Strat 2 Midterm

3 characteristics of a multinational enterprise (MNE)

• Substantial direct investment in foreign countries (not just trading relationships of an import-export business)

• Active, coordinated management of these offshore assets (not simply holding them as a passive financial portfolio)

• Strategic and organizational integration of operations located in different countries

What are 2 traditional motivs to internationalize vs. 3 modern motivations

Traditional:

1. Market seeking: fill out capacity, exploit comp advs and economies of scale and scope

2. Resource seeking (resource-based theory)

• Secure key supplies

• Exploit factor cost differences (access low-cost factors of production), lower cost capital

Modern (post 1970)

1. Industry internalization forces: scale economies, ballooning R&D investments, shortening product life cycles, home country regulations

2. Global scanning and learning capability: Access to emerging trends, new tech, and best skills worldwide (effect of globalization)

3. Competitive positioning: eg. use global operations to pre-empt others, cross-subsidize markets

4 disadvantages and 5 challenges of internationalization

Disadvantages

• Risk of failure

• High amount of resources required

• Negative image in the domestic market

• Decision may be difficult to reverse

Challenges

• Economic differences

• Political-legal environment

• Cultural environment

• Technological environment

• Local industry structure

MACRO Environment: PESTEL

MICRO Environment: Porter’s 5 Forces

What are the means of internalization (control over foreign activities on y axis, amount of resources committed to foreign market x axis)

CAGE Framework

Cultural distance: different languages, different religions, different social norms

Administrative and political distance: Trade and political unions, common currency, tarriffs, trade quotas, restrictions on foreign direct investment, subsidies to local firms, property rights, corruption, weak institutions, political instability

Geographic distance: distance to country, within-country distances, access to waterways and oceans, transportaion and communication infrastructures

Economic distance: wealth and income of customers, resource and factor costs

Global integration and national responsiveness for internalization strategies

Global: Low national responsiveness, high global integration

Multinational: High national responsiveness, low global integration

Transnational: High national responsiveness+ high global integration

What are the mentalities for global, multinationa, and transnational?

Global: company views world as a single unit of analysis; products are developed for the global market; emphasis on global efficiency; operations managed centrally

Multinational: Company overseas markets are considered a portfolio of local opportunities; local adaptations to products and strategies

Transnational: Company simultaneously responds to local needs and global demands; balance local responsiveness and global efficiency; dispersed, specialized, and integrated global activities

What are the 3 major drivers of internationalization?

1. Need for cross-market or global integration

2. National or local responsiveness

3. Worldwide innovation and learning

Forces for global integration + coordination

• Economies of scale and scope

• Factor cost differentials (labour, raw materials)

• Increasingly liberalized environment for trade (EU, USMCA, WTO, CETA) - Trade agreements

• MNEs/Global competitors as change agents:

  • change product/operational context to foster global integration and coordination (eg. starbucks with premium coffee shops)

Forces for national or local responsiveness (think CAGE)

1. Cultural differences: customer behaviour and preferences

2. National infrastructure: technical standards (eg. voltage, tv broadcast)

3. Government demands, political risk: national laws and regulations, host country pressures and demands

4. Local competitors success: Culturally sensitive flexibility and responsiveness, appeal to nationalism

5. Customers: income, preference, habits, consumption patterns

6. Economy: GDP, disposable income, inflation, growth

Forces for worldwide innovation and learning

Increased need due to:

• shortening product life-cycles

• Increased cost of R&D

• Emergence of global technology standards (think USB-C)

• Competitors ability to develop and diffuse innovational globally

How do global, multinational, and transnational industries respond to diverse forces differently?

Global: Affects those shaped primarily by economic forces for globalization (eg. consumer electronics) and need for global integration. Successful MNEs are those that capitalize on highly centralized, scale-intensive manufcaturing and R&D operations and leveraging them through worldwide exports of standardized global products

Multinational: Those shaped primarily by national, cultural, social, and political forces of localization - successful MNEs are those building strong, resourceful national subsidiaries sensitive to local needs and able to develop or adapt products and strategies to respond to their local needs, opportunities, and demands

Transnational strategies: Means responding to all 3 forces, industries are increasingly becoming this, should be the goal of all MNCs

Political risk framework

Understand

• what is my org’s political risk appetite?

  • time horizong of major investments, availability of alt investments, ease of exiting investments, visibility to consumers

• is there a shared understanding of our risk appetite

  • make sure its a concern from boardroom to sales floor

• how can we reduce blind spot?

  • foster creative thinking, guard against groupthink

Analyze

• how can we get good information about the political risks we face?

• how can we ensure rigorous analysis?

  • challenge assumptions and mental models, understand which assets are valuable + vulnerable

• how can we integrate political risk analysis into biz decisions?

Mitigate

• how can we reduce exposure to the political risks we have identified

  • strategies: dispersing critical assets, creating surge capacity and slack in supply chain, sharing political risk assessments and mitgation strategies

• do we have a good system and team in place for timely warning and action

  • set up effective warning systems, establish protocols so that repsonses to specific conditions r triggered automaticall

• how can we limit the damage when something bad happens

  • build relationships with external stakeholders

Respond

• are we capitalizing on near misses

• are we reacting effectively to crises

• are we developing mechanisms for continuous learning

What are techniques MNEs use to mitigate country political risks

• Recruiting local partners

• Limiting R&D in nations with leaky IP protection

• Purchasing insurance against political risks (from multilateral investment guarantee agency or AIG)

• Diversifying their FDI across diff countries