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OMGF > 3 - Internationalization Theories and Foreign Direct Investment > Flashcards

3 - Internationalization Theories and Foreign Direct Investment Flashcards

1
Q

ch. 3.1 Contemporary International Theories

Overview

A
  • Porter’s Diamond
  • Internationalization Process Theory
  • Born Globals and International Entrepreneurship
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2
Q

3.1.1 Porter’s Diamond

Overview

A 
Factor Endowments
Demand and Supply Conditions
Advantages of Regional Clusters
Firm strategy, structure and competition
The Role of Coincidence and of the State
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3
Q

3.1.1 Porter’s Diamond

Porter’s Diamond

A

The analysis of the target country’s ‘Diamond’ unveils its relative international competitiveness and may lever specific competitive advantage to the ‘going-international’-firm!

Observation

Phenomenon:

  • Individual countries often have distinct industries in which they traditionally outperform other nations
  • Globally successful companies very often have the same country of origin (global champions)

Argumentation:
- The competitiveness of a nation or distinctive national industries depend on four (+2) self-enforcing factors that determine the industries “playing ground”

Conceptualization
Porter’s self-enforcing (Diamond) systematic to explain the competitive advantages of nations

Fully connected graph, except for the 2 last

  • Demand conditions
  • Related and supporting industries
  • Company Strategy, structure and competition
  • Factor conditions
  • State
  • Coincidence
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4
Q

3.1.1 Porter’s Diamond

Factor Endowments

A

Important for a competitive advantage is not the endowment with basic factors, but the way they are created, upgraded and deployed

  • Focus: knowledge and competencies
  • Excursus: Resource Based View: valuable, rare, inimitable, organizable (VRIO)

But disadvantages in basic factors can lead to investments in advanced factors (innovation)

Basic Factors:

  • Natural resources
  • Climate
  • Location
  • Demographics

Advanced Factors

  • Venture capital
  • Skilled labor
  • Research facilities
  • Technology
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5
Q

3.1.1 Porter’s Diamond

Demand and Supply Conditions

A

Demand:

  • Structure of demand “shapes” the capabilities of firms
  • Focus: sophisticated and demanding consumers
    • Their needs impact quality and innovation

Supply:

  • Presence of internationally competitive suppliers is beneficial
    • Spillover of knowledge, technologies, quality and innovation
    • Example: German automotive suppliers and success of automotive producers
    • Example: U.S. University Stanford and Silicon Valley
  • Successful industries tend to be grouped.
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6
Q

3.1.1 Porter’s Diamond

Advantages of Regional Clusters

A

Cost reduction through local agglomeration / networked infrastructure / lower costs of transactions

  • Services (Consulting, IT, Marketing)
  • Finance
  • Suppliers

Better access to specific resources

Local access to “social capital” (e.g. experts, engineers, universities)

“Spillover-Effects” in social networks

  • Knowledge sharing through personal exchange
  • Personal relations with banks, VCs etc.

Access to public funding

Disadvantages of “regional” isolates?

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7
Q

3.1.1 Porter’s Diamond

Firm strategy, structure and competition

A

National context and circumstances influence:

  • organization and management
  • structure of competition

Firm strategy, structure and competition
- Refers to the firm strategies and structures and to the nature of competition, prevalent in the target
country.
- Determinants of strategy and structure:
* Managerial practices/ideologies
* Organizational modes and culture
* Company goals
* Individual achievement goals
- Determinants of competition:
* Intensity (high/moderate/low)
* Character (e.g. imitation/innovation)

Role of target market firms as…
…future competitors
- Assessment of target country’s industry dynamics, e.g.: (Model of Hypercompetition)

…potential future alliance partners

  • Assessment of domestic firm’s relevant knowledge base, e.g.:
    • Existing education and research institutions
    • Access to sophisticated technical and managerial know-how
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8
Q

3.1.1 Porter’s Diamond

The Role of Coincidence and of the State

A

Coincidence
- Can lead to changes in the competitive position

The State
- Can have an influence on all primary elements of the “diamond” and change them positively or negatively
- But: state policy is only successful in industries in
which there exist fundamental determining factors of the national advantage

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9
Q

3.1.1 Porter’s Diamond

Evaluating Porter’s Theory

A
  • Does his model predict the pattern of international trade that we observe?
  • What about MNCs who operate in multiple industries?
  • Primarily valuable analytical tool
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10
Q

3.1.2 Internationalization Process Theory

Overview

A

Internationalization Process Theory
The Uppsala Model (1977)
The Uppsala Model Revisited (2009)

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11
Q

3.1.2 Internationalization Process Theory

Internationalization Process Theory

A

Learning based explanation

  • Model suggests a gradual, evolutionary path to internationalization
  • The slow and incremental nature of internationalization by the firm results from the uncertainty that managers have about cross-border transactions
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12
Q

3.1.2 Internationalization Process Theory

Stages in the internationalization process of the firm

A
  • Domestic focus
  • Pre-export stage
  • Experimental involvement
  • Active involvement
  • Committed involvement
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13
Q

3.1.2 Internationalization Process Theory

The Uppsala Model (1977)

A

Learning process
- Accumulated knowledge leads to commitment leads to risk intensive entry modes:

Market knowledge
leads to
Market commitment
leads to more
Market knowledge
etc..

Critical Evaluation:

  • Restricted to early phases of internationalization
  • No operationalization of knowledge (amount; type)
  • No consideration of timing and sequencing
  • No consideration of parallel entries
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14
Q

3.1.3 Born Globals and International Entrepreneurship

Overview

A

Born Globals vs International Entrepreneurship:

Born Globals:
- Most recent extension of Uppsala Model
- Model of a slow, gradual internationalization process is no longer realistic in today’s fast-paced
and inter-connected economy
- Many firms (even young or without much experience) take bold steps to internationalize
- Emergence of Born Global companies – young, entrepreneurial firms that take on internationalization early in their evolution and leapfrog into global markets.

International Entrepreneurship:
- Attention on exploring the motivations for, the pattern of, and the pace of internationalization by
new ventures

Three Key factors influencing International Entrepreneurship

Conceptual Model of International Entrepreneurship

Born Global Firms - Examples
eBay
Logitech

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15
Q

3.1.3 Born Globals and International

Three Key factors influencing International Entrepreneurship:

A

Factors:

  • Organizational
  • Environment
  • Strategic
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16
Q

3.1.3 Born Globals and International

Conceptual Model of International Entrepreneurship

A 
International Entrepreneurship 
Dimensions 
1) Extent 
2) Speed 
3) Scope

3 Key factors + Dimensions = competitive advantage

17
Q

3.2.1 Concepts of FDI

Overview

A

Definition

  • Portfolio Investment
    • The purchase of stocks and bonds to obtain a return on the funds invested (passive)
  • Foreign Direct Investment
    • Transfer of equity funds to other nations to gain ownership and control of foreign assets (active)

Forms

  • Greenfield Investments
    • Establishment of a new operation in a foreign country “from the scratch”
    • Companies typically invest in empty plots of land and build new facilities (i.e. production plants)
  • Mergers & Acquisitions
    • In a merger two (or more) firms join to form a new entity
    • Acquisition: Buying control of a corporation either hostile or friendly
Reasons for Foreign Direct Investments
FDI Theories (selection)
Eclectic Paradigm (Dunning 1979, 1995)
18
Q

3.2.1 Concepts of FDI

Reasons for Foreign Direct Investments

A

Market-seeking motives

  • Gain access to new markets or opportunities
  • Follow key customers
  • Compete with key rivals in their own market

Resource or asset-seeking motives

  • Access raw materials
  • Gain access to knowledge or other assets
  • Access technological and managerial know-how available in a key market

Efficiency-seeking motives

  • Reduce sourcing and production costs
  • Locate production near customers
  • Take advantage of government incentives
  • Avoid trade barriers
19
Q 
3.2.1 Concepts of FDI
FDI Theories (selection)
A
  • Monopolistic Advantage Theory (Hymer/Kindleberger 1969)
  • Internalization Theory (Buckley/Casson 1976) / Transaction-Cost-Theory
  • Eclectic Paradigm (Dunning 1979, 1995)
20
Q 
3.2.1 Concepts of FDI
Eclectic Paradigm (Dunning 1979, 1995)
A

FDI is not dependent on one factor, but on several factors

Three conditions determine firms
internalization via FDI (answer yes to all):
- Ownership-specific advantages
    * no: No internationalization
- Internalization advantages
    * no: Licensing
- Location-specific advantages
    * no: Export
    * yes: FDI

Critique:

  • Theory does not connect the conditions
  • Deterministic; theory does not explain multiple internationalizations (different strategies in multiple countries)
21
Q

3.2.2 Advantages and Disadvantages of FDI

Benefits and Costs of FDI for the HOST Country

A

Benefits of FDI for Host Country:

Resource transfer effects

Balance of payments effects
- FDI can help a country to achieve a current surplus if the FDI is a substitute for imports of goods and services, and if the MNE uses a foreign subsidiary to export goods and services to other countries

Effects on competition and economic growth
- Competition can lead to increased productivity growth, product and process innovation, and greater economic growth

Costs of FDI for Host Country:

Possible adverse effects of FDI on competition within the host nation

Adverse effects on the balance of payments

The perceived loss of national sovereignty and autonomy

22
Q

3.2.2 Advantages and Disadvantages of FDI

Benefits and Costs of FDI for the HOME Country

A

Benefits of FDI for Home Country:

  • The effect on the capital account of the home country’s balance of payments from the inward flow of foreign earnings
  • The employment effects that arise from outward FDI
  • The gains from learning valuable skills from foreign markets that can subsequently be transferred back to the home country

Costs of FDI for Home Country
- The home country’s balance of
payments can suffer:
* From the initial capital outflow required to finance the FDI
* If the purpose of the FDI is to serve the home market from a low cost labor location
* If the FDI is a substitute for direct exports and/or a substitute for domestic production

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