Economics of International Business: A New Research Agenda

330 Pages·2000·1.57 MB·English

by  Mark Casson

Economics of International Business
To Janet
On Our Twenty-fifth Anniversary
Economics of
International Business
A New Research Agenda
Mark Casson
Professor of Economics, University of Reading, UK
Edward Elgar
Cheltenham, UK • Northampton, MA, USA
© Mark Casson 2000
All rights reserved. No part of this publication may be reproduced, stored in a
retrieval system or transmitted in any form or by any means, electronic, mechanical
or photocopying, recording, or otherwise without the prior permission of the pub-
lisher.
Published by
Edward Elgar Publishing Limited
Glensanda House
Montpellier Parade
Cheltenham
Glos GL50 1UA
UK
Edward Elgar Publishing, Inc.
136 West Street
Suite 202
Northampton
Massachusetts 01060
USA
A catalogue record for this book is available from the British Library
Library of Congress Cataloguing in Publication Data
Casson, Mark, 1945–
Economics of international business : a new research agenda / Mark Casson.
Includes bibliographical references and index.
1. International business enterprises—Research—Methodology. 2. International
trade—Research—Methodology. 3. Industrial organization (Economic theory).
4. Competition, International. 5. Industrial policy. 6. Economics. I. Title.
HD2755.5 C3916 2000
338.8’8—dc21
99–045194
ISBN 1 84064 355 2
Typeset by Manton Typesetters, Louth, Lincolnshire, UK.
Printed and bound in Great Britain by Biddles Ltd, www.biddles.co.uk.
Contents
List of figures vi
List of tables viii
Preface and acknowledgements ix
1. Models of multinational enterprise: a new research agenda 1
with Peter J. Buckley
2. Foreign market entry: a formal extension of internalization theory 31
with Peter J. Buckley
3. The boundaries of firms: a global systems perspective 58
4. Bounded rationality, meta-rationality and the theory of
international business 94
with Nigel Wadeson
5. The organization of the multinational enterprise: an information
cost approach 117
6. International joint ventures 161
with Peter J. Buckley
7. Real options in international business 189
with Mohamed Azzim Gulamhussen
8. Entrepreneurship and the international business system:
developing the perspective of Schumpeter and the Austrian
school 228
9. Networks in international business 254
10. Conclusion: methodological issues in international business 278
with Sarianna M. Lundan
Index 309
v
Figures
2.1 Twelve entry strategies and their variants 43
3.1 Basic configuration of the system 67
3.2 Four distinctive linkage structures 73
3.3 Feasible triangular relationships 76
3.4 Optimal locational and ownership strategies for the simplified
example 83
3.5 Optimal locational and ownership strategies for the full
example 85
5.1 Relationship between information costs and transaction costs 121
6.1 Schematic illustration of four IJV configurations generated by
the sharing of technology and marketing expertise contributed
by two firms 164
6.2 Schematic illustration of IJV configurations 5–9 based on a
single shared production facility 167
6.3 Schematic illustration of type 5 IJV as assumed in the formal
model 168
6.4 Schematic illustration of a merger in which firm 1 takes over
firm 2 and rationalizes R&D, as assumed in the formal model 169
6.5 Schematic illustration of a licensing arrangement as assumed in
the formal model 170
6.6 Influence of market size on strategic choice 178
6.7 Influence of the volatility factor on strategic choice 179
6.8 Combined impact of market size and volatility on strategic
choice 180
6.9 Impact of cultural heterogeneity, economies of scope and
technological uncertainty on strategic choice 182
6.10 Comparative analysis of the international business environment
in the 1960s and 1990s 183
7.1 Decision tree for appraisal of option purchase 197
7.2 Graphical solution of the financial option problem 199
7.3 Valuation of a financial option 200
7.4 Option to purchase a real asset with an uncertain future price
but known value in use 203
7.5 Decision to defer investment when future demand is uncertain 206
vi
Figures vii
7.6 Advantages of a small-scale reversible initial investment when
future demand is uncertain 208
7.7 Role of a small-scale reversible investment for collecting
information on demand conditions in a market 210
7.8 An international joint venture as a real option 213
7.9 A hub strategy as a real option 217
7.10 Optimization of production sourcing strategies with randomly
varying production costs 222
8.1 Early stages in the evolution of an economic system: the
emergence of local markets 237
8.2 The development of inland commerce 238
8.3 Long-distance maritime trade (1100–1350) 240
8.4 Mineral revolution (1560–1640) and oceanic revolution
(1660–1760) 241
8.5 Industrial revolution (1780–1850) 242
8.6 Imperialism (1870–1914) 243
8.7 Mass production and manufacturing technology transfer (US
1918–1973; UK 1945–1973) 244
8.8 Globally rationalized production with global learning 245
9.1 Product flow in an international trading system 268
9.2 Information flows for the co-ordination of international trade 269
9.3 International trade: entrepreneurial networks 272
Tables
2.1 Twelve entry strategies and their variants 42
2.2 Costs of alternative strategies compared with the profit norm 44
2.3 Comparative static analysis of the effects of changes in the
values of the explanatory variables on the choice between the
three dominant strategies 49
2.4 Comparative static analysis of the effects of changes in the
values of the explanatory variables on the propensity to adopt
each possible entry mode 50
3.1 Factors influencing the components of linkage cost 68
3.2 Cost structure 72
3.3 Example of facilities costs 81
3.4 Example of linkage costs 81
3.5 Overall cost structure of the simplified example 82
3.6 Costs of alternative location strategies 82
5.1 Factors governing market-making in the PC industry 141
5.2 Influence of communication costs on organizational structure 155
6.1 Typology of IJVs according to the kind of knowledge shared 163
6.2 Key determinants of the costs of alternative strategies 171
6.3 Impact of market size and volatility on strategic choice 181
6.4 Impact of key explanatory factor on strategic choice 187
7.1 Classification of options by type of option and type of asset,
with examples 194
7.2 Classification of non-tradable real options by source of
uncertainty and type of asset, with examples 204
10.1 Summary evaluation of three alternative approaches to
analysing international business behaviour in a global context 303
viii
Preface and acknowledgements
There are several different ways of explaining how this book came to be
written and – more important – why it should be read. I could say that it is a
manifesto for international business research in the New Millennium. I am
sure that some authors will be ‘hyping up’ their books in this way. The truth
is, however, that the book would have been written whether there was a New
Millennium to celebrate or not. Alternatively, I could say that it is the sequel
to my book on The Organization of International Business, published five
years ago. That would be half-true. Unfortunately, though, sequels are rarely
as good as the originals, as they tend to be produced by people who are
running out of fresh ideas. I hope that this isn’t true in the present case, but
the reader can judge for themselves.
The whole truth is, I think, that I wrote this book for my own benefit,
which is possibly one of the worst reasons there is for writing a book.
Certainly, I have enjoyed writing the book – apart from the tedious though
essential task of polishing up the final drafts and chasing up missing refer-
ences. Writing is a form of therapy, as far as I am concerned – though not so
far as my family are concerned, who find that it only exaggerates my antiso-
cial tendencies. I would not wish to claim, however, as one rather arrogant
economist once did, that ‘I wrote this book because I like writing books’.
Apart from the need for therapy, I wrote this book because I felt that the
various papers and articles I had written over the past five years reflected a
reasonably coherent view of recent trends in international business. This
view, I felt, could not be fully articulated within the constraints of a single
paper. The full expression and development of the view required the space
permitted by a book.
The book is based mostly, though not entirely, on this previously published
work. This material has been thoroughly revised and rewritten during the
preparation of the book. A number of the original papers were co-authored,
and I would like to thank my co-authors for their substantial intellectual
contributions, and also for agreeing to their work being revised and pub-
lished in its present form. The co-authors’ names are listed on the Contents
page and in the headings of the individual chapters of the book. I should
also like to acknowledge the co-operation of the publishers of the original
material.
ix