招待論文

The Theory of the Multinational Enterprisefrom a Supply Chain Perspective

Mark Casson(University of Reading)

Abstract
This paper offers an integrated analysis of out-sourcing, off-shoring and foreign direct investment within a systems view of international business. This view takes the
supply chain rather than the firm as the basic unit of analysis. It argues that compet ition in the global economy selects supply chains that maximise the joint profit of all
the firms in the chain. The systems view is compared with the firm-centred viewcommonly used in strategy literature. The paper shows that a firm’s strategy must be
embedded within an efficient supply chain strategy, and that this strategy must be
negotiated with, rather than imposed upon, other firms. The paper analyses the conditions under which various supply chain strategies - and by implication various firmlevel strategies - are efficient. Only by adopting a systems view of supply chains is it
possible to determine which firm-level strategies will succeed in a volatile global economy.
Keywords
International, Strategy, Supply Chain, Off-Shoring, Out-Sourcing, Coordination

1. Introduction
There are two main perspectives on international business (IB) strategy in the li terature. The first view is firm-centred; it focuses on the competitive advantages of anindividual firm, and the way that these advantages influence its strategy and stru cture. Building on Dunning’s eclectic theory (Dunning and Lundan, 2008), the firmcentred view addresses issues of strategic alliances, cross-cultural management, subsidiary autonomy, and so on (Cantwell and Mudambi, 2005). The second view is thesystems view, which focuses on the firm’s environment as well as on the firm itself(Casson, 1990; Buckley and Hashai, 2004). The unit of analysis is the global production system. Building on internalisation theory (Buckley and Casson, 1998; Rugman,1981), the system view examines how far linkages within the global system will becoordinated by multinational enterprises (MNEs) rather than markets. The systemview highlights the strategic importance of interactions between product flow andknowledge flow (Adler and Hashai, 2007). It identifies the characteristics of technologies, products and location s that stimulate the emergence of MNEs and encourage theflows of foreign direct investment (FDI) associated with them.
The evolution of global supply chains is an important development of the lasttwenty years (Buckley and Ghauri, 2011), but it is not always recognised that this-1-

phenomenon appears rather different from these two points of view. From a systems
perspective, international supply chains are the basic building blocks of the global
production system; an individual supply chain for a particular product is a microcosmof the system as a whole. Within a supply chain, the strategies of individual firms areinter-dependent; firms compete when they plan to control the same part of the chain,and co-operate when they plan to control different parts of the chain. Thus one firm’s
strategy may be dictated, at least in part, by another firm’s strategy. If neither firm isdominant then strategy may have to be negotiated rather than imposed. If one firm isdominant then, according to the systems view, the structure of the supply chain will
influence which firm this is likely to be.
By contrast, the firm-centred view typically takes the strategies of other firms asgiven. It suggests that the dominant firm will normally be the firm with the greatest
advantage. Contrary to this, the systems view suggests that advantages are contextdependent. According to the systems view, the way that firms in a supply chain behave is determined by the structure of the chain, while the firm-centred view suggeststhat the structure of the chain is dictated by the strategies of the firms.
The firm-centred view is useful for business school teaching and strategy consulting,because the theory is developed from the perspective of a manager of an individual
firm. The systems view, however, is more appropriate for addressing long-term global
issues of concern to managers of all firms of whatever type. The systems view takes amore detached and distant view that embraces the entire global economy. It focuses,
not on any individual firm, but on the entire population of firms – both existing firms
and potential firms – that interact through competition and cooperation to coordinate
the global economy. According to the systems view, existing types of firm can disappear, and new types of firm emerge, in response to radical changes in global conditions; the firm-specific view, by contrast, focuses on more incremental adjustments
made by existing firms.
The systems view is best explained through economic modelling. Formal modellingis the only way to analyse the interactions within a supply chain in a transparent andrigorous manner. This paper summarises recent work on this topic and considers its
implications for the theory of the MNE.

2. Principle of supply chain coordination
According to Coase (1937), firms emerge because of the cost of using the market. If
there were no cost of using the market then there would be no firms. The existence offirms, on this view, cannot be merely assumed, but must be analysed as an institutional response to the costs of the market. Management is a response to transaction
costs. As a result, the number, size and scope of firms are endogenous.
The boundaries of firms within a given economy must be consistent with each other.
The ownership and location of different firms must be maintained in an institutional
equilibrium. When the boundaries of one firm change, the boundaries of other firms
must adjust. While these interdependencies are recognised in the literature they have-2-

never been formally analysed at an industry level. This paper provides a step in thisdirection.
In Coase’s view the business system comprises a complex set of inter-related activities. Individual activities are created by a division of labour, in which a given produ ction process is split into many stages, so that final product is delivered to customers
through a supply chain. Within an advanced economy there are numerous supply
chains, each converting specific types of raw material into specific types of good.
Supply chains must be coordinated either by managers or markets, or a combination of the two. Competition will select the most efficient mix of modes, in which inefficient combinations of modes are driven out by the most efficient one. When transaction costs are high an entire supply chain may be coordinated by a single verticallyintegrated firm, whereas when markets are efficient the supply chain may be coordinated entirely by arm’s length trade between independent firms, each of which controls just a single stage of production. When transaction costs are greater at certain
stages of the chain than others, the stages with high transaction costs will be internalised within vertically integrated firms, and arm’s length trade will be confined tostages with low transaction costs where the integrated firms at adjacent stages tradewith each other.
When different stages of production are located in different countries, international
supply chains are created. The more sophisticated the division of labour, the greater
will be the degree of specialisation, the proliferation of activities, and the number oflocations at which activities can be carried out. An MNE is created when activities
based in different locations are integrated within the same firm. On this view, MNEs
emerge to coordinate particular portions of supply chains, and they emerge at thesame time as other firms which coordinate other parts of the same supply chain.
These other firms may be single-country firms, or they may be MNEs as well. Firms
controlling one part of a supply chain will have to negotiate with firms controlling adjacent parts of the supply chain, since neither can operate successfully without theother.
Coase’s analysis therefore poses a major challenge to scholars who propose to analyse either the global economy or an individual supply chain in terms of the strategies
of individual firms. Modern IB literature normally examines supply chain coordination from the perspective of a single dominant firm (the ‘channel leader’) that either
owns and controls the entire chain or subcontracts selected stages to passive subcontractors. From a Coasian perspective it is the supply chain as a whole, rather than theindividual firm, that is the appropriate unit of analysis.
It might be thought that focusing on the supply chain as a whole rather than on theparticipating firms would diminish the practical relevance of the theory, but the reverse is actually the case. Supply chain analysis can enrich understanding of the b ehaviour of individual firms because it examines interactions between them – unlike
conventional theory, which often takes the environment of each firm as a given.

-3-3. Modelling supply chains: general observations
Within a supply chain the ownership of different activities is interdependent, forbringing different activities under common ownership affords economies of internalisation. Locations are interdependent too; relocating an intermediate activity closer toan upstream activity may make it further from a downstream activity and vice versa.
For any given activity, ownership and location are interdependent, because relocating
an activity can change a domestic owner into a foreign owner and vice versa. Interdependencies may be quite complex; if an intermediate stage is sandwiched between an
upstream stage and a downstream stage owned by different firms, then the upstream
linkage cannot be internalised without externalising the downstream linkage, andvice versa, unless ownership of the upstream and downstream activities are themselves combined.
Casson and Wadeson (2012a) (CWa hereafter) have recently analysed these issues
within in a simple context: a supply chain comprising just R&D, production and a setof customers. Their analysis reveals that the set of strategies available for international supply chain coordination is wider than supposed. Conventional theory identifies three strategies: exporting, import-substituting FDI and licensing. Supply chain
analysis identifies a fourth strategy - ‘off-shore licensing’ - which involves a firm licensing to a foreign-owned production plant located in its home country. CWa argue
that this strategy appears perverse only because strategic decisions are typically an alysed from a licensor’s point of view. When the same situation is analysed from a licensee’s point of view, licensing can be interpreted as an asset-seeking strategy.
A major weakness of the CWa model is its simplistic supply chain. This paper summarises the results obtained from a more general model (Casson and Wadeson, 2012b– hereafter CWb). This model identifies the most efficient way of organising a supply
chain that serves a given market. The efficient supply chain strategy maximises thetotal profit earned by firms within the supply chain. This allows each firm to maximise its own profit conditional on the profit accruing to the other firms. If the chosen
strategy did not do this it would pay the firms to agree to replace it with one that did.
The model shows that the efficient strategy is governed by the values of nine key
parameters. Changes in the global environment change the values of these parameters and therefore change the supply chain strategies employed by firms. Parametervalues may vary between industries, thereby generating industry -specific forms ofsupply chain coordination. Parameter values may also change over time, guiding theevolution of the international economy by changing the supply chain strategies used
in individual industries.

4. The modelThis section outlines the model. There are three activities - production, distribution,
and R&D - each carried out in a separate facility: a plant, warehouse and laboratory
respectively. The consumers are at the end of the chain, and all are located in a single
host market. The model is illustrated schematically in Figure 1. R&D, represented by-4-the triangle R, feeds knowledge (represented by a grey line) into production, represented by the square P. Product, (represented by a black line) is then consigned to distribution, represented by the square D, from whence it is despatched to consumers,
represented by the square C.
There are just two countries: country 1 in which R is based and country 2 in which
C and D are based. Production P may be located in either country. There is one firm ineach country: firm 1 is headquartered in country 1 and firm 2 in country 2. Activities
cannot be subcontracted to other domestic firms. Potentially the two firms competewith each other to control the supply chain, but they can also collaborate with eachother, e.g. one firm can license technology from the other, or act as it s sales and distribution agent.
It is assumed that the size of the market is fixed. The price is also fixed, either bycompetitive conditions, government regulation, or consumers’ refusal to pay more thansome maximum acceptable price. Since both price and market size are fixed, total reve-

Figure 1: Simple supply chain system

R&D

D

P

R

Technology
transfer

Production

Wholesaleproduct

Distribution

C

Retailproduct

Consumernue is fixed as well. Thus the maximisation of profit implies the minimisation of cost.
It is assumed that revenue is sufficiently large that costs are always covered, and so
production always takes place.
Some of the costs are incurred by the facilities in which the activities are carried out,
and some by the linkages between these facilities. Each facility involves a stock of assets - physical and human - which are employed to transform inputs into outputs.
Their costs include wages, interest and depreciation. Linkages channel flows of resources between the facilities, and incur transport costs, knowledge transfer costs, etc.
Resource flows must be coordinated, either by firms or markets, or a combination of
the two. Coordination applies to both linkages (i.e. inter-plant coordination) and facilities (i.e. intra-plant coordination). This generates the two-way classification of supply
chain costs presented in Table 1. The first dimension (corresponding to the columns)
concerns whether the costs are incurred by the operation of a facility or a linkage. The
second dimension (corresponding to the rows) concerns whether the costs relate d irectly to expenditure on resources or to the coordination of resource use.

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The interplay of these two dimensions generates four categories of cost. These costs
vary according to the ownership and location of the facilities involved. Some costs depend on whether two facilities have the same owner or the same location, and otherson whether the owner is based in the same country as the facility. The table lists thevarious components of cost; all have been identified from mainstream IB literature(Kotabe and Mol, 2006). Facilities costs are represented by plant production costs,
whilst linkage costs are represented by transport costs and technology transfer costs.
Coordination costs relating to facilities are represented by the cost of foreign produ ction, which is the additional cost incurred in owning and managing a plant or warehouse from a foreign location, and the cost of managing foreign R&D, which is at leastas great as the cost of foreign production; these costs are sometimes referred to as the‘costs of doing business abroad’ due to ‘liability of foreignness’, and include an allowance for the risk of expropriation. Coordination costs relating to linkages are particularly important: licensing costs relate to the cost of coordinating a flow of knowledge
when R and P are owned by different firms; costs of arm’s length trade are incurred
when P and D are owned by different firms; while foreign marketing costs are incurred
when D is owned by a foreign firm based in country 1. Linkage costs are assumed to besymmetrical – i.e. where reverse flows occur, the same costs apply in both directions.
With a two-country model there are two possible locations of each facility and two
possible nationalities of ownership. There are three facilities which can be owned byeither firm, and one facility – production – whose location is variable. Since eachownership and location decision can in principle be made independently of the others,
there are 2x2x2x2 = 16 potential supply chain strategies.
Table 1: Classification of costs in the modelType of activity
Type of cost

ResourceF

Linkage

Cost of local production
in countries 1 and 2, c1,
c2 > 0Trade costs: Transport, tariffand compliance costs incurred by exports or imports(symmetrical by country), t >0Technology transfer cost
Coordination

Cost premium of foreign ownership of production or distribution(symmetrical by country), f > 0

Cost premium of foreign ownership of R&D,
g>f>0

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from country 1 to country 2,
x>0
Cost of arm’s length trade:the internalisation benefit
for wholesale market, k > 0
Cost of licensing : the internalisation benefit for knowledge transfer foregone, n > 0
Differential marketing cost:
Cost to a distributor ownedin country 1 of selling incountry 2, m > 0

5. Solution of the model
Despite the number of alternative strategies involved, the CWb model can be solved
in five easy steps
Step 1: Itemise the available strategies and specify their cost functions. The sixteeen
strategies and their cost functions are itemised in Table 2. The numbering of strategies in this table is used throughout the remainder of the paper.

Table 2: Ownership decisions for R&D, production and distribution facilities, coupledwith a location decision for a production facility
Strategy: number and descriptor
1. Export tosales subsidiary
2. Export tosales agent
3. FDI in distribution with
subcontracting
to foreignowned local
plant
4. Offshore licensing
5. Export tosales subsidiarywith subcontracting to local
foreign-owned
R&D facility
6. Host-country
MNE subcontracts off-shore
production
7. FDI in distribution with
out-sourced
production andR&D
8. Fully integrated hostcountry MNE
off-shores production andR&D

Locationof prod’n

Own’shipof R&D

Own’shipofprod’nOwn’shipof distr’n

Cost

1

1

1

1

C1 = c1 + t + m +
f

1

1

1

2

C2 = c1 + t + k

1

1

2

1

C3 = c1 + t + k +n + m + 2f

1

1

2

2

C4 = c1 + t + n
+f

1

2

1

1

C5 = c1 + t + n +
m+f+g

1

2

1

2

C6 = c1 + t + k +
n+g

1

2

2

1

C7 = c1 + t + k +m + 2f + g

1

2

2

2

C8 = c1 + t + f +g-7-

9. Importsubstituting
FDI in production and sales
10. Importsubstituting
FDI in production with sales
agent
11 FDI in sales
with subcontracted production to foreignowned local
plant
12. Licensing
13. Hostcountry firm
licenses asource-countryfirm
14. Hostcountry MNE
subcontracts
production inhost country toforeign firm
15. Hostcountry MNE
subcontracts
distribution toforeign firm
16. Fully integrated hostcountry MNE
off-shores R&D

2

1

1

1

C9 = c2 + x + m +
2f

2

1

1

2

C10 = c2 + x + k
+f

2

1

2

1

C11 = c 2 + x + k +
n+m+f

2

1

2

2

C12 = c2 + x + n

2

2

1

1

C13 = c2 + x + m+ n + 2f + g

2

2

1

2

C14 = c2 + x+ k +
n+f+g

2

2

2

1

C15 = c2 + x+ k +
m+f+g

2

2

2

2

C16 = c2 + x + g

Notes : Cj denotes the cost of strategy j (j = 1,…, 16). c1 : cost of production in country 1; c 2: cost of production in country 2; t: trade-related cost; x: technology transfer cost; n: licensing cost; k: cost ofarm’s length trade; m : cost of foreign marketing; f: cost of foreign ownership of production; g: cost offoreign ownership of R&D.

Step 2: Identify and eliminate dominated strategies that always afford lower profitability than some other strategy. Dominance arises for two reasons: it never pays firm
2 to employ firm 1 as a sales agent when firm 2 owns production, or firm 1 to subcontract R&D to firm 2. Eliminating the dominated strategies leaves eight undominatedstrategies, which are listed in Table 3. These only involve foreign ownership where-8-significant economies of internalisation are available. Three of them are familiar fromconventional IB theory: exporting to a sales agent (strategy 2), import substituting
FDI in production

Table 3: The eight undominated strategies
Scope of firm’s operations

Strategy
1. Export to sales subsidiary

2. Export to sales agent
4. Offshore licensing

Firm 1
Fully integrated MNEexports to a whollyowned distribution facility
Single-country firm exports to an independent
foreign distributor
Single-country firm licenses a foreign firm

8. Fully-integrated hostcountry MNE off-shores
production and R&D
9. Import-substituting FDIin production and sales

Fully integrated MNE
producesandsells
abroad

10. Import-substituting FDIin production with salesagent

MNE produces abroadand distributes throughan independent foreign
firmSingle-country firm licenses a foreign firm

12. Licensing

16. Fully-integrated hostcountry MNE off-shores
R&D

Firm 2Single-country foreign distributor
imports
fromcountry 1
MNE acquires foreigntechnology under licenseand exports to a whollyowned foreign distribution
facility
Fully integrated MNE undertakes both production
and R&D overseas

Single-country firm distributes product acquired
from local foreign-owned
plantSingle-country firm licenses a technology usedin local production anddistribution
Fully integrated MNE undertakes R&D abroad andproduces and sells locallyand sales (strategy 9) and licensing (strategy 12). One is a variant of strategy 2 inwhich distribution is controlled through a foreign sales subsidiary, and another is avariant of strategy 9 in which distribution is subcontracted to a host-country firm.
The remaining three strategies are less familiar, because they all involve foreign investment by the host-country firm (firm 2) rather than the source-country firm (firm-9-1). Strategy 4 (offshore licensing) is a variant of conventional licensing (strategy 1 2) inwhich the licensee locates production in the source country rather than the host cou ntry. Since the licensee already owns a distribution facility, this represents offshore
backward integration by the licensee. Strategy 8 (fully integrated off -shoring by ahost-country MNE) is a variant of exporting (strategy 1) in which firm 2 takes over
the ownership role of firm 1. Firm 2 integrates backwards, not only into production
but also into R&D; in this respect strategy 8 represents an expanded version of of fshore licensing (strategy 4). Strategy 16 (a fully-integrated host-country MNE offshores R&D) is an analogue of strategy 9 (import-substituting FDI in production andsales) with firm 2 replacing firm 1; it can also be understood as a variant of strategy 8
in which production is in country 2 rather than country 1.
In Dunning’s (1981) terminology, the three unfamiliar strategies are examples of asset-seeking FDI. They are unfamiliar because asset-seeking appears in the present
context as a solution to a ‘market-seeking’ problem. The interpretation of off-shore licensing (strategy 4) as asset-seeking was explained by CWa. The host-country firm
(firm 2) seeks access to a new technology generated in country 1; it licenses the technology from firm 1, produces locally in country 1, and exports to its home country 2.
Strategies 8 and 16 reflect a similar motivation, although in both cases R&D is internalised rather than out-sourced as before; under strategy 8 production remains located in country 1, whilst under strategy 16 it is relocated to country 2.
Step 3: Express the costs of the efficient strategies relative to a suitable baseline cost.
Step 4: Compare costs by constructing cost differentials between each pair of strategies.
Step 5: Derive the solution from the pairwise cost comparisons. This identifies theprecise conditions under which each of the eight undominated strategies is chosen –for details see the CWb paper.
The solution identifies a series of regimes, in each of which one of the undominatedstrategies prevails. It prevails because it maximises the total profit that can be derived from the supply chain. Each regime is defined by a series of linear inequalities
relating to the various cost components shown in Table 1. The solution provides acomprehensive account of how the entire supply is structured under each regime, andnot just an account of the behaviour of one particular firm within the chain. It explains in detail how the supply chain will be restructured in response to any givenchange in cost conditions
The solution shows that ownership and location of production within an international supply chain is governed by three key trade-offs:


Alternative forms of internalisation : whether it is better to internalise technology transfer between R&D and production or to internalise the link between- 10 -

production and distribution; and whether any form of internalisation is worth
the cost of foreign ownership involved.


Alternative location strategies: whether it is worthwhile to produce in a foreigncountry where production costs are lower when costs of foreign ownership may
be incurred.



Use of alternative firms to effect internalisation : whether internalisation isbest effected by a source-country firm (based in the county where R&D is located) or by a host-country firm (based in the country where the market is lo-cated).
Whilst the first two trade-offs are recognised in the IB literature, the third trade-off
is not. Furthermore, these trade-offs are usually considered separately in the IB literature whereas under the systems view they are considered together. This is significant because in practice all three trade-offs are important and all three are related.

6. Implications of the solution for the theory of the MNE
The endogeneity of firms
As indicated above, the solution of the model does not merely specify the boundaries
of a given firm, as in conventional theory, but the ownership and location of all thefirms involved in the supply chain. The model ensures that all these boundaries are
consistent with each other, and that together they maximise the profit generated by
the firm as a whole. The model also reveals the internal structure of each firm. Th isinternal structure is adapted to the internal structures of the others. Thus solving forthe supply chain structure as a whole ensures that the configurations of the different
firms are compatible with each other. In particular, it ensures that they trade witheach other in a well-defined set of external markets.
Within this model there are just two possible boundary locations: the market fortechnology linking R and P, and the market for output linking P and D. In principle
both boundaries could exist simultaneously, but in practice they will not because therelevant configurations are never efficient.

The relationship between out-sourcing and off-shoring
Off-shoring involves procuring an input from, or supplying an output to, a foreigncountry. Out-sourcing involves the procurement of an input from, or the supply of an
output to, an independently owned facility (di Gregorio, Musteena and Thomas, 2009;
Mol, 2007). With just two firms in the model, each based in a different country, outsourcing is always international, i.e. involves partnering with a foreign-owned firm.
The relationship between out-sourcing and off-shoring is summarised in Table 4. It
shows that R&D can be off-shored and out-sourced at the same time, and that thesame is true of distribution. However, R&D is never off-shored when distribution isout-sourced, and distribution is never off-shored when R&D is outsourced. Conversely,- 11 -

R&D is never out-sourced when distribution is off-shored, and distribution is neverout-sourced when R&D is off-shored. Either distribution or R&D is always off-shored,
but in four of the eight cases there is no out-sourcing of either activity.
These results reflect the basic economic logic of out-sourcing and off-shoring. Outsourcing foregoes the benefits of internalisation, whereas off-shoring does not. Offshoring is a logical response to cost differentia ls between locations and it is efficient to
exploit such differentials whether internalisation is used or not. Some of the specificresults, however, also reflect the strict assumptions made about the number of different activities (only three) and the number of countries (only two).

Table 4: Analysis of out-sourcing and off-shoring strategies
StrategyOut-source
R&D

1. Export to sales subsidiary
2. Export to sales agent
4. Offshore licensing
8. Fully-integrated hostcountry MNE off-shores production and R&D
9. Import-substituting FDI inproduction and sales
10. Import-substituting FDIin production with sales
agent
12. Licensing

Off-shore

Distribution
F

D

Distribution
F
F

D
D
D
D

F

D
F

16. Fully-integrated hostcountry MNE off-shores R&D
Total of dominating strategies
Total of dominated strategies
Total

R&D

F
2

2

4

4

6
8

6
8

4
8

4
8

Note: D: Domestic linkage; F international linkage (involving export or import)

The relationship between inward and outward FDI
FDI occurs when a facility is owned by a foreign-headquartered firm, and multinationality when a firm owns facilities in more than one country. Supply chain analysis
reveals, however, that the relationship between FDI and multinationality is not quiteso simple as often supposed. A firm that undertakes FDI is not necessarily multinational because it may invest in a single foreign country and operate no domestic facil- 12 -

ity - in other words, it may be a ‘free-standing firm’ (Wilkins, 1988). Free-standing
firms appear naturally in supply chain models because there is no restriction that afirm must own a facility in the country in which it is headquartered.
The patterns of FDI are analysed in Table 5. The first two columns indicate which
activity is foreign-owned, and the source country in which the investor is headquartered. Six of the eight strategies involve some form of FDI. Each firm undertakes FDI
on three occasions: thus there is no bias in the model towards firm 1 undertaking the
FDI. This is in marked contrast to popular expositions of FDI theory, which suggestthat it is the norm for firm 1 to undertake FDI. In the light of the previous discussion,
it could be said that ‘asset-seeking’ FDI is, in principle, just as efficient as ‘marketseeking’ FDI in serving a foreign market. There are two strategies which involve no
FDI: exporting to a sales subsidiary (strategy 2) and licensing (strategy 12); in thesecases supply chain coordination is undertaken entirely by domestic firms.
Table 5: Analysis of FDI stocks and MNE operations
Strategy
1. Export to sales subsidiary
2. Export to sales agent
4. Offshore licensing
8. Fully-integrated host-country MNE
off-shores production and R&D
9. Import-substituting FDI in production
and sales
10. Import-substituting FDI in production with sales agent
12. Licensing
16. Fully-integrated host-country MNE
off-shores R&D
Total of dominating strategies
Total of dominated strategies
Total

FDI
Firm 1
Firm 2D

MNE
Firm 1
Firm 2
RPD

P

PD

RP

RPD

PD

RPD

P

RP

R
3
7
10

3
7
10

RPD
3
3
6

3
3
6

Note: In columns 1 and 2 D, P R denote FDI in distribution, production and R&D respectively. Blank
cells indicate no FDI. In columns 3 and 4 D, P, R denote the activities owned and controlled by an
MNE. Blank cells denote no MNE.

The two firms never undertake FDI at the same time, so there are no cross-flows ofinvestment. The last two columns show that FDI is always undertaken by an MNE.
With only three activities to coordinate, both firms cannot be MNEs at th e same time.
In some cases the MNE owns the entire chain and in other cases only a part of it.
Where an MNE partly owns a supply chain, it integrates either upstream – R and P –or downstream – P and D – but never just the beginning, R, and the end, D.

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Dualistic descriptions of supply chain strategy
Several of the supply chain strategies can be described in more than one way.
Where two firms participate in the same supply chain, strategy can be described fromeither firm’s point of view. Only with full integration, where only one firm is involved,
is the description of strategy unambiguous. For example, if firm 1 exports to its own
distribution subsidiary (strategy 1) then ‘exporting’ is obviously the strategy. But if
firm 1 exports to an independent sales agent, namely firm 2, then firm 2’s strategy is
to import from an integrated foreign supplier. The arguments in favour of firm 1’s perspective is that firm 1 undertakes the FDI, it is the only firm to internalise, and it u ndertakes the R&D. The argument in favour of firm 2’s perspective is that it is based in
the host country and owns a distribution facility there, and therefore knows the market best.
In many cases the ambiguity is more serious. Consider, for example, licensing(strategy 12). From firm 1’s point of view, the strategy is to enter a foreign market bylicensing to firm 2, whilst from firm 2’s point of view it is to out-source and off-shore
R&D. The argument for firm 1’s point of view is that it owns R&D, while the arg ument for firm 2’s point of view is that it is the only firm to internalise (it integrates
production and distribution) and it is based in the market being served. Appealing to
FDI is indecisive because neither firm undertakes FDI. In favour of firm 1, it could beargued that as it owns R&D it controls the development of the technology and hence
determines the technology that is licensed, but in favour of firm 2 in could be said thatit knows the market best and can therefore specify the technology that must be developed; it therefore controls the development of the technology through the terms of thelicensing agreement, in which it pre-purchases the specific technology that it requires.

Which firm is responsible for strategy formation when two or more firms are involvedin the same chain?
No consistent view of strategy formation can be found in the IB literature. Innovation theorists tend to argue that strategy formation is linked to ownership of R&D,
and marketing theorists that proximity to the customer is key, thereby placing strategy formation at opposite end of the supply chain (Buckley and Casson, 2011) . Dunning’s eclectic theory suggests that strategy formation is linked to FDI, and presents
licensing as a less strategic option, while internalisation theorists tend to regard internalisation as the most pro-active strategy even if FDI is not involved.
While supply chain analysis highlights these issues, it takes no particular view onthem. By assuming that the overall profit of the chain is maximised, it leaves open thequestion of how profit is divided. While all the monopoly profit may well be appropriated by the firm that formulates the strategy, no assumption is made about whichfirm that will be. While it predicts the total profit generated by the chain, the theory
does not predict how the profit will be divided, either between participating firms orparticular stages of the chain. The distribution of profit will reflect the terms of thecontracts negotiated between participating firms, which are not predicted by themodel.
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7. Conclusions
This paper has presented a model of supply chain coordination based on a systems
view. It affords a rigorous analysis of the role of MNEs within global supply chains,
and within the world economy as a whole. It liberates IB theory from the constraintsof a purely firm-centred approach to IB strategy. It introduces a formal model in involving four strategic decisions that are interdependent: the ownership of three activities - R&D, production and distribution - and the location of one of them - production.
It is shown that under plausible cost conditions only half of the possible supply chain
strategies are viable.
The circumstances that govern the emergence of firms are captured by the basic parameters of the model. There are nine parameters altogether, grouped into four sets,
and between them they govern the resource costs and communication costs of the system. Ownership structures depend mainly on coordination costs and location strategies mainly on resource costs. There are interdependencies, however, which arise because of the costs of foreign ownership; the lower these costs, the more separable theownership and location decisions become.
Where partnerships between firms develop, the terms of the partnership will reflect
the negotiating strategies of the firms, and the outcome of these negotiations will determine the distribution of profit between the firms. The firm with a monopoly of therelevant technology has the greatest bargaining power, but this is not necessarily thefirm that carries out the R&D. Where technologies are easy to specify and there arecompeting R&D facilities, a firm that is close to the market and alert to opportunities(e.g. a host-country firm) may acquire the technology at cost and thereby appropriate
the rents.
Although the model is context specific, it is easily adapted. Instead of footloose production, for example, footloose R&D can be introduced instead. The model can also be
generalised to three locations rather than two – e.g. to analyse Triad effects, or linkages between countries at different stages of development. While the basic principlesof the model will remain unchanged in each case, altering the context will change thespecific predictions.
The systems view is not intended to replace the firm-centred view, but rather tocomplement it. The firm-centred view has intuitive appeal for business students andbusiness managers because it focuses on issues of immediate concern to them. It fits
well with the notion that IB theory exists to advise managers about devising and implementing strategies - whether for growth, diversification or globalisation. The firm–
centred view, however, affords only a partial and localised view of the firm’s environment that is predicated on given market opportunities, given cost conditions, andgiven competitive rivalries.
The systems view, by contrast, analyses long-run global issues rather than shortrun local issues. It takes very little as given. In the long run certain types of firm may
no longer be viable, because of changes in the global system, and for such firms the
only question may be to optimise their exit strategy. The threat that these firms face
may come, not from their existing competitors, but from future competitors, including- 15 -

firms that have not yet been founded. Unlike the firm-centred view, the systems view
can identify opportunities for new types of firm. The key strategic decisions relating tothese firms will be taken by start-up entrepreneurs before their firms have even beenfounded, but the legacy of these decisions may live on within the corporate cultures ofthe successful start-up firms.
Where existing firms survive, they may find that in future their roles are radicallychanged – e.g. they may become subcontractors to firms to which they previously subcontracted. While they may wish that they could continue to hold the initiative, competitive conditions may dictate otherwise, and the only alternative to accepting a su bordinate role may be to fail altogether. The systems view can help such firms to understand the economic logic of their altered circumstances, and to make the necessary
adjustments before it is too late. Using the systems view, it is possible to analyse, notonly responses to given changes in the environment, but to analyse the fundamental
drivers of change itself.

Acknowledgements
I am grateful to Professor Toshiaki Sugita and Janet Casson for comments on a previous version of this paper.

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