Frank McDonald
University of Liverpool School of Management
BAM SIG in International Business and International Management Seminar on Spatial Factors and MNC Strategy at the University of
Liverpool, 6 Nov 2015
1
 IB/IM
is increasingly examining the role of
sub-national location (Meyer and Nguyen,
2005) including cities (Goerzen, et al, 2013;
Nachum, L., and Wymbs, C., 2007.) – place
is becoming more important
 The work of earlier IB/IM studies that had an
important role for place (Hymer, 1972) has
gradually been dragged back into IB/IM
theory via a renewed interest in the location
component in the OLI Paradigm (Cantwell,
2009; Dunning, 2009)
BAM SIG in International Business and International Management
- Seminar on Spatial Factors and MNC Strategy at the University
of Liverpool, 6 Nov 2015
2



Calls for more firmly incorporating spatial factors in IB/IM
theory have been prominent in recent years
These calls seeks to incorporate Economic Geography into
IB/IM theory but this should include organizations (MNCs)
and embrace cross-border activities and consider the link
between national and sub-national location and the
implications for the strategies and operations of MNCs
(Beugelsdijk, et al, 2010; Beugelsdijk and Mudambi, 2013)
To be useful for IB/IM Economic Geography approaches need
to include the role of organizations, institutions and multiple
sub-national locations and their interconnections nationally
and internationally – arguably Economic Geography
approaches need to have different, and some cases more
robust, theoretical base and crucially need to take account of
cross-border aspects connected to location – countries
matter
BAM SIG in International Business and International Management
- Seminar on Spatial Factors and MNC Strategy at the University
of Liverpool, 6 Nov 2015
3
New
economic geography (NEG)
Relationship
(REG)
Countries
(CCM)
economic geography
& Cities and MNCs
BAM SIG in International Business and International
Management - Seminar on Spatial Factors and MNC Strategy
at the University of Liverpool, 6 Nov 2015
4



NEG (Krugman, 1991) – in essence the incorporation of
traditional theories of location in space set in a general
equilibrium model with increasing returns to scale and
monopolistic competition (Ottaviano and Thisse, 2001 &
2004)
At the heart of the NEG approach is a core-periphery model
based on trade offs between proximity costs (transport
costs) and increasing returns in a two product (traditional
and modern) world with labour mobility and no barriers to
trade
NEG has been developed to include the importance of
vertical integration in industries (Venables, 1996) and
Marshallian externalities as labour moves from periphery to
the core (rural areas to cities) and thereby boosts
consumption levels in cities and also enables enhanced
sharing and learning effects among the inhabitants of cities
(Duranton and Puga, 2004)
BAM SIG in International Business and International
Management - Seminar on Spatial Factors and MNC Strategy
at the University of Liverpool, 6 Nov 2015
5




This gives rise to a putty-clay model (Ottaviano and
Thisse, 2004) whereby a slight change can lead to labour
moving to modern industries that have increasing returns
to scale (putty) – leads to cumulative causation as
agglomeration benefits lead to increased enticements to
labour to move to the core leading to more agglomeration
benefits – centripetal forces – that fixes major activities in
core (cities) – the putty becomes clay
Increased competition and congestion costs in the core
location offset transport costs disadvantages leading to
pull to the periphery - centrifugal forces
Changes in - transport & congestion costs, positive and
negative externalities and the intensity of competition
affect these centripetal and centrifugal forces
NEG provides a core-periphery model enabling analysis of
centripetal/centrifugal forces in an evolutionary context
BAM SIG in International Business and International
Management - Seminar on Spatial Factors and MNC Strategy
at the University of Liverpool, 6 Nov 2015
6
 Useful
model to conceptualise major economic
forces at work in a core-periphery world
 NEG has however several serious drawbacks
 Restrictive and simplistic assumptions about
economic factors to enable mathematical
modules to be built to look for conditions for
equilibrium – which are often multiple
equilibria
 It is solely about markets that operate with no
barriers to movement of resources
 Perhaps most serious drawback - no
connection to real spatial factors – no real
geography - physical, economic or human
BAM SIG in International Business and International
Management - Seminar on Spatial Factors and MNC Strategy at
the University of Liverpool, 6 Nov 2015
7
 Leads
to a series of problems for the usefulness of
NEG for IB/IM
 No role for organizations (firms)
 No clear role for institutions – either formal and
informal
 No clear indications as to why core locations are
located were they are - or why some core locations
are more productive than others
 No role for countries, or sub-national locations
within countries
 NEG is useful to set the scene for key economic
factors in a core-periphery context for IB/IM
studies - but it is of only marginal use to address
the major issues that IB and IM examine
BAM SIG in International Business and International
Management - Seminar on Spatial Factors and MNC Strategy
at the University of Liverpool, 6 Nov 2015
8
 Potentially
interesting application of NEG to IB/IM
 NEG postulates that core locations provide a
bundle of publically provided goods and services
(physical and institutional infrastructures) that are
more attractive than those available in the
periphery - adding to the agglomeration benefits
of core locations
 If the preferences for the bundle varies across
actors a sub-optimal provision of the bundle arises
for some actors because the provision of the
bundle will be focused on actors in the middle of
the desire provision of public goods desire leaving those not in the middle dissatisfied
BAM SIG in International Business and International
Management - Seminar on Spatial Factors and MNC Strategy
at the University of Liverpool, 6 Nov 2015
9
This in the NEG view (Ottaviano and Thisse,
2004) leads to centrifugal forces which is
limited by the lower provision of the bundle of
good and services in the periphery – the core periphery is therefore nearly always in tension
because of the problems of finding ways to get
an optimal bundle of publically provided goods
and services
 Tiebout, 1956 proposed a solution to this
problem of sub-optional provision of publically
provided goods and services - voting with
your feet – ie moving to alternative areas of
provision – this of course requires multiple
core locations which actors can move to

BAM SIG in International Business and International
Management - Seminar on Spatial Factors and MNC Strategy
at the University of Liverpool, 6 Nov 2015
10
In the standard NEG model transport costs also
provide a limit to the voting with your feet solution
as the periphery is too far away to retain
agglomeration benefits from multiple core locations
 In cases with zero or low transport costs agents
(firms) can move resources between core locations
and keep control over them (ie not sell them on
markets) & locate in core locations with bundles of
goods and services best for certain types activities
thereby improving the agglomeration trade off arising
from inadequate bundles of publically provided goods
and services – a type of a differentiated coreperiphery model based on bundles of goods and
services

BAM SIG in International Business and International
Management - Seminar on Spatial Factors and MNC Strategy
at the University of Liverpool, 6 Nov 2015
11





Firms can however link to other core areas via connections
across space by the market & intra-organizational and interorganizational trading of goods and services
MNCs may therefore be well placed to seek Tiebout solutions
The Tiebout model provides a way of extending the coreperiphery NEG model if the assumptions of two locations is
extended to multiple cores that can connect across space – and
organizations (firms) are introduced
This permits firms (MNCs) to operate in a variety of core
locations and to connect to these multiple core locations via
market and organizational trading thereby improving the trade
offs connected to agglomeration
This has similarities to REG but has a much stronger economic
rationale than REG
BAM SIG in International Business and International
Management - Seminar on Spatial Factors and MNC Strategy
at the University of Liverpool, 6 Nov 2015
12
 REG
focus on relational configurations between
firms and territory (sub-national locations often
cities (Dicken and Malmberg, 2001;)
 These relational approaches focus on the local
business environments in which firms are
embedded and the linkages of these local
environments to other locations in the global
economy (Yeung, 2005)
 REG often classify cities in different tiers
according to the characteristics of the
relationship configurations and connection to the
global operations of firms & this is seen as
affecting the strategies of MNCs (Beaverstock et
al, 2000; Taylor, 2004)
BAM SIG in International Business and International Management
- Seminar on Spatial Factors and MNC Strategy at the University
of Liverpool, 6 Nov 2015
13
REG is free of most of the restrictive assumptions of
NEG
 It encompasses – organizations (firms), institutions,
networks and multiple cores as well as core to core
linkages as well as multiple core to periphery
linkages
 It is centred on the competitive advantages of
locations and often has strong ‘real time’
evolutionary stories to tell about how locations gain
and lose competitive advantages
 It often focus on agglomeration benefits at industry
level (clusters)
 It considers the centripetal and centrifugal forces that
are work in a core–periphery world – but not from a
strong theoretical perspective

BAM SIG in International Business and International Management
- Seminar on Spatial Factors and MNC Strategy at the University
of Liverpool, 6 Nov 2015
14




REG is primarily interested in how MNCs operate in different
territories (sub-national locations) and especially what attracts
them to particular locations – it is largely about how location by
MNCs affects economic and social development
IB/IM location theory is primarily concerned with why and how
location affects the exploitation of ownership or firms specific
advantages by MNCs and the mode of entry and management
systems that are used in different locations – it is largely about
the strategy and management of MNCs
REG is clearly more directly connected to IB/IM issues that NEG
because it is concerned with firms, strategies, institutions, &
multiple locations with different competitive advantages
Perhaps most importantly it has spatial features at its heart location in core locations and peripheries and linkages between
core-periphery locations in different places (countries or regions)–
this is largely missing from most IB/IM studies
BAM SIG in International Business and International
Management - Seminar on Spatial Factors and MNC Strategy at
the University of Liverpool, 6 Nov 2015
15
 NEG
predicts that agglomeration benefits will lead
to every growing movement to core locations
constrained only by transport costs and congestion
costs & unfavourable bundles of publicly provided
goods and services – it is firmly based on theory
 REG is rather atheoretical in that it seeks answers
(without any strong theoretical underpinning) to
similar questions as those addressed by NEG and
IB/IM by what could be regarded as case by case
examinations informed by observation and
consideration of ‘big’ issues such as the digital
revolution, globalization and major social changes
 REG (and NEG) has no clear role for countries – a big
problem for IB/IM
BAM SIG in International Business and International
Management - Seminar on Spatial Factors and MNC Strategy at
the University of Liverpool, 6 Nov 2015
16
The NEG view centres on the importance of
increasing returns from agglomeration in a coreperiphery world with no countries whereas new
trade theory (Krugman, 1979) centres on how
increasing returns drives much of international
trade and investment between countries
 This leads to the question (crucial to IB/IM) what is
the relationship between increasing returns at subnational (or city level) and increasing returns at
country level and what role do MNCs play in a
world of trade and investment between nations and
where sub-national location at intra and intercountry levels profoundly affect the strategies and
operations of MNCs (McCann and Acs, 2011)

BAM SIG in International Business and International
Management - Seminar on Spatial Factors and MNC Strategy at
the University of Liverpool, 6 Nov 2015
17
 If
countries matter for trade and investment
flows between countries they matter for cities
because they are located in countries
 The agglomeration trade-offs facing cities
clearly have an international trade and
investment dimension (a country dimension)
and the strategies and operations of MNCs
(as the main drivers of much of trade and
investment) are crucial for these trade-offs
BAM SIG in International Business and International
Management - Seminar on Spatial Factors and MNC Strategy at
the University of Liverpool, 6 Nov 2015
18
Countries (or regional trade blocs) exercise
considerable influence on trade and investment flows
by providing the formal institutional frameworks for
these flows (by way of tariffs, non-tariff barriers and
host of regulatory laws and rules affecting trade and
investment flows) – these exercise significant effect on
the costs and benefits of location in cities because
international trade and investment connected to the
city is affected by the national (or regional trade bloc)
regulatory systems
 Currencies also exercise substantial effects on trade
and investment flows - the control over currencies and
were they are applicable in trade and investment flows
is largely determined by countries or associations of
countries eg the Eurozone

BAM SIG in International Business and International
Management - Seminar on Spatial Factors and MNC Strategy at
the University of Liverpool, 6 Nov 2015
19
 Regulations
on corporate governance and many
issues connected to taxation are the responsibly
of countries and/or associations of countries and
this affects the agglomeration trade-offs of cities
 London is a major world city in banking and
financial services but the regulatory and security
backing for these industries is located in the
British state not the governing authorities in
London
 It is clear that countries and associations of
countries such as the EU exercise considerable
influence on the economic transactions of firms
and thereby affect the agglomeration trade-offs
of being located in cities
BAM SIG in International Business and International
Management - Seminar on Spatial Factors and MNC Strategy at
the University of Liverpool, 6 Nov 2015
20
 Clearly
there are important links between
space of country and the space of subnational locations (cities) and this has
important implications for the strategies and
operations of MNCs
 This is the space dimension in IB/IM theory
that needs to developed – and this is the area
in which IB/IM scholars have expertise
BAM SIG in International Business and International
Management - Seminar on Spatial Factors and MNC Strategy at
the University of Liverpool, 6 Nov 2015
21
 Issues
of the size of country or associations of
countries in which cities are located has important
bearing on the agglomeration trade-offs that
cities face
 The question asked by McCann and Acs, 2011 –
what is the effect of the size of country or
association of countries that a city is located in
for the agglomeration trade offs that that city
faces
 This has profound implications for the
competitive position of cities in addition to the
types of factors highlighted by REG
BAM SIG in International Business and International
Management - Seminar on Spatial Factors and MNC Strategy at
the University of Liverpool, 6 Nov 2015
22
A
city could achieve an optimal agglomeration
trade-off in line with NEG and have well
developed spatial relationships as viewed by the
REG approach but be a poor candidate for MNC
investment because it is located in a country
that has poor abilities to achieve good
international agglomeration trade-offs
 It is this arena of the linkages between country
and city level agglomeration trade-offs that
needs theory development to obtain a better
understanding of place in IB/IM research and to
enable IB/IM to make a valuable contribution to
both NEG and REG
BAM SIG in International Business and International
Management - Seminar on Spatial Factors and MNC Strategy at
the University of Liverpool, 6 Nov 2015
23






Beugelsdijk, S., Mudambi, R., & McCann, P. 2010. Place, space and organization:
Economic geography and the multinational enterprise. Journal of Economic
Geography, 10:485–493.
Beugelsdijk, S. and Mudambi, R. 2013. MNEs as border-crossing multi-location
enterprises: The role of discontinuities in geographic space, Journal of
International Business Studies, 44(5): 413-416.
Beaverstock, J. V., Smith R. G. and Taylor, P. J. 2000. “World-city network: a new
metageography?” Annals of the Association of American Geographers 90: 123–
134.
Cantwell, J. 2009. Location and the multinational enterprise, Journal of
International Business Studies, 40: 35-41
Dicken, P., & Malmberg, A. 2001. Firms in territories: A relational perspective.
Economic Geography, 77: 345–363.
Dunning, J.H. 2009. Location and the multinational enterprise: John Dunning’s
thoughts on receiving the Journal of International Business Studies 2008 Decade
Award, Journal of International Business Studies, 40: 20-34
BAM SIG in International Business and International
Management - Seminar on Spatial Factors and MNC Strategy
at the University of Liverpool, 6 Nov 2015
24







Duranton, G. and Puga, D. (2004) Micro-foundations of urban agglomerations,
Handbook of Regional & Urban Economics , 4: 2063–2117
Goerzen, A., Asmussen, C.G., Nielsen, B.B., 2013. Global cities and
multinational enterprise location strategy, Journal of International Business
Studies, 44: 427–450
Hymer, S. 1972. The multinational corporation and the law of uneven
development. In J. Bhagwati (Ed.), Economics and world order from the 1970s
to the 1990s: 113–140. London: Collier-Macmillan.
Krugman. P. R., 1979, Increasing returns, monopolistic competition and
international trade, Journal of International Economics, 64: 416-424
Krugman, P. R., 1991 Increasing returns to scale and economic geography,
Journal of Political Economy, 99:483-499
McCann, P., and Acs, Z.J., 2011. Globalization: Countries, Cities and
Multinationals, Regional Studies, 45: 17-32
Meyer, K.E., and Nguyen, H.V. 2005. Foreign Investment Strategies and Subnational Institutions in Emerging Markets: Evidence from Vietnam, Journal of
Management Studies, 42(1): 63-93.
BAM SIG in International Business and International
Management - Seminar on Spatial Factors and MNC Strategy
at the University of Liverpool, 6 Nov 2015
25

Nachum, L., and Wymbs, C., 2007. The Location and Performance of Foreign
Affiliates in Global Cities, in Alan M. Rugman (ed.) Regional Aspects of
Multinationality and Performance (Research in Global Strategic Management,
Volume 13), Emerald Group Publishing Limited, pp.221-259






Ottaviano, G.and Thisse, J-F., 2001, On economic geography in economic
theory: increasing returns and pecuniary externalities, Journal of Economic
Geography, 1:153-179
Ottaviano, G.and Thisse, J-F., 2004 Agglomeration and economic geography,
Handbook of Regional & Urban Economics , 4:2563-2608
Taylor, P. J. 2004 World City Network: A Global Urban Analysis London:
Routledge.
Tiebout, C.M. 1956 A Pure Theory of Local Expenditures, Journal of Political
Economy, 64: 416-424
Venables, A.J. 1996, Equilibrium locations of vertically linked industries,
International Economic Review, 37: 341-359
Yeung, H. 2005. Rethinking relational economic geography. Transactions of
the Institute of British Geographers, 30(1): 37–51
BAM SIG in International Business and International
Management - Seminar on Spatial Factors and MNC Strategy
at the University of Liverpool, 6 Nov 2015
26