Technology Transfer in International Business

Technology is a new variable in the equation of economic relations. Traditional theories of international business assumes that all nations have equal access to technology and, therefore, that there is no need to transfer technology from one county to another. Recent research findings have invalidated this assumption. In addition, they point to  technology differences as primary cause of international inequalities in economic achievements. To reduce the inequalities, technology capabilities of the backward nations must be strengthened. The quickest way to do so is to transfer technology from the developed to the developing nations.

Technology is any device or process used for productive purposes. In its broadest sense, it is the sum of the ways in which a given group provides itself with good and services, the group being a nation, an industry, or a single firm. There is a fundamental characteristic of technology that demands clear recognition. Q unites unlike commodities and capital, technology is not depleted or its supply diminished when it is transferred or used. It is usable but not consumable. Once created, technology is inexhaustible until it becomes obsolete. Therefore; export of technology need not cause the source country to reduce its use of the technology. Indirectly, a decline may result if the recipient country creates an industry large to change the global supply and demand equilibrium of the goods produced by the technology involved. For most technology sought by the developing nations this is not the case.

Contrary to the classical assumption, technology is not a free good but a valuable property, nor is it evenly distributed around the globe.… Read the rest

Multinational Corporations and Home Country Relations

Public attitudes toward Multinational Corporations (MNCs) are biased by a nation’s position as a home or host country. Historically, home countries have perceived MNC activities as desirable extensions of their domestic business systems. Conversely host countries have viewed MNCs as agents of foreign influenced and exploitation. This historic dichotomy is now shot through with conflicting perceptions of the MNCs. Different segments of society, such as labor, investors, consumers, traders, and farmers, see their interests affected in different ways. As a result, a multi-sided controversy about the societal merits and demerits of MNCs has grown in both host and home countries.

The most aggressive challenge to the traditionally supportive home country policies towards MNCs has come from organized labor.

Labor Conflict

Multi-nationalization has created for management new mobility and flexibility that have greatly enhanced its bargaining power vis-à-vis labor. Since the sourcing base of the multinational firm knows no national boundaries – it can draw anywhere in the world the capital, technology, raw materials, ideas, and labor that it needs – management is not dependent on any one country’s labor supply or labor union’s policies, but can choose from among a number of potential hosts for any particular operation. In the short run, this new managerial latitude may be limited by the relative immobility of investment in given facilities – the sunk cost constraint – but in the long run nearly all operations can be transferred from one location to another. More significantly, all new investment, whether for replacement or for replacement or for expansion of plant capacity, is internationally footloose and will seek domicile wherever the comparative advantages happen to lie.… Read the rest

Conflicts Between Multinational Corporations and Host Countries

Although the Multinational Corporations (MNCs) has no power over the host government, if may have considerable power under that government. By being able to influence certain factors, the MNC has the opportunity to help or harm national economics; in this sense, it may be said to have power against host governments. Critics of the MNC perceive these powers as potential perils to host societies. The strategic aspects of a host country’s national policy that are subject to the influence of the MNC include:

1. Planning and Direction of Industrial Growth

Host nations have viewed with concern the tendencies of many MNCs to centralize strategic decisions in their headquarters. For the host governments this signifies loss of control over industrial strategy to the foreign-based MNC. The MNCs allegiances are geocentric; their overall objectives are growth and profits globally rather than in the host economy. These objectives require efficiency in the functional areas of management – production, marketing, finance, and so on. Many MNCs have sought greater efficiency through centralization, with headquarters domination of affiliates as the unavoidable result.

  1. Risks of Excessive Centralization: Empirical evidence indicates that a high degree of centralization tends to lead to inflexibility of parent company polices. Decisions are made in headquarters regarding the product mix for each affiliate, extent of inter-affiliate sales of semi finished and finished products, export pricing, inter-affiliate sales, input procurement, packaging, long-rang planning, research and development, and particularly, financial management. When the authority over these vital business decisions is located beyond their jurisdictions, local authorities counter with restrictions on affiliate activities.
Read the rest

Multinational Corporations Adaptability to Host Environments

All Multinational Corporations (MNCs) are not equally likely to cause friction and tension in their host economies. Some adapt with relative ease and become closely integrated with their host environment, both economically and socio-culturally; others remain isolated and insulated, often forming alien enclaves in the host society. There appears to be a causal relationship between the MNC’s organizational structure that is, its organizational design as well as its underlying objectives and strategies and its capacity for social adaptation to host country conditions. In terms of inducement to social conflict, MNCs fall into three categories: home dominated, host dominated, and internationally integrated.

Home or Parent Dominated MNCs

These enterprises are organized and managed in such a way that the foreign based subsidiaries and other affiliates, whatever their specific legal form, serve primarily in a complementary support role. Their function is to help the parent company achieve its business objectives in the headquarters country. The subsidiaries have an entirely dependent role. Their local interests and needs, including social adjustment, are subordinated to and, if necessary, sacrificed for the parent company’s home operations. Highly centralized, run by absentee decision makers, and serving purposes external to the host countries, the home dominated MNC is very likely to cause host country conflict. Its insensitivity toward host nation needs is compounded by its ethnocentric managerial behavior. This type of MNC has been particularly, but not exclusively, characteristic of extractive industries and notice entrants into multinational operations. Increasing self-assertion of host country governments has put home dominated MNCs under increasing pressure to reform or divest.… Read the rest

Transnational Corporations (TNCs) and Foreign Direct Investment (FDI) Decisions

Knowledge-intensive production, technological change, shrinking economic space greater openness have also changed the context for Transnational Corporations (TNCs). There are new opportunities and pressures to utilize them. The opening of markets creates new geographical space for TNCs to expand in and access tangible and intangible resources. It also permits wider choice in the methods firms can use (FDI, trade, licensing, subcontracting, franchising, partnering and so on) to operate in different locations. At the same time, advances in information, communication and transportation technologies, as well as in managerial and organizational methods, facilitate the trans-nationalization of many firms, including SMEs. The combination of better access to resources and a better ability to organize production trans-nationally increases the pressure on firms to utilize new opportunities, lest their competitors do so first and gain a competitive advantage. Competition is everywhere – there are fewer and fewer profit reservations and market niches that remain protected from the fierce winds of competition. Indeed, a portfolio of locational assets – allowing firms to combine their mobile advantages most effectively with the mobile tangible arid intangible resources of specific locations – is becoming an increasingly important source of corporate competitiveness.

Firms have reacted accordingly. A highly visible group of large “traditional” TNCs continues to grow, often with turnovers larger than the national incomes of many developing countries. There are also many new entrants, such as large firms from developed countries that had confined themselves previously to domestic operations (e.g., telecommunications operators). Many are smaller firms from these countries that find it necessary to invest overseas to exploit their ownership advantages or to see advantages and alliances.… Read the rest

Foreign Direct Investment and the Business Environment

Direct investment abroad is a complex venture. As distinct from trade, licensing or investment, Foreign Direct Investment (FDI) involves a long-term commitment to a business endeavor in a foreign country. It often involves the engagement of considerable assets and resources that need to be coordinated and managed across countries and to satisfy the principle of successful investment, such as sustainable profitability and acceptable risk/profitability ratios. Typically, there are many host country factors involved in deciding where an FDI project should be located and it is often difficult to pinpoint the most decisive factor. However, it is widely agreed that FDI takes place when three sets of determining factors exist simultaneously; the presence of ownership-specific competitive ages in a transnational corporation (TNC), the presence of locational advantages in a host country, and the presence of superior commercial benefits in an intra-firm as against an arm’s-length relationship between investor and recipient.

The ownership-specific advantages (e.g. proprietary technology) of a firm if exploited optimally can compensate for the additional costs of establishing production facilities in a foreign environment and can overcome the firm’s disadvantages vis-a-vis local firms. The ownership-specific advantages of the firm should be  combined with the locational advantages of host countries (e.g. large markets or lower costs of resources or superior infrastructure). Finally, the firm finds greater benefits in exploiting both ownership specific and locational advantages by internalization, i.e. through FDI rather than arm’s length transactions. This may be the case for several reasons. For one, markets for assets or production inputs (technology, knowledge or management) may be imperfect, if they exist at all, and may involve significant transaction costs or time-lags.… Read the rest