Limitations faced by Multinational Organizations
Discussion
2.1 Part B: Critical evaluation of internalization theory and monopoly capitalism theory for the growth of multinational enterprises
Buckley and Casson (2009) mainly focused on the imperfections for technology transfer and international trade in intermediate product markets or semi-processed products (p. 1564). The internationalization theory focuses on investing in some foreign subsidiary rather than expanding a brand on the host country. The prime benefits that the organization of the home nation can be obtained is that the company is able to send the knowledge across borders alongside maintaining it within the firm. The theory of Buckley and Casson (2009) highlighted more on the forward integration into production from R&D (p. 1567). They have pointed that internalization can be obtained through two ways- operational internalization and knowledge internalization. Considering the situation of 1970, the theory of internalization seen as unitary, monolithic companies like manufacturing companies; while in 1980s, companies in the home countries invest financial resources to start a joint venture with the companies of similar industry in host country by utilizing the power of the later nation (Buckley, 2016, p. 5).
Coase (1937) highlighted one aspect that in some situation company found that high transaction cost resulted in preferring more of the ownership of the asset rather than the incurring the contracting cost themselves. Coasean theory is similar with Buckley and Casson (2009) in terms of application that has been accomplished by MNEs. Thus, in such cases, the company that desires for the internalization accomplishes it through FDI or Foreign Direct Investment rather than FII or Foreign Institutional Investor (Casson 2014). Thus, the arguments made by Coase (1937) are that firms do not need to internationalize their organization incrementally as they can be born globally (p. 1570). Moreover, multinational enterprises have to create advantages by exploiting the opportunities. Coase also highlighted a difference in the internalization theory other than the Buckley and Casson (2009) that unlike 1970s and 1980s, the theory for early 2000s competition is more focused and is attracted towards increasing use of outsourced activities through FDI. Cantwell’s critique of the internalization theory represents that it is better to invest through FII and with FDI. The prime benefits that can be get through FII is that investors can exchange the money invested in the form of profit only when proceeds with FII as they do not have to involve with any production elements Cantwell (1994). This result in purely passive role of the managing investors as they only selects an established firm for investing money by analyzing market conditions and imperfections to the market rather than creating any strategies for business establishment. Cantwell also stated that in order to obtain internalization, there is no role of ownerships in FII process as all the business functionalities is performed by the existing business on which the investors invests their money (Cantwell 1989).
Advantages of Internalization and FDI
Coase’s article furthermore illustrates three main benefits of the internalization procedures- bounded rationality, opportunistic behavior and assets specificity. Buckley and Casson (2009) furthermore highlight that the main reason for raising the problem of bounded realty is imperfect information. The main problem is difference in rational decision taken by management of the organization for the region that they handle. Moreover, the asymmetry of information between the parties is the reason for which a firm develops their self-interest to gain optimistic behavior. Lastly, misalignment of the planned asset and developed skills required for the development of the asset resulted in internationalization problem.
Williamson (1997) stated that multinational enterprises can able to recover knowledge generation, cost of information and asymmetric information by formulating an across border internal markets. The statement given by Williamson (1997) complements the statement of Coase (1937) that if asymmetric information exists and the knowledge of the officials regarding the products is greater than the buyer, problem might occur. In such cases, it is difficult for the organization to convince the buyer to buy their products and thus as a solution to this problem, the intended company sets up a wholly owned subsidiary in the competition. Letto-Gillies on the other hand highlighted the expansion of the MNEs in the home country only and access the foreign market through export business. However, Williamson (1997) also affirmed with the domestic expansion of the firm and emphasized on operational integration. This is counter argued by Buckley and Casson (2009) by stating that both operational integration and knowledge integration is necessary of the growth of the domestic and multinational firms.
Buckley and Casson (2009) on the contrary to the Coase’s statement portrays that the theory of internalization identifies the limitation of multinational organization and the strategies that these organization can take in relation to the changing the circumstances. Buckley and Casson (2009) furthermore demonstrated that multinational enterprises (MNEs) organize their activities to exploit all the knowledge and technology details internally. Moreover, the process of internationalization is also accomplished through allocating of resources based on market assumptions including planning and direction. Buckley and Casson (2009) thus proposed three assumptions that are- firm that intends to internalize adopts the market imperfection that is present in the host nation, choosing the least cost location for performing all the activities for business and to grow through internalizing the market where the concerned firm found that the cost of internalizing outweighs the benefits.
Coasean Theory and its Applications
On the contrary, transnational monopoly capitalism comprises of three terms- transnational, monopoly and capitalism. The term transnational refers to the scenario when a company, intends to invest in a foreign subsidiary. Monopoly is to attain exclusive possession or control of the trade or business in a commodity. Lastly, the term capitalism demonstrate that the capital invests in the foreign market is so high that there are no other local competitors to invest such capital to survive in the market. Thus, a multinational enterprise, which is a monopoly company in its home nation, can grow in foreign nation by investing through their company by investing a huge capital to establish a monopoly.
Cowling and Sugden (1998) on the other hand, highlighted that capitalism considers phases of evolution and transformation which leads to the changes in its dominant institutions. Thus, the company has to be incorporated into the edifice of economic theory. Casson (2014) highlighted that aspect of ownership advantage for determining the potential of the firm and the management capability of the multinational enterprise (MNE). The economy theory stated that if a corporation intends to internationalize, they focused on management and strategy and the cost involved in the business practices. This is the main reason that foreign direct investment (FDI) especially concentrated in knowledge-intensive industries. Multinational industries plan for brings the source of technology (R&D) and utilize the technology for transferring the technology and developed strategy for all other sub-companies in host nation. Coase’s article does not highlight the nature and action of labor working for the all the sub category corporations. However, Casson (2014) focuses on the flow of intermediate product that highlights the functional division of labor and the related activates that these labor operates. Thus, in order to management the labor activities and movement, company has to distinguish among the intra-plant division and inter-plant division of labor for finding out the differences of working aspects of workers of single location and at different locations (Casson 2014). The Coase’s article also does not focus on the involvement of government for internalization which is necessary to be incorporated in case company intends to operate their business functions in other nation. Cowling and Sugden (1998) highlighted some impact of the transnational monopoly capitalism like- lack of effective demand as there is no other company to compete with the company, low actual profits due to the lack of effective demand in spite of the high potential profits, power of unions will further motivates stagnationist tendencies and de-industrialization. In such cases, innovation in terms of products of the organization further stagnationist tendencies.
Bounded Rationality, Opportunistic Behavior, and Assets Specificity
Marxist theory presents a counterargument for transnational monopolistic capitalism theory that a multinational corporation when comes to other nation. Marxist theory also emphasized on social equality and presents an argument for monopolistic theory and sated that companies with high capital should not be provided with more benefits to create monopoly as there are other organization in the market to do business (letto-Gillies, 2012, p. 147). Cowling and Tomlinson thus suggests the solution for establishing coordination between various industries and sectors. The organization that is in power put forward a possible and desirable scenario comprised with the small and medium-size enterprises networks that can operate transnationally compared to have the control with individual enterprise. This system will have some advantageous points like avoiding the scenario of transnational capitalism, higher level of control by the entire society and higher level of efficiency in the business process in the market.
Baran and Sweezy (1966) study has a significant impact of the issue of the possible stagnationist tendencies on a whole generation of economists. The work highlighted that 1980s onwards, demand side economic analysis was replaced by supply-side analysis. Baran and Sweezy (1966) also found that in its monopolistic phase, modern capitalism has lack of effective demand due to stagnationist tendency as the permanent feature. The rising surplus law replaced the falling rate of profit law. The problem occurred in this case is that the surplus cannot be estimated through actual levels of the variables and should be estimated through potential levels which will not provide any accurate information. Moreover, the economy will also suffer deeper depression if monopolistic system cannot develop effective solution to utilize the surplus. Baran and Sweezy (1966) highlighted a solution for increasing effective demand which can be accomplished through foreign investments as part of ‘exogenous’ investment gives rise to high profits especially in nation like the United Kingdom and United America.
2.2 Task-2: Assessment of effects
An organization need to internalize the innovation of the services and products so that the MNE and the other firms located in the host country place can boost their innovative capabilities. The internet sector contributes 7.2% of the UK’s economy for the year 2009 and made £100 billion (The guardian 2018). Moreover, Roy and Sarkar (2016) stated that technological changes can of four types- incremental innovation, radical innovation, changes of technology system and changes in techno-economic paradigm. Roy and Sarkar (2016) furthermore stated that the progressive modification on the existing products that are done by small scale firm are known as incremental innovation; while, radical innovation refers to such modification that drastically changes the products and process. Another statement given by Vernon (1979) is that larger companies are more innovative as they have sufficient financial resources for investing in Research and Development (R&D). Rugman (1986) also depicted that development in products that creates entirely new sectors and is sometimes highlighted as a combination of both incremental innovation and radical innovation refers to changes of technology system.
Transnational Monopoly Capitalism: Definition and Phases
The organization that is taken into consideration is Google, which is an American multinational technology company established on September 4, 1998. The main product lines of the concerned company are web-based products, development tools, operating system, desktop applications, mobile applications and services (The guardian 2018). Thus, if different form of technological changes considers, Google includes changes of technology system. The web-based products comprised of search tools, advertising services and communication tools; while, the development tools comprised of security tools, map-related products and statistical tools. Google have not utilized the theory of internalization which stated that a company invests on a foreign company in order to operate their knowledge internally. However, Google partially utilize the transnational monopoly capitalism theory, which means Alphabet has the monopoly all over the world under which Google is a company known for their internet services that they are providing to the people.
According to the Deloitte’s report, six key areas where Google have impacted the UK’s economy are Google’s search and advertising products that allows the company to set a direct communication with the customers, brand advertisers, publishers and agencies that allow them to use the display advertising service platform for displaying the image of their products and content distribution services for making more money through online by the content creator. The rest three areas for establishing economic impact are android platform that allows Smartphone application developers to develop a connection with the consumers, cloud-based office productivity suite that allow the offices to utilize Google Drive, Gmail and Google Docs and digital initiatives from where the entrepreneurs and students all can gather data and knowledge for enhancing their digital literacy.
Google has a significant impact on the UK’s economy. Majority of business connects with their customers online through the medium of Google (Google Docs 2018). The economic impact of the Google can be estimated through Google search and AdWords, AdSense, YouTube, Android, DoubleClick and accomplishing Google in workplace (Google Docs 2018). Google has direct impact, indirect impact, induced impact and total economic impact on an economy and for the nation UK, the direct impact of the Google is earning profit through advertisement and content creating using Google AdWords and AdSense (The guardian 2018). The return on investment (ROI) range for the internet usage is between 3.4 and 8 which represents that businesses receive £3.4 to £8 for every £1 invested in gross advertising profits (Google Docs 2018). The indirect economic impact of Google is utilization of the Google services for operating the business functions like for supply chain using the Google Maps; whereas the induced impact of the Google can be witnessed through the medium of using Google services by the customer to get awareness of the company. Marketers and entrepreneurs increasingly use YouTube for establishing their brands through YouTube as a free marketing source. Thus, spreading the knowledge with millions of people can be accomplished which is the main fact for the business internalization. Google have also developed a service that is Content ID for the business people for promoting their brands to help prevent copyright abuses and content creator earned $1 billion through Content ID related payments in UK (Google Docs 2018). YouTube also have policies for earning money. Lastly, the total impact is evaluated as the sum of the direct supply chain and employee spending effects; while, the requirement for the job to support this economic activity denotes the labour productivity. Google’s content distribution services also help these business people to reach large audiences. UK earned £11- £28 billion through the Google Search and AdWords (Google Docs 2018). Moreover, in order to enhance the productivity improvements 5 million enterprises globally utilizes Google search engine. Google’s Adsense is used by publishers hosting adverts are making £243- £545 million and creating 5,000- 10,000 jobs (Google Docs 2018). The job created for Android developers paid of the value of €4 billion (The guardian 2018). Smartphone companies and mobile organizations also provide Google Play and Android operating systems which also have created 439,000 direct jobs for Android development (Google Docs 2018). This Google Play has 1.4 million of mobile applications (Google Docs 2018).
Marxist Theory and the Need for Social Equality
Google is basically known for their internet services; but in recent times the company is also focused on products innovation like- Pixel a Smartphone device and Waymo, a self driving car. This business aspect can be related with the internalization of the knowledge through their products innovation internally. There are two types of innovation- radical innovation and imitative innovation that refer to an innovation that is completely new to the industry and innovation that is new to the firm only respectively (Tushman and Anderson, 1986; Henderson and Clark, 1990). In case of Google, the Pixel is an imitative innovative as they develop a product that is available in the market but is new for the company. However, the radical innovation project in Google is Waymo project that intends to make successful driverless cases that need no assistance of the human. Thus, considering the changes in technology that is adopted by Google is a large scale revolutionary change that is embodies in the new technology systems. The internet services of the Google are so significant and user friendly that it had created its monopoly in the market though there are other organizations perform the same function like Yahoo and Bing. Vernon (1979) on the other hand highlighted one aspect that in nation like UK, good performance in the short or medium term is expected and if the manifestation of the good performance cannot be obtained quickly, share price of the company may fall. Most of the Smartphones other than iPhones utilizes the operating system made by Google as it provides everything in free. Moreover, the development of technology products like self-driven car and Smartphone are additional steps to create a more intense monopoly. This statement is also depicted by Tushman and Anderson (1986) that greater innovative activities of the established multinational companies make them less innovative as the degree of monopoly gets increased and local businesses along with their innovative potential remained undervalued. This can be related to one of the negative impact of the monopolistic capitalism theory that is when a company that has monopoly in a business innovate new technology and products resulted in more stagnation to the entry model of the other developing organization in the same industry (The guardian 2018). In case of Google, has monopoly not only in America but also in United Kingdom that does not allow other internet service organization to formulate a market in the UK business and the further innovation in the services and products resulted in more stagnation to the entry for other organization. Another risk that is this monopoly of only one organization in the industry resulted in adverse impact on the nation’s economy if the operation functionality of that organization becomes stagnant. Lastly, it can be said that according to the theory of Buckley and Casson (2009), Multinational Enterprises do not invest in all countries and have the planning for investing huge capital in some selected nations. On considering this theory, Google have also invested a huge cost for establishing UK headquarters for bringing all the Googlers under one roof and serve with better technology and internet services to the users.
Baran and Sweezy’s Study on Stagnationist Tendencies
Conclusion:
It is found that internalization is also a concept of transferring knowledge through other organization for forward integration into production through the research and development. Another theory that is discussed in the report is transnational monopolistic capitalism theory that refers to gain monopoly in the market through their unique products and services in all the destined host nations, where they intends to operate their business. The internalization is obtained through FDI by the considered organization that is Google as they expand their reach through their body only in different nation and main monopoly through their innovative services and in recent time, products like Pixel mobiles and working on Waymo, driverless automobile project furthermore adds strength to their monopoly business.
This assessment is divided into two parts, where the first part highlights critical evaluation of the two theories- internalisation theory and transnational monopoly capitalism. The second part of the assessment will emphasize on impact of Google in terms of innovation on the UK followed by a conclusion based on the entire discussion.
Reference:
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