BH Chapter 1 Concepts PDF

Chapter 1 : Concepts Multinationals and Global Capitalism 1.Explain the role of multinational in the creation of global capitalism 2.Discuss (3) major debates concerning globalization process 3.Explain the concept of multinational 4.Explain the impact of national cultural using Hofstede dim...

Chapter 1 : Concepts Multinationals and Global Capitalism 1.Explain the role of multinational in the creation of global capitalism 2.Discuss (3) major debates concerning globalization process 3.Explain the concept of multinational 4.Explain the impact of national cultural using Hofstede dimensions 5.Describe Four(4) multinational in perspective Globalization Globalization Definitions Harvey (1989) sees it as the “compression of time and space” Guill’en(2001) defined as “a process leading to greater independence and mutual awareness (reflexivity)among economic, political and social units in the world ,and among actors in general. Bordo, Taylor, and Williamson (2001) identify its most important characteristic as the between-country integration of commodity, labor, and capital markets. The management scholar Kogut (1997) regards globalization as ‘the process of increasing integration in world civilization’. 1. The Origins and extent of Globalization ØDifferent view whether it should be traced back to the decades after WW2 or 19 th century or to the first circumnavigation of the Earth in the 16 th century or Ancient World (Moore and Lewis 1999) See the world become borderless(Ohmae/1990) Three(3) major debates concerning this” process of increasing integration in world civilization “ 1. The Origins and extent of Globalization 2. Causes of globalization 3.Consequences of globalization 2. Causes of globalization Ø Determined by the development of new technologies in communication and transportation. Ø Government and firms have been at least as important as actors (Kogut ,1997) Ø This raises the issue of the ‘inevitability’ of globalization. Ø Historically, the integration’ of world civilizations has not been a linear process. Ø Some historians see the collapse of the international Ø Economy in the interwar years as demonstrating how today's global economy could also be reversed 3.Consequences of globalization Ø Although some have seen globalization as aforce for convergence between countries, it is generally accepted that there is more inequality between countries now than 100 years ago. Ø Globalization has been seen as eroding the sovereignty of nation states Ø Sociologists debate whether mass consumerism is homogenizing cultures of the world Defining Multinationals In 1958 the French economist Maurice Byé coined the expression ‘multi- territorial firm’ In 1960 David E. Lilienthal use term “multinational corporations” when delivered a paper on the problems of US corporations with overseas operations Multinational can be defined as a firm that controls operations or income-generating assets in more than one country. Defining Multinationals A multinational engages in one of two(2) types of foreign investment Foreign direct Invest investment (FDI) Multinationals Multinationals are are owned in invested in their their home host economy Portfolio economy investment -Exporting of goods or services from its home base is not a multinational A multinational engages in one of two(2) types of foreign investment Involves the acquisition of foreign Portfolio securities by individuals or institutions investment without any control over the management of the foreign entity involves management control. Multinationals engage in FDI Foreign direct because they own and control assets in foreign countries. They investment may do this either through acquiring an existing firm or by making (FDI) a greenfield investment involving the establishment of a completely new operation. Foreign direct investment (FDI) Ø Equity arrangement Ø Whole Subsidiary - a company owned or controlled by another company ,which is called the parent company or holding Ø Joint Venture- may share ownership Ø Non- equity arrangement Ø Licensing- which involves a contract between independent firms to transfer technologies, rights or resources. Ø Franchising, when a company grants another company the right to do business in a certain way over a certain period of time in a specified place Ø Cartels :which are agreements between. independent firms to maintain prices or limit output. Ø Strategic alliances: which are arrangements between firms to share facilities or cooperate in new product development  Subsidiary Strategic Alliances Joint Venture Foreign Direct Investment(FDI) Cartels Licensing  “Liability of Foreignness” Ø Crossing borders raises major strategic and organizational issues for firms. This is because they encounter alien policies, cultures, languages and laws. As a result, foreign firms experience the ‘liability of foreignness” Ø The scale of this ‘liability’ rests on the distance between the home economy of a multinational and the host economy. Distance increases costs and risks. Ø Four (4)dimensions of distance. Economic Political Distance Geographi dimensions cal Cultural  Four (4)dimensions of distance Political Cultural Economic Geographical Multiple barriers to Differences in The income Country physical foreign trade and l a n g u a g e , differences d i s t a n c e + investment flows religious ,ethical between countries, transportation + which government belief and social a s w e l l a s infrastructure have traditionally norms differences in maintained -Differ in level of supply chains and trust distribution channels Impact of National Culture on business Ø Definition :National Culture Ø However, all members of a national culture do not act in an identical fashion. National cultures overlap with regional cultures and firm cultures Ø A set of values, expectations and behaviors that are learned, shared, and Ø Factor for Individual Behaviour : Personality, transmitted from one generation to economic status, social context, and other another factors Ø Cultural values may shift overtime with economic conditions, technological shifts, and political interference, but as such values are typically transmitted through child-rearing practices, these shifts are rarely rapid.  Impact of National Culture on business Ø The most extensive empirical research aimed at identifying national cultural differences and their impact on business is the research of Geerte Hofstede. Ø Hofstede identified FIVE(5) dimensions of culture which differed between country.  Impact of National Culture on business Ø Individualism was a characteristic of English-speaking and most other Western societies, while collectivism prevailed in most developing countries. Ø Uncertainty avoidance was higher in German-speaking countries and in Japan than in English-speaking countries. Long-term orientation was found mostly in east Asian countries. Ø Hofstede and other cross-cultural theorists argue that culture has a pervasive influence on how firms are organized, business strategies, negotiations and human resource management. Ø Cultural differences might explain national differences in the organization of firms, such as levels of hierarchy, and concluded that ‘organizations are culture bound’. Ø They suggest that different methods of motivation need to be used in different cultures. Individual incentives work well in individualist cultures, but in more collectivist cultures group incentives or paternalistic policies may motivate better. Multinational in Theory Ownership and location advantages Internalization and the boundaries of firms Knowledge-based theories of the firms Entrepreneurship Ø Comparative advantage is an economy's ability to produce a particular good or service at a lower opportunity cost than its trading partners. Ø Opportunity cost is the potential forgone from a missed opportunity. Multinational in Theory –Ownership and location advantages Ø The Heckscher–Ohlin theory, which sought to explain how a country's comparative advantage determined its trade, assumed atomistic competition, which meant that the issue of ownership did not matter, and that all technology was public, which meant that proprietary technology was also not an issue. Ø As a result, the phenomenon of foreign firms moving technology and other assets between countries and controlling them across borders could not be identified as a matter requiring analysis  Multinational in Theory –Ownership and location advantages Ø Mainstream economic theorists treated multinationals simply as arbitrageurs of capital, moving equity from countries where returns were low to those where it was higher. Ø Breakthrough to explain multinational ownership came when a Ph.D thesis in Massachusetts Institute of Technology completed by Stephen Hymer in 1960. This thesis, which was entitled ‘The International Operation of National Firms’, asserted that FDI involved the transfer of a whole package of resources and not simply finance. Firm required an ‘advantage’ over local firms in order to overcome the ‘liability of foreignness’-comparative advantages. Ø In foreign markets, local firms were assumed to possess superior knowledge about the markets, resources, legal and political system, language, and culture. Foreign firms appeared to have no incentive to locate in such a market, or ability to survive in it, without an advantage.  Competitive advantages Superior Access to management and finance organization techniques Privileged Size of a firm access to raw materials  Ownership Advantages Competitive advantages Ø Access to superior Access to protected Standardized technologies technology, by patents which information, prevent competitors Ø The ability to differentiate knowledge, and copying or acquiring products can be a know-how the technology. significant of advantage for a multinational. Ø The technological Ø Branding and product advantage is access differentiation strategies to new products and can be an important source processes. of advantages.  Ownership Advantages Superior management and organization techniques These can arise from Advantages might Advantages are closely superior organizational also be derived from related and interdependent. structures compared to better trained or The ability of a firm to local rivals, or superior educated managers innovate and generate new m a n a g e m e n t technology is critically t e c hn i q u e s , s u c h a s dependent on its better marketing skills organization or accounting methods. Ownership Advantages- Access to finance Ø Conversely, capital constraints Ø Access to cheaper capital than can force divestments or otherwise local competitor have a major impact on the choice of contractual arrangements for Ø Access to capital market , allow international business operations large multination to borrow cheaply Ø Close relationships exist between banks and industrial companies, the latter might have privileged access to funding. Ownership Advantages Ø According to a theory p r o p o s e d b y Ø Derived from Ø Multinationals, Knickerbocker (1973), the centralization of which are also multinational research, marketing, large firms, strategies can be finance, and other Øpossess an understood in terms of management important source the rivalry of functions that will of market power oligopolistic firms not be available to because of which follow one smaller local economies of another into new competitors scale foreign markets as a defensive strategy. Economies of scale refer to the cost advantages a company gains with the increase in production Ownership Advantages Access to raw material Arise from control over The availability of a mineral or other production of the material, raw material in the home economy can or over processing, or over generate ownership advantages for firms the final markets for raw of that nationality, because materials. they develop product-specific capabilities and knowledge which can be utilized elsewhere  Ownership Advantages-Conclusion Ownership advantages can be Stimulate a foreign investment generated internally within the firm, (ownership)will differ considerably or acquired by licensing a technology between products and industries from a foreign competitor, or by Ø Manufacturing(production buying an entire foreign firm goods)- superior technology and innovative capacity Øenhance operational flexibility by Ø Product differentiation will offering wider opportunities for global often be more important for sources of input that favored access to consumer goods international markets ØAbility to coordinate separate ØProvide the ability to diversify or reduce value-added activities across risks national boundaries Øpossession of intangible assets  Location advantages Nature of the host Tariff and nontariff The spatial country market barriers to trade distribution of  Government-Public resource  Size and income level of a market policy (Subsidiaries endowments  country growth and stage of /Restriction)  Exploitation of natural resources development membership of a wider free trade Government legal –nonrenewable resources such as area or regional economic bloc framework-Security for mining and petroleum determine by geology. Labour costs foreign investor  agglomerations of human skills and informational infrastructures- Financial centre Multinational in Theory –Internalization and boundaries of firm Ø Transactions costs theory provides a Transactions costs of different perspective on the reasons for the the market include the growth of multinationals cost of discovering relevant prices and in Ø Coase (1937) argued that firms and markets arranging contracts for represent alternative methods of organizing each market transaction. production Ø The market is costly and inefficient for undertaking certain types transactions  Multinational in Theory –Internalization and boundaries of firm Ø Because of such costs existence –organized and carried out at a lower cost within the firm than through the market(internalized) and undertaken by the firm itself. Ø Firms will internalize transactions until the marginal cost of doing so exceeds the marginal revenue.mc