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Summary Theories of International Business
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SamenvattingTheories of International Business
Theme 1 - Theoretical foundations for studying IB & MNEs
● There are 3 different scopes in which international business exists…
1. Country-level (focus in 1960, national competitiveness with national statistics
on trade and foreign investment)
2. Firm-level (focus in 1970, FDIs by MNEs looked to transfer their FSA across
borders)
3. Subsidiary-level (focus in 1980, building differentiated network within the
organization)
● Internalization enables the ability to create FSAs
- Internalization theory (part 1) → Focuses on imperfections in intermediate
product markets (emphasis on the ability of MNEs to create and control their
firm-specific advantages)
1. Suggest that organizations must learn and grow internally to become
more efficient and beat the liability of foreigners
2. Suggest that organizations need to learn how to dissipate FSAs, and
not protect them
3. Suggest that organizations need to develop their internal market, this
enables them to effectively monitor and transfer there FSAs
- The internal market of MNEs, that is, the network of foreign subsidiaries,
allows MNEs to control, transfer and exploit their FSAs abroad
● OLI paradigm → Ownership (asset advantages and transactional variables),
location (CSAs) and internalization (the benefits from creating FSAs internally)
- Explains that MNEs conduct FDI based on ownership of specific assets,
advantages offered by specific locations, and the benefits of internalizing
operations rather than outsourcing them
● Uppsala model (stages model) → The model proposes that firms form small,
domestic markets internationalize their activities through a cumulative
stage-dependent process where international expansion is a function of
experiential market knowledge (expansion as a process of organizational learning,
you need to overcome those obstacles slowly)
- Psychological distance → Consequently, companies initially expand in
nearby geographic countries that may have similar CSAs (think from the
Netherlands to Belgium)
- Behavioral theory → The manager plays a central role
● Location-bound FSAs → Which are deployed only in a limited geographical area
and are typically the result of a subsidiary initiative
- Non-location bound FSAs → Which are easily transferred across locations
and the result of an MNEs network effort
,● Tangible resources should be held at subsidiary level, while intangible
resources at the firm level
● MNEs existence → MNEs exist because they are able to use internal transactions
(within the company) when market transactions across borders are not feasible due
to high transaction costs (TCE)
- This can be linked with the internalization theory (which showcases that
vertical and horizontal integration within the firm can be more efficient than
buying it on the market)
● Internalization theory (part 2) → Highlights that a firm exists because it is more
efficient to coordinate a set of activities in-house rather than through market
exchange
● Coasion transaction cost economics (TCE) → Explains that the most efficient
organizational structure minimizes the costs of exchange, which is why firms
internalize transactions when external market exchanges are too costly or inefficient
(states that the optimum organizational structure is one that achieves economic
efficiency by minimizing the costs of exchange)
- Examples of transaction costs are search and information costs, bargaining
costs, policing and enforcements costs
● MNEs abroad investment (there are 4 motives) → MNEs invest abroad because is
to expand their efficient internal transaction costs across borders (traditional
motives)
- Now the OLI model, include the 4 motives (traditional motives)...
1. Market seeing
2. Efficiency seeking
3. Natural resource seeking
4. Strategic asset seeking (modern motive, such as catching up)
● There are 3 FDI motives (reinforced by technological change)…
1. The emerging of intellectual capital as the key wealth-creating asset in
developing nations
2. Increasing integration of economic activity at a regional level
3. Increased focus on alliance capitalism, both intra- and inter-firms, to
achieve value creation goals
● Institutions (the rules of the game) → Underline the rules and constraints that shape
individual and firm behavior
1. Weak institutions → Weak institutions can be seen as an environment that
is not consistently enforced, and or prone to corruption
2. Strong institutions → These contain reliable rules and provide
predictability, transparency and trust in the system
- They create order and reduce the uncertainty of exchange (think of formal
rules → laws, rights and the constitution, and informal constraints →
taboos, traditions and customs)
, - MNEs must constantly adapt to keep up with mandates and policies across
borders
● Firm boundaries → All activities done by the company itself
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