What are the conceptual foundations of an international business strategy? - Chapter 1

 

Introduction

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 seven concepts

Internationally transferable firm-specific-advantages (FSAs)/Non-Location-Bound firm-specific-advantages (FSAs) (1)

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

Non-transferable FSAs/Location-Bound FSAs (2)

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 (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. 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.

Investment in – and value creation through – recombination (4)

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:

  1. An internationally transferable FSA is developed in the home country and can be utilized across borders without any need for adoption.

  2. 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.

  3. 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.

  4. Location-bound FSAs are developed in each host country where the MNE operates and are exploited locally, usually by autonomous affiliates.

  5. 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.

  6. 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.

  7. 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.

  8. Several affiliates located in different countries, develop an internationally transferable FSA together.

  9. 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.

  10. Similar as pattern IX, affiliates work together. In this case they first jointly develop a location-bound FSA towards one specific host country market.

Complementary resources of external actors (5)

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 (imperfect assessment) (6)

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 (imperfect effort) (7)

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.

International business strategy for MNE performance

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.

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