Multinacional Companies Ownership Advantages And Internalisation

1260 words - 5 pages

The firm uses its Ownership advantages in a foreign country despite having disadvantages versus local firms.
Why not sell the OA (as an intermediate good) to local firms, who can use it better? A local firm does possess its own advantage of being local and therefore may be able to use the OA more effectively in that location. But it is more advantageous not to because the market is inefficient, it is better to INTERNALISE than externalise.

Ownership advantages

Ownership advantages (OA) confer on the firm power in the market, or a cost advantage that outweighs the extra costs of doing business abroad.
* Technology (ability to create, acquire and upgrade)
* Management skills
* Marketing skills and well-known trade names
* Size of firm (economies of scale)
* Capital availability and financial expertise
* Entrepreneurial drive and vision
* Ability to foresee and take advantage of global production and marketing opportunities


The basic reason WHY FIRMS INTERNALISE use of the OA (rather than externalise it by selling it to another firm) is because the MARKETS FOR OA's, as intermediate goods, ARE VERY IMPERFECT ( i.e. costly and risky to use).

The reasons for this MARKET FAILURE differ according to the type of intermediate goods (i.e. inputs that play a role in a firm's ability to supply value to consumers). e.g. technology, management skills, marketing skills and trade names, raw materials
and component parts.

However there are functioning markets for such intermediate products in the form of:
technology licensing, management contracts, franchising and trademark licensing.

When it uses these mechanisms the firm externalises its OA. Thus it gains financial rewards from marketing the OA itself.

Alternatively it can internalise use of the OA; i.e. apply it itself to support its own production of the final product (or service) embodying the knowledge or skill.

Internalisation theory (Buckley and Casson, 1976).

These markets for intermediate goods are characterised by high risk and uncertainty as perceived by both buyers and sellers, the costs of making markets for OA's work are sometimes very high.

There are often very high transaction costs in such markets, in the form of: extensive and detailed negotiation or bargaining processes, the need to draw up very precise and, therefore, expensive legal contracts, the need to continually monitor the other side's compliance to the agreement and the need for legal action if the agreement is broken

Many of the risks and uncertainties (and, therefore, high transaction costs) of transferring an OA between independent firms through a market are avoided if it is transferred between two parts of the same firm (i.e. internalised).

An internalised transfer is often more efficient (i.e. costs less to organise and complete, including the practical complications associated with the transfer of know-how) than an externalised one.

Technology is seen as both a very likely source of OA...

Find Another Essay On Multinacional Companies - Ownership Advantages and Internalisation

Theories of Multinational Enterprises. Why do they exist?

1504 words - 6 pages information, will generate the MNE through the process of internalisation. FDI will occur when the advantages in the firm's possession outweigh the additional costs. The MNE will prefer to undertake foreign production through a subsidiary as it is able to keep its advantage within the firm, and therefore recoup its costs and take full advantage of its monopoly. Production through a licensing arrangement or joint venture would increase the likelihood of


1804 words - 7 pages Advantage.Having defined its ownership advantage, and its source of production located in a low cost economy, IKEA look for expands those advantages. Thus, IKEA started its internalisation process trough its different outlets in Sweden, Scandinavia and later on in German and Switzerland.

Employee Ownership

5685 words - 23 pages . (Culpepper, 2004) This has been observed that employee ownership, by itself cannot be expected to automatically increase employee commitment to improving quality and productivity. Other factors, such as employee participation in decision making, management style, and communication of financial and other information, are just as important in motivating employees to enhance company performance.A study found that 70 percent of EOP companies in the

aje group

1587 words - 6 pages AJE GROUPHISTORYAJEGROUP is a multinational enterprise currently represented in 20 countries worldwide with its holding company in Spain. In order to strengthen bonds within all our market sectors we have gained ownership of 22 factories and 120 fulfillment centers employing over 20,000 people. Our infrastructure reaches out to more than one million retail outlets worldwide enabling us to sell over 3 billion liters of beverages including beer

Navigating Glabal Connections

935 words - 4 pages worlds leading food companies, selling biscuits in over forty countries around the globe. This report will examine where Arnott’s is based, the company’s finance, the history of the company and manufacturing, foreign ownership and the effects on the company for Australia. 2.0 Company Background 2.1 Company History Arnotts began as a small bakery in Hunter Street, Newcastle, 1865, selling bread, biscuits and pies, it is now one of the worlds largest

A case scenario: Using social work theories: A Family In Crisis

1158 words - 5 pages ) Consequently, children growing in such an environment are not prepared to take advantages from the opportunities (in form of education, relocation) available to them.Unemployed people are often stereotyped as lazy and unworthy because they do not take advantage of the existing opportunities. This can lead to the internalisation of these stereotypes and can cause people to act in ways that affirm the dominant's group view of them as inferior

Innocent Smoothies Are Coming to Japan

3317 words - 14 pages , it is via FDI into brownfield factories, as this allows the company the most advantage as per the eclectic paradigm (Dunning, 2000, pp.163-190) with ownership, location and internalization advantages. With regard to ownership, the FDI entry instead of licencing or a joint venture allows Innocent absolute freedom to keep the product exactly as planned. Locationally, the factories invested in can be chosen as close to Tokyo as possible to reduce

The Benefits of an Entreprise Offering Profit Sharing

1619 words - 7 pages Another group continuum represents incentive plans that by cooperation of all organizational members create a culture of ownership. These common incentives are profit sharing, and stock option and employee stock ownership plans (ESOPs). According to Coates (1991) “profit sharing plans are defined as an arrangement in which companies make contribution, based on profits, to individual employee account” (p. 19). It can be distributed in form

Employee Ownership and/or Profit Sharing as an Effective Tool for Motivating Employees

1195 words - 5 pages providing a range of services to corporations interested in broadening ownership and workplace participation opportunities for employees. In 1994 Ownership Associates launched the Ownership Culture Survey® (OCS), a survey instrument developed exclusively for the needs of employee-owned companies. Their clients range from Fortune 100 corporations to small, privately-held companies which gives a broad spectrum when considering the effects on

Evidence from cross-listed firms in the US

790 words - 4 pages countries in East Asia due to the concentrated structure in Indonesian companies. In conclusion, referring to the ownership structure, Indonesia will be considered as a country with low level of voluntary disclosure. Works Cited Juhmani, O. (2013). Ownership Structure and Corporate Voluntary Disclosure: Evidence from Bahrain. International Journal of Accounting and Financial Reporting, 3(2). Makhija, A. K., & Patton, J. M. (2004). The

Using Information systems development methodologies and knowledge management ideas to create a University e-learning infrastructure

5384 words - 22 pages of staff may face, someone in the Division has more than likely got the answer, or at least know where to find one.Table 1 Analysis of current strengthsThe department staff also identified a number of weaknesses to the current situation and this is summarised in the following table.Divisional WeaknessReasonIndividual sense of ownership of teaching materials"information is power"When staff spend time producing teaching material they feel, and to

Similar Essays

The Title Of The Essay Is "Business Ownership" The Question Was: Name The Three Different Types Of Business Ownership And Name The Advantages And Disadvantages Of Each Form

1591 words - 6 pages Business OwnershipThere are three different forms of business ownership, the Sole Proprietorship, the Partnership, and the Corporation. Each of these businesses have major advantages and disadvantages.The sole proprietorship is a business which is owned and managed by one individual. Some of its advantages are, the ease of formation, its management control, and its distribution of profits. Some of the disadvantages are, its unlimited liability

The Advantages And Disadvanatges Of Using Third Party Logistics Companies

980 words - 4 pages In order to improve operational efficiency, many companies have chosen to outsource part or all of their logistics activities to third parties. By doing that, company can focus more on its core activities. Green, Turner, Roberts, Nagendra & Wininger (2008) have found out that third-party logistics (3PL) companies typically offer services that cover warehousing, distribution, inventory control, packaging and transportation, such as contracting

The Rapid Growth Of The Malaysian Economy

2179 words - 9 pages . The last factor in Dunning’s theory is Internalisation advantage whereby firms internalise the use of its ownership-specific advantages. It gravitates around the idea that firms perceive it to be in its best interest to exploit its ownership-specific advantage rather than to sell them or award the rights to foreign firms for their own personal use. The key incentives for firms to internalise markets are market imperfections and uncertainty

With Reference To At Least Three Companies Of Your Choice, Critically Evaluate Dunning's Eclectic Paradigm As A Framework Explaining The Reasons Why Companies Engage In Foreign Direct Investment

3043 words - 12 pages China to be attractive as it sold its first model T car there, however, subsequent political, historical and economic events forced the automaker to leave China for 30 years.The remaining stem of Dunning's model provides the answer to 'How' companies go abroad, i.e. by maximising the gains from its competitive advantage through "Internalisation Advantages (IA)".Companies can export products at "arms length" or license at technology to foreign