This preview shows page 1. Sign up to view the full content.
Unformatted text preview: The Global Economy and World Politics
Professor Edward Weisband Part III: Entrepreneurial Firm Lecture 23: Introduction to Globalization and the Efficiencies of the Transnational Entrepreneurial Firm First Cut The Entrepreneurial Firm as a Mechanism of Economic Governance The entrepreneurial firm represents a mechanism organized by and in accordance with the demands of efficiency standards Firms provide a form of economic governance Grounded in the managerial sciences Designed to coordinate sets of specializations Firms represent a mechanism to coordinate specialized divisions of labor By reducing risks that arise as a consequence of interdependent economic activity While enhancing profitability in terms of reduced costs as well as increased profit margins The Entrepreneurial Firm National governments and economies do not represent economic agents empowered with the task of converting capital inputs into value added outputs on the basis of efficiency standards Nor do markets act as agents but rather facilitators of economic activity that foster competitiveness in exchange The question thus arises: what agents compete on the basis of efficiency? What agents convert capital inputs in ways that generate value addedness through innovation and invention? The Answer: The Entrepreneurial Firm Market Conditions and the Size and Structure of Entrepreneurial Firms What influences the organizational size, structure, and strategies of entrepreneurial firms? The answer is profitability Profitability derives from efficiency and how efficiency becomes organized In ways both internal and external to the firm Profit margins based on efficiency depend on cost relative to output and output relative to value added And how value added generates profitability under changing market conditions determined by end user preferences and demands at the margins of markets in which firms operate Theory of the Firm: Drive for Profitability through the Organization of Efficiency The entrepreneurial firm is key to the economic system of capitalism It operates on the basis of efficiency by organizing itself in accordance with efficiency pressures These efficiency pressures arise within the firm in terms of costs relative to outputs and external to the firm in terms of the profitability of outputs relative to market forces WHY? On account of its drive for profitability Profitability represents efficiency standards In two primary ways: The first has to do with cost efficiencies in terms of inputs And the second has to do with profit margins in terms of outputs Firms and Value Added Profitability (VAPr) Firms are profit seeking agents central to capitalist systems Because they represent the key mechanism of converting economic values into higher levels of value addedness The metric of success is profit Firms coordinate and organize specialized divisions of labor to pursue profit under competitive market conditions Firms establish efficiency standards in accordance with profitability Efficiency becomes a function both of cost reductions in terms of specialized capital input costs BUT ALSO as a function of the profitability of outputs measured in terms of Value Added Profitability (VAPr) The Ultimate Metric of Efficiency: VAPr VAPr extends the logic stream That begins with specialization And ends with sectoral diversification with synergies up scales of value addedness The major agent in promoting value addedness is the firm Thus the ultimate metric of competitiveness in capitalism is value added profitability (VAPr) Generated through applications of invention and innovation By entrepreneurial firms Operating as agents of economic conversion between inputs and outputs in open markets Second Cut: Efficiency Standards and Firm Organization The Theory of the Firm
Three (Not Two) Efficiency Challenges In order to remain efficient AND competitive firms must: Reduce risks In terms of specialization and interdependence Reduce costs In terms of production, carrying, and transaction costs (Prepare to discuss in Recitation Sections on Friday) Increase profit margins In terms of goods and services or outputs Firms must seek to achieve a profitable balance among these three challenges The Relationship Between Organizational Structures and Input Cost Efficiencies Entrepreneurial firms seek input cost efficiencies in the name of efficiency, competiveness, and profitability Production Carrying Transaction Input cost efficiencies vary historically As different input cost pressures arise They promote different organizational structures and forms As a response Input Costs: Production and Carrying Production Costs Defined: Factors of Production Skilled Labor and Production Workers Infrastructure Materials Technology Specialized Capital Inputs Carrying Costs Defined: Costs that derive from the firm as an organization Executive compensation (bonuses) and managerial staff salaries Pensions Fringe benefits Input Costs: Transaction Transaction Costs Defined: Costs attached to market exchanges Search and information costs Costs incurred in determining what demanded good is available and at what price Bargaining costs attached to contractual arrangements Costs of negotiating contractual agreements Policing and enforcement costs Costs of enforcement, compliance, accountability, and judicial redress in cases of obligation, liability, and tort Third Cut Pressures Confronting Entrepreneurial Firms: Costs, Profits, and Risks Alternative logics of efficiency tend to lead to varying advantages and disadvantages of various organizational structures The drive for VAPr under competitive conditions generates pressure on entrepreneurial firms relative to input cost reductions and profit margins But the relationships between input cost reductions and profit margin maximization are denominated by risk Risk determines how firms become structured and organized according to the logics of specialization and interdependence designed to reduce capital input costs and enhance VAPr Cost Efficiency and Organizational Structure of the Firm The key is to understand the relationships among Input cost efficiencies, profit margins, and the organizational structure of the firm Once you relate cost efficiency with organizational strategy You can begin to assess how the firm As a form of economic governance Conforms to efficiency standards Organizational Structure of the Firm Profit Margins Input Cost Efficiencies The Relationships of Organizational Structure of Firms and Efficiency Standards Because firms operate under varying market conditions And within different national economies As well as across competitive international markets Organizational structures have changed in three major ways in accordance with changing market conditions that alter how efficiency standards are met in terms of reducing risks, costs, and increasing value added profitability (VAPr) National Vertically Integrated Firms (Fordism) Multinational Vertically Integrated Firms (the M2Form) Transnational Horizontally Coordinated Firms (Toyotaism) ...
View Full Document
This note was uploaded on 05/02/2010 for the course ECON 2064 taught by Professor Weisband during the Spring '10 term at Virginia Tech.
- Spring '10