PowerPoints Week 1 Flashcards
Liability of Foreignness (LOF)
MNEs at a disadvantage to local competitors in a host country
Costs of doing business abroad, non-local-status
LOF the fundamental assumption driving theories of MNEs
Traditional view: To overcome LOF, MNEs need to provide foreign subsidiaries with FSAs
Disadvantages to operating in a foreign market due to:
- Spatial Distance: (travel, transport)
- Unfamiliarity (with the host country, adaption, learning costs)
- Lack of Legitimacy (nationalism)
- Home-country restrictions (on host country activities increase the cost of doing business)
Parent company
an enterprise which has a direct investment enterprise operating in a country other than that of the parent
Subsidiaries
An incorporated enterprise in the host country in which another entity directly owns more than half of the shareholders‘ voting power
FDI
FDI: an investment made to acquire lasting interest in enterprises operating outside of the economy of the investors
Firm-level strategy decision
Investors’ purpose is to gain an effective voice in the management of the enterprise
FDI differs from foreign portfolio investment as it is aims at gaining control over a (foreign) enterprise
An FDI is an investment in which a single foreign investor
- either owns 10% or more of the ordinary shares or voting power or
-owns less than 10%, yet still maintains an effective voice in
management (e.g., specific control rights, golden shares)
IB Theories at Country Level
Country Specific Advantages (CSA)
International Trade
Foreign Direct Investment (FDI)
Vernon’s Product Life-cycle Theory (PLC)
Strong assumption: of Trade Theories and International Economics
Strong Assumption:
Differences in factor endowments across borders will
lead to international transactions, whether transfers of capital or goods
- Assumes it is not an organizational problem (firm-level)
- focused on capital mobility
Product Life-Cycle Theory
Main Idea:
Hymer MNEs and FDI
Two conditions for the existence of FDI:
FDI is a firm-level strategy decision
- MNEs must posses a countervailing advantage over local firms
- The market for selling this advantage must be imperfect
MNEs and FDI
MNEs posses FSAs that allow to overcome LOF
MNEs’ FSA include:
- Product differentiation ability
- Superior marketing and/or distribution skills
- Brand names
- Access to capital and/or raw material
- Intangible assets, (know-how, management skills, technology)
Transaction Cost Economics (TCE)
Explains whether the market or a firm will coordinate economic activity
Market imperfections generate transaction costs (TCs)
- Search and information costs
- Negotiation costs
- writing up a contract
- enforcing the contract - going to court
- Policing and enforcement costs
Internalization allows coordination when a transaction in the intermediate market would not have taken place due to too high (TCs)
Disadvantages of Vertical Integration
- Increases asset base and capital employed
- Reduces flexibility
- Prevents access to external expertise
- Makes it impossible to fully benefit from supplier efficiency and scale
- Reduces focus on core business / capabilities
- Converts variable costs into fixed costs
- Blurs evaluation/knowledge of costs
Problems Associated with Outsourcing
- Spillover to competition
- Loss of critical know-how
- Dependence created by market power
- Dependence created by co-specialization or co-location
- Spillover to competition
- Loss of critical know-how
- Weakened commitment / competitive signaling
Why do MNEs exist?
They are capable to use internal transactions (within the
firm) when market transactions across borders are not
feasible due to high TCs
MNEs aim at maximizing profit by internalizing their intermediate market across borders in order to avoid market imperfections
Internalization Theory
= General Theory of the MNE
Rugman:
Emphasis on the ability of MNEs to create and control their FSAs
Possessing FSAs is a necessary but not a sufficient condition for FDI to take place
MNE’s FSAs should not be dissipated, rather protected:
- MNE’s internal market (= network of foreign subsidiaries)
enables to monitor, transfer and exploit FSAs abroad
Buckley & Casson:
Imperfect intermediate product markets.
- Incentives to bypass imperfect intermediate product markets by creating
internal markets
- Interdependent activities are brought under common ownership and control
Why do MNEs exist?
- They are capable to use internal transactions (within the firm) when market transactions across borders are not feasible due to high TCs
- MNEs aim at maximizing profit by internalizing their intermediate market across borders in order to avoid market imperfections
Eclectic Paradigm: OLI Model
3 types of advantages influencing FDI:
Ownership
Location
Internalization
If these advantages exists, the MNE should replace arm’s length trade (ex. exporting and importing) with intra-firm trade.
O: Ownership can be divided into
- Asset Advantages: various (in)tangible assets - overlap with FSA
- Transactional advantages, strengths in coordinating network of geographically dispersed affiliates
- Firm with strong O-advantages better equipped to overcome LOF
L: Location - Country specific advantages (CSAs)
- natural resources, demand conditions, cultural or institutional factors
- Firms enter foreign countries with the aim to acquire loca.on-specific assets (e.g., knowledge, human capital, natural recourses)
I: Internalization
- refer to benefits of creating, transferring, deploying, recombine, and exploiting FSA internally instead of via contractual arrangements with outside parties
Why do MNEs invest abroad?
Traditional investment motives:
- Market Seeking
- Efficiency Seeking
- (Natural) Resource Seeking
Modern investment motives:
- Strategic asset-seeking
- catch-up
- diversification
- R&D springboard.
4 types of FDI motivations
OLI: Location-advantages
- Natural resource-seeking (traditional)
- Market-seeking (traditional)
- Efficiency-seeking (traditional)
- Strategic asset-seeking (modern)
Scandinavian: Uppsala Model
Try to explain the internalization of small Scandinavian firms
suggests that there are stages of internationalization.
“Experiential market knowledge” Firm with no (or few) international experience enter foreign markets - by exporting - establishing sales subsidiary - investing in production facilities
Importance of ‘psychic distance’
= degree to which a firm is uncertain of the host country’s characteristics - ‘psychic distance -> costs and risks of FDI
Benefits of exploiting FSAs abroad > risks of operating in unknown foreign environments
- firms initially expand to nearby geographic countries that are relative familiar
- after accumulating experience, MNEs expand into more distant country markets
Importance of ‘psychic distance’
Importance of ‘psychic distance’
= degree to which a firm is uncertain of the host country’s characteristics
‘psychic distance -> costs and risks of FDI
location-bound (LB) vs. non-location-bound (NLB) FSAs
:LB FSAs - deployed only in a limited geographical area -> result of subsidiary’s initiative
:NLB FSAs - easily transferred across locations -> result of MNE network effort
MNE as a Network
MNE is viewed as a network rather than a monolithic hierarchy
The subsidiary becomes the key building block of the MNE and unit of analysis
Viewpoint: Understanding each subsidiary’s idiosyncratic resource base, strategy, assigned role inside the MNE, and linkages with other
Firms performance is related to …
Firms performance is related to their sustainable competitive advantage at firm-level, which is:
The result of superiority in resources recombination vis-á-vis competitors
.. in the MNE case =
An added complexity in resources recombination
Institutional-based view (IBV) of IB:
Institutions are commonly known as the “rules of the game”
Institutions shape individual and firm behavior
Institutional frameworks are very much heterogeneous around the world, MNEs need to adapt their strategic choices dealing with host countries heterogeneities.
North:
Institutions are humanly devised constraints that structure political, economic & social interaction.
- Create order
- Reduce uncertainty of exchange
- Formal Rules
- laws
- property rights - Informal constraints
- sanctions
- taboos
- customs
- traditions
