Lecture 2: Core Foundations of IB & MNEs

Question 1

International Business theories are divided into:

Answer 1

Country-level (1960), firm-level (1970), and network/subsidiaries-level of analysis (1980)

Question 2

Product Life-Cycle Theory

Answer 2

Manufacturing products evolve through a cycle of roughly 4 stages: introduction, growth, maturity, decline.

Question 3

Country-Specific Advantages

Answer 3

Strengths or benefits to a specific country or location

Question 4

Firm-Specific Advantages

Answer 4

Unique capabilities that are exclusive to the organisation. They are related to the firm’s ability to coordinate the use of the advantage in production, marketing or customisation of services.

Question 5

The FSAs of an MNE include:

Answer 5

Product differentiation ability, superior marketing and/or distribution skills, brand names, access to capital and/or raw materials, intangible assets (know-how, management skills, technology)

Question 6

Foreign Direct Investment

Answer 6

An investment made by a firm or individual in one country into business interests located in another country to acquire lasting interest.

Question 7

Hymer states two conditions for the existence of FDI

Answer 7

1. Foreign firms must possess a countervailing advantage over local firms; 2. Imperfect markets

Question 8

Liability of Foreignness

Answer 8

The impact of various forms of distance (cultural, economic, institutional and geographic) that explains why MNEs have difficulties in operating in foreign markets.

Question 9

Disadvantages of operating in foreign markets may arise due to:

Answer 9

Spatial distance (coordination costs), unfamiliarity (adaptation and learning costs), lack of legitimacy (nationalism by locals), home-country restrictions (increase the costs of doing business).

Question 10

Transaction Cost Economics

Answer 10

A theory that explains whether the marekt or a firm will coordinate economic activity. The most efficient coordination mechanism between a market and vertical integration exists when market imperfections are in place.

Question 11

Market imperfections generate transaction costs in three ways:

Answer 11

Search and information costs, bargaining costs, policing and enforcement costs

Question 12

When will organisations internalise markets?

Answer 12

When the expected benefits exceed the expected costs.

Question 13

There are two different forms of internalisation:

Answer 13

Operational internalisation: involving intermediate products flowing through successive stages of production and the distribution channel. And knowledge internalisation: explains why firms are set up and how they acquired a degree of monopoly power (more beneficial than operational internalisation)

Question 14

MNEs develop in response to imperfections in the goods and factor markets. Rugman states that for international expansion to take place, setting up facilities abroad must be more efficient than exporting to foreign markets. Three conditions must be satisfied:

Answer 14

1. Different countries
2. Efficient governance system
3. The costs in the market must be higher than those of organising them within MNEs

Question 15

Internalisation Theory

Answer 15

Firms aim at maximising profit by internalising their intermediate markets across national borders, in the face of various market imperfections. The main question here is if a firm should rely on external market measures (export) or internalising its operations (FDI).

Question 16

Internationalisation

Answer 16

An MNE engages in foreign production in order to avoid dissipation of the rents derived.

Question 17

Trade theory

Answer 17

Each country has a fixed endowment of labour and capital and is specialised in producing a mix of products that make the best possible use of its endowments.

Question 18

Eclectic Paradigm

Answer 18

The Eclectic Paradigm integrates several theory streams on cross-border activities at the country and firm level to explain the determinants of FDI and the foreign activities of MNEs. There are three types of advantages influencing FDI:

1. Ownership advantages: The greater the competitive advantages of the investing firms, the more likely they are to be able to engage in or increase, their foreign production.
2. Location advantages = Foreign countries having come CSAs vis-a-vis other countries.
3. Internalisation advantages = Benefits of creating, transferring, deploying, recombining and exploiting FSAs internally instead of via contractual arrangements with outside parties

Question 19

The OLI-paradigm, based on L-advantages, identifies 4 types fo FDI motivations:

Answer 19

1. Market-seeking
2. Natural-resource seeking
3. Efficiency-seeking = To promote a more efficient division of lavour or specialisation of an existing portfolio
4. Strategic asset-seeking = To protect or augment the existing o-specific advantages of the investing firms

Question 20

What should a firm do when all OLI-advantages exist?

Answer 20

Replace arm’s length trade with intra-firm trade

Question 21

Uppsala Model

Answer 21

Internationalisation is a cumulative, path-dependent process whereby a firm’s international expansion pattern is a function of its past international experience and knowledge base.

Question 22

The internalisation theory argues that:

Answer 22

A firm with little or no experience typically enters a foreign market by exporting, establishing a sales subsidiary, or by investing in production facilities.

Question 23

Psychic distance

Answer 23

The degree to which a firm is uncertain of the characteristics of a foreign market, which results in costs and the risks of FDI.

Question 24

FSAs can be Location bound and non-location bound

Answer 24

Location bound = FSAs deployed only in a limited geographical area
non-location bound = FSAs that are easily transferred across locations

Question 25

Resource-based view

Answer 25

Firm performance is related to their sustainable competitive advantage at the firm level, which is the result of superiority in resources combination vis-a-vis competitors.

OR

The idea that the effective and efficient application of all useful resources that the company can muster hel to determine its competitive advantage.

Question 26

The RBV differs from the TCE on three dimensions

Answer 26

1. Firm resource heterogeneity - The RBV assumes that each firm has its own unique set of resources and capabilities that it uses to compete. TCE - Generic firm
2. Firm resource immobility: Economists assume perfect markets, but RBV assumes that markets are not perfect and not all resources can be bought or sold

Question 27

VRIN Model of Barney

Answer 27

Tangible and intangible resources that are valuable, rare, inimitable, and non-substitutable, lead to sustained competitive advantage.

Question 28

Institutions

Answer 28

The rules of the game in a society or, more formally, the humanly devised constraints that shape human interaction.

Question 29

Institutional framework

Answer 29

A set of fundamental, political, social, and legal ground rules that establish basis for production, exchange and distribution.

Question 30

More scholars have come to realise that institutions matter. What misses in the RBV and in the industry-based view?

Answer 30

RBV: Does not hold for a given resource from one context to another.
Industry-based: neglects the contextual dimension