Detailed summary of all articles and cases for the Theories of International Management (Master Business Administration). The summary also includes all the important images.
Summary Theories of International Management ‘Article 1; Fifty Years of International Business
Theory and Beyond (Rugman, Verbeke & Nguyen)’
Introduction
Field of international business has matured -> shifts in level of analysis in international business:
• Pre-Hymer (1960s): focus on national competitiveness at country level, using national
statistics on trade and foreign direct investment (FDI). Differences in factor endowments
across borders will lead to international transactions -> Vernon (product life cycle framework)
and Dunning extend this, but recognize importance of firms in their international business
studies (first stage of modern international business analysis). Rugman confirms this outcome
in context of other country.
• Hymer (1970s): focus on foreign direct investment by multinational enterprise (MNE) and
transfer across borders of firm-specific advantages (FSAs). There is liability of foreignness
(impact of various forms of distance such as cultural, economic), which explains why MNEs
have difficulties operating in foreign markets, especially when facing rivals not hindered by
such distance. Mirror image of Hymer’s analysis is Uppsala model of international expansion
(Johanson and Vahlne): there are stages of internationalisation, whereby potential benefits of
exploiting FSAs abroad need to be weighed against the risks of operating in unknown foreign
environments and costs of learning to do business there. So, country remains co-unit of
analysis along with MNE.
• 1980s: focus on MNE as differentiated network with MNE subsidiary as unit of analysis.
Birkinshaw has developed concept of subsidiary initiatives, whereby focus is on innovative
recombinations of both home and host country country-specific advantages (CSAs) and FSAs
held by MNE’s units in these countries.
So, literature of international business has developed from basic focus on CSAs and FSAs that are
clearly separate and distinguishable from each other towards more nuanced understanding of linkages
between them and manner in which MNE managers in home and host economies will interact to
develop novel recombinations of home and host CSAs and FSAs held by MNE units. Unit of analysis
has shifted from country-level, to parent MNE, to subsidiary level.
From country level to firm level analysis
Hymer tries to explain why firms participate in international operations by focussing on firm level ->
analysis of MNE by showing that MNE is institution for international production rather than
international exchange. Hymer distinguishes between FDI (firm-level control) and portfolio investment
(no firm-level control) -> rejection of country level portfolio investment theory.
Two conditions that have to be fulfilled to explain existence of FDI:
1. Foreign firms must have a countervailing advantage over local firms to make such investment
viable.
2. Market for selling countervailing advantage must be imperfect.
Firms must have some kind of monopolistic advantages sufficient to outweigh the liability of
foreignness (LOF -> arise from lack of knowledge about local customs, differences in local tastes, and
unfamiliar legal systems) to be able to own and control value-adding activities -> FDI will occur mainly
in imperfect markets. MNE’s existence is caused by monopolistic advantages leading to entry barriers
and consumer exploitation.
By internalization theory, MNE’s existence is caused by its efficiency properties: capacity to reduce
transaction costs when replacing an inefficient or non-feasible transaction in market by internal
transaction inside firm -> MNE’s activities enhance rather than reduce consumer welfare because
efficiently coordinated transactions substitute for inefficient ones. In internalization theory, focus
switches from FDI at country level to level of institution making the investment (MNE). Essential
argument is that firms aim at maximizing profit by internalizing their intermediate markets across
national borders in face of various market imperfections.
,Rugman argues that internalization theory is general theory of MNE -> internalization encompasses
within itself reasons for international and domestic production -> important role of MNEs in overcoming
imperfections in various external markets. FSAs arise when MNE has developed special knowhow or
capability that other cannot duplicate (only at high costs) -> resource-based view of Prahalad and
Hamel. FSA is necessary but not sufficient condition for FDI to take place. So, Rugman shows that
MNEs develop in response to imperfections in goods and factor markets.
Hennart developed different version of internalization theory -> for international expansion, setting up
facilities abroad must be more efficient than exporting to foreign markets and a firm must find it
desirable to own the foreign facilities -> three conditions must be satisfied:
1. Interdependent actors must be located in different countries (otherwise only domestic
economic activity).
2. MNE must be most efficient governance system to organize these interdependencies
(otherwise only domestic actors located in different countries would be involved and no MNE).
3. Costs incurred by MNEs to organize these interdependencies in markets must be higher than
those of organizing them within MNEs.
Three types of advantages influence FDI:
1. Ownership advantages (O): asset advantages (tangible and intangible assets such as
patented technology, brand names) and transactional variables (strengths in coordination).
2. Location advantages (L): foreign countries having some CSAs in terms of natural resources,
factors of production, demand conditions, cultural environment, political environment.
3. Internalization advantages (I): benefits of creating, transferring, deploying, recombining, and
exploiting FSAs internally instead of via contractual arrangements with outside parties.
OLI paradigm has some shortcomings: struggles to integrate country and firm level interactions,
ownership advantage could be derived from internalization advantage (not independent parameters),
and ownership advantage cannot be separated from location advantage (are simultaneously
determined).
Group of Scandinavian researchers developed Scandinavian model: internationalization is cumulative,
path-dependent process whereby firm’s international expansion pattern is function of its past
international experience and knowledge base -> internationalization theory: firm with little or no
international experience enters foreign market by exporting -> driving force is experiential market
knowledge. Other concept is psychic distance: degree to which firm is uncertain of the characteristics
of a foreign market -> firms undertake international expansion in incremental manner -> firms will first
enter foreign markets with which they are relatively familiar (geographically, culturally) and then, with
acquired knowledge, enter more distant environments. However, internationalization theory lacks
serious conceptual grounding and generalizability, and psychic distance concept isn’t always true
(Germany don’t enter Swiss and Austrian market, because they are very small). Overall problem with
internationalization theory is that it neglects two critical elements: nature of MNE FSAs and presence
or absence of natural and government-imposed market imperfections.
From firm level to subsidiary level analysis
Most key strategic decision are taken at level of MNE -> MNE is relevant unit of analysis, but there is a
problem in translating and applying firm-level theory to subsidiary unit, which is key building block of
MNE and is viewed as differentiated network rather than monolithic hierarchy -> Birkinshaw has
shifted focus from parent firm to subsidiary managers by demonstrating that subsidiary initiatives may
represent a useful unit of analysis when trying to understand innovation processes inside MNE.
Rugman and Verbeke have suggested that CSAs of host countries may be used in leveraged way and
argued that FSAs can be created anywhere in MNE network (parent company at home and foreign
subsidiaries). FSAs can be location-bound (limited geographic area) and non-location bound
(strengths can easily be transferred across locations). Subsidiary initiatives may lead to development
of location-bound FSAs, but can be transformed into non-location bound FSAs.
, If subsidiary is valid unit of analysis, it should be possible to unbundle resources and capabilities
between subsidiary and MNE -> tangible resources (plant, equipment, people) are held primarily at
subsidiary level and intangible resources (financial, organizational, reputational) are held at firm level,
but it’s harder to unbundle capabilities. These resources shouldn’t be evaluated in terms of potential
for competitive advantage (valuable, rare, non-imitable, and non-substitutable), but should be
considered in combination with other resources -> non-location bound FSAs. Through subsidiary
initiatives, managers can develop both location bound and non-location bound FSAs.
The classic framework for international business theory
Three basic units of analysis can be analysed in classic CSA/FSA matrix, which show impact of
country and firm factors on international business transactions. On vertical axis are country factors
from weak to strong CSA impact and on horizontal axis are firm factors from weak to strong FSA
impact. Cells:
• Strong CSAs + weak FSAs: only CSAs matter to explain scope and direction international
business activities -> mainstream international economics explains how comparative
advantage will lead home country to export goods and services that are abundant (Saudi
Arabia will export oil).
• Strong CSAs + strong FSAs: both CSAs and FSAs matter -> MNE is operating across multiple
countries and coordinating various resources dependencies across borders. CSAs affect the
processes of developing, transferring across borders, deploying, recombining with other
resources and profitably exploiting FSAs -> MNE successfully accesses and leverages CSAs
in home and host environments, and is able to put together bundles of location bound and
non-location bound FSAs to achieve success in variety of host environments.
• Weak CSAs + strong FSAs: competitive advantage results solely from FSAs and country
factors doesn’t matter much -> unaffected by
geography -> consistent with resource-based view.
• Weak CSAs + weak FSAs: nor CSAs and FSAs matter.
The future of distance in intra-firm and inter-firm networks
Challenge in international business is to understand how distance affects the transferability,
deployability, recombination and profitable exploitation across borders of proprietary know-how. Three
types of FSAs that build upon home country CSAs: stand-alone FSAs (patented knowledge, brand
name), routines (way things are done inside firm), and recombination capabilities (augment MNE’s
existing resource base with newly accessible resources). This leads to location bound FSAs and can
become internationally transferrable, deployable and profitably exploitable (non-location bound FSAs:
R&D knowledge, managerial capabilities).
Host country subsidiaries may develop subsidiary-specific advantages (SSAs) as result of their
autonomous initiatives -> SSAs: unique strengths developed by host country subsidiary managers
build upon host country CSAs. Challenge with SSAs is that actual capability cannot be simply
transferred across borders, because underlying knowledge is embedded in subsidiary and its linkages
with local actors.
Challenges of effective deployment, appropriate recombination of non-location bound FSAs with new
location bound FSAs, and managerial effectiveness become compounded as distance increases ->
more difficult for senior MNE managers at head office to understand critical success factors and
engage in proper monitoring and correction of human behaviour. Location boundedness of FSAs is
often mainly intraregional in nature -> FSAs can be relatively easily transferred, deployed, recombined
and profitably exploited throughout home region compared to between regions.
Key insight is that various distance dimensions measured in international business studies aren’t
independent of each other (regional economic integration fosters institutional coordination that may
lower cultural distance and improving transport infrastructure may reduce impact of geographical
distance).
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