3 - Internationalization Theories and Foreign Direct Investment Flashcards
ch. 3.1 Contemporary International Theories
Overview
- Porter’s Diamond
- Internationalization Process Theory
- Born Globals and International Entrepreneurship
3.1.1 Porter’s Diamond
Overview
Factor Endowments Demand and Supply Conditions Advantages of Regional Clusters Firm strategy, structure and competition The Role of Coincidence and of the State
3.1.1 Porter’s Diamond
Porter’s Diamond
The analysis of the target country’s ‘Diamond’ unveils its relative international competitiveness and may lever specific competitive advantage to the ‘going-international’-firm!
Observation
Phenomenon:
- Individual countries often have distinct industries in which they traditionally outperform other nations
- Globally successful companies very often have the same country of origin (global champions)
Argumentation:
- The competitiveness of a nation or distinctive national industries depend on four (+2) self-enforcing factors that determine the industries “playing ground”
Conceptualization
Porter’s self-enforcing (Diamond) systematic to explain the competitive advantages of nations
Fully connected graph, except for the 2 last
- Demand conditions
- Related and supporting industries
- Company Strategy, structure and competition
- Factor conditions
- State
- Coincidence
3.1.1 Porter’s Diamond
Factor Endowments
Important for a competitive advantage is not the endowment with basic factors, but the way they are created, upgraded and deployed
- Focus: knowledge and competencies
- Excursus: Resource Based View: valuable, rare, inimitable, organizable (VRIO)
But disadvantages in basic factors can lead to investments in advanced factors (innovation)
Basic Factors:
- Natural resources
- Climate
- Location
- Demographics
Advanced Factors
- Venture capital
- Skilled labor
- Research facilities
- Technology
3.1.1 Porter’s Diamond
Demand and Supply Conditions
Demand:
- Structure of demand “shapes” the capabilities of firms
- Focus: sophisticated and demanding consumers
- Their needs impact quality and innovation
Supply:
- Presence of internationally competitive suppliers is beneficial
- Spillover of knowledge, technologies, quality and innovation
- Example: German automotive suppliers and success of automotive producers
- Example: U.S. University Stanford and Silicon Valley
- Successful industries tend to be grouped.
3.1.1 Porter’s Diamond
Advantages of Regional Clusters
Cost reduction through local agglomeration / networked infrastructure / lower costs of transactions
- Services (Consulting, IT, Marketing)
- Finance
- Suppliers
Better access to specific resources
Local access to “social capital” (e.g. experts, engineers, universities)
“Spillover-Effects” in social networks
- Knowledge sharing through personal exchange
- Personal relations with banks, VCs etc.
Access to public funding
Disadvantages of “regional” isolates?
3.1.1 Porter’s Diamond
Firm strategy, structure and competition
National context and circumstances influence:
- organization and management
- structure of competition
Firm strategy, structure and competition
- Refers to the firm strategies and structures and to the nature of competition, prevalent in the target
country.
- Determinants of strategy and structure:
* Managerial practices/ideologies
* Organizational modes and culture
* Company goals
* Individual achievement goals
- Determinants of competition:
* Intensity (high/moderate/low)
* Character (e.g. imitation/innovation)
Role of target market firms as…
…future competitors
- Assessment of target country’s industry dynamics, e.g.: (Model of Hypercompetition)
…potential future alliance partners
- Assessment of domestic firm’s relevant knowledge base, e.g.:
- Existing education and research institutions
- Access to sophisticated technical and managerial know-how
3.1.1 Porter’s Diamond
The Role of Coincidence and of the State
Coincidence
- Can lead to changes in the competitive position
The State
- Can have an influence on all primary elements of the “diamond” and change them positively or negatively
- But: state policy is only successful in industries in
which there exist fundamental determining factors of the national advantage
3.1.1 Porter’s Diamond
Evaluating Porter’s Theory
- Does his model predict the pattern of international trade that we observe?
- What about MNCs who operate in multiple industries?
- Primarily valuable analytical tool
3.1.2 Internationalization Process Theory
Overview
Internationalization Process Theory
The Uppsala Model (1977)
The Uppsala Model Revisited (2009)
3.1.2 Internationalization Process Theory
Internationalization Process Theory
Learning based explanation
- Model suggests a gradual, evolutionary path to internationalization
- The slow and incremental nature of internationalization by the firm results from the uncertainty that managers have about cross-border transactions
3.1.2 Internationalization Process Theory
Stages in the internationalization process of the firm
- Domestic focus
- Pre-export stage
- Experimental involvement
- Active involvement
- Committed involvement
3.1.2 Internationalization Process Theory
The Uppsala Model (1977)
Learning process
- Accumulated knowledge leads to commitment leads to risk intensive entry modes:
Market knowledge leads to Market commitment leads to more Market knowledge etc..
Critical Evaluation:
- Restricted to early phases of internationalization
- No operationalization of knowledge (amount; type)
- No consideration of timing and sequencing
- No consideration of parallel entries
3.1.3 Born Globals and International Entrepreneurship
Overview
Born Globals vs International Entrepreneurship:
Born Globals:
- Most recent extension of Uppsala Model
- Model of a slow, gradual internationalization process is no longer realistic in today’s fast-paced
and inter-connected economy
- Many firms (even young or without much experience) take bold steps to internationalize
- Emergence of Born Global companies – young, entrepreneurial firms that take on internationalization early in their evolution and leapfrog into global markets.
International Entrepreneurship:
- Attention on exploring the motivations for, the pattern of, and the pace of internationalization by
new ventures
Three Key factors influencing International Entrepreneurship
Conceptual Model of International Entrepreneurship
Born Global Firms - Examples
eBay
Logitech
3.1.3 Born Globals and International
Three Key factors influencing International Entrepreneurship:
Factors:
- Organizational
- Environment
- Strategic