School of Management Fudan UniversityDouble Degree in International Management

Evolution of International Business 2013Veronica Binda

Class 1.Evolution of International Business:

A general introduction

Practicalities (1)First part's – Teacher

Veronica Binda

Email: veronica.binda@unibocconi.it

Office hours:from April, 9th to April, 12th- every day after the lecture

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)

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”

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%

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”

(1) What is this course about?

International Business: a “micro” and a “macro” perspective

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?

...

International Business: The “macro” level

Home Economy

Companies

Host Economy

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)

(2) What is a multinational company? Why do multinational companies exist?

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

Why do multinationals exist? 1) The eclectic (OLI) paradigm (Dunning)

Ownership advantages Location advantagesInternalization advantages

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

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

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

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

…

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

(3) Evolution of International Business: the “globalization waves”

Waves of globalization

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

(4) International Business before the First Globalization Wave

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)

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

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

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

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?

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!