josef windsperger professor of organization and management
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International Strategy and Organization Part II: International Licensing, Joint Ventures, Consortia, Franchising, Mergers & Acquisitions, Clusters and Counter Trade. Josef Windsperger Professor of Organization and Management. Content. 3 Management of Networks of the MNC - PowerPoint PPT PresentationTRANSCRIPT
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International Strategy and Organization
Part II:
International Licensing, Joint Ventures, Consortia, Franchising, Mergers & Acquisitions,
Clusters and Counter Trade
Josef WindspergerProfessor of Organization and Management
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Content
3 Management of Networks of the MNC
3.1 Theoretical Foundation of Networks of the MNC3.2 International Licensing3.3 International Strategic Alliances, Joint Ventures and Consortia3.4 Internationalization through Franchising3.5 Internationalization through M&As3.6 Internationalization through Clusters3.7 Internationalization through Counter Trade3.8 Organization Design of the MNC of the Future
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3.1 Theoretical Foundations of Networks
Hierarchy Stable Network
Internal Dynamic
Network Network
One Firm Several Firms
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High
Inte
ractio
n L
evel
low
Cooperation
Licensing
Cross-Licensing
Franchising
Countertrade
Consortium
Joint Venture
CompetitionCooperation Propensity
Cooperation
Cluster
Networks of the MNC
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Theories of Networks
Transaction Cost Theory
Property Rights-Theory
Resource-based Theory
Relational View
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3.1.1 Transaction Cost Theory O. E. Williamson (1975)
Atmosphere
Bounded Rationality Uncertainty/Complexity
‚Transaction Costs‘
Opportunism Transaction Specifity
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Quasi-Rents, Specific Investments and Hold-up
g AB
A‘s quasi-rent: QRAB = (gAB – gAC)
A Bg BA
CD g ACg BD
A‘s profit with B: gAB B‘s profit with A: gBA
B‘s quasi-rent: QRBA = (gBA – gBD)
HOLD-UP Potential of B (HB)Quasi-rent of A (QRBA) =
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Transaction Costs and Networks
TC
Specifity, UncertaintyComplexity of Know How
Market Network Hierarchy
S1 S2 S3
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3.1.2 Property Rights-Theory
a. the right to use the goodb. the right to change the goodc. the right to capture the profit or to bear the lossd. the right to sell the good and to receive the liquidation
value
a + b = decision rightsc + d = ownership rights
Contractability (due to intangibility) of assets determines the structure of residual rights
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Example: Franchising-Network
Intangible assets of the franchisor:Brand name assets, system-specific know-how
Intangible assets of the franchisee:Outlet-specific knowledge
ao and a1 are contactible – market coordination
ao and a1 are noncontractible – network coordination
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3.1.3 Resource-based Theory
Resources
Organizational Capabilities
Strategic Rents (SR) = Competitive Advantage
(Schumpeterian and Ricaridian Rents)
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Resource Characteristics
Intangible, tangible resources and organizational capabilities
Heterogenity
Imitability
Substitutability
Firm specifity
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3.1.4 Relational View: Networks and Trust
g AB
A‘s Quasi-Rents: QRAB = (gAB – gAC)
A Bg BA
CD g ACg BD
A‘s Reputation capital: RA B‘s Reputation capital: RB
B‘s Quasi-Rents: QRBA = (gBA – gBD)
Quasi-Rents of A (QRAB) + reputation capital of A (RA)
HA - cooperative behaviorHA - opportunistic behavior
><
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3.2 International LicensingLicensing agreementA company (licencee) is allowed to use the licensor‘s trademark,patent, manufacturing process or some other value creating activity of the licensor.
Objectives(a) In-licencing: Access to complementary assets(b) Out-licensing: Risk reduction, deterrence of potential competitors,standard creation
Cross Licensing Agreement on the exchange of rights for the entire portfolio of technology for a certain time period.
Licensee pays fixed fees and/or royalties (percentage of sales)
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Conditions for Licensing
Complementary and contractible resourcesResources• easy to replicate (contractible)• property rights are well defined
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TC and Licensing
TC
SpecificInvestmentKnow-how ComplexityUncertainty
LicensingHierarchy:FDI
S1 S2S3
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Property Rights-Explanation
ContractibleKnow-how
Non-contractible Know-how
Contractible Know-how Non-contractible Know-how
B
A
NetworkA to B:
Licensing
B to A:Licensing
Market Contract
Austrian company A wants to enter the market in Ukraine. TheCompany B in Chernivtsi has intangible knowledge at the consumer and labour market. On the other hand, the know-how of A is contractible.
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Licensing as a Strategy for Technological Innovations
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Country Culture and Licensing
Does the national culture influence the choice between licensing and foreign direct investments?
“The national differences in levels of trust impact the choice of foreign market entry mode” (Shane, 1994)
Results - High Trust Countries → Licensing - Low Trust Countries → Foreign Direct Investment
“Resorting to hierarchies is less common where trust among people is greater.” (Shane, 1994)
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3.3 International Joint Ventures, Strategic Alliances and Consortia as stable Networks
JV
A B
Joint Venture
Strategic alliance
A B
a b
a, b
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3.3.1 Joint Ventures – Strategic Alliances
Strategic Alliance:Agreement to gain competitive advantage through access to partner’s
resources, including markets, technologies, capital and human resources.
Joint Venture
a.Scale JV:Firms enter together into a stage of production, distribution or a new
market (for example: JV that produce components for
automobile producers). Objective: Economies of Scale
b.Link JV:Firms combine resources and capabilities from different stages of the value
chain. Objective: Synergies in R&D, production, distribution, marketing.
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JV and Strategic Alliances as Stable Networks
Characteristics:– High specific investments, high uncertainty
and/or– Complementary firm-specific resources and
organizational capabilities– Joint Ventures: Allocation of decision and
ownership rights– Strategic alliances: Allocation of decision rights,
no ownership rights– Weak Ties:
Trust instead of formal coordination mechanisms
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Conditions for JV and SA
Hennart 1988: „When knowledge is tacit, it cannot be effectively transferred in codified form; its exchange must rely on intimate human contact“ (366)
- High TC:Markets for intermediate inputs are subject to high transaction costs due to high specific investments and high uncertainty, leading to a transfer of decision and ownership rights.
- Firm-specific resources: The inputs are difficult to imitate by one of the parties.
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TC, Licensing and Joint Venture
TC
Specifity,Know-how Complexity,Uncertainty
Licensing JV Internal Hierarchy
S1 S2 S3
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Determinants of Decision and Ownership Rights in JV
Hennart 1988: „When knowledge is tacit, it cannot be effectively transferred in codified form; its exchange must rely on intimate human contact“ (366)
- According to the PR-theory, the contractibility of assets determines the governance structure.- Noncontractible assets require the transfer of decision and ownership rights.- Intangible assets refer to organizational, marketing, country-specific and technological know how.
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Property Rights-Explanation
ContractibleKnow-how
Non-contractible Know-how
Contractible Know-how Non-contractible Know-how
B
A
Joint VentureA to B:
Licensing
B to A:Licensing
Market Contract
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Joint Venture: Choice of Entry Mode
- Licensing
- Joint venture
- Wholly-owned subsidiary
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Market Entry and Control
Licensing: low control Joint Ventures: shared control Subsidiary (WOS): Decision and ownership
rights have the foreign headquarter
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Licensing: Low
Joint Venture: Medium
Wholly-owned Subsidiary: High
Market Entry and Resource Commitments
Market Entry and Diffusion Risk
Licensing: High
Joint Venture: Medium
Wholly-owned Subsidiary: Low
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Form of Market Entry
Strategic Variables
1. Scale Economies
2. Global Concentration
3. Market Potential
Environmental Variables
1. Country Risks
2. Cultural Distances
3. Demand Uncertainty
4. Competitive Dynamics
Resource Variables
1. Value of the Firm-specific Know-how
2. Tacit Knowledge of the Partner
3. International Experience
Eclectic Theory: Hill et al. 1990
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Latin „consortium“: association, society
= a temporary collaboration to perform a certain task or to provide a specific service or product more efficiently
= association of two or more individuals, companies, universities, or governments (or any combination)
Separate legal status Control over each participant is generally limited to
activities refering to the joint project
3.3.2 Consortia
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Consortium: NewPC-Consortium in Taiwan
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Consortia versus Internalization
Firms have to decide how much of the R&D they should be internally procured
- not possible to procure all R&D from outside - in-house R&D is necessary for implementation
This decision depends on a number of factors:- transaction and disincentive costs- technological and organizational capabilities
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Transaction Cost Explanation
Organization has to balance transaction costs with incentives
– Firm is more likely to integrate R&D activities (in-house) where transaction costs are high
– Firm is more likely to procure R&D from external partners where incentives can be enhanced with market competition
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Organizational Capability Theory (1)
Schumpeter (1912, 1942) and Penrose (1959)
(resource based view)capabilities of the firm result in competitive
advantagescapabilities have to be enhanced through
innovation and learning
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Organizational Capability Theory (2)
R&D transactions: companies acquire scientific knowledge from outside and form alliances with other firms with different capabilities.
Organizational Capability theory Organizational Capability theory - lack of knowledge and sufficient capabilities of the firms- advantage of utilizing the new capabilities of external
partners can exceed the coordinaton cost disadvantages.
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Sakakibara‘s ModelMotives for Consortia
Economic View Economic View Cost-sharing MotivesCost-sharing Motives– symmetrical firms in terms of capabilities or knowledge
– same industry & outcome
Organizational View Organizational View Skill-Sharing Motives Skill-Sharing Motives– heterogeneous capabilities
– direct competitors in the product market
– knowledge base tacit knowledge difficult to transmit complementary knowledge
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Sakakibara‘s ModelSummary
Motives Motives Cost-sharingCost-sharing Skill-sharingSkill-sharingcompetition in R&D consortia
single-industry competition
wide industry participation
firm capabilities in R&D consortia
homogeneous, substitutable
heterogeneous, complementary
role of R&D consortia
divide tasks create/transfer knowledge
private R&D spending
can decrease can increase
constraints firms face
financial resources research capabilities
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3.4 Internationalization through Franchising-Networks
to
Franchisor: System-specific Know-howFranchisee: Initial FeeSpecific Investments
t
Royalties
Characteristics:-Franchisees and franchisor are entrepreneurs.- Intangible Assets: Franchisor‘s brand name, system-specific know howFranchisee‘s local market know how-Incentive system:Royalties and intial fees
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Transaction Cost Theory
TC
Specifity,Uncertainty
Licensing FranchisingCompany-owned subsidiaríes
S1 S2 S3
‚Hostage Model‘
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Intangible assetsSystem-specific und local market knowledge
Residual decision rights
Proportion ofcompany-owned Outlets (PCO)
Royalties/Initial Fees
A Property Rights View
Ownership rights (Residual income rights)
H1
H2
H3
How is the knowledge distrubutedBetween the franchisor and the franchisee?
Who is the residual decision maker (whose decisions influences the residual income)?
How are the ownership rights allocated?
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Entry Forms
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Determinants of the Market Entry Choice: Environmental and Organisational Factors
- Geographic distance
- Cultural distance
- Country risk
- Political risk
- Market volume and growth
- Resources of the partner- Brand name assets- International experience
- Financial situation of the franchisor
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Efficiency Comparison
Subsidiary (WOS)1. High resource commitments2. Central control3. Protection of the system-specific know how Appropriate:
– High cultural and geographic distance– Strong brand name– Important system-specific know how– High market potential and growth– International experience
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Area Development Agreement1. Lower resource commitment2. Relatively strong central control3. Fast market entry
Appropriate:– High geographic and cultural distances– Uncertain market development– Instable legal environment– Local market knowledge is very important– No international experience
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Direct FranchisingHigh control and agency costs
Appropriate:– Low geographic and cultural differences
– Strong local market know how of the franchisees
– Relatively small market potential and growth
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Joint Venture1. Shared control
2. Know-how diffusion risk
3. Lower risk
Appropriate:
– Franchisor has not enough local market knowledge
– Uncertain market development
– High legal and political uncertainty
– Relatively high cultural differences
– Legal barriers
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Master FranchisingLower central control
Appropriate:– High geografic and cultural differences– No international experience – High political risk– Strong market growth– High market uncertainty– Local market know-how is very important.
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3.5 Mergers & Acquisitions Merger Waves
Source: 1895-1920: Nelson (1959); 1921-1939: Thorp/Crowder (1941), 1940-1962: FTC (1971, 1972), 1963-99: MergerStat Review, 2000-03: Thomson Financial, FH Zwickau
1895 00 05 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 00
1000
2000
3000
4000
5000
6000
7000
0
97-04 16-29
(1) „IndustrialRevolution"leads tomonopolies
65-69(2) New Anti-trust laws leads tovertical integrations
(3) “Conglomerate era"due to diversification theory
(4) “Merger mania",
liberalization and deregul-
ation 84-89
(5) Globalization,Single European Market,
Shareholder ValueInternet
93-??
8000
90001999:9.218
10000# of casesWith US-firm involvements
110002000:10.952
2001:9.614
2002:8.423
30.09.2003:5.444
05
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Mergers and Diversification Strategies (1)
Unrelated M&A: Conglomerate Mergers– NPV(A+B) = NPV(A) + NPV(B)– P = NPV(A+B) – NPV(A)– Only generates normal economic profit
Related M&A: Vertical and Horizontal IntegrationNPV(A+B) > NPV(A) + NPV(B) M&A generate strategic rents
NPV = Synergies – Premium (preacquisition value – paid price)
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Mergers and Diversification Strategies (2)
NVP(A) = 15000; NVP(B) = 10000 Unrelated M&A: Conglomerate Mergers
– NPV(A+B) = NPV(A) + NPV(B) = 25000– P = NPV(A+B) – NPV(A) = 10000– Only generates normal economic profit
Related M&A: Vertical and Horizontal Integration– NPV(A+B) = 30000 > NPV(A) + NPV(B)– P = NPV(A+B) – NPV(A) = 15000 M&A generate strategic rents
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Technical economies (functional and management synergies)
marketing, production, organization, scheduling, and compensation
Pecuniary economies
dictate prices by exerting market power
Diversification economies (financial synergies)
portfolio management and risk reduction
Lubatkin (1983)
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The reduction of production/distribution/coordination costs:
1. Through economies of scale
2. Through the adoption of more efficient production or organizational technology
3. Through the increased utilization of the bidder’s management team
4. Through a reduction of agency costs
Jensen & Ruback 1983 (1)
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Financial Motivations:
1. To avoid bankruptcy costs
1. To increase leverage opportunities
1. To gain tax advantages
To gain power in product markets
To eliminate inefficient target management
Jensen & Ruback 1983 (2)
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Target Firm’s Responses against the Bidding Firm
Greenmail: target firm purchases any of its stock owned by a bidding firm for a price which is greater than the current market price.
Poison Pills: any action of a target firm that makes the acquisition very costly, e.g. issue rights for the current stockholders for a special cash dividend in the case of a unfriendly take-over.
Crown jewel sale: target sells parts of the company, which are most profitable for the bidding firm.
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Synergy realization
Organizational integration
Combination potential
Employees‘
resistance
+
+
+
+
+
-
Postmerger Integration Model
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Combination Potential
Economies of scale – similar operations
Operational synergies Administration synergies Managerial synergies Financial synergies
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Employee Resistance
M&As affect career plans M&As create appearance of psychological
problems such as:– “We versus they” antagonism– Distrust, Tension and Hostility
Cultural problems
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Management style similarity– Attenuates employee resistance– Cushions the degree of change and enhances organizational
integration Cross-border Combination
– Impede the interaction and coordination because of country differences
– Culture clashes promoting employee resistance Relative Size
– Insufficient managerial attention to smaller targets– Positively associated with organizational integration
Factors influencing integration
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• The higher the combination potential, the larger the synergy
realisation.
• The stronger the organizational integration, the larger the synergy
realisation.
• The higher the employee resistance, the lower the synergy
realisation.
•The higher the combination potential, the greater the organizational
integration.
• The higher the combination potential, the larger the employee
resistance.
• The greater the organizational integration, the larger the employee
resistance.
Hypotheses
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Networks and M&Asa. Alliances versus M&A
Alliances allow simultaneous and fast entering into multiple countries
Both achieve complementary capabilities and/or economies of scale effects
Alliances have a lower degree of organizational integration than acquisitions
In alliances all decisions must be made by consensus among the partner firms
Alliances are more flexible to adjust to environmental changes
Alliances result in higher knowledge spill-over risks
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b.Acquisitions versus Greenfield Investments
Advantages of greenfield investments: - Know-how advantage of the MNC
(ownership-specific advantages)- High market potential- Long-term market growth- Few competitiors- Stable legal and political institutional factors
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c. Greenfield/Brownfield Investment/Acquisition
Mode Choice
Preference for external expansion(acquisition)
Preference for internal expansion(greenfield)
The acquired foreign firmhas sufficient
resources?
Critical resources arefreely available at the foreign market.
A B G B
yes no yes no
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Global and multidomestic strategies are associated with different types of firm-specific advantages (FSAs):1.location-bound FSAs2.Nonlocation bound FSAs
Global companies: exploitation of nonlocation-bound home based firm-specific advantages
Multidomestic companies: exploitation of location-bound FSAs using host country specific advantages
Impact of International Strategy on the Market Entry Mode (1)
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International Strategy: Impact onM&A and Network Form (2)
Hypotheses:- Companies following Global Strategy higher proportion of Greenfield Investments
- Companies following Multidomestic Strategy higher proportion of Acquisitions and Alliances
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Firm Strategy, Structure and
Rivalry
Factor Conditions
Related and Supporting Industries
Demand Conditions
Government
Porter‘s Diamond Model
3.6 Internationalization through Clusters
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Competitive Advantage through Clusters
They include an array of linked industries and other entities important to competition.
Many clusters include governmental and other institutions that provide specialized training, education, information, research and technical support.
Clusters can be extended downstream, horizontally and laterally.
„Clusters are geographic concentrations of interconnected companies and institutions in a particular field.“ (Michael E.Porter)
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Organisation Design of Clusters
Characteristics:
– Stable network based on the core competencies of partner firms
– Location-bound
– Institutional support Configuration:
– Less formal coordination
- Exclusive brand name at the market
- Stable pool of cooperation partners Soft Integration Factors:
– Trust as coordination mechanism IT-supported network relations
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Evolution of Clusters
historical circumstances; unusual local demand; existence of supplier industry and related industries; a couple of innovative companies stimulate others.
Birth
Decline
Evolution
influence of government and other institutions expands; new entrepreneurs are attracted; suppliers emerge; information accumulates; infrastructure is improved.
technological discontinuities; a shift in buyer‘s needs
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Advantages of Clusters (1)
(A) Access to employees and suppliers
Can recruit from a pool of specialized and experienced employees lowers search and transactions costs
Offer a specialized supplier network minimizes the need for inventory eliminates delays lowers the opportunism risk and coordination costs
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Advantages of Clusters (2)(B) Preferred access to specialized information Extensive market, technical and competitive
information accumulates within a cluster
(C) Access to institutions and public goods Investments by government or other public
institutions and universities can enhance a company’s productivity
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Advantages of Clusters (3)
(D) Higher motivation and easier performance measurement
Local rivalry is highly motivating Peer pressure leads to competitive pressure Easier to compare and measure performances
because of local competition
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Regional Objective: Creation of Location-specific Competitive Advantage
Innovation und Know-How-Upgrading
Strong local
competition
Suppliers with high
capabilities
Sophisticated demand
Specific
resources
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3. 7 Internationalization through Countertrade
- Explanation:Market failure at the international product and financial markets
Advantages for the MNC: Realization of a higher market potential
-Informal coordination mechanisms (reputation capital, trust) instead of formal coordination mechanisms
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Forms of Counter Trade
Classical barter
- Clearing arrangement
- Switch Trading Buy-Back Counterpurchase Offset
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Use of Counter Trade
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
Barter Offset Buyback Counterpurchase Switches
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Barter
Clearing arrangement:
- purchase equal value of goods and services
Switch-trading:
- goods that are useless to the trading country can be sold or transferred to a third country
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Advantages of Barter
To open new markets To avoid protectionist barriers To stimulate trade To trade with the Second World
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Advantages of Offsets
Secure competitive advantage Increase local employment Create alternative sources of financing Transfer technology Avoid taxes and tariffs
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Counter Purchase
Two hard currency contracts Goods are taken back by the seller These goods are not those produced with
the equipment sold. They are from a list which is set up by the importer.
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Buy-Back
Transfer of technology, plant, equipment and technical assistance
Purchase of a certain percentage of the output Long-term orientation
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Buy-back-contractExample
A producer of luxery products from France (F) sells a machine to a company in Ukraine in order to produce and sell these products in Ukraine. The Ukraine producer (U) cannot use these production technology for other products.
Questions:a) Market contract between F and Ukraineb) Vertical integrationc) Buy-back: The F-producer concludes a contract to buy a certain amount of
product from the Ukraine producer.
F UMarket Contract:What is the problem?
Buy-back:‚double hostage effect‘
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Hostage Model of Countertrade (Williamson 1983; Hennart 1988)
TC
Specifity,Uncertainty
Licensing Countertrade Hierarchy: DI
S1 S2 S3
‚Hostage-effect‘
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3.8 Organization Design of the ‘MNC of the Future’
Theses (based on expert interviews)
I. Evolution of ‘virtual countries’
II. Evolution of networks
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„Shifting Networks“ „Virtual Countries“
Processes External Internal
Employment Ad hoc projects with independent partners
Employees
Marketing Partner-specific branding Umbrella branding
OrganizationSelf-organizing teams and networks
Hierarchy with decentralized structures
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Cases for Discussion
Case Study: Joint Venture The car producer ADOK uses the input goods A and B for the production of OMEGA.
The following resources are given: ADOK has firm-specific production know how in producing A but has now experience
in producing B. MAX has firm-specific advantages in developing and producing B. MAX has built up
his ownership-specific advantages through high R&D-investments in the last decades. His capabilities are difficult to imitate by potential competitors.
In addition, the market environment is very uncertain; especially the technological uncertainty is very high because new competitors frequently enter the industry.
A) Which organizational form should be used to produce B?(Market contract, joint venture between MAX and ADOK or internal production)B) Now we assume that MAX has no firm-specific advantages in B; in addition the market
uncertainty is relatively low. Which organizational decision should be made by ADOK in this situation?
C) Assume that ADOK is in Germany and MAX in Bulgaria? Does this influence the organization decision for ADOK and why?
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Case: Joint Venture, Acquisition and Greenfield Investment ALPHA want to enter the following markets:Market A:Characteristics:
High market uncertainty, high market potential and growth, unstable political and legal institutional structure, high cultural differences. In addition, the competitors in the host country have high local market advantages (knowledge of the product and labour market).
(1) ALPHA’S Market entry decision:Joint venture/acquisition/greenfield investment?
Market B:Characteristics:
Many competitors, no market entry barriers, high market potential and growth, longterm international experience. In addition, ALPHA has high competitive advantages in production and R&D. In addition, ALPHA’s organizational culture enables empowerment and decentralized decision making.
(2) Which market entry strategy is efficient in this market?(3) Under which condition would you choose brownfield investment?
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Case: Discussion of Hypotheses – Market Entry in China: JV vs. Licensing
H1: European companies (EC) which consider China as a high risk country are less likely to enter china through JV.
H2: The larger the cultural distance between EC firms’ home countries and China, the more likely they are to employ JV.
H3: The larger the political and economic distance between EC firms’ home countries and China, the less likely these firms are to employ JV.
H4: The greater the international experience of EC firms in China, the more they will employ JV.
H5: The larger the firm size, the more likely that firms will employ JV. H6: When know how is of a tacit nature, it is more likely to be transferred through
JV. H7: The greater the transaction complexity and uncertainty, the greater the
likelihood that firms will use JV. H8: Firms employing a marketing mix strategy with standardized elements are
more likely to use licensing.
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Case: Market Entry of Japanese Firms in US – Acquisitions vs. Greenfield Investments
Discuss: H1: The greater the J-investor’s research and development intensity,
the higher the probability of greenfield investments. H2: The greater the J-investor’s experience in U.S. market, the higher
the probability of acquisitions. H3: The higher the rate of growth of demand in target market, the
higher the incentive to enter through acquisitions. H4:The lower the J-investor’s endowment in human resources, the
higher the likelihood of acquisitions. H5: The larger the size of subsidiary relative to that of the investor,
the higher the probability of an acquisition.