Starting in the late 1990s, “globalization” became a buzzword to describe the apparent integration of markets in the world economy. Many authors and pundits claimed that the world was converging towards a market-friendly democratic place, while gurus and consulting firms were not short of formulae and advice on how to make profits out of the global economy. Decades later, new realities show that globalization does not mean political, cultural, and economic convergence and that forces against it are strong. This course seeks to help you understand the forces of globalization and how cross-cultural management and the relationship of a multinational organization to various host countries is becoming more and more critical in today’s global economy. This course begins with the discussion of these issues and global relationships and delves into a deeper understanding of business strategy in today’s global business marketplace. Upon successful completion of this course, you will be able to: • Understand how we got here and why it matters • Understand the complexities of the current globalization (not all countries are the same) • Evaluate the effects of international trade regulations on international business • Evaluate when and why should we operate as multinationals This course is part of the iMBA offered by the University of Illinois, a flexible, fully-accredited online MBA at an incredibly competitive price. For more information, please see the Resource page in this course and onlinemba.illinois.edu.
Location Advantages
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Del curso dictado por University of Illinois at Urbana-Champaign
Global Strategy I: How The Global Economy Works
20 calificaciones
University of Illinois at Urbana-Champaign
20 calificaciones
Curso 3 de 7 en SpecializationGlobal Challenges in Business
De la lección
Module 4: Why Do We Have Multinationals? What Determines the Type of Multinational?
You don’t need to be a multinational to succeed in the business world. In fact, not all successful firms become multinational and not all multinationals are successful. This module explains what the main elements are in determining whether firms become multinational or not, what characteristics they exploit when going abroad, and where their competitive advantage is.
Conoce a los instructores
Marcelo BucheliAssociate Professor
Department of Business Administration, College of Business
The second set of attributes in the oil life framework are the location advantages,
which are the ones that we're covering in this lesson.
Location advantages are the ones
that a particular country provide that
might create incentives for a firm to move into that country.
So, the difference with the ownership advantages that we covered before,
is that ownership advantages are the ones created within the firm.
Now, location advantages are the ones that a particular country provides.
So let's look at some examples of
these location advantages to have a better understanding of them.
One example of this location advantages is access to natural resources.
Allocation of natural resources was defined literally millions of years ago.
Oil is where it is,
coal happens to be where it happens to be,
the same as copper, or other types of products.
Millions of years of geological transformations have
led to a particular localization of these natural resources.
So firms that need to have access to these natural resources,
they just cannot bring the oil fields into their country,
but they have to go where the oil is or the coal mine is or whatever,
so, they need to go abroad.
So, lets look at some examples of this.
Lets look at the British firm BP.
They own oil fields in places like the United Kingdom,
in the North Sea, Azerbaijan, Norway, the Caribbean,
the United States, particularly in the state of Alaska,
back very far north, or in the Gulf of Mexico,
as well, like in places like Angola,
really global operations in terms of getting access to these natural resources.
Another good example of this is
the South African firm De Beers specialized in the exploitation of diamonds.
Most of their mines are located in places like Botswana, Namibia, or Canada.
Or, another important firm,
the Rio Tinto Group from Australia,
involved in many mining activities all over the world
and therefore has operations in the United States,
Canada, Peru, Mongolia, and Mozambique, among others.
So, again, natural resources are where they are.
If we remember the value chain that we mentioned before,
a firm that requires access to these raw materials,
as an important element in their competitive advantage,
might be even forced to become
a multinational corporation because you have to go where these raw materials are,
which again was defined millions of years ago.
Another location advantage, often creating incentives
for firms to move abroad of their home country, is cheap labor.
Cheap labor, particularly for the manufacturing industry,
but also for white-collar jobs.
Let's say, firms like Intel and Accenture have back office employees in India
and they provide them with the same quality of work an employee
in the United States would or in the United Kingdom or in other places of Europe.
They speak English but they cost a fraction of what their Western counterparts cost.
Korean multinational corporations, Samsung or LG,
have invested heavily in manufacturing facilities in Vietnam.
Vietnam is a country that sells itself
mostly as a place in which cheap labor is reliable and cheap.
So, this is something that firms of rich countries,
like South Korea, take advantage of.
Let's say, back in the 1990s or the early 2000s,
the country that was considered as
a place whose main advantage was cheap labor was China.
As we know, this has changed.
The Chinese have seen their standard of living improving and
even some Chinese corporations are beginning to invest in
places like Vietnam to take advantage of cheap labor.
Related to the previous location advantage that we mentioned,
another one is skilled labor.
You don't always want cheap labor if that cheap labor is uneducated and
if the competitive advantage of the firm requires skilled and highly educated labor.
So, let's take a look at,
again, a firm like Huawei from China,
actually coming or originating in a place that
has a lot of labor and cheaper than in Western countries.
However, Huawei has investment in research and
development in places like the United States or even Sweden.
Sweden, the Swedish labor force,
is way much more expensive than the Chinese one but is better
educated and these countries also provide better protection for property rights.
So, this is a kind of investment in which cheap labor is not the same.
Let's look at another firm like Rolls-Royce.
They produce propellers or boats in a place like Norway,
a place with high wages, long holidays,
high taxes, but that has very highly educated people.
They can produce these propellers,
particularly for oil tankers,
in Sweden and they export this production to China.
So, it's not always that a firm will always go to wherever labor is cheaper,
but where labor is educated.
And let's take another important example from Europe, Finland.
Finland is considered the place with the best education in the world in terms of primary,
secondary, and university education.
The Finnish population is extremely well educated.
Most of them are at least bilingual.
And this is something that has provided firms,
particularly in the information technology,
to – I mean,
with the incentive to go and invest in
Sweden because they have reliable people, reliable workforce,
for the kind of things for which you need somebody who
is a well-educated adult that is well fed,
well rested, and that can comply with the very detailed and sophisticated kind of work.
Another type of location advantage can be infrastructure.
As we know, not all countries in the world have the same type of
infrastructure or infrastructure of the same quality.
So, corporations, for example,
that require a smooth value chain operating
between countries might actually want to invest in countries with good infrastructure.
So, for example, many corporations of the United States
and China invest in places like the European Union because
the supply chains will work more smoothly and in
a more reliable way because of
the wonderful infrastructure in most of the European countries.
The European Union is also a big recipient of investment in software engineering,
partially because, again, the general infrastructure
is one that creates incentives for these.
Now, you don't always go to places with good infrastructure.
It depends on the kind of business you're into.
If you're in the infrastructure business,
you might actually go to a place in the need of infrastructure.
Let's say, a firm like the German multinational corporation Siemens.
They have taken a lot of advantage of the growth of China in the last few decades.
A country that was poor and has enriched itself a lot,
needed better electricity networks or
better electric plants to have all these factories running,
new cities being built, new trains running.
All these things require big and powerful electricity plants.
It was the Germans the ones providing these to the Chinese,
and Siemens in particular made a lot of money out of this.
All these high-speed trains that are being built in places like China,
well, are actually made in Germany,
and Siemens is the one running them or producing them as well.
So, this is something in which bad infrastructure can provide incentives for
a firm to go to a place that is demanding better infrastructure.
And again, particularly German firms like Siemens have taken a lot of advantage of that.
Some countries can provide certain location advantages for
multinational corporations because of government incentives.
Sometimes the government wants the foreign firms to go into their countries.
And they provide incentives such as taxes or tariffs that would encourage
firms to invest in the sectors where the government is
interested in generating more development.
So, this is something firms need to pay attention to.
And, sometimes, firms can join the government in certain efforts.
Let's take the Dutch-British firm Unilever.
Unilever in sub-Saharan Africa joined the government in
campaigns to promote people to wash their hands before having any meal.
Now, this is one of the most effective ways to keep germs away,
and government started promoting this habit
among many people in the sub-Saharan African countries.
Unilever joined these campaigns and provided certain marketing to these campaigns.
Now, if you promote people to wash their hands, they need soap.
And who was going to sell the soap?
Unilever. So, in this way, a firm,
it was a win-win situation for the government,
the welfare of that country,
and the business of this multinational corporation.
So, governments can provide incentives.
The government is not always an obstacle,
but actually the facilitator for foreign corporations to come into their territories.
When we talk about location advantages,
we cannot only focus on the place where the multinational is going to,
but sometimes the country of origin also provides a location advantage.
Let's say, it's not the same if you come from a powerful country as,
say, if you come from a weak country.
Or, it depends also on the rules of your country.
Let's take an example,
the United States of America.
Few countries of the world have better laws to protect firms that go
bankrupt and in which your debts or failures can be erased and almost forgotten.
In other countries, particularly in Europe,
for example, bankruptcy is punished.
It means that you did something wrong and therefore you need to pay for that.
So, one of the,
this provides American firms, when operating abroad,
an advantage because they can take more risks than their counterparts from countries in
which the bankruptcy laws are not as generous as the ones in the United States.
So the risk aversion,
let's say of French firms in comparison to the American firms,
is not necessarily cultural or just that they don't want to take risks.
It's because you're punished for failing, while in the U.S.,
you are not and this is something that the home country can provide
an advantage over other firms from other places.
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