International Organisation Flashcards
Why Do Firms Expand Internationally
International Expansion can be both challenging and uncertain, as it does not guarantee success.
Firms typically pursue internationalisation due to a combination of motives.
Motives for International Expansion
1. Pull Factors: positive drivers attracting firms
- success in the home market
- attraction of new customers
- entrepreneurial spirit and ambition
- request from foreign markets (RFPs)
- learning opportunities from competitors
- Push Factors: external pressures compelling firms to expand
- entry of international competitors in the home market
- saturation of the domestic market
- intense domestic competition
- internationalisation of local customers (e.g. suppliers or buyers moving abroad)
Why Liability of Outsidership Matters
Cultural informational disadvantages can harm foreign firms.
Examples
1. Uber in China: failed due to not aligning with local norms and competition
2. Amazon in India: struggles with localised consumer preferences and regulations
- many firms lack access to local information networks
- only 4% of firms become MNEs
- most global firms still earn 36% of their sales from their home region
Despite challenges, firms may expand internationally for:
1. low transaction costs
- easier to coordinate and manage operations across borders
2. Non-location-bound firm-specific advantages
- leveraging unique skills, technology or products that do not depend on a specific location
Challenges in Becoming Multinational Enterprises (MNEs)
Many firms face difficulties due to the liability of outsidership
- domestic firms have an advantage because they are more familiar with the local environment.
Key challenges include:
1. lack of knowledge
- limited understanding of local customer preferences and needs
- low familiarity
- local customers may be unaware of or less trusting of foreign firms - weak local connections
- limited relationships with suppliers, governments, or stakeholders - cultural unfamiliarity
- foreign firms must learn local cultural norms and regulations
- may face ethnocentrism, where locals judge them by their own cultural standards
Understanding Cultural Differences
Approaches to understanding culture include:
1. Context approach
- low-context cultures: communication is direct and explicit
- high-context cultures: communication relies on implicit messages and context
- Cultural clusters
- a group of cultures with similarities and shared norms - Hofstede’s cultural dimensions
- power distance: degree of inequality accepted in society
- individualism vs collectivism: focus on self vs group harmony
- masculinity vs femininity: preference for competition vs quality of life
- uncertainty avoidance: comfort with ambiguity or need for certainty
- long-term vs short-term orientation: focus on future rewards vs present gratification
Success in Foreign Markets
2 key explanations.
- Institutions-based perspective
- success depends on understanding and adapting to formal and informal rules in a country
- firms succeed if they: - follow the established rules
- influence or change the rules of the game to their advantage
- focus on external environment and institutional contexts - Resource-based view
- internal resources and capabilities drive success
- firms with unique, valuable resources and specialised capabilities outperform competitors
- emphasis on internal strength
Resources and Capabilities
Often used in combination, but it may be hard to clarify the distinction.
- resources: productive assets of a firm
- capabilities: the ability of the firm to use these resources
Resources themselves are not sufficient to provide an advantage over competitors, as firms also need capabilities to use these resources.
Resources
- physical resources: natural resources, equipment, facilities
- financial resources: access to capital
- human resources: talent, management, culture, expertise
- reputational resources: brand strength, goodwill
Capabilities
- innovation: R&D, new ways of organising
- operations: efficient processes
- marketing: deep customer insights and connections
- logistics: delivering products effectively and timely
Goodwill
- intangible value a company possesses due to its reputation, brand strength, customer loyalty, and the relationships it has built with stakeholders
When Do Firm-Specific Advantages Create Value Abroad?
Firm-specific advantages (FSAs) are effective in international markets when:
- Valuable
- products/services meet a customer’s need at the desired price and quality - Rare
- few or no other companies offer similar product/service - Inimitable
- difficult for competitors to replicate due to specialised skills or processes - Organised
- the firm can effectively leverage resources and capabilities to generate value
VRIO (valuable, rare, inimitable, organisation) creates sustainable competitive advantage for international firms only if all four aspects are satisfied and it is transferable across borders
Location Choice & Entry Modes
- the attractiveness of a country depends on various factors (economic, political, cultural)
- the relevance of these factors is determined by the strategic goals of the firm’s expansion
- the entry strategies should align with the firm’s resources, capabilities, and market conditions
FDI & Multinationals
Foreign Direct Investment (FDI) occurs when firms own foreign assets such as sales offices, production facilities, or R&D labs.
Different from:
- indirect investment: buying foreign stocks or bonds (does not involve active strategic decision-making)
- non-equity activities: exporting, franchising, licensing (firms don’t own foreign assets)
FDI Types:
1. Inflow (Inbound FDI)
- investments made by foreign multinationals in a country
2. Outflow (Outbound FDI)
- investments made by domestic multinationals in foreign markets
The FDI stock represents the total amount of foreign-owned assets in a country.
Strategic Objectives in Foreign Expansion
Firms expand internationally for one or more of these four strategic reasons:
- Natural resource seeking:
- aims to secure essential resources
- quality and costs of natural resources - Market seeking:
- aims to find new customers and expand demand
- strong market demand and customers are willing to pay - Efficiency-enhancing:
- aims to reduce costs through production relocation or supply chain optimisation
- an abundance of cheap and qualified labour force and suppliers, transportation and communication structure, proximity to customers - Capability-enhancing:
- aims to access innovation, technology, or expertise
- innovative individuals, firms and universities, industry clusters
Country Attractiveness
- Resource endowments
- human resources
- natural resources
- infrastructure - Market
- market size
- market growth
- the quality of demand - Competition
- agglomeration benefits
- competitive intensity
- entry barriers - Institutions
- regulations
- tax benefits
- institutional quality
Entry Modes in International Expansion
Once a firm selects a country and strategic objective, it must choose an entry mode.
- Non-equity modes:
- exporting: selling products to foreign markets without ownership of local operations
- licensing: selling rights to use technology or trademarks for royalties
- franchising: extending a complete business model
- international transactions take place between two or more independent companies, but there is no equity involved - Equity modes (FDI):
- joint ventures: partnering with one or more firms to establish a new company
- greenfield operations: establishing new operations from scratch in the target country
- acquisitions: purchasing existing companies to gain immediate access to the market
- follow FDI, only these result in ownership in foreign operations
Dunning’s OLI Framework
Explains when FDI is preferable for a firm to become multinational. All three components (ownership, location, internalisation) must be satisfied.
- Ownership advantage
- firm-specific, non-location-bound resources that give a competitive edge internationally
- evaluated using the VRIO framework
- challenges: - cultural distance: difference in values, communication and norms
- institutional distance: regulatory, normative, and cognitive differences between countries
- as the cultural or institutional distance increases, investment must grow to compensate for the increased costs of adaptation - Comparative Location advantage
- host country conditions that make investment attractive relative to the home country
- key factors: - natural factors: abundant natural resources
- created factors: skilled labour, infrastructure, scientific knowledge
- demand conditions: sophisticated or growing domestic demand
- related and supporting industries: strong supplier networks and clusters
- types of FDI: - Vertical FDI: focus on production efficiency, locating assets for securing resources or reducing costs
- Horizontal FDI: focuses on selling products abroad, often to overcome trade barriers or reduce transportation costs
Horizontal expansion is about the merits of licensing a local producer in a foreign market before committing to a foreign investment.
- replicating the same activities that a company performs in its home country in a foreign market
Vertical expansion is about the beneficial comparative advantage in foreign locations by buying inputs or exporting to that market
- relocating parts of the production or supply chain to foreign locations
- Internalisation advantage
- when it is better for a company to conduct activities internally rather than outsourcing
- occurs due to market failures
- market failure scenarios: - high dissemination risk: risk of losing proprietary knowledge to a partner
- high asset specificity: investments tied to specific transactions that are costly to switch
- information asymmetry: need for close monitoring of activities
- knowledge transfer: valuable expertise required by partners increases risks
- Hold-up problem: dependence on suppliers gives them excessive bargaining power
Summary of OLI Framework
Firms should pursue FDI only when they have all three OLI advantages:
1. Ownership: possession of unique, transferable resources
2. Location: comparative advantages in the host country
3. Internalisation: Strong reasons to avoid outsourcing
Integration Responsiveness Framework
Multinational enterprises (MNEs) face the dual challenge of managing local responsiveness and global integration across various markets.
Integration Responsiveness Framework guides how firms balance these pressures.
Global Integration pressures
- the need for economies of scale, consistency, and efficiency across markets
Local Responsiveness pressures
- the necessity to adapt to local customer preferences, regulations, and market conditions
4 key strategies:
- Home Replication Strategy
- low global integration
- low local responsiveness - Localisation Strategy
- low global integration
- high local responsiveness - Global Standardisation Strategy
- high global integration
- low local responsiveness - Transnational Strategy
- high global integration
- high local responsiveness
Global Standardisation Strategy
High global integration, low local responsiveness.
-produces standardised products to maximise efficiency and scale
- centralised decision-making and limited local autonomy
- knowledge mostly developed and retained at the centre and key locations
- extensive bilateral flow of knowledge and people between HQ and subsidiaries
- global product division structure
- e.g. Warner Bros
Advantages:
- economies of scale and cost efficiency
Disadvantages:
- limited ability to meet local needs
Localisation Strategy
Low global integration, high local responsiveness.
- treats each market as unique, adapting extensively to local needs
- autonomous subsidiaries focus on upstream and downstream localisation
- knowledge developed and retained within each subsidiary
- limited flow of knowledge and people to and from HQ
- geographic area structure
- e.g. McDonald
Advantages: - maximised local responsiveness and customer satisfaction
Disadvantages: - high costs due to duplication of resources and efforts
Home Replication Strategy
Low global integration, low local responsiveness.
- replicates the domestic business model in foreign markets
- minimal adaptation to local needs or preferences
- knowledge developed at the centre and transferred to subsidiaries
- extensive flow of knowledge and people from HQ to subsidiaries
- International division structure
- e.g. Starbucks
Advantages: - simple to implement
- leverage home-country expertise
Disadvantages: - lacks local responsiveness, risking customer alienation
Innovation & Learning in Multinationals
Innovation and learning are two key aspects of any multinational company but are challenging to manage. They need to adapt their products and services to the local context or develop completely new products in order to become successful.
The ‘not invented here’ syndrome is when new ideas are resisted, particularly if they come from faraway places.
The lack of absorptive capacity is the capacity to recognise the value of new knowledge and apply it.
Global Integration vs Local Responsiveness
When to prioritise global integration?
- economies of scale are critical
- cross-border competition exists
- customers demand uniform quality or experience
When to prioritise local responsiveness?
- market structures and customer needs vary greatly
- government regulations differ significantly
- local competitors dominate through tailored offerings
Transnational Strategy
High global integration, and high local responsiveness.
- balances efficiency with local adaptation
- promotes global knowledge sharing and local innovation
- knowledge developed jointly and shared worldwide
- extensive flow of knowledge and people in multiple directions, also across subsidiaries
- global matrix structure
- e.g. Netflix
Advantages: - combines cost efficiency, local adaptation, and innovation diffusion
Disadvantages: - complex to implement and manage due to high interdependence
