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Summary articles Strategy and Nonmarket Environment

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  • Strategy and Nonmarket Environment
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  • Radboud Universiteit Nijmegen (RU)

Contains all summaries of the course strategy and nonmarket environment of the Master Strategic Management. Contains: Dunning, J.H. (1980). ‘Toward an eclectic theory of international production: Some empirical tests’ Johanson, J. and Vahlne, J.-E. (1977). ‘The internationalization process of...

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  • October 20, 2019
  • 44
  • 2019/2020
  • Summary

Subjects

  • radboud university
  • strategic management
  • sne
  • master strategic management
  • strategy and nonmarket environment
  • 20192020

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  • Radboud Universiteit Nijmegen (RU)
  • Master Strategic Management
  • Strategy and Nonmarket Environment
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Summary articles SNE
To provide an overview of the prominent internationalisation theories
1. OLI (or the Eclectic) Paradigm
2. Process Theory of Internationalisation (PTI) / Uppsala model
3. Theory of International New Ventures (INV)
4. Global-local dilemma and multinational strategies
5. Entry-mode strategies
6. Types of organisational design/structure
7. Mapping structures into MNE strategies
8. Structures in emerging markets
9. Stakeholder media networks and agenda-setting
10. Institutional context
11. Corporate social performance model
12. Corporate political activity (CPA)

Article 1: Toward an eclectic theory of international production: Some
empirical test (Dunning, 1980)
Outline paper:
 Main features of the eclectic theory of international production
 Evaluation of significance of ownership - and location - specific variables
 Industrial pattern and geographical distribution of sales of U.S. affiliates

Introduction – the underlying theory
The propensity of an enterprise to engage in international production rests on 3 main determinants:
1. The extent to which it can acquire assets which its competitors do not possess;
2. If it is interesting to sell or lease these assets to other firms, or make use of internalize them
itself;
3. How far it is profitable to exploit these assets in conjunction with the indigenous resources of
foreign countries rather than those of the home country.

Summarize of the eclectic approach to the theory of international production:
1. A national firm supplying its own market has various avenues for growth:
a. Diversification: horizontally or laterally into new product lines, or vertically into new
activities, including the production of knowledge;
b. Acquire existing enterprises;
c. Exploit foreign markets.
2. When it makes good economic sense to choose the last route, the enterprise becomes an
international enterprise. However, to be profitable it must possess additional ownership
advantages sufficient to outweigh the costs of servicing an unfamiliar or distant environment.

The function of a firm is to transform valuable inputs into more valuable outputs. Two types of
inputs:
1. Resources available to all firms: e.g. natural resources, most kinds of labour, and proximity to
markets
2. Ownership specific inputs: e.g. certain types of technology and organizational skill. Although their
origin may be linked to location-specific endowments, their use is not so confined.




1

,The eclectic theory brings together 3 strands of economic theory:
1. Ownership advantages: competitive advantages such as trademark, entrepreneurial skills,
production methods (resources that are transferable across borders and enable competitive
advantage building). O alone: Licensing.
a. Example: IKEA (International replicator).
i. Capabilities arising from organisational structures and culture
ii. Support for ongoing learning process aimed at frequent modification of the
format for replication.
iii. Variation in marketing, pricing etc across stores
iv. Standardisation across stores in higher-level features such as company values
and vision




2. Locational advantages: those that arise from using resources that are tied to a particular foreign
location and used jointly with one’s own unique assets (raw materials, low wages, tariffs/taxes).
O and I: Exporting.
Type of L advantages Source of L Example of L advantages
advantages
Exogenous L These derive from Land availability, rainfall, climate, extractive resources.
advantages natural assets Proximity to other markets. Membership in a regional
integration scheme.
Fundamental L Basic infrastructure Primary schools, Health care, Transport, Telecoms
advantages
Legal infrastructure Legal system, Tariff system, Property rights
Regulation and policy Incentives, subsidies, Industrial policy, Competition
policy, Capacity to enforce regulation
Financial Banking, insurance, stock exchange
infrastructure
Knowledge-related L Knowledge Universities, Public research institutes
advantages infrastructure
Structural L Market and demand Income level and distribution, Market size, Consumer
advantages structure sophistication, Availability of skilled employees,
Distribution channels, Competitors
3. Internationalization advantages: advantages that arise through one’s own production rather than
through partnership arrangement such as licensing. Firms prefer FDI over licensing or exporting
to retain control over know-how, functional processes, and strategy, or do not have licensing-
prone capabilities. O, I, and L: FDI

2

, a. Example: Toyota
i. Superior ability to manage design, engineering, manufacturing, and selling of
automobiles
ii. Option to license products
iii. Difficult to codify skills: management and process capabilities
iv. What would happen if Toyota were to allow a foreign entity to produce its cars
under license?

Conclusion
The basic incentive of a firm to internalize its ownership endowments is to avoid the disadvantages,
or capitalize on the imperfections, of one or the other of the two main external mechanisms of
resource allocation:
1. The market or price system: market imperfections arise wherever:
a. Negotiation or transaction costs are high;
b. The economies of interdependent activities cannot be fully captured;
c. Information about the product or service being marketed is not readily available or is
costly to acquire.
2. The public authority fiat: public intervention in the allocation of resources may also encourage
firms to internalize their activities.

Types of Ownership Location Internalization Illustration of
international Advantages Advantages Advantages types of activities
production which favour
MNEs
1. Resource-based Capital, Possession of To ensure stability Oil, coper, tin, zinc,
technology, access resources of supply at right bananas, cocoa,
to markets price. Control of tea
markets.
2. Import Capital, Material & labor Wish to exploit Computers,
substituting technology, costs, government technology pharmaceuticals,
manufacturing management and policy, advantages, high motor, cigarettes
organizational transaction or
skills, surplus r&d, information costs,
other capacity, buyer uncertainty,
economies of scale, etc.
trade marks
3. Export platform As above, but also Low labor costs, The economies of Consumer
manufacturing access to markets Incentives to local vertical integration electronics,
production by host textiles, cameras
governments
4. Trade & Products to Local markets. Need to ensure A variety of goods
distribution distribute Need to be near sales outlets & to which require close
customers. After- protect company's customer contact
sales servicing. name
5. Ancillary Access to markets Markets Broadly as for 2/4 Insurance, banking
services & consultancy
services
6. Miscellaneous Variety-but include Markets Various(see above) Portfolio
geographical investment,
diversification airlines and hotels
(airlines & hotels)




3

, An overview of current approaches
There have been five approaches to testing the theory of international production:
1. Try to explain the pattern of FDI in terms of ownership advantages of MNE;
2. Try to identify whether foreign markets are exploited by trade or nontrade routes;
3. Examining both the level and composition of international involvement in terms of ownership
and locational characteristics.
4. Extend the first three with internalization
5. Relate the specific endowments of firms to those of home countries,




Article 2: The internationalization process of the firm—A model of
knowledge management development and increasing foreign market
commitments (Johanson & Vahlne, 1977)
The PTI/Uppsala model focuses on the gradual acquisition, integration and use of knowledge about
foreign markets and operations, and on the incrementally increasing commitments to foreign
markets. In particular, attention is concentrated on the increasing involvement in the individual
foreign country. Essence: internationalisation is a dynamic process of learning (step-by-step
reduction of market uncertainty).

Introduction
The basic assumptions of the model are that lack of knowledge about foreign markets is an
important obstacle to the development of international operations and that the necessary
knowledge can be acquired mainly through operations abroad. This holds for the two directions of
internationalization:
1. Increasing involvement of the firm in the individual foreign country
2. Successive establishment of operations in new countries

The model has explanatory value, however not predictor value due to the fact that they neglect
decision styles.

Empirical background
Firms often develop their international operations in small steps (gradual internationalization),
rather than by making large foreign production investments at single points in time. Typically, firms
start exporting to a country via an agent, later establish a sales subsidiary, and eventually, in some
cases, begin production in the host country
 E.g. export to Japan, learn more about the country, and set up a local sales subsidiary.

4

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