Transnational Corporations significance??? coordinate and control various stages of production chains creates potential to take advantage of geographical differences in price and quality of factors of production changes in allocation of resources drives changing geography of output and employment opportunities

Question: Why should firms internationalize PRODUCTION?

Macrolevel explanations internationalization of productive capital is 3rd stage preceded by: –internationalization of commodity capital (trade) –internationalization of money capital (overseas investment of portfolio capital) the 3 phenomena are components of a single integrated system

Microlevel explanations-- Stephen Hymer assumption: ceteris paribus, domestic firms have an advantage so a foreign firm needs a firm-specific advantage to offset –large firm size ---> economies of scale –market power and marketing skills –technological expertise –access to cheaper sources of finance –etc.

Microlevel explanations-- Raymond Vernon grounded in product life-cycle concept developed to explain American overseas production (in 1960s and 1970s) Stage 1: American firms introduce new, labor-saving products for affluent households of their domestic market

Raymond Vernon Weakness of this perspective???

Microlevel explanations-- John Dunning ownership-specific advantages factors creating incentive to internalize the use of those advantages through overseas production, not licensing to foreign firms –imperfect markets –uncertainty location-specific factors –explain foreign investment rather than exports

Types of Overseas Investments market-oriented production –where? –Notion of typical evolutionary sequence

Supply-oriented production –natural resource industries cost-oriented production –a relatively recent category –encouraged by developments in transportation and production technology –increased attraction of other factors like labor

But, remember differences in industry mix differences in labor productivity differences in labor militancy and controllability may be as important as costs

Erica Schoenberger American transnational production in Western Europe in 1970s and 1980s Alternative hypotheses

1. Cost-oriented production hypothesis Tariff barriers of 5-15% but: –production cost disadvantage of 17% or so –transportation costs not significant –product differentiation permits success despite tariff costs

2. Alternative hypothesis??? Practical advantages of a local presence these are heightened as distinction between product and service gets blurred