Academic journal article Multinational Business Review

The Economic Theory of International Business: A Supply Chain Perspective

Academic journal article Multinational Business Review

The Economic Theory of International Business: A Supply Chain Perspective

Article excerpt


It is over 30 years since the development of formal economic theories of international business (IB): internalisation theory ([4] Buckley and Casson, 1976, [6] 1998; [25] Rugman, 1981), transaction cost theory ([20] Hennart, 1982) and the eclectic theory or OLI paradigm ([15] Dunning, 1977). These theories have since been extended to encompass joint ventures, headquarters-subsidiary relations, the geographical agglomeration of investment, and many other phenomena ([11] Cantwell, 1989; [2] Beugelsdijk et al. , 2010). There remain, however, some unresolved theoretical issues. [26] Rugman (2010) and [28] Rugman et al. (2011) have argued that Dunning's three OLI factors - the ownership, location and internalisation advantages - should be replaced by just two factors that interact within the context of internalisation:

firm-specific advantages; and

location-specific advantages.

[17] Eden (2003) and [18] Eden and Dai (2010), meanwhile, have suggested that the internal coherence of the OLI paradigm has been compromised by the insertion of too many disparate elements in an effort to provide a comprehensive coverage of topics.

This paper proposes a way of resolving these issues by building upon recent work on global supply chains ([19] Di Gregorio et al. , 2009) and the "systems view" of IB ([12] Casson, 1990, [13] 2000; [8] Buckley and Hashai, 2004). It views the multinational enterprise (MNE) as a coordinator of international supply chains, and reformulates IB theory in this context. This approach clarifies the logical structure of IB theory and suggests a method of simplifying its exposition.

Conventional expositions of IB theory typically focus on a firm's decision about how to supply a foreign market. In Dunning's terminology, this is "market-seeking" investment. Other forms of investment, such as "asset-seeking" and "resource-seeking", are often considered separately. From a supply chain perspective, however, these different types of investment are closely related. The assets utilised by different activities within a supply chain are complementary; thus, ownership advantage conferred by one type of asset may lead to asset-seeking for another type of asset ([16] Dunning and Lundan, 2008). As a result, market-seeking and asset-seeking strategies are linked, and a supply chain perspective can clarify the links between them.

Conventional analysis of "market-seeking" investment is based on a three-way choice between exports, licensing and FDI. From a supply chain perspective, however, market-seeking investment involves a four-way choice ([5] Buckley and Casson, 1981). The fourth option involves licensing to a foreign-owned firm that produces in the same country as the licensor. This option is overlooked by conventional theory, which assumes that firms normally license only to foreign-owned firms that produce abroad, and ignores the possibility that under certain conditions, they may license to foreign-owned firms that produce in their own country instead.

This neglected option, termed "offshore licensing", is identified by supply chain analysis because it focuses upon the supply chain as a whole, whereas conventional theory focuses on the individual firm. Conventional theory presumes that any foreign direct investment (FDI) will be undertaken by the firm that possesses the technological advantage, whereas offshore licensing reflects foreign direct investment undertaken by the partner firm (the licensee) instead. It is therefore necessary to focus on both firms in order to appreciate the full significance of the offshore licensing strategy.

An important practical example of offshore licensing concerns small or medium-size (SME) high-technology firms that license to regional or global MNEs that have production subsidiaries in their own country. They license to MNEs because they lack the professional skills or the geographical reach to serve a regional or global market; they license to foreign MNEs because they lack a local "national champion" MNE to whom they can license, or because foreign-owned MNEs have greater marketing skills than locally-owned MNEs. …

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