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) Foreign Direct Investment
2) Key internationalisation theories – Uppsala Model
3) Dunning’s OLI Paradigm
Key Questions
• What approaches to global strategy do firms take?
• How do organisations internationalise?
• How does international business manage its internal
operations globally?
• How does international business manage its external
operations (e.g. relationship with the host
country/communities)?
Internationalisation?
• What factors are driving the internationalisation processes of these
companies?
BHP Expansion and Pacific Brands Offshoring
http://www.youtube.com/watch?v=TiaNjJNIDkg
http://www.youtube.com/watch?v=BpiC-FSid7w
WHY HAVE AN INTERNATIONALISATION STRATEGY?
Ghoshal (1987)
• Becoming multinational to search a competitive advantage:
– National differences: Exploiting national differences in factor costs
– Scale Economies
– Scope Economies
FOREIGN DIRECT INVESTMENT 1 – How does it work?
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Foreign Direct Investment (FDI)
• An investment into production or business in a country by a company in
another country, either by buying a company in the target country or by
expanding operations of an existing business in that country (Kelly, 2011).
• an investment in controlling and managing value-added activities in other
countries (Peng and Meyer, 2012).
• an investment made to acquire lasting interest in enterprises operating
outside of the economy of the investor (UNCTAD, 2009).
Activity 1: FDI in Africa
• Please watch this clip https://www.youtube.com/watch?v=jofzYoAqbsw
And discuss ‘why FDI in Africa has been growing continuously?’
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MNCs and FDI
• Zara would not be an MNC if it
manufactured all its clothes in
Spain and exported them
around the world. Zara became
an MNC only when it started to
directly invest abroad, for
instance in shops and
distribution centres in Australia,
Japan or Singapore (Peng and
Myer, 2012).
What is the major concern of 506 executives wanting to invest in India?
Why is this important to the internationalisation of your business?
Source: UNCTAD, 2012
Between 2007 and 2011, a total of 1,243 foreign direct
investment (FDI) projects were recorded in Australia
from 933 companies. This represents an average
annual growth rate of 15.4 per cent with a total capital
investment of US$122 billion. Greenfield investments
accounted for 84.8 per cent of projects over this five
year period.
(Brisbane Marketing, 2012)
FDI in Australia
(Source: ABS, 2011)
Industry
$Million
% share of total FDI
Mining
151,065
31.9
Manufacturing
88,481
18.7
Finance
67,653
14.3
Wholesale and Retails
44,500
9.4
Transport and
Communication
43,331
5.3
Statistics – FDI INFLOWS:
FDI and its relationship with Internationalisation
Statistics – FDI OUTFLOWS: UNCTAD (2009)
FDI…Poison or Panacea?
• FDI allows money to freely go to
whatever business has the best
prospects for growth anywhere in the
world.
• Too much foreign ownership of MNCs
can be a concern, especially in
industries that are strategically
important.
• Investors receive additional benefits.
Their risk is reduced because they can
diversify their holdings outside of a
specific country, industry or political
system.
• The risk factors are always the major
concern among MNCs.
• The standard of living in the recipient
country is also improved by higher tax
revenue from the company that received
the foreign direct investment.
Activity 2: Actors in FDI
• Please watch this story from the Villar Mir group, a French company in Spain
and identify (1) ‘actors’ in Foreign direct investment and (2) key issues for
the management team of an MNC prior to the decision to embark on the FDI
in the new country.
http://www.youtube.com/watch?v=5vA6rzUyyu4
INTERNATIONALISATION THEORIES
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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 Model
The basic information: it developed by Johanson & Wiedershiem-Paul in
1975 at Uppsala University.
Complemented by Johanson & Vahlne in 1977.
Empirical bases:
Four Swedish Companies: Volvo, Sandvik, Atlas Copco, and Facit
The model was made in accordance with the entry form and the choice of
the market of these Swedish firms.
The main description:
The Uppsala model is a theory that explains how firms gradually intensify
their activities in foreign markets.
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.
The Uppsala Model
The Uppsala Model
Market
Knowledge
Market
Commitment
Commitment
Decision
-General Knowledge
-Amount of resources
-Marketing methods
-Size of investment
(marketing, organisation)
-Perceived opportunities
and problems in a
specific market
-Degree of commitment
-The economic effect
-Alternative use for the
committed resources and
transferring them into the
alternative one
- Psychic Distance
-Common characteristics
of customers
-Business Culture
-Climate, customer firms
personal
Source: Johanson & Vahlne
(1977)
The 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 internationalisation 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 3: Uppsala Model in Context
[Evaluate]
• Please discuss the concept of Uppsala model in your team and list 3 factors
that may change the application of the model in modern international
business.
• Do you think it is still an effective model?
• Can you think of any industry where it still may apply?
• What has changed this?
DUNNING’s Electic Paradigm –
Why do firms become multinational?
• One of the dominant frameworks for explaining the existence of MNCs and
the determinants of FDI
• O = Ownership
• L = Location
• I = Internalisation
*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
Internalisation
NOTE: Internalisation NOT Internationalisation
Internalisation 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
Future Reading
-Anderson, Erin and Hubert Gatignon. 1986. Modes of Foreign Entry: A Transaction Cost
Analysis. Journal of International Business Studies, 17: 1-26.
- Kogut, B. and H. Singh. 1988. The effect of national culture on the choice of entry
mode. Journal of International Business Studies, 19: 411-432.
- Hennart, J.-F. and Y.-R. Park. 1993. Greenfield vs. acquisition: The strategy of
Japanese investors in the United States. Management Science, 39(9): 1054-1070.
- Hennart, J. F., and Reddy, S. 1997. The Choice Between Mergers/Acquisitions and
Joint Ventures: The Case of Japanese Investors in the United States. Strategic
Management Journal 18: 1-12.
- Barkema, H. G. and Vermeulen, F. 1998. International Expansion Through Start-up or
Acquisition: A Learning Perspective. Academy of Management Journal 41: 7-26.
-- Brouthers, K. D. and Brouthers, L. E. 2000. Acquisition or Greenfield Start-up?
Institutional, Cultural and Transaction Cost Influences. Strategic Management Journal 21:
89-97.