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Theories of International Business > PowerPoints Week 1 > Flashcards

PowerPoints Week 1 Flashcards

1
Q

Liability of Foreignness (LOF)

A

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:

  1. Spatial Distance: (travel, transport)
  2. Unfamiliarity (with the host country, adaption, learning costs)
  3. Lack of Legitimacy (nationalism)
  4. Home-country restrictions (on host country activities increase the cost of doing business)
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2
Q

Parent company

A

an enterprise which has a direct investment enterprise operating in a country other than that of the parent

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3
Q

Subsidiaries

A

An incorporated enterprise in the host country in which another entity directly owns more than half of the shareholders‘ voting power

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4
Q

FDI

A

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)

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5
Q

IB Theories at Country Level

A

Country Specific Advantages (CSA)

International Trade

Foreign Direct Investment (FDI)

Vernon’s Product Life-cycle Theory (PLC)

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6
Q

Strong assumption: of Trade Theories and International Economics

A

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
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7
Q

Product Life-Cycle Theory

A

Main Idea:

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8
Q

Hymer MNEs and FDI

Two conditions for the existence of FDI:

A

FDI is a firm-level strategy decision

  1. MNEs must posses a countervailing advantage over local firms
  2. The market for selling this advantage must be imperfect
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9
Q

MNEs and FDI

A

MNEs posses FSAs that allow to overcome LOF

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10
Q

MNEs’ FSA include:

A
  1. Product differentiation ability
  2. Superior marketing and/or distribution skills
  3. Brand names
  4. Access to capital and/or raw material
  5. Intangible assets, (know-how, management skills, technology)
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11
Q

Transaction Cost Economics (TCE)

A

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)

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12
Q

Disadvantages of Vertical Integration

A
  • 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
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13
Q

Problems Associated with Outsourcing

A
  • 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
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14
Q

Why do MNEs exist?

A

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

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15
Q

Internalization Theory

= General Theory of the MNE

A

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
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16
Q

Eclectic Paradigm: OLI Model

A

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

17
Q

Why do MNEs invest abroad?

A

Traditional investment motives:

  1. Market Seeking
  2. Efficiency Seeking
  3. (Natural) Resource Seeking

Modern investment motives:

  1. Strategic asset-seeking
    - catch-up
    - diversification
    - R&D springboard.
18
Q

4 types of FDI motivations

OLI: Location-advantages

A
  1. Natural resource-seeking (traditional)
  2. Market-seeking (traditional)
  3. Efficiency-seeking (traditional)
  4. Strategic asset-seeking (modern)
19
Q

Scandinavian: Uppsala Model

A

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

  1. firms initially expand to nearby geographic countries that are relative familiar
  2. after accumulating experience, MNEs expand into more distant country markets
20
Q

Importance of ‘psychic distance’

A

Importance of ‘psychic distance’

= degree to which a firm is uncertain of the host country’s characteristics

‘psychic distance -> costs and risks of FDI

21
Q

location-bound (LB) vs. non-location-bound (NLB) FSAs

A

˜: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

22
Q

MNE as a Network

A

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

23
Q

Firms performance is related to …

A

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

24
Q

Institutional-based view (IBV) of IB:

A

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

  1. Formal Rules
    - laws
    - property rights
  2. Informal constraints
    - sanctions
    - taboos
    - customs
    - traditions
25
Q

Institutional weakness =

A

“Institutional weakness” means incentive structures are
absent, arbitrary, or ambiguous

This translates into unpredictability and thus risk

Depends in part on whether society is rule-based or relationship-based:
In rule-based settings - institutions are more transparent and predictable (to outsiders) than in relationship-based settings

Weak institutions can result in:

  • Weak enforcement (protecting property rights)
  • Weak definitions (corruptions and bribery)
26
Q

RBV

A

Tangible and Intangible resources

  1. Valuable
  2. Rare
  3. Inimitable
  4. Non- substitutable/ organizational
    - – This will lead to – Sustained Competitive Advantage.
27
Q

MNEs Subsidiaries

A

MNEs’ subsidiaries tend to have a relative superiority of resource and related recombination ability

  • Compared to rivals from the inside the firm (e.g.other affiliates) and from the outside (i.e. industry competitors)
  • Depending on subsidiary’s mandate (competence creating vs. competence exploring) and its capability on initiates

x Upstream capabilities: R&D, sourcing)
Rooted in MNE dominant routines and less responsive to changes.

x Downstream capabilities: marketing skills
Location bound and allow national responsiveness favoring relative resource superiority.

Theories of International Business (6 decks)

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