Week 6: KC Flashcards
Lu & Beamish (2004)
The most common way to describe the effect of multinationalism on performance
The most common way to describe the effect of multinationalism on performance =
the S-shaped curve, Lu & Beamish (2004) in their three-phase model.
Three-phase model (S-shaped curve)
- Lu & Beamish (2004)
- Possible benefits related to geographic diversification =
- possible costs related to geographic diversification =
+ 3 phases
- Possible benefits related to geographic diversification =
o Exploitation of the firm and country specific advantages
o Economies of scale and scope
o Exploration of new advantages associated with host markets
Benefits are characterized by diminishing returns that depend a lot of the intangible assets of the firm - possible costs related to geographic diversification =
o Liability of foreignness
o Liability of newness
o Coordination costs
Phase 1 –
High costs associated with liability of foreignness/newness will be likely to outweigh the benefits of internationalization
Phase 2 –
Increasing internationalization favors explorational learning, which reduces costs associated with liability of foreignness/newness. Increasing level of geographical scope has positive impact on the firms’ profitability.
Phase 3 –
After threshold of internationalization is reached, the network of foreign subsidiaries becomes so extensive and diversified, that coordination costs reach such high levels that overcome the exploration and exploitation benefits of internationalization, leading to the decline of performance.
Many studies have investigated whether firm’s multinationality affects performance.
Transaction Cost (TC) perspective shows that the relationship is not so obvious.
Two contrasting arguments:
Two contrasting arguments:
- Higher multinationality is associated with lower risks theory of portfolio diversification in finance (spreading operations in multiple countries enables to balance industry and country risk)
• TC explains why MNEs are poor vehicles for overall risk reduction:
- Costs and risks can rise in presence of CAGE distances
- MNEs often invest in countries that are similar to their home country and therefore does not enable them to diversify the overall risk exposure
- MNEs show little unrelated product diversification, they tend to sell the same of very similar products in different countries
- Higher multinationality is associated with higher profitability firm can exploit economies of scale by augmenting the size of served markets. It can provide better
and more flexible access to resources, improve experimental learning (and acquire new set of knowledge and competencies).
TC Theory:
- Economies of scale can be achieved even staying in the home market (If this market is sufficiently large)
- To secure and provide better and more flexible access to resources, market transactions instead of direct investments could be a more efficient option, since market transactions do not require high initial investments and can more easily be undone.
- International expansion may not be driven by learning or asset seeking motivations
o This is the case for exploitation type of investments, such as the market seeking ones for which the knowledge only flows in one direction (from HQ to subsidiaries). As a result, only limited learning possibilities are available.
Multinationality and Performance
The complexity of the M-P relation comes from:
The complexity of the M-P relation comes from:
= Substantive elements underlying multinationality.
- Variety of Strategic Motivations in International Expansion
- Environmental Complexity: Heterogeneity of Foreign Environments Characteristics
- Organizational Complexity: Diversity in Foreign Operations’ Functions and Capability Portfolios
Theorizing is incomplete: Each result may explain part of the puzzle, but not the whole puzzle.
Two internationalization processes over time:
Why do some expansion processes imply larger benefits than others?
SKIP
Why do some expansion processes imply larger benefits than others?
Firm A: Rhythmic and regular pace
Firm B: Years of rapid expansion alternated with long periods of inactivity
International companies face organizational constraints to handle the complexity of international expansion. The firms take different paths according to the firm’s resources and international path.
Three dimension to consider describing a firm’s internationalization process:
SKIP
- Pace of international expansion (it’s velocity)
- Scope of international expansion (it’s span relative to products and geographies)
- The rhythm of international expansion (it’s regularity)
Most important constraints associated with internationalization process:
SKIP
Most important constraints =
Organizational constraints:
• Attention
• Ability to process information
• Organizational inertia
Are associated with;
• Time Compression Diseconomies (Dierickx & Cool, 1989)
• Absorptive Capacity (Cohen & Leventhal, 1990)
Time Compression Diseconomies (Dierickx & Cool, 1989)
Time Compression Diseconomies (Dierickx & Cool, 1989)
= Inefficiencies that occur when things are done faster,
- Learning how to operate in a variety of foreign settings cannot endlessly be compressed in time.
o Time is a fundamental resource to allow the firm to:
▪ Assimilate its heterogenous and often distant foreign experience and apply the experience to commercial ends
▪ Develop new knowledge and organizational routines and integrate them in the existing firm processes
However, today more and more firms show rapid international expansion into multiple foreign markets (Zoom, Spotify, Airbnb, Qualtrics follow these strategies)
This contradicts the gradual theory of internationalization, which suggests that firms maximize the benefits of learning from prior experience, following a regular and incremental trajectory.
Rapid FDI expansion can positively affect firm performance (as in the case of Spotify). This is because:
o Time to market is important, as well as time to build
o Time allows the materialization of first-mover advantages that may significantly improve the firm performance in the long and medium run
Under which circumstances does rapid FDI expansion lead to improved performance and thus lead to enhanced competative advantage of an
internationalizing firm?
Chang & Rhee (2001) impose two moderating factors that may affect the relationship between expansion speed and firm performance
- Internal Resources and Capabilities (Tangible and Intangible)
▪ Slack Tangible Resources (financial resources, infrastructures) – tangible resources available to the organization on top of those needed for survival. These resources affect a more rapid internationalization expansion by minimizing internal and external pressures and favoring the adaptation to different competative environments.
▪ (Slack) Intangible Resources (R&D and marketing capabilities). Source of competative advantage in foreign markets and facilitate the firm’s strategic investments. - External Competative Environment:
= pressures coming from industry globalization.
For firms operating in highly globalized industries, like automotive industry, rapid internationalization expansion may be the only strategic tool to survive and prosper. This is because it allows the achievement of global scale economies.
THERE IS NO OPTIMAL OR RIGHT SPEED FOR INTERNATIONAL EXPANSION!
- a lot of moving parts in this relationship that need to be considered simultaneously.
KEY: = to find the best strategic configuration that allows to match firms’ internal capabilities as well as the external competative pressures.
Chang & Rhee (2001)
Two moderating factors that may affect the relationship between expansion speed and firm performance:
Two moderating factors that may affect the relationship between expansion speed and firm performance:
- Internal Resources and Capabilities (Tangible and Intangible)
▪ Slack Tangible Resources (financial resources, infrastructures) – tangible resources available to the organization on top of those needed for survival. These resources affect a more rapid internationalization expansion by minimizing internal and external pressures and favoring the adaptation to different competative environments.
▪ (Slack) Intangible Resources (R&D and marketing capabilities). Source of competative advantage in foreign markets and facilitate the firm’s strategic investments.
- External Competative Environment
= pressures coming from industry globalization. For firms operating in highly globalized industries, like automotive industry, rapid internationalization expansion may be the only strategic tool to survive and prosper. This is because it allows the achievement of global scale economies.
• Corporate Social Responsibility (CSR) initiatives
SKIP
= Type of business self-regulation
With the aim of being social accountable.
Companies aims to contribute to societal goals of a philanthropic activist or charitable nature by engaging in or supporting volunteering or ethically orientated practices.
CSR strategies encourage the company to make positive impact on environments and a greater range of stakeholders than shareholders (including consumers employees, investors, communities, and others).
CSR is generally understood as strategic initiative that contributes to a brands’ reputation. As such, social responsibility initiatives must coherently align with,and be integrated into a business model to be successful.
Development Impact =
Development Impact = Less deliberate than CSR but still direct in nature, like when considering the amount of jobs the MNE creates. Often these jobs are higher paying than what local or domestic firms can or are willing to pay.
Two important categories (forms) mattering for the societal impact of MNEs.
Deliberate initaitives
- Corporate Social Responsibility
* Development Impact
Sustainable Development Goals (SDGs)
There are 17 sustainable development goals that address a broad range of development issues.
FDI = often seen as a powerful means to supply developing economies with:
- much needed funds and expertise
- setting processes in motion that allow countries to make progress in terms of development.
Contribution of MNEs to the SGDs:
Progress on some SDGs is more likely than on others.
• Kolk, et al. (2017) distinguishes between 4 areas on which MNEs have an impact:
o People, planet, peace, and prosperity
• Shifting focus towards emerging market multinationals and their impact on sustainable development. Such investment is interesting because the host country and home economy can both benefit. There is much more potential in this area to lift more people above poverty threshold and to make growth more inclusive.
o Unless certain conditions are met, development effects may not materialize.
To understand more deliberate strategy of CSR, we need more firm-specific theories.
Two particularly useful theories:
1 Stakeholder theory (e.g., Freeman, 1984) – Integrate RBV and market-based view and add social political level.
o Identifies specific stakeholders of a company (normative theory)
o Examine the conditions under which managers treat these parties as stakeholders (stakeholder salience)
o These stakeholders, such as employees, customers, suppliers, governmental bodies, political groups, trade unions may even help company with its profitability and efficiency goals, perhaps through positive brand exposure and customer retention.
2 Institutional theory – why are company doing what they are doing?
o Has roots in sociology (Scott, 1995)
o Companies engage in CSR and search of legitimacy to ensure its actions are desirable, proper, or appropriate in the eyes of governmental agencies, customers and the wider public.
o Companies may also engage to conform with expectations surrounding their behavior that are created by competitors or by societal values. This is isomorphism.
Institutional theory =
Institutional theory
= why are company doing what they are doing?
o Has roots in sociology (Scott, 1995)
o Companies engage in CSR and search of legitimacy to ensure its actions are desirable, proper, or appropriate in the eyes of governmental agencies, customers and the wider public.
o Companies may also engage to conform with expectations surrounding their behavior that are created by competitors or by societal values. This is isomorphism.
