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Summary of Readings IB
- Instelling
- Universiteit Van Amsterdam (UvA)
All the readings of IB summarized in the document
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1THEME 1: RUGMAN, A.M., VERBEKE, A., & NGUYEN, Q.T.K. (2011). FIFTY YEARS OF INTERNATIONAL BUSINESS
THEORY AND BEYOND. MANAGEMENT INTERNATIONAL REVIEW.............................................................................2
UNITS OF ANALYSIS:..................................................................................................................................................2
THEME 2: GARRETT, G. (2000). THE CAUSES OF GLOBALIZATION. .............................................................................8
THEME 3: DUNNING, J. H. (1998). LOCATION AND THE MULTINATIONAL ENTERPRISE: A NEGLECTED FACTOR?
JOURNAL OF INTERNATIONAL BUSINESS STUDIES, 45-66........................................................................................16
THEME 4: HUTZSCHENREUTER, T., KLEINDIENST, I., & LANGE, S. (2016). THE CONCEPT OF DISTANCE IN
INTERNATIONAL BUSINESS RESEARCH: A REVIEW AND RESEARCH AGENDA...........................................................29
,2
Theme 1: Rugman, A.M., Verbeke, A., & Nguyen, Q.T.K. (2011). Fifty Years of
International Business Theory and Beyond. Management International Review
Units of analysis:
1. Country level
2. The multinational enterprise (MNE)
3. Firm specific advantage (FSAs)
Pre-Hymer (1960) era
Focused on national competitiveness at the country level, using national statistics on trade and foreign
investment
the 1970s
the focus shifted to FDI by the multinational enterprise (MNE) and the transfer across borders of its firm
specific advantages (FSAs)
the 1980s
More attention was devoted to the MNE as a differentiated network with the MNE subsidiary as the unit
of analysis.
“Reading School”: Buckley and Casson (1976, 2009), Rugman (1981), and Hennart (1982)
- The MNE’s existence is not caused by monopolistic advantages leading to entry barriers and
consumer exploitation, but by its capacity to reduce transaction costs
- when replacing an inefficient or non-feasible arm’s length transaction in the market by an internal
transaction, inside the firm, especially in the context of transferring intermediate.
Rugman built the theory of internalization as a general theory of the MNE and he brought of the gap
between internalization theory with strategic management thinking, by developing the concepts of location
bound (LB) and non-location bound (NLB) firm specific advantages (FSAs).
Hennanrt’s vision
For international expansion to take place, setting up facilities abroad must be more efficient than
exporting to foreign markets and a firm must find it desirable to own the foreign facilities.
First, interdependent actors must be located in different countries (otherwise, only domestic economic
activity would occur);
Second, the MNE must be the most efficient governance system to organize these interdependencies
Third, the costs incurred by MNEs to organize these interdependencies in the market (as in the case of
licensing) must be higher than those of organizing them within MNEs .
FDI-foreign direct investment
,3
Dunning’s eclectic paradigm
Types of advantages that influence FDI:
(i) ownership (O) advantages
a. asset advantages
· patented technology
· brand names
b. transactional variables
· a network of geographically dispersed affiliates.
(ii) location (L) advantages
a. cultural,
b. legal,
c. political
d. broad institutional environment
e. market structure at the country level
f. government policies
(iii) internalization (I) advantages
a. benefits of creating, transferring, deploying, recombining and exploiting FSAs internally
instead of via contractual arrangements with outside parties.
From the firm’s viewpoint, the (O) and (I) are not independent parameters in managerial decision making
but need to be considered jointly, with (I) being the dominant consideration.
The CSA/FSA matrix
Firm-specific advantages (FSAs)
1. Stand alone FSAs
a. patented knowledge
b. brand name
2. Routines
a. the way things are done inside the firm
3. recombination capabilities
4. the capacity to augment in a productive fashion the MNE’s existing resource base with newly
accessible resources
Firm-specific advantages (FSAs)
Weak Strong
Strong
Country -political and administrative rules -CSAs affect the processes of developing,
specific greatly affect IB transactions transferring across borders, deploying,
advantages recombining with other resources and
(CSAs) - comparative advantage leads the profitably exploiting FSAs, which are always
home country to export goods and internalized to some extent.
services which build upon its -higher order governance capabilities and core
relatively abundant factor inputs of operating routines following the firm’s
labour, capital and natural resources. dominant
Weak
- country factors do not matter
- competitive advantage results solely from
FSAs
- allegedly locationin dependent brand equity
of the firm, and the managerial resources and
capabilities of the top management team to
grow the firm
FSAs in the non-location bound NLB category typically include R&D knowledge, system integration
capabilities, managerial capabilities, easy access to capital, and sometimes brand names, to the extent that
foreign consumers confer value to these.
The MNE may need to draw upon complementary resources held by external actors in the host country.
, 4
Buckley, P., & Casson, M.C. (2009). The Internalization Theory of The
Multinational Enterprise: A Review of The Progress of A Research Agenda After
30 Years.
What is a MNE?
MNE definition=a firm that controls activities in 2 or more countries. MNE activity is concentrated
in knowledge intensive industries with high R&D, and advertising expenditure
Principles of MNEs:
o located in the country with the least cost locations,
o the benefits of operating in further internalisation of companies are just offset by the
costs,
o firm's growth is directly related to an ongoing stream of innovation
Location strategies- different in practice than theory due to number of factors such as increasing
returns to scale, and that the theory only takes into account the core production and not other
activities like marketing and R&D etc
WHY DO MNEs exist?
MNE existence caused by efficiency properties, activities typically enhance rather than reduce consumer
welfare because efficiently coordinated transactions substitute for inefficient ones. Firms aim at
maximizing profit by internalizing their intermediate markets across national borders in the face of
various market imperfections.
Imperfect markets for intermediate products > incentive to bypass through creating internal markets >
interdependent activities are brought under common ownership and control > internalization of
markets across national boundaries de facto generates an MNE.
Intermediate product= Intermediate goods are products that are used in the production process to make
other goods, which are ultimately sold to consumers. The intermediate goods are sold industry-to-industry
for resale or to produce other products.
Internal market= a system in which goods and services are sold by the provider to a range of purchasers
within the same organization, who compete to establish the price of the product. (f.e. European Union)
Internalization theory revolves around two elements:
1. general theory of the MNE
2. bridging gap with strategic management thinking, by developing the concepts of location bound (LB)
and non-location bound (NLB) firm specific advantages (FSAs).
Rugman (1981) emphasizes that each MNE commands an idiosyncratic set of FSAs, which give it a
competitive advantage relative to other firms. The critical capability of the MNE can also be some unique
element of its management structure or core routines that confer an FSA. Rugman (1981) shows that
MNEs develop in response to imperfections in the goods and factor markets. The CSAs of a nation that
provide a basic level of comparative advantage are augmented by FSAs, internal to the MNE, and
conferring competitive advantage.
Hennart internalization theory; For international expansion to take place, setting up facilities abroad
must be more efficient than exporting to foreign markets (which entails domestic internalization) and a
firm must find it desirable to own the foreign facilities.
3 conditions:
1. interdependent (=depending on each other) actors located in different countries,
2. MNE must be most efficient governance system to organize interdependencies (Institutional-
based view),
3. costs incurred by MNE to organize interdependencies must be higher than those of organizing them
within MNE
“When applied using a global systems view, internalisation theory illustrates how the activities of
different MNEs interact with each other. As a result, an MNE's decisions on how to enter a
particular national market are embedded within its wider global business strategy”
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