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Aharoni - Insights into the Future of International Business

MNEs perceived as new forms of colonialism and as an arm of american hegemony in

the 60s. SINCE THE 80s MNES have been increasingly recognized as the prime
engine of economic development. Their potential to inject capital without debt
servicing obligations create jobs and transfer technology enhance exports and raise
productivity became widely accllaimed in a knowledge based global economy.
Nations compete to get mnes to locate value added activities within their borders. Gov
encourage home based mnes. New mnes are being spawned at earlier stages of a firms
evolution than before born globals. Mnes seek to collaborate in strategic alliances
rather than seeking to be stand alone superstars. Many innovations by mnes stem from
subsidiaries rather than from headquarters. Patent protection important.
Many theories turned out to be true for manufacturing but not for services. Mnes
possess a firm specific exploitable factor that creates oligopolistic advantage.
According to porter when competition in each nation is independent then the industry
is multi domestic. In global industries firms are compelled to compete internationally
to achieve or sustain competitive advantage. Most professional services many
domestic firms operate alongside of a few multinationals. International business is
about how firms behave and how managers of firms decide. The firm learns and it is
operating within an environment mnes are heterogeneous. Ib theory does not have
the ability to predict the future. Research and development is now globally organized.
Mnes are also political actors, extering more political power than some governments.
Researchers may find it rewarding to look at the outlier rather than search for central
tendencies in a population of mnes. The outlier changes the rules of the game and may
achieve immutable and sustainable high profits.
Johanson The Internationalization Process of the Firm A model of knowledge
development and increasing foreign market commitments.
A model of the internationalization process of the firm is developed. The model
focuses on the gradual acquisition integration and use of knowledge about foreign
markets and operations and on the incrementally increasing commitmnts to foreign
markets. In particular, attention is concentrated on the increasing involvement in the
individual foreign country.
The characteristics of the process influence the pattern and pace of
internationalization of the firm. A model of the internationalization process of the firm
that focuses on the development of the individual firm and particularly on its gradual
acquisition, integration and use of knowledge about foreign markets and operations
and on its successively increasing commitment to foreign markets. The basic
assumptions of the model are that lack of such knowledge is an important obstacle to
the development of international operations and that the necessary knowledge can be
acquired mainly through operations abroad. Two directions of internationalization
increasing involvement of the firm in the individual foreign country and successive
establishent of operations in new countries. This paper concentrates on the extension
of operations in individual markets.
Internationalization is a series of incremental decisions.
Based on empirical observations from studies in international business at the
university of uppsala shows that swdish firms develop international operations in
small steps rather than by making large foreign production investments at single
points in time. Start by exporting to a country via an agent, later establish a sales

subsidiary and eventually begin production in the host country. The time order seems
to be related to the psychic distance between the home and the host countries. Defined
as the sum of factors preventing the flow of information from and to the market.
Language, education culture development.
Changes in the firm and its environment expose new problems and opportunities.
Lacking routines for the solution of such sporadic problems the concerns management
searches in the area of the problem.
Internationalization decisions have an incremental character due to lack of market
information and the uncertainty occassioned thereby. Lack of knowledge due to
differences between countries with regard to for example language and culture is an
important obstacle to decision making connceted with the development of
international operations. Information about markets and operations in those markets.
Market knowledge and market commitment are assumed to affect both commitment
decisions and the way current activities are performed. These in turn change
knowledge and commitment.
The firm strives to increase its long term profit which is assumed to be equivalent to
growth, the firm also strives to keep risk taking at a low level. These strivings are
assumed to characterize decision making on all levels of the firm. The state of
internationalization affects perceived opportunities and risks which in turn influence
commitment decisions and current activities.
Market commitment amount of resources committed and the degree of commitment.
Resources can often be considered a commitment to that market. Vertical integration
means a higher degree of commitment than a conglomerative foreign investment. The
more specialized the resources are to the specific market vertical integration is more
commitment than a conglomerative foreign investment. The resources located in the
particular market are most committed to that market, the other part of market
commitment amount of resources committed is easy to grasp. It is close to the size
of the investment in the market, including investment in marketing, organization,
personnel and other areas.
Knowledge isof interest because commitment decisions are based on several kinds of
knowledge. Knowledge of opportunitis or problems initiates decisions. Knowledge
relates to the present and future demand and supply.
Experiential knowledge is the critical kind of knowledge in the present context,
because it cannot be so easily acquired as objective knowledge. In domestic
operations we can rely on lifelong basic experiences to which we can add the specific
experiences of individuals, organizations and markets. General knowledge concerns
marketing methods and common characteristics of certain types of customers. The
market specific knowledge is about characteristics of the specific national market, its
business climate, cultural patterns, structure of the market system and characteristics
of the individual customer firms and their personnel.
Certain kind of operationr requires both general knowledge and market specific
knowledge. Market specific knowledge can be gained mainly through experience in
the market, there is a direct relation between market knowledge and market
commitment. It could be argued that experience could be gained alternatively through
the hiring of personnel with experience or through advice from persons with
The decision to commit resources to foreign operations. Depends on what decision
alternatives are raised and how they are chosen. Decisions are made in response to
perceived problems and or opportunities on the market. This is awareness of need and
possibilities for business actions are dependent on experience. If market conditions

are very unstable experience cannot be expected to lead to decreased uncertainty. If

market conditions are homogenous, experience is probably not a necessary
requirement for market knowledge. Under such market conditions an optimal scale of
operations can be chosen from the beginning. Market uncertainty can also decline as a
consequence of a competetitive or political stabilization of market conditiosn.
Large increases in the scale of operations will only take place in firms with large
resources or in firms which feel little uncertainty about the market. Uncertainty
reducing commitments. Market uncertainty can be expected to rise as a consequence
of experience in a dynamic market environment showing that the original perception
of the market was too simple. It may also rise because of a structural change in market
Increases in market uncertainty due to political changes cannot be expected to lead to
the uncertainty reducing commitments discussed here since such commitments cannot
be expected to affect the political situation.
Additional market commitments will be made in small steps unless the firm has very
large resources and or market conditions are stable and homogenous, or the firm has
experience from other markets with similar conditions. Market experience will lead to
a stepwise increase in the scale of the operations and of the integration with the
market environment where steps will be taken to correct imbalance with respect to the
risk situation on the market. Market growth will speed up this process.
Johanson The Uppsala internationalization process model revisited: From liability
of foreignness to liability of outsidership.
The Uppsala model revisited in light of changes in business practices and theoretical
advances that have been made since 1977. Now the business environment is a web of
realtionships, a network rather than a neoclassical market with many independent
suppliers and customers. Outsidership in relation to the relevant network, more than
psychic distance is the root of uncertainty. The change mechanisms in the revised
model are essentially the same as those in the original version, although we add trust
building and knowledge creation, the latter to recognize the fact that new knowledge
is developed in relationships.
Markets are networks of relationships in which firms are linked to each other in
various, complex and to a considerable extent invisible patterns. Hence insidership in
relevant networks I snecessary for successful internationalization. This indicates there
is a liability of outsidership. Relationships offer potential for learning and for building
trust and commitment both of which are preconditions for internationalization.
Internationalization starts in foreignmarkets close to the domestic market in terms of
psychic distance defined as factors that make it difficult to understand foreign
environments. Then companies would gradually enter other markets further away in
psychic distance terms. Originates in the liability of foreignness, explaining why a
foreign investor needs to have a firm specific advantage to more than offset this
liability. The larger the psychic distance the larger is the liability of foreignness.
Underlying assumptions of upsala are bounded rationality and uncertainty. Two
change mechanisms, firms change by learning from their experience of operations
current activities in foreign markets. They change through the commitment decisions
that they make to strengthen their position in the foreign market. Product of the size of
the investment times its degree of inflexibility. While a large investment in saleable
equipment does not necessarily indicate a strong commitment, unwavering dedication

to meeting the needs of customers does. Experience builds a firms knowledge of a

market, and that body of knowledge influences decisions about the level of
commitment and the activities that subsequently grow out of them. Commitment may
decline or even cease if performance and prospects are not sufficiently promising.
Learning and commitment building take time, explaining why moves are more risky
but potentially rewarding modes and moves into markets that are more distant in
terms of psychic distance are mae incrementally. Behavioral uppsala
Economic internalization and transaction cost and eclectic.
Model of rational internationalization.
The role of networks in the internationalization of firms is apparent. In small software
firms network relationships impact foreign market selection as well as mode of entry .
the interorganizational relationships of suppliers especially with buyers affects their
pattern of international expansion. Focus on business networks as a market structure
in which the internationalizing firm is embedded and on the corresponding business
network structure of the foreign market. Relationship development is a bilateral
process tha tinvolves two parties who learn interactively and make a mutual
commitment to the relationship. The importance of mutual commitment for
internationalization internationalization requires a reciprocal commitment between
the firm and its counterparts. A working relationship is the result of considerable
investment and is an important firm resource. Relationships are socially constructed.
The larger the psychic distance the harder it is to build ne relationships firms involves
in a different close an lasting relationship with important suppliers and customers.
Firms operate in networks of connected business relationships connected means
exchange webs of connected relationships are labeled business networks. The firm
amy create new knowledge through exchanges in its network of interconnected
relationships. Knowledge creation is an outcome of the confrontation between
producer knowledge and user knowledge. The process of creating knowledge is not
separate from the other activities in business relationships: it is embedded in them.
Knowledge does not accrue only from the firms own activities but also from the
activities of its partners.
Thus a network of business relationships provides a firm with an extended knowledge
base. Resources are heterogenous and lead to value creation. Exchange within a
network allows a firm to acquire knowledge about its relationship partners including
their resources needs capabilities strategies and other relationships. The value of
production is derived from exchange. Johanson and mattson developed netowrk
model of internationalization based on business network research. Importance of
business relationships in a firms internationalization though it lacks dynamic
elements. Conceptual input for our work on the mechanism of internationalization in
which we view internationalization as a multilateral network of development process.
The essential elements of the internationalization process. Insidership isnecessary but
insufficient condition for successful business development.
A firm without a position inside a relevant network is an outsider. Outsidership makes
it impossible to develop a business. A firms environment is made up of networks and
this has implications for the ways in which we think about learning, building, trust
and development commitment.
Developing knowledge is fundamental to a firms internationalization, and it grows out
of experience in operations. Learning by experience results in a gradually more
differentiated view of foreign markets and of the firms own capabilities. Foreign entry
should be viewed as a position building process in a foreign market network,
complexities associated with learning when a firm enters a foreign market network.

Firms have to identify the relevant market actors in order to determine how they are
connected in often invisible complex patterns. These patterns can be identified only
by the actions of the entering firm, which causes other market actors to reveal their
ties to each other.
Lack of institutional market knowledge about language laws and rules relates to
psychic distance and liability of foreignness. Lack of business market knowledge
relates to the firms business environment. This lack of market specific business
knowledge constitutes the liability of outsidership. General market knowledge may be
transferred between organizational units. Knowledge about internationalization is
positively related to variations in the experiences a firm has in different markets.
Relationships specific knowledge, developed through interaction between the two
partners and includes knowledge about each others heterogeneous resources and
capabilities. The interaction contributes to more general knowledge about
international relationship development. Variations in te character of relationships may
have a positive impact on the development of general relationship knowledge. The
importance of business network coordination suggests that learning how to coordinate
sets of relationships is important. Causal relation between experiential learning and
resource commitment. Trust can also substitute for knowledge when a firm lacks the
necessary market knowledge. Trust also assumes that human behavior is characterized
by high ethical standards. Trust may develop into commitment if there is willingness
and positive intentions. Thus trust is a prerequisite for commitment a conclusion
that is consistent with the results obtained by morgan and hunt. If trust does not lead
to commitment it implies that there is a desire to continue the relationship a
willingness to invest in it, even recognition of the necessity of making short term
sacrifices that benefit another for reasons of long-term interest for oneself.
Dependency is an unavoidable by product of a beneficial relationship. Trust building
is a costly and time consuming process. Commitment is developed late in the process.
Market commitment and market knowledge affect perceived opportunities and risks
which in turn influence commitment decisions and current activities. The commitment
to a market affects the firms perceived opportunities and risk. Knowledge of
opportunities or problems is assumed to initiate decisions. Model is risk reduction or
avoidance model. Implies reisk management. Opportunities exist in the market
because markets are never in equilibrium. Opportunity recognition involves
discovering the hitherto unknown the result of entrepreneurs being alert and
prepared for surprises. Opportunitiy recognition is associated with ongoing business
activities rather than specific opportunity seeking activities. Prior knowledge makes
individuals better at discovering someopportunities which means that opportunity
seekers should concentrate on what they know, rather than on what others say. The
firm does not have any privileged knowledge about external resources required for
identifying an opportunity. The firm should focus its opportunity analysis on its own
internal resources. Heterogeneity and unavailability of information market research
may be unable to identify many of the opportunities that insiders can. Exploitation
breeds exploration at least for the type of opportunities induced by the market.
Exploitation is risky, risk can be reduced by progressing in small steps and building
successive commitments. The major portion of knowledge in international firms is
local, deposited in local subsidiaries.
Opportunity discovery assumes there are opportunities in the market waiting to be
recognized and opportunity creation assumes that the opportunity is created and
realized by one of the firms. Opportunity development is an interactive process
characterized by gradually and sequentially increasing recognition and exploitation of

an opportunity with trust being an important lubricant. The process of opportunity

identification and exploitation in the network perspective is very similar to the
internationalization process and to the relationship development process.
Companies sometimes leapfrog over stages in the establishment chain, start to
internationalize soon after birth. Moreover joint ventures and strategic alliances are
more commonly used today. And acquisitions.
Environmental changes such as globalization rapid technological change and
deregulation force companies to enter into alliances and joint ventures because no
single company owns all the resources required to exploit larger and continuously
changing markets. The firm is embedded in an enabling and same time constraining
business network that includes actors engaged in a wide variety of interdependent
relationships. Internationalization is seen as the outcome of firm actions to strengthen
network positions by what is traditionally referred to as improving or protecting their
position in the market. As networks are borderless the distinction between entry and
expansion in the foreign market is less relevant given the network context of the
revised model.
Business netowrks allows firms to build on their respective bodies of knowledge
making it possible for them to discover and or create opportunities. We believe that
internationalization is contingent more on developing opportunities than on
overcoming uncertainties, concerning institutional conditions in the foreign market.
Knowledge opportunities relationship commitment decision learning creating trust
building network position.
The speed intensity and efficiency of the process of learning creating knowledge and
building trust depend on the existing body of knowledge, trust and commitment. And
particularly on the extent to which the partners find given opportunities appealing
Furthermore high levels of knowledge trust and commitment in a relationship result in
a more efficient creative process. The interplay between processes of learning creating
opportunities and building trust is described by ghosal.
Expect the focal firm to go abroad based on its relationships with important partners
who are committed to developing the business through internationalization. The firm
is likely to follow a partner abroad if the partner firm ahs a valuable network position
in one or more foreign countries.
Thus the internationalizing company goes where the focal firm and its partners see
opportunities. A foreign market in which the partner has a strong position is another
possibility. No valuable partners it may go where it might be easy to connect with a
new firm that already has a position in the foreign market. Link itself to a middleman
such as an agent or a distributor. Then eventually after establishing relationships with
customers it may bypass the middleman and establish its own subsidiary. Short
psychic distance will facilitate the establishment and development of relationships
which is a necessary but insufficient condition for identification and exploitation of
Process model implies that we should look for explanations in the state variables such
as knowledge, trust or commitment to the firms specific relationships. The focal firm
amy exploit some of its existing connections by using the trust that a partner has
established with another party. Increased knowledge may cause either the focal firm
or its partner to become dissatisfied with the relationship. Either firm may then decide
to decrease its commitment.

International firm has access to one or more specific advantages. Whilelocation

specificity does matter, established relationships offer a firm specific advantage
worthy of attention. Oli paradigm includes strategic alliances and broad network
relationships. Firm specific advantage has a direct impact on internationalization and
an indirect impact on performance. Organizational learning moderates the effect of
internationalization on performance. Business relationships provide a firm with an
extended and unique ressource base that it only partially controls. Furthermore,
exploiting the potential of such an extended ressource base requires that the firms own
resources be coordinated with those of one or several of its partners. The goal of
business network coordination is joint productivity of a set of relationship aprtners
which is difficult to implement as it involves coordinating the partners activities.
When partners operate in different countries, cross country business network
coordination is also needed and is more difficult still. International business network
coordination will become an increasingly important phenomenon with strong
implications for firm specific advantage as well as for internationalization. A firms
problems and opportunities in international business become less a matter of country
specificity and more one of relationship specificity and network specificity. The
problems associated with foreign market entry are largely the same as those
associated with entry into any other market.
Kumar The Case of Hindalco
The Hindalco Flagship company is one of the oldest most diversified family
businesses. 19 joint ventures in the 70s, which laid the foundation for the groups
global ambitions. In 1999 became one of the worlds biggest manufacturers of cement,
carbon black and viscose staple fiber. By then Hindalco was indias largest aluminum
producers 40% of the market. Pursued a two pronged strategy, it would generate
economies of scale in the aluminum manufacturing business by setting up projects in
india and it would use cross border acquisitions to break into the product market i.
Hindalcos management doesnt beieve in short term integration plans, it allows the
postmerger process to evolve naturally and rarely intervenes. By the time the
company bid for novelis it had developed a simple four step process to help meet its
initial postmerger objectives. The steps are standard ones relating to finance
organizational issues, business processes and markets but the indian company
prioritizes them in a unique way.
Hymer The International Operations of National Firms: A study of Foreign Direct
The enterprise may be a joint venture, or unequal partnership. There may be a
licensing agreement or cartel. Tacit collusion among enterprises is possible. The
relationship then is very real just not overt form. The amount of control one enterprise
has over another that is the extent to which decisions of one enterprise is affected by
the other enterprises. The percent of equity of a corporation owned by another
It is sometimes profitable to control enterprises in more than one country to remove
competition between them. Some firms have advantages in particular activities and
may find it profitable to exploit these advantages by establishing foreign operations.
Barrier to international operations arising from discrimination by government

consumers or suppliers. The foreign must forego costs to acquire information about
new countries.
The fact of high negative correlation means that an investor who invests both in
aluminum plants and in their power supply greatly reduces the risk of his investment.
This may be one reason why firms will engage in both activities. The shareholders can
stabilize their profits by buying shares of two different companies each engaging in
only one of the activities.
The main reason why a firm may do it is that it has more information. There are many
firm advantages such as acquriing factor sof production at a lower cost or have
knowledge or control of a more efficient production function or better distribution
facilities or a differentiated product. The advantages that a firm possesses relative to a
firm of its own country may be quite different from the advantage it possesses relative
to firms of another country. It may have advantages in a certain industry, the strength
of the advantages of a particular firm are usually less abroad than at home.
Cost advantage to established firms: control of production techniques via patents or
secrecy. Imperfections in the markets for hired factors of production allowing lower
buying prices to established firms. Significant limitations of the supplies of productive
factors in specific markets, relative to the demands of an efficient entrant firm. Money
market conditions imposing higher interest rates upon potential entrants than upon
established firms. Product differentiation advantage accumulative preference of
buyers for established brand names, control of superior product designs by established
firms through patents permitting either exclusion of entrants from them or the levying
of discriminatory royalty charges. Ownership or contractual control by established
firms of favored distributive outlets. Discouraging entry by sustaining economies of
large scale firm real economies of large scale production supplying significant share
of market, strict pecuniary economies, real or strictly pecuniary economies of large
scale advertising.
Firms may not opt for foreign operations if they can license, rent or otherwise sell its
advantage. Soome firms have subs in some countries and licenses in others.
Decentralized decision making is defective when there are certain types of
interactions between the firms,. If each firm pursues its own interest joint
maximization may well not occur. The problem can be alleviated by central control
and ownership. Common ownership is an attempt to maximize joint rather than
individual profits. The problem of licensing arises from the difficulty of controlling
price and output. To achieve maximum profits, a firm which licenses must specify the
precise use to each firm, this is not always possible under anti trust laws. If the firm is
prohibited by the government from establishing a foreign subsidiary then it has no
choice but to license if it is to get any revenue at all. The exchange rate risk is always
present if the firm undertakes the operation itsef. It is interesting that some companies
ebgin by licensing, then acquire minority interest and ultimately acquire control. The
sequence can also work in the opposite direction. The firm may operate abroad where
it would license at home because there are no local firms to license to. This is
especially likely in underdeveloped countries. The firm can discriminate between
markets through licensing arrangements without itself establishing foreign operations.
Hennart Theories of the Multinational Enterprise
This provides a survey of the theories souht to explain why mnes exist with special
emphasis on transaction costs/internalization. Mne is a private institution devised to

organize through employment contracts interdependencies between individuals

located in more than one country. There is no exact match between FDI and the
growth of MNEs. Differences in real interest rates provides neither a necessary nor a
sufficient reason for the existence of mnes. Fdi measures the export of capital from
one country to the rest of the world. Neither interest rate theory nor portfolio variant
explains the existence of mnes.
Hymers theory of the mne brought focus from the nation to the firm. The crux of
hymers theory was that mnes were instruments by which competitors reduced
competition in industries where large barriers to entry had created and were sustaining
local monopolies. Mnes were internalizing externalities due to competition on
markets for final products. As firms compete with one another they lower the price
they can charge consumers. An mne is only one way of internalizing pecuniary
externalities. Cartels or tacit collusion was also common. Strategic interaction has
been incorporated into transaction cost models. Hymer saw mnes as internalizers of
pecuniary externalities due to structural market imperfectins. Markets are not
perfectly efficient and suffer from natural market imperfections as well. These
imperfections arise because agents are boundedly rational and opportunistic
economic agents do not always know prices, they cannot always trust each other.
High natural market imperfections the expansion of firms across national boundaries
may be a more efficient way to internalize these non-pecuniary externalities.
Internalizing these non-pecuniary externalities is a positive sum game in which both
producers and consumers gain. This is the transaction cost internalization theory of
mne. Transaction cost theories seek to explain why mnes organize international
interdependencies that could also be handled by markets. Many cases of foreign
expansion can be explained by the high cost of using the market when property rights
are imperfectly defined and enforced. Transaction cost theory focuses on the problem
of organizing interdependencies between individuals. These individuals can generate
rents by pooling together different or similar capabilities. Transaction cost theory
argues that firms arise when they are the most efficient institution to organize these
interdependencies. Mnes thrive when they are more efficient than markets and
contracts in organizing interdependencies between agents located in different
countries. Because economic agents suffer from cogntive limitations or bounded
rationality and because some of them are opportunistic organizing this cooperation
will incur positive information, enforcement and bargaining costs. These are called
transaction costs.the basic argument of transaction cost theory is that the cost of
organizing a given transaction varies with the method of organization chosent o
organize it. This is because each of the two methods of organization the price system
and hierarchy experience different levels of costs for a given transaction. The price
system focuses on outputs, which convey to all agents the value of goods and
services. Bounded rationality and opportunism makes markets less than perfectly
efficient. Agents will sometimes be unable to define and measure property rights and
therefore prices will not convey an accurate estimate of the value of goods
andservices. Agents will find it sometimes difficult to measure output, so that money
will have to be spent to enforce traes or there will be some residual amount of
cheating. Agents will also engage in bargaining when there is an insufficient number
of buyers and seller.s the price system is heavily dependent on the definition and
measurement of outputs in all their dimensions. If some dimensions are not measured
then agents will be incited to maximize the measured dimensions at the expense of the
non-measured and hence non-rewarded. The behavior of some market participants

who take advantage of measurement difficulties to overprice and underperform.

Hierarchy replaces the ouput constraints of markets by behavior constraints. They can
be external or internal. This focuses on rewarding agents based on behavior instead of
on output. The relationship by which agents agree to do as told in exchange for a
salary is called the employment contract and the agent is an employee. This allows the
boss to direct the behavior of the agent so as to produce more goods. Naturally the
former transactors will only let the boss direct their behavior if their reward becomes
independent of the specific transaction. The extent of shirking will depend on the cost
of imposing internal or external behavior constraints. The cost is likely to vary across
activities and time periods. Controlling shirking through observation or bureaucratic
rules is easy when behavior is a good guide to performance. Firms also differ from
markets in the way they handle information. In firms agents rely on prices to know
what to do. Prices give them much of the information they need to carry on their
business. Firms mostly rely on hierarchy while markets rely on prices. Why would
institutions use simultaneously both methods of organization. Increased investments
in setting up ever more sophisticated behavior or output constraints will have the
same consequences. Additional behavior constraints over monitoring and
micromanaging will result in less shirking. Contracts add a superstructure of behavior
constraints on what are basically output constraints. Consider franchising franchisers
get to keep the bulk of what they make, but the difficulty of pricing the impact of their
behavior on the goodwill capital of the franchise chain has led franchisors to impose a
set of behavioral constraints.
An mne will expand abroad by organizing interdependencies thorugh hierarchy when
it can organize interdependencies between agents located in different countries more
efficiently than markets. This implies that three conditions must be met,
interdependent agents must be located in different countries, the mne must be the
most efficient ay to organize these interdependencies and the costs incurred by mnes
to organize these interdependencies are lower than the benefits of doing so.
Know-how most applications of transaction costs focus on international
interdependnecies involving knowhow. Know how developed in one country is often
useful in others and can be transferred at a low marginal cost. Markets for know how
suffer however from the fundamental problem of information asymmetry. Bthe patent
system makes it possible to disclose knowhow to potential buyers without losing
property rights to it. Buyers and sellers of knowledge will form an mne and put their
behavior under the control of a central party charged with maximizing their joint
income. The markets for know how is internalized.
Reputation sharing of reputation can be organized through franchising contracts or
within an mne. Franchising contracts typically stipulate that agents pay a royalty on
sales for the use of the franchisors trademark and agree to subject themselves to the
franchisors behavior constraints. Free riding is the main problem with franchising.
International interdependencies in know how and reputation go a long way to explain
mnes in services.
Raw materials and components interdependencies involving raw materials and
components arise when different stages of the value chain are optimally handled by
different agents located in different countries. This occurs when the optimal location
of component manufacture differs from that of assembly. The alternative to contracts
is to have buyers and sellers become employees of the same firm. Employees are paid
to facilitate transfers and no longer benefit from holding up their partners. The
expansion of mnes proceeds generally in the absence of advantages.

Distribution and marketing selling a product in a foreign market generally requires

physical and as well as intellectual investments. These investments can be small and
general purpose or large and specific to a particular manufacturer. The market for
distribution services will be inefficient and thus internalized by firms if it is narrow.
This is due to the small number conditions ex ante or ex post. Ex ante small number
conditions are due to the economies of scale often characterizing distribution.
Distributors may be reluctant to make these investments fearing that they could be
held up by manufactuers.
At low levels of interdependence manufacturers will impose behavioral constraints on
service providers, or retailers on manufacturers. Imposing behavioral constraints
throughf ranchised distribution or contract manufacturing requires that quality
standards be contractually defined and enforced. When this is not the case
manufactuerrs and distributors will find it efficient to be joined within a mne, business
history provides considerable evidence of manufacturers integrating into foreign
distribution for products the quality of which could be affected by improper handling
and servie.
Financial capital financial capital raised in one country can often be profitably
invested in another. Temporarily granting property rights to money lending money is
fraught with special risks. As a protection lenders typically impose behavior
constraints on borrowers, through contracts yet in spite of this transaction costs of
lending are high. Given bounded rationality and opportunisim lenders cannot easily
distinguish honest borrows from dishonest ones. Three second best strategies lend to
those who are familiar, control how the funds are used and ask for collateral. These
strategies prevent many good projects from being funded especially if borrowers
reside in different countries. When domestic and international markets for loanable
funds are characterized by high transaction costs because of information asymmetry
and lack of collateral, the solution is for lenders and borrowers to be joined within a
firm then mnes rather than bank loans or bonds wil be used to transfer financial
capital across countries.
Transaction cost theory argues that mnes arise to organize interdependencies between
agents located in different countries. This occurs when organizing these
interdependencies within the firm is more efficient than organizing them through the
market and when the benefits of organizing interdependencies within the firm are
higher than their costs. The theory is based on a comparison of the cost of organizing
interdependencies in firms and in markets. Just looking at the costs of running
markets is not enough. Market failure is not a sufficient reason why mnes exist. It is
uite possible that the costs that both mnes and markets experience in organizing an
interdependency are higher than the gains. Firms can be more efficient than markets
by replacing output by behavior constraints. Improvements in business technology
that reduce the costs of running firms tend to increase the efficiency of mnes and the
role they play in the international economy. Interdependencies used to be managed by
markets now managed by mnes.
Buckley Is the International Business Research Agenda running out of steam?
Exlaining flows of FDI Hymer suggests that the international firm making entry into
a foreign market must possess an internally transferable advantage the control of
which gives it a quasi monopolistic opportunity to out compete local firms. Barriers to
trade and barriers which prevent host country firms from duplicating this advantage

mean that fdi is frequently the preferred form of exploiting this advantage in foreign
markets. The advantage enables the foreign entrant to overcome the innate advantage
of knowledge of the local market and business conditions possessed by indigenous
firms. Uppsala suggests an incremental approach to international involvement,
deepening involvement as the firm is pulled by market or cost attraction and pushed
by executive interest and learning. Fdi was seen at this stage as driven by external
circumstances somewhat unplanned and the coordinating and planning role of the
firm were not central to theorizing. The mne as an entity the internalization
approach has become the dominant paradigm for the analysis of the mne. By carefully
specifying the transactional costs and ebenfits of internalizing the external markets
which face particular firms in particular economic circumstances, predictions can be
made between internally and externally organized markets which fix the growth of the
firm. A firm will grow by internalizing imperfect external markets until it is bounded
by markets in which the transactions benefits of further internalization are outweighed
by the costs.
Dunning undertook a major systematizing effort in the formulation of his eclectic
theory three pillars of dunnings explanatory framework ownership location and
internalization advantages led to some interesting academic exchanges and empirical
developments but not a new research agenda. The rise of the global economy has been
an important element in the international business agenda since the 1980s. the
sporadic unplanned externally driven approaches to international strategic planning
needed to be superseded by more formal models of global strategy and the myriad
ways of doing international business particularly strategic alliances and international
joint ventures had to be captured by a holistic theoretical approach.
The role of culture the interplay of national cultures might augment transcend or
conflict with particular national cultural traits represents a research agenda with much
life left in it.
Anderson Modes of Foreign Entry: A Transaction Cost Analysis and Propositions
This paper offers a transaction cost framework for investigating entry mode decision.
The most efficient entry mode is a function of the tradeoff between control and the
cost of resource commitment. The firm faces a an array of choices including wholly
owned subsidiary, a joint venture, or a non equity arrangement such as licensing or
contractual joint venture. Classical approaches ephasize choosing the option offering
the highest risk adjusted return on investment in the feasible set. The role of control
ability to influence systems methods and decisions has a critical impact on the future
of the firm. Firm is required to coordinate actions and carry out strategies. Control is a
way to obtain a higher retrun. Control carries a high price, the entrant must assume
responsibility for decision making. Thus to assume control is also to assume some
forms of risk. Control is the most important determinant of both risk and return. High
control modes can increase risk and return. Low control modes minimize resource
commitment but often at the expense of returns. Tradeoff between control and cost of
resource commitments, flexibility and the ability to change systems is always
There are many ways to gain control and many variations within any one form of
entry mode. A minority partner might exercise influence out of proportion to
ownership. Wholly owned subs and majority shareholder are expected to offer highest
degree of contrl. Equal partnership are medium control modes.

The efficiency of an entry mode depends on four constructs that determine the optimal
degree of control transaction specific assets, external uncertainty, internal
uncertaintt and free riding potential.
The premise is that a low level of ownership is preferable until proven otherwise.
Firms are advised to avoid integration whenever the supplier market is competitive, to
have both high return and low risk. Competitive pressure is low then integration is
justified. Transaction specific assets of considerable value accumultate, these are
investments that are valuable only in a narrow range of transactions specialized to one
or a few users or uses.
When transaction specific assets are likely to become valuable transaction cost
analysis suggests that firms are better of either itnegrating the function or redesigning
takss so that general purpose assets will suffice
Modes of entry offering greater control are more efficient for highly proprietary
products or processes.high control is oftn employed for technically sophisticated
products which tend to have higher proprietary content than unsophisticated products.
Entry modes offering higher degrees of control are more efficient for unstructured
poorly understood products and processes.
Entry modes offering higher degrees of control are more efficient for products
customized to the user. Customized products demand considerable local knowledge
entrant must work actively with the local entity to tailor the product to the userpeople
intensive tasks are particularly ill structured, therefore customized business such as
banking should be dominated by high control entry modes.
The more mature the product class the less control firms should demand of a foreign
business identity. Newer technology is likely to be handled by a wholly owned
subsidiary. Specialized knowledge comes into the open market as the innovation
diffuses. Transaction specific assets associated with an innovation become general
purpose assets asociated with a well established product.
External uncertainty is the volatility of the firms environment. Firms should react to
volatility by avoiding ownership. Firms should retain flexibility and shift risk to
outsiders. This suggests the default option market contracting is unchanged by
volatility. Higher control entry modes should not be more effficient in volatile settings
than lower control modes. Given some degree of asset specificity control becomes
more desirable as uncertainty increases. External uncertainty is country risk, political
instability etc.
Transaction cost analysis suggests that in volatile environments entrants are better off
accepting low control entry modes. This avoids resource commitments freeing entrant
to change partners as circumstances change. Low control maintains flexibility. The
greater the combination of country risk and transaction specificity of assets the higher
the appropriate degree of control. Internal uncertainty exists when the firm cannot
accurately assess its agents performance by objective readily available output
measures. Uncertainty internal to the firm makes control more desirable regardless of
the level of asset specificity.
The entrants degree of control of a foreign business entity should be positively related
to the firms cumulative international experience.
The larger the foreign business community in the host country the lower the level of
control an entrant should demand.
Entry modes offering higher degrees of control are more efficient the higher the value
of the brand name.

Cantwell The Location of MNE R&D Activitiy: The Role of Investment Incentives.
Mnes have been consolidating the activities of their subsidiaries granting wide
strategic mandates to some while scaling back on activities of others. One
consequence of this consolidation is that considerable efforts are now being expended
by government inward investment agencies in seeking MNE subsidiaries with broad
mandates. Subs with strong r&d are the type of firms the govs wish to attract.
However the successful r&d subs require the location to have a rich resource base.
The increasing consolidation of investment activity by mnes. Rationalising overall
operations and siting particular activities to take advantage of local advantages. This
has also increased the mobility of fdi by mnes as firms have sought to tailor their
investment profiles to take max advantage of local resources. Not all fdi is equally
valuable. The ideal investment consists of a single facility with regional and
preferable global research and development, production and marketing
responsibilities. Such a facility is a large employer with a highly skilled productive
and high wage workforce and a high level of local purchases to generate macro
multiplier effects. Many mne subsidiaries are far from this ideal. Subs are part of
larger corporate systems and from the perspective of the local area they can become
truncated and fail to embrace a wide range of corporate functions. Mne activity
follows a sequential pattern where successively higher level activities are performed
in foreign subsidiaries. From exporting to fdi with the objective of maximizing the
stream of firm profits. The sub may acquire a broad product or functional mandate.
The acquisition of a broad mandate by a sub substantially increases local benefits
from foreign owned investment. Not all r&d investment is equally attractive.
Historically mnes located r&d in their affilitates abroad for purposes of adaptation of
products to local tastes or consumer needs. Now increast affiliate r&d has gained a
more creative role to generate new technology in accordance with the comparative
advantage in innovation of the country in which the affiliate is located. R&d intensity
rises with the age of affiliates as the corporate life cycle unfolds. R&d intensive subs
are often granted more responsibilities. Competitively stronger mnes are more likely
to locate r&d abroad to have a greater variance in the levels of r&d across affiliates
with r&d becoming especially concentrated in sites where local conditions are most
conducive to technology creation. Localised technology creation and exchange will be
affected by the number and strength of indigenous competitors the form of linkages
with local firms the relevant host country governments policies towards sourcing
input and encouraging a higher local proportion in value added, local technological
capacity and infrastructure.
This paper focuses on the link between government investment incentives and the
location of r&d activities by mnes.
H1 government investment supports have a direct or primary effect on the mne r&d
investment location decision along with firm and location specific variables.
H2 government investment supports have an incremental or second stage effect on
mne r&d investment after accounting for firm and location specific factors.
An affiliate can contribute more creatively to technology generation within a
innovative network the better is the local infrastructure in the location in which it is
sited, which increases its potential skill base and local linkages with other innovative
firms and research institutions. Locations in which indigenous firms have an
innovative tradition will best attract firms from leading foreign centres in the industry
in question. Governments matter in the maintenance of such a regime. Significant
second order impact on the location of r&d within mnes. Tax credits have an

important incremental effect on the loction of r&d encouraging mnes to upgrade

somewhat the technological role expected of the local affiliate in their international
network. Conclusion governments have a twofold influence on the location of r&d
in mnes international networks for innovation. First they affect the climate for
innovation in the host country and form the local linkages between science and
technology. Second their more specific policy measures for corporate r&d and the
attraction of foreign owned mnes can encourage some upgrading at the margin in the
types of operations that mnes site locally.

Dunning The eclectic paradigm as an envelope for economic and business theories
of MNE activity.
The eclectic paradigm has remained the dominant analytical framework for
accommodating a variety of operationally testable economic theories of the
determinants of fdi and foreign activities of mnes. The eclectic paradigm is a simple
yet profound construct. It posits that the extent geography and industrial composition
of foreign production is determined by the interaction of ownership location and
First the competitive advantages of the enterprises seeking to engage in fdi which are
specific to the ownership of the investing enterprises. The greater the competitive
advantages of the investing firms relative to other firms the more they are likely to be
able to engage in or increase their foreign production.
The second is the locational attractions of alternative countries or regions for
undertaking the value adding activities of mnes. This sub paradigm avers that the
more the immobile natural or created endowments favor a presence in foreign rather
than domestic location the more firms will choose to agument or exploit their o
specific advantages by engaging in fdi.
The third sub paradigm offers a framework for evaluating alternative ways in which
firms may organize the creation and exploitation of core competencies given the
locational attractions of different countries or regions. Such modalities range from
buying and selling goods and services through a variety of inter-firm non-equity
agreements to the integration of intermediate product markets and an outright
purchase of foreign corporation.
Therefore the greater the net benefits of internalizing cross border intermediate
product markets the more likely a firm will prefer to engage in foreign production
itself rather than license the right to do so by a technical service or franchise
agreement to a foreign firm. The eclectic paradigm further asserts that the precise
configuration of the OLI parameters facing any particular firm and the response of the
firm to that configuratin is strongly contextual.
Four main types of foreign based mne activity:
That designed to satisfy a particular foreign market market seeking
That designed to gain access to natural resources resource seeking
That designed to promote a more efficient division of labor rationalized or
efficiency seeking.
That designed to protect or augment the existing o specific advantages of the
investing firms strategic asset seeking fdi.

The maturation of the knowledge based economy, the deepening integration of

international economic and financial activity including that fostered by electronic
networks, the liberalization of cross border markets and the flotation of the world
major currencies and the emergence of several new countries as important new
players on the global economic stage. In explaining the growth of international
production this is dependent on the investing firms possessing some kind of unique
and sustainable competitive advantage reative to those possessed by their foreign
O specific competitive advantages those relating to the possession and exploitation
of monopoly power creating some kind of barrier to entry to final product markets by
firms. those relating to the possession of a bundle of scarce, unique and sustainable
resources and capabilities which essentially reflect the superior technical efficiency of
a particular firm relative to those of its competitors. Stem from some kind of barrier
to entry to factor or intermediate product markets by firms not possessing them.- those
relating to the competencies of the managers of firms to identify evaluate and harness
resources and capabilities from throughout the world and to coordinate these with the
existing resources and capabilities under their jurisdiction in a way which best
advances long term interests of the firm.
Incresing significance of fdi based on the possession of or need to acquire dynamic o
advantage. Rationalized or efficiency seeking fdi is only viable if the investing firm is
already producing in at least one foreign country and both intermediate and final
product ttrade is relatively unimpeded by natural or artifical cross border barriers.
Capabilities of firms to sustain and upgrade advantages, harness and influence the
quality and price of complementary asets and to efficiently coordinate these with their
own innovating competencies and their ability to locate their value added activities in
countries and region which offer the optimum portfolio of immobile assets both for
creating or acquiring new o specific advantages and for exploiting their existing
As with the resource based and evolutionary theories the objective of the decision
taker is assumed to be as much directed to explaining the growth of firm specific
assets as to optimizing the income stream from a given set of assets.
The eclectic paradigm has always recognized the importance of the locational
advantages of countries as a key determinant of the foreign production of MNEs.
Since the 1930s there have been numerous context specific theories of geographical
distributions of fdi and the siting of particular value added activities of firms.
The nature and composition of a country comparative advantage has traditionally
been based on ts possession of a unique set of immobile natural resources and
capabilities, but now is geared to its ability to offer a distinctive and non imitatible set
of location bound created assets including the presence of indigenous firms with
which foreign mnes might form alliances to complement their own core
competencies. Some nation states are not only increasingly dependent on cross border
activities of their own and foreign based corporations for their economic prosperity
but that the competitiveness of these corporations is becoming increasingly fashioned
by the institutional framework within which they operated.
Given that a firm has a set of competitive or o specific advantages and the immobile
assets of a foreign country are such as to warrant locating value adding or asset
augmenting activities there what determined whether such activities are undertaken by
the firms possessing the advantages. As long as the transaction and coordination costs
of using external arms length markets in the exchange of intermediate products,
information, technology, marketing techniques exceed those incurred by internal

hierarchies then it will pay a firm to engage in fdi rather than conclude a licensing or
another market related agreement with a foreign producer. The transaction costs of
using external markets tend to be positively correlated with the imperfections of those
markets. Whole range of market failures such as those associated with bounded
rationality and the provision of public and jointly supplied products and common
intangible assets and which permit opportunism information asymmetries uncertainty
economies of scale and externalities of one kind or another. Many cross border
mergers and acquisitions are undertaken to gain new resources or access new
capabilities markets or to lower unit costs of production gain market power. Second
critique of internalization theory is that it is static and gives little guidance as to how
best a firm may organize its activities to create future assets rather than optimize the
use of its existing assets.
As the international production by mnes ahs grown and taken on new patterns as the
world economic scenario has changed and as scholars have better understood the raisn
detre for fdi so new explanations of the phenomena have been put forward and
existing explanations have been modified andoccassionally replaced.
Dunning Multinational Enterprises and the global economy
The study of formal institutions thought to influence economic activity and growth at
the national level has thrown up some curious puzzles. Institutions are restrictive in
that they close off courses of actions that otherwise would be available by making
them excessively costly or reducing their value. Institutions do not impose constraints
on the actions of firms, they affect the cognition of managers and condition the
ossible behavioral paths that an mne might pursue. Mnes may have the ability to alter
the formal or informal incentive structures that affect their actions. The design and
implementation of incentive structures and enforcement mechanisms may be seen to
affect all three parts of the eclectic paradigm. O advantage institution, asset o
advantage and transaction o based advantages.
Ownership specific advantages asset based advantages include know how which
institutions could be subsumed under as an organizational know how.
Oi are reflected in corporate culture, others are more influenced by external norms
and values. A recent ideological shift has directly affected the goods and services
supplied by firms emphasizing the value of maintaining a knowledge commons to
encourage innovation. Extending the boundaries of private knowledge through
extensions to intellectual property rights.
Oi comprises the incentive structure which is specific to a particular firm.
The extent to which and the way in which the asset based coordinating and ownership
advantages of the firm are exploited depends on the institutional advantages of the
firm. The asset based and institutional advantages jointly determine the firms degree
of internalization.
The transfer of the asset based ownership advantages of the mne occurs in
conjunction with the transfer of firm specific institutional advantages making the host
country a recipient of technological as well as institutional transfer.
To the extent that p1 holds and institutional advantages influence the mode in which
the asset based and coordinating advantages of the firm are employed, they also
indirectly influence what is transferred to the host country.

Both the formal and informal institutions in the home country influence the
institutional advantages of firms in the home country while the institutional artefacts
of the host countries influence the institutional advantages of mne subsidiaries.
Ghosal Global Strategy: An Organising Framework
A global strategy is appropriate for global industries which are defined as those in
which a firms compettive position in one national market is significantly affected by
its competitive position in other national markets. Such interactions between a firms
position in different markets may arise from scale benefits or from the potential of
synergies or sharing of costs and resources across markets. Pelmutter creates the
concept of global strategy when he distinguished between the geocentric polycentric
and ethnocentric approaches to multinational management. Worldview of the firm was
seen as the driving force behind its management processes. The more integrated and
rationalized the flow of tasks appears to be the more global the firms strategy is
assumed to be. Levitt argues that an effective global strategy is product
standardization, the core lies in producing and selling the same way throughout the
world. Hout suggests that effective global strategy requires economies of scale
exploitation through global volume taking pre-emptive positions through quick and
large investments and managing interdependently to achieve synergies across
different activities. Hamel & pralahad contradict levitt, they recommend a broad
product portfolio with many product varieties so that investments on technologies and
distribution channels can be shared. Cross subsidization across products and markets
and the development of a strong world wide distribution system. Hout suggests scale
and preemptive investments are the core strategy, while kogut suggests flexibility and
arbitrage is the key.
Corporate objectives are multidimensional and often mutually contradictory, that are
difficult to prioritize. Actions to achieve a particular objective can impede another
equally important objective. Determining the key strategic objectives of an MNC and
the tools that it possesses. The firm must achieve efficiency in its current activities, it
must manage the risks that it assumes in carrying out those activities and it must
develop internal learning capabilities so as to be able to innovate and adapt to future
changes. Competitive advantage is developed by taking strategic actions that optimize
the firms achievements of these different and at times conflicting goals. MNC must
use all three sources of competitive advantage to optimize efficiency risk and learning
simultaneously in a world wide business. Managing the interactions between these
different goals and means is the organizing framework.
Achieving efficiency, the overall efficiency of a firm can be defined as the ratio of the
value of its outputs to the costs of all its inputs. By maximizing this ratio the firm
obtains the surplus resources required to secure its own future. The integration
responsiveness framework visualizes the cost advantages of global integration of
certain tasks visavis the differentiation benefits of responding to national differences
in tastes, industry structures, distribution systems and government regulations. The
same framework can be used to understand the differences in the benefits of
integration and responsiveness at the aggregate level of industries at the level of
individual companies within an industry or even at the level of different functions
within a company. A multinational firm can determine the optimum way to configure
its value chain sonas to achieve the highest overall efficiency in the use of its
resources. Managing risks MNC faces different kinds of risks some endemic to all
and some unique. Macroeconomic risks are completely outside their control such as

wars and random movements in wage rates, exchange rates. Policy risks emphasize
that risks may arise from political actions of national governments. Competitive risks
arise from the uncertainties of competitors responses to its own strategies including
the strategy of doing nothing and trying to maintain the status quo. Finally there are
resource risks, the risk that the adopted strategy will require resources that the firm
does not have cannot acquire or cannot spare. Such as managerial talent, or lack of
appropriate technology or capital. An advantage of proctor and gamble is that it is
exposed to different operating environments and has learned in each environment the
skills and knowledge that coping with that environment specially requires. Liquid tide
is an example of the strategic advantages that accrue from such diverse learning.
Diversity creates the potential for learning, and the organization must consider
learning as an explicit objective and must create mechanisms and systems for such
learning tot ake place. Both centralization and decentralization may impede learning.
Three fundamental tools for building global competitive advantage: exploiting
differences in input and output markets in different countries exploiting economies of
scale and exploiting economies of scope. National differences comparative
advantage of location is perhaps must discussed and understood. Different nations
different factor endowments. A firm can gain cost advantages by configuring its value
chain so each activity is located in the country which has the least cost for the factor
that the activity uses most intensely. This is the core concept of comparative
advantage based competitive advantage. Moreover customer tastes and preferences
may differ ebtween countries. Thus a firm can augment the exchange value of its
output by tailoring its offerings to fit the unique requirements of each national market.
This is the strategy of national differentiation which lies at the core of multidomestic
Comparative advantages of countries are determined by their relative factor
endowments and they do not change. This dynamic aspect of comparative advantages
adds considerable complexity to strategic considerations of the firm. Overall there is
increasing evidence that while comparative advantages of countries can provide
competitive advantages tof irms the realization of such benefits is not automatic but
depends on complex organizational factors and processes. Scale economies can be
used as a competitive tool. A firm must expand the volume of its output so as to
achieve available scale benefits. The higher volume helps a firm to exploit scale
benefits also allows it to accumulate learning and this leads to progressive cost
reduction as the firm moves down its learning curve. Disaggregated analysis of scale
benefits in different value creating activities of the firm. The efficient scale may vary
widely by activity being higher for component production than for assembly. This
disaggregated view permits the firm to configure different elements of its value chain
to attain optimum scale economies in each. Scale efficiencies can be obtained through
increased specialization and through creation of dedicated assets and systems. The
same processes cause inflexibilities and limit the firms ability to cope with change. As
environmental turbulence has increased so has the need for strategic and operational
flexibility. Scope economies is based on the notion that certain economies arise from
the fact that the cost of the joint production of two or more products can be less than
cost of producing them separately. A diversified firm may share physical assets such
as production equipment cash or brand names across different businesses and markets.
Flexible manufacturing systems using robots which can be used for production of
different items is an example of how a firm can exploit such scope benefits. A second
important source of scope economies is shared external relations. Companies can

benefit considerably from the ability to market a diverse range of products through the
same distribution channel.
However even scope economies may not be costless. Different segments, products or
markets face different environmental demands. A firm needs to differentiate its
management systems and processes so that each of its activities can develop external
consistency with the requirements of its own environment. The search for scope
economies is a search for internal consistencies withwithin the firm and across its
different activities. The effort to create such synergies may invariably result in some
compromise with the objective of external consistency in each activity. A global
strategy requires that the firm should carefully separate different value elements and
should locate each activity at the most efficient level of scale in the location where the
activity can be carried out at the cheapest cost. Each activity should then be integrated
and managed interdependently so as to exploit available scope economies. It is a
strategy to maximize efficiency of current operations. But this may increase
endogenous and exogenous risks for the firm. Organizationally an integrated system
requires a high degree of coordination. Moreover, strategies that are aimed at
optimizing risk or learning may compromise current efficiency. Trying to optimize
factor cost economies may prevent scale efficiency and may impede benefiting from
synergies across products or functions. Every firm has a realized strategy, which may
differ from the intended one. The propose framework is not a replacement of existing
analytical tools but an enhancement that incorporate these beliefs.
Yip Global strategy in a world of nations?
Opportunities for gaining competitive advantage and examples of exploited
globalization drivers and strategy levers. Developing the core strategy is the basis of
sustainabe competitive advantage, usually developed at home firm. Internationalizing
the core strategy through international expansion of activities and through adaptation.
Globalizing the international strategy by integrating the strategy across countries.
Multinational companies know the first two steps well but not the third. Industry
globalization drivers are externally determined while global strategy levers are
choices available to the worldwide business. Drivers create the potential for a
multinational business to achieve the benefits of global strategy. In a multidomestic
strategy countries are selected on the basis of their stand alone potential for revenues
and profits. In a global strategy countries need to be selected for their potential
contribution to globalization benefits. In a multidomestic strategy the products offered
in each country are tailored to local needs. In a global strategy the ideal is a
standardized core product that requires minimal local adaptation. In a multidomestic
strategy all or most of the value chain is reproduced in every country. In exporting
most of the value chain is kept in one country. In a global strategy costs are reduced
by breaking up the value chain so each activity may be conducted in a different
country. In a multidomestic strategy marketing is fully tailored for each country and
developed locally. In a global strategy a uniform marketing approach is applied
around the world. In a multidomestic strategy the managers in each country make
competitive moves without regard for what happens in other countries. In a global
strategy competitive moves are integrated across countries. Global strategy levers can
produced cost reductions, improved quality of products and programs, enhanced
customer preference and increased competitive leverage. Costs can be reduced by
pooling production or other activities achieving economies of scale, exploiting lower
factor costs by moving manufacturing to low cost countries or exploiting flexibility.

An integrated global strategy can also reduce costs by enhancing bargaining power,
allowing for switching production among different countries greatly increasing its
bargaining power with suppliers workers and host governments. Drawbacks of global
strategy include activity concentration, uniform marketing and integrated competitive
moves. Global strategy levers can be grouped in four categories: market, cost,
governmental and competitive. Market globalization drivers depend on customer
behavior and the structure of distribution channels. Homogenous customer needs
gives rise to market standardized customers buy on a centralized or
coordinated basis for decentralized use, allowing uniform marketing program. Global
channels are important in exploiting differences in prices by buying at a lower price in
one country and selling at a higher price in another country. Transferable marketing
such as brand names and advertising enables firms to use uniform marketing
strategies and facilitates expanded participation in markets. Cost drivers depend on
the economies of the business, particularly affecting activity concentration.
Economies of scale and scope, a single country market may not be large enough for
the local business to achieve all possible economies of scale or scope. Learning and
experience even if economies of scope and scale are exhausted. Sourcing efficiencies,
favorable logistics, differences in country costs and skills, product development costs
are all cost drivers. Governmental drivers depend on the rules set by national
governments. Favorable trade policies host governments affect globalization
potential through import tariffs and quotas etc. compatible technical standards
differences in technical standards especially government imposed standards limit the
extent to which products can be standardized. Often standards are set with
protectionism in mind. Common marketing regulations the marketing environment
of individual countries affects the extent to which uniform global marketing
approaches can be used. Competitive drivers are entirely in the realm of competitor
choice, and can raise the globalization potential of their industry and spur the need for
a response on the global strategy levers. Interdependence of countries a competitor
may create competitive interdependence among countries by pursuing a global
strategy. Globalized competitors the need to preempt or match individual competitor
moves through expanding into or within major markets. Industries vary across drivers,
no industry is high on every one of the many globalization drivers. A particular
competitor may be in a strong position to exploit a driver that scores low on
globalization. Global effects are incremental not deterministic because the
appropriate use of strategy levers adds competitive advantage to existing sources.
These sources allow individual competitors to thrive with international strategies that
are mismatched with industry globalization drivers. Business and parent company
position and resources are crucial. Organizations have limitations factors such as
organization structure, management processes, people and culture affect how well a
desired global strategy can be implemented. Differences can or should constrain
companies pursuit of the same global strategy.
Ghemawat Managing Differences: the central challenge of global strategy.
Firms can employ aggregation achieving economies of scale by standardizing
operations or adaptation boosting market share by customizing your processes and
offerings to meet local markets unique needs. Or arbitrage exploiting differences.
Change strategy as needed. Consider integrating two strategies. Explore external
integrative mechanisms. The framework for approaching global integration called
AAA triangle. Each A stands for a distinct type of global strategy. Adaptation seeks to

boost revenues and market share by maximizing a firms local relevance. One extreme
example is creating local units in each national market that do a pretty good job of
carrying out all steps in supply chain. Aggregation attempts to deliver economies of
scale by creating regional or global operations. Arbitrage is the exploitation of
differences between national or regional markets often by locating separate parts of
the supply chain in different places. Companies that score in the top decile along any
of the three dimensions advertising intensity, r&d intensity or labor intensity. Focus
on one or two of the As in trying to build competitive advantage. Make sure the new
elements of a strategy are a good fit organizationally. Employ multiple integration
mechanisms. Think about externalizing integration, not all integration that is required
to add value across borders needs to occur within a single organization. It takes a
diversity of forms joint ventures, development and manufacturing links etc.
externalization offers advantages not just for outsourcing noncore services but also for
obtaining ideas from the outside for core areas. Know when not to integrate.
Westney & Zaheer The Multinational Enterprise as an Organization.
The study of organizations in international business is almost exclusively focused on
the MNC. The fundamental feature as an organization is that it maintains multiple
units operating in multiple environments although there is no number of countries in
which a company must operate to qualify as multinational. It is this multi country
organizational presence that defines the MNC. It must simultaneously adapt to and
operate within multiple societies and hence multiple environments.. there central
management is confronted with the challenge of designing systems that retain
sufficient unity and coherence to operate as a common enterprise and to allow
sufficient latitutde and flexibility to adapt to greatly varying circumstances. There are
normative challenges of managing a complex multi environment system and there are
analytic challenges of the MNC as an organizational form. Organizational changes
include structure and design of the organization, the distribution of power and the
nature of internal conflicts and the cognitive and normative patterns within the
Internationalization is an incremental process, a company typically starts as a
domestic enterprise and becomes increasingly international over time, as the number
of countries in which it operates, the number of subunits which it must manage and
the range of activities in which it is engaged, expand. Patterned change over time,
where changes are driven by selection pressures that move organizations in a direction
common to other organizations that share the same trajectory or environment. Those
pressures can either be internal, or external or both. Internal selection pressures arise
from the increasing scale growing complexity and internal diversity and intensifying
coordination requirements that accompany international expansion. These strain the
existing organization to the point that eky features of the organization must change if
it is to continue to grow or even survive. External selection pressures rooted in the
environment can be attributed to two different levels of analysis. Multiple country
environment and the global meta environment.
The structural evolution approach proposed a model of stages through which a
company changed its structures as it internationalized. Internal selection forces such
as management stress caused by diversification as primary drivers of structural
change. Chandler focused on product diversification and IB scholars combined this

with geographic diversification. Fouraker and Stopford define different stages through
which MNC evolved, three stage model of evolution of domestic firms from the
enterprise run by the individual to a functional organization to a divisional structure
driven by increasing scale and then by growing product diversity. Also the mother
daughter structure, where the heads of foreign subsidiaries report directly to the head
of the parent company. The worldwide functional organzation identified in 1970s was
also a variant of the first stage of the evolution of an MNC. Criticism includes that
firms moving from an international division to a global product organization actually
experienced a drop in sales abroad, arguing against a unilinear model of MNC
evolution. Another approach focused on the evolution of activities in terms of value
adding activities mode of operations and location. The force moving a firm across
these stages was what we call the enhancement of capabilities, the incremental
development of managerial skills and knowledge and of organizational routines and
processes that enabled a firm to diversify geographically. A model of
internationalization process of the firm. The model focuses on the development of the
individual firm and the gradual acquisition integration and use of knowledge about
foreign markets and operations and on its successively increasing commitment to
foreign markets. The primary drivers of change across stages were internal to the
organization, in this case being the growth in experiential knowledge that changed the
calculation of the risks and rewards of internationalization. Perlmutter identified three
primary attitudes towards building an MNC: ethnocentric or home country oriented
polycentric or host country oriented and geocentric or world oriented. These attitudes
shape three distinctive constellations of organizational patterns which involve the
locus of decision making standards for evaluation and control, incentive systems, the
directional flows of information and staffing patterns. The polycentric stage is like an
adolescent protest period during which subsidiary managers gain their confidence as
equals by fighting headquarters and proving their manhood. From ethnocentrism to
polycentrism to geocentrism. All three approaches built evolutionary models that were
essentially unilinear in which the MNC (its expanding international activities, its
product diversification, its changing level of collective experience and knowledge)
created the impetus to move from stage to stage. The first two focused on different
aspects of organization design one on formal structure and the other the learning
model on the distribution and ownership of value adding activities across locations.
The integration responsiveness framework developed in the 1980s shifting the
analysis of organization design from formal structure to managerial processes. A
characteristic of the multinational company is the conflict between the geographical
and the product group projections of the organization. Prahalad portrayed this conflict
in terms of internal forces conflicting demands for managerial diversity and
managerial interdependence. Yves doz attributed the tension between the political
imperative and the economic imperative. Forces for global integration and force for
national differentiation vs pressures for global integration and pressures for local
responsiveness. Integration responsiveness framework made it possible to map
industries into a more complex conceptual space and allowed greater scope for
managerial chice than a single continuum from domestic to global. The opportunity
for strategic choice stemmed from the fact that both forces are present to some degree
in all businesses and since each force was composed of multiple factors managers
could choose to focus on meeting certain pressures at the cost of ignoring or
compensating for others. The primary use of the I-R grid was to map inudstries and
therefore to indicate what strategy a firm should pursue a global strategy in business

high on forces for integration and low on forces for national responsiveness, it could
also be used for mapping the strategies of different companies within an industry
whose managers might choose somewhat different positions in the competitive space
based on what bartlett called their administrative heritage. Just as the environmental
forces were seen to constrain but not determine organizational strategy so the firms
organization influenced but did not dictate the strategy chosen. The conflicting
pressures for integration and local responsiveness were not only external but the very
nature of the MNC ensured that they were internalized. The MNC was to develop a
group of managers with a willingness and ability to represent a particular perspective
an understanding of other needs and an appreciation that overall corporate objectives
may require different perspectives to prevail. This emerging organizational model had
the name transnational or multi focus firm, signaling a shift towards a more unilinear
evolutionary model than can be discerned in the writings of the early 1980s. global
organizations and multinational organizations converged into transnational
organizations. The drivers of change can be portrayed as internal rather than
environmental, is a more radical reconceptualization of the emerging organizational
form of the MNC centered not on decision making processes but on innovation and
The configuration/coordination framework of michael porter, creating a two
dimensional grid made up not of environmental but of organizational variables. This
entailed organizational convergence on a single model, characterized in terms rising
levels of both dispersion and coordination. Bartlett and ghosal identified four models
of the MNC: two variants of the multidomestic firm the multinational and the
international, which had subsidiaries that were locally oriented and contained most or
all of the value chain, the global firm where value adding activities were concetrated
in the home country and the transnational where capabilities were distributed across
subsidiaries. The first three were hub and spoke models with MNC home country as
hub the transnational was an integrated network of interdependent subsidiaries. There
is a considerable interest in linking organization theory and the study of the MNC,
one of the principal avenues is the institutional theory. Most importantly dimaggio
and powell: arguing that etablished models of enviornmental pressures on
organizations in social and economic theory overmephasized evolutionary pressures
for competitive efficiency and fit with the resource environment and under estimated
the importance of different evolutionary processes such as isomorphic pressures on
organizations to adapt to other organizations around them. Institutional theory was
developed against the backdrop of a relatively unitary environment faced by a purely
domestic firm.
Kostova developed a multi level model of individual organizational and locational
factors that influence the successful transfer of organizational practices within the
MNC. Most of the work using institutional theory focused on firms that are
multinational as opposed to firms becoming multinational. Interest in knowledge
generation and transfer was also becoming increasingly central to work on the MNC
that drew on and extended theories in the strategy field. The focus changes from the
advantage that enabled a firm to internationalize to the strategic competitive
advantages that a firm derived from being international. The focus also shifted from
the financial advantages to the organizational the operating advantages of being able
to shift activities in the value chain to advantaged locations within the MNC, then the
advantages in generating innovations and in transferring knowledge. There are
growing possibilities for the disaggregation of value chains acoss locations and the
emergence of virtual MNCs and the potential for small and medium enterprises to

extend their activities across borders due to the emergence of new information and
communication technologies. MNC is fundamentally defined by geography and
research is biased towards the largest firms. There are fundamental systematic
differences in such factors as how or even whether MNCs transfer knowledge and
capabilities and how they staff key positions in subsidiaries. The MNC is not simply
an internally integrated network but an extended network as well with multiple
external linkages. More important are the challenges facing researchers in analyzing
the internationalization patterns of the emerging firms of the internet age. Two
different categories of MNCs the large established multi country multi business
MNC that have been primary focus of research an the internationalizing firm in newly
emerging industries and emerging market economies.
Nohria Differentiated fit and shared values: alternatives for managing headquarters
subsidiary relations.
This paper elaborates and provides empirical support for two different approaches to
managing the nexus of headquarters subsidiary relations in a multinational
corporation. First approach is differentiated fit and the second approach is shared
It can be proposed that in an MNC the structure of each headquarters subsidiary
relation must be differentiated to fit its context. Two ways by which headquarters
subsidiary relations may be effectively managed. The first is adopting a principle of
differentiated fit so that the structure of each headquarters subsidiary relation in the
MNC matches the subsidiary context. The second has its roots in parsons classic idea
of shared values and requires that the headquarters and all its subsidiaries develop
common and closely aligned interests and values through various socialization
mechanisms. In this approach little emphasis is given to explicit and formal internal
structural differentiation. The argument implies equifinality the differentiated fit and
shared values are equally effective alternatives for managing headquarters-subsidiary
relations. However we do not wish to suggest they are mutually exclusive. MNCs
may be able to simultaneously achieve a high degree of differentiated fit and shared
values. The attributes of headquarters-subsidiary relations make them very similar to
principal-agent relationships. As the principal headquarters cannot effectively make
all the decisions in the MNC since it does not possess and must therefore depend on
the unique knowledge of the subsidiaries. The headquarters also cannot relinquish all
decision rights to the subsidiaries since local interests may not always be aligned with
the headquarters. This poses a control problem spawning literature on how relations
should be governed and the degree of decision making autonomy the subsidiaries of
an MNC should have. Reductive fallacy of reducing complexity to simplicity or
diversity to uniformity criticizing failure of scholars to account the differences
among subsidiaries. Two aspects of the subsidiary context must be taken into account
1. The complexity of the subsidiarys local environment and 2. The level of resources
possessed by the subsidiary. As complexity of the local environment increases the
importance of local knowledge increases and the subsidiary must be allowed greater
influence in decision making. Moreover as the level of resources possessed by the
subsidiary increases agency costs increase (risk of shirking etc).
Differentiated fit one approach takes into account differences in subsidiary context
based upon contingency theory and follows directly from our earlier paper. The

structure of each headquarters and subsidiary relation is expressly differentiated to fit

the distinctive environmental and resource conditions of the subsidiary. The structural
differentiation is achieved through centralization and formalization (extent to which
decisions made according to impersonal rules routines and procedures). Adopting an
economizing perspective the differentiated fit approach specifies the appropriate
combination of structural elements by which each headquarters subsidiary relation
should be managed. Conditions of fit are said to obtain when the optimal trade offs
exist between the cost of each structural element and its efficacy in the context of the
subsidiary under consideration. The specific way in which the formal structure must
be differentiated to fit varies. As complexity of the subsidiaries environment increases
the efficacy of both centralization and formalization declines. This is because greater
environmental complexity enhances the value of the subsidiarys local knowledge and
hence requires that the subsidiary be granted greater autonomy and flexibility in
making decisions. However as resources possed by the subsidiary increase the
efficacy of centralization declines but of formalization increases. This is because the
subsidiary is likely to resent overt hierarchical control but be more receptive to
impersonal rules and procedures imported to check potential agency problems.
Parsons suggests that the solution to the problem of control was the creation of shared
values which if properly internalized by the actors in a social system guarantee that
the actor wants what it should want and acts as it should act. Shared values were seen
as offering a solution to the problem of creating and managing complex organizations.
Socializing organizational members to have a common set of values and goals can
minimize their divergent interests and enhance their sense of mutual interdependence.
The idea of shared values as the basis of organization was also anticipated by etzioni
in his conception of a normative organization and under the label of strong cultures.
Minimizing the divergence of preferences and interests among members of an
organizatin has been explicitly seen by several scholars as a way to achieve control in
principal agent relations. Common values and beliefs provide the harmony of interests
that erase the possibility of opportunistic behavior. Members cooperate in the
achievement of organizational goals because the members understand and have
internalized these goals. Creating shared values and beliefs among the managers of
subsidiaries and the headquarters makes it more likely that even in the absence of
formal oversight by the headquarters the subsidiaries will use their specific local
knowledge and resources to pursue the interests of the MNC as a whole and not just
their own partisan interests. Governing subsidiaries by creating shared values does not
mean hierarchical or bureaucratic elements are excluded in the governance of
relations. It only means that the emphasis lies in creating shared values across all the
subsidiaries and not on creating explicitly differentiated formal structures to govern
different subsidiaries. In the shared values approach differences across subsidiaries
are legitimized as part of the common values as are actions that respond to these
differences. A strong emphasis is placed on mechanisms such as selection training and
rotation of managers. Importance is also attached to extensive and open
communication between headquarters and subsidiaries and among the subsidiaries.
Extensive socialization and communication also builds trust among the managers and
creates the foundation for reciprocity and easier negotiation and resolution of
potential conflicts. In order to understand how these two approaches are equally
effective alternative approaches it is useful to compare how each deals with the
problems of control and internal diversity.

The differentiated fit approach relies on a strong link between formal structure and
action. Formal structure is seen to tightly constrain action, thus adopting a formla
structure (correctly combining formlization and centralization) that fits the different
circumstances of the subsidiaries responds both to control issues as well as to
differences across the various subsidiaries. The issue of internal diversity is addressed
by differentiating the governance of each subsdiary to fit its context. There is a much
weaker link between formal structure and action in the shared values approach. Here
the emphasis lies in creating common and shared understandings of goals, values and
practices to influence both how subsidiaries perceive their interests and how they act.
Agency and control issues are addressed closely aligning the interests of the
subsidiary and headquarters organization. The issue of internal diversity is managed
by creating norms that legitimate actions that respond to these differences in the
interest of the overall organization. In the former the link between means and ends is
formally specified and constrained and in the latter the link between means and ends
is not.
It is difficult to socialize all the subsidiaries to share a common set of goals and values
and to treat them differently in terms of the degree of centralization and formalization
to which they are subject. But it is possible to have a strong set of shared values and
different rules for each subsidiary. The results provide support for the equifinality
hypothesis and a simultaneity hypothesis that firms can simultaenously create a strong
set of shared values as well as differentiated fit will outperform those that rely on one
or the other of these administrative approaches. Differentiated fit can lead to a very
complex and difficult to manage organizational structure. Homogeneity is easier to
manage than diversity. This may lead to an inflexible structure that may be difficult to
adapt dynamically. Managing by shared values though structurally simpler involves a
significant investment of resources for both initial socialization and continued
normative allegiance. This approach could entail inefficiencies resulting from
redundant communication channels and undue effort spent in negotiating consensus.
One could argue that the shared values approach becomes less effective as the number
of subsidiaries increases and as the company is diversified into unrelated product
markets or located in very differen cultural contexts. A network approach is required
to account for multilevel structural features.
Bartlett Organizing for worldwide effectiveness: the transnational solution.
The enormous success of japanese compnaies triggered analysis highlighting the
convergence of consumer preferences worldwide, the impact of changing
technologies and scale economies on international industry structures and the
emergence of increasingly sophisticated competitive strategies that have led to a rapid
process of globalization in a large number of worldwide businesses. Companies that
are unable to gain firm strategic control of their worldwide operations and manage
them in a globally coordinated manner will not succeed in the emerging international
economy. The concerns of top managers in japan differ, focusing on the forces of
localization that have also been gathering strength in the recent past. Press focused on
growing barriers to trade and the impact of strengthening yen in offsetting the
efficiencies of global scale japanese plants. These managers are much more sensitive
to the flip side of globalization the growing demand of host governments for local
investments, the building resistance of consumers to standardized homogenized global
products and the changing economics of emerging flexible manufacturing
technologies that are making smaller scale production and more tailored products

feasible. Globalizing and localizing forces are working simultaneously to transform

many industries but few companies have built the organizational capabilities to
respond equally to both forces.
European and american companies had well established networks of fairly
independent and self sufficient national subsidiaries decentralized federations. Such
organizations had difficulty responding to the increased demands from their host
governments or adapting to shifts in consumer preferences worldwide and their
strategic posture was often literally multinational multiple national positions, each
highly sensitive to its local market. The problem with this strategy and the
organizational structure that supported it was that it was difficult to coordinate and
control these worldwide operations to respond to global forces. The operating
environment demands more efficient central management and flexible operations.
As the international operating environment becomes more complex over the past
decade the great temptation for companies was to try to imitate the organizational
characteristics and strategic postures of their competitors. Rein in far flung
autonomous subsidiaries, produce standardized global products and pull decision
making power back to the home office. This is a formula that many japanese
companies have used for years. While a companys tasks are shaped by the external
environment its ability to perform those tasks is constrained by what we term its
administrative heritage the companys existing configuration of assets its traditional
distribution of responsibility and its historical norms values and management style.
This internal organizational capability is something that cannot be changed over night
or by decree and one of the important lessons for management is to shift its attention
from a search for the ideal organization structure to a quest for ways in which to build
and leverage the companys existing capabilities to make them more responsive to the
ever changing external demands. However the important lesson is that either blind
imitation simply to eliminate obvious differences or wholesale adoption of another
companys organizational approach or strategic posute is likely to end in failure.
Todays environment demands companies link their diverse organizational
perspectives and resourcesin a way that would allow them to leverage their
capabilities for achieving global coordination and national flexibility simultaneously.
Transnational cpabaility is the ability to manage across boundaries.
Expanding internationally by establishing independent and self sufficient subsidiary
companies around the world, the task of imposing some kind of global direction or
achieving some measure of coordination of activity is often a herculean challenge.
The organizational mechanisms that were key to matsushitas ability to provide strong
central direction and control without becoming inflexible or isolated three factors
stood out: gaining the input of subsidiaries into its management processes; ensuring
that development efforts were linked to market needs; and managing responsibility
transfers from development to manufacturing to marketing. The importance of market
sensing as a stimulus to innovation and do not want centrally driven management
process to reduce its environmental sensitivity. Rather than trying to limit the number
of linkages between headquarters and subsidiaries or to focus them through a single
point for the sake of efficiency companies can try to preserve the different
perspectives priorities and prejudices of its diverse groups worldwide and try to
ensure that they have linkages to those in the headquarters who can represent and
defend their views. No linkages are accidental, they are deliberately created and

maintained and they reflect the companys open acknowledgement that the parent
company is not one homgenous entity but a collectivity of different constituencies and
interests each of which is legitimate and necessary. These multiple linkages enhance
the subsidiarys ability to influence key headquarters decisions relating to its market,
particularly decisions about product specifications and design. The multiple links not
only allow local management to reflect its local market needs they also give
headquarters managers the ability to coordinate and control implementation of their
strategies and plans.
Market mechanisms for directing and regulating the activities located at the center.
The engineering and development groups of the product divisions mediate the
subsequent contracting and negotiation process through which the expertise and
interests of the laboratories and the needs of the product divisions are finally matched.
Product divisions are conscious that their money is spent on product development and
they become less inclined to make unreasonable or uneconomical demands on R&D.
the market mechanism also works to determine annual product styling and features.
Managing responsibility transfer personnel flows within a national subsidiary the
task of transferring responsibility from research to manufacturing and finally
marketing is facilitated by the smaller size and closer proximity of the units
responsible for each stage of activity. This is not so where large central units usually
take the lead role, building some creative means for managing these transitions. The
systems rely heavily on the transfer of people as illustrated by the companys
management of new product development. Internationalizing management as well as
products. As with multiple linkages and internal market mechanisms this
organizational practice was a simple yet powerful tool that seemed to be central to its
ability to make its centrally driven management processes flexible sensitive and
responsive to the worldwide opportunities and needs.
Its also important to develop effective national operations worldwide. Not only
sensitive and responsive to their local environments but also highly innovative and
entrepreneurial. The decentralization of assets that accompanies its localization
program has not always triggered the kind of independence and initiative that had
been hoped for. Three factors that appear central to the development and maintenance
of its effective local management system but also may be adaptable to other
organizations that are trying to promote national innovativeness and responsiveness
within a globally integrated organization phillips use of a cadre of entrepreneurial
expatriates, an organization that forces tight functional integration within a subsidiary
and a dispersion of responsibilities along with the decentralized assets. The top
management of philips national subsidiaries consists of not individual CEO but a
committee made up of the heads of the technical commercial and finance functions.
This system of three headed management had a long history in philips stemming from
the functional backgrounds of the founding philips brothers one an engineer and the
other a salesman. This management philosophy has been modified to a system
emphasizing individual authority and accountability the long tradition of shared
responsibilities and joint decision making has left a legacy of many different
mechanisms for functional integration at multiple levels. These integrative
mechanisms within each subsidiary in philips enhance the efficiency and effectiveness
of local decision making and action in the same way that various means of cross
functional integration within corporate headquarters facilitates its central management
processes. integration mechanisms exist at three organizational levels for each
product there is an article team evolving product policies. Second tier of cross
functional coordination takes place at product group level through group management

team. The highest coordination forum within the subsidiary is the senior management
committee consiting of the top commercial technical and financial managers in the
subsidiary. Acting essentially as a local board the SMC provides an overall unity of
effort among the different functional groups within the local unit and assures that the
national unit retains primary responsibility for its own strategies and priorities. Philips
managers were confronted by transport and communications barriers that forced them
to delegate substantial local autonomy to its decentralized operating units. The need
for local units to develop a sense of self sufficiency was reinforced by the
protectionist pressures of the 1930s that made cross shipments of products or
components practically. Most applied their local resources and capabilities to build
highly successful national businesses sensitive and responsive to the local needs and
opportunities. Valuable organizational capability, the main characteristics of their
development are clear. It must be feasible for offshore units to develop local
capabilities and initiative and this requires the decentralization of appropriate
managerial and technological resources along with the reconfiguration of physical
assets. The location of an opportunity or threat is often different from where the
appropriate response resources are situated in multinational corporations.
Environmental opportunities and threats are footloose shifting from location to
location while organizational resources contrary to the assumptions of many
economists are not easily transferable even within the same company. The location of
a companys strategic resources is related to actual organizational needs and intentions
as well as idiosyncracies of the firms administrative history. This results in
environment resource mismatches: the organization has excessive resources in
environments that are relatively noncritical and very limited or even no resources in
critical markets that offer the greatest opportunities and challenges. Such environment
resource mismatches are pervasive in MNCs. The need is to create organizational
systems that allow the spare capacity and slack resources in strong operating units to
be redirected to environments in which they are weak. Simply creating effective
central and local management does not solve this mismatch problem and to succeed in
the demanding international environment companies must develop their
organizational capabilities beyond the stages described. Local management develops
strong influence on how resources available locally are to be used. Further
organizational commitments are usually hierarchical with local needs taking
precedence over global needs. At the core of resolving the problem of environment
resource mismatches is the major organizational challenge of loosening bonds
between ownership and control of resources within the company. The classic
capabilities of a multinational company that operates as decentralized federation of
units able to sense and respond to diverse international needs and opportunities and
they have evolved beyond the abilities of the global company with its facility for
managing operations on a tightly controlled worldwide basis through its centralized
hub structure. They had developed what we terms transational capabilities. The ability
to manage across national boundaries retaining local flexibility while achieving global
integration this involves the ability to link local operations to each other and to the
center in a flexible way and in so doing to leverage those local and central
capabilities. Effective management of required linkages and processes identify three
organizational characteristics that seemed most helpful in facilitating its developing
transnational management capabilities interdependence of resources and
responsibilities among organizational units, a set of strong cross unit integrating
devices and a strong corporate identification and a well developed worldwide
management perspective. Organizational configuration should be based on a principle

of reciprocal dependence among units. Such an interdependence of resources and

responsibility breaks doesn the hierarchy between local and global interests by
making the sharing of resources ideas and opportunities a self enforcing norm. basic
characteristic of organizational configuration can influence a companys management
of capabilities. To develop truly national systems operated by the nationals of each
company. Integrating local environments and becoming attuned to national interests
and market needs. The process of building organizational interdependence is a slow
and difficult process that must be constantly monitored and adjusted. The value of
constant readjustment of responsibilities and relationships as a way of adapting to
change strategic needs while maintaining a dynamic system of mutual dependence.
Dynamic interdependence is the basis of a transnationa company one that can think
globally and act locally. There is a need for effective organizational integrating
mechanisms to link operations in a way that taps the full potential of the
interdependent configuration. Where relationships among national companies were
competitive and where headquarter subsidiary interactions were often of an adversial
nature the organizational climate in ericsson appeared more cooperative and
collaborative. a clearly defined and tightly controlled set of operating systems: a
people linking process employing such devices as temporary assignments and joint
teams and interunit decision forums particularly subsidiary boards where views can be
exchanged and differences resolved. Strongly that the most effective integrative
device is strong central control over key elements of its strategic operation. A gradual
approach is needed protecting and building on administrative heritage. Having built
flexible central and local management capabilities the next challenge is to link them
in an organization that allows the company to do what it must to survive in todays
international environment think globally and act locally.
McCarthy Overcoming Resistance to Change in Russian Organizations: The
Legacy of Transactional Leadership.
The development of leadership in Russia has been characterized by leaders who are
thought to be strong and omniscient achieve near mythological status. This elevated
status of leaders has led to the view that they should set the direction for their follows
providing rules and practices. Transactional leaders characterized by a controlling top
down orientation that promotes dependency in their followers rather than openness to
change. The continued survival of transactional leadership has led to a resistance to
organizational change that continues to hamper many russian firms as they attempt to
make the transition to a market economy. This resistance has deep historical roots
arising from the institutional and structural impediments that inhibit change among
russian managers and their employees. Thus leaders of russian organizations whether
nationals or expatriates face significant challenges when they attempt to introduce
change. This affects competitiveness and western organizations that have operating
subsidiaries or engage in joint ventures somehow related to russia. Describing the
intrusive role of the state as the most powerful institutional constraint affecting
leadership in russian organizations and as an obstacle to change in corporate
leadership styles. Corporate leadership style is an inhibitor and a potential facilitator
of organizational change. Transactional leadership style is a fundamental cause of
resistance to organizational change and has endured since the soviet period.
Characterized by tough love combines a punitive system of top down control with
paternalistic care for the personal and family needs of employees extending far
beyond the workplace. The culture of fear encouraged resistance of change during the

soviet period and continues to promote that resistance. This article develop DNA,
denial, naivety and acceptance model to explain obstacles and potential solutions to
resistance to change among russian employees. The state is the most important formal
institution that affects leaders of russian companies. The economic system is state
managed, only 35% of russian GDP comes from public sector. This has increased due
to putins administration policies to increase control over many businesses. Intrusive
role of government in business is a major institutional factor threat to economic
progress. Rampant increase in government interference in the form of regulation in
various guises, particularly public private partnerships as the new way of operating. In
the context of state managed network capitalism such networking typically involves
paying bribes to bureaucrats to facilitate transactions which increases the overall cost
of doing business. A major positive result of the intrusive state role has been the
stability provided by the putin administration replacing the chaotic period preceding
it. Some suggest russia seriously lags in most of the reforms needed for a robust
market economy. The ineffective and compromised judicial system and ineffective
legislature must be resolved for corporate leaders to commit to positive organizational
change. Russias excessive dependency on energy as the driver of the economy is a
serious economic issue. Thus a drop in world price of petroleum or natural gas could
send a major jolt through the entire economy, these circumstances could create the
potential for dutch disease a situation in which energy resources and associated
windfalls divert a countrys attention from developing a more balanced economy.
Moreover growth in the truly private sector is needed to diversify the economy. But
this requires effective leadership especially for small to medium sized firms. Putin has
emphasized the need for russia to focus on technology to diversify the economy. The
main impediment is the difficulty of defending ownership in the russian judicial
system. This weakness exacerbates the questionable status of private property. Such
institutional weaknesses are a detriment to investment and the motivation of russian
business leaders to undertake substantive changes in the way they do business
including modifying their leadership styles. Unless russian companies become more
competitive they will not be able to raise the capital needed to modernize become
more efficient and grow. Although the leading russian multinationals in energy and
natural resources have succeeded in raising substantial funds through equity and debt
most private russian companies will not be able to do so without becoming more
competitive. Even the largest companies face serious competitive pressures over the
longer term. Obstacles to free and fair competition arise not only from the role of the
government but also to the undeveloped judicial system. They need to encourage
employees to embrace change and provide an environment to sustain receptiveness to
change. The formal environment including the pervasive role of government the
booming economy seemingly adequate investment and the masking of a
fundamentally noncompetitive economy. This institutional environment has
perpetuated the traditional leadership style that has characterized the soviet period and
had roots in even earlier eras. This style which we view as a classic example of
transactional leadership is an obstacle to organizational and leadership reform. Fear
was the primary motivating factor for employees in this transactional style in soviet
times. Fear of accountability, failure and punishment. Transactional leadership is a
short term managerial orientation rather than a true leadership style and it has little
potential to generate longer term sustainable competitive organizations. It is not
surprising that transactional leadership in russian firms continues to exist givent eh
high power distance orientation in russian culture which according to our research
continues to survive during the economic transition. A high power distance implies

that managers themselves as well as subordinates admire strong authoritarian leaders.

Both want managers to possess necessary information make decisions give orders and
remain at arms length from employees. This cultural dynamic has the potential to
increase loyalty to managers but it also creates greater dependence upon them to
assume responsibility for outcomes thereby freeing employees from accountability.
Traditional russian leadership exemplifies the transactional style in which loyalty is
echanged for freedom from accountability. Transformational leadership could enable
russian leaders to facilitate the changes required to build competitive organizations in
the long run. This style does not depend upon paternalistic relationship but instead
recognizes managers and employees as members of a team in which all accept
responsibility and accountability. Such a style promotes change. Recognizing and
using new technologies marketing ideas and other improvements are more likely
when change is embraced. Organizational reform that is truly transformative in
russian businesses requires a simultaneous commitment to learning and unlearning
with transformation constituting what we call a cognitive makeover. Organizational
members must simultaneously reconstruct their organizations and engage in both
learning and unlearning. Mental models must be erased and replaced with new ways
of thinking and reacting to market realities. Patience and an indepth understanding of
the cultural legacies that continue to fuel resistance to change across organizations
and industries in russia. Fear is the glue that holds oppressive regimes together and
fear was the primary mechanism used by the communist party to maintain conformity
and unquestioning compliance in soviet society. Informal institutional constraints in
the form of cultural norms and traditions continue to have a powerful influence over
attitudes and behavior. The lingering effects of decades of mental programing in
atmosphere of fear can still be detected in the russian workplace. Russian preference
for routines is linked to fear and related to their reluctance to accept personal
responsibility for outcomes. The dangers of this leadership style include low
transparency and little information sharing indicating an overall weakness in
corporate governance in most russian firms. The transactional style is deeply
engrained it is likely to continue as an important obstacle to a more transformational
style of leadership. Four approaches for bolstering organizational reform initiatives in
ways that are compatible with russian culture. Check the DNA of organizational
participants - identify russian nationals in managerial or non managerial positions
who are most receptive to acquiring new knowledge to benefit their firms. Eat the
elephant in pieces russian preference for well defined short term tasks, it is
important to include employees from across functional areas in creating long term
strategies in russian firms. This process can help reduce lingering cynicsm of
employees towards long termplanning that is leftover from soviet era. Combine the
carrot and the stick effective management requires a balanced approach based on
rewards and punishment. Pay for performance systems are applied fairly and
consistently so that employees view such reward systems as legitimate. Create safe
havens for innovation and risk taking demonstrate a leadership style that diminishes
fear in the workplace and encourages risk taking and creative thinking. Adopt policies
and practices that provide a protective shield for employees who fail when taking
appropriate risks and safeguard those who succeed.
Case 2 Organizational culture and incentives at Lincoln Electric.
Lincoln electric is one of the leading companies in the global market for arc welding
equipment. Success is based on high levels of employee productivity. Productivity is

attributed to a strong organizational culture and incentive scheme based on piecework,

dating back to james lincoln who joined in 1907. Lincoln had a strong respect for the
ability of the individual and believed that correctly motivated ordinary people could
achieve extraordinary performance. Lincoln emphasized that there should be
meritocracy where people are rewarded for individual effort. Strongly egaliterian
lincoln removed barriers to communication between workers and managers practicing
an open door policy. Any gains in productivity should be shared with consumers in
the form of lower prices with employees in the form of higher pay and with
shareholders in the form of higher dividends. The companys incentive system
reinforces the organizational culture that grew out of lincolns beliefs. Production
workers are paid according to the number of pieces they produce and the piecework
rates at the company enable an employee working at a normal pace to earn an income
equivalent to the average wage for manufacturing workers in the area where a factory
is based. Workers have responsibility for the quality of their output and must repair
any defects spotted by quality inspectors. Moreover since 1934 production workers
have been awarded a semiannual bonus based on merit ratings. These ratings are
based on objective criteria such as an employees level and quality of output and
subjective criteria. These systems give lincolns employees an incentive to work hard
and generate innovations that boost productivity for doing so influences their level of
pay. Factor workers earna base pay exceeding the average manufacturing wage by
more than 50% and receive a bonus on top of this that in good years could double
base pay.employees in lincolns US plants consistently ranked among highest paid
factor workers in the world. Despite high employee compensation the workers are so
productive that lincoln has a lower cost structure than its competitors. Their unique
culture and incentive system enables it to operate with a very flat organizational
structure. The supervisor to work ratio is 1 to 100 (typical factor is more like 1 to 25
or 1 to 10). Lincolns employees often have long work hours motivated by incentive
system. The average workweek for lincolns employees is between 43 and 58 hours
and the company is able to ask people to work longer on short notice. This
organizational culture and set of incentives works well in the individualistic culture of
the U.S tradition of hard work for more money. Lincoln expanded into international
markets in 80s and 90s and struggled to translate their organizational culture into
foreign operations. Lincoln initially considered exporting from the U.S but was
advised that it would not sell well in europe so they set up wholly owned subsidiaries
to make the equipment locally. Lincoln acquired seven arc welding manufacturers in
europe and one in mexico and established greenfield plants in japan, venezuala and
brazil substantial investment of 325 million dollars. This aggressive expansion
represented a sharp break in the history of the company as up until then their foreign
operations had been minimal. Lincolns senior management most of whom were hired
straight out of college and promoted from within had almost no experience running
international businesses. They were proud of their unqiue incentive system and the
high productivity it created and they believed that applying this system to foreign
factories would be a source of competitive advantage enabling lincoln to grow its
foreign sales and profits. Lincoln left local managers in place for the acquisitions
believing they knew local conditions better than the americans. However the local
management had little working knowledge of lincolns strong organizational culture
and were unable or unwilling to impose that culture on their units where they had
their own long established organizational culture. Local managers introduced its
incentive systems in acquired companies frequently running into legal and cultural
roadblocks. Piecework is often viewed as exploitive compensation system forcing

employees to work harder. It is illegal in germany, and in brazil a bonus paid for more
than two years becomes a legal entitlement. European workers valued extra leisure
more highly than extra income and were not prepared to work as hard as american
counterparts. Germany the average work week was 35 hours compared to 43-58 hours
in the U.S. many companies were unionized and local unions vigorously opposed the
introduction of piecework lincoln was unable to replicate the high level of employee
productivity it had achieved in the states and the expansion pulled down the
performance of the entire company. The entry into europe was soon followed by a
recession that hit the industry hard and many foreign plants were only working at half
their capacity. Ultimately lincoln scaled back operations in europe, shut down german
plant and closed plants in brazil japan and venezuala taking a restructuring charge of
70 million dollars. The company shifted its strategy electing to export u.s made
machines to foreign markets like germany rather than build them locally a strategy
that proved successful. American equipment sold very well in germany, and from that
point lincoln emphasized exports. The one foreign venture that did relatively well was
in mexico, which was acquired in 1990. The mexican venture was unionized and
piecwork ran against the mexican culture, however the local managers introduced the
incentive system gradually. He asked 2 employees out of 175 to take a chance on
piecework and guaranteed a minimum income to reduce risks associated with
piecework. They started to make more money than counterparts so other people asked
to enter the system, it took two years for the entire labor force to convert to the
piecwork system. Lincolns managers didnt know how to run foreign operations nor
did they understand foreign cultures. Consequently we had to rely upon people in the
foreign countries, people we didnt know and didnt know us.
Case 2 Hastings on Lincoln Electrics Harsh Lessons from International Expansion.
Reflection of lincoln CEO in 1993 - European operations lost 7.5 million in june,
second quarter loss violating the covenants with the banks and defaulting on loans.
Profits in the U.S wouldnt be enough to offest losses abroad. Europe was the biggest
problem but money was also being lost in latin america and japan. Consolidated loss
of 12 million dollars for the quarter. First time in 97 years to experience a
consolidated loss. Lincoln sold high value high quality products at competitive prices
and with outstanding customer service. Lincoln expanded abroad as a response to U.S
recession in early 80s so they would be less dependent on the domestic market.
Strong belief that because they were so successful in the U.S that they could be
successful anywhere. Saw tremendous opportunities to reduce costs by applying our
manufacturing expertise equipment and incentive system. We could not afford to
export consumables namely certain electrodes and wire from the U.S . cut throat
commodity business had they exported those items the costs and duties would have
prohibited a competitive price. Several mistaken assumptions lincoln assumed that
the incentive system would be accepted abroad. They were told exporting would not
work as europeans were biased toward their own goods they had to establish a local
player. Lincoln acted without testing. Strong belief that if you had the lowest cost
highest quality manufacturing operation you would automatically dominate the
market. However you also need proper distribution competitive delivery times
relationships in the marketplace and people who can understand and help customers.
Before foreign acquisition lincoln had a cash reserve of more than 70 million dollars
and no debt. In 1992 the debt soared to nearly 250 million dollars or 63% of equity.
Factory workers were graded on four types of performance: quality of their work, the

quantity of their work, their dependability and their cooperation. The last two
performances encourage workers to work together and contribute ideas that would
help everyone. This created employees that worked like entrepreneurs. Absentee and
turnover rates historically very low. As the system draws out the best in people not
much supervision is required. Despite huge losses, downsizing violated everything
lincoln stood for. Downsizing would result in deterioration of morale, trust and
productivity. Its bad long term business. Lincoln employees were resources not
liabilities. Invest enormous amount in people and run dozens of training programs.
They wanted to make the U.S company profitable enough to offset the losses abroad
remain within the bank covenants and borrow the money again to pay the annual
bonus in december. Appealing to employee loyalty and intelligent selfishness.
Managers were asked to eliminate every bottleneck they could find, main bottleneck
was a shortage of people so lincoln started hiring new employees right away, which
required training (which can take two to thre eyears). Every european factor was
operating at 50% capacity or less. The severity of the recession was horrifying. The
incentive system is transferable to some countries especially in countries settled by
immigrants where hard work and upward mobility are ingrained parts of the culture.
Many other places it wont easily take root. It is difficult to install it in a factory that
has different work practices and traditions. Now lincoln builds new plants with a
partner in a joint venture. If done slowly and properl the system can be introduced
into some existing organizations or cultures where it might not seem to fit.
Cazurra Who Cares About Corruption?
Examining the impact of corruption on FDI. Corruption reduces FDI and changes the
composition of country of origin of FDI. Two findings corruption results in lower
FDI from countries that have signed the organization for economic cooperation and
development convention on combating bribery of foreign public officials in
international business transactions. laws against bribery abroad may act as a deterrent
against engaging in corruption in foreign countries. Corruption results in higher FDI
in countries with high levels of corruption suggesting that investors who have been
exposed to bribery at home may not be deterred by corruption abroad and seek
countries with prevalent corruption. Host country corruption discourages foreign
direct investment, corruption the abuse of public power for private gain creates
uncertainty regarding the costs of operation in the country. Corrcorruption acts as an
irregular tax on business increasing costs and distorting incentives to invest. Some
argue that corruption can have a positive impact on investment by facilitating
transactions in countries with excessive regulation. Countries with high levels of
corruption such as china are the recipients of a great deal of FDI, so corruption does
not keep fdi out of very corrupt countries. Not all foreign investors care about
corruption in the host country. Although corruption has a negative impact on fdi
because of additional uncertainty and costs, such costs vary depending on the country
of origin of the fdi. Countries that are OECD combatting bribery of foreign public
officials in international business and fdi from countries with high levels of
corruption. Corruption refers to the exercise of public power for private gain.
Existence of corruption indicates a lack of respect for the rules and regulations that
govern economic interactions in a given society. It represents the need to make
additional irregular payments to get things done. Incentives for corruption whenever
an official has discretion over the distribution of a good or the avoidance of a bad to
the private sector. The official has an incentive to ask for a bribe to increase his or her

income in exchange for a good that has little cost to him or her. The firm has an
incentive to offer abribe and obtain benefits to which it would not otherwise have
access. Corruption can be viewed as grease in the wheels of commerce, facilitating
transactions and speeding up procedures. Corruption is a way to bring market
procedures into an environment of excessive or misguided regulation introducing
competition into what is otherwise a monopolistic setting. Corruption enables free
markets to emerge in situations of limited freedom. Investors who value time or
access to an input more than others will pay more for it. Many scholars have a
negative view of corruption because it is rarely restricted to areas where it may
increase welfare. These scholars see corruption assand in the wheels of commerce.
Corruption is wasteful use of resources also in its prevention. The payment of a bribe
does not ensure that the promised goods are delivered. Investors do not have recourse
in the courts to demand fulfillment of the agreement as bribery is illegal. Firm faces
increased costs even if the bribe results in the fulfillment of the promise. Corruption
results in the inefficient allocation of resources towards areas that are more prone to
bribe payment. The end of the cold war reduced the need to turn a blind eye to
corruption in friendly countries. Second the spread of democracy and freedom of
press exposed bribery that used to be hidden. Third non governmental institutions
such as transparency international took active roles in denouncing corruption. Fourth
international institutions such as the imf started demanding better governance in
development projects. Finally international organizations such as the oecd took an
active role in promoting the reduction of bribery. First hypothesis is that in
comparison with fdi from other countries the relationship between host country
corruption and fdi is negative for fdi from countries with laws against bribery abroad.
Investors from countries with high levels of corruption may select to invest in
countries with high levels of corruption as well because of the similarities in
institutional conditions to their country of origin. Engaging in corruption requires an
understanding of the subtleties involved in offering a bribe owing to the illegal nature
of the offer, simply offering a bribe not just the payment thereof is a criminal offence.
Moreover, corruption is opaque, it requires secrecy to be effective. Engaging in
bribery requires an understanding of the subtleties involved in payment of bribes in
the host country. In some cases it may be difficult to separate the cultural norms of
gift exchange from bribery. A company may use joint ventures or managers with
experience in bribery to deal with the payment of bribes abroad. However the firm
accepts bribery as a valid way of doing business and the firm will incur the additional
costs of finding a local partner so they do not extract rents from the company while
they bribe others. Psychic distance may limit the transfer of information. This distance
reduces the ability of the firm and its managers to understand foreign information.
Thus the firm first expands into countries close to the host country in terms of psychic
distance and later enters countries that are more distant. Thus investors from countries
with high corruption will seek countries with corruption so hypothesis 2 is in
comparison with fdi from other countries the relationship between host country
corruption and fdi is positive for fdi from countries with high corruption. Corruption
creates challenges for investors because it increases the cost of operating abroad as
well as the uncertainty and risk involved. Corruption does not impact all foreign
investors equally because there is variability in the cost of engaging in bribery abroad.
Investors from countries that have laws against bribery abroad are likely to further
limit their fdi in countries with high levels of corruption. These laws increase the cost
of engaging in bribery abroad. Investors from countries with high levels of corruption
appear not to limit their fdi in other countries that also have high levels of corruption.

This paper highlights the importance of understanding the characteristics of the

country of origin when studying the internationalization of firms. This contributes to a
better understanding of the impact of location on internationalization an area that has
been neglected relative to the related areas of ownership and internalization
Ramamurti What is really different about emerging market multinationals?
The multinationalizing trend is widely recognized as similar in nature irrespective of
thr nationality of the parent company. Developed country mnes exploit new
opportunities and resources in emerging markets, and emerging market firms have
had to figure out how tot ake advantage of opportunities and resources in the rest of
the world. Do existing theories developed principally from study of dmnes explain the
behavior of emnes - emerging market mnes
Why do emerging economies produce mnes at all. As poor countries they are expected
to import capital, including foreign direct investment rather than export it. To become
an mne a company must possess significant ownership advantages that can offset its
disadvantages in competing abroad. Emnes lack the technology brand or management
advantages of dmnes. Emnes have ordinary resources resources that have
traditionally not been considered to be the source of extraordinary rents as is the case
as is the case for instance for technology or brand which are argued to underpin a
monopolistic firm specific advantage.
An unsatisfactory explanation is that emnes simply do not possess ownership
advantages. Their internationalization is seen as the result of exploiting home country
comparative advantages such as cheap labor or natural resources not firm specific
ownership advantages. However emnes have gained steam rather than sputtered. A
second unpersuasive explanation is that emnes internationalize to obtain the
ownership advantages they lack. This argument is referred to as the springboard
theory of internationalization. Considerable evidence that emnes venture abroad in
search of valuable technologies or brands. The tenet of the OLI model is that firms
must possess ownership advantages before they can internationalize. Thus it has been
proposed that emnes do possess owernship advantages but they are different from the
ones we see in dmnes. The fact that many emnes have market capitalizations in the
tens of billions of dollars should give one pause. Do they have ownership advantages
in other forms besides cutting edge technology or global brands and he believed at
least some emnes had valuable ownership advantages. Ownership advantages
attributed in the literature to emnes is their deep understanding of customer needs in
emerging markets, the ability to function in difficult business environments, their
ability to make products and services at ultra low costs and ability to develop good
enough products with the right feature price mix for local customers. One of the
advantages to chinese state owned firms is their access to cheap capital which has
sometimes financed their internationalization. The ability of emnes to do things at low
cost is regarded as a weak form of ownership advantage but could we regard wal
marts capabilities in low cost retailing a weak ownership advantage it is not obvious
why some advantages are more precious than others or why some conventional
ownership advantages such as brands are readily accepted as being precious. A second
explanation is that dmnes have more potent ownership advantages because they have
had more time to accumulate capabilities. Thus emnes and dmnes are in different
statges of evolution as mnes and with time emnes may augment and enhance their
ownership advantages to become more like dmnes. Thus the observed differences in

ownership advantages between dmnes and emnes may reflect differences in their
evolution as mnes rather than differences stemming from country of origin. Mne
theory is heavily influenced by studies of mature mnes and western experience.
Emnes are infant mnes involved with early stage internationalization providing
wonderful opportunity to study internationalization as it unfolds and glean insights
about causation that might be missed in retrospective historical research. Failure to
adjust for stage of evolution differences can lead to misleading conclusions about the
ownership advantages of dmnes versus emnes. Emnes unlike dmnes do not possess
strong global brands. Brands are location bound assets that have to be replicated in
each new market. Dmnes are assumed to always possess the ownership advantages
they possess today. Emnes go abroad to obtain technologies and brands primarily for
the exploitation in their home markts not abroad. For firms from large high growth
markets this may make strategic sense. When such emnes acquire companies abroad
they may appear to be engaging in market seeking internationalization when they are
engaging in strategic asset seeking. The liability of foreignness problem is more
severe in the case of market seeking internationalization and ownership advantage is
more of a necessity in that situation than it is for resource seeking internationalization.
According to the model of internationalization firms internationalize gradually with
learning between stages of expansion and increasing commitment to host countries if
things go well. Firms are assumed to expand first to countries similar to the home
country before going to dissimilar countries. According to the product cycle
hypothesis fdi flows from more developed to less developed countries.
Emnes appear to have violated some or all of these core tenets making it appear that
they internationalize the wrong way. Moreover emnes internationalize at a much
faster pace than stages model would suggest. Moreover emnes target countries in the
wrong sequence by expanding into physically or economically distant countries
before entering more proximate and similar countries (netcare?). emnes may also
invest more in developed countries than in other emerging economies. Going from
south to north rather than south to south. Emnes use high commitment choices such as
mergers and acquisitions to enter new markets rather than beginning with low risk
low commitment options such as using sales agents. Unsatisfying explanations based
on their speed of internationalization choice of target countries and high reliance on
m&a as the mode of entry it might appear that emnes are not conforming to
mainstream IB theory. Mathews speaks of the novel strategies and organizational
forms of emnes and notes that they internationalized very rapidly. As if a gestalt
switch from domestic to global player even if actual pattern of internationalization
was incremental. Alternative model to expain emne internationalization cleverly using
the same initials as OLI framework outward orientation, linkage/leverage and
integration. South to north fdi of emnes and their propensity for m&a as resulting
from their emergingness is from the disadvantages of being from emerging markets
and needing to catch up quickly with dmnes. Alternative explanations rapid
internationalization result of the global economic context in which emnes have been
internationalizing one in which the world has become flatter and in which industries
have been deverticalized making it easier for firms to obtain the resources and help
they need to internationalize. Firms in developed countries also sped up
internationalization recently.thus rapid internationalization of emnes may reflect
changes in global business environment rather than innate organizational traits of
emnes. Also emnes invest in countries that are physically or economically distant
because their strategies are based on exploiting differences rather than similarities
across countries as mne theory is overly influenced by dmne experience it has not

paid attention to the case of supplier firms in low wage countries that forward
integrate into developed countries to move up the value curve to get closer to
customers. South to north fdi is not surprising. Two generic strategies for
internationalization can result in south to north fdi by emnes both determined by the
nature of emnes industry. Cross border vertical integration in natural resource
industries either by firms searching for downstream markets or firms searching for
upstream supplies. A very substantial part of south to north fdi where fdi goes to
developed countries by bric firms. South to north fdi strategy occur in industries that
have matured in the developed world but have been booming in emerging economies
industries such as cement steel chemicals beverages processed foods and meats pcs
auto parts emnes act as global consolidators, build scale through horizontal
expansion and obtain advanced technologies through acquisitions in developed
countries. Because the industries are mature or declining in the developed world it
stands reason that in those countries emnes prefer mergers and acquisitions to
greenfield investments. Firms must have ownership advantages before they can
engage in market seeking internationalization holds up well for emnes however they
have different ownership advantages to dmnes reflecting the distinctive conditions of
their home market. There is no reason to believe these ownership advantages are less
valuable or special than those of dmnes especially when applied to emerging markets
which are now the worlds growth engines. What makes an ownership advantage
valuable or special, which ownership advantages are transferable to other countries
and how much ownership advantage a firm needs to offset the liabilities of
foreignness. Also how home country context shapes the ownership advantages of all
firms including emnes. Three contextual variables emerged beside country of origin
that have important implications for the internationalization strategy of firms 1. The
global context for internationalization affecting the ease with which emerging market
firms can internationalize. 2. The stage of evolution of the firm as an mne and 3 the
industry in which it operates e.g natural resources, basic industries.
Luo & Tung International Expansion of Emerging Market Enterprises: A
Springboard Perspective
The springboard perspective can be used to describe the internationalization of
emerging market multinational corporations. EMNES use international expansion as a
springboard to acquire strategic resources and reduce their institutional and market
constraints at home. They overcome their latecomer disadvantage in the global stage
via a series of aggressive risk taking measures by aggressively acquiring or buying
critical assets from mature MNEs to compensate for their competitive weaknesses.
Unique traits characterizing the international expansion of EMNES and the unique
motivatons that steer them toward internationalization. The past two decades have
witnessed rapid growth and remarkable transformation in emerging economies. Five
of the six top attractive global business locations are emerging economies, china india
russia brazil and mexico. Unlike the early path of internationalization for
multinational enterprises from advanced markets and newly industrialized economies
emerging economy enterprises in korea and singapore. Emerging economy enterprises
have benefited tremendously from inward internationalization at home by cooperating
with global players who have transferred technological and organizational skills
allowing emerging market enterprises to undertake outward internationalization later
in some unconventional ways. Developed country mnes remain the major source of
outward foreign direct investment, outflows from developing and emerging economy

mnes have significantly risen from a negligible amount in the early 1980s to 11% in
world stock in 2004 with active engagement in a large number of cross-border
mergers and acquisitions. Overarching framework that analyzes the uniqueness of
emerging market multinational corporations including their rationale and motives,
activities and strategies, propelling and facilitating forces as well as risks and
challenges in the course of international expansion. The core argument of this
framework is that emmnes use outward investments as a springboard to acquire
strategic assets needed to compete more effectively against global rivals and to avoid
the institutional and market constraints they face at home. Their springboard
behaviors are characterized by overcoming their latecomer disadvantage in the global
stage via a series of aggressive risk taking measures by proactively acquiring or
buying critical assets from mature mnes to compensate for their competitive
weaknesses. They are often not path dependent nor evolutionary in selecting entry
modes and project location. Instead their investments abroad could be attributed to
several pressures such as latemover position strong presence of global rivals in their
backyard quick changes in technological and product development. The springboard
is encouraged by their respective home governments the willingness of global players
in advanced countries to sell or share strategic resources and the increasing integration
of the world economy and global production. Springboard activities can be inherently
involving of more risks and challenges by requiring emmnes to overcome their critical
bottlenecks such as poor governance and accountability. Dunnings eclectic paradigm
still relevant to the extent than emmnes expand internationally especially in other
developing countries in search of location specific advantage by leveraging their
unique capabilities. Em mnes are international companies orginating from emerging
markets and are engaged in outward fdi where they exercise effective control and
undertake value adding activities in one or more foreign countries. Caution that major
emerging markets are not individually homogenous but to the extent that enterprises
in these countries face some similar constraints share similar motives and have
common experiences in international business we seek to develop a model that is
generally applicable to mnes form these economies. The patterns, motives and
strategies of nie multinationals and new efforts that examine what lessons from these
multinationals are transferable to emmnes. Based on ownership and the level of
international diversification the breadth of geographical coverage of international
markets through outward investment em mnes can be categorized into four groups,
niche entrepreneurs, world stage aspirants, transnational agents and commission
specialists. Niche entrepreneurs are non state owned mnes whose geographical and
product coverage in international markets is narrowly focused Net care?
Unlike state owned companies niche entrepreneurs typically do not receive
government funding nor possess rich industrial experience and focus on a narrow line
of products and markets to leverage their strengths
EM MNEs systematically and recursively use international expansion as a
springboard to acquire critical resources needed to compete more effectively against
their global rivals at home and abroad to reduce their vulnerability to institutional and
market constraints at home. These efforts are systematic in the sense that
springboarding steps are deliberately designed as a grand plan to facilitate firm
growth and as a long range strategy to establish their competitive positions more
solidly in the global market place. They are also recursive as springboard activities are
Springboarding is manifested in several behaviors or activities. First em mnes use
international expansion as a springboard to compensate for their competitive

disadvantages. When investing in developed countries they seek sophisticated

technology or advanced manufacturing know how by acquiring foreign companies or
their subunits that possess such proprietary technology. Differ sharply from the
advanced market mnes generally leverage and exploit ownership specific competitive
advantages in foreign countries. Some risk taking activities such as acquisitions and
greenfield investments are undertaken for the purpose of counter-attacking global
rivals major foothold in their home country market. EM Mnes use outward investment
as a springboard to bypass stringent trade barriers
EM MNEs use international expansion as a springboard to secure preferential
treatment offered by emerging market governments. Through reverse investments.
EM MNEs seek opportunities through tapping niche opportunities in advanced
markets that complement their strengths gaining preferential financial treatment
offered by home and or host governments, increasing company size and reputation ,
escaping from institutional or market constraints at home,
There are several leapfrog trajectories mirroring springboard behavior in outward
investment. The tend to internationalize rapidly and not in an incremental fashion as
predicted by conventional internationalization process theory. A firms involvement in
international markets occurs incrementally according to an establishment chain. As
latecomers on the global stage em nes need to accelerate their pace of
internationalization so as to catch up with that of incumbents, and netcare embarked
on a strategy whereby they simultaneously pursued customers in many foreign
markets, not just one at a time. Rapid international expansion through high risk high
control entry modes such as acquisitions and greenfield invesmtnets.
The conventional internationalization process logic suggests that firms enter new
market involving successively greater psychic distance which is defined as differences
in language, culture, political systems and so forth. Firms start internationalization in
markets they can most easily understand easy to spot opportunities and perceived
liabilities of foreignness are low. The use of acquisitions secures tacit knowledge and
distinctive resources and reliance on host county experts to organize and manage
sophisticated activities.
Buckley Foreign Direct Investment by Small and Medium Sized Enterprises.
Theoretical background to research on fdi by small and medium sized enterprises.
Export literature sees exporting as an innovative strategy and as a first step in
internationalising, which may end in failure. Thus exporting is seen as a launching
process of deepening international commitment possibly leading to direct investment.
Each stage allows a learning process to take place. Unsuscessful firms can drop out at
any one of the intermediate states and thus never appear as a direct investor. Failures
are weeded out. Internationalisation identifies crucial interactions between internal
and external pressures in the firms development and in particular highlighting the
crucial role of management activity and awareness. All forms of international activity
are management intensive, foreign investment particularly so. Information plays a
crucial role in reducing risk. Minimizing the risks arising from foreignness is to invest
in a country as similar as possible to the home country. This suggests an expansion
strategy based on psychic distance investing in psychically nearby countries first.
Often psychic distance and physical distance are inversely correlated netcare and
Switch from exporting to direct investment is a crucial decision. Alternative modes of
technology transfer can be incorporated into this model by considering licensing as an

alternative intermediate stage. Licensing is not merely a step towards direct

investment it can be a viable permanent and optimal choice under certain
circumstances. Aharoni found a strong initiating force necessary to propel an inert
non-investor along the path towards a foreign direct investment. Such pressure may
come from within the firm an executive with interest in such investment or from the
environment, at outside proposal from a powerful source. The existence of a
profitable opportunitiy is not a sufficient stimulus and the venture must have extra
appeal. The phases of search are general indicators to establish the degree of risk on
the spot indicators and presentation of a report. The small firm must find a way to
raise finance without disclosing its competitive advantage secrets. Moreover the
shortage of skilled management may generate a more serious liability and information
costs bear heavily on small firms. The horizons of small firms are limited by
managerial capacity and there is little global scanning for opportunities.
Legge Human Resource Management.
HRM is contentious, and how does it differ from personnel management. It manages
the employment relationships and the indeterminancies in the employment contract.
Artificial debate - whether hrm differs from personnel management. The mainstream
survery based research on the nature of strategic high commitment human resource
management and its relationship to organizational performance. The relationship
between strategic human resource management and organizational performance
within the general framework of resource based value theory. Strategy may be defined
As a setof fundamental choices about the ends and means of an organization. The
policies and procedures that are aimed at securing first viability and second if this is
achieved sustained competitive advantage. The resource based view of strategy is an
internal firm focused approach. This defines firms as bundles of resources and
suggests that the route to develop sustained competitive advantage is to develop
resources internally that meet the criteria of value, rarity, inimitability
nonsubstitutability and appropriability. Resources are not valuable in and of
themselves they allow firms to perform activities that create advantages in particular
markets. The processes of strategy making deliberate are comprised of rational
planned topdown decision making shaped by social systems in which organizations
are embedded. Emergent processes are those that reflect the very bounded incremental
and political nature of decision making. Types and levels of labor productivity,
organizational flexibility and social legitimacy. The soft developmental humanism
model emphasizes the importance of integrating hr policies with business objectives,
involves the treatment of employees as valued assets, a source of competitive
advantage through their commitment and adaptability of skills and performance.
Employees are proactive and resourceful rather than passive inputs into the productive
process. Rather than exploitation and cost minimization, the watchwords are
investment and value added. The hard model regards employees as a headcount
resource to be managed in a rational impersonal way as any other resource to be
exploited for maximal economic return. The high commitment model emphasizes the
importance of employee motivation and commitment. High performance work
systems emphasize the importance of employee empowerment and increased
involvement in operational decision making. Involves careful recruitment, extensive
use of communication, teamwork that is flexible, training learning, involvement in
decision making, performance appraisal linked to contingent reward systems. High
trust relations are essential to organizational performance thus explaining the failure

in Rwanda, highlighting the importance on human resource management (legge,

p.224). Organizations pursue a strategy of producing high value added goods and
services in a knowledge based industry where it adopts a policy of organic growth
rather than asset management. If the organizations chosen business strategy is to
compete in a labor intensive high volume low cost industry generating profits through
increasing market share by cost leadership such policy of treating employees as
assets may be deemed an expensive luxury. For such an organization the hr policies
may be most appropriate to driving strategic objectives are likely to involve treating
employees as variabe inputs and minimizing costs. Resources are considered features
of the firm that are value creating, and preferably rare, inimitable non substitutable
and appropriable. Including the talents and interactions of employees social
complexity complex patterns of teamwork and coordination inside and outside the
firm and causal ambiguity. The resource based view argues that a firms ability to
achieve success in the long run rests on its ability to understand its core competecies
or those that it needs to develop for future viability as well as competitive advantage.
A core competency can be identified as a bundle of skills and technologies that enable
a company to provide particular benefits to customers, not product specific, represents
the sum of learning across individual skill sets and organizational units, must be
competitively unique, not an asset in accounting sense (so intangible), represents a
broad opportunity arena. Core capabilities defined as knowledge sets composed of
four dimensions, content & process. The dimensions are interlocking and systemic,
can become core rigidities over time unless firms renew by double loop organizational
learning. Capabilities are dynamic over time core capabilities are likely to be copied
by competitors, so the firms seek sustained competitive advantage. The firms ability
to learn faster than its rivals and adapt its behavior more productively gives it
competitive advantage. Firms place high priority on becoming learning organizations
and developing organizational agility. Treating employees and hr systems as
potentially a source of sustained competitive advantage. Integrating human resource
management with business strategy integration has two meanings, external fit and
complementarity of employment policies aimed at generating employee commitment,
flexibility and quality (internal fit).. matching critical human resource management
activities with the organizational life cycle. HR strategy can be systemic allowing
strategy formation to be embedded in organizational and societal culture and
institutions. The processual approach recognizes it to be a multilevel multistage
iterative incremental messy and political process. It downplays the necessary match or
psychological contract between the organization and the employee and the issues
involved if the pursuit of a particular business strategy disrupts this contract. The
limitations of the life cycle and porterian models. Close internal integration may
oversimplify the paradoxical elements involved in managing people highly
committed empowered workforce pursues a strategy of downsizing as is the case for
companies in airline and care manufacturing industries. External fit may undermine
the possibility of achieving internal fit. The universalistic approach is consistent with
institutional theory and arguments about institutional isomorphism. The assumption is
that organizations that survive and prosper do so because they identify and implement
the most effective best policies and practices. Contingency approaches argue that
sustained competitive advantage rests not on imitating the best practice but on
developing unique nonimitable competencies. Idiosyncratic contingencies that result
from path dependency social complexity and causal ambiguity. Organizational
performance is not enhanced by merely following best human resource practices but
from knowledge about how to combine implement and refine the whole potential

range of human resource policies and practices. What is the relationship between
strategic human resource management and organizational performance? High
performance work systems are more likely to be found on the greenfield sites of large
and in the U.K foreign owned and unionized organizations. Legge p.230)
From a human resource management point of view interest in the symbiotic
relationship between just in time and twm production technique and commitment
inducing human resource management systems in order to generate a high
performance work system of reliable and flexible employees to combat the inherent
fragility of lean production. Lean production is a superior way for humans to make
things. The whole world should adopt lean production as quickly as possible. It
involves mutually supportive teamworking flexibility and tqm. Tripod of success or
subjugation flexibility equating with labor intensification and management by stress
quality with control and management through blame, teamworking with peer
surveillance and management through compliance. The tayloristic separation of
conception and execution so that workers work smarter not harder with increased
autonomy and empowerment. The expectancy theory equates skills and abilities with
quality motivation withc ommitment and role structure and perception with flexibility.
Birkinshaw Strategy and Management in MNE subsidiaries.
This chapter focuses on wholly owned subsidiary company as the primary unit of
analysis. The subsidiary is at the heart of the action in the multinational enterprise,
especially with regard to such issues as integration and responsiveness, sourcing of
inputs, inter unit coordination, knowledge creation and transfer and strategic control.
Mnes are building global networks of subsidiaries, where subsidiaries obtain key roles
for sourcing and creation of knowledge as well as penetrating important markets. The
subsidiary is defined as a descrete value adding activity outside the home country, at a
level below the national subsidiary. Important interlinkages between subsidiaries in a
single country, avoiding the criticism that subsidiary studies an anachronism.
Subsidiary strategy oxymoron, because subsidiaries should act as an instrument of
the mne. However it can also be viewed as necessary if the mne is to make effective
use of its far flung network. Key knowledge developed in the subsidiaries provide
more scope for subsidiaries pursuing their own interests. The strategy structure
stream focuses on the strategies and structures of mnes from a classic hierarchical
perspective. The headquarters-subsidiary relationship stream concerns how the centre
could control subsidiaries. The mne process stream focused on issues such as strategic
decision making and organizational change in mnes. Subsidiaries often had unique
access to key resources operating with far more degrees of freedom than officially
condoned and formal structure was less important than management systems or
culture as a way of controlling subsidiary managers. The subsidiary role stream built
explictly on the mnc process stream by moving the level of anylsis down to the
subsidiary. The subsidiary is not just an instrument of the parent but has certain
degrees of freedom in shaping its own destiny.
The increasingly specialized roles taken by subsidiaries within the mne, is the idea
that subsidiaries may differ in the scope of their operations, the extent of
responsibilities and the improtance of the markets they serve and their level of
competence is now well established. Studies envisaged subsidiary autonomy as the
antithesis of control and an outcome that subsidiaries were striving for, however
recent literature treats such autonomy more as an input that drives the subsidiary
development. Subsdiaries are integrated in the mne network and seek influence on the

allocation of resources in the mne. Two pathways one is through subsidiary autonomy
and innovation and the other is through inter-unit networking and learning. The
evolution of subsidiary roles over time fdi is a sequential process whereby the initial
investment leads to waves of additional typically higher quality investment.
Subsidiary evolution can be driven from within or from without. External forces
largely shape the options of the subsidiary while it is up to the subsidiary manager to
take initiative and respond to the opportunities. The flows of information between the
subsidiary and its network extent subsidiaries are embedded in their local
environment and how that affects their internal network relationships and
performance. When strong external network relations are turned into superior
knowledge that is of importance for other mne units will the subsidiary obtain a
stronger position in the mne.
The transaction cost based theory of international production seeks to explain the
existence of mnes in terms of owner specific advantages visavis incumbent domestic
competitors, location specific advantages that favour investment in the local country
and intermediate market failure that favours internalization over other forms of
conctractual arrangements. Thus it implicitly assumes that ownership advantages
originate in the mnes home country but they can arise in subsidiaries aswell.
Subsdiary specific advantage emerges through the interaction of ownership and
location specific advantage. The network perspective argues that the subsidiary moves
from being a subordinate entity to a node in a network, with links to external and
internal actors. The resource based view of the firm is the dominant paradigm in
strategic management, offers great potential to the study of the mne. It argues that
under certain conditions a firms unique bundle of resources and capabilities can
generate competitive advantage. The development of dynamic capabilities and
knowledge as drivers of competitive advantage. The resource based view implicitly
assumes that resources and capabilities are developed and held in a monolithic firm.
Institutional theory became popular for studying mne during 1990s, providing an
understanding of firm similarity. A variet of pressure will deliberately cause firms to
adopt similar behaviors and practices. The bulk of the subsidiary assets are in the form
of intangible assets likel knowledge where property rights are hard to define and
enforce. The role of the subsidiary is shaped and managed from headquarters.
Subsdiary managers obtain strategic discretion operating within certain hq defined
parameters but basically free to develop the business as they see fit. Subsidiary
strategy is the positioning of the subsidiary visavis its competitors and its customers
and with regard to its underlying resources and capabilities. The market positioning
component to strategy and a resource development component. Strategy is about how
the two components are brought together.
The resource side of strategy refers to the internal resources and capabilities held by
the subsidiary deployed in the marketplace. Resources are the stock of available
factors owned or controlled by the firm and capabilities are a firms capacity to deploy
resources using organizational processes to effect a desired end. the extent to which
capabilities are dispersed throughout the firm depends on the ability of the firm to
identify and leverage them, the transfer of best practices. It depends on the extent to
which they are effective in different contexts. Many firm resources and capabilities
are developed at the subsidiary level. They are system dependent or embedded, to
such an extent that they cannot be easily disentangled from their local context. The
ability to nurture and develop capabilities is the responsibility of subsidiary managers
as they have the local contacts and intimate knowledge of local activities. The market
facing side of strategy is becoming increasingly integrated while the resource side is

heterogeneous and needs to be managed with considerable degrees of freedom to be

truly effective. Subsidiary strategy is increasingly concerned with resource
development rather than market positioning.
Birkinshaw Building Firm-Specific Advantages in Multinational Corporations: The
Role of Subsidiary Initiative
How subsidiary companies contribute to the firm-specific advantages of the
multinational corporation. Internal subsidiary resources and initiative have a strong
positive impact on the subsidiaries contributory role. Subsidiary initiative is strongly
associated with leadership and entrepreneurial culture. The contributory role is
strongly associated with subsidiary autonomy and low local competition. Subsidiaries
contribute to the development of firm specific advantages. How do subsidiaries
contribute to firm specific advantages of the MNC. Subsidiaries contribute to the
development of firm specific advantages and also drive the process through their own
initiative. Hymer suggests that firms engaging in overseas production must have some
form of proprietary advantage to compensate for the natural disadvantage of
competing with established firms in a foreign land. This firm specific advantage can
be subdivided into two distinct types of advantage: asset advantage stemming from
exclusive privileged possession of income generating assets and transaction
advantages which reflect the firms ability to economize on transaction costs as a result
of multinational coordination and control of assets. Firm specific advantages are
ncessary though not sufficient for foreign production. Specialized contributor,
strategic leader and active subsidiary refer to subsidiaries that contribute substantially
to firm specific advantage. Environmental determinism the MNC operates in
multiple environments each with its own unique characteristics the role of each
subsidiary is seen in large part as a function of its local environment. The local
country is strategically important or dynamism of local competitors suppliers and
customers is high. Subsidiary choice is where the role of the subsidiary is to a large
extent open to subsidiary management to define for themselves. Specific resources
and capabilities of the subsidiary. All three perspectives have considerable merit, but
is the parent company the key determinant of the subsidiaries role, or are the attributes
of the subsidiary more important, or the local industrial environment? Initiative,
resource growth and visibility form a virtuous circle of development that is
invigorated by the actions of top management. Many subsidiaries exhibit no initiative
as it may not be positively received or because management does not have the drive
or expertise to pursue initiative. The concept of initiative typically raises some
concerns at head office because there are questions oer the motivations of the
subsidiary manager. A subsidiary is defined as any operational unit controlled by the
MNC and situated outside the home country. According to resource based view of the
firm a subsidiary is conceptualized as a heterogeneous bundle of resources, some are
location bound and others are not. Resources need to be valuable rare and imperfectly
imitable to offer the potential of competitive advantage. Less strict approach that
requires the subsidiaries resources to be specialized defined as superior to those
available elsewhere in the MNC. The top down process involves corporate
management identifying their leading edge subsidiaries through informal discussions,
productivity measures and internal benchmarking studies. The bottom up process
consists of entrepreneurial efforts by subsidiary management to demonstrate their
expertise and willingness to take on additional responsibilities to head office
managers. Contributory role to refer to the extent to which the subsidiary has

specialized resources recognized by the corporation as a whole. Subsidiary initiative

is defined as the entrepreneurial pursuit of international market opportunities to which
the subsidiary can apply its specialized resources. What drives sub development is it
environmentally determined assigned by the parent company or a matter of subsidiary
choice. The relationship ebtween subsidiary initiative and specialized resources is
reciprocal, as specialized resources provide opportunity for initiative which enhances
the subs resources. A related aspect of subsidiary top managements role is their
responsibility for shaping the development of an entrepreneurial culture in which
initiative and risk taking behavior can thrive. And entrepreneurial culture is more
likely to promote initiative. And entrepreneurial subsidiary culture will also be
associated with the development of specialized resources in much the same way that
initiative is seen as a driver of resource development. It is suggested that by defining
the appropriate structural context corporate management can either promote or inhibit
the development of the subsidiarys contributory role. The creation of innovation in
subsidiaries is associated with high autonomy high parent subsidiary communication
and high normative integration. Thus decision making autonomy and high levels of
parent subsidiary communication is associated with the subsidiaries contributory role.
Normative integration the extent to which shared values exist across the corporation
was not specified as it is hard to assess at a subsidiary level. Competition drives the
innovation process and the upgrading of capabilities. The extent that the subsidiary is
participating in its local market it is anticipated that the level of local competition will
have a positive influence on the subsidiaries own competitiveness and hence on its
contributory role. Subsidiary leadership and an entrepreneurial culture appear to
promote the development of specialized resources which in turn are strongly
associated with the existence of subsidiary initiative. Initiative is an important
discriminator between high and low contributory role subsidiaries but the role of
initiative may be more critical in the early stages of contributory role development
than in its subsequent growth. Relationship between local competition and both
contributory role and subsidiary initiative. Subsidiaries more likely to have high
contributory roles and undertake initiative if domestic market competition was
perceived to be weak. Rather than build firm specific advantages because of the
strength of the local business environment the subsidiaries build them on account of
the industrys relative weakness. The higb contributory roles appear to be gained
because the subsidiary was relatively protected by niche. For initiatives to be accepted
by the corporate headquarters they must be aligned with the mncs existing strategic
priorities otherwise they re likely to be viewed as self interested behavior.
Rodriguez Government Corruption and the Entry Strategies of Multinationals
MNEs encounter government corruption when operating in host countries, yet it is
typically assumed that government officials pursue national interests rather than their
own. Through an institutional perspective the pervasiveness and arbitrariness of
corruption is examined on mne organizational legitimacy and strategic decision
making. Through laws, regulation and institutions governments influence and
dominate transactions within an economy. All governments are beset in their pursuit
of legitimate objectives by the presence of corruption the abuse of public power for
private benefit warping the rules of the game. The challenges firms face on entering
foreign countries largely reflect their efforts to understand and adapt to local
corruption. To adapt and perform effectively within a new environment, firms must
comprehend and appreciate corruptions essential characteristics. Especially for mnes

understanding the nature of corruption in a given country and differentiating it from

corruption in other countries are central to decisions on entry and expansion.
Corruption may be viewed as opportunities for political behavior. Entry strategy is a
critical element in international expansion, substantially determining a firms resource
commitment investment risk degree of control and share of profits from international
operations. By impacting organizational legitimacy, corruption can alter entry mode
decisions of multinationals. Institutional theory provides a theoretical explanation for
MNE responses to government actions, emphasizing contextual factors influencing
entry mode decisions. Organizations strive for external legitimacy by complying with
their institutional context complying with corruption in brazil may impact the
external legitimacy of netcare worldwide. The internal legitimacy of subsidiaries may
be threatened by compliance with corruption. The complex characteristics of an
environment within a simple theoretical framework is valid as long as simplifcation
facilitates meaningful analysis while capturing the essential features of the
environment. The wide variety of corrupt behaviors confounds the attempt to
characterize corruption in a way that distingusihes one environment from the next.
One of the main challenges in describing corruption is addressing both its transaction
and state specific characteristics. Corruption refers both to a type of transaction
involving the misuse of public power for private gain, and to a prominent statewide
rlationship among public officials established institutions and private parties.
Systemic qualities differentiate the corruption present. Corruption in any nation state
owes its nature and trajectory to a variety of economic, historical and institutional
antecedents. Efforts to explain the histories of states and their characteristics are vital
but beyond the scope of this paper in which we are concerned with the experience of
corruption and its relationship to firm behavior. Pervasiveness is the average firms
likelihood of encountering corruption in its normal interactions with state officials,
reflecting the expectation of the proportion of interactions with the state that will
entail corrupt transactions. it also captures the degree to which a firm is obliged to
address corrupt behavior. The degree to which corruption is a regular and meaningful
part of commercial activity in a given country. The quality of infrastructure services
public institutions economic growth and financial stability are likely to be lower
where firms are heavily involved in corrupt transactions regardless of individual firm
ability to extract benefits in such an environment. Abritrariness is the inherent degree
of ambiguity associated with corrupt transactions in a given nation or state. Where
corruption is arbitrary laws and informal policies may be subject to capricious and
varied interpretation or overlapping and tenuous jurisdictions leading to ineffectual
bribes. Arbitrariness may also result from the ability and willingness of corrupt
officials to vary the set of necessary approvals to extract maximal bribes or from the
entry of bureaucrats into the market for extortion. Arbitrariness renders important
features of corrupt transactions less transparent and more important less predictable
since they do not emerge from a stable underlying structure or process. Arbitrariness
proceeds from normal stastical uncertainty characterized by quantifiable risk over
knowable outcomes toward immeasurable uncertainty. Corruption is highly arbitrary
when transactions with government officials are characterized by an enduring
uncertainty regarding the size target and number of corrupt payments necessary to
obtain an approval. Thus a low degree of efficacy is attached to engagement with
corrupt officials. Arbitrariness renders the corrupt environment largely unknowable
because rules of behavior expectations over outcomes and the power of enforcers are
inherently unstable. The two dimensions of corruption, pervasiveness and
arbitrarineess are independent and capture wholly different aspects of corruption.

Nonequity modes of entry are not viable for netcare, thus it must enter new markets
via foreign direct investment or equity modes. Host country conditions such as
investment risk, industry structure, and culture are among the most salient
determinants of entry mode choice. Similarly the conditions of the entering mnc, its
home country environment, resources, international experience strategic disposition
and competitive advantage affect the choice of entry mode. Firms choose fdi over
arms length entry modes when they are willing to accept the financial risk associated
with the control necessary to minimize the costs of transferring firm specific
advantages via the intrafirm hierarchy. Joint ventures reduce the burden of adjusting
to a new environment. The influence of host country corruption is examined. Firms
will conform to their institutional context so as to achieve external legitimacy which
renders their existence and actions desirable and appropriate in the view of customers
suppliers and the government. Firms may not have access to valuable resources that
are vital to surival and profitability without legitimacy. Thus firm choices are
constrained by socially constructed norms of acceptable behavior. The challenges of
attaining legitimacy and adapting to multiple institutional contexts are especially high
for MNEs. MNEs may avert the liability of foreignness by isomorphing with the host
country environment, enhancing external legitimacy resource availability and survival
capabilities. External legitimacy is enhanced when the mne develops partnerships
with local organizations and personal relationships with host government agencies. To
study the effects of arbitrariness and pervasiveness of corruption on equity entry. The
arbitariness of corruption increases the incentives for an MNE entering via direct
investment to partner with local firms. The core insight of institutional theory is that
organizations strive for external legitimacy by complying with the institutional
context. This process is obstructed by the complexity of the institutional environment.
Where corruption is highly arbitrary firms cannot easily determine their critical
constitutents. A firm may face a multiplicity of corrupt agents, creating numerous and
possibly conflicting pressures. The resulting complexity of the institutional
environment reduces the firms ability to conform and thereby gain legitimacy and
other economic advantages through compliance with local corruption. Arbitrary
corruption encourages the development of social networks which can be important
sources of external legitimacy. When dealing with uncertain rules firms develop
coping mechanisms. When faced with uncertainty newcomers rely on established
firms as sources of information and legitimacy. A joint venture provides significant
sources for legitimacy gains as well as knowledge of dealing with the local
government and other institutions. Pervasiveness where corruption is socially valid
compliance with the practices of a corrupt environment is likely to yield external
legitimacy. Pervasiveness also reduces the institutional complexity as perceived by
firms. MNEs may enter a pervasively corrupt country to avoid another environment
where legitimacy must be acquired through acts of adherence to more costly practices.
Corruption can allow firms to buy their way out of costly requirements in stringent
environments. The demands of legitimacy are less costly, government decisions can
be readily influenced through bribery officials may create market imperfections that
benefit entering mnes by changing regulatory standards or raising the institutional
complexity for competitors. Compliance with corruption assists in overcoming the
liability of foreignness increases external legitimacy and decreases the benefits of a
local partners. Conformity to the external institutional context is not the only
institutional concern in selecting the appropriate entry mode. Adaptation of the
subsidiary to host country conditions may lead to the adoption of local norms and
customs threatening internal legitimacy. The greater the institutional distance the

greater the threat to internal legitimacy of a new subsidiary as it faces two sets of
isomorphic pressures. Corruption affects institutional distance most where it is highly
pervasive. Broadly diffused corruptiion can largely be expected to comply with
corrupt government agents by subsidiaries. Pervasively corrupt environment means
complying with pressures to pay bribes.
Birkinshaw Managing Power in the Multinational Corporation: how low power
actors gain influence.
The power and influence in multinational corporatins. Actors positioned in weak or
low status positions visavis other actors. Objectives pursued by low power actors and
strategies pursued to achieve these objectives. Transaction cost economics is the idea
that mncs internalize market failure in transferring typically intangible assets
overseas. The mnc is conceptualized as an interorganizational network. The foreign
subsidiary receives a more prominent place as a semiautonomous actor with
distinctive environment and resources capable of making strategic choices. Subsidiary
units are dependent in a hierarchical sense on corporate parents but have sources of
influence and power themselves. Low power actors can achieve legitimacy in the eyes
of mnc top executives, they can control resources unique and valuable to the firm, and
they can become central to the various types of strategic networks in which mncs are
embedded. Actors who optimize their strengths on three distinct and conflicting set of
goals. Low power actors can adopt creative strategies to effectively challenge the
status quo or they can enter political games to push their agendas through existing
circuits of power. Tradoff involved in managing interactions between strategic
objectives and means of influence which may not work in unison. Legitimacy is
defined as a recognized perception or assumptiont hat the actions f an entity are
desirable proper or appropriate within some socially constructed system of norms
values beliefs and definitions. Legitimacy is a form of social approval facilitating the
acquisition of power determining how social actors are understood and evaluated. By
achieving legitimacy with people in positions of authority that low power actors can
acquire some degree of salience which can be used to exert influence over corporate
decisions. Resources include financial capital, human talent, technological skills, and
specific reputations that may be obtained from dealing with customers, suppliers,
alliance partners and the environment at large. The asymmetry associated with the
resulting set of dependencies explains the relative distribution of power in society.
The resource dependence perspective the critical objective of low power actors is to
find ways to control resources heavily needed by the parties they seek to influence.
The resources must be important or special they must be scarce and few alternative
strategies exist to source them and there should be a high degree of competition
between control of the resource. Critical resources can quickly become obsolete.
Power and influence emerges for subsidiaries that are able to provide complex and
tacit sets of services. Supplying specialized information on local developments that
have strategic ramification for the global firm or coming up with innovative ideas and
practices that can be transferred to other parts of the firm. Controlling access to
critical resources is of paramount importance to the pursuit of power irrespective of
legitimacy objectives. Resources can only achieve their full value if those in
possession are well connected to relevant circles of influence. Gaining centrality
within strategic networks actors needs to be interlinked to gain power, because it is
centrality that makes resources valuable. This is the foundation of social network
theory. Actors centrally located within the firm system generally have better conduits

at their disposal to control the flow of resources that may be needed by others. Thus
the critical objective of low power actor sis to find ways to gain centality within
categories of strategic networks in which the mnc is embedded. The value of
potentially critical resources is contingent on the continous interactions that unite
actors within both types of networks. Actors without centrality naturally experience
great difficulty in their attempts to control resources that might grant them power and
influence. Distance may be a factor that hinders communications. The next sphere of
influence comprises three groups of subsidiaries at an intermediate stage of
development. Thus low power actors are not held hostage to their situaitons, provided
the right strategies put in place they may be able to increase the influence they have
over mnc decisions and move from undifferentiated entities to global product
specialists. Subsidiaries may find ways to upgrade their cetnrality so influence on
decisions increase. They can increase their legitimacy, they can gain control of critical
rsources and increase their centrality in important categories of strategic networks.
Resources can be seen as the fuel susceptible of bringing power and influence to those
that do not have them. Actors without legitimacy or centrality will find it difficult to
deploy resources in upper circles of influence. Investing in the pursuit of activties
allowing them to acquire new competencies and experiment in new untested markets.
Work through internal channels of authority to build their profiles and enhance their
reputations. Three distinct approaches to challenging the status quo, proactive
initiative taking to build and develop the subsidiary by developing new products or
bidding for new corporate investments. Second is profile building consists of
strategies aimed at building stronger relationships with other parts of the global
company with a view to enahncing the reputation of a subsidiary so that it can better
develop in the future. The third involves low power subsidiaries attempting to break
the rules of the game. Initiative corresponds to discrete proactive undertakings that
advance a new way for subsidiary company to comprehend and conduct its business.
Develop new products, penetrate new markets or generate new ideas applying to other
parts of the global organization. Initatives are critical to the pursuit of power because
important path dependencies affect the level of legitimacy resources and centrality
that subsidiaries have effectively accumulated over time. Subsidiaries must disrupt
important sources of rigidities to createopportunities that regain control over the
trajectories that will dictate their future. The peripheral actors reinvent their
approaches to doing business if they challenge the status quo and influence mnc
strategic behavior. Profile building refers to the behavior undertaken by actors to
improve image credibility and reputation within the mnc. Profile building involves a
complementary set of activities focused on the mnc network resources and centrality
objectives low power actors shape the images and attributions that mnc constructs
about them to build perceptions that their activities are strategically important
deserving of their scarce management attention. The third approache challenges the
status quo radically and involves the highest risk. This involves reorcherstrating a
realignment of power and position. Novel and risky approaches require a change in
perspective in terms of how the subsidiary conceives it association with the mnc
network. Subsidiary managers push against the official norms of the mnc. The safest
approach always consits of finding better ways to compete within the existing system
and can result in missed opportunities and overlooked avenues to pursue power in the
mnc. Breaking the rules is a means of gaining access to additional resources that lie
beyond the mncs boundaries. The potential to disrupt power hierarchies are in place
within the firm power games permeate mnc decisions. Defence can yield some level
of influence to low power actors the norm of reciprocity suggesta that when

individuals are systematically obeyed by their subordinates they feel flattered and
socially obligated to consent them favors at some pooint when opportunities present
themselves. Cooptation brings influential outsiders into the network of influence. E.g
a subsidiary decision to make the exporting of talent a cornerstone of its power game
strategy. Representation is another game quickly available to low power actors
consists of asking a collective of advocates to defend their views and interests on
particular sets of issues. This confers many advantages including greater scale and
legitimacy better resources andimproved access to important networks of influence
low power actors may be unable to achieve much influence if they are too mdoest
about their qualities reluctant to engage in games of self promotion. Coalition
building involves the mobilization of a much more complex set of power influences.
Different categories of social actors decided to pursue power as a collective entity as
with research and development. The formation of relationships for which a broad
sense of purpose exists. Through coalition low power actors succeed through their
ability to influence international public opinion facilitated by increasing availability of
communication technologies. Their capacity to form good interpersonal relationships
is critical to success and so is their motivation to work with others in the pursuit of
important collective goals. Feedback seeking low power actors may decide to
engage in the conscious devotion of effort toward determining correctness and
adequacy of behavior for attaining valued end states. Feedback seeking strategies canr
educe uncertainty by improving the understanding of areas truly needing work low
power actors have two distinct feedback strategies to contemplate monitor the mnc
environment to obtain cues that can be used as input internal corporate systems and
benchmarking studies to understand how rank relation to peer units and invest in
pursuit of activities that address a relatively new untapped market. Sensemaking that
requires a fair deal of interpretation inference and vicarious learning. They can also
inquire about the activities and contributions that would make the greatest impact on
mne operations in a game of consultation. Coopetition is the least avaialble type of
game where low power actors must have deveoped some way of leveraging their
legitimacy, resources and centrality in the mnc the simultaenous pursuit of
cooperation and competition with other parts of the global firm. Through cooperation
low power actors find opportunities to achieve mutually beneficial outcomes. This
may evolve into sophisticated partnerships. Through competition actors find new
ways to compete with peer subsidiary units to advance their cause in the mnc.
Coviello Network Relationships and the Internationalisation Process of Small
Software Firms.
The influence of network relationships on the internationalisation process of small
firms, using multi site case research on the software industry. This integrates the
traditional models of incremental internationalization with the network perspective.
The findings show that the internationalisation process of small software firms
reflects an accelerated version of the stage model perspective and is driven facilitated
and inhibited by a set of formal and informal network relationships. These
relationships impact foreign market selection and mode of entry as well as product
development and market diversification activities. Research on the
internationalisation process tends to focus on large manufacturing organisations in
spite of the importance of small service or knowledge based firms to most economies.
The success of firms pursuing niche strategies and in small domestic markets depends
on their ability to internationalise their operations. How do network relationships

impact internationalisation patterns and processes how network relationships

influence the small firms approach to internationalization particularly in terms of
foreign market and entry mode selection. Primary interest is on small firm processes,
the research also focuss on software developers characterized by high technology
knowledge based and service intensive. Definition of internationalisation is the
process by which firms both increase their awareness of the direct and indirect
influences of international transactions on their future and establish and conduct
transactions with other countries. This view is process based and incorporates the
internal dynamics and learning of the firm as it expands internationally and the
outward pattern of international investment. Incremental approach to international
market expnasion is where a series of stages of internationalisation reflect the firms
increasing market knowledge and commitment over time. Internationalisation may
also involve the set of connected relationships a firm develops as part of its network.
Incremental internationalization illustrateshow managerial learning drives
internationalization. The model also captures manifestations of the process in terms of
market selection and the mechanisms used to enter foreign markets. These studies
highlight the role of managerial learning in the internationalisation process. While
some small firm findings support the view that firms follow an incremental process of
internationalisation in terms of increasing knowledge, commitment and investment
others do not. Interplay between actors is manifested in relationships a network
involves a set of two or more connected exchange relationships. Markets are depicted
as systems of social and industrial relationships among customers suppliers
competitors family and friends. The nature of relationships established will infuence
strategic decisions and the network involves resource exchange among its different
members. As members of the network value relationships rather than discrete
transactions opportunistic behavior is expected to be minimized. It has been suggested
that a firms success in entering a new international market is more dependent on its
position in a network and relationships within current markets, than on market and
cultural characteristics. The network perspective goes beyond the models of
incremental internationalization by suggesting that a firms strategy emerges as a
pattern of behavior influenced by a variety of network relationships.
The potential use of alliances or cooperative arrangements by small firms in the
internationalisation process may improve the potential for foreign market penetration
by providing access to a network of additional relationships. None of the authors
identify the specific network and relationship influences in any detail in the context of
the internationalisation process. This weakness is particularly evident when
considering the causes or drivers of internationalisation and how the process is
manifested in terms of foreign market selection and the mechanisms used for market
entry. The various models of incremental internationalisation provide useful
frameworks for analysis of international growth patterns, in terms of a firms gradual
learning and commitment to international markets.
Gradual learning and commitment to international markets plus the potential influence
of network relationships on the internationalisation process. Integrating the
incremental stage views of internationalisation with the networks perspective. To find
out how internationalisation process of small softtware firms is manifested and how
network relationships influence the small software firms choice of foreign market and

model of entry. Where knowledge is a core competency and firms are small by
international standards.
The case firms began their internationalisation process with the intent to enter foreign
markets and although their first entry was to a psychically and physically close market
other relatively early exapnsion was not. The small software firms show a pattern of
externalising their activities during the internationalisation process often relying on
network relationships for market selectionas well as mode of entry.
The small software firms internationalisation process is rapid with the firms using a
variety of mechanisms to enter a diverse number of foreign markets in as little as
three years. This activity appears to be largely driven by existing network
relationships. Rapid and successful growth appears to be a result fo their involvement
in international networks with major partners often guiding foreign market selection
and providing the mechanism for market entry. Thus network relationships may not
only drive internationalization but influence the pattern of market investment. Initial
product development relationship established with hardware vendors provides the
catalyst and resources for international growth. The inward relationship facilitated
outward expansion. The small software firms externalised certain activities in order to
minimise their financial and market risk during international expansion. Thus network
relationships enhanced the internationalisation activities of all four case firms they
also constrained the pursuit of other opportunities. However while network
relationships enhanced the internationalisation activities of all four case firms, they
also constrained the pursuit of other opportunities. The case findings suggest that
managerial learning occurred whereby market experience and success over time led to
increased knowledge about both markets and managing relationships. This in turn led
to increased commitment to foreign market development and further learning. This
pattern suports johanson and vahlne.
Managerial learning increased experience success increased knowledge
increased commitment to foreign market development.
The case findings indicate that the internationalisation decisions and overall growth
patterns of small software firms particularly with respect to initial and subsequent
market selection and mode of entry are very much shaped by their network of formal
and informal relationships.
This indicates that network development is one of a number of explanatory factors in
the ability and preparedness of a company to expand its foreign market servicing
The international growth patterns of four small software firms were empirically
assessed relative tot their network relationships. Within the context of knowledge
based software developers the understanding of internationalisation process for small
software firms can be enhanced by integrating the models of incremental
internationalisation with the network perspective. The internaitonalisation process is
very rapid, only three stages, small firms make simultaneous use of multiple and
different modes of entry.
This framework presents the internationalisation process in the context of the stages
of internationalisation evident in these small software firms, and their network
relationships and their firm characteristics over time. The network perspective shows
that international market development activities emerge from and are shaped by an
external web of formal and informal relationships.

Gabrielsson Born Globals: how to reach new business space rapidly.

The born global start up lacks resources compared to the requirement of reaching
world markets. The extant internationalization theories may not be adequate to
indicate viable channel alternatives for born globals. The born global must utilize
large channels provided by MNCs networks and or the internet to receive substantial
revenues and cash flow rapidly. These channels also provide learning, technology and
evolutionary growth. It usually takes years for global companies to expand and
penetrate foreign markets enormous money invested in subsdiairies and building
marketing channels in place. Born globals lack such resources and utilize alternative
governance structures rely on hybrid structures in their distribution channels. Born
global firms rapidly globalize their business by methods that circumvent many of the
existing international business research paradigms, have recently received increased
interest from researchers in many countries. Born globals are characterized by vision
and strategy to become global, small and technology oriented, become global from
immediate to three years and geographical expansion in terms of a minimum 25% of
foreign sales. The born global lacks managerial and financial resources required for
globalization and global marketing. Difficult to gain from conventional sources risk
of gaining profitability is higher and challenge even bigger when new entrepreneurial
firm goes global. Evidence from born global software companies indicate that
networks may develop through an initial contact with a larger firm which rapidly
develop into a netowrk of formal and informal contacts that provides market
knowledge and entry to markets around the world.
The economic based internationalization model assumes the firm policy maker is
homo economicus and has access to perfect information and will select a rational
solution. This leads to approaches such as transaction cost and or an eclectic
paradigm. These are microeconomic approaches which imply that the firma ndt he
market are two alternative modes that can be used to accomplish an economic
function. When the market becomes imperfect, the cost of transactions becomes high
and a firm would be better off by performing the function by itself such as distribution
by establishing a sales subsidiary. These theories may fail to provide an appropriate
explanation for the decision making of born globals since cost reductions is not the
key for their localization or internalization decisions. Innovation is acknolwedged as a
entrepreneurial quality. Four main attributes of an entrepreneur innovation
capability, internal locus of control, risk taking propensity and energy level companies
can rapidly grow internationally and jump over stages, and extend beyond the
transaction costs by joining networks abroad. Born globals can be expected to rely
more often on supplementary competences sourced from other firms in their
distribution channels they more often rely on hybrid structures. Various methods can
be used to save costs and make the firm more efficient and effective. Born globals
targeting broader strategic scope in terms of range of products number of segments
customers greater emphasis on developing new channels of distribution. Born globals
must activiate new international marketing business channels in order to penetrate this
new business space and access learning and resources from the global market.
The formation of marketing alliances is not uncommon for born globals. The born
globals realize that when resources are not enough for adequate brand development
they must cooperate in larger partner marketing channels. Some of the above partners

act as distribution channels. Others provide marketing resources for the born global
due to shared interests in co marketing.
Networks as partnerships for born globals networking is an effective way of
overcoming the paucity of resources and simultaneously learning from each other.
Born globals growth worldwide stems from its ability to build and leverage
relationships with its main customer in the network which is the partner who buys its
products/services. The commonality of vision and objectives and potential width and
depth of relationship across the business. Most networks emerge from links between
specialist firms, the internet allows technology enabled relationship management.
Born globals are a subset of entrepreneurs, do not possess sufficient resources at start
up time to stand up to a serious business mistake. They often borrow monetarily by
pledging personal assets. Therefore born global companies trying to reach new
business space in international markets rapidly must use the channels outlined earlier
of mncs as system integrators distributors networks and the internet either separately
or in combination. This lessens the risk of the born global.
Michailova Knowledge-sharing Hostility in Russian Firms.
Identifying capturing and leveraging knowledge contributes substantially to creating
competitive advantage. Systematically sharing knowledge between members avoids
redundancy in knowledge production and the problem solving process. Employees
often seek to improve their knowledge by asking their colleagues, getting training
frim mire experienced colleagues. Asymmetric distribution of knowledge prevents
managers from playing very active roles in the knowledge sharing process. It is
unrealistic to expect that individuals are basically willing to share knolwedge even
when incentives are introduced to produce the desired behavior. It is difficult to create
transparency at the individual level regardless of organizational ties. The two major
reasons why potential knowledge transmitters withold their knowledge fear of
decrease in personal value through sharing knowledge and besides protecting
competitive advantages they may defer from sharing knowledge due to the cost
involved. The time spent on sharing knowledge with other could be invested in
activities more productive for the individual. Organizational structures that promote
individual optimization little incentive to overcome the obstacles of time and
resources. Unless knowledge sharing is built into individuals expectations and is
reflected in reward mechanisms sharing is not likely to take place. Organizational
structures and incentives may promote a tendency of individuals to optimize their own
rewards and consciously or unconsciously hide knowledge from others. This
suboptimizes the total organization. Managers should encourage knowledge sharing
by rewarding transmitters communicating clear overall goals following up with
detailed feedback and setting a good example by sharing their knowledge. Individuals
act within particular contexts, cultural social economic and organizational.
Knowledge hoarding in russian organizations is reinforced by three additional features
coping with high uncertainty regarding how the receiver will use the shared
knowledge, accepting and respecting a strong hierarchy and formal power and
anticipated and actual negative consequences of sharing knowledge with subordinates.
The prevailing climate of suspicion and confidentiality in the russian context extend
beyond 70 years of socialist experience. In soviet system it was forbidden for
strangers to gather in groups and talk in public places.

Respecting formal power and resisting knowledge sharing across hierarchical levels
the high respect for hierarchy and formal power leads to intentional hoarding of
knolwedge anticipating that superiors would not promote them boss threatened by
subordinates. Many russian managers associate knowledge with formal position
based power rather than seeing knolwedge as a necessary condition and organizational
resource for taking optimal managerial decisions. Subordination rather than leadership
as the managers most important function. Managers should sbe more knowledgable
than their employees. all ideas are born in my head no creativity is required or
expected from subordinate workers.independence is alien to many russian workers.
The hierarchical levels in the organization are linked through pyramidal connections
and forces. Inequality in status among organizational participants can be a strong
inhibitor for sharing knowledge especially from lower levels to higher levels. Sharing
knowledge across levels is either not understood or consciously prevented. Russian
managers view sharing knowledge as pointless since employees are not authorized to
make decisions by themselves and therefore do not need the knowledge. Or fear
competitive pressure and loss of authority. Dealing with knowledge sharing hostility
based on encouragement is worthless or counterproductive in russian organizations.
Managers need to exploit the respect for hierarchy and formal power to force
knowledge sharing. It is important to reduce employees uncertainty about the risks of
knowledge sharing by using success stories to illustrate the value of knowledge
sharing. Managers should evaluate on their ability to share knowledge with
Learning from failure is highly valuable not only to the individual but the
organization. It is essential that management develops an atmosphere that embraces
mistakes and motivates individuals to share the learning points with their colleagues.
Apprehension about failures and the subsequent reluctance to share knowledge can be
addressed by working systematically towards establishing trust especially between
employees and managers. Interpersonal trust fundamentally has two forms cognitive
and emotional. In russia mistakes are taboo, russians would be more willing to share
insights about failures if the belief that events are beyond peoples control and
therefore must accept them. The belief that mistakes and problems are dubious and
should be avoided is deeply rooted in russian culture. Preferring not to act limits the
possibilities for learning from actions at the workplace. Reflection is an important
source of feedback and lack of feedback is a barrier to reflection. Many western
managers try to continuously give and receive feedback while russians avoid
discussions lack of interest in refecting upon the process of decision making. Many
russian companies are structured as a coercive bureaucracy. This structural
configuration is based on positional authority top down command and control and
autocratic strategy development. There is also a strong focus on procedures and
regulations. This constrains innovative behavior. When non-innovative behavior is the
norm, it is only logical to punish failures. This increases the level of hostility to
knowledge sharing.
The not invented here syndrome is the resistance towards using knowledge created
elsewhere external knowledge is rejected because it is more prestigious to create
new knowledge than resuse knowledge invented elsewhere. Also recipients dont trust
the quality of the shared knowledge and prefer to develop it themselves. Strong belief
in the zero sum result. In russia reward systems seldom provide the results and effects
intended by management.

Ram Mudambi Is knowledge power? Knowledge flows, subsidiary power and rent
seeking within MNCs
As MNCs have become more linked to international networks knowledge intensity
has risen and r&d gained more creative role. Many subsidiaries have acquired
considerable strategic independencein all aspects of their operations and able to
exercise considerable intra firm bargaining power to influence the distribution of the
firms resources. Intra mnc knowledge flows are a key determinant of subsdiary
bargaining power.
The two trends of increasing subsidiary operational responsibilities and the dispersal
of knowledge creating activities within the MNC network loosen the traditional
hierarchical structure of MNC governance. This has made mncs more like political
coalitions and less like military formations. Greater subsidiary competence
strengthens its role within the mnc only to the extent that other units are able to
assimilate and use it. Must use effort to transfer its competencies to other units. The
bargaining power of a subsidiary to maintain and increase its share of the rents
generated by the operations of the mnc as a whole is crucially dependent on the nature
and pattern of knowledge flows. Headquarters-subsidiary relations, stresses the need
to reconcile the pressures for subsidiary autonomy and smooth knowledge transfer
within the MNC.
This article examines the effects of knowledge flows within dispersed mnc networks
and autonomy control issues simultaneously with the process of knowledge creation
at the subsidiary level. Subsidiaries have their own objectives which may diverfe from
those of the firm as awhole. Important subsidiary objective is its bargaining power
within the firm.
Rentseeking behavior is a manifestation of opportunisim that destroys value. The
solution to this problem proposed by transaction cost economics is monitoring. This
implies limiting the extent of subsidiary autonomy. This has an important bearingon
the ability of subsidiary managers to pursue their own objectives. As bargaining
power rises in subsidiaries headquarters ability to control them declines. Tight control
by headquarters prevents the mnc from realizing the many well documented benefits
of strategically independent subsidiaries. These include learning from local systems of
innovation using and integrating local resources and competencies and generally
introducing a heightened level of dynamism into the parent mnc. Alternatives to
monitoring have been suggested and may alleviate the need for tight headquarters
control. Subsidiary managers intrinsically motivated are less likely to behave
Knowledge flows associated with a subsidiarys operations are the basis for its
bargaining power within the firm.
Intangible assets form a crucial basis upon which a firm can expand into foreign
markets. Internalization theory predicts that a firm should establish its own operations
overseas only if it possesses intangible assets and capabilities that give it competitive
advantages that cannot be transferred through licensing across firm boundaries.
Two sets of intangibles, r&d intangibles and marketing intangibles. Both of these
intangibles have been found to predict stronlgy what firms will undertake fdi and how
stock markets view such expansion. R&d intangibles have been found to be principal
source of value. Marketing intangibles have been found to add value only in consumer
goods industries.
Therefore subsidiaries that control a significant share of the MNCs r&d intangibles
therefore control the firms crown jewels.

Subsidiary managers control of significant amounts of the mncs knowledge assets

can be used to exercise bargaining power within the firm. This implies that control of
knowledge assets may be used in apportioning total mnc wide rents.
Hq-sub relations are like principal-agent relationships. The sub pursues its own
interests and is not a mechanical instrument of hq will. The local interests of subs may
not always align with those of the hq or the mnc as a whole. Agency theory views
subsidiary managers as agents of hq. agents/subs bargain with the principal/hq to
maximize their share of mnc wide rents. Subsidiaries are initially set up by the parent
mnc with certain goals and objectives. The nature of the subsidiary mandate is related
to the motive for the initial investment however the sub evolves over time and this
evolution can occur in both directions. Expanded sub charters relate to controlling
knowledge assets. Subs with control of mncs research and development intangibles
exercise a great deal of bargaining poer. Limited control over r&d means little
bargaining power when dealing with headquarters.
Knowledge flows into and out of subs depends on the motivation of subs to acquire
knowledge and share it. This emphasizes firm organization where incentive structure
of unit managers needs to be carefully designed. The norm for codified knowledge is
relatively easy to transmit to be geographically dispersed whereas highly tacit
knowledge tends to remain localized. Highly tacit knowledge is sourced from foreign
subsidiaries and tends to be driven by strong and unique local competencies or by
particularly strong company specific network capabilities.
Organizational framework of buckley and carter who propose that innovation within
the mnc occurs through global synthesis the integration of knowledge flows from
diverse sources. Highly evolved subsidiaries can undertake such integration in the
host location however this model is beset with three organizational problems.
acquiring information, coordination and motivation.
Flows from subsidiary to parent are knowledge transfers and form the basis of the
mncs network leverage. Flows from location to subsidiary consists of subsidiary
learning and locl competence exploitation.flows from subsidiary to location are flows
of spillovers which have been used to refer to flows both into and out of the firm.
However as the analysis is firm centric rather than location centric we define
spillovers to include only outflows from the subsidiary. The fourth flow is from the
parent to the subsidiary. This knowledge flow is the traditional flow where the sub
exploits a home base knowledge advantage.
Knowledge production depends on the level of research intensity of the subsidiary. A
more research intensive subsidiary wil produce more knowledge output. Second the
greater the knowledge inflow into the subsidiary the greater its knowledge output. The
mode of entry that created the subsidiary in the first place will have a bearing on its
knowledge output.
Higher research intensity of sub higher level of knowledge output
Greater the knowledge inflows into the sub higher its knowledge output
Subsidiaries set up through acquisition associated with higher levels of knowledge
production than greenfield.
Greater subsidiary knowledge enhances the subs ability to influence strategic
decisions within the mnc only to extent that other units are able to assimilate and use

it. Greater effort spent in developing its own knowledge base when this is carried out
at the expense of transferring knowledge to other units and aiding in its use actually
has a negative effect on the subsidiaries position within the mnc.
Sub with knowledge assets that are widely used by and create value for other units
within the mnc have a strong bargaining position within the firm. This is because the
opportunity costs to other subsidiaries of not cooperating with the subsidiary is very
The structure of knowledge networks differes significantly across industries and there
is not a single approach to knowledge management.
Greater the knowledge output of sub greater bargaining power within mnc
Greater the knowledge output from the sub to units within mnc greate its bargaining
power within mnc
Greater the knowledge inflows from other units in the mnc to subs- lower its
bargaining power within mnc
Greater the knowledge outflows from the sub to its location the lower its bargaining
power within mnc
Greater subs local depdence lower its bargaining power within mnc.
Older subs are more likely to receive investment funds than younger subs.
Longer the duration of operations of a sub greater its bargaining power. Firms with
greater external orientation more stable cash flows and better ability to weath
Greater the level of external orientation of a sub- greater its bargaining power within
Mncs differ in extent to which hq control production process. Higher control is form
of operatinal independence.
The greater the level of process control exercised by sub greater its bargaining
power due to information asymmetry.
The extent of rent seeking and consequent resource misallocation depends on the
extent to which abrgaining power can be influenced by sub actions. Internal
bargaining power considerations become more important as resources devoted to firm
focused support of other units fall.
The greater the bargaining power of a sub within the mnc higher the level of rents it
can appropriate.
Subsidiary autonomy is based on discretion granted by hq and subsidiary bargaining
power. This is much more difficult for hq to revoke.
Since the subsidiary has no control over tangible assets, a subsidiarys bargaining
power must be based on intangible assets over which property rights are hard to
define and enforce. The bulk of such assets are in the form of knowledge. Knowledge
is the ky source of subsidiary bargaining power. Knowledge intensive subsidiaries
have strong bargaining power and have greater ability to resist headquarters attempts
to control their resources.
The form of sub autonomy within which knowledge flows occur may be characterized
as discretion as the hq retains the right of veto. Bargaining power is where the sub is
not subject to hq veto. Rent seeking is an inefficient activity from the perspective of
the system as a whole destroying shareholder value.
Andersson Balancing subsidiary influence in the federative MNC: a business
network view.

Interorganizational power can be analyzed by modeling the mnc as a federation. Hq

and subs are involved in a perpetual bargaining process. Thus what power bases are
there that can be used to influence strategic decisions. Power bases associated with the
local business network in which different subsidiaries are embedded and on the hq
knowledge concerning these networks. The influence of subs local business network
are determined by the extent to which the subsidiary provides technology within the
mnc. Externally embedded subs can provide access to a variety of competencies but
may also reduce the subs interests in contributing to overall performance of the mnc.
Subs influence within federative mnc. Hq expects subs to indulge in rent seeking
behavior and increases monitoring of subs whoe external embeddedness is likely to be
valuable. Analyzes the importance of the subs business network as the origin of such
influence and examines the extent to which corporate hq knowledge can counteract
subs influence.
Determining how the local environment can constitute a power base for the sub. The
effectiveness of a subs linkages with its local environment as a power source can vary
depending on characteristics of these linkages. The strategic importance of the
country or the level of competitiveness may or may not be important depending on the
nature of the subs business relationships. The closeness of these relationships has a
strong impact on the extent to which the environment can function as a platform for a
subs intra organizational power. Sub unit power often considered the sub units ability
to avoid control that hq wishes to impose.
The ability to avoid control from hq and the actual influence of the sub on strategic
behavior of the mnc as a whole.
Subs influence on making strategic decisions, subs power base is explicitly linked to
its relationships with certain important customers and suppliers and not only to the
local environment in general. Emphasis on relationship between subsidiaries and the
subs local business environment play a major role as a platfor for its intra
organizational power. A subunits access to resources that are critical to other sub units
in the federative mnc is the primary base of power rather than personal traits like
reputation or charisma. The subunits access to critical resources is dependent on the
relationships it has with its business environment. Power accrues through the structure
not only to those who occupy central network positions but also to those who occupy
central network positions
The concept of power focuses on sub-units ability to win political fights in resistance
to others in the organization. This ability in its turn is dependent on access to
resources of importance for other units operations. Here we concentrate primarily on a
subs ability to contribute to the developmet of a competence in other units. How the
relationships in a subs business network influence its power. Closeness and long term
nature of relationships should be at the centre of the analysis. Knowledge about
networks to be the power base that is independent of other sources of power. Subs are
both profit seeking and rent seeking, wish to contribute to overall performance and
maximize benefits in accordance with its own interests. Subs rent seeking ability to
extract excessively large capital allocations from hq. the local environment is what
differentiates subsidiaries. Sthe presence of dense exchange relationships with local
partners is an important indicator of subsidiary power. The concept of network
embeddedness has also been used by several scholars to explain subsidiaries
competence development. Actors who are strongly tied to each other are more capable
of exchanging information and more willing to do so.

A high degree of network embedddness is conducive to the subsidiarys ability not

only to assimilate new technology from the environment but also to develop new
technology through close interaction with network partners.this is in line with the
conceptualization of a firms business network as a strategic resource.
Network embeddedness has a positive influence on the performance of subs, which
strengthens heavily embedded subs in negotiations concerning their mnc future
investments. A subsidiary learning through knowledge flows from the environment
will improve its listening post role and strengthen its position vis a vis that of the
headquarters as far as information about markets and products in the mnc
environment is concerned.
Higher a subs external network embeddedness greater the influence on strategic
decisions within the mnc.
Subs are not equalized, some have innovative roles, others have access to particular
technologies. Some subs will be more important than others for the development of
competence. Givers of technology are more powerful than receivers of technology.
The subs ability to become a giver of technology depends on its network
embeddedness. High embeddedness is conducive for assimilating valuable knowledge
and for developing new technology that might be of interest to other units within the
Higher the subs external network embeddedness the more important sub is for other
mnc units
More important a sub is to other mnc units competence development greater its
influence on strategic decisions within the mnc
Discussion addressed factors that can explain why subs have the power to compete for
influence within their hq on strategic issues.
The greater the hq knowledge of the subs external network the less influence the sub
will have on strategic decisions within the mnc.
Hq must assess the political landscape in the mnc.
The higher a subs external network embeddedness greater the hqs knowledge of that
network will be.
The more important a sub is for other mnc units competence development the
greater the hq knowledge of the subs external network.
This model deals with the subs ability to influence strategic issues beyond its own
local undertakings rather than its ability to avoid control from above, thereby
increasing its autonomy. The model conceptualises specific business relationships in
the subs environment as their ability to provide power and suggests that the closer the
relationships the greater the power associated with them. The model explicitly
considers the mnc to be an arena for bargaining by including not only the subs power
basebut also the ability of its counterpart in this case the headquarters to moderate the
impact of that power base. Hq monitoring of the sub is one of several potential means
of moderating the subs power base. Power measured by the influence on strategic
issues is not equally distributed among subsidiaries of an mnc. The strength of the
subs external business network is forceful although indirect predictor of variation in
influence between subs. The hq ability to counteract the influence of subs is done
through knowledge about the subs external network. This knowledge is used by hqs to
subdue rather than reinforce the influence of strong subs. Learning about important

sub networks should be a high priority activity at hq level. A strong external network
does not provide a sub with sufficient power to exert strategic influence. The subs
ability to function as a provider of competence to sister units irrespsective of the
strength of its external network. A high level of external embeddedness is positively
related to the subs ability to provide expertise to the mnc. A high degree of external
embeddedness is important for development of sub competence with some spilling
over to other subs. A high degree of external embeddedness indicates sub is largely
involved in long term business interactions with the possible result that issues external
to the mnc are prioritized.
Spencer MNEs and Corruption: The impact of national institutions and subsidiary
The pressure for mnes to engage in corrupt practices in their host country varies
positively with the institutionalization of corrupt practices in both host and home
country environments. The relationship between mnes home environment and the
pressure it faces in the host country is moderated by its localization strategy.
Subsidiaries operating in emerging and developing countries regularly encounter
pressure to engage in corrupt practices such as bribery. Corruption is the norm
ratherthan the exception. The strategic implications of a subsidiarys decisions
regarding corrupt practices are particularly acute for mnes from home countries in
which anti corruption norms have been institutionalized. Characteristics of corruption
can become so institutionalized that they become fundamental components of a
countrys institutional environment. Institutional theory and the MNE firms face
institutional pressure to conform to societal conventions and expectations by way of at
least three processes. Coercive processes reflect pressures imposed by an authority,
normative pressures reflect established paradigms in society and mimetic processes
reflect pressures for firms to imitate successful enterprises in their organizational
field. Such conformity can legitimate a firm by contributing to its acceptance and
endorsement by relevant actors in the institutional environment which can be critical
to the firms survival and performance. An MNEs activities to achieve legitimacy in
one country can affect its legitimacy elsewhere. If corrupt practices such as bribery
are institutionalized, managers are more likely to conform to these societal
expectations to obtain legitimacy. The more that corruption norms are institutionalized
in a host country the greater the pressure the MNE subsidiary will face to engage in
corrupt practices such as bribery in the local environment. Organizational practices
devised at founding will persist as the mne expands abroad into new institutional
environments, thus an mnees response to corruption pressure in foreign subsidiaries
will partially reflect practices devised to conform to its home country institutional
environment. Mnes from less corrupt institutional environments are more exposed to
potential legitimacy spillovers by virtue of the greater disdain for corruption present
in their home environments, they will be more likely to consciously invest in an
internal culture and organizational policies and practices that discourage corruption
worldwide. The less that corruption norms are institutionalized in the MNEs home
country, the weaker the pressure the MNE subsidiary will face to engage in corrupt
practices such as bribery in its host country. The corruption level of the mnes home
country will relate positively to the degree to which local corruption pressure poses an
obstacle to its host country subsidiarys performance. Localization strategies adapt
firms to host country conditions, and may include taking on local aprtners or
investors, and localizing control. An MNE striving to achieve global integration will

have stronger subsidiary interdependence and thus may strengthen headquarters

control through formal mechanisms such as centralized decision making. Government
officials may anticipate the presence of relatively weaker anticorruption norms when
they know local managers hold greater levels of autonomy. Localized control will
moderate the relationship between the institutionalization of corruption in the MNEs
home country and the pressure its subsidiary faces to engage in corrupt practices in
the host country.
Although the presenceof corruption may increase Netcares efficiency by allowing
them to avoid red tape, prevalent bribery leads to unpredictability and higher costs in
business operations (Spencer, p.295).
As Netcare originates from a country in which anticorruption norms are not
institutionalized, it would not require a local partners to undertake corrupt
transactions. The presence of a local partners should have a smaller impact when the
MNE comes from a country in which corruption is more institutionalized since
officials would see little risk in directly pressuring the MNE subsidiary itself (Spencer
Corruption pervades Netcares home environment in South Africa, indicating that they
are less likely to promote an internal culture and organizatinal practices discouraging
corrupt behavior, such as as engaging in bribery. Moreover, Brazilian officials are
likely to be aware of the corruption pervading South Africa and thus act more
aggressively in pressuring Netcares foreign subsidiaries to engage in corruption. As
neither Brazil nor South Africa participate in the Organisation for Economic Cooperation and Development Convention on Combating Bribery of Foreign Public
Officials in International Business Transactions prosecuting bribery of foreign
officials as crime.
There are explicit challenges involved in establishing legitimacy across diverse
institutional environments.
Netcare will face different pressures in Brazil due to its corrupt host country
environment, compared to the U.K, thus it must reduce its exposure to local
institutional pressures.
Netcares internationalization challenges the Uppsala model of a sequential entry
mode. As the corruption level of host countries is positively related to the subsidiary
need to engage in bribery in that country, it follows that Netcare would face
significant pressure to engage, and thus condone, corrupt practices in order to
implement a successful subsidiary in Brazil (Spencer, p. 282)
Different for netcare to venture into a developing country such as Brazil, compared to
a developed country like the U.K. Brazil and South Africa may share institutional
features, such as weak institutional structure and high levels of corruption, however,
even if Netcare has developed strategies to accommodate institutional voids and
government corruption, these voids and corruption may manifest differently in Brazil.
Corruption in brazil may be highly pervasive and arbitrary.. Complying with
corruption in Brazil, in order to achieve legitimacy may negatively affect Netcares
legitimacy in the U.K (Spencer, p. 281).

netcare should have developed the organizational capabilities for dealing with a
diverse set of host country requirements. Learning how to achieve legitimacy in one
environment can be internalized and utilized in another rodriguez p.392

The services Netcare provides elevates the importance of strategic human resource
management. Use legge? Resource based theory? Employees are treated as strategic
Resource based theory suggests that trustworthiness as perceived by market
intermediaries is a criticla source of competitive advance especially important for
firms from economies with strong government intervention.
Netcare combatted its liability of foreigness (apprehensiveness of south african
private health care in u.k) through terrific customer service, engaging the customers
reproduces high levels of trustworthieness.
Netcare exploits opportunities abroad, manifesting in the U.K in order to tap niche
opportunities in advanced markets abroad that complement their strengths core
competence, and to escape from the institutional and market constraints in South
Africa, escaping from the limited domestic market that offers little room to expand.
Netcare seeks assets through strategi alliances
Netcares business model matches Anglo-saxon thinking better, despite geographical
distance, compared to neighbouring countries such as Kenya and Rwanda. Psychic
distance Russian literature Human resource?
Exploring Netcares opportunities to grow, by focusing the Groups efforts on
Exploiting its core competence in consolidating the fragmented market in Brazil and
introducing efficiencies to them, as the health care system resembles the U.K in that
the public health care system provides universal covergage, entirely funded by
taxation and facing substantial capacity and quality challenges.
How can Netcare overcome the challenges of the South African market, and grow
further, exploiting its core competence by expanding into the health-care system in
Exam Case Notes
NetCares International Expansion The proposed legislation of the National Health
Amendment Bill paves the way for regulated prices and collective bargaining between
medical schemes and health service providers such as hospitals and doctors, and could
change the entire industry structure in south africa going forward.
Market share in South Africa more than 28% growth at home by acquisition was
always going to be limited and subject to stringent scrutiny from competition
regulators. Potentially strong organic growth options at home, however, were on the
One of netcares long term goals was to deliver innovative quality health care solutions
to patients in every continent of the world. The recent acquisition of the general

healthcare group in the U.K propelled netcare from a predominantly south african
operation into one of the largest private hospital groups in the world. Political
pressures in south africa could only further complicate the difficult decisions to come
in defining how to execute the groups strategy. What lessons could be learned from
the GHG acquisition how could he leverage the group for further growth
internationally, and which continent was best suited for expansion?
Netcare was founded in 1994 listed on the johannesburg stock exchange in december
1996 with six hospitals. Acquired medicross in 2001. 2006 medicross acquired prime
cure holdings, emerging market with a further 25 centers and 130,000 managed care
customers. Netcare demonstrated strong growth by 2007, providing key services in
south africa private hospital and trauma services through equity interests in 56
hospitals with more than 9546 beds, netcare 911 was the largest private emergency
service with more than 7.5 million members. Ancillary health care services including
primary care services through medicross and prime cure and diagnostic services
through an interest in nationwide administration and logistical services .
South africa characterized as two countries living side by side with a largely black,
poor population with limited access to health care and low standard of living and a
wealthy predominantly white population utilizing a world class private health care
system on the other. The poor rely on a public health care system focused on primary
health care and the management of hiv, malaria and other diseases afflicting the poor
such as malnourishment. The private health care sector resembles that of a developed
country and patients are typically older and require tertiary level care.
Health care spending in 2004 was 8.6% of gdp, 60% of which went toward private
health care. 14% of the population had private medical insurance while 40$ used
private sector health services as outpatients or otherwise. Private health care system in
south africa ranked near the top in terms of access and quality while the public sector
ranked near the bottom. The traditional business model was doctor driven with the
hospital renting facilities and nursing hours to doctors. To attract the busiest doctors to
practice in their hospitals the organizations competed to have the latest and best
medical technology the best nursing staff and world class facilities. Majority of
private patients were covered by medical insurance which increased tariffs about
inflation rates. This led to increased spending on private health encountering
resistance from consumers. For netcare the major implication was the shift from
traditional low volume high margin operations to high volume low cost low margin
ones. During the apartheid era the private hospital sector served the minority white
population almost exclusively while the black population used public hospitals.
Addressing social and economic inequities the south african government developed a
regulatory environment to drive national and sectoral transformation. The broad based
black economic empowerment act promulgated in 2004 allowed the government to
issue codes of good practice for private sector firms.
Netcares philosophy and approach to health care business is characterized by strong
performance driven culture with a fanatical attention to detail. Netcare maintained
world class standards in patient care, staff competence and relationships with medical
practitioners. Six major themes (Netcares strategy) Organizational growth,
operational excellence, physician partnerships, best and safest patient care, passionate
people and transformation. Netcare saw its core competence in consolidating
fragmented markets and introducing efficiencies to them rwanda was fragmented

but political pressure made the environment too unstable to relieve it? While the uk
was fragmented in a more stable environment with a political government
facilitating/matching the goals of netcare, accomodating netcares presence gradually
and supportively
Is netcare more competent in caring for young people while demand increases for care
of older people?
Role of psychic distance can there be more psychic distance within a continent
(from south africa to rwanda) than between continents (south africa to the uk)
Ownership advantage of netcare is its consumer-focus
Emnes have a unique advantage in local market knowledge enabling them to
customize products to the home country
Cost specific advantages were cost reducing
As a company from one f the worlds poorest countries netcare developed adversity
advantages to cope with the bad institutional structure.
Room to expand in the uk and europe contrast to south africa