Week 1: Theoretical Foundations of International Strategy
In the first part of the meeting I will introduce the course, discuss the outline, and present you its main
objectives and desired outcomes. We will also spend some time on team formation. In the second part
of the course we will then delve into more substantive matters.
In particular, we will recall some key theories of the MNE that you first approached during the
Theories of International Management course and discuss their main implications for the crafting of
cross-border strategies at the firm level. We will also consider some highly influential articles that
represent the base for today’s conceptualization of an international strategy. In particular, we will
discuss three main issues related to strategic management in an international context:
1. How MNE theories help us understand what an international strategy is?
2. How could/should we define international strategy (in this course)?
3. What are the main issues to consider for a cross-border strategy?
,Art.1. Rugman, A.M. & Verbeke, A. (1992) - A note on the transnational solution and the
transaction cost theory of multinational strategic management.
Introduction
Barlett and Ghoshal state “that in the future, a company’s ability to develop a transnational
organizational capability will be the key factor that separates the winners from the mere survivors in
the international competitive environment”.
Transaction cost theory as a predictive model argues that both the form and competitiveness of the
international operations of an MNE depend crucially upon the configuration of three elements
(Dunning’s OLI paradigm):
§ Firm-specific (or ownership-specific) advantages (FSAs)
o Asset advantages à proprietary know-how
o Transactional advantages à economizing on transaction costs as a result of
multinational coordination and control of assets
§ Country-specific (or locational) advantages (CSAs) à benefits associated with locating
certain activities in particular countries (arise from structural market imperfections and the
potential to economize on transaction costs)
§ Internalization advantages à benefits associated with different entry modes when serving
foreign markets
Extending the transaction cost theory
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. Two types of
FSAs must be distinguished:
§ Non-location-bound FSAs (NLB-FSAs): FSAs that can be exploited globally and lead to
benefits of scale, scope or exploitation of national differences à Can be transferred at low
marginal costs without much adaptation.
§ Location-bound FSAs (LB-FSAs): FSAs that benefit a company only in a particular location
and lead to benefits of national responsiveness à cannot be easily transferred and require
significant adaptation.
Making this distinction between NLB-FSAs and LB-FSAs,
permits two important points to be recognized.
- First, 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.
- Second, 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.
A transaction cost interpretation of Barlett and
Ghoshal
Three overlapping trends in the operations of MNEs can be found.
1. Foreign subsidiaries are being set up as replicas of the parent company. This is the case best
described by the internalization version of transaction cost theory (cell 3).
,2. Stimulating of firms to develop strategies of national responsiveness, i.e., to become ‘multinational’
firms. Here specific local customer needs and market conditions, as well as government regulation,
provide incentives to firms to develop LB-FSAs (cell 4).
3. Trend towards globalization for economic, technological and market reasons. Globalization
typically implies that NLB-FSAs allow firms to be competitive on world markets. A company
engaged in a global strategy may, of course, build strongly upon CSAs in the home nation, when
exploiting its FSAs.
Transaction cost theory and the transnational solution
The ‘transnational solution’ is a firm’s ability to develop both LB- and NLB-FSAs in the parent and
subsidiaries. In addition, it makes a dual use of CSAs in the home and host countries. Two criteria are
used to classify the MNE’s activities in four categories/organizational types:
§ The strategic importance of local environment (the perceived potential of a particular nation’s
CSAs for the competitiveness of the MNE
§ The level of internal resources and capabilities (the perceived potential of the operation to
contribute to FSA development necessary to improve the MNEs competitiveness)
§ Strategic Leader and Contributor should be selected
for the development of new NLB-FSAs
§ Black Hole firms should be focusing on developing
LB-FSAs to improve the MNEs competitiveness in the
countries
It has been suggested that the MNE should try to develop an optimal mix between the ‘visible hand of
managed integration’ and the ‘invisible hand’, using internal market mechanisms. As Hennart [1991]
has demonstrated, there is an alternative to the two conventional subunit control modes; the
conventional hierarchical system (the functional form) or a profit-centre approach (the M-fortm). The
alternative is socialization, i.e., the alignment of corporate and subunit goals, by persuading subunits
to internalize corporate goals. MNEs will develop a mix of these three coordination and control
techniques.
, Art. 2. Foss, N.J. & Pedersen, T. (2004). Organizing knowledge processes in the multinational
corporation: An introduction.
Purpose
This Introduction discusses the contrast between, on the one hand, the current popularity of
addressing MNC organization in knowledge terms and, on the other, the lack of adequate
understanding of many of the causal mechanisms and contextual factors in relations between
knowledge processes and organizational factors.
Introduction
Tallman (2003) has recently drawn attention to a transition of the dominant conceptual model of
the multinational firm from the market failure approach of internalization theory and transaction cost
economics theory to the market imperfections approach of capabilities or knowledge-based theories of
the firm’ (Tallman, 2003, 495).
A fundamental insight is the conceptualization of the MNC as a knowledge-sharing network whose
existence can be understood in terms of its ability to transfer, create, integrate and deploy certain
kinds of knowledge more efficiently than markets are capable of. There is little theory-based
understanding how mechanisms of organizational control are aligned with knowledge transactions in
an economizing manner.
Knowledge and organization in the MNC: research challenges
In economics, as well as in the strategy field, theories of the firm are either fully concerned with
knowledge issues to the neglect of organizational issues (i.e., the ‘knowledge-based view of the firm’)
or fully concerned with organizational issues (governance, incentive, etc.), but suppress knowledge
issues (i.e., organizational economics).Knowledge inflows into a subsidiary are positively associated
with the richness of transmission channels, motivation to acquire knowledge, and capacity to absorb
incoming knowledge.
Problems
It has become almost axiomatic that knowledge and learning are at the root of understanding how
competitive advantage is gained and sustained (‘knowledge-based view’). The cost and benefits of
knowledge transfer (and integration, deployment, creation, etc.) can only be systematically
comprehended through an explicit understanding of how heterogeneous knowledge elements are
dispersed across an MNC.
Like the knowledge-based literature in general, research on knowledge in MNCs often work with
notions such as ‘capabilities’, ‘knowledge assets’, ‘knowledge processes’, etc. These are aggregate
concepts.
An implication of the lack of proper micro-foundations is that it is unclear how knowledge processes
may be influenced by mechanisms of organizational control, such as authority, the use of incentives,
monitoring and the building of shared context.
A closely related and key problem in thinking about the interaction of knowledge and organization in
the MNC has to do with the causal-temporal structure of managerial choice.
Bridging the gaps: the articles
The five articles in this Focused Issue are all occupied with the interaction between knowledge
processes and organization. However, they differ substantially in a number of dimensions, such as the
particular knowledge processes and organizational mechanisms that they investigate, as well as the
theories that are applied and the empirical context that is chosen.
Although most of the articles focus on the transfer of knowledge, they look at different organizational
mechanisms and structures, including MNCs, strategic alliances and joint ventures, and some apply
the headquarter (or teacher) perspective while others make use of the subsidiary (or student)
perspective. In terms of applied theories, the articles seem to mainly draw on two rather different
branches of theorizing, namely organizational economics (e.g., agency theory) and perspectives that
In the first part of the meeting I will introduce the course, discuss the outline, and present you its main
objectives and desired outcomes. We will also spend some time on team formation. In the second part
of the course we will then delve into more substantive matters.
In particular, we will recall some key theories of the MNE that you first approached during the
Theories of International Management course and discuss their main implications for the crafting of
cross-border strategies at the firm level. We will also consider some highly influential articles that
represent the base for today’s conceptualization of an international strategy. In particular, we will
discuss three main issues related to strategic management in an international context:
1. How MNE theories help us understand what an international strategy is?
2. How could/should we define international strategy (in this course)?
3. What are the main issues to consider for a cross-border strategy?
,Art.1. Rugman, A.M. & Verbeke, A. (1992) - A note on the transnational solution and the
transaction cost theory of multinational strategic management.
Introduction
Barlett and Ghoshal state “that in the future, a company’s ability to develop a transnational
organizational capability will be the key factor that separates the winners from the mere survivors in
the international competitive environment”.
Transaction cost theory as a predictive model argues that both the form and competitiveness of the
international operations of an MNE depend crucially upon the configuration of three elements
(Dunning’s OLI paradigm):
§ Firm-specific (or ownership-specific) advantages (FSAs)
o Asset advantages à proprietary know-how
o Transactional advantages à economizing on transaction costs as a result of
multinational coordination and control of assets
§ Country-specific (or locational) advantages (CSAs) à benefits associated with locating
certain activities in particular countries (arise from structural market imperfections and the
potential to economize on transaction costs)
§ Internalization advantages à benefits associated with different entry modes when serving
foreign markets
Extending the transaction cost theory
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. Two types of
FSAs must be distinguished:
§ Non-location-bound FSAs (NLB-FSAs): FSAs that can be exploited globally and lead to
benefits of scale, scope or exploitation of national differences à Can be transferred at low
marginal costs without much adaptation.
§ Location-bound FSAs (LB-FSAs): FSAs that benefit a company only in a particular location
and lead to benefits of national responsiveness à cannot be easily transferred and require
significant adaptation.
Making this distinction between NLB-FSAs and LB-FSAs,
permits two important points to be recognized.
- First, 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.
- Second, 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.
A transaction cost interpretation of Barlett and
Ghoshal
Three overlapping trends in the operations of MNEs can be found.
1. Foreign subsidiaries are being set up as replicas of the parent company. This is the case best
described by the internalization version of transaction cost theory (cell 3).
,2. Stimulating of firms to develop strategies of national responsiveness, i.e., to become ‘multinational’
firms. Here specific local customer needs and market conditions, as well as government regulation,
provide incentives to firms to develop LB-FSAs (cell 4).
3. Trend towards globalization for economic, technological and market reasons. Globalization
typically implies that NLB-FSAs allow firms to be competitive on world markets. A company
engaged in a global strategy may, of course, build strongly upon CSAs in the home nation, when
exploiting its FSAs.
Transaction cost theory and the transnational solution
The ‘transnational solution’ is a firm’s ability to develop both LB- and NLB-FSAs in the parent and
subsidiaries. In addition, it makes a dual use of CSAs in the home and host countries. Two criteria are
used to classify the MNE’s activities in four categories/organizational types:
§ The strategic importance of local environment (the perceived potential of a particular nation’s
CSAs for the competitiveness of the MNE
§ The level of internal resources and capabilities (the perceived potential of the operation to
contribute to FSA development necessary to improve the MNEs competitiveness)
§ Strategic Leader and Contributor should be selected
for the development of new NLB-FSAs
§ Black Hole firms should be focusing on developing
LB-FSAs to improve the MNEs competitiveness in the
countries
It has been suggested that the MNE should try to develop an optimal mix between the ‘visible hand of
managed integration’ and the ‘invisible hand’, using internal market mechanisms. As Hennart [1991]
has demonstrated, there is an alternative to the two conventional subunit control modes; the
conventional hierarchical system (the functional form) or a profit-centre approach (the M-fortm). The
alternative is socialization, i.e., the alignment of corporate and subunit goals, by persuading subunits
to internalize corporate goals. MNEs will develop a mix of these three coordination and control
techniques.
, Art. 2. Foss, N.J. & Pedersen, T. (2004). Organizing knowledge processes in the multinational
corporation: An introduction.
Purpose
This Introduction discusses the contrast between, on the one hand, the current popularity of
addressing MNC organization in knowledge terms and, on the other, the lack of adequate
understanding of many of the causal mechanisms and contextual factors in relations between
knowledge processes and organizational factors.
Introduction
Tallman (2003) has recently drawn attention to a transition of the dominant conceptual model of
the multinational firm from the market failure approach of internalization theory and transaction cost
economics theory to the market imperfections approach of capabilities or knowledge-based theories of
the firm’ (Tallman, 2003, 495).
A fundamental insight is the conceptualization of the MNC as a knowledge-sharing network whose
existence can be understood in terms of its ability to transfer, create, integrate and deploy certain
kinds of knowledge more efficiently than markets are capable of. There is little theory-based
understanding how mechanisms of organizational control are aligned with knowledge transactions in
an economizing manner.
Knowledge and organization in the MNC: research challenges
In economics, as well as in the strategy field, theories of the firm are either fully concerned with
knowledge issues to the neglect of organizational issues (i.e., the ‘knowledge-based view of the firm’)
or fully concerned with organizational issues (governance, incentive, etc.), but suppress knowledge
issues (i.e., organizational economics).Knowledge inflows into a subsidiary are positively associated
with the richness of transmission channels, motivation to acquire knowledge, and capacity to absorb
incoming knowledge.
Problems
It has become almost axiomatic that knowledge and learning are at the root of understanding how
competitive advantage is gained and sustained (‘knowledge-based view’). The cost and benefits of
knowledge transfer (and integration, deployment, creation, etc.) can only be systematically
comprehended through an explicit understanding of how heterogeneous knowledge elements are
dispersed across an MNC.
Like the knowledge-based literature in general, research on knowledge in MNCs often work with
notions such as ‘capabilities’, ‘knowledge assets’, ‘knowledge processes’, etc. These are aggregate
concepts.
An implication of the lack of proper micro-foundations is that it is unclear how knowledge processes
may be influenced by mechanisms of organizational control, such as authority, the use of incentives,
monitoring and the building of shared context.
A closely related and key problem in thinking about the interaction of knowledge and organization in
the MNC has to do with the causal-temporal structure of managerial choice.
Bridging the gaps: the articles
The five articles in this Focused Issue are all occupied with the interaction between knowledge
processes and organization. However, they differ substantially in a number of dimensions, such as the
particular knowledge processes and organizational mechanisms that they investigate, as well as the
theories that are applied and the empirical context that is chosen.
Although most of the articles focus on the transfer of knowledge, they look at different organizational
mechanisms and structures, including MNCs, strategic alliances and joint ventures, and some apply
the headquarter (or teacher) perspective while others make use of the subsidiary (or student)
perspective. In terms of applied theories, the articles seem to mainly draw on two rather different
branches of theorizing, namely organizational economics (e.g., agency theory) and perspectives that
