The Organisation of MNE Activity

8/12/2019 The Organisation of MNE Activity

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The organisation of MNE activity:

the external network

: 2012.4.19:


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Outline

Introduction The Spectrum of Organisational Modes: Cooperation and Competition

Cooperative Agreements: Some Theoretical and Methodological Considerations

Transaction Cost and Resource Attributes

Some Methodological Issues

Joint Equity Ventures

Why Do Firms Enter into Joint Ventures

Where are Joint Ventures Likely to Succeed

Cultural and Institutional Influences in Joint Ventures

Concluding Remarks

Non-Equity Cooperative AgreementsBuyer/Seller Agreements

Strategic Alliances

The Choice between Acquisitions, Alliances and Greenfield Investment

A Note on Cross-Border Cartels and Collusion

Conclusions


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Introduction

Globalisationthe costs of using the market have declined

relative to the costs of organisation within corporate

hierarchiesstrategic alliances & outsourcing agreements

Not only that the determinants of external relationships can

be analysed by use of the eclectic paradigm of international

production, but also that the strategic choice as to the

structure and pattern of these transactions is likely to be an

important influence on the future OLI configuration of MNEs.


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Introduction

The Chapter proceeds in the following way:

(1) Describes the kinds of relationships an MNE may forge with

other firms located outside its national boundaries.

(2) Pays especial attention to two kinds of cross-bordercooperative relationships:

1. Joint ventures

2. Strategic alliances.


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The Spectrum of Organisational Modes:

Cooperation and Competition

In between these two extreme forms of organisation, a firm

may engage in a variety of organisational relationships, each

of which involves a different combination of resources,

capabilities and institutional commitment; and that of riskbearing and control sharing.

Single Company Separate Firm


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Based on Buckley and Casson (1985).


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In some cases, firms may work together to achieve specificand well-articulated goals, and for a limited period of time. Inothers, they may form JVs or non-equity alliances to promoteand organise a large number of diverse activities over a much

longer period of time. Some firms, when faced with aparticular market failure, may react by adopting an exitstrategy and internalise that market. Others might respond byadopting a voice strategy and work to lower the transactioncosts of using it (Hirschman, 1970).

Until comparatively recently, most of the literature on MNEactivity and international production concentrated on thenature of the ownership rather than the transactionalrelationships between firms.


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There is an extensive body of literature within the IB field on

the choice of entry mode, that is, how the MNE chooses

between these different types.

Since these pioneering studies, a full range of entry modes

have been subjected to closer study, with most attention

being paid to international JVs and strategic alliances,

particularly in high-technology fields.


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Cooperative Agreements: Some Theoretical and

Methodological Considerations




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Cooperative Agreements: Some Theoretical and

Methodological Considerations

Firms internalise their cross-border intermediate product

markets (I)is determined by the interaction of its ownership-

specific advantages, including asset (Oa), transaction (Ot) and

institutional (Oi) advantages, with the location advantages (L).

The degree to which a firms network of global activities is

dominated by long-term contractual relationships, JVs or

strategic alliances, is partly influenced by the industries and

countriesin which it operates, but also by its own institutionaland other competencesin managing different kinds of

cooperative relationships.


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The degree of ownership

(1) Economic and strategic

(2) Social, environmental and cultural

Imperfect markets

(1) Advance its goals

(2) Reduce the perceived transaction costs

(3) Increase the economic rent earned or control the use

made of the final output


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Examples of the kinds of trade-offs involved in a control

versus a nocontrol situation:

(1) A Canadian aluminium fabricating company

Internal Management Cost v.s. External Transaction cost

(2) A Swiss pharmaceutical company

Internalise the Market

(3) A US auto firm

Licensing(4) A Singaporean-owned hotel

Joint Equity Venture


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When firms are most likely to conclude alliancescomplementary but dissimilar activities

Matching of activities to capabilities rather than on whether

the constituent firms are producing complementary or

substitutable products or processes.

If only Transaction costshard minerals vs. service sectors


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The value of resources that the firm does not own, but has

access to, differs between firms depending on their existing

resources and their path-dependent development.

Governance structure reflects not only the firms

management systems, IT processes and market knowledge

(Oa), but also its institutional assets (Oi), which may be

embedded in its management team and its own culture; and

also that of the countries in which it operates (Li). In ouropinion, it is the content and quality of a firms Oi that will

determine the effectiveness by which it organises inter-firm

transactions while minimising its resource commitments.


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There are two cooperative modes of entry that have received

a great deal of attention in the literaturenamely, joint

equity venturesand strategic alliancesand they are the

focus of this chapter as well.

Before moving on, however, we wish to highlight four

methodological concerns that have become apparent as

research in this area has expanded.


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Four methodological concerns

(1) A possible overemphasis on cultural influences.

(2) The evaluation of performance and the definition of

success.

(3) Methodological caveat arises from the fact that the choice

of entry mode is endogenous to the individual firm, and a

failure to account for firm self-selection is likely to lead to

misleading conclusions.

(4) Studies on the choice of entry mode have tended to

emphasise the element of choice over the restrictions

imposed by a limited range of alternatives.


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No best Entry Mode

This makes research on entry modes very challenging. In most

instances these is no one best form of entry, although the

performance implications of different modes of entry can be

usefully studied within one firm over time, or across firms

that have made the same choice (in the same markets).


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Why Do Firms Enter into Joint Ventures?

The extent to which control is exerted by a majority

shareholder depends on two main factors.

(1) the contributionboth financial and non-financialthat

each of the shareholders can, and does, make to the venture.

(2) the transaction costs which may have to be incurred

before a mutually acceptable decision is reached, for example,

in respect of the location of a new investment or an R&D

facility, the degree of outsourcing, the allocation of export

markets, and the repatriation of profits.


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Why Do Firms Enter into Joint Ventures?

Vertical JVs

Some JVs are vertical and essentially replace offshore

subcontracting and/or licensing relationships along the value-

added chain of a particular product.

Horizontal JVs

Concluded primarily to exploit the economies of scope and

scale of at least one of the investing parties across value-

added chains.

Both may be undertaken to protect or advance the

competitive positions of the participating firms and to assist

them in the restructuring of their portfolio of assets.


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When are Joint Ventures Likely to Succeed?

(1) The objectives of the JV;

(2) The amount and type of resources, capabilities and market

access which each partner should commit to the venture

(3) The incentive structures and enforcement mechanisms

underpinning the creation and deployment of such resources

and capabilities;

(4)The way in which the venture is organised and managerial

responsibility is divided

(5)The distribution of benefits of the venture

(6) The form and direction of the ventures growth and/or its

pattern of diversification


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When are Joint Ventures Likely to Succeed?

Contract

Issues

Informal institutional arrangement

The composition costs and benefits of JVsOi

Choice of partner

Economic or strategic characteristics


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Concluding Remarks

Over the past decade, numerous scholars have studied

international JVs in the context of the choice of entry mode.

Yet, due largely to the wide variety of different possible

settings for the JV, few consistent findings have emerged from

the literature.


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Concluding Remarks

Consistent Findings

(1) An MNE that owns an integrated network of activities is

likely to view its participation in JVs very differently from a

multidomestic MNE that operates a group of stand-alone

affiliates. Similarly, a local partner of a JV will tend to evaluate

the costs and benefits of the venture according to its own

organisational strategy and positioning in other networks of

value-added activities.


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Concluding Remarks

Consistent Findings

(2) Taking a wider and longer perspective, it may be

appropriate to relate these changing ownership patterns to

the advent of alliance capitalism (Dunning, 1995, 1997a,

2002b), the gradual globalisation of business activity, and to

changes in the world economic and political environment.


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Concluding Remarks

Consistent Findings

(3) Some of the observed changes may also relate to the

maturation of investment from important investor nations,

such as Japan.

* Example about Japan


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Non-Equity Cooperative Agreements

Two main types of cooperative business relationships:

(1) Verticalrelationships involving buyers and sellers.

(2) Horizontalrelationships involving strategic business

alliances.

It should be noted, however, that while we try to maintain the

distinction between joint equity ventures, non-equity

alliances and other contractual relationships as set out in

Table 9.1, the literature on alliances does not always make the

same distinction, and thus some of the discussion in this

section will concern equity ventures as well.


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Non-Equity Cooperative AgreementsBuyer/Seller Agreements(Vertical non-equity relationaships)

backward cooperative/buying relationships

May consist of a one-off transaction in which the contractorsimply specifies what he/she needs from the supplier, and acceptsor rejects the product according to whether or not it meets thatspecification.

Forward cooperative/selling agreements

(1) Licensing agreements

(2) Franchising agreements(3) Management Contracts

(4) Turnkey Contract


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Licensing

Definition

Typically involve the transfer of a right to use a specific piece ofproprietary technology (for example, the exploitation of a patent)relevant to the production of a physical product.

Although the licensee is usually responsible for that production, theagreement may allow the contractor some control over the usemade of the rights to ensure that his/her own competitive positionis protected.

Payment way

The usual payment for a licence is a fee or royalty based on thevalue or quantity of the output which embodies the informationand knowledge provided by the licensor.Occasionally it may also be

related to the profits earned by the licensee.

Non-Equity Cooperative AgreementsBuyer/Seller Agreements(Vertical non-equity relationaship)


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Franchising

Definition

Most common in the service sectors, may contain extremely

detailed requirements and conditions.

Payment Way

Consideration typically takes the form of a lump-sum payment

from the franchisee to the franchiser for the franchising right,plus a fee based upon unit sales.



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Management Contracts

Definition

The know-how of the management of the contractor istransferred to the contractee, who then has the responsibility

for undertaking the management services according to theterms of the contract.

Payment Way

Usually consists of a lump-sum managerial fee plus a variableroyalty based on turnover and/or profits.

*Rarely concerned with transferring only management skills.



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Turnkey Contract

Definition

A one-off agreement by which a foreign enterprise agrees todesign, build and equip a complete unit of production, such as

a petrochemical plant or a motor car factory, and then turns itover to a local enterprise after a running in period duringwhich the staff of the foreign enterprise manages theestablishment while training local personnel.

Payment Way

Usually based on a formula which might include a lump-sumfee plus a royalty on the output produced.


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Each of the above arrangements represent the main forms of

vertical cooperative agreements between buyer and seller in

which there is usually a one-way flow of knowledge

between the partner, who otherwise would be the foreign

direct investor, to the one who would otherwise be theaffiliate of the investor.


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Vertical Cooperative Agreement Between Seller/Buyer

To the Seller

A non-equity arrangement alleviates the risks of ownership, butincreases the transaction costs associated with the misuse ordissipation of property rights, whenever these cannot be fullyprotected through the contract, and/or where the litigationprocedure is costly or ineffective.

To the Buyer

Subcontracting poses some similar and some different risks.Availability, price, quality and timing of delivery of the productsbeing purchased are some of the areas in which a buying firm mayfear that the kind of cooperation they require is not easilyguaranteed by a contractual relationship.


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Cooperative agreements between firms supplying different

products but engaging in broadly similar activities (horizontal non-

equity relationships).

Three main reasons for the growth of strategic alliances(1) The increasing cost of R&D in technologically advanced

industries, and the global competitive pressures that have forced

even the largest MNEs to collaborate in innovatory activities.

(2) Firms may collaborate to better exploit Ot advantages arisingfrom the economies of large-scale production, scope, specialisation

and rationalisation.

(3) firms may form alliances to co-opt or counteract the O

advantages of competitors deemed to work against their interests.

Non-Equity Cooperative AgreementsStrategic Alliances(Horizontal non-equity relationships)


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Two large databases on alliances that are frequently used in

empirical research :

(1) CAIT

Cooperative Agreements and Technology Indicators

(2) SDC

Securities Data Corporation



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alliance networks

The first is that expounded by Burt (1992),who has

emphasised the importance of non-redundant ties and the

entrepreneurial actors that bridge structural holes in the

network

The second is that of Coleman (1988, 1990), who has

emphasised the tendency of social actors to replicate and

reinforce their existing networks.



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How do firms decide whom they choose as partners?

In the case of a smaller firm looking to gain access to the

marketing and distribution network of an MNE, this is likely to

be more of a buyers market where the smaller firm, with

little or no record of prior alliances, is likely to bear more ofthe risk in any contractual relationship.

New alliance opportunities are also likely to be presented by a

firms existing alliance partners, from whom they also solicit

referrals when seeking new partners



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The networks of firms that are formed by alliance partners can

be beneficial in two ways.

(1) There are direct benefits derived from relational

embeddedness (or proximate ties) in the network, notably the

access to better information.

(2) there are indirect or structural benefits which accrue from

belonging to a network which facilitates the overall flow of

information. Moreover, the social capital (track record) which

firms are able to accumulate in the network allows them tofurther utilise the productive ties within the network.



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Learning from alliance partners

Ghemawat et al. also found that three-quarters of strategic

alliances were motivated by three factors

(1) The promotion of technological cooperation.

(2) The integration of production and access to better

distribution.

(3) Marketing networks.

*Knowledgeplays an important role in alliances.



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The Choice between Acquisitions, Alliances

and Greenfield Investment

According to UNCTAD estimates, less than 3% of M&As are

actually mergers, and full acquisitions account for two-thirds

of the total, while minority acquisitions are particularly

common in the developing countries.

Proportion of the M&As

(1) O-specific advantages

(2) pre-empt their competitors


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If effective learning consists of a balance between exploration

and exploitation, acquisitions would be the preferred mode to

revitalise or augment knowledge while greenfield investment

would be used to exploit the existing capabilities of the firm

(including past experience), and that firms would alternatebetween the two forms over time

Another factor that is likely to influence the choice between

M&As and greenfield investment is the balance between

global integration and local responsiveness adopted by theMNE.


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When knowledge acquisition is the primary motivation, the

choice facing the MNE is often that between M&As and

alliances rather than greenfield entry.

In addition to the difference in the financial implications

between the two modalities, Vanhaverbeke et al. (2002) have

hypothesised that alliances pose more hazards in terms of

opportunism, while M&As might be burdened by

indigestibility


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Cartels usually comprise a collaboration of several firms

producing similar products, which are intended to fulfil a

particular purpose.

The definition of a cross-border cartel

An international syndicate, combine or trust formed especially

to regulate prices and output in some field of business.


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To be successful, the participants must be in agreement about

the aims and strategies of the association, and the

distribution of the benefits. They tend to be more successful

where there are many buyers and few sellers; where there

would otherwise be intensive price competition among themember firms; and where the products involved have few

substitutes or potential substitutes.


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Conclusions

In the last decade or so, inter-firm agreements have become

an increasingly important form of cross-border economic

involvement.

Cooperative ventures are increasingly seen as a first-best

organisational form designed to spread financial risks,promote the efficient use of resources and to acquire new

assets and capabilities.

The emergence of the globally integrated or transnationalheterarchy has both blurred the boundaries of the firm.


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Conclusions

Networks as organisational forms may serve multiple

purposes, and the kind of knowledge that is transmitted

through them can take many forms (Lundan, 2002). More

unconventional forms of alliance partnering includerelationships between firms and NGOs.

Unconventional FormNon-profit organisations

EX: (1)Starbucks and TransFair USA

(2)Chiquita and the Rainforest Alliance


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The Organisation of MNE Activity

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