Week 1: KC

Question 1

Globalization; 3 main debates

Answer 1

1. Is globalization real? Hyperglobalist vs. Sceptics
2. Is globalization dead? What is the future of globalization?
3. Is globalization good…? Protest comes from perceived negative benefits of globalization

1. Is globalization real? Hyperglobalist vs. Sceptics
   • Hyperglobalists:
   - today’s global economy is genuinely borderless.
   Information, capital, and innovation flow all over the world at top speed, enabled by technology.
   - There are global products (we see all over the world), there is homogenous taste (the world is flat, all hamburgers taste the same for everyone in every country) and there is standardization.

• Sceptics argue that globalization is a myth.

• variation in national business systems
• most trade and FDI is within each of the ‘triads’ and this looks more like regionalization.

2. Is globalization dead? What is the future of globalization?
   • Some argue the end of globalization is near / must be stopped. Some countries take on a more nationalistic stand
3. Is globalization good…? Protest comes from perceived negative benefits of globalization
   - perceived negative benefits

Democracy, environment, instability world order, homogenization of culture, equality

Question 2

Why Global Value Chains (GVC) complex?

Answer 2

Geograpical/ cultural reasons
- different locations around the world

Organizational reasons

• within the MNEs boundries (subsidiaries)
• outside MNEs boundaries (suppliers, universities, research institutions)

–> this all results in high coordination costs

Question 3

Transaction Cost Theory (- Rugman & Verbeke)

How do MNEs make strategic decisions about GVC activities?

Three key decision drivers:

Answer 3

1. Firm-specific advantages (FSAs)
   - Unique capabilities of the organizations
   - product and process technoogy
   - marketing and distribution skills
   - propiertary know-how
2. Country-specific advantages (CSAs)
   - resources and competency available in a specific location
   - Access to natural resources
   - Access to a growing market
   - Supportive tax system
3. Internalization advantages (IAs)
   - Benefits associated with keeping business activities wityhin the firm boundaries
   - benefits associated with different entry modes when serving foreign markets

–> These three concepts are strongly interconnected

Question 4

Three strategic decisions concepts of firms

How are they (strongly) interconnected?

Answer 4

• FSAs:

• are not solely developed in the home country
• and may be transferred within the MNE network
• CSAs (also in a specific host country) can contribute to the development of new FSAs
• IAs depend on a company’s transactional FSA to operate foreign subsidiaries

Question 5

Transnational Strategic Solution (Rugman & Verbeke)

Answer 5

Transnational Strategic Solution, with on one side the home country with their own FSAs and on the other side the host country with their FSAs.

The CSAs of the specific country the company is active in, interact with the FSAs of these companies.

The transnational solution builds upon three sources of competitive advantage:

1. LB-FSAs,
2. NLB-FSAs,
3. a dual use of CSAs of both the home and host nations.

Leads to different combination of advantages… –>

• Non-location bound FSAs (highly flexible)
• Location bound FSA (non transferrable)

Question 6

(Micheal Porter)

Two types of industry:

Answer 6

Unit of analysis is always the industry

• Multi-domestic
– firm operates in different markets/countries, the competative strategies adopted in one market may not be successful in another market if these markets are disconnected to each other.
o For instance, the insurance industry

• Global
– competition that crosses international borders. The strategies of these firms should be designed in a way that may fit in different markets served by the firm. Markets are highly connected.
o For instance, the electronic consumer equipment industry

Question 7

Michael Porter

Competitive Advantage

Answer 7

Unit of analysis is always the industry

Competitive Advantage = gained by carrying out business activities with
- lower costs
- and superior coordination/differentiation
(offering higher or distinctive value to the customer) compared to competitors.)

Question 8

Michael Porter

Competitive scope =

Answer 8

A firm that competes internationally must decide how to spread the activities in the value chain among countries.

Competitive scope = the breadth of activities the firm employs
together in competing in an industry

Question 9

Porter’s value chain

Answer 9

Primary Activities:

• Inbound Logistics
• Operations
• Outbound Logistics
• Marketing & Sales
• Service

Support Activities:

• Firm Infrastructure
• Human Resource Management
• Technology Development
• Procurement

Together lead to; Margin

Question 10

spreading activities in value chain.

Two different dimensions:

Answer 10

1. Configuration of business activities (concentrated vs. dispersed)
   • Geography of activities
   o Concentrated – performing activity in one location and serving the world from there (Apple manufacturing in China only but welling worldwide)
   o Dispersed – performing every activity in every country (Heineken manufacturing and selling in different countries)
2. Coordination of business activities (market vs. internalization)
   • Define governance of activities
   o Market/high
   o Internalization/low

This all leads to 4 strategic options to compete internationally

Question 11

4 strategic options to compete internationally

Answer 11

IMAGE

Coordination of activities: HIGH/LOW

Configuration of activities: Geographically DISPERSED/CENTERED

1. High / Dispersed:
   - high foreign investment with extensive coordination among sybsidiaries
2. Low / Dispersed:
   - country-centered strategy by MNEs with a number of domestic firms operating in only one country
3. High / Centered:
   - purest global strategy
4. Low / Centered:
   - export based strategy with decentralized marketing

Question 12

Ghemawat (2008); arbitrage

+ The AAA framework

Answer 12

Argues: that country differences can be a source rather than a constraint for value creation.
 Tradeoff between integration or responsiveness.

• The AAA framework
  1. Adaptation - local responsiveness
  2. Aggregation - aggregate and overcome differences to achieve scale and scope economies
  3. Arbitrage - exploiting differences between countries and relative countries specific advantages - absolute economies of specialization

–> Three elements cannot be obtained at the same time.

–> First 2 elements suggest either to adapt to differences to enjoy local responsiveness,
or to aggregate and overcome differences to achieve scale and scope economies

–> Arbitrage should be applied when International activities are organized by function – HR, IT, Procurement (Support Activities); because emphasizes on vertical relationships across organizational boundaries

Question 13

Framework of Barlett & Ghoshal

Types of International Strategy

Answer 13

Companies face two direct pressures:
1.) Global Integration (integrate operations on global scale) and 2.) responding to Local Conditions of markets in which they operate

Global Integration/Globalization =

• Allows companies to break up their value chain and move parts to favorable locations.
• increase of competition putting a pressure on the necessity of reducing costs therefore producing at large scale (economies of scale).
• Products are usually standardized and there is threat of global competition, which is why companies should be integrated in a tight manner.

Local Responsiveness =

• Countries differ in customer tastes, which forces manufacturers to adapt offering
• also large differences considering infrastructure, business practices, distribution channels, etc
• products should be adjusted to meet local demand.
• Companies that do this, are local responsive.

Global Strategy;
- HIGH global integration / LOW local responsiveness

International Strategy;
- LOW global integration / LOW local responsiveness

Transnational Strategy
- HIGH global integration / HIGH local responsiveness

Multidomestic Strategy
- LOW global integration / HIGH local responsiveness

Question 14

(Barlett & Ghoshal); Framework of MNEs in globalized world

Global Strategy;

Answer 14

Global Strategy;
- HIGH global integration / LOW local responsiveness

Example:

• Pharmaceutical company
• produce similar if not identical medicine for multiple markets. Tightly integrated with subsidiaries in other locations. There is limited local responsiveness as the products are not meant to adjust to local markets

Question 15

(Barlett & Ghoshal); Framework of MNEs in globalized world

International strategy

Answer 15

International Strategy;
- LOW global integration / LOW local responsiveness

High quality products that are globally recognizable, that make them suited for exporting. Face limited pressure to relocate value chain activities (no need for outsourcing) and products do not have to be adapted to local consumer demands as much

Example:
- Jack Daniels

Question 16

(Barlett & Ghoshal); Framework of MNEs in globalized world

Transnational strategy

Answer 16

Transnational Strategy
- HIGH global integration / HIGH local responsiveness

• Global and Multi-Domestic firm.
• Aim is to maximize local responsiveness but also gaining benefits from global integration.
• Has integrated and interdependent network of subsidiaries all over the world
• but locally responsible in downstream activities such as marketing and sales.

Example:
- Unilever, active in global markets and adapting to local markets at the same time

Question 17

(Barlett & Ghoshal); Framework of MNEs in globalized world

Multi-domestic strategy;

Answer 17

Multidomestic Strategy
- LOW global integration / HIGH local responsiveness

• Strong pressure to be locally responsive.

Example

• Fast-moving consumer goods industry, like Nestle.
• Adapt products to local taste in markets by offering different products in different market.
• This does not rely on GVC as subsidiaries operate relatively autonomes from headquarters (unlike Unilever).

Question 18

(Barlett & Ghoshal); Framework of MNEs in globalized world

McDonalds - Which Strategy?

Answer 18

McDonalds would be placed in between

• International Strategy
• and Multi-domestic strategy

Offers standardized services but still adapts products to local taste.

• International strategy – High quality products that are globally recognizable, that make them suited for exporting
• Multi-domestic strategy – Strong pressure to be locally responsive.

Question 19

(Barlett & Ghoshal); Framework of MNEs in globalized world

IKEA - Which Strategy?

Answer 19

IKEA would be in-between

• Global Strategy
• Transnational Strategy

Has a similar global value chain and production in low-cost locations. Some products are found across the world, and some are uniquely altered to local customers.

• Global strategy – Local responsiveness is relatively low but tightly integrated GVC
• Transnational strategy – Global and Multi-Domestic firm. Aim is to maximize local responsiveness but also gaining benefits from global integration. Has integrated and interdependent network of subsidiaries all over the world but is locally responsible in downstream activities such as marketing and sales.

Question 20

Criticism; Framework of Barlett & Ghoshal

Rugman & Verbeke (1992) - How does this fit international business standards?

Answer 20

Suggestion: The framework should make a distinction between location bound and non-location bound FSAs

1. NLB-FSAs need not necessarily originate within the parent company, but may also be created by a subsidiary or by joint efforts of the firm’s different operations located abroad.
2. Many of the FSAs generated within the parent company may be perceived to be NLB-FSAs, whereas in reality they constitute LB-FSAs. As concerns CSAs, it should be recognized that CSAs of host countries may be used in a ‘leveraged’ way, namely when contributing to the development of new FSAs.

A transnational firm builds its competitive advantage upon a mix of LB-FSAs and NLB-FSAs. Firms in this view should attempt to reap benefits of both national responsiveness and integration.

• Allow for analysis of Barlett & Ghoshal typology and theory extension

–> TRANSACTION COST THEORY

Leren; IMAGE

Question 21

OLI framework

Answer 21

= Widely used to access necessary conditions for FDI.

• Ownership advantages: firms need to have some advantage of ownership, such as patents or substantial R&D knowledge, or advantage of nationality (access to strong domestic networks)
• Location advantages: the location into which a firm wants to expand should be attractive enough for the firm by offering certain advantages (such as large market, low taxes)
• Internalization advantages: it should be advantageous to the firm to organize the investment itself, rather than through a partnership arrangement or outsourcing.

Question 22

Four basic dimensions of competitive scope:

Answer 22

Four basic dimensions of competitive scope:

1. Segment scope (product varieties, customer types)
2. Industry scope (range of industries the firm competes in)
3. Vertical scope (what activities are performed by the firm versus suppliers)
4. Geographic scope (key for MNEs, as they need to make decisions on how to locate the parts of the value chain in different countries).

Question 23

Extending the transaction cost theory

Answer 23

However, transaction cost theory has not dealt with the ways in which CSAs may actually contribute to the long-run development of new FSA, through their leveraged use in the corporation.

Question 24

There are different types of arbitrage:

Answer 24

• Knowledge arbitrage → the diffusion and adaptation of a central stock of knowledge
• Labour arbitrage → production shifts to countries with low labour costs
• Capital arbitrage → plant and infrastructure can cost less in low labour countries
• Tax arbitrage → moving assets or functions to low-cost regimes