International business strategy: effectively and efficiently matching an MNE's internal strengths, relative to competitors, with the opportunities and challenges found in geographically dispersed environments that cross international borders.
MNEs (Multinational Enterprises) need certain internal strengths to overcome additional costs of doing business abroad, those are called: internationally transferable, or non-location bound FSAs (Firm Specific Advantages). Most complex issues in international business strategy revolve around seven concepts.
The MNE operates across national borders to create value and satisfy the stakeholder. Doing business abroad leads to additional costs for the MNE. To overcome these costs the MNE needs internal strengths like technological, administrative and marketing knowledge. The scope of the business across borders depends on this set of internal strengths, which are called the non-location-bound FSAs. These firm-specific-advantages (FSAs) will keep their value when an MNE is crossing borders.
There is a paradox of an internationally transferable FSA. When a FSA exists of easily codifiable knowledge, it is cheap and easily to transfer, but it can also be easily imitated by other firms. This makes the transfer costs low, but also the value that can be derived from it, may also be low.
On the other hand, when a FSA exists of tacit knowledge, which requires person-to-person communication and sending human resources abroad to build up experience over time by learning, it will be expensive and time-consuming, but also difficult to imitate and thus a valuable FSA.
The most important bundle of tacit knowledge is contained in the MNEs heritage (the key routines developed by the firm since its inception). There are four archetypes of administrative heritage associated with international FSA transfer:
Centralized exporter: a home-country-managed firm. Standardized products manufactured at home embody the firm’s FSAs and make the exporting firm successful in international markets. This all happens without doing any activity in the host country, so no development of new FSAs in the host country. So this is only exporting the product. The activities occur mostly in the downstream end of the value chain and are related to distribution, marketing and logistics operations.
International projector: FSAs from the home country are copied and transferred to subsidiaries in host countries. The foreign subsidiaries are practically clones of the home operations. With this the firm extensively relies on professional managers who can transfer the success home country recipes. Only the internationally transferable FSAs are taken to the host country. There is no development of location bound FSAs in the host country.
International coordinator: an efficiency seeking MNE which is specialized in specific value-added activities and forming vertical value chains across borders. The FSAs of the MNE are linking the geographically dispersed operations through seamless logistics. The firm is doing different parts of the production process in different countries.
Multi-centred MNE: consists of a set of entrepreneurial subsidiaries abroad and does all its activities (produce, sell, etc.) in the host country. The firm adapts to the host country, so local responsiveness is its foundation. They operate with independent local production to satisfy local market needs. The MNE only transfers the key routines from the home country and builds up new Location-Bound FSAs in the host country.
The above set of archetypes actually is not complete. Although the four architypes describe most large MNEs, there are two other types:
Freestanding companies: companies that were set up abroad often in the home country’s colonies, without a prior domestic production base. The colonies offered reduced additional costs of doing business abroad and provided direct access to the location advantages of the host countries involved. Freestanding companies are actually part of larger business networks.
Emerging Economy MNEs (EMNEs): firms that do not derive their success from advanced technology and strong brand names, but firms that build on generally available resources in their home country such as low-cost labour and various forms of government support. These firms thrive on recombining whatever FSAs they may possess with resources accessed abroad. Many of their FSAs result from entrepreneurial judgement, knowledge borrowed from advanced economy MNEs and disciplined execution of a firm-level strategy. Some typical EMNE FSAs:
Entrepreneurial quality of management
Management capabilities in effective strategy execution
Learned technologies, resulting from roles such as licensee or subcontractor for technology-rich MNEs from developed countries
Learned knowledge from early alliance formation with other MNEs
Privileged access to home country resources
Cost innovations/operational excellence
Ability to adapt technology or products to emerging economy needs
Location-bound FSAs are not easily transferred, deployed and exploited in foreign markets. There are four main types:
Stand-alone resources: are linked to location advantages, such as a certain market or a network, which are immobile and therefore non-transferable.
Other resources: do not have the same value abroad, because they are not applicable to the host country or they are not as valuable as in the home country. Examples are local marketing knowledge and reputational resources.
Local best practices: routines which are highly effective and efficient in the home country, but which might not be the same across borders. Examples are incentive systems for highly skilled workers or buyer-supplier relations.
Domestic recombination capability: engaging in product diversification or innovation, taking the FSAs and/or product from the home country and recombine it to adapt to the host country. This recombination capability of the firm may not be adept enough to confront the complexities of foreign markets.
With location-bound FSAs, the corresponding FSA in each host country will need to be created or acquired from third parties operating in the foreign markets. Linking investments may be required for the matching of the FSAs with the foreign characteristics. These investments can be seen as investments in host country or host region responsiveness.
Location advantages represent the set of strengths of a specific location, useable for all the firms operation in that location, the reasons why an MNE would go there. Some examples of location advantages are abundant natural resources, a superior educational system, the presence of a demanding local market for specific products. Sometimes these location advantages are only present in part of a country. For instance, economic clusters are often located in only a part of a country. There are also cases where location advantages reach across country borders. These location advantages for a firm can be seen as host country location advantages.
FDI (Foreign Direct Investment): the allocation of resource bundles by an MNE in a host country, with the purpose of performing business activities over which the MNE contains strategic control there. There are 4 motivations to perform activities abroad:
Natural resource seeking: contains the location advantage of the host country, it is the search for physical, financial of human resources. Precondition, is that access is needed. The availability of natural resources in host countries means that investment abroad will lead to higher value creation than investment in the home country.
Market seeking: the search for customers in host countries. A firm is market seeking when producing and selling activities in the foreign market create higher value than the activities in the home country. This is not the same as exporting, because market seeking involves business activities in the host country.
Strategic resource seeking: searching for access to advanced resources such as upstream knowledge (product- and process related technological knowledge), downstream knowledge (critical for interface with customers), administrative knowledge (knowledge regarding the functioning of the organisation) and reputational sources. Firms often engage on strategic resource seeking if they want to become an industry player in important knowledge development centres or output markets.
Efficiency seeking: a firm’s desire to capitalize on environmental changes that make specific locations more attractive than before the concentration of specific activities.
The success of an MNE abroad depends on its ability to link the transferable FSAs with location advantages in host countries.
Recombination: being able to grow by innovating and diversifying; means combining existing resources with newly accessed resources. Resource recombination requires three things:
Entrepreneurial skills of managers and employees to be able to adapt to new circumstances while recombination.
Unused productive resources
The willingness and capacity to let go of some resources embedded in extant FSAs and to replace these.
Recombination capability is the MNEs highest order FSA, because this helps the MNE to transfer its existing set of FSAs, it creates new knowledge, integrates this with the existing knowledge, and exploit the resulting. There are ten common patterns of FSA development and resource recombination:
An internationally transferable FSA is developed in the home country and can be utilized across borders without any need for adoption.
A location-bound FSA is developed in the home country and then upgraded to become internationally transferable. May occur at both upstream and downstream ends of the value chain.
An internationally transferable FSA is developed at home, but location-bound knowledge must be added to it in the host countries where the MNE operates.
Location-bound FSAs are developed in each host country where the MNE operates and are exploited locally, usually by autonomous affiliates.
An internationally transferable FSA is developed autonomously in a host country affiliate and then diffused internationally, either as intermediate good or embodied in finished products.
Foreign affiliate develops an internationally transferable FSA, guided by corporate headquarters in the home country. The recombination capacity is co-located in the home and host country.
A foreign affiliate develops a location-bound FSA and then upgrades the FSA to make it internationally transferable, guided by the home country corporate headquarters.
Several affiliates located in different countries, develop an internationally transferable FSA together.
A set of affiliates develops an internationally transferable FSA, like in pattern VIII. However, here location-bound knowledge is added in the countries involved, allowing national responsiveness.
Similar as pattern IX, affiliates work together. In this case they first jointly develop a location-bound FSA towards one specific host country market.
By going abroad some ingredients may be missing, those can be provided by external actors (provider, distributors, licensees, partners, etc. from the host country), this will help to overcome the distance. Two conditions have to be satisfied for this to work:
Internal development is expected to bring a lower net value than relying upon external actors.
The need to rely on external actors can be satisfied in practice.
Bounded rationality is about the imperfect assessment of a present or future state of affairs, thereby leading to incorrect beliefs, caused by a lack of information. The problem is the access to information and even if they have the right information, another problem is the capability to process complex information bundles. Information is partial and incomplete, cognitive limitations of managers, and differences in cognitive decision making between home and host country. Examples of bounded rationality are property rights, different decision-making approaches between home and host country.
Bounded reliability is about imperfect effort, leading to incomplete fulfilment. Agents do not always carry through on their expressed intentions to try to achieve a particular outcome or performance level.
One source is opportunism which involves false promises.
The second source is benevolent preference reversal, the actor’s promise is made in good faith but preferences change overtime.
The question is whether international expansion has a positive effect on the MNEs return and risk. This depends on several factors:
The MNE should only undertake foreign expansion projects if this makes more economic sense than domestic projects.
Even if recombination capacity is strong, international success requires substantial investments, learning and legitimacy creation over time.
Adaptation to the host country increases costs for the MNE.
C.K Prahalad and Gary Hamel have provided the idea that core competencies (company’s most important FSA, its vital routines and recombination capabilities) constitute the most important source of a MNEs success. Core competencies include shared knowledge, organized in routines, and the ability to integrate multiple technologies, or recombination capabilities, carried by the key employees.
Core competencies are more important than stand-alone FSAs and they produce physical, tangible things which are called core products. These represent areas of technological leadership in the form of key components from which end products are developed and created. The core products are put together to create end products.
There are 3 characteristics to identify core competencies, a core competence should:
Be difficult for competitors to imitate
Provide potential access to a wide variety of markets
Make a significant contribution to the perceived customer benefits of the end product
To these three we can add an extra fourth one, which is especially important for a large MNE; the loss of the core competence would have an important negative effect on the firm’s present and future performance.
Strategic management is needed to develop a strategic architecture. Thus, to develop a road map of the future that identifies core competencies to build the required technologies. Strategic management should have the primary goal of developing the strategic architecture to guide building and acquiring core competencies. Strategic architecture is a road map of the future that identifies which core competencies to build and their corresponding technologies. The resource allocation process of a firm should support the strategic architecture of a firm. The incentive system should be designed so that managers who act in the interest of the firm rather than their own are rewarded. This reduces bounded reliability problems.
In different industries different FSAs are required. If an industry changes rapidly, the core competencies can become core rigidities. In this case the flexibility and adaptation of the strategy are very important. Core competencies involve the combination of existing resource bundles with new resources. The co-allocating of all the activities and supporting linkages is critical to international success.
Bartmess and Cerny provide five criteria to assess the need for co-locating activities instrumental for further recombination. These five determine the scope of the bounded reliability problem that must be solved. The five criteria are:
Complexity: If the information that has to be communicated is complex this requires geographic proximity.
Required level off interaction: low predictability of information content and need for two-way information requires close geographic proximity of the activities.
Similarity of background and expertise of the individuals involved: less similarity between the individuals makes it more difficult to communicate from a distance.
Requirement of a prior relationship: there are types of sensitive communication that require a prior relationship between the communicating parties. A prior relationship leads to confidence between the parties. The absence of such a relationship requires a need for closer geographic proximity.
Concreteness of information: the less concrete the information, the greater the need for face-to-face communication and thus geographic proximity.
Key critique on core competence approach is that Prahalad and Hamel do not include country factors in their analysis. They overestimate’ the role of strategic management and underestimate role of (host) country location factors.
Identify and nurture your company’s core competences.
Develop a strategic architecture to guide your firm in acquiring and building core competencies.
Make sure you understand the economic potential and drawback of acquiring FSAs through external strategic alliances.
Do not overestimate the transferability of the FSAs across borders. Also be sure to understand the costs involved in resource recombination.
When expanding internationally or investing abroad reflect on co-location requirements.
C.K Prahalad and Gary Hamel have provided the idea that core competencies (company’s most important FSA, its vital routines and recombination capabilities) constitute the most important source of a MNEs success. Core competencies include shared knowledge, organized in routines, and the ability to integrate multiple technologies, or recombination capabilities, carried by the key employees.
Core competencies are more important than stand-alone FSAs and they produce physical, tangible things which are called core products. These represent areas of technological leadership in the form of key components from which end products are developed and created. The core products are put together to create end products.
Michael Porter argues that a company’s ability to compete abroad is based on a set of location advantages in its home country. The idea is that when a company experiences a high level of pressure in the home country it will push the firm to innovate and upgrade systematically. This will create new FSAs, which will be the instruments for the expansion to foreign markets.
According to Porter, the FSAs of a firm are primarily developed because the firm faces external pressure. Therefore, a firm should not rely on natural factor endowments like low labor costs. Such natural factor endowments are short-term advantages which can be easily replicated by rival firms. A nation’s competitiveness depends on the capacity of its industry to innovate and upgrade.
Porter says that the most important aspects of international business strategy are the four key home country location advantages. Those are combined in Porter’s Diamond. The four key sets of country attributes of Porter’s diamond are:
Factor conditions: like natural resources and created factor conditions (such as skilled labor, knowledge, and infrastructure). These are particularly valuable when specialized, so when they are customized towards effective deployment in specific economic activities and companies. Firms need to continuously develop new skills, like continuous learning of employees and continuous innovation of machines
Demand conditions: not only domestic market size, but also domestic buyer sophistication. When buyers are demanding, the external pressure on the firm increases and so the competitiveness increases.
Related and supporting industries: the need for high-quality suppliers.
Firm strategy, industry structure and rivalry: a competitive industry, not-sheltered protective markets and a well-functioning industry may help the firm in that industry to become more internationally competitive.
Those 4 variables plus 2 external variables (government and ‘chance’) determine the competitiveness of industries in international markets. ‘Chance’ includes for instance being lucky in an innovation process and coincidently creating a new technology.
There is interaction between the four attributes of the diamond which causes an industry-wide recombination capability which is not attributable to the actions of the individual firms in the industry. To get a strong diamond, there are certain requirements per country attribute:
Factor conditions: the factor conditions accessible to the firm need to be continuously upgraded through the development of skills and the creation of new knowledge. Even when natural endowments are limited the firm could turn disadvantages into advantages.
Demand conditions: companies must respond to new customer demands by pushing the envelope of existing technology and by designing new features. So the presence of demand conditions encourages companies to be innovative. This may lead to early insights into the future needs of customers abroad which can lead to first-mover advantages.
Related and supporting industries: high competitive firms at home, especially suppliers, are crucial to enhance innovation through:
More efficient outputs
Ongoing exchange of ideas
Timely feedback
Short lines of communications between activities in the vertical chain.
Domestic rivalry: rivalry forces companies to develop unique FSAs, beyond the generally available location advantages in their home base. In this way companies get motivated to enter international markets and exploit these FSAs. Domestic rivalry is a key instrument to international competitiveness.
When having a strong diamond, the creation of non-location bound FSAs will be stimulated. With those non-location bound FSAs, a company can go abroad.
Each individual attribute of Porter’s diamond has impact on the competitiveness of an industry. However, their joint impact on the competitiveness is even more important. The four attributes work as an interdependent system; each element affects the other elements. Often the attributes operate in a small geographic space where most firms of the industry are concentrated. This forms a cluster.
Each industry has a different specific diamond of competitive advantage. Porter argues that industry-specific pressures lead to innovation and productivity improvements and thus to international competitiveness.
A key concern is that FSAs are in Porter’s theory completely domestically determined. Porter places too much emphasis on the home country as the appropriate level of analysis.
Porter focuses mainly on the rise of industries at national level and not so much on firm-specific challenges. Therefore, his work does not provide much guidance for managers of newly established firms. Such a (complementary) perspective, for new firms was provided by Walter Kuemmerle in a piece on the entrepreneur’s path to global expansion. The simple international expansion pattern is the incremental accessing of a neighbour’s input or output market. Kuemmerle identified two other, more aggressive, international expansion patters:
The resources of the home country are used to exploit substantial cross-border opportunities in output markets. This works if the internationally transferable FSAs can immediately be used to satisfy demand in the foreign markets.
The newly established firms search for resources such as capital in foreign input markets, while maintaining their operations and sales primarily in the home country.
In contrast to Porter, Kuemmerle found that newly established companies can successfully expand internationally, as long as they use a low-risk, low-cost, incremental approach in their neighbouring countries.
David Teece provides another complementary perspective to the one of Porter. Teece’s work was on the inward FDI in one of the best known technological clusters, Silicon Valley. His work focused mainly on the rationale for Japanese FDI in this cluster and what its effects were. He suggests two things:
Porter-type single diamond thinking does not hold when the foreign investors can provide complementary resources that are not provided by the domestic diamond itself, but instrumental to domestic, firm-level sustainability and expansion.
Foreign MNE activity through inward FDI can be a bridge between the location advantages of two different countries. In his case these two different countries were the US and Japan.
Michael Porter argues that a company’s ability to compete abroad is based on a set of location advantages in its home country. The idea is that when a company experiences a high level of pressure in the home country it will push the firm to innovate and upgrade systematically. This will create new FSAs, which will be the instruments for the expansion to foreign markets.
According to Porter, the FSAs of a firm are primarily developed because the firm faces external pressure. Therefore, a firm should not rely on natural factor endowments like low labor costs. Such natural factor endowments are short-term advantages which can be easily replicated by rival firms. A nation’s competitiveness depends on the capacity of its industry to innovate and upgrade.
According to Pankaj Ghemawat, managers do have to take into account distance when making decisions about global expansion and assessing host country advantages. Such differences between home and host countries include differences in culture, economic status, societal institutions and physical location.
Ghemawat’s term distance has different components, which can be categorized into four categories:
Cultural distance: results from differences in national cultural attributes. Examples of this are differences in language, race and religion.
Administrative/institutional distance: reflects differences in societal institutions. This distance is low when two countries share a history, have political ties, trade with each other or synchronize politics.
Geographic/ spatial distance: represents the physical distance between the countries, taking into account the ease of transport between both. This distance is high when there are differences in topography and climate. The geographic distance is low when two countries have a common border. Also human intervention, like good transportation or a good communication can reduce the geographic distance.
Economic distance: represents differences in consumer wealth, income level, infrastructures and costs and quality of natural, financial and human resources.
The higher those distances between countries, the lower the trade levels will be. Ghemawat has the idea that the distance between two countries, gives extra risk and cost to entering new markets. He concludes that higher inter-country distance corresponds with lower inter-country trade levels, implying a lower profitability of success.
Details of the distance categories, by what it can be affected and which industries are being affected are explained below:
Cultural distance: is higher when there is a preference for locally produced products or when there are no tolerances or copyright infringements. Affected industries: soft items, such as food, which are selected on personal taste and culture, are more sensitive to this cultural distance than hard items such as machinery and bulk items.
Administrative/institutional distance: governments can create administrative distance very effectively. Like raising barriers for protecting domestic industries; there can be a higher distance through unilateral measures, like forbidding certain things. Administrative distance is affected by institutional infrastructure, such as corruption and social upheaval. Affected industries are industries with large numbers of employees which are producing essential goods and the ones that exploit a host country’s key natural resources.
Geographic distance: also man-made elements such as transportation networks and communication infrastructure can make the geographic distance between countries higher. Affected industries are low-value-to-weight products, perishable products and trade in services and capital, because of information and infrastructure. Products with low value-to-weight ratios, like cement and steel, and highly perishable products incur the highest cost increases when the transportation distance increases.
Economic distance: there are two broad approaches to expanding abroad:
Replicating existing competitive advantages, building upon scale and scope economies, which is typical for the centralized exporter and the international projector. This is more effective with a small economic distance, it requires standardization.
The second approach is exploiting differences in input costs or prices between markets through economic arbitrage, which is typical for international coordinators. MNEs embrace economic distance, because that possesses FSAs that allow the firm to exploit and link the diverse location advantages of high distance countries. This strategy is adopted by vertically integrated MNEs.
The four distances between countries will remain present and will continue to be barriers for expanding abroad/international business.
A complementary perspective to the perspective of Ghemawat is written by Till Vestring, Ted Rouse and Uwe Reinert. Ghemawat focuses on the risk of penetrating too many high-distance output markets. However, Vestring, Rouse and Reinert focus on the risk of using too few high-distance output markets.
They argue that the MNEs that intend to be cost leaders in their industry should have portfolios of the low-cost countries where activities can be outsourced to. These portfolios should be based on the set of location advantages that each host country offers.
What the MNE should do is develop a recombination capability; and FSA on offshoring. This means that offshoring decisions should be handled centrally.
It is important that the MNE is well informed about the relevant costs and other country characteristics before selecting the offshoring locations. Such country characteristics include the availability of specialized skills.
Another complementary perspective to Ghemwat’s perspective is provided by Bernd Schmitt and Yigang Pan. They focus on cultural distance and provide guidance for Western MNEs that sell branded consumer products when penetrating high-distance Asian markets. Examples of such branded consumer products are soft drinks, financial services, health care and entertainment.
An MNE must invest substantial effort and time in developing a pan-Asian branding strategy to overcome the cultural distance between the home and the host country. Several branding elements must be adapted:
The MNE must devote attention to selecting the right corporate and product names. It is important to keep the languages, and its characteristics, of Asia in mind when searching for a brand name. It is also important that the corporate and brand names have a desirable sound and tonal associations.
The MNE must pay attention to create the right image for the brand. In Asian countries the corporate image is often more important than individual product images. In other countries, the US for example, the corporate brand name may mean little.
Senior managers should be aware that the perceptions of quality can be different in Asia compared to the perceptions in the West.
Schmitt and Pan argue that senior management must either pay attention to these aspects of cultural distance or follow Ghemawat’s perspective and avoid high-distance markets.
Macro level distance does not always hold for all firms (distance for a firm ≠ distance for all firms). This may be the explanation for a lack of success in a foreign market.
A firm’s FSA can be that it is able to deal with these distances. A company can develop its recombination capability which makes it possible to overcome distance barriers.
The impact of distance differs for different parts of the value chain. The conclusions of Ghemawat are more persuasive in the downstream end than in the upstream end of the value chain.
Ghemawat assumes that FSAs are developed in the home market, but firms may also develop FSA in a host country. Ghemawat’s conclusions are not so useful for companies that want to enter foreign markets to cultivate new FSAs within the host country environment.
Ghemawat does not discuss cooperative entry modes (like a joint venture or strategic alliance) and how they may help to reduce distance (because they are complementary resources).
According to Pankaj Ghemawat, managers do have to take into account distance when making decisions about global expansion and assessing host country advantages. Such differences between home and host countries include differences in culture, economic status, societal institutions and physical location.
Chris Bartlett and Sumantra Ghoshal suggest that large MNEs are making a mistake when they adopt two strategies:
Homogenization: treating all the subsidiaries the same
Centralization: making all strategic decisions at the headquarters
These MNEs do not see, that the subsidiaries can develop their own unique strengths and augment further the MNEs existing FSA bundles. Strategic decision making and control in the home country can lead to enormous bounded reliability and rationality challenges. These result from the fact that the decision making in the headquarters can become isolated and oblivious to changing conditions in other host markets. Bounded reliability challenges include senior managers not making sufficient efforts to increase the potential value of the subsidiaries. Bartlett and Ghosal argue that giving subsidiaries more power and decision making authority may help in building an FSA in the host country.
According to Bartlett and Ghosal, senior management frequently adopts two simplifying strategies:
Universal/ United Nations model of multinational management: the mistake of homogenization. The MNEs give each subsidiary the same roles and responsibilities and the subsidiaries are subjected to the same coordination and control systems. This approach usually involves complete subsidiary independence (as in multi-centered MNEs) or complete dependence (as in centralized exporters and international projectors). Universal response helps to deal with the coordination problem, but sometimes it is better to allow limited subs authorization.
Headquarters hierarchy syndrome: the mistake of centralization. The subsidiaries are seen as units that act as implementers and adapters. Views that the organization consists of two levels, the dominant layer and the subordinates that will implement. The dominant headquarters control key decisions and company resources to be able to implement a consistent international strategy. The national subsidiaries are subordinates that implement the global strategy.
Those two strategies cause tensions between the headquarters and the subsidiaries, which want to fight for more interdependence. Next to that, opportunities are missed by local subsidiaries because the headquarters may kill entrepreneurial spirit in subsidiaries. So opportunities are not optimally exploited. Adopting these two strategies to corporate face bounded rationality problems will trigger bounded reliability challenges for the MNE.
To decide how much authority to give a subsidiary, Bartlett and Ghoshal decided that subsidiary autonomy depends on:
The strategic importance of each market, which should be assessed by the senior corporate management.
How strong are the subsidiaries’ resources like labor, technology, marketing achievements, R&D. Senior management should rate the resource base of each subsidiary.
Bartlett and Ghosal made a subsidiary classification system which distinguishes four subsidiary types:
Black hole: weak in resources, but located in a strategically important market. Being used to maintain a presence in this key market to keep ahead of new innovations by competitors. In the long run this unit wants to commit more resources to build up.
Implementer: weaker in resources and low in the strategic importance of the market with respect to long-term survival, growth and profitability of the MNE. Most subsidiaries fit in this type. This unit is the key to a firm’s overall success, because it generates a steady stream of cash flow and it may help to build competitive advantage by contributing to company-wide scale and scope economics
Strategic leader: high in resources and high in the strategic importance of the market. The role of this unit is to assist the headquarters in identifying industry trends and developing new FSAs in response to emerging opportunities and threats.
Contributor: high in resources, but low on importance of strategically local market. This unit is typically for developing new FSAs. Its subsidiary specific, specialized resource base might benefit other units, if the headquarters understand its potential economic value for the entire MNE
See page 161, figure 5.1 for the visualization of this classification.
A complementary perspective to Bartlett and Ghosal is provided by Chan Kim and Renee Mauborgne. They have written an important article on making global strategies work. ‘Due process’ is the wat strategic decisions are made, no matter what their outcome is. Due process is also called procedural justice. Kim and Mauborgne argue that subsidiary managers attach much importance to due process and often accept a resource allocation that does not benefit their subsidiary if they think that due process was observed in making that strategic decision.
Due process (procedural justice) implies that decision making involves five principles:
The familiarity of the corporate headquarters with the local situation at the subsidiary level. Senior managers understand the implications of the decisions for the subsidiary.
Effective two-way communication between subsidiaries and corporate headquarters.
Consistency in decision making across subsidiaries. There must be a clear and transparent routine when making decisions across all subsidiaries.
The possibility for managers of subsidiaries to challenge the dominant perspective at corporate headquarters.
A transparent explanation of final decisions made by corporate headquarters.
If procedural justice increases, this will reduce the negative impact of unfavourable resource allocation decisions on commitment, trust and the willingness of managers of subsidiaries to execute centrally made decisions.
Another complementary perspective is provided by Anant Neghandi, Golpira Eshghi and Edith Yuen. They wrote an article about the strengths and weaknesses of Japanese MNE subsidiary management. Their work identifies five main problems of Japanese MNEs:
Japanese MNEs adapt a centralized, autocratic approach for their foreign subsidiaries. This approach is adopted without evidence of a consensus-based management style.
Japanese MNEs have little confidence in the ability of non-Japanese managers in subsidiaries in host countries.
Relationships of trust that are established between corporate headquarters and foreign subsidiaries are usually specified to a few key managers.
Japanese staffing policies are often ethnocentric.
Japanese MNEs often avoid unions and discriminate against women and minorities. While they are very sensitive to host government regulation and the rule of law.
There are several practises that increase the likelihood that subsidiary incentives will contribute to FSA development. These practices include the following mechanisms:
Spending money on new initiatives.
Formally requesting proposals for projects
Using subsidiaries as incubators.
Creating internal subsidiary networks as the key for the organization of the recombination capabilities of the MNE.
Chris Bartlett and Sumantra Ghoshal suggest that large MNEs are making a mistake when they adopt two strategies:
Homogenization: treating all the subsidiaries the same
Centralization: making all strategic decisions at the headquarters
These MNEs do not see, that the subsidiaries can develop their own unique strengths and augment further the MNEs existing FSA bundles. Strategic decision making and control in the home country can lead to enormous bounded reliability and rationality challenges. These result from the fact that the decision making in the headquarters can become isolated and oblivious to changing conditions in other host markets. Bounded reliability challenges include senior managers not making sufficient efforts to increase the potential value of the subsidiaries. Bartlett and Ghosal argue that giving subsidiaries more power and decision making authority may help in building an FSA in the host country.
Walter Kuemmerle’s idea is that many MNEs, particularly international projectors, are wisely decentralizing their R&D by building worldwide networks of R&D labs. Instead of keeping all their R&D activities in their home country, they are building international networks in which foreign R&D laboratories fulfil specific roles within the firm. Two reasons for this trend are:
Many MNEs want to be present in several innovation and knowledge clusters, in order to monitor and absorb new developments. A host country is essential to absorb and monitor developments. MNEs must integrate their R&D facilities more closely with the host country operations to support difficult production tasks. Kummerle identified three key stages in the development of R&D in subsidiaries:
Selecting the decision makers.
Selecting the decisions and actions that strengthen the initial capabilities of the lab. Senior managers have to keep in mind that different lab types have different needs and require different skills.
Selecting the decisions and actions that are designed to maximize the lab’s contributions to the strategic goal of the MNE. Each lab should interact with the other R&D units and with the manufacturing and marketing operations of a firm on a regularly basis. The senior managers need to make sure that the resources necessary for a successful lab, meeting its objectives, are in line. This includes new FSA development.
MNEs must integrate their R&D facilities more closely to the host country, because of the commercial requirement of moving quickly from innovation to market.
Kuemmerle identified two distinct types of host country R&D facilities:
Home-base-exploiting sites: those are supporting manufacturing facilities in the foreign country, to adapt standard products to the demand there. Information flows to the foreign laboratory from the central lab at home. Home-base-exploiting labs should be located closely to key markets and the MNEs own foreign manufacturing units so that the firm’s technological innovations can be rapidly adapted to host country requirements.
Key challenge: overcome the distance between home & host and manage info flow.
Solution: put managers in charge in foreign lab who know the firm and the central lab.
Home-base-augmenting sites: acts as the firm’s eyes and ears in the host country, accessing knowledge from rivals and research institutions there. Information flows from the foreign laboratory to the central lab at home. Home-base-augmenting labs should be located in critical knowledge clusters, where it will be well positioned to tap into new sources of innovations.
Key challenge: access local knowledge and use while not being an insider is difficult. So they should strengthen ties with local community, but also make sure knowledge is useable and relevant for manufacturing operations.
3 key limitations of Kuemmerle’s model on R&D capabilities abroad:
He ignores tensions between host country lab(s) and central headquarters’ lab in setting the research agenda: subsidiaries’ managers versus central top management team.
He does not include the possibility of joint venture or strategic alliance as options to tap into foreign country’s knowledge
He does not take in account the hidden (and rising) costs of off shoring
A complementary view on Kuemmerle is provided by Julian Birkinshaw and Nick Fry. Their work is mostly focused on the drivers of new development activities in large, established MNEs. They address one critical limitation of Kummerle, namely that he overlooks subsidiary role dynamics.
Birkinshaw and Fry distinguish between two subsidiary initiatives:
Internal initiatives: attempts by the managers of the subsidiary to be chosen as the location for new corporate R&D investments.
External initiatives: result from managers of foreign subsidiaries identifying an opportunity in their business environment. This is often a result of interactions with suppliers, competitors or customers.
Both internal and external initiatives can be attempts to earn home-base-augmenting innovation charters.
A key problem that subsidiary managers face, when pursuing new resource combinations, is the corporate immune system. This is largely due to bounded reliability problems. Headquarters often do not understand the initiatives of the subsidiary which leads to false attributions of empire building.
Another complementary view is provided by Andrew Inkpen. His work shows that a firm does not always have to set up its own labs to acquire knowledge. A firm can persuade another firm to form an alliance and hereby access the other firm’s innovation. Inkpen studied the MNE General Motors (GM) and the Toyota Production System (TPS). He showed that GM had to overcome two main bounded rationality problems to be able to effectively use the knowledge base of TPS. These two are:
Understand the routines that drive the TPS system.
The TPS routines had to be recombined with the extant GM car manufacturing knowledge, which led to resistance and adaptation problems.
Walter Kuemmerle’s idea is that many MNEs, particularly international projectors, are wisely decentralizing their R&D by building worldwide networks of R&D labs. Instead of keeping all their R&D activities in their home country, they are building international networks in which foreign R&D laboratories fulfil specific roles within the firm. Two reasons for this trend are:
Many MNEs want to be present in several innovation and knowledge clusters, in order to monitor and absorb new developments. A host country is essential to absorb and monitor developments. MNEs must integrate their R&D facilities more closely with the host country operations to support difficult production tasks. Kummerle identified three key stages in the development of R&D in subsidiaries:
Selecting the decision makers.
Selecting the decisions and actions that strengthen the initial capabilities of the lab. Senior managers have to keep in mind that different lab types have different needs and require different skills.
Selecting the decisions and actions that are designed to maximize the lab’s contributions to the strategic goal of the MNE. Each lab should interact with the other R&D units and with the manufacturing and marketing operations of a firm on a regularly basis. The senior managers need to make sure that the resources necessary for a successful lab, meeting its objectives, are in line. This includes new FSA development.
MNEs must integrate their R&D facilities more closely to the host country, because of the commercial requirement of moving quickly from innovation to market.
Kasra Ferdows has the idea that senior MNE managers should try to upgrade their host country factories, so they can develop FSAs. Managers should give certain subsidiaries more control and decision making power depending on their strengths and the importance of the market. They do this in order to get the subsidiary to contribute to the FSA of the entire MNE in other markets. Production subsidiaries get a new role; not just cheap production, but overall added value for the firm.
With his work Ferdows attempts to answer the following question: ‘’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 severs but also in every market served by the company?’’. The answer depends mostly on the mindset of the senior managers in the home country.
Ferdows describes 3 major changes in the international business environment that drove the new foreign factory roles, leading production subsidiaries to become more than just cheap production locations:
International trade tariffs went down: (GATT/WTO) the need to establish plants to overcome trade barriers are not that important anymore.
Production is more complex in terms of supply chain management and planning: not just low wages, but overall productivity counts, including technology and infrastructure.
Time to go from development to actual manufacturing and marketing has become shorter: MNEs increasingly co-locate development and manufacturing activities (broad mandate for subsidiaries).
According to Ferdows there are six possible roles for foreign manufacturing facilities, based upon two parameters:
The strategic purpose of the plant: related to the host country location advantages the firm wants to access; proximity to market, access to low-cost production or access to knowledge and skills.
The level of distinct FSAs held by the plant: the additional strengths added by the plant itself; weak or strong. This also includes the higher-order FSAs of the plant.
Six roles of foreign manufacturing plants. The six factory roles are:
Offshore factory: access to low-cost production, low level of distinct FSAs. Typically does not develop new FSAs and receives minimum autonomy. The manufacturing output of the firm is exported.
Server factory: primary purpose is to manufacture goods and supply a predefined, proximate market. Market imperfections (trade barriers, logistic costs) usually explain the establishment of such factories. This factory may engage in some FSA development, but has little autonomy.
Outpost factory: similar to the ‘black hole’ type subsidiaries, purpose is to gather access to valuable knowledge and skills from host country clusters. This role is usually combined with that of an offshore (input market driven) or server (output market driven) factory.
Source factory: purpose is to access low-cost production on the input side, but it also engages in resource recombination and developing FSAs to turn it into a best practice plant in MNEs network for the assigned products. Has more autonomy in terms of logistics, product customization etc. Will be put up in locations with good infrastructure and a skilled workforce.
Contributor factory: oriented primarily towards the host country output market. Supplies proximate markets, and being at the upstream end of the value chain, it is responsible for resource recombination in the form of process improvements, new product development, customizations, etc.
Lead factory: the most important one in terms of resource recombination and new FSA development. Access valuable inputs from the local cluster and plays a key role in localized manufacturing innovation. The factory is closely connected with both the key players on the input side as well as the users on the output side.
Ferdows says that an MNE should aim to upgrade its offshore, server and outpost factories so that they gain the ability to develop FSAs. This upgrading process requires a high level of commitment and it involves resource recombination spread over 3 stages:
Enhancing internal performance
Accessing and developing external resources
Developing new knowledge that can benefit the overall network
The upgrading process results in a robust network of factories with FSA-developing roles, in which the factories are able to adapt to changes in the marketplace. The ultimate goal of a foreign factory should be developing a world-class speciality.
However, this upgrading process often does not take place, because of several obstacles managers might face:
Fear of relying on foreign operations for critical skills.
Treating overseas factories like cash cows neglecting LT investment.
Creating instability by shifting production in reaction to X rates and wage costs.
Government entices MNEs to locate in sometimes unattractive locations.
Ferdows believes that management should upgrade all factories; which is 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.
A complementary perspective to Ferdows is provided by Alan MacCormack, Lawrence Newman and Donald Rosenfield. They argue that senior managers should not neglect qualitative parameters when locating plants. When senior managers face bounded reliability problems they might tend to favour easily measurable variables and thereby neglecting other important variables such as the knowledge and skills held by the local workforce. The location that is chose by the senior managers must provide resources that can be combined with the set of FSAs of the MNE.
Flexible manufacturing systems (FMS) are an efficient response to product life cycle reduction and the need to adapt products to satisfy the needs of the customers.
Just-in-time management (JIT) leads to a response to specific customer demands and eliminates the need to hold inventories.
Total quality management (TQM) is focused on continuous improvement. Understanding the customer and it needs is very important and incorporated into daily job routines.
These three (FMS, JIT and TQM) all place a significant demand on the workforce of the host country.
Another complementary view is provided by Craig Galbraith. He studies the situation where firms continuously invest in innovation while having little financial rewards for it. According to Galbraith, one way to escape such a situation is to move towards a system with flexible, smaller plants than can easily adapt to changes in the demand and supply side.
Galbraith observed that more pre-transfer training did not reduce the losses in productivity. The two main reasons for this bounded rationality problem were:
There was often a lack of operational responsibility and operation experience in the training team.
There was not enough attention towards production support activities, like ordering and inventory control, job responsibilities and personnel requirements.
Galbraith also identified a bounded reliability problem; facility personnel refused to provide support in the long-term to the recipient facility, in technology relocation cases.
Kasra Ferdows has the idea that senior MNE managers should try to upgrade their host country factories, so they can develop FSAs. Managers should give certain subsidiaries more control and decision making power depending on their strengths and the importance of the market. They do this in order to get the subsidiary to contribute to the FSA of the entire MNE in other markets. Production subsidiaries get a new role; not just cheap production, but overall added value for the firm.
With his work Ferdows attempts to answer the following question: ‘’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 severs but also in every market served by the company?’’. The answer depends mostly on the mindset of the senior managers in the home country.
Economic/ operating exposure: the impact of changes in real exchange rates relative to the MNE’s competitors, so what the effect is on the net present value of the MNE’s future income streams. D.R Lessard and J.B Lightstone made recommendations to minimize this impact, senior managers should strive to:
Have a flexible sourcing structure; which means being able to shift production from one to another country quickly and efficiently.
Attain the capability to engage in exchange rate pass through; which means the capability to raise prices in response to exchange rate fluctuations without losing sales volume.
Economic exposure is about the negative effects of large unexpected changes in exchanges rates on a firm’s competitiveness related to rivals. This is affected by the geographic configuration of its input and output markets. Firms with the strongest market position, the most differentiated products and the greatest flexibility to shift production will have the lowest negative impact of the fluctuations on its future income stream.
Even firms that are purely domestic, without foreign operations, can incur economic exposure if their rival MNEs are positively affected by exchange rates for internationally sourced inputs.
Transaction exposure: the risk of financial losses resulting from outstanding but unfulfilled contractual commitments.
Translation exposure: risk of losses resulting from the translation of accounting statements expressed in foreign currencies into the home country currency at consolidation date.
It is important to distinguish between real and nominal exchange rates when assessing economic exposure.
Nominal exchange rates: the direct exchange ratios between currencies.
Real exchange rates: changes in the nominal exchange rate minus the difference in inflation rates between the two countries. This is the rate which affects the level of economic exposure for firms.
When the nominal exchange rates between two currencies correspond exactly with the differences in inflation between the two countries, there is purchasing power parity.
Economic exposure is important to think about because:
It may result in negative effects on MNE income compared to rivals
Adds uncertainty to value of a firm’s location advantages
MNEs are active in multiple countries, and need to look at their overall economic exposure: not just one country, but the overall risk (country diversification)
It affects the strategic decision to locate in a certain country
Not all MNEs suffer to the same extent because they all are exposed to different risks (related to country presence) and because of different strategies.
In terms of the books framework three things are important concerning economic exposure:
Economic exposure should be viewed as a parameter that adds uncertainty to the value of a firm’s location advantages. Even access to location advantages may not lead to long-run competitive advantage if the value of these advantages depends on macro parameters like the exchange rate.
Economic exposure also implies that the location advantages benefiting an MNE should be considered not only positively and on country-by-country basis, but also as a portfolio of potential risks for future cash flows.
MNEs can choose to develop specific FSAs allowing risk mitigation in the foreign currency, by immunizing their products to economic exposure, by allowing full exchange rate pass through.
The situation faced by each MNE unit can be described in terms of two parameters. These two parameters are:
The exposure absorption capability on the input market side.
The exchange rate pass through on the output market side
These two parameters lead to a classification of operating exposure at the subsidiary level:
The 3rd quadrant (strong exposure absorption capability on the input market side and strong exchange rate pass through on the output market side), is the most desirable situation because economic exposure effects are absent. This MNE is able to make the necessary adjustments on the input market side, and has such a strong market position that any cost increases can be translated into price increases for customers without a loss of business.
The 2nd quadrant (weak exposure absorption capability on the input market side and weak exchange rate pass through on the output market side) is the least favourable. This MNE typically sells products which are greatly affected by small price increases.
The 1st and 4th quadrants are intermediate causes, where one of the parameters is strong and the other parameter is weak.
Lessard and Lightstone suggest that companies manage economic exposure through one of the next three approaches:
Separate business unit model: each subsidiary configures its own operations to reduce its specific operating exposure.
Companywide portfolio model: country diversification, exchange rate may go up in one country and down in other, on balance total lower rate of economic exposure (even though individual units may have higher risk). All the operational structures together balance each other.
Flexible operational planning model: production transfer, if X-rate goes up/down, move production from one plant / country to another. Problem: you need excess capacity.
The problem is that MNEs in different countries are exposed to exchange rate risks; risk of net present value reduction of the firm’s future income streams. Lessard and Lightstone suggest that managers who cannot set the policy of the company on economic exposure are not responsible for the economic exposure effects of changing exchange rates.
Christopher Holland, Geoff Lockett, Jean-Michel Richard and Ian Blackman provided a complementary perspective to Lessard and Lightstone. They wrote a piece on the evolution of a global cash management system. One of their findings was that MNEs can develop FSAs in functional areas, like international financial management, and that these can have an important implication for the strategy of the MNE beyond the functional area itself.
Another complementary perspective was provided by Alan Rugman. He wrote a piece on international financial management which was totally neglected. Rugman argues that MNEs are formed when a firm’s FSAs can only be exploited through foreign direct investment rather than through exports or licensing agreements.
Important to note is that Rugman does not agree with the suggestion that economic exposure should drive strategic decisions, like the decision of a plant location.
Economic/ operating exposure: the impact of changes in real exchange rates relative to the MNE’s competitors, so what the effect is on the net present value of the MNE’s future income streams. D.R Lessard and J.B Lightstone made recommendations to minimize this impact, senior managers should strive to:
Have a flexible sourcing structure; which means being able to shift production from one to another country quickly and efficiently.
Attain the capability to engage in exchange rate pass through; which means the capability to raise prices in response to exchange rate fluctuations without losing sales volume.
Economic exposure is about the negative effects of large unexpected changes in exchanges rates on a firm’s competitiveness related to rivals. This is affected by the geographic configuration of its input and output markets. Firms with the strongest market position, the most differentiated products and the greatest flexibility to shift production will have the lowest negative impact of the fluctuations on its future income stream.
Even firms that are purely domestic, without foreign operations, can incur economic exposure if their rival MNEs are positively affected by exchange rates for internationally sourced inputs.
According to Levitt, globalizations of markets do not need to locally adapt; MNEs do not have to worry that much about customizing to cultural preferences. Technology has largely homogenized consumer preferences. The majority of consumers simply want the same; high quantity, high reliability and a low price. So MNEs should focus on such products and standardize their products and services worldwide to achieve economies of scale. The MNE should implement global strategies across all markets. This choice of Levitt for global standardization rests on two foundations:
Cultures and national social tastes are not fixed but subject to continuous change. These changes towards homogenization are the result of technology.
Companies can offer globally standardized products, harness economies of scale to deliver high-quality, dependable goods at low cost by converging tastes now.
Customers are clearly influenced in their buying decision by two things: low prices regardless of feature preferences and promotion regardless of price. Levitt argues that some customization may still be required if all efforts to acceptance of standardized products and to change local preferences have been used.
If a company forces prices and costs down and driving reliability and quality up, while maintaining sustainability, customers will prefer the standardized products.
A complementary perspective to Levitt is provided by John Quelch and Lisa Klein. Their work is focused on the potential offered by the internet to change the face of international marketing. They argue that the internet can have positive effects on international operations.
Services with a broad geographic scope often become more valuable to the customers of the MNE because these services are international available and accessible. So the distribution and number of customers affects the value of the service to the next customer.
In line with Levitt, Quelch and Klein find that companies which offer standardized products will have certain advantages when using the internet. When using the internet, customers worldwide will demand more standardized products. The internet should be seen as a tool to reduce bounded rationality problems that the MNE faces in host countries.
Sales on the internet via central websites should not be at the expense of conventional, foreign affiliates’’ sales.
Another complementary perspective to Levitt is provided by David Arnold, Julian Birkinshaw and Omar Toulan. Their work is on the potential and the limits of global account management.
Global account management: dedicating specialized resources, typically involving non-location bound routines, to serve internationally operating customers in an integrated fashion.
According to these authors there are two main pitfalls to an effective implementation of global account management:
If the customer is more internationally coordinated than the supplier, the main effect of global account management may be price squeezes, with little benefit for the supplier.
If the supplier pays insufficient attention to implementation details, important internal problems of bounded rationality and reliability occur.
According to Levitt, globalizations of markets do not need to locally adapt; MNEs do not have to worry that much about customizing to cultural preferences. Technology has largely homogenized consumer preferences. The majority of consumers simply want the same; high quantity, high reliability and a low price. So MNEs should focus on such products and standardize their products and services worldwide to achieve economies of scale. The MNE should implement global strategies across all markets. This choice of Levitt for global standardization rests on two foundations:
Cultures and national social tastes are not fixed but subject to continuous change. These changes towards homogenization are the result of technology.
Companies can offer globally standardized products, harness economies of scale to deliver high-quality, dependable goods at low cost by converging tastes now.
Customers are clearly influenced in their buying decision by two things: low prices regardless of feature preferences and promotion regardless of price. Levitt argues that some customization may still be required if all efforts to acceptance of standardized products and to change local preferences have been used.
If a company forces prices and costs down and driving reliability and quality up, while maintaining sustainability, customers will prefer the standardized products.
MNEs must develop managers with a broad mental map covering the entirety of the MNE’s geographically dispersed operations. This is critical to the MNE’s long term profitability and growth. Managers commanding deep knowledge of internal MNE functioning represent the MNE’s key resource to facilitate international expansion and to coordinate geographically dispersed, established operations. Such managers are best positioned to:
Engage in the international transfer of non-location-bound FSAs form the home nation
Identify the need for new FSA development in host countries and facilitate such development
Meld both location-bound and non-location-bound FSAs
Expatriation: most direct and rigorous way to give managers the in-depth knowledge of the MNE’s internal network, as well as the abilities to transfer routines abroad and be a catalyst for recombining resources.
J.S Black and H.B Gregersen studied expatriate management and found four common problems in how firms manage their expatriates:
Senior managers in the home country often underestimate the impact of cultural distance on organizational function, and as result, do not invest sufficiently in training programs.
The responsibility for expatriates is often assigned to human resource managers which have no international experience, so they do not have any insight in the problems expatriates face.
Senior management view expatriates as being well paid and well looked after, and therefore as having little to complain about.
In many MNEs, a common misconception persists that expatriates do not need help readjusting after having returned home, despite that changes will probably have occurred during their absence.
There are three best practices when it comes to successfully managing expatriate managers, according to Black and Gregersen:
Creating knowledge and developing global leadership skills: a key component here is that both senior management in the home country and the expatriate should share a clear understanding of the expatriate’s purpose and related expectations. This needs careful planning, which yields far more long-term benefits for both.
Making sure that candidates have cross-cultural skills to match their technical abilities: effective resource combination requires a mix of technical and social skills.
Devoting attention the re-integrating expatriates into their home country after their assignment.
The adoption of all these three best practices leads to successful expatriate management. Adopting only one or two of these best practices does not lead to successful assignments.
Companies look for five characteristics when choosing expatriates:
A drive to communicate
Broad-based sociability
Cultural flexibility
Cosmopolitan orientation
A collaborative negotiation style
Black and Gregersen describe three approaches an MNE can choose to successfully select candidates for expatriation:
An informal but efficient selection process. A senior executive observes the reactions, actions and instincts of the employees in several settings.
A much more formal approach. The MNE uses an extensive survey at an early stage of the career of the employee to assess individual preparedness for expatriation.
Looking for prior international experience in new hires, and thereby leveraging the training and investment in international management provided by previous employees.
Black and Gregersen suggest that all the MNE’s expatriate selection processes entail a trade-off between accuracy and cost. The assessment process formed by carefully routines is costly in the beginning, but also very accurate with selecting the right individuals for expatriation. This reduces the risk of costs resulting from failed expatriate assignments. The key to a successful selection is to have a systematic way of assessing the cross-cultural aptitudes of people you may want to send abroad.
A complementary perspective is provided by C.K. Prahalad and Yves Doz. They do not focus on human resource management but on the creation of an appropriate organizational context.
Organizational context: a blending of organizational structure, information systems, measurement and reward systems, career planning and a fostering of common organizational culture.
When change is required MNE management should take action. The senior management should take actions to remain profitable. However, it can be the case that the corporate headquarter is unable to impose the actions of the senior management. In such a case there is a control gap, which can only be closed through creating and adequate organizational context. For this several steps have to be followed.
Before discussing these steps we first need to explain how MNEs can be descried in terms of four orientations:
Cognitive orientation: the perception by managers of what constitutes the relevant business environment and the main competitive forces in this environment.
Strategic orientation: the interpretation of the managers of the changes occurring in the relevant external environment.
Administrative orientation: the information management system within the MNE. Especially the management of accounting data and personnel performance data.
Power orientation: who in the firm has the power to do what.
When creating an adequate organizational context a change process is needed, according to Prahalad and Doz. Each successful change process includes the same eight steps:
The appointment of a new key executive, formally assigned the task of effecting change.
Legitimize the executive’s appointment and role as change agent through external pressures in the form of increased competition.
The executive explicitly states the consequences of new environmental threats for the strategy of the firm. The new strategic orientation is laid out.
Minor reallocations of authority are legitimized.
On the basis of cognitive, administrative and strategic shifts, multiple minor reallocations become possible.
The cumulative effect of the multiple reallocations of authority establishes a key executive as a powerful actor in the change process.
Building on the new power, the executive is then able to engage in more drastic changes like changes in status and career paths of managers.
The key executive supported and validated the newly created cognitive, strategic and power orientations using finely tuned data-management tools. These include performance measurement systems, budget procedures and resource allocation.
Another complementary view is written by Christopher Barlett and Sumantra Ghosal. In their article they discuss how to give managers the necessary organizational capabilities. Their work shows the importance of legitimizing different perspectives in the MNE. They also point out the importance of simultaneous fostering and melding of non-location bound and location-bound knowledge.
MNEs must develop managers with a broad mental map covering the entirety of the MNE’s geographically dispersed operations. This is critical to the MNE’s long term profitability and growth. Managers commanding deep knowledge of internal MNE functioning represent the MNE’s key resource to facilitate international expansion and to coordinate geographically dispersed, established operations. Such managers are best positioned to:
Engage in the international transfer of non-location-bound FSAs form the home nation
Identify the need for new FSA development in host countries and facilitate such development
Meld both location-bound and non-location-bound FSAs
Expatriation: most direct and rigorous way to give managers the in-depth knowledge of the MNE’s internal network, as well as the abilities to transfer routines abroad and be a catalyst for recombining resources.
David Arnold has the idea that, when selling in foreign markets, MNEs should maintain relationships with local distributors over the long term, even when they already established their own local network for their major clients. The first step in internationalization is often establishing a relation with a foreign distributor, because:
They have the knowledge about the local market, regulations and business practices
They know where to hire the appropriate staff
They know potential customers and how to develop a relationship with these potential customers
Their FSAs are location bound and helps overcome the distance that the internationalizing firm has to deal with
Many MNEs establish relationships with local distributors to reduce costs and to minimize risks. The transition period to having new local distributors is often difficult and costly. According to Arnold, these problems can be avoided through strategic planning of distributor selection and governance of the relationships with the local distributors.
Local distributors often serve as a beachhead in the first stage of internationalization. A beachhead strategy means that when you go into the host country you need to focus your strength and concentrate on winning a small area, which is the beachhead, that becomes the stronghold from which you will have advance into the rest of the market. This is a minimal, low-investment, low-risk strategy where the MNE waits and sees what can be achieved with minimal commitment. The distribution strategy often follows a pattern:
1st stage: initial success. Success is easy to capture as the low hanging fruit. A new product in a new market sells itself. There are new and enthusiastic partners.
2nd stage: flattening success and sometimes even declining. After the first success, the market becomes more difficult, because there are new entrants and the competition increases.
3rd stage: the MNE starts questioning its local partner and may
Take over control of distribution channel
Build a self-owned distribution channel
Many local distributors observe that the relationships with the MNE will only be temporarily. When this is the case, local distributors may not be willing to make large investments in marketing and business development which are necessary to grow in the long term. . As a result, the local partner and MNE will not invest in each other anymore. The local distributor expects unreliability of the MNE which will create distributor unreliability. This is a vicious cycle.
This may lead to a fall in the growth of sales. Both parties argue that the fault lies with the other party but in reality both parties share responsibility for the failure of the distribution agreement. However, Arnold argues that MNEs must understand that distributors are implementers of the marketing strategy rather than marketing departments in the country market.
The solution to these common problems between MNEs and their foreign distributors, according to Arnold, is to recognize that the phases of the strategy are predictable and that MNEs should plan for them in a way that is less disruptive and costly than the beachhead strategy. Successful firms often go from a beachhead strategy into developing a long term relationship with the local partner, in combination with direct distribution by the MNE itself.
The key for the MNE is to find the balance between three competing objectives:
To maintain strategic control over important customers
To benefit from the local partner’s market knowledge and market access
To reduce risk associated with high demand uncertainty in the host market
Arnold offers a list of seven guidelines for MNEs when dealing with local distributors. These guidelines should help MNEs to avoid the common pattern of market underperformance as a result of underinvestment and over-reliance on distributors. The seven guidelines are:
Proactively select locations and only then suitable distributors; select your distributors, do not let them select you.
Focus on distributors’ market development capabilities; look for distributors capable of developing markets, rather than those with a few obvious customer contacts.
Manage distributors as long-term partners; this will make distributors willing to invest more in strategic marketing and long-term development.
Provide resources (managerial, financial and knowledge-based) to support distributors for market development purposes.
Do not delegate marketing strategy to distributors; distributors should be able to adapt to the MNEs marketing strategy, but the MNE should hold clear leadership.
Secure shared access to the distributors’ critical market and financial intelligence; this will reduce the MNEs bounded rationality problems, because it improves its understanding of the local market.
Link national distributors with each other, especially at the regional level (spanning several countries).
All this is especially relevant to the centralized exporter, whereas the views of Ghosal, Kuemmerle and Ferdows are especially applicable to the international projector.
A complementary perspective is provided by Andrew R. Thomas and Timothy J. Wilkinson. They argue that MNEs may also face a difficult distribution challenge at home, with implications for international strategy. Especially US manufacturing MNEs have made a strategic mistake in managing their domestic distribution system according to Thomas and Wilkinson. The manufacturing MNEs should regain control over domestic distribution and engage in direct marketing. This is consistent with the view of Arnold.
However, there is an important difference between the view of Thomas and Wilkinson and the view of Arnold. Namely, Arnold shows the advantage of using distributors if managed properly while Thomas and Wilkinson show a disadvantage of using distributors and a benefit of direct sales.
Another complementary perspective to Arnold is provided by Hau L. Lee. He writes about how manufacturing MNEs should manage uncertainty on the input side as well as on the output side of the supply chain. He argues that the bullwhip effect can occur, even if demand were predictable, if there is poor planning by the foreign distributor.
The bullwhip effect: the amplification of order variability as one goes upstream along a supply chain.
The MNE should also try to eliminate unnecessary uncertainty on the supply side. To mitigate supply interruptions and to stabilize the supply side risk hedging is critical. Supply chain management can be very effective in order to reduce uncertainty on the input and output side according to Lee. This requires information planning and the MNE can develop a new non-location bound FSA in the form of an agile supply chain. This is common among international coordinators.
Demand uncertainty: results from the limited capability of the MNE to understand what set of new location-bound FSAs needs to be developed to enter the new market.
Supply uncertainty: results from bounded rationality challenges that the senior MNE managers face when optimizing logistics when the new country needs to be linked to the existing supply chain.
Arnold says that the MNE can effectively manage uncertainty together with distributors and suppliers if they engage in information sharing, joint coordination and planning.
Five management takeaways for international distribution:
Review the international distribution strategy and relationships with local distributors.
Follow the seven guidelines of Arnold for MNEs when using local distributors in international expansion.
Consider the disadvantages of local distributors and the advantages of direct sales.
Assess the uncertainty in the output and input markets of the supply chain.
Evaluate the optimal governance of international distribution and use a intergrative approach to coordinate the supply chain.
David Arnold has the idea that, when selling in foreign markets, MNEs should maintain relationships with local distributors over the long term, even when they already established their own local network for their major clients. The first step in internationalization is often establishing a relation with a foreign distributor, because:
They have the knowledge about the local market, regulations and business practices
They know where to hire the appropriate staff
They know potential customers and how to develop a relationship with these potential customers
Their FSAs are location bound and helps overcome the distance that the internationalizing firm has to deal with
Many MNEs establish relationships with local distributors to reduce costs and to minimize risks. The transition period to having new local distributors is often difficult and costly. According to Arnold, these problems can be avoided through strategic planning of distributor selection and governance of the relationships with the local distributors.
The second entry mode implies you start to cooperate with a rival, in forming a strategic alliance. Such ‘competitive collaboration’ occurs because MNEs find it increasingly difficult to bear alone the enormous R&D costs to launch new products. The challenge here is to learn as much as possible from this partner, while giving away as few of your own FSAs as possible. The advantage of a strategic alliance is that you share risks and costs (R&D), you learn from your partner’s complementary resources, and there is quicker development of capabilities to deliver products and services to the output market.
Gary Hamel, Yves Doz and C.K. Prahalad wrote about the situation where large MNEs from strategic alliances with other equally large foreign firms which are rivals in the international market place. This competitive collaboration happens because MNEs find it difficult to bear alone the costs of R&D when launching new products. MNEs use competitive collaboration to enhance their technology and internal skills.
Hamel, Doz and Prahalad identified four key principles for companies to successfully form strategic alliances:
Collaboration is competition in a different form
Harmony is not the most important thing for success
Cooperation has limits; companies must defend against competitive compromise
Learning from partners is very important
The study of Hamel, Doz and Prahalad reveals that Asian firms generally benefited the most from strategic alliances with foreign MNEs. They provide four reasons for this:
Asian firms are willing to put more effort in learning from their partners. This attitude is different than Western firms due to cultural and historical differences between Asia and West.
Asian firms see alliances as an opportunity to develop new FSAs and not as a tool to reduce costs and risk.
Asian firms typically define clear learning objectives regarding what they want to achieve from the alliance. They observe their partners to acquire knew knowledge.
Asian MNE alliances often involve complex tacit process knowledge that is hard to transfer. In contrast, Western MNE alliances often involve easy transferable knowledge.
While some companies gain competitive strength from alliances, others fall behind. The costs of an alliance are:
The own FSA could be appropriated by the alliance partner (so it is important to develop safeguards against such reverse knowledge flows).
A risky learning race starts; how to learn more from your partner than your partner learns from you.
Knowledge sharing becomes dysfunctional because of bounded reliability; partners want to contribute as little as possible.
Managers pay too much attention to the learning race and forget about the goal of the strategic alliance in the first place.
When an MNE has too many strategic alliances, this reduces coherence and increases management problems.
When outsourcing there are four principles that MNE senior managers should respect to avoid the circle of increased dependency on a partner. These four principles are:
Outsourcing to provide a competitive product cannot replace the need to build FSAs in the long term.
Senior managers should keep in mind the negative consequences of outsourcing, like capability losses, instead of only looking at short-run beneficial cost effects.
Senior managers should consider the cumulative effects that individual outsourcing decisions have regarding the vicious circle of dependency on outside actors.
FSAs should be strengthened and rejuvenated as quickly as possible if they dissipate toward a partner in an outsourcing relationship.
The challenge of a strategic alliance is to share enough skills to create advantage vis-à-vis companies outside the alliance, whilst preventing the transfer of core skills to the partner. The goal is to limit the transparency of their operations. The nature of the FSAs contributed by an MNE to an international alliance affects how easily these FSAs will diffuse to a partner. Two important variables:
Mobility: the ease of moving the complete physical constructions of how to duplicate an FSA. The more mobile, the easier it may diffuse.
Embeddedness: an FSA is embedded if it cannot easily be shared through actors outside the firm, without problems of interpretation or absorption across cultures. The more embedded the FSA, the less easily it is to diffuse.
A complementary perspective to Hamel, Doz and Prahalad is provided by Erin Anderson and Sandy Jap. They wrote about the dark side of alliances; dependence, exploitation and abuse. Anderson and Jap argue that the best relationships on the surface (the most stable and long-lasting ones) are often the most vulnerable to problems of bounded reliability. A relationship is more vulnerable to bounded reliability when there are high levels of trust involved, unless safeguards are introduced to prevent it. Anderson and Jap show the use of six types of safeguards to avoid the dark side of alliances:
Regular re-evaluation of the alliance relationship. One effective way of doing this is to bring in new evaluators. Changing employees and managers may contribute to avoiding bounded reliability problems.
Continued focus on profitability rather than volume. In supply chain relationships senior managers often attach to much importance to the size of the relationships. However, the size of the relationship can be a poor indicator of the contribution of the relationship to profitability.
Continued attention to alternatives, back-ups. When managers have realistic alternatives they can avoid becoming dependent on alliance partners.
Swapping hostages. Both partners should invest resources that cannot easily be redeployed outside the alliance without significant loss of value.
Setting and reassessing common goals. Setting clear goals and re-elevating these goals is critical.
Avoiding vicious cycles of suspicion and the resulting buildup of bounded reliability.
Another complementary view is provided by Prashant Kale and Jaideep Anand. In their work they describe the problems associated with establishing alliances, especially in the form if joint ventures set up for market-seeking purposes in emerging economies. They argue that these joint ventures are set up when they are the only penetration option for the foreign MNE, given a restrictive regulatory regime which prevents wholly owned operations. In such a case the use of a local partner is required for deploying the FSAs of the MNE.
In the short run the MNE can learn more from a privately local partner than rom a state-owner partner. However, in the long run the state-owned partner may be the better option because privately owned partners face stronger incentives to enter a competitive learning race with the MNE.
Kala and Anand showed with their work that MNEs usually were better equipped to win the learning race against the local partner. The reasons for this better learning include three elements:
A systematically MNE intent to learn from the partner
The better preparedness of the MNE to identify valuable learning opportunities based on prior experiences with local partners in other places.
The existence of learning routines underlying the learning capability of the MNE.
Much of the value that is added to the MNE may reside in internationally transferable, intangible FSAs. These FSAs can be easily redeployed to other countries without the loss of productive value.
The second entry mode implies you start to cooperate with a rival, in forming a strategic alliance. Such ‘competitive collaboration’ occurs because MNEs find it increasingly difficult to bear alone the enormous R&D costs to launch new products. The challenge here is to learn as much as possible from this partner, while giving away as few of your own FSAs as possible. The advantage of a strategic alliance is that you share risks and costs (R&D), you learn from your partner’s complementary resources, and there is quicker development of capabilities to deliver products and services to the output market.
Mergers and acquisitions (M&As) transactions usually do not make economic sense, according to Ghemawat and Ghadar. The entry modes with the highest level of commitment are mergers and acquisitions. Those are done to create larger firms that are supposedly better able to deal with globalized markets. Next to that, when a firm is active in a mature industry with low growth, an M&A can be a strategic move to break the mould. An M&A serves as a radical break that changes the organization radically, which sometimes, is needed.
The theory of comparative advantage states that specific production activities will be concentrated in the countries that possess advantages relative to other countries. This theory predicts the geographic concentration of production. However, the theory does not predict the concentration of the number of companies in an industry; it does not account for economies of scale.
Ghemawat and Ghadar examined data regarding the market share of companies in more than 20 industries. Based on their results they computed a modified Herfindahl index for each industry. This index is a measure for market share concentration. This index can take values between 0 and 1. A high index, with the maximum of 1 which implies that there is only one firm in the market, implies a high degree of market share consolidation while a lower index implies a lower level of concentration. So when the number of firms in a market increases, the Herfindahl index will decrease.
The aim of a consolidation must always be to create value. However, creating value through consolidation is often harder than senior managers expect when contemplating an M&A. Mergers and acquisitions are not easy because of:
Pre – and post integration obstacles: each firm has its own FSA, which are partly location bound. If the distance is large, it will be more difficult to integrate these FSAs. Plus even for FSAs that are transferable, it is not easy to integrate these.
Purchase price premiums: as a result of firms competing for a firm that can be taken over, the price increases.
Ghemawat and Ghadar provide a list of six senior management biases, why managers like M&A. Those can all be interpreted as reflections of bounded rationality and, in some cases, also bounded reliability:
Top line obsession: Happens when senior managers focus too much on growth of sales instead of on profits. The bounded reliability problem here is that managers only pursue their own interests.
Stock price exploitation: In case of overvalued stock prices, managers would like to benefit from that. This is because when a firm has overvalued stock prices it is more affordable to engage in large M&A transactions. Here the bounded reliability problem is opportunistic behaviour.
Grooved thinking: “this is the way we always did it”. Senior managers often want to follow the traditional mindset in an industry even when this mindset has become obsolete.
Herd behaviour: copy paste behaviour of senior managers; they do what the competitor does. Herd behaviour can reduce the individual risk of underperforming rival firms of managers. The bounded reliability lies in the senior managers engaging primarily in self-serving behaviour.
Personal commitments. Senior managers may stick to their own personal views when engaging in M&A transactions, even when the M&As in their industry systematically lead to underperformance.
Trust in interested parties: Investment banks can push firms out of own interests in earning commissions and fees. Here the source of bounded reliability problems resided with the external parties to the transaction; these parties act in their own interests instead of the interests of the firm that hired them.
Alternative strategies that senior managers can pursue are:
‘Pick up the Scraps’. This are spin-offs and divestments that result from the mega M&As and other companies. This can lead to profitable growth opportunities for firms that retained from engaging in large M&As.
‘Stay Home’ ; Many firms have ample opportunity to improve their competitive position locally or in their home region.
‘Keep Your Eye on the Ball’ ; Companies can improve competitiveness by remaining focused on developing and exploiting their key FSAs, while their competitors focus on M&A deals and struggle with the post-M&A integration.
‘Make Friends’ ; Strategic alliances may be a good solution too. They often have less resistance internally then M&As.
‘Appeal to the Referee’ ; Companies may slow the M&A’s of competitors by calling on regulators to review antitrust implications.
‘Stalk Your Target’ ; The company observers the others while they explore and test the waters first.
‘Sell Out’ ; Be the seller rather than the buyer may be more profitable if consolidation is economically justified.
A SA (strategic alliance) versus M&A (merger and acquisition).
An alliance is preferred over M&A when:
Each firm only needs a subset of the FSAs of the partner
It is difficult to dispose of the prospective partner’s unusable resources because they are firm specific: if you buy the whole firm and cannot sell the parts of it you do not like
The advantage of SA is that you only get those parts of the FSA of a partner that are really needed. That is why it is called a strategic alliance. But, there are also legal issues involved. Not every country allows in every industry to establish a SA or a merger. For example in the defence industry, or nuclear industry. Exactly because foreign firms should not be able to learn from the local firm. That is perceived by politicians as giving away knowledge to foreign partners.
One thing to note is that the large-scale M&As between regional firms in the 1990s where only possible because the previous two decades witnessed a trend towards freer trade and investment.
James Sebenius provides a complementary perspective to Ghemawat and Ghadar. He focuses on the success of the Italian copper producer Societa Metallurgica Italiana (SMI). This firm grew rapidly after several acquisitions across-boarder throughout Europe. He argues that there are two reasons for the acquisition success of SMI:
For every transaction, senior management was always clear about the logic behind the proposed acquisition and the value that it will create. SMI was patience and waited with purchasing the targets until relevant stockholders of the target were predisposed.
The senior executives engaged in careful stakeholder management. SMI had the ability to build the acquisition transactions in such a way that the focus was shifted from the economic value principles towards clauses to allow stakeholders that were critical to see the value of the acquisition.
Inkpen, Sundaram and Rockwood provide a second complementary view to Ghemawat and Ghadar. In their work they look at less successful M&A cases; European acquisitions in California. They described that there were barriers that made the acquisitions they studied unsuccessful. Such barriers were mostly related to differences in the entrepreneurial culture, corporate governance practices and related routines.
European MNEs had very slow integration and rigid decision making that led to less successful acquisitions. There are four reasons for this:
European firms adopt time-consuming consensus-building strategies before making a decision on changes in the acquired firm.
European MNEs neglected to convey quickly a picture of the future of the entity to the staff. This led to high turnover rates.
The European expatriates only socialized with each other instead of attempting to make it to social networks of the host country.
There was often confusion immediately after the acquisition about who was actually responsible for the strategic decision making of the firm.
Mergers and acquisitions (M&As) transactions usually do not make economic sense, according to Ghemawat and Ghadar. The entry modes with the highest level of commitment are mergers and acquisitions. Those are done to create larger firms that are supposedly better able to deal with globalized markets. Next to that, when a firm is active in a mature industry with low growth, an M&A can be a strategic move to break the mould. An M&A serves as a radical break that changes the organization radically, which sometimes, is needed.
Emerging economies (which historically where called ‘less developed’ or ‘third world countries’) have been providing the world’s fastest growing markets for most products and services. Emerging economies play an important role in the world economy and MNE strategic activity. Those countries offer potential cost and innovation advantages and they represent new output markets, this makes them attractive for MNEs:
They have relatively inexpensive skilled labor and trained managers; this offers MNEs lower manufacturing and service costs.
They can give MNEs access to a new kind of innovation, than the one that will be found in the mature markets.
They can be used as a counter-strategy to the increasing expansion of emerging economy MNEs into the world’s developed markets.
Tarun Khanna, Krishna Palepu and Jayant Sinha have the idea that emerging economies are characterized by important institutional voids, so the biggest challenge for MNEs operating in those economies is to understand and deal with those voids. They suggest that MNEs face difficulties due to the unavailability of two kinds of institutions that can facilitate business:
Efficient local intermediary firms
Broader macro-level institutions
In the home country, these would be often taken for granted and being considered as generally available location advantages. In the emerging economies they are absent. Senior managers should not assume that business is done in the same way in emerging economies as in developed economies.
Institutional voids: lack of well-functioning firms, or mostly state owned enterprises. Lack of macro-level institutions, so no courts, difficult to get contracts, lack of well functioning financial markets. It is difficult to deal with this uncertainty.
MNEs should customize their approaches, so they can fit the host country’s institutional context, to reduce the institutional distance. So these voids in the emerging economies require MNEs to invest in the creation of compensating location-bound FSAs. This is instrumental to the success of the MNE’s extant. The key bounded rationality problem though, is that many analyses of host country location advantages do not account for the unique institutional makeup of the individual emerging economies.
If so difficult, why do MNEs go to emerging markets?
Market seeking: home markets and other developed markets saturated, new markets that are developing rapidly
Efficiency seeking: these markets may be developing rapidly, but still relatively cheap to produce locally.
Disadvantages of emerging markets are:
Still low levels of development,
High growth figures, but also associated with high volatility (hence risky).
High levels of corruption, low levels of trust, difficult to do business, networking is important.
There are five components of the institutional context that are the most relevant to MNEs. With those, MNE senior managers, are able to create a map of the country’s institutional context and this shows the extent in which the MNE would need to invest in location-bound FSAs in each context:
Macro-level political and social context; managers should identify a country’s power centres and decide whether there are checks and balances in place. One example of an important thing is for instance to know what form of private property rights protection there is in the country.
Macro-level openness (the extent to which the country welcomes FDI, ideas and travels) of the economy; this level of openness affects the markets directly relevant to firms. Open economies are more likely to attract global intermediaries. Too much openness though, reduces the strength of the MNEs FSAs relative to the host country firms.
Product markets; these are becoming more attractive, but MNEs still have difficulties with getting reliable information about the consumers in these markets. Looking from the perspective of the consumer; emerging economies lack of customer courts and therefore creating distrust in large MNEs.
Labor markets; in this sphere, emerging economies are often characterized by large labor pools, but there is often a lack of managerial and skilled workers. Difficult in these labor markets is the difficulty in assessing the quality of talent available. There is a lack of recruiting agencies to screen employees as well as a lack of organizations that rates training quality. MNE managers should measure the education infrastructure to sort out the quality of the educational institutions.
Capital markets; the capital markets from emerging economies are largely inefficient and they lack the specialized intermediaries in areas such as credit rating, investment analysis, banking services, etc. Because of this, it may be difficult for MNEs to raise capital, evaluate worthiness and enforce contracts. MNEs senior managers should therefore assess the capital market’s inefficiencies in a wide variety of areas.
After laying out those five components of an emerging economy’s institutional context, MNE managers need to choose among three options:
Adapt the business model to the host country whilst keeping its core dominant logic constant. The MNE adapts its business model to each emerging economy, with special attention to filling institutional voids that make a non-starter.
Change the emerging economy’s institutional context, by for example, creating more efficient markets. In this case resource recombination benefits the MNE and is also important for societal spillovers.
Stay out of emerging economies where the requirements for new FSA development are too high.
David Arnold and John Quelch provide a complementary perspective to Khanna et al. They use another framework for assessing the market potential of emerging economies and provide an advice for a strategy in emerging economies. There are two drivers for possible increased sales in emerging economies, according to Arnold and Quelch. (1)The increase in disposable income that creates a potentially profitable market. (2)The growth of the internet, which allows for new markets to flourish by avoiding difficulties with conventional channels.
Arnold and Quelch suggest four areas where MNEs need to reconfigure their marketing approach:
The timing of entry. MNEs often want to postpone entry. However, Arnold and Quelch argue that there may be high first-mover advantages in the emerging economies.
Market attractiveness. The traditional approaches that are used to evaluate market attractiveness may not be appropriate to use in emerging economies.
Product policy. The MNE types centralized exporter and international projector traditionally adopt an international product life cycle approach to emerging economies. However, consumers in emerging economies do not need such an approach. Important to point out is that the marketing of product does not require conventional infrastructure.
Partner policy. Happens for instance when the government imposes regulations so that the MNE must cooperate with local partners and when the distance with the host environment is large. To avoid problems of bounded reliability the MNE must select partners on the basis of competence instead than on a product-market familiarity basis. Arnold and Quelch argue that MNEs must also avoid delegating their marketing strategy to intermediaries and they must remain open to multiple partners.
Another complementary perspective to Khanna et al. is provided by Maria Flores Letelier, Fernando Flores and Charles Spinosa. They argue that the MNE must have a deep understanding of the culture of the consumers when entering an emerging economy. It is key to understand the value for the end-user, the consumer. The MNE should also help customers to develop product-type skills that will have value in the long term instead of only selling goods to satisfy consumer demand.
A common penetration strategy for MNEs entering emerging economies is reducing costs and prices by eliminating desirable product features. Such a strategy is typically adopted by centralized exporters and international projectors. Letelier et al. warn MNEs for this strategy.
According to Letelier et al. MNEs develop a new FSA with three components. The three components are:
Identify opportunities that are culturally relevant and which will improve the lives of customers.
Build relationships and do not simply contract by engaging customers.
Craft new measures for assessing success. An example of such a measure is the growth of the wealth of the MNE’s customers.
Emerging economies (which historically where called ‘less developed’ or ‘third world countries’) have been providing the world’s fastest growing markets for most products and services. Emerging economies play an important role in the world economy and MNE strategic activity. Those countries offer potential cost and innovation advantages and they represent new output markets, this makes them attractive for MNEs:
They have relatively inexpensive skilled labor and trained managers; this offers MNEs lower manufacturing and service costs.
They can give MNEs access to a new kind of innovation, than the one that will be found in the mature markets.
They can be used as a counter-strategy to the increasing expansion of emerging economy MNEs into the world’s developed markets.
Pankaj Ghemawat and Thomas Hout argue that it is unclear whether future global giants will come from the developed economy or from emerging economy MNEs. This will on a great extant depend on:
How these two groups of firms react and adapt to FSAs and location advantages of the other group.
How effectively each group of firms will deploy FSAs compared to the firms in the other group in several different locations where both firm groups compete with each other.
A firm will experience success when it has the ability to recombine resources such that viable business opportunities are met. The appropriate strategy to success is often a mix of the choices between (a) low-cost leadership in production and logistics versus (b) differentiation in technology or marketing.
Both groups of firms want to disprove that industry is destiny. They attempt to engage in new forms of resource recombination. MNEs try to emulate the FSAs of their rivals in emerging economies while EMNEs try to acquire or develop marketing-based or technology-based FSAs. When a developed economy MNE enters the home market of an EMNE, an EMNE can react in four different ways to this:
The EMNE can continue to specialize in mass-scale, cost-efficient manufacturing at home. Hereby being an OEM supplier to the developed economy MNEs that entered the home market.
The EMNE can try to continue to use its initial cost advantages by spreading its own value chain across borders. Other countries may be more favourable locations for activities in the value chain in terms of cost efficiency.
The EMNE can try to increase its own value by moving up their value chain. This can be done through technology development or creating brand names.
The EMNE can make the decision to specialize in narrow segments of the value chain. Such segments are those where competition is highest and where the EMNE can command high value.
EMNEs face a challenge when expanding internationally. Managing an internationally network of operations is very difficult. It can also be very challenging to engage in resource recombination whereby initial FSAs are complemented with location-bound FSAs in host countries.
A complementary perspective to Ghemawat and Hout is provided by Orit Gadiesh and Till Vestring. They write about the dynamics of competing in an emerging economy. They focus on the rise of Chinese MNEs. In good-enough markets foreign MNEs are often forced to pursue joint ventures with Chinese manufacturers. The Chinese MNEs may benefit from the initial FSAs when providing low-cost products to good-enough markets.
Another complementary perspective is provided by Huei-Ting Tsai and Andreas B. Eisingerich. They wrote a piece on the internationalization strategies of EMNEs. Their work was on the international strategies of firms from four emerging markets, South Korea, Taiwan, Hong Kong and India. This work led to a framework that differentiates between six types of EMNEs on the basis of two factors. The two factors are (low and high) R&D intensity and (low and high) marketing intensity. The six types of EMNEs that resulted from this are:
Regional exporters/importers. These firms are at the output side and engage primarily in sales and distribution of the products to neighbouring countries. This type of EMNE has low R&D intensity and low marketing intensity.
Global exporters/importers. These firms have high marketing intensity and thus invest much more in sales and distribution than firms of type 1. However, they do not really engage in R&D and thus R&D intensity is low.
Technology followers. These firms have high R&D intensity but low marketing intensity. This group consists of firms that are contract manufactures and they place great important on technology to be able to pursue original equipment manufacturing (OEM) or original design manufacturing (ODM).
Technology leaders. These firms have, similar to type 3, high R&D intensity but low marketing intensity. However, these firms rely much more on their in-house technological innovation.
Global market niche players. This group of firms, just as type 3 and 4, has high R&D intensity but low marketing intensity. However, they are slightly more focused on marketing than type 3 and 4.
Multinational challengers. These firms have a high R&D intensity as well as a high marketing intensity. This can lead to fierce competition with large MNEs from developed economies.
The smiling curve was first proposed by Stan Sihn and describes the fact that not each activity in the value chain leads to similar value creation per unit produced. On the horizontal axis we find the value chain activities that can be performed moving from upstream FSAs to downstream FSAs. The vertical axis measures the degree to which each activity creates value added for the company. On this axis we move from low created value to high created value. The smiling curve is U-shaped with on the upper left point proprietary technology development, advanced engineering and systems design. In the middle, the lowest point, there is assembly, routinized mass production according to specs and routinized logistics. On the upper right point we find marketing, brand name development and advertising and sales. See figure 15.2 on page 461 for a graphical representation of the smiling curve.
The smiling curve implies that most EMNEs start with producing commodity-type products and services. This is often a result of OEM/OED contracts with large MNEs from developed economies. This means that the EMNEs first tend to assemble and manufacture according to the exact specifications of the international client.
Pankaj Ghemawat and Thomas Hout argue that it is unclear whether future global giants will come from the developed economy or from emerging economy MNEs. This will on a great extant depend on:
How these two groups of firms react and adapt to FSAs and location advantages of the other group.
How effectively each group of firms will deploy FSAs compared to the firms in the other group in several different locations where both firm groups compete with each other.
A firm will experience success when it has the ability to recombine resources such that viable business opportunities are met. The appropriate strategy to success is often a mix of the choices between (a) low-cost leadership in production and logistics versus (b) differentiation in technology or marketing.
Corporate social responsibility (CSR): good citizenship by the firm, by its obligations to society, especially when this is affected by the firm’s strategies and practices. With expanding abroad, MNEs are expected to show CSR in their host country. This requires a manager to consider his acts in terms of a whole social system, and holds him responsible for the effects of his acts anywhere in that system.
Debra Dunn and Keith Yamashita suggest that MNEs can engage in initiatives that benefit their stakeholders and the firm’s corporate citizenship obligations to society at the same time. So an MNE can do well and do good at the same time. Dunn and Yamashita focus on Hawlett-Packards (HP) CSR efforts. International citizenship efforts are based on a simple framework, according to HP. This framework is: strong ethics and transparent governance form the basis for integrity on which all the decisions and policies must be based.
There are three CSR areas on which HP is focused: (1)privacy, (2) the environment and (3) e-inclusion (which means using technology to reduce economic and social divides).
Dunn and Yamashita detail seven business practices in citizenship efforts:
Unearthing customer needs; divining the needs of customers by investigating at underlying problems and transferring this understanding to the innovation process.
Fielding a diversely talented team; this means getting involved with human and other resources of the host country, which are the core of the firm’s more conventional FSAs. This gives the firm development skills with a broader range of knowledge, including line management knowledge, expertise in government affairs, and a rich understanding of culture.
Adopting a systems approach; this does not attempt to optimize individual parts, but it views these parts in a broader context and wants to optimize the whole.
Creating a leading platform; In ICT a leading platform is referred to as a standardized, generally accepted configuration of hardware as well as computers and computerized devices which can be linked to another hardware or software.
Building an ecosystem of partners; most sustainable communities have different stakeholders with an interest in a long-term solution. The alignment of interests offers protection from hazards associated with each partner’s bounded reliability. The aim is to create a healthy ecosystem of partners, which all bring their complementary resources to the initiative and are all dedicated to solving problems.
Set a deadline for the project; deadlines create a sense of urgency, this keeps all participants focused.
Solving, stitching and scaling; this eliminates the bounded rationality challenge of trying to figure out all the possible forms the solution will eventually take and customizes a solution for a single customer.
For an MNE manager, the business value of a project is the routine from which the project was developed. There are four key phases of project development:
Quick start; this phase tries to establish credibility and momentum by achieving a few quick successes.
Ramp up; characterized by gathering resources for prototyping, evaluating solutions and training stakeholders so they can take ownership of the initiative. The key to this phase is to bring the ecosystem of international and local partners together.
Consolidation phase; evaluating the intellectual property generated to date, helping local partners deciding which solutions to deploy and stopping sub-projects unlikely to reach their goals.
Transition phase: identifying leaders and transferring knowledge and power to local participants.
Unfortunately, it is unlikely that doing good and doing well could be combined in the world’s extremely poor regions. The activity of an MNE is not able to replace the role of a government, in terms of taking care of public goods. Foreign investments get really costly because they are being forced to provide such public goods on a large scale. Next to that, it will force an MNE into a role it is not meant to fulfil, and it is unlikely that it will be fulfilled effectively and efficiently. For changes, it is important that there is a capable network to support it, which is missing in those extremely poor regions.
MNEs that fill institutional voids may be a key instrument to new FSA development and to the upgrading of a poor emerging economy. However, it cannot replace the lack of a baseline institutional infrastructure.
Richard Locke and Monica Romis provide a complementary perspective to Dunn and Yamashita on CSR. They argue that MNEs need to go beyond monitoring suppliers for compliance with labor codes of conduct and should instead collaborate closely with suppliers to attack problems of poor working conditions at their source. As the main problem in developing countries is a bounded rationality one, only monitoring will not measure the real workplace conditions, as suppliers can hide relevant information.
The results of the work of Locke and Romis suggest that interventions that are aimed ate reorganizing work and empowering labour on the shop floor in global supply chain factories can lead to significant improvements in conditions on the work floor.
Another complementary perspective on CSR is provided by Sushil Vachani and N. Craig Smith’s. They suggest that socially responsible pricing affects the bottom line immediately and directly. Social responsible pricing can mean fair trade; agreeing on paying a higher price on the input side, or on the output market side it can mean lowering prices. CSR that is expressed by support for fair trade can be seen as a reputational resource for MNEs. This is often an indicator of an FSA in the stakeholder management. Most CSR pricing on the output market involves lowering prices benefiting poor customers.
Vachani and Smith also highlight the case of AIDS drugs in developing countries. They show that drug pricing policies can affect the MNE and also social welfare. There are three main approaches used by MNEs to improve access to drugs in developing countries:
The drug donation approach: This approach increases the access to drugs by giving them free of charge. This approach gives the MNE tax benefits and the country social welfare benefits. Problems with this approach are the hidden costs in host countries, and the fact that this approach will not work for diseases that require extensive and long-term treatments.
The out-licensing approach: this is the same as an international projector strategy of licensing. The host country manufacturer produces the drug under license. The advantage of this approach is that it gives the MNE distance from the lower prices in the developing country. This reduces the potential for price referencing, in which downward pressure on prices in developed markets is caused by reference to the lower price charged in developing economies. Another advantage is the positive media attention for the MNE. The problem with this approach though, is the limited complementary resource availability. Next to that, drug access may still be limited as the price may not be low enough, and the referencing problem is unlikely to disappear completely.
Differential pricing: this is the most common approach and it means selling the same product at different prices in different markets. An advantage of this approach is that it provides the flexibility to balance pharmaceutical MNE revenues and social welfare. Problems with this approach are product diversion risks, price referencing, and high administrative overhead costs. Next to that, there is a risk of the drugs not taken as prescribed because of the lack of good infrastructure. The last problem is a bounded reliability one; MNE price reductions can reduce host government and donor efforts to provide appropriate financial support for drug access.
Corporate social responsibility (CSR): good citizenship by the firm, by its obligations to society, especially when this is affected by the firm’s strategies and practices. With expanding abroad, MNEs are expected to show CSR in their host country. This requires a manager to consider his acts in terms of a whole social system, and holds him responsible for the effects of his acts anywhere in that system.
Michael Porter and Claas van der Linde argue that environmental regulations imposed by the government, can enhance competitiveness by forcing companies to come up with innovative ways to use resources more productively and potentially develop green FSAs. This can benefit the firms, because it might lead to cost efficiencies or value enhancement. So they suggest that strict environmental standards may lead to new FSAs. Porter and van der Linde recommend senior managers to respond to environmental regulations by adopting a resource productivity approach instead of a pollution control approach.
Porter and van der Linde also suggest a shift towards a dynamic, resource productivity model of environmental regulation; this opens a new way of looking at the full system costs and the value associated with any products. This resource productivity approach suggests that environmental initiatives should be embedded in the production system. According to Porter and van der Linde, environmental regulation can trigger two broad forms of innovation:
The first form involves technologies that reduce the costs of dealing with pollution.
The second form addresses the root cause of pollution by improving resource productivity. This leads to better utilization of inputs, better product yields and better products.
New innovations are often used by companies to command price premiums for green products and to open up to new market segments. A higher value is placed on resource efficient products by the world. Environmental regulations motivate and educate companies to adopt environmental innovations. This can help to overcome bounded rationality problems.
There are five major features that make good for environmental regulations, according to Porter and van der Linde:
Good environmental regulations create maximum opportunity for innovation by letting industries discover how to solve their own problems. The regulations do not specify the means, only the requirements on which results should be achieved.
Regulations should be strict, which encourages real behavioural change in industry through innovations.
Regulations should allow for a phasing-in period, this reflects the realities of researching, developing and adopting new technologies.
Regulations should encourage a resource productivity approach rather than a conventional pollution control approach. So it should encourage environmental improvements as close as possible to the source of the pollution, like early in the value chain.
Countries should develop regulations before other countries. This allows domestic industries to gain first-mover advantages on the international stage.
Environmental management is playing an important role in MNE corporate responsibility approaches. The global warming concerns have put the environment at the forefront of consumer and non-governmental organization advocacy efforts. Stakeholders examine MNEs carefully at their environmental footprints.
Stuart Hart and Mark Milstein provide a social activist perspective complementing Porter and van der Linde. Their piece is about international business strategies that align with the goal of global sustainability. They distinguish three types of economies:
Developed or consumer market: represents an economy of one billion wealthy consumers with an advanced infrastructure. Within this market, a MNEs ecological footprint should be reduced by reinventing products and processes.
Emerging economies: consists of roughly two billion people, customers who can meet their basic needs but have minimum purchasing power. MNEs should keep the expanding demand for products by population growth in balance with the limited physical capacity of these countries to provide necessary infrastructure and institutional context.
Survival economies: consists of three billion potential customers, largely rural, individuals not meeting their basic needs, minimal infrastructure. MNEs should recognize the opportunity presented by this group.
Another complementary perspective to Porter and van der Linde is provided by Ans Kolk and Jonathan Pinkse. They focus on climate change and classify and analyse the strategies that firms can use to mitigate their climate change impact. They argue that flexible public policies in the climate change are now more prevalent than in earlier years. Kolk and Pinkse focus on two strategic goals at firm level:
Innovation: means that firms can improve their business performance through FSA development. This will be driving the reduction of emissions. This is an approach for managers who see the potential business opportunities of climate change policy.
Compensation: transferring or trading emissions or emission-generating activities. This is an approach that managers who see climate change as a business risk, tend to.
Kolk and Pinkse suggest that firms fall into six broad types:
Cautious planners: firms preparing for action but who show little activity related to any of the potential climate change strategic options. This firm mentions measures to reduce greenhouse emissions, but does not provide any specific details on what might be used to achieve this goal.
Emergent planners: do not have implemented climate change measures yet. However, they have set targets for the greenhouse gas reduction. So it has well-developed targets, but no long-term plans to reach those.
Internal explorers: firms with a strong internal focus, bringing as a result a combination of targets and improvements in their production process. Firms in this group often reduce their CO2 emissions to try to improve their energy efficiency.
Vertical explorers: firms with a strong focus on environmental measures within their supply chains. The reason for this company to focus on upstream and downstream activities: it relies on natural resources that are vulnerable to extreme weather conditions and/or its manufacturing process had low climatic impact compared to the consumption of its products.
Horizontal explorers: firms that seek opportunities to mitigate their climate change impact in markets outside their current business scope.
Emission traders: these firms trade on emission markets and participate in offset projects. They focus on the opportunities of emissions trading and is combining this with an internal reduction target that has a global scope and with a beneficial position towards new markets and products.
In the end, both corporate social responsibility and corporate environmental sustainability may lead to new FSAs. Which is done by local adaptation (one unit or one country) or by universal approach (multiple countries, one approach). The question is to adapt or not, and if so how, is particularly relevant for emerging markets where institutions (law and government) are often weak. It is especially relevant in emerging markets because of the so-called institutional voids that create uncertainty.
Michael Porter and Claas van der Linde argue that environmental regulations imposed by the government, can enhance competitiveness by forcing companies to come up with innovative ways to use resources more productively and potentially develop green FSAs. This can benefit the firms, because it might lead to cost efficiencies or value enhancement. So they suggest that strict environmental standards may lead to new FSAs. Porter and van der Linde recommend senior managers to respond to environmental regulations by adopting a resource productivity approach instead of a pollution control approach.
Centralized exporter = standardized products manufactured at home, embody the firm’s FSAs and make the exporting firm successful in international markets. This all happens without doing any activity in the host country, so no development of new FSAs in the host country. So this is only exporting the product.
International projector = FSAs from home country are copied. Only the internationally transferable FSAs are taken to the host country. No development of location bound FSAs in the host country.
International coordinator = efficiency seeking MNE which is specialized in specific value-added activities and forming vertical value chains abroad. Is doing different parts of the production process in different countries.
Multi-centred MNE = does everything (produce, sell, etc) in the host country. Adapts to the host country, so local responsiveness is its foundation. Transfers only the key routines from the home country and builds up new Location-Bound FSAs in the host country.
Freestanding companies = companies that were set up abroad often in home country’s colonies, without a prior domestic production base.
Emerging Economy MNE = firms that do not derive their success from advanced technology and strong brand names, but firms that build on generally available resources in their home country such as low-cost labour and various forms of government support.
FDI (Foreign Direct Investment) = the allocation of resource bundles by an MNE in a host country, with the purpose of performing business activities over which the MNE contains strategic control there.
Natural resource seeking = contains the location advantage of the host country, it’s the search for physical, financial of human resources. Precondition, is that access is needed.
Market seeking = the search for customers. Not for the centralized exporter, because this involves business activities in the host country.
Strategic resource seeking = searching for access to advanced resources such as upstream knowledge (product- and process related technological knowledge), downstream knowledge (critical for interface with customers), administrative knowledge (knowledge regarding the functioning of the organisation) and reputational sources.
Efficiency seeking = desire to capitalize on environmental changes that make specific locations more attractive.
Recombination = being able to grow by innovating and diversifying, means combining existing resources with newly accessed resources.
Cultural distance = results from differences in national cultural attributes.
Administrative/institutional distance = differences in societal institutions. This distance is low when there is a shared history, political ties, trading between the two or synchronized politics.
Geographic/ spatial distance = the physical distance, taking into account the ease of transport between both. Is high when there are differences in topography and climate. Is low when there is a good transportation and communication network.
Economic distance = differences in wealth, income level, infrastructures and costs and quality of natural, financial and human resources.
CD (the cultural distance) = important because it increases complexity to deal with foreign workforce, hence more risky investments, as a result: relatively small investments or low level of commitment or no local partners.
Homogenization = treating all subsidiaries the same.
Centralization = all strategic decisions at the headquarters.
Black hole = weak in resources, but located in a strategically important market. Being used to maintain a presence in this key market to keep ahead of new innovations by competitors. In the long run this unit wants to commit more resources to build up.
Implementer = weak in resources and low in the strategic importance of the market. Most subsidiaries fit in this type. This unit is the key to a firm’s overall success, because it generates a steady stream of cash flow and it may help to build competitive advantage by contributing to company-wide scale and scope economics.
Strategic leader = high in resources and high in the strategic importance of the market. The role of this unit is to assist the headquarters in identifying industry trends and developing new FSAs in response to emerging opportunities and threats.
Contributor = high in resources, but low on importance of strategically local market. This unit is typically for developing new FSAs. Its subsidiary specific, specialized resource base might benefit other units, if the headquarters understand its potential economic value for the entire MNE.
Mobility = the ease of moving the complete physical constructions of how to duplicate an FSA. The more mobile, the easier it may diffuse.
Embeddedness = an FSA is embedded if it cannot easily be shared through actors outside the firm, without problems of interpretation or absorption across cultures. The more embedded the FSA, the less easily it is to diffuse.
Home-base exploiting sites = those are supporting manufacturing facilities in the foreign country, to adapt standard products to the demand there.
Home-base augmenting sites = acts as the firm’s eyes and ears in the host country, accessing knowledge from rivals and research institutions there.
Offshore factory = access to low-cost production, low level of distinct FSAs. Typically does not develop new FSAs and receives minimum autonomy.
Server factory = primary purpose is to manufacture goods and supply proximate markets. Market imperfections (trade barriers, costs) usually explain the establishment of such factories. This factory may engage in some FSA development, but has little autonomy.
Outpost factory = similar to the ‘black hole’ type subsidiaries, purpose is to gather access to valuable knowledge and skills. This role is usually combined with that of an offshore (input market driven) or server (output market driven).
Source factory = purpose to access low-cost production on the input side, but it also engages in resource recombination and developing FSAs. Has more autonomy. Will be put up in locations with good infrastructure and a skilled workforce.
Contributor factory = oriented primarily towards the host country output market. Supplies proximate markets, and being at the upstream end of the value chain, it is responsible for resource recombination in the form of process improvements, new product development, customizations, etc.
Lead factory = the most important one in terms of resource recombination and new FSA development. Access valuable inputs from the local cluster and plays a key role in localized manufacturing innovation.
Economic/ operating exposure = the impact of changes in real exchange rates relative to the MNEs competitors, so what the effect is on the net present value of the MNE’s future income streams.
Expatriation = most direct and rigorous way to give managers the in-depth knowledge of the MNE’s internal network, as well as the abilities to transfer routines abroad and be a catalyst for recombining resources.
Institutional voids = lack of well-functioning firms, or mostly state owned enterprises.
Corporate social responsibility (CSR) = good citizenship by the firm, by its obligations to society, especially when this is affected by the firm’s strategies and practices.
The drug donation approach = increases the access to drugs by giving them free of charge.
The out-licensing approach = this is the same as an international projector strategy of licensing. The host country manufacturer produces the drug under license.
Differential pricing = this is the most common approach and it means selling the same product at different prices in different markets.
Innovation = means that firms can improve their business performance through FSA development. This will be driving the reduction of emissions. This is an approach for managers who see the potential business opportunities of climate change policy.
Compensation = transferring or trading emissions or emission-generating activities. This is an approach that managers who see climate change as a business risk, tend to.
International business strategy: effectively and efficiently matching an MNE's internal strengths, relative to competitors, with the opportunities and challenges found in geographically dispersed environments that cross international borders.
Most complex issues in international business strategy revolve around seven concepts.
(1) Internationally transferable firm-specific advantages (FSAs) / Non-location-bound FSAs. The MNE operates across national borders to create value and satisfy the stakeholder. The scope of the business across borders of the MNE depends on the set of internal strengths, which are called the non-location-bound FSAs. There are four archetypes of administrative heritage associated with international FSA transfer:
Centralized exporter: a home-country-managed firm. Standardized products manufactured at home embody the firm’s FSAs and make the exporting firm successful in international markets.
International projector: FSAs from the home country are copied and transferred to subsidiaries in host countries.
International coordinator: an efficiency seeking MNE which is specialized in specific value-added activities and forming vertical value chains across borders.
Multi-centred MNE: consists of a set of entrepreneurial subsidiaries abroad and does all its activities (produce, sell, etc.) in the host country.
Although the four architypes describe most large MNEs, there are two other types; freestanding companies and emerging economy MNEs (EMNEs).
(2) Non-transferable FSAs / Location-bound FSAs; are not easily transferred, deployed and exploited in foreign markets. There are four main types:
Stand-alone resources: are linked to location advantages.
Other resources: do not have the same value abroad, because they are not applicable to the host country or they are not as valuable as in the home country.
Local best practices: routines which are highly effective and efficient in the home country, but which might not be the same across borders.
Domestic recombination capability: taking the FSAs and/or product from the home country and recombine it to adapt to the host country.
(3) Location advantages; represent the set of strengths of a specific location, useable for all the firms operation in that location, the reasons why an MNE would go there. FDI (Foreign Direct Investment): the allocation of resource bundles by an MNE in a host country. There are 4 motivations to perform activities abroad: Natural resource seeking, market seeking, strategic resource seeking and efficiency seeking.
(4)Investment in – and value creation through – recombination; being able to grow by innovating and diversifying; means combining existing resources with newly accessed resources.
(5) Complementary resources of external actors; by going abroad some ingredients may be missing, those can be provided by external actors), this will help to overcome the distance.
(6) Bounded rationality (imperfect assessment); is about the imperfect assessment of a present or future state of affairs, thereby leading to incorrect beliefs, caused by a lack of information. The problem is the access to information and even if they have the right information, another problem is the capability to process complex information bundles.
(7) Bounded reliability (imperfect effort); is about imperfect effort, leading to incomplete fulfilment.
C.K Prahalad and Gary Hamel: core competencies (company’s most important FSA, its vital routines and recombination capabilities) constitute the most important source of a MNEs success.
Core competencies are more important than stand-alone FSAs and they produce physical, tangible things which are called core products.
A core competence should:
Be difficult for competitors to imitate
Provide potential access to a wide variety of markets
Make a significant contribution to the perceived customer benefits of the end product
A fourth one that can be added to this, which is especially important for a large MNE; the loss of the core competence would have an important negative effect on the firm’s present and future performance.
Strategic management is needed to develop a strategic architecture. Strategic management should have the primary goal of developing the strategic architecture to guide building and acquiring core competencies.
Strategic architecture is a road map of the future that identifies which core competencies to build and their corresponding technologies.
Core competencies involve the combination of existing resource bundles with new resources. The co-allocating of all the activities and supporting linkages is critical to international success.
Five criteria to determine the scope of the bounded reliability problem:
Complexity
Required level off interaction:
Similarity of background and expertise of the individuals involved
Requirement of a prior relationship
Concreteness of information
Michael Porter: a company’s ability to compete abroad is based on a set of location advantages in its home country.
The FSAs of a firm are primarily developed because the firm faces external pressure. Therefore, a firm should not rely on natural factor endowments because such natural factor endowments are short-term advantages.
A nation’s competitiveness depends on the capacity of its industry to innovate and upgrade.
Porter says that the most important aspects of international business strategy are the four key home country location advantages; Porter’s diamond. four key sets of country attributes of Porter’s diamond are:
Factor conditions
Demand conditions
Related and supporting industries
Firm strategy, industry structure and rivalry
There is interaction between the four attributes of the diamond which causes an industry-wide recombination capability which is not attributable to the actions of the individual firms in the industry. To get a strong diamond, there are certain requirements per country attribute:
Factor conditions: the factor conditions accessible to the firm need to be continuously upgraded through the development of skills and the creation of new knowledge.
Demand conditions: companies must respond to new customer demands by pushing the envelope of existing technology and by designing new features.
Related and supporting industries: high competitive firms at home, especially suppliers, are crucial to enhance innovation.
Domestic rivalry: rivalry forces companies to develop unique FSAs, beyond the generally available location advantages in their home base
When having a strong diamond, the creation of non-location bound FSAs will be stimulated. With those non-location bound FSAs, a company can go abroad.
Each individual attribute of Porter’s diamond has impact on the competitiveness of an industry. However, their joint impact on the competitiveness is even more important.
Porter’s work does not provide much guidance for managers of newly established firms. Such a (complementary) perspective, for new firms was provided by Walter Kuemmerle. The simple international expansion pattern is the incremental accessing of a neighbour’s input or output market. Kuemmerle identified two other, more aggressive, international expansion patters.
In contrast to Porter, Kuemmerle found that newly established companies can successfully expand internationally, as long as they use a low-risk, low-cost, incremental approach in their neighbouring countries.
David Teece provides another complementary perspective to the one of Porter. Teece’s work was on the inward FDI in one of the best known technological clusters, Silicon Valley.
Ghemawat’s term distance has different components, which can be categorized into four categories:
Cultural distance: results from differences in national cultural attributes.
Administrative/institutional distance: reflects differences in societal institutions.
Geographic/ spatial distance: represents the physical distance between the countries, taking into account the ease of transport between both..
Economic distance: represents differences in consumer wealth, income level, infrastructures and costs and quality of natural, financial and human resources.
There are two broad approaches to expanding abroad:
Replicating existing competitive advantages, building upon scale and scope economies, which is typical for the centralized exporter and the international projector.
The second approach is exploiting differences in input costs or prices between markets through economic arbitrage, which is typical for international coordinators.
Ghemawat focuses on the risk of penetrating too many high-distance output markets. However, Vestring, Rouse and Reinert focus on the risk of using too few high-distance output markets.
MNEs that intend to be cost leaders in their industry should have portfolios of the low-cost countries where activities can be outsourced to. These portfolios should be based on the set of location advantages that each host country offers.
It is important that the MNE is well informed about the relevant costs and other country characteristics before selecting the offshoring locations.
Bernd Schmitt and Yigang Pan focus on cultural distance and provide guidance for Western MNEs that sell branded consumer products when penetrating high-distance Asian markets
Several branding elements must be adapted by the MNE to overcome cultural distance: (1) The MNE must devote attention to selecting the right corporate and product names. (2) The MNE must pay attention to create the right image for the brand. (3) Senior managers should be aware that the perceptions of quality can be different in Asia compared to the perceptions in the West.
Schmitt and Pan argue that senior management must either pay attention to these aspects of cultural distance or follow Ghemawat’s perspective and avoid high-distance markets.
Limitations of Ghemawat’s distance framework
Macro level distance does not always hold for all firms.
A firm’s FSA can be that it is able to deal with these distances.
The impact of distance differs for different parts of the value chain.
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 a joint venture or strategic alliance) and how they may help to reduce distance (because they are complementary resources).
Chris Bartlett and Sumantra Ghoshal suggest that large MNEs are making a mistake when they adopt two strategies: (1) Homogenization: treating all the subsidiaries the same. (2) Centralization: making all strategic decisions at the headquarters
According to Bartlett and Ghosal, senior management frequently adopts two simplifying strategies:
Universal/ United Nations model of multinational management: the mistake of homogenization. The MNEs give each subsidiary the same roles and responsibilities and the subsidiaries are subjected to the same coordination and control systems.
Headquarters hierarchy syndrome: the mistake of centralization. The subsidiaries are seen as units that act as implementers and adapters. Views that the organization consists of two levels, the dominant layer and the subordinates that will implement.
To decide how much authority to give a subsidiary, Bartlett and Ghoshal decided that subsidiary autonomy depends on: (1) The strategic importance of each market, which should be assessed by the senior corporate management. (2) How strong are the subsidiaries’ resources like labor, technology, marketing achievements, R&D. Senior management should rate the resource base of each subsidiary.
Subsidiary classification system which distinguishes four subsidiary types:
Black hole: weak in resources, but located in a strategically important market.
Implementer: weaker in resources and low in the strategic importance of the market with respect to long-term survival, growth and profitability of the MNE. Most subsidiaries fit in this type.
Strategic leader: high in resources and high in the strategic importance of the market.
Contributor: high in resources, but low on importance of strategically local market.
‘Due process’ is the wat strategic decisions are made, no matter what their outcome is. Due process is also called procedural justice.
Kim and Mauborgne argue that subsidiary managers attach much importance to due process and often accept a resource allocation that does not benefit their subsidiary if they think that due process was observed in making that strategic decision.
Due process (procedural justice) implies that decision making involves five principles:
The familiarity of the corporate headquarters with the local situation at the subsidiary level.
Effective two-way communication between subsidiaries and corporate headquarters.
Consistency in decision making across subsidiaries.
The possibility for managers of subsidiaries to challenge the dominant perspective at corporate headquarters.
A transparent explanation of final decisions made by corporate headquarters.
There are several practises that increase the likelihood that subsidiary incentives will contribute to FSA development. The mechanisms included are: Spending money on new initiatives, formally requesting proposals for projects, using subsidiaries as incubators and creating internal subsidiary networks as the key for the organization of the recombination capabilities of the MNE.
Walter Kuemmerle’s idea is that many MNEs, particularly international projectors, are wisely decentralizing their R&D by building worldwide networks of R&D labs.
Instead of keeping all their R&D activities in their home country, they are building international networks in which foreign R&D laboratories fulfil specific roles within the firm.
Two reasons for this trend are:
Many MNEs want to be present in several innovation and knowledge clusters, in order to monitor and absorb new developments.
MNEs must integrate their R&D facilities more closely to the host country, because of the commercial requirement of moving quickly from innovation to market.
Kummerle identified three key stages in the development of R&D in subsidiaries: (1) Selecting the decision makers. (2) Selecting the decisions and actions that strengthen the initial capabilities of the lab. (3) Selecting the decisions and actions that are designed to maximize the lab’s contributions to the strategic goal of the MNE.
Kuemmerle identified two distinct types of host country R&D facilities:
Home-base-exploiting sites: those are supporting manufacturing facilities in the foreign country, to adapt standard products to the demand there. Information flows to the foreign laboratory from the central lab at home.
Home-base-augmenting sites: acts as the firm’s eyes and ears in the host country, accessing knowledge from rivals and research institutions there. Information flows from the foreign laboratory to the central lab at home.
3 key limitations of Kuemmerle’s model on R&D capabilities abroad:
He ignores tensions between host country lab(s) and central headquarters’ lab in setting the research agenda.
He does not include the possibility of joint venture or strategic alliance as options to tap into foreign country’s knowledge
He does not take in account the hidden (and rising) costs of off shoring
Birkinshaw and Fry distinguish between two subsidiary initiatives:
Internal initiatives: attempts by the managers of the subsidiary to be chosen as the location for new corporate R&D investments.
External initiatives: result from managers of foreign subsidiaries identifying an opportunity in their business environment.
Inkpen’s work shows that a firm does not always have to set up its own labs to acquire knowledge. A firm can persuade another firm to form an alliance and hereby access the other firm’s innovation
Kasra Ferdows has the idea that senior MNE managers should try to upgrade their host country factories, so they can develop FSAs.
Managers should give certain subsidiaries more control and decision making power depending on their strengths and the importance of the market.
Ferdows describes 3 major changes in the international business environment that drove the new foreign factory roles:
International trade tariffs went down
Production is more complex in terms of supply chain management and planning
Time to go from development to actual manufacturing and marketing has become shorter
According to Ferdows there are six possible roles for foreign manufacturing facilities, based upon two parameters: (1) The strategic purpose of the plant: related to the host country location advantages the firm wants to access. (2) The level of distinct FSAs held by the plant: the additional strengths added by the plant itself; weak or strong.
The six factory roles are:
Offshore factory: access to low-cost production, low level of distinct FSAs.
Server factory: primary purpose is to manufacture goods and supply a predefined, proximate market.
Outpost factory: similar to the ‘black hole’ type subsidiaries, purpose is to gather access to valuable knowledge and skills from host country clusters.
Source factory: purpose is to access low-cost production on the input side, but it also engages in resource recombination and developing FSAs to turn it into a best practice plant in MNEs network for the assigned products.
Contributor factory: oriented primarily towards the host country output market.
Lead factory: the most important one in terms of resource recombination and new FSA development. Access valuable inputs from the local cluster and plays a key role in localized manufacturing innovation.
The upgrading process of the offshore requires a high level of commitment and it involves resource recombination spread over 3 stages: (1) Enhancing internal performance, (2) Accessing and developing external resources and (3) Developing new knowledge that can benefit the overall network
However, this upgrading process often does not take place, because of several obstacles managers might face:
Fear of relying on foreign operations for critical skills.
Treating overseas factories like cash cows neglecting LT investment.
Creating instability by shifting production in reaction to X rates and wage costs.
Government entices MNEs to locate in sometimes unattractive locations.
Critiques on Ferdows:
Ferdows believes that management should upgrade all factories; which is 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.
These three (FMS, JIT and TQM) all place a significant demand on the workforce of the host country:
Flexible manufacturing systems (FMS) are an efficient response to product life cycle reduction and the need to adapt products to satisfy the needs of the customers.
Just-in-time management (JIT) leads to a response to specific customer demands and eliminates the need to hold inventories.
Total quality management (TQM) is focused on continuous improvement. Understanding the customer and it needs is very important and incorporated into daily job routines.
Economic/ operating exposure: the impact of changes in real exchange rates relative to the MNE’s competitors, so what the effect is on the net present value of the MNE’s future income streams.
Senior managers should strive to: (1) Have a flexible sourcing structure. (2) Attain the capability to engage in exchange rate pass through
Even firms that are purely domestic, without foreign operations, can incur economic exposure if their rival MNEs are positively affected by exchange rates for internationally sourced inputs.
Transaction exposure: the risk of financial losses resulting from outstanding but unfulfilled contractual commitments.
Translation exposure: risk of losses resulting from the translation of accounting statements expressed in foreign currencies into the home country currency at consolidation date.
It is important to distinguish between real and nominal exchange rates when assessing economic exposure.
Nominal exchange rates: the direct exchange ratios between currencies.
Real exchange rates: changes in the nominal exchange rate minus the difference in inflation rates between the two countries. This is the rate which affects the level of economic exposure for firms.
Economic exposure is important to think about because:
It may result in negative effects on MNE income compared to rivals
Adds uncertainty to value of a firm’s location advantages
MNEs are active in multiple countries, and need to look at their overall economic exposure
It affects the strategic decision to locate in a certain country
In terms of the books framework three things are important concerning economic exposure:
Economic exposure should be viewed as a parameter that adds uncertainty to the value of a firm’s location advantages.
Economic exposure also implies that the location advantages benefiting an MNE should be considered not only positively and on country-by-country basis, but also as a portfolio of potential risks for future cash flows.
MNEs can choose to develop specific FSAs allowing risk mitigation in the foreign currency, by immunizing their products to economic exposure, by allowing full exchange rate pass through.
The situation faced by each MNE unit in terms of two parameters. The parameters are: (1) The exposure absorption capability on the input market side. (2) The exchange rate passes through on the output market side
These two parameters lead to a classification of operating exposure at the subsidiary level:
The 3rd quadrant (strong exposure absorption capability on the input market side and strong exchange rate pass through on the output market side), is the most desirable situation because economic exposure effects are absent.
The 2nd quadrant (weak exposure absorption capability on the input market side and weak exchange rate pass through on the output market side) is the least favourable.
The 1st and 4th quadrants are intermediate causes.
Lessard and Lightstone suggest that companies manage economic exposure through one of the next three approaches:
Separate business unit model
Companywide portfolio model
Flexible operational planning model
According to Levitt, globalizations of markets do not need to locally adapt; MNEs do not have to worry that much about customizing to cultural preferences.
Technology has largely homogenized consumer preferences. The majority of consumers simply want the same; high quantity, high reliability and a low price.
MNEs should focus on such products and standardize their products and services worldwide to achieve economies of scale.
This choice of Levitt for global standardization rests on two foundations:
Cultures and national social tastes are not fixed but subject to continuous change.
Companies can offer globally standardized products, harness economies of scale to deliver high-quality, dependable goods at low cost by converging tastes now.
Customers are clearly influenced in their buying decision by two things: low prices regardless of feature preferences and promotion regardless of price.
Levitt argues that some customization may still be required if all efforts to acceptance of standardized products and to change local preferences have been used.
A complementary perspective to Levitt is provided by John Quelch and Lisa Klein. They argue that the internet can have positive effects on international operations.
Services with a broad geographic scope often become more valuable to the customers of the MNE because these services are international available and accessible.
Companies which offer standardized products will have certain advantages when using the internet. When using the internet, customers worldwide will demand more standardized products.
The internet should be seen as a tool to reduce bounded rationality problems that the MNE faces in host countries.
Global account management: dedicating specialized resources, typically involving non-location bound routines, to serve internationally operating customers in an integrated fashion.
There are two main pitfalls to an effective implementation of global account management:
If the customer is more internationally coordinated than the supplier, the main effect of global account management may be price squeezes, with little benefit for the supplier.
If the supplier pays insufficient attention to implementation details, important internal problems of bounded rationality and reliability occur.
MNEs must develop managers with a broad mental map covering the entirety of the MNE’s geographically dispersed operations. This is critical to the MNE’s long term profitability and growth.
Expatriation: most direct and rigorous way to give managers the in-depth knowledge of the MNE’s internal network, as well as the abilities to transfer routines abroad and be a catalyst for recombining resources.
J.S Black and H.B Gregersen studied expatriate management and found four common problems in how firms manage their expatriates:
Senior managers in the home country often underestimate the impact of cultural distance on organizational function, and as result, do not invest sufficiently in training programs.
The responsibility for expatriates is often assigned to human resource managers which have no international experience, so they do not have any insight in the problems expatriates face.
Senior management view expatriates as being well paid and well looked after, and therefore as having little to complain about.
In many MNEs, a common misconception persists that expatriates do not need help readjusting after having returned home, despite that changes will probably have occurred during their absence.
There are three best practices when it comes to successfully managing expatriate managers, according to Black and Gregersen:
Creating knowledge and developing global leadership skills
Making sure that candidates have cross-cultural skills to match their technical abilities
Devoting attention the re-integrating expatriates into their home country after their assignment.
The adoption of all these three best practices leads to successful expatriate management. Adopting only one or two of these best practices does not lead to successful assignments.
Companies look for five characteristics when choosing expatriates: (1) A drive to communicate, (2) Broad-based sociability, (3) Cultural flexibility, (4) Cosmopolitan orientation and (5) A collaborative negotiation style.
Three approaches an MNE can choose to successfully select candidates for expatriation:
An informal but efficient selection process.
A much more formal approach. The MNE uses an extensive survey at an early stage of the career of the employee.
Looking for prior international experience in new hires.
Organizational context: a blending of organizational structure, information systems, measurement and reward systems, career planning and a fostering of common organizational culture.
MNEs can be descried in terms of four orientations: (1) Cognitive orientation, (2) Strategic orientation, (3) Administrative orientation and (4) Power orientation.
David Arnold: when selling in foreign markets, MNEs should maintain relationships with local distributors over the long term.
The first step in internationalization is often establishing a relation with a foreign distributor.
Local distributors often serve as a beachhead in the first stage of internationalization.
A beachhead strategy means that when you go into the host country you need to focus your strength and concentrate on winning a small area, which is the beachhead, that becomes the stronghold from which you will have advance into the rest of the market
The distribution strategy often follows a pattern:
1st stage: initial success.
2nd stage: flattening success and sometimes even declining.
3rd stage: the MNE starts questioning its local partner.
The key for the MNE is to find the balance between three competing objectives:
To maintain strategic control over important customers
To benefit from the local partner’s market knowledge and market access
To reduce risk associated with high demand uncertainty in the host market
Arnold offers a list of seven guidelines for MNEs when dealing with local distributors.
Proactively select locations and only then suitable distributors
Focus on distributors’ market development capabilities
Manage distributors as long-term partners
Provide resources (managerial, financial and knowledge-based) to support distributors for market development purposes.
Do not delegate marketing strategy to distributors
Secure shared access to the distributors’ critical market and financial intelligence
Link national distributors with each other, especially at the regional level
MNEs may also face a difficult distribution challenge at home, with implications for international strategy.
The bullwhip effect: the amplification of order variability as one goes upstream along a supply chain.
A strategic alliance occurs because MNEs find it increasingly difficult to bear alone the enormous R&D costs to launch new products.
The advantage of a strategic alliance is that you share risks and costs (R&D)..
Hamel, Doz and Prahalad identified four key principles to successfully form strategic alliances:
Collaboration is competition in a different form
Harmony is not the most important thing for success
Cooperation has limits; companies must defend against competitive compromise
Learning from partners is very important
The costs of an alliance are:
The own FSA could be appropriated by the alliance partner.
When an MNE has too many strategic alliances, this reduces coherence and increases management problems.
When outsourcing there are four principles that MNE senior managers should respect:
Outsourcing to provide a competitive product cannot replace the need to build FSAs in the long term.
Senior managers should keep in mind the negative consequences of outsourcing.
Senior managers should consider the cumulative effects that individual outsourcing decisions have.
FSAs should be strengthened and rejuvenated as quickly as possible.
Mobility: the ease of moving the complete physical constructions of how to duplicate an FSA.
Embeddedness: an FSA is embedded if it cannot easily be shared through actors outside the firm, without problems of interpretation or absorption across cultures.
Six types of safeguards to avoid the dark side of alliances:
Regular re-evaluation of the alliance relationship.
Continued focus on profitability rather than volume
Continued attention to alternatives, back-ups.
Swapping hostages.
Setting and reassessing common goals.
Avoiding vicious cycles of suspicion and the resulting buildup of bounded reliability.
Joint ventures are set up when they are the only penetration option for the foreign MNE, given a restrictive regulatory regime which prevents wholly owned operations.
Much of the value that is added to the MNE may reside in internationally transferable, intangible FSAs.
The entry modes with the highest level of commitment are mergers and acquisitions.
The theory of comparative advantage states that specific production activities will be concentrated in the countries that possess advantages relative to other countries.
Herfindahl index is a measure for market share concentration. high index implies a high degree of market share consolidation.
Pre – and post integration obstacles: each firm has its own FSA, which are partly location bound. If the distance is large, it will be more difficult to integrate these FSAs.
Purchase price premiums: as a result of firms competing for a firm that can be taken over, the price increases.
Six senior management biases, why managers like M&As.
Top line obsession: Happens when senior managers focus too much on growth of sales instead of on profits.
Stock price exploitation: In case of overvalued stock prices, managers would like to benefit from that.
Grooved thinking: Senior managers often want to follow the traditional mindset.
Herd behaviour: copy paste the behaviour of competitors.
Personal commitments. Senior managers may stick to their own personal views.
Trust in interested parties: Investment banks can push firms out of own interests.
Alternative strategies that senior managers can pursue are:
‘Pick up the Scraps’. This are spin-offs and divestments that result from the mega M&As and other companies.
‘Stay Home’; Many firms have ample opportunity to improve their competitive position locally or in their home region.
‘Keep Your Eye on the Ball’; Companies can improve competitiveness by remaining focused on developing and exploiting their key FSAs.
‘Make Friends’; Strategic alliances may be a good solution too.
‘Appeal to the Referee’; Companies may slow the M&A’s of competitors by calling on regulators to review antitrust implications.
‘Stalk Your Target’; The company observers the others while they explore and test the waters first.
‘Sell Out’; Be the seller rather than the buyer may be more profitable.
An alliance is preferred over M&A when: (1) Each firm only needs a subset of the FSAs of the partner, (2) It is difficult to dispose of the prospective partner’s unusable resources because they are firm specific.
Emerging economies have been providing the world’s fastest growing markets for most products and services.
Those countries offer potential cost and innovation advantages and they represent new output markets, this makes them attractive for MNEs:
They have relatively inexpensive skilled labor and trained managers.
They can give MNEs access to a new kind of innovation.
They can be used as a counter-strategy to the increasing expansion of emerging economy MNEs.
Khanna et al.: emerging economies are characterized by important institutional voids, so the biggest challenge for MNEs is to understand and deal with those voids.
Institutional voids: lack of well-functioning firms, or mostly state owned enterprises. Lack of macro-level institutions, so no courts, difficult to get contracts, lack of well-functioning financial markets.
These voids in the emerging economies require MNEs to invest in the creation of compensating location-bound FSAs
MNEs go to emerging markets for two reasons:
Market seeking: home markets and other developed markets saturated, new markets that are developing rapidly
Efficiency seeking: these markets may be developing rapidly, but still relatively cheap to produce locally.
Disadvantages of emerging markets are: (1) Still low levels of development, (2) High growth figures, but also associated with high volatility and (3) High levels of corruption, low levels of trust, difficult to do business.
There are five components of the institutional context that are the relevant to MNEs:
Macro-level political and social context
Macro-level openness (the extent to which the country welcomes FDI, ideas and travels) of the economy
Product markets
Labor markets
Capital markets
MNE managers need to choose among three options:
Adapt the business model to the host country whilst keeping its core dominant logic constant.
Change the emerging economy’s institutional context.
Stay out of emerging economies where the requirements for new FSA development are too high.
Four areas where MNEs need to reconfigure their marketing approach:
The timing of entry.
Market attractiveness.
Product policy.
Partner policy.
MNEs develop a new FSA with three components:
Identify opportunities that are culturally relevant.
Build relationships and do not simply contract by engaging customers.
Craft new measures for assessing success.
A firm will experience success when it has the ability to recombine resources such that viable business opportunities are met.
The appropriate strategy to success is often a mix of the choices between (1) low-cost leadership in production and logistics versus (2) differentiation in technology or marketing.
MNEs try to emulate the FSAs of their rivals in emerging economies while EMNEs try to acquire or develop marketing-based or technology-based FSAs.
When a developed economy MNE enters the home market of an EMNE, an EMNE can react in four different ways to this:
The EMNE can continue to specialize in mass-scale, cost-efficient manufacturing at home.
The EMNE can try to continue to use its initial cost advantages by spreading its own value chain across borders.
The EMNE can try to increase its own value by moving up their value chain.
The EMNE can make the decision to specialize in narrow segments of the value chain.
There is a framework that differentiates between six types of EMNEs on the basis of two factors. The two factors are (low and high) R&D intensity and (low and high) marketing intensity. The six types are:
Regional exporters/importers. This type of EMNE has low R&D intensity and low marketing intensity.
Global exporters/importers. These firms have high marketing intensity but R&D intensity is low.
Technology followers. These firms have high R&D intensity but low marketing intensity.
Technology leaders. These firms have, similar to type 3, high R&D intensity but low marketing intensity.
Global market niche players. This group of firms, just as type 3 and 4, has high R&D intensity but low marketing intensity. However, they are slightly more focused on marketing than type 3 and 4.
Multinational challengers. These firms have a high R&D intensity as well as a high marketing intensity.
The smiling curve implies that most EMNEs start with producing commodity-type products and services. This is often a result of OEM/OED contracts with large MNEs from developed economies.
Corporate social responsibility (CSR): good citizenship by the firm, by its obligations to society, especially when this is affected by the firm’s strategies and practices.
With expanding abroad, MNEs are expected to show CSR in their host country.
MNEs can engage in initiatives that benefit their stakeholders and the firm’s corporate citizenship obligations to society at the same time.
Dunn and Yamashita focus on Hawlett-Packards (HP) CSR efforts. There are three CSR areas on which HP is focused: (1) privacy, (2) the environment and (3) e-inclusion.
There are seven business practices in citizenship efforts:
Unearthing customer needs; divining the needs of customers by investigating at underlying problems and transferring this understanding to the innovation process.
Fielding a diversely talented team; this means getting involved with human and other resources of the host country, which are the core of the firm’s more conventional FSAs.
Adopting a systems approach; this does not attempt to optimize individual parts, but it views these parts in a broader context and wants to optimize the whole.
Creating a leading platform;
Building an ecosystem of partners; most sustainable communities have different stakeholders with an interest in a long-term solution.
Set a deadline for the project; deadlines create a sense of urgency, this keeps all participants focused.
Solving, stitching and scaling; this eliminates the bounded rationality challenge of trying to figure out all the possible forms the solution will eventually take.
For an MNE manager, the business value of a project is the routine from which the project was developed.
There are four key phases of project development:
Quick start; this phase tries to establish credibility and momentum by achieving a few quick successes.
Ramp up; characterized by gathering resources for prototyping, evaluating solutions and training stakeholders so they can take ownership of the initiative.
Consolidation phase; evaluating the intellectual property generated to date.
Transition phase: identifying leaders and transferring knowledge and power to local participants.
Socially responsible pricing affects the bottom line immediately and directly.
Social responsible pricing can mean fair trade; agreeing on paying a higher price on the input side, or on the output market side it can mean lowering prices.
Three main approaches used by MNEs to improve access to drugs in developing countries:
The drug donation approach: This approach increases the access to drugs by giving them free of charge.
The out-licensing approach: The host country manufacturer produces the drug under license
Differential pricing: selling the same product at different prices in different markets.
Environmental regulations imposed by the government, can enhance competitiveness by forcing companies to come up with innovative ways to use resources more productively and potentially develop green FSAs.
Resource productivity model suggests that environmental initiatives should be embedded in the production system. Environmental regulation can trigger two broad forms of innovation:
Technologies that reduce the costs of dealing with pollution.
The second form addresses the root cause of pollution by improving resource productivity.
There are five major features that make good for environmental regulations:
Good environmental regulations create maximum opportunity for innovation.
Regulations should be strict.
Regulations should allow for a phasing-in period.
Regulations should encourage a resource productivity approach.
Countries should develop regulations before other countries.
Three types of economies:
Developed or consumer market: represents an economy of one billion wealthy consumers with an advanced infrastructure.
Emerging economies: consists of roughly two billion people, customers who can meet their basic needs but have minimum purchasing power.
Survival economies: consists of three billion potential customers, largely rural, individuals not meeting their basic needs, minimal infrastructure.
Innovation: means that firms can improve their business performance through FSA development.
Compensation: transferring or trading emissions or emission-generating activities.
Kolk and Pinkse suggest that firms fall into six broad types:
Cautious planners: firms preparing for action but who show little activity.
Emergent planners: do not have implemented climate change measures yet.
Internal explorers: firms with a strong internal focus.
Vertical explorers: firms with a strong focus on environmental measures within their supply chains.
Horizontal explorers: firms that seek opportunities to mitigate their climate change impact.
Emission traders: these firms trade on emission markets and participate in offset projects.
Summary with the 1st edition of International Business Strategy by Verbeke
Summary with International Business Strategy by Verbeke
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