Week 2: KC Flashcards
OLI
Units of analysis to consider when deciding on location:
- Country level = NL
- Sub-national level = Limburg
- Supra-national level = EU
Location advantages are in principle accessible equally to all firms that are physically established in a specific location. However, …
- Not full information about location advantages associated with a specific location may be readily available
- Even when information is available, there may be costs associated with accessing this knowledge ; . May be available only for domestic firms or acquired through experience.
- Location advantages may be made available differentially by the actions of governments that seek to restrict (or encourage) the access for a particular group of actors to certain location advantages.
MNEs
The optimal location behavior is determined by analyzing…
the optimal location behavior is determined by analyzing …. firm-specific characteristics and location-specific characteristics.
the location behavior of the MNE reflects the interaction between
- Ownership and Location Advantages
What are two main drivers determining the ability of a firm to access location advantages:
- Distance
- CAGE (Ghemewat, 2001); Cultural, Administrative, Geographic, and Economic
- LoF (Zaheer, 1995); Spatial Distance, Unfamiliarity, Host-Location and Home-Location - Connectedness
- of people, goods, services providers, and knowledge
- favors the access to location advantages by establishing the connection between individuals, firms, and locations
3 Types of location advantages:
- Country-Level location advantages
• Exogenous location advantages (culture, political environment, or climate ect.)
• Fundamental location advantages
- Basic infrastructure (healthcare, schools, port, and transport)
- Legal infrastructure (legal and tax systems)
- Financial infrastructure (banks, insurance, and stock exchange)
• Knowledge Asset location advantages
- Universities or research institutions
- Industry-level location advantages
• Structural location advantages
- market and demand structure (wage, size of potential market)
- Industrial policy - Firm-level location advantages
• Collocation location advantages
- advantage because of presense of other actors in same location
- Agglomeration economies
- takes place at glocal cities or industrial/business clusters (silicon valley)
Agglomeration economies =
Agglomeration economies =
are the benefits that come when firms and people locate near one another together in cities and industrial clusters.
- Essence of interaction between ownership and location advantages
- Originated from the spatial concentration of business activities (how densely particular ethnic groups are situated in a geographic location)
Spatial agglomeration of MNEs (Mariotti, et al., 2010)
Traditional approach: Stresses the importance of firms to locate near each other.
MNEs tend to imitate other MNEs –> Generating locational cascades –> To reduce information cost –> As a result of information externalities
Contrasting Location Behavior
Two main types
- Geographical proximity
= is necessary to promote social learning
- results in: lower coordination and communication costs…
- …but it is not sufficient to generate interactions - Companies being a few miles apart is not enough for them to collaborate or learn from each othe - Interaction does not necessarily lead to positive spillovers.
- Net knowledge flow maybe negative; Informational outflows from the MNE may be more valuable to its competitor than any potential information inflows from this competitor to the MNE.
- MNEs may not co-locate with domestic companies because of knowledge spillovers. This depends on the MNEs competitive position compared to local firms.
x When: MNE expects positive knowledge spillovers for the MNEs - MNE has positive CA compared to foreign MNEs - more likely to agglomerate with local companies
x When: MNE expects negative knowledge spillovers - agglomeration is less likely to happen
Uppsala Model:
Key aspects
+
Key elements
Key aspect: Sequential nature of internationalization
Key elements:
1. Psychic distance = perceived distance between home country and host country, captures uncertainty of managers due to lack of knowledge of foreign markets.
Usually more knowledge of related countries as opposed to further away countries.
- liability of foreignness
Understanding foreign countries is not difficult just because of difference in language or culture,
Other factors are important too,
- as described in the CAGE framework of distance factors (Ghemawat, 2001):
These are objective differences between countries. However, when these are seen as
perceived differences, they also fit into the Uppsala model.
- Cultural
- Different values and norms
- Different languages
- Different religions, network systems - Administrative
- Different legal systems
- Lack of colonial ties
- Not in the same trading bloc, currency - Geographic
- Physical distance
- No common border
- Differences in climates - Economic
- Differences in consumer income
- Differences in resources
- Differences in business systems
Internationalization is likely to be a gradual process next to sequential: (Uppsala)
- MNEs first go to new market for which psychic distance is low
- Market understanding increases though experience
- Room to expand further (to company with low psychic difference)
Added Distance
Not all countries follow the sequential, gradual process like the Uppsala model. (Tesco)
Added Distance =
- the difference between the parameters of the country in to which MNEs expand and the parameter of the closest country already in that MNEs portfolio.
- Newly established subsidiaries may be more relevant to receive knowledge from, rather than from the firm’s distant home country
Why would an MNE invest in a specific location?
Motivations for Foreign Direct Investments (FDI):
IMPORTANT: Location specific advantages should be matched to the FDI motivation
MNEs should rethink the link between FDI motivation and location choices.
; Global environment is fast-changing and characterized by climate changes, SDGs, trade wars, new regulations considering tax havens
Motivations for Foreign Direct Investments (FDI):
- (Natural) Resource seeking investments
- Market seeking investments
- Efficiency seeking investments
- Strategic resource seeking investments (Catch-up, Diversification, R&D springboard)
- (Natural) Resource seeking investments
• Local availability of resources – quantity, price, and quality
• Local availability of infrastructure
• Possibility to access and exploit domestic capital-intensive resources
o Example Shell: Plant in Nigeria to source and produce gas which is exporter to other countries - Market seeking investments – through this company may access new markets
• Large, growing, and regional (similar) markets are preferred. More connected and easily accessible markets should be prioritized
• Minimal transportation costs: No or low tariff-barriers for import and export and good infrastructures are characteristics of ideal locations
• Possibility to co-location with customers and/or local service supports
o Example Uniqlo: Opened its European distribution center in the south of the Netherlands, close to the Belgium border with the idea to expand its presence in the Benelux region. - Efficiency seeking investments
• Mainly driven by cost reduction purposes, availability of human capital or intermediary products at competative price can represent typical location specific advantages associated to these investments
o Low costs on production related labor, material, etc., but also on R&D and testing-related activities
• The location allowing to leverage economies of specialization, like specialized spatial clusters, in which resources and inputs are shared in a limited geographical space. For instance, science and industrial parks or an entrepreneurial environment. - Strategic resource seeking investments (Catch-up, Diversification, R&D springboard)
– Demirbag & Glaiser (2010)
• Access to tangible and intangible resources including brand, patent, design, or machineries.
• Catch up strategies – invest in advanced countries to quickly learn technological knowledge from their competitors
• Diversification strategies – acquiring company operating in different business segments, the company can grow and enter quickly in an unrelated line of busines
• Exchange of localized tacit knowledge – co-location remains essential for this
Strategic resource seeking investments
– Demirbag & Glaiser (2010)
- Catch up strategies =
- Diversification strategies =
Strategic resource seeking investments = Access to tangible and intangible resources including brand, patent, design, or machineries.
Catch up strategies = invest in advanced countries to quickly learn technological knowledge from their competitors
Diversification strategies = acquiring company operating in different business segments, the company can grow and enter quickly in an unrelated line of busines
Why would you relocate a (International) HQ?
Laamanen, et al., 2012
Standard answer: Being closer to client or the outcome or restructuring process of
the company itself
Main motivation according to recent literature: o Access to low corporate taxes o Access to low wages o Good business services o Same-industry specialization o HQ agglomeration o Good air traffic connections
How to create new FSAs and how to succesfully compete in foreign markets?
Location advantages of the host country in combination with strong FSAs
; could allow a firm to create new FSAs and successfully compete in foreign markets.
