Lesson 1-3

Question 1

What are the 3 dimensions of the “Basic Framework for International Business”?

Answer 1

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

Industry-based-view:
Industry competition and characteristics.

Resource-based-view:
Firm-specific resources and capabilities.

Question 2

Name the 3 enablers of Globalization?

Answer 2

Expansion of technology: Business has become more international because
• Transportation is quicker
• Communications enable control from afar
• Transportation and communications costs are more conducive for international operations.

Liberalization of cross-border movements: Lower governmental barriers to the movement of goods, services, and resources enable companies to take better advantage of international opportunities.

Development of supporting institutional arrangements that:
• Are made by business and government
• Ease flow of goods
• Reduce risk

Question 3

Name the factors pulling towards complete localization?

Name the factors pulling towards complete globalization?

Answer 3

Question 4

Name the 4 parameters to measures the depth of globalization?

Answer 4

1. Information
2. People
3. Capital
4. Trade

Question 5

Two “laws” seem to govern the depth and breadth of globalization.
Explain the terms.

Answer 5

Depth of globalization:
How much activities is international vs. domestic?  The law of semi-globalization suggests that international business activity, while significant, is much less intense than domestic activity.

Breadth of globalization: The extent to which international activity is distributed globally rather than narrowly focused.  The law of distance suggests that crossborder activities are dampened by distance.

Question 6

Name the forces for global integration?

Name the forces for local Responsiveness?

Answer 6

Pressures for global integration

• Seek cost reduction through economies of scale and arbitrage benefits
• Capitalize on converging consumer trends and universal needs Provide uniform service to multinational consumers
• Conduct global sourcing
• Sense and respond to global competitors
• Take advantage of media with crossnational reach, e.g. Facebook, Twitter, TV

Pressures for local responsiveness

• Leverage local talent and cheap factors of input
• Cater to local customer needs
• Accommodate difference in distribution channels
• Respond to local competition
• Adjust cultural differences
• Meet local government regulations and legal requirements

Question 7

Mention the difference between market- and non-market strategies?

Answer 7

**Market Strategies**
Competetive advantage (what, where, why, when, how, what activity)

**Non-market Strategies**
Other considerations (markets sentiments, trade policies, social media, NGO's, compliance, local benefits).

Question 8

Name the three generic sources of competetive advantage?

Answer 8

Adaptation (local responsiveness):
Increases revenues and market share by tailoring one or more components of a company’s business model to suit local requirements or preferences.

Aggregation:
Delivers economies of scale or scope by creating regional or global efficiencies; involves standardizing a significant portion of the value proposition.
Arbitrage:
Exploits economic or other differences between national or regional markets, usually by locating separate parts of the supply chain in different places.

Question 9

Name the dimensions of the CAGE Framework?

Answer 9

Cultural distance
Different languages different ethnicities; lack of connective ethnic or social networks different religions different social norms

Administrative distance
Absence of colonial ties absence of shared monetary or political association political hostility government policies institutional weakness

Geographical distance
physical remoteness lack of a common border lack of sea or river access size of country weak transportation or communication links differences in climate

Economic distance
differences in consumer incomes differences in costs and quality of:
• natural resources
• financial resources
• human resources
• infrastructure
• intermediate inputs
• information or knowledge

Question 10

Name the generic reasons of why nations trade?

Answer 10

1. Availability of goods
2. Differences in technology
3. Differences in factor endowments
4. Differences in consumer demand
5. Transport costs
6. Economies of scale in production
7. Government policies

Question 11

What are the gains from trade? And are all groups winners from trade?

Answer 11

• *A nation’s gains from trade consists of two components:**
  1. the gain from the reallocation of consumption
  2. the gain from specialization in production

Who gains?
Producers and workers in the export industry gain as a result of higher world prices and a larger volume of trade;

Consumers of the import competing good gain as a result of lower world prices and a larger supply; and

Firms which use imported components and materials in their production process gain as a result of lower import prices.

Who Losses?
Producers and workers in the import-competing industry lose due to increased competition from imports;

Consumers of the export good lose due to the smaller supply available to the local market and higher world prices;

Firms which use exportable components and materials in their production process lose due to increased prices.

Question 12

Mention the 6 theories of international trade?

Answer 12

Before 20th century:

1. Mercantilism
2. Absolute advantage
3. Comparative advantage

• *In the 20th century:**
  4. Product life cycle
  5. Strategic trade
  6. National competitive advantage

Question 13

What is the basic ideas of the trade theory Mercantilism?

Answer 13

− International trade as a zero-sum game −

Basic assumption: the wealth of the world – measured in gold and silver – is fixed. − Thus, a nation that exports more and imports less becomes richer (as it enjoys the net inflows of gold and silver) – and vice versa.  Sounds funny today, doesn’t it? – But is it that archaic? − The upshot? self-sufficiency would be best. − In a sense, it is the direct intellectual ancestor of contemporary protectionism.

Question 14

What are the key points about the trade theory Absolute Advantage?

Answer 14

Emergence: As a criticism of Mercantilism

Thought leader: Adam Smith (1723-1790)

Basic idea:

− The “invisible hand” of markets, rather than governments, should determine the scale and scope of economic activities (laissez-faire)

− By being self-sufficient and by (ineffectively) producing a wide range of products, mercantilist policies reduce the wealth of a nation in the long run

− Under “free trade”, each nation gains by specializing in economic activities in which it has an absolute advantage

Greatest insights:

1. By specializing, each nation can produce more
2. And, by trading, they can benefit more
3. International trade is not a zero-sum game

Question 15

What are the key points about the trade theory of absolute advantage?

Answer 15

“If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the product of our own industry, employed in a way in which we have some advantage”

“There is one thing you can do best. Find it. Concentrate on it. Trade for everything else!”

Question 16

What are the key points about the trade theory comparative advantage?

Answer 16

The theory suggests that – even though one nation has an absolute advantage over another one in the production of two goods – as long as the other nation is not equally less efficient in the both goods, this nation can still choose to specialize in the production of one good in which it has comparative advantage – defined as the relative (not absolute) advantage in one economic activity that one nation enjoys in comparison with other nations.

Question 17

Explain the term “Factor Endowments” (begavelse / styrker).

Answer 17

Factor endowments:
– the extent to which different firms / countries possess various factors such as labor, land, and technology. − For example? − This is called the “factor endowment theory” (or Heckscher-Ohlin theory): A theory that suggest that nations will develop comparative advantage based on their locally abundant factors.

Question 18

Explain the trade theory “Product Life Cycle”?

Answer 18

The world in three categories:

1) lead innovation nation (the US),
2) other developed nations,
3) developing nations

− Every product has three life cycles stages: 1) new, 2) maturity, 3) standardized

Greatest insights and criticism:
− Dynamic comparative advantage which accounts for changes in the patterns of trade over time.
− Criticism on two accounts: 1) it assumes that the US will always be the lead innovation nation, 2) it assumes a stage-by-stage migration of production

Question 19

Explain the trade theory “Strategic Trade”?

Answer 19

Basic idea:
− Strategic intervention by governments in certain industries can enhance their odds for international success − Typically, these industries tend to be: highly capital intensive, industries with high entry barrier (domestic firms may have little advantage w/o government assistance) and industries that feature substantial first mover advantage

Greatest insights:
In contrast to mercantilist policy, strategic trade theorists do not advocate to promote all industries but only a few strategically important ones.

Criticism on two accounts: what is a strategically important industry? Are governments capable and objective enough?

Question 20

Explain the trade-theory Competetive advantage?

Answer 20

Basic idea:
− The competitive advantage of certain industries in different nations depends on four aspects that form a “diamond” (Porters diamond):
1) country factor endowments,
2) domestic demand,
3) domestic firm strategy, structure and rivalry,
4) related and supporting industries.

− The dynamic interaction of these four aspects explains the competitive advantage of leading industries in different nations.

Greatest insights: First multi-level theory connecting firms, industries and nations

Criticism: lacks comprehensive empirical testing and places too much influence on domestic conditions

Question 21

Try to summarize the trade theories.

Answer 21

• Trade theories indicate that world output increases through international trade.
• However, gains are not equally split across countries and industries and even firms within one industry, explaining at least part of the friction that globalization causes.
• International trade is also heavily moderated by distances (e.g. geographic distance, cultural distance, psychic distance) among trading nations.
• In an extension of classical trade theory, Porters Diamond shows industry clusters are at the heart of national (or regional) competitiveness.
• Multinational firms may use this knowledge to selectively tap into pockets of knowledge residing in other nations.

Question 22

In reality still plenty of trade barriers or “the rules of the game” exist. Name the two barriers to free trade.

Answer 22

Tariff Barriers:

• Trade barriers that rely on tariffs to dampen imports
• Major tariff barrier: import tariffs; resulting in deadweight costs.

Non-tariff barriers:

• Trade barriers that rely on non-tariffs to dampen imports
• Examples: (1) subsidies, (2) import quotas, (3) export restraints, (4) local content requirements, (5) administrative policies, (6) antidumping duties

Question 23

What are the arguments against free trade?

Answer 23

Economic Arguments:

1. The need to protect domestic industries
2. The necessity to shield infant industries

Political arguments:

1. National security
2. Consumer protection
3. Foreign policy
4. Environmental and social responsibility

Question 24

Mention the motives for international diversification (why do companies what to do international business)?

Answer 24

Answer:
Market (growth, costs, etc.), knowledge and management imperatives.

Other Reasons:

• Prolong product life cycle
• Overcome growth barriers in home market
• conquer new markets
• tap the world market for goods and services
• global footprint enables above average growth rates
• attack competitors in their home markets
• take-over other firms before competitor can (‘pre-emptive strike’)
• escape from stifling domestic institutional environment
• reduce factor costs gain access to scarce and so far unavailable resources
• diversify business cycle and currency risks
• exploit technological development in geographical clusters by re-locating R&D center
• expose company to particularly demanding customers abroad
• disseminate new technologies, management practices
• multiply domestic capabilities abroad
• personal interest in internationalization
• easier recruitment of young talents
• improved career tracks

Question 25

Explain the levels and types of strategies (hint: 5 types)

Answer 25

Network (inter-organizational) strategy

Corporate Strategy

Business Strategy

Functional Strategy

International (Global) Strategy (most important for this class)

Question 26

What is strategy?

Answer 26

Strategy is concerned with making choices among two or more alternatives

Integrating both planning and action school

Strategy as “a firm’s theory about how to compete successfully”

Leveraging the concept of “theory” which serves two purposes: explanation and prediction

Question 27

What are the three theoretical perspectives on international strategy?

Answer 27

Question 28

Define Industry competetion.

Answer 28

Industry
• A group of firms producing products (goods and/or services) that are similar to each other
• Identification of a clearly demarcated industry is at the heart of the industry-based view; however, this concept may be increasingly elusive (“ecosystem”)

Theories of industry competition
• Perfect competition (rarely observed)
• Industrial organization (IO) economics model
• Industry structure determines strategy and firm performance (SCP model)
• Original goal-help regulators minimize firm’s excess profits
• Strategists use the IO model to try to earn excess profits

Question 29

Name the 5 forces from Michael Porters diamond.

Answer 29

1. Rivalry among competitors

oligopolistic industries: competitors often match each other in foreign entries • sometimes firms may enter foreign markets to retaliateoligopolistic industries: competitors often match each other in foreign entries
• sometimes firms may enter foreign markets to retaliate

2. Threat of entrants
by tapping into wider and bigger markets, international sales can increase scale economies and deter entry

3. Bargaining Power of suppliers

• may prompt foreign market entries in the form of backward integration
• for example, to provide a steady supply of raw materials at late stage production

4. Bargaining power of buyers
• may prompt foreign market entries in the form of forward vertical integration

5. Threat of substitutes (products)
• market potential for substitute products may encourage firms to bring them abroad

Question 30

Mention the five business-level strategies.

Question 31

Regarding the internal persective of resources and capabilities, mention tangible and intangible resoruces and capabilities.

Answer 31

Tangible
• Resources and capabilities that are observable and easily quantified
• Broadly organized in four categories:
• Financial (e.g., ability to raise external capital)
• Physical (e.g., location of plants, offices, and equipment)
• Technological (e.g., possession of patents, trademarks, and trade secrets)
• Organizational (e.g., formal planning, command, and control systems)

Intangible
• Resources and capabilities not easily observed or difficult (or impossible) to quantify
• Examples include:
• Human (e.g., managerial talent, organizational culture)
• Innovation (e.g., R&D capabilities, capacities for change)
• Reputational (e.g., perceptions of product quality, reputation as a good employer, reputation as a socially responsible corporate citizen)

Question 32

Name the components of Porters Value Chain.

Answer 32

Question 33

Provide an example of a cost structure in the automotive industry.

Answer 33

Question 34

Mention the components of the VRIO framework.

Answer 34

Value of firm-specific resources and capabilities
• might allow foreign entrants to overcome the liability of foreignness

The rarity of firm-specific assets
• patents, brands, and trademarks are important
• patented and branded products are often marketed overseas

Imitability
• if firms are concerned that their imitable assets might be expropriated in certain countries, they may choose NOT to enter
• Transaction costs because of dissemination risks

Methods of organizing firm-specific resources and capabilities
• bundles of firm-specific resources and capabilities may favor firms with strong complementary assets integrated as a system and encourage them to utilize these assets overseas

Question 35

Companies considering international moves should seriously address three seemingly simple questions: What are the questions to be asked about going global?

Answer 35

1. Are there potential benefits for our company?
2. Do we have the necessary management skills?
3. Will the costs outweigh the benefits?

Question 36

Explain the definition of institution and explain the difference between formal institutions and informal institutions?

Answer 36

Institutions: Definitions
• “Humanly devised constraints that structure human interaction and govern individual and firm behavior” (North)
• “Regulatory, normative, and cognitive structures and activities that provide stability and meaning to social behavior”

(Scott) Key role: reduce uncertainty (political and economic)

Question 37

Mention some of the INSTITUTION-BASED CONSIDERATIONS ON COUNTRY RISKS.

Answer 37

Informal institutional differences: e.g., cultural differences

Formal institutional differences
Regulatory risks (associated with unfavorable government policies)
• governments demanding e.g., that foreign entrants share technology with local firms, essentially increasing the dissemination risk
• Obsolescing bargain (“expropriation”)
Trade barriers:
• Tariff barriers (taxes levied on imports)
• Nontariff barriers
• safety inspections
• local content requirements
• entry modes restrictions
Currency risks:
Speculation and hedging

Question 38

What is the definition of Liability of foreignness?

Answer 38

It is defined as the inherent disadvantage foreign firms experience in host countries because of their non-native status.

It is manifested in at least two dimensions:
• Differences in formal and informal institutions govern the rules of the game in different countries
• Foreign firms are often (formally or informally) discriminated against

Foreign firms deploy overwhelming resources and capabilities to offset the liability of foreignness

Asset of foreignness might also exist

The country-of-origin effect may shift over time