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Developments in International Business Theory in the 1990S Jminiiil of Markftifig MMiagcmriil. 1991, 7. I.S-24 Peter J. Buckley Developments in University of Bradford International Business Management Centre Theory in the 1990s International business theory must meet many challenges in the 1990s, including the explanation of the co-operative process amongst firms as well as the competitive process. Political changes will occur not least because of deregulation within and integration between nations. The direction of trade policies, technological imperatives and social changes will impact upon multinational firms and cause restructuring policies to he put into effect. The relationship between the industrialized world and the less developed countries loill continue to be mediated largely through multi- national firms. A robust theory based on a parsimonious set of axioms can indeed meet these challenges. The structure of the theory based on the interaction of internalizafion decisions, location strat- egy and their relationship with market structure is expanded. Conceptual progress is suggested to enable theoretical dei'elopmeni to continue. 1. Introduction It is rather presumptuous to attempt to predict developments in a wide field such as international business theory during such a turbulent period. However, recent developments in international business suggest that the subject area is sufficiently mature and core concepts are so well embedded, that predictions are not entirely foolhardy. Part 2 of this paper examines the key empirical issues in the world economy which international business theory should explain. Part 3 examines the tools of international business theory and Part 4 questions whether they are adequate to the task. This paper takes a personal view of the development of theory. It draws in particular on the internalization approach whose two key axioms on internalization decisions and location costs were developed by Buckley (1988). It thus represents a version of the "Reading School' approach to the theory of the multinational firm. It is recognized that this is not the only theory of international business, but it is not appropriate here to review potential and actual rival theoretical approaches. It is possible to envisage convergence of theories—a greater incorporation of strategic management concepts perhaps—but for reasons of exposition, this issue is not treated here. 2. Empirical Issues in the World Economy of the 1990s Several important trends seem likely to influence the world economy throughout the 1990s: An earlier version of this paper was given at the International Symposium "MNEs and 21st Centur>- Scenarios" organized by the Workshop for the Studies of Multinational Enterprises, Tokyo, July 4 to 6, 1990,1 am grateful to the participants for their comments, 0267-^257X/91/0]015+10 $03.00/0 © 1991 Academic Press Umited 16 Peter J. Buckley 1. An increase in both competition and collaboration between firms (Jorde and Teece 1989). (a) A search for improvements in competitiveness at national, indus- trial, firm and product level and increasing attention to the source of competitive- ness, (b) Increasing use of joint ventures, alliances and other collaborative devices between firms. 2. Political changes including deregulation, political, economic and financial integration and change in trade policies, (a) The increased pace of the deregulation of industry particularly in former command economies. This will direct attention to the management of newly privatized industries, (b) The process of integration in Europe (EC), North America and possibly Asia is likely to continue. Developments to 1992 and after will lead to increasing economic, political and financial harmonization in the EC of the twelve and it is likely that more members will join, (c) The development of trade policies is difficult to predict. The general trend of deregulation does not always extend to the international market and integration moves are frequently accompanied by rising extemal trade barriers. 3. Technological imperatives will continue to be important in international busi- ness. The increasing resources put into research and development play a major role in international competition. The impact of radical learning in inducing spin-offs and the management of radical innovation as well as developmental changes in product and process innovations will play a major role in international competition and the institutions of the world economy. 4. Social changes, too, will influence international business. Demands for im- provements in social conditions are determinants of future patterns. Clear indica- tions of the growth of "green" issues are already with us. Demand for greater equality and equality of opportunity influence fiscal regimes as issues of "life-style" deterinine consumption patterns and regimes of work. 5. All of the above changes are likely to lead to considerable restructuring of the world economy and of its constituent parts at national, regional, local, firm and intra-firm levels. 6. Most of the above issues will primarily concern the developed, industrialized world. The relationship between advanced countries and the less developed coun- tries, as mediated through international business operations, will remain a crucial issue. 3. The Contribution of International Business Theory The above empirical issues set the agenda for a purposive theory of international business. Any theory must attempt to explain and predict these emerging phenom- ena. Because of the diverse nature of these factors, a successful theory must be wide- ranging and interdisciplinary while not so general as to be vacuous. The theory proposed here based on internalization theory, location cost and transaction cost minimizing behaviour is sufficiently rigorous to meet the challenge. Some Criticisms The core theory of internadonai business has been subject to close scrutiny and has had to weather the storms of criticism, not least from its proponents, including Developments in Business Theory 17 myself (Buckley 1983,1988,1990). This is because it has been unthinkingly applied in its most general form without the necessary restrictions and qualifying assumptions. Its empirical impact lies in its special applications to particular configurations of the world economy, not in its general axiomatic basis. Figure 1 from Buckley (1988) is an earlier attempt to elucidate this point. 1. General Theory lnternalizaEion Location Costs 2. Special Theorv' Other Special Theories Primar>' Products Requiring Monitoring of Product Quality 3, Application Other Applications fJananas 4. Empirical Investigation Demand Side: Market for Bananas (% Dominated by MNEs) Supply Side: Banana MNEs (and Non MNEs) Interaction: Business Strategy in the Banana {and related) Indust 5, Micro-micro level Incidence of costs—measurement of transactions costs Figure 1. Structure of the Theory and Testing: An Example A recent set of criticisms is contained in a perceptive article by Charles Kindle- berger (1988). Kindleberger makes three sets of points which may be construed as criticisms of internalization theory. These are: (1) many foreign in\'estment decisions are "close cases" and similar firms may make different decisions when facing similar decision sets; (2) multinational firms are not unified firms but rather are loose agglomerations of profit centres; and (3) joint ventures are difficult to fit into the theory because they are inherently unstable and do not work in the long run. The "close case" argument Is an interesting one. Kindleberger alludes to the vacillations of the European car makers Volvo and Volkswagen on their potential entry into manufacture in the United States of America. It is implied that the fact that the decision in both cases was so close and that the two firms did not make the same decision refutes any general theory of foreign direct investment. This would be so if the theory were attempting broad generalizations at a macro level (as perhaps Aliber's approach (1970, 1971) does). However the firm level elements are crucially important as in the firm's reaction to uncertainty. Moreover, the assessment of competition and of the firms' own competitive advantages at a given time are crucial. It is also important that transaction cost factors and location costs change over time 18 Peter J. Buckley and may cause the exporting versus foreign investment decision to switch, The fact that in these cases the measurable costs of each mode seem to be so finely balanced meant that intangibles—uncertainties about the ability of the firm to achieve a given level of market penetration, costs of distribution, reaction of competitors—could swing the balance of the decision. The role of management decision making also plays a part. It is perfectly conceivable that even were the external circumstances facing a firm identical (which they never are) that two firms would choose alternativ e paths based on their evaluation of probabilities of outcome. Management discretion in imperfectly competitive markets has long been a precept of business theory. The organization of the firm is an issue tackled by Kindleberger. He takes the view that (many) modern multinationals are loose agglomerations of profit centres rather than unified decision takers. This is not incompatible with internalization theory. Indeed, it is one potential outcome of growth by internalization that the firm is explicitly organized as a complete internal market with shadow price signals being used as an internal co-ordinating mechanism between quasi-independent profit centres.
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