Lecture 2a: Why firms go global/Modes of entry

Question 1

what is international business?

Answer 1

all commercial transactions that take place between two or more countries

• -activities include financial flows (e.g. investments), goods and services (eg transportation)
• -actors include individuals, firms, public sector organizations and even social sector organizations

Question 2

How does an international business transaction differ from domestic business? (3 main ways)

Answer 2

– 2 or more different sets of laws & regulations
– 2 or more different cultures
– more than one currency

Question 3

What are the seven forces driving globalization?

Answer 3

• Increase in and application of technology
• Liberalization of cross-border trade and resource
movements
• Development of services that support international
business
• Growth of consumer pressures
• Increase in global competition
• Changes in political situations and government policies
• Expansion of cross-national cooperation

Question 4

What are the main potential costs of globalization (3)?

Answer 4

• Threats to national sovereignty
• Economic growth and environmental stress
• Growing income inequality and personal stress

Question 5

describe the cost of globalization: Threats to national sovereignty

Answer 5

– Loss of freedom to “act locally”
– Supranational trade dispute resolution mechanisms (e.g. WTO
mechanisms)

Question 6

describe the cost of globalization: Economic growth and environmental stress

Answer 6

Concern that growth consumes nonrenewable natural resources and increases burden on environment

Question 7

describe the cost of globalization: Growing income inequality and personal stress

Answer 7

– Weak mechanisms to compensate or retrain those whose jobs are eliminated by trade liberalization (or innovation or changing consumer tastes for that matter)
– Emerging superstars overshadow those left behind
– Personal stress of increased competition

Question 8

What are the different modes/types of international business?

Answer 8

1. Merchandise exports & imports
2. Service exports & imports
   – Passenger travel & transportation of goods
   – Royalties & licensing fees
   – Other private services: business, professional & technical
   services (BPT), education, financial services, insurance,
   telecommunications
3. Investments
   – Foreign direct investment (FDI)
   – Portfolio investment

Question 9

What are the four main reasons firms go international?

Answer 9

1. Seeking markets / sales
2. Seeking resources
3. Diversifying / reducing risk
4. Learning (acquiring, transferring, applying
   knowledge internationally)

These are key factors guiding decisions about whether,
where, and how to engage in international business

Question 10

Describe the factor in deciding if firms go international: seeking markets

Answer 10

• large size and economies of scale
• lower input costs due to large size
• scale economies in shipment, distribution and promotion
• access to low cost financing

Question 11

Describe the factor in deciding if firms go international: seek resources

Answer 11

• ability to access raw materials oberseas

- ability to shift production overseas

Question 12

Describe the factor in deciding if firms go international: reduce risk

Answer 12

• financial flexibility

- ability to shift production overseas

Question 13

Describe the factor in deciding if firms go international: learn

Answer 13

• information advantages

- managerial experience and expertise

Question 14

What are the advantages (general) of MNC?

Answer 14

• Superior technical know-how
• Ability to leverage existing reputation, brand image,
goodwill
• Large size & scale economies
• Managerial experience & expertise
• Ability to locate activities elsewhere
• Information advantages
• Risk diversification across countries

Question 15

describe the advantage of MNCs: • Superior technical know-how

Answer 15

– Technology, marketing, resource extraction

Question 16

describe the advantage of MNCs: Large size & scale economies

Answer 16

– Increases bargaining power
– Scale helps cover high fixed costs in capital intensive
industries
– Lower input costs due to scale
– Logistics, distribution & promotion scale economies
– Lower financing costs and lower credit risk

Question 17

describe the advantage of MNCs: Ability to locate activities elsewhere

Answer 17

– Sourcing raw materials
– Locating production facilities
– Financial flexibility  transfer pricing
– Tax planning (& “tax inversion”*)

Question 18

What are some potential disadvantages of MNCs?

Answer 18

• Business risks: FX risk (which may be hedged)
• Host-country regulations
• Different legal systems
• Political risks – major regulatory shift may be greater risk
than nationalization, war etc.
• Operational difficulties e.g. adapting to local business
practices
• Cultural differences
• Coordination costs

Question 19

What are two good reasons firms internationalize (D. Lessard)?

Answer 19

– Because they are good at something that “travels”?
More solid grounds for going international
– Because the industry/game is global in scope? Probable
grounds for going international

Question 20

What does the “liability of foreignness” mean?

Answer 20

• One might expect multinational firms to have a
competitive disadvantage versus local firms in the host
country.
– Multinational firm faces the “liability of foreignness”.
– Domestic firms have advantage of lower distance
(geographic, economic, cultural and administrative) and superior knowledge of local market

Question 21

Is there a strong link between internationalization and performance?

Answer 21

No

at least studies do not show a strong relationship between incremental international expansion and increased profitability

• –since firms and the international environment are heterogeneous
• –various motives for internationalization and varying goals and profitability horizons

Question 22

what does international business strategy aim to do?

Answer 22

create a sustained competitive advantage in a world characterized by varying degrees of distance/differences

Question 23

according to Buckley and Casson’s s The Future of the Multinational Enterprise (1976), when do firms internalize activities?

Answer 23

A firm internalizes activities under common
ownership when transaction costs of coordinating
through the market are too high.