Summary International Business Strategy
Alain Verbeeke, 2nd edition. (chapters 1-7, 11-14, and 16A)
Chapter 1. Conceptual Foundations of International Business Strategy
Introduction: in this chapter, we will look at each of the seven concepts of this book’s unifying
framework:
1. Non-location-bound firm-specific advantages (FSAs). The words ‘internationally transferable’
FSAs will be used interchangeably with ‘non-location-bound’ FSAs.
2. Location-bound FSAs.
3. Location Advantages.
4. Investment in, and value creation through, recombination.
5. Complementary resources of external actors.
6. Bounded rationality.
7. Bounded reliability.
Internationally transferable FSAs: the MNE creates value and satisfies stakeholder needs by
operating across national borders. The MNE is, almost by definition, at a disadvantage as compared to
firms from the host country, because these firms possess a knowledge base that is more appropriately
matched to local stakeholder requirements. This incurs additional cost to the MNE. MNE managers
find it particularly difficult to anticipate the liability of foreignness resulting from the cultural and
institutional differences with their home country environments.
In order to overcome these disadvantages, MNEs must have proprietary internal strengths,
such as technological, marketing, or administrative knowledge. These are called the non-location-
bound FSAs. These do not stop creating value when the border is crossed between the home and the
host country, through their precise value may be somewhat different in the two countries. In principle,
these can be transferred, deployed, and exploited successfully across borders. The paradox of an
internationally transferable FSA is the following: if the FSA consists of easily codifiable knowledge,
then it can also be imitated easily by other firms. This means the potential value from its exploitation
is relatively low.
In contrast, FSAs that consist of tacit knowledge are hard to transfer, deploy, and exploit,
because it cannot be fully replicated through simple communication channels. Perhaps the most
important bundle of tacit knowledge is contained in the MNE’s administrative heritage: the key
routines developed by the firm since its inception. These are often determined by the vision of the
founder and the firm’s particular set of external circumstances. At a general level, and when looking at
the early history of large numbers of MNEs, we can distinguish among four archetypes of
administrative heritage, each with a specific routine of international FSA transfer:
1. The centralized exporter. A home-country-managed firm that builds upon a tradition of selling
products internationally, out of a limited number of facilities in the home country, and with
only minor, usually customer-oriented, value-creating activities abroad. Standardized products
manufactured at home embody the firm’s FSAs, and make the exporting firm successful in
international markets. Foreign subsidiaries are facilitators of efficient home country
production, with multinational activities primarily occurring in the downstream end of the
value chain, and are related to marketing, distribution, and related logistics operations.
2. The international projector. This firm builds upon a tradition of transferring its proprietary
knowledge developed in the home country to foreign subsidiaries, which are essentially clones
of the home operations. Knowledge-based FSAs developed in the home country are
, transferred to subsidiaries in host countries. The international projector MNE seeks
international expansion by projecting its home country success recipes abroad. This firm relies
on an extensive cadre of professional managers who can act as expatriates or
repositories/transfer agents of the home country success recipes.
3. The international coordinator. This centrally managed firm’s international success builds
upon a tradition of managing international operations, both upstream and downstream,
through a tightly controlled but still flexible logistics function. International operations are
specialized in specific value-added activities and form vertical value chains across borders.
The MNE’s key FSAs are in efficiently linking these geographically dispersed operations
through seamless logistics.
4. The multi-centered MNE. This firm’s international success does not build primarily on
knowledge-based FSAs developed in the home country. The multi-centered MNE consists of a
set of entrepreneurial subsidiaries abroad, which are key to knowledge-based FSA
development. National responsiveness is the foundation of the international strategy. The non-
location-bound FSAs that hold these firms together are minimal: common financial
governance and the identity and specific business interest of the founders or main owners
(typically entrepreneurial families or financial investors). ‘
These four types describe the bulk of large MNE’s, but not all. The commonality among all
these types is the transfer of at least some FSAs across borders. One example that does not fit this
framework is colonial, freestanding companies, primarily set up by the Dutch and the British. These
firms were established on the basis of entrepreneurial judgment and sound governance being deployed
internationally. To the extant that freestanding businesses were actually part of larger business
networks, the value of entrepreneurial coordination skills and other managerial services was even
more apparent.
A second non-fitting example includes many emerging economy MNEs (EMNEs). These
firms typically do not derive their strengths from advanced technology, brand names or a sophisticated
logistics apparatus. Rather, building upon generally available resources in their home country such as
low-cost labor, these firms thrive on recombining whatever FSAs they may possess with resources
accessed abroad.
Whatever archetype an MNE falls under, history suggests that the MNE will usually
overestimate the international transferability from a mere technical standpoint, the potential for foreign
deployment and the profitable exploitation of its FSAs. Whatever may constitute an FSA in the home
country, does not necessarily confer the same value in a foreign context. Whereas upstream resource
bundles, such as superior sourcing systems or unique product technology, may have universal,
transferable appeal, this usually does not hold for more downstream strengths, where the interface with
the customer is key to successful sales and profit performance.
Non-transferable (location bound) FSAs: Immobile resources linked to location advantages, local
marketing knowledge and reputational resources, local best practices in the form of routines and a
domestic recombination ability. These FSAs cannot be easily transferred, deployed, and exploited in
foreign markets. There are four main types of location-bound FSAs:
1. Stand-alone resources linked to location advantages, e.g. a network of retail locations.
2. Other resources such as local marketing knowledge and reputational resources. These may not
have the same value across borders, either because they are not applicable to a host country
context, or because they are simply not valued to the same extent by foreign stakeholders.
, 3. Local best practices may not be considered as such abroad by a variety of stakeholders, and
may even be deemed illegal. E.g. service quality in hotels.
4. Even the firm’s domestic recombination capability, which may have led to a dominant market
share and superior expansion rate in the home country, may not be adept enough to confront
the additional complexities of foreign markets. ‘
All these kinds of location-bound FSAs will have to be created in the corresponding host
country or acquired from third parties operating in these foreign markets. Linking investments may be
required to allow the matching of the MNE’s internationally transferable FSAs with the relevant
characteristics in host countries and regions. These linking investments can be viewed as investments
in host country or host region responsiveness.
Location advantages: the MNE’s economic success does not occur in a spatially homogeneous
environment. Location matters. Location advantages represent the entire set of strengths characterizing
a specific location, and useable by firms operating in that location. These strengths should always be
assessed relative to the useable strengths of other locations. Such strengths are really stocks of
resources accessible to firms operating locally, and not accessible, or less so, to firms lacking local
operations. E.g. abundant natural resources may help the creation of successful firms in the natural
resource industry.
Location advantages do not confer an equal strength to all locally operating firms vis-à-vis
firms operating elsewhere. Rather, the more effective and efficient use of location advantages by some
firms, usually the combination of these location advantages with specific proprietary resources, may
confer to them an additional FSA over other locally operating firms, usually the combination of these
location advantages with specific proprietary resources, may confer to them an additional FSA over
other locally operating firms.
Location advantages can vary widely in their geographical scope. In some cases, a location
advantage accrues to all firms operating in a particular country, in others it is limited to some industry
or even some particular business. Moreover, in some cases, location advantages accrue only to firms
operating in part of the country, such as economic clusters.
Another way to classify location advantages is to classify them by what motivates a firm to
conduct economic activity in that location. Foreign direct investment is the allocation of resource
bundles (combinations of physical, financial, human, knowledge, and reputational resources) by an
MNE in a host country, with the purpose of performing business activities over which the MNE
retains strategic control in that country. Using this concept, we can distinguish four motivations for
firms to perform activities in a host country rather than at home:
1. Natural resource seeking. The search for physical, financial, or human resources in host
countries. A precondition to such investment is that the host country institutional environment
actually allows foreign MNEs to access these resources.
2. Market seeking. The search for customers in host countries. Market seeking is not the same as
mere exporting: market seeking involves business activities in the host country.
3. Strategic resource seeking. The desire to gain access to advanced resources in the sphere of
upstream knowledge, downstream knowledge, administrative knowledge, or reputational
resources. These resources are in principle not generally accessible. This type of FDI therefore
typically involves taking over other companies, engaging in alliance activity or becoming an
insider in foreign knowledge clusters.
4. Efficiency seeking. A firm’s desire to capitalize on environmental changes that make specific
locations in the MNE’s international network of operations more attractive than before for the
consolidation or concentration of specific activities.
, Ultimately, a firm’s success abroad depends on its ability to link its internationally transferable FSAs
with location advantages in host countries. This linking process often requires developing new,
location-bound FSAs in the host country. As a result, the existing base of internationally transferable
FSAs is extended with a location-bound component, thereby improving its exploitation potential in the
host country.
Value creation through recombination: means that the firm is able to grow by innovating and
diversifying. This means combining in novel ways existing resources, often in conjunction with newly
accessed resources. In this process, managers find hew profitable ways to use excess resources at a
relatively low marginal cost and to meld these with newly accessed resources. In any organization,
resource recombination requires three things. First, entrepreneurial skills possessed by managers or
other employees that can be deployed in the face of new productive opportunities. Second, slack or
unused productive resources. Third, the willingness and capacity to let go of some resources
embedded in extant FSAs, and to replace these by resources with higher value creating potential in
host environments.
When faced with competition, the MNE’s most important strengths are usually not its
physical, financial, or human resources as stand-alone items. Instead, the MNE’s key strengths are its
valuable, often proprietary knowledge, particularly its routines and recombination capabilities. Here,
competitiveness results from the capability to recombine these knowledge bundles with newly
accessed resources to produce goods and services that meet stakeholder needs internationally. The
recombination capability is the MNE’s highest-order FSA. This capability means the firm can not only
transfer abroad its existing set of FSAs, but also create new knowledge, integrate it with the existing
knowledge base and exploit the resulting, new knowledge bundles across geographic space, in ways
that satisfy stakeholder needs.
Effective recombination requires entrepreneurial skills, as well as unused or slack resources
that can be deployed to develop new knowledge and perform the actual recombination. Finally, in host
environments, it usually entails melding selectively existing resources with newly accessed resources
so as to overcome the ‘distance’ between existing operations and the host environment. One side note:
strong routines, even though a critical component of the MNE’s FSAs, can sometimes be detrimental
to recombination, and thus to the MNE’s recombination capability. Ten patterns of recombination
exist:
1. Pattern 1. An internationally transferable FSA is developed in the home country and can be
utilized across borders without any need for adaptation.
2. Pattern 2. A location-bound FSA is developed domestically, in the home country, and is then
upgraded so as to become internationally transferable. The upgrading draws on the firm’s
recombination capability.
3. Pattern 3. An internationally transferable FSA is developed at home, but, in order to exploit it
profitability in host countries, location-bound knowledge must be added to it, in the various
host countries where the MNE operates.
4. Pattern 4. Location-bound FSAs are developed in each host country where the MNE operates,
and these FSAs are exploited locally, usually by autonomous affiliates. By definition, this
involves recombination, as the foreign affiliate exists only because of prior FDI and related
transfer of resource bundles.
5. Pattern 5. An internationally transferable FSA is developed autonomously in a host country
affiliate and then diffused internationally, either as an intermediate good, or embodied in
finished products.
6. Pattern 6. The foreign affiliate develops an internationally transferable FSA, but in this case
guided by corporate headquarters in the home country. The recombination capability is co-
located in the home and the host country.
