Lecture 2 Flashcards
The concept of distance
- Geographic distance –> Distance in km
- Cultural distance –> language
- Economic distance –> as purchasing power of the people, in different counties different expenses have a different importance ( French higher expenses for food > Netherlands: lower food expenses
- Administrative distance (subjective): Is the legal sustem similar to a country
- Psychic distance (the perception of distance) –> totallu subjective: two different firms have different distances to a firm in India (because one of the firms has a worker from India so feels itself closer to the country
What is different about operating abroad?
- Geographic distance
- Increases transport costs (perishability, services)
- Increases management costs
- Different economic conditions and currency
- Different laguage, culture, and institutions
Cost of foreignness: the dumb foreigner syndrome
- Management
- Politcs
- Marketing and communication
Cultural frictions are a major, but underrestimatied, management problem in international business
They greatly impair the implementation of global strategies
- Global marketing coordination
- technology transfer
- joint ventures and mergers and acquisitions
How to become an insider in a new market
- Take joint venture partners
- Hire local managers
- Enlist local stakeholders
- directors
- banks
- PR campaigns
How to deal with diffrences?
AAA strategies model
- Adaptation
- Aggregation
- Arbitrage
AAA model
Arbitrage
Benefits from international heterogeneity
- Take advantage of inernational differences in:
- Availability of factors (including culture and administrative infrastructure)
- Relative cost of factors (comparative advantage)
- labor
- capital
- natural resources
Aggregation
AAA model
Benefits from international homogeneity
- Exploit scale economies (plant level/ firm level
- Relationship between volume of production per unit of time and average cost of production.
- Driven by fixed costs
- The higher fixed cost, the higher the volume of output for which costs are the lowest (minimum efficient scale)
- Exploit learning curve advantages
- Wxploit relational investmenst: Follow the customer
Adaption
aaa model
Seeks to boost revenues and market share by maximizing a firm’s local relevance. Proxied by expenses.
Adjusting to differences
Future of arbitrage
Reduction in trasportation costs dissociates locus of prodcution form that of consumption
Reduction in telecom costs will lead to dramatic increase in outsourcing of services
Future of aggregation (Replication)
- Factors pushing for globalization
- Plant level scale economies
- Firm level economies
- Factors hindering globalization
- Communication costs
- tranportation costs
- Government barriers
- Globalization backlash
Aggregation/replication strategies
- Increse plant and firm-level scale economies
- Decrease factors that hinder globalization
- Transportation cost
- taste differnces
- government barriers
Destruction of replication
- Demand increases cased by MNE sales of standard products makes it economical to produce local variants
- Local producers are better able to produce these variants
Arbitrage strategies
Discover and exploit inernational differences in culture, administrative infrastructure, and factor costs
Conclusions of globalization
- Level of globalization is net result of factors pushing for and factors hindering it
- varies across industries
- Given the added cost of operating abroad, not al firms shoeld be global
- International activities are based on arbitrage and replication
- Arbitrage benefits form inernational heterogeneit
- Replicaiton benefits from inernational homogeneity
- A firm can pusue successful replicaiton by increasing firm and plant scale economies and decrasing the factors hindering globalization
- There is often a high payoff form being the first entrant in a new global industry
