Lecture 4 Flashcards
A typical internationalization process
- Initially, the firm might license patents, trademarks or technology to a foreign company in exchange for a fee or royalty
- The firm sees a potential for extra sales by exporting and uses a local agent or distributor to enter a foreign market
- The firm may use exporting as a ‘vent’ for its surplus production an dmight have no long-term commitment to the international market
- As exports become more important, the MNE will set up an office for its sales representatvie or a slaes subsidiary
- The firm might set up local packaging and/or assembly operations
- Finally, the firm will set up a wholly-owned subsidiary (FDI)
MNE or MNC
Mulitantional enterprise
- A company headquartered in one country but with operations in one or more other countries
- MNEs often downplay the fact that they are foreignheld
Why do MNE exist
Uppsala internationalization model - Behavioral approach
4 stages of inetnational expansion (the establishment chain):
- Weak exporting activity
- Permanent exporting activity through representatives
- Establishment of sales divisions abroad
- Production abroad
- Increasing Psychic distance
Psychic distance
The factors preventing or disturbing firms from learning about and understanding of a foreign environment. These factors concern mostly differences in language, culture, political sustemsn, level of education or level of industrial development.
Perceptual distance
Subjective - in the eye of the beholder
Why do MNE exists? - Economic approach - Key assumptions
- Cost of doing business abroad - cost of foreigneness - liability of foreignness
- To compete in foreign markets MNE needs some ‘advantages. against local competitors
- Acitvities are internalized if its is more ‘better’ than buying in the market
Transaction costs Economics TCE
- Markets and firms represent alternative ways of coordinating production
- Transaction costs (using market = buying)
- Search and informaiton: Finding dupplier, checking price, quality, delays
- Bargaining and decision: negotiation, drafting contract
- Policing and enforcing: Legal, audit
Forms of governance
Three fundamental forms of transaction governance and the condtions when they are likely to occur:
- Market: Autnomous parties exchanges are governed by prices in supply demand equilibrium
- Hierarchy: Transactions among parties occur under a unified owner, who settles disputes by administrative fiat
- Hybrid: Long term contractual relations that preserve autonomy, but provide added transaction-specific safeguards as compared with the market
Behavioral assumptions
Transaction parties can never wriete completely detaild agreements covering all possible future contingencies
- Boundend rationality: Utility-maximizing, intendedly rational transactors are constrained by cognitive limits on their capacities to process information efficiently
- Opportunism: Self interest with guile, could induce strategic behavior by transactors to liet to, cheat, confuse, mislead their exchange partners
Even when opportunism risks are low, organisations must still safeguard against possibly severe damages from an opportunistic partner
Transaction costs depends on?
Transaction have three key dimensions that determine how their costs affect governance choice
- Uncertainty: about enivronments, other actors
- Example: floods delay factory supplier’s just in time deliveries
- Frequencey of exchanges: one-off or recurrent
- Asset specificity: investmetns lacking alternative uses except at loss of productive value; asset specifities can be human skills, geographical sites, brand names, dedicated machinery
- example: training needed for seller
OLI framework
- Ownership advantage
- Firm specific factors including technology, patent process and other core competencies
- Location advantage
- Location specific factors. These are external tot the firm includign trasportation cost
- Inernalization
- Cost advantage from vertical and horizontal integration, due to transaction cost caused by market failure
Ownership advantages O
Possesion of some intangible asset (knowledge, brand) unique to the firm.
Include benefits arising form sieze and established position of firm:
- Market power (including brand)
- Economies of scale
- Favored accesss to inputs - perhaps via ownership or geography
Locational advantages L
The ‘ where’, place or geography of international production
Key question: Why are production facilities established by MNEs in particular countires?
For FDI, must be in firm’s interest to use Ownership advantages with some facor input in a foreign country
- Or becayse of market size, import controls
- If no location advantages exist then foreign markets can be efficietnly served by exports
Internalization advantages I
Why use ownership advantages internally, rather than license themn to a foreign firm?
- Exploit market failure
- Control supplies
- control market outlets
- anti-competitive practices
- Protect against market failure:
* avoid costs of using (imperfect) market knowlegde
MNE’s unique resource base
- Physical resources: natural resources, buildings, plant equipment
- financial resources: equity and loan capital
- Human resources: individuals and teams, entrepreneurial and operational skills
- usptream knowledge: sourcin knowlegde, product and process-related technological knowledge
- Downstream knowledge: marketing, sales, distribution and after sales service
- Administrative knowledge: organizational structure, culture and systems
- Reputational resources: Brand names, reputation for honest business dealings
- Buildinb upon its resource base, as well as its acces to location advantages, the MNE will develop stand-alone FSAs and routines, and will also engage in rresource crecombination
- FSAs reflect the firm’s distinct strengths vis-a-vis rivals, and are teh source of tis competitive advantage in the market place
Routines
- The distinct ability to combine further the firm’s resources, unique ways valued by the firm’s stakeholders
- Routines are stable patterns of decisions and actions that coordinate the productive use of resources, and thereby generate value, whether domesically or internationally.
- The combination ability expressed in routines is a higher-order FSA (flexible spending accounts)
Recombination
- Constitutes the heart of international business strategy
- Artful orchestration of resources, especially knowledge bundles, as a response to differences between national and foreign environments, and to satisfy new stakeholder demands in these foreign environments
- Entrepreneurial judgement is at the heart of the MNE’s recombination capability
- Precondition to value creation and satisfying stakeholder needs in complex international settings
Transferability of FSAs
If the FSA consists of easily codifiable knowledge (if it can be articulated explicitly, as in a handbook or blueprint) then it can be cheaply transferred abroad, but it can also be easily imitated by other firms
Though expensive and time-consuming to transfer tacit knowledge acroos borders, the benifit to the MNE is that this knowledge is also difficult to imitate. It is often a key source of competitive advantage when doing business abroad.
FSA that are not transferable abroad –> location bound FSA
- Stand-alone resources linked to laction advantages (privileged retail loactions)
- Local marketing knowledge and reputional resources, such as brand names
- Local best practices such as incentive systems or buyer-supplier relations
- Domestic recombination capability
Location advantages
- Entire set of stengths of a location, and accessible by firms in that location
- Should always be assessed relative to the strenghts of other locations
- Intrumental to FSAs
