International Strategy Studyguide PDF

International Strategy Studyguide 1 Lecture 1............................................................................................................................................................................................... 3 Chapter 1: Core concepts and FSAs.........

International Strategy Studyguide 1 Lecture 1............................................................................................................................................................................................... 3 Chapter 1: Core concepts and FSAs.............................................................................................................................................................3 Building a theory........................................................................................................................................................................................3 Firm specific advantages - FSAs...........................................................................................................................................................3 Location advantages................................................................................................................................................................................. 4 Liability & Advantage of foreignness.................................................................................................................................................4 Bounded rationality.................................................................................................................................................................................. 5 Bounded reliability....................................................................................................................................................................................5 The four MNE archetypes....................................................................................................................................................................... 6 Chapter 2: Prahaland and Hamel................................................................................................................................................................. 7 Benito, 2015: Elements of international strategy.................................................................................................................................8 Lecture 2............................................................................................................................................................................................... 9 Chapter 3: Porter’s diamond + Grant (?)...................................................................................................................................................9 Chapter 4: Ghemawat’s CAGE..................................................................................................................................................................... 10 Culer and Guillen, 2010: Strategic asset seeking FDI....................................................................................................................... 11 Lecture 3: Culture, institutions and international strategy.............................................................................................. 13 Beugelsdijk & Welzel, 2018..........................................................................................................................................................................14 Institutions and institutional distance....................................................................................................................................................14 Zhou and Guillén, 2016............................................................................................................15 Lecture 4: Entry modes................................................................................................................................................................. 16 1. FOREIGN DISTRIBUTORS (EXPORTING).......................................................................................................................................... 16 2. LICENSING AND FRANCHISING............................................................................................................................................................ 17 3. ALLIANCES / JOINT VENTURES............................................................................................................................................................17 4. WHOLLY OWNED SUBSIDIARIES......................................................................................................................................................... 19 4.B: Acquisitions...................................................................................................................................................................................... 19 4.B: Greenfield investment.................................................................................................................................................................. 19 4. C: Brownfield investment................................................................................................................................................................19 Foreign entry mode theories.......................................................................................................................................................................20 Oviatt & McDougall, 2005: Internationalization speed................................................................................................................... 22 Hollander et al. (2017): A resource based view on entry mode.................................................................................................. 23 Lecture 5.............................................................................................................................................................................................24 Chapter 5..............................................................................................................................................................................................................24 Chapter 6: Kuemmerle and International Innovation...................................................................................................................... 26 Lecture 6: International sourcing and production.............................................................................................................. 31 Chapter 7: Ferdows and International Production............................................................................................................................31 Lecture 7.............................................................................................................................................................................................36 Chapter 14: Khanna et al. on The role of emerging economies....................................................................................................36 Chapter 15: Emerging market MNEs....................................................................................................................................................... 39 eMNEs...........................................................................................................................................................................................................39 Tsai and Eisingerich (2010 CMR): Six types of EMNEs...........................................................................................................39 Hernandez and Guillen (2018, JIBS): What is theoreticallz novel about eMNEs?....................................................... 40 Chapter 17A: International CSR.................................................................................................................................................................40 D. Dunn and K. Yamashita, (HBR) ‘Microcapitalism and the megacorporation’...........................................................41 Richard Locke and Monica Romis (SMR)...................................................................................................................................... 41 S. Vachani and N. C. Smith (CMR)......................................................................................................................................................41 Lecture 8: Cross cultural aspects of corporate governance.............................................................................................. 42 Comparative corporate governance (Aguilera & Jackson, 2010)................................................................................................ 42 Business ethics from a cross-cultural perspective (Hooker, 2009)............................................................................................ 45 Relation based vs rule based cultures............................................................................................................................................ 45 2 Lecture 1 Chapter 1: Core concepts and FSAs Building a theory Step 1. - Developing unique resources 1. Physical resources (natural resources, buildings, plant equipment) 2. Financial resources (equity and borrowed capital) 3. Human resources (individuals and teams, entrepreneurial and operational skills) 4. Upstream knowledge (product and process-related technological knowledge) 5. Downstream knowledge (marketing, sales, distribution and after sales service) 6. Administrative knowledge (organizational structure, culture and systems) 7. Reputational knowledge (brand names, reputation for hones business dealings) Step 2. - Developing routines 1. The distinct ability to combine further the firm’s resources, in unique ways valued by the firm’s stakeholders 2. Routines are stable patterns of decisions and actions that coordinate the productive use of resources, and thereby generate value, whether domestically or internationally Step 3. - Recombination of existing resources in new ones - entrepreneurial skills 1. Constitutes the heart of international business strategy 2. “Artful orchestration of resources, especially knowledge bundles, as a response to differences between national and foreign environments, and to satisfy new stakeholder demands in these foreign environments” → basically: firms needs to well-organized and managed in all aspects both in the home and host countries 3. Entrepreneurial judgement is at the heart of the MNE’s recombination capability → Stand alone resources + Routines + Recombination skills = Firm specific advantages (FSAs) Firm specific advantages - FSAs FSA Definition: Firm-specific advantages reflect the firm’s distinct strength versus competitors and are a source of its competitive advantage in the marketplace Stand alone resources + Routines + Recombination skills = Firm specific advantages (FSAs) Recombination skills are the highest order FSAs because they are hard to imitate, innovating and diversifying Types: Location bound Non-location bound / internationally transferable 1. uses stand-alone, immobile resources linked Technological, marketing or administrative to location advantages knowledge 2. very deep knowledge of local marketing or a → these do not stop creating value when the local reputation border is crossed between home and host 3. developed a unique way of working that is country → the MNE can transfer, deploy and local; local best practises in form of routines exploit these FSAs successfully across 4. entrepreneurial potential (domestic borders recombination capability) which is difficult to transfer across borders to a different context 3 Location advantages Many firms are successful internationally because they take advantage of a favourable local environment Def.: entire set of strengths characterizing a specific location, and usable by firms operating in that location Should be assessed relative to the useable strengths of other locations Examples: ○ Abundant natural resources → may help the creation of successful firms in the natural resource industry ○ Superior educational system → support firms that build upon sophisticated human resource skills ○ Presence of demanding and sophisticated local market → specific products wil likely foster local innovation in the relevant industry Location advantages =! strengths to all locally operating firms More effective and efficient use of local advantages → additional FSA over other locally operating firms → may explain why only a few firms from world-renowned domestic industries have been able to grow internationally (ie. French parfume) Key def.: FDI: the allocation of resource bundles by an MNE in a host country with the purpose of performing business activities over which the MNE retains strategic control in that country Types: Home country location advantages Host country location advantages = motivations for FDI 1. Geographical scope 1. Natural resource seeking: availability of inputs 2. particular country (ie. favourable 2. Market seeking: Market size & growth, consumer tax regime) wealth & taste, availability of sales channels, availability 3. Only a part of a country (ie. of marketing and sales professionals economic or tech clusters) 3. Strategic resource seeking: Availability of 4. May even reach across country knowledge-related assets; availability of specialized borders (ie. NAFTA) intermediaries and service providers 4. Efficiency seeking: Availability of production factors at low cost 5. (Export platform MNE activity → infrastructure important) Liability & Advantage of foreignness LoF AoF A foreign firm (e.g., an MNE) has an a-priori A foreign firm (e.g., an MNE) may also have an disadvantage vis-à-vis a local firm, because of: a-priori advantage vis-à-vis a local firm, Geographic, linguistic, economic, political, because of cultural attractiveness educational, institutional, cultural, etc. e.g.,US fastfood; French wine & luxury goods; Bounded rationality and bounded reliability Italian styling The possibility of arbitraging between different regimes e.g., costs of inputs, taxes, environmental and labor standards 4 Bounded rationality Bounded rationality: reflects ‘scarcity of mind’, meaning that the manager responsible for making decisions and engaging in purposive action in the firm always fact information problems First problem: ○ any information about the environment relevant to the MNE’s functioning and performance, especially about the future state of the environment, is necessarily partial and incomplete, given the complexity and uncertainty characterizing the environment and its evolution ○ Basically: incomplete information ○ Incomplete information about environmental complexity → may impede successful international expansion Second problem: ○ Even if critical information is abundant and rather accurate, senior MNE management faces a problem of processing this information, especially in determining its relevance to the firm and its implications ○ Basically: difficulty processing information Bounded reliability Bounded reliability reflects the ‘scarcity of effort to make good open-ended promises’: agents do not always carry through on their expressed intentions to try to achieve a particular outcome or performance level First source of bounded reliability: opportunism Second source of bounded reliability: benevolent preference reversal ○ Type 1.: ‘good faith local prioritization’ / reprioritization - Overseas actors make promises in good faith → BUT with time divert their effort to the pursuit of local preferences at the expense of organizational/global preferences ○ Type 2.: ‘scaling back on over-commitments’ - Actor who made an initial promise was overconfident in his/her capacity to deliver These bounded reliability issues cannot be simply reduced to bounded rationality issues, because they are not caused by a lack of information or an inability to process information ○ Opportunism → individual may possess all information BUT self-centered desires ○ Benevolent preference reversal → making the same mistakes over and over again even if the outcomes of these mistakes are predictable Particular level of unreliability in the MNE can be eliminated by a number of governance mechanisms, such as 1. Contractual safeguards (ie. sufficient monitoring) to align interests → curbing opportunism 2. Joint goal development, goal segmentation (setting milestones) and frequent communication to align expectations and to sustain cognitive proximity thereby reducing reprioritization 3. Routines such as multi-level and multi-stage decision making processes to reduce the impact of individual evaluation biases and impulsivity. Thereby reducing the occurrence of over-commitments and the subsequent need to scale back on such over-commitments and the subsequent need to scale back on such over-commitements Bounded rationality is about the imperfect Bounded reliability is about the imperfect effort assessment of a present or future state of affairs, towards pre-specified goal achievement, thereby thereby leading to incorrect beliefs leading to incomplete fulfilment of promises 5 The four MNE archetypes Centralized exporter International projector International coordinator Multi-centered MNC* Defintition Produces everything at home and Copies home country operations Manages different operations in Collection of independent only sells abroad to host countries different countries to be most businesses: entrepreneurial Copy home paste abroad efficient subsidiaries that create their own Global Value Chain location bound FSAs Each country has its own value chain Transferable FSA (Embodied in final product) Knowledge about the product and Seamless logistic: smooth flow of Developing administrative and process products and services from one core routines; administrative Expatriates: managers that go country to another identity; company culture and from headquarters to Ability to coordinate location identity (e.g. logo) subsidiaries advantages present in multiple coutries Location advantage (host Customers (market-seeking) Customers Varies in each country Customers (tailor the products to market) Sells standardized products Also sells the same products in the demand of the customers) every country, but manufacturing can be close to the customer Location bound FSA Produce products that cater to (host market) - - - the needs of the customer → based on demand Example Motion picture studios (USA) Ford, Disney/ Disneyland British Petroleum Ltd; Logitech Philips (NL), Lafarge Group (FR) (SUI) 6 Chapter 2: Prahaland and Hamel Prahaland and Hamel’s 1990 HBR article: ‘The core competence of the corporation’ (Many complementary perspectives) Main idea: core competencies (=higher order FSAs) are the most important factors contributing an MNE’s success → these include: 1. Organization’s shared knowledge = organized into routines 2. Organization’s ability to integrate multiple technologies = recombination of internal resources 3. routines/recombination abilities carried by key employees The theory has a long-term, internal focus These core competencies product the core products → key component of end products Sources of competitiveness = core competencies (routines + recombination capabilities) + core products + end products Core competence → Core product → End product(s) Learning and knowledge about Two conditions: Sold to customers internal processes 1. Used in all end-products of the Eg. Honda → cars, lawn mowers, Cognitive (mind) → sth that top company motorbikes managers possess 2. Tangible (touch, feel) reflection of Eg. knowledge about producing the core competences engines → only applies to companies that Idea based upon internal produce multiple products organizational factors → not → primarily applies to respond to external pressures manufacturing companies (not service) Eg. Honda → engine 4 criteria of core competences 1. Difficult to imitate 2. Provide potential access to a wide variety of markets 3. Make a significant contribution to the perceived customer benefits of the end product 4. The loss of a core competence would have an important negative effect on the firm’s performance Primary role of senior / strategic management = develop a ‘strategic architecture’ = a road map of the future that identifies which core competencies to build and their constituent technologies Dangers of acquiring FSAs through external strategic alliances: 1. Need to have a clear understanding of the FSAs it is trying to build 2. Outsourcing strategies → may lead to loss of FSA Five main weaknesses of Prahalad and Hamel’s concept 1. They do not explicitly touch upon the issue of location advantages and geographic determinants of FSAs, nor do they consider the feasibility and cost in practice of transferring non-location-boud FSAs to other locations 2. They overlook the importance of the geographical embeddedness of competence carriers eg. individuals and groups with a deep knowledge of the company routines and the ability to drive resource recombination 3. They overlook the role of subsidiary-level capabilities of MNE competitiveness and the problems associated with transferring these to other units in the MNE 4. They overlook important bounded rationality and reliability problems 5. They fail to make a distinction between the back end and customer end parts of the value chain 7 Benito, 2015: Elements of international strategy WHY Internationalization motives: Market seeking Efficiency seeking Resource seeking Strategic asset seeking WHERE Location choice: Attractiveness of country / Distance to home country WHAT Marketing & sales / Manufacturing / Purchasing, extraction / R&D etc. HOW Export / licensing / franchising / JV / Alliance / FDI / Brownfield, Greenfield 8 Lecture 2 Chapter 3: Porter’s diamond + Grant (?) Michael Porter’s HBR article: ‘The competitive advantage of nations’ Porter’s diamond helps explain how companies emerge with firm specific advantages based on their home environment. Any company’s ability to compete in the international arena is based mainly on an interrelated set of location advantages in its home country High level of pressure in its home base → pushes the firm to innovate → FSA creation → these are instrumental to foreign expansion FSAs are primarily developed because of external pressure This theory has a short-term, external focus Four sets of country attributes → points of a ‘diamond of national competitive advantage’ ○ These + two external variables (government and chance) determine the competitiveness of specific industries in the international marketplace ○ These factors are industry specific! 1. Factor conditions Natural resources, skilled labour, scientific knowledge and infrastructure Particularly valuable if specialized These need to be continuously upgraded There is a relation between the location characteristics of a country and the competitive strengths of the firms in the country Types: Basic factors vs advanced factors Generalized factors vs. specialized factors 2. Demand conditions Domestic market size + domestic buyer sophistication → pressure → Incites companies to be innovative 3 broad attributes of the home demand conditions: (1) Nature of buyer needs, (2) Size and pattern of growth of the home demand, and (3) Internationalization of domestic demand. 3. Related and High-quality, internationally competitive home-based suppliers + companies in supporting industries related industries Also for instance high quality universities 4. Firm strategy, Highly competitive, home-based industry with efficient macro-level governance industry structure and several domestic rivals and rivalry 5. Government and Government: competitive advantage if well-functioning and not corrupt chance Luck Often long-term consequences of chance: new innovations, significant changes in world financial markets or exchange rates, oil crisis Criticisms of Porter’s model Verbeke: Porter places too much emphasis on the home country conditions → “firms expand abroad only if they can establish a match between their FSAs and the location advantages of the host economies they penetrate, whether input or output markets” Tautological? The framework is more descriptive than predictive Operationalization of many factors is difficult Less applicable to small open economies and to resource-rich economies 9 Chapter 4: Ghemawat’s CAGE anagers often overestimate the attractiveness of foreign markets because they fail to take into account the risks and costs associated with distance Higher inter-country distances → lower probability of success Person behind the theory: Ghemawat The four dimensions of ‘distance’ - CAGE (Walmart example) Dimension Details Examples Cultural Eg. differences in language, religious beliefs, social Starbucks → coffee norms and race traditions of countries Administrative/ Low if: common history, political ties, efforts towards US policies prohibiting Institutional economic and monetary integration, preferential trade US-based firms from agreements, synchronize government policies trading with Cuba Geographic/ Physical distance between countries, different Spatial topography, size, climate, time zones, transportation Economic Differences in consumer income level and distribution, Starbucks → requires a infrastructure characteristics, cos and quality of consumer base with a natural, financial, and human resources, prevailing certain level of wealth business practises 10 Limitations of Ghemawat’s distance framework: Macro level distances does not always hold for all firms (distance for a firm =! Distance for all firms) A firm’s FSA can be that it is able to deal with these distances Impact of distance differs for part of the value chain (eg. only upstream (eg. R&D) or only downstream (eg. marketing)) Ghemawat assumes that FSAs are developed in the home market, but firms may also develop FSA in a host country Ghemawat does not discuss cooperative entry modes (like JV) and how they may help to reduce distance (becuase they are complementary resources) Culer and Guillen, 2010: Strategic asset seeking FDI Institutions and the internationalization of US venture capital firms Introduction Venture capital firms make capital investments in “opportunities’ that typically entail high risk, and a potential for high return - they are typically strategic asset seeking ○ Traditional portfolio investment theories assume no managerial control ○ Traditional FDI assumes the firm exercise managerial control over the foreign operation While venture capitalists exhibit some characteristics of traditional foreign portfolio investor, they: ○ Provide the venture with organizational, managerial, industry, and even technological expertise ○ They exert much more frequent and extensive control over the company than a typical portfolio investor Venture capital is an activity difficult or nearly impossible to orgnaize effectively and successfully across borders ○ The local nature of deal-making ○ Venture capitalists tend to fund ventures located relatively close to their domicile so as to facilitate monitoring and control ○ This is similar to strategic asset seeking FDI by traditional firms RQ: What are the features of the institutional environment that influence venture capital firms’ foreign market entry decisions, and how does this effect changes as firms acquire experience Moderating role of experience → negative on each relationships ○ International investment experience provides venture capital firms with skills to: Evaluate and monitor investment opportunities Write contracts Lead investments toward successful liquidity events under different institutional constraints DV: VCF’s international experience IVs with significant effects: ○ Patents/GDP ○ Publictaions/GDP ○ English legal system ○ Stock market capitalization ○ Policy stability The decision of venture capital firms to invest in companies located in foreign markets is driven by ○ Institutions that foster the availability of innovative and entrepreneurial opportunities ○ The extent to which the institutional infrastructure of each country enables the appropriation of returns As the firm accumulates international experience, the effect of institutions becomes smaller in size, a finding the authors interpret as evidence that firms learn to overcome institutional constraints 11 Characteristics of locations: 12 Lecture 3: Culture, institutions and international strategy What is culture? Culture: the collective programming of the mind which distinguishes the members of one category of people from another The category of people can be a: ○ Nation, region, or ethnic group ○ Women vs men ○ Old vs young ○ Social class ○ Profession or occupation ○ Type of business ○ Work organization or part of it (organizational culture) ○ Family Two types of research Etic Emic Quantitative, outside-in, “objective” Qualitative, inside-out, “subjective” Features Criticised for failing to Focuses more on capturing the uniqueness of recognize the uniqueness and each cultural environment and look for complexity of cultures and specificities not found in other cultures; they relying on polarized views are based on the meanings and interpretations of members of a given culture Amae1 is an emic concept in the japanese culture, indivating a particular form of mutual dependency → cannot translate to English well Example Hofstede - IBM data 1967-1973 Ingelhart: world Values Survey program Original 4 dimensions: power Collected in six waves → whether culture changes distance, uncertainty avoidance (strong → rigid codes), 2 dimensions individualism, masculinity (more 1. Traditional vs rational-secular authority competitive) 2. Survival vs self expression values Additional 2: LT orientation, Indulgence Beugelsdijk & Welzel, 2018 → summary When both security and freedom are in short supply → people prioritize security As people feel safe, they begin to prioritize freedom because it is essential to thrive Is Inglehart misspecifying the dimensionality of cross cultural variation? The inside perspective of ethnographers, who strive to describe a particular culture in its own terms, and the outside perspective of comparativist researchers, who attemp to describe differences across cultures in terms of general external standards Critiques of Hofstede Data collection procedure and sample has been questioned on grounds of representativeness Empirical work has shown individualism vs collectivism and power distance are one factor, with individualism and power distance merging in a single pole The temporal stability of the scores on hofstede’s cultural dimensions is increasingly questioned Is national culture the correct unit of analysis? 1 Amae has important implication sfor hierarchical relations; the superior has the moral obligation to indulge the subordinate under specific circumstances; In return the subordinate is unquestionably loyal; can be seen as a safety valve in the strictly hierarchical japanese society; a particular manifestation of collectivism; also related to power distance and paternalism 13 Beugelsdijk & Welzel, 2018 RQ: Does the evolutionary logic of cultural change suggested by Inglehart and Welzel apply to a better validated set of cultural dimensions inspired by Hofstede? Re-analyzed the World Values Survey data Distinguish three comprehensive dimensions based on the data ○ Collectivitsm - individualism ○ Duty - joy (indulgence vs restraint and LT vs ST) ○ Distrust - trust (uncertainty avoidance) Over time, countries predominantly tend to shift towards more individualism, more joy, and more distrust When organizations embrace cultural diversity, they can: ○ Overcome rigidities and inertia, develop unique and potentially valuable capabilities, and foster learning and innovation ○ Pay greater attention to cultural sensitivities and be better prepared to navigate the cultural quagmires in the context of cross-border M&As ○ Have heightened levels of creativity, greater adaptability, and higher quality of problem-solving Institutions and institutional distance Institutions = the rules of the game: humanly devised constraints that structure human interaction, and these can be formal, such as rules and laws or informal such as norms of behaviors Neo institutionalism: regulative, normative, cognitive social structures that provide stability and meaning to social life Institutions are the crystallizations of culture and culture is the substratum of institutional arrangements 14 Beyond national institutions Zhou and Guillén, 2016 Institutional distance drives liability of foreignness, which is “all additional costs a firm operating in a market overseas incurs that a local firm would not incur Costs include ○ Product adaptation costs ○ Discrimination costs ○ Governance costs ○ Appropriation costs The decision to invest ineranationally and the impact of the investment reflect the joint effects of ownership, location, and internationalization (OLI) ○ O-specific advantage arises from multinationals’ ownership of, or access to, a set of income-generating assets, or capabilities to coordinate these assets, in a way that benefits them relative to their competitors (we call these FSAs) ○ L-specific advantages refer to specific resources and market conditions of a host country that are potentially available to all firms. ○ I-specific advantage reflects the greater organizational efficiency or superior incentive structure of hierarchies, or the ability to exercise monopoly power over the assets under common governance (the advantages of doing it yourself – being in control via e.g. greenfield) RQ: How does LOF reduces the advantages of these? ○ LOF is related to different types of costs and each types of costs are related to different types of institutional distance ○ Each LOF is more or less important, depending on motivation 15 Reflections on Zhou and Guillén Limitations of a single country study Data on FDI motivations are rare Do firms face discrimination costs with market seeking FDI? Example exam question: Using the paper “Categorizing the Liability of Foreignness: Ownership, Location, and Internalization‐Specific Dimensions” by Zhou and Guillen (2016), explain how each cost of liability of foreignness is related to institutional distance/institutions Lecture 4: Entry modes Two types Non-equity Equity Examples 1. Exporting 4. Greenfield 2. Licensing 5. Acquisition 3. Franchising 6. Joint Venture alliances Key organizing mechanism contract ownership 1. FOREIGN DISTRIBUTORS (EXPORTING) a) Centralized exporter b) Foreign distributors Example: Dell NOT sell through dealers → order from C → components from S → assemble → ship directly from factory to end user Advantages of the direct sales model → FSA ○ Closeness to end users → understand needs, forecast demand, build LT relationships ○ Savings through eliminating distributors → good for C and reduce inventory Direct sales model applied selectively: individual assessment of each host country ○ Users’ familiarity with the Dell brand ○ Availability of skilled sales force ○ Availability of capable suppliers and carriers to meet JIT management ○ Market size Problems when entering China through distributors → vicious circle of bounded reliability 16 Vicious circle / cycle of bounded reliability MNE typically incests very little in marketing and business development → assumes distributor takes care of these → ‘beachhead strategy’: this minimal, low-risk, low investment strategy → long-term intent: eventually take direct control → BUT many distributors know that they are temporary → unwilling to make significant investments → vicious cycle of increased bounded reliability: the distributor’s expectation of MNE unreliability + distributor unreliability MNEs are advised to maintain relationships with local distributors even after establishing their own network → balance between ○ Strategic control over important customers ○ Benefits from local partner’s marketing knowledge and market access ○ Risk reduction when faced with high demand uncertainty in new market 2. LICENSING AND FRANCHISING a) Licensing: a business arrangement in which on ecompany gives another company permission to manufacture its products or use its technology for a specified payment → explicit, patent-protected FSAs b) Franchising: arrangement where one party (the franchiser) grants another party (the franchisee) the right to use its trademark or trade name, as well as certain business systems and processes, to produce and market a G/S according to certain specifications → trademarks/ trade names and/or business formula 3. ALLIANCES / JOINT VENTURES a) Alliances - Advantage: share risks and costs (eg. R&D), learn from partners complementary resources, and quicker development of capabilities to deliver products and services - Challenge: learn as much as possible from this partner while giving away as few of your own FSAs as possible - Typically contractual - Control depends on quality of foresight b) JV: firm A from country 1 and firm B from country 2 join forces and jointly establish a new firm C in a foreign country, 1, 2, or 3rd - Based on contract and equity ownership - Control based on contracts and residual ownership rights Hamel et al.. 1989: Collaborate with your competitors and win Lecture notes: Many alliances between Western and Asian MNEs in the 1980s and 1990s were outsourcing arrangements In these cases the Asian firms tended to profit more: ○ Intrinsic willingness to learn from alliance partner ○ View alliances as an opportunity to develop new FSAs rather than to reduce investment and risks ○ Define clear learning objectives and focus efforts on acquiring new knowledge ○ Own contribution to alliance often involves complex, tacit process knowledge that is not easily imitated or transferable Question: Why do some MNEs gain strongly, whereas others end up as losers? It is possible for both MNEs to benefit! 17 Main ideas HBR article by: Gary Hamel, Yves Doz and C. K. Prahalad Focus: why large MNEs form strategic alliances with equally large foreign firms that are also rivals in the international marketplace ○ How to win the learning race: how to learn more from your partner than your parner learns from you Explain why some MNEs greatly benefit from these partnerships in term of FSA development, while others do not Benchmark: the change in each partner’s competitive strength Four key principles that successful companies adhere to when forming strategic allances: 1. Collaboration is competition in a different form 2. Harmony is not the most important measure of success 3. Cooperationi has limits → companies must defend against competitive compromise 4. Learning from partners is paramount It is possible for both parties to benefit from the alliance → for this, each must share some but not all of its knowledge and skills ○ Companies must select what skills and technologies they pass to their partners Obtaining new FSAs New knowledge obtained from the external partners must be effectively disseminated internally: “Knowledge acquired from a competitor-partner is only valuable after it is diffused through the organization” Nature of the FSA affects how easily it will diffuse to a partner → important variables: 1. Mobility (the ease of moving the complete physical instructions of how to duplicate an FSA) → the more mobile the FSA, the more easily it may diffuse 2. Embeddedness → an FSA is embedded if it cannot easily be shared through communication with actors outside the firm, without problems of interpretation or absorption across cultures → the more embedded the FSA, the less easily it may diffuse Limiting the sharing of FSAs Limit the formal scope of the alliance to a well-defined learning area Careful consider the physical location of the alliance (eg. far away from headquarters) Establish incremental, performance-related checkpoints → specific knowledge bundles valuable to alliance functioning are shared only within the alliance context, and only when the alliance has achieved some preset performance benchmarks Empower company ‘gatkeepers’ to control and moderate informal information transfers at lower operational levels to the partner (eg. easy access to key people and facilities prohibited) Prashand Kale and Jaideep Anand (CMR): Alliances/JVs in emerging economies (India) Foreign MNEs usually won the “learning race” against its partner, theregy eliminating resource compelementarity The learning asymmetry between the MNE and its local partner creates an inherent instability in the JV Growing incentive to transform the JV into a wholly owned subsidiary Volkswagen vs Suzuki → VW did not share core technology 18  4. WHOLLY OWNED SUBSIDIARIES 4.B: Acquisitions M&A are not easy: 1. Pre. and post integration obstacles 2. “Purchase price premiums” So why do managers still do M&As? - Cognitive biases why managers like M&A 4.B: Greenfield investment Advantages Disadvantages - Can exert higher level of control over - Cannot build on expertise local partner subsidiary - Allows for incremental investments 4. C: Brownfield investment Advantages Disadvantages - The acquired firm can have resources - Conflicts over restructuring that are valuablc to the MNE - Somewhat less control than with - Can help overcome weak local greenfield institutions 19 Foreign entry mode theories Transaction cost Two key assumptions theory Actors operate and choose within a bounded rationality There is potential for actors to behave opportunitistically (bounded reliability) Distinction between two types of uncertainty Environmental uncertainty (eg. political risk) Behavioural uncertainty (behaviours of partner firms, suppliers, distributors, etc.) → they type of risk that dominates (in the decision makers mind) determines the entry mode TCE approach To entry modes is static Generally considers whether firms enter countries via market based modes (eg. contracting) or internationalization (eg. WOS) Firms perceiving high transaction costs (high funding, negotiation and monitoring costs for partners) in a market tend to use wholly owned modes Transaction costs increase when: ○ It can be difficult to estimate contingencies in an arrangement with a partner ○ There may be information asymmetry between partners ○ Monitoring and enforcement might be difficult due to distance, communication problems and lack of measurable outcomes Asset specificity Definition: Assets that lose value in alternative use The level of firm-specific technology (asset specificity) may also influence mode choice, since firms with greater technology may incur higher transaction costs in safeguarding their technology from misappropriation Firms making high asset specific investments tend to use wholly owned mode as asset specificity tends to create contracting hazards because of the impact of opportunism, when a partner can take advantage of another firm’s dependency Institutional theory Institutional theory investigates how firms enter and later operate in foreign markets, in an institutional context Isomorphism: companies try to look more like other companies to gain legitimacy in an environment - tension between external isomorphism and internal isomorphism Choice between a JV and WOS ○ Foreign firms choose for JV if there are strong regulative andn normative pressures in the host country ○ Foreign firms tend to choose the entry mode that is more frequently used by their competitive counterparts in the same host country ○ Foreign firms tend to choose the entry mode that they have chosen in preceding foreign market entries Institutional theory reflects a static view on entry mode choice based on antecedents/influencing factors on the one hand, and entry mode choice and respective performance outcomes on the other hand 20  The eclectic The eclectic paradigm (OLI) distinguishes between 3 types of advantages paradigm 1. Ownership advantages (FSAs) 2. Location advantages 3. Internationalization advantages Used to explain choice between ownership and non-ownership modes If all three advantages are present → ownership-based entry form → WOS, acquisition, brownfield, greenfield, JV Otherwise market based entry firm → export, licensing/franchising, contractual alliance Static approach Internationalization Over time firms learn, which allows them to process theory Increase commitment (investments) Opt for higher control modes (equity-based) Enter markets at a larger “distance” Dynamic approach An embedded subsidiary is a subsidiary that has strong ties to local market and non-makrket actors Resource based view Emphasizes importance of resources/competencies (FSAs): How can the resources be made of value in a foreign market? How can the resources be protected? Companies can learn Recombination skills Internationalization experience Country-specific experience Can use resources to help deal with LoF Strategic, more dynamic approach 21 MNE types and entry mode choice Lean Effects of digitalization on internationalization internationalization Enhances communication capabilities, enabling better coordination across geographically dispersed activities Equips firms with greater flexibility to organize their boundaries through outsourcing and offshoring Attenuates cross-border information asymmetries Reduces resource commitments Reduces dependence on location-specific FSAs Allows firms to adopt local identities in foreign markets Allows for faster learning through direct customer feedback Oviatt & McDougall, 2005: Internationalization speed International entrepreneurship: More recently, research has shifted away from explaining slow, incremental internationalization to highlighting how recent technological advances and cultural awareness has appeared to open previously untapped foreign markets to new ventures – Here, we focus on “born globals” or international new ventures, which are business organizations “that, from inception, [seek] to derive significant competitive advantage from the use of resources and the sale of outputs in multiple countries”. This paper presents a model of how the speed of entrepreneurial internationalization is influenced by various forces. The model begins with an entrepreneurial opportunity and depicts the enabling forces of technology, the motivating forces of competition, the mediating perceptions of entrepreneurs, and the moderating forces of knowledge and networks that collectively determine the speed of internationalization The model in words: after an entrepreneurial actor discovers or enacts an opportunity and interprets the enabling and the motivating forces, then the knowledge–intensity of the opportunity combined with the know–how already available to the entrepreneurial actor, plus the characteristics of the entrepreneur's international network largely determine internationalization speed. 22 Hollander et al. (2017): A resource based view on entry mode SMEs suffer from limited financial and personnel resources and the respective capabilities to employ these resources making them highly vulnerable to costly failures in foreign markets SMEs often lack foreign market knowledge as they are less internationally diversified and possess fewer international engagements compared to their larger counterparts Third, SMEs are particularly sensitive to external challenges arising in the host country market Equity Allow firms a greater closeness to foreign markets and customers Require significant managerial and financial resources in order to set up such foreign operations Non-equity Require lower amounts of resources and provide greater flexibility Lack foreign market closeness A RBV on entry mode choice of SMEs The TBV considers a firm’s valuable, rare, ahrd to imitate or substitute resources and capabilities as foundation of sustainable CAs and, in turn, superior firm performance ○ International experience - experiential knowledge on how to organize and manage the firm in international environments ○ Product adaptation - firms’ ability to adapt the physical characteristics as well as the attributes of products in order to better meet the needs of foreign customers Both enable SMEs to mitigate their liabilities of smallness and, in turn, to pursue their foreign market entry mode strategy with greater efficiency (leading to an improved foreign venture performance) Hypotheses: 1. SMEs that choose an equity entry mode achieve a higher foreign venture performance 2. Non-equity entry modes enhance SME’s foreign venture performance in the presence of high levels of international experience 3. Non-exuaity entry modes enhance SMEs’ foreign venture performance in the presence of high levels of product adaptation 4. A configuration of non-equity entry modes coupled with high levels of international experience and product adaptation will positively influence SMEs’ foreign venture performance Final thoughts Neither mdoe of entry is more beneficial in all situations, instead, the non-significant effect emphasizes the need to contextualize the entry mode choice and foreign venture performance relationship Resources and capabilities help SMEs to pursue (entry mode) strategies with greater efficiency Resources and capabilities need to be studied in combination What about cultural and institutional distance? - it is harder to use current firm FSAs as distance increases 23 Lecture 5 Chapter 5 Introduction: People of the chapter: Bartlett and Ghoshal Main idea: large MNEs are making a mistake when they adopt the two simplifying strategies of homogenization and centralization ○ Homogenization: treating all subsidiaries the same ○ Centralization: making all their strategic decisions at central headquarters Problems: ○ Not recognizing subsidiaries’ potential to develop strengths on their own ○ Not further improving the MNE’s existing FSA bundles ○ Corporate headquarters: isolate and ignorant to changing conditions in international markets → bounded rationality and bounded reliability problems What a firm should so: ○ Optimize the deployment of their present FSAs ○ Support the development of new FSA s in their multinational subsidiary network The two simplifying strategies ‘United Nations model’ ‘Headquarters hierarchy syndrome’ Approach Homogenized Centralized Treatment of Similar in terms of roles and Decisions and control by headquarters, subsidiaries responsibilities regardless of unique subsidiaries just implementers and features and environments adapters Either complete subsidiary Can work for International coordinator independence or dependence Can work for International Projector Results Subsidiaries in important and Subsidiaries with specialized resource = problems unimportant markets are treated the base → cannot unleash their same → opportunities not optimally entrepreneurial abilities exploited Response to 1. Many MNEs have moved towards ”an organizational model of problems differentiated rather than homogenous subsidiary roles and of dispersed rather than concentrated responsibilities” a. Subsidiaries need to adapt to local conditions → Multi-centered MNE b. Capabilities can charters differ between subsidiaries by design → International coordinator 2. Simple normative model as a response to differentiated subsidiary role requirement a. Strategic importance b. Resource base 24  Black Hole Strategic leader Presence in key market → keep up Role: assist corporate headquarters in HIGH with actions of competitors identifying industry trends and BUT long-run → commit more developing new FSAs in response to resources to improve subsidiary → emerging opportunities and threats improve market success Implementer Contributor Most common Typically developed new FSAs (often LOW BUT key to success → may generate a result of entrepreneurial host country steady stream of cash flow → management) contributing to scale and scope economies → competitive advantage LOW HIGH Limitations 1. Subsidiary roles are not always decided upon by HQ, but can also be the result of subsidiary initiative a. How can subsidiary initiative be encouraged and guided? → more resources, personnel on both sides for communication 2. The analysis is static a. Does not address subsidiary role dynamics, especially after regional integration schemes 3. No distinction is made between upstream and downstream compeittencies / opportunities 25 Core competences = highest order FSAs Company’s shared knowledge (organized into routines) Ability to integrate multiple technologies (reflecting the recombination of internal resources) routines/recombination abilities carried by key employees (the so-called competence carriers) that can be deployed across business units “In the long run, competitiveness derives from an ability to build, at lower cost and more speedily than competitors, the core competencies that spawn unanticipated products. The real sources of advantage are to be found in management’s ability to consolidate corporate-wide technologies and production skills into competencies that empower individual businesses to adapt quickly to changing opportunities” Stand alone FSAs such as technological know-how are NOT CORE COMPETENCES They involve: ○ Collective learning ○ Communicating ○ Harmonizing multiple streams of technology ○ Organizing value-creationskills across departmental boundaries They should: ○ Be difficult to imitate ○ Provide potential access to a wide variety of markets ○ Make a significant contribution to the perceived customer benefits of the end product Core competences → produce the physical, tangible core products Areas of technological leadership in the form of key components from which end products are developed and created End products = finished goods Chapter 6: Kuemmerle and International Innovation Introduction Outsourcing Offshoring The decision to do it yourself or not The decision to produce in another country Def.: Using a company outside the multinational Def.: obtaining services or products from another firm to perform services and / or create goods country that traditionally were performed inhouse by the While much offshoring involves outsourcing multinational firm. production to another company, it can also refer to re-location of certain aspects of a business to another country MNEs move from centralzed R&D in home country towards international networks of foreign R&D laboratories Two main reasons: 1. Need to move quickly from innovation to market (output side) → integrate R&D and manufacturing locally 2. Need for presence in knowledge and innovation clusters (input side) → acquire new knowledge The location of R&D matters 26 Main reasons for offshoring 1. MNEs want to be present in different knowledge & innovation areas in the world (clusters of innovation: Bangalore ICT, Route 128 Boston / Silicon Valley) 2. Commercial pressure to move quickly from innovation to market (from lab to customer in shortest time span) 3. Offshoring of advanced tasks is also possible because ICT revolution, physical proximity no longer always needed Home-base-exploiting labs Characteristics: Should be close to key markets and the MNE’s own foreign manufacturing units → technological innovations can be rapidly adapted to host country requirements → adapt manufacturing to → support production Role: adapt standard products to local demand there Sometimes requires new location bound FSAs in host countries to link the MNE’s internationally transferable FSAs more effectively with the location advantages of the host country Information flows from HQ to subsidiary Example: Eli Lilly’s in Japan → senior manager selected as leader Key bounded rationality problem: distance between home country R&D operations and host country manufacturing operations → solution: put managers in charge in foreign lab that know the firm and the central lab 27 Home-base-aguamenting labs Characteristics: Should be located in critical knowledge clusters relevant to the MNE’s businesses → good position to tap into new sources of innovations Develop knowledge for the entire MNE Information flows from subsidiary to HQ Example: Xerox in France → hired renowned French scientists Main problem: access local knowledge and use while not being an insider (is difficult) thus strengthen ties with local community but also make sure knowledge is useful and relevant for manufacturing operations 3 Key limitations of Kuemmerle’s model 1. Ignores tension between host country lab(s) and central HQ lab in setting the research agenda: subs managers versus central Top management team, e.g. are R&D initiatives of subsidiary in line with overall corporate strategy? 2. He does not include the possibility of JV or SA as options to tap into foreign country’s knowledge 3. Hidden (and rising) costs of offshoring: offshoring in US peripheral regions. → underestimate costs and overestimate benefits Reshoring: bringing back activities to the home country after they had been offshored Main reasons for reshoring: Wage and currency changes quality, warranty and rework Freight costs and delivery 28 Complementary perspective 1: Andrew Inkpen, Learning through alliances, CMR 2005 Distant knowledge can sometimes be accessed in the home-base itself, through collaboration with foreign firms Codified tacit knowledge Example: General Motors (GM) did not set up a home-base augmenting (or exploiting) site in Japan, but learned about the Toyota Production System principles through a joint venture with Toyota Beginning low productivity, high absenteeism (unexcused), low quality, managers acting arbitrarily ignoring safety measures, workers stealing goods and getting drunk Process GM contributed the Fremont plant; Toyota was responsible for the design and operation of the plant Toyota contributed $ 100 million in cash; a further $ 250 million raised by the JV itself Toyota contributed core staff of 30-35 managers on a 3-5 year basis, plus 30-60 lowerlevel managers and trainers on a 3-month rotating basis; GM contributed only 16 managers on a 3-year basis Two types of car produced: Corolla FX & New version of the Chevrolet Nova: Toyota designed and engineered both GM wanted to innovate and learn about Toyota Production System: especially its ‘lean manufacturing’ principles GM needed to overcome several bounded rationality challenges Result Employee pride increased Absenteeism dropped and participation in the program rose Complementary perspective 2: Julian Birkinshaw and Nick Fry: Subsidiary initiatives to develop new markets, SMR 1998 Roles of subsidiaries change over time due to chater change and subsidiary initiative ○ Charter change: change in the “shared understanding between the subsidiary and the headquarters regarding the subsidiary’s scope of responsibilities” ○ Subsidiary initiative: “the proactive and deliberate pursuit of a new business opportunity by a subsidiary company, undertaken with a view to expand the subsidiary’s scope of responsibility, in a manner consistent with the MNCs strategic goals” Changes in subsidiarz capabilities and subsidiary carter influenced by: Parent company Competitive internal resource allocation factors Decentralization of decision making Ethnocentrism / polzcentrism top managers Subsidiary Track record of subsidiary facors Quality of the relationship subsidiary HQ Entrepreneurial qualities of subsidiary managers Host country Strategic opportunities in the host country factors Host country government Dynamism of local business environment 29 Subsidiary driven charter expansion Parent driven invesetment Parent driven divestment Atrophy through subsidiary neglect 30 Lecture 6: International sourcing and production Chapter 7: Ferdows and International Production Introduction: Original framework for subsidiaries developed by Bartlett & Goshal Kasra Ferdows: 3 major changes that leads production subsidiaries to become more than just cheap production locations: 1. International tariffs went down: (GATT/WTO), need to establish plants to overcome trade barriers not that important anymore. 2. Production is more complex in terms of supply chain management and planning: not just low wages, but overall productivity counts, including technology and infrastructure. 3. Time to go from manufacturing to marketing has become shorter: MNEs increasingly co-locate development & manufacturing (broad mandate for subsidiaries) RQ: How can a factory located outside of a company’s home country be used as a competitive weapon not only in the market that it directly serves but also in every market served by the company? ○ Efficient and low cost or producing and innovative? 3 factors changing the roles of foreign factories 1. Declining tariff barriers 2. Increased capital intensity of manufacturing 3. Increased importance of co-location manufacturing and R&D Beyond the traditional motives (tariff and trade concessions, cheap labour, capital subsidies and reduced logistics costs), MNEs should leverage their foreign factories to get closer to customers and suppliers, to attract skilled and talented employees and to create centres of expertise for the entire company Six roles of foreign manufacturing plants MNE activity Strategic Level of distinct FSAs held by the plant purpose of the market Weak Strong Strategic asset Access to Outpost (I) Leader (I) seeking MNE knowledge and activity skills Similar to ‘Black hole’ (input side) Access to valuable inputs Gather info & knowledge Role in local innovation For ‘O’ combined with ↓ Closely connected to key players Market seeking Proximity to Server (O) Contributor (O&I) MNE activity market Manufacture to regional markets Similar to server but commands Some FSA development stronger capabilities Little autonomy Still regional / specific markets Resource recombination and product development Efficiency Access to low Offshore (O) Source (O&I) seeking MNE cost production activity Access low-cost production Access low-cost production Does not develop new FSAs Also resource recombination Minimum autonomy ‘Best practise’ plant Output exported FSA development + autonomy Implementer on the input side Strategic leader on the input side 31 Key differences between plant types Upgrading development from left to right, for all types of MNE activity (according to Ferdows) Upgrading involves resource recombination spread over 3 stages: 1. Enhancing internal performance (eg. training, JIT manufacturing) 2. Accessing & developing external resources (eg. strengthening supplier network) 3. Developing new knowledge that can benefit the overall network Upgrading often does not take place, because: 1. Fear of relying on foreign subsidiaries by HQ 2. Treating overseas factories like cash cows, neglecting long term investment 3. Creating instability by shifting production in reaction to exchange rates and wage costs 4. Government entices MNEs to locate in sometimes unattractive locations Factories more upgraded → FSA development → greater emphasis on intangible internal strengths (like recombination abilities) and location advantages and less on tangible ones such as lower costs or taxes End result: ‘robust network’ of factories with FSA-developing roles, able to adapt swiftly to changes in the marketplace Criticism of Ferdows’ work Ferdows believes that management should upgrade all factories; not necessarily true. Ferdows underestimates the value of low cost (highly efficient) factories in host countries. This may still be important. The choice for permanent offshoring can be a good one if the firm’s FSA is the capability to flexibly offshore activities. Complementary perspective 1: Kedia &Mukherjee, 2009 Ferdows does not discuss the changing nature of production: outsourcing and increased use of lont-term, relational contracting with external suppliers Kedia &Mukherjee, 2009: Understanding offshoring ○ Outsourcing: finding the optimal level of control over the firm’s activities 32 ○ Offshoring: Transnational relocation or dispersion of activities 33 In-house development Great interest in staying on shore Very few advantages of externalizing certain functions Company already has the assets and skills → just do it in-house Read the article to understand and make notes for the rest Complementary perspective 2: Willy C. Shih, ‘What it takes to reshore manufacturing successfully’. 2014 “Rising costs of labour and utilities, logistics challenges, etc. in foreign locations have prompted many firms to reshore activities back to their home country Six challenges of reshoring: 1. Hiring skilled employees in new plants in home country 2. Decades of offshoring led to shortage of high level production engineers and managers 3. capital/labour ratio 4. Hollowed-out supply base 5. Convincing customers of reshoring 6. Linking reshored production with R&D activities Video at the end → relevant for exam Flex case → similar questions in exam Founded in 1969 in CA, expanded internationally in the 80s Initially put components together but later they evolved 1. How did Flex classify its plants before the mid 1990s: a. According to the complexity of PCB assembly and the technologies involved 2. What was the drawback of such a classification? a. Only what they did at the moment but no focus on the future 3. Define the strategic roles of the following plants mentioned in the case a. The chennai industrial park in India b. The Guadalajara industrial park in Mexico c. The Doumen industries park in 34 The chennai industrial Serves Indian market exclusively park in India Has developed specific strengths Will become part of Flextronics global supply network Type: Server → Contributor → might be upgraded a leader The Guadalajara Proximity to North American market: regional output oriented industrial park in Mexico Some of the jobs were later moved to Doumen industrial park in China Type: offshore or server → They wanted cheap labour → access to low cost production → OR they wanted to be close to US The Doumen industries Access to skilled workforce and tech capabilities park in China Distinct FSAs: proximity to supplier network Acces to knowledge and skills is combined with access to low cost production Increasing role in Flextronics’ worldwide manufacturing activities Type: initially offshore → then source → finally leader The plants acquired from Focus on gaining access to advanced tech cap and specialized IE knowledge High capacity and capability to offer customized tech solutions to customers Advanced recombinateion capabilities Global role in worldwide (photo) Type: leader 4. Why does Flextronics still have manufacturing plants in some high cost regions? a. Either to stay close to key customers or to gain advanced tech capabilities → the former contributor plants while the latter leader plants 5. Where does the strength of Flextronics lie? → in its portfolio of different types of plants a. Regional plants to maintain proximity to key customers b. Low cost locations for generic jobs c. Plants with access to advanced technological capabilities d. Plants developing world class specialty in certain strategic areas 35 Lecture 7 Chapter 14: Khanna et al. on The role of emerging economies Introduction Emerging economies: fastest growing markets for most products and services MNEs are attracted to these countries bc. LAs & new markets ○ Relatively inexpensive skilled labour ○ Lower manufacturing and service costs ○ Different genre of innovation MNEs from North America, Europe and Japan need to enter emerging economies as a counter-strategy to the increasing expansion of emerging economy MNEs into the world’s developed markets Common aspects of a country’s economy that underlie various definitions of ‘emerging economy’: ○ Absolute level of economic development (GDP per capita) ○ Pace of economic development (GDP growth scale) ○ The extent and degree of stability of the ‘free market’ system features Main ideas of Khanna et al. Most important criterion: presence of institutional voids (market faliures) → absence of: 1. Efficient local intermediary firms 2. Certain broader macro-level institutions (eg.contract reinforcing government) → in the developed home country these would be generally available LAs Eg. absence of intermediary firms → in the home country these are a source of LB complementary resources allowing MNEs to deploy and successfully exploit their NLB FSAs (for example strong retailing networks) → in the developing country: lack of skilled market research Institutional voids in emerging economies require MNEs to engage in substantial investments to create compensating LB FSAs, instrumental to the successful exploitation of the MNE’s extant, NLB FSAs ○ BUT very difficult → avoid such markets ○ Even if they try → severe bounded rationality constraints For instance: choosing the country Bounded rationality problem: the traditional analyses of emerging economies do not show the relevant data → do not account for many significant differences → Khanna et al.: Five components of the institutional context that are relevant (below) → the conventional industry analysis is only useful after understanding the country’s institutional context Five components of the institutional context: Political & social Identify a country’s power centres and assess wheter there are checks and system balances in place What is the rule of law? Questions to assess: What form of private property rights protection exist? How independent are the media? How accountable are politicians? Can strangers be trusted to honour contracts? Country openness Openness refers to the extent that the country welcomes FDI, but it also includes openness to ideas and openness to travel The openness in a country affects the markets directly relevant to firms 36  Questions to assess: Are the government, media and the population at large receptive to foreign investment? Can a company make greenfield investments and acquire local companies? Are foreign intermediaries allowed (i.e. advertising firms, retailers, auditing firms)? Can executives leave and enter the country freely? Can citizens travel abroad? Product markets Emerging economies are becoming increasingly attractive, but MNEs still struggle to get reliable information about the consumers in such markets Questions to assess: What is the availability of data on customer tastes and purchasing behavior? Are there cultural barriers to market research? Can customers obtain unbiased information? Can companies access raw materials of good quality? Labour markets Large labour pools, but these countries often lack both managerial and skilled workers MNEs have a difficulty assessing the quality of talent available Also: what is the language of business? Questions to assess: What is the language of business? Are there post-recruitment training needs? Can employees move easily from one company to another? Capital markets Emerging economies’ capital markets are largely inefficient and lack specialized intermediaries in areas such as credit rating, investment analysis, banking services, venture capital and auditing It may be difficult for the MNE to raise capital Questions to assess: Are there capital market inefficiencies in areas such as ○ barriers to raising capital, ○ weakness in corporate governance (i.e. investor protection), ○ absence of financial intermediaries, ○ inefficiencies in regulating the financial services sector, ○ poor accounting standards, ○ inadequate procedures surrounding financial distress? After examining the five component: 3 options 1. Adapt the MNE’s business model to the host country while keeping its core dominant logic constant a. MNE melds NLB FSAs from the home country with newly developed LB FSAs in the host b. Example: Unilever entering India or African markets → they trained women from those communities as micro entrepreneurs and used them to sell their products to the communities 2. Change the emerging economy’s institutional context (eg. to create more efficient markets) a. But this is only available to a limited number of MNEs b. Example: Suzuki to India → could not rely on suppliers bc too low quality → trained suppliers 3. Stay out of emerging economies where the requirements for new FSA development are too high a. Example: Home depot → stay out of some latin American countries 37 Why do MNEs still go to emerging markets? Efficiency seeking Market seeking Plus: Managers do not really take institutional aspects into account Most important aspects looked at when entering new country (Source: McKinsey): ○ 61% >> market size ○ 17% >> political and economic stability ○ 13% >> structural conditions (institutional context) Example: Heineken in Africa (idk if real) Taking advantage of institutional voids Create monopolies, tax avoidance, embellishing impact, advertising freedom, like marketing beer as healthy 38 Chapter 15: Emerging market MNEs eMNEs eMNE: emerging market MNE - a company with a permanent foreign presence and whose home country is an emerging economy Traditionally ○ Low level of technology and advertising intensity ○ Low cost labour and materials in large scale manufacturing plants ○ Privileged network ties with local stakeholders Recently ○ Technology based or marketing based FSAs ○ Engagement in new forms of resource recombination Strategy for eMNEs 1. Specialize in cost efficient, mass-scale manufacturing 2. Spread the own value chain across borders 3. Move up the value chain 4. Specialize in the narrow segments of the value chain For example, Google and eBay started as industry leaders in China, but were, over time, outperformed bz Baidu and TaoBa Main challenge for eMNEs: lack of managerial and organizational capablities to govern a multinational network Tsai and Eisingerich (2010 CMR): Six types of EMNEs 39 Hernandez and Guillen (2018, JIBS): What is theoreticallz novel about eMNEs? Classic theories of MNEs were originally from observations rom the most developed parts of the world Categorization of prior work arguing that classic theory: ○ Requires no changes ○ Should incorporate boundary conditions ○ Modify basic assumptions ○ Should be completely discarded (very few say this) New multinational enterprises compared to traditional multinationals Key takeaway: up their capabilities Complementary perspective: Orit Gadiesh and Till Vestring (SMR) Success largely attributed to their focus on products of sufficient quality and sufficiently low price to gain market share in segments of the middle class and B2B ○ In some industries, the share of the good enough products represents 80% of the total market ○ Example of huawei and its strategic pillars Strategy for foreign MNEs: dual branding (creating separate brands for the same product or service) Chapter 17A: International CSR Rana Plaza example: On April 24, 2013 at 8:00 a.m. ○ 3639 workers refused to enter the building due to large and dangerous cracks in the factorz walls ○ Coerced to enter with violence and the threat of losing their jobs At 8:45 a.m. ○ The electricity went out and the factories’ five generators kicked in ○ Loud explosion as the building collapsed, killing 1137 workers Who was to blame? The outsourcing firms, the building owner or the government? 40 CSR CSR refers to good citizenship bz the firm → obligations and responsibility towards society affected by firm’s strategies and practices International CSR ○ Particularly important when extending supply chains to developing countries ○ MNEs dictate these policies from HQ D. Dunn and K. Yamashita, (HBR) ‘Microcapitalism and the megacorporation’ Argument: good citizenship can be viewed as a cost increase but also as an opportunity to develop FSAs and to improve performance HP’s CSR efforts (iCommunity initiative in Kuppam, India) ○ Citizenship efforts on e-inclusion: the use of technology to reduce economic and social divides ○ HP realized that doing good and doing well could be made mutually reinforcing & the benefits have extended to other communities: Richard Locke and Monica Romis (SMR) Argument: MNEs need to go beyond monitoring suppliers for compliance with labour codes and should instead attack poor working conditions at their source Comparison of two Mexicon firms subject to Nike monitoring, but very different in working conditions S. Vachani and N. C. Smith (CMR) Argument: pricing allows the MNE to fulfill obligations to society rather than maximizing profits Socially responsible pricing can involve agreeing to pay higher prices for inputs, as seen with fair trade coffee At the output market side, CSR pricing revolves around lowering prices benefiting poorer customers with a weaker ability to pay 41 Lecture 8: Cross cultural aspects of corporate governance Comparative corporate governance (Aguilera & Jackson, 2010) Three pillars of institutions Institutions: rules and norms that guide how individuals, organizations and markets interact with each other (Scott, 1995) Regular pillar on the surface, shaped by normative, shaped by cultural cognitive (iceberg) Number of distinct questions What is corporate governance? ○ How responsibility is distributed between the parties, what governs decision making in the corporation What is comparative corporate governance? ○ Why & how are corporate governance practices similar or different across countries? ○ Maximize value for stakeholders ○ US model kind of considered as a benchmark for best practices BUT it is not clear how to be transferred into other contexts Is it possible to identify international best practices of corporate governance, or do clear economic, social, and political trade-offs exist between different corporate governance systems? To what extent may practices be borrowed or adapted across international contexts? What factors explain the stability, change, or potential convergence of corporate governance practices over time and space? 42 Variety of different perspectives Economics and Agency theory