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Economics of International Business: A New Research Agenda PDF

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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

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Economics of International Business sets out a new agenda for international business research. Mark Casson asserts that it is time to move the subject on from sterile debates about transaction cost economies and resource-based theories of the firm. Instead of focusing on the individual firm, the new
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