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INTRODUCTION  

International  business  strategy:  effectively  and  efficiently  matching  an  MNE’s  internal  
strength  (relative  to  competitors)  with  the  opportunities  and  challenges  found  in  
geographically  dispersed  environments  that  cross  international  borders.      
 
The  seven  concepts  of  the  unifying  framework  (brief  overview)  
1. Internationally  transferable  (or  non-­‐location-­‐bound)  firm-­‐
specific  
advantage  (FSAs)  
a. Tacit  know-­‐how  (difficult  to  transfer)  
b. Explicit  knowledge  (easy  to  transfer)  
Reflects  the  
i. Blueprints,  docs,  memo’s  
distinct  resource    
2. Non-­‐transferable  (or  location-­‐bound)  FSAs  
base  available  to  
a. Marks  &  Spencers:  first  in  its  chain  to  open.  Advantage:  prime  
the  firm,  critic  to  
real  estate  Transfer  to  Canada    transfer  the  advantage?  
achieving  success  
No.  
in  the  
b. Best  Practice:  TOYOTA  Supplier  networks  
marketplace  
c. Reputation  based  (Thumbs  up  vs  coca  cola)    Switch  watch  
3. Location  advantages  
a. Silicon  valley  
i. Huge  pool  of  qualified  engineers  (Stanford  closeby)/Clusters  
  
Complimentary  skills    
4. Investment  in  –  and  value  through  –  recombination  
a. Constitutes  the  heart  of  int  business  strategy:  The  highest-­‐order  FSA  is  the  
ability,  not  just  to  combine  reliably  the  MNE’s  existing  resources,  but  to  
recombine  its  resources  in  novel  ways,  usually  including  newly  accessed  
resources  where  in  a  limited  geographic  space  or  internationally  
5. Complementary  resources  of  external  actors  (not  shown  explicitly  in  figure)  
a. Additional  resources,  provided  by  external  actors  bt  accessible  to  the  MNE,  
which  may  be  necessary  to  fill  resource  gaps  and  achieve  success  in  the  
marketplace  
6. Bounded  rationality    
Reflect  the  behavioural  
a. We  don’t  have  the  mental  capacity  to  put  together  all  
characteristics  (of  both  
the  information  and  evaluate  it.  
senior  MNE  managers  
b. You  have  preference  and  you  try  to  maximize  those  
and  another  relevant  
preferences  
economic  actors)  that  
c. Utilarian  theory:  based  on  price  
may  impede  
7. Bounded  reliability  
international  success  
a. There  is  inconsistency  between  what  you  expect  and  
what  actually  happens.  There  are  limits  to  the  extent  to  
which  you  can  rely  on  someone.    
 
Resource  base  (expressed  in  managerial  terms)  
Constitutes  of  various  components  either  owned  by  –  or  accessible  –  to  the  firm  
1. Physical  resources,  including  natural  resources,  buildings,  plant  equipment,  etc  
2. Financial  resources,  including  access  to  equity  and  loan  comp  
3. Human  resources,  including  both  individuals  and  teams.  These  individuals  and  
teams  have  both  entrepreneurial  and  operational  (or  efficiency-­‐related)  skills  
4. Upstream  knowledge,  including  sourcing  knowledge,  as  well  as  product-­‐  and  
process-­‐related  technological  knowledge  

5. Downstream  knowledge,  critical  to  the  interface  with  customers,  and  related  to  
marketing,  sales,  distribution  and  after-­‐sales  service  activities  
6. Administrative  (governance-­‐related)  knowledge  regarding  the  functioning  of  the  
organizational  structure,  organizational  culture  and  organizational  systems  
7. Reputational  resources,  including  brand  names,  a  good  reputation  for  honest  
business  dealings,  etc.  
 
A  firm  can  have  FSA  in  each  of  the  above  resource  areas.  The  nature,  level  and  
contestability  of  these  strengths  vis-­‐à-­‐vis  rivals  should,  in  principle  be  identifiable  
through  a  properly  conducted  benchmarking  exercise.    
 
 
INSERT  FIGURE  1  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 Internationally  transferable  FSA  and  the  four  MNE  archetypes   The  MNE  creates  value  and  satisfies  stakeholder  needs  by  operating  across  national   borders.   then  it  can  be  cheaply  transferred  and  effectively  deployed  and  exploited  abroad.PART  1:  CORE  CONCEPTS   Chapter  1:  Conceptual  foundations  of  international  business  strategy     1.  usually  customer-­‐oriented.  (Cost  of  FSA  transfer  relatively  ↓  but  potential  value  also     relatively  ↓.  value   creating  activities  abroad   b. Centralized  exporter  (market  seeker)   a.  institutional  and  spatial  distance  between  home  and  host  country   environments.   o This  can  also  be  a  embodied  in  a  final  product.  I.  building  up  experience  over  time.  the  MNE  must  have  proprietary  internal  strengths. Economies  of  scale   ii.   -­‐ This  set  of  strengths  is  called  the  non-­‐location  bound  FSA’s   o These  FSA’s  do  not  stop  creating  value  when  the  border  is  crossed  between   home  and  host  country. International  projector  (cloning  home  operations)   .  marketing  or  administrative  (governance-­‐related  knowledge). Foreign  subsidiaries  act  largely  as  facilitators  of  efficient  home  country   production   i.  namely  if  competitors  can  easily  imitate  what  the  MNE  is  best  at)       IN  CONTRAST  MNE’s  face  great  difficulty  transferring  tacit  knowledge  (because  this   cannot  fully  be  replicated  through  simple  communication  channels.  such  as   technological.  or  by  network  partners  (such  as  joint  venture   partners  or  distributors)   The  paradox  of  an  internationally  transferable  FSA  is  the  following:   If  the  FSA  consists  of  easily  codifiable  knowledge  (explicit  knowledge  such  as  blueprint).  but  it  can   be  easily  imitated  by  other  firms.   c.  because  these  firms  possess  a  knowledge  basis  that  is   appropriately  matched  to  local  stakeholder  requirements.  when  the  MNE  exports   gods  and  services  that  are  valued  highly  by  host  country  customers    Intermeidiate  products  (quality  control)    Exploitations  of  FSA’s  abroad  can  also  be  done  by  external  actors   (such  as  licensees).  learning  by  doing  etc.e.  almost  by  definition.  out  of  a  limited  number  of  (scale-­‐efficient)  facilites  in  the   home  country  and  with  only  minor.     2.)   Example:  most  important  bundle  of  tacit  knowledge  is  contained  in  the  MNEs   administrative  heritage:  key  routines  developed  by  the  firm  since  it’s  inception       THERE  ARE  4  MNE  Archetypes  of  administrative  heritage   1. Standardized  products  manufactured  at  home  embody  the  firm’s  FSAs   (themselves  developed  on  the  basis  of  a  favourable  home  country   environment. Standardize  products  and  sell  it  in  the  host  country. This  home-­‐country-­‐managed  firm  builds  upon  a  tradition  of  selling  product   internationally.  including  local  clustering)  and  make  the  exporting  firm   successful  in  international  markets.  resulting  form  cultural   economic.     -­‐ The  MNE  incurs  additional  costs  of  doing  business  abroad.  at  a  disadvantage  as  compared  to   firms  form  the  host  country.  it  requires  person-­‐ to-­‐person  communication  and  is  necessarily  associated  with  sending  human  resources   abroad.   -­‐ To  overcome  this.  When  crossing  the  MNE  is.

 The  non-­‐ location-­‐bound  FSAs  that  hold  theses  firms  together  are  minimal:  common   financial  governance  and  the  identity  and  specific  business  interests  of  the   founders  or  main  owners  (typically  entrepreneurial  families  or  investors)   i.  National   responsiveness  is  the  foundation  of  the  international  strategy.  But  you’re  taking  a  different  set  and   recombining  it  with  the  local  aspect  in  the  host  country.  Their  early  stages  include. The  firm  builds  upon  a  tradition  of  transferring  its  proprietary  knowledge   developed  in  the  home  country  to  foreign  subsidiaries.  which  are   essentially  clones  of  the  home  operations     b.   Although  there  are  4  archetypes  that  describe  the  bulk.   3. International  coordinator  (coordinate  location  advantages  in  host  countries)   a.  resulting  from  a  role  as  licensee  or  subcontractor   for  technology  rich  MNEs  from  developed  economies. The  multi-­‐centred  MNE  consists  of  a  set  of  entrepreneurial  subsidiaries   abroad. You  transfer  your  assets  and  clone  them    (Disney  Land)   4.a.     i.  both  upstream  and  downstream. Multicentred  MNE  should  be  viewed  as  a  portfolio  of  largely   independent  businesses. Knowledge-­‐based  FSAs  developed  in  the  home  country  are  transferred  to   subsidiaries  in  host  countries. International  operations  are  specialized  in  specific  value-­‐added  activities   and  form  vertical  value  chains  across  borders.  which  are  key  to  knowledge-­‐based  FSA  development.  However.e  .  Many  older  European  MNEs  fit  this  mould   (unlike  Japanese  MNEs)     b.  there  are  other  types.  rather  on  building  on  their  own  resources.  and  provided  home  country  entrepreneurs   with  more  direct  access  to  the  location  advantages  of  the  host  countries   involved.   o Privileged  access  to  home  country  resources   .  brand  names  or  a  a  sophisteicated  logistics     apparatus.     -­‐ Emerging  Economy  MNEs  (EMNEs). Multi-­‐centred  MNE  (building  on  host  country’s  location  FSAs)     a.  The  international  projector  MNE  seeks   international  expansion  by  projecting  its  home  country  success  recipes   abroad.  through  a   tightly  controlled  but  still  flexible  logistics  function   b.     o Learned  knowledge  from  early  alliance  formation  with  other  MNEs   whereby  the  EMNE  may  have  provided  strength  in  government  relations   or  access  to  local  resources  to  the  alliance.  These  firms  do  not  derive  their  strenths   primarily  from  advanced  technology.   o Entrepreneurial  quality  of  management     o Management  capabilities  in  effective  strategy  execution   o Learned  technologies.  The  MNE’s  key  FSAs  are  in   efficiently  linking  these  geographically  dispersed  operations  through   seamless  logistics. The  international  coordinator  builds  upon  a  tradition  of  managing   international  operations.  the   commonality  among  all  these  types  is  the  transfer  of  at  least  some  FSAs  across  borders     -­‐ I. You’re  present  in  different  countries.not  included  in  the  4  are  freestanding  compnies  (companies  that  were   set  up  abroad  mainly  by  British  and  Dutch  investors. MANY  LARGE  MNES  IN  NATURAL  RESOURCES  INDUSTRIES  FIT  THIS  ARCHETYPE   ii.     o Public  policy  and  institutional  convergence  greatly  reduced  the  additional   costs  of  doing  business  abroad.

 advantage:  the  presence  of  customers  willing   and  able  to  purchase  the  firm’s  product  (NOT  THE  SAME  AS   EXPORTING)   o 2.  Natural  resource  seeking:  entails  the  search  for  physical  financial  or   human  resources  in  host  countries   o 2.  a  superior  educational  system  –  another  location  advantage  –  will  support  firms   that  build  upon  sophisticated  human  resource  skills   -­‐  Or  home  country  advantages  (natural  resources)     Why  would  an  MNE  want  to  engage  in  FDI  in  a  host  country?   -­‐ FDI:  the  allocation  of  resource  bundles  (combinations  of  physical.   administrative  knowledge  or  reputational  resources   o 4.  may  not  have  the  same  value  across  borders     3.  This  may  lead  to  a  dominant   market  share  and  superior  expansion  rate  in  the  home  country.e.  Strategic  resource  seeking:  the  desire  to  gain  access  to  advanced   resources  in  the  sphere  of  upstream  knowledge  downstream  knowledge.o Cost  innovations/operational  excellence. Other  resources  such  as  local  marketing  knowledge  and  reputational  knowledge   and  reputational  resources. Even  the  firm’s  domestic  recombination  capability  may  not  be  adept  enough  to   confront  the  additional  complexities  of  foreign.  as  the  firm   engaged  in  product  diversification  or  innovation.  several  motivations   o 1.  financial.  and  useable  by   firms  operating  in  that  location.   human  knowledge  and  reputational  resources)  by  an  MNE  in  a  host  country.  and  thereby  its  geographic   market  coverage  domestically.  Location  advantages   Represent  the  entire  set  of  strengths  characterizing  a  specific  location.  such  as  a  network  of   privileged  retail  locations  leading  to  a  dominant  market  share  in  the  home   market  (as  often  found  in  retail  banking).     2.  routines/systems/buyer-­‐ supplier  relations)   4. Stand-­‐alone  resources  linked  to  location  advantages.e.  Non-­‐location  bound  FSAs  (4  main  types)   1.  There  strengths  should  always  be  assessed  relative  to   the  useable  strengths  of  other  locations   -­‐  I.  Efficiency  seeking:  the  desire  to  capitalize  on  environmental  changes   that  make  specific  locations  in  the  MNEs  international  network  of   operations  more  attractive  than  before  for  the  consilidation  or   concentration  of  specific  activities       .  with   the  purpose  of  performing  business  activities  over  which  the  MNE  retains   strategic  control  in  that  country   -­‐ Answer:  MNE  should  engage  in  FDI  only  if  the  host  country  confers  a  location   advantage  relative  to  the  home  country.  sometimes  as  the  result  of   functioning  in  adverse  environment  circumstances  and  ill-­‐functioning   external  markets   o Ability  to  adapt  technology/products  to  emerging  economy  needs   2. Local  best  practices:  may  not  be  considered  as  such  abroad  by  a  variety  of   stakeholders  and  might  even  be  deemed  illegal  (i.  Market  seeking:  reflects  the  search  for  customers  in  host  countries    Host  country  loc.  are  immobile  and  therefore  inherently   non-­‐transferable.     3.

 integrate  it  with  the  existing  knowledge  base  and  exploit  the  resulting.  meaning  that  the  managers  responsible  for  making  decisions  and   engaging  in  purposive  action  in  the  firm  always  face  information  problems   1.  and  to  replace  these  by  resources  with  higher  value  creating   potential  in  host  enviroms.  especially  about  the  future  state  of  the  environment.   -­‐  The  MNE’s  recombination  capability  leads  to  processes  and  products  that  embody   ‘integrated  bundles’  of  knowledge.4.     o Continuous  innovation  and  effective  exploitation  of  innovation  is  required  to   stay  ahead  of  the  competition     MNE’s  highest  order  FSA  .  Slack  or  unused  productive  resources.  and  does  not  jeopardize   the  specific  expansion  project  considered.  Complementary  resources  of  external  actors   Some  success  ingredients  may  be  missing  and  these  can  be  provided  by  external  factors   -­‐ International  development  of  the  required  strengths  is  expected  to  bring  a  lower   net  value  than  relying  upon  external  factors   -­‐ The  need  to  rely  on  external  can  be  satisfied  in  practice.  is   .     6.    (Aim  is   finding  new  profitable  ways  to  use  resources)   -­‐ Resource  combination  require  3  things:   o 1.  but  also  create  new   knowledge.  beyond  those  needed  for  the   efficient  functioning  of  current  operations   o 3.  The  willingness  and  capacity  to  let  go  of  some  resources  embedded  in   extant  FSAs.  Value  creating  through  recombination   The  firm  is  able  to  grow  by  innovating  and  diversifying.  often  in  conjunction  with  newly  accessed  resources.  new   knowledge  bundles  across  geographic  space  in  ways  that  satisfy  stakeholder  needs     Patterns  figure:  (MAKE  TABLE  WITH  THE  FIGURES)   Pattern  1:  I   Pattern  2:   Pattern  3:   Pattern  4:   Pattern  5:   Pattern  6:   Pattern  7:   Pattern  8:   Pattern  9:   Pattern  10:     5.  This  means  combining  in  novel   ways  existing  resources.  meaning  melded  bundles  of  old  and  newly  accessed   knowledge   -­‐  The  firm  cannot  only  transfer  abroad  its  existing  set  of  FSAs.  Any  information  about  the  environment  relevant  to  the  MNEs  functioning   and  performance.  Bounded  rationality   Reflects  scarcity  of  mind.  Entrepreneurial  skills  (managers  +  employees)  to  face  new  productive   opportunities.   o 2. Access  to  information  sufficient  in  quality  and  quantity  to  guide  decision  making   and  managerial  action   a.

 given  the  multifacetedness   of  the  relevant  information  (variety  of  types  of  accessible  information)     6.necessarily  partial  and  incomplete.     Example:  Commonly  encountered  by  senior  managers  of  MNEs. Problems  of  processing  information. Limited  capability  to  process  complex  information  bundles   a.  Bounded  reliability   Imperfect  effort  towards  pre-­‐specified  goal  achievement.  giving  the  complexity  and  uncertainty   characterizing  the  environment  and  its  evolution.   2.   They  may  select  different  information  as  relevant  to  strategy.  thereby  leading  to  incomplete   fulfilment  of  promises   .  especially  in  determining  its   relevance  to  the  firm  and  its  implications  for  strategy.  is  the  phenomenon  that   senior  managers  in  the  home  country  and  senior  managers  in  the  host  country  may   adopt  difffent  decision-­‐making  approaches.

 may  lead  to  the  loss  of  FSAs     .  organic  development. Which  points  to  the  distinctiveness  of  the  firm’s  routines  and  recombination   abilities   2.    Core  competencies  involve  the  combo  of  stand-­‐alone-­‐knowledge   bundles  found  in  different  functions  into  routines.   which  are  put  together  to  create  end  products.  the  firm  intends  to  internalize  the  knowledge  and  skills  of  the  alliance   partner(s)     o Thus  furthering  the  creation  of  the  company’s  own  technological  and   process-­‐related  FSA   o B&C    argue  that  manufacturing  knowledge  –in  fact.e.  a  key  stakeholder  group     In  addition  to  these  3  there  is  a  4th  characteristic  (implicitly  assumed  by  P&H)   4.   -­‐ So.  any  type  of   knowledge  embedded  in  a  single  functional  area  such  as  R&D  or   marketing  –  is  not  a  core  competence  in  and  of  itself. Be  difficult  for  competitors  to  imitate  in  terms  of  achieving  the  required  internal   coordination  and  learning   a.Chapter  2:  The  critical  role  of  firm-­‐specific  advantages   Two  perspectives   -­‐ Prahalad  &  Hamel. Provide  potential  access  to  a  wide  variety  of  markets   a.  there  is  the  issue  of  acquiring  FSAs  through  external  strategic  alliances   rather  than  through  internal.  as  well  as  the   further  recombination  of  existing  resource  bundles  with  new   resources      Successful?  Entire  set  should  be  transferred  abroad   -­‐ Outsourcing  strategies  for  key  components.   -­‐ Bartmess  &  Cerny  (B&C)   o Explains  the  implications  of  a  core-­‐competencies  approach  when  the  MNE   expands  internationally     There  are  3  characteristics  to  help  managers  identify  core  competencies  (A  core   competence  should)   1.  meaning  the  firm’s  routines  and   recombination  capabilities. Make  a  significant  contribution  to  the  perceived  customer  benefits  of  the  end   product   a.  as  a  shortcut  to  increased  short-­‐term   profitability.  produce  components  called  core  products. The  loss  of  a  core  competence  would  have  an  important  negative  effect  on  the   firm’s  present  and  future  performance   a. Which  points  to  the  capability’s  contribution  towards  combining  or   recombining  resources  for  success  in  new  environments   3.  1990  (P&H)   o Senior  managers  should  view  their  firm  as  a  portfolio  of  ‘corporate   competencies’  which  are  its  high-­‐order  FSAs  (i.   o According  to  P&H. In  terms  of  value  creation  and  satisfying  stakeholder  objectives     Furthermore.  core  competencies. Which  points  to  satisfying  the  needs  of  customers.  shared  knowledge).

 feelings  and  cultural  values  may   be  embedded  in  the  information  transmitted)     Chapter  3:  The  nature  of  home  country  location  advantages   Porter.  resulting  in  FSA  creation. Lower  predictability  of  info+need  for  two-­‐way  info  requires  geo  proximity   3. Does  not  simply  refer  to  tacitness  of  ino  in  technical  sense. Complexity     a. Concreteness  of  information   a.  1990  (The  competitive  advantage  of  nations)   -­‐ Any  company’s  ability  to  compete  in  the  international  arena  is  based  mainly  on   an  interrelated  set  of  location  advantage     -­‐ A  high  level  of  pressure  in  its  home  base  pushes  the  firm  to  innovate  and  to   upgrade  systematically. Higher  complexity  requires.  and  demanding  local   customers   -­‐ Porter’s  diamond  consists  of:   o Factor  conditions:      Factors  of  production  in  the  home  base  such  as  natural  resources      &  More  importantly:  created  factors  conditions  such  as  skilled   labour.  As  a  result  his  provides  relatively  little  practical  guidance   .  geographic  proximity  to  be  effective  and   efficient     2. Less  similarity.     o These  FSAs  are  instrumental  to  expansion  in  foreign  markets   o “A  nation’s  competitiveness  depends  on  the  capacity  of  its  industry  to   innovate  and  upgrade”.  aggressive  home-­‐based  suppliers.  They  benefit  from  having  strong   domestic  rivals.  home-­‐based  industry  with  efficient  macro-­‐level   governance  and  several  domestic  rivals  may  help  the  firm  in  that   industry  become  internationally  competitive     Porter  focuses  primarily  on  the  rise  of  industries  at  the  national  level.  scientific  knowledge  &  infrastructure   o Demand  conditions:    Focus  on  domestic  market  size  &  domestic  buyer  sophistication   o Related  and  supporting  industries:    High-­‐quality  internationally  competitive  home-­‐based  suppliers    Companies  related  industries  are  critical  to  the  firm’s  international   competitiveness   o Firm  strategy.   1.  prior  relationship     5.Assuming  a  given  volume  of  information  that  must  be  exchanged  between  two   distinct  activities.  industry  structure  and  rivalry:    Highly  competitive. Similarity  of  background  and  expertise   a.  and  less  on   firm-­‐specific  challenges. Sensitive  communication  between  related  activities  req.  more  difficult  to  communicate  from  a  distance     4.   -­‐ Companies  gain  advantage  against  the  world’s  best  competitors   o Because  of  pressure  and  challenge. Required  level  of  interaction   a. Requirement  of  a  prior  relationship   a.  But  also  the   info  beyond  its  verbal  content  (emotions.  these  5  criteria  together  determine  the  scope  of  the  bounded   rationality  problem  that  must  be  solved.

  ii.   communication  infrastructure.       Chapter  4:  The  problem  with  host  country  location  advantages     Pankaj  Ghemawat  (2001)  HBR:  “Distance  still  matters:  the  hard  reality  of  global   expansion”.       i. Ghemawat:  products  with  “low  value-­‐to-­‐weight”  ratios  (such  as   steel  and  cement)  and  highly  perishable  items  incur  the  greatest   cost  increases  as  transportation  distances  increase  (CEMEX)     4. Represents  differences  in  consumer  wealth. Represents  the  physical  distance  between  countries. Cultural  distance:   a. More  than  physical  proximity!  It  encompasses  other  aspects  affecting   the  separation  of  countries  in  space  (and  therefore  in  time).   infrastructure  characteristics.  quotas.  have  political  ties. Two  broad  approaches     1.  Here  he  explains  that  although  technology  makes  the  world  smaller.  Chinese  language  content       2.  Having  a  common  border  or   easy  access  via  river  and  ocean  waterways  may  keep  this  distance  low.  financial  and   human  resources.to  the  managers  or  owners  of  newly  established  firms.  income  level  and  distribution.  Demonstrates  that  firms  often  overestimate  the   attractiveness  of  foreign  markets  while  neglecting  risks  arising  from  DISTANCE.  restrictions  on  foreign-­‐owned   companies  and  preferential  treatment  of  domestic  firms   3. I.  in  terms  of  what  location   advantages  can  –  or  should  –  mean  to  them.e.  can  reduce  this  distance.  have  engaged  in  efforts  towards   economics  and  monetary  integration  or  preferential  trading   arrangements.   Human  intervention. Geographic  (or  spatial)  distance   a.   i. Administrative  (or  institutional)  distance   a.  Reflects  differences  in  societal  institutions. I.     i.  in  order  to  protect  domestic  industries.  the  cost  and  quality  of  natural.   including  man-­‐made  elements  such  as  transportation  costs.  Star  TV  underestimating  the  market’s  preference  for  locally   produced.  and  synchronize  government  policies. Results  from  difference  in  national  cultural  attributes  such  as  language.  This  distance  can  be  low  (or   lowered)  if  two  or  more  countries  share  a  common  history  (including   colonial  relations). Exploiting  differences  in  input  costs  or  prices  between   markets  through  “economic  arbitrage”     .   Differences  in  topographic  or  climate  my  make  this  distance  higher.  taking  into  account   the  ease  of  transport  between  the  countries.  building  upon   scale  and  scope  of  economies   2. Economic  distance   a.  such  as  the  creation  of  efficient  transportation  and   communication  links.  and  prevailing  business  practices.e.     Distance  (CAGE):     1.  host  countries  raise   barriers  through  trade  tariffs.  social  norms  and  race   i. Replicating  existing  competitive  advantages.  it  does   not  elimate  the  cost  of  distance.   religious  beliefs.

 soft.g.  labor  cost  might  be   low.  health  care  etc)  when  penetrating  the   high-­‐distance  Asian  markets.Ghemawat’s  methodology  is  based  on  a  thorough  analysis  of  economic  data  concerning   international  trade.  drinks.     a. i.e.  but  it  has  more  political  uncertainty   o They  argue  that  large  MNEs  should  develop  a  particular  recombination   capability:  an  FSA  in  offshoring.  China  &  India)  but  attempt  to  reduce  risk  by   including  a  broader  set  of  countries  in  their  offshoring  strategy.     o The  authors  implicitly  take  on  Ghemawats  suggestions:  that  they   must  be  well  informed  on  all  relevant  cost  categories  and  other   relevant  country  characteristics     2.       .  as  does  the  problem  of  imperfect  processing  of   information       Theory:   Ghemawat  demonstrates  that  the  extent  of  globalization  has  been  vastly  exaggerated.  in  Asia  do  the  strokes.  For  Ghemawat  distance  is   fundamentally  a  barrier.e.  He  regressed  trade  between  every  possible  pair  of  countries  in  the   world  in  each  of  70  industries  on  each  dimension  of  distance. Attention  must  be  devoted  to  creating  the  right  image.  Each  distance  component   comounds  the  bounded  rationality  problem  faced  by  the  MNEs  senior  management:  the   problem  of  uncertainty  increases.    In  practical  terms.   They  observed  that  many  cost  leaders  in  industries  ranging  from  automotive  and   chemicals  to  consumer  products  and  technology  do  not  simply  outsource  to  a  few   high-­‐profile  low-­‐cost  destinations  (i.   The  dot  com  boom  was  supposed  to  signal  the  end  of  distance.  With  this  article  Ghemawats   dismisses  the  blief  that  distance  has  finally  been  conquered  and  that  the  CAGE  distances   are  here  to  stay.  Rouse  &  Reinert  wrote  a  complementary  perspective  with  the   message  that  MNEs  intending  to  be  cost  leaders  in  their  industry  should  establish   portfolios  in  low-­‐cost  countries  to  which  selected  activities  can  be  outsourced.  but  are  handled  in  a   centralized  fashion    to  create  cost  advantages  across  business   units  by  pooling  resources.  They  do  caution   against  undisciplined  fragmentation  of  offshoring  activities   o They  focus  on  the  benefits  of  accessing  multiple.  entertainment.  ‘high-­‐distance’  input   markets    Whereas  Ghemawat  focuses  on  the  risk  of  penetrating  too  many  of   ‘high-­‐distance’  output  markets.e.  A  truly  global   marketplace  would  materialize  thanks  to  information  technology.  characters  have  the  same  meaning  as  you   want  them  to  have   b. Attention  must  be  devoted  to  selecting  the  right  corporate  and   product  brand  names     i.  for  Vestring  et  al  it  is  fundamentally   an  opportunity  (i.  jointly  developing  new  suppliers  or   expanding  economies  of  scale  in  low-­‐cost  countries.  a  large  MNE  would  be  insufficiently   diversified  if  it  outsourced  only  to  China. Schmidt  &  Pan  complementary  perspective  focuses  on  the  cultural  distance   components  and  provides  guidance  to  Western  MNEs  selling  branded  consumer   products  (e.  with  unlimited   potential  for  firms  to  expand  in  foreign  markets  etc.     1.  that  means  that  strategic  offsoring  decisions  are   not  left  to  individual  business  units. Vestring.

 They   suggest  that  (1)  many  MNEs  mistakenly  view  host  country  subsidiaries  simply  as   recipients  and  distributors  of  company  knowledge  and  products. Black  hole:  rather  weak  unit  in  terms  of  specialized  resources.i.     -­‐ B&G    Both  have  dysfunctional  effects  on  the  MNE.  as  corporate  HQ  attempt  to  maintain  control  of   the  subsidiary  network.       In  response  to  these  problems  B&G  observed  a  number  of  MNEs  have  moved  towards  “an   organizational  model  of  differentiated  rather  than  homogenous  subsidiary  roles  and   dispersed  rather  than  concentrated  responsibilities.  These  MNEs  do  not   recognize  the  MNEs  potential  to  develop  unique  bundles  which  in  turn  can  make  the   corporate  HQ  isolated  and  oblivious  to  changing  conditions  in  key  international  markets.  (Either  positive  or  negative)       Types  of  subsidiary  categories   1.   where  the  corporate  brand  name  may  mean  little  to  consumers  in   terms  of  the  value  they    attribute  to  it.     These  two  simplifying  strategies  –  homogenization  and  centralization  –  cause  tensions   between  headquarters  and  subsidiaries.       Chapter  5:  Combining  firm-­‐specific  advantages  and  location  advantages  in  a   multinational  network   Bartlett  &  Ghoshall  (1986)  –  How  MNEs  should  manage  their  subsidiary  network.  The  MNE  can  use  this  unit  to  maintain  a   .  including  criticism  of  other  firms.  and  therefore  the  opportunities  they  provide   are  not  fully  exploited.  specialized  resource  base  are   unable  to  excape  from  an  implementer  role  and  unleash  their   entrepreneurial  abilities.     -­‐ Dominant   o Corporate  HQ  control  key  decision-­‐making  process  and  overall  company   resources  in  order  to  implement  a  consistent  global  strategy     -­‐ Subordinate   o National  subsidiaries. Schmitt  &  Pan’s  implicit  message  is  that  senior  management  must   either  pay  sufficient  attention  to  these  shopping  lists  of  distance   components  or  else  follow  Ghemawat’s  perception  and  avoid  such   high-­‐distance  markets  altogether.  is   inappropriate.  merely  ‘act  as  implementers  and  adapters  of  the   global  strategy  in  their  localities’.  This  contrasts  with  the  US.  divorced  from  a  particular   product.     (2)  The  HQ  hierarchy  syndrome.       o Strategy  2:  subsidiaries  with  a  distinct. Asian  perceptions  are  affected  by  the  ‘collectivist’  nature  of  Asian   society  –  meaning  inter  alia  that  specific  reference  groups  may  be   critical  in  persuading  customers  to  purchase  a  product.     i.   c.     o Strategy  1:  important  markets  and  subsidiaries  are  treated  in  the  same   way  as  unimportant  ones. Here  the  corporate  image  is  often  more  important  than  the  image   created  for  an  individual  product.  senior  management  views  the  organizations  as   consisting  of  two  distinct  levels.  while  entrepreneurial  subsidiary  managers  fight  for  more   independence  and  freedom  of  action  in  their  local  markets.  and  that   comparative  advertising.  but  it  is  located  in   a  strategically  important  market.

 because   they  may  generate  a  steady  stream  of  cash  flow.     b. Implementer:  Subsidiary  with  weaker  (or  absent)  specialized  resources.       Strategic  importance     of  the  local  market     High   1   3   2   4   Low         Low         High     Resource  base  of  the  subsidiary     Keeping  these  four  subsidiary  categories  in  mind.  or  they  may   want  to  engage  in  acquisitions  or  strategic  alliances  in  order  to   access  complementary  resources  and  improve  market  success.  however.  however. The  black  hole  status  does  reflect.  profitability  and  growth.     a.  senior  management  at  corporate  HQ   must  provide  a  clear  sense  of  overall  strategic  direction.  specialized  resource  base  might  then  benefit  other  units  in  the   firm  if  corporate  HQ  understands  its  potential  economic  value  to  the   entire  MNE. This  is  a  highly  competent  local  subsidiary  in  a  strategically  important   market.         Context  and  complementary  perspectives     .  often  as  the  result   of  an  entrepreneurial  host  country  management  team.  and  allocate  appropriate  roles   and  responsibilities  to  the  different  subsidiaries  in  the  MNE  network. In  the  longer  run. Strategic  leader   a. Contributor   a.  but  one  located  in  a  less  important   market. Implementers  are  often  key  to  a  firm’s  overall  success.presence  in  a  key  market  in  order  to  keep  abreast  of  new  innovations  or  strategic   moves  by  competitors.  MNEs  may  want  to  commit  more  resources  to   such  markets  in  order  to  build  up  their  subsidiary.  The  role  of  this  type  of  business  unit  is  to  assist  corporate  HQ  in   identifying  industry  trends  and  developing  new  FSAs  in  response  to   emerging  opportunities  and  threats.     4.     2.     b. This  subsidiary  type  has  typically  developed  new  FSAs. Authors  suggest  that  most  MNEs  subsidiaries  are  in  this  category.  despite  a  lack  of  specialized  resources  or  even   profitability  in  the  local  subsidiary  unit  itself.  an  undesirable   competitive  position  in  a  key  market.  It’s  subsidiary-­‐ specific.     a.  and   located  in  a  market  of  lesser  importance  with  respect  to  the  MNE’s  long-­‐term   survival.  and  may  help  build   competitive  advantage  by  contributing  to  companywide  scale  and  scope   economies   3. Highly  competent  national  subsidiary.  as  a  function  of  the   specialized  resources  they  command  and  the  importance  of  the  market  in  which  they   are  located.       i.

This  implies  that  senior  managers  at  corporate  hq   understand  –or  at  least  appear  to  understand-­‐  all  the   implications  of  specific  decisions  for  the  subsidiaries   affected     ii. Possibility  for  subsidiary  managers  to  challenge  the  dominant   perspective  at  corporate  hq   1.  to  the  way  strategic  decisions  are  made.   irrespective  of  the  outcome  =  procedural  justice)   a.  C&M  agree  with   B&G  on  that  senior  maangers  at  MNEs  faced  with  strategic  management   decisions  often  centralize  the  decision-­‐making  process.  Their  expansion  into  foreign  markets  typically  followed  the   blueprints  of  and  conventional  ‘cookie  cutter’  patterns  of  FSA  development  and   exploitation  that  had  been  set  by  the  founders  of  the  firm  or  its  senior  management  in   the  early  stages  of  its  international  growth.  However.  undimensional  approaches  to   subsidiary  management  commonly  used  by  centralized  exporters.B&G  saves  it  harshest  criticism  for  the  homogenized.  i. In  particular  the  bottom-­‐up  part  of  this  two-­‐way   communication  signals  that  senior  managers  at  corporate   hq  take  subsidiary  managers’  views  seriously  and  are   willing  to  engage  in  a  dialogue  with  these  managers   iii. Consistency  in  decision  making  across  subsidiaries:   1.  irrespective  of  their  outcome.e.  C&M  note  that   subsidiary  managers  attach  substantial  importance  to  due  process  and  will  usually   accept  an  allocation  of  MNE  resources  that  does  not  benefit  their  unit.  While  the  iron  curtain  was  still  up  an  communist  countries  like  China   remained  essentially  closed  to  foreign  MNEs.  many  firms  continued  to  grow  their   international  operations. Corporate  hq’s  familiarity  with  the  local  situation  at  the  subsidiary   level   1.  international   projectors  and  to  some  extent  multi-­‐centred  MNEs  expanding  in  the  post  WW2  period  up   to  the  mid  80s. Effective  two-­‐way  communication  between  corporate  hq  and   subsidiaries   1. Due  process  (also  called  procedural  justice)  implies  that  decision   making  respects  5  simple  principles   i.  presenting  subsidiary   managers  with  a  demotivating  fait  accompli  (something  already  done)   rather  than  bring  out  the  best  in  them.  rather   than  focussing  on  treating  subsidiaries  differently  as  a  function  of  their  specialized   resources  and  the  stratefic  importance  of  their  location  as  B&G. Consistency  –  in  the  sense  of  adopting  clear  and  transparent   criteria  and  routines  to  make  decisions  across  the  entire   subsidiary  network  –  prevents  perceptions  of  politicized   decision  making  and  favouritism  advantaging  one   subsidiary  over  another. Chan  Kim  &  Mauborgne  on  the  topic  of  ‘due  process’:  this  refers  to  the  way   strategic  decisions  are  made.   iv.   knowledgeable  about  the  local  situation  in  host  countries   . This  signals  to  subsidiary  managers  that  senior   management  at  corporate  hq  –  even  if  confident  in  its   perspective  –  is  nonetheless  willing  to  hear  its  assumptions   and  conclusions  challenged  by  individuals  in  the  trenches.     1.  (attach   important  to  due  process.  The  problem  with  this  is  that  it  destroys   the  entrepreneurial  spirit  and  motivation  in  such  subsidiaries.

 Eshgi  and  Yuen  predate  but  also  complement  B&G’s  study  by  adding   the  strengths  and  weaknesses  of  Japanese  MNE  subsidiary  management.  job  security.       . Due  process  can  reduce  bounded  rationality  problems  in  the  MNE  i.  training  options  and  fringe  benefits   v.   ii. Here  senior  management  at  corporate  hq  makes  a  serious   effort  to  explain  in  depth  the  rationale  for  the  decisions   made. In  many  cases. Five  main  problems  found  in  Japanese  MNEs:   i.   tendencies  towards  homogenization  and  centralization  prevent  many  Japanese  MNEs  from   developing  strategic  leader  subsidiaries.       b.     1.  In  fact.     2. Japanese  staffing  policies  are  often  ethnocentric.  try  to  avoid  unions  and   frequently  discriminate  against  women  and  minorities   Main  conclusion  that  arises  is  that  strong  FSAs  in  technology  .  especially  in   the  real  of  upstream  activities  such  as  R&D.  tendencies  toward  homogenization  and  centralization  prevent   many  Japanese  MNEs  from  developing  strategic  leader  subsidiaries. Relationships  of  trust  established  between  corporate  HQ  and   foreign  subsidiaries  are  usually  confined  to  a  few  key  managers  in   these  subsidiaries.e. Neghandi.   iv. Though  they’re  particularly  sensitive  to  host  government   regulation  and  the  rule  of  law  in  general.  non-­‐Japanese  managers  frequently   face  unofficially  ceilings  on  promotion.  Compared  with   their  Japanese  counterparts.  autocratic  approach  vis-­‐à-­‐vis  their  foreign   subsidiaries.  as  well  as  different  career   paths.  production  and   government  relations  do  not  imply  a  strong  FSA  in  managing  a  foreign  subsidiary   network.     a. Relatively  little  confidence  in  the  ability  of  non-­‐Japanese  managers   in  host  countries   iii.  without  much  evidence  of  a  consensus-­‐based   management  style. Adopt  a  centralized.  In  fact.  thereby  pre-­‐empting  any  second-­‐guessing  or   rumours  on  the  substantive  reasoning  behind  these   decisions.  especially  in  the  realm  of  upstream  activities  such   as  R&D.  The   conclusion  of  their  article  is  that  strong  FSAs  in  technology.  foreign  subsidiaries  are  simply  informed   after  the  fact  about  important  decisions  made  by  senior   management  at  corporate  hq.   by  actively  seeking  input  from  host  countries.v.  production  and  government   relations  do  not  imply  strong  FSA  in  managing  a  foreign  subsidiary  network. A  transparent  explanation  of  final  decisions  made  by  corporate  hq   1.

 as  well  as  the  firm’s  manufacturing  and  marketing   operations   . Home-­‐augmentening  and  home-­‐exploiting  have  different  needs  and   require  different  skills.     2. HB  Exploiting  labs  should  be  located  close  to  key  markets  and  the   MNE’s  own  foreign  manufacturing  units  so  that  the  firm’s   technological  innovations  can  be  rapidly  adapted  to  host  country   requirements  if  needed. Information  flows  to  the  foreign  laboratory  from  the  central  lab  at  home.     -­‐ First.  given  the  commercial  requirement  of  moving  quickly  from  innovation  to   market.   Kuemmerle  indentified  two  distinct  types  of  host  country  R&D  acilities  based  on  their   primary  strategic  role  inside  the  MNE:  home-­‐base-­‐exploiting  sites  and  home-­‐base-­‐ augmenting  sites.       Three  key  stages  in  developing  of  foreign  R&D  units:     1. HB  Augmenting  labs  should  be  located  in  critical  knowledge   clusters  relevant  to  the  MNEs  businesses.  information  generally  flows  ‘from  the  foreign  laboratory   to  the  central  lab  at  home. Home-­‐base-­‐augmenting  sites    primarily  access  local  knowledge  and  send   information  back  to  the  central  lab   a.PART  2:  Functional  issues   Chapter  6:  International  innovation     This  chapter  examines  Kuemmerle’s  idea  that  many  MNEs. The  decisions  and  actions  designed  to  maximize  the  lab’s  contributions  to  the   MNE’s  overall  coroporate  strategic  goals     a.  where  they  will  be  well   positioned  to  tap  into  new  sources  of  innovations   3.  so  as  to  support  complex  production  tasks.  many  MNEs  feel  they  need  to  be  present  in  various  knowledge  and   innovation  clusters  scattered  around  the  world.  should  interact  regularly  with   the  other  R&D  units.  MNEs  must  integrate  their  R&D  facilities  more  closely  with  host  country   manufacturing  operations.  and  absorbed  by  host  country   manufacturing  operations     1. One  of  the  key  bounded  rationality  problems  facing  the  MNE  is  reducing  the   ‘distance’  between  home  country  R&D  operations  and  host  country   manufacturing  operations   2.  each  lab.   1.   especially  the  home-­‐base-­‐exploiting  ones.       There  are  two  main  reasons  for  this  trend. Selecting  decision  makers   a. With  these  labs.  are  wisely  decentralizing  their  R&D  by  building  worldwide  networks  of  R&D   labs.       i. Most  set  up  a  technology  steering  committee  (reporting  directory  to  CEO)   2.       ii.   -­‐ Second. A  home  base  explointing  R&D  operation  (particularly  if  led  by  managers  from   within  the  company)    will  reduce  this  distance.3).  Building  upon  the  ‘home-­‐base’  concept  developed  by  Michael  Porter  (ch. Set  of  decisions  and  actions  that  streghten  the  faclity’s  initial  capabilities   a. Home-­‐base-­‐exploiting  sites    primarily  receives  information  form  the  central   lab  in  the  home  country  and  adapt  products  to  local  demand   a. To  maximize  the  lab’s  contributions  to  the  MNE’s  strategic  goals.  particularly  international   projectors.

 MNEs  should  levarage  their  foreign  factories  to  get   closer  to  customers  and  suppliers  to  attract  skilled  and  talented  employees.     Ferdows  attempts  to  answer  one  key  question:  ‘How  can  a  factory  located  outside   of  a  company’s  home  country  be  sued  as  a  competitive  weapon  not  only  in  the   market  that  it  directly  serves  but  also  in  every  market  served  by  the  company?’   -­‐ Answer  depends  on  the  mindset  of  home  country  senior  managers:   o Senior  managers  who  view  their  factories  merely  as  sources  of  efficient.  capital.  to  achieve  low  costs.  including  his  own   consulting  work  with  a  dozen  large  manufacturing  MNE’s.  Research  based  on  a  wide  variety  of  sources.       Beyond  the  traditional  motives  such  as  ‘tariff  &  trade  concessions.  and  to   provide  exemplary  service  to  customers  throughout  the  world.   low-­‐cost  product  typically  don’t  allocate  their  factories  many  resources    These  managers  get  only  what  they  expect:  efficient.  5  &  6.  looking  at  how  MNEs  can  tap  their   foreign  factories.  cheap  labor.   • They  allocate  their  factories  more  resources  and  get  more  in   return     Ferdows  observes  that  the  most  successful  manufacturing  MNEs  view  their  foreign   factories  as  sources  of  FSAs  beyond  the  ability  to  save  costs  as  with  conventional   offshoring  plants.  4  year  study  etc.   Kuemmerle  offers  the  following  4  qualities  of  the  ideal  profile  of  R&D  unit  leaders  whom   are  instrumental  to  the  necessary  knowledge  recombination.   subsidies  and  reduced  logistics  costs’.       Kuemmerle  illustrates  that  MNEs  are  increasingly  adopting  an  interlinked  network  of   host  country  facilities  to  improve  their  R&D  efforts.  rather  than  relying  on  a  centralized   approach  with  all  core  R&D  performed  in  the  firm’s  home  market.  depending  on  whether  their  primary  purpose  is  to  exploit   knowledge  or  augment  knowledge.  In  addition.   -­‐ Respected  scientists  or  engineers  and  skilled  managers   -­‐ Able  to  integrate  the  new  site  into  the  company’s  existing  R&D  network   -­‐ Comprehensive  understanding  of  technology  trends   -­‐ Able  to  overcome  formal  barriers  when  they  seek  access  to  new  ideas  in  local   universities  and  scientific  communities     R&D  lab  managers  must  be  able  to  marshal  the  resources  necessary  for  the  lab  to  be   successful  in  meeting  its  objectives.       Chapter  7:  International  sourcing  and  production   Kasra  Fewdows  “making  the  most  of  foreign  factories’    (HBR)   This  chapter  will  extend  the  analysis  of  ch.  the  labs   can  play  different  roles.  low-­‐cost   production   o Senior  managers  with  higher  performance  expectation  from  their  foreign   factoris  require  innovation  and  customer  service  as  well    These  managers  generally  expect  their  foreign  factories  to  be   highly  productive  and  innovative.  and  to   create  centres  of  expertise  for  the  entire  company   .  including  new  FSA  development.

  1.   proximate  national  or  regional  output  market     b. This  factory  type  typically  does  not  develop  new  FSA  +  receives   minimum  autonomy   2.  rather  the  emphasis  is  on  the  overall   productivity  level  (factors  influencing  that.  typically  predetermined  by  senior   management  in  the  home  country.     -­‐ The  subsidiary  must  develop. Access  to  knowledge  and  skills  (often  closely  tied  to  both  in-­‐  and  output   markets)   i. Primary’s  purpose    manufacture  goods  and  to  supply  a  predefined.   c.  6  that  a  successful  penetration  of  foreign  markets  requires   more  than  merely  transferring  non-­‐location-­‐bound  knowledge  from  the  home  country   to  the  host  country. The  plant’s  manufacturing  output.   based  upon  two  parameters.   1. Server  factory   a.  internationally  transferable  FSAs   building  up  the  location  advantages  of  the  host  country  cluster.  in  its  own  right. Access  to  low-­‐cost  production  (factories  need  to  acces  input  markets)   c. Market  imperfections  such  as  trade  barriers. The  level  of  distinct  FSAs  held  by  the  plant  (weak  or  strong)     Six  roles  of  foreign  manufacturing  plants   1.       This  falls  in  line  with  ch. Encompasses  need  to  tap  into  input  markets. Primary’s  purpose    simply  access  low-­‐cost  production  factors  as  an   implementer  on  the  input  side     b.     The  article  distinguishes  among  six  possible  roles  for  foreign  manufacturing  facilities.  but  the  ultimate  goal   is  to  serve  (output)  markets  with  innovative  products.   2.  infrastructure.  worker  education  and  skills   3.  logistics  costs  and  foreign   exchange  exposure  usually  explain  the  establishment  of  such  factories  in   specific  host  countries   .   MNEs  seldom  select  manufacturing  locations  based  simply  on  the   lowest  possible  wages.There  are  three  changes  in  the  international  business  environment  driving  the   assignment  of  these  new  foreign  factory  roles. Strategic  purpose  of  the  plant     a. Proximity  to  the  market  (importance  of  output  markets  for  selling  the   products)   b.  which  then  receive  broad   geographic  mandates  within  their  areas  of  expertise.  reducing  the  need  to  establish  foreign  plants  merely  to  overcome  trade   barriers   2.  is  then  exported. MNEs  increasingly  co-­‐locate  development  and  manufacturing   activities  in  highly  specialized  plants. Time  frame  available  to  move  from  development  to  actual  manufacturing  and   marketing  has  become  shorter   a.   technology. Offshore  factory   a. International  trade  tariffs  declined  substantially  in  the  second  half  of  the  20th   century. Modern  manufacturing  is  increasingly  technologically  sophisticated  (meaning   capital-­‐intensive)  and  has  complex  supply-­‐chain  requirements   a.

 strengthening  the  plant’s   supplier  network  and  improving  logistics  integration  with  distributors   3. 5.   product  customization  etc. Closely  connected  with  both  the  key  players  on  the  input  side  (such   as  research  labs)  and  the  end  users  on  the  output  side.     i.    through  employee  training+edu)   2. Accesses  valuable  inputs  from  the  local  cluster  where  it  is  embedded  and   plays  a  key  role  in  localized  manufacturing  innovation. c.  However  it  also  receives   resources  to  engage  in  resource  recombination  and  to  develop  FSAs  that   will  turn  it  into  a  ‘best  practice’  plant  in  the  MNE’s  network  for  the   assigned  product  range      More  autonomy  in  terms  of  logistics. Primary’s  purpose    gain  access  to  low-­‐cost  production  factors  on  the   input  side.  as  well  as  changes  in  a  factor’s   culture  and  management  style!!     Upgrading  is  spread  over  3  stages.  as  it  entails  a   substantial  investment  of  time  and  resources. 6.  but  it  ultimately  has  a  narrow   charter  with  relatively  little  autonomy  or  specialized  capabilities   Outpost  factory     a.  server  and  outpost  factories  so  that  they  fain   the  ability  to  develop  FSAs  such  as  source.3.     -­‐ However  this  upgrading  requires  a  high  level  of  commitment. Developing  new  knowledge  that  can  benefit  the  overall  MNE  network       Emphasis  of  upgrading  lies  on  the  intangible  internal  strengths  and  location   advantages  rather  than  tangible  (lower  costs  etc)     The  solution  lies  in  specialization.   .  mainly  on  the  input  side  (Similar  to  ‘black  hole’   type  subsidiaries)   b. May  engage  in  some  FSA  development. More.     b. Accessing  and  developing  external  resources  (i.  similar  to  an  offshore  factory.     Overall  an  MNE  should  upgrade  its  offshore.  but  it  commands  stronger  capabilities.   i.e.   new  product  development.e. Primary’s  purpose    oriented  towards  the  host  country/region  output   market   b. Similar  to  server  factory. 4. Primary’s  purpose    to  gather  valuable  information  from  advanced   host  country  clusters.  customizations  etc   Lead  factory   a. On  the  manufacturing  side.   but  nonetheless  has  a  narrow  charter   Contributor  factory   a. May  be  a  strategic  leader  on  the  input  side  of  the  value  chainx.  cotributor  and  lead  factories.   i.  it  is  responsible  for   resource  recombination  in  the  form  of  process  improvements.  at  the  upstream  end  of  the  value  chain. MOST  IMPORTANT  in  terms  of  resource  recombination  and  new  FSA   development     b.   1.  this  role  is  usually  combined  with  that  of  an   offshore  (input  market  driven)  or  server  (output  market  driven)  factory   Source  factory   a. The  MNE  sets  up  source  factors  in  locations  with  good  infrastructure  and   a  skilled  workforce. Enhancing  internal  performance  (i.

 be  able  to  shift  production  form  one  country  to  another   quickly  and  efficiently    Attain  the  capability  to  engage  in  exchange  rates  pass  through   • I.Ferdows  cautions  managers  about  4  common  obstacles  that  may  prevent  the   upgrading  of  foreign  factories:     1. Enticement  of  government  relocation  incentives  to  move  factories  to  new  locations   that  possess  minimal  potential  for  upgrading     Insert  figure  page  222                                   Chapter  8:  International  finance   Lessard  &  Lightstone    How  MNEs  should  deal  with  economic  exposure  (different   from  transaction  and  translation  exposure)   -­‐ Economic  exposure:  the  (possbibly  negative)  impact  of  (largely  unexpected)   changes  in  real  exchange  rates  (on  a  firms  competetitiveness)  relative  to  the   MNE’s  competitors   o To  minimize  this  impact  L&L  recommend  that  senior  managers  strive  to      Have  a  flexible  sourcing  structure   • I.e.  capability  to  raise  prices  in  response  to  exchange  rate   fluctuations  without  losing  sales  volume   -­‐ Transaction  exposure:  risk  of  financial  losses  resulting  from  outstanding  but   unfulfilled  contractual  commitments  (i.e.  sales  contracts  in  different  currency)   -­‐ Translation  exposure:  risk  of  losses  resulting  from  the  translation  of  accounting   statements  expressed  in  foreign  currencies  into  the  home  country  currency  at   consolidation  date     The  issue  is  not  to  understand  how  fluctuating  foreign  exchange  rates  directly  affect  the   company’s  income  stream. Fear  of  relying  on  foreign  operations  for  critical  skills   2. Treating  overseas  factories  like  cash  cows  and  neglecting  long-­‐term  investment   3.e.  but  rather  to  gain  insights  into  the  longer-­‐term  relative   inpacts  of  these  fluctuations  on  income  streams   . Creating  instability  by  shifting  production  in  reaction  to  fluctuating  exchange  rates   and  costs   4.

 If  two  firms  have  the  exact  same  structure  in  terms  of  sourcing  (pridcut   differentiation.-­‐ Ie.     o In  that  case.e.   -­‐ Nominal  rates:  The  direct  exchange  rates  between  currencies   o i.  however.  if  a  US  company  sells  and  finances  within  the  US  then  it  has  no  transaction   and  translation  risk.  exchange  rates   are  volatile  and  greatly  influence  the  competitiveness  of  companies  selling   to  the  same  market  but  getting  materials  and  labour  from  different   countries’     -­‐ I.e.   -­‐ However.  however  if  its  main  competitor  is  Japanese  it  will  have  an   economic  exposure.  as  it  changes   in  the  real  exchange  rate  affect  the  level  of  economic  exposure!     -­‐ If  in  the  very  long  run  purchase  power  holds  than    (starting  from  an  equilibrium)   differences  in  inflation  rates  and  resulting  price  levels  between  countries  should   be  precisely  offset  by  corresponding  changes  in  their  nominal  exchange  rate.  nominal  rate  of  4%   -­‐ Real  exchange  rate:  Changes  in  the  nominal  exchange  rate  minus  the  difference   in  inflation  rates  between  two  countries   o    i.    This  can  also  occur  in  purely  domestic  firms  without  foreign   operations  or  product  if  their  market  rivals  include  MNEs  whose   competitive  position  is  positively  affected  by  exhange  rates  for   internationally  sourced  inputs.  most  differentiated   products  and  the  greatest  flexibility  to  shift  production  will  incur  the   lowest  negative  impact  on  the  net  present  value  of  its  future  income   stream.  Then  the  US  firm  has  a   competitive  advantage.  but   also  on  choices  made  by  rivals  in  terms  of  the  geographic  configuration  of  their   investments  and  their  sourcing  policies.     According  to  L&L  there  are  3  important  elements  of  economic  exposure:   -­‐ Economic  exposure  should  be  viewed  as  a  parameter  that  adds  uncertainty  to  the   value  of  a  firm’s  location  advantages     .     It  is  important  to  distinguish  between  real  vs  nominal  exchange  rates.  and  its  these  real  exchange  rate  fluctuations  that   create  economic  exposure  risk  for  companies:   o “In  the  short  run  of  6  months  to  several  years.  however  when  the  dollars  real  exchange  rate   increases  the  position  will  be  weakened  through  higher  relative  costs.e.     o When  the  US  dollar  depreciates  against  the  yen.     o Only  in  cases  whereby  the  nominal  exchange  rate  changes  between  the   dollar  and  yen  correspond  exactly  with  differences  in  inflation  rates   between  the  US  and  Japan.  flexilbility  to  shift  product)  from  a  foreign  country  then  a   fluctuation  of  the  exchange  rate  will  affect  them  in  the  same  way.  however  if  one   sources  from  another  country  then  it  affect  the  firms  differently     o Since  the  firm  with  the  strongest  market  position.  causal  empiricism  teaches  that  differences  do  persist  in  the  medium   term  (sometimes  several  years).  real  rate  4%  -­‐  3%  (inflation  difference)     Economic  exposure  not  only  depends  on  decision-­‐making  inside  the  individual  firm.  is  purchasing  power  parity  maintained.  real  exchange  rate  would  be  negligible.

-­‐ -­‐ o Implies  that  even  unfettered  access  to  location  advantages  in  a  desirable   geographic  area  may  not  lead  to  long-­‐run  competitive  advantage  if  the   economic  value  attributed  to  these  location  advantages  depends  on  the   evolution  of  macro-­‐level  parameters  such  as  currency  exchange  rates   Economic  exposure  concept  also  implies  that  the  location  advantages  benefitting   an  MNE  should  be  considered   o Not  solely  in  a  positive  sense.  and  on  country-­‐by-­‐country  basis.     o Firms  occupying  a  market  leadership  position  with  highly  differentiated   products  will  generally  be  best  positioned  to  engage  in  exchange  rate  pass   through      they  can  adjust  their  pricing  if  necessary  to  offset  any  increased   costs  arising  from  economic  exposure  without  incurring  a  los  in   sales  volume  (for  such  firms  economic  exposure  is  minimal).  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  are  by  ‘immunizing’  their  porducts  to  economic  exposure.       The  horizontal  axis  shows  the  unit’s  capability  to  ‘pass  through’  changes  in  real   exchange  rates   o Is  the  subsidiary  in  a  position  to  pass  any  price  changes  on  to  its   customers?  (in  3.       Inspired  by  L&L  the  following  figure  provides  a  classification  of  operating  exposure   at  the  subsidiary  level:         -­‐ -­‐ The  vertical  axis  represents  the  capability  relative  to  rivals  to  adjust  its  source   structure  and  thus  its  cost  position.  the  firm  can  do  this  without  a  loss  of   business)   o 2.  thereby   allowing  full  ‘exchange  rate  pass  through’.  to  a  potential  new  exchange  rate  reality.  MNEs  in  this  quadrant  typically  sell  commodity-­‐type  products.  This  is  the  case.  the  sales   of  which  can  be  greatly  affected  by  even  a  small  price  increase  (high  price   elasticity).

 whereby  a  portfolio  of  businesses  and  operational   structures  is  selected  with  offsetting  exposures  which  balance  each  other   a.     However.  senior  management  should  reduce  their  own   bounded  rationality  problem  by  adjusting  either  performances  indicators  or  goal-­‐based   expectations  to  eliminate  the  economic-­‐exposure  effects  on  performance  of  fluctuations   in  real  exchange  rates.  and  real   bounded  rationality  reduction  will  require  substantial  investment  in  communication.  and  therefore  configures  its  own   operations  in  such  a  way  as  to  reduce  its  specific  economic  exposure   a.  currency   hedging  instruments  available  for  managing  contractual  exposure:   1. Result  of  such  diversification  is  a  lower  total  rate  of  exposure  across  the   company. Also  typical  for  subsidiaries  that  import  products  from  the  parent   company  home  (FX  risk)  and  that  lack  a  strong  market  position  in   the  host  country  (i.  Companies  that  hedge  their  transaction  exposure  but   fail  to  take  economic  exposure  into  account  may  be  actually  raising  their  total  exposure     They  suggest  that  companies  typically  manage  economic  exposure  through  one  of  three   approaches. Each  business  unit  is  assessed  individually. Again. This  strategy  entails  a  trade-­‐off  between  increased  production  costs  and   lowered  risks   2. Incorporates  flexibility  in  operational  planning.  When  assessing   the  performance  of  these  managers.  a  trade-­‐off  is  necessary  between  the  increased  costs  of  carrying   excess  capacity  (so  as  to  allow  production  transfers)  on  the  one  hand  and   reduced  economic  exposure  risks  on  the  other       Managers  who  cannot  set  company  policy  on  economic  exposure  should  not  be  held   responsible  for  the  economic  exposure  effects  of  volatile  exchange  rates.  these  types  of  administrative  adjustments  will  be  insufficient.e. Company-­‐wide  perspective.  which  tend  to  be  more  strategic  than  administratively  oriented.         .  even  though  individual  units  may  continue  to  have  higher  levels   of  risk  on  their  own   3.    The  company  exploits   fluctuating  exchange  rates  by  switching  production  between  factories   a.  lot  of  competitors)     In  the  long  run  managers  should  consider  –economic-­‐  exposure  when  setting  strategy   and  worldwide  product  planning.

>  so  domestic  markets  are  no  safe  haven     Levitt  concedes  that  administrative  heritage  and  corporate  culture  play  a  large  role  in   determining  the  success  or  failure  of  a  firm’s  managerial  effect:  “there  is  no  one  reliable   right  answer  –  no  one  formulae. They  eventually  lose  relevance  to  economic  decision  making   ii.  reliability  and  low  prices.       His  argument  rests  on  two  foundations.  reliability  and  low  price  Therefore.       this  is  true  for  commodities  and  high-­‐tech  products  but  also  for   ‘high  touch’  goods  (items  where  personal  interaction  among   individuals  is  critical  at  moment  of  purchase  or  during   consumption/usage)  and  services   Examples:  Pizza. Cultures  and  national  societal  tastes  are  not  fixed.  economic.  McD’s.   basically  conferring  additional  value  to  non-­‐location-­‐bound  FSAs. Cultural  preferences  follow  one  of  two  paths.  jazz.Chapter  9:    International  marketing   Theodore  Levitt    MNEs  should  not  worry  very  much  about  customizing  to  cultural   preferences.   dependable  goods  and  low  cost.  communication  and  travel  have  revolutionized  commerce  and  trade.  with  technology  guiding  the  change  to  homogenization   a.   1.  the  MNE’s  routines  and   recombination  capabilites)  that  count       .  as   well  as  in  downstream  activities  such  as  distribution  and  marketing  and  in   management  activities  in  general.  but  are  subject  of  continuous   change.  Levi     2.  there  are  always  equivalent   segements  in  other  markets  worldwide  that  allow  for  a  global  approach  satisfying  the   above  3  criteria:  quality.  Sony. Diffuse  to  other  groups  and  become  the  substance  of  global  trends. High  quality  and  low  cost  are  not  mutually  exclusive  objectives:   i.  converging  tastes  now  allow  companies  to  offer  globally   standardized  products.  and   strengthening  the  MNE’s  ability  to  deploy  and  exploit  such  non-­‐location-­‐bound   FSAs.  harnessing  economies  of  scale  to  deliver  high-­‐quality.e.  pepsi.   a.  institutional  or  spatial  distance.  Technology  has  largely  homogenized  consumer  preferences  –  most  consumers   simply  want  quality. Building  on  point  1.       This  warning  acts  as  a  reminder  that  even  when  adopting  a  global  approach  to   marketing.  MNEs  should  focus  on  offering   such  products  and  services.  pitta  bread.   The  key  is  standardized  products  that  allow  for  economies  of  scale  in  production.  coke.       Levitt  sees  the  multi-­‐centered  MNE  being  gradually  replaced  by  centralized  exporters   and  international  projectors     -­‐ Technology.  MNEs  should  standardize  their  products  and  services   worldwide  in  order  to  achieve  economies  of  scale. They  represent  complementary  goals  achievable  through   innovation  &  efficiency.  it  is  effective  organization  and  implementation  (i.       No  matter  how  small  or  niched  a  product  area  may  be.  and  should  implement  global  strategies   across  all  markets.   i.  irrespective  of  cultural.

  -­‐ 10-­‐20%  of  US  expatriates  actually  came  back  home  early  because  of   dissatisfaction  or  disillusionment  and  difficulties  to  a  new  foreign  culture   -­‐ >30%  did  not  meet  senior  management  expectations   -­‐ Of  those  who  completed  25%  ended  up  leaving  the  company       Black  &  Gregersen’s  attribute  these  unfavourable  outcomes  to  4  common  problems  in   how  firms  manage  their  expatriates.   1.     Managers  commanding  deep  knowledge  of  internal  MNE  functioning  represent  the   MNE’s  key  resource  to  facilitate  international  expansion  and  to  coordinate   geographically  dispersed. Senior  managemnt  in  many  MNEs  view  expatriates  as  being  well  paid  and  well   looked  after. Senior  managers  in  the  home  country  often  underestimate  the  impact  of  cultural   distance  on  organizational  functioning  and.  do  not  invest  sufiecient  in   programmes  to  select  and  train  properly  potential  candidates. Many  MNEs  mistakingly  assume  that  expatriates  do  not  need  help  readjusting   after  having  returned  home.  This  is  critical  to  the  MNE’s  long-­‐term   profitability  and  growth.  as  well  as  the  abilities  to  transfer  routines  abroad  and  be   catalyst  for  recombining  resources.     -­‐ It  also  gives  managers  valuable  experiential  knowledge  of  the  pressure  for  good   faith  local  prioritization  and  other  types  of  benevolent  preference  reversal  in   affiliates. Responsibility  for  expatriates  is  often  assigned  to  human  resources  managers.       Expatriation  is  the  most  direct  and  rigorous  way  to  give  managers  this  in-­‐depth  knowledge   of  the  MNE’s  internal  network.     o Which  will  reduce  bounded  rationality  problems     Black  &  Gregersen’s  paper  describes  the  alarming  findings  that  nearly  80&  of  all  mid-­‐   to  large-­‐sized  MNEs  send  managers  abroad  at  a  significant  cost  to  the  company.   very  few  of  whom  have  an  y  international  experience     a.  as  a  result.  especially  in  an  era  when  foreign  markets  are  becoming   increasingly  important  contributors  to  innovation  and  cost  reduction  at  the  upstream   end  of  the  value  chain.   Chapter  10:  Managing  managers  in  the  multinational  enterprise   MNEs  must  develop  managers  with  a  broad  mental  map  covering  the  entirety  of  the   MNE.  despite  the  fact  that  changes  will  likely  have   occurred  during  their  absence.  and  to  overall  sales  performance  at  the  downstream  end.   little  insight  in  the  problems  faced  and  how  they  remedy  them.  and  therefore  as  having  little  to  complain  about   4.s  geographically  dispersed  operations.   3.           .     2.  established  operations.  such  managers  are  best  positioned  to     -­‐ Engage  in  the  international  transfer  of  non-­‐location-­‐bound  FSAs  from  the  home   nation   -­‐ Identify  the  need  for  new  FSA  development  in  host  countries  and  facilitate  such   development   -­‐ Help  combine  location-­‐bound  and  non-­‐location  bound  FSAs.

 Successful  companies  look  for  five  characteristics:   1.Black  &  Gregersen’s:  when  it  comes  to  successfully  managing  expatriate  managers. Carefull  planning  on  these  issues  yield  more  long-­‐term  benefits  to  both  the   company  and  the  employees  than  expatriate  assignments  simply  geared   towards  filling  a  staffing  shortage  or  business  need  abroad.  there   are  3  best  practices. Cross-­‐cultural  abilities  are  often  overlooked  as  companies  tend  to  send   people  who  are  ‘capable  but  culturally  illiterate’    effective  resource   recombination  requires  a  mix  of  technical  and  social  skills   3. Cosmopolitan  orientation   5. Devote  substantial  attention  to  reintegrating  expatriates  into  their  home   country  after  their  assignment   i. Prepare  people  to  make  the  transition  back  to  their  home  offices   a. Both  senior  management  in  the  expatriate’s  home  country  and  the   individual  sent  abroad  share  a  clear  understanding  of  the  expatriation’s   purpose  and  related  expectations. A  drive  to  communicate   2.       2. Make  sure  that  candidates  have  cross-­‐cultural  skills  to  match  their  technical   abilities   a.   b. Such  a  process  allow  effective  absorption  of  the  former  expatriate   into  the  home  country’s  professional  and  personal  environment       The  authors  suggest  that  it  is  the  simultaneous  adoption  of  all  3  practises  that  leads  to   successful  expatriate  management. Focus  on  creating  knowledge  and  developing  global  leadership  skills   a. Cultural  flexibility   4.     1. Collaborative  negotiation  style       PART  3:  Dynamics  of  global  strategy     Chapter  11:  Entry  mode  dynamics  1:  Foreign  distributors     Chapter  12:  Entry  mode  dynamics  2:  Strategic  alliance  partners       Chapter  13:  Entry  mode  dynamics  1:  Mergers  and  acquisitions       Chapter  14:    The  role  of  emerging  economies     Chapter  15:  Emerging  economy  multinational  enterprises   Chapter  16A:  International  strategies  of  corporate  social  responsibility   Chapter  16B:  International  strategies  of  corporate  environmental  sustainability               .  Black  &   Gregersen  also  discuss  the  required  personal  characteristics  for  employees  to  be  high-­‐ potential  expatriate  prospects.     i.  adopting  only  one  or  two  of  the  practices  does  not   suffice  to  achieve  successful  assignments       In  addition  to  outlining  the  appropriate  way  to  manage  expatriate  employees. What  types  of  knowledge  should  be  acquired  etc. Broad-­‐based  sociability   3.