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International Management lectures summary
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Summary of all the lectures of the course International Management for the Master International Management.
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Lecture 1Reasons for a firm to internationalise: new customers, cost savings, and access to resources.
The impact of technology on society
Space: activities are not tied to place
Time: tasks are fragmented
Relationships: tasks are interconnected, participants are scattered, and interactivity at a
distance
Motives for internationalization (FDI):
Market seeking: venturing abroad to find customers.
Efficiency seeking: venturing abroad to lower costs of performing economic activities, and/or
rationalizing existing operations in various locations.
Resource seeking: venturing abroad to access resources that are not readily available at
home or that can be obtained at a lower cost abroad.
Strategic asset seeking: venturing abroad to obtain strategic assets (tangible or intangible),
which may be critical to their long-term strategy, but that are not available at home.
Lecture 2
Foreign direct investment (FDI) can be defined as the setting up of an organizational unit abroad that
is owned by a company domiciled elsewhere. As alternatives to FDI, firms may import or export
activities, enter an agreement with another party (licensing), or engage in close collaboration with
another party (alliance).
Types of distances: cultural, administrative, geographic, economic, and psychic. Distance influences
international trade. Psychic distance is measured at the firm / individual level and concerns the
perceived distance. Differences when operating abroad include: geographic distance, different
economic conditions and currency, different language, culture, and institutions, and different
governments. Geographic distance increases transport costs (perishability and services) and
increases management costs.
Cultural distance Administrative distance
Different languages Absence of colonial ties
Different ethnicities; lack of connective Absence of shared monetary or
ethnic or social networks political association
Different religions Political hostility
Different social norms Government policies
Institutional weakness
Geographic distance Economic distance
Physical remoteness Differences in consumer incomes
Lack of a common border Differences in costs and quality of:
Lack of sea or river access - Natural resources
Size of country - Financial resources
Weak transportation or communication links - Human resources
Differences in climates - Infrastructure
- Intermediate inputs
- Information or knowledge
Business takes place within societal rules that determine how the game is played and who wins and
who loses. Rules can be explicit (laws) or implicit (customs). Liability of foreignness: foreigners are
often at a disadvantage because they do not know, cannot impact, and often cannot accept the local
societal rules of doing business, it is also known as the cost of doing business abroad.
1
,Cultural frictions greatly impair the implementation of global strategies, including global
marketing coordination, technology transfer, joint ventures and mergers and acquisitions.
Cultural convergence or divergence
Convergence Divergence
Communication – language fluency Nationalism
Common technology Integration
International human flows (tourism, etc.) Religion
International curriculum Still many remote areas
Political stability Growing number of countries
Secular
International ideas - sustainability
How to deal with differences?
AAA strategies model:
- Adaptation: to achieve local relevance through national focus while exploiting some
economies of scale. Adapt the product to the local preferences.
- Aggregation: to achieve scale and scope economies through international standardization.
Exploit learning curve advantages and exploit relational investments, follow the customer.
Create the same product for multiple similar markets.
- Arbitrage: to achieve absolute economies through international specialization. Take
advantage of international differences in availability of factors (including culture and
administrative infrastructure) and relative cost of factors (comparative advantage) (labour,
capital, and natural resources). Advertise the product as different from the country, different
country of origin.
Arbitrage benefits from international heterogeneity, while aggregation benefits from international
homogeneity. Scale economies refers to the relationship between volume of production per unit of
time and average cost of production. It is driven by fixed costs. The higher the fixed costs, the higher
the volume of output for which costs are the lowest (the minimum efficient scale).
Factors pushing for globalization Types of international strategies (Hennart)
Plant level scale economies
Firm level scale economies
Factors hindering globalization
Communication costs
Transportation costs
Government barriers
Globalization backlash
Conclusions
The level of globalization is net result of factors
pushing for and factors hindering it. Globalization varies across industries. Given the added cost of
operating abroad, not all firms should be global.
International activities are based on arbitrage and replication. Arbitrage benefits from international
heterogeneity. Replication benefits from international homogeneity. A firm can pursue successful
replication by increasing firm and plant scale economies and decreasing the factors hindering
globalization. There is often a high payoff from being the first entrant in a new global industry.
Pressure for global integration
Pressure for local
Bartlett and Ghoshal model responsiveness
Low High
High Global Transnational
Low International Multi-domestic
2
, Lecture 4
The internationalization process: license export via agent or distributor export through own
sales representative or sales subsidiary local packaging and/or assembly FDI
A multinational enterprise (MNE) is a company that is headquartered in one country but has
operations in one or more other countries.
The Uppsala internationalization model
4 stages of international expansion (the establishment chain):
1. Weak exporting activity
2. Permanent exporting activity through representatives
3. Establishment of sales divisions abroad
4. Production abroad
In each step the psychic distance increases. Psychic distance: the factors preventing or disturbing
firms from learning about and understanding of a foreign environment. These factors concern mostly
differences in language, culture, political systems, level of education, or level of industrial
development. It is the perceptual distance, it is subjective – in the eye of the beholder.
A foreign firm will face the cost of doing business abroad, the cost of foreignness, or the liability of
foreignness when operating abroad. Therefore, to compete in foreign markets MNEs need some
advantages against local competitors. Activities are internalized if it is better than buying in the
market (arm’s length transaction).
Transaction cost economics (TCE)
Markets and firms represent alternative ways of coordinating production.
Transaction costs (using market = buying)
o Search and information: finding supplier, checking price, quality, delays.
o Bargaining and decision: negotiation, drafting contract.
o Policing and enforcing: legal, audit.
Three fundamental forms of transaction governance and the conditions when they’re likely to occur:
Market: autonomous parties’ exchanges are governed by prices in supply-demand
equilibrium.
Hierarchy: (formal organisation) transactions among parties occur under a unified owner,
who settles disputes by administrative fiat.
Hybrid: long-term contractual relations that preserve parties’ autonomy but provide added
transaction-specific safeguards as compared with the market.
Transaction parties can never write completely detailed agreements covering all possible future
contingencies (incomplete contracting). Transactors’ abilities & motives involve:
• Bounded rationality: Utility-maximizing, intendedly rational transactors are constrained by
cognitive limits on their capacities to process information efficiently (contrast to neoclassical
perfect info)
• Opportunism: “Self-interest with guile” could induce strategic behaviour by transactors to lie
to, cheat, confuse, mislead their exchange partners
Even when opportunism risks are low, organisations must still safeguard against possibly severe
damages from an opportunistic partner (worst case scenario).
Transactions have three key dimensions that determine how their costs affect governance choice
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