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Lectures & Knowledge Clips - Theories of International Business 2021

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All lectures & knowledge clips of Theories of International Business 2021 (February), including pictures and tables. From the master Business Administration at UvA

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  • 6 september 2021
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  • 2020/2021
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Theories of International Business
Lecture week 1 – Core Foundations of IB & MNEs
Multinational Enterprises
 An MNE: ‘a firm that owns and/or controls value creating activities in two or more
different countries’ (Adaptation of Buckley & Casson, 2009, p.1564)  multiple
locations
 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

Foreign Direct Investment
 FDI: an investment made to acquire lasting interest in enterprises operating outside
of the economy of the investors
 Investors’ purpose is to gain an effective voice in the management of the enterprise
 % of equity ownership considered an effective voice in the management of an
enterprise (degree of control)

Transaction Cost Economics
 Coasian Transaction Cost Economics (TCE)
o Originally within a domestic context
 Explains whether the market or a firm will coordinate economic activity
o Most efficient coordination mechanism between market & vertical integration
when market imperfections in place
 Market imperfections generate transaction costs (TCs)
 Search and information costs
 Bargaining costs (i.e. incomplete contracts)
 Policing and enforcement costs
 Internalization allows coordination when a transaction in the intermediate market
would not have taken place due to too high (TCs)
 What are transaction costs?
Scanning the environment and finding an adequate trading partner, Negotiating and
bargaining, writing up a contract, Controlling and monitoring performance, Enforcing the
contract, e.g. going to court & Facing the risks associated with “hold-up”

,Internalization Theory


 Imperfect intermediate product markets
o Incentives to bypass imperfect intermediate product markets by creating
internal markets
o Interdependent activities are brought under common ownership and control
 Why do MNEs exist?
o They are capable to use internal transactions (within the firm) when market
transactions across borders are not feasible due to high TCs
 MNEs aim at maximizing profit by internalizing their intermediate
market across borders in order to avoid market imperfections
General Theory of the MNE
 Emphasis on the ability of MNEs to create and control their FSAs
o Possessing FSAs is a necessary but not a sufficient condition for FDI to take
place
 MNEs FSAs should not be dissipated, rather protected
o MNEs internal market, i.e. network of foreign subsidiaries, enables to
monitor, transfer and exploit FSAs abroad
 (also where national institutional regimes may be not effective)

Why do MNEs invest abroad? (more in week 3)
 Traditional investment motives: market seeking, efficiency seeking, (natural)
resource seeking
 Modern investment motives: strategic asset seeking (catch-up, diversification, R&D
springboard)

Scandinavian: Uppsala Model (Johanson & Vahine, 1977)
 Try to explain the internalization of small Scandinavian firms
 The Uppsala model suggests that there are stages of internationalization
o Internationalization as a cumulative and path-dependent process based on
past international experience and knowledge base
 “Experiential market knowledge”
o Firm with no (or few) international experience enter foreign markets
 By exporting,
 Establishing a sales subsidiary
 Investing in production facilities
 The importance of “Psychic distance”
o Degree to which a firm is uncertain of the host country’s characteristics
 Psychic distance  Costs and risks of FDI
 Benefits of exploiting FSAs abroad  Risks of operating in unknown foreign
environments
o Firms initially expand in nearby geographic countries that are relative familiar
(i.e. geographically, institutionally and culturally proximate)
o After accumulating experience, MNEs expands into more distant country
markets

,MNE as a Network
 MNE is viewed as a network rather than a monolithic hierarchy
o The subsidiary becomes the key building block of the MNE and unit of analysis
 Viewpoint: understanding each subsidiary’s idiosyncratic resource base, strategy,
assigned role inside the MNE, and linkages with other subsidiaries
o Emphasis on organizational entrepreneurship or ‘subsidiary initiative’, rather
than the parent company
 Rugman and Verbeke (1992, 2001, 2003)
o Location-bound (LB) vs, non-location-bound (NLB) FSAs
 LB FSAs – deployed only in a limited geographical area  result of
subsidiary’s initiative
 NLB FSAs – easily transferred across locations  result of MNE
network effort

RBV & MNEs
 Firms performance is related to their sustainable competitive advantage at firm-level,
which is
o The result of superiority in resources recombination vis-à-vis competitors
 … In the MNE case
o An added complexity in resources recombination
 Rivalry for resources could come also from the internal network of
subsidiaries
 Importance of subsidiary’s mandate

RBV & VRIN/VRIO Models




 Tangible and intangible resources/assets
o Tangibility  possible to observe or quantify (measure/count)
o Intangibility  not observable and difficult (if not impossible) to quantify
 Capabilities
o Competences owned by the firm as a result of combining resources (and
capabilities) together to perform a specific task (core competences)
RBV & IB: Trend topics
 International strategic alliances
o RBV  learn from partners may be a tacit resource underlying a firm’s
competitive advantage
o IB  for MNEs, earning from local partners facilitate local knowledge
acquisition and strengthen firm performance in host countries
 Emerging market MNEs (EMNEs)
o Emerging markets represent a unique institutional environment EMNEs are
different vis-à-vis traditional MNEs (e.g. State-owned enterprises, Business
groups, Born global)
 It answers the questions such as: why some firms do not go through the stage-model
of internationalization?

, Institutional-based view of IB
Defining institutions & IBV
 Institutions are commonly known as the ‘rules of the game’ defined:
o By economist North (1990) as ‘the humanly devised constraints that structure
human interaction’
o By sociologist Scott (1995) as ‘regulative, normative, and cognitive structures
and activities that provide stability and meaning to social behavior’
 Institutions shape individual and firm behavior
o Bounded rational choices, reliability in interactions with other actors
o ‘.. institutions reduce uncertainty for different actors by conditioning the
ruling norms of behaviors and defining the boundaries of what is legitimate.
Actors […] make choices within a given institutional framework’

Institutional Framework: North’s definition
 North: institutions are humanly devised constraints that structure political, economic
& social interaction
o Create order
o Reduce uncertainty of exchange
 Formal rules: constitutions, laws property rights
 Informal constraints: sanctions, taboos, customs, traditions)
 Incremental institutional evolution of political and economic institutions create the
economic environment
North’s Contrasting Institutions
 What explains differences?
 Nature of context: higher levels of political competition
 Path dependency:
o Organizations owe their existence to the opportunities provided by the
(in)formal institutional frameworks
o Differing opportunities sets lead to different historical paths

Institutions can be WEAK OR STRONG
 “Institutional weakness” means incentive structures are absent, arbitrary or
ambiguous
 This translates into unpredictability and thus risk
 Depends in part on whether society is rule-based or relationship-based:
o In rule-based settings, institutions are more transparent and predictable (to
outsiders) than in relationship-based settings

Institutions can be WEAK
 Proceedings held behind closed doors
 Exact definition of ‘state’ or ‘trade’ secret unknown
 Defendants ‘typically found guilty’
 Main lesson for other MNEs?
 “You never know what is going to happen”
 WEAK definitions
o Corruption and bribery

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