Multinationals, Technology & Competitiveness (RLE International Business)

John Dunning

• Publisher: Routledge
• Year: 2013
• ISBN:
  9781135124205
• Edition: 1
• Topic: Betriebswirtschaft
• Subtopic: Internationale Wirtschaft

This book explores some aspects of the interface between technology, competitiveness and the role of multinational enterprises in the world economy. This group of essays stresses the role of asset creation and usage, rather than reliance on natural factor endowments as a basis for national competitiveness and examines the role of multinational enterprises as vehicles for technological transfer, and the efficient co-ordination of economic activity across national boundaries.

Chapter One

Introduction

SOME THEMES OF THIS MONOGRAPH

This monograph explores some aspects of the interface between tech­ nology, competitiveness and the role of multinational enterprises (MNEs) in the modern world economy. In so doing it makes use of a number of paradigms and theories, but its starting point is the eclectic paradigm of international production set out in Dunning (1988). This paradigm suggests that existence and growth of firms and the location of their production will depend upon their ability, first, to generate and sustain some income-generating advantage or set of advantages over and above that of their competitors or potential competitors; second, to make the best use of these advantages, either by extending their own activities or by selling their right of use to other firms; and, third, to choose the most effective locations to create these advantages and to produce value-added activity and co-ordinate inter- and intra-firm trans­ actions arising from them. The paradigm draws upon two main streams of economic thought; they are the theory of the distribution of factor endowments and the theory of economic organization, and particularly that part of each concerned with the relative efficiencies of markets and hierarchies in allocating resources both between and within sectors.

Although the paradigm has been mainly used to explain international production, it can also be helpful in evaluating the competitiveness of firms, and particularly those in an international economy. From a firm's viewpoint, its ability to compete rests on its ability to produce the kind of products which consumers wish to buy (or can be persuaded to buy), and to organize the activities required to do so in such a way which mini­ mizes production and transaction costs. Both these tasks have a locational dimension and all three - the choice of 'what and how to produce', of 'how to organize production' and 'where to locate value adding activities' - reflect the ability of firms to make the best use of factor endowments, including the creation of new endowments, and the organizational routes for their management such as the spot market, various contractual relations including strategic alliances, joint ven­ tures, etc. and ·internal hierarchies. At any rate, competitiveness is usually defined in terms either of the firm's performance as a whole in relation to what it perceives to be its main competitors, or its ability to produce and sell a particular range of products or capture specific markets. Measures include profitability, growth of asset value, market share or change in market share, export performance, productivity, and so on.

This monograph contends that the internationalization of production not only affects the competitiveness of the firms undertaking the pro­ duction but that of other firms which are part of its sphere of influence or network of activities. Foremost among these are suppliers and competi­ tors in both the home countries of MNEs and the host countries in which their affiliates operate, but, through such avenues as managerial and labour turnover, the overall repercussions are often much wider than this. Both within industries and between industries, MNEs affect the way economic activity is organized, the pattern of that activity and its outcome; in short, the competitiveness of countries.

The competitiveness of countries is an even more elusive concept to define than the competitiveness of firms. Interpretations and definitions abound. At a macro level, national competitiveness might mean the ability of a country to sustain a comparable rate of growth of its gross national product (GNP) to that of other countries with a similar structure of resources and stage of development.¹ However, most definitions tend to get behind the reasons for this and concentrate on the efficiency of resource usage within sectors using some measure of productivity, and on the efficiency of resource allocation between sectors using some method of revealed comparative advantage, including export-import ratios, for particular sectors. Chapters 4, 5 and 9 in this book examine the role of MNEs in promoting this kind of competitiveness.

The interesting aspect of the internationalization of business is that it highlights the difference between the competitiveness of firms and that of countries. Multinational enterprises judge their success by how successful they perform relative to other firms independently of where they produce their output;² indeed, many MNEs produce the majority of the value-added outside their national boundaries (Stopford and Dunning 1982; UNCTC 1983, 1988). In the language of the eclectic paradigm the competitiveness of firms will be ownership-specific but will depend on the ability of firms to make the best use of both endogenous and exogenous resources to attain their objectives, wherever the value­ adding activities might be located. Countires, however, judge success by the efficiency at which their own resources, or those which their firms may use abroad, can create value-added activities for their own citizens. Although this depends partly on the ownership of firms, essentially it rests on the extent, use and pattern made of location specific or immobile resources.

The difference was not always so. Indeed, 100 years ago the assump­tion of the classical theory of trade that resources were immobile across boundaries, and that the only advantage which firms of one nationality possessed over those of another was their access to the natural endow­ ments of the country in which they located was basically true in practice. Neither does the neo-classical model of trade allow for any ownership­ specific advantages of firms, and international resource allocation is assumed to be based purely on the distribution of factor endowments.

Two interrelated factors have changed this situation, and they both have done so by introducing the economics of market failure into the equation.

The first is what might be called the knowledge of asset creation andusage. This essentially refers to the ability of firms and countries to innovate new products, processes and materials or to make better use of existing products, processes and materials, and to co-ordinate the production and marketing of these in the most efficient way. Such knowledge not only embraces product or process technology, but also that relating to complementary activities such as purchasing, finance, marketing and so on.

The second is what might be called the knowledge of organizing economic activity; this is the capacity of firms, either internally or by establishing a contractual but ongoing relationship with other firms, to engage in, and/or co-ordinate activities which might otherwise have been undertaken by independent firms. Such value-adding activities may be integrated (that is, internalized) by firms of a given value-added chain (for example, vertical integration) or across value-added chains (for instance, horizontal integration). These activities may take place within or across national boundaries. But the net result of both forms of knowledge of co-ordination has been the extension of the boundaries of firms; the first through the economies of variable proportions or scale of the plant and the latter through the economies of scope and synergy.

The point to notice about both forms of knowledge is that:

• (1) they cannot be thought of as natural factor endowments; they have to be created;³
• (2) their creation need not rest on the presence of location-specific resources in the country of creation;
• (3) since often (and particularly the technology of asset creation) takes on the characteristics of a public good, this means that in order to ensure their production, the firms have to be given some protection against the value of the output of this production being dissipated before a normal profit is earned (they can only exist in imperfect markets);
• (4) whatever the ability of firms to co-ordinate separate economic activities, the fact that they choose to do so rather than use alternate routes, notably the market, suggests there is some kind of market failure causing extended transaction costs to be higher than hierarchical transaction costs.

Moreover, as has been described in great detail elsewhere - Rugman (1981, 1986), Teece (1986), Buckley and Casson (1985), Casson (1987), Hennart (1986), Dunning (1988)- markets as an organizational route for many kinds (but not all) of goods and services have become increasingly imperfect over the past century. This is due to three main reasons:

• (1) the incre·asing element of uncertainty (this particularly applies to some cross-border transaction) of the market to guarantee the buyer or the seller the terms of the agreement (for example, with respect to quality, price, delivery dates, protection of property rights); and the increasing costs of redressing the failures of the market.⁴
• (2) the increasing extent to which the economic consequences of the exchange are not captured in the terms agreed by the buyer and seller, that is, there are external costs or benefits to a transaction which a buyer or seller may wish to capture for himself. These economies might include those arising from the co-ordination of the use of the assets which are necessary to supply the products separately.⁵ Economies of scope are another externality.
• (3) the increasing extent to which economies of large-scale production can only be fully reaped if only one or a few firms competing under the oligopolistic conditions make up the market. This conflict, between the gains of lower costs and the losses arising from imperfect competition, has led to the concept of workable compe­ tition and contestable markets being developed by industrial economists.

There are a whole set of exogenous circumstances which have led to an increase in market failure in recent years. Interacting with the technology and the volatility of the environment, (Kogut, 1985) has been the role of governments. Governments may and do affect a nation's competi­ tiveness and that of its firms in a myriad of ways. They do so by affecting the ability of economic agents within their governance (1) to create and sustain and efficiently utilize innovatory and productive capacity, and (2) to co-ordinate their domestic and international activities at least as well as their foreign competitors. As the factors influen·cing the location of industries are increasingly having more to do with technology and less with natural factors endowments, governments as the custodians of the educational system, the providers of the modern equivalent of nine­ teenth-century public utilities, notably road, rail and airport facilities, and a telecommunications infrastructure, play a crucial role not only in determining their own trade and foreign investment policies but how these may impact on those of other countries at the international negotiating table.⁶

At the same time, governments may influence competitiveness in more indirect ways. Some of these are described in Chapter 4. These include not only their responsibility for defence and space-related activities (for exchange rate monetary and fiscal policies, for anti-trust and consumer protection legislation, and a gamut of other mandatory and persuasive measures); but also by promoting a particular economic ethos and consensus among their constituents about a nation's economic goals and strategy and how these might best be implemented.

It is the way in which governments have dealt with some of these less intangible issues that have distinguished the successful industrial nations of the world from some of their less successful counterparts in the last twenty years (Lodge and Vogel 1987; McGraw 1986). This is not a subject which we will explore in any detail in this volume-in any case the jury is still out! But we would emphasize that it is incorrect to think of government intervention always as a market distortion. Like private hierarchies, governments may, and often do, add to economic welfare by helping to overcome the failure of markets. Indeed, in some cases we would argue that only governments have the resources and power to do so, and this particularly applies to the inability of other instruments of capitalism to adjust speedily enough to changes in demand and supply conditions, brougpt about either by technological change or the emer­ gence of new competitors which themselves have often been assisted by their own governments. In this respect, governments may stimulate efficient markets, by helping to ease the restructuring constraints and rigidities which markets seem unable to remove. It is this kind of positive interventionism by government which we see as a fundamental feature of modern-day industrial societies, and it arises both because a country's competitive advantage is increasingly resting on its technological capabi­ lities and because of the way in which it organizes its activities in imperfect market conditions. Also, because of the operation of MNEs, the economic activities in the sectors in which such countries are likely to have a comparative advantage are becoming more footloose, and more influenced by government-related locational variables.⁷

THE PLAN OF THE BOOK

The book takes up the themes identified in the previous paragraphs and discusses them primarily, but not exclusively, from the perspective of the advanced industrialized countries. Chapter 2 presents an overview of the main factors influencing the growth of international business over the past century; it pays especial attention to the role of technology and that of government policy in fashioning the extent and pattern of foreign direct investment (FDI) and MNE-related activity. Chapter 3 also takes a historical look at the changing form of international technology transfer undertaken by MNEs. More particularly, it distinguishes between the role of MNEs as creators and disseminators of specific technological assets, and their role as controllers of the modalities in which a network of activities, using interrelated technologies, are organized.

Chapter 4 deals with the interface between technology, competi­ tiveness and FDI. It starts with a simple closed economy model in which the competitiveness of firms and countries rests on the location-bound resource endowments of the economy, and then examines the ways in which the character of the two kinds of competitiveness are changed when one first introduces technology and, second, the cross-border mobility of resources into the picture. Chapter 5 continues the discussion by focusing on the changing competitive position of Europe vis-a-vis the US over the period 1955-82; and especially the part played by US direct investment in Europe in bringing this about. Again, technology is seen to act as the means of improving competitiveness, but FDI is the main institutional mechanism for achieving this. However, we shall also argue that the extent and geographical pattern of US direct investment in Europe during this period was greatly influenced by the economic policies and systems pursued by individual European governments.

Chapter 6 looks at the interaction between technology transfer and competitiveness in a different way. It introduces the notion of technolo­ gical cumulation and the related concepts of 'virtuous' and 'vicious' technology-induced circles. It argues that in international industries MNEs may play a crucial role in either improving the competitiveness of the countries in which they operate, for example, by helping to upgrade the ownership-specific ( 0) advantages of indigenous firms and the location-specific (L) advantages of countries, or by bringing about the reverse phenomenon. The chapter illustrates its argument from the viewpoint of two MNE-dominated industries in the UK, one which has performed well, that is, pharmaceuticals, and the other which is gen­ erally uncompetitive by world standards- motor vehicles.

Chapter 7 looks in more detail into the location of technology-creating activities by MNEs in the pharmaceutical industry, and makes some reasonably informed guesstimates of how selected industrialized coun­ tries have fared in their attempts to build up indigenous technological capacity in this sector.

Chapter 8 turns its attention to the way in which the technology transfer by MNEs to the newly industrializing countries (NICs) has affected the technological competitiveness of the investing countries. This is a subject of increasing concern among US and European legislators, particularly with respect to those sectors in which there are serious domestic unemployment or structural adjustment problems. The chapter explores some of the arguments for controlling the outflow of technology to developing countries, but concludes that this is neither a viable nor a sensible course of action. Excepting where the development of its NICs is distorted by government subsidies, aid and import controls, the chapter argues that governments should confine their intervention to reducing the domestic transactional costs of structural change.

Chapters 9 and 10 focus on the structural adjustment problems of the UK and examine the way in which outward and inward direct investment has aided or inhibited such adjustment. Chapter 9 looks in some de...

Table of contents

• Front Cover
• Title
• Copyright
• Dedication
• Contents
• Acknowledgements
• List of Figures
• List of Tables
• 1 Introduction
• 2 International Business in a Changing World Environment
• 3 Market Power of the Firm and International Transfer of Technology
• 4 Multinational Enterprises, Technology Transfer and National Competitiveness
• 5 Inward Direct Investment from the USA and Europe's
• 6 The Changing Role of MNEs in the Creation and Diffusion of Technology
• 7 International Direct Investment in Innovation:The Pharmaceutical Industry
• 8 The Consequences of the International Transfer of Technology by MNEs: A Home Country Perspective
• 9 Multinational Enterprises, Industrial Restructuring and Competitiveness: A UK Perspective
• 10 The UK's International Direct Investment Position in the Mid-I980s
• 11 The Anglo-American Connection and Global Competition
• 12 Multinational Enterprises and the Organization of Economic Interdependence
• References
• Index