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Wednesday, August 21, 2013

International Sales as Factors of Distance and Knowledge



Organizations that work together naturally share information to maintain their business operations. Keller and Yeaple (2013) discuss the transactional costs associated with embodied (traded intermediates) and disembodied information (direct communication). Their research has implications for multinational firms that require efficient use of information and product transferrence to compete on the global market. Their model provides two ways of analyzing how increased distance reduces sales and why changing technology may influence the dynamics of trade. 

Modern advances in telecommunications have positively affected the ability to maintain homeostasis with market trends. Those organizations that engage in research-intensive products rely on  information transference to develop quality products that are well received in the market. The ease of information transference in either embodied or disembodied form impact the strength of operations of multinational firms.

For example, the farther away the sales outlet from the manufacturing organization, the less sales made. This trend appears to have similarities with the information transference throughout the economic chain and the inefficiencies created by increased spatial distance. As improvements in logics and communication capabilities increase there is likely to be a reduction in cost and decision lag time. 

As all decisions are from knowledge, all products are built on knowledge, all sales are based on knowledge and therefore the distance between two entities and the method of information transference will naturally have an impact on sales and profits. Just as the communication level between executives, managers, employees, and customers is important for proper business development the strength of communication across geographically dispersed areas is also important. 

The researchers used firm-level data of the international structure of U.S. multinational operations from the Bureau of Economic Analysis. A multinational firm was considered a U.S. legal entity that made direct investment in at least one foreign business. The total survey included 1,000 U.S. multinationals and 3,000 affiliates from 48 distinct industries.  They observed total R&D expenditures by year and by industry. This helped them determine a ratio of R&D expenditures to sales. 

Their analysis found that cost of transfer varied with the knowledge intensity and the destination. For each leg, and organizations gravitated toward those methods that reduced costs as much as possible. As disembodied knowledge costs are fixed, firms choose this method to maximize efficiency. As distance between entities grows, so does the knowledge intensity and the general costs associated with that knowledge.  

The research is important in the sense that distance and trade costs should not be viewed only in physical terms. Such trade costs should also take into account the general cost of knowledge transference between countries and cultures. As the distance between the home country and the subsidiary increases so does the general costs on multiple fronts. Likewise, as international shipping costs and information costs decline, economic activity is likely to increase due to improved sales opportunities. Those companies that integrate new communication technologies and knowledge are likely to have longer reaches for products/services and sales. 

Kellery, W. & Yeapler, S. (2013). The gravity of knowledge.  American Economic Review, 103 (4).

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