Week 10 Flashcards
Foreign Direct Investment
is direct investment in production or business in one country by a business from another country.
What is a multinational firm?
Firms that sell or produce in multiple countries.
What differences should a business consider when thinking through an international strategy?
Customer tastes, needs, and income levels
Government regulations
Legal systems
Public tolerance for foreign firms
Reliability of basic infrastructure (eg roads & electricity)
Why do firms expand internationally?
Growth - Home markets are saturated and there is no more room for growth.
Efficiency - become more efficient by utilizing lower-cost resources, extending the product life cycle, and leveraging economies of scope and scale.
Managing risk - protection against disasters (economic, political, natural, etc).
Knowledge - acquire valuable knowledge for innovation.
Responding to customers/competitors - follow clients and/or rivals.
Define globalization.
The spread of business across national borders.
What does successful international expansion require?
It requires a clear understanding of possible risks.
What tool can businesses use to assess what countries to enter?
CAGE analysis:
Cultural distance - degree of difference between the cultures.
Administrative distance - degree of differences between the legal/regulatory frameworks.
Geographic distance - physical distance between the countries.
Economic distance - degree of difference between the average income of people in the countries.
What are two competing pressures that firms need to manage when expanding internationally?
Local responsiveness - adjustments to products, services, and processes in order to account for local culture and needs.
Standardization - making products, services, and/or processes consistent across different units within a firm and/or across different countries the firm operates in.
Three strategies a firm could employ to manage these tensions.
Multidomestic strategy - tailoring products/services to local markets.
Global strategy - selling standardized products/using standardized processes around the world.
Arbitrage strategy - buying where costs are low and selling where prices are high (leveraging market differences).
With a multidomestic strategy, name three ways to manage variations.
Focus adaptations - tightly focusing on a particular product, customer segment, or geographic area.
Externalize adaptations - externalize the work of adapting the product for local needs (eg franchising/alliances).
Design adaptability - manage the costs of localization so that it can be adapted while still maintaining economies of scale.
How is a global strategy typically achieved?
Use a low-cost strategy through economies of scale or by differentiation. Usually a firm will centralize some functions of the value chain while localizing others to avoid excessive centralization.
What are the four types of arbitrage strategy?
Economic arbitrage - capitalizing on differences in costs by buying where costs are low and selling where prices are high
Capital arbitrage - capitalizing on differences in the cost of capital by acquiring capital where it is less expensive
Cultural arbitrage - capitalizing on differences in culture between countries by actively using the culture of one country as a selling point for products being marketed in another country.
Administrative arbitrage - capitalizing on differences in taxes, regulations, and laws between countries by operating where they are lower/more lax.
What is a transnational strategy?
A strategy involving a combination of both local responsiveness and standardization. It’s combining the international strategies together.
Name four ways a firm can enter an international market.
Exporting
Licensing/franchising
Joint ventures/alliances
Wholly owned subsidiaries
