Week 6 Flashcards
What was the dominant pattern of the global factory up until the 1990s?
Unified ownership with centralised organisation and control by one firm
What is the new shift in the global factory trend?
Shifting towards a growth in arms’-length coordination between firms.
What is eroding these “traditional” corporate structures?
Trade and transaction costs have fallen which is making inter-firm collaboration more viable.
If a firm has lots of arms length contracts instead, what is its main role?
Its main role is now orchestrating (supervising/coordinating) its fragmented supply chain. (Fever-Tree)
What are the implications for SMEs of the evolving global factory?
MORE OPPORTUNITY. They could very likely be contracted
What are the benefits for MNEs using arms length fragmented supply chains?
They can focus on high value activities and areas of competitive advantage. Delinking reduces capital tied up thus increasing profitability and returns
Give a rough definition of the global value chain
Complex vertical sequence of linked production processes that combine to deliver a finished good or service
Why might firms cooperate as a long term strategy?
- Global expansion strategy
- Reduce R&D, marketing, distribution costs
- Capability seeking
What are X-Coalitions?
Horizontal alliances where each firm performs specialist activities at one or more stages in value chain. Each firm provides O and/or L advantages
What is the most common type of X coalition?
Joint ventures
What are the principal objectives of joint ventures?
Resource or capability seeking
Idea is to create an otherwise unavailable combination of specialist skills and knowledge
What are some characteristics of a joint venture?
- Separate legal entity
- Shared decision making
- Shared investment
What are the costs/risks of joint ventures?
- Conflicting managerial structure
- Incompatible objectives
- Opportunistic behaviour
What is a Y coalition?
A vertical alliance where many, if not all, activities of value chain are undertaken by each firm in the alliance.
STRATEGIC BUSINESS ALLIANCE
SBAs generally occur between…
major global competitors.
What is the primary objective of a strategic business alliance?
To reduce fixed costs in R&D, manufacturing, logistics and distribution by delivering greater scale economies
Why are SBAs important in technology-intensive industries?
Because the costs associated with R&D in tech intensive industries are very high so pooling resources is smart.
Give another advantage of SBAs relating to advantage sharing.
They can improve production and managerial efficiency by pooling together know how and O advantages
Why are SBAs becoming more popular?
- Rising R&D costs means firms need to consolidate their efforts
- Firms are increasingly specialised in R&D so joining forces is good
Are SBAs good for competition?
There are of course competition concerns with SBAs relating to collusion.
What are some costs and risks of SBAs?
- Mutual dependence
- Coordination
- Incompatible objectives
- Unequal commitment
What are OEMs?
Own-equipment manufacturer
Contracts for outsourcing production at arms length with independent suppliers. The MNE transfers O advantages so the contractor ONLY supplies this one MNE
What are OBMs?
Own-brand manufacturers
Contracting out production and supplying several MNEs.
Using OEM and OBM allows MNEs to..
- Reduced their capital tied up
- Reduce their investment
-Reduce variable and fixed costs
MNEs can focus on increasing the sources of their competitive advantage
What are ODMs?
Own-design manufacturers.
Advanced form of OBM. They do R&D and so MNEs get access to these outputs
What is a fractal factory?
- All production takes place on one site
- Significant benefits to having all suppliers on site to solve problems
What is out-sourcing?
The contracting out all or part on a productive/organisational activity to a third party supplier
What is FDI (offshoring)?
The cross-border relocation and distribution of production/organisational activities previously undertaken in home country.
Why might a firm choose to outsource?
-Someone else can do it cheaper/better than you!
Why might outsourcing be better/cheaper?
-Potentially hold “O” advantages
-The amount of finance tied up in these activities mightn’t be worth it.
What does Ronald Coase suggest might put a firm off of outsourcing?
High transaction costs. Searching and negotiating costs.
What are Williamson’s 3 elements for outsourcing?
Bounded rationality
Opportunism
Asset specificity
What is bounded rationality?
The idea that you cannot account for all outcomes/eventualities in a contract so it cannot be water-tight.
What is opportunism?
The idea that agents will try and game the system. You cannot rely on good will
What is asset specificity?
Relationship specific investment has no other uses. Changes bargaining power
What happens is you have bounded rationality and opportunism?
You are FUCKED
What are Barthélmy’s five deadly outsourcing sins?
-outsourcing activities that shouldn’t be outsourced
-choosing wrong vendor
-writing a poor contract
-overlooking personnel issues
-losing control of activity
What is another critical issue with outsourcing?
You might lose tacit knowledge. You’ll lose your employees with that unreachable experience.
What are the objectives of FDI?
Behrmans:
Market
Resource
Efficiency
Strategic asset
Why would firms choose to transfer some of their activities abroad whether in-house or at arms’-length? (FDI)
- Cost savings from IDL
What should firms consider if engaging in FDI?
Risk implications
Can you coordinate effectively?
How to enter?
What are the dimensions we look at in terms of the home-country effects of FDI?
- Impact in trade (BoP)
- Impact on domestic labour market
What are the general findings on the impact of outward FDI on home country exports?
Complementarity
How do outward vertical and horizontal FDI differ on their impact on home country trade?
Horizontal FDI could lead to a substitute live relationship with trade (fewer exports)
Vertical FDI could lead increased exports
Could depend on manufacturing/services
What factors determine the magnitude of substitutability/complementarity for FDI and trade.
- Type of FDI (vertical/horizontal)
- Manufacturing vs services?
- Trade policy
Generally, what is the impact of FDI on home-country employment?
Most studies find that domestic and foreign employment are complements and so outsourcing/off-shoring leads to a positive impact on domestic employment.
What happens if foreign and domestic labour are substitutes and you engage in FDI?
Lower foreign wages leads to an increase in foreign employment and a reduction at home. This is more likely if FDI is horizontal.
How does FDI actually improve employment in the home country?
Well, given home and foreign labour are complements, as you offshore low-value activities, firm will become more profitable and expand. The increases the availability of higher-value jobs at home and therefore employment increases through changing skill composition.
How does outward FDI impact skilled vs unskilled labour at home differently?
High skilled workers gain as unskilled activities are transferred abroad. This increases demand for skilled labour.
For unskilled workers, demand for their services falls
How does outward FDI affect home labour productivity?
By offshoring low-skilled jobs, we increase the skill intensity of domestic production and therefore we raise productivity and wages.
How does labour market flexibility affect the impact of FDI?
In flexible labour markets, demand for skilled labour increases and people move to these jobs.
Less flexible labour markets experience
