The extensive summary of all the articles/slides/lectures of the Theories of International Management course is a complete resume of all the information you need to know in order to brilliantly pass your exam. I got 9.5
THEORIES OF INTERNATIONAL MANAGEMENT
Theme 1: Theoretical Foundations for Studying International Business and Multinational Enterprises
Theme 2: Regional and Global Integration Processes
Theme 3: Home and Host Country Distance and Entry Mode of Multinational Enterprises
Theme 4: Host Country Influences on International Business
Theme 5: Conceptualizing the Multinational Enterprise: Traditional and Emerging Types
LEARNING OUTCOMES:
1.Explain the core theoretical foundation for studying IB and MNEs
2.Discuss the relevance of each of the theme covered during the course for understanding the nature of
IB
3.Link together and critically analyze the different theories/conceptual models
4.Apply the theory/conceptual models to explain contemporary and real-world IB activity
TOPICS COVERED IN CLASS
• What determines the success and failure of firms around the globe?
• What initiates internationalization (motives, triggers, internal and external barriers)?
• How can we select a country to enter?
• How can we enter a new country (entry modes)?
• What is different about emerging economies?
• How can businesses enter emerging economies and what aspects should they be aware of?
REAL-WORLD CASES
•Why?
•To discuss how the theoretical/conceptual arguments from the previous week can be used to
understand and analyze real IB problems/phenomena
•How?
•Discussion materials in preparation via Canvas (Case#1 will be posted on Thursday)
•Read the material and prepare the discussion in advance
•Discussion points will be provided in advance
Why study international management?
Growing a firm requires understanding how to tale advantage of global opportunities and overcoming
challenges from foreign competitors
International Business (IB) is defined as a business (or firm) that engages in international (cross-
border) economic activities
OR
The pursuit of value creating opportunities by both public private business organizations, in countries
other than their country of origin.
There are different level of analysis to use in IB:
• Country level- it includes themes like corruption, culture, organizational structure
• Firm level (MNE , subsidiaries)- industry of the firm, top management
• Individual level
A Multinational Enterprises (MNE) is a firm that engages in foreign direct investments and operates in
multiple countries
1
,THEME 1: THEORETICAL FOUNDATIONS FOR STUDYING INTERNATIONAL BUSINESS AND
MULTINATIONAL ENTERPRISES
KEY TOPICS
• WHY and HOW do firms go abroad?
• How theories can answer these questions?
• Understand the main levels of analysis used in IM over time
• Understand the 3 main theories used in IM/Strategy and their main arguments (think of two
examples of firms per theory)
• Understand the importance for managers to understand the pitfalls of globalization
How theories developed over time and used different level of analysis
HOW DID IM THEORIES DEVELOP OVER TIME?
Overtime there has been a shift in the core unit of analysis of IM:
1. Country-level (before 1960): the analysis focuses on international economics and national
competitiveness; macro-level trade and investment flows between countries; it is measured using
national statistics on trade and FDI.
In 1960 Hymer focuses on MNC activities : distinction between financial investments and FDI – FDI gives the
firm control over the business activities in other countries
2. MNE-firm level (1970s) [FDI, MNEs]: Why some firms posses unique resources and competencies
relative to their competitors of other nationalities?
3. MNE-network level (1980s): MNEs’ network/subsidiaries-level of analysis. Typically taken top-down
approach that the HQs provides capabilities to subsidiaries
IB theories at Country level
The key theories used to analyze IB at a country-level are:
1. CSA (Country Specific Advantages)
2. FDI (Foreign Direct Investment)
3. Vernon’s Product Life-Cycle Theory
Trade theories and international economics
The assumption is that differences in factor endowments across borders will lead to international
transactions, whether transfers of capital or goods ! country-specific advantage (CSA)
Different countries have different resources and they base their import and export decision based on
factors like raw material and natural resources.
Product Life-Cycle Theory by Vernon (1996)
Many products evolve trough a cycle of 4 stages- Introduction, Growth, Maturity, Decline - which
corresponds to the rate of growth of industry sales.
Product Life-Cycle Theory has major implications for international strategies as industry change may
force firms to relocate parts of their business to other countries
2
,! Main conclusion: Comparative advantage may change over the life time of a product (example: TV
production shift from USA to South-East Asia)
count
Foreign direct investment (FDI) refers to investments in, controlling and managing value-added
activities in other countries.
Further, the investor’s purpose is to gain effective voice in the management of the enterprise.
According to the OECD definition, the lowest threshold of ownership that can be considered as FDI is 10 %
!at least 10 % of voting rights in the target enterprise needs to be within the investing corporation.
! For an MNE investing in FDIs requires high commitment and long-term investment focus, in order to
exercise a certain degree of control within the target company
! The target company wants to improve the economic progress (FDI is a chance for direct injection in the
economy) BUT also FDI comes at a cost of local firms going out of the industry and any wider benefits to
the local economy are uncertain [local firms could be pushed out of business or the economy could be not
evenly distributed in the country]
! Host countries are accepting FDI sent from home countries; this flow of money from FDI can be used to
reinvest in additional FDI (home countries invests in FDI in the host country, which is re-investing FDI in
another host country)
1.1 The Internalisation Theory of the Multinational Enterprise: A Review of the Progress of a
Research Agenda after 30 Years
Buckley and Casson (2009)
THE INTERNALISATION THEORY OF THE MULTINATIONAL ENTERPRISE
MNE = Firm that owns & controls activities in 2 or more different countries
3
, " Boundaries of a firm are set of the margin where the benefits of further internalization of
markets are just offset by the costs.
" Firm chooses its optimal location for each stage of production by evaluating regional product
costs & choosing the set of locations for which the overall average cost of production is
minimized.
" Info costs that increase with distance encourage the centralization of activities where
exchanges of knowledge through teamwork are of the essence.
" Optimum size of a firm is set where the costs & benefits to further internalization are equalized
at the margin
" New version of the firm emphasized the internal division of labor; involving specialized
functions comprising not only production but also marketing and R&D
THE CONCEPT OF INTERNALISATION
“Make or Buy decision” = backwards integration issue
" Most organizations use a range of intermediate inputs and generate a range of intermediate
outputs
" Internalization assume rational action. So internalize markets only when benefits >= cost
" 2 distinct forms of internalization:
1. Operational Internalization = intermediate products flowing through successive
stages of production and the distribution channel
2. Knowledge Internalization = the internalization of the flow of knowledge emanating
from R&D
Gains from knowledge internalizations are big, but also big risk due to information asymmetry
and buyer uncertainty (flowed info or products you paid for)
" MNE’s increased a lot after WW2. After war the opportunities for technology transfer
increased dramatically.
" Also mass-production in the U.S. were well codified in the inter war phase.
" Technology was harder to transfer to some countries because education system was not so
good. Difficult to recruit workers who could absorb technology quickly (barrier for
internationalization)
" Political risk in post-colonial societies meant that factories were prone to nationalization or
expropriation (barrier for internationalization)
" Protection patents were weak (barrier for internationalization)
" Distribution of welfare improvements btw home and host country are unequal
RATIONAL ACTION MODELLING
" Rationality does not imply complete info. The # of options that decision makers consider is
often restricted.
" Where decision-making is concerned, the factors that influence the decision are exogenous,
whereas the outcomes of the decision are endogenous.
1. Endogenous variable: growth, profitability and multinationality in a firm.
2. Exogenous variables: cost R2D, cost of licensing. Cost general and demand.
Exogenous variables can be characterized as either firm-specific, industry-specific or location-
specific
1. Firm-specific = cost of R&D and skills of R&D
2. Industry-specific = cost of licensing
3. Location-specific = production cost in different regions
THE COASION HERITAGE: INTERNALISATION AS A GENERAL THEORY OF THE FIRM
" Employer has in incentive to monitor well, because the stronger the cooperation the higher
the profit
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