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Lecture 1

International Business (King's College London)

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Lecture 1
Intro to IB & MNCs

International business: it’s about (1.) firms engaging in cross-border activities and/or (2.) the activity of
doing business abroad –Peng and Meyer

MNC: a publicly listed firm that engages in foreign direct investment (FDI) by directly investing in,
controlling and managing value-added activities in foreign countries

 FDI = direct investments in activities that control value creation in foreign countries (according to
UN, FDI threshold is owning at least 10% equity stake)
 MNCs are usually publicly listed firms (MNEs include privately held too, and this can be more
important as many countries have ”underdeveloped” stock markets)

OLI paradigm:
FDI is beneficial if the firm possesses Ownership, Location & Internationalization advantages:
 O-advantages  firm resources are transferable to foreign countries, thus attaining their competitive
advantage
o Resources can be transferred e.g. tangible assets
o Benefits of combining business units in different countries e.g. supply-chain management
o Benefits from organizational structure and culture e.g. norms and values
 L-advantages  the local context offers a new opportunity that isn’t present at home
o Markets e.g. access to markets with growth potential
o Human resources e.g. skilled labor force
o Natural resources e.g. oil, gas
o Agglomeration (locating near other firms) e.g. cluster of info advantages (Silicon Valley)
 I-advantages  business activities are better organized when information flows internally, as
opposed to interacting on the external market (hence joint ventures or takeovers)
o Asset specificity e.g. transform inter-firm trade to intra-firm trade avoiding opportunistic
behavior (manipulating the accounting sheets to retain money)
o Information asymmetry e.g. closer monitoring and control
o Dissemination of risk -Decrease the level of risk
o Tacit knowledge transfer e.g. knowledge that is internalized by people and cannot be
written or verbalized
o FDI can be more efficient than market based solutions such as exporting, licensing and
outsourcing

Top MNCs by revenue:

1. Royal Dutch Shell (UK)  TNI = 73
2. Exxon Mobil (USA)  TNI = 63
3. BP (UK)  TNI = 70
4. VW (GER)  TNI = 59
5. Toyota (JPN)  TNI = 59

Most MNCs have the majority of their sales in their home region  particularly the triad: North America,
Europe & Asia

Int. revenue significantly important in recent years

 Internet companies have grown their international share of revenue the fastest
o Annual growth rate of share of non-US revenue (1992-2012) in %: Manufacturing (Ford,
GM) = 3% vs. Social Media (FB, Linked-in) = 16%

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Internationalizing due to:

 Resource-seeking objectives (Supply oriented)  Exxon Mobil
– designed to gain access to natural resources. Certain resources you don’t have at home – minerals,
oil, gas or human resource of labour and workforce.

 Market-seeking objectives (Demand Oriented)  Netflix

-designed to satisfy particular foreign market. Huge market you want to tap into, big growth potential

 Efficiency-seeking objectives (Rationalized seeking) Apple

-designed to promote more efficient division of labour or specialization of an existing portfolio of
foreign and domestic assets by MNEs.
- Trying to economize on your supply chain. This type of FDI though is related to first and second
kind, is usually sequential to it.

 Strategic-asset-seeking objectives  Chemchina

-designed to protect or augment the existing ownership specific advantages of the investing firms and
or to reduce those of their competitors. Moving abroad to get resources and strategic assets

“Target – Case Study”

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Should they internationalize?

 Option 1: not to internationalize, but continue to focus on the domestic market in the U.S. through
either: pushing the food segment of its store business.
o However, there are pressures from foreign competitors in the discount segment, questionable
if able to compete with them in the long-run.
o Go back to basics by offering high-value apparel and household goods.
 Option 2: internationalize:
o Look to the successful ventures by Walmart in markets abroad

What countries constitute promising markets for Target, given their unique capabilities?
 China: promising market for retailers, but Targets “cheap chiq” approach may not fit the Chinese
culture.
 Canada: culturally proximate but does not have the high growth numbers of emerging economies,
such as to the south or east.
 Mexico: Walmart already has a 50% share of the market there; tough to compete

Solution  Target should look to previously colonialized countries such as India and South Africa, because
they are:
 Emerging economies with promising market opportunities
 Shared the English language  thus easier to reduce cultural distance
Modes of entry:
 JV, Acquisition of domestic player or set up their own wholly-owned subsidiary

Reading 1: What’s the purpose we study International Business? (Meyer 2013)

 There are opportunities and challenges that firms face when they firstly enter an international market
as an outsider in the local context
o Create organizational structures
 Globalization accelerates business interfaces across countries, while only marginally reducing
differences in national context

Reading 2: Eclectic Paradigm as a framework for theorizing MNC activity (Dunning, 2004)

 Eclectic paradigm – OLI framework comprises of 3 components (with their subcomponents)

1. Competitive advantages of companies seeking to engage in FDI, which are specific to
ownership of the enterprises being invested in (O-advantages);
 The greater the competitive advantage of investing firms  the greater the chances to
engage (or increase) foreign production
2. Locational advantages (L) of alternative countries or regions
 The more immobile, static or created benefits, which firms can utilize together with
their competitive advantage, favor a presence in the foreign country the more firms
will choose to augment or exploit their O-specific advantages by engaging in FDI
3. Internationalization (I) offers a framework for evaluating alternative ways of organizing the
creation and exploitation of a firm’s core competencies
 The grater the net benefits of internalizing the cross-border immediate product
markets, the more likely FDI will occur instead of licensing for example

 4 main types of foreign activity by MNCs:

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1. To satisfy a particular foreign market  market seeking/demand FDI

2. To gain access to natural resources (minerals, unskilled labor)  resource seeking/supply
oriented FDI
3. To promote a more efficient division of labor or specialization of existing portfolio of
domestic assets (outsourcing)  rationalized/efficiency seeking FDI
4. To protect or expand the existing O-advantages of the investing firms by/or reducing those of
their competitors  strategic/asset seeking FDI
 Outward FDI more likely for countries like Switzerland and Netherlands as opposed to Russia or
India due to  competencies, size and experience of companies, locational attractions for natural
resources, attitude to risk
 4 outcomes of the 1980s & 90s:
1. Maturation of knowledge-based economy
2. Deepening integration of international economic/financial activity (stock market)
3. Liberalization of cross-border markets
4. New players as emerging dominant economies (e.g. China, Brazil)

 Ownership sub-paradigm  3 advantages:

1. Possession and exploitation of monopoly power  originates from a barrier to entry to final
product markets without ownership
2. Possession of a bundle of scarce, unique and sustainable resources and skills
3. Using the competencies of managers to recognize and capitalize on opportunities of
international expansion (resources, skills or more revenue)
 Static O-advantages are benefits that arise from investing firms acting on an opportunity that is
already there in the foreign country: e.g. resource or market access
 Dynamic O-advantages are benefits for the firm to generate more income overtime

 Location sub-paradigm:
 Traditionally the competitive advantage offered by a region’s location was based on the unique
set of immobile natural resources or capabilities
 Brazil’s Golden Triangle: Rio, Sao Paolo & Belo Horizonte “terra rossa” soil offering
perfect climate for coffee production becoming the driver of Brazil’s growth
 Nowadays the competitive advantage is geared to offering a non-imitable set of location bound
created assets (e.g. presence of indigenous firms, with which MNCs can form alliances to
enhance their core competencies)
 2012 Jaguar Land Rover JV with Chinese Cherry Automobile in order to “combine
the experience of the luxury brand with Cherry’s knowledge of the market to produce
relevant, advanced models”
 Due to globalization some nation states are becoming increasingly dependent on cross-border
activities and FDI for their economic prosperity  their competitive advantaged is governed by
the institutional framework in which they operate
 Chinese firm investing in mining in Guinea (dependency) or Shell in Nigeria

 International sub-paradigm:
 Advantage: firm will choose to organize business activities internally by creating an international
company instead of obtaining a license because it is cheaper than conducting the core
competencies “at home”
 If external costs are high, you engage in FDI;
 If cost-related risk is high to produce internally, licensing occurs
 Criticisms:
 Incomplete theory as it only looks at the costs/transaction related activities (short-term
profit), not things like learning adaptation, capabilities to produce etc.
 Static theory because it does not propose how a firm can create future assets but only
speaks about optimizing use of existing assets
 Inter-firm coalitions = internationalization but without equity

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