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Theories of Internation Management - Lectures notes 2016
Summary of all the lecture notes & slides of Theories of International Management 2016
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International managementWeek 1
Lecture 1 – introduction
Why international business? Because of the internet companies are more and more connected to
each other. This makes it important to know the different cultural backgrounds to make cooperation
easier. Furthermore, if a company wants to keep making more profit, at one point it has to make
decision to go across borders. Before a company can do this, the company has to gain knowledge
about the future host country. It’s complicated to go abroad you’re facing something different and
going out of your comfort zone and this may bring extra costs and problems on the political firm.
Global value chain: the smiling curve different parts of the iPhone are made in different countries.
Different activities of the production of a product is globally spread. The bottom of the smile are
distribution with low cost or made in emerging economies.
IM is about managing complexity and uncertainty: cross-border activity brings new challenges
requiring awareness and strategic thing & implying interdisciplinary approaches and open mindset.
IB is more complex than business in a single country: has border effect currency and political risks,
institutional and cultural differences, country variation in terms of social values, ethics and
expectations
Conceptualizing international business
Traditionally, international business is defined as a business (or firm) that engages in
international (cross-border) economic activities
Conceptually: the pursuit of value creating opportunities by both public and private
organizations in countries other than their country of origin.
The study of international business more holistically considers both the foreign and
domestic firms.
IB key-words
-Multinational enterprises (MNE): a multinational enterprise can be defined as 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-generated assets abroad, but may also trade goods and services
across international borders.
Parent company: an incorporated or unincorporated enterprise, or group of enterprises,
which has a direct investment enterprise operating in an country other than that of the
parent
Subsidiaries: an incorporated enterprise in the host country in which another entity directly
owns more than half of the shareholders voting power.
-Foreign direct investment (FDI): FDI refers to an investment made to acquire lasting interest in
enterprises operating outside of the economy of the investor. Further, in cases of FDI, the inventor’s
purpose is to gain effective voice in the management of the enterprise in the foreign country.
Some degree of equity of ownership is almost always considered to be associated with an
effective voice in the management of an enterprise the BPM5 suggests a threshold of 10
per cent of equity ownership to qualify an investor as a foreign direct investor.
A direct investment enterprise is an incorporated or unincorporated enterprise in which a
single foreign investor either owns 10 percent or more of the ordinary shares or voting
power of an enterprise, or less than 10 per cent of the ordinary shares or voting power of an
enterprise, yet still maintains an effective voice in management.
, The most important characteristic of FDI, which distinguishes it from foreign portfolio
investment, is that it is undertaken with the intention of exercising control over a (foreign)
enterprise.
Different level of analysis: (1) Country level (2) Firm level; MNE’s & Subsidiaries (3) Individual level
Important questions
1. Why do MNE’s excist?
2. Which are the most important factors determining the performance of an MNE
3. How are MNE’s decision influence by the external environment
4. Which are the main sources of opportunities challenges to consider in IB decision.
Lecture 2 – Theoretical foundations for studying IB and MNEs
Theme: theoretical foundations for studying international business and multinational enterprises
Timeline
1. Pre-Hymer (1960) era: country-level of analysis International economics and national
competitiveness: National statistics on trade and foreign investments
2. 1970s: firm-level of analysis FDI by MNEs. BE a step ahead. Try to open the black box of trade, and
try to find out who is making the trades from one country to another.
3. 1980s: MNEs network/subsidiaries-level of analysis. After you managed to be a step ahead, they
tried to go a bit father and try to look at MNE as a network. Find out how the networks work.
IB Theories at country level
difference between trade and FDI: with FDI you can have the possibility to manage the investment
and influence the management. Trade is just a firm in the US selling a product to Europe without
further influence or power. With FDI the US firm has a distribution firm in Europe, they have to be
physically present in the other country.
Trade theories and international economics
Strong assumption: Differences in factor endowments (amount of land, labour and
entrepeneurship that a country possesses and can exploit for manufacturing) across borders
will lead to international transactions, whether transfers of capital or goods
Assumes it is not an organizational problem (at firmlevel)
Focused on capital mobility
Assumed perfect markets
Vernon’s (1966) Product life-cycle theory
The theory suggests that early in a product's life-cycle all the parts and labor associated with that
product come from the area in which it was invented. After the product becomes adopted and used
in the world markets, production gradually moves away from the point of origin.
Recognition of the importance of firms
-Pioneer in IB studies
USA had a technology-related country specific
advantage (CSA)
-Embedded in US firms
To exploit such CSA, and transfer technology in
foreign markets ( in the growth fase)
-US parents company create replicates (branch
plants) in Canada and western Europe
Key Theories and Concepts
, Country specific advantages
International trade
Foreign direct investment
Vernon’s Product Life-cycle Theory
IB theories at firm level
Monopolistic advantage - Imperfect final markets Hymer (1960), Kindleberger (1969) & Caves
MNE and its FSAs (Firm specific Advantages=knowledge) are at the core of the analysis
FDI is a firm-level strategy decision rather than a capital-market financial decision (Dunning
and Rugman 1985)
Hymer’s 2 conditions for the existence of FDI (instead of trade):
I. MNEs must posses a countervailing advantage over local firms
II. The market for selling this advantage must be imperfect; the final market from the host
country must be imperfect. So the MNE’s can be monopolist in the host country. The MNE’s
are creating something new which the local companies does not have.
i.e. monopolistic advantages held by and individual MNEs and entry barriers leading to
reductions in the consumer welfare
Hymer recognizes MNEs possession of firm-specific advantages (FSAs)
-that allow to overcome liability of foreignness ‘cost of doing business abroad’ (Zaheer,
1995), derived from lack of knowledge of host market
MNEs’ FSAs include (Firm Specific Advantages)
-Product differentiation ability
-Superior marketing and/or distribution skills
-Brand names
-Access to capital and/or raw material
-Intangible assets, e.g. know-how, management skills, technology
Internalization theory - Imperfect intermediate markets - Ronald Coase (1937)
There are a number of transaction costs involved in using the market; the cost of obtaining a good or
service via the market actually exceeds the price of the good. Other costs, including search and
information costs, bargaining costs, keeping trade secrets, and policing and enforcement costs, can all
potentially add to the cost of procuring something from another party. markets and hierarchies are
alternative co-ordination mechanisms for economic transactions
Coasian Transaction Cost Economics (TCE)
-Originally developed within a domestic context
-Theory that explains when the market or a firm will coordinate economic activity
Most efficient coordination mechanism between market and vertical integration when
market imperfections are in place
Vertical integration is a strategy where a company expands its business operations into
different steps on the same production path, such as when a manufacturer owns its supplier
and/or distributor
-Market imperfections generate transaction costs (TCs)
I. Search and information costs
II. Bargaining costs (i.e. incomplete contracts)
III. Policing and enforcement costs
Internalization allows coordination when a transaction in the intermediate market would not
have taken place due to too high (TCs)
Internalization theory – peter Buckley and Mark Casson (1976)
, Imperfect intermediate product markets
-Incentives to bypass imperfect intermediate product markets by by creating internal markets
-Interdependent activities are brought under common ownership and control
Why do MNEs exist?
-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.
Internalization theory – Peter Buckley & Mark Casson (1976)
Factor markets Intermediate product markets final product markets
Imperfect intermediate product markets
-Incentives to bypass imperfect intermediate product markets by creating internal markets
-Interdependent activities are brought under common ownership and control
Why do MNE’s exist? They are capable to use internal transactions (within the firm) when
market transactions across borders are not feasible due to high TC MNEs aim at maximizing
profit by internalizing their intermediate market across borders in order to avoid market
imperfections
Internalization Theory - General Theory of the Multinational Enterprise - Alan Rugman (1981)
Emphasis on the ability of MNEs to create and control their FSAs
-Possessing FSAs is a necessary but not a sufficient condition for FDI to take place
MNE’s FSAs should not be dissipated (afgevoerd), rather protected
-MNE’s 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)
Eclectic paradigm – OLI model Dunning (1977, 1988, 1998)
3 types of advantages influencing FDI
Ownership (O), Location (L) and Internalization (I) advantages
-Integration of theories at both country- and firm-level
O-advantages (Owner) can be divided into
-Asset advantages (Oa), i.e. various tangible and intangible assets – overlap with FSAs
-Transactional advantages (Ot), i.e. strengths in coordinating network of geographically
dispersed affiliates
L-advantages (location) reflect foreign countries having some CSAs vis-à-vis other countries
-e.g. natural resources, demand conditions, cultural or institutional factors
I-advantages (internationalisation) refer to benefits of creating, transferring, deploying,
recombining and exploiting FSAs internally instead of via contractual arrangements with
outside parties
Ownership advantages is the same as FSA.
Location advantages is the same as CSA
Using FDI instead of trade gives a company I-advantages.
OLI paradigm, based on L-advantages, identities 4 types of FDI motivation
1. Natural resources seeking
2. Markets seeking
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