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The Multinational Enterprise

Theory and History

Mark Casson

This book summarises Mark Casson’s recent research on the multinational enterprise. This work is firmly rooted in history and examines the evolution of the internalisation theory of the multinational enterprise over the past forty years and, in the light of this, considers its potential for further development. The book also explores internationalisation theory in respect to marketing and brands, the supply chain, risk management as well as methodology.
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Index

Mark Casson

Abadie, A. 324

Alan Rugman’s methodology 26061

bounded rationality 262

contradictions

flagship firm concept 2746

and Hymer 2734

economic efficiency 2656

economic principles 2614

economic theories 2678

endogenous and exogenous variables 262

equity 2656

evolution from trade-offs to heuristics 26870

external markets 26870

FDI 262

good and bad theory 276

internalization theory 2624

key features of 261

neoclassical economic models 2612

policy relevance 2657

quality of evidence collection 267

role in defining the field 265

as a scholar

bibliophile 272

birthdays with publication of book 2712

development of younger scholars 272

oral tradition 27071

Alchian, A.A. 213

algebraic models, supply chains 1456

Allen, M.T. 323

Alliance Assurance 319, 3312

Anglo-Iranian’s risk-management

strategies 321

Anti-Apartheid movement 323

Apollinaire 128

appropriation of profit 33, 35

Argentina, trademark registration 128

asset-seeking investment 151, 171, 196, 200

avoidance, as risk management strategy 291, 292, 314

Babbage, C. 218

backward integration 84, 17071, 186, 190, 327

bailouts 247

bandits, effect on FDI 325

barrier to entry 328

Basque terrorism 324

Bass beer 1256

Bass v. Wendell 126

Bass v. Wielemans-Ceuppens 126

Beiersdorf 322

benefits of internalization 190, 194, 197, 202, 222, 231, 235, 236, 245, 246, 262

Bhopal explosion 333

‘Black Bass’ label 129

Black, E. 323

Black & White whisky 1278

Borsumij 318

bottom-level decisions 1819

boundaries of firms 2021, 23, 356, 39, 99, 101, 177, 223, 225

bounded rationality 262

Bowie & Co. Brewery 129

fraudulent labelling 3267

brand protection, imitation and 1212

defensive strategies of brand owners 1247

imitators’ strategies 1224

long-term strategies 1279

brands

sample of 115

and trademarks 116

British business, globalization of

brand protection see brand protection, imitation and counterfeiting 117, 130

imitation see imitation

trademark see trademark

British, MNEs 31718

British Petroleum (BP) 321

Buchanan, J. 1278

Buckley, P.J. 3, 4, 79, 210, 264, 26870

internalization theory 21823

‘Burke’s Bottled Guinness Stout’ 1234

business failure, and MNEs 2468

business risks 334, 337

controlling competition by preventing entry 328

infringements of IPRs 3257

supply chain coordination problems 3278

see also specific risks

Calles, Plutarco Elias 319

capital flow 215

capital market 269

cartels 11

Casson, M. 50, 63, 65, 79, 147, 1789, 210, 218, 221, 26870

internalization theory 21823

Chandler, A. 327

channel leader 857, 104

Chao, L. 58

cheating 334, 35

classical economics 8, 11

Coase, R.H. 7, 8, 38, 79, 1778, 231, 235, 238, 240, 242, 2689, 2734

critical appraisal of analysis of 21315

early IB applications of 21518

international business theory 21113

Coca-Cola 325, 326

Colman’s mustard labels 123

competition 59, 266

of firms 17, 256, 35

in global industry 546

imperfect 2368

oligopolistic 40

in technologies 667

comprador system 318

constant returns to scale 65

contact-making 91

contracts 31, 2889

as a coordinating mechanism 31

cooperation in firms 129

coordination 14, 3031, 21213

of facilities 813

firms and governments compared 2356

markets versus firms 2345

markets versus governments 234

supply chain 140, 153

coordination costs 46, 47, 48, 94, 153, 154, 181, 182

COPEC (Compania de Petroleos de Chile) 320

cost advantage of location 187

cost components 1556

factors impact on 1646

cost structures 946

of undominated strategies 185

costs

classification of 468, 95, 1812

deception 242

of doing business abroad 7, 14, 45, 95, 154, 182, 210, 224

of foreign marketing 568, 161, 165, 185

of foreign ownership 157, 160, 185

of foreign production 159, 160

of imitation 303

of internalization 2426

of licensing 57, 1568, 165, 1678, 185, 222

of mitigation 296, 298301

of political risk 69

of prevention 296301

supply chain model 1467, 1534

of transacting 218

costs offshoring 165

counterfeiting 117, 130

covert cheating 33

cultural homogenization 165

cumulative probability distribution function 2967

Danzon, P.M. 58

D’Cruz, Joseph 2745

decentralization 33

deception 24043

decision process 295, 296

Decker, S. 317

decolonization 31719, 334

deliberate deception 240

demand information 90

Demsetz, H. 213

Dicken, P. 223

Diewert, W.E. 262

discrimination, against foreign investors 316

diseconomies, managerial 243

dishonest buyer 240

dishonest seller 240

distribution facilities 90, 102, 180

ownership decisions for 1834

distribution, internalization of 21921

division of labour 97, 1412, 213, 219, 220

complexity of 244

in global economy 2323

intermediate product flow 233

divisionalization 2445, 245

doing business abroad, costs of 7, 14, 45, 95, 154, 182, 210, 224

dollar shortage of 1950s 6

dominated strategies 185

downstream production 83, 101, 245

Dunning, J. 6, 186, 210, 271, 274

eclectic theory 78, 199, 265

DuPont 320

Dutch, MNEs 318

E. & J. Burke 123, 129

economic analysis of supply chains, internalization theory

division of labour 1412

formal modelling 1447

overview 13941

strategy: role of service-only subcontracting 1434, 147

economic efficiency 2656

economic geography 11

economic opportunities 31

economic rents 66

economic theory

of firm as foundation for IB theory

business failure and MNEs 2468

coordination methods 2346

costs of internalization 2426

deception 24042

heterogeneity 23840

imperfect competition 2368

importance 23031

price discrimination 2368

spatial division of labour 2323

importance of 23031

of international business, supply chain model

ambiguities 15052

choice of foreign entry mode 15263

dynamics of IB strategy 1638

extensions of theory 17071

wider implications 16870

of international supply chains

applications and extensions 200201

cost 18082

dualistic view of strategy 1979

inward and outward FDI 1957

modelling 17980

offshoring of R&D 1935

outsourcing of R&D 1935

ownership and location of production 18990

principle of 1778

solution of the model 1829

Eden, L. 264

Elect beer 125

endogenous firm 19, 21, 192

endogenous variables 262

ETA (Euskadi ta Askatasuna) terrorism 324

exogenous variables 262

exporting 157, 160

expository models, supply chains 145

external markets 26870

external risks 287

external threats, failure of MNEs 247

facilities

coordination of 813

costs 47, 182

failure of business 2468

FDI see foreign direct investment (FDI)

financial risks 311, 3289, 337

firm-specific advantage 232

firm-specific effects 523

firms

boundaries of 1923, 34, 356, 39, 99, 101, 177, 223, 225

cooperation between 129

coordination 2356

endogeneity 192

as foundation for international business theory 21113

innovation decision 41

marketing knowledge 24950

nature of 32

new entry 40

sample of 115

size 244

supply chain strategy 1989

typology of 66

unit cost of supply 42

fixed costs 46, 48, 68

flagship firms 104, 107, 2746

foreign direct investment (FDI) 46, 158, 160, 165, 197, 216, 2224

backward integration 17071

endogenous variable 262

forward integration 17071

in high-risk environments, history

classification 30913

institutional risk management 31629

management 31416

meat export trade 332

natural hazards 33033

risk-management strategies 3337

in high-risk environments, theory avoiding risky situations 2856

basic model 294301

extended model 3047

human agency 289

incompetence 291

institutional risks 28891

limited range of risks 285

motivations for 28990

random factor 2948

risk management strategies 2914

sources of risk 286, 2889

types of risk 2868, 290

uncertainty of firms 2868, 294

offshore licensing 16062

resource-seeking 17072

service-only subcontracting 1434

supply chain model 168

see also mitigation; prevention

Foreman-Peck, J. 200

form of imitation 122

formal model

of MNE 2527

of supply chains 1447

forward integration 17071, 239, 327

franchising 6, 15, 18, 2223

free enterprise 30

free-standing firms 195

functional division of labour 232

Gardeazabal, J. 324

geographical dispersal, of production and research capabilities 164, 165

German, MNEs, 3213

global competition 59, 67

global economy 12, 21, 23

division of labour in 2323

ownership configuration in 97101

global factory 104

global industry 12, 15, 16

analysing prices trends 546

competition in 58

sunk costs and competition in 546

global knowledge 1011

globalization of British business

brand protection see brand protection, imitation and

counterfeiting 117, 130

imitation see imitation

trademark see trademark

government regulations 2767

governments, coordination 2356

Guinness beer 123, 129

headquarters 64

location 42, 48, 568, 724

Heckscher-Ohlin factor-intensity theory 93

Heide, L. 323

Hennessy cognac 122

heterogeneity of product 23841

high-risk environments, foreign direct investment (FDI) in

history

classification 30913

institutional risk management 31629

management 31416

meat export trade 332

natural hazards 33033

risk-management strategies 3337

theory

avoiding risky situations 2856

basic model 294301

extended model 3047

human agency 289

incompetence 291

institutional risks 28891

limited range of risks 285

motivations for 28990

random factor 2948

risk management strategies 2914

sources of risk 286, 2889

types of risk 2868, 290

uncertainty of firms 2868, 294

see also mitigation; prevention

hollow firms 103, 1045, 107

holograms 128

honest buyer 240

honest seller 240

horizontal intellectual division of labour 142

host-government policy 316

human agency, risks from 288, 289

Huntley & Palmers biscuits 124

Hymer, Stephen 8, 25, 21518, 2734

licensing decision 221

Iammarino, S. 223

IB strategy see international business (IB) strategy

IB theory see international business (IB) theory

IBM 3223

imitation 114, 11618

and brand protection 1212

defensive strategies of brand owners 1247

imitators’ strategies 1224

long-term strategies 1279

imitator’s reputation, damaging 1267

imperfect competition 2368

import-substitution 289

incentives 288

incompetence, risks of 291

incremental innovation 545

‘Indonesianization’ 318

industrial division of labour 233

industrial organization (IO) 40

Industrial Union Society Against Counterfeiting 128

industry competition 39

industry evolution 523

industry model

costs and prices 41

developing 41

economics literature 4652

feature of 42

IB theory 41

innovation decision 41

motivation for 4042

practical applications 528

profits and prices 42

solution of 4652

structure of 423

summary of 425

technology in 425

industry-specific effects 523

inflationary risk in Brazil 329

information costs 88

innovation decision 45, 67, 74

firms 41

innovation decisions 1819, 21

institutional risks 28891, 311, 314

management business 3258

financial 3289

political 31623

social 3245

intangible flows of knowledge 219

integrated subcontracting 857, 96

intellectual division of labour 142

intellectual property (IPR) 162, 164, 237

infringements of 3257

risk 285, 290, 304

interdependent facilities 83

global economy view of 7981

intermediate product flows 1412, 144, 21213, 21920, 233

coordination 214, 235

prices of 212

intermediate product markets 389, 222

competition 237

intermediation 23940

intermediator 23941

internalization 239

benefits of 956, 190, 194, 197, 202, 222, 231, 235, 236, 245, 246, 262

costs 2426

modelling of 252

decisions 22

first-order condition for 2556

intermediate product flows 39

and location decisions 412

of market 323

Internalization Plus 1523, 26, 27, 28

development of 278

exogenous parameter changes 213

innovation decision of firms 1819

issues 26

see also internalization theory

internalization theory 23031

Coase’s analysis 38

costs of survival: oversimplification 235

deception 2412

economic analysis of supply chains

division of labour 1412

formal modelling 1447

overview 13941

strategy: role of service-only subcontracting 1434

fundamental framework 3036

integrated subcontracting 857

integrating into location theory

cost structure 946

location and ownership of facilities 93

multicountry world 923

profit-maximizing supply chain configuration 967

role of headquarters 934

knowledge flows 8792

logical structure 711

and marketing, future research 1059

modelling the production system 1215

offshoring 1015, 140

origin and early context 57

outsourcing 1015, 140

ownership configuration in global economy 97101

proprietary knowledge 13940

and systems view of international business

clarifications and qualifications 835

global systems view of interdependent facilities 7981

as theory of boundaries of firms 1921

internal threats, failure of MNEs 247

international business (IB) strategy

dynamics 1638

cost of foreign marketing 165

cost of licensing 165, 1678

costs offshoring 165

factors impact on cost 1646

international business (IB) theory 45, 24, 20911

critical appraisal of Coase’s analysis 21315

early applications of Coase 21518

economic theory of firm see economic theory, of firm as foundation for IB theory

firm as foundation for 21113

political risk 314

research 2246

supply chain model

ambiguities 15052

choice of foreign entry mode 15263

extensions of theory 17071

wider implications 16870

view of Buckley and Casson 21823

years of consolidation 2234

international sanctions 323

international standards 164

international supply chains, economic theory of

applications and extensions 200201

cost 18082

dualistic view of strategy 1979

inward and outward FDI 1957

modelling 17980

offshoring of R&D 1935

outsourcing R&D 1935

ownership and location of production 18990

principle of 1778

solution of the model 1829

International Telephone & Telegraph Inc. (ITT) 317

interplant coordination 81

interplant division of labour 141, 142

interplant versus intraplant coordination 34

intraplant coordination costs 945

intraplant division of labour 213

inward FDI 1957

IPR see intellectual property (IPR)

Iran, political risks 32021

J. & J. Colman 123

John Swire & Sons 318

Johnnie Walker 129

Johnstown flood 330

Jones, G. 329

Journal of International Business Studies (JIBS) 4

Kemp, Murray 5

Knight, F.H. 214, 215

knowledge 1011

knowledge flows 445, 8792, 989, 102, 233

marketing 1058

R&D 219

knowledge-based products 39

Kojima, K. 223

labour, division of 97, 1412

in global economy 2323

intermediate product flow 233

large growth firms 163

large-scale market entry 306

least-cost strategy 1578, 167, 187, 188

liability of foreignness 45

liberalization

of investment 164

of trade 164

licensees 66

licensing 6, 7, 11, 15, 18, 197, 199

agreement 142

costs 68, 154

decision, Hymer’s analysis of 221

strategy 66

proprietary knowledge 241

service-only subcontracting 144

technology 43, 45

linkage costs 47, 153, 154, 182

litigation, for trademark protection 1256

lobbying 314

to manage risk of imitation 304

to prevent political hostility 3023

trademark protection 128

location decisions 1445

location of headquarters, role of 934

location of plants 93, 1447, 225

location of production 1525, 157, 160, 168, 18991

location strategy 155

location theory, integrating internalization theory and 927

long-run global competition 37

long-term contracts 34, 84

low production costs 161

Lundan, S.M. 186

MacDougall, Donald 5

management experience 244

management/managerial capability 212, 2478, 249

managerial diseconomies 243

Manila Railway Company 331

marginal costs 212, 237, 238, 249, 253, 254, 256

marker seeking 289

market size 3056

market-seeking investment 151, 171, 196, 200

market-sourcing costs 2534

market-sourcing decision 18, 19, 20, 23

marketing

costs 68

future research 1059

knowledge flows 8792, 1058, 24950

and R&D 78, 912, 98100, 102, 1057

regionalism 108

see also internalization theory

marketing-led firms 102, 1068

ownership in global economy 97101

markets

efficiency 32

imperfection 236, 238

and supply chains 65

markets versus firms, coordination 2345

markets versus governments, coordination 234

Markusen, J.R. 223, 262

McCann, P. 223

McKinsey 329

McManus, J. 21518

methodological individualism 30

Mexico, trademark registration 128

middle-level decisions 18

mitigation

applications 3014

costs of 296, 298301

responsiveness 302, 306

as risk management strategy 2912, 3047, 314, 316, 319, 3346

see also prevention

monopolistic price discrimination 237

monopoly 236, 296

market failure 237

of product 169

role of 217

theory 8, 11

Moreno, J. 319

motivations, for foreign direct investment 28990

Mudambi, R. 200

multicountry world 923

Multinationals as Flagship Firms (Rugman and D’Cruz) 275

multiplant firms 78

multistage production 141, 214

Nash equilibrium 67, 74

natural forces, risks from 288

natural hazards

disease 3323

earthquakes and fires 3312

floods 33031

industrial disasters 333

storms and hurricanes 330

Nazi regime 3223

negotiation, for trademark protection 126

neoclassical economics 235, 2612

neoclassical theory 7, 8

new economic geography 93

newly industrializing country (NIC) 1612, 164

NIC see newly industrializing country (NIC)

objective risks 309, 334

offshore licensing 155, 157, 16063, 167, 169, 170, 171, 179, 186

examples of 162

feature of 16061

low costs of foreign production 162

offshoring 1015, 139, 140

oil crisis of 1970s 31920

OLI approach 1689, 210

oligopolistic competition 40

oligopoly theories 40

opportunity recognition 32

optimizing supply strategy 6971

outsourcing 1015, 107, 139, 140

outward FDI 1957

overall coordination costs 2535, 257

overt cheating 334

ownership 31

ownership advantage 232, 247, 249

ownership configuration in global economy 97101

ownership of facilities 93, 225

ownership of product 1445

ownership of production 1525, 157, 160, 168, 18991

ownership permutations 97

‘Panama Disease’ 332

parallel production 80

Paris Convention and the Madrid Agreement 119

Paris Convention for the Protection of Industrial Property 119

parsimony in theory 2645

patent infringement 325

patent protection 107

pay-offs 46

Pears soap, counterfeiting of 127

Pennsylvania Railway 330

Pepsi 325

perfect competition 217

pharmaceutical industry 58

phyloxera 332

planning versus prices 34

plans 33

political relations improvement 165

political risks 285, 314, 334

cost of 69

institutional risks management 31623

decolonization 31719

international sanctions 323

radicalism 319

totalitarian states 31921

wars 3213

Polyacryl Iran Corporation (PIC) 320

Porter, Michael 260, 263

pre-emptive trademark registration 1278

prevention

applications 3014

costs of 296301

incentives 3023

of political hostility 3023

as risk management strategy 2914, 3045, 314, 316, 318, 3346

price determination 16, 17, 18, 65, 712

price discrimination 2368

monopolistic 237

price mechanism 212

prices trends, in global industry 546

private institutions 289

product development 104

product dimension 244

product distribution 219

product flow 45

product heterogeneity 23840

production

costs 65, 68

decisions 45

geographical dispersal of 164

internalization of 21921

ownership and location of 45

stages 1213

production facilities 102, 180

ownership decisions for 1834

production system modelling 1215

productivity of plant 81

profit distribution 169

profit maximization 1523, 180

profit-maximizing supply chain configuration 967

profits 42

projects 312

property rights 31, 266

proprietary knowledge 41, 8790, 13940, 209, 241, 245, 248, 269

R&D 219

public institutions 289

quality of imitation 122

radical innovation 545

radicalism 319

Railway companies, floods effects on 33031

random factor, risks from 2948

rational action modelling 262

rational innovation decision 45

rational multistage decision-making 295

R&D 180

capabilities, geographical dispersal 164

facilities 64

internalization analysis 12, 14

location of 18, 19, 20, 42, 48, 56, 57, 724, 225

marketing and 78, 912, 98100, 102, 104, 1057

offshoring of 1935

outsourcing of 1935

ownership and location of 45

ownership decisions for 1834

production and 18990

proprietary knowledge 219, 221

Read, R.A. 200

regionalism, in marketing 108

regional MNEs 568

relative prices 54

resource costs 47, 53, 94, 95, 153, 154, 181

of production 186

resource-seeking investment 170

responsive strategies, risk management 292

returns to scale 65

risk

classification of 30913

problems faced by foreign investors 31113

external 287

high-risk see foreign direct investment (FDI), in high-risk environments, history; foreign direct investment (FDI), in high-risk environments, theory

of imitation 3034

of incompetence 291

institutional see institutional risks

intellectual property 285, 290, 304

risk management strategies 31416

acquiescent behaviour 337

aggressive behaviour 337

applications 3014

assessment 3337

avoidance 291, 292

mitigation 2912, 314, 316, 319, 3346

costs of 296, 298301

prevention 2914, 314, 316, 318, 3346

costs of 296301

risk of failure 2467

rival firms 41

Rowntree 124

Royal Dutch Shell 318, 320

Royal Exchange Assurance 3312

Rugman, A. see Alan Rugman’s methodology

Russian terrorism and bandits 3245

San Francisco earthquake of 1906 331

Schering AG 322

Schumpeterian entrepreneurs 32

search costs, heterogeneity of product 2389, 241

Sears 319

service-only subcontracting 1434, 147

shareholders 85

short-run local competition 37

shrinking of distance 164, 165

Silk Association of America (SAA) 317

Sluyterman, K.E. 318

small firms 163

small-scale market entry 306

Smith, Adam 141, 212

social risks 337

bandits and terrorists 3245

strikes, riots and boycotts 324

sources of risk 286, 2889

South Africa, business risk 323

spatial division of labour 2323

specific right 31

Stackelberg game 2956

Standard Fruit 333

Strange, Susan 264

subcontracting 6, 15, 18, 19, 25, 656, 689, 847, 103, 145, 2223

subcontractors 44, 49, 66, 81, 85, 143, 144

subjective risks 309

subsidiary autonomy 245

substitution, in capital and labour 268, 270, 277

suitable baseline cost 186

sunk costs 41, 48, 58, 305

in global industry 546

supply chain coordination problems, business risks 3278

supply chain model 1512

coordinating 656

costs 1534

economic analysis of, internalization theory division of labour 1412

formal modelling 1447

overview 13941

strategy: role of service-only subcontracting 1434

economic theory of

applications and extensions 200201

cost 18082

dualistic view of strategy 1979

inward and outward FDI 1957

modelling 17980

offshoring of R&D 1957

outsourcing of R&D 1935

ownership and location of production 18990

principle of 1778

solution of the model 1829

facilities 80

FDI 168, 17072

foreign entry mode

limitations 16870

offshore licensing 16063

solution 15560

specification 1525

markets and 65

offshore licensing 155, 157, 16063, 167, 169, 170, 171

OLI approach 1689

role of knowledge 87, 88

role of marketing 89

strategies 100101

wider implications 16870

switching strategies, risk management 292, 304, 306

systems view of international business

clarifications and qualifications 835

global view of interdependent facilities 7981

supply chain model

ambiguities 15052

choice of foreign entry mode 15263

dynamics of IB strategy 1638

extensions of theory 17071

wider implications 16870

tariffs 161, 162

teamwork 34

technology

innovation decisions 45, 67, 74

knowledge flow 445

licensing 43, 45

ownership and location of R&D 45

product flow 45

rivalry in 423

technology-led firms 1078

technology-owners 66, 67

technology-seeking investments 568

terrorism effect on FDI

in Malaysia and Singapore 325

Russia 3245

top-level decisions 18, 20, 48

totalitarian states 31921

trade costs 47, 68

trade liberalization 140, 164

trade-offs 19091, 200

to heuristics, evolution from 26870

trademark

defined 116

foreign registrations 119, 125

history 11921

imitation and brand protection 1219

infringement 11718, 130

Japanese law for 127

litigation 1256

negotiation 126

pre-emptive 1278

propensity to register 1245

protection 116, 118, 326

transaction costs 177, 21011, 218, 2412

transfer prices 245

transport costs 161, 162

Treaty of Madrid of 1891 119

trust 35

two country world, resource flows in 978

UK trademark law of 1875 119

undominated strategies 185

Unilever

business risks 329

financial risks 329

political risks 323

uninational firms 8

Union Carbide 333

unit cost of supply 42

United Africa Company (UAC) 317

United Fruit 319, 3323

‘Unscented Colonial transparent soap’ case of 1916 127

upstream production 83, 101, 245

value chain analysis 176

variable costs 46, 68, 154, 182

vertical integration 83, 213

vertical intellectual division of labour 142

Wadeson, N.S. 50, 63, 1789

wars, institutional risks management 3213

Wilkins, M. 327, 328

Williamson, O.E. 241

World War I 322

World War II 322