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School of Management Fudan UniversityDouble Degree in International Management
Evolution of International Business 2013Veronica Binda
Class 1.Evolution of International Business:
A general introduction
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Practicalities (1)First part's – Teacher
Veronica Binda
Email: [email protected]
Office hours:from April, 9th to April, 12th- every day after the lecture
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Practicalities (2)First part's – Material
Geoffrey Jones (1996) – Chapter 2: “The Evolution of International Business”
Case: Andrea Barbarigo, merchant of Venice
Case: Nestlé’s early years as an international firm
Power point presentations of each class (sent by email)
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Practicalities (3)First part's – Timetable
Topic Reading
Tuesday 09/04/20138:55-11:35
Evolution of International Business: a general introductionForms of international business before the First Global Economy
G. Jones (1996), chapter 2, sections: “The environment of International Business”, “Origins before 1880”
Wednesday 10/04/201313:30-16:05
Case: Andrea BarbarigoThe rise of global firms in the First Global Economy (1880-1930)
Case: Andrea Barbarigo;G. Jones (1996), chapter 2, section: “Growth 1880-1930”
Thursday 11/04/20138:55-11:35
Case: NestléCan globalization be stopped? Globalization challenged and reversed (1930-1950)
Case: Nestlé; G. Jones (1996), chapter 2, section: “Alternatives to multinational enterprise”
Friday 12/04/20138:55-11:35
Restoring a global economy (1950-1980)The New Global EconomyMock Exam
G. Jones (1996), chapter 2, sections: “Resurgence, 1950-1980”, “Global Business”
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Practicalities (4)First part's – Assessment method
The first part accounts for 25% of the whole course's grading:
Class contribution (individual): 10%5% class attendance5% class discussion (quality, not just quantity!)
Final exam (individual): 15%
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Today’s Topics
(1) What is this course about? International Business: a “micro” and a “macro” perspective
(2) What is a multinational company? Why do multinational companies exist?
(3) Evolution of International Business: the “globalization waves”
(4) International Business before the First Globalization Wave
Material: G. Jones (1996), chapter 2, sections: “The environment of International Business”, “Origins before 1880”
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(1) What is this course about?
International Business: a “micro” and a “macro” perspective
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International Business: The “micro” level
What determines the international success and failure of firms?
How firms behave and their managers decide in different institutional environments?
What are the alternative ways in which multinationals organize their cross-borders activities?
...
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International Business: The “macro” level
Home Economy
Companies
Host Economy
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First part's aims
To connect the “micro” perspective (entrepreneurial choices, international strategies and structures of companies)...
… to the “macro” one (evolution in the global economy)...
… in a 3D framework: markets, technology, institutions
To provide historical foundations to global strategy making (second part)
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(2) What is a multinational company? Why do multinational companies exist?
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What is a multinational company?
A multinational is a firm that controls operations or income-generating assets in more than one country
Multinationals are owned in their home economy and invest in host economies
A firm whose sole international involvement is the exporting of goods or services from its home base is not a multinational
A firm whose sole international involvement is the acquisition of foreign securities without any control over the management of the foreign entity is not a multinational
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Why do multinationals exist? 1) The eclectic (OLI) paradigm (Dunning)
Ownership advantages Location advantagesInternalization advantages
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OLIStephen Hymer and the “Ownership advantages” (1960)
Local firms in foreign markets have superior knowledge about the markets, culture, resources...
A foreign company requires an “advantage” over local firms in order to overcome the “liability of foreignness”
Foreign firms have incentives to establish subsidiaries abroad, or are able to survive there, only if they have some advantages over their local rivals
“Ownership” (or “competitive”) advantages: technology, management and organization, access to finance, size, raw materials, and so on
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OLILocational factors (Wilkins, Cantwell...)
A company could exploit ownership advantages throughout exporting rather than engaging in FDI
Locational factors within the host economy help to explain why a company should undertake FDI rather than export
Some examples: nature of the host economy market, labor costs, spatial distribution of resource endowments, specific country capabilities
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OLITransaction costs and Internalization (Coase, Williamson...)
The market is costly and inefficient for undertaking certain types of transactions (e.g. cost of discovering relevant prices, of arranging contracts...)
Whenever transactions can be organized and carried out at a lower cost within the firm, they will be internalized and undertaken by the firm itself
Cross-borders transactions in intermediate goods, in goods where intangible assets (patents, brands and tacit know-how) are essential competitive advantages, and in goods that require display and after-sales service in foreign markets, will be undertaken through hierarchy rather than market exchange
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Why do multinationals exist? 2) Knowledge-based theories
Resource-based view theory (Penrose, Kogut&Zander) Every firm has a bundle of scarce, unique and sustainable
resources and capabilities. Multinationals specialize in the transfer of knowledge that is difficult to understand and codify
…
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Why do multinationals exist? 3) Product life cycle and company life cycle
Vernon: the product life-cycle. When a new product is developed, a firm normally chooses a domestic
production location because of the need for close contacts with customers and suppliers. As a product matures and the technology becomes more difficult to protect, the firm will begin to look for lower cost production locations in other countries with bigger market opportunities
Uppsala School: Internationalization is an incremental process evolving hand in hand with learning and experience.
Two types of increasing involvement: 1) exporting; agency establishment; sales subsidiary; production
subsidiary2) from the closest market in terms of psychic and physical distance to
the more distant ones
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(3) Evolution of International Business: the “globalization waves”
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Waves of globalization
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Trends in International Business were related to:
The overall macroeconomic conditionsThe degree of receptivity to foreign enterprisesThe degree of capital liberalizationTrade protectionismTransport and communication technology
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(4) International Business before the First Globalization Wave
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Before the First Global Economy
International business starts well before the First Global Economy
Activities: mainly trading
Features: high risk, transaction and agency costs
The role of the families and of the “State”
Exceptional cases of international business which were sustained over long periods
Problems & solutions (institutions, forms of enterprise)
Three examples:• 11th - 14th Centuries: Medieval Merchants (3 cases – today)• 15th Century: Andrea Barbarigo (tomorrow)• 17th - 19th Centuries: Privileged Companies (today)
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Learning from Medieval merchants: (a) Agency relationships
11th century – Mediterranean Sea: the Maghribi traders' coalition
The “coalition”: an economic institution utilized to facilitate complex trade
characterized by asymmetric information and limited legal contract enforceability
it was based upon a reputation mechanism utilized by Mediterranean traders to confront the organizational problem associated with the exchange relations between merchants and their overseas agents
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Learning from Medieval merchants: (b) Property rights
A high level of insecurity for European merchants trading in foreign countries in the period between ca. 1050 and ca. 1360
Merchant guilds enabled merchants to make a credible threat to impose an embargo
on a foreign ruler who did not commit himself to providing an acceptable level of commercial security
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Learning from medieval merchants: (c) Contract enforcement in impersonal exchange
Merchants from remote corners of Europe traveled abroad to exchange goods with each other for both immediate and future delivery and paid both in
cash or on credit
The “Community Responsibility System” enabled European merchants to
commit to keep their contractual obligations in impersonal exchange from
the late medieval to the modern period
The Community Responsibility System was an institution in which
intra-community contract enforcement provided the basis for an institution to
support impersonal, inter-community exchange
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Trading (or privileged) companies
17th-19th centuries, international trade on long distances
Limited liability, joint-stock companies
“Monopolistic” or “oligopolistic” position in trade, closeness with the political power
Managerial hierarchies recruited at home
Diversification strategies
Companies in context – why this type of firm?
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Summarizing
When companies cross borders they encounter a range of costs and challenges arising from the environment they invest in
There are a number of approaches to explaining why firms should nevertheless seek to engage in multinational investment
The history of multinationals can confront these insights with evidence of “what really happened”
Globalization has a long history. The flow of people, trade, and capital across borders however has not been a linear one, but one with major ebbs and flows. International strategies and structures changed according to the context
The context for international business was tough before the First Global Economy. But, even so, international business was possible and profitable!