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  • DEPARTMENT OF ECONOMICS ECON 318: INTERNATIONAL BUSINESS Lent 2005 Course Aims & Objectives To provide an introduction to the economic analysis of International Business though the teaching and application of core theory to critical issues in the subject. This permits an improved understanding of the activities of, and interaction between, multinational enterprises (MNEs) in the international economy. The course critically examines the evolution of theories of MNEs and International Business. It uses these insights to analyse issues relating to risk, transfer pricing, strategy, alliances, organisational structure and marketing. Key Skills Students who complete this course successfully are expected to have acquired improved skills in the following areas: the analysis of problems, the application of theory to evidence and issues, report writing, group working and presentation. Learning Outcomes By the end of this course, students should have the knowledge and understanding of the determinants of the development processes of emerging economies. Student should then be able to: • Assess economic policies and the growth performance of emerging economies. • Plan and manage their time effectively in relation to deadlines while displaying individual initiative and enterprise. • Conduct individual assignments and perform effectively in a group environment by demonstrating leadership and team-building qualities • Demonstrate logical arguments, analyse and interpret data and evaluate alternative perspectives on the basis of objective reasoning. • Communicate and present complex arguments in oral and written form with clarity and succinctness • Work effectively both individually and within a team environment Desired Outcomes
  • To provide appropriate theoretical and analytical tools to facilitate an understanding of explanations of the existence of multinational enterprises (MNEs) and the implications for business from an international perspective. Course Structure *The course comprises ten lectures and ten seminars, one each per week, during the Lent Term. The lecture time for the course is Thursday 11am in Faraday C18. Attendance at seminars is compulsory by university regulation. Seminar times are given on the Part 2 Notice Board in the Economics Mixing Bay outside Room B34 and all students registered for the course should sign up for one of these. As always, seminars begin in Week 1. Course Personnel Lectures 1-3 and 9-10 are given by Sougand Gholesorkhi (s.golesorkhi@lancaster.ac.uk, Room B10 MS, ext 94221). Lectures 4-8 are given by the Course Director, Dr Robert Read (r.read@lancaster.ac.uk, Room B12 MS, ext 94233). Any queries about the course should be addressed to the Course Director. Coursework & Assessment The continuous assessment for this course is one compulsory essay of no more than 1,500 words (not including supporting data, diagrams) to be submitted by 4pm, Thursday 17 March (Week 10). Essay titles are provided at the end of this course paper. A Final Examination covering all aspects of the course will be held in May/June 2004. The final mark for this course is a weighted average of the coursework (one third) and the final exam (two thirds). Late Coursework Submission Coursework submitted up to seven days after the essay deadline is subject to a ten-mark penalty. Coursework submitted later than seven days after the deadline will be given a mark of zero. Reasonable requests for an extension beyond the coursework deadline require the completion of an Extension Request Form (obtainable from Vicki Shaw in Room B35 MS) and must be signed by the Head of Department or nominee. Course Documentation Overheads for Lecture 4 to 8 and copies of this course paper can be found at http://www.lancs.ac.uk/staff/ecarar. 2
  • Course Reading The principal alternate recommended texts for this course is: Rugman, AM & RM Hodgetts (2002), International Business: a Strategic Management Approach, FT Prentice Hall, 3rd ed. Hill, CW (2000), International Business: Competing in the Global Marketplace, 3rd ed, McGraw-Hill. There are several useful alternative supporting texts: Burton, F & F McDonald (2002), International Business, Thomson. [Parallel text] Caves, RE (1996), The Multinational Enterprise & Economic Analysis, Cambridge University Press, 2nd ed. [Reviews the relevant theoretical/empirical literature] Daniels, JD & , LH Radebaugh & DP Sullivan (20040), International Business: Environments & Operations, 9Prentice Hall, 10th ed. [Parallel text] Dunning, JH (1993), Multinational Enterprises & the Global Economy, Addison Wesley. [Extensive theory and empirical evidence] Griffin, RW & MW Pustay (2002), International Business: a Managerial Perspective, 3rd ed, FT Prentice Hall. [Parallel text] Harrison, A, E Dalkiran & E Elsey (2000), International Business: Global Competition from a European Perspective, Oxford University Press. [Parallel text] Where possible, these items, along with the recommended readings, are on Short Loan in the University Library. Readings marked with an asterisk are alternatives and strongly recommended; the remainder are highly useful. Students are expected to make regular use of relevant publications, including The Economist, Financial Times, Fortune, International Business Week, Harvard Business Review etc. Case-study examples drawn from this literature should be provided to support presentations, arguments and essays. LECTURE 1: INTERNATIONAL BUSINESS & GLOBALISATION An overview of the forces driving globalisation. Concepts and definitions in International Business. Explaining International Business: the multinational enterprise (MNE) and theories of international trade, investment and international production (international industrial economics). Distinguishing between foreign direct investment (FDI) and portfolio investment. The growth of International Business. *Hill, ch 1. *Rugman & Hodgetts, chs 1 & 2. 3
  • *Harrison et al., chs 1 & 2. *Daniels et al., ch 1 *Burton & McDonald, ch 2. Dunning, chs 1, 2 & 5. Chandler, AJ (1986), 'The evolution of modern global competition', in ME Porter (ed), Competition in Global Industries. Ghauri, P, & P Buckley (2002), Globalisation and the end of competition: a critical review of rent seeking multinationals in Havila et al (eds), Critical Perspectives on Internationalisation, pp 7-28. Rugman, AM (2001), The End of Globalization: Why Global Strategy is a Myth & How to Profit from the Realities of Regional Markets, ch 7. Seminar Topics 1.1 What are the principal factors underlying the growth of international business. To what extent have these factors altered over time? 1.2 Does the growth of capital markets in newly emerging economies spell the end for the MNE? 1.3 Describe the shifts in the global economy over the past five decades. What are the implications of these changes for UK firms? LECTURE 2: THE ECONOMIC THEORY OF INTERNATIONAL BUSINESS: MARKET IMPERFECTIONS The neo-classical explanation of International Business. International monopolistic competition and the market imperfections approach to International Business: market power, competitive advantage, transactions costs, international internalisation and the MNE. *Hill, ch 4. *Burton & McDonald ch 3 *Rugman & Hodgetts, chs 2 & 3. *Dunning, chs 3 & 4. Coase, R (1937) 'The nature of the firm', Economica. Ferguson, PR et al (1993), Business Economics, ch 2. Mundell, RA (1957), 'International trade and factor mobility', American Economic Review. Dunning (1988), chs 1, 2 & 4. Pitelis, C & R Sugden (eds) (1993), The Nature of the Transnational Firm, chs 2 & 4-5. 4
  • Dunning, JH (1995), ‘What’s wrong and right with trade theory?’, The International Trade Journal, vol 9, no 2, pp 165-201, reprinted in JH Dunning (ed) (1997), Alliance Capitalism & Global Business, Routledge. Redding, S (1999), Dynamic comparative advantage and the welfare effects of trade, Oxford Economic Papers, vol 51, no 1, pp 15-39. Seminar Topics 2.1 Are international capital flows a substitute for international trade? 2.2 Identify sources of international market imperfections between countries: how are they different from market imperfections within any particular country? 2.3 Is the MNE the most efficient solution to international market imperfections? What are the alternatives to the MNE? LECTURE 3: THE INTERNATIONALISATION OF INTERNATIONAL BUSINESS Why firms go abroad: the competitive (location) advantages of nations; the objectives of overseas activities operations; economic efficiency and the international division of labour. *Hill ch 6. *Rugman & Hodgetts, chs 3 & 10. Dunning (1993), chs 3, 7 & 17. Porter, ME (1990), The Competitive Advantage of Nations, chs 7-10. Caves, R. ch 1. Dunning, JH & RD Pearce (1994), ‘The nature and growth of MNEs’ in C Nobes & R Parker (eds), Issues in International Accounting, Allen, pp 1-26. Dunning, J. (1999), ‘Trade location of economic activity and the multinational firm: a search for an eclectic approach’, in P Buckley & P Ghauri (eds), The Internationalisation of the Firm: a Reader, 2nd edition, London: ITB Press. Dunning, J (2000), ‘The eclectic paradigm of international production: a personal perspective’, CN Pitelis & R Sugden (eds), The Nature of the Transnational Firm, Routledge. Seminar Topics 3.1 Distinguish between location factors which promote market-seeking and export- platform international business operations. 3.2 Explain what is meant by the international division of labour. What are its implications for the structure of international business? 5
  • 3.3 Compare the theories of international business; which one offers the best explanation of horizontal FDI, why? LECTURE 4: TECHNOLOGY & COMPETITIVE ADVANTAGE IN INTERNATIONAL BUSINESS Technology and the sources of competitive advantage. Technology models of International Business: the Technology 'Gap'; the Product Cycle. The role of information and property rights in the value chain, R&D intensity, the internationalisation of R&D, TRIPs. *Hill, chs 4, 6 & 17. *Rugman & Hodgetts, ch 10. Dunning, chs 4, 11 & 12. Caves, ch 7. Vernon, R (1966), 'International investment and international trade in the product cycle', Quarterly Journal of Economics. Vernon, R (1979), 'The product life-cycle hypothesis in a new international environment', Oxford Bulletin of Economics & Statistics. Porter, ME (1990), The Competitive Advantage of Nations, chs 3,4 & 12. Papanastiassiou, M & RD Pearce (1990), Multinationals, Technology & National Competitiveness, chs 4, 5 & 9. Archibugi D, J Howells & J Michie (1999), Innovation Policy in a Global Economy, chs 1, 8, 10-12. Pearce, RD (1997), Global Competition & Knowledge, chs 1, 4, 6, 10 & 11. Seminar Topics 4.1 Is competitive advantage sustainable? Discuss in the context of the Technology Gap and Product Cycle models. 4.2 Why do some countries have a comparative advantage in creating new technologies? 4.3 How do firms obtain private rents from knowledge if it is a public good? LECTURE 5: MACROECONOMIC RISK IN INTERNATIONAL BUSINESS Financial explanations of International Business: the differential rate of return hypothesis; currency areas. Macroeconomic risk, exchange rates and exposure. The Treasury function. *Hill, chs 9-11. *Rugman & Hodgetts, chs 7 & 13-14. 6
  • Daniels & Radebaugh, chs 9-11 & 20. Tayeb, chs 9-11. Aliber, RZ (1970), 'A theory of direct foreign investment', in CP Kindleberger (ed), The International Corporation. Caves, ch 6. Seminar Topics 5.1 Do financial explanations of international business support or conflict with economic explanations? 5.2 Explain the phenomenon of exchange rate risk. Why is it important to international business and how may it be minimised? 5.3 Account for different attitudes to macroeconomic risk in international business? LECTURE 6: TOPICS IN INTERNATIONAL BUSINESS: INTERNATIONAL MARKET ENTRY, COMPETITION & STRATEGIC INTERACTION Competitive advantage and international entry modes: exporting; licensing and franchising; joint ventures; own production. The nature of international competition; the Bartlett & Ghoshal model. Explaining strategic interaction: oligopolistic reaction and contestability. *Rugman & Hodgetts, chs 8, 10 & 15. Caves, chs 3 & 4. Dunning, chs 7 & 15. Tayeb, chs 6 &15. Ferguson, PR et al (1993), Business Economics, chs 11 & 16. Porter, ME (1980), Competitive Strategy. Porter, ME (1985), Competitive Advantage. Porter, ME (1986), 'Changing patterns of international competition', California Management Review, vol 18, no 2, pp. Ghoshal, S (1987), 'Global strategy: an organizing framework', Strategic Management Journal, vol 8, pp 425-40. Baumol, WJ (1982), 'Contestable markets: an uprising in the theory of industry structure', American Economic Review, vol 72, no 1, pp 1-15. Seminar Topics 6.1 Discuss the extent to which the need for control over foreign operations varies with the core competencies and strategy of a firm. How do these factors affect a firm’s entry mode? 7
  • 6.2 Critically assess the usefulness of the Bartlett & Ghoshal model of the internationalisation of International Business. 6.3 What are the implications of contestability for international market structure and pricing? LECTURE 7: TOPICS IN INTERNATIONAL BUSINESS: INTERNATIONAL TAXATION & TRANSFER PRICING ISSUES The structure of international taxation: double taxation; the distortionary impact of national tax regimes. Internal transactions and transfer pricing: definitions; motives; regulation; and competitive strategy. The impact on corporate profit centres. *Rugman & Hodgetts, ch 14. *Daniels et al, ch 19. Dunning, ch 18. Caves, ch 8. Rugman, A & L Eden (1985), Multinational & Transfer Pricing, chs 1-3, 12, 13. Seminar Topics 7.1 What are the implications of non-neutrality in taxation for a country's relative attractiveness to foreign investors? 7.2 Compare and contrast the territorial and worldwide approaches to the taxation of foreign source income in international business. 7.3 Should national tax authorities assess whether a MNE’s internal transactions are under- or over-priced? LECTURE 8: TOPICS IN INTERNATIONAL BUSINESS: MARKETING Identifying international market opportunities: measuring market attractiveness; Gap Analysis; income and demand elasticities; national versus international products and brands; cultural issues. *Rugman & Hodgetts, chs 5, 11, 16-19. *Daniels et al, ch 16. Dunning, JH, ch 4. Hallen, L & J Johanson (1985), 'Industrial marketing strategies and different national environments', Journal of Business Research, also in D Ford (ed) (1990), Understanding Business Markets. 8
  • Turnbull, PW (1987), 'Interaction and international marketing: an investment process', International Marketing Review, also in D Ford (ed) (1990), Understanding Business Markets. Douglas, SP & CS Craig (1989), 'Evolution of global marketing strategy: scale, scope and synergy', Columbia Journal of World Business. Seminar Topics 8.1 Provide a critique of Gap Analysis as a means of identifying market opportunities. 8.2 Outline the costs and benefits of a global as opposed to a local product strategy. To what extent do the specific characteristics of the product or service being supplied determine the strategy? 8.3 What impact do cultural factors have on product characteristics in international business. LECTURE 9: TOPICS IN INTERNATIONAL BUSINESS: ORGANISATIONAL STRUCTURE, CONTROL & LOGISTICS The location of decision-making: centralised versus decentralised; geographic-, product- and function-based. Internationalisation and organisational structure. The logistics of international activities. *Hill, chs 13 & 16. *Rugman & Hodgetts, chs 9 & 10. *Daniels et al, chs 13, 14, 15 & 17. Dunning, ch 8. Egelhoff, WG (1988), 'Strategy and structure in multinational corporations: a revision of the Stopford & Wells model', Strategic Management Journal. Daniels, JD, RA Pitts & MJ Tretter (1984), 'Strategy and structure of US multinationals: an exploratory study', Academy of Management Journal. Doz, YL (1982), 'Strategic management in multinational companies', Sloan Management Review. Doz, YL (1986), Strategic Management in Multinational Companies, chs 7-10. Forsgren, M & U Holm (1990), 'Internationalization of management: dominance and distance', in PJ Buckley & P Ghauri (eds) (1993), The Internationalization of the Firm. Bartlett, CA & P Ghoshal (1989), Managing Across Borders: the Transnational Solution, Hutchinson, pp 15-61. 9
  • Birkinshaw, J (1994), ‘Approaching heterarchy: a review of the literature on multinational strategy and structure’, Advances in International Comparative Management, vol 9, pp 111-44. Seminar Topics 9.1 How may the extent of a firm's international activity affect its organisational structure? 9.2 Compare and contrast the impact of centralisation and decentralisation on firm performance. 9.3 Can management systems and firm cultures be transferred successfully across international boundaries? LECTURE 10: INTERNATIONAL BUSINESS ALLIANCES International co-operation between firms: R&D, product standardisation; component sourcing; marketing. Joint ventures and the development of OBM and ODM co-operation. SMEs in international business. *Hill, ch 14. *Rugman & Hodgetts, ch 10. *Burton & McDonald ch 9 Dunning, ch 9. Harrigan, KR (1984), 'Joint ventures and global strategies', Journal of World Business, also in PJ Buckley & P Ghauri (eds) (1993), The Internationalization of the Firm. *Hobday, M (1995), Innovation in East Asia: the Challenge to Japan, chs 3 & 8. Porter, ME & MB Fuller (1986), ‘Coalitions and global strategy’, in ME Porter (ed), Competition in Global Industries. Anderson, E & H Gatignon (1986), ‘Models of foreign market entry’, Journal of International Business Studies, Autumn, pp 1-26. Contractor FJ (1990), ‘Contractual and co-operative forms of international business: towards a united theory of model choice’, Management International Review, vol 30, no1, pp 31-54. Cross, A (2000), ‘Modes of internationalisation’, in M Tayeb (ed), International Business: Theories, Policies & Practices, Pearson. Seminar Topics 10.1 What can firms expect to gain and what might they lose from engaging in international strategic alliances? 10
  • 10.2 Compare and contrast the competitive implications of OBM and ODM strategies. 10.3 To what extent are strategic alliances beneficial for small- and medium-sized firms (SMEs)? ESSAY TITLES Write an essay of not more than 1,500 words, not including supporting data, diagrams etc, on one of the following topics. Essays to be handed in by 4.00pm on Thursday 17 March. 1. How may financial explanations of international business be integrated with economic ones? What role have financial factors played in the expansion of foreign direct investment (FDI) over the last twenty-five years? (2004 Exam Question). 2. Explain and analyse the international operating structure of firms in the context of the available theoretical frameworks and using at least one case-study example. (2004 Exam Question). 3. Given that the costs and risks incurred in international business are significantly higher than in any single national market, explain the international dominance of multinational enterprises (MNEs). 4. ‘Rising and converging per capita incomes across countries imply that consumption patterns will become homogenous internationally’. Provide a critique of this view and its implications for international business. 11