Robert Merton once remarked that “[the sociologist] has ample reasons to study the works of Weber, Durkheim and Simmel and, for that matter, to turn back occasionally to the works of a Hobbes, Rousseau, Condorcet or Saint Simon … Previously unretrieved information is still there to be usefully employed as new points of departure” (1967, pp. 34 and 37).

His exhortation certainly applies to international business–government relations (IBGR), but who still reads Jack Behrman, Richard D. Robinson, and John Fayerweather who wrote expertly and at length on this topic? For that matter, who has even heard of them among the younger generation of IBGR scholars? The late Raymond Vernon and Charles Kindleberger (partly on account of Hymer's thesis) have fared better in this regard, but why has this happened?

One could speculate that the relevant and cumulative knowledge of the past (here defined as 1960 to 1975) has been substantially incorporated in subsequent formulations, so that the above authors need no longer be read and cited since many textbooks on international business, marketing, finance, management, and strategy now include sections and even chapters on the structures and roles of governments as well as on negotiating with them.

Besides, the search for relevance in teaching and research has dictated a focus on current phenomena, institutions, and developments – such as globalization, the North American Free Trade Association (NAFTA), and the World Trade Organization (WTO) – which far surpass in size and scope those analyzed by scholars of the 1960s and 1970s.

Introduction

The interaction between multinational enterprises (MNEs) and the governments of nation-states has been studied for over thirty years, going back to the classic analysis of Vernon (1971). The interaction between MNEs and home and host governments has been further developed by Stopford and Strange (1991) in a model of triangular economic diplomacy. The entire development of a scholarly field known as international political economy takes as its focus the interactions between MNEs and States. What can be added to this literature?

The answer is new evidence that MNEs operate predominately on a regional basis, rather than on a global basis as many earlier studies have assumed. Yet, rather than MNEs operating across borders around the world, the evidence, e.g., in Rugman (2000), is that the vast majority of MNEs have as much as 80 percent of their sales within their home region. Further, these “Triad” regions of the EU, North America, and Asia account for well over 90 percent of all MNE activity (as revealed by sales, or assets, or employees). Thus a focus on regionalization is now required to analyze states and firms.

The issues to be explored in this chapter are the following:

1. Given the new evidence on the economic interdependence within each region of the Triad, is this being facilitated by regional or multilateral trade agreements? The EU is much more of an integrated common market than the looser free trade agreements of the North American Free Trade Association (NAFTA), the Free Trade Association of the Americas (FTAA), and the Asian Agreement of November 2002. […]

The idea that relations between international companies and national governments can usefully be viewed as a bargaining situation is not new in the international business literature. If we limit the history of business analysis to just post-Second World War writings, then the focus on these relations probably began with someone such as Stephen Hymer (1960), who looked at multinational firms as institutions that internalize transactions costs (efficiency) and at the same time seek to dominate markets through monopoly power (equity). He did not relate the former issue to dealings with governments, but he certainly did consider the second issue, arguing that powerful international firms can pursue monopolistic goals, unless they are constrained by governments. While his perspective was ultimately critical of multinational firms, his focus included the key relationship of concern here, between national governments and international firms.

Another author writing at the same time was Jack Behrman (1960, 1962), who explored the use of foreign direct investment as a tool for economic development, and who recommended government policies to stimulate this activity. Behrman's work was far more policy oriented, with emphasis on explaining the phenomenon of foreign direct investment, and on how governments could channel (encourage) that activity to pursue development goals. Behrman clearly focused on the interests of firms and the interests of governments, and on the ways in which they could pursue mutually acceptable goals.

Introduction

Relationships between multinational enterprises (MNEs) and governments in Central and Eastern Europe (CEE) have been shaped by the region's struggle to shed legacies of central planning, and create prosperous market economies. This context has created special challenges for both MNEs and local governments to establish relations with each other, understand each other's needs, and to engage in mutually beneficial negotiations.

Due to path dependency of institutions, extraordinary politics during this period and the inheritance from the previous regime shape the future institutional frameworks (North, 1990; Stark, 1992). Policy decisions during the period of radical change around 1990, such as methods of privatization, had long-lasting effects on institutions, and moreover on the distribution of wealth and power. In many countries, the institutional vacuum and weak legal framework in the early 1990s permitted a large extent of opportunistic behavior, rent shifting, bribery, and corruption. In some countries, vested interests have inhibited the pace of reform (EBRD, 1999; Stiglitz, 1999). Consequently, the process of building institutions in transition economies has taken more time than most reform scenarios envisaged in 1990.

The duration of extraordinary politics and the pace of reform depend on each country's economic and institutional legacies. Some countries were considered among the developed economies prior to the Second World War while others went directly from a feudal or early capitalist system to a socialist system. These distinct cultural and systemic inheritances influence informal institutions such as norms and values in these countries.

Introduction

The best-known model of relations between multinational enterprises and host country governments is the obsolescing bargain model (OBM), first developed by Raymond Vernon in Sovereignty at Bay (1971). obsolescing barguin model (OBM) explains the changing nature of bargaining relations between a MNE and host country (HC) government as a function of goals, resources, and constraints on both parties (Vernon, 1971, 1977; Kobrin, 1987; Brewer, 1992; Grosse and Behrman, 1992; Grosse, 1996). In OBM, the initial bargain favors the MNE, but relative bargaining power shifts to the host country government over time as MNE assets are transformed into hostages. Once bargaining power shifts from the MNE to the host country, the government imposes more conditions on the MNE, ranging from higher taxes to complete expropriation of MNE assets. Thus, the original bargain obsolesces, giving OBM its name. Originally applied as an explanation for widespread expropriation and nationalization in the 1970s of MNE natural-resource subsidiaries located in developing countries (Vernon, 1977), OBM was later tested in other situations such as manufacturing MNEs and developed HCs, with much weaker results (Kobrin, 1987).

The now widely held view among IB scholars is that OBM has outlived its usefulness. The many case studies testing the model suggest that MNEs were able to retain relative bargaining power and prevent opportunistic behavior by HC governments so the bargains, in practice, seldom obsolesced.

Historically, motion pictures have been analyzed from many different perspectives and approaches. The business of film is receiving much closer scrutiny these days, again from diverse viewpoints. Although the popular press has always been fascinated with the spectacle of Hollywood, more media attention seems to be devoted these days to the business of film making in publications such as Entertainment Weekly and television programs such as Entertainment Tonight. Of course, much of this coverage is prompted by the industry itself through the studios' extensive publicity and promotion operations.

On the other hand, film industry insiders have produced a wide range of literature that more rigorously discusses the business practices of commercial film making in the United States. Many are aimed at Hollywood wannabes (for instance, Levy 2000), while others are mostly anecdotal essays about the industry (for instance, most anything by Peter Bart). At one time, Squire (1983, 1992) was one of the few sources that provided useful inside information on how the industry worked as a business. More recently, however, a number of industry accountants and legal experts have offered books detailing the complex financial and legal arrangements that surround the production, distribution, and retailing of commercial films (for instance, Daniels et al. 1998; Moore 2000). In addition, financial and investment advisors regularly produce detailed analysis, useful even for those not interested in investing in the industry (for instance, Vogel 2001; Cones 1996).

The supply chain for movies released for theatrical exhibition consists of the distributor, exhibitor, and the audience, as shown in Figure 5.1. The audience has opportunities to watch movies in a number of distribution outlets: domestic theaters, foreign theaters, home video, and cable and network TV, where the time lags between the releases of the movies in successive outlets differ but are typically measured in months (Figure 5.2). Despite the availability of these multiple release windows, the theatrical performance of films in the United States has been considered by practitioners to be a critical success driver: “Theatrical exhibition is the major factor in persuading the public what they want to see, even if that public never sets foot inside a motion picture theater. And how well and how long a picture plays in theaters has everything to do with its value in other markets” (Daniels, Leedy, and Sills 1998, p. 34). The main reasons as to why the theatrical experience is believed to have such a significant impact on the performance of the movie in its other distribution channels are the buzz created by the studios prior to and during the theatrical release dates, generated through high advertising spending, and the attention given by the media to box-office performance and figures. It is interesting to note that the recent phenomenon characterized as “TV screens get larger and movie theater screens get smaller” has, to date, not had a significant negative impact on the moviegoers' behavior.

In 1891, Thomas Edison and W. K. Laurie Dickson invented the Kinetoscope, the earliest ancestor of the modern motion picture. Competitive pressures soon induced Edison to alter the technology to project movies rather than show them to individual viewers, and the Edison Company introduced the Projectoscope in 1896. Repeated lawsuits against competitors over alleged patent infringements proved insufficient for Edison's ambitions; in 1908, the Edison Company joined with Biograph to form the Motion Picture Patents Company. This arrangement of interlocking agreements among studios, exhibitors, and Eastman Kodak (the primary supplier of film), however, only delayed the Edison Company's fate. Antitrust rulings against the Motion Picture Patents Company and superior movies out of California eventually forced the Edison Company to sell out in 1918.

Innovation, competition, and collusion … economics has always been the irreplaceable tool to study the motion picture industry.

In April 2003, the Weidenbaum Center on the Economy, Government, and Public Policy, in collaboration with the Department of Economics and the Department of Film and Media Studies (all of Washington University in St. Louis), presented Entertainment Economics: The Movie Industry. The first day of this conference was a public symposium with panels on digital technology, financing, and movie making. The second day was a scholars' conference with each of the following authors presenting research on his or her topic of expertise. This volume is the tangible product of that effort.

Film production is a fascinating process. A raw idea is crystallized into a full-blown production with characters, set, and story. Film projects are also very expensive commodities by any standard – the average film produced in 2002 cost $58.8 million dollars, with print and advertising costs north of $30 million (see www.mpaa.org).

Sometimes film development and production are on a fast track. In other cases, the route to production may take a very long time. For example, in 1995 the acclaimed historical novelist Patrick O'Brian met in Hollywood with Charlton Heston and Samuel Goldwyn Jr. to discuss how his literary work could be translated into the language of film. Even though his books had been extremely successful, it took eight years (during which time Mr. O'Brian passed away) for the books to be turned into “Master and Commander: The Far Side of the World,” released in December 2003.

Such a long and uncertain process is not very common in other industries, except for industries facing regulatory hurdles and/or requiring a long research and development process. In particular, one may be able to draw comparisons with the biotechnology and drug industries, which face both regulatory hurdles and a long development process with uncertain prospects.

In the studio era, which ended gradually with the Paramount decision in the late 1940s, studios controlled the entire decision process. Since then, the development process has become much more diffuse, with many ways in which films can come into existence.

Juxtapose the words “movie” and “accounting” and you have fodder for late-night television comedy or raging complaints by Hollywood heavyweights or visions of Frankenstein kitchens in which different sets of books are cooked. Even without cooking, the books themselves are often regarded as works of fiction. This chapter attempts to show why such views are, for the most part, largely exaggerated, untrue, or based on ignorance and misinformation.

THEORY AND PRACTICE

Accounting systems are designed to enable owners and potential investors to realistically portray the health and viability of any project or business. In the case of movies and television, the prospective investor may be a trader of the company's shares as well as an actor, producer, director, or some other type of financial participant. Although financial reports must be tailored specifically for the needs of the different participants, the reports are all derived from the same project sources and are based on commonly accepted rules and definitions for recognition of revenues, expenses, and, hopefully, profits.

Investors and traders in the shares of large companies, for instance, do not need nor necessarily want to know how every participant in every film distributed or produced by the company has been compensated. Conversely, creative participants will typically be more interested in the compensation potential from their own film projects than in how the global conglomerate that owns the studio also managed to profit and grow from investments in cable networks and systems, broadcast stations, recorded music operations, theme parks, and myriad other ventures.

Is a movie the primary product of Hollywood studios, or a “loss leader” for a stream of products that produces more than half the total revenue earned from each new Motion Picture Association of America (MPAA) release? According to data from the 2002 MPAA Economic Report (www.mpaa.org), the domestic box office totaled $9.5 billion, and the international box office gross was $9.6 billion, but the VHS and DVD rental and sales market totaled more than $20 billion. Viewed alternatively, the average MPAA-released film in 2002 earned domestic box-office revenues of $32.5 million but cost $59 million to produce and another $31 million for distribution and marketing (Table 6.1). Although Hollywood studios acting as distributors earn profits from distribution, ancillary products are crucial by design for the success of Hollywood.

This chapter has three objectives. The first is to establish the magnitude of the major ancillary products. The second is to examine the nature of the relationships among these markets. The third, and most important, is to raise a set of challenging research issues that is important from the standpoint of both academic researchers and industry professionals.

When the movie has been made and the costs have been paid, it is time for the distributor to send the movie into the world of potential consumers to find the largest possible audience. Whereas the theatrical life of a movie now represents only one of several revenue-generating components, the launching of a movie has implications that reverberate for the rest of its commercial life. Consequently, this chapter focuses on how movies are sent into theatrical exhibition.

The theatrical release of a movie is the most visible part of its commercial life, and a number of fascinating questions are being or have yet to be addressed. How well can studios and analysts predict movies' theatrical performances? How much is an Oscar nomination worth? Is the current system of release timing the best possible one for consumers? What about for businesses? Is the vertical integration of production and distribution foreclosing independent moviemakers from having their movies shown in theaters? How important is word of mouth, and do distributors anticipate word of mouth and behave in ways to increase their own profits?

This chapter attempts several tasks. First, we examine the movies that were launched in 2002. This was a fairly typical year, and its consideration will instruct later efforts. Second, we integrate a small portion of the extant marketing and economics literature, providing general implications made possible by that integration. The chapter concludes with ideas and directions for future research.