The theory of international business

THE THEORY OF INTERNATIONAL BUSINESS Economic Models and Methods Mark Casson The Theory of International Business Mark Casson The Theory of International Business Economic Models and Methods Mark Casson Department of Economics University of Reading Reading, United Kingdom ISBN 978-3-319-32296-4 ISBN 978-3-319-32297-1 DOI 10.1007/978-3-319-32297-1 (eBook) Library of Congress Control Number: 2016946226 © The Editor(s) (if applicable) and the Author(s) 2016 This work is subject to copyright All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed The use of general descriptive names, registered names, trademarks, service marks, etc in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use The publisher, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication Neither the publisher nor the authors or the editors give a warranty, express or implied, with respect to the material contained herein or for any errors or omissions that may have been made Printed on acid-free paper This Palgrave Macmillan imprint is published by Springer Nature The registered company is Springer International Publishing AG Switzerland In memory of Alan Rugman: scholar, friend, colleague PREFACE AND ACKNOWLEDGEMENTS The ideas presented in this book have been gestating for a long time The premature and unexpected death of my good friend Alan Rugman has stimulated me to reflect on how far theories of international business (IB) have changed in the forty years since we first met Discussions with Peter Buckley have led me to ask whether these changes have been for the better or not I have therefore resolved to set down what, in my opinion, the theory of IB might look like now if the direction originally charted had been followed up in a systematic way IB scholars seem to have lost the initiative in theory development In the 1970s and early 1980s, IB exported key ideas to economics, but now IB is largely an importer of ideas from other fields IB scholars seem to think that concepts derived from strategic management and the resourcebased theory of the firm provide all the economics that is required to understand IB. This is a big mistake A major objective of this book is to help to rectify this error This book is based on a series of ‘Masterclass’ lectures delivered at the Henley Business School, University of Reading, in November 2015 The class was attended by an international group of scholars and students I am grateful to the participants for giving up their valuable time and for providing feedback which helped me to turn my lectures into book The Masterclasses are funded by Helen Rugman to perpetuate the intellectual legacy of Alan Rugman I hope that these notes will advance the agenda pursued by Alan in his years at Reading, which was to restore the theory of the firm to its proper place at the heart of IB studies I am vii viii PREFACE AND ACKNOWLEDGEMENTS grateful to James Walker for inviting me to present this Masterclass, and for providing the stimulus to prepare the original notes The book draws on recent work that I have been undertaking in collaboration with colleagues and, in particular, in joint research with Nigel Wadeson (University of Reading) and Lynda Porter (University of Bath) I have also benefited from discussions with Rajneesh Narula, Quyen Nguyen and Maggie Cooper Davide Castellani and Janet Casson provided valuable comments on the final draft I should also like to thank Daria Radwan for her cheerful and meticulous administrative support The book assumes little or no prior knowledge of economics It does, however, address some popular misconceptions in IB regarding economics which need to be dispelled Central to prevailing misconceptions is the failure to realise why economists develop models and to appreciate why such models are essential for analysing business behaviour in a global economy CONTENTS The Relationship Between Economics and International Business Studies Introduction to Modelling Techniques 21 Introduction to Monopoly 41 Introduction to Location 53 71 Division of Labour and Modularisation Analysis of Ownership Modelling Contractual Arrangements 93 111 Global Rivalry 129 Extensions of the Models 147 ix CHAPTER 10 The Management of the Firm Abstract The international business (IB) literature rarely questions why firms exist Yet economic activity does not require firms; it simply requires that each asset or resource is controlled by a specific individual, and that each individual can take account of other individuals’ plans when taking their decisions Firms are not individuals, but are controlled by individuals; they are essentially legal constructs that are useful to people who organise risky team activities This approach clarifies many important issues in the management of firms—especially large multinational firms This chapter employs this approach to re-examine some classic problems in IB management from an economic perspective It provides important insights that cannot be obtained from conventional international management literature Keywords Model • Economics • International business • Mathematics technique THE FIRM AS A LEGAL INSTITUTION It was emphasised at the outset that the economic modelling of IB does not require the concept of a firm The explanation is quite simple: an individual can, in principle, own foreign assets and use them to supply product © The Editor(s) (if applicable) and the Author(s) 2016 M Casson, The Theory of International Business, DOI 10.1007/978-3-319-32297-1_10 157 158 M CASSON to a global market To underline this point, there was no reference to the ‘firm’ in the discussion of Models 1–6; the concept only appeared in the discussion of contractual arrangements in Model 7, and then only to a limited extent A firm is essentially a legal construct It is a fictional person that owns property and makes contracts in its own name It can acquire, utilise and dispose of assets like an ordinary person It cannot decide things for itself, however, because it is not a real person and has no mind of its own Of course, it is quite useful to refer to ‘the strategy of the firm’ as shorthand, when describing a strategy set out by the chief executive and endorsed by the board As noted earlier, playing with words is quite acceptable provided that the context remains clear It seems quite natural to taken the firm as a given in IB theory, because they are so commonplace Firms are set up on personal initiative, however; they have no will of their own and cannot create themselves Firms are typically established by people who believe that they have discovered a business opportunity from which they hope to make a profit The story begins with people, who have an idea, and set up a firm to exploit it; the story does not begin with a firm that creates itself and hires a chief executive to manage it Because firms are not people they have certain advantages over people • Firms can outlive their founders; a firm can be sold as a going concern if the founder dies or is unable to manage it themselves • The owner of a firm does not pay tax on their revenues but only on their profit; their expenses can be deducted first • The limited liability of a firm protects the owner’s personal assets in the event of bankruptcy • A firm acts as a nexus of contracts; it can employ workers and sell product in its own name These contracts not have to be renegotiated if the founder dies • A firm can pool the capital of financial backers It can therefore grow by raising additional capital from other people It also provides stability: shareholders share financial risks, thereby ‘insuring’ the firm against unexpected fluctuations in profit • Shares in a firm can be bought and sold on stock exchanges, thereby providing shareholders with personal liquidity; their wealth is not tied up in perpetuity THE MANAGEMENT OF THE FIRM 159 These are not mere points of theory They are underpinned by historical experience Prior to the 1850s the modern concept of the firm was hardly known Businesses were either sole traders, family organisations, or partnerships Indeed, these forms remain important today: sole traders export through e-Bay and internet marketing; family businesses run corner shops, restaurants and bars; and partnerships are common in professional services, for example, doctors and lawyers The modern concept of the MNE is, in fact, a derivative of the concept of the modern corporations that came to prominence in the USA in the 1920s Contemporaries described the modern corporation as a joint-stock firm with many small shareholders and a professional salaried management team based in a large headquarters It typically exploited mass production to supply a consumer product through a vertically integrated distribution channel It was a social phenomenon: its scientists and salesmen enjoyed iconic status, and its founder was active in politics and philanthropy As exports expanded after World War II these firms ‘jumped’ tariff barriers, and produced abroad through wholly owned subsidiaries, thereby becoming MNEs This picture, unfortunately, has provided an enduring stereotype of what it means for a firm to be an MNE In fact MNEs existed long before the modern corporation emerged Chartered trading companies were popular in the seventeenth century, especially for discovery and colonisation Before then IB was undertaken by individual merchants, operating alone, in partnership, or under the auspices of local guilds Early forms of MNE include the German Hansa, and the English Monarchy with its continental Staple ports As business has globalised, new forms of MNE have emerged Offshore production for the domestic market has become more common, for example Every time a new form of MNE emerges, it seems that someone announces that a new theory is required to explain it They not realise that the economic theory of IB explains IB in all its forms, and is not preoccupied with just a single stereotype TEAMWORK AND INTRA-PLANT COORDINATION A firm is involved in a nexus of contracts with individuals who have a variety of roles Some, like customers and suppliers, are outside the boundaries of the firm, whilst others, like workers and managers, are inside The position of shareholders is ambiguous They are outside the firm in the sense 160 M CASSON that the firm does not have authority over them, but are inside in the sense that they have ultimate authority over the management Inside the firm the workers are accountable to the managers A key issue in the theory of the firm is why employees would accept a role in which they can be directed by others The general view is that there are economies of teamwork and that teams can only operate successfully with one person in charge Four main reasons are given for unitary direction of a team • Pace-making This is the simplest reason An orchestra requires a conductor to control the beat of the music and a boat crew requires a cox to synchronise the strokes of the oars The authority of the pacemaker is often over-stated, however; the conductor does not necessarily choose the music score and a cox does not necessarily select the crew Indeed, on a production line synchronisation is effected automatically by a clock or buzzer • Supervision A supervisor monitors workers’ performances to ensure that they comply with their contracts A lazy worker who is ‘freeriding’ on the efforts of fellow members of their team will be identified and penalised by a supervisor While the pace-maker and the coordinator are ordinary workers doing a special job, a supervisor is committed to protecting their employer’s interests • Coordination of immediate response under high-frequency volatility There are many cases where workers in a plant must respond immediately to unanticipated changes in conditions, and it is crucial that responses are coordinated It is impossible to negotiate in real time over every job that a worker has to perform There are too many contingencies to prepare for all of them in advance, and too much variation in them to devise simple rules that cover all eventualities It is simpler to arrange for workers to be on the spot in readiness to exactly as directed by someone in authority The example of troops in battle illustrates the problem The coordinator is the relevant authority • Coordinating the use of proprietary knowledge Each member of a team may have a special skill, but someone has to have an overarching view of how these skills fit together Someone needs to translate theory into practice; plans into outcomes; and knowledge into products and services They need to use their knowledge to solve practical problems whilst keeping it confidential too THE MANAGEMENT OF THE FIRM 161 INTER-PLANT AND INTRA-PLANT COORDINATION COMPARED The functions of pace-maker and supervisor are mainly relevant to the coordination of activities within a single plant, whereas the coordination of product flow and knowledge are also relevant to flows connecting different plants In other words, pace-making and supervision relate mainly to intra-plant coordination while coordination of product flow and knowledge relate to inter-plant coordination too As a result, pacemaking and supervision are often discussed in the context of employment contracts, whereas coordination of product flow and knowledge flow are usually discussed in the context of multi-plant firms Multi-plant firms are often described as either horizontally or vertically integrated Horizontal integration refers to a firm with multiple plants of a similar type Vertical integration refers to a firm with different types of plant operating at different stages of production A diversified or conglomerate firm may have plants at the same stage of production each producing a different product for a different market As noted earlier, an MNE is a special type of multi-plant forms owning activities in more than one country An MNE may be horizontally integrated or vertically integrated, or both, and can be diversified as well In a multi-plant firm such as an MNE coordination operates at both the inter-plant and intra-plant levels, and the question arises how these two levels are related There are two opposing considerations • The overall success of the firm depends upon how well the activities of all its employees are coordinated This suggests that all the employees should be treated in a similar way, share similar beliefs, speak the same language and so on The ‘psychological contract’ between the firm and its employees should be same everywhere even though, for reasons of national compliance, the legal contracts cannot be exactly the same in different countries If the firm possesses a ‘high-trust’ culture then the benefits of this culture (in terms of reducing monitoring costs) can be shared through the organisation • Intra-plant coordination and inter-plant coordination are fundamentally different because one involves just a single plant and the other two or more separate plants Workers within the same plant may meet face-to-face on a daily basis but the same cannot be said of workers in different plants Intra-plant coordination should therefore 162 M CASSON be organised differently from intra-plant coordination; furthermore, there is no reason why different plants should use similar methods of intra-plant coordination, especially if they are geographically or culturally far apart These issues recur continually in the IB literature under the general rubric of ‘headquarters-subsidiary relations’ The models represented above have taken the ‘separatist’ view throughout The question of how exactly intra-plant coordination is effected has not been explicitly addressed The issue of licensing versus FDI has been analysed without reference to the question of whether a licensee uses employment contracts similar to the licensor, or whether a wholly owned foreign subsidiary uses contracts similar to the parent firm or its home-country subsidiary Taking the ‘integrated view’ would require some re-working of the theory, but would provide additional insights too MANAGEMENT CAPACITY CONSTRAINTS The greater the degree of internalisation, the greater the burden of information processing that falls on the management of a firm The wider the spread of locations at which the firm produces and sells, the greater the amount of localised information that the firm requires The firm must gain access to this information from its local mangers Authority for local decisions can be devolved, so that local decisions are taken using local information But the larger the firm becomes, the more difficult it becomes to devolve effectively; it is difficult to identify, empower and reward those who possess the most internal information Failure results in high turnover amongst key staff A succinct way of putting this is that under internalisation the problems of external markets not go away entirely, but re-appear in a different guise within the firm While managers need to be empowered, they also need to be held to account Unlike intermediators in external markets, managers not buy and sell internally for their own profit; any profits or losses they make accrue to their employers instead The worst that can happen to a manager that makes a mistake is that they lose their job Although well-motivated managers may a better job than external intermediators, poorly motivated managers may a worse job instead Transparency is required Different activities within the firm may be established as profit centres, trading with each other at internal prices, THE MANAGEMENT OF THE FIRM 163 for example, upstream production and downstream production Internal prices can distinguish between underperformance and over-performance in different centres Success, however, depends on internal prices being set correctly With internal bilateral monopoly, for example, where a single downstream facility is locked in to buying from a single external facility, price may be set through internal politics So how is it possible to determine whether internal prices are correct? A potential solution is to open up the internal market by allowing individual profit centres to trade externally if they wish Thus, upstream production can sell intermediate product to independent downstream producers, while downstream production can procure from independent upstream producers Opening up an internal market can give the firm the best of both worlds; search is facilitated because alternative sources of supply and demand can be explored; the quotes obtained can then be used to set internal prices, and individual profits centres can then decide whether to internalise or not As its scale of its operation expands, the variety and complexity of the issues confronting top management increases too As a result the firm may become increasingly bureaucratic While there may be economies of scale with respect to size of plant (see above), there are often diseconomies of scale with respect to size of firm Increasing managerial diseconomies of scale may set an overall limit to the size of the firm Early neoclassical economists regarded management as a fixed factor, specific to each firm Because of this fixed factor, there were diminishing marginal returns to variable inputs such as labour and capital, and so there was an optimal size beyond which the firm could not profitably expand Where the fixed factor is identified with a single owner-manager, such as the founder, the size of the firm is dictated by their ability, and in particular their ability to delegate authority in an efficient manner The larger the span of control that the owner can exercise, the larger their firm can become Personal experience is an important factor in management capacity Some managers may have the ability to learn from experience and ‘grow with the job’, but others may not Recruiting experienced managers from established large firms into senior positions can avoid this problem, but it threatens the promotion prospects of long-serving staff; it also increases the costs of training and induction 164 M CASSON Where top management is the constraint, the firm may be forced to reduce its reliance on internalisation As it grows, the firm opts increasingly for licensing, subcontracting and other arm’s length relationships This reduces the diversity and complexity of issues facing top management Firms that continue to grow and ignore the warning signs of managerial stress run the risk of dramatic collapse BIBLIOGRAPHY On the economics of teamwork see: Alchian, A. A., & Demsetz, H (1972) Production, information costs, and economic organization American Economic Review, 62, 777–795 On the role of entrepreneurship and management in the context of the firm see Casson, M (1991) Economics of business culture Oxford: Oxford University Press Casson, M (1996) The nature of the firm reconsidered: Information synthesis and entrepreneurial organization Management International Review, 36(1), 55–94 Casson, M (2014) The economic theory of the firm as a foundation for international business theory Multinational Business Review, 22(3), 205–226 Kaldor, N (1934) The equilibrium of the firm Economic Journal, 44, 60–76 Knight, F. H (1921) Risk uncertainty and profit Boston: Houghton Mifflin Penrose, E. T (1959) Theory of the growth of the firm Oxford: Blackwell CHAPTER 11 Conclusions: A Model-Building Agenda This book has one main conclusion: that IB researchers should make greater use of economic models There are plenty of reasons for not using economic models, but most of them are bogus, and the rest are exaggerated Economics in IB has received more ‘outsider’ criticism in the last twenty years than it has ‘insider’ development Insiders are well aware that economic modelling has its limitations, but they also know how these limitations can be minimised by careful model specification Economists themselves are partly to blame for this sad state of affairs Too often they present their models as purely technical exercises and deliberately make them difficult to follow in order to make themselves look clever Their models are developed outside any practical or meaningful context purely as an exercise in intellectual ingenuity They positively invite criticism In the 1970s and 1980s economic models of IB were developed as a branch of applied economics, with the aim of explaining empirical anomalies and analysing important policy issues of the day That enthusiasm for practical economic models needs to be re-ignited today Modellers can become more practitioner-focused, but the readiest solution is for practitioners to learn the craft of modelling But first practitioners must master the ‘tool kit’ of concepts and techniques that are required to implement the modelling agenda This book is intended to help them This object of this book is not to present a series of economic models that students of IB should learn by rote The models that appear in this book were developed for expository purposes—to explain how models can © The Editor(s) (if applicable) and the Author(s) 2016 M Casson, The Theory of International Business, DOI 10.1007/978-3-319-32297-1_11 165 166 M CASSON illuminate understanding of classic issues in IB. Models are powerful: as analytical devices, hypothesis generators and—in diagrammatic form—as artistic constructs Models can be persuasive: they provide an argument with a rhetorical flourish The real aim of this book, therefore, is to empower IB scholars to construct their own models, and not just to copy or adapt other people’s models The early chapters presented some standard economic models, subsequent chapters adapted these to IB, and finally, in the preceding chapter, it was shown how further models can be constructed All the techniques set out above can be found in standard textbooks This includes differential calculus, the method of substitution, the Lagrange multiplier, the solution of non-cooperative games, decision trees and probability theory However, texts are often weak on motivation, intuition, and examples of practical value Above all, texts not engage, at a philosophical level, with what is meant by modelling, what makes it so useful and how it is done It will certainly pay the interested reader to work through carefully the various models presented in this book, in order to gain confidence in using the methods With this confidence they can then engage with issues that interest them personally and construct new models for themselves The resulting models can be used to generate new hypotheses, support a policy stance, constructively criticise previous work and so on Modelling has enormous potential, but it is only by doing it that the IB profession will discover exactly how much it can achieve INDEX A abstraction, Adam Crusoe, 95 ad valorem, 152, 153 advantage, 17, 41, 42, 53, 54, 62–4, 66, 76, 90, 98, 104, 107, 119, 123, 129, 158 appropriation, 81, 105, 108, 124 assumption, 2, 3, 5–7, 10, 12, 21, 23, 24, 27, 29, 43, 47, 54, 55, 60, 82, 93, 96, 101, 118, 130, 153 auctioneer, 16, 55, 60, 96 B back-substitution, 46, 57 bounded rationality, 12 budget constraint, 44, 47, 56 buyer uncertainty, 98 C capabilities, 4, 27, 43, 54 capacity, 19, 64, 124, 147, 162–4, 165 cartel, 8, 131 causation, 23 chartered trading company, 159 collusion, co-location, 104, 114, 139 comparative advantage, 53, 63, 66, 76, 90, 104, 107 comparative statics, 31–2, 48, 49, 57, 58, 67, 68, 74, 78–9, 89 competencies, competition, 4, 21, 54, 129, 133, 138, 139, 154 complexity, 3–5, 7, 13, 147, 163, 164 concentration, 27, 72, 147, 148, 155 constant returns to scale, 27, 36, 89 constraint, 12, 23, 27–30, 34, 36, 37, 44, 45, 47, 56, 70, 94, 112, 136–8, 148, 162–4 consumption, 13, 16, 22, 24–39, 41, 43, 46–51, 53, 54, 56, 58–60, 65, 66, 68, 69, 73, 74, 137, 149, 150 contextual, 21, 22 contract, 8, 9, 42, 48, 60, 93–7, 99, 131, 149, 150, 162 contractibility, 7, convexity, 36 © The Editor(s) (if applicable) and the Author(s) 2016 M Casson, The Theory of International Business, DOI 10.1007/978-3-319-32297-1 167 168 INDEX coordination, 13, 72, 101, 103, 105–10, 104–21, 124–126, 137, 147, 149, 159–62 cost, 8, 13, 28–33, 38, 43–7, 49–51, 55, 57, 63–65, 69, 71, 73–83, 85, 88, 93, 95–8, 100–10, 111–27, 129–30, 137–39, 141–3, 147–50, 152, 161, 163 D deadweight loss, 51, 52 decision tree, 85, 86, 101, 112, 113, 115, 135, 154, 155, 166 definition, 5, 6, 9, 45–6 demand, 6–8, 10, 25, 26, 31–3, 38–9, 43–9, 52, 55–8, 61–7, 68, 70, 73, 75, 77, 88, 96–8, 105, 108, 112, 122, 142–4, 149, 151, 163 derivative, 29, 30, 34, 159 development, 1, 16, 17, 22–4, 58, 71, 72, 81–8, 90, 94, 96–7, 103–5, 108, 114–16, 122, 123, 126, 130–3, 137–42, 145, 148, 149, 165 differentiation, 11, 17, 72 direct substitution, 28, 29 discrimination, 41, 53, 64, 68, 70, 73–4, 79, 89 distance, 7, 36, 49, 50, 76, 83, 96, 104, 108–10, 107, 109, 111, 112, 114, 122, 126, 130, 148 distribution, 9, 51, 72–80, 84, 159 division of labour, 71–90 downstream, 17, 22, 163 dynamics, 23 E economics, 1–19, 28, 42, 52, 54, 71, 80, 157, 165 economies of scale, 147–9, 154, 155, 163 Edgeworth Box, 58–60 endogenous, 23, 24, 31, 32, 46, 78, 103, 138 equilibrium, 6, 8–11, 23, 31, 32, 36–8, 43, 44, 46, 47, 49, 52, 55–8, 60–2, 65, 68, 75, 79, 96, 131–5, 137, 141, 145 exogenous, 23, 25, 31, 103, 138 export, 53, 55–7, 61, 62, 65–7, 68, 73, 80, 85, 90, 117, 121–3, 138, 151–3, 159 F factor of production, 137 fairness, familiarity, 110 FDI See foreign direct investment (FDI) firm, 2, 4–8, 13, 16, 18, 21, 41, 42, 53, 72, 93, 94, 103, 106, 111, 112, 123, 129, 131, 136, 138, 147, 153, 155, 157–64 fixed cost, 82, 85, 86, 103, 107, 112, 114, 122, 127 fixed factor, 163 foreign direct investment (FDI), 6, 117, 118, 121–3, 162 foreign market, 116–8, 119–26 founder, 158, 159, 163 franchising, 99–101, 106, 110, 123–6 G game theory, 4, 129 global market, 42, 54–63, 130, 138, 158 government, 7, 54, 104, 150–5 INDEX H headquarters, 93, 94, 103–5, 107, 108, 112–18, 122, 123, 125–7, 130–1, 137–41, 145, 148, 149, 153, 159, 162 heterogeneity, home market, 117–8, 125 homogeneity, 6, human nature, 2, hypothesis, 21, 23, 24, 166 I import, 2, 3, 5, 8, 11, 13, 16–18, 23, 28, 42, 44, 53–5, 57, 58, 62, 69, 77, 80, 82, 85, 124, 138, 148, 151–3 indifference curve, 33, 35–8, 58–60 indivisible, 82, 103, 148 industry, 90 information, 3, 6, 9, 12, 13, 28, 37, 38, 90, 93, 96–8, 100, 103–8, 116, 130, 132, 135, 139, 143–5, 152, 162 innovation, 9, 46, 81, 82, 85, 86, 89, 107, 116, 122, 129–39, 141–6, 149, 150 institution, 7, 13, 93, 110, 157–9 instrumental, 3, 21–3, 27 intellectual property rights, 97, 99, 105, 150 intermediator, 16, 22, 23, 42–8, 50–2, 55, 65, 67, 69, 70, 74, 81, 85, 95, 96, 112, 162 international trade, 2, 17, 53–65, 95 inter-plant coordination, 161–2 intra-plant coordination, 159–62 inventory, 100, 102, 106–8, 110, 124, 126 J justice, 169 K knowledge, 7, 8, 10, 12, 16, 17, 22, 43, 72, 80–8, 90, 94, 96–99, 103, 105–10, 112, 113, 115, 121, 123, 138, 139, 153, 154, 160, 161 knowledge transfer, 8, 72, 83–7, 108, 113, 115, 121, 138, 139 L labour, 4, 18, 24, 27, 28, 33, 41, 43, 47, 63, 71–90, 94, 95, 99, 102, 104, 107, 108, 151, 163 Lagrange multiplier, 28–30, 37, 38, 166 land, 24, 95 leakage, 100, 105–8, 110, 116, 124–6 lemons problem, 98 licensing, 81, 94, 98–100, 102, 105, 108, 110, 116–23, 162, 164 limited liability, 151, 158 linear, 24–6, 28, 29, 44, 45 location, 7, 13, 16, 17, 22, 24, 27, 53–70, 72, 73, 76–8, 80–90, 94, 95, 97, 103–5, 112–27, 130–40, 145, 147–9, 153–5, 162 lump sum, 47–9, 51, 152 M management, 17, 18, 100, 103, 106, 108, 110, 124, 157–64 marginal cost, 45, 49, 51, 81 marginal revenue, 45, 49, 51, 69, 75 marketing, 22, 67, 72–80, 85, 87, 90, 94, 96, 98, 100, 101, 104–6, 108, 110, 116–18, 121, 122, 124–126, 130, 159 mathematics, 10–11, 24, 39 maximisation, 12, 28, 29, 34, 38, 39, 45–6, 112 method of solution, 115–16 170 INDEX minimisation, 104, 105, 110, 113, 126, 153, 154, 165 model, 2–10, 12, 13, 16, 17, 23–32, 42–9, 52, 54–70, 73–90, 97, 103, 107, 112–45, 148, 153, 154, 158, 165–6 modularisation, 17, 71–90 monopoly, 41–52, 54, 65–7, 73, 75, 79, 81, 85, 86, 99, 133–7, 145, 163 N Nash, neoclassical, 17–19, 72, 163 nexus of contracts, 158, 159 non-co-operative, 4, 130, 166 O offshore, 90, 117–23, 125, 139, 159 OLI framework, 42 oligopoly, 146 one-part tariff, 42–52 opportunity cost, 28, 31–3, 38, 44–6, 49, 51, 57, 63, 65, 69, 73, 76, 82, 103 optimisation, 85, 113, 120, 126 out-sourcing, 138 ownership, 7, 41, 42, 93–112, 115 P parameter, 23–5, 27, 29, 31, 45, 46, 57, 121, 138 plant, 18, 83, 94, 97, 115, 118, 159–63 preference, 2, 3, 11, 23, 31, 33, 41, 43, 54, 57, 60, 103, 152 price, 6, 11, 22, 37, 42–51, 54–62, 64–70, 73–6, 79–81, 85, 86, 88–90, 94, 96, 98, 99, 112, 115, 122, 126, 130, 131, 133, 136–9, 149, 151, 153, 154, 162, 163 probability, 141–5, 166 production, 13, 16–18, 22, 24, 27, 28, 32, 36, 38, 47, 48, 54–66, 68, 72–8, 80–90, 94, 97–110, 112, 114–27, 130, 137, 139, 142, 147–51, 153, 155, 159–61, 163 productivity, 27, 28, 33, 54, 55, 58, 62, 63, 71, 73, 82, 107, 149, 150, 153 profit margin, 46, 49 property, 7, 25, 28, 42, 93–5, 97, 99, 103, 105, 149, 150, 158 putting-out, 100, 106, 110, 123–6 Q quadratic, 24, 26, 29, 30 quality assurance, 106 R rationality, 1–4, 11, 12 resource-based theory, 2, revenue, 11, 45, 49, 51, 69, 75, 150, 151, 153, 158 risk, 3, 82, 97, 98, 100, 103, 106, 107, 116, 141, 143, 144, 150, 152, 158, 164 rivalry, 4, 9, 131–48 S satiation, 25, 29, 33, 36, 48, 58 scheduling, 106 schools of thought, 17–19 segmentation, 17 sequential, 23, 32, 132, 135, 136 shareholder, 7, 151, 158, 159 specialisation, 59, 61–5, 72, 76 strategy, 2, 4, 17, 39, 42, 66, 97, 101, 103, 115, 117, 119, 121–3, 130–5, 137–9, 143, 148, 149, 158 INDEX subcontracting, 94, 99–101, 106, 110, 123–5, 164 supply, 6, 8, 17, 22, 38, 39, 42, 43, 49, 52, 55, 56, 58, 61–5, 69, 72, 75, 77, 79, 80, 84, 87–9, 90, 96, 97, 99–101, 103, 106, 108, 112–16, 118–27, 130, 136–9, 142–4, 149, 150, 157, 159, 163 supply chain, 17, 72, 84, 89, 90, 100, 101, 112–16, 118–22, 124–6, 137, 139, 149, 150 surplus, 50, 69, 70, 74 T tariff, 42–52, 55, 67, 149–54, 159 taxes, 154 teamwork, 4, 159–60 transfer pricing, 153, 154 transitive, 3, 11 transport, 55, 69, 72–80, 83, 87, 108, 119, 121, 123, 130, 138, 148 two-part tariff, 42, 47–51, 67 171 U uncertainty, 97, 98, 130, 141, 145 uniform price, 43, 65–7, 70, 81 unit cost, 45, 47, 64, 66, 75–7, 79, 80, 82, 83, 85–8, 107, 112, 114, 115, 119, 126, 127, 130, 137, 148 upstream, 17, 22, 163 utility, 5, 10, 12, 23–30, 32–9, 43, 45, 50, 52, 54, 57, 60–2, 90, 144 V variable, 5, 6, 10, 23–6, 28–31, 42, 46, 83, 85, 123, 130, 138, 163 variable cost, 28–32, 46, 83, 85, 123, 130, 138, 163 W welfare, 32–3, 46, 52, 81 worker, 4, 7, 16, 22–4, 27, 33, 35, 41–52, 54–63, 65–9, 71–3, 83, 95, 106, 107, 150, 158–61 .. .The Theory of International Business Mark Casson The Theory of International Business Economic Models and Methods Mark Casson Department of Economics University of Reading Reading,... assumed that the competencies of employees constituted capabilities of the firm from which the firm could earn exceptional profit The theory ignored the way that the labour market works The labour... some of the THE RELATIONSHIP BETWEEN ECONOMICS AND INTERNATIONAL BUSINESS 11 solutions are derived by the differentiation of a function, which measures the rate of change of the value of a function