Lecture 2: Core Foundations of IB & MNEs Flashcards
(30 cards)
International Business theories are divided into:
Country-level (1960), firm-level (1970), and network/subsidiaries-level of analysis (1980)
Product Life-Cycle Theory
Manufacturing products evolve through a cycle of roughly 4 stages: introduction, growth, maturity, decline.
Country-Specific Advantages
Strengths or benefits to a specific country or location
Firm-Specific Advantages
Unique capabilities that are exclusive to the organisation. They are related to the firm’s ability to coordinate the use of the advantage in production, marketing or customisation of services.
The FSAs of an MNE include:
Product differentiation ability, superior marketing and/or distribution skills, brand names, access to capital and/or raw materials, intangible assets (know-how, management skills, technology)
Foreign Direct Investment
An investment made by a firm or individual in one country into business interests located in another country to acquire lasting interest.
Hymer states two conditions for the existence of FDI
- Foreign firms must possess a countervailing advantage over local firms; 2. Imperfect markets
Liability of Foreignness
The impact of various forms of distance (cultural, economic, institutional and geographic) that explains why MNEs have difficulties in operating in foreign markets.
Disadvantages of operating in foreign markets may arise due to:
Spatial distance (coordination costs), unfamiliarity (adaptation and learning costs), lack of legitimacy (nationalism by locals), home-country restrictions (increase the costs of doing business).
Transaction Cost Economics
A theory that explains whether the marekt or a firm will coordinate economic activity. The most efficient coordination mechanism between a market and vertical integration exists when market imperfections are in place.
Market imperfections generate transaction costs in three ways:
Search and information costs, bargaining costs, policing and enforcement costs
When will organisations internalise markets?
When the expected benefits exceed the expected costs.
There are two different forms of internalisation:
Operational internalisation: involving intermediate products flowing through successive stages of production and the distribution channel. And knowledge internalisation: explains why firms are set up and how they acquired a degree of monopoly power (more beneficial than operational internalisation)
MNEs develop in response to imperfections in the goods and factor markets. Rugman states that for international expansion to take place, setting up facilities abroad must be more efficient than exporting to foreign markets. Three conditions must be satisfied:
- Different countries
- Efficient governance system
- The costs in the market must be higher than those of organising them within MNEs
Internalisation Theory
Firms aim at maximising profit by internalising their intermediate markets across national borders, in the face of various market imperfections. The main question here is if a firm should rely on external market measures (export) or internalising its operations (FDI).
Internationalisation
An MNE engages in foreign production in order to avoid dissipation of the rents derived.
Trade theory
Each country has a fixed endowment of labour and capital and is specialised in producing a mix of products that make the best possible use of its endowments.
Eclectic Paradigm
The Eclectic Paradigm integrates several theory streams on cross-border activities at the country and firm level to explain the determinants of FDI and the foreign activities of MNEs. There are three types of advantages influencing FDI:
- Ownership advantages: The greater the competitive advantages of the investing firms, the more likely they are to be able to engage in or increase, their foreign production.
- Location advantages = Foreign countries having come CSAs vis-a-vis other countries.
- Internalisation advantages = Benefits of creating, transferring, deploying, recombining and exploiting FSAs internally instead of via contractual arrangements with outside parties
The OLI-paradigm, based on L-advantages, identifies 4 types fo FDI motivations:
- Market-seeking
- Natural-resource seeking
- Efficiency-seeking = To promote a more efficient division of lavour or specialisation of an existing portfolio
- Strategic asset-seeking = To protect or augment the existing o-specific advantages of the investing firms
What should a firm do when all OLI-advantages exist?
Replace arm’s length trade with intra-firm trade
Uppsala Model
Internationalisation is a cumulative, path-dependent process whereby a firm’s international expansion pattern is a function of its past international experience and knowledge base.
The internalisation theory argues that:
A firm with little or no experience typically enters a foreign market by exporting, establishing a sales subsidiary, or by investing in production facilities.
Psychic distance
The degree to which a firm is uncertain of the characteristics of a foreign market, which results in costs and the risks of FDI.
FSAs can be Location bound and non-location bound
Location bound = FSAs deployed only in a limited geographical area
non-location bound = FSAs that are easily transferred across locations
