Cotton Articles Ver.6.0

(English only... personal note)

  Location has been considered as a potential source of advantage of a nation and firms. The macro-level discussions around the national advantage provide useful insights into the motives of cross-border relocation and supplement the micro-level discussions of how firms decide to internationalize.
 
 

  The first macro-level argument dates back to An inquiry into the nature and causes of the wealth of nations (Smith, 1776). It explained a country’s advantage as the ability to produce products at a lower resource cost, and called it an Absolute Advantage. Based on this concept, David Ricardo (1817) has developed Comparative Advantage and explained that, even where a country has an absolute advantage over another with regard to all of its products, it can still gain through specialisation and trade in that product for which its absolute advantage is greatest. Further, Heckscher-Ohlin model (Ohlin, 1933)  explained trade patterns based on their relative factor advantages. The model explains that those countries with an abundance of certain types of factor (e.g., labour, capital, natural resources) will be able, and thus expected, to produce products that embody those abundant factors. In the later stage of the development, a number of alternative models, such as the gravity model (Isard, 1954) and the reciprocal dumping model (Brander and Krugman, 1983), have been proposed to supplement the incomplete explanation of the previous models (e.g., the Leontief paradox (Leontief, 1954)). While these economical, mathematical models successfully explained the static economic advantage of a specific region to a certain degree, they suffer from the fact that the empirical evidence often does not support the prediction of the models. Part of the reason for this is their lower emphasis on the differences in the institutional structures of societies, not only purely economic institutions but also political and wider social structures.


  The concept of the Varieties of Capitalism provides a valuable insight into these institutional frameworks within which firms operate. This approach takes the view that the distinctive national institutional structures influence the strategies of firms (Hall and Soskice, 2001). These are several variations on this concept, such as Divergent Capitalisms by R. Whitley (1999). However, the key point made is that different countries produce different solutions, thereby generating distinctive national economic that lead to different characteristics of firm strategies between nations (Lauder et al., 2008). Moreover, one of the most distinctive predictions of this approach is that there should be a strong link between countries’ institutional structure and the type of economic activities in which they specialize (Amable, 2003). This concept explains the varied competitive advantages and can supplement the economic mathematical models in explaining the qualitative advantages of different nations. However, because the focus of this approach is to explain national differences, it will not fully explain the decisions of each firm.


  Competitive Advantage of Nations (Porter, 1990) provided an intersection between this macro-level discussion and the analysis of the industry and the firm by investigating four broad attributes that affect a nation’s capacity to innovate and be competitive (Grant, 1991). He argued that the dynamic elements, such as demand conditions and firm strategy, structure, and rivalry, can supplement factor endowments that are rather passive and inherited factors and lead to a statistic view of national success. According to this, the multinational status of a company can be explained as a reflection of a company’s ability to exploit the strengths gained in one nation in order to establish a position in other nations (Porter, 1990). Porter’s analysis criticized at least five issues: the unclear object of analysis, fundamental misunderstandings of the factors that determine trade, flaws in the methodology and mode of reasoning, the undefined role of foreign direct investment, and the validity of the empirical evidence (Davies and Ellis, 2000). However, it has been developed and modified by a number of researches, accommodating the development of a global business environment (Rugman and Verbeke, 1993, O'Malley and Van Egeraat, 2000, Clancy et al., 2001, Chen and Hsieh, 2008).


  In this globalized world, business functions can be traded like products and services between nations. The contest is no longer seen solely as “nation against nation, but now more often as a “location tournament”. Although the major focus of these theatrical explanations is to predict the trade pattern and the strength of a country against other countries, they provide an essence of the competitive advantage that a firm can gain by expanding its operations overseas.


  The most influential micro-level analysis on the firm’s decision regarding location might be Transaction Cost Economics. It explains how a firm chooses its optimal structure for each stage of the production by evaluating the costs of economic transactions (Williamson, 1971, Williamson, 1975, Hymer, 1976, Hennart, 1982, Buckley, 1990). TCE analysis was later expanded by the industrial-organization theory, such as the theories of monopolistic advantage/market imperfections (Caves, 1971, Agmon and Lessard, 1977) and internationalization theory (Buckley and Casson, 1976, Rugman, 1981), evaluating the economic incentives of the international expansion of the firm. Another argument that focuses on the firm-level analysis is the Eclectic paradigm (Dunning, 1988, Dunning, 2001), which is based on economic theory and has transaction costs and factor costs as its main explanatory variables, together with the assumption of rational decision-making in firms (Melin, 1992). Dunning argued that these factors determine a MNC’s international competitiveness, the geographical configuration of its asset base, and its organizational structure. Further, it tries to explain the behaviour of not only a firm, but also of an alliance of firms (Dunning, 1995). However, it explains the “existence” of the multinational enterprise rather than “process” of internationalization (Buckley, 1990). On the process of internationalization, Stages models built an explanation of the changing behaviour of the firm in the course of the development of their international operation. It argues that the managerial learning of a firm strongly influences the internationalization process, suggesting that the process begins with low-risk indirect exporting, followed by the market expansion into higher-risk markets after gaining the necessary knowledge (Johanson and Vahlne, 1977, Johanson and Vahlne, 1990). From a different angle, the Network model explained the important role of the inter-person and inter-firm network, especially in the early phase of internationalization (Dunning, 1995). It explains the influence of formal and informal relationships in internationalization and argues that foreign market entry is a result of the interaction and development of a multitude of relationships on the basis of the theories of social exchange and resource dependency (Penrose, 1959, Johanson and Vahlne, 2003). The location decision incorporates both business (formal) and social (informal) relationships (Coviello and McAuley, 1999).


  The understanding of both macro factors and micro factors that influence the firm’s organizational strategy, structure, and process help to identify why and how organizations make the location decision: domestic or overseas. The individual firm is the decision-maker that decides whether to locate overseas or at home, based on the observation of the specific micro-situation, with the influence of macro-factors.