Nicole Adler and Niron Hashai create a predictive tool that incorporates rivalry and consumer preference

Adler, Nicole

Hashai, Niron

LSE Research Online

2/12/2016When multinationals choose locations, consumers andcompetitors matterblogs.lse.ac.uk /businessreview/2016/02/12/when-multinationals-choose-locations-consumers-and-competitors-matter/The field of international business has long adopted the view that multinational enterprises (MNEs) may berepresented as networks of activities connected via knowledge and product flows. The major determinants ofefficient location choices are considered to be proximity to markets, resources and suppliers.There are two standard approaches to modelling MNEs’ location choices. The first attempts to minimize total costs,which implies that the firm is a price-taker, i.e., a company charges the prevailing prices in a market with little to nodifferentiation, so revenues are fixed, leaving only the possibility to reduce costs in order to maximize profits.” Thisview ignores competition as an additional important determinant in price setting in a differentiated market. Thesecond approach takes competition into account, yet assumes that the locations of competitors are fixed, such thatMNEs choose to co-locate or separate from their competitors’ network. The downside of the latter approach is that itignores the strategic interaction between MNEs that respond to the location choices of their competitors.In recent research, we cross the international business viewpoint of the MNE with location-optimization models usedin operations research, McFadden’s discrete choice consumer approach  and Nash’s game theory gestalt in thesearch for equilibria outcomes in global markets.We develop a game which incorporates both rivalry and strategic interaction as a means to endogenize the pricesand costs of competing MNEs. The model captures the reactions of competing MNEs while maximizing profits. Animportant feature of our model is the inclusion of consumer preferences, in terms of willingness to pay for products orservices. A consumer’s decision to purchase from a specific MNE is often a function of perceived quality and notsimply a reaction to price. More specifically, preferences for locally supplied customer support and/or production in aseemingly technologically advanced location are both likely to impact consumers’ willingness to pay. Consequently,when modelling the location choices of competing MNEs, one ought to also consider consumer preferencesbecause they reflect potential additional revenues that may outweigh any supplementary fixed or variable costs.1/3The impact of the approach taken is demonstrated through a series of computational experiments. Theseexperiments show that the location decisions of competing MNEs striving to fulfill consumer preferencessubstantially differ from those taken when competitors’ locations are ignored or assumed to be set exogenously.Despite the fact that we do not explicitly model region-specific attributes or differences, such as cultural andinstitutional distance, regional liabilities of foreignness or regional integration patterns, our computationalexperiments reveal two dominant location configurations. In one configuration, MNEs concentrate their operations inspecific regions, and in the other, globally dispersed MNEs possess a regional organizational structure. In bothcases, it is evident that the regional focus tendency is much more prevalent for R&D and marketing activities thanfor production activities. This is demonstrated in the Figure which highlights a potential duopoly equilibria outcomebetween US and Japanese MNEs.Figure 1. Duopoly network outcomes with consumer preferences for Western production and local marketing support lead to U.S. -Japan duopolyA key insight of our research is that the knowledge flow costs resulting from the coordination of dispersed activities,coupled with MNEs’ preference to avoid direct competition, increases the tendency of MNEs to choose regionallyfocused location configurations. It is further evident that geographic distance by itself can be a dominantdeterminant of regionally focused MNEs, where interregional differences in terms of culture, institutions andintegration patterns intensify regional focus, but are not necessary conditions for the phenomenon to occur as theliterature implies. Finally, and importantly, by specifically modelling the location of value-chain activities, such asR&D, production and marketing, we are able to show which of these functions is more likely to become regionallyfocused, as well as identify the two types of dominant location configurations (MNEs that concentrate theiroperations in specific regions and globally dispersed MNEs that possess regional organizational structures). Theseinsights could not be gained without the specific modelling of value chain activities rather than a firm level approach.In summation, by marrying insights from the international strategy, industrial organization, and operations researchfields, the general framework ought to enable managers and researchers to empirically evaluate various complex,and sometimes contradictory, predictions regarding global competitive outcomes and location decisions.The major premises of this research are that: (1) it would be erroneous to treat competitors’ current locations asgiven and fixed in the long term, hence the MNE’s objective function should be formulated in the form of a bestresponse function; (2) consumer utility functions often include quality parameters that are determined by MNEs’2/3location choices and impact the consumers’ willingness-to-pay; and (3) the combination of models within a singleformulation enables the decision maker to analyze individual firm choices and the overall market equilbria outcomesimultaneously. ♣♣♣Notes:This post is based on the authors’ paper The Impact of Competition and Consumer Preferences on theLocation Choices of Multinational Enterprises, Global Strategy Journal, 5 (4), 278-302, 2015.This post gives the views of its authors, not the position of LSE Business Review or the London School ofEconomics.Featured image credit: Yuyuan Shopping Centre, Shanghai d’n’c CC-BY-SA-2.0Nicole Adler  is an Associate Professor in the Department of Operations Research and OperationsManagement (OR/OM) at Hebrew University’s School of Business Administration. Her OR rootsstarted with a masters degree at LSE where she learned much from Professors JonathanRosenhead and Susan Powell, among others. Her major research interests include applied gametheory to model competition, multi-criteria productivity analysis to measure efficiency andtransportation including aviation and high speed rail. Dr. Adler is currently participating inHorizon2020 financed consortiums investigating the economics of change in the Air TrafficManagement sector and the application of Big Data to better understand consumers. She hasundertaken research financed by the European Union, the Israel Science Foundation and multiple governmentministries.Niron Hashai is an Associate Professor and the Albertson-Waltuch Chair in BusinessAdministration in the School of Business Administration at the Hebrew University of Jerusalem,Israel. He currently serves as the Academic Director of the Asper Center for Entrepreneurship andInnovation, the Academic Director of the Executive MBA and the Head of the Strategy andEntrepreneurship Area at the school. Dr. Hashai also teaches at New York University and is aresearch fellow at the John H. Dunning Research Centre, University of Reading. His researchinterests include: theory of the multinational corporation, technological innovation andinternationalization, and growth patterns of small high technology firms. Copyright © 2015 London School of Economics3/3

When multinationals choose locations, consumers and competitors matter

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