Dba bvasconez dherrera Cluster

Byron Vásconez & Daniel Herrera
Daniel Herrera
Byron Vásconez
July 20th 2016
Administrative factors behind the MNE performance
“Multinational enterprise, internal governance, and industrial organization”
Teece, D.J. (1985).
Modern Management Systems
Bogota DBA III

Byron Vásconez & Daniel Herrera DBA 3 – Centrum PUCP- MsM
1. Introduction
2. Some Basics Concepts
3. Insights about MNE and IO
4. Empirical Literature
5. Other relevant aspects
6. Conclusions
7. References
Outline
Introduction
Some Basic Concepts about MNE and Corporate Strategy
Insights about MNE, Internal Governance and IO:
Empirical Literature
Other Relevant aspects
Conclusions
References
2

Introduction
 Many companies have developed their strategy of growth outside from their local country
(Multinational Enterprise).
 Most of the literature on corporative strategy and performance of the MNE focuses on three
principals aspects: organization, resources and competitive advantages.
Within the business environment and organization, exists an particular interest of research on
what leds to MNE’s performance with host country conditions and internal governance. (and vice
versa)
 In this line, Teece’s work is a reference in the analysis of MNE, so the inclusion as a pivot in the
cluster will helps us to understanding the context of the decisions of internationalization of the
MNE in from market imperfection in host countries.
3
1. Introduction
6. Conclusions
7. References

Introduction
Why do the author wrote the article we are presenting? Teece proposed in previous studies that the internalization
of transaction costs incentivize the creation of MNE especially when it comes from vertical MNE.
Key Question of Paper: The analysis of market concentration of MNE and FDI in specific industries proposed by
Hymer was a contribution to positive economics of international firm but according with Teece, was misleading in its
emphasis upon market power rather efficiency analysis.
4
1. Introduction
6. Conclusions
7. References
 David Teece is a Professor of Hass School of Business in Berkeley from 1982. He received
a Ph.D. in economics, specializing in industrial economics, international trade, and
technological innovation. He is also the director of the Center for Global Strategy and
Governance and faculty director of the school’s Institute for Business Innovation. He has
authored over 30 books and 200 scholarly papers, and has been cited more than 92,000
times, per Google Scholar. Teece is pioneered on dynamic capabilities approach. (Personal
web page)
 In particular, we were interested in his analysis about how technology adoption and
innovation and its affect the industrial organization in specific industries and how Public
Policies need to be adapted.

Some Basic Concepts 1/3
 CORPORATE STRATEGY based on Collins and Montgomery (1985) on the
creation of competitive advantages in MNE and its interrelation between
three criteria.
 When a MNE strategy of grow through internationalization and
diversification from their local market, need to structure their organization
and resources associated with their business to create a competitive
advantage that allows it to maintain a desired level of performance.
5
1. Introduction
6. Conclusions
7. References
 MARKET ENTRY MODELS: Another important aspect is to understand the
dynamics of FDI and MNE. Several authors such as Penrose (1961), Aliber
(1970), Casson (1979) and Teece (1977) recognize that MNEs respond to a
dynamic pattern to move from exports to FDI. (Transaction Cost framework)
 According the Aliber’s benchmark model, there are many possible ways in
which market servicing strategy can evolve, depending upon the cost
structures of alternative modes and the pattern of market growth.
 Exists some criticism about this view but Cantwell (1991) sees the theory as
giving useful insights about the "timing" of FDI and "take-overs" of MNEs
which move into an unrelated business sector.

DIVERSIFICATION: An underpinning issue related to how a corporate parent in MNE may
or may not add value to that created by its business units is the extent and nature of the
diversity of the products or services it offers.
6
6. Conclusions
7. References
Horizontal
• Economies of Scale and
Scope
Conglomerates
• Coordination
Economics
Vertical integrated
• Scale, Scope and
Coordination economies
(Efficiency)
Corporate
value added
Forms
Related diversification Unrelated diversification
1. Introduction

Theories about MNE (Kojima, 1984)
 Macro economic approach
 FDI as International Flow (Arbitrage Theory) (Hymer, 1979)
 Location Theory ( Duning, 1979)
Government Import Restrictions ( Calvet, 1981)
Exhange Risk Exposure (Aliber, 1983)
MNE as supplement of International Trade (Kojima, 1978)
 Micro economic approach
Business Management (Kindleberger, 1969)
Market Power Approach ( Hymer,1960, Kindleberger 1984,1989)
Product Cycle Theory (Vernon, 1966, 1979)
Internalization (Transaction Cost) Theory of MNEs (Buckley and Casson, 1976; Teece, 1981)
Eclactic Paradigm OLI (Duning, 1980, 1989)
7
6. Conclusions
7. References
1. Introduction

MNE, Internal Governance and IO (Teece, 1985)
Hymer’s work is a contribution to positive economics of international firm, but is misleading in its emphasis upon market
power rather efficiency analysis.
Teece structured his criticism with three arguments:
i. Monopoly vs Efficiency:
• MNE varies according forms of FDI that Hymer did not considered, where efficiency are more important than revenue enhancing.
• Vertical integration is more complex to be used to extract monopoly rents except in the presence of transaction specific asset
(lock In effect). Horizontal Integration depend of a) Rent Yielding Asset (ie Technology) and b) inferior Market Transactions. In
both efficiency and rent extraction effect its included.
• Internalization approach failing to explain where FDI is more efficient form of internal organization.
ii. Host Country Controls:
• Governance on MNE depend on transaction-specific-assets.
• Governance structures in MNE and Host country, Symmetrical safeguards and Incentives. (Regulation, Arbitration, Tax Incentives,
Bilateral Investment Treaties, etc)
iii. Dynamic considerations:
• The approach underemphasize on dynamics. The relation of Market Power and efficiency could change in the time in particular if
market power is defensible.
8
1. Introduction
6. Conclusions
7. References

Comments about paper: Empirical Literature
9
1. Introduction
6. Conclusions
7. References
 Most empirical analysis of FDI by MNE impact on concentration has focused in
developed Countries. A few studies in developing countries are based mostly on
data from 1970 to 1990. (OECD, 2012)
 Forte (2013) analyzed 27 empirical studies published since 1979 allows us to
identify two types of approaches:
 First, there are authors that focus on the impact of foreign presence in the
level of host country industry concentration and second others authors have
turned to the analysis of the effects of foreign presence in host country local
firms, particularly on the entry, exit or survival of domestic firms.
 In resume, most of the studies seems that FDI is more like to raise host-
country concentration rates in developing countries than in mature
economies but evidence until now is mixed.
 In other hand, exists empirical evidence about productivity growth and spillover
effects with the presence of FDI. As report of OECD (2012) summarizes later
studies for developed countries confirm increase the level of value added and
labor productivity in particular in industries with a high component of technology.
The evidence in developing countries are mixed and differ across countries and
sectors.
 Important question behind this is which effect is more important according the
internal governance of MNE in different environments.

Comments about paper: FDI in Latam
10
1. Introduction
6. Conclusions
7. References
 FDI are heterogeneous across Latin-American countries. Most of FDI in Latin America is focused in Vertical FDI (Gas, Oil,
metal products).
 New significant growth of Multilatinas firms open new questions about internal governance, rents from inefficient markets and
its performance.

Comments to the paper: Other relevant aspects
11
1. Introduction
6. Conclusions
7. References
 Dynamic Capabilities. If MNEs are entering in a highly concentrated industry, the immediate
impact of the entry of MNCs will be an increase in the number of firms in the industry which is more
likely to provide competition to the existing market leaders. But the long run effect of FDI on market
structure will depend on competitive strength and technological capabilities of host country firms.
 Teece proposal, about dynamic capabilities framework is especially relevant to markets exposed
to rapid technological change and strong international competition. The key questions are how is
design the orchestration of capabilities and resources when there is such a diversity of assets inside
and outside the enterprise and, how this competitive advantage (capability) may increase o
decrease level of competition in local markets. (ie. Pharmaceutics, Telecommunications).

Comments to the paper: Relationship with other papers in Cluster
12
1. Introduction
6. Conclusions
7. References
Paper Key Question Comment
Arrow, K.J. (1964). Control in large
organizations. Management Science 10(3),
397-408.
Organizations are a means of achieving the benefits of collective action
in situations where the price system fails, (or contractual) but a better
allocation of resources may use a nonmarket methods as coalitions,
teams, committees, etc.
Its important develop a Control System and enforcement rules (and
incentives) to align utility function into organization.
Early work about organizational design including discuss
the problem in public also and private organizations.
Information Monitoring system of contracts of means
transaction cost.
Also, Arrow in 1974 wrote a little book about topics of
authority, codes of responsibility trust and values how
other forms of nonmarket methods to control large
organizations.
Bartlett, C. and Ghoshal, S. (1998). Organizing
for worldwide effectiveness: The
transnational solution. California
Management Review, 31(1), 1-21.
Authors analyzed strategic outlook of different MNE and how this
balanced the potential needs for global integration and global
differentiation.
B&G proposed that firms must gain in the time sufficient flexibility to
adapt their strategies to global competitiveness global and local
demands.
Bartlett, C. and Ghoshal (1991) proposed a framework to
evaluate the forces and pressure for global integration and
differentiation. (Integration – Responsiveness Framework).
For example, in the case for local responsiveness by local
government or regulation specific asset (High pressure for
differentiation) and high demand for demand for
integration due economics of scale, the organization will be
made like Transnational.
Jacque L. L. & Lorange, P. (1984). The
international control conundrum: The case of
Hyperinflationary subsidiaries. Journal of
Business Studies 15(2), 185-201
J&L studied the impact of exchange rates and hyper inflation of local
companies in MNE firms. The authors shows that many subsidiaries are
complex to evaluate their performance if its difficult to estimate foreign
currency exchange rate. The authors a model to analyze budget in MNE
under complex conditions into MNE.
Management Control Systems for MNE must somehow
incorporate multiplicity of contextual factors that are
somewhat tied to the local environments in which MNE
operate for example, exchange rate fluctuations, inflation,
price controls, etc.

Conclusions (Open Discussion)
 Hymer’s contribution to positive economics its important because introduce issues of IO in International Economics in
early years but the theory have several aspects that must be extended. Teece (1985) resume 3 relevant aspects:
Monopoly vs. efficiency, Host Country Controls and Dynamic issues.
 Teece’s criticism are relevant because contextualized the fact of market power is a static and partial view of markets for
MNE and their performance and also depends of different models of internal governance of MNE.
 Teece’s Framework of Dynamic Capabilities result in a important complement to explain particular governance of MNE
and their high performance.
The empirical evidence also makes it clear that the influence of FDI on local industrial structure is heterogeneous and
outcomes on firm performance are directly linked with mature of markets, degree of flexibility of asset and level of
efficiency to translate from local operation to MNE.
 Its important to extend the research on Latin-American markets, in particular how Foreign MNE exploits their dynamic
capability in local markets and if this has influence in market concentration. Also, results relevant explore the internal
governance of Multilatinas firms and their process of internationalization in recent years.
13
1. Introduction
6. Conclusions
7. References

References
Arrow, K.J. (1964). Control in large organizations. Management Science 10(3), 397-408.
Aliber, R. Z. (1970), “A theory of direct foreign investment”, in C. P. Kindleberger (ed.) pp 17-34, The International Firm. Cambridge, Mass: MIT Press.
Blalock, G. and Gertler, P., J. (2009). “How firm capabilities affect who benefits from foreign technology”. Journal of Development Economics, 90(2), 192–199.
Bartlett, C. and Ghoshal, S. (1998). Organizing for worldwide effectiveness: The transnational solution. California Management Review, 31(1), 1-21.
Buckley, P. J. (1985) "A critical view of theories of the multinational enterprise", in P. J. Buckley and M. Casson (eds.), pp. 1-19, The Economic Theory of Multinational Enterprise.
London: The Macmillan Press
Casson, M. C (1982), "Transaction costs and the theory of the multinational enterprise", in A.M. Rugman (ed.), pp. 24-43, New Theories of the Multinational Enterprise. New York: St
Martin’s Press.
CEPAL, (2016), IED en America Latina, Santiago, UN
Duning,J. (1980), "Towards an eclectic theory of international production", Journal of International Business Studies, 11(1):9-31.
Forte, R. ( 2013), “Multinational firms and host country market structure: a review of empirical literature”, Working Paper School of Economics and Management, University of Porto
Jacque L. L. & Lorange, P. (1984). The international control conundrum: The case of Hyperinflationary subsidiaries. Journal of Business Studies 15(2), 185-201
Hymer, S. (1979), “The Multinational Corporation: A Radical Approach’. Cambridge: Cambridge University Press.
Kijima, K. (1984), "Micro and Macro Economic Models of Foreign Direct Investment: Towards a Synthesis", Hitotsubachi Journal of Economics, 25(2):1-20.
OECD, (2012), FDI for development, Maximizing benefits, minimizing cost. Paris, OECD Publishing.
Teece, D. (1985), "Multinational enterprise, internal governance and industrial organization", American Economic Review, 75(2):233-237.
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1. Introduction
6. Conclusions
7. References

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