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Summary Theories of International Management ARTICLES
Theories of international management, All articles from week 1-6.
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IM Week 1Rugman, Verbeke, Nguyen (2011): Fifty years of international business theory and beyond
MNE = Multinational enterprises
FSAs = Firm specific advantages
CSAs = Country specific advantages
FDI = Foreign direct investments
IB = International Business
Introduction
- The paper examines the literature of IB over the last fifty years.
- There have been several shifts in the analysis of IB
o 1960 (Pre-Hymer): Focus on national competitiveness at country level (CSAs).
National statistics on trade
Foreign investment
o 1970: Shift to a focus on Foreign Direct Investment (FDI) by Multinationals (MNEs) and the
transfer across border of its Firm Specific Advantages (FSAs).
Individual competences (i.e. R&D Knowledge, brandnames)
Capabilities
o 1980: Shift to the MNE as a separated network.
MNE subsidiary (dochteronderneming) as main focus of analysis
Focus on growth in a specific cultural, economic and institutional context
- It is assumed that there is not really an organizational challenge to be addressed in creating an
efficient system of international exchange.
- The impact of various forms of distance (cultural, economic, institutional and geographic) explains why
MNE’s have difficulties operating in foreign markets (especially when facing competition not hindered
by such distance).
- Recent work shows that in many cases the boundary between CSAs and FSAs become somewhat
blurred. The challenge for the MNE is to develop relationships with powerful local actors to open up
access to the desired CSA’s
In summary, over the last fifty years, the literature of IB has developed from a somewhat basic focus on CSAs
and FSAs that are clearly separate and distinguishable from each other, towards a more nuanced
understanding of the linkages between them and the manner in which MNE managers in the home and host
economies will interact to develop novel recombinations of home and host CSAs and the FSAs held by various
MNE units, dispersed across borders.
Overall, the subject of analysis has shifted from the country-level (CSA’s) to the parent MNE, and now
increasingly to the subsidiary level, often with a focus of the subsidiary’s role in the internal MNE network.
From country level to firm level analysis
Monopolistic Advantage (Hymer):
- Interested in the product market
- For firms to own and control value-adding activities, they must possess some kind of monopolistic
advantages sufficient to outweigh the liability of foreignness (LOF).
, - LOF: Means the impact of various forms of distance (cultural, economic, institutional and geographic)
- Two conditions have to be fulfilled to explain the existence of FDI:
1. Foreign firms must possess a countervailing advantage over local firms to make such investment
viable;
2. The market for selling this advantage must be imperfect. Some monopolistic advantages
outweight the LOF.
- FDI is a firm-level strategy decision rather than a capital-market financial decision Hence, FDI will
occur mainly in imperfect markets.
- There are three types of FSAs:
o Stand-alone FSAs: i.e., patented knowledge or a brand name
o Routines: i.e., the way things are done inside the firm
o Recombination capabilities: i.e., the capacity to augment in a productive way the MNE’s
existing resource base with newly accessible resources
Internalization theory (Ronald Coase):
- MNE’s existence is not caused by monopolistic advantages but by its efficiency properties: capacity to
reduce transaction costs when replacing an inefficient transaction in the market by an internal
transaction inside the firm.
- The MNE’s activities enhance consumer welfare because efficiently coordinated transactions replace
inefficient ones.
- This theory explains why firms become involved in international production.
- Emphasis switches from country level (CSA), to the level of the business making the investment (FSA).
- The essential argument of internalization theory is that firms aim at maximizing profit by internalizing
their intermediate markets (typically intangible: technology, production, know how, brands, etc.)
across national borders.
Rugman argues that internalization theory is a general theory of the MNE. Internalization encompasses within
itself the reasons for international (as well as) domestic production. Another researcher suggests that
Rugman’s most important contribution to internalization theory are:
1. His role in building the theory of internalization as a general theory of the MNE
2. His bridging of the gap between internalization theory with strategic management thinking, by
developing the concepts of location bound (LB) and non-location bound (NLB) FSAs.
Rugman emphasizes that each MNE needs a personal set of FSAs, which give it a competitive advantage
relative to other firms. However, he also notes that possessing FSAs is necessary but not a sufficient condition
for FDI to take place. Rugman 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.
Internalization Theory (Hennart):
- For international expansion to take place: facilities abroad are more efficient.
- Slightly different perspective:
o Setting up facilities abroad must be more efficient than exporting
o A firm must find it desirable to own the foreign facilities
- 3 conditions must be satisfied for the MNE to organize interdependencies between economic actors
more efficiently than markets:
o Interdependent actors must be located in different countries
o The MNE: most efficient governance system to organize interdependencies
o Costs incurred by MNEs to organize the interdependencies in the market must be higher than
those of organizing them within MNEs.
,The eclectic paradigm (Dunning):
- The eclectic paradigm integrates several theory streams on cross border activities at the country and
firm levels to explain FDI.
- The eclectic paradigm proposes that three types of advantages influence FDI:
1. (O) Ownership advantages
- Owner asset advantages: tangible and intangible
- Owner transactional advantages: strengths in coordinating a geographically dispersed network of
subsidiaries.
2. (L) Location advantages
- Foreign countries having certain CSAs (i.e. natural resources, factors of production, demand
conditions, cultural, legal, political conditions)
3. (I) Internalization advantages
- Benefits of creating, transferring, deploying, recombining and exploiting FSAs internally instead of
via contractual arrangements with 3th parties.
- However, this paradigm struggles to integrate country and firm level interactions.
- The model identifies the locational advantages of 4 types of international production (FDI Motivation):
- Natural resources seeking
- Market seeking
- Efficiency seeking
- Strategic asset seeking
The Uppsala model (Johanson and Vahlne):
- Internationalization is a cumulative, path-dependent process whereby a firm’s international expansion
pattern is a dependent on its past international experience and knowledge base.
- Process oriented model: knowledge involve, learning by doing.
- There are stages of internationalisation, whereby the potential benefits of exploiting FSAs abroad
need to be weighted against the risks of operating in unknown foreign environments and the
costs of learning to do business there.
- Internationalization stages:
- Licensing
- Exporting
- Local warehouse and direct local sales
- Local assembly and packaging
- Joint venture
- FDI
- Firms initially expand in nearby geographic countries that may have similar CSAs. As the firm learns to
overcome the LOF, it then expands into more distant country markets, at which stage the unfamiliar
cultural, economic, and political environment will be offset against the firm’s ability of recombining its FSAs
with host country CSAs.
- Johanson and Vahlne also introduced the concept of ‘psychic distance’: The degree to which a firm is
uncertain of the characteristics of a foreign market.
The overall problem with the internationalization theory approach is that it often misses two critical elements:
1. The nature of MNE FSAs; which determines to a large extent the potential benefits of internationalization
versus alternative modes of operating in foreign markets.
2. Presence of absence of natural and government-imposed (overheid opgelegde) market imperfections;
which may make the use of external markets a failure.
From firm level to subsidiary level analysis
In the third stage of modern-day work in IB, the unit of analysis has become the subsidiary of the MNE and the
subsidiary manager.
, - The subsidiary become the key building block of the MNE, so a differentiated network rather than a
hierarchy.
- No serious MNE network analysis can be conducted without understanding each subsidiary’s personal
resource base, strategy, assigned role inside the MNE, and linkages with other subsidiaries.
The clearest expression of this approach can be found in Birkinshaw:
- The focus is on innovative recombination’s of both home and MNE host country CSAs and FSAs.
- Innovative recombination’s can ultimately generate new types of FSAs across the MNE network and
strengthen the MNEs overall competitive advantage.
The shift of focus has several origins:
1. First, a stream of research in Canada examined the extent to which Canadian subsidiaries of foreign
MNEs can act independently with world product mandates (WPMs). They found that these
subsidiaries should manage their own interaction with the management level, checked by the MNE’s
head office in the home country.
2. Second, research on MNE moved from a focus upon the centralized, hierarchical multidivisional
towards an understanding of the linkages between the home country firm and its subsidiaries.
Framework of Hedlund’s; He argues that the M-form (Parent driven MNE) would be replaced by the N-
form (Network based MNE).
Birkinshaw:
- Birkinshaw demonstrates that the subsidiary (or even the subsidiary manager as driver/facilitator of
subsidiary initiatives) may represent a useful unit of analysis when trying to understand innovation
processes inside the MNE.
- Many strategic decisions critical to innovation may be taken at the subsidiary level and can lead to new FSA
generation.
Rugman and Verbeke:
- Rugman and Verbeke suggest that CSAs of host countries may be used in a ‘leveraged’ (hefboom) way.
- MNEs make dual use of CSAs from the home and host countries, and subsidiaries throughout the MNE
network are critical in CSA recombination efforts (in line with their ‘Double diamond framework’)
- They argue that FSAs can be location- bound (LB) or non-location bound (NLB).
- The LB FSAs reflect strengths deployable and exploitable in a limited geographic area but cannot
be profitably exploited outside of this area.
1. Intermediate output: e.g. managerial skills or R&D knowledge
2. Final products.
- The NLB FSAs reflect company strengths that can easily be transferred across locations at low cost,
deployed and profitably exploited, with only limited need for resource recombination.
1. Upstream: e.g. technological knowledge
2. Downstream: e.g. brand names
- Subsidiary initiatives may lead to the development of LB FSAs but these can be transformed into
NLB FSAs, namely when being augmented with best practice attributes inside the MNE network.
Birkinshaw and Pedersen:
- If the subsidiary is a valid unit of analysis in its own right, it should be possible to separate resources and
capabilities between the subsidiary and the MNE.
- Most tangible recourses are held primarily at the subsidiary level
- E.g. plant, equipment and people resources
- Most intangible resources are held at the MNE level
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