General Frameworks for the Global Firm - Lecture 2

Introduce key conceptual frameworks from the international business "toolbox,"
including the eclectic paradigm and the CSA–FSA framework, which capture
ownership advantages, location advantages, and internalization advantages.
Explain why firms become multinational enterprises (MNEs) —what motivates them to expand abroad.
Understand the internationalization process.
Describe the international activities of small and medium-sized enterprises (SMEs).

A framework for Global Strategies: FSA –CSA Matrix
- STRUCTURE: WHAT ADJUSTMENTS?
- COUNTRY CSAs
- STRATEGY: WHAT CHANGES?
- FIRM FSAs

Based upon Stephen Hymer’s (1976) Monopolistic Advantage Theory.
The theory was developed after neoclassical theories in economics proved ineffective in explaining how foreign firms were able to compete against domestic firms.
Hymer argued that the MNE’s success lies in its access to a ‘package (or bundle) of resources’ including technology and management skills that offered the owner monopolistic advantages to outcompete indigenous firms.
These monopolistic advantages were either:
- Not available to local firms, or;
- Superior to the assets of local firms.

A unique capability proprietary to the organization.
It may be built upon product or process technology, marketing or distributional skills.
There are three types of Ownership advantages:
- Asset-type (physical assets, proprietary knowledge content, whether embodied in intellectual, property, or in technical personnel).
- Transaction-type (ability to generate rent by the use of superior intra-firm hierarchies, both intra-firm, and between firms and markets).
- Recombinant-type (ability to recombine the firms own assets with other internal and external assets).

COUNTRY-SPECIFIC ASSETS (CSAS): COUNTRY FACTORS
Natural resource endowments (minerals, energy, and forests), the labor force, etc.
In principle, Location advantages should be accessible to all. However, this may not be the case as:
- Full information about Location advantages associated with a specific location may not be readily available;
- Even where information is available, there may be costs associated with accessing this knowledge;
- Location advantages may be made available (or denied) by the actions of governments that seek to encourage (or restrict) the activities of a particular group of actors by introducing barriers to their use of certain Location advantages.

Ownership factors (O): FSAs
Location factors (L): CSAs
Internalization factors (I): FSAs
O and I, in practice, are integrated features of FSA Management within the MNE that cannot be decoupled in strategic decision making.

The goal of external environmental analysis is to identify opportunities and threats that will need to be addressed.
The purpose of an internal environmental analysis is to evaluate the company’s financial and personnel strengths and weaknesses.
Internal and external analyses will help identify long-term (2–5 years) and short-term (<2 years) goals.

Once goals have been established, the plan is then broken into major parts and each affiliate and department is assigned goals and responsibilities.

Progress is periodically evaluated and changes are made in the plan to accommodate changing circumstances and new information.

QUAD 1) Resource-based and/or mature, globally-oriented firms producing a commodity-type product
→ Cost Leadership (Improving FSA can make them move to quadrant 3.)
QUAD 2) Inefficient, floundering firms
→ No alternative but to exit or to restructure
QUAD 3) Follow any of the generic strategies
→ Both Cost Leadership & Differentiation
QUAD 4) differentiated firms with strong FSAs in marketing and customization
→ Differentiation (the CSA is not relevant)

INTERNATIONALIZATION: THE PROCESS BY WHICH A COMPANY ENTERS A FOREIGN MARKET.
Not all international business is done by MNEs. Indeed, setting up a wholly-owned subsidiary is usually the last stage of doing business abroad.
Why do businesses wait to set up wholly-owned subsidiaries?
- Foreign markets are risky.

When the firm decides to enter a new market, the first step is to decide whether it will opt for non-equity or equity entry modes.
At the first stage, it may want to avoid the risks of high commitment to unknown (foreign) markets by arranging non-equity modes, such as exports, contractual agreements, licensing or franchising agreements.
The firm may later move to equity modes (FDI), such as partial or full acquisition, which involve higher commitment to the foreign markets and often require higher knowledge or experience.

Initially, the firm might license patents, trademarks or technology to a foreign company in exchange for a fee or royalty.
The firm sees a potential for extra sales by exporting and uses a local agent or distributor to enter a foreign market.
The firm may use exporting as a “vent” for its surplus production and might have no long-term commitment to the international market.
As exports become more important, the MNE will set up an office for its sales representative or a sales subsidiary.
The firm might set up local packaging and/or assembly operations.
Finally, the firm will set up a wholly-owned subsidiary (FDI).

Smaller firms perceive Internationalization differently. There are two approaches:
- An increasingly common term in the academic literature is the ‘Born Global’ firm.
- Born global firms are immediately or very quickly reliant on a foreign presence to derive significant competitive advantage from the use of resources and the sale of outputs.
- Leveraging particular firm-specific advantages (FSAs), such as new technologies, unique products or services, or a valuable capability derived from one or more locations, born global firms serve customers locally or globally.