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Theories of International BusinessUniversity of Amsterdam
Exam Document
Contains:
Course outline questions (headers)
Key point answers (bullets)
Relevant references to all articles (sub-bullets)
For every week.
,Theme 1: IB foundations
1. How do you determine the boundary of a firm and why would you expand?
a. The industry’s value chain contains the suppliers’ value chain, company value chain &
customer value chain.
b. Porter’s value chain contains primary and support activities. Together, these determine
the company’s margin.
i. Primary activities: inbound logistics, operations, outbound logistics, marketing
and sales & service.
ii. Support activities: firm infrastructure, HR management, technology
development & procurement.
iii. ‘Boundary of the firm’ is a consequence of this. It pertains the decision which
assets, strategic capabilities (expand, profit pools) to own and which to access
through the market (divest & outsourcing).
1. Outsourcing: turning over an organizational activity to an outside
supplier that will perform it on behalf of the principal firm.
a. Offshore: outsourcing to a firm abroad.
b. Onshore: outsourcing to a domestic firm.
2. Contrast with FDI: with FDI, subsidiaries are set up abroad and the work
is done “in-house”, but the location is overseas.
iv. Disadvantages of vertical integration and of outsourcing.
1. Vertical integration: increases asset base and capital employed, reduces
flexibility, prevents access to external expertise, impossible to fully
benefit from supplier efficiency and scale & reduces focus on core
capabilities.
a. Upstream/backward integration: raw materials, components
and manufacturing.
b. Downstream/forward integration: distribution, sales and
service.
2. Outsourcing: dependence created by co-specialization or co-location,
dependence created by market power (powers of suppliers and buyers),
loss of critical know-how, weakened commitment, spillover to
competition, declining differentiation.
c. Result of value chain
i. MNE: company owns and/or controls value creating activities in 2+ countries.
1. FDI: an investment made to acquire lasting interest in enterprises
operating outside of the economy of the investors. MNEs use FDI to
establish or purchase income-generating assets abroad.
2. FDI motivations (Dunning 2000 ‘The Eclectic Paradigm as an Envelope
for Economic and Business Theories of MNE Activity’):
ii. Natural resource seeking FDI
1. Activity designed to gain access to natural resources (minerals, unskilled
labor).
2. Example: Oil from Saudi Arabia.
iii. Market seeking FDI
1. Activity designed to satisfy particular (set of) foreign markets (Netflix
Uppsala model).
2. Example: Dutch company selling stroopwafels on Amazon to US, or
Netflix expanding to Canada.
2
, iv. Efficiency seeking FDI
1. Activity designed to promote a more efficient division of labor or
specialization of existing portfolio of foreign and domestic assets by
MNEs (cheaper labor/production).
2. iPhones produced in China, assembled in US.
v. Strategic asset seeking FDI (modern)
1. Activity designed to protect (defensive) or augment (offensive) existing
ownership specific advantages of investing firms and/or to reduce those
of their competitors. Acquiring strategic assets enabling a firm to
compete in a given market.
2. Example: acquisition of Whatsapp by Facebook.
3. Other modern motives: catch-up, diversification and R&D springboard.
a. Isenberg 2008 ‘The Global Entrepreneur’ : defensive (cost) and
offensive (market) reason.
d. Resulting IB strategy:
i. How to outperform global competitors (globalization).
ii. How to enter foreign markets (entry mode).
iii. How to deal with home/host country changes (distance).
2. What are the different IB theories? (Rugman & Verbeke 2011 ‘Fifty years of international
business theory and beyond’: analysis shift from CSAs to FSAs to subsidiary)
a. At country level (focus on national competitiveness):
i. Trade theory: differences in factor endowments across borders will lead to
international transaction, whether transfers of capital or goods.
ii. Vernon’s Product Life Cycle: manufacturing products evolve through a cycle of
roughly 4 stages introduction, growth, maturity & decline.
iii. FDI (above).
b. At firm level (focus on FDI and transfer of FSA across borders):
i. Hymer states 2 conditions for existence of FDI:
1. MNE must possess countervailing advantage over local firms.
2. The market for selling this advantage must be imperfect i.e. the firm has
some kind of monopolistic advantages sufficient to outweigh the LOF, to
be able to own and control value-adding activities.
a. MNEs FSAs (unique advantages of an MNE): product
differentiation, superior marketing or distribution, brand name,
access to capital & intangible assets (e.g. technology).
i. These allow to overcome Liability of Foreignness.
1. LOF: the aggregated effect of the firm’s
interaction with all elements of the IBE (costs of
doing business abroad). Firms may experience
difficulties when going abroad, because they are
non-local firms to the host country. These
disadvantages arise from spatial distance,
unfamiliarity with the host country, illegitimacy
caused by economic nationalism and host-
country restrictions.
a. MNEs can overcome LOF through FSAs
and isomorphic strategies.
3
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