Summary Introduction to IB Chapter 1: Unifying framework: 1. Non location bound FSAs - The set of MNE internal strengths , the availability of which both allows and constrains the scope of the firm’s expansion across borders. For example, final products with outstanding production quality. If the FSA consist of easily codifiable knowledge (and can be written down in a handbook), then it can be cheaply transferred, but it can also easily be imitated by other firms. This is known as the paradox of internationally transferable FSAs. Tacit knowledge can be a key source of competitive advantage when doing business abroad. However, it can be difficult and time consuming to employ it abroad. - Specific routines of international FSA transfer, archetypes of administrative heritage: o Centralized exporter, this home country managed firms builds upon a tradition of selling products internationally from its home country. When this archetype goes abroad, it immediately reaches the host country location advantages, which are the customers in this case. The non-location bound FSAs are the exporter’s products. o International projector, the firm builds upon a tradition of transferring its proprietary (patent) knowledge developed in the home country to foreign subsidiaries, which are essentially clones of the home operations. In the ideal case when going abroad, the host country operations directly access the local customers, without much need to develop new location-bound knowledge, again because of the desirability of the MNE’s products. o International coordinator, builds upon a tradition of managing international operations, through a tightly controlled but still flexible logistics function. For example, search for relevant resources internationally, manufacture in the most cost-efficient locations, and sell their products wherever there is demand for them. o Multi-centred MNE, consists of set of entrepreneurial subsidiaries (dochterondernemingen) abroad, which are key to knowledge-based FSA development. 2. Location bound FSAs - FSAs that can’t be easily transferred, deployed and exploited in foreign markets. There are four main types of location-bound FSAs. o Stand-alone resources linked to location advantages, such as a network of privileged retail locations leading to a dominant market share in the home market. o Local marketing knowledge and reputational resources. o Local best practices, routines considered highly effective and efficient in one country, may not be considered as such abroad by variety of stakeholders, and may even be deemed illegal. o The firm’s domestically recombination capability may not be adept enough to confront the additional complexities of foreign markets. 3. Location advantages. - Represent the entire set of strengths characterizing a specific location, and useable by firms operating in that location. o Natural resources. o A superior educational system. o The presence of demanding and sophisticated local market for specific products. o Favourable government regulations. o Economic clusters o Cross-border location advantages such as EU and NAFTA. o Geographical advantages. For example, rivers and oceans. - Why are firms operating abroad? The answer is that there are some host country advantages that make it very attractive. We can distinguish among four motivations to perform activities in a host country rather than at home. o Natural resource seeking. o Market seeking. o Strategic resource seeking, the desire to gain access to advanced resources in the sphere of upstream knowledge, downstream knowledge, administrative knowledge or reputational knowledge. It’s not generally accessible. This type of FDI typically involves taking over other companies, engaging in alliance activity or becoming an insider in foreign knowledge clusters. o Efficiency seeking, a firm’s desire to capitalize on environmental changes that make specific locations in the MNE’s international network of operations more attractive than before the consolidation or concentration of specific activities. 4. Recombination skills - Value creation through recombination skills means that a firm is able to grow by innovating and diversifying. This means combining in novel ways existing resources with newly accessed resources. Resource combination requires three things. o Entrepreneurial skills o Unused productive resources, beyond those needed for the efficient functioning of current operations o The willingness and capacity to let go of some resources - One paradox needs to be noted here: strong routines can sometimes be detrimental (nadelig) to recombination skills, and thus to the recombination capability. 5. Complementary resources of external actors - In many cased MNE’s need complementary resources of external actors to be successful abroad. These external actors can help if at least two conditions are fulfilled: o Internal development of the required strengths is expected to bring a lower net value than relying upon external actors. o The need to rely on external actors can be satisfied in practice, and does not jeopardize the specific expansion project considered. 6. Bounded rationality - Managers responsible for making decisions and engaging in purposive action in the firm always face information problems. o Any information about the environment relevant to the MNE’s functioning and performance, is necessarily partial and incomplete, give the complexity and uncertainty characterizing the environment and its evolution. But in some cases foreign acquired market knowledge gives some advantages at the home market. o Even if critical information is abundant (overvloedig) and rather accurate, senior MNE management faces a problem of processing this information, especially in determining its relevance to the firm and its implications for strategy. - Another problem is that senior managers in the home country and senior managers in the host country may adopt different decision-making approaches. And even if they agree on the same approach, the two groups may interpret those facets differently. 7. Bounded reliability - Reflects the scarcity of effort to make good on open-ended promises: agents do not always carry through on their expressed intentions to try to achieve a particular outcome of performance level. o Opportunism o Benevolent preference reversal, in which an actor’s initial promise is made in good faith, but the actor’s preferences change over time, though not with the intent to harm the party to which the promise was made. Foreign direct investment (FDI) The allocation of resource bundles by an MNE in a host country, with the purpose of performing business activities over which the MNE retains strategic control in that country. What is a firm specific advantage? - An FSA refers to the unique characteristics of a firm that make it competitive relative to its rivals. Simply put, what is so good about this firm that determines its success? Verbeke gives a whole range of examples of things in which firms can be good. What basic but important distinction does Verbeke make? - The basic distinction is between location bound and non-location bound FSAs. What is the broader question that the field of International Business is concerned with? - What determines if a firm is going to be successful in expending into foreign countries? What does Verbeke mean when he talks about unique resources? - He means that unique resources are only available in certain area that makes the firm very good in that certain area. Also known as the resource based view of the firm. What unique resources does he lift? - Physical resources (natural resources, buildings, plant equipment) - Financial resources (equity and borrowed capital) - Human resources (individuals and teams, entrepreneurial and operational skills) - Upstream knowledge (product and process-related technological knowledge) - Downstream knowledge (marketing, sales, distribution and after sales service) - Administrative knowledge (organizational structure, culture and systems) Reputational resources (brand names, reputation for honest business dealings) What is a routine? - A routine refers to the idea that firms should not only have a unique resource, but also be able to handle it and exploit it. A firm should develop a routine to use this unique advantage. So it should be an advantage that only helps them once, no they should be able to build on it for years and in other contexts as well. Only if it is a routine, and a firm is used to it, they can exploit it when going abroad. You first have to develop something unique, then know how to use it to beat the competition. Why does a firm need recombination skills? - A firm needs recombination skills, because if it does not have these, it will lose its competitive advantage. A firm has to keep on renewing itself. Otherwise the other firms will be better and more competitive. This process of competition forces firms to stay competitive and keep on generating new products and services. How do FSAs relate to host country location advantages? - The crucial issue that a firm has a certain FSA. It would be optimal of course if the thing in which the firm is good matches the interesting aspects of a host country. If a firm has developed a FSA in the production of low cost cars, it will look for a location that offers low wage costs. If a firm has an FSA because it has the knowledge top develop very advanced ICT systems, it will be good to tap into the knowledge that is in Silicon Valley. Entry mode: the way a firm has organized its foreign activity Chapter 4: There are four different types if distances: - Cultural distance, things such as language, religion, social norms and race. - Administrative (or institutional) distance, things such as political ties, economic or monetary integration or synchronize government policies. - Geographic (or spatial) distance, the physical distance between two countries. - Economic distance, things such as consumer wealth, income level, infrastructure characteristic and the cost and quality of natural, financial and human resources. Higher distances correspond with lower inter-country trade levels, implying a lower probability of success. Bern Schmitt and Yigang Pan - Cultural distance component Lecture quiz questions 2-10-2019 All acquisitions are done to increase control. Compared to market seeking FDI, strategic asset seeking FDI often involves technology. Bartlett and Ghoshal observe that subsidiaries are often seen as implementers. What is exports, and what is the difference between MNE activity - Exporting refers to production of goods at home and selling these to customers abroad. The key difference is that a MNE is active e in the host country with a subsidiary or production or sale affiliate. What different types of FDI exist? What is a multinacional (MNE)? MNE means MultiNational Enterprise and it means that the organization is located and has the production of service in both host and home country. What is exports, and what is the difference between MNE activity and exports? Exports are the goods and services produced in one country and purchased by the residents of another country. The difference between MNE activity and exports is that MNE only produces in the host country while an exporter produces in a country and sells it in another. What different types of FDI exist? There are four different types: 1. Strategic resource seeking 2. Export platform 3. Market seeking 4. Natural resource seeking 5. Efficiency seeking What does it mean that Singapore has 90326 million dollar of sales in 2003? How much of that goes back to the US? How much to local customers in Singapore? And how much is shipped to third countries? - The US company has a host location in Singapore. 9220 million of the 90326 million goes back to the US, 34612 million goes to the local market and the rest, 81106 million, goes to foreign countries. In question 3 we asked for a theoretical distinction. What different types of FDI can you distinguish empirically using the sales data? Make for each FDI a new column and calculate the share of each type of US MNE activity in total US MNE activity. - The types of FDI that can be observed from the table are: Market seeking (sales to - locals), Efficiency seeking (sales back to US), and Export platform (sales to third - countries). Which three countries have the highest fraction of efficiency seeking MNE activity? Why would that be? - Israel, Malaysia and Costa Rica because they are developing countries and they have some advantages that other countries don't have, such as low cost labor or abundant resources. This way, US firms tend to set up affiliates there and ship the finished products elsewhere. Which country has the highest fraction of market seeking MNE activity? Why would that be? - New Zealand because it's small and therefore have a small market. Remote island location. What type of MNE activity of US multinationals is most important for the Netherlands? Why would that be? - The most important US MNE activity for the Netherlands are the exports. The Netherlands is a first world country and is attractive to exporters from all over the world. Export platform. What factors would play a role in determining how much MNE activity a country attracts? Are all these factors equally important for all the different types of MNE activity? Explain. - - A lot of things need to be considered such as political situations, development in the country, location, labor or production costs. Each one of these factors are different for each type of MNE activity depending on which one it is. For example, if the MNE is market seeking, the amount of customers that are in the market is the main cause that makes an MNE to move into a specific country. Another example would be if the MNE is efficiency seeking, then elements such as manufacturing costs will be the most important thing. How well trained are the employees, do they have the right skills and knowledge? How are the infrastructure functions? Such as good roads and trains. How is the tax regime? High or low? Is it far from our home market? The transport costs in case we have to ship goods from or to the home market. Wage costs? Expensive or cheap? Level of development, are local customers rich or poor? Calculate the mean of the different types of MNE activity - Market seeking MNE activity: 64,7% - Efficiency seeking MNE activity: 8,6% - Export platform MNE activity: 26,7% In the globalization debate proponents and opponents discuss the different positive and negative aspects of globalization. Opponents frequently refer to the damaging role of multinationals in the context of child labour, pollution, and abuse of power in countries with weak governments. This boils down to a view on multinationals that locate production in those places where production is the most efficient. This is an often-heard claim that opponents make. Having calculated the mean scores of different types of FDI, can you say that these opponents or anti-globalists are right? - No they aren’t since efficiency seekers are the smallest part. 1. That is difficult to say on the basis of these data. We can say however that the opponents refer to the efficiency seeking MNE. 2. Its is especially these, that are often criticized. The data tell us however, that thus type only counts for 8,6% and the vast majority of MNE activity is market seeking. 3. Seen from this perspective, these opponents may exaggerate. 4. This is not full story of course; the point is that the last years this efficiency seeking MNE activity has increased. So, 8.6% may ben relatively low, it is however increasing the last years. What are the two key observations that are the basic starting point for Bartlett and Ghoshal? The two key observations that are the basic starting point for Bartlett and Goshal are the Universal model to treat your subsidiary: homogenization and HQ-hierarchy syndrome: centralization. 10). What is the consequence of the above observations? As a consequence of the opportunities are missed by local subs: HQ may kill the entrepreneurial spirit in subsidiaries The consequence is that because subsidiaries are supposed to listen to the headquarter…. 11) What difficult and important managerial question does this trigger? The question that this trigger is “How much autonomy do you need to give to a subsidiary?” 12) What factors determine how much autonomy you give to a subsidiary? The strategic importance of each market and how strong the subs resources are; like marketing achievements, technology or labour among others. 13) Based on these two factors, Bartlett and Ghoshal have developed a 2 x 2 taxonomy. Draw this and explain it in your own words. As it shows the table, the senior corporate management should assess each market accordingly to its strategic importance of the local market and its subsidiary resource base in terms of marketing achievements and sales, R&D and production capabilities. Lecture 4 questions Brexit will increase: - Administrative distance with the EU Ghemawhat’s CAGE ignores: - Joint ventures Chinese FDI in China is mostly: - Natural resource seeking If cultural distance increases: - Firms will choose The best model to measure cultural differences: - Does not exist Individualism is related to: - The relative importance of the group Hofstede, Schwartz and GLOBE all: - Rely on matched sampling Cultural distance: - Can be calculated using the Kogut and Singh index The illusion of stability means: - That cultures do not change Case questions Cultural Distance 2. What is the difference between the mean and variance? Use an example to explain the difference. Mean: average score within a group - If we add up all your ages and divide it by the amount of students in this tutorial, we have the mean age in the group Variance: The average variability (spread) of a set of data(squeared difference from the mean) - Variance informs us on the spread of age within the group. Large variance indicates that 4b. What would be the implications if we do not control for variance when calculating cultural distance? 10. Assess the strengths and weaknesses of the Kogut and Singh measure of cultural distance.
