The organisation of MNE activity: the external network

: 2012.4.19 :

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 Agreements Buyer/Seller Agreements Strategic Alliances The Choice between Acquisitions, Alliances and Greenfield Investment A Note on Cross-Border Cartels and Collusion Conclusions

Introduction
Globalisation the costs of using the market have declined relative to the costs of organisation within corporate hierarchies strategic 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.

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-border cooperative relationships: 1. Joint ventures 2. Strategic alliances.

The Spectrum of Organisational Modes: Cooperation and Competition

Single Company
Separate Firm

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 risk bearing and control sharing.

The Spectrum of Organisational Modes: Cooperation and Competition

Based on Buckley and Casson (1985).

The Spectrum of Organisational Modes: Cooperation and Competition

In some cases, firms may work together to achieve specific and well-articulated goals, and for a limited period of time. In others, they may form JVs or non-equity alliances to promote and organise a large number of diverse activities over a much longer period of time. Some firms, when faced with a particular market failure, may react by adopting an exit strategy and internalise that market. Others might respond by adopting a voice strategy and work to lower the transaction costs of using it (Hirschman, 1970).

Until comparatively recently, most of the literature on MNE activity and international production concentrated on the nature of the ownership rather than the transactional relationships between firms.

The Spectrum of Organisational Modes: Cooperation and Competition

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.

Cooperative Agreements: Some Theoretical and Methodological Considerations

Transaction Cost and Resource Attributes Some Methodological Issues

Cooperative Agreements: Some Theoretical and Methodological Considerations

Firms internalise their cross-border intermediate product markets (I) is determined by the interaction of its ownershipspecific 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 countries in which it operates, but also by its own institutional and other competences in managing different kinds of cooperative relationships.

Transaction Cost and Resource Attributes

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

Transaction Cost and Resource Attributes

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

Transaction Cost and Resource Attributes

When firms are most likely to conclude alliances complementary 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 costs hard minerals vs. service sectors

Transaction Cost and Resource Attributes

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 our opinion, 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.

Some Methodological Issues

There are two cooperative modes of entry that have received a great deal of attention in the literature namely, joint equity ventures and strategic alliances and 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.

Some Methodological Issues

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.

Some Methodological Issues

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).

Joint Equity Ventures Why Do Firms Enter into Joint Ventures?

The Definition of JVs Any long-term alliance which falls short of a merger, and in which two or more economic entities own a sufficiently large proportion of the equity capital to give each of them some degree of control or influence over key areas of decision making

* proportion of the equity capital

Joint Equity Ventures 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 contribution both financial and non-financial that 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.

Joint Equity Ventures Why Do Firms Enter into Joint Ventures?

Vertical JVs Some JVs are vertical and essentially replace offshore subcontracting and/or licensing relationships along the valueadded 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 valueadded 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.

Joint Equity Ventures 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

Joint Equity Ventures 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

Joint Equity Ventures

Cultural and Institutional Influences in Joint Ventures
Culture (1) collectivism-individualism (2) masculinityfemininity (3) uncertainty avoidance (4) power distance (5) psychic distance Institutional (1)coercive (2)mimetic (3)normative

Joint Equity Ventures 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.

Joint Equity Ventures 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.

Joint Equity Ventures 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.

Joint Equity Ventures 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

Non-Equity Cooperative Agreements

Two main types of cooperative business relationships: (1) Vertical relationships involving buyers and sellers. (2) Horizontal relationships 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.

Non-Equity Cooperative Agreements

Buyer/Seller Agreements(Vertical non-equity relationaships)
backward cooperative/buying relationships May consist of a one-off transaction in which the contractor simply specifies what he/she needs from the supplier, and accepts or rejects the product according to whether or not it meets that specification.

Forward cooperative/selling agreements (1) Licensing agreements (2) Franchising agreements (3) Management Contracts (4) Turnkey Contract

Non-Equity Cooperative Agreements

Buyer/Seller Agreements(Vertical non-equity relationaship)
Licensing Definition Typically involve the transfer of a right to use a specific piece of proprietary 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, the agreement may allow the contractor some control over the use made of the rights to ensure that his/her own competitive position is protected.

Payment way The usual payment for a licence is a fee or royalty based on the value or quantity of the output which embodies the information and knowledge provided by the licensor.Occasionally it may also be related to the profits earned by the licensee.

Non-Equity Cooperative Agreements

Buyer/Seller Agreements(Vertical non-equity relationaship)
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.

Non-Equity Cooperative Agreements

Buyer/Seller Agreements(Vertical non-equity relationaship)
Management Contracts Definition The know-how of the management of the contractor is transferred to the contractee, who then has the responsibility for undertaking the management services according to the terms of the contract. Payment Way Usually consists of a lump-sum managerial fee plus a variable royalty based on turnover and/or profits. *Rarely concerned with transferring only management skills.

Non-Equity Cooperative Agreements

Buyer/Seller Agreements(Vertical non-equity relationaship)
Turnkey Contract Definition A one-off agreement by which a foreign enterprise agrees to design, build and equip a complete unit of production, such as a petrochemical plant or a motor car factory, and then turns it over to a local enterprise after a running in period during which the staff of the foreign enterprise manages the establishment while training local personnel.

Payment Way Usually based on a formula which might include a lump-sum fee plus a royalty on the output produced.

Non-Equity Cooperative Agreements

Buyer/Seller Agreements(Vertical non-equity relationaship)
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 the affiliate of the investor.

Non-Equity Cooperative Agreements

Buyer/Seller Agreements(Vertical non-equity relationaship)
Vertical Cooperative Agreement Between Seller/Buyer To the Seller A non-equity arrangement alleviates the risks of ownership, but increases the transaction costs associated with the misuse or dissipation of property rights, whenever these cannot be fully protected through the contract, and/or where the litigation procedure is costly or ineffective. To the Buyer Subcontracting poses some similar and some different risks. Availability, price, quality and timing of delivery of the products being purchased are some of the areas in which a buying firm may fear that the kind of cooperation they require is not easily guaranteed by a contractual relationship.

Non-Equity Cooperative Agreements

Strategic Alliances(Horizontal non-equity relationships)
Cooperative agreements between firms supplying different products but engaging in broadly similar activities (horizontal nonequity 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 arising from 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 Agreements

Strategic Alliances(Horizontal non-equity relationships)

Non-Equity Cooperative Agreements

Strategic Alliances(Horizontal non-equity relationships)
Two large databases on alliances that are frequently used in empirical research : (1) CAIT Cooperative Agreements and Technology Indicators (2) SDC Securities Data Corporation

Non-Equity Cooperative Agreements

Strategic Alliances(Horizontal non-equity relationships)
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.

Non-Equity Cooperative Agreements

Strategic Alliances(Horizontal non-equity relationships)
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 of the 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

Non-Equity Cooperative Agreements

Strategic Alliances(Horizontal non-equity relationships)
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 to further utilise the productive ties within the network.

Non-Equity Cooperative Agreements

Strategic Alliances(Horizontal non-equity relationships)
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.

*Knowledge plays an important role in alliances.

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

The Choice between Acquisitions, Alliances and Greenfield Investment

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 alternate between 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 the MNE.

The Choice between Acquisitions, Alliances and Greenfield Investment

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

A Note on Cross-Border Cartels and Collusion

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.

A Note on Cross-Border Cartels and Collusion

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 the member firms; and where the products involved have few substitutes or potential substitutes.

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 transnational heterarchy has both blurred the boundaries of the firm.

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 include relationships between firms and NGOs.
Unconventional Form Non-profit organisations EX: (1)Starbucks and TransFair USA (2)Chiquita and the Rainforest Alliance

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