Week 1: International Business Theories Flashcards
Liability of Foreignness (LOF)
” The cost of doing business abroad”
LOF is the fundamental assumption driving theories of MNEs (Internalization theory, OLI Paradigm, Uppsala model)
To overcome LOF: - MNEs need = FSAs
Disadvantages to operating in a foreign market due to:
- Spatial Distance:
- travel, transportation, coordination costs - Unfamiliarly with host country
- adaption, learning costs - lack of legitimaticy
- economic nationalism by local stakeholders - Home-country restrictions
- restrictions on host-country activities increase the costs of doing business.
MNE =
An MNE = ‘a firm that owns and/or controls value creating activities in two or more different countries’ (Adaptation of Buckley & Casson, 2009, p.1564)
An MNE = a firm that uses FDI to establish or purchase income- generating assets abroad, but may also trade goods and services across international borders
FDI =
FDI =
- firm-level strategy
- Investment made to acquire lasting interest in enterprises operating outside of the economy of the investors.
TO GAIN: an affective voice in the management of the enterprise.
Hymer:
2 conditions for the existence of FDI (instead of trade):
- MNEs must possess a countervailing advantage over local firms
- the market for selling this advantage must be imperfect
Vernon’s (1966) Product Life-Cycle Theory
Main idea: Manufacturing products evolve through a cycle of roughly 4 stages
FSAs include:
- product differentiation ability
- superior marketing and/or distribution skkills
- brand names
- access to capital and/or raw material
intangible assets, e.g. know-how, management skills, technology
Transaction Cost Economics (Ronald Case):
Market imperfections generate transaction costs (TCs)
I. Search and information costs
II. Bargaining costs (i.e. incomplete contracts)
III. Policing and enforcement costs
Explains whether the market or firm will coordinate an economic activity
Transaction Costs are:
- scanning the environment and finding trading partner
- negotiating and bargaining
- writing a contract
- controlling and monitoring performance
- enforcing the contract (going to court)
- facing the risks associated with ‘hold-up’
When to high TCs -> Internalization: might be solution
Internalization happens when a transaction in the intermediate market would not have been taken place due to to high TCs
Vertical Integration
Disadvantages:
- increases asset base and capital employed
- reduces flexibility
- prevents access to external expertise
- makes it impossible to fully benefit from suppliers efficiency and scale
- reduces focus on core business / capabilities
converts variable costs into fixed costs - blurs evaluation / knowledge of costs
Outsourcing
Disadvantages:
- Dependance created by co-specialization or co-location - inadequate performance (quality, availability)
- loss of critical know-how
- spillover to competition
- weakened commitment / competitive signaling
Eclectic Paradigm - OLI Model (Dunning)
OLI = 3 types of advantages that influence FDI
Integration of theories at both country- and firm-level
1) Ownership advantages
= Firm-level competitive advantages that help overcome LOF - don’t have? - outsource!
Firms with strong O-advantages are better equipped to overcome LOF
- assets advantages (FSAs)
- scare, tacit, firm-specific knowledge
- transactional advantages
- strength in coordinating network geographically dispersed affiliates
- ability to identify and exploit resources
2) Location advantages
= non present? - stay away!
4 types of FDI motivations:
- natural-resource-seeking
- market-seeking: big population, or attractive market
- efficiency-seeking: wages
- strategic asset-seeking: knowledge, skills
3) Internalization advantages
= risk manageable? - outsource/trade !
= benefits of creating, transferring, deploying, recombining and exploiting FSAs internally!
- MNEs compensate for market failure -> institutional risk!
- keeping activities inside firm but outside country
Why do MNEs Invest Abroad?
“Traditional” investment motives:
- Market seeking
- Efficiency seeking
- (Natural)Resource seeking
“Modern” investment motive(s):
- Strategic asset seeking
Catch-up
Diversification
R&D springboard
Stages Model: Uppsala Model
Stages Model: Uppsala Model
= firms internationalize/expand incrementally -> in stages –> “learn on the way”. —> slow process to built knowledge
- lack of market knowledge
- lack of international experience
- perceptions of risk in dealing with foreign business partners
Firms with no (or few) international experience enter foreign markets:
- by exporting
- establishing a sales subsidiary
- investing in production facilities
Model suggests:
1: initial expansion in nearby countries
2: after, expansion when gained more knowledge
3: steps are incremental
4: emphasis on psychic distance
MNE as a Network
Birkinshaw (1996, 1997)
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
Rugman and Verbeke (1992, 2001, 2003):
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
Resource Based View
Firm specific RESOURCES and CAPABILITIES are key determines for success and failure of firms!
Firm performance is related to their sustainable competitive advantage at firm-level:
-> due to superiority in resources recombination
How to sustain competitive advantage?
- .. tangible and intangible resources are:
- Valuable
- no? -> competitive disadvantage - Rare
- no? -> competitive parity - Inimitable
- no? -> temporary competitive advantage - Organized
- no? -> unused competitive advantage
-> VRIN/VRIO - all together = comp. advantage
Institutional Based View (IBV)
Formal + informal rules of the game
are the determines to the success and failure of firms around the globe.
North:
Institutions are humanly devised constraints that structure political, economic & social interaction
- create order
- reduce uncertainty of exchange
path dependency:
- organizations owe their existence to the opportunities provided by the (in)formal institutional frameworks
- differing opportunities sets lead to different historical paths
Assumes:
1) actors behave predictably and make rational choices
–> seeking rewards, while avoid sanctions
2) institutions reduce uncertainty by: conditioning norms of behaviors and defining boundaries what is legitimate
Institutional weakness
= incentive structures are absent, arbitrary or ambiguous
- translates in: unpredictability and risk
- depends in part of society is rule-based or relationship-based
weak institutions:
- you never know what will happen
- corruption and bribery
- weak enforcement (protecting IP-rights)
