Superior de Economia e Gestão, Lisbon (60)

Implementation of a Global Employment Company: Pros and Cons

Robyn Swinehart Rockwell Collins Inc

A global employment company (GEC), is typically a shell branch office or subsidiary of a multi-national corporation used to house their expatriate employees. A GEC can either be a domestic or an off-shore establishment, depending on the needs of the company and the make up of their expatriate employee population. The main reason for establishing a GEC is for the avoidance of permanent establishment issues arising in foreign countries,

other tax and legal issues, and for the containment and management of expatriation costs. This paper will address the issues surrounding the decision to establish a global employment company with all pertinent data considered for each decision point encountered. (61)

Resources and Institutions Driving Growth Directions of Business Groups

Danchi Tan Department of International Business National Chengchi University, Taiwan

Klaus E Meyer

Department of Management University of Reading Business School

Organizations face trade-offs when designing growth strategies. With limited resources, managers have to decide in which type of business they want to deploy their resources. We integrate the Penrosian theory of the growth of the firm with institutional perspectives to analyze when business groups expand in different product areas, and when they expand abroad. Our empirical results support our propositions concerning the resource to growth relationships. Business groups with institutionally embedded resources, such as managerial ties to government, tend to pursue domestic product diversification. On the other hand, business groups with non-location bound resources have higher degrees of internationalization. (62)

Leadership, National Culture and Performance Management in The Chinese Software Industry

Denise Tsang

Department of Management University of Reading Business School

A number of indigenous software firms have grown rapidly across major Chinese cities such as Beijing, Shanghai and Shenzhen during the past decade, creating a new generation of high tech entrepreneurs dominating the country’s richest list. This paper tries to unearth the performance management among these knowledge-intensive firms, which are owned and led by their founders; it will also highlight the unique characteristics of performance management that has emerged from a Confucian culture shaped by the socio-economic model in post-second world war China. The basic tenet of the paper is that despite prevailing international best practice of performance management in the Chinese software industry, the success of indigenous firms is associated with entrepreneurial leaders who align their firms’ performance management with the core cultural value of collectivism. (63)

How to Turn Bankrupt Businesses Around Lessons from a Third World Multinational in Transition Economies

Liviu Voinea

Group of Applied Economics, Bucharest This paper deals with the recent surge of the British-Indian empire Mittal in the steel industry. The rise of this third-world multinational was built upon acquisitions in emerging and transition economies, including Poland, Czech Republic, Kazahstan, Romania, Ukraine, Bosnia Hertzegovina, Serbia Montenegro, Croatia. This paper compares between acquisition practice in some of these economies, and explains the success of Mittal Steel in turning around the performance of former bankrupt SOEs. We also present a case study of Mittal Steel, in a cross-country perspective. It finds that OLI theoretical framework can fit the experience of LNM. The paper blends social-economic analysis with management and marketing lessons and it is representative for a rara avis in transition economies: successful privatizations. However, the paper is not one facet only: controversial facts are also discussed, with a focus on the privatization of SIDEX (Romania) to LNM.

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Varieties of Capitalism and Varieties of Firm

James Walker Department of Management

University of Reading Business School

G. T. Wood Department of Economics

University of Reading Business School

Chris Brewster University of Reading Business School

The varieties of capitalism literature suggests that specific national economies are likely to be associated with specific sets of firm level practices, ensuring the continuation of distinct national varieties of capitalism. Regulationist critics point to the temporary and inherently instable nature of any specific mode of regulation; the effects of institutions are likely to be uneven and temporary, potentially making for a greater diversity in firm practices at specific times, even if a limited number of systemic archetypes are likely to predominate. Based on large scale survey evidence, this paper explores the extent to which several distinct and viable varieties of firm may coexist within specific varieties of capitalism, whether specific varieties of capitalism are associated with a greater or lesser degree of diversity in firm level practices, and, whether, over time, there is a global pressure towards a greater diversity in practice.

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The Integration of Personal Values, Emotional Intelligence and Job Performance A Focus on Ethnicity Issues in Malaysia

Dahlia Zawawi

Department of Management University of Reading Business School

This paper analyses the relationship between values, emotional intelligence and job performance among the Malays, Chinese, and Indians. Since it was one of the pioneer studies conducted on the employees in Malaysia, data collection were conducted in stages to enhance its contribution. Preliminary interviews and round table discussion were adopted to further confirm the logic of the framework specifically the link between the variables. The paper has proven that relationships exist between values, and job performance; and emotional intelligence and job performance although the degree varies. (66)

An Investigation of the Multinational Corporations’ International Transfer Pricing Practices in Developing Countries The case of China - review of theoretical and empirical literature

Kamil Zbychorski

Centre for International Business University of Leeds Business School

This paper will contribute to the theory and empirical knowledge of multinational firms and international business through investigating transfer pricing methods and motivations adopted by multinational corporations operating in mainland China (hereafter China). Previous studies analyzing ITP issues are mainly focused on developed countries such as the USA, United Kingdom, Canada and Japan. A very limited number of studies focused on developing countries, while empirical research focusing on China is superficial, being just at the initial stage. The Chinese phenomenon is challenging common transfer pricing theories. Multinational corporations find it difficult to implement appropriate solutions to meet new transfer pricing challenges in China. The aim of this paper is to light up the issues raised above, particularly explain what transfer pricing strategies are adopted by MNEs operating in China, and the nature and frequency of intra-company cross border transactions between MNEs affiliates operating in China and other country group members. Additionally, we also try to find out which transfer pricing methods are used by MNEs operating in China for determining intercompany prices for tangible assets, intangible property and services transactions. We also try to find out what is the level of importance of selected variables bearing on international transfer pricing choices in China. (67)

Managerial Teamwork Perceptions Case Finland and Baltic States

Päivi Käri Zein

Center for International Business Research Helsinki School of Economics

The purpose of this article is to focus on the development of top managerial teamwork (TMT) in cross-border post-acquisition integration in a previously hierarchical, post-soviet environment. The research is focusing on difficulties experienced in teamwork context in this environment. Due to internationalization of business through merger & acquisitions (MA’s) the use of nationally diverse teams has increased rapidly. This paper deals with the cross-cultural managerial teamwork –concept in transition societies, namely the Baltic states. The teamwork development process is studied in a Finnish-Baltic M&A integration, and various aspects and factors affecting teamwork are presented. Empirical findings are presented. The argument is that even the GNP and PPP are growing rapidly, the peoples’ mindset are not doing the same, and the post-soviet mentality is hindering the fluid and flexible managerial teamwork in many ways.

TRACK 4

CONFLICTS IN INTERNATIONAL BUSINESS REGULATION

(68) Corporate Income Taxation in CEECs

and the Preconditions for Corporate Income Tax Competition

Christian Bellak Department of Economics

Vienna University of Economics and Business Administration

Markus Leibrecht1 Department of Economics

Vienna University of Economics and Business Administration MNEs attribute advantages to “tax competition” (e.g. playing off on government against another) as well as to its alternative “tax coordination” (e.g. due to possibly lower compliance costs). This contribution examines first the likelihood of corporate income tax competition for Multinational Enterprises (MNEs) in an enlarged Europe. We first provide a definition of corporate income tax competition and derive preconditions for the existence of tax competition from this definition. The four preconditions are (i) the mobility of firms is technically possible and MNEs make use of it; (ii) independent governments use the tax instrument actively; (iii) using the tax instrument is explicitly motivated by attracting mobile bases or not loosing them; and (iv) taxes are a significant determinant of international investment decisions. We conclude that the four preconditions are indeed fulfilled and corporate income tax competition is therefore a likely scenario in an enlarged Europe. The second aim of this contribution is to answer the questions whether there should be scope for national corporate income tax policy from an economic point of view and whether there will be scope for national tax policy in the future. The answer to the first part of the question is derived on the basis of the theoretically predicted and empirically simulated economic effects of corporate income tax competition and tax coordination. The second part of the question is answered based on the Commission’s position towards corporate income tax coordination as shown in official EU documents. We conclude that there should and will be scope for national tax policy in the enlarged EU.

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Gulf Business Model: Other Invisible Hands

Jeremy Cripps American University of Kuwait

In the “Ihya Ulum al-Din” Abu Hamid Ibn Al-Ghazali previewed the natural spontaneous order of economy which some seven hundred years later, Adam Smith was to capture for western economists with the phrase “the invisible hand.” Ghazali’s 12th century analysis of the division of labor leading to specialization in some 25 different processes needed to make a needle also previewed the 10 man multi-process production process in Smith’s famous pin-factory. Ghazali also wrote at length on the institution of Hisbah. Hisbah might best be described as an early form of security exchange commission with its principal function of identifying improper market interference and unethical practices such as fraud and usury. Of particular interest is Ghazali’s writing in Kitab Nasihat al Muluk on the special role of government in an economy. Ghazali quite rightly sees no necessary linkage between the division of labor and the concept of equilibrium. In Kitab Ghazali warns rulers of “the abuse of authority, pride, surrender to flattery, and deceitful religious scholars.” This paper first notes reasons why the division of labor, the invisible hand, ought not to be linked with the notion of market equilibrium. In the process the reader will note how the counsel Al Ghazali gave to the rulers of states has too often been ignored in western economies. The paper then continues to identify how, in the Gulf, too often “the principles of justice and equitable treatment” which should operate in an open market have been corrupted and so have not prioritized individual and social needs. The paper identifies specific examples of the (albeit innocent) abuse of authority by government in the Gulf which have corrupted the market and most particularly how the abuse of government threatens the social security of the Gulf’s youngest citizens.

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Globalization and its Impact on Development: Policy Issues Pervez N Ghauri Manchester Business School, University of Manchester

Over the past couple of decades governments have been persuaded that adoption of liberal and pro-multinational enterprises (MNEs) policies are generally beneficial for their local economies. In addition, globalization of the world economy, pressures from international institutions such as World Trade Organisation (WTO) and the World bank and increasing bargaining power of MNEs have had weakening effect on the bargaining power of governments

(Yamin and Ghauri 2004; Ghauri and Buckley 2002; Dunnning 2000; Dunning and Narula 1999). On the other hand, Buckley and Casson (1998) and Ghauri (1999) suggest that internal and external pressures on multinational enterprises in the 1990s are causing new challenges for MNEs and are producing a new strategic imperative – flexibility. The search for flexibility is a reaction to external volatility (e.g. due to globalization) and to attempts to reduce monopolistic ‘pinch-points’ (e.g. single supply sources, tie-in to particular locations). The search for flexibility leads to (vertical) disintegration and foreign direct investments being seen as ‘real options’. This results in a new ownership strategy with networks of loose relationships on the one extreme and a new locational strategy based on mergers and acquisitions (M&As) on the other. In most cases however, operations where central activities (e.g. R & D and marketing) are augmented by decentralised activities (e.g. manufacturing and distribution) is becoming the name of the game. These two strategies can be combined so that wholly owned central facilities such as finance, marketing and R & D at head offices are combined with dispersed market based activities such as manufacturing, distribution and warehousing that are performed at different but optimal locations. The concept of ‘global factory’ suggested by Buckely and Ghauri (2004), is already a reality, where some locations specialise in production of a particular product and can manufacture goods for all or most of the producers in that sector. Even in this case however, activities with high value added industries/segments are finding their place in the developed world/regions such as automobiles in Austria, while activities in low value added industries are being located in the developing world/regions such as shoes and textiles in India and China. The ability of multinational firms to appropriate rent by adjusting their location and foreign market servicing strategies, partly in response to globalization and partly in response to national governmental policies, enhances their flexibility and their bargaining power (Ghauri and Buckley 2002). Buckley (1996) shows that the range of policies open to multinational firms make broad-brush policies untenable, because in each policy cell (exporting, licensing, foreign direct investment), government policies will have both positive and negative effects. Targeted policies, moreover, are difficult to design, given the dynamics of the firm’s evolving foreign market servicing strategies and the links between the different elements in the firm’s global value chains. The result of these strategies is to create uncertainty for the host countries. Locational policies create difficulties in that multinationals are becoming more ‘footloose’ and are liable to move ‘offshore plants’ in response to changing incentives, demand and supply conditions. The search for flexibility also means that multinationals may engineer internal competition between competing plants within the same firm with weaker plants being winnowed out by failures in internal tendering. The arguments for policy intervention are weakening. Krugman (1987), in reviewing the arguments for interventionist policies based on externalities and strategic trade considerations, concluded that the optimal policy set is so sensitive to technological and behavioural parameters, that the results of intervention are uncertain, even in areas where externality and monopoly arguments are strong. Further, the information available to government policy makers is likely to be partial, out-of-date and biased (not in the least by representations on the part of the rent-seekers). These extreme forms of liberalization with their advocacy for a minimal state are creating disenchantment with globalization and giving birth to a movement for global civil rights demanding state as well as corporate social responsibility (Yamin and Ghauri 2004; Stiglitz 2002). (71)

General Agreement on Investment: Departure from the Investment Agreement Patchwork.

Philippe Gugler

University Of Fribourg, Switzerland

Vladimir Tomsik World Trade Institute, Berne, Switzerland

Comprehensive multilateral rules governing international economics are currently limited to trade issues. Even though the WTO agreements contain major loopholes, multilateral rules on trade constitutes a broad umbrella of rights and obligation under which regional, plurilateral and bilateral agreements as well as national laws all regulate trade issues. Although foreign direct investment (FDI) has increased significantly over the last two decades, outpacing the already significant expansion of trade during the same period (UNCTAD, 2005, p. 14.), the current international legal framework for FDI is highly fragmented. The current framework consists of a wide variety of national and international rules and principles that differ in form, strength, and coverage. The result is an increasingly complex international setting for international investment in which governments must ensure consistency between differing sets of obligations.

One of the striking characteristics of the present situation in investment rules is the diversity of approaches and legal architectures. In many cases, countries are simultaneously parties to bilateral, regional, plurilateral, and multilateral agreements. These agreements can be binding and non-binding, with and without commitments on admission, with and without provisions on corporate behaviour, use top-down and bottom-up architectures, and be part of or outside the context of broader trade agreements. While this diversity of approaches does raise important issues of policy coherence, it also reflects the variety of ways in which participating countries have managed to find a balance of advantage and mutual benefits in rule-making in this area. It is seldom easy for a government to relinquish some of the discretion it has in particular policy area. But governments have been persuaded of the benefits of doing just that in the area of trade policies. What they have given up in policy discretion by accepting WTO rules and disciplines is more than compensated by the increased predictability and stability of trade policies. Every country gains from the stimulus which this, along with trade liberalization, gives to trade and trade-related investment. An opportunity to bind liberalized FDI

rules would greatly enhance their credibility and value in the eyes of foreign investors. It would also make the FDI policies of other countries much more predictable, for example as regards the use of incentives in competing to attract FDI. Enhanced credibility of one’s own FDI regime would be especially beneficial to less developed countries competing against the wealthy, developed countries for FDI. Given the increasing inseparability of economic developments, as well as of policy formulation, in these two areas, it is not surprising that many of the current issues arising out of the interlinkages between trade and FDI have to do with policy coherence. There is, first of all, the problem of rule coherence among agreements and instruments dealing with investment at various levels ranging from the national to the multilateral. The existence of a large number of overlapping legal instruments and initiatives in the investment area creates risks of confusion, uncertainties, and legal conflicts, especially where the agreements in question follow different architectures. There is also the issue of coherence in efforts to further develop international cooperation in the areas of trade and investment. Clearly, the interrelation between these policy areas should be handled in a way that does not compartmentalize policy areas that are, in reality, becoming increasingly intertwined. A lack of rule and policy coherence poses a danger to security and predictability, which are basic goals of trade and investment agreements. Foreign direct investment, like trade, is particularly sensitive to uncertainty and instability. Indeed, the long-term commitment that an investing company makes, through the transfer of resources and establishment of commercial operations in another country, makes it particularly sensitive to risk, not only to the investment itself but also to the trade flows on which the viability of the investment depends. The paper surveys and explores all levels of the international investment agreements (bilateral, regional, plurilateral, and multilateral) in order to present and discuss the current patchwork in the international investment regulation framework. We also discuss whether a General Agreement on Investment could make a departure from this “spaghetti bowl” of international investment arrangements. (72)

The FDI Effect on the Economic Growth within the Context of the Investment Development Path

The Case Of Latin American Countries

Juan José Durán Herrera Centro Internacional Carlos V

Universidad Autónoma de Madrid

Fernando Úbeda Mellina Centro Internacional Carlos V

Universidad Autónoma de Madrid In order to analyze the relationship between foreign direct investment and economic development in the less developed countries, we propose to utilize the investment development path (IDP) theory to reduce the heterogeneity of these countries. In the case of Latin American Countries, using data for the period 1970-2004, we observe a casual relationship between economic growth and productivity and inflow FDI for the two extreme cases: most advanced countries (emerging economies) and the least developed countries (the more underdeveloped countries). (73)

Multinational Corporations and Politics in the Developing World Nathan Jensen

Department of Political Science Washington University in St. Louis

The existing literature linking political institutions and the investments of multinational corporations has focused on how high levels of political risk deter investors from entering into some emerging markets. In this paper I argue that multinationals have multiple tools to manage risks rather than avoid them. Specifically, I focus how multinationals tailor their operations to both minimize political risks and to maximize political influence. Drawing on a confidential data set covering the complete universe of U.S. foreign direct investments abroad, I find that U.S. multinationals restrict the size of their operations in authoritarian regimes relative to democratic regimes in order to minimize the amount of assets at risk. I also find preliminary evidence for firms attempting to increase their influence by aligning their operations with the preferences of incumbent governments. More specifically, firms increase the number of workers they employ when left-of-center governments come to power. (74)

A Resource-based View of Firms’ Prosecution of Trade Remedy Cases in the United States of America

Johan Lindeque

School of Management University of Bath

This study addresses the role of firms in the prosecution of antidumping and countervailing duty cases in the United States of America. A business strategy perspective of corporate political activity is adopted to identify key resources and capabilities for prosecuting these cases. Data for the study was collected through 45 semi-

structured interviews held between November 2005 and July 2006. Participants included trade attorneys, economists, academics, industry representatives and other professionals practicing in the area of antidumping and countervailing duty law in Washington DC. Antidumping and countervailing duty cases are found to require significant commitments of both tangible and intangible resources from both inside and outside the firm. The prosecution of these cases by firms is shown to be more nuanced than suggested by previous research. (75)

When Foreign Direct Investment Generate Positive Spillovers A Meta Analysis

Klaus Meyer

Department of Management University of Reading Business School

Evis Sinani

Center for East European Studies Copenhagen Business School

The extensive empirical literature analyzing productivity spillovers from foreign direct investment to local firms provides inconclusive results. Some studies find that foreign presence has a positive impact on the productivity of domestic firms, while others find no evidence or a negative effect. Differences in the results may be attributable to contexts, such as the structural differences between developed, developing and transition economies. However, results may also vary due to different empirical methodologies, notably the use of aggregate versus firm-level data and cross-section versus panel data analysis. We conduct a meta-analysis to investigate reasons for these conflicting results, and provide a revised interpretation of earlier research and its policy implications, and new priorities for future research. Our analysis suggests that the hypothesized spillovers are not confirmed for industrialized countries in the 1990s. Transition economies may experience spillovers, but these have been declining in recent years. (76)

The Reform of EU Merger Control: Adopting the US Approach?

Eleanor J Morgan School of Management

University of Bath The EU merger control, first introduced in September 1990, has become a significant player on the world stage alongside the much longer standing merger control in the US. In 2006, for example, a record 356 mergers were notified under the EU provisions and the international scope of many of the larger deals means that it is not uncommon for larger mergers to need clearance from both authorities. A new EC Merger Control Regulation (ECMR) came into operation on 1 May 2004 after a lengthy revision process which began with the publication of a Green Paper in December 2001. The resulting reforms marked the most significant overhaul of the merger regime since merger control legislation was first introduced at EU level. The substantive aspects of the original ECMR were revised for the first time and these revisions were accompanied by various procedural and jurisdictional changes. There were also some important non-legislative developments. This paper, a revised version of Morgan (2006), examines the main recent developments in the EU system of merger control in the light of the new legislative provisions, the development of ‘soft law’ and the analysis of decisions in particular cases. In so doing, it provides evidence of the extent to which the treatment of mergers in the EU is moving nearer to the US approach after some high profile conflicts with the US authorities under the previous merger regime, notably in Boeing McDonnell Douglas and GE/Honeywell. The paper first outlines the key features of the ECMR as initially enacted. It then provides a very brief overview of the merger control record prior to the recent changes and points to some of the pressures for reform. The reforms are examined against this background, with most attention being devoted to new developments in merger appraisal. The discussion of appraisal focuses on the assessment of horizontal mergers because no guidelines have yet been published on the assessment of vertical and conglomerate mergers, although the European Commission (the ‘Commission’) has stated an intention to do so in future. The paper also examines the main procedural changes and internal reforms before reflecting on the likely significance of these new developments and the extent of convergence with the approach adopted in the US. This latter aspect is planned to be the focus of the poster presentation.

Competition policy is an increasingly significant area where the occasional high profile divergence has featured between the EU and US. The EU-US dispute over the EU's ban on the purchase of Honeywell by General Electric (GE) represented an instance of the exercise of extraterritorial competition policy towards two US based multinational firms on the part of the EU. The controversy surrounding the case was reminiscent of the transatlantic rift in 1997 when the Commission threatened to block Boeing’s purchase of McDonnell-Douglas. While the Boeing merger crisis was resolved after considerable diplomatic brinkmanship with modifications to satisfy the EU, the GE deal was banned by the European authorities amid acrimony that persisted for some time. The EU and US authorities came to diametrically opposed views about the likely impact of GE/Honeywell even though it affected world markets so there was no difference in the geographic scope of their analyses or the products investigated. The split was even more notable in view of the increased efforts to cooperate on merger cases by the US and EU authorities since Boeing-McDonnell Douglas. The Commission's investigation of this complex case appears to have been undermined

by its relative autonomy, combined with procedures, processes and a lack of resources that left it vulnerable to inadequate analysis. Failures in communication between US and EU officials were not a major problem but rather the limited and flawed assessment by Brussels which the EU system allowed (see Morgan and McGuire, 2004). The controversy over GE-Honeywell, which occurred as the December 2001 Green Paper on merger reform was being drafted, together with the three subsequent high profile Court judgements against the Commission in late 2002, were a 'wake up call' to the Commission to find ways of increasing the rigour of its economic analysis and of enhancing transparency and accountability in merger control; they paved the way for a much more thoroughgoing reform than originally envisaged. The following summary highlights a degree of convergence to US merger policy through the main changes to the general system of EU merger control, particularly the revised approach to appraising horizontal mergers. The new test for appraising mergers is the main substantive change introduced by the new ECMR. The original ‘dominance’ test was interpreted by the Court of First Instance as requiring first, a finding of dominance and second, that effective competition would be significantly impeded as a result. This contrasts with the US test which prohibits mergers that would substantially lessen competition (the SLC test). But rather than adopting the same standard, the EU retained dominance in the new wording as a particular case of its ‘substantial impediment to effective competition test’ (SIEC test). This means there is still the possibility of greater attention being paid to the structural effects of mergers in the EU. Merger guidelines have long been a feature of US merger policy and the changes to the EMCR were accompanied, for the first time, by Guidelines to the assessment of horizontal mergers. The EU Guidelines clarify the meaning of ‘collective dominance’ as a concept and show the avenues of investigation that will be followed in assessing the likelihood of coordinated behaviour which are not dissimilar to the US. The control of mergers is explicitly extended to cover non-coordinated effects in oligopoly and the framework for analysis provided in the Guidelines is applicable whether or not a merger creates a market leader, as in the US. The Guidelines introduce ‘safe harbour’ thresholds based on the Hirschmann- Herfindahl measure of concentration (HHI), used in the US for some time. These have been set slightly more liberally than in the US but, in practice, the median levels of HHI for unchallenged cases in the US were far higher than those set out in the EU Guidelines. Although HHIs give useful benchmarks, however, their superiority over other proxies for market power is no longer regarded as clear cut. The new Regulation retains the original wording dealing with efficiencies and has not adopted a Williamsonian efficiency ‘defence’. The new SEIC test and treatment in the Guidelines should encourage a more positive approach to possible efficiency savings and help to ensure they are explicitly treated. The merger review process in the EU is largely administrative with the Competition Directorate taking responsibility for which cases to examine in detail and providing the analysis; it is involved in all aspects of the decision with ratification by the Commission usually being a formality. In contrast, the American system is judicial, and an order from an independent judicial authority has to be obtained before banning a merger. The strong criticisms of economic assessment and practices have led to significant change in internal organisation and procedures within the EU’s administrative structure. DG Competition has been reorganised and there has been a relatively small (by US standards) but much needed increase in economic expertise to increase the rigour of the Commission’s analysis and prevent excessive reliance on submissions from interested parties. Peer review panels have been set up and a number of other new checks and balances introduced as well as some changes to the timetable to allow time for more detailed assessments (although many of these changes are discretionary and so it remains to be seen how far they will be implemented). The substantive reform of the Regulation and accompanying Guidelines are likely to bring the assessment of horizontal mergers, which account for the majority of transactions under the ECMR, more closely into line with the US approach. Whether this will be true of conglomerate mergers, where the EU has typically taken a more interventionist stance, remains to be seen when new guidelines on this type of merger are published. The adoption of a more cautious approach, more similar to the US, seems likely following recent Court judgements including the results of the appeals arising from GE/Honeywell. The reforms do not, however, address the fundamental question of the Commission’s combined role of judge, jury and prosecutor and the relatively slow judicial review process to which it is still subject. It will take time to see whether the changes, which bring many features of substantive appraisal closer to the US system, will be enough to restore the Commission’s credibility or whether more far reaching reform to the EU’s administrative system of merger control will be necessary in future.

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Location and R&D alliances in the European ICT industry

Rajneesh Narula

Department of Economics University of Reading Business School

Grazia D. Santangelo

Facoltà di Scienze Politiche Università degli Studi di Catania

This paper shows empirically that in an intra-industry oligopolistic scenario the location of a firm’s innovative activities plays an important role in determining its partner selection in R&D alliances. Such a role is mainly attributed to a strategic use of R&D alliances as a means to limit knowledge flows and protect competences, rather than to promote knowledge flows. By drawing on a novel dataset matching alliances and patent data for the European ICT industry, the econometric analysis shows that partners’ prior co-location (at both national and sub-

national regional level), previous ties and technological overlap matter in the choice of partner, while common nationality has a negative impact on alliance formation

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Foreign Direct Investment and Aid: Engines for Growth in Transition Economies?

Carmen Stoian Kent Business School, University of Kent

Fragkiskos Filippaios

Kent Business School, University of Kent The issue of economic growth and development has long been identified as a key component of the policy agenda. Most economic policies in developed, developing or transition economies aim to increase economic growth rates and consequently improve living standards. The current agenda of United Nations (UN) has at its core the enhancement of living standards, through upgrading basic infrastructure, widening participation in education and offering health services to inhabitants of developing countries. The title of this highly ambitious but at the same time crucially important project is the Millennium Goals. On the other hand, most international organisations established after the Second World War, have as one of their primary objectives the economic development and stabilisation of countries under development. The International Monetary Fund, the World Bank, or even organisations like the European Union, usually offer aid to countries in financial or other trouble. Within this context, where aid is usually coming from the international organisations upon the satisfaction of specific criteria, countries do also compete for other foreign capital flows. The majority of those flows represent foreign direct investment (FDI), steaming from multinational firms’ activities. FDI is related with specific investment motives and is determined by market forces rather than international organisations or international agendas. Both flows, i.e. aid and FDI, although determined in a completely different way, enhance economic growth, and mirror the efforts of the country towards building a more stable social and macroeconomic environment. There is, thus a clear relationship between economic growth, international aid and FDI. On the other hand, growth does indeed affect the FDI potential of a country, through the increase of the market size. This reinforces the market-seeking motivations of international investors. Growth also affects the level of international aid, as it might signal in the early stages of development the commitment of the country towards achieving economic stability. This in turn will facilitate international aid flows to the country under investigation. Finally, increased FDI flows are usually associated with higher levels of economic stability or at least the effort of a country to achieve it. It is beyond the scope of the paper to investigate the relationship between growth, international aid and FDI flows in the context of developing countries. This group, we believe is rather heterogeneous and different factors could affect the interrelationship in different regions of the world. This paper will focus on transition economies where the process of transition from a centrally planned to a market economy was implemented through a variety of paths and had a mixture of outcomes in terms of economic growth and development. With the fall of Communism, countries in Central and Eastern Europe have embarked upon a challenging process of democratisation and transition towards a market economy. With Communism failing to deliver, a main goal of the post-1989 period has been to improve the living standards for the population, to bring them closer to the much sought after Western European living standards. This would translate into high rates of economic growth leading to an increasing economic convergence with the European Union in terms of GDP per capita. Diminishing the income gap was seen as beneficial not only for the former centrally planned economies, but also for the European Union which could thus acquire increasingly strong economic partners. While setting up political and economic co-operation agreements with the successor states of the Soviet Union, the EU has offered the prospect of EU membership to several Central and Eastern European countries, ten of which joined the union in May 2004 and January 2007 respectively. Part of the EU’s strategy to assist the development of the European post-Communist economies has been encouraging institutional reforms, opening up trade, offering aid and enhancing foreign direct investment. To what extent are these factors likely to have contributed to economic growth in Central and Eastern Europe? In this paper we explore the role of multinational enterprises (MNEs) and of economic aid in enhancing growth in European post-communist economies. Given the financial crisis within the EU and the heated international debate over trade, not aid, we examine the relationship between aid and foreign investment in determining growth levels in post-communist European economies by using an Arrelano-Bond estimation technique. This is the first contribution of this paper. In tune with recent research, we also explore the extent to which institutional factors account for different patterns of FDI, growth and aid in European post-communist economies by using specific data on institutions. As FDI and aid are not exogenous to growth, we test the interplay between growth, FDI aid through a three-way system of simultaneous equations. We find that countries which have faced negative growth can firstly attract aid, leading onto economic growth and to an increase in FDI, which can in turn further enhance economic growth. This is the third contribution of this paper. We use a representative sub-sample of sixteen European post-communist economies some of which have joined the EU, are likely to join or have political and economic agreements with the Union. These countries are Albania, Belarus, Bulgaria, Croatia, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Moldova, Poland, Romania, Russia, Slovakia, Slovenia and Ukraine with observations for a period between 1990 and 2002. This decade includes most of the economic and political transition to date. Data is provided by the World Development Indicators (WDI), Vienna Institute of Economics (WIIW) and IRIS.

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Have We Reached A Policy ‘Tipping Point’? FDI in Developing And Transition Economies

Andrew Sumner

Institute of Development Studies, UK Received wisdom on FDI and development has recently been questioned. Various countries have taken measures less favourable to FDI, notably in natural resource sectors. Overall, the approach to FDI seems to have become more critical. Have we reached, or are we moving towards a ‘tipping point’ in FDI policy thinking? If so what are the drivers. This paper discusses emerging contemporary policy shifts in FDI and the role of policy narratives, actors/networks and context in tentative shaping those trends. (80)

Semper Eadem? Fifty Years Of Us-Malaysian Economic Relations

Shakila Yacob University of Malaya, Malaysia

The economic relationship between the US and Malaysia can generally be described as robust. This is epitomised through the steady rise of trade between the two nations and US foreign direct investment in Malaysia. The US has been Malaysia’s largest trading partner since 1997 and remains the country with the largest trade surplus with Malaysia. Conversely, Malaysia, at the end of 2006, was the US’s tenth largest trading partner globally and its largest trading partner in South East Asia. Trade figures up to November of 2006 indicate that US imports from Malaysia totalled US$ 33,390.3 million while U.S. exports to Malaysia totalled US$11,637.1 million (US Census Bureau, 2007). In terms of FDI, the US was ranked as Malaysia’s largest foreign investor from 1997 to 2002, falling to the third largest in 2003, although in actual terms FDI increased 42 percent from US$7.1 billion in 2003 to US$10 billion in 2005, as noted by US government’s Bureau of Economic Analysis (FDI Magazine, 2006). This was despite an overall drop in inward FDI into Malaysia by 14 percent in 2005, and contrary to the rise seen in all ASEAN countries (UNCTAD World Investment Report, 2006). The impact of US investment into Malaysia can be appreciated at many levels. US multinationals as of 2003 had a collective workforce totalling almost 120,000, resulting in a payout of US1.3 billion in salaries and benefits. In the same year, the service sector attracted US$7 billion worth of US investments (Fui K. Soong, 2004), significantly higher than US investments in the manufacturing sector which totalled US$278.7 million between the years 2001-2004 (Ministry of International Trade and Industry, 2005). US investment has diversified into many sectors such as semiconductor, manufacturing, oil and gas, the petrochemical industry, consumer goods, and, notably, the service sector. This paper begins by briefly examining the historical dimensions of US-Malaysia relations and then identifies the determinants or motivating factors for US FDI into colonial Malaya and post-colonial Malaysia. There follows an analysis of the impact of Malaysian government policies on US trade and FDI, with a particular focus on the effects of the NEP as well as the subsequent Malaysia Plans and Outline Perspective Plans. The paper also draws conclusions on the extent to which these economic policies, especially those targeting local development and indigenous empowerment, contributed towards creating and sustaining a more politically stable, FDI-friendly environment. The increasing shift from US investment in the manufacturing sector to the service sector in Malaysia is then detailed, with subsequent discussion on the sources of friction between the two countries.