Geography Reference
In-Depth Information
trade costs imply that exporting from a domestic location becomes more
attractive. However, HFDI and multinationalism have increased dramati-
cally over recent decades, thereby producing outcomes which appear to be
counterintuitive according to the KCM.
One way of reconciling these observations is to assume that the set-up
costs of individual foreign establishments have fallen over time. Indeed,
the building of plants and the establishing of new 'turnkey' production
facilities is becoming increasingly sophisticated, thereby pointing to
the conclusion that set-up costs of overseas establishments are falling.
However, as we will see in later chapters, plant set-up costs may well also
involve issues related to labour knowledge, skills and training, and there
is very little evidence which suggests that these costs have fallen over time.
As such, the overall evidence on this point is inconclusive.
Alternatively we could assume that the location-specific economies
of scale have actually become less important over recent years, and the
decline in the importance of economies of scale has been even greater
than the decline in transport and trade costs. Indeed, there is growing evi-
dence that the geography of many production systems and input-output
chains are actually becoming more spatially fragmented (e.g., Parr et al.
2002; Klier and Rubenstein 2008). However, the suggestion that location-
specific economies of scale have fallen over time appears to be at odds with
the fundamental assumptions of the new economic geography
9
and also
with the wealth of emerging empirical evidence (OECD 2006; World Bank
2009), the emphasis of which is on the increasing worldwide importance of
agglomeration effects, at least during the 1990s.
A third attempt at reconciling theory and observation is to suggest that
as transport costs fall the potential profits of foreign-firm acquisition sys-
tematically favour the acquiring firms, thereby promoting outward FDI
based on mergers and acquisitions (Neary 2008). This insight is obviously
consistent with much of the available evidence. Moreover, the establish-
ment of export 'platforms' can become even more attractive under condi-
tions of foreign economic integration, as the size of the market that can be
served from that establishment becomes more important than simply the
size of the domestic market (Neary 2009).
Thus, the dichotomy between
horizontal versus vertical
integration
seems to be no longer suitable for reflecting the main organizational
forms of international operations implemented by MNEs. The complex-
ity of MNEs' integration strategies has been acknowledged also by the
KCM scholars, who have recognized that MNEs actually follow
complex
integration strategies
rather than those in one or either category (e.g.,
Grossman, et al. 2003; Yeaple 2003; Neary 2009). As such, MNEs are
both horizontally and vertically integrated, mixing up different strategies
