Static Theories of International Business, Transaction Cost Analysis Model - International Business

Static Theories of International Business

The static theories of international business are designed to characterize and explain the functioning of a firm in an international, often unfavorable, environment. The task of the company's managers is to find the best balance between the environment (opportunities and threats) and the firm (strengths and weaknesses). Taking this into account, we can distinguish three main components of models:

1) environmental factors, i.e. model of the environment in which the firm operates;

2) Possibilities, i.e. alternatives available to the firm;

3) decision criteria used by managers.

Among the most popular criteria are used to maximize profits, market share, control and minimize costs and risks.

The above mentioned aspects are interrelated because the company faces environmental factors that determine its capabilities. The task of management is to choose the optimal alternative, based on the reflecting views of management and the resources available to the firm and the criteria for decision-making. Internationalization is seen as a planned process.

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Dunning's eclectic paradigm. An eclectic paradigm explaining the logic of decision-making about the implementation of FDI was developed by the English researcher J. Dunning. The paradigm explains the activities of TNCs, in which exports for the company will be less preferable compared to FDI. The conditions are divided into three groups of benefits, which can be expressed by the scheme "property - location - internalization" (ownership - location - internalization (OLI)). That is why this paradigm is often called the OLI paradigm. Given the availability of these advantages, the firm will carry out FDI in the course of its international activities. Let's briefly consider three groups of the above advantages.

1. The advantage of ownership (O) in relation to other enterprises serving a particular market is the consequence of possession of tangible and intangible assets less accessible to other firms, and also depends on the size of the firm, the monopoly position, the best resource opportunities (material resources, trademarks, patents and so on).

2. The advantage of location (L) comes from the characteristic of the economy of another state, otherwise the foreign market would be serviced by export of products. The advantages of location determine the location of investment and are the result of different cost factors of production.

3. The advantage of internalization (I) is a consequence of the implementation of the first two conditions and implies the performance of any operation within the firm (internalization). In the absence of such advantages, the firm can externalize the operation, for example, issue a license to manufacture its products to another enterprise.

This theory will be discussed in more detail in Section 2.4.

Transaction Cost Analysis Model

The theory of internalization, based on the theory of transaction costs, explains the reasons for the emergence of multinational companies and the development of their international operations due to the fact that within the organization costs are lower than in foreign markets. First, due to market imperfections and opportunism of its participants, the firm, when concluding deals, incurs certain costs. Secondly, the firm increases its efficiency by reducing these costs. Thirdly, the total costs can be reduced by integrating certain types of activities into the internal structure.

The theory of transaction costs determines the conditions under which a firm should internalize a particular type of activity. In the case of international activities, this means that the firm must choose between the use of the agent or importer, on the one hand, and the establishment of the trading subsidiary on the other.

Theory asserts that if such criteria as the degree of uncertainty about the results of transactions, the frequency of transactions, the amount of investment necessary for the implementation of transactions are evaluated highly, then this activity should be internalized, i.e. made by the company itself.

According to R. Coase, the firm will continue to expand until the cost of arranging an additional transaction within the firm becomes equal to the cost of implementing the same transaction through an exchange on the open market. Subsequently, the researchers began to separately analyze the transaction costs that preceded and subsequent contracting. The change in this procedure was due to the complication of forms of international transactions.

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According to Fig. 2.1, when choosing between forms of FEA - export, licensing or FDI - taking into account the level of costs along the ordinate axis, the export form is the least expensive for the number of operations Q1. Licensing is optimal for the number of transactions in the range of Q1 and Q2, and in the event that the number of transactions exceeds the value of Q 2, the least costly form of activity will be the implementation of FDI.

Cost-based approach to choosing the FEA method: Sehrort - costs of export activities; Ccontract - costs arising from cooperation with an external partner (licensing); CFDI - costs when performing FDI, Q is the total number of transactions

Fig. 2.1. Cost-based approach to the choice of the way FEA: Sehrort - the costs of export activities; Ccontract - costs arising in cooperation with an external partner (licensing); CFDI - costs in the implementation of FDI; Q is the total number of operations

Meditate alone

What factors, but in your opinion, will the further development of the transaction cost analysis model be caused?

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