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Theme III: MNE Entry Modes (Literature Summary)

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  • Module
  • Theories of International Business (6012B0427Y)
  • Institution
  • Universiteit Van Amsterdam (UvA)

This is a complete summary of all literature regarding Week I: Core IB Theories for the course 'Theories of International Business'. The summary is designed to give an easy-to-read insight into the core aspects of each paper. Papers covered include: ARTICLE I: LOCATION AND THE MULTINATIONAL ...

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Document information

  • September 14, 2023
  • 40
  • 2023/2024
  • Summary

Subjects

  • theories of ib
  • mne entry points
  • business administration
  • msc
  • mandatory reading
  • literature
  • international business
  • discussion paper
  • reading
  • university of amsterdam
  • uva
  • theories of international business

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  • Universiteit van Amsterdam (UvA)
  • Business Administration
  • Theories of International Business (6012B0427Y)
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TABLE OF CONTENTS
THEME III: MNE ENTRY MODES..........................................................................................1
ARTICLE I: LOCATION AND THE MULTINATIONAL ENTERPRISE: A NEGLEGTED FACTOR?
(DUNNING)...................................................................................................................................2
INTRODUCTION...............................................................................................................................................2
THE CHANGING WORLD SCENARIO FOR INTERNATIONAL BUSINESS ACTIVITY.............................................2
THE CHANGING GEOGRAPHY OF MNE ACTIVITY............................................................................................3
THE MICROECONOMICS OF THE LOCATION OF MNE ACTIVITY......................................................................4
MACROECONOMIC ASPECTS OF THE CHANGING INTERNATIONAL ALLOCATION OF ECONOMIC ACTIVITY..5
CONCLUSION:..................................................................................................................................................6
ARTICLE II: BOUNDARIES OF THE FIRM: INSIGHTS FROM ITNERNATIONAL ENTRY MODE
RESEARCH (BROUTHERS & HENNART)..........................................................................................7
INTRODUCTION...............................................................................................................................................7
BACKGROUND.................................................................................................................................................7
THEORETICAL PERSPECTIVES..........................................................................................................................8
INDUSTRIES AND FIRMS................................................................................................................................12
FIRM BOUNDARIES AND PERFORMANCE.....................................................................................................14
DIRECTION FOR FUTURE THEORY DEVELOPMENT AND RESEARCH.............................................................15
CONCLUSION.................................................................................................................................................18
ARTICLE III: A “STRATEGY TRIPOD” PERSPECTIVE ON EXPERT BEHAVIORS (GAO, MURRAY, KOTABE
& LU)..........................................................................................................................................20
INTRODUCTION.............................................................................................................................................20
THEORETICAL FOUNDATION AND HYPOTHESES DEVELOPMENT.................................................................20
METHOD.......................................................................................................................................................24
ANALYSIS AND RESULT..................................................................................................................................26
DISCUSSION..................................................................................................................................................27
CONCLUSION.................................................................................................................................................28
ARTICLE IV: THE HIERARCHY MODEL OF MARKET ENTRY MODES (PAN & TSE)............................29
INTRODUCTION.............................................................................................................................................29
LITERATURE REVIEW.....................................................................................................................................29
THE HIERARCHAL MODEL.............................................................................................................................30
HYPOTHESIS..................................................................................................................................................30
METHOD.......................................................................................................................................................35
RESULT...........................................................................................................................................................37
CONCLUSION.................................................................................................................................................38
DISCUSSION PAPER: HOW NETFLIX EXPANDED TO 190 COUNTRIES IN 7 YEARS (BRENNAN).......39
INTRODUCTION.............................................................................................................................................39
GLOBAL EXPANSION STRATEGY.....................................................................................................................39
EXPONENTIAL GLOBALIZATION.....................................................................................................................39




THEME III: MNE ENTRY MODES

,ARTICLE I: LOCATION AND THE MULTINATIONAL ENTERPRISE: A NEGLEGTED
FACTOR? (DUNNING)

INTRODUCTION

The author critiques the assertion that "internalization" is the most crucial element in the
OLI (Ownership, Location, and Internalization) framework for explaining the existence of
multinational enterprises (MNEs) and foreign direct investment (FDI). They argue that all
three components of OLI are equally important and interdependent, with no single leg
performing better than the others.

Furthermore, the author emphasizes that the eclectic paradigm's "internalization"
component is indeed critical but asserts that the choice of whether to internalize
intermediate product markets within the home country or a foreign country depends on
various factors, including costs and benefits. They also highlight the interdependence
between entry mode, geography, and competitive advantages in international business,
especially in knowledge-intensive industries.

The author discusses the historical evolution of research on FDI, starting with a focus on
locational variables in the 1960s, then shifting to the institution making the investment in
the mid-1970s. They argue that the internalization school has contributed more to
explaining multi-activity firm growth than the MNE concept itself.

Finally, the paper addresses the changing global economic landscape since the mid-1970s
and how it has influenced MNE activity. It explores shifts in microlocational determinants of
international production, the role of location portfolios in promoting competitive
advantages, and the impact of MNEs on trade and non-MNE transactions from a
macroeconomic perspective.

THE CHANGING WORLD SCENARIO FOR INTERNATIONAL BUSINESS
ACTIVITY

Over the past two decades, significant shifts have transformed the global economy into one
marked by three key features:

1. Intellectual Capital's Dominance: Intellectual capital, encompassing knowledge and
information, has become the primary driver of wealth creation in industrialized
economies. The market value of corporations now significantly exceeds the value of
their tangible assets, reflecting the importance of intangible assets. Knowledge-
intensive workers have grown in proportion within the labor force, emphasizing the
role of "white collar" professionals.
2. Globalization of Economic Activity: Economic activities have become increasingly
global due to advancements in transportation, communication, and reduced trade
and investment barriers. World trade consistently outpaces global output growth,
and foreign affiliates of multinational enterprises (MNEs) now generate sales that
surpass the total value of global trade. A substantial portion of trade and capital
flows occurs within MNEs.

, 3. Rise of Alliance Capitalism: "Alliance" capitalism, characterized by collaboration
among stakeholders, has emerged. This includes closer intra-firm relationships, inter-
firm cooperative agreements, and partnerships between governments and firms.
Stakeholders work together more actively to achieve their economic objectives.
These changes have led to several implications:
 Impact on Value-Added Activities: Knowledge-intensive and knowledge-supporting
production have unique spatial requirements, and MNEs are well-equipped to
provide the necessary resources and capabilities. These factors affect the
geographical distribution of foreign direct investment (FDI) and related activities.
 Globalization and Concentration: While globalization suggests the dispersal of
production and ownership across borders, other economic forces drive the
geographical concentration of such activities within specific regions and countries.
Transaction costs and benefits related to spatial proximity play a role in this
concentration.
 Cross-Border Alliances: Firms increasingly engage in cross-border alliances,
impacting the transfer of knowledge and intangible assets across national boundaries
and influencing the location of value-added activities, especially those involving high-
value asset augmentation.
These shifts are reinforced by two factors:
1. Technological Advances: The 1980s ushered in a new generation of technological
advances that are now bearing fruit. These innovations significantly impact the
macro and micro geography of MNEs.
2. Market Economy Renaissance: Many national governments have reevaluated their
macroeconomic policies and organizational strategies. This is particularly evident in
China, Central and Eastern Europe, India, Africa, and Latin American economies.
These changes have a profound impact on the assessment of economic and political
risks related to FDI by MNEs.

THE CHANGING GEOGRAPHY OF MNE ACTIVITY

In the period from 1991 to 1996, the distribution of global foreign direct investment (FDI)
and multinational enterprise (MNE) activity exhibited significant changes, influenced by
various factors. During this time frame:

 Developed countries received 64 percent of global FDI inflows.
 Developing countries accounted for 33 percent of FDI inflows.
 Central and Eastern European countries received 3 percent of FDI inflows.
 A notable shift was observed in the distribution of FDI within developing countries.
 South, East, and Southeast Asia (including China and India) increased their share of
inbound investment in developing countries from 26 percent to 62 percent.
 In contrast, Latin America and the Caribbean saw their share decline from 53 percent
to 34 percent within developing countries.

This changing geography of FDI is noteworthy as it aligns reasonably well with the overall
investment trends, regardless of ownership. For instance:
 The share of world inbound FDI accounted for by developed countries decreased
from 78 percent to 70 percent between 1975-1980 and 1990-1995.

,  Similarly, the share of world gross fixed capital formation, including the part financed
by foreign firms, declined from 84 percent to 73 percent during the same periods.
 In all developing economies, the corresponding figures were 21 percent and 30
percent, and 15 percent and 26 percent, respectively.
 For Asia, these figures were 7 percent and 19 percent, and 7 percent and 19 percent,
respectively.

These data suggest that while there are specific factors influencing the geography of FDI in
host countries, many of the drivers affecting FDI location may not be unique to its country of
origin. This aspect merits further consideration and exploration.


THE MICROECONOMICS OF THE LOCATION OF MNE ACTIVITY

Scholarly thinking about the location of multinational enterprises (MNEs) has evolved over
the last two decades. Initially, this subject received less attention from international business
scholars because it was believed that principles explaining firms' location decisions within
national boundaries could be extended to explain cross-border locational preferences.
Additionally, there was little overlap between the methodologies of international trade
economists and locational economists.
Three major developments in the global economy have affected MNE capabilities, strategies,
and locational preferences:

1. The growing importance of firm-specific knowledge-intensive assets in wealth
creation, often requiring skilled labor and infrastructure.
2. Reduction in certain trade barriers but the emergence of other spatially related
transaction costs.
3. The increasing need and ease of firms to coordinate cross-border activities and form
alliances with foreign firms.
4.
These factors have led to various outcomes, including firms concentrating certain value-
added activities in limited locations, dispersing activities across several locations, favoring
advanced developed economies, or opting for emerging market economies. These trends
reflect a changing international division of labor influenced by MNEs.
The motives for foreign direct investment (FDI) have also changed significantly, with a
notable growth in strategic asset-seeking FDI aimed at protecting or augmenting advantages
through asset acquisition or partnerships. This type of FDI often seeks assets like technical
knowledge, learning experiences, management expertise, and organizational competence,
typically concentrated in advanced industrial countries.
Traditional forms of FDI have also evolved, with foreign affiliates engaging in higher-order,
innovative activities as they become more embedded in host countries. Location-specific
assets sought by MNEs to enhance competitive advantages are increasingly economic and
institutional facilities. The presence of other foreign investors in a country is becoming more
significant, fostering agglomeration benefits and networking effects.
In summary, the changing nature of external economies, spatial transaction costs, and the
locational needs of MNEs have led to a more concentrated pattern of certain types of FDI,

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