Einheit 5: International Economic Actors Flashcards
multinational firms
International business activity is carried out by multinational firms, countries only
establish the framework.
Global Presence: Operate in multiple countries, establishing a substantial and often diversified presence in various regions around the world.
Diverse Business Activities: Engage in diverse business activities, including
production, marketing, research and development, and sales, across different countries.
Complex Organizational Structure: Typically have complex organizational structures,
often with a centralized management coordinating operations across different
subsidiaries or business units in various countries.
Multinational firms can have various different faces: MNEs, Born Globals, SMEs,…
MNEs
MNEs such as VW develop, produce and market their products across markets
Scale: Large corporations with a significant global footprint. They have established
operations in multiple countries and operate on a global scale.
Foreign Direct Investment (FDI): MNEs make substantial investments in foreign
markets, often through FDI, acquiring assets or establishing subsidiaries.
Global Supply Chains: They often manage extensive global supply chains, sourcing
inputs and components from different countries to optimize production processes.
Risk Management: Operating in multiple countries exposes MNEs to various risks,
including currency fluctuations, geopolitical instability, and regulatory changes.
Adaptation: MNEs might have very different approaches in different countries e.g. production of VW Beetle stopped in Germany in 1978, in Mexico 2003
SMEs
SMEs = Small & Mediun-sized Enterprises such as Toms often enter global markets more gradually
Scale: Generally smaller with a more localized or regional focus.
While some SMEs may engage in international trade, their operations are typically on a smaller scale compared
to MNEs.
Internationalization: May begin as local or regional businesses. If they choose to
internationalize, may do so at a more gradual pace than Born Globals.
Capabilities: May have limited resources compared to MNEs but can still engage in
international trade, often focusing on niche markets or specific regions.
Organizational Complexity: Usually have simpler organizational structures, with a
more localized or regional focus, and may face challenges in establishing a global
presence.
Flexibility: Often more agile and flexible in responding to market changes and adapting to evolving business conditions due to their smaller organizational structure.
Born Globals
Born Globals such as Airbnb navigate the global stage from day one
Immediate Internationalization: Characterized by their rapid and early engagement in international markets shortly after establishment.
Global Mindset: Born Globals have had a global mindset since its foundation, intending to operate globally rather than focusing solely on domestic markets.
Technologically Savvy: Often leverage technology to facilitate their global operations, utilizing digital platforms, e-commerce, and online marketing.
Innovative Products or Services: Typically offer innovative and niche products or
services that have global appeal, allowing them to quickly attract an international
customer base.
Network-Based Operations: Tend to rely on extensive networks, partnerships, and
alliances to establish a global presence and overcome resource constraints.
liability of foreignness
Liabilities of foreignness (LOFs), refer to the disadvantages or challenges that
foreign firms may face when operating in unfamiliar or foreign markets.
These liabilities arise, for example, from differences in formal and informal
institutional conditions between the firm’s home country and the host country where
it operates.
Essentially, LOFs represent the costs and obstacles associated with being an
outsider or foreign entity in a particular market.
The LOF arises in the form of unfamiliarity costs, relational costs, and
discrimination costs in host country markets.
One important consequence of the existence of LOFs is that – to be able to
successfully internationalize – firms must hold a sustainable competitive advantage
over local firms. Otherwise, the cost disadvantage may outweigh the potential benefits of internationalization.
strategies to earn competitive advantages
Cost Leadership strategy:
▪ Focus on achieving the lowest cost of production and operation within an industry
▪ Achieved through economies of scale, efficient processes, supply chain optimization,
volume production
Differentiation strategy:
▪ Unique and distinctive products to charge premium prices and attract customers
seeking these unique features
▪ Achieved through innovation, strong brand management, and effective
communication with potential customers
Focus Strategy:
▪ Cost-Focus: Offer products at the lowest cost in a narrow market segment
▪ Differentiation-Focus: Cater to unique preferences in niche markets
-> Competitive advantage: lower cost vs. differentiation
-> competitive scope: broad target vs narrow target
-> need to decide which strategy to pursue and avoid being stuck in the middle
following different motives
In simple terms, increasing profits can either take place by an increase in revenue, or by a decrease in cost.
Both objectives can be achieved either by exploiting existing advantages or by exploring new ones.
International business researchers have identified four main categories of
motivation. The first three aim to exploit already existing advantages while the fourth (strategic asset seeking) aims to create new advantages.
Market Seekings
Resource Seeking
Efficiency Seeking
Strategic Asset Seeking
Market Seeking Motive
By entering foreign markets, companies can tap into new customer bases, diversify
their revenue streams, and extend the lifecycle of their products or services.
Additionally, international markets might offer different consumer preferences,
allowing firms to diversify their product lines and cater to a broader range of tastes
and demands.
Resource Seeking Motive
Firms venturing abroad to gain access to natural resources, unskilled labor, or
commodities that might be scarce, of superior quality, or more affordable than in
their home country.
Efficiency Seeking Motive
Firms enter other countries with the goal of promoting a more efficient division of
labor or specialization, thereby reaping economies of scale and scope.
Strategic Asset Seeking Motive
Firms seek to access resources that either enhance an existing competitive edge or
diminish a competitor’s advantage. This motivation goes beyond immediate financial gains and looks at the long-term strategic positioning of the firm.
First Mover Advantage
First mover can select the most lucrative business opportunities, establish
robust distribution networks, shape consumer preferences, and accumulate
valuable location experience.
Furthermore, by preemptively securing distribution channels, engaging in
aggressive marketing, and promoting their brand, these pioneers can create
barriers to entry for subsequent entrants.
First Mover Disadvantage
First movers and early followers often grapple with heightened market and
regulatory uncertainties.
They bear the costs associated with pioneering a new market, which can be
time- and resource-intensive.
strategic options on how to grow internationally
Value Chain Activities
When entering a market, firms can decide what elements of the value chain
they want to operate in the market. Just sales, sales, and production, maybe
also R&D and/or sourcing. Multiple alternative combinations are possible.
Ownership
Firms can decide to enter a market with full ownership (wholly owned investment), shared ownership (joint venture), or no ownership (export,
license)
Establishment of Ownership
When deciding on a shared or full ownership entry mode, firms can decide
whether they want to set up a new company or acquire an existing one.
Joint Ventures
Joint Ventures can have two or more partners
Partners share equity in an investment (the joint venture)
Partner firms remain legally independent
In 1984, Volkswagen set up the Shanghai Volkswagen Automotive Co.
Ltd. (now SAIC Volkswagen Automotive Co. Ltd.), an International Joint
Venture with three Chinese Partners.
integration-responsiveness challenges
On the one hand, firms face forces to integrate activities across countries
-> Integration, i.e. interconnecting activities across countries, can create economies
of scale and learning curve effects (see next two slides)
On the other hand, firms are confronted with forces for local responsiveness
-> Heterogeneous market structures and different formal and informal institutions
across markets can require firms to adapt strategies, structures, and offerings,
among others, to assure success in the market.
The choice between integration and responsiveness is complex
-> A high level of integration increases efficiency but may not resonate with local
customers
-> A high level of responsiveness increases fit to local markets but may decrease
efficiency and lead to higher costs
Economies of scale
Economies of scale are
efficiency gains as a
consequence of size
Examples:
▪ Bulk buying reduces
cost per unit due to
increased negotiation
power
▪ Fixed-cost degression
in production reduces
fixed costs per unit
▪ Marketing cost per unit
can often be reduced
with increasing sales
volumes
drive the efficiency of integration
learning curve
Learning curve effects
result from experience,
not from pure volume
Rule of thumb:
▪ Cost per unit of a
standardized product
decrease by a
constant percentage
(often 20-30%) when
the cumulative output
doubles
▪ Consequently, relative
efficiency gains
decrease over
time/produced volume
drive efficency of integration
IR matrix
Based on forces for integration and responsiveness and internal preferences,
firms can decide on the strategy they want to pursue.
Global integration high vs low
loval responsiveness low vs high
high global integr. + local responsiveness = GLOBAL STRATEGY
low global integr. + low local responsiveness = NO ADVANTAGES
high global integ. + high local responsiveness = TRANSNATIONAL STRATEGY
low global integr. + high local responsiveness = MULTIDOMESTIC STRATEGY
Reality Check: While we observe substantial variation in global
strategies, hardly any firms follow a purely global or purely multidomestic approach – but we can observe clear tendencies toward strategies
global strategy
Integration pursues the creation of a global brand
image, utilization of economies of scale, and the
reduction of costs
Apple is a good example of a firm pursuing a very
global strategy
Multidomestic strategy
Responsiveness leads to focus on local customer needs
and differentiation across markets in respective countries
Wienerberger is an interesting example of a firm pursuing a very multidomestic strategy
transnational strategy
In a transnational strategy, firms try to combine both the advantages of integration and the advantages of
responsiveness
McDonald’s, with a global brand and several global
products and at the same time a product portfolio that
is adjusted to local preferences, is a good example of a
firm following a transnational strategy
transnationality Index
TNI measures the extent to
which firms engage in international business activities
Developed by the UN Conference on Trade and Development
Assesses the transnationality of a firm based on the following three dimensions:
▪ FA: Ratio of foreign assets to total assets
▪ FS: Ratio of foreign sales to total sales
▪ FE: Ratio of foreign employment to total employment
A higher score indicates a higher level of global exposure
different internal organizational structures
International division structure
Global area structure
Global functional or product structure
Global Matrix structure
international division structure
▪ Separate, independent department for all international activities
▪ Often used at the beginning of internationalization, complex to handle in later stages
CEO
->marketing
-> finance
-> production
-> HR
-> International
Global area strucutre
Divide the company into regions which are responsible for managing all aspects of the company’s operations in that area
Often connected with multidomestic strategy as the focus is on regional/national
responsiveness
CEO
-> Europe
-> Asia
-> North America
-> South America
-> Africa
Global Functional or Product Structure
Operations are divided into functions or products which are then managed globally (i.e., marketing, production, finance,…)
Often connected with global strategy as the focus is on global integration across units
Functional
CEO
-> Marketing
-> Finance
-> Production
-> HR
Global Product Structure
CEO
-> Product Group 1
-> Product Group 2
-> Product Group 3
-> Product Group 4
Global Matrix Structure
▪ Combination of global and functional/product structure
▪ Relevant for a transnational strategy to ensure both focus on integration and
responsiveness
Asia Europe Americas Africas Marketing Finance HR Production
current trends for multinational firms
Two critical and non-negotiable aspects which multinational organizations must
strategically integrate into their operations for long-term success and relevance:
Sustainability:
-Sustainable Development Goals
-Three Pillars of Sustainability
-Measuring Sustainability
-Reporting Standards
Digitalization:
-changes in how business is domne
-AI & Machine Learning
-IoT Use cases
SDGs
The Sustainable Development Goals (SDGs) developed by the United Nations aim to
address global challenges by 2030 (Agenda 2030)
sustainability based on three pillars
Sustainability concerns more than just the
environment!
Society: Improving quality of life,
healthcare, and education
Economics: Promoting economic growth,
business ethics, fair trade, and equitable
wealth generation
Environment: Nature and the environment
are not inexhaustible resources, but subject to protection and rational use
Multinational firms in achieving SDGs
Contrary to the past, Agenda 2030 no longer focuses on the role of governments and NGOs but puts a strong emphasis on the involvement of companies.
MNCs in the past have been strong contributors to negative externalities
associated with global business activities (e.g., pollution, inequality, well-being).
This also implies that they are in a strong position to positively influence the
achievement of the SDGs
MNCs contributing significantly to the SDGs can
▪ Increase awareness and create momentum, and
▪ Provide strong leadership in the implementation of SDGs based on their strong resources and capabilities
However, so far scholars argue that “the role of MNEs in the process of global
legitimation and application of the SDGs still remains a largely unfulfilled promise
and opportunity.”
Understanding MNC’s SDG footprint
Chose relevant SDGs: Which of the 17 UN SDGs are impacted most by the business?
Create appropriate KPIs: Which KPIs best measure the impact on the SDGs of the
business?
▪ Society: e.g., empowered people, % of women in management positions, workplace
safety, average employee payroll and benefits
▪ Economics: e.g., % of suppliers reviewed in the context of sustainability, % of
suppliers that comply with established sustainability strategy, profit growth
▪ Environment: e.g., energy consumption (kWh/year), energy saved due to
implemented improvements (%), water consumption, % of water recycled/reused,
toxic emissions, carbon emissions
Calculate firm impact: How do the respective KPIs perform over time? What impact does the business have?
Contextualize firm impact: How does the business compare to national/international
goals, related industries, or similar businesses?
sustainability reporting standards
Current Landscape: Sustainability reporting is becoming increasingly important for
organizations worldwide. However, the standards and frameworks guiding these reports vary, reflecting the evolving nature of sustainability accounting and reporting
Key Standards and Frameworks: Global Reporting Intiative (GRI), Sustainability
Accounting Standards Board (SASB), Task Force on Climate-related Financial
Disclosures (TCFD) and most importantly for Europe the Corporate Sustainability
Reporting Directive (CSRD), the EU-Taxonomy and the European Sustainability
Reporting Standards (ESRS)
Challenges: Inconsistency across markets and a lack of common measurements
Future Directions: More standardization and increased regulatory requirements
Implications for Organizations: Adaptability and compliance and new strategic
opportunities (brand reputation, investor relations)
Sustainable Investment framework by world economic forum
Sustainable Investment Policies are key to
ensuring investments take place in alignment with ESG principles
Sustainable Finance Mobilization entails a
framework to increase the flow of capital to
sustainable international investment
Sustainable Investment Promotion and
Facilitation can drive sustainable investments through, for example, investment incentives conditional on SDG achievements, or the provision of
guarantees for sustainable investments
After the investment is made, measures need to ensure the sustainable development impact of
the investment (e.g. via stakeholder engagement)
Impacts of digitalization
Global Connectivity: Digitalization enables instant and seamless communication
across borders, fostering global connectivity -> facilitates collaboration, information sharing, and real-time decision-making.
E-Commerce and Online Markets: Companies can now reach international markets more easily, and consumers can access products and services from around the world.
Data Analytics and Business Intelligence: Digitalization allows businesses to collect,
analyze, and leverage vast amounts of data -> enhances decision-making processes,
market insights, and operational efficiency.
Supply Chain Digitalization: The digitalization of supply chains enhances visibility,
traceability, and efficiency.
Remote Work and Collaboration: Digital tools and technologies have facilitated
remote work and global collaboration.
Cybersecurity: Digitalization brings about new challenges in protecting sensitive
information and ensuring the integrity of digital assets on a global scale.
Impact of digitalization on global value chains
Digital tools such as cloud computing, video conferencing, and collaborative platforms enable seamless communication and real-time collaboration among global teams.
This facilitates quicker decision-making, reduces misunderstandings,
and ensures that all parts of the value chain are aligned and responsive to
market changes.
Technologies like the Internet of Things (IoT), blockchain, and advanced analytics provide greater visibility and traceability throughout the supply chain. IoT devices can monitor the condition and location of
goods in transit, while blockchain ensures secure and transparent record-keeping.
These technologies help in optimizing inventory levels, reducing delays,
and ensuring quality control.
Automation technologies, including robotics and artificial intelligence
(AI), streamline production processes and reduce the need for manual
intervention. AI algorithms optimize everything from production schedules to
logistics routes, enhancing operational efficiency.
For example, predictive maintenance powered by AI can foresee
equipment failures before they occur, minimizing downtime and disruptions.
Data-driven decision-making is another major advantage brought by
digitalization. Big data analytics allows companies to analyze vast amounts
of data from various stages of the value chain, gaining insights that drive
strategic decisions.
By understanding patterns and trends, businesses can forecast demand
more accurately, tailor products to customer preferences, and enhance
overall supply chain agility.
Shein case example
Founded in 2008, Shein, a Chinese online fashion company, has reshaped
the global retail industry landscape within a short span of time. As of 2022,
Shein’s market valuation rose to $100 billion, surpassing the combined worth
of industry giants Inditex and H&M.
Shein’s AI algorithms analyze a vast amount of data, comprising social media trends, user engagement on its app, and historical sales data.
This aids the company in forecasting trends and understanding customer
preferences with a speed and precision unrivaled by conventional fashion
houses.
Its product lineup is continuously updated, with thousands of new items
added every week based on the latest data analysis.
