International production | Management Optional Notes for UPSC PDF Download

Introduction

Global production pertains to the creation of goods and services across international locations and markets. This entails a management process that carefully considers the local production market (including labor and capital) and meets the demands of international customers. The scope of international production involves vertical production chains that span various countries within a region, along with distribution networks reaching worldwide. Key players in this arena are corporate firms within machinery industries, encompassing general machinery, electrical machinery, transport equipment, and precision machinery. However, certain firms in other sectors, like textiles and garments, also participate in building this extensive network.

Origin of International Production in East Asia

• In the mid-1980s and early 1990s, East Asian countries underwent significant changes in their development strategies.
• These changes were instrumental in the creation of international production and distribution networks in the region.
• The strategies adopted by East Asian developing economies actively embraced the benefits of hosting foreign direct investment (FDI).
• Notably, the new development policies emphasized market forces but were more nuanced than simple laissez-faire approaches, involving active government participation in the development process.

Impact on Academic Thought

• The development of international production and distribution networks in East Asia left a lasting impact on academic thinking, particularly in the fields of trade and foreign direct investment (FDI) patterns.
• While traditional theories like the comparative advantage theory still hold explanatory power, the significance of trade in intermediate goods and the clustering of industries prompted the emergence of new theoretical perspectives in international trade theory.
• Concepts such as fragmentation theory and agglomeration theory gained prominence in academic discussions.

The Eclectic Paradigm

• The eclectic paradigm, proposed by John Dunning in the late 1970s, is a comprehensive framework explaining the factors that influence the development of multinational enterprises through foreign production.
• It encompasses three key factors: ownership advantages ('O'), locational factors ('L'), and internalization factors ('I').
• Dunning's eclectic paradigm, often referred to as OLI (Ownership, Location, Internalization), has become a pivotal framework for empirical investigations into the determinants of foreign direct investment (FDI).

Ownership Advantages

In the context of international production, ownership advantages refer to unique attributes possessed by a firm that compensate for the additional costs associated with setting up and operating abroad.

• These advantages are akin to future investment options, representing the growth opportunities available to the firm.
• The proportion of a firm's value represented by assets-in-place influences its growth opportunities.

Internalization

• Internalization is a crucial aspect of the eclectic paradigm, denoting the choice between investing abroad and licensing or franchising to exploit ownership advantages ('O').
• It comes into play when the international market is not the most suitable modality for transacting intermediate goods or services, revealing a potential market failure.
• Multinational enterprises may find it more attractive to internalize ownership advantages when faced with perceived costs of market failure.

Locational Advantages

• Locational advantages are the second determinant in the eclectic paradigm, emphasizing the benefits associated with locating specific activities in particular countries.
• Multinational enterprises leverage these advantages to address spatial market failures, essentially internalizing external spatial imperfections.

Internationalization Advantages

• Internationalization advantages refer to the relative benefits of serving foreign markets.
• Multinational enterprises opt to transfer their ownership advantages abroad rather than selling them when internationalization advantages are present.
• The perceived high costs of transactional failure lead multinational enterprises to transfer their advantages across national borders.

Application of the Eclectic Paradigm

• The eclectic paradigm provides a theoretical foundation for understanding the 'where' of production for multinational enterprises.
• Multinational enterprises choose to produce abroad when it is in their best interests to combine intermediate products produced in their home country with those specific to the foreign country.
• This decision is driven by considerations of spatial transferability and the presence of immobile factors or intermediate products in the foreign country.