frank mcdonald university of liverpool school of management 1 bam sig in international business and...

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Contemporary International Business and International Management and MNC Location Theory – where is Space in these Approaches?

Frank McDonaldUniversity of Liverpool School of

Management

BAM SIG in International Business and International Management - Seminar on Spatial Factors and MNC Strategy at the University of

Liverpool, 6 Nov 2015

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IB/IM is increasingly examining the role of sub-national location (Meyer and Nguyen, 2005) including cities (Goerzen, et al, 2013; Nachum, L., and Wymbs, C., 2007.) – place is becoming more important

The work of earlier IB/IM studies that had an important role for place (Hymer, 1972) has gradually been dragged back into IB/IM theory via a renewed interest in the location component in the OLI Paradigm (Cantwell, 2009; Dunning, 2009)

BAM SIG in International Business and International Management - Seminar on Spatial Factors and MNC Strategy at

the University of Liverpool, 6 Nov 2015

IB/IM theory of location and place

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Calls for more firmly incorporating spatial factors in IB/IM theory have been prominent in recent years

These calls seeks to incorporate Economic Geography into IB/IM theory but this should include organizations (MNCs) and embrace cross-border activities and consider the link between national and sub-national location and the implications for the strategies and operations of MNCs (Beugelsdijk, et al, 2010; Beugelsdijk and Mudambi, 2013)

To be useful for IB/IM Economic Geography approaches need to include the role of organizations, institutions and multiple sub-national locations and their interconnections nationally and internationally – arguably Economic Geography approaches need to have different, and some cases more robust, theoretical base and crucially need to take account of cross-border aspects connected to location – countries matter



IB/IM theory of location and place

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New economic geography (NEG)

Relationship economic geography (REG)

Countries & Cities and MNCs (CCM)

BAM SIG in International Business and International Management - Seminar on Spatial Factors and MNC Strategy at the University of Liverpool, 6 Nov 2015

Three views on Place Location Theory

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NEG (Krugman, 1991) – in essence the incorporation of traditional theories of location in space set in a general equilibrium model with increasing returns to scale and monopolistic competition (Ottaviano and Thisse, 2001 & 2004)

At the heart of the NEG approach is a core-periphery model based on trade offs between proximity costs (transport costs) and increasing returns in a two product (traditional and modern) world with labour mobility and no barriers to trade

NEG has been developed to include the importance of vertical integration in industries (Venables, 1996) and Marshallian externalities as labour moves from periphery to the core (rural areas to cities) and thereby boosts consumption levels in cities and also enables enhanced sharing and learning effects among the inhabitants of cities (Duranton and Puga, 2004)



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This gives rise to a putty-clay model (Ottaviano and Thisse, 2004) whereby a slight change can lead to labour moving to modern industries that have increasing returns to scale (putty) – leads to cumulative causation as agglomeration benefits lead to increased enticements to labour to move to the core leading to more agglomeration benefits – centripetal forces – that fixes major activities in core (cities) – the putty becomes clay

Increased competition and congestion costs in the core location offset transport costs disadvantages leading to pull to the periphery - centrifugal forces

Changes in - transport & congestion costs, positive and negative externalities and the intensity of competition affect these centripetal and centrifugal forces

NEG provides a core-periphery model enabling analysis of centripetal/centrifugal forces in an evolutionary context



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Useful model to conceptualise major economic forces at work in a core-periphery world

NEG has however several serious drawbacks Restrictive and simplistic assumptions about

economic factors to enable mathematical modules to be built to look for conditions for equilibrium – which are often multiple equilibria

It is solely about markets that operate with no barriers to movement of resources

Perhaps most serious drawback - no connection to real spatial factors – no real geography - physical, economic or human

BAM SIG in International Business and International Management - Seminar on Spatial Factors and MNC Strategy

at the University of Liverpool, 6 Nov 2015


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Leads to a series of problems for the usefulness of NEG for IB/IM

No role for organizations (firms) No clear role for institutions – either formal and

informal No clear indications as to why core locations are

located were they are - or why some core locations are more productive than others

No role for countries, or sub-national locations within countries

NEG is useful to set the scene for key economic factors in a core-periphery context for IB/IM studies - but it is of only marginal use to address the major issues that IB and IM examine



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Potentially interesting application of NEG to IB/IM NEG postulates that core locations provide a

bundle of publically provided goods and services (physical and institutional infrastructures) that are more attractive than those available in the periphery - adding to the agglomeration benefits of core locations

If the preferences for the bundle varies across actors a sub-optimal provision of the bundle arises for some actors because the provision of the bundle will be focused on actors in the middle of the desire provision of public goods desire - leaving those not in the middle dissatisfied


New economic geography (NEG) & Tiebout model

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This in the NEG view (Ottaviano and Thisse, 2004) leads to centrifugal forces which is limited by the lower provision of the bundle of good and services in the periphery – the core -periphery is therefore nearly always in tension because of the problems of finding ways to get an optimal bundle of publically provided goods and services

Tiebout, 1956 proposed a solution to this problem of sub-optional provision of publically provided goods and services - voting with your feet – ie moving to alternative areas of provision – this of course requires multiple core locations which actors can move to



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In the standard NEG model transport costs also provide a limit to the voting with your feet solution as the periphery is too far away to retain agglomeration benefits from multiple core locations

In cases with zero or low transport costs agents (firms) can move resources between core locations and keep control over them (ie not sell them on markets) & locate in core locations with bundles of goods and services best for certain types activities thereby improving the agglomeration trade off arising from inadequate bundles of publically provided goods and services – a type of a differentiated core-periphery model based on bundles of goods and services



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Firms can however link to other core areas via connections across space by the market & intra-organizational and inter-organizational trading of goods and services

MNCs may therefore be well placed to seek Tiebout solutions

The Tiebout model provides a way of extending the core-periphery NEG model if the assumptions of two locations is extended to multiple cores that can connect across space – and organizations (firms) are introduced

This permits firms (MNCs) to operate in a variety of core locations and to connect to these multiple core locations via market and organizational trading thereby improving the trade offs connected to agglomeration

This has similarities to REG but has a much stronger economic rationale than REG



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REG focus on relational configurations between firms and territory (sub-national locations often cities (Dicken and Malmberg, 2001;)

These relational approaches focus on the local business environments in which firms are embedded and the linkages of these local environments to other locations in the global economy (Yeung, 2005)

REG often classify cities in different tiers according to the characteristics of the relationship configurations and connection to the global operations of firms & this is seen as affecting the strategies of MNCs (Beaverstock et al, 2000; Taylor, 2004)




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REG is free of most of the restrictive assumptions of NEG

It encompasses – organizations (firms), institutions, networks and multiple cores as well as core to core linkages as well as multiple core to periphery linkages

It is centred on the competitive advantages of locations and often has strong ‘real time’ evolutionary stories to tell about how locations gain and lose competitive advantages

It often focus on agglomeration benefits at industry level (clusters)

It considers the centripetal and centrifugal forces that are work in a core–periphery world – but not from a strong theoretical perspective




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REG is primarily interested in how MNCs operate in different territories (sub-national locations) and especially what attracts them to particular locations – it is largely about how location by MNCs affects economic and social development

IB/IM location theory is primarily concerned with why and how location affects the exploitation of ownership or firms specific advantages by MNCs and the mode of entry and management systems that are used in different locations – it is largely about the strategy and management of MNCs

REG is clearly more directly connected to IB/IM issues that NEG because it is concerned with firms, strategies, institutions, & multiple locations with different competitive advantages

Perhaps most importantly it has spatial features at its heart - location in core locations and peripheries and linkages between core-periphery locations in different places (countries or regions)– this is largely missing from most IB/IM studies




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NEG predicts that agglomeration benefits will lead to every growing movement to core locations constrained only by transport costs and congestion costs & unfavourable bundles of publicly provided goods and services – it is firmly based on theory

REG is rather atheoretical in that it seeks answers (without any strong theoretical underpinning) to similar questions as those addressed by NEG and IB/IM by what could be regarded as case by case examinations informed by observation and consideration of ‘big’ issues such as the digital revolution, globalization and major social changes

REG (and NEG) has no clear role for countries – a big problem for IB/IM



Relationship economic geography REG

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The NEG view centres on the importance of increasing returns from agglomeration in a core-periphery world with no countries whereas new trade theory (Krugman, 1979) centres on how increasing returns drives much of international trade and investment between countries

This leads to the question (crucial to IB/IM) what is the relationship between increasing returns at sub-national (or city level) and increasing returns at country level and what role do MNCs play in a world of trade and investment between nations and where sub-national location at intra and inter-country levels profoundly affect the strategies and operations of MNCs (McCann and Acs, 2011)




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If countries matter for trade and investment flows between countries they matter for cities because they are located in countries

The agglomeration trade-offs facing cities clearly have an international trade and investment dimension (a country dimension) and the strategies and operations of MNCs (as the main drivers of much of trade and investment) are crucial for these trade-offs




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Countries (or regional trade blocs) exercise considerable influence on trade and investment flows by providing the formal institutional frameworks for these flows (by way of tariffs, non-tariff barriers and host of regulatory laws and rules affecting trade and investment flows) – these exercise significant effect on the costs and benefits of location in cities because international trade and investment connected to the city is affected by the national (or regional trade bloc) regulatory systems

Currencies also exercise substantial effects on trade and investment flows - the control over currencies and were they are applicable in trade and investment flows is largely determined by countries or associations of countries eg the Eurozone




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Regulations on corporate governance and many issues connected to taxation are the responsibly of countries and/or associations of countries and this affects the agglomeration trade-offs of cities

London is a major world city in banking and financial services but the regulatory and security backing for these industries is located in the British state not the governing authorities in London

It is clear that countries and associations of countries such as the EU exercise considerable influence on the economic transactions of firms and thereby affect the agglomeration trade-offs of being located in cities




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Clearly there are important links between space of country and the space of sub-national locations (cities) and this has important implications for the strategies and operations of MNCs

This is the space dimension in IB/IM theory that needs to developed – and this is the area in which IB/IM scholars have expertise




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Issues of the size of country or associations of countries in which cities are located has important bearing on the agglomeration trade-offs that cities face

The question asked by McCann and Acs, 2011 – what is the effect of the size of country or association of countries that a city is located in for the agglomeration trade offs that that city faces

This has profound implications for the competitive position of cities in addition to the types of factors highlighted by REG




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A city could achieve an optimal agglomeration trade-off in line with NEG and have well developed spatial relationships as viewed by the REG approach but be a poor candidate for MNC investment because it is located in a country that has poor abilities to achieve good international agglomeration trade-offs

It is this arena of the linkages between country and city level agglomeration trade-offs that needs theory development to obtain a better understanding of place in IB/IM research and to enable IB/IM to make a valuable contribution to both NEG and REG




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Beugelsdijk, S., Mudambi, R., & McCann, P. 2010. Place, space and organization: Economic geography and the multinational enterprise. Journal of Economic Geography, 10:485–493.

Beugelsdijk, S. and Mudambi, R. 2013. MNEs as border-crossing multi-location enterprises: The role of discontinuities in geographic space, Journal of International Business Studies, 44(5): 413-416.

Beaverstock, J. V., Smith R. G. and Taylor, P. J. 2000. “World-city network: a new metageography?” Annals of the Association of American Geographers 90: 123–134.

Cantwell, J. 2009. Location and the multinational enterprise, Journal of International Business Studies, 40: 35-41

Dicken, P., & Malmberg, A. 2001. Firms in territories: A relational perspective. Economic Geography, 77: 345–363.

Dunning, J.H. 2009. Location and the multinational enterprise: John Dunning’s thoughts on receiving the Journal of International Business Studies 2008 Decade Award, Journal of International Business Studies, 40: 20-34


References

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Duranton, G. and Puga, D. (2004) Micro-foundations of urban agglomerations, Handbook of Regional & Urban Economics, 4: 2063–2117

Goerzen, A., Asmussen, C.G., Nielsen, B.B., 2013. Global cities and multinational enterprise location strategy, Journal of International Business Studies, 44: 427–450

Hymer, S. 1972. The multinational corporation and the law of uneven development. In J. Bhagwati (Ed.), Economics and world order from the 1970s to the 1990s: 113–140. London: Collier-Macmillan.

Krugman. P. R., 1979, Increasing returns, monopolistic competition and international trade, Journal of International Economics, 64: 416-424

Krugman, P. R., 1991 Increasing returns to scale and economic geography, Journal of Political Economy, 99:483-499

McCann, P., and Acs, Z.J., 2011. Globalization: Countries, Cities and Multinationals, Regional Studies, 45: 17-32

Meyer, K.E., and Nguyen, H.V. 2005. Foreign Investment Strategies and Sub-national Institutions in Emerging Markets: Evidence from Vietnam, Journal of Management Studies, 42(1): 63-93.


References

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Nachum, L., and Wymbs, C., 2007. The Location and Performance of Foreign Affiliates in Global Cities, in Alan M. Rugman (ed.) Regional Aspects of Multinationality and Performance (Research in Global Strategic Management, Volume 13), Emerald Group Publishing Limited, pp.221-259

Ottaviano, G.and Thisse, J-F., 2001, On economic geography in economic theory: increasing returns and pecuniary externalities, Journal of Economic Geography, 1:153-179

Ottaviano, G.and Thisse, J-F., 2004 Agglomeration and economic geography, Handbook of Regional & Urban Economics, 4:2563-2608

Taylor, P. J. 2004 World City Network: A Global Urban Analysis London: Routledge.

Tiebout, C.M. 1956 A Pure Theory of Local Expenditures, Journal of Political Economy, 64: 416-424

Venables, A.J. 1996, Equilibrium locations of vertically linked industries, International Economic Review, 37: 341-359

Yeung, H. 2005. Rethinking relational economic geography. Transactions of the Institute of British Geographers, 30(1): 37–51


References

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