MNC

• Firm is a black box
  • Produces only for outsiders
  • Input factors of production are transformed into an output of finished goods
  • uniform inputs into uniform outputs

Firms choose the level of vertical integration that minimizes the transaction cost

Production cost:

• costs of transforming inputs into outputs
• dependent on production functions, independent of the form of organizations

Transaction costs:

• cost of economic exchange
• externally and internally (cost of organizing internal echange)

• Internalize activities that can be carried out cheaper than externally
• Firms will expand until the transaction costs of the market are less than the transactions costs within the firm

• Because it is more efficient to internalize certain cross-boarder activities than to carry them out via market
• Previous theories: Secure monopoly situations across boarders and to reduce competition

Ex ante:

• Search/Information costs
• Bargaining cost

Ex post

• Monitoring costs
• Enforcement costs (Durchsetzung)
• Adjustement costs

Sales:

• Higher transaction costs with independent intermediary vs. foreign sales subsidiary

Production:

• Higher transaction costs with independent supplier vs. foreign production subsidiary

• People have limited capabilites to act rational
• limited information
• limited information processing capabilities
  • impossible to have full contracts

• People act in a self-interested way
• People are not entirely honest and thruthful
• People take advantage of unforeseen circumstances that give them chance to exploit another party

• Market governance of transaction is more efficient than vertical integration
• Competitive pressure makes transaction partners conform to contracts

• Frequency
• Uncertainty
• Specificity (most important)

Enhances the tendency for vertical integration, because the overhead costs for hierarchical governance will be easier to recover for recurring transactions

• Unpredictable ex ante (environmental uncertainty)
• No verification ex post (behavioral uncertainty)

• transaction-specific assets are assets that are tailored to a particular transaction and cannot be easily redeployed outside the relationship of the parties to the transaction (-->lock in effect)

• Transferring know-how is inefficient across markets
  • information asymmetry leads to intransparency
  • revealing all information already transfers his know-how to the buyer free of charge
  • internalizing the "markets for know how" by exploiting the market yourself is a solution to market failure

• Reputation gained by a company (in country A) can be exploited (in country B)
• free-riding is a main problem with exploiting reputation externally
  • franchising might be used to exploit reputation
  • Internalizing could reduce free-riding

In markets with small numbers:

"small numbers bargaining" could lead to market failure f.Ex. in the case of asset specificity

• Physical (warehouses etc.) and intellectual (sales persons)
• Can be small or large and specific
• "Small numbers bargaining" (high retailing concentration)
• seldom activities might be infrequent or frequent

• Opportunistic behaviour is often too negative (people also fulfill their contract as supposed)
• TCA could lead to recommendations of control, that are necessary
• Opportunistic behaviour as self fulfilling prophecy-->leads to negative attitude
• Organisations have the opportunity to develop a coherent context which reduces opportunism
• Long-lasting relationships could become more expensive if the behaviour of the partner is opportunistic
• TCA is neglecting the potential of different partners: competive advantages by internationalization
• TCA is neglecting production costs
  • Specializiation of partners reduces transaction costs

Sustained competitive advantage and long-term success of companies stems from a heterogeneous distribution of valuable resources between firms

• How to exploit its resources to gain optimal rents?
• How do I expand & develop my resource base? (Intern: Core competencies External: acquisitions)
• Should I cooperate to complement my resources? How far are my resources in danger when I cooperate?

• Assets which are tied semipermanently to the firm
• All assets (Information, knowledge) that enable the firm to conceive of and implement strategies that improve efficiency

• Physical capital: equipment, geographic location, access to raw material
• human capital: training, judgement, intelligence
• organisational capital: formal structures, formal planning, controlling

• Valuable
• Rare
• Imperfectly imitable or not tradeable
• Cant be strategic equivalent substitues that are valuable but not rare or not imperfectly imitable

• Path dependency as  reason
  • ability of a firm to obtain a resource is dependent upon unique historical conditions
• Causal amiguity as reason
  • If its not clear which resource is relevant for the competitive advantage, others cannot imitate it
• Social complexity as reason
  • resources are tied into a complex social structure (company culture and reputation)
  • It is not clear how to develop these resources

• Knowledge as the resource
• Does not reduce its value by using it, rather enhances it
• firms compete on the creation, development of their knowledge

• Companies are bundles of knowledge (protected learning areas)
• Firms are social communities that specialize in the creation and internal transfer of knowledge
  • Knowledge transfer is considered costly (difference to TCA)
  • Knowledge transfer more effective internally (richer options for transfer mechanism)

Knowledge is a recipe describing how activites are carried out

• Individual vs. organizational
• Explicit vs. tacid/implicit knowledge

-->tacid knowledge: difficult to capture, built by long-lasting learning process

-->explicit knowledge: patent, franchise

• Location-bound vs. non-location-bound

• Motivation to send knowledge--> Is there an incentive to transfer knowledge?
• Crediblity of the source

• Motivation to accept knowledge and to integrate it
• Absorptive capacity of the organization
  • Learning is faster the more knowledge is already available

• Need for complementary knowledge
• Knowledge as a power base in cooperative arrangements
• value reduction of existing knowledge by transfer to partner
• Outsourcing, where internal development is necessary or where internal knowledge base is not sufficient as base for further learning

• Limits growth opportunities
• Diversification only in "close industries" (overlapping knowledge)
• Internationalisation into markets with low "distance" (cultural, market structure)
• Inertia (Trägheit) in company strategies

• Companies exchange resources with their environment, they need external resources to survive (companies as open systems)
  • can be supply side (like critical components) or market side (market access via retailer)
  • creates dependencies from other organisations
  • creates a risk for the company
  • relationships between HQ and its subsidiaries are considered
• RDT highlights the situations in which resource dependency is strong and unproblematic as well as strategies to minimize risk
• Power based theory
  • Political solutions considered important