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Summary International Business Strategy
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- Katholieke Universiteit Leuven (KU Leuven)
Summary of the lessons and a good preparation for the exam.
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Summary International BusinessStrategy
Part I: core concepts
“What determines the international success and failure of firms?”
This is the key question that will be addressed in part 1. Different scholars have provided
different answers to this question. We will compare their different answers to this question
and evaluate the validity of their ideas (by looking at the strengths and the weaknesses).
By reviewing, comparing and evaluating these ideas, we will make use of a single framework:
the framework developed by Alain Verbeke. In chapter one of the book, he explains these 7
concepts and in the subsequent chapters, he applies that framework to the different ideas of
international business strategy developed by these management gurus. The framework
suggests how to improve multinational enterprise’s performance in two area’s: value
creation and satisfying stakeholder goals across borders.
1. Conceptual foundations of international business strategy
1.1 Introduction
International business strategy is a concept that is relevant for multinational firms. Firms
that are internationally active need to develop an international strategy.
“What is the largest multinational firm in the world?”
The answer on this question depends on how we define the size of the firm. We can
measure the size of the firm in different ways:
Annual worldwide revenues/sales (=the most used one): Walmart
The list of top 12 in the PowerPoint contains 4 multinational firms of emerging
economies, which are called the emerging market multinationals. Further on in the
course, we will see that these types of multinationals actually tend to internationalize
for different reasons than most of the multinationals from developed countries
Profits: Saudi Aramco
Value of the assets: China National Petroleum
Capital intensive firms (other examples are for instance Volkswagen, Toyota…) rank
high on this criterium.
Number of employees: Walmart
Market capitalization: Apple
Walmart is thus the biggest multinational firm in terms of annual sales and in terms of
employees. However, Walmart has not always been successful in foreign countries as they
exited several foreign countries over the past decades (Germany, South-Korea, Japan…).
Even for the largest multinationals, foreign expansion is very challenging.
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,1.2 Definition
International business strategy = effectively and efficiently matching a multinational
enterprise’s internal strengths (relative to competitors) with the opportunities and
challenges found in geographically dispersed foreign environments that cross international
borders. This matching principle is a necessary condition to create value and satisfy
stakeholder goals (both domestically and internationally).
Multinational enterprise (MNE) = a firm that (partly) owns and controls value-adding
operations in at least two countries.
Not all internationally active firms are MNEs (a firm that works together with an
independent supplier in India is internationally active, but it is not an MNE as it does not own
these operations)
1.3 The seven concepts of the unifying framework
Differences among the different management gurus are usually just variations on these
central concepts. The seven concepts are:
1. Non-location-bound firm specific advantages (FSAs)
2. Location-bound firm specific advantages (FSAs)
3. Location advantages
4. Value creation through recombination
5. Complementary resources of external actors
6. Bounded rationality
7. Bounded reliability
The first three concepts together reflect the distinct resource base available to the firm,
which is critical to achieve success in the marketplace. This resource base has various
components:
Physical resources
Financial resources
Human resources
Upstream knowledge
Downstream knowledge
Administrative knowledge
Reputational resources
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,Conceptual framework Verbeke
According to Verbeke, each home country provides certain location advantages to the firms
operating there. The middle and the right part of the triangle refer to the internal strengths,
which can be location-bound (non-transferable) or non-location bound FSAs (internationally
transferable). There are different types of FSAs. There is an international border that
internationalizing firms need to cross when they want to become internationally active, and
when doing so, firms may face issues related to bounded rationality and bounded reliability.
When the international border is crossed, the firm becomes active in a host country. Foreign
firms tend to enter countries to tap into location advantages in these countries. In each host
country, each firm will also have non-location-bound and/or location-bound FSAs. This
means that the internationalizing firm may transfer non-location-bound FSAs from the home
country to the host country and/or the internationalizing firm may also develop location-
bound FSAs in the host country itself. A firm need to have at least some non-locations bound
FSAs to offset a liability of foreignness that they may encounter (=a disadvantage compared
to the domestic firms).
Non-location bound (NBL) FSAs
These are corporate strengths that are technically transferable to other countries AND can
be profitably exploited there (= it is technically transferable abroad and maintains its value
after having been transferred).
These FSAs are not necessarily transferrable to all foreign countries in the world, but
only to some. A company only knows after the transfer whether a certain FSA was
location-bound or non-location bound to that specific host country. So, it might be that a
certain FSA is non-location bound to one host country, but is location bound in another
country (because one of the two conditions is not being met).
Non-location-bound FSAs can be transferred abroad in two ways:
1. Embedded in final products
The firm has certain internal strengths that can be exploited abroad, but the firm
decides to keep the FSAs in its home country to manufacture products there and
then exports their products abroad. In that case, the exported products contain the
FSAs, which means that these FSAs are embedded in the exported products.
Customers in foreign countries benefit thus from these FSAs, but the FSAs
themselves are not directly transferred from the firm’s home country to the foreign
market.
2. ‘Intermediate inputs’
FSAs themselves are transferred directly to foreign countries in a separate form. This
might be the case due to natural or government-imposed trade barriers.
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, In order to succeed internationally, firms must have at least some non-location-bound
FSAs, because firms typically face a so-called liability of foreignness when they expand
internationally. This means that those firms incur costs that local firms do not incur. There
might be different reasons for those additional costs of doing business abroad: a lack of
knowledge about local tastes & customs, a lack of connections with local businesses &
politicians and discrimination by the local government…
Example eBay vs Alibaba:
When eBay (from the USA) attacked Alibaba in its home market China, Alibaba believed eBay
would face such a large liability of foreignness in China that it would fail in its attempt to
conquer the Chinese market. This turned out to be right. eBay shut down its Chinese website
in 2007.
Examples of non-location-bound FSAs:
Unique product technology
General management skills
Global brand reputation
Administrative knowledge
Non-location-bound FSAs: geographic scope
Verbeke and Rugman analyzed the worldwide distribution of the annual revenues of the 500
largest multinational enterprises in the world (Fortune500). When a firm’s non-location
bound FSAs would be transferrable towards every country all over the world, then one
would expect that those firms should realize similar shares of their sales in each main world
region. However, Rugman and Verbeke found that most of those firms realize most of their
sales in their home region. According to the authors, that indicates that a firm’s FSAs have a
limited geographic scope. To some degree, they are non-location bound, but only towards
countries that belong to the same region as the home country of the MNE.
The authors split up the world into three ‘triad regions’: North America, the European Union
and Asia. There are limits to the use of these three regions only (because what about Latin
America or Africa for instance?), but the authors defend their choice by arguing that most of
the firms they observe have their headquarters in one of those three regions.
Results of the study:
Ø Only 9 firms where truly global firms in the sense that only these 9 firms realized
between 20-50% of their sales in each Triad region. Examples of these 9 companies
are Coca-Cola, Philips, Louis Vuitton…
Ø Only 25 firms managed to realize 20-50% of their sales in two triad regions. These
are called bi-regional firms. Examples are BP, Nissan, Unilever…
Ø Most of the other firms (not listed up above) realized most than 50% of their sales in
one Triad region, usually their home country. These are called home-region oriented
firms.
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