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Introduction to international business and the MNCLearning Teaser
“Why would Tata (Indian conglomerate) acquire Jaguar Land Rover? 2008
IB definition
IB is about 1.businesses and firms engaging in international / cross-boarder economic activities and/or 2. The
activity of doing business abroad
MNC definition
A firm that engages in foreign direct investment (FDI) by directly investing in, controlling and managing,
value-added activities in foreign countries.
• FDI = direct investment in activities that control value creation in foreign countries. UN defines FDI
threshold as owning 10% equity stake (i.e. joint ventures involve FDI)
MNC v MNE v TNC
• MNC = multinational corporation i.e. typically describes a publicly listed firm
• MNE = multinational enterprise i.e. broader concept, because it includes privately held firms as well. This
can be important, because many countries have underdeveloped stock markets (e.g. Germany)
• TNC = transnational corporation i.e. describes firms that are not multi - but actually transnational -
questionable if these exist at all
• MNCs are usually the most well-known and visible type of firms. Also, they are facing more complex and
diverse sets of pressures, and there is a lot of data available. So in this course we will be mostly concerned
with MNCs
Why do firms go multinational? OLI paradigm
• Main argument in favour = FDI is beneficial if three key conditions are met: the firm possesses ownership
advantages, location advantages and internalisation advantages
Ownership advantages
Disadvantages of entering a new country to operate - laws and regulations, cultural clashes.. assumptions that
disadvantages outweigh the advantages however
• Type I = resources can be transferred (e.g. tangible assets such as proprietary knowledge) - advantage of
being active in different countries because combinations of capabilities across countries
• Type II = capabilities arise from combining business units in different countries (e.g. logistics, supply-
chain management)
• Type III = capabilities arise from organisational structure and culture (e.g. norms and values)
,Locational advantages
• Type I - markets e.g. size of market, growth potential in terms of where the growth is more prosperous and
likely to give long term advantages and revenue. For smaller countries for example, it is really important to
be active in markets such as the UK which is a big market
• Type II - human resources e.g. skilled labour force which can be location specific and in order to access
them it could be required of you to be locally present
• Type III - natural resources e.g. oil and gas
• Type IV - agglomeration e.g. cluster advantage such as Silicon Valley - linked to human resource - cluster
advantages refers to locations that might have a high percentage of a labour with a specific skill which you
might be looking to employ
Internalisation advantages
• FDI can be more efficient, and effective than market-based solutions such as exporting, licensing and
outsourcing
• Type I advantage - asset specificity. E.g. transform inter-firm trade into intra-firm trade to prevent
opportunistic behaviour
• Type II advantage - information asymmetry. E.g. closer monitoring and control
• Type III advantage - disseminating risk. E.g. prevent unauthorised dissemination of know-how
• Type IV advantage - tacit knowledge transfer. E.g. direct control enables transfers of more implicit
knowledge
How global are MNCs really?
• Most multinational companies have their headquarters in this triad, they also have most of their sales in
their home region, in particular the triad of North America, Europe and Asia (usually Japan)
• Increasing importance of foreign revenue -
• Differences between countries remain -
• The new face of MNCs - uber
Reasons to go international
Resource-seeking objectives = seek natural
resources and that pushes you to internalise
(but it could also be human resource) - supply
side oriented
Market-seeking objectives = future growth,
higher consumer base
Efficiency-seeking objectives = business can
grow - economies of scale, looking for cheaper
labour for instance in countries like India
Strategic-asset-seeking objectives = usually
related to acquisition and takeover of other
companies as an entry mode of starting
activities in other countries - defending or
augmenting ownership advantages, gaining capabilities, gaining technology for instance.. - e.g. Chemchina is
a chemical company in China that bought a Swiss chemical company in order to expand brand value and
gain capabilities related to ownership advantages
,How do firms engage in IB activities?
Non-equity = not owning equity and shares in a
local firm.. this are more cost-efficient ways to
internationalise
Equity modes = Wallmart bought ASDA is an
example of equity mode using acquisition.
Usually a trade off between commitment, risk
and control over activities.
IB as increasingly important firm
• Globalisation as process of increasingly interconnected and interdependent people, cultures and businesses
• Deglobalisation ? New phenomenon
• At the same time: cultures and institutions continue to differ in important aspects
• This exact is what IB is all about
• Music research aims for generalisable theories, which is not so IB like since the latter depends on context
, Institutional approaches to capitalist diversity - lecture 2
How do firms enter foreign markets
• Non-equity modes
- Sourcing: having a supplier in another country
- Exporting: customers in different countries
- Licensing: license product to right to other companies to use your intellectual property
- Strategic alliance: typically involves lots of contracts - contractual arrangement between firms
• Equity modes
- Joint venture: key difference between this and SA is that both involve partnerships between two or
more companies, however, a joint venture involves equity investment (not only contracts, firm A might
have shares of firm B)
- Acquisition: acquiring an old company or creating your own production plan in a foreign country
How do firms internationalise?
Uppsala Model (Johanson & Vahlne, 1997) - developed in Sweden, state internationalisation model
• Staged internationalisation model, meaning that MNEs gradually increase their international involvement
• MNEs/MNCs gradually increase their market commitment = you may start with sourcing, as a non-
equity mode of entry, for instance a MNC in the UK might source from Germany and doing so increases
their market commitment, and then you might keep moving along the scale towards equity modes.
• They move to increasingly distant countries = e.g. Germany country might move to Austria/Switzerland
first, the theory suggests you might not necessarily start with far away countries such as China, Taiwan or
Indonesia.
=
• So commitment increases along the two dimensions of geography (not necessarily geographic distance, but
distance in the sense of institutional distance, how different are those countries in the sense of institutions)
and entry mode. Nevertheless, usually neighbouring countries don’t only share geographic small distance,
but in terms of institutional distance, neighbour countries tend to be similar too (e.g. language, culture..)
To measure context, IB Research has often relied on Culture
• Culture is a body of learned behaviour, a collection of beliefs, habits and traditions, shared by a group of
people and successfully learned by people who enter society”
The Hofstede Framework - research project that tries to measure culture in 5 (+1 added later)
dimensions
• Power distance = degree to which people accept unequal distribution of power
• Individualism vs collectivism = individual freedom vs belonging to a group
• Masculinity vs feminity = assertive, decisive, and aggressive leaders with a focus on material rewards,
high competitiveness vs compassion, relationships with a focus on quality of life
• Uncertainty avoidance = relative degree of risk-taking and resistance to change, being comfortable with
uncertainty and ambiguity
• Time orientation = long-term orientation vs short-term orientation
• Indulgence = enjoying life and having fun
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