Topic 1: The global environment

Global business concepts

Global business: Business around the globe

International business:
- Firms engaging in international economic activities
- The action of doing business abroad
Multinational enterprise (MNE): Firms engaging in foreign direct investment and
operating in multiple countries. Private are less because shareholders are bigger in
numbers
Foreign direct investment (FDI): Investment in controlling and managing value added
activities in other countries.
Gross domestic product (GDP): sum of value added by resident firms, households, and
governments operating in an economy
Purchasing power parity (PPP): Conversion determining the equivalent amount of
goods and services different currencies can purchase.
BRIC: Acronym for the emerging economies of Brazil, Russia, India and China.
- BRICS: Addition of South Africa
Triad: Developed economies of North America, Western Europe and Japan.
Base of the Pyramid (BoP): Vast majority of humanity who makes less than 2000$/year

The global economic pyramid:

On top GDP per capita higher than 20.000$ approximately 1 billion people
At the middle GDP per capita between 2.000$ and 20.000$ approx. 1 billion
At the bottom GDP per capita lower than 2.000$ approximately 5 billion

Why study global business:

- Advancing your employability and your career in the
global economy
- Better preparation for possible expatriate
assignments abroad
- Stronger competence in interacting with foreign
suppliers, partners, and competitors and in working
for foreign-owned employers in your own country.

Unified framework for Global business

It is a framework that represent that the study of global business is interdisciplinary. It
is what determines the success and failure of firms around the globe.

1. Institution-based view: Formal and informal rules of the game

- Suggests that firm performance is determined by institutional frameworks
governing firm behaviour worldwide.
- Institutional framework is about the formal and informal institutions that govern
individual and firm behaviour.
- Deals with external environment
 2. Resource-based view: Firm-specific resources and capabilities
- Suggests that firm performance is determined by its internal resources and
capabilities.
- Liability of foreignness: inherent disadvantage that foreign firms experience in
host countries because of non-native status.
- Firm’s resources and capabilities con offset the disadvantage
- Firms must have valuable and unique firm specific resources not shared by
competitors in the same environment
- Deals with firm’s internal resources.

Globalization
It can be viewed at the country industry, or firm level, which results in various
definitions of globalization:

Definition (Anthony Giddens)

“the worldwide interconnection at the cultural, political and economic level

resulting from the elimination of communication and trade barriers”

“globalization is a process of convergence of cultural, political and economic

aspects of life”

Country level definition (Vijay Govindarajan and Anil Gupta)

“growing economic interdependence among countries as reflected in increasing

cross-border flows of three types of entities: goods and services, capital, and
know-how.” (definition at country level)

Advantages of globalization
Close integration of countries and peoples of the world
Higher economic growth and standard of living
Increase in technology sharing
Extensive cultural integration

Disadvantages of globalization
Undermining of wages in rich countries
Exploiting workers in poor countries
Too much power to MNEs
Alteration of the physical environment
Inequality issues
MNE-oriented disadvantages:
- Lack of complete market integration
- Sales of MNE’S are unevenly distributed across the globe
- MNEs must configure their value-chain activities on a worldwide basis of face
competitive disadvantages
- Distance still matters and that firms face a liability of foreignness when they
enter new geographic markets.
What globalization DOES NOT mean?
- Complete cross-border integration of countries and markets
- The production and distribution of products and services of a homogenous type and
quality on a worldwide basis
- At some level, value-chain activities must be local
- Most of the largest MNEs still derive the majority of their sales from their home
region
- Doing the same things everywhere, with firms becoming stateless and abandoning
country images and culture
- Disregarding the need for local responsiveness.

Global competition
Companies competing in the global area will probably have several, or all, of the
following symptoms:
- Fewer total basic products
- More variants on these basic products
- A position in major emerging markets (not as a choice but a necessity)
- More worldwide products
- Foreign exchange risk as an important issue
- Significant interaction between managers form many countries
- More discussion about costumers, competitors, technology, and suppliers with
counterparts in other countries
- Multiple reporting relationships within and across the organization

Why do firms pursue global expansion?

- To seek revenue growth opportunities
- To compete against global competitors
- To support global customers
- To access global knowledge
- To achieve efficiency in managing value-chain activities

Distance and global strategy

Distance continues to play a factor in global expansion decisions
About distance, is easier to cross an immediate border than to enter a market which is
may thousands of miles away.
A man called Ghemawat, identified 4 dimensions of distance:
1. Cultural distance includes language, religious, cultural, administrative,
geographic, and economic
2. Administrative distance involves a country’s institutions and the degree to
which they are related to those of another country
3. Geographic distance involves both the miles between countries and the
access to the infrastructure of trade, such as harbours and airports.
4. Economic distance primarily involves the relative wealth or income of a
country’s consumers.
Semiglobalization
Perspective that suggests that barriers to market integration at borders are high, but
not high enough for complete insulation between countries
Types of globalization:
- Total isolation suggests localization: strategy that treats each country as a
unique market.
- Total globalization lead to standardization: strategy of treating the entire world
as one market.

Debate: ethical dilemma

- Opponents of globalization NGOs: Organizations not affiliated with governments
- Firms view NGOs as partners
- Current business school students exhibit values and beliefs that favour globalization

Strategic management (Topic 2)

Resources
Tangible and intangible assets used by a firm to choose and implement its strategies:
- Tangible resources: assets that are observable and easily quantified
Examples: financial, physical and technological
- Intangible resources: assets that are hard to observe and difficult to quantify
Examples: human, innovation and reputational
Normally we refer to resources as resources and capabilities, because those are also
considered resources.

-Intangible - Tangible
Human (talent) Financial
Innovation Physical
Reputational Technological

Value creation
Chain value: series of activities used in the production of goods and services, making
them more valuable.
- It consists of primary activities and support activities
- Each activity requires a number of resources and capabilities
Benchmarking: examining whether a firm has the resources and capabilities
- To perform a particular activity in a manner superior to competitors
Decision model is used as a remedy when an activity is unsatisfactory
- Need to compare with the competitor and you are in race for the
market SHARE. You have to be aware from the locals and global
competitors. You have to benchmark yourself. This is crucial to enable to
make a choice.

The value chain:

- Primary activities: input research and development components final
assembly marketing output
- Support activities: infrastructure, logistics and human resources
Two-stage decision model in value chain analysis
Do we really need to perform this activity in-house?
NO outsource, sell the unit, or lease its services to other firms
YES Do we have the resources and capabilities that add value in a way better than
rivals do?
- YES keep doing it
- NO acquire the necessary resources and capabilities in-house or access to
them through strategic alliances.

In-house activities
To perform an activity in house, a firm must determine whether the activity is:
- Industry-specific or common
- Proprietary or not (tight to patents, technology is available to everyone
Commoditization: process of market competition through which unique products
become commodities. It occurs when the products lose their ability to command high
prices and margins.

In-house vs Outsource
Industry specific and high commoditization outsource
Industry specific and proprietary in-house
Common across industries and high commoditization outsource
Common across industries and proprietary it depends
Outsourcing Turning over an activity to an outside supplier who performs it on
behalf of the local firm.
Reasons for outsourcing:
- Certain activities possess generic attributes and can be shared across industries.
- Lack of skills to develop capabilities in-house, to which we can access through alliances.

Different types of outsourcing: EXAM

Offshoring: outsourcing to an international or foreign firm
Onshoring: outsourcing to a domestic firm
Captive sourcing (FDI): setting up subsidiaries abroad so that work is done in-house
- Location is foreign
Business process outsourcing (BPO): outsourcing of business process
- Loan origination, credit card processing, and call centre operations
Reshoring: moving formerly offshored activities back to the home country of the focal
firm.

Depending on the location of the activity and its mode, we can classify it in:
In-house and foreign location captive sourcing (FDI)
In-house and domestic location domestic in-house
Outsourcing and foreign location offshoring
Outsourcing and domestic location onshoring

VRIO Framework
It is a resource-based framework focused on Value, Rarity, Imitability and Organizational
aspects of resources and capabilities.

Value
- Value-adding resources: lead to competitive advantage
- Non-value-adding resources: make firms suffer from below-average performance

Rarity
- Valuable and rare resources and capabilities: provide temporary competitive
advantage
- Valuable but common (not rare) resources and capabilities: lead to competitive parity.
Imitability
- Imitation is difficult casual ambiguity: difficulty of identifying the actual cause of a
firm’s successful performance
- Easy to imitate tangible resources than intangible resources
- Hard-to-imitate resources and capabilities: lead to sustained competitive advantage

Organization
- If the company have valuable, rare and hard-to-imitate capabilities, in order to attain
sustained competitive advantage and above average performance, capabilities should
also be organized.
- Complementary assets: combination of numerous resources and assets that enable a
firm to gain a competitive edge
- Ambidexterity: using capabilities to simultaneously deal with paradoxes
- Social complexity: socially intricate and interdependent ways that firms are

organized. The VRIO framework and firm performance

Implications for Action

- Managers need to build a firm strength based on the VRIO framework
- Relentless imitation or benchmarking, while important, is not likely to be a
successful strategy
- Managers need to build up resources and capabilities for future competition
- Students need to make themselves into “untouchables” whose jobs cannot be easily
outsourced.

For and Against offshoring

For:
- Creates value for firms
- Access to low-cost and high-quality labour
- Allows firms to focus on core capabilities
Against:
- Nurtures rivals
- Negative impact on developed economies
- US firms not bound by American ethical values
Motivation for internationalization (Topic 3)

Holistic factors
Internal: External:
Profit-making opportunities International peace and stability
Business growth World economic growth and emerging regions
International reputation Reduction in trade barriers
Competitive advantage Sociological developments and skills

Country-specific factors
Political and economic stability
Culture and institutions
Country’s stock of “created assets”
- Assets which a country has developed through investment over a number of years
- Tangible assets: transport and communication infrastructure
- Intangible assets: education and skills, technology and the capacity for innovation,
intellectual property, and business network.
Supportive government policies: tax rates or financial incentives
Absence of nuisance costs: bureaucratic obstacles, corruption, and mafia-style activities

Firm-specific factors
Access to markets Access to resources Cost reduction
Large and emerging Resources are Access to low-cost
markets core business materials, energy, or labour
Access to a regional Large quantities of Financial
trading area resources are needed incentives
First-mover Specialized resources Avoidance of
advantages are immobile trade barriers
Need to follow the
competition

Location factors
Raw materials
Labour availability and quality
Infrastructure
Examples:
- Technology firms in India or Oil industry in Saudi Arabia
- Building on the comparative advantage offered by their country location to
develop a competitive edge in world markets

Demand factors
Quality of local demand
Sophistication of local buyers
Prevalence of multinational buyers
Examples:
- Fashion-conscious France
- Miniaturization and technological complexity loving consumers in Japan.
Strategic positioning
School 1 standardization of markets: integration and standardization
School 2 dissimilarity of markets: localization and adaptation
School 3 transnational strategy / administrative coordination / cross-subsidization:
integration and localization

Choosing a strategic approach

Industrial-based view Porter’s 5 forces
Resource-based view VRIO framework
Institutional-based view formal and informal rules of the game

Five Forces framework

The focal firm’s performance critically depends on the degree of competitiveness of
the five forces within an industry. So, the stronger and more competitive these forces
are, the less likely the focal firm is able to earn above-average return, and vice versa

Threats indicative of strong competitive forces than can depress industry profitability

Rivalry among competitors

- A large number of competing firms
- Rivals are similar in size, influence, and product offerings
- High-price, low-frequency purchases
- Capacity is added in large increments
- High exit costs

Threat of potential entry (threat of entrants)

- Little scale-based low-cost advantages (economies of scale)
- Little non-scale-based advantages
- Inadequate product proliferation
- Insufficient product differentiation
- Little fear of retaliation
- Non-government policy banning or discouraging entry

Bargaining power of suppliers

- A small number of suppliers
- Suppliers provide unique and differentiated products
- Focal firm is not an important customer of suppliers
- Suppliers are willing and able to vertically integrate forward

Bargaining power of buyers

- A small number of buyers
- Products provide little cost savings or quality of life enhancement
- Buyers purchase standard, undifferentiated products from focal firm
- Buyers are willing and able to vertically integrate backward

Threat of substitutes
- Substitutes superior to existing products in quality and function
- Switching costs to use substitutes are low
About the Five Forces framework:
- Not all industries are equal in terms of their potential profitability
- The task for strategists is to assess the opportunities (O) and threats (T) underlying
each competitive force affecting an industry, and then estimate the likely profit
potential of the industry
- The challenge is to stake out a position that is strong and defensible relative to the
five forces.

Institutional-based view:
Strategic choices are selected within and constrained by institutional frameworks in
developed economies
Striking differences between institutions in developed and emerging economies has
pushed the institution-based view to the forefront
Strategic choices are direct outcomes of the dynamic interaction between institutions
and firms

Institutions: are humanly devised constraints (restricciones) that structure human

interaction. These constraints are regulatory, normative and cognitive structures and
activities that provide stability and meaning to social behaviour.

Dimensions of institutions:
Degree of formality Examples Supportive pillars
Laws
Formal
Regulations Regulatory (coercive)
institutions
Rules
Norms
Informal Normative
Cultures
institutions Cognitive
Ethics

Institutional framework formal and informal institutions governing individual and

firm behaviour
Formal institutions laws, regulations, rules which are supported by the regulatory
pillar (the coercive power of governments)
Informal institutions norms, cultures and ethics which are supported by the
normative and cognitive pillars

What do institutions?
- Reduce uncertainty
- Signal conduct as acceptable or not, which constraints the range of acceptable
actions.

Transaction costs:
Are associated with economic transactions or more broadly, costs of doing business.
- A major source of transaction costs leads to opportunism, what is defined as
“self-interest seeking with guile” by Williamson.
- The possibility of opportunism introduces uncertainty
- Uncertainty can lead to transaction costs
Two core propositions
1. Managers and firms rationally pursue their interests and make choices within the
formal and informal constraints in a given institutional framework
2. While formal and informal constraints combine to govern firm behaviour, in
situations where formal constraints are unclear or fail, informal constraints will
play a larger role in reducing uncertainty to managers and firms.

The internationalization strategy (Topic 4)

Internationalization factors
- Economic forces: the biggest one, people put institutional factors in economic
forces, because are forces that have effects in institutions. GDP, exchange rates,
interest rates, wages, public polices, etc…
- Market forces: Barriers to entry, degree of rivalry, cooperation, etc.
- Business factors: Innovation, quality, customer focus, cost advantages,
differentiation, etc…

The evolution of internationalization

First exports, then direct investment and finally, purchases in form of acquisition

Internationalization strategy
When is the timeline to enter?
How you want to do it: centralize or decentralize.
Once you have decided the five 5 factors, then you asses the available resources you
have in order to enter the new countries, if you are going to have additional resources
once you enter.
Then you get the final decision
And finally, you design the organization in order to do that the value chain goes well

Where to internationalize? The role of market choice

Preliminary evaluation of the markets
- Countries that offer good opportunities for the generic product.
- Discard countries with low market growth, isolated ones and those that present
few opportunities due to size (small ones).
- Australia and New Zealand, good examples of multiple foreign market
identification, because of their proximity
Refined analysis of the selected markets
- Market potential
- Potential sales

The selection process:

A chart showing the systematic process for the country or countries. (Figure 7 ppp)

How to internationalize
Resource base (internal factors) and industrial base (external factors)
- Internal factors: products, capabilities, financial resources and other resources
 - External factors: positioning of rivals, potential customers, marketing, distribution
and technological innovation.
Marketing and distribution are not in the industrial organization.
Innovation forces are important.

Strategic positioning
Cost leadership: When you position trough cost leadership, you offer a product the
cheap as possible. So, it is about offering a product that is more or less standardized
but at a lower price than the competition.
Differentiation: your product is different from the competitor. So, it is about offering a
product with a high added value for the consumer that is superior to those offered by
any rival company. When consumers can perceive the superior value, the company can
earn higher margins from their product.
Strategic positioning: in terms of country demand, …

Choosing the right country

First of all, you look to the historical analysis, because if you don’t understand the
history, you don’t understand how the country does business, then the economic and
political situation, then you asses the culture, then you analyse the product data and
the demography, then you look the risk factors and finally, you should do a
regional/global trend analysis.

For example, Italy is not a good country to enter right now.

Historical analysis (background analysis):

Some understanding of target country’s history, geography, culture, and demography
is necessary You have to understand how the country has developed and what are the
demographics.

In order to compare two countries, you have to go back in time. In the ppp we can
observe a comparison between Russia and Czech Republic.
- Differences in the size (geo and population), climatic location
- Historical differences
Before communism:
- Russia’s agricultural economy ( - 1917)
- Czechoslovakia’s industrialized economy ( - 1948)
After communism:
- Russia never experienced democracy until 1991
- Czechoslovakia had been a democracy since its inception as an
independent state in 1918.
Why the Czech Republic more readily accepted democracy and the market
economy after the end of communism? Because after a brief experimentation
with a more open society under Boris Yeltsin, the Russians sought refuge in
strong central leadership under president Putin when times became difficult.
Economic and political analysis:
Current political system and institutions
Major government economic polices
Country’s economy
- GDP you can know if a country is stable or not
- GDP annual growth rate
- GDP per capita
- Inflation
- Unemployment
- Consumer expenditure
- Volume of external trade, etc…

Cultural assessment:
Language: in terms of communication
Religion: is important because for some countries take too much in account the religion
principles.
Social structure: some countries are more hierarchical and other more horizontal.
Attitudes: how flexible people are when there are new changes.

Product data and demographic analysis:

Product data typically give us what is the consumption level in a country. What
people have, the environment of the consumer, household consumption.
- Number of passenger vehicles
- Television sets/computers
- Telephone
- Internet connections
Demographic indications depending on the demographic indications you are going
to shit your strategic view to a specific type of products.
- Life expectancy
- Prevalence of particular diseases
- Literacy rate

Risk factor analysis:

- Political risk
- Economic risk
- Corruption maybe when you enter to a new country you have to learn to
deal with corruption because for this country, corruption is a way of life.
- Cultural mistakes assuming supremacy or a not good attitude
- Human error human error in the management
- Natural disasters

Regional/global trends analysis:

World economic activity boom
- MNE’s and economic liberalization in the triad countries
- New economic dynamism in South-East Asia, China, Central and Eastern
Europe, and Latin America. Dynamism in emerging countries is important.
Periodic financial turbulence
- Latin America (Mexico 1994-1995, Argentina crisis 2001-2002)
- East Asia (1997-1998)
- Russia and Brazil (1998)
- International financial markets (2008-2009)
- In Nordic countries (1990-1997)
Internationalization of terrorism
- Triggered by 11th September 2001 (‘9/11’)
- Tension increase between the West and the Islamic world

What to internationalize: the role of product choice

Product analysis:
The ideal product
- Well-received in home market plenty of demand
- High profit levels in other countries
- Ability of manufacturing parts to meet growing demand abroad greenfield
operation: instead of me acquiring a plant to manufacture a rubber, I build the
plant.
- Ability to commercialize abroad similarly to home market Coca-Cola
Product policy:
Achieving Global reach: the product is considered to have a global market
competitive advantage at world level
Bypassing Country specific differences: using promotional campaigns to adapt
consumers and users to the company’s product
Reducing Adapting costs: leads to greater promotional costs to homogenize national
demand for the company’s product if I can made changes to the product when I shift
to one market to the other. These changes can mean two things: changes to adapt
(small) or changes to demonstrate a high economic level. Producing a defected
product has a high risk, because the next product has to be perfect and succeed,
because if not, nobody is going to buy products of this firm.
Product adaptation:
- Market differentiation: identifies domestic markets and differences that distinguish
them from each other ad from firm’s home market
- Country differentiation: implies the decision to adapt the product to the specific
preferences of each country. society is used to innovations in a faster rate, they
expect different technologies innovations in a faster rate.
- Costly strategy: normally associated with higher adaptation costs and lower
promotional costs.

Emerging trends
ICT (1994-2007): big expenditure by government and firms to build information and
communication technologies.
- The internationalization of small and medium sized businesses
- In-house management of information and communications
- Management of relations with other companies and/or customers
- Marketing intelligence, as well as the other variables that influences strategic
and operational management: product policy, pricing strategy…
Now (2015 – now) we have industry 4.0: you have smart sensors, internet, platforms,
big data analytics (firms spend a lot in understanding trends), mobile devices and
advanced human-machine interfaces

International new ventures:

- New market conditions in economic sectors
- Technological development in production, transport and communications
- Increasing importance of global alliances and networks
- Entrepreneurial spirit and leadership skills entrepreneur is a 24h job

Born global firms:

- Offer products with high or very high added value
- Generally target distant countries
- Compete in emerging sectors in markets in which the use of new technologies
is a key aspect of their competitiveness.

Logitech
It is a Swiss company and it is an example of a born global firm.
It is a young company and, since its creation, it has created a significant number of
subsidiaries in the USA, Taiwan and Hog Kong and currently employees around 5000
people throughout the world.

The economic forces (Topic 5)

International Economic analysis

- System complexity
- Market dynamism
- Market interdependence
- Data overload

Economic factors affecting IB operations

External influences
- Physical and social factors:
 Political policies and legal practices
 Cultural factors
 Economic forces: economic freedom, economic systems and economic
indicators
 Geographic influences
- Competitive environment

Operations: objectives, strategy and means (medios)

Economic freedom
- Absolute right of property ownership
- Freedoms of movement for labour, capital, and goods
- Absence of coercion or constraint of economic liberty
- Economic freedom index: the extent to which a government constraints free
choice and free enterprise for reasons that go beyond the need to protect
property, liberty, safety, and efficiency.
- Financial freedom: relates to financial system
- Value: explains a country’s development, performance, and potential.
- Trends: positively related to financial property, economic stability, and standards
of living.
You can see high correlation between economic freedom and the standards of living,
we also have to take into account that poverty, inequality, were the correlation is
negative.

Fear of freer markets:

The global financial crisis = less support for free markets
China lost 30% of its consumption
The outcome of this could be the satisfaction,

The market test:

For managers is important to know how the governments regulates the economy,
protects the property rights, sets fiscal and monetary policies and enforces antitrust
regulation.
- Individual ownership is one of the signals of factor that determines
- Demand and supplies are not affected by outliners
- Your rights are protected by patents, trademarks,

Type of economic systems:

The economics systems are used to organize the production, distribution, and
consumption of good and services.
Types:
- Market economies:
- Command economies: Spain is under a command economy, the government
provides a plan, how to distribute the resources.
- Mixed economies: is what we are living in most causes when we have a socialist
government. More efficient.

Means and methods of a market economy:

- Privatization: lets the private sector regulate supply and demand. It improves
production and consumption decisions.
- Deregulation: helps markets to optimize productivity
- Property rights: give entrepreneurs ownership of their idea, effort and risk. The
protection boosts economic freedom.
- Antitrust legislation: it encourages competition and prevents monopolies from
exploiting consumers and restraining market growth.
Characteristics:
- Mostly private (individual or business) ownership of resources
- Bias toward entrepreneurial innovation
- Applies the invisible hand laissez-faire, property rights and individualism
Laissez faire: abstention by governments from interfering in the free market.
- Philosophical Anchor: capitalism

Command economy:
- Under a command economy, the visible hand of the state supersedes the invisible
hand of the market.
- This type of economy lets the state mobilize idle resources, usually lab or, to
generate high-growth spurts.
- Central planning cannot consistently predict consumers’ preferences.
Characteristics:
- The government owns most or all resources
- Bias toward large-scale, capital intensive production
- Applies the visible hand of the state, central planning and collectivism
- Philosophical Anchor: communism

Mixed economy:
- It combines elements of market and command economic systems: government
and private enterprises influence production, consumption, investment and
savings.
- Government permit firms to decide given prevailing market conditions
- Also, government may have partial ownership stakes.
Characteristics:
- Government and private ownership of economic resources mixed in varying
proportion
- Goal of balancing economic efficient but protecting against the excesses of greed
and self-interest.
- Philosophical Anchor: socialism

Measures of economic performance

GNI: Gross National Income learn definition (we don’t deal with the formula) it is the
most well know country economic index. To compare income between countries
GNP: Gross National Product a value of final product and services a country produces.
GDP: Gross Domestic Product the total market value of all output produced in a
country. It studies all the economic activities produced in a country (not only product
and services). It asses’ economic environments

Adjusting analytics (economic analysis)

Managers improve the usefulness of GNI by adjusting it for:
- Growth rate of the economy
- Number of people that live in a country
- The cost of living
- The purchasing power parity (GNI per capita): it is the relative purchasing power
of different countries’ currencies for the same basket of goods and services.
Other important measure to do the economic analysis is inflation:
- It is the sustained rise in prices measured against a standard level of purchasing
power.
- Then, the supply of money in banks increase, what leads to a continuous
devaluation of the currency.
- You measure inflation by the CPI (US) and the HICP (EU)
- Chronic inflations: important consequence of inflation, it is when a country
experience rising prices for a prolonged period.
- Deflation is a decrease in general prices of goods and services caused by a
reduction in the supply of money or credit.
- Reflation: increasing the money supply and reducing taxes to accelerate

Another measure to analyse economics is employment rate:

- Unemployment (paro): differs from countries and is calculated in the same way
but in several countries, welfare exists.
- How to repay the debt:
- Two types of debt:
Internal debt: government expends more that they collect in taxes so, the
government debt in domestic currency by domestic residents.
External debt: debt to foreign creditors in foreign currency.
- Growing public debt indicates: tax increases, reduced growth, rising inflations and
increasing austerity.

Other measures to analyse economics:

Income distribution: asses the values levels of income of the population, so it is the
proportion of population that earns various levels of income

Gini coefficient: it is the most common tool to measure inequality, what means that
measures the extent to which income shares deviate from a perfectly equal
distribution.

The Multidimensional Poverty Index (MPI): it concerns in a single number, the

individuals, households or other units analysis across several attributes or dimensions
in order to inform the poverty levels in a given population.

The Balance of Payments (BoP): is a method used by the countries to monitor all
international monetary transactions (transactions with the rest of the world) at a
specific period. It summarizes all transactions that a country’s individuals, companies,
and government bodies complete with individuals, companies, and government bodies
outside the country.
- Current account:
Value of exports and imports of physical goods
Receipts and payments for services
Private transfers (expats)
Official transfers (international aid)
- Capital account:
Long-term capital flows: money invested in foreign firms
Short-term capital flows: money invested in foreign currencies
Global Indexes
- Global Competitiveness Index (GCI): based on financial market development,
macroeconomic environment, technology readiness, market efficiency and
innovation.
- World Competitiveness Index (WCI): based on international trade, employment,
prices, business legislation, productivity and management practices.
- Global Innovation Index (GII): based on competency in promoting technologies,
expanding human capacities and streamlining organizational capabilities.
- Where-To-Be-Born Index (WTBBI): how well a country provides opportunities for a
healthy safe and prosperous life.

The road ahead

- Changing of the Guard: developed vs emerging
- Changing markets: BRIC
- Big Plans but Big Problems: black-swan event
- National challenges
- Green constraints
- Dethroning the dollar
- Stronger ties

Trade theories (Topic 6)

Introduction
Trade theory helps managers and government policymakers focus on:
- What products should we import and export?
- How much should we trade?
- With whom should we trade?

International operations and economic connections

A company must gear its strategy to trading (importing and exporting goods and
services) and transferring (transfer production factors, such as labour and capital,
internationally) its means of operation across borders. Once this process has taken
place, the two countries are connected economically.

Interventionist theories
Mercantilism (economic thought between 1500 and 1800) it holds that a country’s
wealth is measured by its holdings of its gold. The good point is that countries should
export more than they import. By this way they can receive gold from countries that
run deficits. During this epoch the supply of commodities rely on colonies. Also,
running a trade surplus is not necessarily beneficial.
Neomercantilism countries that try to run favourable balances of trade in an attempt
to achieve some social or political objective.
Free-trade theories
Theory of Absolute Advantage country’s wealth is based on its available goods and
services rather than on gold (Adam Smith, 1776).
- Some countries produce some goods more efficiently than others
- Specialization increases potential output
- Natural advantage: considers climate, natural resources and labour force
availability
- Acquired advantage: technological process to make the product and produce a
unique product.
Theory of Comparative Advantage What happens when one country can produce all
products at an absolute advantage? Then, global efficiency gains may still result from
trade if a country specializes regardless of other countries’ absolute advantage. What
means that if a country specializes ignoring the absolute advantage of other countries,
then the global efficiency gains may still result from trade.
In order to produce more efficient output, countries must give up less efficient output.

Assumptions and limitations related to the previous both theories

- Full employment: not a valid assumption of absolute advantage and comparative
advantage
- Economic efficiency: countries goals may not be limited to economic efficient
- Division gains: how countries will divide increased output
- Transport costs: they are a limitation if cost more to transport the goods, than
what is saved through specialization.
- Statics and dynamics: theories of absolute and comparative advantage are static,
otherwise, the relative conditions that give countries production advantages or
disadvantages change, so are dynamic.
- Services: both theories deal with products rather than services. Theories apply as a
resource go into service production.
- Production networks: both theories deal with trading one product for another. In
some cases, portions of a product may be made in different countries.
- Mobility: both theories assume that resources can move domestically from the
production of one good to another and with no cost. But different skill needs
might invalidate this assumption.

Country and economy size theories:

Theory of country size helps to explain the relative dependence on trade
Large countries:
- Depend less on trade than small ones
- Export a smaller portion of output than small countries
- Import a smaller part of consumption needs than small countries
- Have higher transport costs for foreign trade than small countries
The economy size helps to explain differences in the absolute amount of trade
Factor-proportions theory (Eli Heckscher and Bertil Ohlin)
Factors in relative abundance are cheaper than factors in relative scarcity.
Production factors are homogenous:
- Not labour
- Companies may substitute capital for labour depending on the cost of each
- Bigger countries depend more on products requiring larger production runs

Country similarity theory

Companies create new products in response to market conditions in their home
market. So, in order to sell their products, companies should turn to (recurrir) markets
similar to themselves.
Developed countries trade with each other:
- Produce and consume more
- Emphasize technical breakthroughs in different sectors
- Produce differentiated products/services
Trading partners are affected by:
- Cultural similarity
- Political relations between countries
- Distance

Product Life Cycle theory

It says that the production location shifts between countries depending on the stage in
the product’s life cycle.
Four stages:
1. Introduction:
- Innovation in response to observed need
- Exporting by the innovative country
- Evolving product characteristics
2. Growth
- Increases in exports by the innovating country
- More competition
- Increased capital intensity
- Some foreign production
3. Maturity
- Decline in exports from the innovating country
- More product standardization
- More capital intensity
- Increases competitiveness of price
- Production start-ups in emerging economies
4. Decline
- Concentration of production in developing countries
- An innovating country becoming a net importer
Limitations of the PLC
- Products with high transport costs may have to be produced close to the market
- Products with short PLC offering no cost reduction
- Luxury products for which cost is of little concern to the consumer
- Products for which a company can use differentiation strategy
- Products that require specialized technical personnel to be located near production.

The diamond of national competitive advantage theory

Companies development and maintenance of internationally competitive products
depends on favourable:
a) Factor conditions: are sufficient quantities and combination of production factors
available at acceptable prices?
b) Demand conditions: are consumer likely to buy what we can produce with the
factor conditions above and at the price we can deliver to them?
c) Relating and supporting industries: can we outsource production factors to
concentrate our efforts on what we can do best?
d) Firm strategy, structure and rivalry

Factor-mobility theory
The production factors move in order to gain more income and to flee (huir) adverse
political situations.
The effects of that movement on transforming factor endowments pressures for the
most abundant factors to move to areas of scarcity.
The impact of international factor mobility (especially people) on world trade requires
the need for components, the parent company’s ability to sell complementary
products and the need for equipment for subsidiaries.

Entry modes (Topic 7)

Factors that affect the decision on the entry mode to a foreign market
External factors:
- Market factors of target country
- Factors of target country context
- Production factors of target country
- Factors of country of origin
Internal factors:
- Company production factors
- Company resources/commitment factor

Criteria for evaluating international market entry methods

Profitability Risks
The advantage of acting quickly Required resources
Market share Flexibility
Level of control Level of earning within the organisation
Entry mode evolution

Stages:
1. Indirect export
- Export orders not deliberately sought
- May include random licensing agreements
- Small commitment to external market
2. Direct export
- Exporting via: agent or distributor; any foreign office; sales subsidiary
- May include search for licensing agreements
- The domestic and international businesses considered separate
3. Investment abroad
- Production, export and licensing mix
- IB department replacing export department
- Separate international strategy
4. Multinationalization/globalizations/transnationalization
- Global entry strategy
- Comparative evolution method
- Production per geographic area

The exporting process:

- Export means selling a product in a territory other than the domestic one
- To export is the first step in a company’s internationalization process
- It requires min amount of commitment
- It implies a low-risk, no large resources are needed
- There are two different categories: indirect (passive) export or direct (active) export

Indirect export
It can be done via independent intermediaries:
- Foreign buyer: purchases on behalf of a company located in the destination country
- Trader: takes possession of the product at the source to resell in other countries
- Broker: oversees an agreement between a seller and a buyer in different countries
for a commission.
- Agent: in charge of positioning products in external markets for commission
- Export company: acts as export department of the company
- Trading company: an import and export company operating in many countries
with a large network of international connections.
 The pros are low initial costs since there is no investment requires by the exporting
firm, low level of risk, greater flexibility and increased sales.
The disadvantage is that the firm cannot develop own entry strategy since the
company depends totally on the intermediaries, they have little knowledge on
exporting to external markets, and the potential of sales is low.
With indirect export the goals are the selection of the distribution channel, then
promote the good or service internationally and finally, distribute the product.

Direct export
It is about establish relationships with intermediaries
End purchasers abroad: the final buyers of the products are in the foreign country
Control bureaucratic, logistic and financial aspects of export
Can lead to an export department, export division or to an international division
The importer takes possession of the merchandise and resell it to the end
customer, he doesn’t have territorial exclusivity and neither long-term
relationship with the exporter.
The agent represents the exporting company in the destination country. He charges
a commission to the exporting company by the work that he does. He won’t take
possession of the products exported and rarely maintains an inventory or finance
purchases. Is possible that an exporting company has more than one agent.
The distributor is the responsible for product exportation and he charges a margin
by selling products to end customers. Differently from the importer, it has territorial
exclusivity, and also, he maintains a long-term relationship with the exporter.
The pros are that through direct export the company has a greater potential for
sales and profits, also a total or partial control of international marketing strategy
and more feedback from the market, and finally, better protection over intangible
assets. The cons are that to direct export a greater initial investment is required,
what implies higher risks. Less flexibility and learning curve.

International alliances
When there is an ownership relationship that implies a creation of a new entity:
a) Joint ventures
Those are based on a contractual agreement between two or more companies that
provide capital or other types of assets to create a new company.
- The foreign company provides capital and technology
- The local company provides capital, market knowledge and market access.
Pros:
- Control over production and marketing
- Market knowledge
- Experience in international marketing
Cons:
- High risk
- Discrepancies on priorities and strategies
- Decision involving the reinvestment of dividends
- The level and the types of R+D done locally
- The cost of transferring products, raw materials and services
- Market activities.
b) Export consortiums
It involves small or medium-sized businesses providing the capital required to
create a new entity for export purposes
- Exportation with fixing export prices
- Physical distribution
- Selection and appointment of intermediaries
- Solvency reports and managing debt recovery
- Local vs foreign market type
- Cooperative vs consortium: they have different legal framework and
governance structure.
c) External trade cooperatives

When there is an ownership relationship that doesn’t implies a creation of a new entity:
a) Other alliances
Characterised by having a minority of shareholders, so it has less than 50% of
outstanding shares. Also, they have stock instead of cash: share swaps

When there isn’t an ownership relationship but there is a creation of a new entity:
a) Projects supported by governments or international institutions
Examples:
- European organization for Nuclear Research (CERN), 1954: European research
organization that operates the largest particle physics laboratory in the world.

When there isn’t an ownership relationship and neither a creation of a new entity:
- Consortiums and R+D associations
- Licensing and cross licensing
- Business creation franchises
- Cross-distribution
- Mixed agreements
- Manufacturing and administration contracts
a) Licensing:
- the political climate in the destination country makes it difficult to repatriate
profits
- The size of the market does not make investment worthy
- The lack of raw materials or components, or because these are not adequate
- The lack of specialised workers or the labour environment in the country is not
suitable for production.
Cons of licensing:
- Low royalty income
- Less risky alternative, less potential profits
- Transfer control of operations to the licensee:
Lower production standards
Quality and the use of incorrect sales practices
Damaging the prestige and reputation of the brand
- Risk that the licensee can become a competitor in other markets
- The licenser cannot use alternative entry method during license duration
b) Franchising:
It is another type of license for retail distribution that authorizes the use of franchisor
trademark.
It provides the licensee with a product (product franchise) or standardized
operating and marketing systems at the point of sale (business start-up franchise).
Pros:
- Product cannot be exported
- No FDI investment type
- Transferable product/service process
- Easily manufacturing products/services
- Not for heavy investments/high levels of management and technical skills
- Franchisee contributes in exchange for concession
- Rapid expansion within a foreign market with low investment
- A standardized marketing system with distinctive branding
- Greater immunity from instability on the country
Cons:
- Legal restrictions on franchising
- Difficulties associated with finding trustworthy people
- Limited profits
- Lack of control
- Creation of future competitors

c) Piggy-back agreements:
In this case a manufacturer uses their distribution channels in other markets to sell
products made by another firm.
Pros:
- Products with similar distribution channels
- No large investments
Cons:
- No full control over the international marketing
- Distribution company will end up using their own brand

d) Cross-distribution:
It covers the exchange of complementary products for distributions in other
countries

e) Mixed agreements:
Usually combines distribution with technology licensing

f) Manufacturing contracts:
It is about subcontracting a firm for manufacturing purposes, so marketing activities
are carried out by subcontractor
Pros:
- Quick market penetration
- Low risk
- High flexibility
Cons:
- Finding the ideal manufacturer in the external market
g) Administration contracts
- Selling services in exchange for a fee
- Internationalizing services, not products
- Allows better control over know-how
- Ensures quality control
- Provides international experience
- Facilitates international expansion

FDI (Foreign Direct Investment)

It is the transfer of an entire company to another country in order to exploit natural
resources, to manufacture products at lower costs and to penetrate local markets. It
can be done it with total or partial acquisition of a company of the foreign country or
creating a new company in the abroad country.
Pros:
- Exploit competitive advantages within the target market
- Lower supply costs
- Increased product supply
- Higher quality and supply
- Create marketing advantages
- Offer faster post-sales services
- Create local brand image
Cons:
- Requires more capital, more management efforts and more resources
- High political risks
- High amount of information
- High operating costs

Political risk classification:

- Risk of general political instability
- Ownership and control risks
- Operational risks
- Transfer risks

How to decide if a company should do a foreign investment or not.

In order to don’t reject to do a first foreign investment:
- The proposal for foreign investment has to warrant further study
- The current investment climate in the target country must be acceptable
- During the planned period, the investment climate must remain acceptable
- Taking into account risks, our economic analysis, must indicate a sufficient return
from the investment project and confirm that other goals will be met.
In case that it doesn’t happen, instead of rejecting directly the possibility of do a
first foreign investment, the company should redesign the project. Only if the
company cannot redesign the project, then the investment will be rejected.
- Our negotiations with the government of the target country must reach a
satisfactory conclusion. In case that the company doesn’t reach a satisfactory
conclusion, it is going to do the first foreign investment, only if they can continue
with negotiations and finally reach a satisfactory conclusion.
Variables that affect the choice of entry mode
Those are the variables that affect the FDI inflation
External variables:
Market factors of the target company:
- The present and projected size of the destination market
- Competition structure: atomistic vs oligopolistic vs monopolistic
- Availability and quality of local marketing infrastructure
Production factors of the target company:
- Quality, quantity and cost of raw materials, labour and energy
- Quality and cost of economic infrastructure (transport, communications, etc..)
Environment (context) factors of the target country:
- Government policies and regulations associated with international business
- Geographical distance
- Economy of the destination country
- Socio-cultural factors
- The influence of political risks
Factors associated with the company’s country
- Size
- Competitive structure
- Production costs
Internal variables
Product factors:
- Product differentiation
- Pre and post-sales service
- Technology-intensive products
Resource commitment
- High level of commitment means increased alternatives of entry methods
The level of internationalization
- Initial stage vs mature stage
Knowledge or ignorance of foreign markets

Entry modes of control levels, profit potential, commitment of resources and risk
Indirect exports: very low level of control and profit potential and very low
commitment of resources and risks
Licence: low level of control and profit potential and low commitment of resources and
risk
Sales subsidiary: medium level of control and profit potential and medium
commitment of resources and risk
Joint venture: high level of control and profit potential and high commitment of
resources and risk
Production subsidiary: very high level of control and profit potential and very high
commitment of resources and risks
Big chart topic 7 after the FDI slide
General political stability
- Past political conduct
- Forms of government
- Government ideology
- The ideologies of rival political groups
- Social and political conflict
Government policy in relation to foreign investment
- Past experience of foreign investors
- Attitude towards foreign investment
- The handling of foreign investment and other agreements
- Restrictions on foreign ownership
- Local content requirements
- Restrictions on foreign management and other that affect it
- Incentives for foreign investors
- Investment entry regulations
Other government policies and legal factors
- The application of contracts
- The functioning of the courts
- Corporate and business legislation
- Labour laws
- Taxes
- Import restrictions and tariffs
- Trademark and patent protection
- Anti-monopoly and restrictive practices legislation
- The efficiency and honesty of public administrators
The macroeconomic environment
- The role of the government in the economy
- GDP
- Population
- Per-capita income
- Personal income distribution
- Industrial sectors
- Transport and communications infrastructure
- Inflation rate
- The fiscal and monetary policy of the government
- Price control
- Local capital costs and availability
- Employer/employee relations
- Consumer associations
- The development of governmental plans and programmes
International payments
- Balance of payments
- Foreign exchange and national cost
- Repatriation restrictions
- Exchange rate fluctuations
MNE’s strategy (Topic 8)

Global strategy
The strategy is the action that managers take to attain the goals of a firm.
The purpose is to make profit and maximize it, to do that the company should increase
the price of its products. For that, the company has to differentiate its products by
adding value, features, improving quality and the service. The way to achieve it is
allocating the scarce resources to attain goals.

Global expansion benefits

- Earn greater return from distinctive skills, core competences: imitable or
difficult to imitate skills in value chain
- Achieve location economies: choice of FDI location and create multinational
network of activities (global web)
- Reduce the cost of value creation: learning, economies of scale

Global integration vs local responsiveness

MNEs face asymmetric forces:
- Pressures for the efficiency of global integration: concentrate configuration and
standardize coordination
- Pressures for the effectiveness of local responsiveness: disperse configuration
and adapt coordination.
MNE must strike some sort of balance

Pressure for global integration

Globalization of markets:
- Global buying patterns indicate that consumers worldwide seek global products
- Demand-pull conditions due to money’s intrinsic functions:
Difficult to acquire
Transient
Scarce
- Supply-push conditions: expanding trading network
Efficiency gains of standardization:
- Standardization via location, scale and learning capture
- Drives improving the efficiency of effort
- Charging lower prices
- Produce low-cost, high-quality products that differ little, if any, in features and
functionality
- Relies on customer value confidence

Pressures for local responsiveness

Divergent consumer behaviours: differences in local consumer preferences
- Cultural predisposition
- Historical legacy
- Endemic nationalism
Host-government policies
- Financial crisis spurs governments to strongly encourage MNEs to improve their
local responsiveness
When pressure interact? The Integration Responsiveness Grid
It relates the global and local pressures that influence on MNE’s strategy and it
positions an industry in the quadrant that represents its sensitivity to the dual
imperatives, what means that depending on the grade of the local responsiveness and
the global integration, the company should choose one or another strategy.
Why? Operating internationally requires:
- Configuring and coordinating operations
- Reconciling the competing demands of global integration and local responsiveness
How? The integration responsiveness interacts through adaptation or standardization
- Adaptation: strong pressures to respond locally but low pressures to integrate
globally
- Standardization: high pressure to integrate globally along with slight pressure for
local responsiveness

Types of strategy
1. International strategy: low local responsiveness pressures and low global
integration pressures (IR Grid positioning)
- Orientation: leverage core competencies and leverage home country
innovations into competitive positions abroad
- Value chain configuration: concentrated value activities directed from home
headquarters
- Value chain coordination: centralized coordination processes and parent
retains control of core competencies
- Key advantage: facilitates transfer of skills and expertise from parent to
subsidiaries
- Key disadvantage: centralizing at home weakens configuration efficiency and
coordination flexibility
- Examples: Kraft, google, P&G, Nucor, Harley Davidson, Baidu, Apple, Carrefour.

2. Global strategy: low local responsiveness pressures and high global integration
pressures (IR Grid positioning)
- Orientation: target universal needs or wants that support selling standardized
products worldwide and emphasize volume, cost minimization, and efficiency
- Value chain configuration: concentrated value chain configuration exploits
location economics
- Value chain coordination: industry pressures to max standardization and min
costs, and requires coordinating value activities operations from global
perspective
- Key advantage: low-cost, high quality products that differ little
- Key disadvantage: reduced learning opportunities due to standardization
- Examples: Toyota, Canon, Haier, Texas Instruments, Caterpillar, Cemex, Infosys,
Walmart, Huawei, LLVMH, American express, Nokia, Cisco.
3. Multidomestic strategy: high local responsiveness pressures and low global
integration pressures (IR Grid positioning)
- Orientation: differentiate products to respond to national differences
- Value chain configuration: dispersed subsidiaries command discretion to
adapt to local conditions
- Value chain coordination: subsidiaries operate quasi independently, and
autonomy lets then adapt activity to local marketplace
- Key advantage: reduced need for central support to manage local activities
- Key disadvantage: encourages “mini-me” phenomenon that replicates activities
across subsidiaries
- Examples: Unilever, Nestle, Heinz, The Body Shop, McDonald’s, etc…

4. Transnational strategy: high local responsiveness pressures and high global

integration pressures (IR Grid positioning)
- Orientation: simultaneously manage the tensions of global integration and local
differentiation, and leverage specialized knowledge and promote worldwide
learning
- Value chain configuration: concentrated to tap location economies, but also
dispersed because is subject to minimum efficiency standards, to meet local
preferences
- Value chain coordination: integration and responsiveness coordination
between headquarters and subsidiaries.
- Key advantage: supports efficiency, compels effectiveness, leverage learning
- Key disadvantage: difficult to configure, though to coordinate, prone to
performance shortfalls
- Examples: GE, Tata, Zara, IBM

Advantages and disadvantages of the different strategies

Strategy Advantages Disadvantages
Lack of local responsiveness
Inability to realize location
Transfer core competencies to
International economies
foreign markets
Failure to exploit experience curve
effects
Exploit experience curve effects
Global Lack of local responsiveness
Exploit location economies
Inability to realize location
economies
Customize product offerings and
Failure to exploit experience curve
Multidomestic marketing in accordance with local
effects
responsiveness
Failure to transfer core
competencies to foreign markets
Exploit experience curve effects
Exploit location economies
Customize product offerings and Difficult to implement due to
Transnational
marketing in accordance with local organizational problems
responsiveness
Reap benefits of global learning
Subsidiary strategy (Topic 9)

Foreign subsidiary
It is an organisational unit owned by a multinational company that carries out value-
added activity in a foreign country.
The French multinational Alstom has three business units with different headquarters:
- Alstom Transports
- Alstom Power
- Alstom Grid

Conditions of foreign direct investment

The Eclectic Paradigm: OLI Model ownership, location and internalization
Dunning develop this theory as a model of the foreign direct investment (FDI). This
theory says which are the factors that affect the company decision about foreign direct
investment.
Factors:
1. Possession of a competitive advantage (ownership)
- Ownership of technology or trademarks
- Ownership of organisational, marketing, management, production, R&D and
human capital capabilities
- Exclusive access to business, natural resources, financial and information factors
- Government protection
2. Internalisation of a competitive advantage (Internalisation)
- Savings in transaction and negotiation costs
- Avoidance or exploitation of government intervention via fees, taxes and price
control
- Control of factor supply
- Capture of synergies between interdependent activities
3. Localization of a competitive advantage (Location advantage)
- Spatial distribution of inputs and markets
- Costs of transport and communication
- Control of imports
- Distance: different languages, cultures, ways of doing business, customs, etc…
- Savings in R&D, production, marketing
- Infrastructure: sales, legal, transport and communications, etc…
= FDI (Foreign Direct Investment)

OLI framework issues

- MNE exists because if its possession of superior resources
- A strong statement of the RBV as applied to incumbents and the sustaining of
existing advantages
- OLI applies mainly to incumbent MNEs
- Firm can derive advantages by expanding abroad to access a resource that is
otherwise not available
LLL model (linkage, leverage and learning)
1. Linkage
- Partnerships and joint ventures seen by incumbents as sources of leakage of
proprietary assets and knowledge
- Partnerships and joint ventures seen by aspiring MNE as principal vehicles for
reducing the risks involved in international expansion.
- Reality of resources access as a motive
- Versus ownership
2. Leverage
- Links can be established with incumbents or partners so that resources can be
leveraged
- Focus towards resources and their leverage potential
- Versus internalization
3. Learning
- Repeated application of linkage and leverage processes may result in the firm
learning

Comparison between OLI and LLL models

Criterion OLI LLL

Resources accessed through
Resources utilized Proprietary resources
linkage with external firms
Locations established as part Locations tapped as part of
Geographic scope
of vertically integrated whole international network
Bias towards operations Bias towards operations
Make or buy? internalized across national created through external
borders linkage
Is achieved through repetition
Learning Not part of the OLI
of linkage and leverage
Process of No part of the OLI: MNE’s Proceeds incrementally
internationalization international reach assumed through linkage
Not part of the OLI:
Global integration sought as
Organization organization could be
latecomer advantage
multinational o transnational
Capturing of latecomer
Driving paradigm Transaction cost economics
advantages
Comparative static
Cumulative development
Time frame observations, comparing
process
one
point in time with another

Classification of subsidiaries and strategy

The difference between the subsidiary strategy and the strategic role of a subsidiary is
about the decision-making power of the subsidiary:
- Subsidiary with less decision-making power subsidiary with strategic role
- Subsidiary with high decision-making power subsidiary with strategy
Subsidiary types: White and Poynter (1984)
Marketing satellite (local subsidiary)
- Primary activities are marketing and logistics
- Sells products in its local market
- Carries end phases: product assembly, packaging, packing, after-sales, etc.
Miniature replica (local subsidiary)
- Local copy of the parent company
- High decision-making autonomy
- No interaction with other subsidiaries
- No interaction with the rest of the MNE units
- Result of a multi-domestic strategy
Rationalized manufacturer (integrated subsidiary)
- Manufactures components or products
- Does not have much decisions making power
- It does not market nor does it conduct research and development
- Under pressure to keep costs down
Product specialist
- Able to develop, produce and market a particular product line
- Usually self-sufficient
- Less decision-making power than the strategic independent subsidiary
Strategic independent (qualified subsidiary)
- Total independence to develop new lines of business
- Unlimited access to global markets
- Administrative and financial relations are its main link with the parent company

Subsidiary types: Bartlett and Ghoshal (1986)

Strategic leader (qualified subsidiary)
- Subsidiary with high internal capabilities located in a very important market
- Expertise to generate competitive advantage
- Can carry out projects with high strategic impact
Contributor (integrated subsidiary)
- Component but operates in markets of little importance
- Developing resources and capabilities outside its context
- Strong determination
Implementer (local subsidiary)
- Passive subsidiary with only the minimal resources and capabilities it needs to
continue its local operations in a non-strategic market
- Results from the rationalization of the internat. value chain of a multinational
- The parent company assigns a specific function to the subsidiary
- Its chances of autonomy and decision-making power are very limited
- Adopts the strategic role imposed by the parent company
Block hole
- Subsidiary is in a strategically important market but doesn’t have the capabilities
to take advantage of it
- A temporary position
- Main aim is to learn from environment and develop new capabilities that will
enable it to become a strategic leader
Subsidiary types: Jarillo and Martínez (1990)
Autonomous subsidiary
- Has a complete value chain in the foreign country
- Low degree of integration with the rest of the units of MNE
- Self-sufficient in resources and capabilities
- High decision-making power
- Limited to the local geographical area
- Typical of a multi-domestic strategy
- High degree of fragmentation of resources and capabilities
- Low degree of integration
Receptive subsidiary (integrated subsidiary)
- Specializes in few value chain activities
- Good interaction with rest of MNE
- Its scope of action goes beyond the local context of the subsidiary
- Typical of global strategic approach
- Low degree of fragmentation of resources and capabilities
- High degree of integration
Active subsidiary (qualified subsidiary)
- Widely available capabilities
- Strong integration with the rest of MNE
- High decision-making power
- Typical of MNE with a transnational strategic approach
- High degree of fragmentation of resources and capabilities
- High degree of integration

Subsidiary types: Taggart (1997)

Quiescent subsidiary (local subsidiary)
- Low level of local response
- Low degree of integration
- Intermediate phase in the evolution of a subsidiary
- Common in the early years of a subsidiary

Subsidiary development and evolution

Subsidiary evolution: accumulation or depletion in resources and capabilities over time
that determine and shape firm strategy or strategic role (Birkinshaw and Hood, 1998)
Factors influencing subsidiary evolution:
1. Assignment of strategic role by parent company, who can:
- Strengthen and promote the role of the foreign subsidiary within the group
with new direct investments that increase its resources and capabilities
- Weaken and demote the role of the foreign subsidiary within the group if there
are divestments and the relocation of resources.
2. Choice of subsidiary itself:
To influence subsidiary evolution, the local directors must demonstrate initiative, an
entrepreneurial approach and a proactive attitude.
3. Determinism of environment where subsidiary operates:
The activities of the subsidiary are influences by the nature of the local environment:
customers, competitors, suppliers and government.
Impact of culture (Topic 10)

The importance of cultures in MNEs

MNC differences:
- Structure design
- Relationship coordination (parent vs subsidiary)
- HR policies
- Strategic priorities
Culture as an organizational diversity tool

Cultural differences
Antecedents:
- Affect the relationship between parent company and subsidiaries
- Major factor in failure os strategic alliances
- Key for marketing strategies
- Influence the relationship between expatriates and local staff of subsidiaries
- Condition the viability of HR policies
- Determine organizational learning ability
Consequences:
How company integrates cultural differences will affect its competitive advantage

The concept of culture

It is the set of norms and values shared by a group determining how the group
individuals behave and interpret the behaviour of others.
Hofstede define culture as a process of collective programming, to the extent that we
perform our actions within the limits set for us by culture.

Features of culture
- General vs personal: culture is distinct from personality of individuals
- Social vs biological: culture is not genetically inherited, it results from sharing
experiences
- Perception vs reality: culture is a simplification of the reality. It guides us by
defining the limits of what is good and bad.
- Complexity vs simplicity: failure to understand certain behaviours if we do not
have a complete view of it
- Constant vs dynamic: culture remains relatively stable over time
- Taboos vs commonalities: each group has its own specific sensitive issues

Determinants of culture
- Climate: extreme (analytical skills) vs benign (social skills) weather
- Dominant religions: the values and beliefs intrinsic to religions are also transferred
to the societies in which they are introduced
- Work practices: the dominant production models in a society also influence its
culture. For example, the values of agricultural, industrial or service-based
societies.
- Language, dominant social, political, ideological and economic systems contribute
to shaping culture.
Cultural dimensions
- Nordic: Finland, Norway, Denmark and Sweden
- Germanic: Austria, Germany and Switzerland
- Anglo-Saxon: Australia, United States, Canada, New Zealand, United Kingdom,
Ireland and South Africa
- Latin European: France, Belgium, Spain, Portugal and Italy
- Latin America: Argentina, Venezuela, Chile, Mexico, Peru and Colombia
- Far east: Malaysia, Hong Kong, Philippines, Taiwan, Vietnam, Indonesia, Thailand
and Singapore
- Arab: Bahrain, Abu Dhabi, UAE, Kuwait, Saudi Arabia and Oman
- Middle East: Turkey, Iran and Greece
- Independent: Brazil, Japan, India and Israel
Each area includes the countries that are culturally closest to one another
Adjacent areas also indicate a degree of proximity between countries.

Power distance
It tells us how the members of a society view difference in power and status
High power distance:
- Differences in power and status are high and accepted by both superiors and
their subordinates
- Superiors tend to exert an autocratic and paternalistic leadership
- Superiors closely supervises subordinate activities
- High degree of stratification in organizational structures, with lots of
hierarchical levels
- Importance is attached to each person’s position in the structure managers
expect to negotiate with people having the same rank
- Countries: Latin American countries, Russia, China and some countries in Asia
and Eastern Europe.
Low power distance:
- These structures tent to very flat
- Countries: Anglo-Saxon and Northern European countries

Uncertainty Avoidance (UA)

- It measures our degree of insecurity in relation to the unknown or what is to come
- For high UA, anything new, unknown or uncertain is regarded with suspicion, as
though it were a threat
- Preference to consult with specialists on the subject than staff
- Countries with a high UA are more conservative and always try to keep risk under
control
- Formalization is favoured as a mechanism of coordination
- Establishing stable relationship over time with their suppliers, customers and
other economic agents
- Lifelong employment is common practice
- Company loyalty is considered a virtue
- Low staff mobility
- Problems when recruiting expatriates
Assertiveness (masculinity)
- It is the extent to which individuals act with determination and a clear focus on
success and achieving goals
- It attaches value to power, money and material things, anything that can be used
to measure what a person can achieve by acting competitively
- Highest dimension values represent masculine cultures, lower values represent
feminine ones.
- Feminine cultures place more value on quality of life, good working environment
and sharing tasks
- Masculine societies prominent feature: the separation of tasks between genders.
- Countries with low assertiveness: Northern Europe, Latin America, Arab and
Germanic countries
- Countries with high assertiveness: Anglo-Saxon and Asian countries

Individualism - collectivism
The individualism dimension measures the degree to which people identify only with
their own interests and, at most, those of their most immediate family.
- Individualistic people plan their actions, they act independently and, in all
events, involve few people in their decisions
- The higher the index of individualism, the more responsible a person is
considered to be for his/her actions; by comparison
- Staff motivation and remuneration policies must be based on the person rather
than the team
- Countries: Northern Europe and Anglo-Saxon countries
The collectivism indicates that the interests of the individual converge with those of a
larger group or community with which the latter identifies completely.
- In collective societies, responsibilities and initiatives are distributed among the
group
- Promotions made on personal merit rather than seniority, as is the case in
more collective societies
- Countries: Arab, Latin American and Asian countries
Intimacy (privacy) vs togetherness (publicness)

Short/long- term orientation

It is about the time perspective according to which we orient our actions
Short-term orientation:
- Immediate result decisions given the highest consideration
- Value attached to spontaneity and ability to enjoy the moment
- Increased dependence on others
- Countries: Latin American, Eastern Europe and the Middle East
Long-term orientation:
- Thinking about the future consequences of actions
- Increasing capacity for self-control
- Can lead to neglect current social and personal relations
- Countries: Anglo-Saxon, Germanic countries, Northern Europe and Asia.
 Performance or relationship orientation
It is the extent to which the most important aspect of an issue in certain cultures is the
business or the people involved
Performance-oriented there is a clear line between commercial or business
relationship and the personal lives of the individuals.
It is easier to establish business relations in a performance-oriented than in relationship-
oriented cultures because:
- No need to have consolidated a relationship beforehand
- Willingness to connect with strangers
- Using clear and direct language
Having contracts and trusting the other party is a prerequisite in relationship-oriented
cultures.
Performance-orientation countries: Northern Europe, Germanic and Anglo-Saxon.
Relationship-orientation countries: Arab countries, Latin American and most of Africa.

Time consideration
Monochronic:
- Cultures in which people are constantly watching the clock
- Tendency to concentrate on what we are doing, so we don’t usually do more
than one thing at a time
- Punctually is very important
Polychronic:
- Cultures, in which things are much more relaxed in this sense
- Work and meetings can be constantly interrupted by other activities, which
overlap and converge.

Expressivity
High expressive cultures
- Verbal communication is accompanied by numerous gestures
- Tone of voice is usually high
- High vocal pitch used to draw attention
- Silence is a sign of alarm and caution
- Low interpersonal distance
- High eye contact
- Countries: Arab countries, Latin Europe and Latin America
Low expressive (reserved) cultures
- Voice tone is moderate
- High vocal pitch interpreted as aggression
- Silence accepted as a natural phenomenon
- High interpersonal distance
- Low eye contact
- Countries: Northern Europe, Southeast Asia and Germanic countries
Universalism – particularism
Universalism tells how fare a society is governed by rules and how widely they are
accepted.
- In this societies the norms and the obligations act as a moral benchmark
- Countries: Northern Europe, Germanic and Anglo-Saxon countries
Particularism tells that private circumstances are considered more important than rules.
- Personal relationships (family, friends, etc.) are stronger than any abstract rule
- Countries: Southeast Asia, China and Russia

Specificity- Holism
Specific cultures:
- Tendency to analye facts in isolation
- People considerations on a particular issue will be limited to this issue
- Things are not taken personally
- Specifying every aspect involved in the negotiation
- Countries; Southeast Asia and most Latin American countries
Holistic cultures:
- Things are analysed in a more global way
- Relationships are much more diffuse and go beyond the specific
- Countries: Anglo-Saxon countries, China and Japan

Culture and local business practices

Globalisation has transmitted a Western view of the world
Emerging countries like the BRICs are playing a greater role on the international stage
The link between all these systems is the distance between their vision and that of
Western individualism
a) Guanxi (Chinese): it is a system of interpersonal relations that is developed
essentially through networks. The ingredient that keeps guanxi going is the
exchange of favours, what leads to the development of mutual obligations between
members of the network. In these networks, the status of the individuals is
considered very important
b) Sharia (Islam): it is a law that regulates many aspects of life for the followers of this
religion (Islam). The Koran (sacred book of Islam) forbid different activities
c) Dharma (Hindu): it is a concept that puts the individual at the centre of the
universe. Individuals are responsible for their own actions and the consequences of
these. The Hindu vision is far more holistic than the Western one and involves
the feeling of belonging to a group. Dharma is based on the notion of obligation or
responsibility. It, in public business, is based on public good, efficacy, innovation and
learning.
d) Blat (Russian): it is a system of interpersonal relationships that holds certain
parallels with guanxi, although it doesn’t enjoy such widespread social legitimacy. It
entails the use of personal networks to access resources or perks in exchange for
gifts, money or other favours. For blat, the benefits obtained are at the expense of
others.
e) Ubuntu (African): considers the company as a community, not as a sum of
individuals. The role of the company is to reward the communities to which it
belongs. The values that inspire the philosophy are respect, humanity, compassion
and care of others.
International Human Resource Management (Topic 11)

Design of IHRM policy

HRM aspects of MNE
- Greater range of HRM activities
- Occupational profiles more diverse
- Closer interrelations required between careers and personal lives of staff
- Interaction with external organisations fosters diversity

Options in IHRM
Key strategic decision: choosing between expatriates or local managers to look after
foreign operations

Expatriates:
A professional temporarily posted to a country other than the home country to
perform a task. They are necessary when the company has difficulties in recruiting staff
in the host country, or when the local environment is volatile, or when the company
want to achieve a wide cultural gap.
Assignments
- Traditional expatriation (1-5 years)
- Short- or medium- term expatriation (less than 1 year)
- Permanent expatriation
- International commuters
- Cross-border managers or technicians
- Different forms of mobility: international training, exchanges, creation of
virtual working networks, international trainees, etc.
Types:
- Parent country nationals
- Third country nationals

Local manager:
A professional holding a position of responsibility in a foreign subsidiary and is of the
same nationality as the country in which the subsidiary is located. They are the
alternative to using expatriates. Usually the MNE pursues a multidomestic strategy
Advantages:
- Wages are lower than expatriates
- Extra expatriates’ costs do not apply
Disadvantages:
- Cultural gap
- Information bias
- Supervision issues
- Career advancement issues
IHRM approaches
1. Polycentric approach
MNE adopting a multidomestic strategy
Advantages:
- Homogenous culture not developed throughout the MNE
- MNE adopts the culture of each country in which it operates
- MNE identify is the addition of the different cultures of the countries in which it
operates
- It is used when MNE operates under strong localising or fragmenting pressures
that make the competitive conditions different in each country
Disadvantages:
- Differences in consumer tastes and need, for example, food and cultural
products
- High transport costs relative to product price, what require production facilities
to be located close to consumers
- Local government demands, which may be more restrictive in sectors
considered strategic for the country

2. Ethnocentric approach
MNE adopting a global strategy
Requirements:
- Economies of scale
- “Single market” viewpoint of the world
- Competitors/costumers are also MNEs
- Similar consumer tastes and needs in the different countries
- Lower trade barriers
Issues:
- Need to maintain a high degree of centralization in decision making
- Need for a uniform treatment of foreign operations
- Risk of excessive ethnocentrism due to centralization

3. Geocentric approach
MNE adopting a transnational strategy
Characteristics:
- Not built around the perspective of a particular country
- Aim is to create a shared mindset based on plurality making it truly
international and unbiased
- The geocentric mindset is part of the philosophy of the transnational strategic
approach
- The role of expatriates is essential for developing a common culture, but the
nationality of the manager is no longer important
- The basic mechanism of coordination is socialization
Expatriation types:

Parent country nationals (PCN)

- Considered “inside staff”
- Incorporate MNE mission and vision
- Widespread use even when not necessary
Pros:
- Allows MNE to obtain staff with international training
- Enables acquisition and sharing of knowledge
- Fosters spread of MNE culture
- Facilitates coordination between different units
- Ensures subsidiary strategy aligns with headquarters
Cons:
- Salary costs
- Expatriation costs
- Ethnocentric attitude of PCNs
- Demotivating for local staff

Third country nationals (TCN)

- Can operate as substitutes or “doubles” of local staff or PCNs when is difficult to
recruit local managers or when MNE uses the polycentric approach.
- It is used less as substitutes and more as the first choice for businesses with
geocentric approach.
Pros:
- Interpret local conditions better than PCNs
- Salary costs are usually lower than those of PCNs
- Can be a tool for building and spreading a geocentric culture
- Effective for coordination and control
Cons:
- Local authorities consider them foreign staff what leads to issues concerning
processing of work/residence permits
- Potential conflict between the two countries and so, there are situations where
professionals from both countries cannot work together.
- When TCNs complete the assignment, they can take the decision to leave the
company, but may they wish to stay in the cost country.

Trends in expatriation
- Around 3000 expat professionals from Spanish MNEs
- China could have more than 180000 expatriates
- TCNs are becoming widespread more than half of the total expatriates
- The traditional expatriate profile: male aged around forty from the company’s
home country posted to a management position for a period of four to five years.
- Traditionally expatriate managers had the task of focusing on a particular country
or culture, but currently expatriate managers must be able to adapt and work with
different cultures.
Personal profile of expatriates
Age:
- Largest group of expatriates is 40 to 49 years old, counting for around 40% of the
total. It combined with the 30-39 age bracket, together they represent almost 75%
of the total. Expatriates under 30 years old only 10%
Gender:
- Generally, 20% women, but in Northern Europe 40% of expats are women
- Expatriation is an obstacle to both partners maintaining their careers
- Around 80% of expatriate have partners and the 80% of expatriates are
accompanied by their partner or their international assignment

Length of expatriation
- Assignment of under one year represent just 1/5 of the total
- 50% all international assignments are 2-4 years
- About 6% are considered permanent
- About 33% of international assignments take longer than expected because the
initial project is extended or because there is not replacement to carry on the
work of the expatriate.

Reasons for accepting or rejecting expatriation

Acceptance:
- Career plans
- Workforce results
Rejection:
- Family reasons in 80% of cases mostly because the concern for partner’s career
- Career aspirations
- Salary or quality of life in the host country

The expatriation process:

Staff are assigned to international destinations in a similar process to that used to fill
domestic positions
1. Recruitment and selection of expatriates
Expatriates candidates must have the necessary technical skills and ability to carry
out the task effectively
Successful expat candidate abilities:
- Cultural awareness, detect and adapt to differences, avoiding ethnocentrism
- Ability to form and lead multicultural teams
- Fluency in foreign languages
- Resilience and resistance in the face of adverse situations
- Strong motivation
- Ability to strike an adequate balance between work and personal life
Recruiting expatriates
- Externally: it is done directly or through specialised companies (<10%)
- Internally: training young staff to learn about the company, or hiring experts in
a particular destination, or strengthen links between MNE units and facilitates
coordination and control.
2. Training for expatriation
Training is the tool by which personnel can acquire and develop the necessary
knowledge and skills to carry out their expatriate work.
- Technical training: improve the skills for a specific job performed by the
professional
- Intercultural training: correct interpretation of the behaviour of people from
other cultures preventing potential conflicts
The cross-cultural training model:
- Informative approach: the length of expatriation is 1 month or less, the
duration of training is less than one week, and the degree of rigour is low. In
this approach take place briefings, cultural meetings, film, videos, books,
artists, and is necessary only a survival vocabulary.
- Affective approach: the length of expatriation is between 2 months to 1 year,
so the duration of training is between 1 to 4 weeks and the degree of rigour is
medium. In this approach expat trains in cultural assimilation, role play, critical
incidents, case studies, stress reduction, and it requires a moderate language
learning.
- Immersion approach: the length of expatriation is between 1 to 3 years, so the
training duration is 1 to 2 months and the degree of rigour is high. In this
approach expat goes to an assessment centre, field experiments, do
simulations, do a sensitivity training, and is required and advances language
training

Expatriate compensation systems

The compensation policy goals:
- Serve as a tool to attract and retain staff in priority areas
- Facilitate cost-effective transfer of expatriates
- Allow expatriates to maintain lifestyle and economic status while on duty
- Facilitate adaptation to the differences of the new environment
- Deal fairly and consistently with all categories of international employees
- Be consistent with the overall strategy and business needs of the MNE
- Facilitate the end of the assignment and the return home
Home country policy:
- Salary based on structure of home country of the expatriate
- Issues: difference with local managers, sustainability of payment packages across
countries
Host country policy:
- Expatriate regarded as a member of the local staff
- Subject to the same pay system as the rest of the employees of the subsidiary
- Issues: expatriates return home
Hybrid policy:
- Mixed features of home/host policies
Regional policy:
- Groups countries of a region together and considers them as one
Expatriate’s wage complemented by extras: allowances, insurance and taxation
treatment:
- Allowances and premiums are extra payments to offset difference in spending
between the home and the host countries
 - Premium types:
Relocation premium compensation for being posted abroad (10%-40% of wage)
Cost of living allowance considers differences in home-host country standards
Housing allowance company takes care of the expatriate housing
Hardship premium related to risk and difficulties associated with host country
Travel allowance covering costs two annual trips by expatriate and family to
home country
Other extras car, return, trip, dual career.
- Insurance:
Social protection systems vary in different countries
Expatriate retires in the home country
Contributes to social security systems of host country obligation
- Taxation:
Laissez faire expatriate in charge of all taxation duties
Adhoc strategy MNE with a small group of expatriates tend to apply a tailored
treatment to each case
Tax protection MNE pays extra tax if host country obligations are higher than
home country
Tax equalization expatriate pays same tax for base salary earned in home
country

Expatriate failure and repatriation

- Selection and training issues
- Family adaptation issues: it means that half of all failures have their roots in
domestic problems
- Failure rate of expatriation (early return) can reach 30%
Practices to reduce failure rate of expatriation
- Offering possibilities to reconcile expatriate’s career with that of partner
- Agreement with local company to offer a position to partner in host country
- Providing a job in the same MNE in host country
- Job-seeking support to partner in host country
- Training for partner to find a job in host country
- Planning the expatriation process
- Keeping expatriates informed about events at home
- Offering training after return home

The expatriation cycle:

The acculturation curve
Life for expatriates
- Being able to adapt to different cultural environments
- Gives individuals a more open mind
- Makes them more flexible and dynamic
- Gives them skills that are increasingly valuable

Third country kids (TCKs)

They are the children of expatriates, and they accompany their parents to
international destinations.
They are also called cross-cultural kids, and those children and young under 18 who
have spent a significant part of their childhood in a culture distinct from their parents’
home culture. They are people with extraordinary intercultural skills, making them
more observant, flexible and tolerant.
Advantages:
- Never assume their way is the best
- Their experience in diversity leads them to accept people as they are regardless of
race or nationality
- Willing to think alternatively, appreciating and reconciling different habits and beliefs
- Multilingual, active people, free from ethnocentrism
- Accustomed to moving, with a great ability to cross cultural barriers
Disadvantages:
- Suffer from varying degrees of uprooting
- Although they can connect deeply with very diverse people and paces, they also feel
distant from them
- Difficulties to create string bonds with other or identifying themselves with any
culture in particular
- The idea of commitment or intimacy generate a certain uncertainty in them.

Internationalization of SMEs (Topic 12)

Introduction
SMEs have specific characteristics that are likely to influence their foreign market entry
mode choice:
- Limited financial and personnel resources
- High level of sensitivity to external influences
- Ownership structure and management characteristics: family-owned firms
often less willing to share control with a partner, for example in an equity joint
venture.
SMEs are less prone to choose higher-commitment entry modes, except the SMEs with
prior international experience

Commitment, risk and control

Commitment: some entry modes require a large commitment of resources to the host
country, while others allow resources commitments to be shared among partners
Risk: the more resources committed, the greater the risk of losing them if foreign market
engagement fails
Control: it is determined by responsibility level for operational and strategic decision-
making in the foreign market
Characteristics of SMEs
Three of SMEs characteristics have direct relationships with resource commitment, risk
and control:
- SMEs are at a resource disadvantage compared to large MNEs resource scarcity
limits smaller firms’ ability to reach more advanced and committed stages of
internationalization.
- SMEs are highly sensitive to external challenges it makes SMEs difficult to find an
entry mode to deal with host country risks.
- SMEs vary from other types of firms in terms of theory ownership structure
personal dispositions determine the extent to which decision-makers perceive that
they can control internationalization.

Theoretical frameworks
Transaction cost economics (TCE)
- Companies choose a certain organizational structure to minimize controlling and
monitoring costs
- TCE draws on three main causes:
Asset specificity
Uncertainty
Frequency creating market transaction and control costs
- SME foreign market entry mode choice depends on degree of the foreign
investment’s asset specificity
- Impact of international experience as a mechanism allowing to reduce the internal
uncertainty that firm’s foreign market entry mode choice
- High-commitment entry modes allow SMEs to obtain control over activities in host
country.

Eclectic paradigm (OLI)

It combines insights from resource-based, institutional and transaction cost theories.
Firms choose entry mode by considering advantages as they relate to three factors
that make up the OLI framework: ownership, location and internalization.
- Ownership advantages are firm-specific competitive advantages (resource-based
view), which must be unique and sustainable.
- Location advantages are country-specific (institutional theory) advantages of the
international market
- Internalization (transaction cost theory) advantages are the benefits a firm
obtains by choosing a high-commitment entry mode rather than internationalizing
through partnership arrangements.
OLI framework and SMEs
SMEs can internalize host country related risks and contingencies by means of high-
commitment entry modes
SMEs perceptions about host country’s risk significantly influences their entry mode
choice
The level of ownership and locational advantages enhance SMEs’ propensity to choose
entry modes with higher levels of commitment.
Institutional theory
It suggests that country’s institutional environment affects a firm’s scope of action
because the environment reflects the “rules of the game” according to which firms
must behave.
New institutionalism distinguishes between formal and informal institutions
- Informal institutions contain primarily patterns of behaviour in a certain culture.
- Formal institutions are determined in political rules or legal decisions.

New institutional theory

It suggests that country’s institutional environment consists of regulatory, cognitive and
normative dimensions
- Regulatory: implies rules and laws responsible for society’s stability
- Cognitive: refers to cognitive structures in society that are taken for granted
- Normative: encompasses society’s social values, culture and norms
A firm entering a foreign market strives for legitimacy and acceptance by conforming
with host country conditions and expectations

Institutional theory and SMEs

- Challenges arising from host country context stress firm’s resources base,
impacting SMEs’ foreign market entry mode
- Foreign market entry mode varies from MNEs when SME is exposed to high levels
of risk in the foreign market
- High-commitment entry modes like acquisitions and greenfield investments
improve SMEs ability to deal with institutional challenges that arise in the host
country
- One way to deal with institutional challenges is to diversify risk by operating in
multiple markets
Social capability/network theory
- It refers to firm’s ability to acquire and exploit resources from business netwroks
- Entry mode choice is contingent on network relationships, rather tha solely on
firm-specific advantages
- By means of network relationships opportunistic behaviour is controlled and
minimized
- Social capital helps reduce external uncertainties associated with contractual
hazards: social ties re based on trust
- Social capital reduces barriers to internationalization: network relationship helps
the firm “to establish the right to do business in the new market”

Social networks and SMEs

Social networks allow SMEs to:
- Substitute theory own lack of resources with network partners’ resources
- Enable SMEs to commit more strongly to host country via entry mode
SMEs can employ social capital to:
- Learn about conditions in host country
- Overcome challenges that can arise in the foreign market
- Make higher-level commitments abroad
Contextual dimensions
Home markets
Those consists of an opportunity set determined by:
- Production factors: country’s physical infrastructure, labour quality…
- Institutions: credibility and effectiveness of country’s bureaucratic
infrastructure Since firms seek to capture profitable opportunities, foreign entry mode
is contingent on home country environment
SME internationalization depends on the extent to which an SME’s home market is a
source for additional resources.
Host markets
The host countries determine:
- The formal (political risks) institutional context with which a firm must deal in a
foreign country
- The informal (culture) institutional context with which a firm must deal in a foreign
country
- These conditions may affect SME foreign market entry mode
Psychic distance
- It is the sum of factors preventing the flow of information to and from the market
- Emphasizes the extent to which environment differences (culture, language,
geographic distance) between home and host countries inhibit information flow
and create barriers to learning
- Role of psychic distance in terms of cultural distance, geographic distance, or both
and their effect on SME foreign market entry mode choice
- SMEs tend to prefer lower-commitment entry modes (licensing) when psychic
distance is high to reduce risks and avoid resource losses in case of failure.
Industry
It defines characteristics that shape the competitive strategy of a group of firms that
produces products that are close substitutes for each other
The industry in which a firm operates determines:
- Degree of competition
- Necessity for innovation
- Product characteristics
SME foreign market entry mode depends on firm’s industry the behaviour of the
manufacturing firm is choosing how to enter foreign markets may not be fully
applicable to service firms.
Firm age
- Critical contextual dimension in SME foreign market entry mode
- Focus on SMEs that internationalize early or even nearly from their inception firms
internationalizing right from or shortly after their birth are often called “born
globals” or international new ventures and are distinguished from SMEs that follow
a slower internationalization.
- Not all SMEs are young firms, while the majority of young independent firms
internationalizing are SMEs
- Firms that internationalize nearly from inception suffer from liabilities of newness
- Early and rapidly internationalizing firms enjoy some learning advantages of
newness identify, value, select, and assimilate new knowledge faster than older
companies.
SME internationalization
- Small size usually considered a problem in internationalization
- Number of small firms operating in international markets has been increasing
- Currently, SMEs represent the majority of firms in most countries
- SME decisions regarding the internationalization process pertains to foreign
market on SME chooses to conduct business in aka international market selection
(IMS) and to modes used to do so aka entry mode selection (EMS).

International Market Selection (IMS)

Two major traditional approaches to IMS:
- A systematic approach – use a formalized decision process to analyse the
potential of target markets
- A non-systematic approach: entry decisions made by “non-rational” reasons
that defy the optimizing logic of the market
SME have not developed successful administrative policies and procedures
SME have an inclination towards adopting opportunistic rather than systematic strategic
decisions
Common SME features:
- Lack of important resources
- Lack of international experience

Entry mode selection (EMS)

SME have a passive behaviour during EMS
Entry methods are not actively chosen by SMEs, but consequence of:
- agreements with foreign partners
- fulfilment of an unsolicited order
however, there are SMEs exhibiting an active EMS:
- carrying out a systematic comparison of alternative entry models
- analysing many factors prior to making a decision

Benefits of SMEs internationalization

- Globalization of world economy
- Strengthening of global multilateral trading system
- Reduction and elimination of tariff and nontariff measures
- Development of information and communication channels
- Global financial deregulation
- Shorter product lifecycle

Born Globals (Topic 13)

Introduction
- Firms that undertake international business from an early stage in their
development are emerging in significant numbers worldwide.
- Referred to as “born globals”, international new ventures (INVs) and global start-
ups, they have increased due to world interconnectivity
 - The born globals are business organizations that from inception, seek to derive
significant competitive advantages from the use of resources and the sale of
outputs in multiple countries.
- In 2016 the European Union estimated that some 20 percent of new enterprises in
Europe are BGs.

New vs old MNE

The new MNEs of the 1980 and 90s aimed at becoming world leaders in their respective
industries, not just marginal players. They don’t come only from emerging countries.

Dimension NEW MNEs OLD MNEs

Speed of
Accelerated Gradual
internalization
Weak: upgrading of Strong: required resources
Competitive advantage
resources required available in-house
Strong: firms used to
Weak: firms used to stable
Political capabilities unstable political
political environments
environments
Dual path: entry into
developing countries for
Single path: from less to
Expansion path market access and developed
more distant countries
countries for resources
upgrading
External growth: alliances,
Internal growth: wholly
Preferred entry modes joint ventures and
owned subsidiaries
acquisitions
High: because of their recent Low: because if their
Organizational
and relatively limited ingrained structure and
adaptability
international presence culture

Motivations of born globals

- The market in BG’s home country is not large enough to support the scale at which
the BG needs to operate
- Most of BG potential customers are foreign, multinational companies
- Many of BG’s potential customers have overseas operations where they will use
BG’s products or services
- BGs operate in a knowledge-intensive or high-technology sector
- Having the most technically advanced offering in the world is key to BG’s
competitive advantage.
- BG’s product or service category faces few trade barriers.
- BG’s product or service has high value relative to its transportation and other
logistics costs.
- Customer needs and tastes are fairly standards across BG’s potential country-
markets.
- BG’s product or service has significant first mover advantages or network effects.
- BG’s major competitors have already internationalized or will do soon
- BGs have key managers who are experienced in international business.
Environment/context for BGs
Domestic and foreign market:
- Level of economic development
- Risk/uncertainity
- Size and growth rate
- Economic conditions/dynamism
- Institutions/political/legal
- Culture/psychic distance
- Presence of opportunities
- Competitive intensity
General environment
- Globalization
- Technology

Resources of BGs
- Monopolistic advantages
- Knowledge/market knowledge
- Capital
- Top management characteristics
- Human resources
- Legitimacy
- Social capital
- Networks/alliances
- Networking/partnering
- Products
- Digital technologies
- International experience
- Channel effectiveness
- Government support

Capabilities/dynamic capabilities
- Managerial vision/commitment
- Managerial competence
- Knowledge competence
- Learning orientation/capability
- Innovativeness/technological competence
- Absorptive capacity
- International growth orientation
- International business competence
- International entrepreneurial orientation
- Proactiveness and aggressiveness
- Risk-taking proclivity or tolerance
- Flexibility/adaptability
- Market orientation
- Marketing competence
- Networking/collaboration competence
- Internal processes
Strategies of BGs
- Internationalization/entry strategies
- R&D intensity
- Strategic orientation
- Generic strategies
- Niche market strategy
- Integration/responsiveness
- First mover/pioneer
- Follower/imitation
- Product standardization
- Marketing communications
- Distribution
- Service/support
- Digitalization
- Servitization

Characteristics of BGs
- Industry, size, structure, age, age at internationalization and performance
objectives
- Technology adaptation: adaptation of available technology to small-scale
product markets, cheap labour, and/or imperfect input markets
- Early adaptation of new technology: implementation of new technology
developed by someone else
- Reverse innovation: make the most out scarce resources
- Ethnic branding: consumer brands with appeal to immigrant home-country
communities abroad
- Efficient production and project execution: ability to absorb technology,
combine resources and innovate
- Product innovation: incremental product improvements; specialized products
for market niches
- Institutional entrepreneurial ability: skills or know-how needed to operate in
the peculiar institutional conditions
- Expertise in the management of acquisitions: experience gained in the home
country in the management of M&As and corporate restructuring
- Networking skills: ability to develop networks of cooperative relationships
- Political know-how: advantage in dealing with host governments and with
political risk in less developed countries.

General phenomena
- Early and rapid internationalization
- Liabilities of newness and foreignness
- Opportunity creation
- Opportunities discovery
- Opportunities exploitation
- Social responsibility/sustainability
Learning from born globals
- Action should take precedence over strategy: companies need to experiment and
to adapt incrementally rather than wait for the “perfect” strategy to arrive
(Bimbo).
- Niche thinking: companies must follow the path of least resistance into foreign
markets (niche). Later they can use that niche as a platform or beachhead for
mounting an assault on the mainstream of the market (Haier).
- Building up scale fast: pre-empt competitors, attract price-sensitive customers,
and build up market share (Samsung Electronics).
- The ability to embrace chaos: building networks of local partners to minimize risk
and maximize adaptation (Acer)
- Smart acquisitions: buying assets that complement its existing capabilities and
doing so at the right time and with a clear integration strategy
- Expand with abandon: if a company waits to make a foreign move until it is ready,
then it is too late. Foreign expansion cannot be planned day by day.
- Abandon the sacred principles: what brought them success in the past cannot
became a hindrance for pursing the new opportunities.