FINAL Exam

Question 1

1. Three ways of understanding what globalization is:

Answer 1

− A new force sweeping through the world in recent times
− A long-run historical evolution since the dawn of human history
− A pendulum that swings from one extreme to another from time to time

Question 2

2. Identify two types of institutions & supportive pillars:

Answer 2

1. Formal Institutions
   - Examples: Laws, Regulations, Rules
   - Institution represented by laws, regulations, and rules
   - Supportive Pillar: Regulatory pillar–> The coercive power of governments
2. Informal Institutions
   - Examples: Norms, Cultures, Ethics
   - Institution represented by cultures, ethics, and norms
   - Supportive Pillar: Normative Pillar (The mechanism through which norms influence individual and firm behavior) & Cognitive pillar (The internalized (or taken-for-granted) values and beliefs that guide individual and firm behavior)

Question 3

3.Explain how institutions reduce uncertainty

Answer 3

The key role of institutions is to reduce uncertainty by constraining the range of acceptable actions.
− Uncertainty can lead to transaction costs.
− Transaction costs also rise from opportunism, the act of seeking self-interest with guile.

Question 4

4. Identify the two core propositions underpinning an institution-based view of global business.

Answer 4

A
Proposition 1: Managers and Firms rationally pursue their interests and make choices within the formal and informal constraints in a given institutional framework

Proposition 2: While formal and informal institutions combine to govern firm behaviour, in situations where formal constraints are unclear or fail, informal constraints will play a larger role in reducing uncertainty and providing constancy managers and firms.

Question 5

5. Different types of formal institutions

Answer 5

1. Political Systems (The rules of the game on how a country is governed politically):
   - Democracy
   - Tolitanarianism: A political system in which one person or party exercises absolute political control over the population (4 Types include Communist: centers on a communist party, Right-Wing: is characterized by its intense hatred against communism, Theocratic: refers to the monopolization of political power in the hands of one religious party or group, Tribal: refers to one tribe or ethnic group monopolizing political power and oppressing other tribes or ethnic groups)
   - Authoritarianism: A political system in which political plurality is undermined and concentrated government power is imposed
2. Economic Systems (Rules of the game on how a country is governed economically):

• Market economy: A pure market economy is characterized by laissez-faire and total control by market forces.
• Command economy: A pure command economy is defined by government ownership and control of all means of production.
• Mixed economy: Most countries operate mixed economies, with a different emphasis on market versus command forces.

Other:
- property rights: The legal right to use an economic property (resource) and to derive income and benefits from it
- intellectual property rights: Right associated with the ownership of intellectual property

3. Legal Systems:

• Civil law: uses comprehensive statutes and codes as a primary means to form legal judgments.
• Common law: is shaped by precedents and traditions from previous judicial decisions.
• Theocratic law: is a legal system based on religious teachings.

Question 6

6. Ways to understand cultural differences.

Question 7

7. Explain how to use a VRIO framework to understand a firm’s resources and capabilities

Answer 7

A VRIO framework suggests that only resources and capabilities that are valuable (V), rare (R), inimitable (I), and organizationally (O) embedded will generate sustainable competitive advantage.

Question 8

8. Articulate the difference between keeping an activity in-house and outsourcing it

Answer 8

Outsourcing is defined as turning over all or part of an organizational activity to an outside supplier.
* An activity with a high degree of industry commonality and a high degree of commoditization can be outsourced, and an industry-specific and firm-specific (proprietary) activity is better performed in-house.
* On any given activity, the four choices for managers in terms of modes and locations are
A. offshoring,
B. onshoring,
C. captive sourcing/FDI, and
D. domestic in-house activity.

Question 9

9. Why nations trade?

Answer 9

1. There are economic gains from trade.
2. International trade must be win–win: both sides must share economic gains.
3. Both sides must have economic gains

Resource-based view: Firms in one nation generate exports that are valuable, unique, and hard to imitate –> Beneficial for foreign firms to import

Institution-based view: Different rules governing trade are designed to determine how gains are shared or not shared

Question 10

10. Key terms associated with international trade

Answer 10

• Export: Selling abroad
• Import: Buying from abroad
• Merchandise (goods): Tangible products being traded
• Service: Intangible services being traded
• Trade deficit: An economic condition in which a nation imports more than it exports
• Trade surplus: An economic condition in which a nation exports more than it imports
• Balance of trade: The aggregation of importing and exporting that leads to the country-level trade surplus or deficit

Question 11

11. Understand the six theories of international trade

Answer 11

Classical trade theories:
(1) mercantilism,
(2) absolute advantage, and
(3) comparative advantage

Modern trade theories:
(1) product life cycle,
(2) strategic trade, and
(3) national competitive advantage of industries

Question 12

12. Key terms associated with FDI

Answer 12

• Foreign portfolio investment (FPI): Investment in a portfolio of foreign securities such as stocks and bonds
• Sovereign wealth funds (SWF): A state-owned investment fund composed of financial assets such as stocks, bonds, real estate, and other financial instruments
• Management control right: The right to appoint key managers and establish control mechanisms
• Horizontal FDI: A type of FDI in which a firm duplicates its home country-based activities at the same value-chain stage in a host country
• Vertical FDI: A type of FDI in which a firm moves upstream or downstream at different value-chain stages in a host country
• Upstream vertical FDI: A type of vertical FDI in which a firm engages in an upstream stage of the value chain in a host country (Final Assembly to Components)
• Downstream vertical FDI: A type of vertical FDI in which a firm engages in a downstream stage of the value chain in a host country (Final Assembly to Marketing)
• FDI flow: The amount of FDI moving in a given period (usually a year) in a certain direction
• FDI inflow: Inward FDI moving into a country in a year
• FDI outflow: Outward FDI moving out of a country in a year
• FDI stock: Total accumulation of inward FDI in a country or outward FDI from a country across a given period

Question 13

13. Why firms choose FDI?

Question 14

14. Explain how FDI results from ownership, location and internalization advantages

Answer 14

• OLI advantage: A firm’s quest for ownership (O) advantages, location (L) advantages, and internalization (I) advantages via FDI
• Ownership advantage: An MNE’s possession and leveraging of certain valuable, rare, hard-to-imitate, and organizationally embedded (VRIO) assets overseas in the context of FDI (also called firm-specific advantage, or FSA)
• Location advantage: Advantage enjoyed by firms operating in a certain location
• Internalization advantage: The replacement of cross-border markets (such as exporting and importing) with one firm (the MNE) locating and operating in two or more countries

Question 15

15. Who: RBV (FSAs)

Question 16

16. Why: strategic motivations; internalization advantages

Answer 16

Motives for Acquisitions:

1. Synergistic motives (IB Issues & RB Issues)
   - IB: Respond to formal institutional constraints and transitions
   - RB:
   –> Leverage superior managerial capabilities
   –> Enhance market power and scale economies
   –> Access to complementary resources
2. Hubristic motives (IB Issues & RB Issues)
   - IB: Herd behavior—following norms and chasing fads of M&As
   - RB: Managers’ overconfidence in their capabilities
3. Managerial motives (IB Issues & RB Issues)
   - IB: Self-interested actions such as empire-building guided by informal norms and cognitions

Question 17

17. Where: Location advantages; distance (C.A.G.E.)

Answer 17

Location-specific advantage: The benefits a firm reaps from the features specific to a place

Strategic goals –> Location-specific advantages

1. Strategic Goal: Natural resource seeking–> LSA (Possession of natural resources and related transport and communication infrastructure)
2. Strategic Goal: Market seeking–> LSA (Abundance of strong market demand and customers willing to pay)
3. Strategic Goal: Efficiency seeking –> LSA (Economies of scale and abundance of low-cost factors)
4. Strategic Goal: Innovation seeking–> LSA (Abundance of innovative individuals, firms, and universities)

Cultural and institutional distances:
C. cultural
A. administrative
G. geographical
E. economic

Question 18

19. How: entry modes; establishment modes; acquisition vs. alliance

Answer 18

Scale of entry: The amount of resources committed to entering a foreign market

• Entry mode: A form of operation that a firm employs to enter foreign markets
• Non-equity mode: A mode of entry (exports and contractual agreements) that reflects relatively smaller commitments to overseas markets
• Equity mode: A mode of entry (joint ventures and wholly owned subsidiaries) that indicates relatively larger commitments to overseas markets

Types of Contractual Agreements
1. Turnkey project: A project in which clients pay contractors to design and construct new facilities and train personnel
2. Build-operate-transfer (BOT) agreement: A nonequity entry mode used to build a longer-term presence by first constructing and then operating a facility for a period of time before transferring operations to a domestic agency or firm
3. Research-and-development (R&D) contract: An outsourcing agreement in R&D between firms
4. Co-marketing: Efforts among a number of firms to jointly market their products and services

Equity Modes:
1. Joint venture (JV): A new corporate entity jointly created and owned by two or more parent companies
2. Wholly owned subsidiary (WOS)
- A subsidiary located in a foreign country that is entirely owned by the parent multinational
- Means to set up a WOS (establishment mode)
1) Greenfield operations: Building new factories and offices from scratch
2) Acquisitions: Acquiring the control of another firm’s operations and management from one firm (target). The target becomes the subsidiary.

Contractual (nonequity-based) alliance: Alliance between firms that is based on contracts and does not involve the sharing of ownership.

–> Includes co-marketing, research and development (R&D) contracts, turnkey projects, strategic suppliers, strategic distributors, and licensing/franchising

Equity-based alliance: Alliance based on ownership or financial interest between the firms
–> Strategic investment: One firm investing in another as a strategic investor
–> Cross-shareholding: Both firms investing in each other to become cross-shareholders

Question 19

18. When: First-mover vs. late-mover; stage model

Answer 19

1. First-mover advantage: Benefits that accrue to firms that enter the market first and that late entrants do not enjoy

Examples:
- Proprietary, technological leadership
- Pre-emption of scarce resources
- Establishment of entry barriers for late entrants
- Avoidance of clash with dominant firms at home
- Relationships with key stakeholders such as governments

2. Late-mover advantage: Benefits that accrue to firms that enter the market later and that early entrants do not enjoy

Examples:
- Opportunity to free ride on first mover investments
- Resolution of technological and market uncertainty
- First mover’s difficulty to adapt to market changes

Question 20

20. Integration-responsive framework

Answer 20

Integration-responsiveness framework: A framework of MNE management on how to simultaneously deal with the pressures for both global integration and local responsiveness

MNEs’ two sets of pressures:
1. Global integration
2. Local responsiveness

Question 21

21. Four types of international / multinational strategy

Answer 21

1. Global standardization strategy: A strategy that focuses on development and distribution of standardized products worldwide in order to reap the maximum benefits from low-cost advantages
2. Transnational strategy: A strategy that endeavors to be simultaneously cost efficient, locally responsive, and learning-driven around the world
3. Home replication strategy: A strategy that emphasizes the duplication of home country-based competencies in foreign countries
4. Localization (multidomestic) strategy: A strategy that focuses on a number of foreign countries/regions, each of which is regarded as a stand-alone local (domestic) market worthy of significant attention and adaptation

Question 22

22. Fit between multinational strategy and structure & knowledge management

Answer 22

Strategic Fit
- Strategy as a link between the firm and its external environment
- For a strategy to be successful, it must be consistent with the firm’s external environment and with its internal environment – its goals and values, resources and capabilities and structure

Center of excellence: An MNE subsidiary explicitly recognized as a source of important capabilities, with the intention that these capabilities be leveraged by, and/or disseminated to, other subsidiaries

Worldwide (global) mandate: A charter to be responsible for one MNE function throughout the world.

4 Different Structures:

International division structure: An organizational structure that is typically set up when firms initially expand abroad, often engaging in a home replication strategy

Geographic area structure: An organizational structure that organizes the MNE according to different geographic areas (countries and regions)
Country (regional) manager: The manager of a geographic area, either a country or a region

Global product division structure: An organizational structure that assigns global responsibilities to each product division

Global matrix structure: An organizational structure often used to alleviate the disadvantages associated with both geographic area and global product division structures, especially for MNEs adopting a transnational strategy

The relationship between strategy and structure is reciprocal:
- Strategy usually drives structure
- The relationship is not one way
- Neither strategy nor structure is static

Knowledge MGMT:

1. Knowledge management: The structures, processes, and systems that actively develop, leverage, and transfer knowledge
2. Explicit knowledge: Knowledge that is codifiable (can be written down and transferred with little loss of richness)
3. Tacit knowledge: Knowledge that is noncodifiable, whose acquisition and transfer require hands-on practice
4. Absorptive capacity: The ability to recognize the value of new information, assimilate it, and apply it

Knowledge Management in Four Types of Multinational Enterprises

Problems in Knowledge Management

• Knowledge acquisition: Failure to share and integrate external knowledge
• Knowledge retention: Employee turnover and knowledge leakage
• Knowledge outflow: “How does it help me?” syndrome and “knowledge is power” mentality
• Knowledge transmission: Inappropriate channels
• Knowledge inflow: “Not invented here” syndrome and absorptive capacity

Question 23

23. Explain how institutions and resources affect strategy, structure, and innovation.

Answer 23

• Externally, MNEs are subject to the formal and informal institutional frameworks erected by various home-country and host-country governments.
• How MNEs are governed internally is determined by various formal (responsibilities defined by an organizational chart) and informal (organizational norms, values, and networks) rules of the game.
• Organizational culture: The collective programming of the mind that distinguishes the members of one organization from another

Question 24

24. Four types of CSR strategies.

Answer 24

Reactive strategy: A strategy that would only respond to CSR causes when required by disasters and outcries - “Not my problem”

Defensive strategy: A strategy that focuses on regulatory compliance but with little actual commitment to CSR by top management - “What’s the point”

Accommodative strategy: A strategy characterized by some support from top managers, who may increasingly view CSR as a worthwhile endeavor - “If it’s easy”

Proactive strategy: A strategy that endeavors to do more than is required in CSR - “Green crusaders”

Question 25

25. The leading debate concerning CSR – race to the top vs. race to the bottom.

Answer 25

Debate 2: Race to the Bottom (“Pollution Haven”) versus Race to the Top

MNEs lower environmental standards
*Lowering costs by relocating to locations where regulations are less stringent
*Using the threat of relocation to prevent governments from raising environmental standards

MNEs raise environmental standards
*Pressures from worldwide CSR demands—especially from customers in developed economies
*Requirements of MNE headquarters for worldwide compliance of higher CSR standards