Week 1 - Expanding Abroad Flashcards
What is a multinational enterprise (MNE)? (2 conditions)
- SUBSTANTIAL DIRECT INVESTMENT in foreign countries, not just the trading relationships of an import-export business
- Engaged in the ACTIVE MANAGEMENT of these offshore assets rather than simply holding them in a passive investment portfolio
What are the key differentiating characteristics of an MNE?
- Importance of both strategic and organizational integration, and thereby the ACTIVE, COORDINATED MANAGEMENT of operations located in different countries
- An MNE creates an internal organization to carry out key cross-border tasks and transactions internally rather than depending on trade through external markets
What are the some traditional motivations to internationalize?
- The need to SECURE KEY SUPPLIES
- MARKET-SEEKING BEHAVIOUR – this motivation was particularly strong for companies that has some intrinsic advantage (e.g., technology, brand recognition) which gave them a competitive advantage in offshore markets
- The desire to ACCESS LOW-COST FACTORS of production
Explain Vernon’s Product Cycle Theory
Suggests that the starting point for an internationalization process is typically an innovation that a company creates in its home country. To exploit this development:
- The company builds production facilities in home market since this is where main customer base is located, some demand also may be created in other developed countries (i.e., exports). An export unit is typically established.
- Set up production facilities in importing countries (that are already selling our products), making the transition from being an exporter to a true MNE.
- Increased competition forces prices up, company moves production to low-wage, developing countries to meet the demands of its customers at lower cost.
What are some emerging motivations to internationalize?
- Increasing scale economies, ballooning R&D investments, and shortening product life cycles
- Global scanning and learning capability – a company drawn offshore to secure supplies of raw materials was more likely to become aware of alternative, low-cost production sources around the globe
- Competitive positioning - go where our competitors go
What are some other motivations to internationalize?
- Unique market opportunity
- Extension of product life cycle
- Risk diversification
- Tax benefits
- Domestic competitive pressures
- Excess production capacity
- Declining home country sales
What advantages do domestic companies have over the MNEs entering the country? How can the MNE overcome these disadvantages?
Domestic companies have a huge natural advantage (e.g., greater familiarity with the national culture, industry structure, government requirements, etc.). Their existing relationships with relevant customers, suppliers, regulators, etc. provide additional advantages that the foreign company must either match or counteract with some unique strategic capability.
Most often, the countervailing strategic advantage of the foreign company is its superior knowledge or skills (e.g., advanced technological expertise, specific marketing competencies, etc.) or scale economies in R&D, production, etc.
The MNE cannot expect to succeed in the international environment unless it has some distinctive competency to overcome the liability of its foreignness.
What are the 3 conditions that must be met for the existence of an MNE?
- Some foreign countries must offer certain location-specific advantages to provide the requisite motivation for the company to invest there.
- The company must have some strategic competencies or ownership-specific advantages to counteract the disadvantages of its relative unfamiliarity with foreign markets.
- It must possess some organizational capabilities to achieve better returns from leveraging its strategic strengths internally rather than through external market mechanisms such as contracts or licenses.
Explain the Uppsala Method (the incremental approach to internationalization)
o The company makes an initial commitment of resources to the foreign market, and through this investment, it gains local market knowledge about customers, competitors, and regulatory conditions.
o On the basis of this market knowledge, the company is able to evaluate its current activities, the extent of its commitment to the market, and thus the opportunities for additional investment.
o It then makes a subsequent resource commitment, perhaps buying out its local distributor or investing in a local manufacturing plant, which allows it to develop additional market knowledge.
o Gradually, and through several cycles of investment, the company develops the necessary levels of local capability and market knowledge to become an effective competitor in the foreign country
What are some other methods/processes that companies use to internationalize?
- Some companies invest in or acquire local partners to shortcut the process of building up local market knowledge
- Some companies internationalize by gradually moving up the scale, from exporting through joint venturing to direct foreign investment, etc.
Explain the INTERNATIONAL mentality.
- In the earliest stages of internationalization, many MNE managers tend to think of the company’s overseas operations as distant outposts whose main role is to support the domestic parent company in different ways
- Products are developed for the domestic market and only subsequently sold abroad
- Technology and other sources of knowledge are transferred from the parent company to the overseas operators
- Offshore manufacturing represents a means to protect the company’s home market
Explain the MULTINATIONAL mentality.
- A multinational strategic mentality develops as managers begin to recognize and emphasize the differences among national markets and operating environments.
- Companies with this mentality adopt a more flexible approach to their international operations by modifying their products, strategies, and even management practices country by country.
- Managers of foreign operations tend to be highly independent entrepreneurs, often nationals of the host country.
- Plants are built more to provide local marketing advantages or improve political relations than to maximize production efficiency.
Explain the GLOBAL mentality.
- Creating products for a WORLD MARKET and manufacturing them on a global scale
- Underlying assumptions is that national tastes and preferences are more similar than different, or that they can be made similar by providing customers with standardized products at adequate cost and with quality advantages other those national varieties they know.
Explain the TRANSNATIONAL mentality.
- Be more responsive to local needs while capturing the benefits of global efficiency
- Resources and activities are dispersed but specialized
Why do nations trade? What are the benefits for the exporter and importer?
Creation of value!!!
Benefits for exporter:
→ Higher prices
→ Increased volume
→ Lower cost per unit
Benefits for importer:
→ Lower prices
→ Greater variety and increased quality
→ Diversification of supply
