Volume I : Location. Not for Reproduction

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1 Volume I : Location

2 Strategy

3 The Product Cycle Hypothesis The Product Cycle Hypothesis in a New International Environment Vernon R Oxford Bulletin of Economics and Statistics, Vol. 41, Iss. 4, Pages: , 1979

4 The Product Cycle Hypothesis Developed by Raymond Vernon in 1966 Explains the pattern of international trade The Product Cycle A company in a developed country launches a new, technologically advanced product in its home market The new product is first exported to similar countries, i.e. countries with similar needs, preferences, and incomes Later on, production gradually moves away from the point of origin. The Product Cycle Hypothesis

5 The Product Cycle Hypothesis in a New International Environment The power of the Product Cycle Theory has been changing due to two reasons. Leading MNCs have developed global networks of subsidiaries The US market is no longer unique among national markets either in size or factor cost configuration The Product Cycle Hypothesis

6 The Network s Spread The Product Cycle Hypothesis

7 Spread of Production The Product Cycle Hypothesis

8 The Global Network in Operation The Global Scanner An MNC with an innovating capability that has developed a powerful capacity for global scanning The Standardized Products Firm This type of firms develops and produces a line of standardized products which they think responds to a homogenous world demand rather than to the distinctive needs of individual markets The Home Market Firm A firm s choices of innovations and production sites remain myopically oriented to the home market, while all analysis of foreign markets is left to its individual foreign producing subsidiaries The Product Cycle Hypothesis

9 Conclusion The product cycle concept continues to explain and predict a certain category of foreign direct investments. Although it no longer can be relied on to provide as powerful an explanation of the behaviour of US firms as in decades before The hypothesis may still apply to; Smaller firms European and Japanese firms Firms in less-developed countries The Product Cycle Hypothesis

10 Location of entrepreneurial firms Why butterflies don't leave: Locational behavior of entrepreneurial firms Stam E Economic Geography, Vol. 83, Iss. 1, Pages: 27-50, Jan 2007

11 Why Butterflies don t leave Entrepreneurial firms important for growth. Highly likely to start in home region of its founder. Major important job creators. Major question is do they stay in their home region or do they move their location? Location of Entrepreneurial firms

12 The purpose of the article Is to improve our understanding of the locational behavior of entrepreneurial firms. Most studies have failed to take into account the changing nature of the entrepreneurial firm. The article distinguishes five development phases. Location of Entrepreneurial firms

13 Life course of a company The start-up phase: business opportunity recognized. The initial survival phase: Company becomes profitable. The early growth phase: Company can grow it s market share and look at new markets. Location of Entrepreneurial firms

14 Life course of a company The growth syndrome phase: a relapse in the growth of the company. The accumulation phase: Here the company really takes off. A study of these phases provides insight into the changing nature of firms. Location of Entrepreneurial firms

15 Development of spatial organization How the company moves physical resources like labor, machinery and other resources. Is outcome of a location decision making process. Three strands of literature explains this. Neo classical economics literature. Resource dependence literature. Organizational capabilities literature. Location of Entrepreneurial firms

16 How does it work in the live of a company? In the start-up and initial survival phases companies focus on their home market. In the early growth phase companies expand their geographic market area. In the accumulation phase production is decentralized outside the home region. Relocation is determined by internal factors. Location of Entrepreneurial firms

17 Research design and data collection Three-stage nested design. In the first two stages the population was determined. In the final stage the research cases where selected. Firms were selected from the database of the Dutch Chambers of Commerce. Location of Entrepreneurial firms

18 Data collection and findings Research population of 174 firms. Data collected via telephone survey. 55% had moved after they started but only 4% outside their home region. 67% of jobs where created by firms that stayed within their region of origin (95% of the population). 12% of jobs created by firms that were locationally flexible firms. Location of Entrepreneurial firms

19 Conclusion Spatial organization of entrepreneurial firms co-evolves with the accumulation of resources. Firms do not decide to branch out in the early stages of it s live. As a rule companies to not leave their home region but in some exceptional cases they do move beyond their old environment. Location of Entrepreneurial firms

20 An example of an Icelandic firm Actavis is an example of an Icelandic firm employees and only 500 in Iceland. Operation in 40 countries on 5 continents. The company we are working with Practical is in the early growth phase. Looking at opportunities to expand their business outside Iceland. Location of Entrepreneurial firms

21 Global R&D Strategies for Global R&D: a study of 31 companies reveals different models and approaches to the conduct of low-cost R&D around the world Khurana, Anil Research-Technology Management, Vol. 49, Iss. 2, Pages: 48-57, Mar-Apr 2006

22 The Article Published in Research-Technology Management, March 2006 A study of the utilization of R&D abroad Focused on 31 company Global R&D

23 The benfits of R&D in emerging markets Emerging markets, such as Brazil, Russia, India and China=BRICS Fast growth in purchasing power Highly educated workers Lower salary demands Improved legal framework Foreign R&D = insight and development of products suitable for the foreign market Global R&D

24 GE on the GO General Electric is a good example. Have invested heavily in offshore R&D Large innovation center in Bangalore, India Employs 3,000 researchers First come, first served... Global R&D

25 Development of R&D abroad Focused on 31 company Majority or 88% stay at home Most who start up R&D abroad focus on low cost. Collaboration and outsourceing Learn by doing Managers state that the main reason is the risk involved Global R&D

26 Factors driving international R&D and its success Location, location, location! BRICS? The ability to absorb Transfer of knowledge Distinguish predictable processes Global R&D

27 Icelandic companies? CCP has opened up branches in China and the US. Marel has factories and service centers abroad. Belgingur the company we are working with is only based in Iceland Global R&D

28 Location of multinational organizations Institutions and the OLI paradigm of the multinational enterprise John H. Dunning and Sarianna M. Lundan Asia Pacific J Manage (2008) 25:

29 INTRODUCTION The article was published in Springer Science + Business Media 24. January Understanding of the different forms of Multi- National Enterprises (MNEs). Framework that examines how an institutional dimension can be incorporated - OLI paradigm. Location of Multinational Organizations

30 Before we start... what is MNE theory? Stands for Multi-National Enterprise. MNE is a company, or a corporation, that operates in at least two countries. MNE is a result of previous Foreign Direct Investment (FDI). Location of Multinational Organizations

31 What is OLI paradigm? It is a framework for analyzing the decision to engage in Foreign Direct Investment (FDI), based on three kinds of advantage that FDI may provide in comparison to exports, namely: Ownership Location, and Internalization Location of Multinational Organizations

32 Further about OLI paradigm The design of a firm may be seen to affect all three parts of the OLI paradigm. 1. Link between economical growth at a national level and location-based (L) advantages in the OLI. 2. The internationalization (I) factor is institutionalized at the micro level. 3. The O-advantages are most difficult to deal with has to be distinguished between assets and transaction based factors. Location of Multinational Organizations

33 Main Results Helps to analyze and determine the boundaries of MNE s. Introduction of aframework to examine institutional dimensions. Incorporates dimensions into the three OLI paradigm components. Helps understanding what determines MNE s behaviour and its effects on home and host countries. The paper reasons that international knowledge and experience makes the difference between the winners and losers at the global market. Location of Multinational Organizations

34 Conclusions OLI paradigm helps to evaluate how countries and firms can affect the value adding possibilities. The MNE network should be considered as a coordinator of global systems of added value. Engaging in cross-border activity provides many opportunities. MNE fronts alot of challenges from both NGO and governmental stakeholders. Institutional analysis both micro and macro offers new ways to confront the complexities of today's global economy. Location of Multinational Organizations

35 Example of Icelandic company Íslenska útflutningsmiðstöðin (IEC) / Reyktal AS IEC - established in a seafood trading company focused on shrimp and scallops. Late 80:s IEC got involved in peeling plant operation. The Icelandic ITQ system (Individual Transferable Quota System) blocked access of the raw material. Year 1997 IEC was forced to reduce its activity or invest abroad to ensure enough raw material for the peeling capacity but where to go? Location of Multinational Organizations

36 Example of Icelandic company Íslenska útflutningsmiðstöðin (IEC) / Reyktal AS (2) The entry decision involved analyzing three main factors; 1. The possibilities of obtaining fishing rights. 2. The cost of labor. 3. Transaction costs /cost of doing business. The investment was made in Estonia by founding Reyktal AS in The Internalization was a forced one and the DFI made due to aneed perhaps away to survive! Today Reyktal AS is the main operation of the group. Location of Multinational Organizations

37 Strategy: Location