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ECON254 THEORY OF THE FIRM. TUTORIAL 5. GROWTH, MANAGERIAL THEORIES OF THE FIRM AND THE ECONOMICS OF MULTINATIONAL ENTERPRISE.

1. Dunning’s Eclectic Theory.

Read the following short case study and use Dunning’s eclectic paradigm to explain why IBM has decided to pull out of production of PCs at Zelenograd and revert to exporting. Hint: Dunning’s paradigm argues that firms will set up overseas operations where three conditions hold:

• The firm has Ownership advantages – things the firm is able to do particularly well relative to its rivals • There are Locational advantages – there are good reasons why the overseas location is more favourable than supplying from the home country • There are Internalisation advantages – good reasons why the firm will run it’s own overseas operation rather than contracting a third party to produce the good under licence

IBM Pulls out of Zelenograd.

IBM is considering bending its production of personal computers at Zelenograd, near Moscow, blaming changes in the Russian tax regime for undermining the economic rationale for manufacturing computers locally compared to importing them. Other Western computer manufacturers are also complaining that tax breaks granted to Russian trading groups with connections in the Kremlin have undermined the local market’s price structure. The decision is a serious setback to Russia’s attempts to attract foreign direct investment and reflects the unpredictable business conditions that still bedevil many sectors of the economy. The concessions to Russian trading organisations have enabled some favoured dealers to sell imported computers free of tariffs and taxes, which normally amount to 21.5% of the selling price. “Some dealers have a way of getting computers into the country with reduced duties which few reputable companies can do. We are constantly

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