Globalization and Multinational Corporations Quiz

Chapter 1: Concepts - Multinationals and Global Capitalism

• The course is from University of Cyberjaya, specifically Business History FAMG 1003
• The chapter focuses on multinationals and global capitalism.
• Key learning outcomes include:
  • Explaining the role of multinationals in creating global capitalism
  • Discussing three major debates surrounding globalization
  • Defining multinationals
  • Explaining the impact of national culture using Hofstede dimensions
  • Describing four multinationals in a broader perspective

Globalization Definitions

• Harvey (1989) views globalization as the "compression of time and space."
• Guillén (2001) defines it as a process leading to increased independence and mutual awareness among global actors.
• Bordo, Taylor, and Williamson (2001) highlight the integration of commodity, labor, and capital markets between countries as the most critical characteristic.
• Kogut (1997) describes globalization as the process of increasing integration in world civilization.

Origins and Extent of Globalization

• There are differing views on when globalization began, ranging from the decades after World War II to the 16th century or even earlier.
• Some note ancient global connections.
• Others point to specific events, like the first circumnavigation of the Earth.

Causes of Globalization

• Globalization is driven by new communication and transportation technologies.
• Government policies and actions, as well as firms, have played an important role
• These developments have raised the question of globalization's inevitability
• Historically, integration has not been a linear process, with instances like the collapse of the international economy during the interwar period.

Consequences of Globalization

• Increased inequality between countries is a generally accepted consequence of globalization.
• Concerns exist about the erosion of national sovereignty of states due to globalization.
• Sociologists debate whether mass consumerism homogenizes global culture.

Defining Multinationals

• Maurice Byé (1958) coined the term "multi-territorial firm."
• David E. Lilienthal (1960) introduced the term "multinational corporations" to describe US corporations with overseas operations.
• A multinational is a firm controlling operations or income-generating assets in more than one country.

Foreign Direct Investment (FDI)

• Multinationals engage in FDI to gain management control of assets in foreign countries.
• FDI can involve acquiring existing firms or establishing new operations (greenfield investment).

Foreign Direct Investment (FDI) Arrangements

• Equity arrangements like wholly-owned subsidiaries or joint ventures.
• Non-equity arrangements like licensing or franchising.
• Cartels are agreements between independent firms to maintain prices or limit output.
• Strategic alliances involve firms sharing facilities or cooperating on new product development.

Liability of Foreignness

• Crossing borders presents strategic and organizational challenges for firms due to dealing with unfamiliar policies, cultures, and laws, which generates a "liability of foreignness."
• The extent of this "liability" depends on the difference between the multinational's home country and the host country.
• Distance increases costs and risks.

Impact of National Culture on Business

• National culture comprises learned, shared, and transmitted values, expectations, and behaviors across generations.
• National cultures may overlap with regional and firm cultures but individual responses don't always mirror a national culture.
• Individual behavior is shaped by personality, economic status, social context, and other factors.
• Cultural values shift slowly over time, influenced by economic conditions and other external factors.

Impact of National Culture on Business - Hofstede Dimensions

• Geerte Hofstede conducted research on national cultural differences.
• He identified five dimensions : power distance, uncertainty avoidance, individualism-collectivism, masculinity-femininity, and long-term versus short-term orientation, which are important when operating globally.

Multinational in Theory - Ownership and Location Advantages

• The Heckscher-Ohlin theory, while focused on trade, assumed atomistic competition, making ownership issues irrelevant.
• Mainstream economics treats multinationals as capital arbitrageurs, moving to areas with higher returns.
• Important work by Stephen Hymer, from the MIT, introduced concepts that emphasized a firm's advantage over a host country's firm, as well as advantages from locations. This involved the transfer of proprietary technology and other resources.

Multinational in Theory - Competitive Advantages

• Competitive advantages stem from factors like access to superior technology, information, knowledge, access to finance, size of the firm, and access to raw materials.

Ownership Advantages

• These include access to superior technology, protected patents and/or knowhow, standardized technology, branding and product differentiation, superior management, and organization techniques, and access to finance.

Ownership Advantages - Access to Finance

• Multinationals often have access to cheaper capital compared to local competitors.
• Access to wider capital markets allows for cheaper funding.

Ownership Advantages - Economies of Scale

• Large firms benefit from economies of scale, giving them greater market power and cost advantages.

Ownership Advantages - Access to Raw Materials

• Control over raw material production, processing, or access to raw material markets is a significant advantage.

Ownership Advantages – Conclusion

• Ownership advantages can boost foreign investment.
• Technological and product differentiation are key advantages.
• Coordination of value-added activities across borders is essential.

Location Advantages

• Factors like the nature of the host country market(market size, growth, development, free trade agreements), tariff/nontariff barriers affect international trade, spatial distribution of resources, and government regulations influence location advantages for businesses.

Multinational Theory – Internalization and Boundaries of Firm

• Transactions costs theory suggests firms may internalize a transaction if the in-house cost of production is lower than the cost of completing the task through a market relation.

Multinational Theory – Internalization and Boundaries of Firm

• Companies internalize transactions to reduce costs associated with market imperfections, such as negotiating contracts, price discovery ,or moral hazard.

Internalization - Transaction Cost

• Specific assets (tangible, intangible) are dedicated, causing diminishing returns if used in other transactions.
• Bounded rationality (limited knowledge) and the potential for opportunistic behavior (dishonesty) complicate transactions.

Internationalization-Electric Paradigm of International Production

• The eclectic paradigm combines ownership and internalization advantages with location-specific advantages.
• Firms engage in international production if they have ownership advantages in foreign markets, perceive advantages in transferring those advantages, and benefit from locational advantages.

The Eclectic Paradigm of International Production

• Ownership advantages include intangible assets such as product innovations, organizational and marketing systems, knowledge, and human capital.
• Governance advantages offer flexibility, global sourcing, and better knowledge of international markets.
• Differences in locations, including regulations and resources, are crucial for strategic decisions.

Internationalization Incentive Advantages

• Search and negotiation costs, moral hazard, and adverse selection are avoided with internationalization.
• A company can reduce risks and enforce contracts by operating internally.

Multinational Theory - Knowledge-Based Theories of the Firm

• Firm strategies and structures create organizational strengths crucial for success in global markets.
• Localized skills and routines foster the firm's core competencies in Research and Development, manufacturing, and/or other operations.
• A firm's unique resources and competencies, particularly in localized knowledge, can be crucial competitive advantage factors.

Multinational Theory - Entrepreneurship (Neoclassical and other Perspectives)

• Entrepreneurship involves alertness to arbitrage opportunities and initiating actions to take advantage of those opportunities.
• Understanding the process of taking risks is key to understanding the entrepreneur's role.
• Different perspectives on what entrepreneurship entails—risk taking, innovating, and coordinating resources in a changing environment.
• Entrepreneurs who are aware of changing conditions in markets and/or global competition can develop advantages for firms.

Other notes

• Sahlman et al. (1999) offer a unique Harvard Business School view of entrepreneurship—the pursuit of opportunities regarding resources without regard for existing asset control.
• Entrepreneurship is often found in both start-ups and long-standing businesses and is influenced by location.
• The entrepreneurial figure is an innovator disrupting markets.