International Business: Actions
Internationalisation Theories and Practices (I)
Business College
School of Management
Key Learning Objective
• This session will help you to understand the concepts of:
1) Internationalisation of business organisations
2) Key international business theories
3) Complexities of choices and approaches in
internationalisation
Key Questions
• How do organisations internationalise?
• How does international business manage its internal
operations?
• How does international business manage its external
operations (e.g. relationship with the host
country/communities)?
Internationalization?
• BHP Expansion
http://www.youtube.com/watch?v=TiaNjJNIDkg
• Pacific Brands Story
http://www.youtube.com/watch?v=BpiC-FSid7w
Goverments attitudes towards FDI
Goverments attitudes towards FDI
Statistics:
FDI and its relationship with Internationalisation
Statistics: UNCTAD (2009)
Activity 1: Discussion
• In your opinion, what are they key factors for MNCs to invest in the new
foreign market such as Myanmar? Why?
• http://www.youtube.com/watch?v=kgHIVs_ECSo
Literature on MNCs and Internationalisation
• Mainstream MNC Theories
After the Second World War, the rapid development of MNCs and
their FDI caused widespread interest among western scholars. They
adopted different research methods and created basic assumptions
towards different research objects, and consequently created various
MNC theories.
The Uppsala Internationalisation Model
• Swedish manufacturing companies begin their internationalisation process by
establishing in the Nordic countries.
• According to the stage model the Swedish researchers stressed that Swedish
manufacturing companies began to operate abroad in a nearby market and
then slowly penetrated markets far away. This model was developed in the
1970s and has lately been criticised for no longer being relevant.
Uppsala Model
• A basic assumption of the model is that lack of knowledge about foreign
markets is a major obstacle to internationalization, but that this obstacle can
be overcome through learning about foreign market conditions.
• The firm’s own current operations are the main source of this kind of learning.
In turn, this reasoning leads to a second assumption of “learning by doing”
(cf. Lindblom, 1959; and Johnson, 1988).
• Investment decisions and actual investment commitments are made
incrementally as uncertainty is successively reduced.
• The more the firm knows about a foreign market, the lower the perceived
market risk will be and, consequently, the higher the actual investment by the
firm in that market tends to be.
Criticisms
• The Uppsala internationalisation model has been criticized as deterministic
(Reid, 1981) and, if firms were to develop in accordance with the model,
individuals would then have no strategic choices (Andersson, 2000).
• Another bigger challenge is that today many firms simply do not follow the
traditional pattern of internationalization proposed by stage theory. Some
firms are international from their birth and have been called: international new
ventures (Oviatt and McDougall, 1994, 1995), born global (Madsen and
Servais, 1997), and global start-ups (Oviatt and McDougall, 1995).
Activity 2: Debate
• The Uppsala Internationalisation model helps us to understand the
internationalisation process of MNCs in 1970s-1990s. Please discuss new
factors that change the validity of this concept in the contemporary
international business.
Source: Adapted from Sumantra Ghoshal & Nitin Nohria, ‘Horses for courses: Organizational forms for
multicultural corporations’, Sloan Management Review, Winter 1993, pp. 27, 31.
International strategy
• Create value by transferring valuable core competencies
to foreign markets that local competitors lack.
• Centralise product development functions at home
• Establish manufacturing and marketing functions in local
country but head office exercises tight control over it
• Limit customization of product offering and market
strategy
–Strategy effective if firm faces weak pressures for local
responsive and cost reductions
Multi-domestic strategy
• Main aim is maximum local responsiveness.
• Customize product offering, market strategy including
production, and R&D according to national conditions
• Generally unable to realize value from experience curve
effects and location economies.
• Possess high cost structure.
Global strategy
• Focus is on achieving a low cost strategy by reaping cost
reductions that come from experience curve effects and
location economies.
• Production, marketing, and R&D concentrated in few
favorable functions.
• Market standardized product to keep cost low.
• Effective where strong pressures for cost reductions and
low demand for local responsiveness.
Transnational strategy
• To meet competition firms aim to reduce costs, transfer
core competencies while paying attention to pressures for
local responsiveness
• Global learning
–Valuable skills can develop in any of the firm’s world
wide operations
–Transfer of knowledge from foreign subsidiary to home
country, to other foreign subsidiaries
• Transnational strategy difficult task due to contradictory
demands placed on the organization
–Example : Caterpillar
Why firms become multinational?
1. The OLI Paradigm (Dunning J.)
• One of the dominant frameworks for explaining the existence of MNCs and
the determinants of FDI
• O = Ownership
• L = Location
• I = Internalization
*Note: The modern paradigm of OLI is well discussed in Dunning and
Lundan (2008), Institutions and the OLI paradigm of the Multinational
Enterprise, Asia Pacific Journal of Management, 25:573-593.
Ownership
• The firm that invests abroad has a competitive advantage (to exploit) and outcompete the firms that operate in the country where the investment is done.
– Economies of scale connected to large-sized company
– Possess technologies that give an advantage on the subsidiary abroad
– Monopolistic advantages in terms of priviledged access to inputs or outputs
markets
– Skills of management
Location
• Advantages of the foreign location:
– Different nations have different factor endowments:
– Natural resources:
– Cheap labour force
– Skills and capabilities
– Country characteristics (political stability, regulations, cultural distance)
Bolivia happens
to possess up to
54% of the world's
Lithium deposits
Underneath the salt lies the world's largest lithium reserves
Internalization
• Internalization occurs when a firm expands its operations in another country, by
acquiring the property of the assets that are abroad
• Ownership of foreign assets more convenient than the market
• Why?
– Information asymmetries (transaction costs can be too high) -> Market failures
– Keeping skills and capabilities internal to the firm
Why firms become multinational?
Ghoshal (1987)
• Becoming multinational to search a competitive advantage:
– National differences: Exploiting national differences in factor costs
– Scale Economies
– Scope Economies
1. National differences
• Different nations have different factor endowments:
– A firm can gain cost advantages by configuring its value chain so that
each activity is located in the country which has the least cost for the
factor that the activity uses most intensively
– E.g. Land in Honduras, cheap labour force in China, cheap but skilled
engineers in India...(changing over time)
2. Scale economies
• A firm expanding its total volume of sales, reduces its average costs in a given
period of time
• It is thus important to expand to several markets as to produce more of a product
• Higher volumes also favour experience economies (learning by doing)
• However, large scale also implies higher complexity and organization is critical
3. Scope economies
• Scope economies: when the cost of the joint production of two or more
products can be less than producing them separately
• Scope economies achieved though:
– Shared equipment, brands, and other assets
– Shared external relations
– Shared knowledge
Main strategies for setting up subsidiaries (Dunning)
• Natural-resource seeking
• Efficiency seeking
• Market seeking
• Capability seeking
Venezuela
Activity 3: Internationalization of Chocolate
• Please visit www.ferrero.com and read business mission and Ferrero in the
world section, then discuss Ferrero’s reasons to internationalise into almost
all parts in the world? Why Ferrero has been successful in the
internationalisation process of the company?
Born Global
• The ‘Born Global’ concept was coined in a survey for The Australian
Manufacturing Council by the McKinsey Consultants
• In Australia, a new breed of exporting companies, which contributed
substantially to the nation's export capital, was then emerging. The creation
of these exporters though not unique to the Australian economy, reflects 2
fundamental phenomena of the 1990s:
–1.Small is beautiful
–2.Gradual internationalization is dead
Born Global
• Amongst the Born Global firms, in Australia, there are several high-tech firms,
but the typical firm uses well-known technology.
• These firms have experienced higher growth rates than other industries in
Australia and a large growth in their export compared to their home-market
sales.
• A major factor in the explanation of the Born Global phenomenon (McKinsey
& Co., 1993) is the management’s commitment to internationalization.
• Another major factor is the firm’s ability to standardize production, marketing,
etc. in a global niche instead of developing customized products.
Factors Supporting ‘Born Global’
• Dramatic increases in speed, quality and efficiency of
international communication and transportation have
reduced the transaction costs of multinational
interchange.
• Increasing homogenization of many markets in distant
countries has made the conduct of international business
easier to understand by everyone.
• International financing opportunities are increasingly
available.
• Human capital is internationally mobile.
References
• Ghoshal, S., & Nohria, N. (1993), “Horses for courses: Organizational forms
for multicultural corporations”, Sloan Management Review, Winter 1993, pp.
27, 31.
Johanson, J., Vahlne, J.-E. (1977), "The internationalization process of the
firm – a model of knowledge development and increasing foreign market
commitments", Journal of International Business Studies, Vol. 8 No.1, pp.2332.
• Madsen, T.K., Servais, P. (1997), "The internationalization of born globals: an
evolutionary process?", International Business Review, Vol. 6 No.6, pp.55181.
• Oviatt, B.M., McDougall, P.P. (1994), "Toward a theory of international new
ventures", Journal of International Business Studies, Vol. 25 No.1, pp.45-64.
• Oviatt, B.M., McDougall, P.P. (1995), "Global start-ups: entrepreneurs on a
worldwide stage", Academy of Management Executive, Vol. 9 No.2, pp.30-44.