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Explaining international production
Book reviews
393
harmonization objective and therefore excluded them from their reciprocity calculations. A series of withdrawn offers by the Community and the United States then followed. The ultimate agreement provided for hot!; -2ons5derablv less liberalization and less hahnonization than the original formula. w Baldwin attributes the problem to a failure to ‘integrate better the formula negotiations, the process of determining exceptions and the attainment of reciprocity . . .’ (p. 199). In addition, given the repeated nature of the bargaining framework, the strategy of pulling back an offer is unproductive. Alternative strategies, such as negotiating over staging, would produce more satisfactory results. Other important issues in the GATT concern the breakdown in the use of the ‘escape clause’ or safeguard provisions and increased use of conditional MFN status. Baldwin also discusses extensions of the GATT to include services, trade-related investment, and intellectual property rights, and an improved dispute-settlement apparatus. Finally, a number of possible methods for returning the world trading system to the free-trade track are evaluated, though it is at this point that Baldwin is most pessimistic. His forecast for the near future is a continued drift towards distortions in world trade and greater use of discriminatory measures. At the root of the problem is the inability of industrial economies to contend with structural changes which come about as the result of shifting comparative advantage. Overall, this is a very entertaining and timely book filled with historical anecdotes which are complemented by careful analysis. It is written in a style that is suitable for virtually anyone interested in trade policy issues. Both academics and policy-makers will find useful lessons on trade policy problems, conflicts, and the GATT. Drusilla K. Brown Tufts University
John H. Dunning, Explaining 1..ternational Production (Unwin Hyman, London, 1989) pp. xvii -t-378, $19.95. This volume, by a leading scholar of multinational enterprises ( comprehensively with international production, defined as value-adding activity owned or controlled and organized by a firm outside its natio boundaries. It includes, but is not limited to, production financed by fore direct investment; the power to influence or control production abroa also be exercised through contractual and co production is, of course, at the cove of the important aspects of Es that are beyond the
Book
reviews
labor relations, and international trade (though trade is treated as an alternative modality to investment). The book consists of a series of essays, some revised versions of previous publications and about one-third new. There is a notable amount of repetition; some reflects the need in each of the formerly free standing essays to set out the basic features of the author’s approach. The initial chapters set out the author’s influential OLI paradigm of international production. For a foreign controlled enterprise to cope successfully with the extra costs encountered in being an outsider, it must have some assets that give it offsetting advantages. These ownership-specific (0) advantages may consist of the unique possession of specific assets (such as knowledge) or of the ability to coordinate these and other assets better than others. A firm with an O-advantage must decide whether to exploit them through markets (sell to others) or to internalize the production (I) covered by the advantage. Finally, if the firm chooses to internalize, it must decide whether to produce at home or in foreigrl location (L). This depends on the locational attractions of various sites. The OLI paradigm is not so much a theory of international investment behavior in the sense of caus2.l relationships as a classification of the factors that influence the modality through which a firm serves foreign markets: the relevance and influence of different elements in the paradigm may vary from case to case. Thus, it cannot predict how a particular firm will behave. Each firm is a unique set of characteristics and capabilities, and even firms similar in these respects may have different attitudes towards risk-taking. The author illustrates this point with an example of the differences between the establishment of a new copper mine in New Guinea and the takeover of a U.S. pharmaceutical by a U.K. tobacco firm. Mowever, it is possible, the author maintains, to identify the main variables affecting the behavior of groups of firms with similar characteristics and investment activity. In separate essays, he applies the OLI paradigm to the international hotel ‘ mosstry and to MEs in the business services sector of the United Kingdom. There are chapters on the history of foreign direct investment (FDI) and on f*cII,,:. ~ZZC~ of thought regarding FDI. The former includes interesting tables :~~m~rizing the estimated stock of accumulated foreign direct investment by country of origin and by recipient country for 1914, 1938, 1960, 1973, and 1983. The data are sparsely explained; there is not even reference to the change of price levels over the 70-year period. There are chapters setting out an investment development path, explaining intra-industry international production, and dealing with non-equity forms of international production. The newly written concluding chapter is addressed to the new shape of In the past the E acted as a loo ding resources or cal markets. The
Book reviews
395
holds, is now coming to resemble the nerve center of activities designed to organize internal production most efficiently, to apply technology and marketing knowledge, and, what is relatively new, to work through alliances with other firms. IBM, for example, has made agreements with communications firms in Japan, Italy, and Sweden. The impetus to alliances is the high cost of R&D and the fact that the utilization of the new technologies often requires their combination with other technologies produced by different firms. New telecommunications devices, for example, involve the latest technology in, carbon materials, fiber optics, computer technology, and electronic engineering. This book is the work of a scholar with comprehensive knowledge in the field. It would have been easic- for the reader to absorb were it organized as an integrated volume, but it is useful to have Dunning’s work on international production brought together. Irving B. Kravis University of Pennsylvania
393
harmonization objective and therefore excluded them from their reciprocity calculations. A series of withdrawn offers by the Community and the United States then followed. The ultimate agreement provided for hot!; -2ons5derablv less liberalization and less hahnonization than the original formula. w Baldwin attributes the problem to a failure to ‘integrate better the formula negotiations, the process of determining exceptions and the attainment of reciprocity . . .’ (p. 199). In addition, given the repeated nature of the bargaining framework, the strategy of pulling back an offer is unproductive. Alternative strategies, such as negotiating over staging, would produce more satisfactory results. Other important issues in the GATT concern the breakdown in the use of the ‘escape clause’ or safeguard provisions and increased use of conditional MFN status. Baldwin also discusses extensions of the GATT to include services, trade-related investment, and intellectual property rights, and an improved dispute-settlement apparatus. Finally, a number of possible methods for returning the world trading system to the free-trade track are evaluated, though it is at this point that Baldwin is most pessimistic. His forecast for the near future is a continued drift towards distortions in world trade and greater use of discriminatory measures. At the root of the problem is the inability of industrial economies to contend with structural changes which come about as the result of shifting comparative advantage. Overall, this is a very entertaining and timely book filled with historical anecdotes which are complemented by careful analysis. It is written in a style that is suitable for virtually anyone interested in trade policy issues. Both academics and policy-makers will find useful lessons on trade policy problems, conflicts, and the GATT. Drusilla K. Brown Tufts University
John H. Dunning, Explaining 1..ternational Production (Unwin Hyman, London, 1989) pp. xvii -t-378, $19.95. This volume, by a leading scholar of multinational enterprises ( comprehensively with international production, defined as value-adding activity owned or controlled and organized by a firm outside its natio boundaries. It includes, but is not limited to, production financed by fore direct investment; the power to influence or control production abroa also be exercised through contractual and co production is, of course, at the cove of the important aspects of Es that are beyond the
Book
reviews
labor relations, and international trade (though trade is treated as an alternative modality to investment). The book consists of a series of essays, some revised versions of previous publications and about one-third new. There is a notable amount of repetition; some reflects the need in each of the formerly free standing essays to set out the basic features of the author’s approach. The initial chapters set out the author’s influential OLI paradigm of international production. For a foreign controlled enterprise to cope successfully with the extra costs encountered in being an outsider, it must have some assets that give it offsetting advantages. These ownership-specific (0) advantages may consist of the unique possession of specific assets (such as knowledge) or of the ability to coordinate these and other assets better than others. A firm with an O-advantage must decide whether to exploit them through markets (sell to others) or to internalize the production (I) covered by the advantage. Finally, if the firm chooses to internalize, it must decide whether to produce at home or in foreigrl location (L). This depends on the locational attractions of various sites. The OLI paradigm is not so much a theory of international investment behavior in the sense of caus2.l relationships as a classification of the factors that influence the modality through which a firm serves foreign markets: the relevance and influence of different elements in the paradigm may vary from case to case. Thus, it cannot predict how a particular firm will behave. Each firm is a unique set of characteristics and capabilities, and even firms similar in these respects may have different attitudes towards risk-taking. The author illustrates this point with an example of the differences between the establishment of a new copper mine in New Guinea and the takeover of a U.S. pharmaceutical by a U.K. tobacco firm. Mowever, it is possible, the author maintains, to identify the main variables affecting the behavior of groups of firms with similar characteristics and investment activity. In separate essays, he applies the OLI paradigm to the international hotel ‘ mosstry and to MEs in the business services sector of the United Kingdom. There are chapters on the history of foreign direct investment (FDI) and on f*cII,,:. ~ZZC~ of thought regarding FDI. The former includes interesting tables :~~m~rizing the estimated stock of accumulated foreign direct investment by country of origin and by recipient country for 1914, 1938, 1960, 1973, and 1983. The data are sparsely explained; there is not even reference to the change of price levels over the 70-year period. There are chapters setting out an investment development path, explaining intra-industry international production, and dealing with non-equity forms of international production. The newly written concluding chapter is addressed to the new shape of In the past the E acted as a loo ding resources or cal markets. The
Book reviews
395
holds, is now coming to resemble the nerve center of activities designed to organize internal production most efficiently, to apply technology and marketing knowledge, and, what is relatively new, to work through alliances with other firms. IBM, for example, has made agreements with communications firms in Japan, Italy, and Sweden. The impetus to alliances is the high cost of R&D and the fact that the utilization of the new technologies often requires their combination with other technologies produced by different firms. New telecommunications devices, for example, involve the latest technology in, carbon materials, fiber optics, computer technology, and electronic engineering. This book is the work of a scholar with comprehensive knowledge in the field. It would have been easic- for the reader to absorb were it organized as an integrated volume, but it is useful to have Dunning’s work on international production brought together. Irving B. Kravis University of Pennsylvania