Comprehensive summary of the lectures for the course Multinational Strategic Planning. Suitable for students International Business. Given by Alain Verbeke at the Vrije Universiteit Brussel in the academic year . Allowed me to pass during the first session.
Summary:
Lectures Multinational Strategic Planning
PROFESSOR ALAIN VERBEKE
Gino Aytas | 2MA IB | Academic year 2022 – 2023
Version 1
,Practical information:
The final grade is composed out of a written closed book exam for 100% of the mark. The
exam consists out of both open questions and multiple choice questions as well as a case
study.
At the end of each chapter you can summarize in light of the learning objectives set out in
the slides. This identifies clearly what the most important aspects of a chapter are.
1. Lecture 1: Chapter 1
1.1. CH1: CONCEPTUAL FOUNDATIONS OF INTERNATIONAL BUSINESS
STRATEGY
Lets start by defining what an international business strategy is.
An international business strategy is effectively and efficiently matching
multinational enterprise’s (MNE) internal strengths (relative to competitors)
with the opportunities and challenges found in geographically dispersed
environments that cross international borders.
By matching MNEs with opportunities and challenges according to their internal strengths
a company can create value and satisfy stakeholder goals (domestically &
internationally). Each geographical environment’s stakeholders will have different goals
compared to the others. It is evident that such international business strategy entails much
more than simply doing business abroad.
It is important to introduce seven concepts that we will use throughout the entire course:
• Internationally Transferable Firm-Specific Advantage (FSA)
o Non-location bound
o Can be exploited profitably across borders
o Without international success is unlikely
For example luxury goods such as Louis Vuitton. All around the world Louis Vuitton
products are in demand. Meaning that not much has to be changed per country where it is
being sold. The product is known for its quality and prestige, which along with the product
are internationally transferable FSAs.
• Non-transferable FSA
o Location bound
For example when a Belgian company sets up a subsidiary in the USA. In terms of
accounting everything is radically different. An incredible accountant in Belgium can not
be transferred to the new location easily as the system is different. This makes the person a
non-transferable FSA that is location bound to Belgium. New transferable FSAs for the
domestic location have to be developed.
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,Another example is relationships. A construction company for example has favourable
relationships with its suppliers in the home country. However this FSA is not going to
transfer abroad. New relationships have to be made abroad.
• Location Advantages
For example when located in Belgium as a logistics hub. The port of Antwerp functions as
the gate of the blue banana for maritime shipments. This can be advantageous to some
companies and is an advantage inherent to being located in Belgium.
In other countries such location advantages could be natural resources or clusters. Or
Ireland, where there are advantageous tax regimes for companies.
• Investment and value creation via resource recombination
o Not one single resource yields value
o Recombining multiple resources together yields value
o Requires investment
• Complementary resources of external actors
For example an Italian company that makes luxury goods that it wants to sell around the
world. Entering the US the Italian company requires a distribution network, a marketing
plan and so on. This might be difficult for the company to execute itself, it will seek external
actors to provide complementary resources.
• Bounded Rationality
o i.e. the scarcity of mind
o More uncertainty across border
Information about the future is always imperfect. However in general you have a better
understanding domestically compared to internationally. It is a trade-off between wanting
intelligence and cost: how much are you willing to spend and what intelligence do you
need?
In general the closer you are to something (ex. trough a foreign subsidiary), the better
one is able to deal with bounded rationality problems.
• Bounded Reliability
When you do business with someone there is the assumption that the actor with which
you do business (ex. joint venture partner, employee) is reliable. No one is doing business
with an actor that is considered dishonest. However, in reality this is frequently not the
case. One should structure agreements to maximize the probability of actors staying
reliable. Actors you do business with have some reliability, but there should be safeguards
to ensure the reliability is executed upon.
Trust is a useless concept as it makes yourself vulnerable. You believe that the other
actor will treat you well. That may be okay in your private life, however in business there
should be no trust.
PAGE 2
, Take for example engineers working in Formula 1. Their employment contract contains a
non-compete clause, prohibiting them from working at another Formula 1 team in the next
years. As much as you trust the employee not to share confidential info, it is better to
safeguard you against it.
Sources include opportunism (i.e. false promises or reneging on promises) on the one
hand. On the other it is trough benevolent preference reversal, meaning that people
tend to overcommit. For example a parent company that envisions to triple their sales
over the next year, which is confirmed by the subsidiary. This is combined with bounded
rationality: people in the home country don’t know what is going on in the host country,
unaware that the confirmation from the subsidiary in the host country is impossible.
Sometimes people reprioritize. Going back to the earlier example the parent company
could ask the subsidiary to do certain things. However local requirements at the subsidiary
take over, causing the subsidiary to become unreliable.
Finally there is identify based discordance, meaning that although an actor means well,
its identity gets in the way. Take for example the warehouse department of a company
wants to reduce the inventory on hand to the lowest possible level to save costs. However
the purchasing department is able to utilize purchase discounts by buying in bigger batches,
causing there to be more inventory than is required for demand. There is an identify based
discordance between the two groups, that both want the best for the company.
This diagram sums up the concepts we just introduced. The triangle represents the
pyramidal nature of a FSAs. In the home country a firm enjoys location advantages on
which it builds. The MNE builds location bound FSAs and a narrower set of non-location
bound FSAs. The circle highlights all FSAs the company enjoys in the home country milieu.
The strategy for effectively deploying and exploiting non-location bound FSAs is
influenced by bounded reliability and rationality.
Looking at data of MNEs their activity in the global economy we can note that from 2003
to 2017 exports have increased tremendously. The foreign direct investments (FDI)
have also increased substantially. FDI reflects the acquisition or setup of companies and
joint ventures abroad. Finally stocks regarding FDI have also increased a lot.
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