IB Foreign Direct Investment (FDI) PDF

Foreign direct investment (FDI) is investment in, controlling, and managing value-added activities in other countries. By establishing FDI abroad, companies become MNEs. Foreign portfolio investment (FPI) are investments in a portfolio of foreign securities such as stocks and bonds. The main differe...

Foreign direct investment (FDI) is investment in, controlling, and managing value-added activities in other countries. By establishing FDI abroad, companies become MNEs. Foreign portfolio investment (FPI) are investments in a portfolio of foreign securities such as stocks and bonds. The main difference between FDI and FPI is the keyword "direct." Direct means the direct management of foreign assets/ having a controlling stake in the company, which was defined as having an equity stake of 10% of the company. Hence, FDI includes joint ventures, which are operations with shared ownership by several domestic or foreign companies. There are various forms of FDI that are existing. Horizontal FDI: FDI that creates operations abroad at the same position in the value chain as the operation in the home country. Vertical FDI: FDI in operations in different stages of the value chain, upstream or downstream. Upstream vertical FDI happens in an upstream stage of the value. Downstream vertical FDI happens in a downstream stage of the value chain in two different countries. There are two approaches to measure FDI: by flow and by stock. FDI flow: The amount of FDI moving in a given period (usually a year) in a certain direction. FDI stock: The total value of inbound FDI in a country or outbound FDI from a country operating at a given point in time. Theoretically, this corresponds to the accumulation of FDI flows over time. 6.2 OLI Paradigm 2 3 OLl paradigm: A theoretical framework positing that ownership (O), location (L), and internalization (1) advantages combine to induce fims to engage in FDI. → it conditions are met, fol is the best Ownership advantages oy to engage in foreign investments What does the firm own that allows it to overcome its liability of foreignness when competing with local firms in their country? Liability of foreignness: The inherent disadvantage a firm faces when competing with local firms in a foreign country. This liability of foreignness arises from several sources, including firms' lack of local knowledge and networks and from various institutions, such as government regulations and media scrutiny, which tend to favor local firms over foreign firms. These capabilities are difficult to transfer across borders-location-bound resources. For firms to compete abroad, they need to possess ownership advantages (O-advantages), defined as resources of the firm that are transferable across borders and that enable the firm to attain competitive advantages abroad. Examples of Ownership advantages: Operation manuals, codes of conduct, organizational norms and practices, technology, managerial know-how, and network of suppliers. The most famous MNEs from Europe and North America tend to have O-advantages grounded in technology and brands, while others may have O-advantages grounded in their operations, their networks, or their ability to manage in certain business environments. Locational advantages What does the host location have to offer that allows the firm to create more value than it would by purely operating in its home country? - Locational advantage (L-advantage): An advantage enjoyed by firms operating in certain locations. Three forms of location-specific advantages are markets, resource endowments, and institutions. - Markets Reasons encourage firms to set up operations close to their markets: 1. Protectionism - MNEs want to avoid tariffs and non-tariff barriers that may inhibit exports. 2. Transportation costs - MNEs want to reduce transport costs over long distances, especially when products are perishable, breakable, and heavy. 3. Direct interaction with the customer - is especially important in industries where associated services such as just-in-time delivery or after-sales services are an essential part of the product offering. 4. The production and sale of some services cannot be physically separated - for example, hotels, banking, and consultancy. 5. Marketing assets: FDI enables MNEs to acquire local firms that control sought-after assets, such as distribution networks and brand names. - Resources 2. Natural resources: Oil, gas, and mining deposits in certain locations. Agglomerations provide access to complementary resources in several ways: (1) knowledge spillovers, (2) specialized workforces, and (3) specialized buyers and suppliers. a. Example: wind energy industry in Denmark, tech companies clustering in Silicon Valley, financial services clustering in London - 4. Institutions: The institutional environment can also be an L-advantage or a locational disadvantage. Example: Incentive schemes to attract FDI (e.g. Hungary) Internalization advantages What advantages does the firm get from directly owning the operation abroad rather than relying on contracts and markets as a means of exchange? Internalization advantages (I-advantages): Advantages of organizing activities within a multinational firm rather than using a market transaction. Transaction costs arise first from transaction-related activities, such as searching for partners, monitoring product quality and enforcing contracts. High transaction costs can result in market failure - imperfections of the market mechanisms that make some transactions prohibitively costly and sometimes prevent transactions from taking place. Differences between countries tend to increase both the costs of markets and the costs of internal coordination. Yet, often, the impact on markets is larger, thus making internal organization in an MNE more attractive. Internalization enables MNEs to overcome market failure through three types of decisions: (1) FDI versus exporting, (2) FDI versus contracting, and (3) FDI versus outsourcing. - FDi US EXPORTiNG - FDi V/S CONTRACTING FDI vs Exporting - Asset specificity: An investment that is specific to a business relationship. - FDI U/S OUTSOURCING FDI overcomes market failure that originates from the interdependence of firms based on asset specificity that could be exploited opportunistically by one of the participants through internalization. By replacing an external market relationship with a single organization spanning both countries, the MNE thus reduces cross-border transaction costs and increases efficiencies. Example: Engaging in vertical FDI by owning the subsidiary (organizing everything in-house, so no incentive for opportunistic behavior) FDI essentially transforms the international trade between two independent firms in two countries into intra-firm trade between two subsidiaries in two countries controlled by the same MNE. The MNE is, therefore, able to coordinate cross-border activities better, which is an internationalization advantage. However, in some industries, such as tin, where no such specific investments are required, firms are less likely to integrate vertically. FDI vs contracting (licensing) - Licensing: A contract by which a firm allows another firm to use its intellectual property rights in return for a fee. Franchising: A contract by which a firm allows another firm to use its branded service or products in return for a fee, 1. Avoid dissemination risk: FDI provides a higher degree of direct management control that reduces the risk of firm-specific resources and capabilities being opportunistically taken advantage of. 2. Even if there is no opportunism on the part of licensees and if they are willing to follow the wishes of the foreign firm, certain types of knowledge may be too difficult to transfer to licensees without FDI.2 a. Tacit knowledge, on the other hand, is non-codifiable, and its acquisition and transfer requires hand on practice. 3. FDI provides more direct and tighter control over foreign operations: a. Even when licensees (and their employees) have no opportunistic intention to take away 'secrets,' they may not follow the wishes of the foreign firm that provides the EDI vs. offshore outsourcing Three types of problems can arise in offshore outsourcing: (1) hold-up problems due to asset specificity, (2) unauthorized dissemination of technology, and (3) costs of monitoring quality and standards. 1. If the activity requires substantial specific investment by the service provider, the problem of asset specificity arises. This may lead to a one-sided dependence of one partner on the other, and market failure is likely, Hence, you rarely see outsourcing of activities that are unique to a firm. Typically, firms outsource activities that are common across several industries where there is scope for other firms to develop complementary specialist capabilities for that activity. a. Example: Flextronics is a specialist in the assembly of electronic products 2. The outsourcing service provider may use knowledge of the firm's technology for other purposes, for instance, helping competitors or entering the industry itself. Thus, offshore outsourcing requires safeguards on the use of technology. 3. For some activities, companies may find it necessary to monitor the actual manufacturing process rather than simply buying the finished products. a. Example: making sure child labor is not used in production facilities Benefits and costs of FDI Consumers BENEFITS access to international quality products and brands - (lower prices due to scale economies and competition COSTS - reduces the variety of traditional local brands (if local firms are crowded out) - monopoly pricing when an MNE dominates the market Suppliers - technology transfer enhances productivity - opportunity to become an international supplier crowding out by international sourcing cacciato fuari Competitors - technology spillovers enable learning - competition may trigger upgrading) and innovation crowding out by overwhelming competition Workers Government employment opportunities - typically, higher labor standards than local firms - training and knowledge transfer - tax revenues economic growth often less labor-intensive production (thus fewer workplaces) than local firms costs of subsidies and other incentives Natural environment MNEs often have higher environmental standards than local I firms MNEs may locate highly polluting activities in places with less stringent Internationalization as a process Capabilities in managing in foreign environments are, to a large extent, based on experiential knowledge; that is, they have to be learned by engaging in a particular activity and context. This focal role of experiential knowledge leads to a path-dependency in firms' growth: a firm may, by chance, start to export to Japan, then learn more about the country, and then set up a local sales subsidiary. Path dependency is reflected in internationalization process models: (1) the Uppsala model of internationalization, (2) the network internationalization model, and (3) stages models of internationalization. Uppsala model of internationalization The essence of this model is that internationalization is a dynamic process of learning in which firms make decisions over their next step based on what they know at the time. So, a firm may make an initial commitment of resources to a market, which provides a basis for learning about the environment and, therefore, allows the building of context-specific experiential knowledge and reduces the liability of outsider ship. This knowledge then shapes the firm's ability to recognize business opportunities, its perception of risk, and the cost of deepening its involvement. Network internationalization model It is an extension of the Uppsala model, recognizing that the internationalization of a firm is often interdependent with the internationalization of its network. SERVITANE Smaller firms and entrepreneurs leverage external resources through relationships with other businesses and government agencies. - Networks provide access to assets, talent, technology, and valuable knowledge about customers, suppliers, and competitors. - Network relationships are crucial for reducing resource deficiencies, facilitating access to information, and promoting organizational learning, particularly in the context of the international growth of business networks. Stages models of internationalization Stages models suggest that firms go through the process in a slow, stage-by-stage process before they can successfully operate an FDI. Thus, firms would go through a sequence of modes that reflect an increasing degree of commitment, for example, first exporting, then licensing, then joint ventures, and finally wholly owned subsidiaries. The specific modes vary, however, across industries and business models. 11.2 Accelerating resource acquisition International new ventures (INV) Start-up companies that "from inception, seek to derive significant competitive advantages from the use of resources and the sale of outputs in multiple countries." In popular language, they are often referred to as (born globals. Companies providing products or services via internet often pursue such early internationalization. Strategies for acquiring or building certain resources and capabilities for international business: 1. Building an entrepreneurial team with international experience through: a. Immigrant entrepreneurs, expats, and people who have worked or studied abroad. 2. Cooperating with internationally active firms or foreign investors 3. Learning from others a. For example, from earlier entrants of the industry by mimetic behavior - Imitating the behavior of others as a means to reduce uncertainty. 4. Acquiring resources abroad a. Rent offices, buy real estate, source local raw materials, and hire people with specialist technical expertise or local knowledge. In a more mature stage, listing on a stock market overseas. 11.3 Institutions and Internationalization The ability of internationally inexperienced firms to engage in international business is, to a large extent, shaped by the following: 1. The institutional environment of the home country a. Institutions have a major impact on firms' exports and the profitability of such exports. i. Low trade barriers allow foreign entrants to challenge local firms and thus indirectly encourage firms to pursue their opportunities abroad. ii. High tariffs encourage growth behind these protective barriers, for instance, by expanding in related industries or by integrating suppliers. b. Some countries provide export credit insurance to support SME exporters in overcoming the uncertainty associated with international business. 2. The institutional distance between the home country and the host country. a. Smaller firms will be more sensitive to differences in institutions across countries because the costs of doing business increase with cultural and institutional distance. b. Internationalization process models suggest that firms normally enter first where the cost of entry and the perceived risks are lowest, which is in culturally similar countries. c. However, these distance effects only moderate the basic rationale for doing business. For instance, natural resource-seeking firms have some compelling reasons to enter culturally and institutionally distant countries (such as Papua New Guinea for bauxite, Zambia for copper, and Nigeria for oil). 12.1 Strategic Objectives of Establishing Foreign Subsidiaries Entry strategy: A plan that specifies the objectives of an entry and how to achieve them. - The building blocks of an entry strategy: HRM, Logistics, Location, Timing, Marketing, Ownership, Greenfield or acquisition There are four common objectives for establishing subsidiaries abroad and to engage in FDI: 1. Natural resource-seeking: Investors' quest to pursue natural resources in certain locations. a. The main questions are, therefore, where do we find these resources, and how can we best secure access to them? 2. Market-seeking: Investors' quest to go after countries that offer strong demand for their products and services. a. Where are our potential future customers, and what do we have to do to reach them better than our competitors do? 3. Efficiency-enhancing: Investors' quest to single out the most efficient locations for each value chain activity. a. The main question is: how can we lower the costs of our operations to deliver products and services to our customers? 4. Capability-enhancing: Investors' quest for new ideas and technologies to upgrade their own technological and managerial capabilities. a. Where are the latest technologies and ideas that we can connect to our existing technologies and innovation activities? These four strategic goals, while analytically distinct, are not mutually exclusive. 12.2 Where to Enter? Favorable locations in certain countries may give firms operating there access to location-specific advantages, that is, advantages that can be exploited by those present at a location. Locational advantages relate, in particular, to markets, resource endowments, agglomeration, and institutions. Matching strategic goals with locations is crucial. Strategic goals Prime concerns Location-specific advantages Illustrative locations Market-seeking *The size and growth potential of a market, *The existing structure of industry *Strong market demand and customers willing to pay *Marketing and sales of consumer goods anywhere in the world Natural resource-seeking *The quality and costs of local resources, *The existing structure of industry *Quality and costs of natural resources *Oil exploration in the Middle East, Russia and Venezuela Efficiency-enhancing *The quality and costs of local resources, *The costs and productivity of the local labor force, *The geography and logistics infrastructure, *The existing structure of industry *Economies of scale, abundance of low-cost labor force and suppliers, transport and communication infrastructure *Manufacturing in Guandong, China; logistics in Rotterdam, Vienna, and Miami Capability-enhancing *Existing local capabilities, The existing structure of industry *Innovative individuals, firms and universities, industry agglomeration *Chinese acquisitions of technologies and brands in Germany *Wind energy in Jutland *IT in Silicon Valley and Bangalore 12.3 When to Enter? First-mover advantages: Advantages that first movers obtain and that later movers do not enjoy. Proprietary, technological leadership - Pre-emption of scarce resources - Establishment of entry barriers for late entrants - Relationships and connections with key stakeholders such as customers and governments Late-mover advantages: Advantages that late movers obtain and that first movers do not enjoy. The following points are as well first-mover disadvantages: Opportunity to free-ride on first-mover investments - Resolution of technological and market uncertainty - First mover's difficulty in adapting to market changes First movers can maintain their leadership position if they continuously commit resources and if they actively learn about the local environment. Many first movers, however, did not succeed in creating sustained market leadership. 12.4 How to Enter? Modes of entry are the format of foreign market entries. Non-equity modes are modes like exports and contractual agreements. Equity modes: A mode of entry (JV that involves taking full or partial) equity ownership in a local firm. Preferred when it comes to transferring intangible assets/tacit knowledge The more markets are characterized by information asymmetries (the content, value, and usage of these assets), the more likely MNEs are to prefer to handle this transaction internally and, therefore, choose an equity mode. The choice of an entry mode depends essentially on two questions: how do we access complementary local resources? And how much control will we attain? Wholly owned subsidiary (WOS): A subsidiary located in a foreign country that is entirely owned by the parent multinational. Greenfield or Full Acquisition. Greenfield investments: Building factories and offices from scratch. Acquisition: The transfer of the control of operations and management from one firm (target) to another (acquirer), the former becoming a unit of the latter. JVs and partial acquisitions are special cases of a strategic alliance: Collaboration between independent firms using equity modes, non-equity contractual agreements, or both. A joint venture (JV) is a 'corporate child' that is a new entity jointly owned by two or more parent companies. Three forms: minority JV (the focal firm holds less than 50% equity), 50/50 JV, and majority JV (more than 50% equity). Partial acquisitions: Acquisitions of an equity stake Wholly ouned Full in another firm. They occur in particular (1) if a seller is unwilling to sell the business in full or (2) if the previous owners are still needed to run the Degree on outy cortre operation. Equity modes of entry: advantages and disadvantages Entry modes Advantages Design operations to fit the parent Complete equity and operational control Better protection of know-how Option to scale operation to needs Complete equity and operational control Better protection of know-how Do not add new capacity Fast entry speed Sharing costs, risks, and profits Access to partners' knowledge and assets 50% e 50% Politically acceptable some Access to operations that the previous owner is reluctant to give up Previous owners' continued commitment Disadvantages Risks Greenfield (wholly owned) Add new capacity to an industry and make a competitive industry more competitive Slow entry speed (relative to acquisitions) No co-owner-related risks No integration failure risk High investment risk due to large capital commitment and long pay-back periods Acquisition (full) TAMEOVER Political sensitivity  High up-front capital needs Post-acquisition integration challenges High investment risk due to large upfront capital commitment Integration process-related risks No co-owner-related risks Joint venture (newly established) Divergent goals and interests of partners Limited equity and operational controll Difficult to coordinate globally Limited investment risk due to lower capital commitment High risk of coordination failure Partial acquisition stake Need to restructure and integrate, yet with limited controll Limited investment risk due to lower capital commitment High risk of integration problems High risk of conflicts with co-owners 12.5 Institutions and Foreign Entry Strategies Foreign entry strategies are often constrained by the institutional environment in the host economy. Institutions may: (1) prohibit certain types of operations or transactions (2) create a need for local knowledge (3) change the relative (transaction) costs of alternative strategies (4) motivate tariff-jumping FDI Institutional constraints on foreign entry Types of constraints Certain operations or transactions are not permitted Need for local knowledge Impact of entry mode (examples) Establish JVs where WOSs are not permitted Establish JVs to access local knowledge Avoid complex arm's-length contracts with unfamiliar partners Avoid full or partial acquisitions of local firms Impact on location (examples) Locate where planning permissions are easier to obtain Locate in agglomerations of foreign investors that help in attaining local knowledge Locate in areas where local uncertainty is lower Higher transaction costs due to costly contract enforcement Higher transaction costs due to lack of financial intermediaries Higher tariffs or other trade barriers Locate production in the target market Entering a market where there's little demand for your product. Common strategy When it comes to choosing new markets to enter, the safe and effective choice is to focus on regions with visible, existing demand for your products or services. The downside of this strategy is the market can have stiff competition (because the potential market is no longer secret) concanema agguenta Different approaches: Start Small, Introduce New Product Categories, Pivot to Meet Existing Demand 1. Start small: a. First, a company assumes a strong market potential. Assumptions might be based on political shifts, technological innovation, rising middle class, etc. b. Depending on an organization's level of confidence in these assumptions, it may make sense to test out a market with a small initial investment before making a larger commitment. c. For example, first, open only one store and see whether demand for the product or service grows. 2. Introduce New Product Categories: a. There's a lot to be gained if your company manages to be the one to introduce people to an entirely new category of products. That means first understanding the local market and then developing a novel value proposition that will resonate with local customers. b. For example, the Italian cruise line Costa Cruises being introduced in the Chinese market when most Chinese tourists had never even heard of cruising - ships were thought of only as a means of transport. The company started small with a 1,000-person ship in Shanghai to test out the market. 3. AthenaSummary Pivot to Meet Existing Demand: (chonging dinection) a. Not all pioneers benefit from favorable market shifts or a warm response to a novel type of product. b. If you're having trouble getting new customers to adapt to you (but the market still seems worth pursuing), you might be better off pivoting your business to meet them where they are, C.Example: Linkedin was not gaining popularity in China, so the company decided to shut it down and make a more culturally fit product - a new job application site. Responsible business: Businesses acting both efficiently and ethically, meeting and exceeding legal requirements, and considering their impact on people and the environment. Sustainability: Meeting the needs of the present without compromising the ability of future generations to meet their needs around the world. - United Nations Sustainable Development Goals (UN SDGs): A set of 17 goals declared by the United Nations in 2015 The goals build on the notion of human rights. - MNEs are meeting the requirements and expectations regarding sustainability by developing triple-bottom-line strategies that incorporate economic, social, and environmental performance and by reporting their progress in annual sustainability reports. 10.2 Stakeholders of The Firm A stakeholder is any group or individual who can affect or is affected by the achievement of the organization's objectives. This includes: Employees, Shareholders, Customers, Suppliers, Communities, Environmental groups, Industry associations, Social groups, Trade unions, Governments. Primary stakeholder groups: The constituents on which the firm relies for its continuous survival and prosperity: Shareholders, managers, employees, suppliers, customers, government, and communities (law, tax, regulations) Secondary stakeholder groups: Those who influence or affect, or are influenced or affected by, the corporation but are not engaged in transactions with the corporation and are not essential for its survival. Environmental groups: Greenpeace, Trade unions, NGOs. Such groups may have the potential to cause significant embarrassment and damage to a firm. Why shareholders matter: two perspectives 1. Instrumental view: A view that treating stakeholders well may indirectly help financial performance. a. Firms engage in corporate social and environmental responsibility (CSER), which is defined as a firm's engagement with social and environmental issues in their communities because they believe that it creates benefits for both external and internal stakeholders. b. On average, evidence suggests that CSER is associated with better financial performance. However, in some contexts, the impact appears to be negative. There only seem to be benefits if CSER is implemented consistently over a long time. 2. Normative view: A view that firms ought to be self-motivated to 'do it right' because they have social obligations. A managerial approach that bridges the normative and instrumental views is shared value creation: An approach to CSER that focuses on activities that are good for both the firm and its stakeholders. Can be done in 3 ways: 1. Look for unmet social needs in the community and design new products or business models to serve this community while earning profits on the products or services they provide. 2. Modify their business practices to increase benefits for external stakeholders. a. Train suppliers to reduce negative effects such as pollution while reducing the firm's supply chain risk. 3. Initiatives can be launched that create value for a local community but indirectly create value for the company. a. Invest in local communities around the factory. Greenwashing is talking about social or environmental initiatives without addressing fundamental concerns. Stakeholder conflicts Different stakeholder groups often also disagree with each other. Hence, the challenge is not only to balance between shareholders and other stakeholders but also between different groups of stakeholders. 10.3 Responsible Business in The Global Economy MNEs often have to figure out themselves what is 'right' in light of the formal and informal institutions in both home and host countries. Two areas where these issues are particularly pertinent are (1) environmental standards and (2) labor standards. 1. Environmental standards MNEs get incentives from outside: MNEs are running some of the largest industrial operations around the world, and hence, they are also among the biggest polluters. MNEs have incentives to engage in institutional arbitrage by shifting pollution-intensive production to 'pollution havens in developing countries, where environmental standards may be lower. Institutional arbitrage is the practice of locating activities wherever the costs of complying with regulatory institutions are lowest. Firms may use the threat of relocation to put pressure on home country governments not to raise environmental standards. Developing countries may enter a'race to the bottom' by lowering (or at least not tightening) regulatory requirements to attract FDI. MNEs incentive from inside (voluntarily application of higher than required environmental standards): - MNEs are more closely monitored by stakeholders in their home and host countries. MNEs' green image can no longer be enhanced by moving dirty activities 'out of sight. MNEs may gain scale advantages from implementing common standards across operations in different countries. Firms exposed to higher environmental regulations may become early movers into new technologies or new business models, which may translate into long-term competitive advantages when other countries follow in upgrading their standards. - Higher standards reduce the risk of catastrophic events such as a fire destroying production facilities or a high-profile media report detecting pollution the firm itself was not aware of, which can result in a firm having major liabilities and lawsuits. 2. Labor standards Rules for the employment of workers including working hours, minimum pay, union representation, and child labor. In their own operations in developing countries, MNEs often provide professional training, higher wages, and better working conditions than local competitors. They try to attract some of the best people, and after investing in their training, they are keen to keep them. The introduction of labor standards and compliance processes over entire supply chains expands the scope of such potentially positive influences. Even so, MNEs are still being criticized: local firms may complain that the best people do not want to work for them because MNEs pay 'too high' wages. Meanwhile, European trade unions may complain about the 'too low wages paid in emerging economies that put pressure on wages in Europe. - Code of conduct (standards of engagement, code of ethics): Written policies and standards for corporate conduct and ethics. Health, Safety, and Environment (HSE): A common term to cover the areas for which companies have mandatory standards. - Compliance training: Mandatory training and tests designed to ensure that every employee knows the relevant codes of conduct. MNEs in sensitive sectors such as banking or pharmaceuticals require every employee to go through compliance training and sit a test every year. 10.4 Institutions, Stakeholders, and Responsible Business People in liberal market economies (LMEs) and coordinated market economies (CMEs) have different understandings of what firms are and their role in society. Liberal market economies - Explicit CSER In LMEs like the USA and the UK, firms are unambiguously considered economic enterprises that exist to serve the shareholders' interests.The pursuit of economic self-interest (within legal constraints) promotes the welfare of society as a whole. Hence, firms' first and foremost stakeholders are shareholders, whose interests managers have a legal duty to look after. - View in CSER: it is good if it helps profits. At the same time, the financial system requires a high degree of transparency, the education system is largely private, and the cultural system values individual freedom but also giving back to society' - that is, sharing wealth with others. These features of the institutional context induce firms to voluntarily assume responsibility for social concerns. Coordinated market economies- Implicit CSER Managers have to act in the interests of the shareholders, yet a wide range of formal and informal constraints impose other obligations on firms. Regulations of many aspects of business are more specific, and the state is supplying a wide range of services to society financed by taxes raised by individuals and firms. This is supported by cultures that consider many aspects of the welfare state to be the responsibility of the state and expect firms and individuals to help the state with its responsibilities by first paying taxes and obeying laws and regulations. Explicit CSER Implicit CSER Describes corporate activities that assume responsibility for the interests of society. Describes corporations role within the wider formal and informal institutions for society's interests and concerns. Consists of voluntary corporate policies, programs, and strategies. Consists of values, norms and rules that result in (often codified and mandatory) requirements for corporations. Incentives and opportunities are motivated by the perceived expectations of different stakeholders of the corporation Motivated by the societal consensus on the legitimate expectations of the roles and contributions of all major groups in society, including corporations In recent years, the institutional context for CSER has changed in two ways: (1) CSER has moved up the corporate agenda around the world, and (2) there has been some convergence between CMEs and LMES. 1. A) Social and environmental concerns become important to people once their basic needs, such as food, clothing, and accommodation, have been met, so many groups of stakeholders have become more vocal about the issues. B) Formal and informal institutions have evolved over time C) More focus on CSER might be a way for MNEs to compensate for increased focus on shareholder value and demonstrate legitimacy of their global business model despite the negative side effects of globalization on communities. 2. LMEs have introduced more regulation on a number of issues, such as the environment and corporate governance. On the other hand, firms in CMEs realized that playing by the rules may not be enough when operating across borders. How far does MNEs' responsibility extend in global value chains? a. Legally, firms are responsible for their own operations, not those of other firms. b. MNEs concerned with their brand reputation accept that normative pressures are also relevant in defining the appropriate standards in the operations of their suppliers and sub-suppliers. How can MNEs be sure of what actually happens in a sub-supplier's plant? C. Reporting guidelines on carbon footprints are still largely voluntary. A commonly used industry standard, the Greenhouse Gas Protocol 2. Is CSER good for the stakeholders that are the object of this policy? Some critics view CSER activity as mainly a public relations exercise, with few benefits for workers in sub-supplier plants or for the natural environment. - NGOs, journalists, and politicians assert that responsible business goes beyond CSER and should be independent of profit considerations. The connection between CSER, corporate reputation, and consumer buying behavior is unclear, with inconclusive empirical evidence on whether instrumentally motivated CSER provides benefits for stakeholders. - Some CSER initiatives indeed do not create value for stakeholders. Good intentions are not sufficient to create a positive impact on stakeholders; local context is important. - Other critics suggest that CSER is mainly making up for damage caused by the same MNEs earlier (cocoa industry) Prof. Richard Locke suggests four conclusions: TRASCURABKE Codes of conduct alone have negligible effect on labor practices. - Helping suppliers through knowledge transfer helps. Collaborative relationships with suppliers that share productivity gains help even more. The origin of unsatisfactory labor standards is often in the manufacturers own business models, especially just-in-time delivery, minimization of inventories, short life cycles, and last-minute design changes - combined with stiff penalties on suppliers failing to deliver. 3. How important are hyperorms versus local norms? Hypernorms are norms considered valid anywhere in the world. Respect for human dignity. - Respect for universal basic rights. - Good citizenship in the host society, respecting their institutional context. When exactly should hypernorms dominate over local norms? Almost every country has local laws and norms that some foreign MNEs may find objectionable. In Malaysia, ethnic Chinese are discriminated against by law. At the heart of this debate is whether foreign MNEs should spearhead efforts to remove some of these discriminatory practices or conform to host country laws and norms. This is obviously a non-trivial challenge. Implications for action A defensive strategy is a strategy that focuses on regulatory compliance with little top management commitment to CSER causes. An accommodative strategy is a strategy that is characterized by some support from top managers, who may increasingly view CSER as a worthwhile endeavor. A proactive strategy is a strategy that endeavors to do more than is required in CSER. CSER strategies need to balance corporate and societal interests: - Businesses may focus their innovation activities on areas of social and environmental needs. - Businesses may collaborate to voluntarily set and implement standards. - Businesses may benefit from collaborative relationships with NGOs. - CSER publicity should match CSER's capabilities. Building a Global Corporate Social Responsibility Program via Mergers and Acquisitions: a Managerial Framework. つ CSR- Corporate Social Responsibility: The process by which managers within an organization think about and discuss relationships with stakeholders as well as their roles in relation to the common good, along with their behavioral disposition with respect to the fulfillment and achievement of these roles and relationships. - Also known as the triple bottom line CBA- Cross-border mergers and acquisitions Typically, studies focus only on the financial performance of an acquisition, which assumes acquisitions are primarily measurable by financial metrics and are principally accountable to shareholders. This paper interconnects CSR and CBA because CSR serves as a means to balance relationships and interests across a geographically dispersed network of stakeholders. The goal is to show that when CBA involves CSR, both the profitability and social responsibility of the firm are ensured. Critics argue that CSR is a burden on shareholders and companies, but more recent standpoints underscore the benefits of corporate responsibility toward all stakeholders. The two positions became less polarized, and CSR developed into a strategic issue deserving of focused managerial input and attention due to globalization. Recent studies largely regarded CR as a voluntary and deliberate choice by top management, anticipating a positive influence on organizational performance-in other words, a strategy. The linkage between CSR and acquisitions: CSR can serve as a motivating factor for CBA CSR can then help acquirers integrate targets after acquisitions As CSR development becomes intertwined with a CBA strategy, both are subject to institutional influences in the form of home country and host country norms and policies. Framework Framework interrelates CBA, CSR, stakeholders, and institutions within the context of organizational hierarchical levels and home and host country markets. The programmatic aspects of CBA and CSR as jointly promoting both shareholder and broader stakeholder benefits are emphasized. - Horizontal axis: shows the home and host top monogment markets of a firm. - Vertical Line: captures the hierarchical dimension, ranging from top management through entry-level employees' involvement in CBA and CSR. - Left quadrants: exhibit practices relating to employee country of origin. - Right quadrants: relate to activities in countries entered through acquisitions. - Upper quadrants: display a managerial commitment to CSR at home. - Lower quadrants: illustrate emplovee volunteerism and outreach in host markets. Home country-top leadership: addresses global leadership and top-down commitment to the triple bottom line 7 Host country-top management: displays top management international philanthropic outreach for large-scale relief needs. Host country-employee: depicts employee local volunteerism and corporate resources for responding to CSR needs in host markets. Home country-employee: represents opportunities for employee participation in the flagship headquarters location, again, as setting standards and signaling a commitment to the offices worldwide. The quadrants subsume a range of stakeholders and institutional factors and ways in which CSR can develop both at home and abroad as a firm expands into host markets by acquisitions. Arabian Gulf - company Large Logistics Group (LLG) case study to illustrate the interconnections between CSR and CBA Findings refer to rising global logistics firms, which we call Large Logistics Group (LLG), doing business worldwide in the land, air, and sea transportation and warehousing of corporate goods. Between 1997 and 2016, the firm engaged in an intensive international acquisition program that expanded its reach from the Arabian Gulf into over 100 countries worldwide. The acquisition program carried out by LLG goals included: (1) acquiring further transportation and storage capabilities by land, sea, and air (2) internationalizing from the Arabian Gulf into other regions of the world. The CSR-CBA connection is not as much about CSR programs acquired but more about: a. first perceiving global social responsibilities emergent with a global business footprint b. and then having selected IT, supply chain, and transport capabilities that were acquired by acquisitions (particularly in developed areas to enhance CSR delivery. Because the LLG CSR program, in part, involves the distribution of items, their facilities as a global logistics firm- expanded and strengthened through CBA-motivated them toward an active global CSR stance customized for supplying goods as well as services, according to particular community needs. 2. The CSR-CBA interrelation at LLG centers on communities as much as capabilities. a. Having acquired target firms and entered various markets worldwide through acquisitions, LLG also targeted stakeholders in these regions. For acquisitions into the more developed markets of Europe and the U.S., as well as to other countries even within the Arabian Gulf, capabilities acquired through CBA facilitated CSR, Application of the framework Top management involvement in the country of origin: Leadership development and signaling top-down commitment. - LLG has shown its commitment as a global social responsibility leader by bringing identified high-talent middle-management executives from all areas of the company into an intensive firm-wide global leadership development program emphasizing intertwined people-planet-profits initiatives and responsibilities. - Participants, elected by their divisional or functional senior management, spend a year together at various intervals, gaining cross-fertilization insights into the triple bottom-line functioning of the firm-—insights that they can then take back to their original divisions or new assignments as their careers grow or that they can apply in interacting with any acquired entity. - Not only can CBA potentially bring more leadership talent into the pipeline, but the international acquisition program offers both acquired and internal talent expanded geographic and social responsibilities. The CBA program enabled the developing leaders to have access to various national and customer portfolios for management within a global context. Complementing the acquisition strategy, the LLG CSR program--interwoven throughout the corporate culture and operations-—means that the emergent leaders are thoroughly attuned to implementing the profitability-responsibility dualism and can manage according to this dualism. Top management involvement in host countries: Rapid mobilization and international coordination for resource allocation in natural disasters. - At the direction of top management and drawing on international logistics infrastructure built up through extensive CBA, LLG accesses its rapid transport capabilities for swiftly delivering essential resources to disaster-stricken areas in an outreach of international philanthropic goodwill known within the CSR program as humanitarian logistics. - LLG has leveraged its technological capabilities, including specialized software for communications and order fulfillment, to mobilize resources for natural disaster relief around the world. - LLG forms part of a global citizenship network with the UN and additional humanitarian agencies. Employee involvement in host countries: Identifying and responding to local stakeholder needs Here, the acquisitions and social responsibility are interrelated through the CBA, bringing LLG into new markets, countries, and regions, while the prevailing corporate CSR ethic has already attuned LLG employees toward stakeholder engagement at the local level. - Employees involved in the acquired regions, whether from previous LLG operations or newly hired locally, are expected to be aware of and participate in CSR initiatives. For employees familiar with the acquired region, local CSR needs may already be apparent, while recommendations for cultural awareness and integration are provided for those less familiar. - The LLG CSR program runs largely on employee volunteerism under the leadership and with the financial support of top management. Employee involvement in the country of origin: Building a unified brand, culture, and employ commitment to the organization In LLG, the CSR program calls not only for employee volunteerism in any region in which the firm does business but also for employees' direct efforts in ensuring ethical behavior from the shop floor to the executive suite. LLG emphasizes opportunities for its large global workforce to encourage employee volunteerism in CSR efforts, unify the LLG culture, and provide voice and visibility to employees for career and social responsibility pursuits. The cultural unification has been another CSR-CBA interconnection wherein the global integration and outlook of the CSR program have provided employees across all countries and acquisitions with a similar platform and common basis for social responsibility. Customizing for context: Giving value to customers and giving back to communities The presence or absence of various state institutions influences the local customization of CSR within the global parameters of the interrelated CBA and CSR programs. Examples are drawn from the Arabian Gulf case and then from two EU instances of CBA-CSR interconnections. LLG CSR in home markets: Customization according to institutional context In the home region markets, the countries of the Arabian Gulf have benefited from direct governmental largesse toward health, education, and social welfare since the advent of oil exploration and extraction. Given natural resource munificence and sovereign beneficence, the home CSR can concentrate on enhancing educational excellence, technological initiatives, and career advancement - for all employees - while also supporting carbon footprint reduction, recycling, and environmental protection. LLG CSR implementation in host markets For instance, in sub-Saharan Africa and areas of Southeast Asia, CSR centers on large-scale disaster relief - in the event of turbulence in the natural environment - and daily measures such as clean water, literacy, and educational opportunities, as well as safety measures and cleanup of and care for the natural environment. Regimes here have been more challenged fiscally, with less health, education, and technological infrastructure. The CSR-CBA interconnection is that the global range of stakeholders to be served, the particular communities entered, and the capabilities to serve those communities as well as broader stakeholders all occurred via acquisitions, enhancing the firm's global footprint. Benefits for the firm: LLG, as the acquiring firm, additionally enhanced personnel and technological resources as well as supply chain and transport capabilities. Recommendations for managers - Conceive and, as much as possible, strategize CSR as fully complementary with and integrated into the overall strategic vision and mission of the firm. - Identify CSR initiatives leveraging the firm's unique resources and competitive advantage. - Consider acquisitions as impacting a spectrum of stakeholders. - Customize according to national institutions and context. - Extensively involve all levels of the organization. - Ensure cross-communication between acquisition and CSR program managers. Findings emphasize that stakeholders other than shareholders are instrumental in making acquisitions succeed and that securing stakeholders commitment by attending to their interests can facilitate acquisition implementation, especially in international settings. Rather than focusing primarily on national culture distance or brand value in CBA, we argue that firms pursuing these deals should be cognizant of the unique properties of institutional settings and relevant stakeholders for both CBA and CSR. Fundamental tension MNEs face two types of fundamental tension: 1. Integrating their operations globally or regionally a. Strategies for this are the global integration (aggregation) strategies, which focus on synergies between operations at different locations. In many MNEs, the degree of global integration varies across functions. For example, product development, sourcing, and finance are often handled in regional or global business units, while sales, distribution, and human resources are typically managed locally because they depend more on local resources and customers. Such integrations help realize aggregation benefits, such as economies of scale, global innovation, and global sourcing. It does not necessarily imply standardization; it may simply involve sharing of resources and integration of processes. Aggregation often follows geography: country, region, and global. Yet, in some industries, other dimensions, such as cultural, administrative, and linguistic commonalities, are more important. 2. Adapting in each host country to be locally responsive a. Strategies for this are the local responsiveness (or adaptation) strategies: Strategies that deliver locally adapted products to each market. Pressures for local responsiveness arise from different consumer preferences, which vary tremendously around the world. Also, host country institutions, formal and informal, put pressure on companies to localize their products, especially when government entities (such as the UK's NHS) are important buyers or industry regulators. 15.2 1. Levers of Adaptation by Pankaj Ghemawat Focus on activities and products that require less adaptation across markets. Firms may sell the same products but position them in different segments or focus on young urban consumers whose consumption patterns vary less across countries. 2. Externalize the costs of adaptation by working with local partners. MNEs, such as McDonald's or KFC, have developed franchising models that empower local franchisees to vary products within the scope of the corporate brand and to carry the costs and risks associated with such adaptation. 3. Design the basic product in ways that increase the flexibility of the final product to be produced for different markets. 4. Organize innovation processes with the effectiveness of variation in mind. The integration-responsiveness framework by Chris Bartlett and Sumantra Ghoshal This framework suggests that integration and responsiveness may not be incompatible. Authors argue that MNEs may be able to pursue both objectives simultaneously. Integration-responsiveness framework: A framework of MNE management on how to simultaneously deal with global integration and local responsiveness. n-responsiveness framework 1. Home replication strategy: strategy that emphasizes international replication of home country-based competencies such as production scales, distribution efficiencies, and brand power. Gaspone an 2. Localization (multi-domestic) strategy: A strategy that focuses on a number of foreign countries/ regions, each of which is regarded as a stand-alone 'local' (domestic) market worthy of significant attention and adaptation. 3. Global standards strategy: A strategy that relies on the development and distribution of standardized products worldwide to reap the maximum benefits from low-cost advantages. 4. Transnational strategy: A strategy that aims to be simultaneously cost-efficient, locally responsive, and learning-driven around the world. Home replication Leverages home country-based advantages Relatively easy to implement Lack of local responsiveness May result in foreign customer alienation Localization Maximizes local responsiveness High costs due to duplication of efforts in multiple countries  Too much local autonomy Global standards Leverages economies of scale Emphasizes integrated innovation Lack of local responsiveness Too much centralized control Transnational Cost-efficient while being locally responsive Engages in global learning and diffusion of innovations Organizationally complex Difficult to implement 15.4 Four organizational structures in MNEs Corporate headquarters (HQs) are an MNE's central unit that hosts corporate executives as well as central staff functions. Normally, it is based in the country of origin of the MNE. Below these HQs, the structure varies greatly. 1. International division structure: A structure bundling all international activities into one unit. Typically set up when firms initially expand abroad, often engaging in a home replication strategy. Two problems: First, foreign subsidiary managers, whose input may be channeled through the international division, are not given sufficient voice relative to the heads of domestic divisions. - Second, by design, the international division serves as a 'silo' whose activities are not coordinated with the rest of the firm that focuses on domestic activities. Consequently, such an organizational structure is mainly used by firms where international sales contribute only a small share of their revenues. International division structure Headquarters Procurements Operations Marketing Internationa Icences 2. Geographic area structure: An organizational structure that organizes the MNE according to different countries and regions. A geographic area can be a country or a region, such as 'Europe, the Middle East, and Africa. The regional leadership team is often based in the regional headquarters (regional HQ) in the region itself, where country managers report to the regional HQ. Both the strengths and weaknesses of this structure lie in its local responsiveness. Although being locally responsive can be a virtue, it also encourages the regional fragmentation of the MNE, potentially leading to the replication of efforts in, for example, product development. Geographic area structure Europe Asia Pacific America Middle East and Ainica 3. Global product division structure: An organizational structure that assigns global responsibilities to each product division. It treats each product division as a stand-alone entity with full, worldwide - as opposed to domestic - responsibilities. It facilitates attention to pressures for cost efficiencies because it enables consolidation on a worldwide basis and reduces inefficient duplication. Most MNEs operating in more than one line of business have adopted a product division structure, some supplementing it with a regional structure within each product division. Global matrix structure: An organizational structure with two set lines of authority, typically a regional line and a product line. A global matrix structure aims to realize the advantages of both geographic area and global product division structures, especially for MNEs adopting a transnational strategy. Its hallmark is the sharing and coordination of responsibilities between product divisions and geographic areas in order to be both cost-efficient and locally responsive. This structure creates linkages both locally and globally and supports the goals of the transnational strategy. In practice, however, the matrix is often challenging to implement. The reason is simple: subsidiary managers usually find there is enough headache dealing with one boss, and they do not appreciate having to deal with two bosses who may not agree with each other. protem: dealing with 2 bosse Ава тедіол нО Cacpe region HO Вигой Neither strategies nor structures are static. For example, many MNEs view their internal structures as networks rather than hierarchies and provide business units with some degree of autonomy along with responsibilities and performance evaluations. Internal quasi-markets help to coordinate activities around the world. Structures also change in response to external pressures.The changing role of MNE subsidiaries Subsidiaries are embedded in both the MNE and their local environment, and they develop subsidiary-specific resources and capabilities, often by integrating resources from the MNE with resources obtained in the local environment. The local leadership team of the subsidiary is usually more knowledgeable about the host country's environment and, hence, best positioned to develop and implement local strategies. Many subsidiaries attain considerable autonomy within the MNE and may even become worldwide leaders for certain specializations. - Worldwide (or global) mandate: A charter to be responsible for one MNE function throughout the world. Subsidiary initiatives: The proactive and deliberate pursuit of new opportunities by a subsidiary to expand its scope of responsibility. Advantages: Providing subsidiary managers with the freedom to act entrepreneurially is a powerful way to elicit the best ideas and initiatives of the local team. Concerns: Subsidiary autonomy also makes it more difficult to realize the benefits of integration, in particular, economies of scale and shared standards and practices. Managing knowledge in global MNEs: Types of knowledge The opportunities for accessing and creating knowledge around the world are vast, yet the challenges of knowledge management in such a complex setting are equally vast. Many of the capabilities that are the foundation of MNEs' competitiveness are grounded in knowledge. In fact, many scholars argue that knowledge management is the defining feature of MNEs. Knowledge management: The structures, processes, and systems that actively develop, leverage, and transfer knowledge. Types of knowledge Explicit knowledge is codifiable (that is, it can be written down and transferred with little loss of its richness). Virtually all the knowledge captured, stored, and transmitted by IT is explicit. Tacit knowledge is non-codifiable, and its acquisition and transfer require hands-on practice. Tacit knowledge is evidently more important and harder to transfer and learn; it can only be acquired through learning by doing (driving, in this case). - Organizational (or team-embedded) knowledge is more than the sum of the knowledge held by individuals; it is held by the organization either in shared repositories of documents and data or embedded in the practices and routines of the members of the team. Ikujiro Nonaka identified four types of knowledge that organizations have to manage Managing knowledge in global MNEs: Enabling knowledge flows globally Ways to enable knowledge flows globally: - Develop shared practices and platforms - including video platforms - that facilitate communication. Empower boundary spanners, that is, individuals who have strong personal networks across units within the MNE (and beyond) and frequently communicate with their network to facilitate knowledge sharing, even though they may not be in a formal leadership role. Reverse knowledge transfer: Knowledge created in a subsidiary is transferred from the subsidiary to a parent organization. Operationally, this type of knowledge transfer is often not easy for three reasons: First, HQ usually combines a high degree of power with some degree of 'not invented here syndrome. Thus, there may be inherent resistance, combined with the ability to block initiatives coming from subsidiaries. Second, if a subsidiary is technologically more advanced, then HQ may lack the competencies to assess the technology and its potential applications within HQ operations. The third challenge is particularly relevant for emerging economy firms seeking to tap into technology and managerial knowledge in Europe or North America: the sought knowledge is often embedded in organizational routines and cultures, and the effective transfer of best practices would require major changes in the organizational culture of the parent organization, which is difficult to achieve given the often steep hierarchies and personal loyalties permeating many emerging economy businesses. Most knowledge creation takes place in groups of people doing similar or related tasks, known as a community of practice (CoP). Knowledge exchange within a CoP is more timely and relevant to the participants' practice. So, firms may foster social interaction between people doing similar jobs. One simple way to do that is to offer free coffee in the office: the coffee machine becomes a point where people meet, gossip, and exchange practical knowledge about their jobs. Organizing CoPs is more complex in M NEs operating across multiple locations and where people speak different languages and originate from different cultures. - CoPs can operate through face-to-face interaction, for instance, by bringing experts on specialist topics together in workshops and 'away days.' - Other CoPs operate as virtual communities of practice, sharing information on the internal social networks of the MNE and talking regularly through video conferences. Managing knowledge in global MNEs: Knowledge Governance Knowledge governance: The structures and mechanisms MNEs use to facilitate the creation, integration, sharing, and utilization of knowledge. Elements of knowledge governance Challenges Common obstacles Knowledge retention Can the firm keep the knowledge it has accumulated? Employee turnover and knowledge leakage Knowledge sharing Are people willing to share knowledge with others inside the firm? 'How does it help me?' syndrome and 'knowledge is power' mentality Knowledge transmission Is knowledge communicated effectively between people and business units? Inappropriate channels, language barriers Knowledge utilization Do potential recipients appreciate and utilize knowledge available elsewhere in the organization? 'Not invented here' syndrome, lack of absorptive capacity - the ability to recognize the value of new information, assimilate it, and apply it. As solutions to combat these problems, corporate HQ can design the formal rules of the game: 1. Tying bonuses to measurable knowledge outflows and inflows 2. Using high-powered, corporate- or business-unit-based incentives (as opposed to individual-and team-based incentives) 3. Codifying tacit knowledge High-powered incentives may undermine a corporate culture of sharing knowledge, as individuals focus on initiatives that are measured and rewarded while reducing informal means of sharing that can be more timely and effective. In other words, large bonuses can undermine a cooperative culture. Consequently, many MNEs develop informal integrating mechanisms, such as (1) facilitating networks among various subsidiaries through joint teamwork, training, and conferences and (2) promoting strong organizational cultures and shared values for cooperation among subsidiaries. The key idea is that instead of using formal command-and-control structures, knowledge management is best facilitated by informal social capital, which refers to the informal benefits individuals and organizations derive from their social structures and networks. Social capital helps in motivating individuals to help coworkers from different subsidiaries. MNEs, therefore, organize major events for participants from across their global network, not only to learn from each other but to develop personal relationships. 15.9 Institutions and the choice of organizational structure Home country institutions European MNEs were operating traditionally in very distinct national markets, which encouraged localization strategies and geographic division structures. With the introduction of the EU single market in 1993, these differences diminished and reduced the case for a geographic structure, leading firms to integrate operations more across countries and move to product divisions or matrix structures. Home country institutions European MNEs were operating traditionally in very distinct national markets, which encouraged localization strategies and geographic division structures. With the introduction of the EU single market in 1993, these differences diminished and reduced the case for a geographic structure, leading firms to integrate operations more across countries and move to product divisions or matrix structures. Host country institutions Host country governments want to attract MNE investments in higher value-added activities by providing tax incentives and free infrastructure upgrades or limiting activities by threatening to block market access. MNEs tend to look more broadly at the institutional framework for innovation, also known as national innovation systems- The institutions and organizations that influence innovation activity in a country. Therefore, MNEs locate their R&D units near quality universities and research laboratories and close to where networks between business and academia facilitate knowledge flow. MNEs also have to follow informal institutions when dealing with host countries. 15.10 The Resource-Based Considerations - The VRIO framework highlights the importance of resource organization in creating value. - Innovations often fail to reach the market, and many new products end up being financial failures. MNEs need effective organizational processes and structure. - Rarity is a key factor in determining the success of organizational structures and processes. Rarity comes from developing tacit organizational knowledge that connects systems with the firm's needs. - Formal structures are easier to imitate than informal ones, making it difficult to imitate an organizational culture of collaboration. - Organizational structure is crucial in exploiting the values created by MNEs. Profitable innovators have complementary assets and organizational structures to enable innovation creation. Moving (business unit) headquarters overseas Reasons for moving: At the business level: the 'center of gravity' of the activities of a business unit may pull its HQ towards a host country. For example, the Danish East Asiatic Company moved its operational HQ from Copenhagen to Singapore because most of its markets were in Asia. → where they hove mast mornet At the corporate level, there are strategic rationales: - First, the HQ location is a clear signal to stakeholders that the firm is a global - rather than domestic or local - player. - Second, it may facilitate access to capital markets. A corporate HQ in a major financial center such as New York or London facilitates direct communication with institutional shareholders, financial analysts, and investment banks and promotes visibility in a financial market. - Third, moving corporate HQ to a new country clearly indicates a commitment to that country's market. Implications for practice - Appreciate the external rules of the game affecting the organizational structures of MNEs in home and host countries. - Understand and be prepared to adapt the internal rules of the game governing MNE management. - Develop learning and innovation capabilities to leverage multinational presence as an asset - 'act local, think global'. Chapter 17 17.1 Definitions of marketing and supply chain Marketing refers to efforts to create, develop, and defend markets that satisfy the needs and wants of individual and business customers. A supply chain is the flow of products, services, finances, and information that passes through a set of entities from a source to the customer. Supply chain management refers to activities that plan, organize, lead, and control the supply chain. 17.2 Understanding Consumers Around the World When companies want to adapt their marketing to consumers in different countries, they need to understand their (potential) consumers, media, and distribution channels. Companies conduct consumer research in their foreign markets - research aiming to explain and predict the behaviors of consumers. Such research may take several forms: (1) survey-based research, (2) experimental adaptation, and (3) anthropological studies. More recently, firms started relying more on the big data generated by tracking people's activities. - To make sure that the product and its marketing are appropriate in the foreign market, agencies turn to ethnography - A research method exploring cultural phenomena through participant observation. 17.3 Marketing Mix Consumer research is one side of the coin of international marketing; the other side is the marketing mix deployed by companies to reach consumers through (1) product, (2) price, (3) promotion, and (4) place. Product refers to the offering that customers purchase (physical products, services, brand identity). - A key concern is standardization versus localization. Standardization allows the exploitation of economies of scale. However, many fail because one size does not fit all. - Another major concern is to decide whether to prioritize global or local in their portfolio. The key is market segmentation - identifying segments of consumers who differ from others in purchasing behavior. There are limitless ways of segmenting the market (males versus females, university versus high school-educated. MNEs serve diverse consumer preferences with multi-tier branding, a portfolio of different brands targeted at different consumer segments: global brands for the premium segment, national brands for the mid-markets and/or for mass-markets, and further brands for specific niche markets. - MNEs should also consider translating brand and product names. For example, the Japanese fashion chain Uniqlo was very aware that in German, the name would be pronounced 'uni-klo' and be associated with university toilets. They delayed entry into Germany until after they established themselves in other large European markets. - Another key consideration is how much to emphasize the country of origin of a brand. At times of political tensions, such country-of-origin images can turn into a liability. - As a rule of thumb, products deeply embedded in culture, such as food and entertainment, tend to require more adaptation than, say, electronic gadgets like computers and televisions. Price refers to the expenditures that customers pay for a product. - Price elasticity- How demand changes when prices change. Most consumers are 'price-sensitive'. The basic economic theory of supply and demand suggests that when prices drop, consumers will buy more and generate stronger demand, which in turn will motivate firms to expand production to meet this demand. The segment of price-sensitive consumers is even more important in emerging economies, where many people still live on low incomes. - However, not all consumers are highly price-sensitive. Luxury products that are status symbols of upwardly mobile middle classes attain their status exactly because not everyone can afford these products. The brands usually compete on brand appeal and differentiation, not on price. Total cost of ownership: Total cost needed to own a product, consisting of initial purchase cost and follow-up maintenance/ service cost. Example: Nescafé Espresso machine. Prices for the machine start at €78 (and even less if you find a special offer), while a box of 16 capsules of coffee costs €5.65. Promotion refers to all the communications that marketers insert into the marketplace. Channels of promotion: TV, radio, advertising, social network campaigns, coupons, direct mail, billboards, direct marketing (personal selling), and public relations. There is a limit to the effectiveness of standardized promotion. The messages communicated in advertising are often culturally embedded, which implies that they would be received differently in different countries. Local implementation helps in adapting marketing and promotion to local tastes and adapting to political and cultural sensitivities. Humor, in particular, often does not translate well and is better developed locally or not at all. - In addition to the traditional localization challenge, a new challenge lies in marketing via the Internet. A key challenge of using such interactive media is that advertisers lose some control over their brands: this brand image evolves with the contributions of participants in online forums. However, this also entails a risk of unwanted images or stories spreading quickly and widely. The 'place' in marketing refers to the location where a product is sold, which can be a physical location or a virtual location on the internet. In international business, a key decision is often when to enter which market - and in what sequence. Four sets of considerations come into play: (1) market potential, (2) costs, (3) strategic motives and (4) distribution channels. 1. The potential of a market is usually estimated based on the size and growth of the market for the specific products, taking into consideration trends (measured by industry-level market statistics) that may affect potential customers' buying behavior (assessed by customer つ Tr 2. Second, expected revenues need to be converted to estimates of net revenues, taking into account both the cost of the initial entry and the unit costs that may be higher due to the adaptation of products and marketing programs. Third, strategic motives for the choice of market include test markets, which are markets where trials are rolled out before a worldwide (or Europe-wide) introduction of new products. For example, Nordic countries are a popular test market because they resemble other European markets. 4. Fourth, the question of place is closely related to the question of distribution channel - how to bring the products to the customer. 17.4 Supply Chain Management Distribution channel - the set of business units and intermediaries that facilitate the movement of goods to consumers. - Inbound logistics- Purchasing and the coordination of intermediaries on the supply side. - Outbound logistics- Sales and the coordination of intermediaries on the customer side. - Intra-logistics- The effective movement of goods within a factory. A supply chain, therefore, covers all movements of goods at any stage of the value chain, encompassing both inbound and outbound logistics. Three ways to strengthen supply chains: (1) agility, (2) adaptability, and (3) alignment. Agility refers to the ability to react quickly to unexpected shifts in supply and demand. For instance, at Zara, as soon as designers spot certain trends, they create sketches and go ahead with ordering fabrics without finalizing designs. This speeds things up because fabric suppliers require a long lead time. Designs are finalized when reliable data from stores arrive. Production commences as soon as designs are complete. Zara's distribution centers are also highly efficient, allowing the company to handle demand fluctuations without creating bottlenecks. - Under external shocks (such as the blocked Suez Canal in 2021 and the Icelandic volcano eruption in 2010), an agile supply chain can rise to the challenge, while a static one can pull a firm down. Adaptability refers to the ability to change supply chain configurations in response to long-term changes in the environment and technology. Enhancing adaptability often entails making a series of make-or-buy decisions. This requires firms to continuously monitor geopolitical, social, and technological trends, make sense of them, and reconfigure the supply chain accordingly. Outsourcing to specialist manufacturers not only enables the reduction of fixed costs but also flexibility, as firms are not burdened with excess capacity when changing production volumes. Alignment refers to the alignment of interests of partners in a supply chain. - Supply chains that are better at resolving conflicts of interest may be able to outperform other supply chains. - There are two key elements to achieving alignment: power and trust. - Sometimes, a neutral intermediary - more specifically, third-party logistics (3PL) providers - may more effectively align the interests in the supply chain. In the case of outsourcing in Asia, buyers (importers) include large retail businesses, while suppliers (exporters) are often smaller Asian manufacturers. Despite best intentions, both sides may still distrust each other due to extensive cultural and regulatory differences between the countries within the value chain. 17.5 Institutions, Marketing, and Supply Chain Management Formal and informal institutions in both target and home countries constrain the options for marketing and supply chain management. Standards in advertising - formal rules designed by governments to protect consumers- vary considerably across countries. Important to adapt for products such as tobacco or alcoholic beverages. Examples: ASA rulings and guidelines; in Germany, it is not permitted to directly compare performance with competing products. - Other constraints arise from ownership restrictions. - Informal rules do not lead to official sanctions, but they can undermine the effectiveness of market strategies. In marketing, most blunders happen due to failure to appreciate the deep underlying differences in cultures, religions, and norms - all part of the informal institutions. Supply chains not only create interdependencies between firms, but they themselves can become a channel for the diffusion of practices and norms. If consumers expect their T-shirts to be produced to certain minimum labor standards, then retailers use codes of conduct to impose these standards (along with documentation) on all manufacturers in their supply chain. Similarly, many European firms adopted the ISO 9000 series of quality management systers. 17.6 Resources, Marketing, and Supply Chain Management We can evaluate marketing and supply chain management activities based on the VRIO criteria. 1. VALUE a. Marketing creates value for a firm if it helps to increase revenues by either increasing sales volumes or raising prices that can be charged to customers, identifying products that best suit the customers. Marketers should constantly reassess techniques and deal with challenges in cross-cultural contexts. b. Supply chain management creates value for customers by providing products at the right time at the right place, but dependence on certain suppliers and channels may destroy value at times of disruption. 2. RARITY a. First movers into new techniques may attain rare advantages, which will still diminish because of the spread of the technology. b. If all rival firms advertise on Google and use DHL to manage logistics (all of which do add value), these activities, in themselves, are not rare. Country of origin as liability or asset - Being foreign can be a competitive advantage when it indicates quality or trend. Example: Anything Korean - ranging from handsets and TV shows to kimchi (pickled cabbage) flavored instant noodles - is considered hip in Southeast Asia. - Marketers have to decide whether to enhance or downplay such a country-of-origin effect. Some consumers may be attracted by the 'Americanness,' and some are not. Broad social resentment against a brand can be harmful to both the brand and the country of origin. In addition, if the political relationship between the two countries deteriorates, this can turn against a brand. - Others deliberately associate with a different country, For instance, Giordano downplays its Asian origin by adopting an Italian-sounding brand of clothing line made by a Hong Kong company that has no connection with Italy. 17.8 Implications for Practice The institution-based view suggests that knowledge of formal and informal rules of the game in each location of operation is critical. The resource-based view argues that firms such as Zara that develop superior capabilities in marketing and supply chain management will emerge as winners. - Know the formal and informal rules of the game on marketing and supply chain management in each local context in which you operate. - In marketing, study local consumers' behaviors, preferences, and norms to avoid blunders. - In supply chain management, focus on agility, adaptability, and alignment (the triple-A) BMW presentation I / R Framework not just at the corporate level, but also at business units (production, R&D, sales, marketing) and business activities GOODWILL 2 years warranty for every customer, and after those 2 years the customer covers the costs —> goodwill offer = BMW covers cost when smth happens after the warranty expires ○ customers have to receive the same treatment around the world (global standardization)  ○ different environments for the same car structure sometimes create problems, different types of defects ex. very warm or cold climate (local adaptation) ○ how they can individually customize the goodwill decision, pay attention to extra services to offer (customization) How do they do that? - HQ has the best information on global standardization - LOCAL SUBSIDIARIES know the market in different countries (local adaptation) - DEALERS are close to the individual customers (customization), they reach the local subsidiaries to suggest decisions, and are allowed by subs to make decisions themselves— quick response to individual customer Standardize goodwill consistent goodwill behavior across countries different outcomes in different countries: ○ different implementation of global goodwill decisions (Germany: the dealers find out that there’s a pattern of goodwill for a specific direct. very expensive bc they didn’t need to make individual goodwill decisions UK: the customers would have to reach the subsidiaries, and the dealers never discover if there’s a pattern or not, but more economical) ○ Different ideas about the right goodwill strategy Dealers’ exercise of decision-making authority Goodwill payment is always done by the subsidiaries, but sometimes the dealer could pay the goodwill on the spot and the subsidiary covers the costs = dealer authorization rate is different in each country (ex. Italy 91%, it trains the dealer to make the decisions) - In some cases is good to standardize and in others is good to customize - the importance of subsidiaries’ roles