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Summary Strategy and nonmarket environment
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Strategy and NonmarketEnvironment Lectures
This summary contains lecture notes, summaries of the key articles and guest lectures.
,Lecture 1
Exam & report
4 questions – 25 % percent each
2 questions about markets – 2 questions about non-market
Reports will be looked for coherence and consistency
Foreign Direct Investment (FDI): Companies that choose to acquire a controlling ownership position
in a business in another country.
Three theoretical frameworks will be discussed today:
1. OLI (Eclectic Paradigm)
2. Process Theory of Internationalisation
3. Theory of International New Ventures / Born Globals
OLI (Eclectic) Paradigm
- Idea of the theory is that there are certain combinations of advantages that make it cost-
effective for multinationals to internationally expand their operations.
- Ownership advantages
- Transferable firm-specific resources, e.g. trademarks, brands, managerial talents and
production techniques. Resources can be both tangible and intangible.
- If you only possess ownership advantages, the best option to expand internationally is
licensing.
Licensing: partnering with a third-party company which is allowed to use your brand, in
exchange for a royalty fee.
- Internalisation advantages
- Advantage that you attain from producing yourself. Cost of producing the product yourself is
then lower compared to outsourcing production to a partner → transaction costs
- Location advantages
- Location bound resources (raw materials, infrastructure) that make it attractive to invest in a
manufacturing plant abroad. These advantages are tied to a particular foreign region and are
used jointly with a firm’s unique assets. Examples are raw materials, low taxes and low
wages.
Classification of location advantages
- Exogenous location advantages: derive from natural assets
, - Fundamental location advantages: basic, legal & financial infrastructure; regulation and
policy
- Knowledge related location advantages: knowledge infrastructure (e.g. universities)
- Structural location advantages: market and demand structure
Internalisation
Internalisation theory refers mostly to firms which prefer FDI over licensing or exporting, in order to
retain control over know-how, functional processes and strategy. Think about the Brompton example
(bike manufacturer) which decided to keep production in UK instead of China in order to retain their
uniqueness and intellectual property.
Process Theory of Internalisation (Uppsala model)
- This theory tells us that internationalisation is a dynamic process of learning, and therefore
often a slow and gradual process.
Why are firms risk-averse and slow in their internationalization process?
Fundamental assumption is that they do not have enough knowledge about the foreign
market.
- There is a direct relation between market knowledge and market commitment. Knowledge
can be considered as a resource, and consequently, the better the knowledge about a
market, the more valuable are the resources and the stronger is the commitment the firm
will have to the market. This is especially true of experiential knowledge, which cannot easily
be transferred to other individuals.
- Then there is a relation between current activities and market commitment. More activities
in a country give more market knowledge, which can be further used and leads to a higher
commitment.
- When the market knowledge goes up, and the perceived risk of the market goes down, there
is increasing commitment to the market. Thus there is an incremental approach to
commitment.
, - Emerging market firms might be inclined to be more quickly expand their international
operations, they accelerate the process of PTI. One condition for this is that you need to have
enough resources to be able to do this.
Theory of international new ventures
- INVs: businesses that from the beginning are thinking about expanding internationally. These
are designed to be international from the very start. Typically these firms are small, they are
mostly in IT & Biotech
Comparison of PTI & INV
- PTI - Growth produces internationalization
- INV – internationalization that produces growth
Identifying born globals / INVs
- International by design, not by emergence
- Highly active in international markets within one or two years of their founding
- Limited financial and tangible resources
- Predominantly technology firms
- International outlook and international entrepreneurial orientation
Elements for sustainable international new ventures
- Internalization of some transactions
- Alternative governance structures → network structure & hybrid structures (licensing and
franchising) used by INVs
- Foreign location advantages → possession of private knowledge
- Unique resources
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