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Summary Theories of International Business
Summary of the mandatory lecture clips of theories of International Business, including a short summary of all articles.
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Voorbeeld van de inhoud
Theories of International Business – Master BASummary
Victor Roos
Content
Page
§1 Theoretical foundations for studying IB & MNE’s 2
§2 Regional & global integration processes 16
§3 Entry mode of MNE’s & FDI motivations 22
§4 Home and host country effect & the concept of distance 31
§5 New and emerging types of MNE’s 41
Learning objectives
1. Explain the core theoretical foundation for studying IB and MNE’s broadly conceived
2. Summarize the relevance of each of the themes covered during the course for understanding
the nature of IB
3. Link together and critically analyze the different theories/conceptual models associated with
the five themes of the course
4. Combine topics and theories of different themes covered during the course to design a new
research idea to study an IB issue
5. Apply the theory/conceptual models associated with the themes to create a conceptual model
for the analysis of contemporary and real-world IB activity.
Exam
- There will be no questions asked about topic 5.
- Know the essentials of all articles: the core theoretical perspectives
- Be able to identify relationships between theories in terms of similarities, differences, and
developments in thinking.
,Theories of International Business – Master BA – Summary
§1 Theoretical foundations for studying IB & MNE’s
Lecture 1, Knowledge Clip 1.2-1.8, Article 1.1-1.5
Strategy is not just about getting from A to B, it is also about your end-goal. We are talking about
International Business (IB) if we are going cross borders. Therefore, IB strategy is about:
- How to outperform global competitors
- Which (foreign) markets to enter
- How to develop new products abroad
- How to create synergies between HQ/Subs
- With which foreign firms/partner to cooperate
- How to stimulate entrepreneurship (new ventures)
- How to deal with home/host country changes
Conceptualizing IB
Traditionally, (IB) is defined as a business (or firm) that engages in international (cross border)
economic activities (Peng, 2012). Conceptually, it is:
- The pursuit of value creating opportunities, by both public and private business organizations
in countries other than their country of origin.
- The study of IB more holistically considers both the foreign and domestic firms.
Difference between IB and IM
IM is about managing complexity and uncertainty: cross border activity brings new challenges. It
requires awareness and strategic thinking and is implying interdisciplinary approaches and an open
mindset. IB is more complex than business in a single country: border effects include for example
currency and political risks, institutional and cultural differences, and country variations in terms of
social values, ethics and expectations.
§1.1 Why is IB important?
Lecture 1
Studying IB is important for three reasons:
1. Understand how globalization has connected businesses, markets, people, and information
across countries.
2. To develop a global mindset.
3. To plan a career in business by understanding the barriers of doing business with partner from
other countries.
The study of IB gives you frameworks to understand the connectedness in the market.
§1.2 IB terminology, value chain & boundaries of the firm
Lecture 1, Knowledge Clip 1.2
Companies that operate in an IB context are called multinational enterprises (MNE’s): a firm that owns
and/or controls value creating activities in two or more different countries. An MNE is a firm that uses
FDI to establish or purchase income-generating assets abroad but may also trade goods and services
across international borders. To be an MNE, requires two things:
- A parent company: this is an incorporated or unincorporated enterprise, or group of
enterprises, which has a direct investment enterprise operating in a country other than that
of the parent.
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Victor Roos
,Theories of International Business – Master BA – Summary
- Subsidiaries: an incorporated enterprise in the host country in which another entity directly
owns more than half of the shareholder’s voting power (e.g. MINI is a subsidiary of BMW).
It is also called a TNC or MNC. It is a company that engages in international (cross-border) economic
activities, sometimes an MNE. Transnational corporations (TNC) are incorporated or unincorporated
enterprises comprising parent enterprises and their foreign affiliates. A parent enterprise is defined as
an enterprise that controls assets of other entities in countries other than its home country, usually by
owning equity capital stake.
FDI, or foreign direct investment, is defined as: an investment made to acquire lasting interest in
enterprises, operating outside of the economy of the investor with the investor’s purpose to gain an
effective voice in the management of the enterprise. It differs (based on company policy) how many
shares or what percentage of the shares you need to have to 'have something to say about company
policy' or during the board meetings to have an effective voice. Usually you can think of 5% or more.
Anything lower than this usually does not have an influence on the operations of business ideas of a
company. Golden shares are very important to get a majority in the voting process. FDI differs from
foreign portfolio investment as it aims at gaining control over a (foreign) enterprise.
Industry and company value chains
A company’s value chain is pretty
straightforward, as seen in the first
picture. An industry’s value chain ads
the supplier’s value chain at the front,
and the customers’ valuer chain at the
back.
Porter has also developed a (famous)
model for this, as seen in the second
picture. A company adds value
through every step of the way. The
main takeaway of Porter’s model is
that it is not just one office doing
everything; it is a series of activities.
The question is how to configure
these activities in IB.
The way the profit margin is divided differs per industry. For Apple, e.g. the highest margin is on their
Apple Care program.
Upstream resources refer to resources that originate early in the process. Examples are oil and gas.
MNE’s from BRIC-countries (especially India and Brazil) usually start by consolidating the upstream
resources before moving to the downstream resources.
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Victor Roos
, Theories of International Business – Master BA – Summary
Boundary of the firm
The boundary of the firm means what does the firm do and what does someone else do. In the left
picture all the activities are within the firm boundaries (vertical integration). Vertical integration refers
to using internal exchanges rather than market transactions to carry out an activity. In the right picture
there is a form of outsourcing. Outsourcing is turning over an organizational activity to an outside
supplier that will perform it on behalf of the focal firm. Almost every activity can be outsourced. The
logistics (e.g.) can be done by DHL/PostNL/etc. The question is how you draw the boundaries of the
firm.
Disadvantages of vertical integration Problems associated with outsourcing
Increases asset base and capital employed Dependence created by co-specialization or co-
location
Reduces flexibility Inadequate performance: customization/quality
/ availability
Prevents access to external expertise Dependence created by market power
Makes it impossible to fully benefit from supplier Hold up
efficiency and scale
Reduces focus on core business/capabilities Loss of critical know-how
Converts variable costs into fixed costs Weakened commitment/competitive signaling
Blurs evaluation/knowledge of costs Spillover to competition
Declining differentiation
International global value chain
The value chain becomes even more interesting on an international scale,
as you have the whole world to distribute to. This raises multiple questions:
- From ‘center of gravity’ to vertical integration?
- Where are the ‘profit pools’, and where does a company have
strategic capabilities.
- Where to expand, and where to divest?
- What local market factor/institutions enter those decisions?
The question in IB is if you outsource this of if you invest in it yourself. In
IB there are two sorts of outsourcing: offshore (outsourcing to a firm
abroad) and onshore (outsourcing to a domestic firm). When you invest in
yourself you use FDI.
The global value chain is usually a ‘smiling curve’.
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Victor Roos
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