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Summary Theories of International Business
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Summary of 42 pages for the course Theories of International Business at UvA (Grade: 8)
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Theme 1: Core IB theoriesKeywords
International Business (IB)
Multinational Enterprise (MNE)
Foreign Direct Investment (FDI)
Traditionally, international business (IB) is defined as a business (or firm) that
engages in international (cross-border) economic activities (Peng, 2012).
Conceptually, international business entails the following:
The pursuit of value creating opportunities
… by both public and private business organizations
… in countries other than their country of origin
The study of IB more holistically considers both the foreign and domestic
(home country) firms.
IB is about managing complexity and uncertainty:
Cross-border activity brings new challenges…
…requiring awareness and strategic thinking.
IB study and research by its very nature needs to be interdisciplinary and thus more
complex (and so, more interesting).
A multinational enterprise (MNE, TNC or MNC) can be defined as a firm that owns
and/or controls value creating activities in two or more different countries. An MNE is
a firm that uses FDI to establish or purchase income generating assets abroad but
may also trade goods and services across international borders.
Parent company: as incorporated or unincorporated enterprise, or group of
enterprises, which has a direct investment enterprise operating in a country
other than that of the parent.
Subsidiaries: an incorporated enterprise in the host country in which another
entity directly owns more than half of the shareholders’ voting power.
Foreign Direct Investment (FDI) refers to an investment made to acquire lasting
interest in enterprises operating outside of the economy of the investor. Further, the
investor’s purpose is to gain an effective voice in the management of the enterprise.
Some degree of equity ownership is almost always considered to be associated with
an effective voice in the management of an enterprise. An FDI is an investment in
which a single foreign investor:
Either owns 10% or more of the ordinary shares or voting power of an
enterprise or
Owns less than 10% of the ordinary shares or voting power of an enterprise,
yet still maintains an effective voice in management.
, The most important characteristic of FDI, which distinguishes it from foreign
portfolio investment, is that it is undertaken with the intention of exercising
control over a (foreign) enterprise.
Different levels of analysis
Country level: international economics and national competitiveness
o National statistics on trade and FDI
o Macro-level trends
Firm level:
o Strategic decision of MNEs
o FDI vs. foreign financial investments
Subsidiaries (intra-MNEs network) level:
o Top-down approach: HQ – subsidiaries
o Strategy horizontal vs vertical
IB/IM questions to be answered
Why do MNEs exist (Buckley & Casson, 2009)
o Using international transactions
o Maximizing profit by internalizing => establishing a subsidiary in foreign
country
Which are the most important factors determining the performance of an
MNE?
How MNE’s decisions are influenced by the external environment?
Which are the main sources of opportunities and challenges to consider in IB
decisions?
What are the challenges and benefits of being an MNE?
Value Chains
Industry’s Value Chain:
From ‘center of gravity’ to vertical integration
Where are the ‘profit pools’, and where does a company have strategic
capabilities?
Where to expand, where to divest?
What local market factors/institutions enter these decisions?
,Porter’s Value Chain:
Outsourcing vs. FDI
Outsourcing: turning over an organizational activity to an outside supplier that will
perform it on behalf of the focal firm.
Offshore: outsourcing to a firm abroad
Onshore: outsourcing to a domestic firm
Outsourcing is in contrast to FDI where you set up subsidiaries abroad and the work
done is “in-house”, but the location is overseas (impacts the boundary of the firm).
Example: Apple’s iPhone (the smiling curve).
Apple decided to not to do all the activities in one place:
Designed in California
Assembled in China
Advertising in New York or Los Angeles
IB theories at Country level
Keywords
Country Specific Advantages (CSA)
Vernon’s Product Life-Cycle Theory (PLC)
Country Level
Differences in factor endowments across borders (differences between countries) will
lead to international transactions, whether transfers of capital or goods (strong
assumption):
Assumes it is not an organizational problem (at firm-level)
Focused on capital mobility
Assumes more or less perfect markets
Vernons (1966) - Product Life-Cycle Theory
, Main idea: manufacturing products evolve through a cycle of roughly 4 stages
Industrial changes may force firms to relocate activities to other countries
The USA has technology-related country specific advantage (CSA)
o To exploit such CSA, they should transfer technology in foreign markets
IB theories at Firm level
Keywords
Firm Specific Advantage (FSA)
Liability of Foreignness (LOF)
Monopolistic advantage – imperfect final markets
MNEs and its FSAs are the core of the analysis.
FDI is a firm-level strategy decision rather than a capital-market financial decision
(Dunning and Rugman, 1985).
Hymer (1980) came up with 2 conditions for the existence of FDI (instead of trade):
1. MNEs must possess a countervailing advantage over local firms
2. The market for selling this advantage must be imperfect
o I.e. monopolistic advantages held by an individual MNE and entry barriers
leading to reductions in the consumer welfare
MNEs possess firm-specific advantages (FSAs) ... that allow them to overcome
liability of foreignness (LOF) i.e. ‘cost of doing business abroad’ (Zaheer, 1995)
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