Chapter 9: International Strategy Flashcards
Foreign direct investment definition (FDI)
Direct investment in production or
business in one country by a
business from another country.
Multinational firms
Firms that sell or produce in multiple countries.
Some of the differences between countries
that increase complexity and affect the success of international strategies include variations in:
- Customer tastes, needs, and income levels
- Government regulations
- Legal systems
- Public tolerance for foreign firms
- Reliability, and even existence, of basic infrastructure, such as roads and electricity
- Strength of supporting industries, including distribution channels to customers
This chapter addresses the complexity of international strategy by answering three questions strategists ask when thinking about going international:
- Why should we go international? What specific cost
or revenue advantages might we gain? - Where should we expand? Of all the countries we
could enter, which are the right ones? - How should we expand? What international strategy
should we employ? How can we tell if we
have the right one? And, what strategic options do
we have for entering a foreign country?
Globalization
The spread of businesses across national borders.
Why Firms Expand Internationally
1) Growth
2) Efficiency
3) Managing risk
4) Knowledge
5) Responding to customers or competitors
1) Growth
The need to grow sales is one of the biggest reasons that firms expand internationally
Example: This is one of the primary reasons that Harley-Davidson started selling in
foreign markets
2) Efficiency
Many firms enter additional markets in order to become more efficient.
Efficiency takes a number of forms, including
- obtaining lower-cost resources,
- extending the lifespan of products,
- achieving economies of scale and scope.
Product life cycle
The stages a product or service goes through
during its lifespan.
3) Managing risk
Operating in more than one country can also provide firms with a measure of protection against
disaster, both economic and natural
4) Knowledge
Another reason for expanding into other countries is to acquire valuable knowledge, the basis for innovation.
When a firm sells in different countries, to people with different tastes and needs, it often gains new insights about its products and services
5) Responding to customers or competitors
Last, but not least, firms may expand internationally in response to either customers or competitors.
This is particularly true of business-to-business (B2B) firms that perform intermediate
steps of the value chain for large customers
where to expand?
The easiest answer is to enter the country with the largest number of potential customers— often, a country with a huge population, such as China or India
Four types of distance (CAGE)
cultural,
administrative,
geographic,
economic
_________________ determined by a CAGE analysis, with an emphasis on the distance that most affects your specific industry, the greater the likelihood of a successful expansion.
The lower the distance
Cultural Distance
The degree of difference between the cultures of
two nations.
Examples: refers to differences in language and culture, the way people live and think about the world. People in another country might hold different beliefs about a host of significant issues, including how people should interact and how business should be conducted
Administrative Distance
The degree of differences between the
legal and regulatory frameworks of two nations.
Example: refers to differences in the legal, political, and regulatory institutions between countries. For example, are laws and government policies similar or different between two countries?
Administrative distance is low among countries that
(1) use the same legal system, such as the common law system used in the Anglo sphere (the United
Kingdom and its former colonies, including the United States, Canada, Australia, and India);
(2) used to be part of a colonizer/colony network, such as some European countries and their
former African colonies;
(3) use the same currency; or
(4) are part of the same trading bloc, such
as NAFTA in North America or the European Union.
Industries most directly affected by administrative distance are those in which
governments are most likely to have a stake
Example: This includes industries that provide equipment or services critical to national security, such as providers of steel or telecommunications;
those that employ large numbers of people; those that serve government directly, such as
mass-transportation equipment manufacturers; those that extract natural resources; and
those that produce staple goods that most people buy, such as rice in Thailand or corn in Mexico
Geographic Distance
The distance in miles, or kilometers,
between two countries.
Companies are more likely to succeed in nearby countries, because physical proximity lowers
both transportation and communication costs
That’s one reason most US companies expand
first to Canada and Mexico
Economic Distance
The degree of difference between the average
income of people in two different countries.
-usually measured as per capita GDP (gross domestic product
Firms from wealthy nations tend to expand to other wealthy nations because the customers there earn enough income to buy similar products.
The industries most affected by economic distance are those for which
the demand for the demand for products is very elastic—meaning demand changes dramatically as prices go up or down
