Critical assessment of Transaction Cost Economics and Resource Based View theories in terms of their usefulness in explaining firms’ internationalization strategies.
Two Nobel Prize winners have extensively contributed to one of the theories that will be discussed in this essay. It is very exciting to access Transaction Cost Economics and Resource Based View theories in terms of their usefulness in explaining firms’ internationalisation strategies. This assessment will be based on two American companies: Harley Davidson-motorcycle manufacturer operating internationally and Wal-Mart - multinational Retail Corporation.
First of all, The beginnings of TCE- Transaction Costs Economics Theory is associated with British economist Ronald Coase, who used the term Transaction cost excessively to explain why firms to accomplish a number of tasks use in House capabilities and for the other part use external providers-market. A good illustration is when internal Transaction costs go up the firm is more likely to outsource and vice versa if external Transaction costs exceed Internal then firm should perform these tasks in House. Ronald Coase received a Nobel Prize "for his discovery and clarification of the significance of transaction costs and property rights for the institutional structure and functioning of the economy" (Nobelprize.org 2013).The other key contributor to TCE Theory is a great American economist also a Nobel Prize winner for contributing to economic sciences - Oliver E. Williamson. The Theory has been developed to great lengths since 1930s and today Transaction Cost Theory is not only used to explain Mechanisms of Governance in the home market, but to analyze the structure of the firm that should be used in foreign markets to manage risks and reap better results from international operations. Such structures are: a) Markets; b) Hybrids c) Hierarchies. Those structures are regarded as a) structure having the least control over firms’ international operations and the least risk exposure while c) having the most control and having biggest exposure to risks in unstable markets. The next point that will be focused on is TCE theory usefulness in Harley Davidson Internationalization process. Harley Davidson-HD is a motorcycle manufacturer based in a U.S. founded in 1903. It provided motorcycles for military during World War I and World War II, as there was a high demand for reliable heavy-weight motorbikes. Currently Harley Davidson is operating in more than 60 countries around the globe and is a well known Brand associated with an American feeling of freedom, and being part of ‘bad boys‘ known as HOG (Harley Owners Group). In 1990s Harley Davidson Management has recognized the need for international expansion as they were facing slowing sales growth in U.S. and increased competition by Suzuki, Honda, Ducati etc. In 2005 Harley Davidson has expanded to Japan by opening its subsidiary and developed distribution network. In 2008 HD has acquired MV Augusta Group based in Italy but mainly because of Global recession had to divest in Augusta in 2010. Harley Davidson has been selling its motorcycles in Brazil since 1993 and in 1999 decided to start manufacturing there, because of increased imports taxes by the Brazilian government. In addition, Harley Davidson was able to access cheap Brazilian labour and avoid import taxes at the same time. We can make a fair assumption that the main reason why HD has come up with this strategy was- producing in U.S. costs were exceeding costs of transferring part of manufacturing to Brazil. In Case of expanding to Italy, making the assumption that Harley Davidson being a U.S. based company were aware of the global recession, HD could have used Transaction Based Cost theory to reduce its exposure to risk by choosing different entrance strategy i.e. instead of acquiring MV August – Hierarchical structure, Harley Davidson could expand in Italy trough channels requiring much less...
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