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Theories of International Management 2018 - summary & lecture slides
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Summary of all articles and lecture slides - February 2018
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IntroductionInternational business (IB) is defined as a business (or firm) that engages in international (cross-
border) economic activities → conceptually, the pursuit of value creating opportunities, by both
public and private business organizations, in countries other than their country of origin.
Multinational enterprise: a firm that engages in foreign direct investments and operates in multiple
countries.
Foreign direct investment: refers to investments in, controlling and managing value-added activities
in other countries.
➔ The investor’s purpose is to gain an effective voice in the management of the enterprise.
➔ The lowest threshold of ownership that can be considered as FDI is 10%, so at leads 10% of
the voting rights in the target enterprise needs to be within the investing corporation.
When foreign direct investment:
- In for example The Netherlands: Nature of the firm changes → becomes MNE
- In for example The Netherlands: High commitment
- In for example The Netherlands: Long-term investment
- In for example The Netherlands: Management interested in exercising certain degree of
control
- In for example India: want to improve the economic progress (FDI is a chance for direct
injection in the economy)
- In for example India: But, also FDI comes at a cost of local firms going out of the industry &
any wider benefits to the local economy are uncertain.
Different level of analysis to use in IB:
- Country level
- Firm level
o MNE
o Subsidiaries
- Individual level
,International Management Theme 1
– Theoretical Foundations for Studying International Business and
Multinational Enterprises
3 main theories used in IM:
- Industry-based view
- Resource-based view
- Institution-based view
Shifts in the core unit of analysis:
Country level (before 1960)
Focus on country level analysis
- International economics and national competitiveness
- Macro-level trade and investment flows between countries
- National statistics on trade and foreign investment.
Strong assumption: differences in factor endowments across borders will lead to international
transactions, whether transfers of capital or goods. CSA! Vernon and Dunning extended this
assumption, but recognize the importance of firms in their pioneering IB studies.
Product life-cycle theory: many products evolve through a cycle of roughly four stages: introduction,
growth, maturity and decline – which corresponds to the rate of growth of industry sales.
Product Life-Cycle Theory has major implications for international strategies as industry change may
force firms to relocate parts of their business to other countries. For example TVs in US:
1. 1939: sale started in the US → US emerged as the unrivalled innovating country
2. 1950: annual sales of TV sets in US reached over 7 million → some production was moved to
Europe
3. 1960: first TV sets were imported from Japan
4. 1970: the last surviving US TV firm (Zenith) became a wholly owned subsidiary of LG
Electronics. As product matured, TV production moved from developed to developing
countries.
5. Last two decades: countries like South Korea and Taiwan have become developed
themselves → shifted production even further to location with cheaper labor cost.
Conclusion: Comparative advantage may
change over the life time of a product.
Key theories and concepts:
- CSA → country specific advantage
- FDI → foreign direct investment
- PLC → Vernon’s Product Life-Cycle
Theory
,MNE-firm level (1970s)
MNE and the transfer across borders of its FSAs are at the core of the analysis.
FDI is a firm-level strategy decision rather than a capital-market financial decision. With FDI, a firm
tries to have a degree of managerial control over the foreign location. FDI will mainly occur in
imperfect markets.
Hymer focused on MNE activities. He recognizes MNEs possession of firm-specific advantages (FSA)
The FSAs are the core of the analysis.
FSA → firm specific advantages
- Allow you to overcome liability of foreignness; the impact of various forms of distance
(cultural, economic, institutional and geographic)
- Cost of doing business abroad → if you don’t have the knowledge.
Examples of MNEs’ FSAs:
- Product differentiation ability
- Superior marketing and/or distribution ability
- Brands names
- Access to capital and/or raw material
- Intangible assets, e.g. know-how, management skills, technology
There are different ways to consider your internationalization:
1. OLI paradigm: why do so many firms become MNEs by engaging in FDI?
A man (Dunning (from the electic paradigm) see slide) thought about ‘why do so many firms become
MNEs by engaging in FDI? There should be some economic gains for these firms from using FDI
rather than other forms of international business. He started with OLI. He undoubtedly presents the
most comprehensive framework to explain foreign entry mode choices and the economic efficiency
implications thereof. Firms need to ask these three things when they are going to internationalize:
- Ownership: why do you go abroad?
Ownership advantages: resources of the firm that are transferable across borders and that
enable the firm to attain competitive advantages abroad.
E.g. resources created in one country that can be exploited in other countries such as
proprietary technology and managerial know-how of VW.
- Location: where do you go?
Location advantages: operation at that location allows the MNE to create value that it would
not be able to create at home. Reason:
o natural resources seeking
o market seeking
o efficiency seeking
o strategic asset seeking
- Internationalization: how do you do it?
Internalization advantages: the activities in both locations are better organized within a MNE
rather than using a market transaction (third party). Internalization advantages refer to
benefits of creating, transferring, deploying, recombining and exploiting FSAs internally
instead of via contractual arrangements with outside parties.
Where markets are internalized across national boundaries, MNEs are created. Benefits arise
from the avoidance of imperfections in the external market, but there are also costs.
, Part of article Buckley and Casson
According to this new vision (involving specialized functions comprising not only production
but also marketing and R&D), the firm could operate multiple plants, with some plants
specializing in one type of activity and other plants in another. Different plants could be
located in different countries – when different countries were involved, a multi-plant
enterprise became an MNE. But managing of this is hard, and that is where licensing came in,
and later entry options such as franchising and subcontracting. But this was not the right way
to being satisfied. They were particularly keen to stress that MNEs should be viewed as part
of a global system in which they both cooperated and competed with each other. This global
system would comprise interdependent specialized facilities created through an international
division of labor. When applied using a global systems view, internalization theory illustrates
how the activities of different MNEs interact with each other. As a result, a MNEs’ decisions
on how to enter a particular national market are embedded within its wider global business
strategy.
Internalization theory:
Emphasis on the ability of MNEs to create and control their FSAs
Easier to control and create.
MNEs FSAs should be protected: MNEs internal market, i.e. network of foreign subsidiaries,
enables to monitor, transfer and exploit FSAs abroad.
Rugman bridges the gap between internalization theory with strategic management thinking,
by developing the concepts of location bound (LB) and non-location bound (NLB) firm specific
advantages (FSAs). Possessing FSAs is necessary, but not a sufficient condition for FDI to take
place.
The question within the internalization theory: when your firm is considering to enter a new
country, should you rely on external market measures (e.g. exporting) or internalize
operations (e.g. FDI)?
Internalization theory assumes rational action. Rational agents will internalize markets when
the expected benefits exceed the expected costs. Rationality signifies that decision maker
can identify a set of options, and has an objective by which these options can be ranked, and
an ability to identify the top-ranked options and select it. Rationality does not imply
complete information.
Rational action models distinguish sharply between endogenous and exogenous variables.
Where decision-making is concerned, the factors that influence the decision are exogenous
(included costs of R&D, the costs of licensing, production costs at home and abroad,
transport costs, tariffs, non-tariff barriers, and the parameters of product demand), whereas
the outcomes of the decision are endogenous (included the growth, profitability, and degree
of multinationality of the firm).
Why do the different activities in different countries needed to be coordinated by the firm?
o Operational integration: employment with a firm provides an independent monitor –
the employer – who ensures that the workers do not impede each other. The
employer has an incentive to monitor as well, because the stronger the cooperation
the higher is his profit. And loyalty to the firm may encourage spontaneous hard
work.
o Knowledge integration: the employer may have discovered a new product and, while
he cannot license his knowledge of this product to his workers, because they do not
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