Introduction to International Business NOT BY ME

MNE

Multinational Enterprise

FSAs

Firm Specific Advantages

Why are FSAs necessary?

MNE's need certain internal strenghts to overcome the additional costs of doing business abroad

What's a characteristic of transferable FSAs?

Keep value when crossing borders

What is the paradox of transferable FSAs

If FSA consists out of easily codifiable knowledge, it is easy and cheap to transfer abroad. HOWEVER: FSA is also easily imitated by other firms

Transferable FSAs

FSAs which keep value when crossing borders

What is a FSA consisting out of Tacit Knowledge

Requires person-to-person communication and sending human resources abroad (expensive and time consuming, but valuable)

What's a MNEs heritage?

The key routines developed by firm since its inception

Where lies the most important bundle of tacit knowledge regarding MNEs?

Is contained in the MNEs heritage:

1. Centralized exporter
2. International projector
3. International coordinator
4. Multi-centered MNE

Centralized exporter

Standardized products are manufactured at home. MNE is managed from home. Final product \= firm's FSA. No development of new FSAs in host country. Minor, customer oriented value-creating activities abroad. Essentially, a market seeker. E.g.: Warner Bros

International projector

FSAs from home are copied. Only internationally transferable FSAs are taken abroad. No development of location-bound FSAs in host country. Essentially clones of home operations. Projects its successful home recipe abroad. E.g.: Ford and Disneyland

International coordinator

Efficiency seeking MNE. Specialized in specific value-added activities. Form vertical value chains abroad. Does different parts of the production process in different countries. Main FSA is ability to coordinate location advantages of multiple hosts. E.g.: BP and Shell

Multi-centered MNE

Does everything (produce/sell) in host country. Adapts to host country. Local responsiveness is its foundation. Only transfers core routines from home. Builds new location-bound FSAs in host country. Basically independent businesses all over the world. E.g.: McDonalds, sells burgers everywhere but McKroket in NL, McArepa in Vzla etc.

What are the 4 MNE archetypes?

1. Centralized exporter
2. International projector
3. International coordinator
4. Multi-centered MNE

What are the 4 types of location bound FSAs?

1. Stand-alone resources
2. Other resources
3. Local best practices
4. Recombination capabilities

What are 'stand alone resources' in terms of location bound FSAs?

Linked to location advantages. E.g.: certain market/network which is immobile

What is another description for Location-Bound FSA?

Non transferable FSA

What is another description for Non-Location Bound FSA?

Transferable FSA

What is another description for Transferable FSA?

Non location bound FSA

What are 'other resources' in terms of location bound FSAs?

FSAs which do not have same value abroad because they are not applicable to host country or not as valuable as in home country. E.g. local marketing knowledge and reputation

What are 'local best practices' in terms of location bound FSAs?

Routines which are highly effective and efficient in home country, which might nog be the same abroad. E.g. incentive-systems for workers or buyer-supplier relations

What is 'recombination capability' in terms of location bound FSAs?

May have led to success and expansion in home market due to product diversification or innovation, but might not be adept to tackle additional complexities of foreign markets. Highest order FSA for MNEs. Can help to transfer existing FSAs, create new knowledge and integrate it with existing knowledge to exploit the result.

What are the 7 types of 'unique resources' a MNE should develop?

1. Physical resources
2. Financial resources
3. Human resources
4. Upstream knowledge
5. Downstream knowledge
6. Administrative knowledge
7. Reputational resources

Physical resources

natural resources, buildings, plant equipment

Financial resources

equity and borrowed capital

Human resources

individuals and teams, entrepreneurial and operational skills

What are routines?

Stable patterns of decisions and actions that coordinate the productive use of resources (thereby generating value either domestically/internationally). Repeated processes.

Upstream knowledge

product and process-related technological knowledge

Downstream knowledge

marketing, sales, distribution and after-sales service

Administrative knowledge

organizational structure, culture and systems

Reputational resources

brand name, reputation for honest business etc

FSAs

Stand alone resources
+
Routines
+
Recombination skills
\=?

Recombination skills

The heart of international business strategy. Orchestration of resources (especially knowledge bundles) as response to differences between home/host country environments. Entrepreneurial judgment at heart of MNE's recombination capabilities. Skills to diversify.

Why go abroad? What are the types of multinational activities?

1. Natural resource seeking
2. Market seeking
3. Efficiency seeking
(4. Strategic resource seeking
5. Export platform MNE activity)

Bounded rationality

Imperfect assessment. Information is partial/incomplete. Limited mental capacity managers. Differences in cognitive decision making between home and host.

Bounded reliability

Imperfect effort. Opportunistic behavior. Local prioritization. Agents do not always carry out their expressed intentions. Distance from HQ monitoring. Sources: opportunism & preference reversal

Location Advantages

Strenghts of specific location. Reasons why MNE would go there.

What are reasons for MNE to go to a certain country?

1. Abundant natural resources
2. Superior educational system
3. Presence of demanding/sophisticated local market

What does sometimes happen regarding Location Advantages?

Sometimes they are only applicable to firms operating in certain parts of a country (e.g. in economic clusters);
Sometimes they can reach across country borders (e.g. the North American Free Trade Agreement)

What is Foreign Direct Investment?

Allocation of resources (physical, financial, human, knowledge and reputational) by MNE in host country, with purpose of performing business activities over which MNE contains strategic control there. Should only engage in it if host country has location advantage relative to home country.

What does FDI stand for?

Foreign Direct Investment

Natural Resource Seeking

Search for physical, financial or human resources in host countries (location advantages). Investment abroad should leads to higher value creation than investment at home. Precondition: access must be allowed. E.g.: Exxon Mobil buying/developing new oil fields in new countries

Market Seeking

Search for customers in host country. Must have presence of customers willing and able to buy firm's products. Not for centralized exporter because this involves business activities in host country. E.g.: expansion of McDonalds

Strategic Resource Seeking

'Unique resources' - Searching for access to advanced resources such as upstream knowledge (product- and process related technological knowledge), downstream knowledge (critical for interface with customers), administrative knowledge (knowledge regarding the functioning of the organisation) and reputational sources. E.g.: Samsung taking over other companies with certain tech knowledge

Efficiency Seeking

Desire to capitalize on changes in environment that make specific locations more attractive than before. Can be: technological breakthroughs, increased industry focus on innovation, shorter product cycles, reduction of trade/investment barriers, e.g.: NAFTA and EU

What are complementary resources of external actors and why are they needed?

Sometimes a certain success ingredient can be missing when going abroad, which can be provided by external actors (providers, distributors, licensees, partners etc from host country) to overcome the 'distance'

What are the concepts of unifying framework by Verbeke?

1. Non-location bound FSAs
2. Location bound FSAs
3. Location advantages
4. Recombination (investments&value-creation)
5. Complementary resources
6. Bounded rationality
7. Bounded reliability

Name 2 Problems when going abroad?

1. Bounded rationality
2. Bounded reliability

What is Verbeke's view on International Business activity?

Balanced view: interaction between firms and their FSAs and the locational characteristics of home and host country
Firm factor (role of firm) and country factor (home/host country).
While borders might change, culture remains. Interaction is not static, it may change over time.

What are Prahalad & Hamel's core competences?

Core competences are higher order FSAs (but difficult to distinguish from FSAs)
- Vital routines
- Recombination capabilities (entrepreneurial ability)

Core competences produce core products

What are the characteristics of core competences by Prahalad & Hamel?

1. Difficult for competitors to imitate
2. Provide potential access to a wide variety of markets
3. Make significant contribution to the perceived customer benefits of end product (customer needs)
4. (Especially important for large MNEs) Loss of core competence would have a huge negative effect on the firm's present and future performance

What is the role of strategic management?

To develop '..' architecture to allow focus on core competences. Develop a road map of the future that identifies core competences to build the required technologies. Either through internal resources or by external acquisitions and alliances. In long term: will help to foster company-wide innovation, competitiveness and success.

What is the key critique of core competence approach by Prahalad & Hamel?

Creators do not include country factors. Overestimate the role of strategic management. Underestimate the role of (host) country location factors

What are 2 entry modes for IB?

1. Through FDI
2. Through licensing

What are the problems related to entry modes (FDI/Licensing)?

1. Property rights: licensees can capture MNE's FSAs which can reduce value
2. External partner may have lower quality standards, which create negative spillover effects for the MNE, such as bad reputation
3. In case of FDI: MNE has to learn how to deal with new governments and foreign employees/work practices
4. Impact of using outside actors on development trajectory of MNE's recombination capabilities

What is Prahalad & Hamel's view?

Company's main strategy should be to build or acquire core competencies. Senior managers need to rethink the concept of the large diversified firm seeking worldwide leadership: its more than a group of independently managed business units/subsidiaries.

What is Michel Porter's view?

Any company's ability to compete internationally is based on interrelated set of location advantages in home country. High level of pressure in home country pushed MNE to innovate and upgrade systematically resulting in FSA creation. A nation's competitiveness depends on capacity of its industry to innovate and upgrade.

Home country + external pressures (competition) \= FSA -\> instrument for going abroad

What are the elements of Porter's Diamond (of National Competitive Advantage)?

1. Factor conditions
2. Demand conditions
3. Related & supporting industries
4. Firm strategy, structure & rivalry
5. Government and chance

What is the key critique on Porter's diamond?

FSAs in Porter's theory are completely domestically determined. Porter places too much emphasis on home country as the appropriate level of analysis. Too home country driven/deterministic

Factor Conditions

Porter.
Created factor conditions such as: skilled labour, scientific knowledge and infrastructure. Country's disadvantages can be turned into advantages (e.g.: Japan, strong in certain tech fields due to lack of natural resources; J-I-T production process as a solution to lack of affordable warehouse space). Factor conditions need to be continuously upgraded

Demand Conditions

Porter.
Not only focus on domestic market size, but also on domestic buyer sophistication. When buyers demand, external pressures on firm increases -\> competitiveness also increases. Company must respond to new customer demands by pushing the envelope on existing technology/design features.

Related & Supporting Industries

Porter.
The need for high quality/internationally competitive home-based firms (especially suppliers). Can also be universities etc. Creates ongoing exchange of ideas, timely feedback and short lines of communication

Firm Strategy

Porter.
A highly competitive, not sheltered, well functioning, home-based industry pushes firms to become internationally competitive. They create FSAs to deal with home market, but then use these for entering and exploiting international markets.

Government & Chance

Two external variables in Porter's Diamond. You need luck and governments which aren't corrupt. E.g.: decision to locate somewhere (Silicon Valley / Philips in Eindhoven)

According to Bartlet & Ghoshal you cant treat all subsidiaries the same & make all decisions in HQ. Why not?

Giving subsidiaries more power & decision making authority may help in building a FSA in the host country

Subsidiary autonomy according to Bartlet & Ghoshal depends on what?

1. The strategic importance of each market (market perspective)
2. How strong subsidiary resources such as Labor, Tech, Marketing, R&D are (company perspective)

Strategic importance of local market is HIGH & Resource base of subsidiary is LOW?

Black hole or beachhead. More resources in future

Strategic importance of local market is HIGH & Resource base of subsidiary is HIGH?

Strategic leader. Assists HQ, is a crucial subsidiary in key market. Has a lot of autonomy

Strategic importance of local market is LOW & Resource base of subsidiary is HIGH?

Contributor. Key subsidiary but not in a key market.

Strategic importance of local market is LOW & Resource base of subsidiary is LOW?

Implementer. 70 to 80% of subsidiaries are this one. Has no special role.

What does distance include according to Ghemawat?

1. Cultural distance
2. Administrative/Institutional distance
3. Geographic distance
4. Economic distance

Cultural distance

Distance component resulting from national attributes such as language, religious beliefs, social norms and race.

Administrative distance

Component reflects differences in societal institutions. Can be low(ered) if two or more countries share a common history (e.g.: colonial) or have close political ties.

Economic distance

Component which represents differences in consumer wealth, income level and distribution, infrastructure characteristics, the cost and quality of natural, financial, and human resources and prevailing business practices

What is the general conclusion regarding higher distances (Ghemawat)?

The higher the distances, the lower the trade leves will be. Imply a lower probability of success.

Why do senior managers often overestimate the attractiveness of foreign markets?

Because they fail to take into account the risks and costs associated with distance.

Geographic distance

Components that represent the physical distance between countries, taking into account the ease of transport between countries. Having a common border or easy (river/ocean) access may keep distance low

What does 'distance' do according to Ghemawat?

Gives extra risks and cost to enter new markets.

When is cultural distance higher?

When there is a preference for locally produced products or when there are no tolerances for copyright infringements

What industries are affected by cultural distance?

Soft items such as food which are selected on taste

When is administrative distance higher?

When governments raise barriers for protecting domestic industries through unilateral measures such as forbidding certain things. Can also be higher because of corruption

What industries are affected by administrative distance?

Industries with large numbers of employees which are producing essential goods and the ones that exploit a host country's key natural resources

What is another word for administrative distance?

Institutional distance

When is geographic distance higher?

Man-made elements such as transportation networks and communication infrastructure can make it higher.

What industries are affected by geographic distance?

Low value-to-weight products, perishable products and trade in services and capital because of information and infrastructure

What is the typical approach for expanding abroad by Centralized Exporters & International Projectors?

Replicating existing competitive advantages and building upon scale & scope economies. Requires standardization and is more effective with small economic distance.

What is the typical approach for expanding abroad by International Coordinators?

Exploiting differences in input costs or prices between markets. Embrace economic distance because it possesses FSAs which allows it to exploit and link the diverse location advantages of high economic distance countries.

What are limitations of Ghemawat's distance framework?

- Looks at macro level distance which does not always hold for all firms. Distance for one form doesnt have to be the same as for all firms.
- A firm's FSA may be ability to deal with these distances
- Impact of distance differs for parts of the value chain
- Assumes all FSAs are developed in home country (which is incorrect: can also develop in host country)
- Does not discuss cooperative entry modes such as joint ventures or strategic alliances

What measurements are included in Hofstede's framework?

1. Uncertainty avoidance
2. Power distance
3. Individualism-collectivism
4. Masculinity-femininity
(5. Long-term orientation
6. Indulgence vs self-restraint)

When a culture scores high on uncertainty avoidance, what do they emphasize?

Rules & regulations

When the power distance is high, what do we not expect from team members?

Initiation of action

"Are people individualistic or act like a group?" relates to what measurement?

Individualism-Collectivism

What is a good example of a country scoring high on femininity?

Sweden

"Are we interested in short or long term goals?" refers to what measurement?

Long term orientation

"Are people more pessimistic?" Or "do they emphasize more on leisure time?" have to do with what measurement?

Indulgence vs self restraint

What is CDx?

Cultural distance between country X and home country

What is Iij?

Country J's score on the I'th cultural dimension

What is IiUS?

The score of the United States on I dimension

What is Vi?

The variance of the score of that specific dimension

What's a relatively new wat of looking at leadership & CD?

-GLOBE-
Global
Leadership
Organizational
Behavior
Effectiveness