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Summary introduction to IB
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Summary of 14 pages for the course Introduction To International Business at RuG (Samenvatting)
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MNE = Multinational enterprise, need certain internal strengths to overcome additionalcosts of doing business abroad.
- Internationally transferable FSA
- Non-location bound FSA
-> FSA = Firm Specific Advantages
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Internationally transferable FSA = FSA keep their value when MNE is crossing borders.
Paradox: FSA exist of easily codifiable knowledge, it is cheap and easily to transfer, but also
easily imitated by other firms. This makes transfer costs low, but the value may decrease.
On the other hand, when a FSA exists of tacit knowledge which requires person-to-person
communication and sending human resources abroad, it will be expensive and time
consuming, but also difficult to imitate = valuable FSA.
Four archetypes of MNEs heritage (key routines):
- Centralized exporter = Standardized products manufactured at home, not doing any
activity in host country, no development of new FSA in host country(Only exporting product)
- International projector = FSAs from home country are copied, no development of location
bound FSAs in host country.
- International coordinator = Efficiency seeking MNE which is specialized in specific value-
added activities. Is doing different parts of production process in different countries.
- Multi-centred MNE = Does everything in host country. Adapts to host country, local
responsiveness is foundation. Transfers only the key routines from home country.
Extra archetypes:
Freestanding companies = Companies that were set up abroad in home country’s colonies,
without a prior domestic production base. Colonies offer reduced cost.
Emerging economy MNE = Firms that do not derive their success from advanced technology
and strong brand names, but build on generally available resources in their home country
such as low-cost labour and various forms of government support. Recombining FSA is
important. Some typical FSAs:
- Entrepreneurial quality of management
- Management capabilities in effective strategy execution
- Cost innovations
- Ability to adapt technology or products to economy demands
- Privileged access to home country resources.
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Non transferable FSAs/Location-bound FSAs:
- Stand-alone resources: Linked to location advantages, such as certain market or a network
which are immobile.
- Other resources: Do not have the same value abroad, because they are not applicable to
the host country or they are not as valuable as in the home country such as local knowledge
or reputations.
- Local best practices: Routines which are highly effective and efficient in the home country,
but which might not be the same abroad.
- Recombination capability: Engaging in product diversification or innovation, taking the FSA
and product from the home country and recombine it to adapt to the host country.
The corresponding FSA need to be created in host country from third parties
, Location advantages: Represent the strengths of a specific location, usable for all the firms
operating in that location, the reason an MNE would go there.
FDI: Foreign direct investment: The allocation of resource bundles by an MNE in a host
country, with the purpose of performing business activities over which the MNE contains
strategic control there.
4 motivations to perform activities rather abroad:
- Natural resource seeking = Contains the location advantage of the host country, it’s the
search for physical, financial of human resources. Precondition, is that access is needed.
- Market seeking = The search for customers. Not for the centralized exporter, because this
involves business activities in host country.
- Strategic resource seeking = Searching for access to advanced resources such as upstream
knowledge, downstream knowledge, administrative knowledge.
- Efficiency seeking = Desire to capitalize on environmental changes that make specific
locations more attractive.
Value creation through recombination: Being able to grow by innovating and diversifying,
means combining existing resources with newly accessed resources. Recombination
capability is the MNEs highes order FSA, because this helps the MNE to transfer its existing
set of FSAs, it creates new knowledge, integrates this with the existing knowledge, and
exploit resulting.
Two problems going abroad:
- Bounded rationality: The problem is the access to information and even if they have the
right information, another problem is the capability to process complex information bundles.
Information is partial and incomplete, cognitive limitations of managers, and differences in
cognitive decision making between home and host country.
Bounded reliability: Agents do not always carry through on their expressed intentions to try
to achieve a particular outcome or performance level. Once source is opportunism which
involves false promises. The second source is benevolent preference reversal, the actor’s
promise is made in good faith but preferences change over time.
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Core competencies: Company’s most important FSA, constitute the most important source
of an MNEs success. Core competencies include shared knowledge, organized in routines,
and the ability to integrate multiple technologies, or recombination capabilities, carried by
the key employees.
Core competencies produce core products: Technological leadership in the form of key
components from which end products are developed and created.
3 characteristics to identify core competencies:
- Be difficult for competitors to imitate
- Provide potential access to wide variety of markets
- Make a significant contribution to the perceived customer benefits of the end products.
Extra 4th one for large MNE: The loss of the core competence would have an important
negative effect on the firms present and future performance.
Key critique: Competence approach does not include country factors
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