Week 1: Introduction to IBC
International Business is important for companies seeking growth, diversification and a
competitive edge in the global marketplace. It fosters economic development, technological
transfer and cultural exchange, contributing to a more interconnected and mutually beneficial
global economy
Key Words
- MNE: Multinational enterprise: a company that has operations in more than one country.
- FDI: foreign direct investment: the investment of assets, such as money or technology in
a foreign country with the aim of establishing a lasting interest in an enterprise in that
country
- EMMNE: Emerging market multinational enterprise: A multinational enterprise
originating from an emerging market.
- New ventures: newly established businesses in foreign markets or those expanding
internationally for the first time.
- Monopolist adv. : producer in a market who has exclusive control over the supply of a
particular product/service.
- LOF (Liability of Foreignness): MNE is at a disadvantage to local competitors in a host
country. Refers to the inherent challenges and disadvantages. To overcome LOF, MNEs
need to provide foreign subsidiaries with FSAs (traditional view)
- Disadvantages in operating in foreign market (Zaheer, 1995)
1. Spatial distance
2. Unfamiliar
3. Lack of legitimacy
4. Home-country restrictions on host country activities
- MNEs overcome distance with FSAs or using isomorphism strategy
- FSAs: refer to unique and valuable assets, capabilities and resources that
multinational enterprise possesses and that gives a competitive advantage over
other firms. Isomorphism strategy: process by which organizations in different
locations become similar or homogenous in their structure, practices and
strategies. MNEs can employ an isomorphism strategy to reduce the perceived
differences and challenges associated with distance
Distance CAGE (Ghemawat): cultural, administrative, geographical, economical
Cultural distance: differences between countries in terms of language, religion, social
norms and values. Impact on IB: greater cultural distance can lead to differences in consumer
preferences, communication styles and business practices.
Pros
, - Market adaptation: understanding and adapting to cultural differences can
help companies tailor their products, services and marketing strategies to
better suit the preferences and expectations of local consumers.
- Building relationships: cultural sensitivity fosters better relationships with
local stakeholders including customers and employees, leading to
increased trust and loyalty.
- Market differentiation: adapting product and services to local cultures can
create a unique selling proposition, differentiating a company from
competitors.
Cons
- Cultural clashes: differences may result in misinterpretation of marketing
messages, leading to ineffective communication
- Resistance to foreign brands: some markets may resist foreign cultural
influences, making it challenging for international brands to gain
acceptance
- High adaptation costs: customizing products, marketing materials and
business practices to suit different cultures can be costly and
time-consuming.
Administrative/institutional distance: differences in government and political systems, legal
frameworks and institutions between countries. Impact on IB: administrative differences can
affect the ease of doing business, regulatory compliance and the level of political risk.
Companies must navigate diverse legal and regulatory environments in different countries.
Pros
- Stable business environment: a stable administrative environment
provides predictability, allowing businesses to plan for the long term.
- Government support: supporting government policies can create a
favorable business environment, encouraging foreign investment.
Cons
- Political instability: administrative differences, like political instability can
introduce uncertainties and risks for IB
- Complex compliance: divergent regulatory requirements increase the
complexity and cost of compliance for multinational companies
- Bureaucratic challenges: administrative hurdles, like complex
bureaucratic processes can slow down decision-making and hinder
operational efficiency
Geographic distance: factors such as physical distance between countries, climate and
topography.
Pros
- Local resource access: proximity to resources can reduce transportation
costs and provide easier access to local suppliers
, - Cultural similarity: geographic proximity often correlates with cultural
similarities, facilitating easier adaptation of products and services
- Responsive operations: proximity enables companies to respond quickly
to changes in the local markets, adjust inventory levels and adapt to
emerging opportunities or challenges
Cons
- Logistical challenges: long distances can lead to increased transportation
costs, longer lead times and logistical challenges in supply chain
management
- Communication delays: time zone differences may result in
communication delays
- Limited control: managing operations from a distance may result in limited
control over local activities and reduces responsiveness, making it harder
to address issues promptly and enforce consistent standards
Economic distance: refers to differences in income levels, wealth distribution and overall
economic development between countries. Economic differences can impact consumers
purchasing power, market demand and the competitive landscape.
Pros
- Market opportunities: economic differences create opportunities for
companies to offer products that cater to diverse income levels
- Diversification: operating in economically diverse markets provides a level
of risk diversification, reducing dependence on a single market’s
economic transition
Cons
- Economic disparities can contribute to income inequality, affecting the
purchasing power of consumers in certain segments
- Pricing challenges: setting appropriate pricing strategies that balance
affordability and profitability can be challenging in economically diverse
markets
- Currency risks: fluctuations in exchange rates pose risks to companies
engaged in international trade, impacting profits and competitiveness.
Transaction costs: costs associated with the exchange of goods, services or assets between
economic agents located in different countries, transaction costs are a key consideration in the
decision-making process of engaging in cross-border trade or investment. Minimizing
transaction costs is essential for companies engaged in IB as it contributes to the overall
efficiency of cross-border trade and investment.
Internationalization theory: seeks to explain how and why firms gradually expand their options
from domestic markets to international markets.
Eclectic Paradigm/OLI Model (Dunning): Ownership, Location and Internationalization:
framework that explains the motivations and strategies behind foreign direct investment (FDI).
, - Ownership: refers to unique assets, resources or capabilities that a company
possesses and that give it a competitive edge. technology, brand reputation,
managerial expertise or exclusive access to natural resources.
- Location: location advantages refer to the specific benefits a company can gain
by operating in particular foreign markets. These benefits may include access to
raw materials, a skilled labor force, favorable market conditions, or strategic
proximity to key customers.
- Internatilization: refers to the decision-making process of a company regarding
whether to swerve foreign, markets through exports or by establishing a
presence in those markets.
How? Entry Mode Choice
Why is it crucial? important implications in terms of
- Resource commitment
- Exploration vs exploitation strategies
- Risk and uncertainty
- Learning and knowledge transfer
Which are the main factors to consider?
- Home-host country distances
- FDI motivations
- Host-country characteristics, ex. Political and economic risks, regulations
- Firm strategy
Relationship with Competitive Advantage-specific assets (CSas):
1. CSAs as Ownership Advantages: CSAs often form the core of a company;s ownership
advantages. These could include patents, proprietary technologies, unique production
processes or brand equity that give a company a competitive edge.
2. CSAs with Location advantages: the location of a company’s operations may be
driven by the presence of specific CSAs that are beneficial in a particular region. Access
to resources, skilled labor or a supportive ecosystem may be integral to leveraging CSAs
effectively.
3. CSAs and internationalization decision: the decision to internalize operations in a
foreign market is influenced by the importance of protecting and leveraging CSAs.
internationalization allows the company to maintain greater control over its unique
assets, reducing risk of intellectual property leakage.
Uppsala Psychic Distance (Johanson & Vahlne)
- Theoretical framework that explains the internationalization process of firms.
Internationalization as a cumulative and path dependant process based on past
international experience and knowledge base
- The psychic distance in Uppsala model claims that companies may internationalize to
low psychic distance within closer countries first in terms of culture and institutions in
order to avoid cultural and institutional differences that could be challenging.
