The emergence and growth of multinational enterprises Essays

The emergence and growth of multinational enterprises Essays The emergence and growth of multinational enterprises Paper The emergence and growth of multinational enterprises Paper Essay Topic: Sociology Among the many existing economic and social theories on the emergence of the multinational enterprise (MNE) and its relationship with foreign direct investment (FDI), internalisation theory has room for further development in a present day context, thus is the subject of this study. An MNE is an enterprise that engages in foreign direct investment (FDI) and owns or controls value-adding activities in more than one country (Dunning, 1993, p. 3). Several schools of thought exist in business literature that explain the internationalisation process of firms, such as market imperfection theory (Hymer, 1976; Kindleberger, 1969), product life-cycle theory (Vernon, 1971), internalisation/transaction costs analysis (Buckley Casson, 1976; Williamson, 1977, 1993) and OLI paradigm (Dunning, 1980). This study focuses on internalisation theory due to its great contribution to development of MNE theory. The main objective of this study is to explore the framework of internalisation theory using a case of video game industry in Japan,to further refine the theory. In the first section, the relevant literature on internalisation theory are critically reviewed. In particular, two empirical research projects are highlighted in order to determine which research method is appropriate to this area of study. Further questions are subsequently discussed in the second section. In the last section, the research design is described. 1. Literature Review 1.1 Internalisation Theory The main concept of internalisation theory is that firms grow by internalising markets through foreign direct investment (FDI) to minimise transaction costs (Buckley, 1988). If the cost of using arms-length markets are low, some form of arms-length arrangement (licensing, exporting, franchising, joint venture (JV)) would occur (Buckley Casson, 1976, 1988). Internalisation theory developed by Buckley and Casson (1976) is based on the empirical evidence obtained from their survey research. For the sample they chose 434 large manufacturing firms and collected each firms data including growth rate, profitability, size and capital-intensity in order to examine the relationship between multinationality, growth and profitability which stems from the internalisation. Through the statistical analysis, Buckley and Casson confirmed their postulate that internalisation of markets generates MNEs. Buckley and Casson (1976)s approach to research can be categorised as positivistic approach. There are mainly two different ways of approaching research which are positivistic approach and phenomenological approach (Saunders, Lewis Thornhill, 1997). As a definition of positivism, Benton and Craib (2001) state that in social science it can be seen as an attempt to put the study of human social life on a scientific footing by extending the methods and forms of explanation which have been successsful in natural science (Benton Craib, 2001, p. 28). On the other hand, phenominology is concerned with understanding human behaviour from the participants own frame of reference (Hussey Hussey, 1997, p. 52), PAs Hussey and Hussey (1997) explain, positivistic approach is objective in nature and uses deductive process, while phenomenological approach is more subjective in nature and inductive in the research process. The advantage of positivistic approach is that research findings possess a high level of reliability. The data produced from positivist research is usually quantitative data which refers to all data that is collected in numerical form (Hussey Hussey, 1997, pp. 150). Therefore, if research findings yielded from quantitative data were repeated by another researcher, (s)he could obtain similar results (Hussey Hussey, 1997). In the case of Backley and Casson (1976)s research, large cross-sectional samples and numerical company data made their findings reliable. The disadvantage of positivist research is that validity will likely be low (Hussey Hussey, 1997). Validity is concerned with whether the findings are really about what they appear to be about (Saunders, Lewis Thornhill,1997). According to Hussey and Hussey, because positivistic research focuses on the precision of measurement, often the measure does not reflect the phenomenon which the researcher investigates. Regarding Backley and Casson (1976)s research method, Kobrin (1977, pp. 138) criticised as follows: difficulties of their research are unnecessarily compounded by a very partial reporting of results; for example, statistics rather than coefficients are reported as measures of the strength of association. From a different viewpoint, Backley and Casson (1976)s research has another weakness in terms of data collection. They mention two short-comings of the data: firstly, information on RD expenditure is available only by industry and not by firm, and secondly, an international and interregional breakdown of operations by host country is available only for a very limited number of firms (Buckley Casson, 1976, pp. 84). In quantitative research, such lack of data would be a severe disadvantage. 1.2 Application of Internalisation Theory Considerable amounts of research have been undertaken in order to test the application of internalisation theory. A case study of Coca-Cola in China conducted by Mok, Dai and Yeung (2002) is an empirical tests. In their research, internalisation theory was used to explain Coca-Colas experience and success by changing modes of entry from franchising to JVs. Mok et al. concluded a key of Coca-Colas success in the Chinese market was the internalisation of its market transactions through establishment of JVs rather than wholly owned subsidiaries. The contribution of Mok et al. (2002)s research was they not only provided implications of internalisation theory but also insight into the market expansion strategy of a global soft drink manufacturer in China. For research methodology, Mok et al. (2002) employed case studies in addition to general data collection. The case study is a research strategy which focuses on understanding the dynamics present within single settings (Eisenhardt, 1989, p. 534). It involves gathering detailed information about the unit of analysis with a view to obtaining in-depth knowledge (Hussey Hasse, 1997). There would be three strengths in Mock et al.s case study. First, Mok et al.s choice of sample fully matches their objective of research. Since Coca-Cola is undoubtedly one of the biggest MNEs and has long history of investment in China since 1979, it is a good sample with which to explain the growth of MNE and FDI. In addition, China is a preferable location because its market was a typical imperfect market (Mok, Dai Yeung, 2002). Secondly, Mok et al. (2002) took advantage of qualitative data gained from interviews. Qualitative data is concerned with qualities and non-numerical characteristics (Hussey and Hussey, 1997, pp. 150). Mok et al.carried out interviews with high-level management of Coca-Cola. Their main purpose of the interviews was to obtain information about the companys business operations, especially its relationship with local partners (Mok et al., 2002). They emphasis the importance of interviews as follows: only rarely was this type of information obtainable from any other publicly available sources (Mok et al., 2002, pp. 40). According to May (1997), the advantage of interviews is that they yield rich insight into peoples experiences, opinions, aspirations, attitudes and feelings. In the case of Mok et al.s research, companies entry mode choices were made clear by examining managerial perception revealed in the interviews. Such evidence would not be found sufficiently in official data. However, there are limitations of Mok et als case study. First, since the sample came from a single industry, thus the generalisability of the results is restricted (Mok et al., 2002). Second, as Dunning (1993) claims, the information obtained by field questionnaires and/or interviews with MNEs represents the subjective judgment of the responders to questionnaires or the interviewees. 1.3 Discussion After establishment of its basic concepts, the internalisation theory was confirmed by many researchers as a general explanation for the MNE trend. However, it is questionable that internalisation theory can sufficiently explain the recent variety of activities of MNE. The emergence of global E-commerce companies could be cited as a prime example. For these companies, internalising advantage would be less of a factor since the Internet reduces both internal coordination and market transaction costs (Dunning Wymbs, 2001). Another example is Japanese video game companies which are multinationalised but less internalized to their market. Nintendo and Sony have great share in the video game industry both domestically and internationally, but they seldom have a joint venture or partnership with foreign partners and their almost all production takes place in Japan1. Their overseas subsidiaries are mainly only responsible for sales and marketing. Unlike with E-commerce, the video game industry requires a certain physical space to manufacture and convey its products, similar to other mass-production industries. Nevertheless, the fact that internalisation rarely occurs in Japanese MNEs in video game industry is problematic. It can be supposed that unique characteristics of this industry cause this phenomenon. Thus, further study is needed to examine whether internalisation theory can apply to the video game industry in Japan. 2. Research Method The purpose of this research is to test the applicability of internalisation theory and reconsider the theoretical framework of the theory. Finally, suggestions are made with regards to further research that could be carried out in relation to the discoveries made in this study. 2.1 Research Design This research takes a positivistic approach. As noted above, while phenomenological approach is concerned with generating theories, positivistic approaches focus on hypothesis testing (Hussey Hussey, 1997). In this research, the data collection is concerned with testing a theory rather than generating new theories. The research approach can also devided inductive or deductive (Hussey Hussey, 1997). Deductive research is defined by Hussey Hussey as a study in which a conceptual and theoretical structure is developed and then tested by empirical observation. Hussey Hussey describes inductive research as a study in which theory is developed from the observation of empirical reality. It is this former approach that applies to this study. As a research strategy, this research uses a case study. The research strategy is a general plan of how you will go about answering the research questions (Saunders et al, 1997) The different strategies are experiment, survey, case study, grounded theory, ethnography and action research. As Saunders et al. (1997) mentioned, case studies can be a very worthwhile way of exploring existing theory. It is the main aim of this research. In addition, a case study will be of particular interest to a researcher if (s)he wishes to gain a rich understanding of the context of the research and the process being enacted (Morris and Wood, 1991, cited in Saunders et al., 1997). This research will be effective by gaining rich and detailed information in a particular setting. 2.2 Data collection method This research utilises methodological triangulation both a quantitative and qualitative data collection method (Easterby-Smith, Thorpe Lowe, 1991, cited in Hussey Hussey, 1997). According to Hussey and Hussey (1997), triangulation is advantageous in understanding a research problem and can overcome the potential bias and sterility of a single-method approach. In this research, quantitative data are collected by survey, and qualitative data are gathered through interviews. Mail-in survey questionnaires will be sent to the Japanese video game companies that expand their business overseas including hardware makers and software providers. The objective of questionnaire is to obtain general information on MNEs profiles and performances and to explore their strategy for market entry mode. In order to complement the survey data, secondary data will also be used such as annual reports of companies and government publications The collected data will be analysed using appropriate measuring. At the same time, interviews will carried out with management level staff in a Japanese video game company or those who have knowledge about this area of study. Such qualitative interviews will be used to provide significant quantitative results.