A changing nature of international business
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Since the 1980’s, there is a changing nature of international business. MNC’s needed a transformation to follow this change, that is why international business networks appeared. According to Casson and Cox (1997), network can be defined as : ” A set of linkages which either directly or indirectly connect every member of a group”.
This essay will first deal about the network concept (as a “high trust co-ordination mechanism linking independent owners”), then the classification and the components of a network will be analysed, and finally the network concept seen as an explanation of international business.
In network, there is the implication of close but non exclusive relationship. Autonomy and choice are emphasised. So, what do we mean by network?
Network is a solution (J. Child & D. Faulkner, 1998) to reduce uncertainty (with good relationship and solidarity), to provide : flexibility, capacity (with links inside the networks between firms), speed (to take rapidly advantage of opportunities), access to resources and skills not owned by the company itself (a company can finish a project using abilities and skills of other in the network), information.
Also, the organisation needs interaction with other which control resources the organisation requires.
The power (composed by the economic base, the technologies, the range of expertise, the level of trust and the legitimacy) is one of the conditions a network needs to fulfil in order to survive.
In addition, the transmission of information is another condition and finally the trust. This latter is very important for a network to function. The essence of this organisation is that the different members trust each other (Casson, 1997). In Thorelli’s view (1986), the factors that dominate relationships in a network are power and trust.
Further more, there are three ways of international strategies about the network. First of all, the Intra-firm structure (linked headquarters), then the Inter-firm structure: (to exploit complementarities) divided in three kinds: International strategic alliances (with alliance joint venture and functional specific competitive alliances), International sub contracting and Dynamic networks. Finally, the third way is the Networks (to improve the effective use of resources).
Moreover, different classifications exist about networks. First, Snow ; Al talk about internal, stable and dynamic networks, but the more often used is the one of Dicken (4th edition) which is just above.
Network relationship can be described as in the appendix 1. As we can see, dominated network and equal partners networks are far away from hierarchy. Dominated network can be represented for example with the Japanese industrial Keireitsu and equal partner network do not infer that partners have the same power.
In addition, what are the different components of a network? First, the geography of the TNC’s is composed by , for example : the headquarters (corporate or regional), the Research and Development and the production process (Dicken, Global Shift).
Besides, network is the centre of different relationships. Some of the most important are the one which appear firstly in subcontracting (industrial or commercial one). It enables the principal firm to avoid new investment, to externalise risks and costs for example. For the subcontractor the advantage is to get access to certain unattainable market. Secondly, the international strategic alliances, which are not mergers, are divided in three types: the research oriented, the technology oriented and the market oriented. These alliances enable firms to get an easier access to the markets, to technologies and to share cost.
Another interesting point is the connection between the organisational dimension of TNC networks and the geographical dimension. First there is the Hymer model (Appendix 2) which explains that the internal organisation of labour within the TNC correspond to an international division of labour. Moreover, there is the economic landscape (Appendix 3) which explains that networks have dispersed but also concentrated activities. Finally, networks always have a strong regional position.
Furthermore, why the network concept is an explanation of international business? First of all, there is the OLI theory of International Business of Dunning divided in three advantages.
Firstly, the ownership advantages which could answer to : Why firms are going abroad? (for specialised knowledge, size economies (scale…) and monopolistic advantage). Secondly, the location specific advantage with the following question: Where can the firm settle themselves? Solution can be found with the ESP paradigm: “environment, system, policies” (what the host country offers). Thirdly, the internalisation advantage refers to “How will the firm settle themselves?”. That means : which organisation the firm should adopt to get specific advantages from the chosen location and to maximise them? (Eric Jasmin, 2003).
But these above advantages are no longer sufficient. The idea of innovation should be integrated, the network should focus on international co-ordination and collaboration and the idea that the State is the principal cause of investment not be avoided.
Also, the weakness of internalisation explains the recent growth of international business. In addition, Dunning recognises that with the evolution of the investment strategies, there is a necessity for the paradigm to evolve.
With regards to the consequences of network, there are: a local market become international, it leads also to a lower competition, to regionalisation. Moreover, there is a creation of a monopolistic power when oligopolistic firm make alliances, which leads to a diminution of the utility welfare, the choice, the competition and an increase in prices.
Moreover, some external factors favour networks. Indeed, governments are favouring networks by creating free trade areas or making agreements (firms are involved in networks by making alliances, sub-contracting…).There is also the implication of some international institutions like the WTO. This latter has for purpose to make the world as a single market, so firms and countries would be connected each other in the area of international business.
To conclude, with the above definition of the networks, their core elements and their different ways to be successful, we can understand better why the network concept can be seen as an explanation of international business. Nowadays, it will be very difficult for a firm (which wants to be an international one) to survive without integrating a network. Indeed, it is very hard to trade internationally if you stay in your own sphere. Networks are part of the international business which tend to lead to the inter-dependence idea. Indeed, countries’ and firms’ networks are present and they form the today’s world.