INTERNATIONAL

Get to know the world:

Statistics:
 www.fn.no
http://www.doingbusiness.org Index that has

BUSINESS

been put together by several indexes. Also sub
indexes =)
 All of the indexes is important.

Sammendrag  Book value - the total value of the equity at

the stock market (is worth 0,5=0,5 50 in
stead of 100).
2019  

LIVE OLSEN
ASSIGNMENT:
 
Select three countries where of one should be
HØLMO Norway, one should be another OECD country
and one should be a low-income country.
 Familiarize yourself with
www.doingbusiness.com. Which part of
the webpage to you like the best? And
why? How does the World Bank do the
ranking and the scoring?
 Do some googling and try to identify other
resources that can help us better
understand and compare countries.
 Imagine that you run a small business in
each of the three countries
 Among the topics covered by
www.doingbusiness.com and the other
sources you have identified which do you
think are the most critical in each of the
three countries? (do you think there are
differences for a small business depending
in which country it operates)
 Why do you think the World Bank puts lots
of resources into making up the World
Business Indicators?

CHAPTER 1 
 

Foreign direct investments (FDI)
 A direct investment into production or business
by an individual or company in another country
 Either buying a company or expanding existing
operations in a country
 
What is an international company?
 How does an international company differ
from a domestic company?
 
Key terms
Global business: business around the globe
including both international (cross-border)
activities and domestiv business activities
International Business (IB)
“IB is about 1) businesses (firms) engaging in
international (cross border) economic activities
and/or 2) the activity of doing business abroad.
(Peng and Meyer, 2011, p. 6)
Multinational Enterprise (MNE)
“A firm that engages in foreign direct investment
(FDI) by directly investing in, controlling and
managing value added activities in other
countries”. (Peng and Meyer, 2011, p. 6)
 
Foreign direct investment (FDI)
Investments in, controlling and managing value-
added activities in other countries. (Peng and
Meyer, 2011, p. 6)
Important economic terms:
 gross national product (GNP) –
2
 measured as the sum of value added by
resident firms, households, and
government operating in an economy.
 gross domestic product (GDP)
 total market value of all final goods and
services produced within a country in a
given period of time usually a calendar
year.
 gross national income (GNI)
 GDP plus income from nonresident sources
abroad – the term used by the World Bank
and other international organizations to
supersede the GNP term.
 purchasing power parity (ppp) –
 adjustment made to the GDP to reflect
differences in the cost
of living.
 The big mac index - the cost of a big mac in
norway versus the big mac in china
 
A multinational enterprise (MNE): Both activites
internationally (Income statement) and
assets/liabilities (Balance sheet)
 A firm that engages in foreign direct investment
(FDI) “by investing in, controlling and managing
value added activities in other countries”. (Peng
and Meyer, 2011, p. 6), i.e., involves international
assets and liabilities
International business in a value chain
perspective
 1. We discuss issues worldwide as they are
relevant to European businesses and

managers focusing on:.

o business in nearby countries,
 
o The institutions of the EU,
 
  o small and medium-sized enterprises
  (SMEs),
  o research by European scholars on
  these issues
  2. We go beyond developed economies by
What do we really look at? devoting extensive space to emerging
Geographical conditions. markets.
 Climate has a huge impact on the business  
opportunity, and it is influencing culture a lot. In  
Norway we are a culture where people in average What is globalization?
is very good at planning because of our climate. Many people talk about globalization, yet they do
 Terrain and seaways: Landlocks has a big not necessairly mean the same thing
disadvantage. Bolivia etc. Eritrea and ethiopia has
a huge conflict bc eritrea has the sea and ethiopia
tries to take over eritrea.
 Natural resources: oil has been a big
disadvantage for many countries because they do
not have strctures and institutions in their
contries that benefits it. Venezuela, kongo
 
 
  Guillén (2001) defines it as ‘a process leading to
  greater interdependence and mutual awareness
  (reflexivity) among economic, political and social
  units in the world, and among actors in general’
   
   
European and Global Business
 
 International business (IB) is about:
businesses (firms) engaging in international
(cross-border) economic activities
 the activity of doing business abroad.
 This book goes beyond traditional IB textbooks in
two important ways:

3
 Positive sides
1. Economic growth
2. Sharing of technologies
3. Cultural exchange
 Negative sides
1. Undermines wages in rich countries
o Unskilled norwegian labor has lost
their jobs to immigrants. The number
of NAV users have gone up.
o The increase in salary for unskilled  
labor over the last 20 years has been
much less than skilled ones  
2. Exploits workers
Top 10 largest companies in the world by market
3. Gives MNEs too much power capitalization
Apple
Alphabet inc/Google
Microsoft
Berkshire hathaway
Exxon mobil corp
Amazon
Facebook
Johnson & Johnson
General electric
AT & T

4
 Motive: Resources: not only economic, also employees,
copyrights- tangible/non-tangible resources.
Why and How do firms expand internationally  
and what is the mentality around it? Institution based view
 
Ethnocentric
Formal and informal rules of the game
1. Home-country oriented (How to do business in a foreign country)
Polycentric FORMAL: What are the rules of the country for
foreign firms?
1. Host country oriented
INFORMAL: How do culture and values affect
Geocentric how to do business in a foreign country?
1. World oriented  
Environment (foreign country) influences the firm ́s
2. "the world is our market" success
Liability of foreignness
   
Resource-based View
A unified framework An Institution based view which views
performance as determined only by
"What makes a company successful if it goes external environments has its limitations.
international?" The resource-based view focuses on a firm’s
internal resources and capabilities.
the “liability of outsidership” infers the more a
firm’s origins differ from the host
environment, the less the firm has
experience in the host country and the
further away its nearest prior affiliate.
Firms as Coca Cola and Microsoft possess firm-
specific resources that enabled them to
attain leadership positions around the
globe.
1. Hence the primary weapon of foreign
firms is overwhelming resources and
Our ‘big question’ is: capabilities that, after offsetting the
“What determines the success and failure of firms liability of outsidership, still result in
around the globe?” some significant competitive
To answer this question, we focus on two core advantage.
perspectives:  
an institution-based view
a resource based view.  
 
Institutions: a set of behavoiurs that are written
down, how are the laws etc, established rules.
 
Formal (written down) / informal (a set of
behaviours) institution.
 
They will influence our business a lot and how do
we combine Norway and Belgium? How is the
institutional fit? Norway + India- not a good
institutional fit. Need to know about the
institutional distance to have success with the
business there.
 

5

Outsidership / liability of foreignness
Is outsidership always negative? Can you think of
countries or industries where it could be a benefit
to be a foreign firm?
When Did International Business Start?
China, India, and Japan 15,000 years ago
Africa and South America thousands of years ago
Eleventh century
Fifteenth and sixteenth centuries
Colonization
 
Chapter summary:
Explain the concepts of international business
(IB) and global business
IB is defined as(1) a business (firm) that
engages in international (cross border)
economic activities, and (2) the action of
doing business abroad.
This book places special emphasis on the
challenges faced by European businesses,
and the challenges of emerging economies.
 
Articulate what you hope to learn by reading
this book and taking this course.
 To better compete in the corporate world
that will require global expertise.
 To enhance your understanding of what is
going on in the global economy.
 
Identify one fundamental question and two
core perspectives that provide a
framework for studying this field
6
 Our most fundamental question is: What
determines the success and
failure of firms around the globe?
 The two core perspectives are (1) the
institution-based view
 and (2) the resource-based view.
Participate in the debate on globalization with a
reasonably balanced and realistic
view.
 Globalisation has created unprecedented
contacts between nations and
cultures, with both positive and negative
consequences for individuals.
 Globalisation has been evolving in waves,
with a major peak in the late 19th/early
20th century.
 The recent wave of globalisation has
accelerated with the rising powers of
emerging economies, yet it remains
volatile.
Have a basic understanding of the global
economy and broad trends. MNEs,
especially large ones from developed
economies, are sizable economic entities.
 
1. Draw implications for action and recognize
your own biases.
 Globalisation requires business leaders to
stay up-to-date with economic, social and
political developments around the world.
 Current and would-be business leaders
need to be aware of their own hidden pro-
globalisation biases.
 
CHAPTER 2 –
INSTITUTIONS:
ECONOMIC, POLITICAL
AND LEGAL SYSTEMS 
 We focus on clear contracts/systems/plans, they
on good relationships and networks
 You have right but you don’t get right
 System to enforce contract is weak
 Constant change in legal framework
 Geografical and culture distance
 Misunderstandings
 Misunderstandings
 What are we facing?

 
 
What does institutions mean in International
Business?
 Definition: Formal and informal rules of the
game
 
What is an institution?
When you google it you will get a picture of a
bank.
 
What do institutions do?
 
Institutions' key role is to reduce uncertainty
 Uncertainty increases transaction costs –
costs associated with economic transactions
 Institutional frameworks can reduce the
potential for opportunistic behaviour by
explicitly establishing rules.
 
No rules: uncertainty, Rules = certainty
 
Dimensions of Institutions
Formal institutions are normally the government,
and informal institutions concern behaviours are
morally right and wrong, and what is important
and not within a society.
 
 
The financial crises of 2008 revealed that banks
made major mistakes in their risk management
practices. Probing deeper, it emerged that a
combination of cognitive and normative pressures
may be at fault.
7
Discuss with your classmate:
Why do you think Europe created the European
Union? What are the benefits of unified formal
institutions across boarders? Are all institutions in
Europe now the same across all member states?
Understanding institutions
 Institutions
o “rules of the game”
 Institutional transitions
o Fundamental and comprehensive
changes introduced to formal and
informal rules of the game that affect
firms as players
o Changes in the institutions
 east european states 1990 -
today
 Path dependent - parents,
grandparents has influenced
you - and generations influence
each other.
 Institution-based view
o success and failure of firms are
enabled and constrained by
institutions
 Institutional framework
o Formal and informal institutions
governing individual and firm
behavior
 Formal institutions
o Laws, regulations, and rules - may be
imposed by home countries and host
countries
 Norms
o Values, beliefs, and actions
Institutions are not static
Institutions evolve over time. Institutional
transition, defined as ‘fundamental and
comprehensive change introduced to the formal
and informal rules of the game that affect
organizations as players’, are common, especially
in emerging economies
The case of Ecuador: Some examples:
 Interest rate ceilings in banks
 Minimum salary
 Minimum 4% disabled workers
 Legalized position of drugs
 
Core propositions
 
 
 o Characterised by the “invisible hand”
of market forces; government takes a
hands-off, or laissez faire, approach
 Command economy
o Government taking the “commanding
height” in the economy; all factors of
production are government- or state
owned and controlled, and all supply,
demand, and pricing are planned by
the government
 Mixed economy
o Elements of both market economy
 Firms adapt to local institutions. and command economies
 In cases where formal institutions are  
“weak” informal institutions will play a Varieties of Capitalism
greater role.  
  How important is the stock market vs the
Three main types of formal institutions employment protection? And how important is
 Political systems employment protection in the country you are
 Economic systems doing business?
 Legal systems  
   
Political systems  
 A political system refers to the rules of the  
game on how a country is governed  Adam Smith: The «father of capitalism»
politically. somthing good, will help us improve the life
o Political risk is the risk associated with of every citizen
political changes that may negatively  “First” book: The theory of the moral
impact domestic and foreign firms. sentiments
   “Second” book: The wealth of Nations
Types of Political System It is a mechanism that fits the rich more than the
 Democracy poor.
o System in which citizens elect  
representatives to govern the country
on their behalf
 Totalitarianism (dictatorship)
o System in which one person or party
exercises absolute political control
over the population
 
What is a democracy?
 Is there a difference in democracy between
Norway and Tanzania?
o Both countries have free elections
 "power to the people"
 A system where you vote directly for the
president or the parliament members to
elect who is going to be in charge.
 
 
Economic Systems
 Economic Systems
o The rules of the game on how a
country is governed
 Market economy

8

Legal systems
 Legal systems
o Rules of the game on how a country’s
laws are enacted and enforced
 Civil law
o A legal tradition that uses
comprehensive statutes and codes as
a primary means to form legal
judgments.
 Common law
o A legal tradition that is shaped by
precedents and traditions from
previous judicial decisions.
 Case law
o Rules of law that have been created
by precedents of cases in court.
 
Legal traditions
 
9
Different legal systems: does it matter for
businesses?
 
Hernando de Soto (economist from Peru) - the
mystery of capital
 Most poor people are poor because they
cannot legally register their properties and
use these to get access to loans or sell them
and use their dead «land capital» in better
ways
 Creating legal registers for land is the most
important development tool
 The lack of legal security for land ownership
is the main reason that many countries are
poor.
Intellectual property rights
Patents
 legal rights awarded by government
authorities to inventors of new
technological ideas, who are given exclusive
(monopoly) rights to derive income from
 such inventions through activities such as
manufacturing, licensing or selling.
Copyrights
 the exclusive legal rights of authors and
publishers to publish and disseminate their
work (such as this book, a photo or a piece
of software).
Trademarks
 exclusive legal rights of firms to use specific
names, brands and designs to differentiate
their products from others.
 
Property: traditionally refers to tangible pieces of
property (such as land).
Intellectual property: specifically refers to
intangible property
The case of microfinance - a big question
 Small loans to small businesses
 Emerges in places with weak formal
institutions
 Is microfinance a tool for development or is
it "locking" poor people into continued
poverty?
 Is the existence of microfinance an
argument for politicans not to make
improvement in the formal institutions
 
Get to know countries by their formal institutions
 Who knows most about the rest of the
world?
o The CIA
o The CIA world factbook
 
Arguments:
Institutions & economic development
 Institutions ensure that firms are able to
make gains from trade. Specifically, they
enable firms to enter contracts, and be
reasonably sure that partners will honour
their contractual obligations, or that they
can use the court system to enforce the
contract.
 A lack of strong, formal, market-supporting
institutions forces individuals to trade on an
informal basis with a small neighbouring
group and forces firms to remain small, thus
foregoing the gains from a sharper division
of labour by trading on a large scale with
distant partners.
 Emergence of formal, market-supporting
institutions encourage individuals to
specialize and firms to grow in size to
capture the gains from complicated long-
10
distance trade (such as transactions with
distant, foreign countries).
 When formal, market-supporting
institutions protect property rights, they will
fuel more innovation, entrepreneurship and
thus economic growth.
 
Implications for practice
This chapter has sketched the contours of an
institution-based view of international business,
which is one of the two core perspectives
presented throughout this book.
Most developed economies are supported by
strong, effective and market-supporting formal
institutions, while most underdeveloped
economies are held back by weak, ineffective and
market-depressing formal institutions.
 
Chapter summary:
 Explain the concept of institutions and their
key role in reducing uncertainty:
 Institutions are defined as ‘the rules of the
game’.
 Institutions have formal and informal
components, with different supportive
pillars.
 Their key functions are to reduce
uncertainty, curtail transaction costs and
constrain opportunism.
 Managers and firms rationally pursue their
interests and make
choices within formal and informal
institutional constraints in a given
institutional framework.
 When formal constraints are unclear or fail,
informal
 constraints will play a larger role.
 
 Explain the basic differences among political
systems:
 Totalitarianism is a political system in which
one person or political party exercises
absolute political control.
 In democracies, citizens elect
representatives to govern the country, yet
the institutions governing this selection vary
widely.
  
 3. Explain the systemic differences among
economies:
 A pure market economy is characterized by
laissez faire and total control by market
forces.
 In liberal market economies (LMEs),
companies are predominantly financed
through the stock market, while labour
markets are highly flexible
 In coordinated market economies (CMEs),
businesses, governments, trade unions,
industry association and other economic
actors coordinate their actions not only
through markets.
 
 Explain the basic differences between legal
systems:
 Civil law uses comprehensive statutes and
codes as a primary means to form legal
judgments.
 Common law is shaped by precedents and
traditions rom previous judicial decisions.
 Property rights are legal rights to use an
economic resource and to derive income
and benefits from it.
 Corporate governance systems specify how
managers are controlled by other interested
parties of the firm.
CHAPTER 3: INFORMAL
INSTITUTIONS: CULTURE,
RELIGION AND LANGUAGE
 
Where do Informal Institutions come from?
Informal institutions come from socially
transmitted information and are part of the
heritage that we call culture. They tell individuals
in a society what behaviours are considered right
and proper, and what would be unacceptable.
 Typically, cultures have no clearly defined
origin, but have evolved over time.
11
 Those within a society tend to perceive
their own culture as ‘natural, rational and
morally right’. This self-centered mentality
is known as ethnocentrism
Culture can be seen as the collective
programming of the mind which distinguishes the
members of one group or category of people from
another.
 
Culture
 What is the “right” way to address your
boss?
 What is the “right” way for your boss to
address you?
 
Cross-cultural literacy
 Understanding of how differences across
and within nations can affect the way
business is practiced
 Understanding of relationship between
culture and the cost of doing business in a
country or region
 MNEs can be engines of cultural change
 
Ethnocentrism: belief in the superiority of one's
own ethnic group or culture
 
Culture thus is shared in a group, connecting
members of the group with each other, and with
their history. In this chapter, we focus on nation
states as the relevant group;
Definitions
 ‘A way of life of a group of people, the
configuration of all the more or less
stereotyped patterns of learned behaviour,
which are handed down from one
generation to the next through means of
language and imitation". Barnouw 1985
 ‘Culture is a collective phenomenon that is
shared with people who live or lived within
the same social environment, which is
where it was learned. It is the collective
programming of the mind which
distinguishes the members of one group or
category of people from another.’
Hofestede 1997
 
3 ways to systematically understand cultural
differences:
 Context
 Cluster
 Dimension

Cultural context
 Context is the underlying background upon
which interaction takes place.
o In low-context cultures (such as in
North American and Western
 European countries), communication is
usually taken at face value without much
reliance on unspoken context. In other
words, yes means yes
o In contrast, in high context cultures
(such as Arab and Asian countries),
communication relies a lot on the
underlying unspoken context, which
is as important as the words used.
o For example, ‘yes’ does not
necessarily mean ‘yes, I agree’, it
might mean ‘yes, I hear you"
Civilisation clusters
 A Civilization is ‘the highest cultural
grouping of people and the broadest level
of cultural identity people have"
o Huntington 1996 has advanced a
highly controversial idea that the
Western civilization will clash with the
Islamic and Confucian civilizations in
the years to come.
o GLOBE has (6) Confucian Asia, (7)
Eastern Europe, (8) Middle East, (9)
Southern Asia and (10) Sub-Sahara
Africa.
o The underlying idea that people and
firms are more comfortable doing
business with other countries within
the same cluster. This is because
common history, religion and customs
within the same cluster reduce the lia
o bility of outsidership when operating
abroad (see chapter 1)
12
Caracteristics og clusters
 Anglo- competitive and result-oriented
 Confucian Asia - result-driven, encourage
group working together over individual
goals
 Eastern Europe - forceful, supportive of co-
workers, treat women with equality
 Germanic Europe- value competition &
aggressiveness and are more result-
oriented
 Latin America- loyal & devoted to their
families and similar groups
 Latin Europe- value individual autonomy
 Middle East- devoted & loyal to their own
people, women afforded less status
 Nordic Europe- high priority on long-term
success, women treated with greater
equality
 Southern Asia- strong family & deep
concern for their communities
 Sub-Sahara Africa - concerned & sensitive
to others, demonstrate strong family
loyalty (Northouse, 2007, p.309-313).
Leadership behaviours in clusters:
https://www.tlu.ee/~sirvir/IKM/Leadership
%20Dimensions/
leadership_behavior_and_culture_clusters.html
 
Hofstede's cultural dimensions
 
 Influential, but only a starting point
 
Six dimensions:
  Power distance expresses the degree to
which the less powerful members of a
society accept and expect that power is
distributed unequally.
 Individualism refers to the perspective that
the identity of an individual is
fundamentally his or her own
 Masculinity versus femininity dimension
refers to the relative importance of values
traditionally held by men and women.
 uncertainty avoidance refers to the extent
to which members in different cultures
accept ambiguous situations and tolerate
uncertainty.
 long-term orientation emphasizes
perseverance and savings for future
betterment
 Indulgence stands for a society that allows
relatively free gratification of basic and
natural human drives related to enjoying
life and having fun. Restraint stands for a
society that suppresses gratification of
needs and regulates it by means of strict
social norms
 
Limitations of Hofstede's framework:
 Cultural boundaries are not the same as
national boundaries
 Based on interviews with IBM employees
only (single firm approach)
 Original data now 40 years old
Ongoing research: does language influence the
performance of banks?
 H1: There is a positive relationship between
the bank's financial performance and
whether the bank operate in a country
using officially one of the major languages
of international business (such as English,
Spanish, or French).
 H2: There is a positive relationship between
the bank's financial performance and it
sharing a common language with its
international partner.
 H3: There is a negative relationship
between the bank's financial performance
and it having the linguistic distance with its
international partner.
 
Religion
 Religion is a major manifestation of culture,
and it is the source of some of the
differences in norms and values that we
discussed before.
13
 Knowledge about religions is crucial even
for nonreligious managers
 Religious beliefs and activities affect
business through:
o religious festivals,
o daily and weekly routines
o activities and objects with symbolic
values – positive or negative
 Religious differences, more than any other
differences, tend to raise emotions – and
thus are challenging to handle for
businesses
 Showing respect for other religions and
associated values will help you avoiding
conflict and creating a basis for doing
business.
 
McCullough and Willoughby (2009)
 a) that religion can promote self-control;
 (b) that religion influences how goals are
selected, pursued, and organized;
 (c) that religion facilitates self-monitoring;
 (d) that religion fosters the development of
self-regulatory strength;
 (e) that religion prescribes and fosters
proficiency in a suite of self-regulatory
behaviors; and
 (f) that some of religion’s influences on
health, well-being, and social behavior may
result from religion’s influences on self-
control and self-regulation.
 CHAPTER 3: FIRM
RESOURCES:
COMPETITIVENESS AND
GROWTH
The resource based view has emerged as one of the
two core perspectives on global business. It focuses
on the inside of the firm, complementing the
institutional view, which focuses on firm's external
environment.
This chapter introduces tools to address these
sorts of questions.
 We first define resources
 Then we introduce classification schemes
for resources
 We then focus on value (v), rarity(r),
imitability(i) and organization(o) - through a
VRIO framework
 We apply these concepts in a value chain
analysis on the decision whether to jeen an
activity in-house or outsource it.
  
Primary resources as the tangible and intangible
assets as well as the human resources that a firm
uses to choose and implement its strategies.
 Tagible assets are those items that are
observatable and quantifiable
 Financial assets include internal funds such
as shareholde's capital and retained profits,
as well as external capital, like loans
provided by banks
 Physical assets include plants, offices,
infrastructure and equipment as well as
inventories of raw materials, components
and finished goods.
 
Examples of tangible primary resources
 
 
Intangible assets are also found on company's
balance sheets, but they are harder to value
 Technological resources include patents,
trademarks and copyrights that entitle the
firm to intellectual property rights and
enable it to generate valuable products
 Reputational resources are the firm's
goodwill, brand names and business
relationships
o Goodwill is the value of abilities to
develop and leverage the firm's
reputation as a solid provider of
goods and services, an attractive
employer and/or a socially
responsible corporate citizen
o Reputation can be regarded as an
outcome of a competitive process in
which firms signal their attributes to
constituents
14
 Human resources (or human capital are
embedded in the individuals working in an
organization.
o individual employees’skills, talent and
knowledge,
o individual employees' capacity for
collaboration and communication,
and their abilities for interpersonal
interaction that are not captured by
the firms' formal systems and
structures
o Employees' shared values, traditions
and social norms within an
organization.
 Financial analysts may take human
resources for granted.
 Many MNEs regard them as a foundation of
their capabilities.
Capabilities
 Knowledge and associated routines and
practices are known as capabilities. These
are firm-specific abilities to use resources t
achieve organisational goals
o No firm is likely to generate
competitive advantage by relying
only on primary resources!
 Most goods and services are produced
through a chain of vertical activities (from
upstream to downstream) that add value -
in short a value chain.
Value chain
 Value chain is a series of activities used in
the production of goods and services that
make a product or service more valuable-
 Value chain analysis forces managers to
think about firm resources at a very micro,
activity-based level
 Benchmarking
o Examining whether a firm has
resources and capabilities to perform
a particular activity in a anner
superior to competitors
 Commodizattion
o Process of market competition
through which uniquie products that
command high prices and high
margins gradually lose their ability to
do so, thus becoming commodities
 
Capabilities
 Many of the most important capabilities in
today's business worl relate to abilities to
connet different stages of the value chain.
  Capabilities in innovation
o Firms assets and skills to (1) research
and develop new products and
services and (2) innovate and change
ways of organising
 Capabilities in operations
o A firms ability to effectively
implement its regular activities,
notably the manufacturing process
 Capabilities in marketing
o enable firms to develop and sustain
brands awareness and values and to
induce consumers to buy these
brands.
 Capabilities in sales and distribution
o enable firms to manage interactions
with (potential) customers and in
bringing products to the right
customer at the right time
 Capabilities in corporate functions
o Include a firm's planning, command
and control systems and structures
 
Competitive advantage: resources * capabilities =
competitive advantages
 
Benchmarking
Benchmarking compares resources against those
of your competitors on two questions:
 Which resources are most important in
conferring sustainable competitive
advantage in your industry?
 Where are your strengths and weaknesses
as compared to your competitors?
Benching has 4 steps:
 Choose a benchmark organisation to
compare yourself with
 Identify the relevant resources
 Assess the importance of your resources.
The VRIO framework introduced can help
you in this assessment.
 Score and assess the relative strengths
Be aware that benchmarking is a useful analytical
tool - but not more
 An inferior score suggests an issue may
need to be addressed, but it does not imply
that the competitor’s structure and
processes should be imitated
 
Outsourcing is turning over an organizational
activity to an outside supplier that will perform it
on behalf of the focal firm.It is one way to
overcome a strategic weakness.
Offshoring
15
Offshoring is when activities are moved from a
firm’s main country of operations to another
country. Outsourcing and offshoring have
emerged rather recently.
 
Debates and extensions
The offshore of high-end Services has become
controversial It starting with IT and now
encompassing all sorts of ‘business process
outsourcing’ (BPO) to countries led by India
Offshoring service providers are gradually moving
up the value chain as original equipment
Manufacturers (OEMs) become original design
manufacturers (ODMs).
 
Chapter Summary
 Explain what firm resources are:
 Resources include primary resources and
capabilities that provide the basis for firms
to attain competitive advantages, and to
grow.
 Primary resources include tangible and
intangible assets, as well as human
resources.
 Capabilities can be classified by their stage
of the value chain, or their function within
the organization.
 
 Assess the resources of a firm using the
VRIO framework:
 A VRIO framework suggests that only
resources that are value creating, rare, hard
to imitate and organizationally embedded
will generate sustainable competitive
advantage.
 
 Use benchmarking analysis outsourcing and
offshoring decisions:
 Benchmarking is a technique of comparing
a firm’s capabilities to its rivals.
 Outsourcing is turning over all or part of an
organizational activity to an outside
supplier.
 Offshoring is relocating an activity to
another country, either in house or with
outsourcing, to take advantage of locational
advantages in that country.
 Participate in two debates on cross-border
capabilities and offshoring:
 In the long run, is offshoring beneficial or
detrimental for Western firms and
economies?
 In the long run, how can dynamic
capabilities helps firms to stay ahead in
changing industries?
  Draw implications for action:
 Managers need to understand their
resources based on the VRIO framework to
optimize their resource exploitation.
 Managers need to continuously create new
resources, in part by benchmarking against
the best, and in part by developing entirely
new capabilities that go beyond the
competitors’ state-of-the-art.
 Students are advised to make themselves
‘untouchables’ whose jobs cannot be
offshored.
 CHAPTER 5: TRADING
INTERNATIONALLY
• International trade is a hot topic in politics as
the benefits of trade are often unevenly
distributed.
• The theoretical foundations for international
trade provide a structured way of thinking
and analyzing issues that are central to both
businesses and government policy.
• How can the two core perspectives (resource-
based and institution-based views) help us
understand the crucial issue of why nations
trade?
Why do nations trade?
• Most nations actively participate in
international trade – consisting of exporting
(selling abroad) and importing (buying from
abroad).
• Trade is undertaken by ‘firms from different
nations’ – rather than by governments.
• Trade contribute to the trade deficit (a
surplus of imports over exports) or to the
trade surplus (a surplus of exports over
imports) of nation states.
Theories of international trade
The theories of international trade are examined
in the order in which they evolved:
1) Mercantilism
2) Absolute advantage
3) Comparative advantage
4) Product life cycle
5) Strategic trade
6) National competitive advantage.
The first three are often regarded as classical
trade theories. The last three are viewed as
modern trade theories.
16
Mercantilism:
Theory of mercantilism 1600 and 1700s
• Wealth of the world (measured in
gold and silver) is fixed and that a
nation that exports more and imports
less would enjoy the net inflows of
gold and silver and thus become
richer; international trade is viewed
as a zero-sum game.
Protectionism
• Idea that governments should actively
protect domestic industries from
imports and vigorously promote
exports.
Absolute advantage
Free trade (Adam Smith 1776)
• Buying and selling of goods and
services with little or no government
intervention.
Theory of absolute advantage
• Nation gains by specializing in
economic activities in which that
nation has an absolute advantage.
Absolute advantage
• To be more efficient than anyone else
in the production of any good or
service.
Theory of competitive advantage
• Nation A has an absolute advantage in
production of all goods compared to Nation B.
• As long as Nation B is not equally less efficient
in the production of both goods, Nation B can
still choose to specialize in the production of
one good in which it has comparative
advantage.
Comparative advantage
• Relative (not absolute) advantage in
one economic activity that one nation
enjoys in comparison with other
nations.
Opportunity cost
 • Cost of pursuing one activity at the
expense of another activity, given the
alternatives.
Comparative advantage
Ricardo (1817) suggests that even if America has
an absolute advantage over Europe in both cars
and aircraft, as long as Europe is not equally less
efficient in the production of both goods, Europe
can still choose to specialize in the production of
one good (such as cars) where it has comparative
advantage.
Where do absolute and comparative advantages
come from?
• Smith looked at absolute productivity
differences, and Ricardo emphasized relative
productivity differences. But what leads to
such productivity differences?
• Swedish economists Heckscher and Ohlin
argued that absolute and comparative
advantages stem from different resource
endowments.
The extent to which different countries possess
factors of production - various resources, such as
labour, land and technology
• The factor endowment theory suggests that
nations tend to export goods whose
production requires a lot of those resources
that the country has plenty of.
• Nations develop comparative advantage
based on their locally abundant factors.
Classical theories
In summary, classical theories, (1) mercantilism,
(2) absolute advantage and (3) comparative
advantage (which includes resource
endowments), evolved from approximately 300
years ago to the beginning of the 20th century.
Vernon divided the world into three categories:
1) lead innovation nation (which,
according to him, is typically the USA)
2) other developed nations
3) developing nations.
This theory has been criticized on two accounts:
1) it assumes that the USA will always be
the lead innovation nation for new
products (sic).
2) it assumes a stage-by-stage migration
of production that takes at least
several years (if not decades).
An increasing number of firms now simultaneously
launching new products (such as iPods or game
consoles) around the globe.
Strategic trade theory
This suggests that strategic intervention by
governments in certain industries can enhance their
odds for international success.
First mover advantage
• Advantage that first entrants enjoy and do not
share with late entrants.
Strategic Trade Policy
• Government subsidies inspired by strategic
trade theory.
• Strategic trade theorists do not advocate a
mercantilist policy to promote all industries.
• They propose to help a few strategically
important ones.

More recently, three modern theories, outlined

next, emerged:

1) Product life cycle

2) Strategic trade theory
3) National competitive advantage of
industries

Product life cycle

Vernon developed the product life cycle theory,
which was the first dynamic theory to account for
changes in the patterns of trade over time.

17
 • Porter argues that the dynamic interaction of
these four aspects explains what is behind the
competitive advantage of leading industries in
different nations.
• This is the first multilevel theory to
realistically connect firms, industries and
nations.
• Critics argue that the ‘diamond model’ places
too much emphasis on domestic conditions.
National institutions and international trade
There are two broad types of trade barriers:
(1) tariff barriers
(2) nontariff barriers (NTBs)
As a major tariff barrier, an import tariff is a tax
imposed on imports.
Trade barriers: tariffs
Figure 5.7 uses rice tariffs in Japan as a hypothetical
example to show that there are unambiguously net
losses – known as deadweight loss.
Panel A: In the absence of international trade, the
domestic price is P1 and domestic wheat farmers
produce Q1, determined by the intersection of
domestic supply and demand curves.
Panel B: Because the domestic rice price P1 is higher
than world price P2, foreign farmers export to Japan.
In the absence of tariffs, Japanese farmers reduce
output to Q2. Japanese consumers enjoy more rice at
Q3 at a much lower price P2.
Panel C: The government imposes an import tariff,
effectively raising price from P2 to P3. Japanese
farmers increase production from Q2 to Q4, and
consumers pay more at P3 and consume less by
reducing consumption from Q3 to Q5. Imports fall
from Q2Q3 in panel B to Q4Q5 in panel C.
Non-tariff barriers
Taken together, trade barriers reduce or eliminate
international trade. NTBs include:
(1) Subsidies
(2) Import quotas
(3) Export restraints
(4) Local content requirements
18
(5) Administrative practices
(6) Antidumping duties.
(7) Import quotas are restrictions on the
quantity of imports. Import quotas
are worse than tariffs because with
tariffs, foreign goods can still be
imported if tariffs are paid.
(8) Import quotas are protectionist and
there are political costs that countries
have to shoulder in largely pro-free
trade environments.
(9) Voluntary export restraints (VERs)
have been developed to show that on
the surface, exporting countries
voluntarily agree to restrict their
exports.
(10)The arsenal of trade warriors also
includes anti-dumping duties levied
on imports that have been sold at less
than a ‘fair’ price – or ‘dumped’ – and
thus harm domestic firms.
Economic arguments against free trade?
The economic arguments against free trade include:
a) the need to protect domestic
industries:
• At the height of the recession
in 2009, British workers at the
Lindsey oil refinery went on
strike to protest against IREM,
an Italian construction
company, bringing its Italian
and Portuguese workers into
the country to conduct
expansion work.
b) the necessity to shield infant
industries:
• If domestic firms are as young
as ‘infants’, in the absence of
government intervention,
they stand no chance of
surviving and will be crushed
by mature foreign rivals. Thus,
it is imperative that
governments level the playing
field by assisting infant
industries.
Political arguments against free trade?
Political arguments against free trade advance a
nation’s political, social and environmental agenda
regardless of possible economic gains from trade.
These arguments include:

(1) national security

(2) consumer protection
(3) foreign policy
(4) environmental and social
responsibility.

Debates and ectensions

1) Trade deficit versus trade surplus.

• The 2008 Nobel laureate in
economics, Paul Krugman argued in
1993:

Chapter summary:
1. Use resource and institution-based views to
explain why nations trade:
• The resource-based view suggests
that nations trade because some
firms use their unique resources and
• Critics disagree; they argue that international capabilities to produce goods in
trade is about competition between nations – demand in other nations.
about markets, jobs and income. • The institution-based view suggests
that national and international ‘rules
2) Impact of trade on job markets. of the game’ influence the actual
flows of international trade.
2. Understand classical and modern theories of
international trade:
• Classical theories include (1)
mercantilism, (2) absolute advantage
and (3) comparative advantage.
• Modern theories include (1) product
life cycles, (2) strategic trade and (3)
the ‘diamond model’.

3. Appreciate how economic and political

institutions influence international trade:
• The net impact of various tariffs and
NTBs is that the whole nation is worse
off while certain special interest
groups (e.g. certain industries, firms
and regions) benefit.
• Economic arguments against free
trade center on (1) protection from
‘unfair’ competition and (2) infant
industries and (3) unequal distribution
of costs and benefits.
• Political arguments against free trade
focus on (1) national security, (2)
consumer protection, (3) foreign
policy and (4) environmental and
social responsibility.

19
 4. Participate in two leading debates on
international trade:
• The first deals with whether
persistent trade deficit is of grave
concern or not.
• The second deals with rich countries’
response to shifts in comparative
advantage.
5. Draw implications for action:
• Discover and leverage comparative
advantage of world-class locations.
• Monitor and nurture current
comparative advantage of certain
locations and take advantage of new locations.
• Be politically engaged to
demonstrate, safeguard, and advance
the gains from international trade.
CHAPTER 6 - investing
abroad directly
There are two inds of international investment:
 Foregin portfolio investment (FPI)
o An investment in a portfolio of
foreign securitues such as stocks and
bonds that do not entail the active
management of foreign assets. FPI is
‘foreign indirect investment’.
 Foreign direct investment (FDI)
o Defined by the United Nations as
involving an equity stake of 10% or
more in a foreign-based enterprise.
 Horizontal FDI duplicates its
home country-based activities
at the same value chain stage
in a host country through FDI.
 Vertical FDI is a type of FDI in
which a firm moves upstream
or downstream in different
value chain stages in a host
country.
o If a firm through FDI moves upstream
or downstream in different value
chain stages in a host country, we
label this vertical FDI
o Upstream vertical FDI a type of
vertical FRI in which a firm engages in
an upstream stage of the value
20
o Downstream vertical FDI a type of
vertical FDI in which a firm engages in
a downstream stage of the value
chain in two different countries.
o An MNE, by definition is a firm that
engages in FDI
 Note that non-MNE firms can
also do business abroad by (1)
exporting and importing, (2)
licensing and franchising, (3)
outsourcing, (4) engaging in FPI
or other means.
 What sets MNEs apart from
non-MNEs is FDI.
 In 1990, there were 37,000
MNEs, with 170,000 foreign
affiliates
 By 2009, more than 82 000
MNEs (more than double the
1990 number) managed about
810 000 foreign affiliates
(almost five times the 1990
number).
 Clearly, there has been a
profliferation of MNEs lately
o FDI flow the amount if FDI moving in
a given period (usally a year) in a
certain direction
o FDI stock the total accumulation of
inbound FDI in a country or outbound
FDI from a country across a given
period of time (usually several years).
 
Why do firms engage in FDI?
OLI paradigm, which proposes that FDI is the
most appropriate form of international business if
three conditions are met:
 Ownership advantages (o-advantages)
Resources of the firm that are transferable
across borders, and enable the firm to to
attain competitive advantages abroad.
 Locational advantage (L-advantages)
Advantages enjoyed by firms operating in
certain locations.
1. Internalization advantages (I-advantages)
Advantages of organizing activities within a
multinational firm rather than using a
market transaction.

 
Location-bound resources - resources that cannot
be transferred abroad
 
Location advantages
Five reasons firms set up close to their markets
2. Protectionism in the form of tariffs or non-
tariff barriers, may inhibit exports. However
MNEs can overcome such barriers by
setting up local production.
3. Transportation costs , especially over long
distances for e.g. perishable, breakable,
heavy or bulky products can be a
perishable, breakable, heavy or bulky
products can be a lower costs
4. Direct interaction with the customer e.g.
suppliers to the automotive industry need
to produce near manufacturers to integrate
in their supply chain.
5. Production and sale of some services
cannot be physically separated e.g. hotels,
banking or consultancy.
6. Marketing assets may be more important
for a fast-entry strategy. FDI enables MNEs
21
to acquire local firms which control sought-
after assets, e.g. distribution networks and
band names.
Other location advantages
 Resources as L-advantages
 Agglomeration as L-advantages
Agglomeration the location advantages that arise
from the clustering of economic activities in
certain locations
 Institutions as L-advantages
Internalization advantages
 A key advantage of FDI over other modes is
the ability to replace (‘internalize’) external
market relationships.
 With one firm (the MNE) owning,
controlling and managing activities in two
or more countries.
 Transaction costs are the costs of
organizing a transaction e.g. searching for
partners, monitoring product quality and
enforcing contracts.
 Also sub-optimal allocation of resources
due to unrealized transactions (aka.
opportunity costs)
 High transaction costs can result in market
failure.
Asset specificity: an investment that is specific to
a business relationship
Market failure: imperfections of the market
mechanism that make some transactions
prohibitively costly
 
FDI versus licensing
There is a choice between the technology to a
local firm and FDI establishing its own production
facilities
 Licensing
o Firm A’s agreement to give Firm B the
rights to use A’s Firm A’s agreement
to give Firm B the rights to use A’s
trademark for royalty fee paid to A by
B.
 Dissemination risk
o The unauthorized diffusion of firm-
specific know-how.
o If a foreign company grants a license
to a local firm to manufacture or
market a product, ‘it runs the risk of
the licensee, or an employee of the
licensee, disseminating the know-
how or using it for purposes other
than those originally intended’.
  Managing proprietary assets through FDI
does not completely shield firms from
dissemination risks, but FDI is better than
licensing that provides no such
management control.
 FDI provides more direct and tighter control
over foreign operations, but FDI is likely to
be more expensive than licensing
 
National institutions and FDI
 Consensus is that FDI leads to a win-win
situation for both home and host countries.
 Most countries retain some institutions
that either (1) restrict the presence of FDI
or (2) regulate the operations of FDI
 
Debates and extensions
 Despite the general trend towards
friendlier policies to facilitate inbound FDI,
debates continue in various host countries.
 Can we trust foreign firms in making
decisions important to our economy, in
particular the interaction between MNEs
and host governments?
 MNEs and host governments are shaped by
their relative bargaining power – their
ability to extract a favourable outcome
from negotiations due to one party’s
strength.
 Emerging economy multinationals – those
MNEs originating from an emerging
economy and headquarter there.
 Sovereign wealth funds (SWF) are a ‘a
state-owned investment fund of financial
assets such as stocks, bonds, real estate or
other financial instruments funded by
foreign exchange assets’.
 SWFs undertake FDI, yet they operate
differently than conventional MNEs:
o they are state-owned or controlled
o they typically acquire equity stakes
sufficient to influence target forms,
yet they do not get involved in day-
to-day management or integrate
operations.
 
Implications for action
 Carefully assess whether FDI is justified in
light of other foreign entry modes such as
outsourcing and licensing
 Pay carful attention to the location
advantages in combination with the firm's
strategic goals
22
 Be aware of the institutional constraints
and and enablers governing FDI and
enhance legitimacy in host countries.
 
Chapter Summary
 Understand the vocabulary associated with
FDI:
 FDI refers to directly investing in activities
that control and manage value creation in
other countries.
 MNEs are firms that engage in FDI.
 FDI can be classified as horizontal FDI and
vertical FDI.
 FDI flow is the amount of FDI moving in a
given period in a certain direction (inflow or
outflow).
 FDI stock refers to the assets under control
of foreign MNEs.
 Explain why ownership advantages are
necessary for firms to engage in FDI.
Ownership refers to resources that are
internationally transferable and enable
firms to attain competitive advantages
abroad.
 Explain what location advantages attract
foreign investors.
 Location refers to locational advantages
that can help MNEs attain their strategic
goals.
 Explain and apply the concept on
internalization advantages.
 Internalization refers to the replacement of
cross-border market relationship with one
firm (the MNE) locating in two or more
countries. Internalization helps to
overcome market imperfections.
 Appreciate the benefits and costs of FDI to
host and home countries.
 Foreign direct investors interact with a
variety of stakeholders in the host
economy, each of which may benefit
directly or indirectly, while some may be
worse off.
 Explain how home and host country
institutions affect FDI.
 Host countries may restrict FDI by outright
bans, case-by-case approval, or limits on
foreign ownership, but such restrictions
have become less common in recent years.
 Foreign investors are subject to the same
regulatory institutions as local firms, plus in
some countries special regulations for
foreign investors.
 Variations in corporate taxation rules also
influence the pattern of FDI.
  Participate in three leading debates on FDI.
 The relationship between MNEs and host
governments is subject to ‘obsolescing
bargain’.
 Emerging economy MNEs and sovereign
wealth funds (SMEs) are important new
players in the global economy.
 Sovereign wealth funds from resource-rich
countries are becoming important
international investors.
 Draw implications for action.
 Carefully assess whether FDI is justified, in
light of other options such as outsourcing
and licensing.
 Pay careful attention to locational
advantages in combination with the firm’s
strategic goals.
 Be aware of the institutional constraints
governing FDI and enhance legitimacy in
host countries.
 
 European Constitution (2002)
o Project to create a new legal
foundation for the EU, which failed
 Lisbon Agreement (2007)
o earlier treaties of the EU, and
changing the institutional structures
of the EU and opening up
membership
 
Economic transition
 Central and Eastern Europe (CEE) have
experienced a different form of integration
o While Western Europe established
market economies, CEE developed a
system of central planning under the
Soviet Union.
 Processes included:
o Economic transition
 Changing from central plan to a
maret economy
o Liberasiation

CHAPTER 8 - EUROPEAN  Removal of regulator

restrictions on business
INTEGRATION o Stabilisation
 Policies to combat
https://www.theguardian.com/world/2012/oct/
12/european-union-nobel-peace-prize macroeconomic imbalances
o Privatization
Starting point: treaty of Rome
EEC Treaty 1957 stated in its Article 2:  Change of ownership from
 ‘It shall be the aim of the Community, by state to the private
establishing a Common Market and  These “transition” economies have now
progressively approximating the economic “ascended to become, mostly, part of the
policies of Member States, to promote european union
throughout the Community a harmonious  
development of economic activities, a Free movement in the EU
continuous and balanced expansion, an  Goods
increased stability, an accelerated raising of  Capital
the standard of living and closer relations  People
between its Member States.’  Services
 Initially, the focus was on establishing a  
customs union with a common external The single market
tariff, and common policies for agriculture, The single market is about free movements of
transport, trade and the support of goods, capital, people and services within the
developing countries. union.
   It complements the customs union, which
Common agricultural policy (CAP) secures application of a common external
28 member states https://europa.eu/european- tariff on all imported goods.
union/about-eu/countries/member-countries_en  The Principles of Harmonization
o Mutual recognition
 
Treaties and agreements  Products recognized as legal in
 Single European Act (SEA) (1986) one country may be sold
o The agreement that established the throughout the EU
o Harmonized sector
basis for the single european market
 Maastricht Treaty (1993)  Sectors for which the EU has
o Deepening integration in Europe. created common rules
o Subsidiarity

23
  The EU takes action only if it is
more effective than actions
taen at lower levels
 The single market for services is not yet a
single harmonized market
 Political compromises and protected i
 nterests are still being accomodated
 
Advantages and disadvantages of joining the Euro
 
 European Integration started with the Treaties
The Maastricht Criteria established that countries
had to accept the monetary union. Countries
were required to have:
 annual budget deficits not exceeding 3 per cent
of GDP
 public debt under 60 per cent of the GDP
 inflation rates within 1.5 per cent of the three
lowest rates in the EU
 long-term interest rates within 2 per cent of the
three EU countries with the lowest rate, and
 exchange rate stability
EU: what it is and how does it work
 http://www.bbc.co.uk/guides/zgjwtyc#z2fscwx
 https://www.youtube.com/watch?
v=ywJS7swbqeE
 Brexit: https://www.youtube.com/watch?
v=7eoDwvl0QGk
EU formal structures
 European council
o The assembly of heads of governments
setting overall policy
 President of the European Council
o The person chairing the meetings of the
European Council.
 Council of the European Union
o The decision-making body consisting of
ministers from the national governments; it
decides by qualified majority voting.
 European Commission
o The executive arm of the EU, similar to a
national government.
 Directorate General (DG)
24
o A department of the commission, similar to
a government ministry.
 President of the Commission
 The head of EU's executive, similar to a national
prime minister.
 European Parliament
 The directly elected representation of European
citizens.
Chapter summary
Explain the origins and the evolution of the EU:
of Rome aiming to overcome the historical
divisions of Europe.
The EU has continuously been enlarged, starting with
the UK, Denmark and Ireland in 1973.
The integration in the EU has continuously been
deepened through a series of intergovernmental
treaties often known by the cities where they
were signed. Most important are the Single
European Act (1986), the Maastricht Treaty
(1992) and the Lisbon Treaty (2007).
o Explain the evolution of the institutional
environment in transition economies:
 Before 1990, CEE countries had an economic
system organized around a central plan.
 The processes of transition in the 1990 focused
on liberalization, stabilization, privatization and,
crucially, the creation of a new institutional
framework.
 Having met the Copenhagen Criteria of the EU,
ten CEE countriesbecame members of the EU in
2005 and 2007.
1. Explain how and why the institutional
framework created by the EU is pivotal for
business:
 Single market based on freedoms of movement
of goods, capital, people and services.
 Implemented though harmonization of regulation
in some sectors, and mutual recognition of
national regulation in others.
 The EU aims to facilitate free movement of
people within the union, notable to enable
people to take up a job in another country.
 The euro has become a common currency in 16
countries that have transferred their monetary
policy to the European Central Bank..
 EU competition policy aims to ensure that a
competitive environment is maintained in cases
of mergers and acquisitions, cartels and collusion
and state aid.
1. Outline the political institutions of the EU:
 Formal political structures of the EU resemble a
government, yet national governments wield
power through the Council.
 The decision-making processes in the EU are
based on democratic principles, yet they often
are far removed from the individual citizens in
member countries
1. Participate in debates over the future of the
EU:
 Enlargement creates not only benefits but also
costs for existing EU members, who thus may be
less enthusiastic to admit further
members.
 The UK has an ambiguous relationship with the
EU grounded in its history and its political culture.
1. Draw Implications for Action:
 With major institutional changes being decided at
European level, businesses need to be informed
about current rules and expected
future change, and they may direct their lobbying
to Brussels and Strasbourg.
 
 
CHAPTER 9 -
INTEGRATION AND
MULTILATERAL
ORGANIZATIONS
EIU: the top 10 risks to the global economy 2019
 
Why is globalization important?
 It allows countries to specialize in areas where
they have most resources
 Labour intensive goods
o Developing countries
 Capital intensive goods, human capital
especially
o Developed countries
 
Comparative advantages
https://www.youtube.com/watch?v=ol4NexZ0iII
https://www.youtube.com/watch?v=ol4NexZ0iII
“Comparative advantage is an economic law
referring to the ability of any given economic
25
actor to produce goods and services at a lower
opportunity cost than other economic actors"
 
World trade organization
The WTO is the multilateral organization
establishing rules for international trade, and
resolving trade-related conflicts between nations
worldwide.
 Handle disputes constructively.
 Common set of rules through the principle of
non-discrimination
 Raise income, generate jobs and stimulate
economic growth
 
Origins are in the General Agreement on Tariffs
and Trade (GATT), created in 1948.
 
Trade disputes
Core activities of the WTO is its dispute
settlement mechanism which aims to resolve
conflicts between governments over trade-
related matters.
 WTO does not have its own enforcement
capability.
 Any country that has lost a dispute case can
choose its own options:
 change its laws or practices to be in
compliance
 defy the ruling by doing nothing and be
willing to suffer trade retaliation by winning
countries known as "punitive duties"
 a WTO ruling is a recommendation but not an
order; no higher level entity can order a sovereign
government to do something against its wishes
DOHA
A round of WTO negotiations started in Doha,
Qatar, in 2001 – Officially known as the ‘Doha
Development Agenda’ to:
 reduce agricultural subsidies in developed
countries to facilitate exports from developing
countries,
 slash tariffs, especially in industries that
developing countries might benefit (such as
textiles),
 free up trade in services
 strengthen intellectual property protection
 
The complexity of an agreement on "everything"
among 149 member countries (as of 2006) in the
Doha round has proen to be a challenge to far
(sic)
 
How will Trump’s politics
influence international trade?
 http://money.cnn.com/2016/12/29/news/
economy/trump-trade-china-mexico-2017/
Is Trump good for the US economy?
 https://www.cnbc.com/2018/09/07/how-trump-
has-set-economic-growth-on-fire.html
 
International monetary fund
 IMF is a multilateral organization promoting
international monetary cooperation and
providing temporary financial assistance to
countries with balance of payments problems.
 It has three primary activities on behalf of its 184
member countries:
 monitoring the global economy,
 providing technical assistance to developing
countries
 lending to countries in financial difficulties.
 IMF conditionally typically imposes conditions
that require belt-tightening by pushing
governments to embark on reforms that they
probably would not have undertaken otherwise.
 The financial crisis of 2008 has led to renewed
debates around the pros and cons of IMF
conditionality.
 In particular in the IMF has no power over
those countries that do not need its loans
even when running major budget deficits or
current account deficits – notably the USA
and the EU.
 
Regional economic integration in North America
 Free trade area (FTA)
 A group of countries that remove trade
barriers among themselves
 North American Free Trade Agreement (NATFA)
 A free trade agreement among
Canada, Mexico and the USA.
 USA-Dominican Republic-Central America Free
Trade Agreement (CAFTA)
 A free trade agreement between the USA
and five central american countries and the
dominican republic
 Andean Community
 A customs union in South America that was
launched in 1969.
 Mercosur
 A customs union in South america that was
launched in 1991
 
 
Bilateral agreements
 After Doha there has been a proliferation of
bilateral FTAs
26
 Examples include the Australia-New Zealand
Closer Economic Relations Trade Agreement
(ANZCERTA or CER)
 The USA signed 17 bilateral free trade and
investment agreements with countries as diverse
as Australia, Singapore, Peru, Oman and Jordan,
while three more are in the process of
ratification.
 Advocates of bilateral FTAs see them as a
convenient substitute for global free trade.
 Critics argue they:
 permit countries with large markets to use
their bargaining power to more effectively,
 lead to a hub and spoke system of
international trade that further strengthens
the countries at the hubs,
 create fragmented rules for businesses
operating in multiple countries
 increase trade diversion
 
Debates and extensions
Inequality among nations, and persistent poverty
in many developing countries remains an issue
despite World Bank funding.
For businesses, development projects funded by
the World Bank or other development bank
provide opportunities to engage in infrastructure
development projects.
 
Chapter summary:
Explain the multilateral institutions of global
trade system, and their current challenges:
There are both political and economic benefits
for global integration by trade.
The GATT (1948–1994) significantly reduced
tariff rates on merchandize trade.
The WTO (1995–present) was set up not only to
incorporate the GATT but also to cover
trade in services, intellectual property,
trade dispute settlement and peer review
of trade policy.
The Doha Round to promote more trade and
development thus far failed to accomplish
its goals.
Explain the multilateral institutions of global
monetary system, and their current
challenges:
 The IMF promotes monetary cooperation
and provides temporary financial assistance
with balance of payments problems.
 IMF loans are usually conditional on
macroeconomic or financial reforms, which
is often controversial in the countries
concerned.
 Describe the advantages and disadvantages of
regional and bilateral economic integration
in the Americas, Asia Pacific and Africa:
 Despite problems, NAFTA has significantly
boosted trade and investment among
members.
 In South America, the prominent regional
deals are Andean Community and
Mercosur.
 Regional integration in Asia Pacific is taking
place in ASEAN, SAFTA and the GCC.
Participate in two debates on further
multilateral policy forums and institutions
contributing to economic integration:
 Development banks such as the World Bank
provide loans for projects such as
infrastructure in
developing countries.
 The Kyoto Agreements and the
Copenhagen Accord aim to combat climate
change.
 International banking standards promoted
by the Basel Committee are being revised in
view of the experiences of the global
financial crisis.
Draw implications for action:
 Managers need to understand the rules of
the game at both global and regional levels
to assess challenges and opportunities.
 Firms ought to make the most of their
home region as they usually are better
prepared to compete on regional as
opposed to global levels.
 Managers need to be aware and possibly
engaged in the political discussions as they
are likely to shape the business
environment of the future.
 
 
CHAPTER 10 -
CORPORATE SOCIAL
RESPONSIBILITY
 https://www.youtube.com/watch?
v=E0NkGtNU_9w
What is CSR?
The firm's consideration of, and response to,
issues beyond the narrow economic, technical
and legal requirements of the firm to accomplish
social benefits along with the traditional
economic gains which the firm seeks.
27
CSR: to make money or to do good?
Intrumental view: good for profit
 Environmental focus makes the firm more
lean and resource oriented.
 Good personell treatment makes staff more
productive
 Strong social reputation attracts customers
Normative view: It is a moral obligation to do CRS
regardless of whether it is profitable or not
 An activity can only count as CSR if it does
not cover its costs
 
Milton friedman:
Milton Friedman, University of Chicago,
suggested: ‘The social responsibility of business is
to increase its profits’. This line of thought draws
upon the idea that pursuit of economic self-
interest (within legal constraints) promotes the
welfare of society as a whole.
Workers will be worse off if firms unilaterally
raised standards because the firm would lose
competitiveness and in consequences workers
would lose their job.
 
The bottom lines
 Financial bottom line
 Social bottom line
 Environmental bottom line
 
Can you do well by doing good?
Impact investment
 https://www.youtube.com/watch?
v=gLPJnRhnL20
 
Business students want to do well by doing good
 https://edition.cnn.com/2018/10/08/success/
business-students-impact-investing/index.html
Stakeholder: any group or individual who can
affect or is affected by the achievement of the
organization's objectives
 discontinuing relationships with non-
compliant suppliers.
 This allows MNEs to shift from a focus on
compliance with thestandards of engagement to
a commitment approach that involvesjoint
problem solving, information exchange and the
diffusion of best practices
 
How to treat your labour when operating abroad?
 Home country or host country policies on:
 Salaries?
 Working conditions?
 Child labour?
 What about the conditions in local suppliers to
MNEs?
 Are firms responsible for the conditions in
the companies from where they buy inputs
to their value chains?
o Legal or moral responsibilities?
 
Institutions and CSR

 
Environmental issue
Acting on the global stage exposes MNEs to more
complex ethical issues that increase the
importance of creating appropriate CSR policies
To attract foreign direct investment, developing
countries may thus enter a ‘race to the bottom’
by lowering (or at least not tightening)
environmental standards?
 
Standards of engangement
 In Europe, many consumers - and NGOs - expect
that their shoes and their clothes are made by
people being paid and treated fairly. This raises Liberal market economies (LMEs) and
two questions: coordinated market economies (CMEs) have
 Are MNEs responsible for what happens in different understandings of what firms are, and
other firms, and what their role in the society is.
 How can they be sure what actually  
happens in a sub-suppliers plant? Host country institutions may influence CSR
 MNEs have standards of engagement that they strategy abroad
impose on suppliers.  
 These establish minimum standards for
working hours, age of workers, health and
safety, wages and other aspects of
operating a manufacturing plant
 With these standards come monitoring and
enforcement regimes that With these
standards come monitoring and
enforcement regimes that With these
standards come monitoring and
enforcement regimes that warnings -

28

 
Debates and extensions
 Is CSR good for financial performance?
 Some studies indeed report a positive
relationship, studies indeed report a
positive relationship,
 Consistent CSR policies over long time
periods seem to have a positive effect,
while short-term or temporary initiatives
do not.
 Is CSR good for society?
 critics describe CSR activity as "window
dressing" and assert that the firms only do
what is good for themselves i.e.
Shareholders
 NGOs, journalists and politicians have
asserted that firms also have other
obligations to their stakeholders.
 
Chapter Summary
Articulate a stakeholder view of the firm:
A stakeholder view of the firm urges companies to
consider not only shareholders but other
interested parties.
An instrumental view advocates attention to
stakeholders if that helps financial performance;
in contrast a normative view believes in the moral
obligation of companies to treat stakeholders
responsibly.
Stakeholders often disagree with each other, creating
complex moral challenges and needs for effective
communication.
 Articulate CSR challenges faced by firms in
the global economy.
 MNEs face opposing economic incentives to
produce where environmental regulation is less
tight, and to implement standards higher than
the legal minimum.
 Labour standards in foreign subsidiaries and
supplier networks are subject to scrutiny by NGOs
as well as by the MNEs themselves.
1. Explain how institutions influence firms’
corporate social responsibility activities:
 Institutional differences explain why American
firms are more likely to pursue voluntary, ‘explicit
CSR’, while European firms pursue ‘implicit CSR’.
 When confronting institutional pressures for CSR,
firms may employ (1) reactive, (2) defensive, (3)
accommodative and (4) proactive strategies.
1. Participate in three leading debates
concerning corporate social responsibility:
 These are: (1) CSR and financial performance, (2)
CSR and benefits for society and (3) political
neutrality in CSR engagement overseas.
1. Draw implications for action:
 Managers should understand the institutions
affecting CSR, anticipate changes and seek to
influence such changes.
 CSR publicity should match CSR capabilities.
 CSR should be an integral part of the core
activities and processes of a firm.
 
 
CHAPTER 11 -
STARTING
INTERNATIONAL
BUSINESS
Firms can act as sellers or byers or both. In
international trade, the sellers are known as
exporters and the buyers are known
as importers.
 

29

Sporadic exporters
 Many firms start international business through
direct exports that is the sale of products to
customers in another country.
 This strategy is attractive for less experienced
firms because they can reach foreign customers
directly.
 
 When domestc markets downturn, sales abroad
may compensate.
 This is called sporadic (or passive) exporting
 Letter of credit (L/C) is states that the importer’s
bank will pay a specific sum of money to the
exporter upon delivery
 
Intermediaries
Direct exports represent the most basic mode
capitalizing on economies of scale in production
concentrated in the home country, and affording
better control over distribution
Indirect exports is exporting through an
intermediary.
 Intermediaries are more common for
standardized products and commodities
(e.g. textiles, woods and meats), where
competition focuses on price
 Local sales agents receive a commission on
sales.
 Distributors trade on their own account; in
other words, they buy the products and
then sell them on in the local market at
30
their own risk and using their own
channels.
Why do firms engage in foreign direct
investment?
OLI paradigm , which proposes that FDI is the
most appropriate form of international business if
three conditions are met:
 Ownership advantages (O-advantages)
1. Resources of the firm that are
transferable across borders, and
enable the firm to attain competitive
advantages abroad.
 Locational advantage (L-advantages)
1. Advantages enjoyed by firms
operating in certain locations.
 Internalization advantages (I-advantages)
1. Advantages of organizing activities
within a multinational firm rather
than using a market transaction.
International contracts
Contract licensing
 Firm A’s agreement to give Firm B the rights
to use A’s proprietary technology
(e.g.patent) or trademark for a royalty fee
paid to A by B.
1. Licensor is the company granting a
license.
2. Licensee is the company receiving a
license.
Franchising represents a similar idea, but
typically covers entire business concepts:
not only the product, service and
trademark, but also the marketing strategy,
operation manuals and quality control
procedures.
1. Franchisor is the company granting a
franchise.
2. Franchisee is the company receiving a
franchise.
The licensor/franchisor does not have tight
control over production and marketing, and thus
how their technology and brand names are used.
 
 
FDI flow the amount of FDI moving in a given
period (usually a year) in a certain direction
FDI stock the total accumulation of inbound FDI in
a country or outbound FDI from a country across
a given period of time (usually several years).
 
Other Forms of Internationalizaton
Turnkey project
 1. A project in which clients pay contractors to 
design and construct new facilities and train
personnel.
Design and build (DB) contract
1. A contract combining the architectural or
desgin work with the actual contruction
Build-operate-transfer
1. A contract combining the construction and
temporary operation of a project eventually
to be transferred to a new owner
Consortium
1. A project based temporary business owned
and managed jointly by several firms
Subcontrcting
1. A contract that involves outsourcing of an  
intermediate stage of a value chain Institutions & environments
   
Resources to support internationalization The ability of internationally inexperienced firms
Experiential knowledge - knowledge learned by to engage in international business is to a large
engaging in the activity and context extent shaped by:
Uppsala model is a model of  The institutional environment of the home
internationalization processes focusing on country
learning processes 1. Open economies with low trade
1. Sweden's IKEA took 20 years before barriers allow foreign entrants to
entering Norway challenge local firms, and thus
i. Then it focused on building indirectly encourage firms to pursue
Western European operations their opportunities abroad.
ii. Only more recently has it  Institutional distance between the home
accelerated its and host countries
internationalization 1. The extent of similarity or
 Network internationalization model dissimilarity between the regulatory,
1. Over time, firms in a network normative and cognitive institutions
reinforce each others’ of two countries.
internationalization processes, thus 2. Cultural distance is the difference
the expertise in a firm’s network between two cultures along some
grows both with new members identifiable dimensions.
joining, and with existing members  
gaining more experience.
 Stages models of internationalization CHAPTER 12 –
1. Internationalization seen as a slow
stage-by-stage process an SME goes
FOREIGN ENTRY
through STRATEGIES
 
Accelerating resources acquisition
Born global - international new venture
 Start-up company that from inception, seek to
derive significant competitive advantages from
the use of resources and the sale of outputs in
multiple countries.

31
  
The first question to ask (when considering a new
country)
 What do you (the firm) want to achieve?
 What is the country that can give you the
highest advantage in pursuing what you
want to achieve
 
 
Establishing a subsidiary abroad
 Natural resource seeking
 Fims' quest to pursue natural resources in
certain locations
Market seeking
 Firms' quest to fo after countries that offer
strong demand for their products and
services
Efficiency seeking
 Firms' quest to single out the most efficient
locations featuring a combination of scale
economies and low-cost factors.
Innovation seeking
 Fims target countries and regions
renowned for generating world-class
innovaions
These four strategic goals, while analytically distinct,
are not mutually exclusive
 

32
  
 
The third question to ask
When should we enter the new market?
 
Table 12.2 first-mover and late-mover advantages
 
The choice of FDI entry modes

 
The forth question to ask
1. How should we enter the new market?
 
Should you enter with or without equity?
 Non equity modes
 Exort
 Contractual agreements (alliances etc)  
 Equity modes The fifth question to ask
 Joint ventures  How will you control the foreign operation?
 Wholly owned subsidiaries  
  12.5 - types of aquisitions
Modes og entry
 

33
  Entry strategies need to take
i. Marketing
ii. Human resource
iii. logistics operations into
account
 Apply institution-based view to explain
constraints on foregin entry:
 Formal and informal institutions may
restrict the options for foreign entry,
create needs for local knowledge,
and increase transaction costs of
certain forms of transaction
 Participate in two leading debates on
foreign market entries:
 These debates are
 The scale of a foreign entry
 And acquistion dynamics
 
 Draw implications for action:
Implications for practice
 From an institution-based view,
 Understand the rules of the game - both formal
managers need to fit their strategies
and informal - and fit your strategies to the
to the constraints and opportunities
constraints and opportunities of these institutions
of local institutions.
 Bring together the MNEs global capabilities and
 From a resource-based view,
complementary local resources
managers need to bring together the
 Match the different elements of an entry strategy
MNEs global capabilities and
wth the firm's strategic goals
complementary local resources.
 
 Managers must match the different
Chapter summary
elements of an entry strateg ywith
 Explain why MNEs establish subsidiaries
the firm’s strategic goals.
abroad (why to enter);
 
 Firms’ strategic goals can be grouped in
four categories CHAPTER 13 –
 Natural resources
 Market COMPETITIVE
 Efficiency
 Innovation DYNAMICS
Identify relevant locational advantages that Analyzing market competition
may attract investor (where to enter): Porter's five forces
 Foreign entrants seek locational
advantages that matche their
strategic objectives
 Compare and contrast first- and late-mover
advantages (when to enter):
 First-movers can attain advantages
such as early brand building, yet
there are countervailing benefits for
fast followers
 Compare and contrast alternatives modes
of foreign market entry (how to enter)
 Entry modes vary by the degree of
control that entrants attain over the
local operation
 Entry modes provide access to local
resources in different ways  
 Explain the interdependence of operations Synamics of competition
and entry strategies:
34
 Attack is n initial set of actions to gain
competitive advantage
 Counter-attack is a set of actions in response to
an attack
 Awareness, motivation, capability (AMC)
framework
 A conceptual framework indicatng when firms are
likely to attack and counter-attack each other
 Blue ocean strategy: A strategy of attack that
avoids direct confrontation.
 Haier’s entry into the US white goods
market. Although Haier dominated its
home country, China, with a broad range of
products, it chose to enter the US market in
a low profile segment: compact
refrigerators for hotels and student
residences.
 
"if you hit me I will hit you back"

 
Collude or not
 Collusion is collective attempts between
competing firms to reduce competition
 Tacit collusion
 Firms indirectly coordinate actions by
signalling their intention to reduce output
and maintain pricing above competitive
levels.
   Explicit collusion
 Firms directly negotiate output, fix pricing
and divide market
 Cartel
 An entity that engages in output- and price-
fixing, involving multiple competitors.
 Prisoners' dilemma
 In game theory, a type of game in which the
outcome depends on two parties deciding
whether to cooperate or to defect.
 
Aims of price fixing by firms
 Businesses recognise teir interdependence - act
together to maximise joint profits
 Cut some of the costs of competition, e.g.
Marketing wars
 Reduces uncertainty - higher profits increases
producer surplus/shareholder value
 
Price dumping
 "an exporter selling below cost abroad and
planning to raise prices after eliminating local
rivals"

35
  
Formal institutions: anti-dumping
 Dumping is when an exporter is (1) selling below
cost abroad and (2) planning to raise prices after
eliminating local rivals.
 
EU repeals anti-dumping measures against
Norwegian salmon (2009)
 The Council of the European Union 17 July
decided to repeal the anti-dumping measures on
imports of farmed salmon originating in Norway
with effect from 20 July. I am pleased that the EU
is fulfilling its WTO obligations and now repealing
the measures so that the situation of Norwegian
salmon on the EU market can be normalised,”
said Foreign Minister Jonas Gahr Støre.
 This means that the measures imposed by the EU
on 21 January 2006 have now been withdrawn in
their five years and entailed the introduction of a
minimum import price of EUR 2.80 per kilogram
for whole fish and other minimum import prices
for salmon fillets, etc.
 
Market structures
 Concentration ratio is % of total industry sales
accounted for by the top 4, 88 or 20 firms
 Price leader is a firm that has a dominant market
share and sets "acceptable" prices and margins in
the industry
 Capacity to punish is sufficient resources
posessed by a price leader to detemine and
combat defection
 
Collution possible:
 Few firms (high concentration)
 Existence of an industry price leader
 Homogenous products
 High entry barrier
 High market commonality (mutual forbearance)
 
Collusion difficult (competition likely)
 Many firms (low concentration)
 No industry price leader
 Heterogenous products
 Low entry barriers
 Lack of market commonality (no mutual
forbearance)
 
Long term survival
 Survival strategies may achieve just that – survival
– but not prosperity in the longer term.
 Entrepreneurs may view a crisis as an opportunity
to enter new markets
 Conventionally, businesses try to look into the
future by economic forecasting
36
 A technique using econometric models to
predict the likely future value of key
economic variables
 An alternative is scenario planning
 A technique generating multiple scenarios
of possible future states of the industry
 Scenarios provide a basis for contingency
plans that may be implemented when
certain events happen or benchmarks are
reached.
i. Plans devised for specific situattions
when things could go wrong
 
Debates and extension
Local firms versus big MNEs
Defender strategy centres on leveraging local assets
in areas which MNEs are weak
Extender strategy centres on leveraging home-grown
competencies abroad
Contender strategy centres on a firm engaging in
rapid learning and then expanding overseas
Dodger strategy centres on cooperating throuh joint
ventures with MNEs and/or sell-off to MNEs
 
Chapter summary
Explain how attacks and counter-attacks are
used in dynamic competition:
Attackers need to consider possible
counter-attacks, which are driven by
(1) awareness, (2) motivation and (3)
capability.
Explain how and why firms sometimes like to
collude:
Collusion may enable firms to collectively
earn higher return at the expense of
their customers and/or suppliers.
Industries primed for collusion tend to
have (1) a smaller number of rivals,
(2) a price leader, (3) homogeneous
products, (4) high entry barriers and
(5) high market commonality.
Without talking directly to competitors,
firms can signal to rivals by various
means
Outline how competition policy and anti-
dumping laws affect international
competition:
Competition policies outlaw (1) price-
raising cartels, (2) division ofmarkets
and (3) anticompetitive practices by
dominant firms.
Internationally, anti-dumping laws
discriminate against foreign firms and
protect domestic firms.
 Articulate how resources and capabilities
influence competitive dynamics:
Resources meeting the VRIO criteria are
necessary for long-term success in a
competitive battle.
Discuss how firms can compete during a major
recession:
Survival strategies focus on liquidity and
preservation of resources.
Strategies for the next upswing focus on
positioning in post-recession markets.
Scenario analysis is a powerful tool to
better understand the possibilities of
the future
Participate in two leading debates on the
politics of competition:
They are (1) small firms competing with
Big MNEs and (2) anti-dumping
versus competition
Draw implications for action:
Analyze your competitor to be able to
predict likely reactions and counter-
attacks.
Understand the rules of the game
governing competition around the
world
Strengthen resources and capabilities
that more effectively competeand/or
cooperate
 
CHAPTER 14 –
BUILDING GLOBAL
STRATEGIES
 
Global strategies take advantage of operations spread
across the world
This chapter focuses on the opportunities of global
strategies, and how companies can make best use
of the diversity of the world.
We first summarize different types of advantages that
firms may be chasing when they develop global
strategies. Then, we introduce the AAA typology
of strategies that illustrates different ways in
which firms can create value by integrating
operations across countries: aggregation,
adaptation and arbitrage.
We then explore how firms use acquisitions to
develop the kinds of global operations that allow
them to deploy these strategies on the global
stage, and discuss how institution- and resource-
based views help explain the patterns and
performance of aquisitions
 
Advantages of the global firm
Global scale advantages reduce costs in production,
product development and marketing
Global sourcing provides access to a wider range of
inputs
Global knowledge management enhances innovation
Risk diversification redu
ces the corporate risk profile
 
AAA strategies:
 
Mergers and acquistiions
An acquisition he transfer of the control of operations
and management from one firm (target) to
another (acquirer), the former becoming a unit of
the latter
For example, Danisco (Opening Case ) acquired
Cultor of Finland and integrated it in its
own operations; Cultor ceased to exist as a
firm
A merger is the combination of operations and
management of two firms to establish a new legal
entity.
Merger in 2005 between Interbrew (Belgium)
and Ambev (Brazil) created Inbev, which
merged in 2009 with Anheuser Busch (USA)
to form AB-Inbev.
Most large M&As are cross-border (international)
M&As; they account for approximately 30 per
cent of all M&As. In 2007 (a record year), M&A
deals topped 2,9 trillion euro, of which 1,3
involved in european companies
Most of the largest MNEs of the world have grown by
acquisitions, as have many MNEs from emerging
economies that recently entered the global stage
 
 
Cross border mergers and acquisitions

37
 Will the merged firm attain a dominant marked
share?
Will consumers benefit from cost savings or
accelerated innovation in the merged firm?
Will the removal of competition enable the merged
firm to raise prices?
Vertical and conglomerate M&A:
Will the merged firm have the ability to use its control
over multiple stages of the value chain to limit
access to suppliers or customers for competitors
operating in only one stage=
Will the merged entility have economic incentives to
behave in such manner?
Will such behaviour give rise to significant
impediment to effective competition?
 
Causes of acqusition failures

 
Motives for acquisitions
Synergistic motives
Leverage superior organizations
Enhance market power
Reduce costs by eliminating SE TABLE 14,3-.....
 
 
Acquisitions versus alliances
An alternative to a full take over of another firm is a
collaboration with that firm is strategic alliance
(ch 12)
JVs draw on competences of two (or more) parent
Due dilligence is the assessment of the target
firms. They are an attractive options if three
firm's financial status, resources and strategic fit.
conditions are met:
Strategic fit is the effective matching of
Two entities can together achieve something
complementary strategic capabilities
that neither could achieve on its own, for
Organizational fit is the similarity in cultures,
example market leadership in their industry
systems and structures
or next-generation innovations.
 
The merged unit depends on inputs such as
Debates and extensions
technologies from both parent firms that
Hidden champions
may be disrupted by legal separation (in
International business is often presented as
other words, market transaction costs are
primarily a matter of big MNEs competing
high).
for market share.
A full take-over is not feasible, perhaps because
Across Europe, firms with 1000 or 5000
the competition authorities would object
employees operate on the global stage in a
A strategic alliance may consist of far-reaching
specific, narrowly defined industry.
operational collaboration stopping short of full
They are leading in their selected niche markets
acquisition.
world wide with competitive advantages
Strategic alliances may also serve to prepare a full
grounded in highly specialized technological
acquisition.
competences that are exploited worldwide.
 
Globalfocusing
 
A strategic shift from diversification to
Regultors assessing mergers and acquisitions
specialization which increases the
Horisontak M&A:
international profile.

38
 Acquisitions and divestments the scale of Draw implications for action:
business units are often closely related Managers need to understand and
  master the rules of the game
Chapter summary: Governing alliances and acquisitions
Articulate the strategic advantages of globally around the world.
operating firms: When managing acquisitions, the savvy
Advantages include global scale manager should focuson both
advantages, global sourcing, global strategic and organizational fit.
knowledge management, servicing of
global customers and risk
diversification. CHAPTER 15:
Explain different business modes to exploit the
advantages of a global firm:
STRUCTURING AND
Aggregation strategies focus on the ORGANIZING MNES
realization of synergies between • MNEs operate in many different local
operations in different locations contexts, and their ability to make
Adaptation strategies aim to deliver connections between local contexts is crucial
locally adapted products in each to achieve competitive advantage in global
market. strategies.
Arbitrage strategies exploit the
differences in prices in different • MNEs are typically knowledge-intensive firms
markets. where the creation, dissemination and/or
3. Explain why global firms engage in mergers exploitation of knowledge are essential for
and acquisitions, and alliances: their competitive advantage.
Acquisitions may be driven by expected
• How MNEs organise creative people and
synergies, by managerial hubriad or
diverse subunits in distinct local contexts is at
by self-interest of the individuals
the core of this chapter.
involved.
Alliances provide an alternative to a full • We start by introducing a traditional view on
acquisition, for example by merging organizing the MNEs based on the conflicting
business units, or collaborating on pressures for integration and local
operations. responsiveness, followed by a modern view
Apply the institution-based view to explain focused on knowledge management.
patterns of acquisitions:
Horizontal acquisitions may not be • The institution- and resource-based views
permitted if they result in a reduction shed additional light on these issues.
of competition that is judged to be The integration-responsiveness framework
harmful to consumers.
Vertical acquisitions may not be
permitted if they allow a dominant
player to inhibit competition in an
upstream or downstream industry.
Remedial measures include prohibition of
the merger, required divestments or
behavioural constraints
Apply the resource-based view to explain when
acquisitions are likely to succeed:
The impact of resources on acquisitions is
illustrated by the VRIO framework.
Participate in two leading debates on global Localisation (multidomestic) strategy focuses on a
strategies: number of foreign countries/ regions, each of which is
(1) how hidden champions can succeed, regarded as a stand-alone ‘local’ (domestic) market
and (2) how globalfocusing allows worthy of significant attention and adaptation.
conglomerate to become global
specialists.

39

Four structures
• International division is typically set up when
firms initially expand abroad, often engaging
in a home replication strategy.
• Geographic area structure is an organizational
structure that organizes the MNE according to
different countries and regions.
• Country or regional manager is the business
leader of a specific geographic area or region.
• Global product division is a structure that
assigns global responsibilities to each product
division.
Managing knowledge
• Many of the capabilities that are the
foundation of MNEs competitiveness are
grounded in knowledge.
• Knowledge management is the structures,
processes and systems that actively develop,
leverage and transfer knowledge.
• Knowledge is a broad concept that includes
not only factual information but the know-
how and know-why held by individuals and by
the firm.
• Explicit knowledge is codifiable (that is, can be
written down and transferred with little loss
of its richness). Virtually all the knowledge
captured, stored and transmitted by IT is
explicit.
• Tacit knowledge is non-codifiable and its
acquisition and transfer require hands-on
practice.
– Tacit knowledge is more important
and harder to transfer and learn; it
40
can only be acquired through learning
by doing.
Communities of practice (CoP) are groups of people
doing similar work and sharing knowledge about their
practices of work. In MNEs with a global or
transnational strategy, codification is often not
sufficient for effective knowledge exchange of varying
degrees of complexity between many different
parties.
“Knowledge governance refers to choosing structures
and mechanisms that can influence the processes of
sharing and creating knowledge” (Foss and
Michailova, 2009)
Chapter summary:
1. Articulate the relationship between strategy
and structure:
- The integration-responsiveness framework
provides a tool to analyze strategy and
structure.
- 4 pairs: (1) home replication
strategy/international division structure, (2)
localization strategy/geographic area
structure, (3) global standardization
strategy/global product division structure and
(4) transnational strategy/global matrix
structure.
2. Outline the challenges associated with
learning, innovation and knowledge
management:
- The challenges for knowledge management
arise from the tacitness of knowledge.
- The transnational strategy requires more
comprehensive knowledge flows across the
organization than the other three
organizational strategies.
 - Communities of practice (CoP) are an communication between different units of the
important means to share knowledge in MNE.
MNEs.
Expats can bring:
- Governance mechanisms for knowledge face
difficult trade-offs between hard incentives • Intellectual capabilities:
and social capital as conduit for knowledge
exchange. • Psychological capabilities:
3. Explain how institutions and resources affect • Social capabilities.
strategy,structure and learning:
- Institutions in the home country, especially The immersion approach involves placing a person in
ownership and governance structure, affect a situation where they will learn by practice
the strategies and structures adopted. • Culture shock is an expatriate’s reaction to a
new, unpredictable, and therefore uncertain
environment.
CHAPTER 16: • Expatriate stress is caused by an imbalance
INTERNATIONAL HUMAN between expectations and abilities affected
by culture shock.
RESOURCE MANAGEMENT
HRM – human resource management
• Human resource management (HRM) is
defined as activities that attract, select and
manage employees.
• HRM plays a crucial role in MNEs, where a
great diversity of people work together at
multiple locations, and where people
frequently have to move between locations.
• This chapter first outlines three distinct
approaches to international
• HRM. We explore the management of
– people sent abroad by the MNE.
– local employees in subsidiaries • Psychological contract is an informal
abroad. understanding of expected delivery of
benefits in the future for current services.
– the institution - and resource-based
views to shed further light on these • Reverse culture shock is the experience by
issues. persons returning to their country of origin.

Chapter summary:
1. Distinguish ethnocentric, polycentric and geocentric
management:
- Expatriates (play multiple challenging roles and often
have high failure rates. They need to be carefully
selected.
2. Explain how expatriates are managed in MNEs:
- Expatriates play many crucial roles in MNE
subsidiaries, and therefore need a variety of both
financial and personal abilities.

• Expatriates play a critical role in managing - Pre-departure language tuition and cross-cultural
subsidiaries of MNEs, and in facilitating training is essential but not always provided.

41
- Expatriates typically experience a period of culture
shock cause by their limited understanding of the
local context and pressures at work.
- Returnees face problems of re-integration both
professionally and privately.
3. Explain how MNEs manage their employees in
subsidiaries abroad:
- Training and development of HCNs are now an area
of differentiation among many MNEs.
- Retention of top talent HCNs requires competitive
pay, ongoing training, clear career prospects and
culture-sensitive performance appraisal.
4. Discuss how the institution-based view sheds
light on HRM:
- HRM is significantly shaped by formal and
informal rules both at home and abroad.
5. Discuss how the resource-based view sheds
light on HRM:
- As HRM becomes more strategic, it should be
assessed using the VRIO criteria.
6. Participate in two leading debates concerning
HRM:
- These are (1) non-traditional forms of
expatriation, and (2) expatriation versus
inpatriation.
7. Draw implications for action:
- HR managers need to have the four Cs: being
curious, competent, courageous and caring
about people.
- Non-HR managers need to proactively
develop an international career mindset.
CHAPTER 17:
INTERNATIONAL
MARKETING AND
SUPPLY CHAIN
MANAGEMENT
Outline:
• Marketing
– Efforts to create, develop and defend
markets that satisfy the needs and
wants of individual and business
customers.
• Supply chain
42
– Flow of products, services, finances
and information that passes through a
set of entities from a source to the
customer.
• Supply chain management
– Activities to plan, organize, lead and
control the supply chain.
– Chapter starts by outlining the
challenges of understanding diverse
consumer behaviours around the
world. It then discusses how MNEs
use marketing and supply chain
management to deliver products that
diverse customers value. The
institution- and resource-based views
add further insights on the variations
of marketing and supply chain
management around the world.
Debates and extensions follow.
The marketing mix
- Marketing mix
– The underlying components of
marketing management: product,
price, promotion and place.
- Product
– The offerings that customers
purchase.
– Even for a single category (such as
women’s clothing or sports cars),
product attributes vary tremendously.
For firms interested in doing business
around the world, the leading concern
is standardization versus localization
Market segmentation
• Identifying segments of consumers who differ
from others in purchasing behaviour.
• Global consumers can be divided into four
categories:
– Global citizens (who are in favor of
buying global brands that signal
prestige and cachet).
– Global dreamers (who may not be
able to afford, but nevertheless
admire, global brands).
– Anti-globals (who prefer local goods
because of the perceived negative
side effects of globalization).
 – Global agnostics (who don’t care
about the global nature of the brands
they
buy).
Marketing mix: Price:
• Price
– The expenditures that customers are
willing to pay for a product.
• Price elasticity
– How demand changes when prices
change.
• Not all consumers are highly price sensitive.
Luxury products that are
status symbols of upwardly mobile middle
classes attain their status exactly because not
everyone can afford these products.
Marketing mix: Place:
• Place is the location where products and
services are provided.
• In international business, a key decision is
when to enter which market and in what
sequence.
• Four sets of considerations come into play:
– Market potential,
– Entry costs,
– Strategic motives,
– Distribution channels. How to bring
the products to the customer.
• A distribution channel is the set of business
units and intermediaries that facilitates the
movement of goods to consumers.
• Firms used to have separate ‘purchasing’ and
‘sales’ units that would interact with
respectively suppliers and customers, and
intermediaries on either side.
• With changes in transportation, data-
processing and communication technologies,
these two aspects of business operations have
converged.
Distribution: supply chain:
43
• Inbound logistics
– Purchasing and the coordination of
intermediaries on the supply side.
• Outbound logistics
– Sales and the coordination of
intermediaries on the customer side.
Supply chain management
• Marketing and supply chain management
activities based on the VRIO criteria
– Managers need to ask: Do these
activities add value?
– Managers need to assess the rarity of
marketing and supply chain activities
– Managers need to ask: Is our firm
organizationally ready to accrue the
benefits of improved marketing and
supply chain management?
VRIO-reminder
• The Question of Value: "Is the firm able to
exploit an opportunity or neutralize an
external threat with the resource/capability?"
• The Question of Rarity: "Is control of the
resource/capability in the hands of a relative
few?"
• The Question of Imitability: "Is it difficult to
imitate, and will there be significant cost
disadvantage to a firm trying to obtain,
develop, or duplicate the
resource/capability?"
• The Question of Organization: "Is the firm
organized, ready, and able to exploit the
resource/capability?" "Is the firm organized to
capture value?"
Do’s and don’ts in international marketing

Debates and extensions
• Market orientation refers to a way of thinking
that places priority on the creation of superior
customer value in the marketplace.
– A market-oriented firm listens to
customer feedback and allocates
resources accordingly to meet
customer expectations.
– The debate centres on how firms
benefit from market orientation
differently around the world.
• Relationship orientation is a focus to
establish, maintain and enhance relationships
with customers.
– Key to the debate is how firms benefit
from market or relationship
orientation differently around the
world.
Chapter summary:
1. Appreciate how international marketers can
handle cross-cultural differences in consumer
behaviour:
- Using marketing surveys and non-
conventional methods, international
marketers need to study consumer
behaviours in the markets they wish to enter.
2. Articulate the four Ps in marketing (product,
price, promotion and place) in a global
context:
- In international marketing, the number-one
concern on product is standardisation versus
localisation.
- Marketers care about price elasticity – how
responsive purchasing behaviour is when
prices change.
- In promotion, marketers need to decide
whether to enhance or downplay the country-
of-origin effect.
44
- The place of sales is central to decisions
where and in what sequence to enter foreign
markets.
3. Outline the triple As in supply chain
management (agility, adaptability and
alignment):
- The term distribution channel has been
replaced by supply chain management in
response to more outsourcing to suppliers,
contract manufacturers and 3PL providers
- Agility deals with the ability to quickly react to
unexpected shifts in supply and demand
- Adaptability refers to the ability to
reconfigure supply chain in response to longer
term external changes
- Alignment focuses on the alignment of
interests of various players in the supply
chain.
4. Discuss how institutions affect marketing and
supply chain management:
- Formal and informal rules such as advertising
standards and employment law significantly
impact these two areas.
5. Discuss how resources affect marketing and
supply chain management:
- Managers need to assess marketing and
supply chain management
based on the VRIO criteria.
6. Participate in two leading debates concerning
marketing and supply chain management:
- The debates are (1) market orientation versus
relationship. orientation, and (2) asset versus
liability of countries-of-origin.
7. Draw implications for action:
- Knowing the formal and informal rules of the
game will enable savvy managers to answer
challenges in marketing and supply chain
management.
- To avoid marketing blunders, managers
should study consumer behaviour before
deploying their marketing mix.
- Managers can enhance supply chain
management by focusing on agility,
adaptability and alignment (the triple As).
Lecture 18: The impact of the macroeconomic
environment on business performance
 
https://papers.ssrn.com/sol3/papers.cfm?
abstract_id=3297543
 
The best measures for competitiveness is the  Increased financial integration - how you ca
sustainable profit trade cross border shares of the company,
Higher rate of return = higher cost of capital for the different instruments
firm = fewer possible investments  But an increased number of countries and
  idiosyncratic risks (exchange risk etc)! - it
  develops all the time, many countries on the
Macroeconomic uncertainty waiting list
 Exchange rates - relative price. One currency  
expressed in another currency. USD vs NOK for  
instance  
 Interest rates - plural because you take one
interest rate compared to a interest rate
abroad. Interest rate comparisons are very
valuable for the firm. - the price of the money
 Inflation rates - (PPP) - the price of goods and
services. Which one to use depends on your
purpose. How much does it cost to produce my
product in France vs Norway? When you
combine interest and inflation = real interest
rate. If you have a negative interest rate it
encourage you to borrow money. Exchange rate
+ inflation rate = real exchange rate. Corrected
for the inflation.
 Political risk premia - is the
additional risk associated with investing in an
international company, rather than the
domestic market. 
o => a set of relative prices
 
Generated by International parity conditions, they Investing in the growth of eastern africa
furnish us. If they derivate from the equibrillium - it´s «MTI» is Swahili for tree - symbolizing MTI’s focus on
either a loss or a profit for the company. growing companies, with the potential to bear fruit
  from long-term effort of investing, coaching,
Perspective mentoring and monitoring (5-66% ownership, debt,
 Insider - staff, management management for hire).
 Outsider - shareholder, bankers - how has the
How Can MTI Help local businesses?
macroeconomic factors influenced the firm?
- Access to Cheaper and/or more long-term
 Researcher
capital
 
- Access to competence....People with
With such a fragmented world it will be a tremendous
education
demand for knowledge of international business
- Access to experience...People in trusted
Swizz central bank - 40% on the stock market. Had a
networks
huge loss last quarter because they needed to sell
franc to cope with the exchange rates, bought stocks
INTERNATIONAL BUSINESS
in Apple and became the second largest shareholder Sammendrag
in Apple - Apple facing a huge loss and so is the Swizz
central bank. CHAPTER 1 
 
   Book value - the total value of the equity at
What is new in the global economic order the stock market (is worth 0,5=0,5 50 in
 Increased economic integration - how are goods stead of 100).
and services transported, tourism, cross border
investment

45

Foreign direct investments (FDI)
 A direct investment into production or business
by an individual or company in another country
 Either buying a company or expanding existing
operations in a country
 
What is an international company?
 How does an international company differ
from a domestic company?
Key terms
Global business: business around the globe
including both international (cross-border)
activities and domestiv business activities
 
International Business (IB)
“IB is about 1) businesses (firms) engaging in
international (cross border) economic activities
and/or 2) the activity of doing business abroad.
(Peng and Meyer, 2011, p. 6)
Multinational Enterprise (MNE)
“A firm that engages in foreign direct
investment (FDI) by directly investing in,
controlling and managing value added
activities in other countries”. (Peng and
Meyer, 2011, p. 6)
Foreign direct investment (FDI)
Investments in, controlling and managing value-
added activities in other countries. (Peng and
Meyer, 2011, p. 6)
Important economic terms:
 gross national product (GNP) –
 measured as the sum of value added by
resident firms, households, and
government operating in an economy.
 gross domestic product (GDP)
 total market value of all final goods and
services produced within a country in a
46
given period of time usually a calendar
year.
 gross national income (GNI)
 GDP plus income from nonresident sources
abroad – the term used by the World Bank
and other international organizations to
supersede the GNP term.
 purchasing power parity (ppp) –
 adjustment made to the GDP to reflect
differences in the cost
of living.
 
 The big mac index - the cost of a big mac in
norway versus the big mac in china
A multinational enterprise (MNE): Both activites
internationally (Income statement) and
assets/liabilities (Balance sheet)
 A firm that engages in foreign direct investment
(FDI) “by investing in, controlling and managing
value added activities in other countries”. (Peng
and Meyer, 2011, p. 6), i.e., involves international
assets and liabilities
 
International business in a value chain
perspective
 
 
 
 
 
 
 
 
 
What do we really look at?
Geographical conditions.
 Climate has a huge impact on the business
opportunity, and it is influencing culture a lot. In
Norway we are a culture where people in average
is very good at planning because of our climate.
 Terrain and seaways: Landlocks has a big
disadvantage. Bolivia etc. Eritrea and ethiopia has
a huge conflict bc eritrea has the sea and ethiopia
tries to take over eritrea.
 Natural resources: oil has been a big o Unskilled norwegian labor has lost
disadvantage for many countries because they do their jobs to immigrants. The number
not have strctures and institutions in their of NAV users have gone up.
contries that benefits it. Venezuela, kongo o The increase in salary for unskilled
  labor over the last 20 years has been
European and Global Business much less than skilled ones
 International business (IB) is about:
2. Exploits workers
businesses (firms) engaging in international
(cross-border) economic activities 3. Gives MNEs too much power
 the activity of doing business abroad.
 This book goes beyond traditional IB textbooks in Top 10 largest companies in the world by market
two important ways: capitalization
1. We discuss issues worldwide as they are Apple
relevant to European businesses and
Alphabet inc/Google
managers focusing on:.
o business in nearby countries, Microsoft
o The institutions of the EU, Berkshire hathaway
o small and medium-sized enterprises Exxon mobil corp
(SMEs), Amazon
o research by European scholars on
Facebook
these issues
Johnson & Johnson
2. We go beyond developed economies by
devoting extensive space to emerging General electric
markets. AT & T
 
   
What is globalization? Motive:
Many people talk about globalization, yet they do
Why and How do firms expand internationally
not necessairly mean the same thing
and what is the mentality around it?
Ethnocentric
1. Home-country oriented
Polycentric
1. Host country oriented
Geocentric
1. World oriented
Guillén (2001) defines it as ‘a process leading to
2. "the world is our market"
greater interdependence and mutual awareness
(reflexivity) among economic, political and social  
units in the world, and among actors in general’ A unified framework

 Positive sides
1. Economic growth
2. Sharing of technologies
3. Cultural exchange
 Negative sides
1. Undermines wages in rich countries "What makes a company successful if it goes
international?"

47

Our ‘big question’ is:
“What determines the success and failure of firms
around the globe?”
To answer this question, we focus on two core
perspectives:
an institution-based view
a resource based view.
 
Institutions: a set of behavoiurs that are written
down, how are the laws etc, established rules.
Formal (written down) / informal (a set of
behaviours) institution.
 
They will influence our business a lot and how do
we combine Norway and Belgium? How is the
institutional fit? Norway + India- not a good
institutional fit. Need to know about the
institutional distance to have success with the
business there.
 
Resources: not only economic, also employees,
copyrights- tangible/non-tangible resources.
 
Institution based view
 
Formal and informal rules of the game
(How to do business in a foreign country)
FORMAL: What are the rules of the country for
foreign firms?
INFORMAL: How do culture and values affect
how to do business in a foreign country?
 
Environment (foreign country) influences the firm ́s
success
Liability of foreignness
Resource-based View
An Institution based view which views
performance as determined only by
external environments has its limitations.
The resource-based view focuses on a firm’s
internal resources and capabilities.
the “liability of outsidership” infers the more a
firm’s origins differ from the host
environment, the less the firm has
experience in the host country and the
further away its nearest prior affiliate.
Firms as Coca Cola and Microsoft possess firm-
specific resources that enabled them to
attain leadership positions around the
globe.
1. Hence the primary weapon of foreign
firms is overwhelming resources and
48
capabilities that, after offsetting the
liability of outsidership, still result in
some significant competitive
advantages
 
Outsidership / liability of foreignness
 
Is outsidership always negative? Can you think of
countries or industries where it could be a benefit
to be a foreign firm?
When Did International Business Start?
China, India, and Japan 15,000 years ago
Africa and South America thousands of years ago
Eleventh century
Fifteenth and sixteenth centuries
Colonization
 
 
Chapter summary:
Explain the concepts of international business
(IB) and global business
IB is defined as(1) a business (firm) that
engages in international (cross border)
economic activities, and (2) the action of
doing business abroad.
This book places special emphasis on the
challenges faced by European businesses,
and the challenges of emerging economies.
 
Articulate what you hope to learn by reading
this book and taking this course.
 To better compete in the corporate world
that will require global expertise.
 To enhance your understanding of what is
going on in the global economy.
Identify one fundamental question and two
core perspectives that provide a
framework for studying this field
 Our most fundamental question is: What
determines the success and
failure of firms around the globe?
 The two core perspectives are (1) the
institution-based view
 and (2) the resource-based view.
 
Participate in the debate on globalization with a
reasonably balanced and realistic
view.
 Globalisation has created unprecedented
contacts between nations and
cultures, with both positive and negative
consequences for individuals.
  Globalisation has been evolving in waves,
with a major peak in the late 19th/early
20th century.
 The recent wave of globalisation has
accelerated with the rising powers of
emerging economies, yet it remains
volatile.
 
Have a basic understanding of the global
economy and broad trends. MNEs,
especially large ones from developed
economies, are sizable economic entities.
2. Draw implications for action and recognize
your own biases.
 Globalisation requires business leaders to
stay up-to-date with economic, social and
political developments around the world.
 Current and would-be business leaders
need to be aware of their own hidden pro-
globalisation biases.
CHAPTER 2 – INSTITUTIONS: ECONOMIC,
POLITICAL AND LEGAL SYSTEMS  changes introduced to formal and
 We focus on clear contracts/systems/plans, they
on good relationships and networks
 You have right but you don’t get right
 System to enforce contract is weak
 Constant change in legal framework
 Geografical and culture distance
 Misunderstandings
 Misunderstandings
 What are we facing?
What does institutions mean in International
Business?
 Definition: Formal and informal rules of the
game
 
What is an institution?
When you google it you will get a picture of a
bank.
 
What do institutions do?
 
Institutions' key role is to reduce uncertainty
 Uncertainty increases transaction costs –
costs associated with economic transactions
 Institutional frameworks can reduce the
potential for opportunistic behaviour by
explicitly establishing rules.
 
No rules: uncertainty, Rules = certainty
 
Dimensions of Institutions
49
Formal institutions are normally the government,
and informal institutions concern behaviours are
morally right and wrong, and what is important
and not within a society.
 
The financial crises of 2008 revealed that banks
made major mistakes in their risk management
practices. Probing deeper, it emerged that a
combination of cognitive and normative pressures
may be at fault.
 
Discuss with your classmate:
Why do you think Europe created the European
Union? What are the benefits of unified formal
institutions across boarders? Are all institutions in
Europe now the same across all member states?
 
Understanding institutions
 Institutions
o “rules of the game”
 Institutional transitions
o Fundamental and comprehensive
informal rules of the game that affect
firms as players
o Changes in the institutions
 east european states 1990 -
today
 Path dependent - parents,
grandparents has influenced
you - and generations influence
each other.
 Institution-based view
o success and failure of firms are
enabled and constrained by
institutions
 Institutional framework
o Formal and informal institutions
governing individual and firm
behavior
 Formal institutions
o Laws, regulations, and rules - may be
imposed by home countries and host
countries
 Norms
o Values, beliefs, and actions
 
Institutions are not static
Institutions evolve over time. Institutional
transition, defined as ‘fundamental and
comprehensive change introduced to the formal
and informal rules of the game that affect
organizations as players’, are common, especially
in emerging economies
  
The case of Ecuador: Some examples:
 Interest rate ceilings in banks
 Minimum salary
 Minimum 4% disabled workers
 Legalized position of drugs
 
Core propositions
 Firms adapt to local institutions.
 In cases where formal institutions are
“weak” informal institutions will play a
greater role.
 
Three main types of formal institutions
 Political systems
 Economic systems
 Legal systems
Political systems
 A political system refers to the rules of the
game on how a country is governed
politically.
o Political risk is the risk associated with
political changes that may negatively
impact domestic and foreign firms.
 
Types of Political System
 Democracy
o System in which citizens elect
representatives to govern the country
on their behalf
 Totalitarianism (dictatorship)
o System in which one person or party
exercises absolute political control
over the population
 
What is a democracy?
 Is there a difference in democracy between
Norway and Tanzania?
o Both countries have free elections
 "power to the people"
 A system where you vote directly for the
president or the parliament members to
elect who is going to be in charge.
 
 
Economic Systems
 Economic Systems
o The rules of the game on how a
country is governed
 Market economy
o Characterised by the “invisible hand”
of market forces; government takes a
hands-off, or laissez faire, approach
 Command economy
50
o Government taking the “commanding
height” in the economy; all factors of
production are government- or state
owned and controlled, and all supply,
demand, and pricing are planned by
the government
 Mixed economy
o Elements of both market economy
and command economies
 
Varieties of Capitalism
 
How important is the stock market vs the
employment protection? And how important is
employment protection in the country you are
doing business?
 
 
 
 Adam Smith: The «father of capitalism»
somthing good, will help us improve the life
of every citizen
 “First” book: The theory of the moral
sentiments
 “Second” book: The wealth of Nations
It is a mechanism that fits the rich more than the
poor.
 
Legal systems
 Legal systems
o Rules of the game on how a country’s
laws are enacted and enforced
 Civil law
o A legal tradition that uses
comprehensive statutes and codes as
a primary means to form legal
judgments.
 Common law
o A legal tradition that is shaped by
precedents and traditions from
previous judicial decisions.
 Case law
o Rules of law that have been created
by precedents of cases in court.
Hernando de Soto (economist from Peru) - the
mystery of capital
 Most poor people are poor because they
cannot legally register their properties and
use these to get access to loans or sell them
and use their dead «land capital» in better
ways
 Creating legal registers for land is the most
important development tool
  The lack of legal security for land ownership
is the main reason that many countries are
poor.
 
Intellectual property rights
 
Patents
 legal rights awarded by government
authorities to inventors of new
technological ideas, who are given exclusive
(monopoly) rights to derive income from
such inventions through activities such as
manufacturing, licensing or selling.
Copyrights
 the exclusive legal rights of authors and
publishers to publish and disseminate their
work (such as this book, a photo or a piece
of software).
Trademarks
 exclusive legal rights of firms to use specific
names, brands and designs to differentiate
their products from others.
 
Property: traditionally refers to tangible pieces of
property (such as land).
Intellectual property: specifically refers to
intangible property
 
The case of microfinance - a big question
 Small loans to small businesses
 Emerges in places with weak formal
institutions
 Is microfinance a tool for development or is
it "locking" poor people into continued
poverty?
 Is the existence of microfinance an
argument for politicans not to make
improvement in the formal institutions
 
Get to know countries by their formal institutions
 Who knows most about the rest of the
world?
o The CIA
o The CIA world factbook
 
Arguments:
Institutions & economic development
 Institutions ensure that firms are able to
make gains from trade. Specifically, they
enable firms to enter contracts, and be
reasonably sure that partners will honour
their contractual obligations, or that they
can use the court system to enforce the
contract.
51
 A lack of strong, formal, market-supporting
institutions forces individuals to trade on an
informal basis with a small neighbouring
group and forces firms to remain small, thus
foregoing the gains from a sharper division
of labour by trading on a large scale with
distant partners.
 Emergence of formal, market-supporting
institutions encourage individuals to
specialize and firms to grow in size to
capture the gains from complicated long-
distance trade (such as transactions with
distant, foreign countries).
 When formal, market-supporting
institutions protect property rights, they will
fuel more innovation, entrepreneurship and
thus economic growth.
 
Implications for practice
This chapter has sketched the contours of an
institution-based view of international business,
which is one of the two core perspectives
presented throughout this book.
Most developed economies are supported by
strong, effective and market-supporting formal
institutions, while most underdeveloped
economies are held back by weak, ineffective and
market-depressing formal institutions.
 
Chapter summary:
 Explain the concept of institutions and their
key role in reducing uncertainty:
 Institutions are defined as ‘the rules of the
game’.
 Institutions have formal and informal
components, with different supportive
pillars.
 Their key functions are to reduce
uncertainty, curtail transaction costs and
constrain opportunism.
 Managers and firms rationally pursue their
interests and make
choices within formal and informal
institutional constraints in a given
institutional framework.
 When formal constraints are unclear or fail,
informal
 constraints will play a larger role.
 
 Explain the basic differences among political
systems:
 Totalitarianism is a political system in which
one person or political party exercises
absolute political control.
  In democracies, citizens elect
representatives to govern the country, yet
the institutions governing this selection vary
widely.
 3. Explain the systemic differences among
economies:
 A pure market economy is characterized by
laissez faire and total control by market
forces.
 In liberal market economies (LMEs),
companies are predominantly financed
through the stock market, while labour
markets are highly flexible
 In coordinated market economies (CMEs),
businesses, governments, trade unions,
industry association and other economic
actors coordinate their actions not only
through markets.
 
 Explain the basic differences between legal
systems:
 Civil law uses comprehensive statutes and
codes as a primary means to form legal
judgments.
 Common law is shaped by precedents and
traditions rom previous judicial decisions.
 Property rights are legal rights to use an
economic resource and to derive income
and benefits from it.
 Corporate governance systems specify how
managers are controlled by other interested
parties of the firm.
CHAPTER 3: INFORMAL INSTITUTIONS:
CULTURE, RELIGION AND LANGUAGE
 
Where do Informal Institutions come from?
Informal institutions come from socially
transmitted information and are part of the
heritage that we call culture. They tell individuals
in a society what behaviours are considered right
and proper, and what would be unacceptable.
 Typically, cultures have no clearly defined
origin, but have evolved over time.
 Those within a society tend to perceive
their own culture as ‘natural, rational and
morally right’. This self-centered mentality
is known as ethnocentrism
Culture can be seen as the collective
programming of the mind which distinguishes the
members of one group or category of people from
another.
 
Culture
52
 What is the “right” way to address your
boss?
 What is the “right” way for your boss to
address you?
Cross-cultural literacy
 Understanding of how differences across
and within nations can affect the way
business is practiced
 Understanding of relationship between
culture and the cost of doing business in a
country or region
 MNEs can be engines of cultural change
 
Ethnocentrism: belief in the superiority of one's
own ethnic group or culture
 
Culture thus is shared in a group, connecting
members of the group with each other, and with
their history. In this chapter, we focus on nation
states as the relevant group;
 
Definitions
 ‘A way of life of a group of people, the
configuration of all the more or less
stereotyped patterns of learned behaviour,
which are handed down from one
generation to the next through means of
language and imitation". Barnouw 1985
 ‘Culture is a collective phenomenon that is
shared with people who live or lived within
the same social environment, which is
where it was learned. It is the collective
programming of the mind which
distinguishes the members of one group or
category of people from another.’
Hofestede 1997
 
3 ways to systematically understand cultural
differences:
 Context
 Cluster
 Dimension
 
Cultural context
 Context is the underlying background upon
which interaction takes place.
o In low-context cultures (such as in
North American and Western
 European countries), communication is
usually taken at face value without much
reliance on unspoken context. In other
words, yes means yes
 o In contrast, in high context cultures
(such as Arab and Asian countries),
communication relies a lot on the
underlying unspoken context, which
is as important as the words used.
o For example, ‘yes’ does not
necessarily mean ‘yes, I agree’, it
might mean ‘yes, I hear you"
Civilisation clusters
 A Civilization is ‘the highest cultural
grouping of people and the broadest level
of cultural identity people have"
o Huntington 1996 has advanced a
highly controversial idea that the
Western civilization will clash with the
Islamic and Confucian civilizations in
the years to come.
o GLOBE has (6) Confucian Asia, (7)
Eastern Europe, (8) Middle East, (9)
Southern Asia and (10) Sub-Sahara
Africa.
o The underlying idea that people and
firms are more comfortable doing
business with other countries within
the same cluster. This is because
common history, religion and customs
within the same cluster reduce the lia
o bility of outsidership when operating
abroad (see chapter 1)
Caracteristics og clusters
 Anglo- competitive and result-oriented
 Confucian Asia - result-driven, encourage
group working together over individual
goals
53
 Eastern Europe - forceful, supportive of co-
workers, treat women with equality
 Germanic Europe- value competition &
aggressiveness and are more result-
oriented
 Latin America- loyal & devoted to their
families and similar groups
 Latin Europe- value individual autonomy
 Middle East- devoted & loyal to their own
people, women afforded less status
 Nordic Europe- high priority on long-term
success, women treated with greater
equality
 Southern Asia- strong family & deep
concern for their communities
 Sub-Sahara Africa - concerned & sensitive
to others, demonstrate strong family
loyalty (Northouse, 2007, p.309-313).
Hofstede's cultural dimensions 
 Influential, but only a starting point
 
Six dimensions:
 Power distance expresses the degree to
which the less powerful members of a
society accept and expect that power is
distributed unequally.
 Individualism refers to the perspective that
the identity of an individual is
fundamentally his or her own
 Masculinity versus femininity dimension
refers to the relative importance of values
traditionally held by men and women.
 uncertainty avoidance refers to the extent
to which members in different cultures
accept ambiguous situations and tolerate
uncertainty.
 long-term orientation emphasizes
perseverance and savings for future
betterment
 Indulgence stands for a society that allows
relatively free gratification of basic and
natural human drives related to enjoying
life and having fun. Restraint stands for a
society that suppresses gratification of
needs and regulates it by means of strict
social norms
Limitations of Hofstede's framework:
 Cultural boundaries are not the same as
national boundaries
 Based on interviews with IBM employees
only (single firm approach)
 Original data now 40 years old
 
 Ongoing research: does language influence the
performance of banks?
 H1: There is a positive relationship between
the bank's financial performance and
whether the bank operate in a country
using officially one of the major languages
of international business (such as English,
Spanish, or French).
 H2: There is a positive relationship between
the bank's financial performance and it
sharing a common language with its
international partner.
 H3: There is a negative relationship
between the bank's financial performance
and it having the linguistic distance with its
international partner.
 
Religion
 Religion is a major manifestation of culture,
and it is the source of some of the
differences in norms and values that we
discussed before.
 Knowledge about religions is crucial even
for nonreligious managers
 Religious beliefs and activities affect
business through:
o religious festivals,
o daily and weekly routines
o activities and objects with symbolic
values – positive or negative
 Religious differences, more than any other
differences, tend to raise emotions – and
thus are challenging to handle for
businesses
 Showing respect for other religions and
associated values will help you avoiding
conflict and creating a basis for doing
business.
 
McCullough and Willoughby (2009)
 a) that religion can promote self-control;
 (b) that religion influences how goals are
selected, pursued, and organized;
 (c) that religion facilitates self-monitoring;
 (d) that religion fosters the development of
self-regulatory strength;
 (e) that religion prescribes and fosters
proficiency in a suite of self-regulatory
behaviors; and
 (f) that some of religion’s influences on
health, well-being, and social behavior may
result from religion’s influences on self-
control and self-regulation.
54
 CHAPTER 3: FIRM RESOURCES:
COMPETITIVENESS AND GROWTH
The resource based view has emerged as one of the
two core perspectives on global business. It focuses
on the inside of the firm, complementing the
institutional view, which focuses on firm's external
environment.
This chapter introduces tools to address these
sorts of questions.
 We first define resources
 Then we introduce classification schemes
for resources
 We then focus on value (v), rarity(r),
imitability(i) and organization(o) - through a
VRIO framework
 We apply these concepts in a value chain
analysis on the decision whether to jeen an
activity in-house or outsource it.
 
Primary resources as the tangible and intangible
assets as well as the human resources that a firm
uses to choose and implement its strategies.
 Tagible assets are those items that are
observatable and quantifiable
 Financial assets include internal funds such
as shareholde's capital and retained profits,
as well as external capital, like loans
provided by banks
 Physical assets include plants, offices,
infrastructure and equipment as well as
inventories of raw materials, components
and finished goods.
 
Intangible assets are also found on company's
balance sheets, but they are harder to value
 Technological resources include patents,
trademarks and copyrights that entitle the
firm to intellectual property rights and
enable it to generate valuable products
 Reputational resources are the firm's
goodwill, brand names and business
relationships
o Goodwill is the value of abilities to
develop and leverage the firm's
reputation as a solid provider of
goods and services, an attractive
employer and/or a socially
responsible corporate citizen
o Reputation can be regarded as an
outcome of a competitive process in
which firms signal their attributes to
constituents
 Human resources (or human capital are
embedded in the individuals working in an
organization.
 o individual employees’skills, talent and
knowledge,
o individual employees' capacity for
collaboration and communication,
and their abilities for interpersonal
interaction that are not captured by
the firms' formal systems and
structures
o Employees' shared values, traditions
and social norms within an
organization.
 Financial analysts may take human
resources for granted.
 Many MNEs regard them as a foundation of
their capabilities.
 
Capabilities
 Knowledge and associated routines and
practices are known as capabilities. These
are firm-specific abilities to use resources t
achieve organisational goals
o No firm is likely to generate
competitive advantage by relying
only on primary resources!
 Most goods and services are produced
through a chain of vertical activities (from
upstream to downstream) that add value -
in short a value chain.
 
Value chain
 Value chain is a series of activities used in
the production of goods and services that
make a product or service more valuable-
 Value chain analysis forces managers to
think about firm resources at a very micro,
activity-based level
 Benchmarking
o Examining whether a firm has
resources and capabilities to perform
a particular activity in a anner
superior to competitors
 Commodizattion
o Process of market competition
through which uniquie products that
command high prices and high
margins gradually lose their ability to
do so, thus becoming commodities
 
Capabilities
 Many of the most important capabilities in
today's business worl relate to abilities to
connet different stages of the value chain.
 Capabilities in innovation
o Firms assets and skills to (1) research
and develop new products and
55
services and (2) innovate and change
ways of organising
 Capabilities in operations
o A firms ability to effectively
implement its regular activities,
notably the manufacturing process
 Capabilities in marketing
o enable firms to develop and sustain
brands awareness and values and to
induce consumers to buy these
brands.
 Capabilities in sales and distribution
o enable firms to manage interactions
with (potential) customers and in
bringing products to the right
customer at the right time
 Capabilities in corporate functions
o Include a firm's planning, command
and control systems and structures
 
Competitive advantage: resources * capabilities =
competitive advantages
 
Benchmarking
Benchmarking compares resources against those
of your competitors on two questions:
 Which resources are most important in
conferring sustainable competitive
advantage in your industry?
 Where are your strengths and weaknesses
as compared to your competitors?
Benching has 4 steps:
 Choose a benchmark organisation to
compare yourself with
 Identify the relevant resources
 Assess the importance of your resources.
The VRIO framework introduced can help
you in this assessment.
 Score and assess the relative strengths
Be aware that benchmarking is a useful analytical
tool - but not more
 An inferior score suggests an issue may
need to be addressed, but it does not imply
that the competitor’s structure and
processes should be imitated
 
Outsourcing is turning over an organizational
activity to an outside supplier that will perform it
on behalf of the focal firm.It is one way to
overcome a strategic weakness.
Offshoring
Offshoring is when activities are moved from a
firm’s main country of operations to another
country. Outsourcing and offshoring have
emerged rather recently.
  
Debates and extensions
The offshore of high-end Services has become
controversial It starting with IT and now
encompassing all sorts of ‘business process
outsourcing’ (BPO) to countries led by India
Offshoring service providers are gradually moving
up the value chain as original equipment
Manufacturers (OEMs) become original design
manufacturers (ODMs).  
Chapter Summary
 Explain what firm resources are:
 Resources include primary resources and
capabilities that provide the basis for firms
to attain competitive advantages, and to
grow.
 Primary resources include tangible and
intangible assets, as well as human
resources.
 Capabilities can be classified by their stage
of the value chain, or their function within
the organization.
 
 Assess the resources of a firm using the
VRIO framework:
 A VRIO framework suggests that only
resources that are value creating, rare, hard
to imitate and organizationally embedded
will generate sustainable competitive
advantage.
 
 Use benchmarking analysis outsourcing and
offshoring decisions:
 Benchmarking is a technique of comparing
a firm’s capabilities to its rivals.
 Outsourcing is turning over all or part of an
organizational activity to an outside
supplier.
 Offshoring is relocating an activity to
another country, either in house or with
outsourcing, to take advantage of locational
advantages in that country.
 Participate in two debates on cross-border
capabilities and offshoring:
 In the long run, is offshoring beneficial or
detrimental for Western firms and
economies?
 In the long run, how can dynamic
capabilities helps firms to stay ahead in
changing industries?
 Draw implications for action:
 Managers need to understand their
resources based on the VRIO framework to
optimize their resource exploitation.
56
 Managers need to continuously create new
resources, in part by benchmarking against
the best, and in part by developing entirely
new capabilities that go beyond the
competitors’ state-of-the-art.
 Students are advised to make themselves
‘untouchables’ whose jobs cannot be
offshored.
 
CHAPTER 5: TRADING INTERNATIONALLY
• International trade is a hot topic in politics as
the benefits of trade are often unevenly
distributed.
• The theoretical foundations for international
trade provide a structured way of thinking
and analyzing issues that are central to both
businesses and government policy.
• How can the two core perspectives (resource-
based and institution-based views) help us
understand the crucial issue of why nations
trade?
Why do nations trade?
• Most nations actively participate in
international trade – consisting of exporting
(selling abroad) and importing (buying from
abroad).
• Trade is undertaken by ‘firms from different
nations’ – rather than by governments.
• Trade contribute to the trade deficit (a
surplus of imports over exports) or to the
trade surplus (a surplus of exports over
imports) of nation states.
Theories of international trade
The theories of international trade are examined
in the order in which they evolved:
7) Mercantilism
8) Absolute advantage
9) Comparative advantage
10) Product life cycle
11) Strategic trade
12) National competitive advantage.
The first three are often regarded as classical
trade theories. The last three are viewed as
modern trade theories.
Mercantilism:
Theory of mercantilism 1600 and 1700s
 • Wealth of the world (measured in
gold and silver) is fixed and that a
nation that exports more and imports
less would enjoy the net inflows of
gold and silver and thus become
richer; international trade is viewed
as a zero-sum game.
Protectionism
• Idea that governments should actively
protect domestic industries from
imports and vigorously promote
exports.
Absolute advantage
Free trade (Adam Smith 1776)
• Buying and selling of goods and
services with little or no government
intervention.
Theory of absolute advantage
• Nation gains by specializing in
economic activities in which that
nation has an absolute advantage.
Absolute advantage
• To be more efficient than anyone else
in the production of any good or
service.
Theory of competitive advantage
• Nation A has an absolute advantage in
production of all goods compared to Nation B.
• As long as Nation B is not equally less efficient
in the production of both goods, Nation B can
still choose to specialize in the production of
one good in which it has comparative
advantage.
Comparative advantage
• Relative (not absolute) advantage in
one economic activity that one nation
enjoys in comparison with other
nations.
Opportunity cost
57
• Cost of pursuing one activity at the
expense of another activity, given the
alternatives.
Comparative advantage
Ricardo (1817) suggests that even if America has an
absolute advantage over Europe in both cars and
aircraft, as long as Europe is not equally less efficient
in the production of both goods, Europe can still
choose to specialize in the production of one good
(such as cars) where it has comparative advantage.
Where do absolute and comparative advantages
come from?
• Smith looked at absolute productivity
differences, and Ricardo emphasized relative
productivity differences. But what leads to
such productivity differences?
• Swedish economists Heckscher and Ohlin
argued that absolute and comparative
advantages stem from different resource
endowments.
The extent to which different countries possess
factors of production - various resources, such as
labour, land and technology
• The factor endowment theory suggests that
nations tend to export goods whose
production requires a lot of those resources
that the country has plenty of.
• Nations develop comparative advantage
based on their locally abundant factors.
Classical theories
In summary, classical theories, (1) mercantilism, (2)
absolute advantage and (3) comparative advantage
(which includes resource endowments), evolved from
approximately 300 years ago to the beginning of the
20th century.
More recently, three modern theories, outlined next,
emerged:
4) Product life cycle
5) Strategic trade theory
6) National competitive advantage of
industries
Product life cycle
 Vernon developed the product life cycle theory,
which was the first dynamic theory to account for
changes in the patterns of trade over time.
Vernon divided the world into three categories:
4) lead innovation nation (which,
according to him, is typically the USA)
5) other developed nations
6) developing nations.
This theory has been criticized on two accounts:
3) it assumes that the USA will always be
the lead innovation nation for new
products (sic).
4) it assumes a stage-by-stage migration
of production that takes at least
several years (if not decades).
An increasing number of firms now simultaneously
launching new products (such as iPods or game
consoles) around the globe.
Strategic trade theory
This suggests that strategic intervention by
governments in certain industries can enhance their
odds for international success.
First mover advantage
• Advantage that first entrants enjoy and do not
share with late entrants.
Strategic Trade Policy
• Government subsidies inspired by strategic
trade theory.
• Strategic trade theorists do not advocate a
mercantilist policy to promote all industries.
• They propose to help a few strategically
important ones.
• Porter argues that the dynamic interaction of
these four aspects explains what is behind the
competitive advantage of leading industries in
different nations.
• This is the first multilevel theory to
realistically connect firms, industries and
nations.
58
• Critics argue that the ‘diamond model’ places
too much emphasis on domestic conditions.
National institutions and international trade
There are two broad types of trade barriers:
(1) tariff barriers
(2) nontariff barriers (NTBs)
As a major tariff barrier, an import tariff is a tax
imposed on imports.
Trade barriers: tariffs
Figure 5.7 uses rice tariffs in Japan as a hypothetical
example to show that there are unambiguously net
losses – known as deadweight loss.
Panel A: In the absence of international trade, the
domestic price is P1 and domestic wheat farmers
produce Q1, determined by the intersection of
domestic supply and demand curves.
Panel B: Because the domestic rice price P1 is higher
than world price P2, foreign farmers export to Japan.
In the absence of tariffs, Japanese farmers reduce
output to Q2. Japanese consumers enjoy more rice at
Q3 at a much lower price P2.
Panel C: The government imposes an import tariff,
effectively raising price from P2 to P3. Japanese
farmers increase production from Q2 to Q4, and
consumers pay more at P3 and consume less by
reducing consumption from Q3 to Q5. Imports fall
from Q2Q3 in panel B to Q4Q5 in panel C.
Non-tariff barriers
Taken together, trade barriers reduce or eliminate
international trade. NTBs include:
(11)Subsidies
(12)Import quotas
(13)Export restraints
(14)Local content requirements
(15)Administrative practices
(16)Antidumping duties.
(17)Import quotas are restrictions on the
quantity of imports. Import quotas
are worse than tariffs because with
tariffs, foreign goods can still be
imported if tariffs are paid.
 (18)Import quotas are protectionist and
there are political costs that countries
have to shoulder in largely pro-free
trade environments.
(19)Voluntary export restraints (VERs)
have been developed to show that on
the surface, exporting countries
voluntarily agree to restrict their
exports.
(20)The arsenal of trade warriors also
includes anti-dumping duties levied
on imports that have been sold at less
than a ‘fair’ price – or ‘dumped’ – and
thus harm domestic firms.
Economic arguments against free trade?
The economic arguments against free trade include:
c) the need to protect domestic
industries:
• At the height of the recession
in 2009, British workers at the
Lindsey oil refinery went on
strike to protest against IREM,
an Italian construction
company, bringing its Italian
and Portuguese workers into
the country to conduct
expansion work.
d) the necessity to shield infant
industries:
• If domestic firms are as young
as ‘infants’, in the absence of
government intervention,
they stand no chance of
surviving and will be crushed
by mature foreign rivals. Thus,
it is imperative that
governments level the playing
field by assisting infant
industries.
Political arguments against free trade?
Political arguments against free trade advance a
nation’s political, social and environmental agenda
regardless of possible economic gains from trade.
These arguments include:
(5) national security
(6) consumer protection
(7) foreign policy
59
(8) environmental and social
responsibility.
Debates and ectensions
2) Trade deficit versus trade surplus.
• The 2008 Nobel laureate in
economics, Paul Krugman argued in
1993:
• Critics disagree; they argue that international
trade is about competition between nations –
about markets, jobs and income.
Impact of trade on job markets.
Chapter summary:
3. Use resource and institution-based views to
explain why nations trade:
• The resource-based view suggests
that nations trade because some
firms use their unique resources and
capabilities to produce goods in
demand in other nations.
• The institution-based view suggests
that national and international ‘rules
of the game’ influence the actual
flows of international trade.
4. Understand classical and modern theories of
international trade:
• Classical theories include (1)
mercantilism, (2) absolute advantage
and (3) comparative advantage.
• Modern theories include (1) product
life cycles, (2) strategic trade and (3)
the ‘diamond model’.
4. Appreciate how economic and political
institutions influence international trade:
• The net impact of various tariffs and
NTBs is that the whole nation is worse
off while certain special interest
groups (e.g. certain industries, firms
and regions) benefit.
• Economic arguments against free
trade center on (1) protection from
‘unfair’ competition and (2) infant
industries and (3) unequal distribution
of costs and benefits.
• Political arguments against free trade
focus on (1) national security, (2)
consumer protection, (3) foreign
policy and (4) environmental and
social responsibility.
 6. Participate in two leading debates on
international trade:
• The first deals with whether
persistent trade deficit is of grave
concern or not.
• The second deals with rich countries’
response to shifts in comparative
advantage.
7. Draw implications for action:
• Discover and leverage comparative
advantage of world-class locations.
• Monitor and nurture current
comparative advantage of certain
locations and take advantage of new locations.
• Be politically engaged to
demonstrate, safeguard, and advance
the gains from international trade.
CHAPTER 6 - investing abroad directly
There are two inds of international investment:
 Foregin portfolio investment (FPI)
o An investment in a portfolio of
foreign securitues such as stocks and
bonds that do not entail the active
management of foreign assets. FPI is
‘foreign indirect investment’.
 Foreign direct investment (FDI)
o Defined by the United Nations as
involving an equity stake of 10% or
more in a foreign-based enterprise.
 Horizontal FDI duplicates its
home country-based activities
at the same value chain stage
in a host country through FDI.
 Vertical FDI is a type of FDI in
which a firm moves upstream
or downstream in different
value chain stages in a host
country.
o If a firm through FDI moves upstream
or downstream in different value
chain stages in a host country, we
label this vertical FDI
o Upstream vertical FDI a type of
vertical FRI in which a firm engages in
an upstream stage of the value
o Downstream vertical FDI a type of
vertical FDI in which a firm engages in
a downstream stage of the value
chain in two different countries.
60
o An MNE, by definition is a firm that
engages in FDI
 Note that non-MNE firms can
also do business abroad by (1)
exporting and importing, (2)
licensing and franchising, (3)
outsourcing, (4) engaging in FPI
or other means.
 What sets MNEs apart from
non-MNEs is FDI.
 In 1990, there were 37,000
MNEs, with 170,000 foreign
affiliates
 By 2009, more than 82 000
MNEs (more than double the
1990 number) managed about
810 000 foreign affiliates
(almost five times the 1990
number).
 Clearly, there has been a
profliferation of MNEs lately
o FDI flow the amount if FDI moving in
a given period (usally a year) in a
certain direction
o FDI stock the total accumulation of
inbound FDI in a country or outbound
FDI from a country across a given
period of time (usually several years).
 
Why do firms engage in FDI?
OLI paradigm, which proposes that FDI is the
most appropriate form of international business if
three conditions are met:
 Ownership advantages (o-advantages)
Resources of the firm that are transferable
across borders, and enable the firm to to
attain competitive advantages abroad.
 Locational advantage (L-advantages)
Advantages enjoyed by firms operating in
certain locations.
7. Internalization advantages (I-advantages)
Advantages of organizing activities within a
multinational firm rather than using a
market transaction.
 
Location-bound resources - resources that cannot
be transferred abroad
 
Location advantages
Five reasons firms set up close to their markets
8. Protectionism in the form of tariffs or non-
tariff barriers, may inhibit exports. However
 MNEs can overcome such barriers by
setting up local production.
9. Transportation costs , especially over long
distances for e.g. perishable, breakable,
heavy or bulky products can be a
perishable, breakable, heavy or bulky
products can be a lower costs
10. Direct interaction with the customer e.g.
suppliers to the automotive industry need
to produce near manufacturers to integrate
in their supply chain.
11. Production and sale of some services
cannot be physically separated e.g. hotels,
banking or consultancy.
12. Marketing assets may be more important
for a fast-entry strategy. FDI enables MNEs
to acquire local firms which control sought-
after assets, e.g. distribution networks and
band names.
Other location advantages
 Resources as L-advantages
 Agglomeration as L-advantages
Agglomeration the location advantages that arise
from the clustering of economic activities in
certain locations
 Institutions as L-advantages
 
Internalization advantages
 A key advantage of FDI over other modes is
the ability to replace (‘internalize’) external
market relationships.
 With one firm (the MNE) owning,
controlling and managing activities in two
or more countries.
 Transaction costs are the costs of
organizing a transaction e.g. searching for
partners, monitoring product quality and
enforcing contracts.
 Also sub-optimal allocation of resources
due to unrealized transactions (aka.
opportunity costs)
 High transaction costs can result in market
failure.
 
Asset specificity: an investment that is specific to
a business relationship
Market failure: imperfections of the market
mechanism that make some transactions
prohibitively costly
 
FDI versus licensing
There is a choice between the technology to a
local firm and FDI establishing its own production
facilities
 Licensing
61
o Firm A’s agreement to give Firm B the
rights to use A’s Firm A’s agreement
to give Firm B the rights to use A’s
trademark for royalty fee paid to A by
B.
 Dissemination risk
o The unauthorized diffusion of firm-
specific know-how.
o If a foreign company grants a license
to a local firm to manufacture or
market a product, ‘it runs the risk of
the licensee, or an employee of the
licensee, disseminating the know-
how or using it for purposes other
than those originally intended’.
 Managing proprietary assets through FDI
does not completely shield firms from
dissemination risks, but FDI is better than
licensing that provides no such
management control.
 FDI provides more direct and tighter control
over foreign operations, but FDI is likely to
be more expensive than licensing
 
National institutions and FDI
 Consensus is that FDI leads to a win-win
situation for both home and host countries.
 Most countries retain some institutions
that either (1) restrict the presence of FDI
or (2) regulate the operations of FDI
 
Debates and extensions
 Despite the general trend towards
friendlier policies to facilitate inbound FDI,
debates continue in various host countries.
 Can we trust foreign firms in making
decisions important to our economy, in
particular the interaction between MNEs
and host governments?
 MNEs and host governments are shaped by
their relative bargaining power – their
ability to extract a favourable outcome
from negotiations due to one party’s
strength.
 Emerging economy multinationals – those
MNEs originating from an emerging
economy and headquarter there.
 Sovereign wealth funds (SWF) are a ‘a
state-owned investment fund of financial
assets such as stocks, bonds, real estate or
other financial instruments funded by
foreign exchange assets’.
 SWFs undertake FDI, yet they operate
differently than conventional MNEs:
o they are state-owned or controlled
 o they typically acquire equity stakes
sufficient to influence target forms,
yet they do not get involved in day-
to-day management or integrate
operations.
 
Implications for action
 Carefully assess whether FDI is justified in
light of other foreign entry modes such as
outsourcing and licensing
 Pay carful attention to the location
advantages in combination with the firm's
strategic goals
 Be aware of the institutional constraints
and and enablers governing FDI and
enhance legitimacy in host countries.
 
Chapter Summary
 Understand the vocabulary associated with
FDI:
 FDI refers to directly investing in activities
that control and manage value creation in
other countries.
 MNEs are firms that engage in FDI.
 FDI can be classified as horizontal FDI and
vertical FDI.
 FDI flow is the amount of FDI moving in a
given period in a certain direction (inflow or
outflow).
 FDI stock refers to the assets under control
of foreign MNEs.
 Explain why ownership advantages are
necessary for firms to engage in FDI.
Ownership refers to resources that are
internationally transferable and enable
firms to attain competitive advantages
abroad.
 Explain what location advantages attract
foreign investors.
 Location refers to locational advantages
that can help MNEs attain their strategic
goals.
 Explain and apply the concept on
internalization advantages.
 Internalization refers to the replacement of
cross-border market relationship with one
firm (the MNE) locating in two or more
countries. Internalization helps to
overcome market imperfections.
 Appreciate the benefits and costs of FDI to
host and home countries.
 Foreign direct investors interact with a
variety of stakeholders in the host
economy, each of which may benefit
62
directly or indirectly, while some may be
worse off.
 Explain how home and host country
institutions affect FDI.
 Host countries may restrict FDI by outright
bans, case-by-case approval, or limits on
foreign ownership, but such restrictions
have become less common in recent years.
 Foreign investors are subject to the same
regulatory institutions as local firms, plus in
some countries special regulations for
foreign investors.
 Variations in corporate taxation rules also
influence the pattern of FDI.
 Participate in three leading debates on FDI.
 The relationship between MNEs and host
governments is subject to ‘obsolescing
bargain’.
 Emerging economy MNEs and sovereign
wealth funds (SMEs) are important new
players in the global economy.
 Sovereign wealth funds from resource-rich
countries are becoming important
international investors.
 Draw implications for action.
 Carefully assess whether FDI is justified, in
light of other options such as outsourcing
and licensing.
 Pay careful attention to locational
advantages in combination with the firm’s
strategic goals.
 Be aware of the institutional constraints
governing FDI and enhance legitimacy in
host countries.
 
CHAPTER 8 - EUROPEAN INTEGRATION
Starting point: treaty of Rome
EEC Treaty 1957 stated in its Article 2:
 ‘It shall be the aim of the Community, by
establishing a Common Market and
progressively approximating the economic
policies of Member States, to promote
throughout the Community a harmonious
development of economic activities, a
continuous and balanced expansion, an
increased stability, an accelerated raising of
the standard of living and closer relations
between its Member States.’
 Initially, the focus was on establishing a
customs union with a common external
tariff, and common policies for agriculture,
transport, trade and the support of
developing countries.
 
Common agricultural policy (CAP)
 28 member states https://europa.eu/european-
union/about-eu/countries/member-countries_en
 
Treaties and agreements
 Single European Act (SEA) (1986)
o The agreement that established the
basis for the single european market
 Maastricht Treaty (1993)
o Deepening integration in Europe.
 European Constitution (2002)
o Project to create a new legal
foundation for the EU, which failed
 Lisbon Agreement (2007)
o earlier treaties of the EU, and
changing the institutional structures
of the EU and opening up
membership
Economic transition
 Central and Eastern Europe (CEE) have
experienced a different form of integration
o While Western Europe established
market economies, CEE developed a
system of central planning under the
Soviet Union.
 Processes included:
o Economic transition
 Changing from central plan to a
maret economy
o Liberasiation
 Removal of regulator
restrictions on business
o Stabilisation
 Policies to combat
macroeconomic imbalances
o Privatization
 Change of ownership from
state to the private
 These “transition” economies have now
“ascended to become, mostly, part of the
european union
 
Free movement in the EU
 Goods
 Capital
 People
 Services
 
The single market
The single market is about free movements of
goods, capital, people and services within the
union.
 It complements the customs union, which
secures application of a common external
tariff on all imported goods.
63
 The Principles of Harmonization
o Mutual recognition
 Products recognized as legal in
one country may be sold
throughout the EU
o Harmonized sector
 Sectors for which the EU has
created common rules
o Subsidiarity
 The EU takes action only if it is
more effective than actions
taen at lower levels
 The single market for services is not yet a
single harmonized market
 Political compromises and protected i
 nterests are still being accomodated
 
Advantages and disadvantages of joining the Euro
 
The Maastricht Criteria established that countries
had to accept the monetary union. Countries
were required to have:
 annual budget deficits not exceeding 3 per cent
of GDP
 public debt under 60 per cent of the GDP
 inflation rates within 1.5 per cent of the three
lowest rates in the EU
 long-term interest rates within 2 per cent of the
three EU countries with the lowest rate, and
 exchange rate stability
 
EU: what it is and how does it work
 http://www.bbc.co.uk/guides/zgjwtyc#z2fscwx
 https://www.youtube.com/watch?
v=ywJS7swbqeE
 Brexit: https://www.youtube.com/watch?
v=7eoDwvl0QGk
 
EU formal structures
 European council
o The assembly of heads of governments
setting overall policy
 President of the European Council
o The person chairing the meetings of the
European Council.
 Council of the European Union
o The decision-making body consisting of
ministers from the national governments; it
decides by qualified majority voting.
 European Commission
o The executive arm of the EU, similar to a
national government.
 Directorate General (DG)
 o A department of the commission, similar to
a government ministry.
 President of the Commission
 The head of EU's executive, similar to a national
prime minister.
 European Parliament
 The directly elected representation of European
citizens.
 
Chapter summary
Explain the origins and the evolution of the EU:
European Integration started with the Treaties
of Rome aiming to overcome the historical
divisions of Europe.
The EU has continuously been enlarged, starting with
the UK, Denmark and Ireland in 1973.
The integration in the EU has continuously been
deepened through a series of intergovernmental
treaties often known by the cities where they
were signed. Most important are the Single
European Act (1986), the Maastricht Treaty
(1992) and the Lisbon Treaty (2007).
o Explain the evolution of the institutional
environment in transition economies:
 Before 1990, CEE countries had an economic
system organized around a central plan.
 The processes of transition in the 1990 focused
on liberalization, stabilization, privatization and,
crucially, the creation of a new institutional
framework.
 Having met the Copenhagen Criteria of the EU,
ten CEE countriesbecame members of the EU in
2005 and 2007.
1. Explain how and why the institutional
framework created by the EU is pivotal for
business:
 Single market based on freedoms of movement
of goods, capital, people and services.
 Implemented though harmonization of regulation
in some sectors, and mutual recognition of
national regulation in others.
 The EU aims to facilitate free movement of
people within the union, notable to enable
people to take up a job in another country.
 The euro has become a common currency in 16
countries that have transferred their monetary
policy to the European Central Bank..
 EU competition policy aims to ensure that a
competitive environment is maintained in cases
of mergers and acquisitions, cartels and collusion
and state aid.
1. Outline the political institutions of the EU:
 Formal political structures of the EU resemble a
government, yet national governments wield
power through the Council.
64
 The decision-making processes in the EU are
based on democratic principles, yet they often
are far removed from the individual citizens in
member countries
1. Participate in debates over the future of the
EU:
 Enlargement creates not only benefits but also
costs for existing EU members, who thus may be
less enthusiastic to admit further
members.
 The UK has an ambiguous relationship with the
EU grounded in its history and its political culture.
1. Draw Implications for Action:
 With major institutional changes being decided at
European level, businesses need to be informed
about current rules and expected
future change, and they may direct their lobbying
to Brussels and Strasbourg.
 
 
CHAPTER 9 - INTEGRATION AND
MULTILATERAL ORGANIZATIONS
EIU: the top 10 risks to the global economy 2019
 
Why is globalization important?
 It allows countries to specialize in areas where
they have most resources
 Labour intensive goods
o Developing countries
 Capital intensive goods, human capital
especially
o Developed countries
 
Comparative advantages
“Comparative advantage is an economic law
referring to the ability of any given economic
actor to produce goods and services at a lower
opportunity cost than other economic actors"
 
World trade organization
The WTO is the multilateral organization
establishing rules for international trade, and
resolving trade-related conflicts between nations
worldwide.
 Handle disputes constructively.
 Common set of rules through the principle of
non-discrimination
 Raise income, generate jobs and stimulate
economic growth
 
Origins are in the General Agreement on Tariffs
and Trade (GATT), created in 1948.
 
Trade disputes
 Core activities of the WTO is its dispute
settlement mechanism which aims to resolve
conflicts between governments over trade-
related matters.
 WTO does not have its own enforcement
capability.
 Any country that has lost a dispute case can
choose its own options:
 change its laws or practices to be in
compliance
 defy the ruling by doing nothing and be
willing to suffer trade retaliation by winning
countries known as "punitive duties"
 a WTO ruling is a recommendation but not an
order; no higher level entity can order a sovereign
government to do something against its wishes
 
DOHA
A round of WTO negotiations started in Doha,
Qatar, in 2001 – Officially known as the ‘Doha
Development Agenda’ to:
 reduce agricultural subsidies in developed
countries to facilitate exports from developing
countries,
 slash tariffs, especially in industries that
developing countries might benefit (such as
textiles),
 free up trade in services
 strengthen intellectual property protection
 
The complexity of an agreement on "everything"
among 149 member countries (as of 2006) in the
Doha round has proen to be a challenge to far
(sic)
 
 
International monetary fund
 IMF is a multilateral organization promoting
international monetary cooperation and
providing temporary financial assistance to
countries with balance of payments problems.
 It has three primary activities on behalf of its 184
member countries:
 monitoring the global economy,
 providing technical assistance to developing
countries
 lending to countries in financial difficulties.
 IMF conditionally typically imposes conditions
that require belt-tightening by pushing
governments to embark on reforms that they
probably would not have undertaken otherwise.
 The financial crisis of 2008 has led to renewed
debates around the pros and cons of IMF
conditionality.
65
 In particular in the IMF has no power over
those countries that do not need its loans
even when running major budget deficits or
current account deficits – notably the USA
and the EU.
 
Regional economic integration in North America
 Free trade area (FTA)
 A group of countries that remove trade
barriers amongst themselves
 North American Free Trade Agreement (NATFA)
 A free trade agreement among
Canada, Mexico and the USA.
 USA-Dominican Republic-Central America Free
Trade Agreement (CAFTA)
 A free trade agreement between the USA
and five central american countries and the
dominican republic
 Andean Community
 A customs union in South America that was
launched in 1969.
 Mercosur
 A customs union in South america that was
launched in 1991
 
 
Bilateral agreements
 After Doha there has been a proliferation of
bilateral FTAs
 Examples include the Australia-New Zealand
Closer Economic Relations Trade Agreement
(ANZCERTA or CER)
 The USA signed 17 bilateral free trade and
investment agreements with countries as diverse
as Australia, Singapore, Peru, Oman and Jordan,
while three more are in the process of
ratification.
 Advocates of bilateral FTAs see them as a
convenient substitute for global free trade.
 Critics argue they:
 permit countries with large markets to use
their bargaining power to more effectively,
 lead to a hub and spoke system of
international trade that further strengthens
the countries at the hubs,
 create fragmented rules for businesses
operating in multiple countries
 increase trade diversion
 
Debates and extensions
Inequality among nations, and persistent poverty
in many developing countries remains an issue
despite World Bank funding.
For businesses, development projects funded by
the World Bank or other development bank
 provide opportunities to engage in infrastructure
development projects.
 
Chapter summary:
Explain the multilateral institutions of
global trade system, and their current
challenges:
There are both political and economic
benefits for global integration by
trade.
The GATT (1948–1994) significantly
reduced tariff rates on merchandizes
trade.
The WTO (1995–present) was set up not
only to incorporate the GATT but also
to cover trade in services, intellectual
property, trade dispute settlement
and peer review of trade policy.
The Doha Round to promote more trade
and development thus far failed to
accomplish its goals.
Explain the multilateral institutions of
global monetary system, and their
current challenges:
 The IMF promotes monetary cooperation
and provides temporary financial assistance
with balance of payments problems.
 IMF loans are usually conditional on
macroeconomic or financial reforms, which
is often controversial in the countries
concerned.
Describe the advantages and
disadvantages of regional and
bilateral economic integration in the
Americas, Asia Pacific and Africa:
 Despite problems, NAFTA has significantly
boosted trade and investment among
members.
 In South America, the prominent regional
deals are Andean Community and
Mercosur.
 Regional integration in Asia Pacific is taking
place in ASEAN, SAFTA and the GCC.
Participate in two debates on further
multilateral policy forums and
institutions contributing to economic
integration:
 Development banks such as the World Bank
provide loans for projects such as
infrastructure in
developing countries.
 The Kyoto Agreements and the
Copenhagen Accord aim to combat climate
change.
66
 International banking standards promoted
by the Basel Committee are being revised in
view of the experiences of the global
financial crisis.
Draw implications for action:
 Managers need to understand the rules of
the game at both global and regional levels
to assess challenges and opportunities.
 Firms ought to make the most of their
home region as they usually are better
prepared to compete on regional as
opposed to global levels.
 Managers need to be aware and possibly
engaged in the political discussions as they
are likely to shape the business
environment of the future.
 
 
 
CHAPTER 10 - CORPORATE SOCIAL
RESPONSIBILITY
 https://www.youtube.com/watch?
v=E0NkGtNU_9w
 
What is CSR?
The firm's consideration of, and response to,
issues beyond the narrow economic, technical
and legal requirements of the firm to accomplish
social benefits along with the traditional
economic gains which the firm seeks.
 
CSR: to make money or to do good?
Intrumental view: good for profit
 Environmental focus makes the firm more
lean and resource oriented.
 Good personell treatment makes staff more
productive
 Strong social reputation attracts customers
Normative view: It is a moral obligation to do CRS
regardless of whether it is profitable or not
 An activity can only count as CSR if it does
not cover its costs
 
Milton friedman:
Milton Friedman, University of Chicago,
suggested: ‘The social responsibility of business is
to increase its profits’. This line of thought draws
upon the idea that pursuit of economic self-
interest (within legal constraints) promotes the
welfare of society as a whole.
Workers will be worse off if firms unilaterally
raised standards because the firm would lose
competitiveness and in consequences workers
would lose their job.
 The bottom lines
 Financial bottom line
 Social bottom line
 Environmental bottom line
 
 
Stakeholder: any group or individual who can
affect or is affected by the achievement of the
organization's objectives
 
Environmental issue
Acting on the global stage exposes MNEs to more
complex ethical issues that increase the
importance of creating appropriate CSR policies
To attract foreign direct investment, developing
countries may thus enter a ‘race to the bottom’
by lowering (or at least not tightening)
environmental standards?
 
Standards of engangement
 In Europe, many consumers - and NGOs - expect
that their shoes and their clothes are made by
people being paid and treated fairly. This raises
two questions:
 Are MNEs responsible for what happens in
other firms, and
 How can they be sure what actually
happens in a sub-suppliers plant?
 MNEs have standards of engagement that they
impose on suppliers.
 These establish minimum standards for
working hours, age of workers, health and
safety, wages and other aspects of
operating a manufacturing plant
 With these standards come monitoring and
enforcement regimes that With these
standards come monitoring and
enforcement regimes that With these
standards come monitoring and
enforcement regimes that warnings -
discontinuing relationships with non-
compliant suppliers.
 This allows MNEs to shift from a focus on
compliance with thestandards of engagement to
a commitment approach that involvesjoint
problem solving, information exchange and the
diffusion of best practices
 
How to treat your labour when operating abroad?
 Home country or host country policies on:
 Salaries?
 Working conditions?
 Child labour?
67
 What about the conditions in local suppliers to
MNEs?
 Are firms responsible for the conditions in
the companies from where they buy inputs
to their value chains?
o Legal or moral responsibilities?
 
Institutions and CSR
Liberal market economies (LMEs) and
coordinated market economies (CMEs) have
different understandings of what firms are, and
what their role in the society is.
 
Host country institutions may influence CSR
strategy abroad
 
 
Debates and extensions
 Is CSR good for financial performance?
 Some studies indeed report a positive
relationship, studies indeed report a
positive relationship,
 Consistent CSR policies over long time
periods seem to have a positive effect,
while short-term or temporary initiatives
do not.
 Is CSR good for society?
 critics describe CSR activity as "window
dressing" and assert that the firms only do
what is good for themselves i.e.
Shareholders
 NGOs, journalists and politicians have
asserted that firms also have other
obligations to their stakeholders.
 
Chapter Summary
Articulate a stakeholder view of the firm:
A stakeholder view of the firm urges
companies to consider not only
shareholders but other interested
parties.
An instrumental view advocates attention
to stakeholders if that helps financial
performance; in contrast a normative
view believes in the moral obligation
of companies to treat stakeholders
responsibly.
Stakeholders often disagree with each
other, creating complex moral
challenges and needs for effective
communication.
 Articulate CSR challenges faced by firms in
the global economy.
 MNEs face opposing economic incentives to
produce where environmental regulation is less
tight, and to implement standards higher than
the legal minimum.
 Labour standards in foreign subsidiaries and
supplier networks are subject to scrutiny by NGOs
as well as by the MNEs themselves.
1. Explain how institutions influence firms’
corporate social responsibility activities:
 Institutional differences explain why American
firms are more likely to pursue voluntary, ‘explicit
CSR’, while European firms pursue ‘implicit CSR’.
 When confronting institutional pressures for CSR,
firms may employ (1) reactive, (2) defensive, (3)
accommodative and (4) proactive strategies.
1. Participate in three leading debates
concerning corporate social responsibility:
 These are: (1) CSR and financial performance, (2)
CSR and benefits for society and (3) political
neutrality in CSR engagement overseas.
1. Draw implications for action:
 Managers should understand the institutions
affecting CSR, anticipate changes and seek to
influence such changes.
 CSR publicity should match CSR capabilities.
 CSR should be an integral part of the core
activities and processes of a firm.
 
 
CHAPTER 11 - STARTING INTERNATIONAL
BUSINESS
Firms can act as sellers or byers or both. In
international trade, the sellers are known as
exporters and the buyers are known as
importers.
 
 
Sporadic exporters
 Many firms start international business through
direct exports that is the sale of products to
customers in another country.
 This strategy is attractive for less experienced
firms because they can reach foreign customers
directly.
 
 When domestc markets downturn, sales abroad
may compensate.
 This is called sporadic (or passive) exporting
 Letter of credit (L/C) is states that the importer’s
bank will pay a specific sum of money to the
exporter upon delivery
 
Intermediaries
Direct exports represent the most basic mode
capitalizing on economies of scale in production
68
concentrated in the home country, and affording
better control over distribution
Indirect exports is exporting through an
intermediary.
 Intermediaries are more common for
standardized products and commodities
(e.g. textiles, woods and meats), where
competition focuses on price
 Local sales agents receive a commission on
sales.
 Distributors trade on their own account; in
other words, they buy the products and
then sell them on in the local market at
their own risk and using their own
channels.
 
Why do firms engage in foreign direct
investment?
OLI paradigm , which proposes that FDI is the
most appropriate form of international business if
three conditions are met:
 Ownership advantages (O-advantages)
1. Resources of the firm that are
transferable across borders, and
enable the firm to attain competitive
advantages abroad.
 Locational advantage (L-advantages)
1. Advantages enjoyed by firms
operating in certain locations.
 Internalization advantages (I-advantages)
1. Advantages of organizing activities
within a multinational firm rather
than using a market transaction.
 
International contracts
Contract licensing
 Firm A’s agreement to give Firm B the rights
to use A’s proprietary technology
(e.g.patent) or trademark for a royalty fee
paid to A by B.
1. Licensor is the company granting a
license.
2. Licensee is the company receiving a
license.
Franchising represents a similar idea, but
typically covers entire business concepts:
not only the product, service and
trademark, but also the marketing strategy,
operation manuals and quality control
procedures.
1. Franchisor is the company granting a
franchise.
2. Franchisee is the company receiving a
franchise.
 The licensor/franchisor does not have tight
control over production and marketing, and thus
how their technology and brand names are used.
 
 
FDI flow the amount of FDI moving in a given
period (usually a year) in a certain direction
FDI stock the total accumulation of inbound FDI in
a country or outbound FDI from a country across
a given period of time (usually several years).
Other Forms of Internationalizaton
Turnkey project
1. A project in which clients pay contractors to
design and construct new facilities and train
personnel.
Design and build (DB) contract
1. A contract combining the architectural or
desgin work with the actual contruction
Build-operate-transfer
1. A contract combining the construction and
temporary operation of a project eventually
to be transferred to a new owner
Consortium
1. A project based temporary business owned
and managed jointly by several firms
Subcontrcting
1. A contract that involves outsourcing of an
intermediate stage of a value chain
 
Resources to support internationalization
Experiential knowledge - knowledge learned by
engaging in the activity and context
Uppsala model is a model of
internationalization processes focusing on
learning processes
1. Sweden's IKEA took 20 years before
entering Norway
i. Then it focused on building
Western European operations
ii. Only more recently has it
accelerated its
internationalization
 Network internationalization model
1. Over time, firms in a network
reinforce each others’
internationalization processes, thus
the expertise in a firm’s network
grows both with new members
joining, and with existing members
gaining more experience.
 Stages models of internationalization
1. Internationalization seen as a slow
stage-by-stage process an SME goes
through
69
 
Accelerating resources acquisition
Born global - international new venture
 Start-up company that from inception, seek to
derive significant competitive advantages from
the use of resources and the sale of outputs in
multiple countries.

 
Institutions & environments
The ability of internationally inexperienced firms
to engage in international business is to a large
extent shaped by:
 The institutional environment of the home
country
1. Open economies with low trade
barriers allow foreign entrants to
challenge local firms, and thus
indirectly encourage firms to pursue
their opportunities abroad.
 Institutional distance between the home
and host countries
1. The extent of similarity or
dissimilarity between the regulatory,
normative and cognitive institutions
of two countries.
2. Cultural distance is the difference
between two cultures along some
identifiable dimensions.
 
CHAPTER 12 – FOREIGN ENTRY STRATEGIES
 
The first question to ask (when considering a new
country)
 What do you (the firm) want to achieve?
 What is the country that can give you the
highest advantage in pursuing what you
want to achieve
 
Establishing a subsidiary abroad
 Natural resource seeking
 Fims' quest to pursue natural resources in
certain locations
Market seeking
 Firms' quest to fo after countries that offer
strong demand for their products and
services
Efficiency seeking
 Firms' quest to single out the most efficient
locations featuring a combination of scale
economies and low-cost factors.
Innovation seeking
  Fims target countries and regions
renowned for generating world-class
innovaions
These four strategic goals, while analytically distinct,
are not mutually exclusive
  
The third question to ask
When should we enter the new market?
The forth question to ask
2. How should we enter the new market?
 
Should you enter with or without equity?
 Non equity modes
 Exort
 Contractual agreements (alliances etc)
 Equity modes
 Joint ventures
 Wholly owned subsidiaries
  
The choice of FDI entry modes
 
The fifth question to ask
 How will you control the foreign operation?
 
12.5 - types of aquisitions
 
Implications for practice
 Understand the rules of the game - both formal
and informal - and fit your strategies to the
constraints and opportunities of these institutions
 Bring together the MNEs global capabilities and
complementary local resources
 Match the different elements of an entry strategy
wth the firm's strategic goals
 
Chapter summary
 Explain why MNEs establish subsidiaries
abroad (why to enter);
 Firms’ strategic goals can be grouped in
four categories
 Natural resources
 Market
 Efficiency
 Innovation
Identify relevant locational advantages that
may attract investor (where to enter):
 Foreign entrants seek locational
advantages that matche their
strategic objectives
 Compare and contrast first- and late-mover
advantages (when to enter):
70
 First-movers can attain advantages
such as early brand building, yet
there are countervailing benefits for
fast followers
 Compare and contrast alternatives modes
of foreign market entry (how to enter)
 Entry modes vary by the degree of
control that entrants attain over the
local operation
 Entry modes provide access to local
resources in different ways
 Explain the interdependence of operations
and entry strategies:
 Entry strategies need to take
i. Marketing
ii. Human resource
iii. logistics operations into
account
 Apply institution-based view to explain
constraints on foregin entry:
 Formal and informal institutions may
restrict the options for foreign entry,
create needs for local knowledge,
and increase transaction costs of
certain forms of transaction
 Participate in two leading debates on
foreign market entries:
 These debates are
 The scale of a foreign entry
 And acquistion dynamics
 Draw implications for action:
 From an institution-based view,
managers need to fit their strategies
to the constraints and opportunities
of local institutions.
 From a resource-based view,
managers need to bring together the
MNEs global capabilities and
complementary local resources.
 Managers must match the different
elements of an entry strateg ywith
the firm’s strategic goals.
 
CHAPTER 13 – COMPETITIVE DYNAMICS
Analyzing market competition
Porter's five forces
 Aims of price fixing by firms
 Businesses recognise teir interdependence - act
together to maximise joint profits
 Cut some of the costs of competition, e.g.
Marketing wars
 Reduces uncertainty - higher profits increases
producer surplus/shareholder value
 
Price dumping
 "an exporter selling below cost abroad and
planning to raise prices after eliminating local
rivals"
 
Formal institutions: anti-dumping
 
 Dumping is when an exporter is (1) selling below
Synamics of competition
cost abroad and (2) planning to raise prices after
 Attack is n initial set of actions to gain
eliminating local rivals.
competitive advantage
 
 Counter-attack is a set of actions in response to
EU repeals anti-dumping measures against
an attack
Norwegian salmon (2009)
 Awareness, motivation, capability (AMC)
 The Council of the European Union 17 July
framework
decided to repeal the anti-dumping measures on
 A conceptual framework indicatng when firms are
imports of farmed salmon originating in Norway
likely to attack and counter-attack each other
with effect from 20 July. I am pleased that the EU
 Blue ocean strategy: A strategy of attack that
is fulfilling its WTO obligations and now repealing
avoids direct confrontation.
the measures so that the situation of Norwegian
 Haier’s entry into the US white goods
salmon on the EU market can be normalised,”
market. Although Haier dominated its
said Foreign Minister Jonas Gahr Støre.
home country, China, with a broad range of
 This means that the measures imposed by the EU
products, it chose to enter the US market in
on 21 January 2006 have now been withdrawn in
a low profile segment: compact
their five years and entailed the introduction of a
refrigerators for hotels and student
minimum import price of EUR 2.80 per kilogram
residences.
for whole fish and other minimum import prices
 
for salmon fillets, etc.
"if you hit me I will hit you back"
 
 
Market structures
Collude or not
 Concentration ratio is % of total industry sales
 Collusion is collective attempts between
accounted for by the top 4, 88 or 20 firms
competing firms to reduce competition
 Price leader is a firm that has a dominant market
 Tacit collusion
share and sets "acceptable" prices and margins in
 Firms indirectly coordinate actions by
the industry
signalling their intention to reduce output
 Capacity to punish is sufficient resources
and maintain pricing above competitive
posessed by a price leader to detemine and
levels.
combat defection
 Explicit collusion
 
 Firms directly negotiate output, fix pricing
Collution possible:
and divide market
 Few firms (high concentration)
 Cartel
 Existence of an industry price leader
 An entity that engages in output- and price-
 Homogenous products
fixing, involving multiple competitors.
 High entry barrier
 Prisoners' dilemma
 High market commonality (mutual forbearance)
 In game theory, a type of game in which the
 
outcome depends on two parties deciding
Collusion difficult (competition likely)
whether to cooperate or to defect.
 Many firms (low concentration)
 
 No industry price leader

71
 Heterogenous products
 Low entry barriers
 Lack of market commonality (no mutual
forbearance)
 
Long term survival
 Survival strategies may achieve just that – survival
– but not prosperity in the longer term.
 Entrepreneurs may view a crisis as an opportunity
to enter new markets
 Conventionally, businesses try to look into the
future by economic forecasting
 A technique using econometric models to
predict the likely future value of key
economic variables
 An alternative is scenario planning
 A technique generating multiple scenarios
of possible future states of the industry
 Scenarios provide a basis for contingency
plans that may be implemented when
certain events happen or benchmarks are
reached.
i. Plans devised for specific situattions
when things could go wrong
 
Debates and extension
Local firms versus big MNEs
Defender strategy centres on leveraging local assets
in areas which MNEs are weak
Extender strategy centres on leveraging home-grown
competencies abroad
Contender strategy centres on a firm engaging in
rapid learning and then expanding overseas
Dodger strategy centres on cooperating throuh joint
ventures with MNEs and/or sell-off to MNEs
 
Chapter summary
Explain how attacks and counter-attacks are
used in dynamic competition:
Attackers need to consider possible
counter-attacks, which are driven by
(1) awareness, (2) motivation and (3)
capability.
Explain how and why firms sometimes like
to collude:
Collusion may enable firms to collectively
earn higher return at the expense of
their customers and/or suppliers.
Industries primed for collusion tend to
have (1) a smaller number of rivals,
(2) a price leader, (3) homogeneous
products, (4) high entry barriers and
(5) high market commonality.
72
Without talking directly to competitors,
firms can signal to rivals by various
means
Outline how competition policy and anti-
dumping laws affect international
competition:
Competition policies outlaw (1) price-
raising cartels, (2) division ofmarkets
and (3) anticompetitive practices by
dominant firms.
Internationally, anti-dumping laws
discriminate against foreign firms and
protect domestic firms.
Articulate how resources and capabilities
influence competitive dynamics:
Resources meeting the VRIO criteria are
necessary for long-term success in a
competitive battle.
Discuss how firms can compete during a major
recession:
Survival strategies focus on liquidity and
preservation of resources.
Strategies for the next upswing focus on
positioning in post-recession markets.
Scenario analysis is a powerful tool to
better understand the possibilities of
the future
Participate in two leading debates on the
politics of competition:
They are (1) small firms competing with
Big MNEs and (2) anti-dumping
versus competition
Draw implications for action:
Analyze your competitor to be able to
predict likely reactions and counter-
attacks.
Understand the rules of the game
governing competition around the
world
Strengthen resources and capabilities
that more effectively competeand/or
cooperate
 
CHAPTER 14 – BUILDING GLOBAL
STRATEGIES
 
Global strategies take advantage of operations spread
across the world
This chapter focuses on the opportunities of global
strategies, and how companies can make best use
of the diversity of the world.
We first summarize different types of advantages that
firms may be chasing when they develop global
strategies. Then, we introduce the AAA typology
of strategies that illustrates different ways in
 which firms can create value by integrating
operations across countries: aggregation,
adaptation and arbitrage.
We then explore how firms use acquisitions to
develop the kinds of global operations that allow
them to deploy these strategies on the global
stage, and discuss how institution- and resource-
based views help explain the patterns and
performance of aquisitions
 
Advantages of the global firm
Global scale advantages reduce costs in production,
product development and marketing
Global sourcing provides access to a wider range of
inputs
Global knowledge management enhances innovation
Risk diversification redu
ces the corporate risk profile
 
AAA strategies:
 
 
Mergers and acquistiions
An acquisition he transfer of the control of operations
and management from one firm (target) to
another (acquirer), the former becoming a unit of
the latter
For example, Danisco (Opening Case ) acquired
Cultor of Finland and integrated it in its
own operations; Cultor ceased to exist as a
firm
A merger is the combination of operations and
management of two firms to establish a new legal
entity.
Merger in 2005 between Interbrew (Belgium)
and Ambev (Brazil) created Inbev, which
merged in 2009 with Anheuser Busch (USA)
to form AB-Inbev.
Most large M&As are cross-border (international)
M&As; they account for approximately 30 per
cent of all M&As. In 2007 (a record year), M&A
deals topped 2,9 trillion euro, of which 1,3
involved in european companies
Most of the largest MNEs of the world have grown by
acquisitions, as have many MNEs from emerging
economies that recently entered the global stage
 
Cross border mergers and acquisitions
 
Motives for acquisitions
Synergistic motives
Leverage superior organizations
Enhance market power
73
Reduce costs by eliminating SE TABLE 14,3-.....
 
 
Acquisitions versus alliances
An alternative to a full take over of another firm is a
collaboration with that firm is strategic alliance
(ch 12)
JVs draw on competences of two (or more) parent
firms. They are an attractive options if three
conditions are met:
Two entities can together achieve something
that neither could achieve on its own, for
example market leadership in their industry
or next-generation innovations.
The merged unit depends on inputs such as
technologies from both parent firms that
may be disrupted by legal separation (in
other words, market transaction costs are
high).
A full take-over is not feasible, perhaps because
the competition authorities would object
A strategic alliance may consist of far-reaching
operational collaboration stopping short of full
acquisition.
Strategic alliances may also serve to prepare a full
acquisition.
 
 
Regultors assessing mergers and acquisitions
Horisontak M&A:
Will the merged firm attain a dominant marked
share?
Will consumers benefit from cost savings or
accelerated innovation in the merged firm?
Will the removal of competition enable the merged
firm to raise prices?
Vertical and conglomerate M&A:
Will the merged firm have the ability to use its control
over multiple stages of the value chain to limit
access to suppliers or customers for competitors
operating in only one stage=
Will the merged entility have economic incentives to
behave in such manner?
Will such behaviour give rise to significant
impediment to effective competition?
 
Causes of acqusition failures
Due dilligence is the assessment of the target
firm's financial status, resources and strategic fit.
Strategic fit is the effective matching of
complementary strategic capabilities
Organizational fit is the similarity in cultures,
systems and structures
 
 Debates and extensions
Hidden champions
International business is often presented as
primarily a matter of big MNEs competing
for market share.
Across Europe, firms with 1000 or 5000
employees operate on the global stage in a
specific, narrowly defined industry.
They are leading in their selected niche markets
world wide with competitive advantages
grounded in highly specialized technological
competences that are exploited worldwide.
Globalfocusing
A strategic shift from diversification to
specialization which increases the
international profile.
Acquisitions and divestments the scale of
business units are often closely related
 
Chapter summary:
Articulate the strategic advantages of globally
operating firms:
Advantages include global scale
advantages, global sourcing, global
knowledge management, servicing of
global customers and risk
diversification.
Explain different business modes to
exploit the advantages of a global
firm:
Aggregation strategies focus on the
realization of synergies between
operations in different locations
Adaptation strategies aim to deliver
locally adapted products in each
market.
Arbitrage strategies exploit the
differences in prices in different
markets.
3. Explain why global firms engage in
mergers and acquisitions, and
alliances:
Acquisitions may be driven by expected
synergies, by managerial hubriad or
by self-interest of the individuals
involved.
Alliances provide an alternative to a full
acquisition, for example by merging
business units, or collaborating on
operations.
Apply the institution-based view to
explain patterns of acquisitions:
Horizontal acquisitions may not be
permitted if they result in a reduction
74
of competition that is judged to be
harmful to consumers.
Vertical acquisitions may not be
permitted if they allow a dominant
player to inhibit competition in an
upstream or downstream industry.
Remedial measures include prohibition of
the merger, required divestments or
behavioural constraints
Apply the resource-based view to explain
when acquisitions are likely to
succeed:
The impact of resources on acquisitions is
illustrated by the VRIO framework.
Participate in two leading debates on global
strategies:
(1) how hidden champions can succeed,
and (2) how globalfocusing allows
conglomerate to become global
specialists.
Draw implications for action:
Managers need to understand and
master the rules of the game
Governing alliances and acquisitions
around the world.
When managing acquisitions, the savvy
manager should focuson both
strategic and organizational fit.
CHAPTER 15: STRUCTURING AND ORGANIZING
MNES
• MNEs operate in many different local
contexts, and their ability to make
connections between local contexts is crucial
to achieve competitive advantage in global
strategies.
• MNEs are typically knowledge-intensive firms
where the creation, dissemination and/or
exploitation of knowledge are essential for
their competitive advantage.
• How MNEs organise creative people and
diverse subunits in distinct local contexts is at
the core of this chapter.
• We start by introducing a traditional view on
organizing the MNEs based on the conflicting
pressures for integration and local
responsiveness, followed by a modern view
focused on knowledge management.
• The institution- and resource-based views
shed additional light on these issues.
The integration-responsiveness framework
Localisation (multidomestic) strategy focuses on a
number of foreign countries/ regions, each of which is
regarded as a stand-alone ‘local’ (domestic) market
worthy of significant attention and adaptation.
Four structures
• International division is typically set up when
firms initially expand abroad, often engaging
in a home replication strategy.
• Geographic area structure is an organizational
structure that organizes the MNE according to
different countries and regions.
• Country or regional manager is the business
leader of a specific geographic area or region.
• Global product division is a structure that
assigns global responsibilities to each product
division.
Managing knowledge
• Many of the capabilities that are the
foundation of MNEs competitiveness are
grounded in knowledge.
• Knowledge management is the structures,
processes and systems that actively develop,
leverage and transfer knowledge.
• Knowledge is a broad concept that includes
not only factual information but the know-
how and know-why held by individuals and by
the firm.
• Explicit knowledge is codifiable (that is, can be
written down and transferred with little loss
of its richness). Virtually all the knowledge
captured, stored and transmitted by IT is
explicit.
• Tacit knowledge is non-codifiable and its
acquisition and transfer require hands-on
practice.
– Tacit knowledge is more important
and harder to transfer and learn; it
can only be acquired through learning
by doing.
Communities of practice (CoP) are groups of people
doing similar work and sharing knowledge about their
practices of work. In MNEs with a global or
transnational strategy, codification is often not
sufficient for effective knowledge exchange of varying
degrees of complexity between many different
parties.
75
“Knowledge governance refers to choosing structures
and mechanisms that can influence the processes of
sharing and creating knowledge” (Foss and
Michailova, 2009)
Chapter summary:
4. Articulate the relationship between strategy
and structure:
- The integration-responsiveness framework
provides a tool to analyze strategy and
structure.
- 4 pairs: (1) home replication
strategy/international division structure, (2)
localization strategy/geographic area
structure, (3) global standardization
strategy/global product division structure and
(4) transnational strategy/global matrix
structure.
5. Outline the challenges associated with
learning, innovation and knowledge
management:
- The challenges for knowledge management
arise from the tacitness of knowledge.
- The transnational strategy requires more
comprehensive knowledge flows across the
organization than the other three
organizational strategies.
- Communities of practice (CoP) are an
important means to share knowledge in
MNEs.
- Governance mechanisms for knowledge face
difficult trade-offs between hard incentives
and social capital as conduit for knowledge
exchange.
6. Explain how institutions and resources affect
strategy,structure and learning:
- Institutions in the home country, especially
ownership and governance structure, affect
the strategies and structures adopted.
CHAPTER 16: INTERNATIONAL HUMAN
RESOURCE MANAGEMENT
HRM – human resource management
• Human resource management (HRM) is
defined as activities that attract, select and
manage employees.
• HRM plays a crucial role in MNEs, where a
great diversity of people work together at
multiple locations, and where people
frequently have to move between locations.
• This chapter first outlines three distinct
approaches to international
• HRM. We explore the management of
 – people sent abroad by the MNE.
– local employees in subsidiaries
abroad.
– the institution - and resource-based
views to shed further light on these
issues.
• Expatriates play a critical role in managing
subsidiaries of MNEs, and in facilitating
communication between different units of the
MNE.
Expats can bring:
• Intellectual capabilities:
• Psychological capabilities:
• Social capabilities.
The immersion approach involves placing a person in
a situation where they will learn by practice
• Culture shock is an expatriate’s reaction to a
new, unpredictable, and therefore uncertain
environment.
• Expatriate stress is caused by an imbalance
between expectations and abilities affected
by culture shock.
• Psychological contract is an informal
understanding of expected delivery of
benefits in the future for current services.
• Reverse culture shock is the experience by
persons returning to their country of origin.
Chapter summary:
1. Distinguish ethnocentric, polycentric and geocentric
management:
- Expatriates (play multiple challenging roles and often
have high failure rates. They need to be carefully
selected.
2. Explain how expatriates are managed in MNEs:
- Expatriates play many crucial roles in MNE
subsidiaries, and therefore need a variety of both
financial and personal abilities.
- Pre-departure language tuition and cross-cultural
training is essential but not always provided.
- Expatriates typically experience a period of culture
shock cause by their limited understanding of the
local context and pressures at work.
- Returnees face problems of re-integration both
professionally and privately.
76
3. Explain how MNEs manage their employees in
subsidiaries abroad:
- Training and development of HCNs are now an area
of differentiation among many MNEs.
- Retention of top talent HCNs requires competitive
pay, ongoing training, clear career prospects and
culture-sensitive performance appraisal.
5. Discuss how the institution-based view sheds
light on HRM:
- HRM is significantly shaped by formal and
informal rules both at home and abroad.
6. Discuss how the resource-based view sheds
light on HRM:
- As HRM becomes more strategic, it should be
assessed using the VRIO criteria.
7. Participate in two leading debates concerning
HRM:
- These are (1) non-traditional forms of
expatriation, and (2) expatriation versus
inpatriation.
8. Draw implications for action:
- HR managers need to have the four Cs: being
curious, competent, courageous and caring
about people.
- Non-HR managers need to proactively
develop an international career mindset.
CHAPTER 17: INTERNATIONAL MARKETING
AND SUPPLY CHAIN MANAGEMENT
Outline:
• Marketing
– Efforts to create, develop and defend
markets that satisfy the needs and
wants of individual and business
customers.
• Supply chain
– Flow of products, services, finances
and information that passes through a
set of entities from a source to the
customer.
• Supply chain management
– Activities to plan, organize, lead and
control the supply chain.
– Chapter starts by outlining the
challenges of understanding diverse
consumer behaviours around the
world. It then discusses how MNEs
use marketing and supply chain
management to deliver products that
 diverse customers value. The • Not all consumers are highly price sensitive.
institution- and resource-based views Luxury products that are
add further insights on the variations
status symbols of upwardly mobile middle
of marketing and supply chain
management around the world. classes attain their status exactly because not
everyone can afford these products.
Debates and extensions follow.
Marketing mix: Place:
• Place is the location where products and
The marketing mix services are provided.
- Marketing mix • In international business, a key decision is
– The underlying components of when to enter which market and in what
marketing management: product, sequence.
price, promotion and place.
• Four sets of considerations come into play:
- Product
– The offerings that customers – Market potential,
purchase. – Entry costs,
– Even for a single category (such as – Strategic motives,
women’s clothing or sports cars),
product attributes vary tremendously. – Distribution channels. How to bring
For firms interested in doing business the products to the customer.
around the world, the leading concern
• A distribution channel is the set of business
is standardization versus localization
units and intermediaries that facilitates the
Market segmentation movement of goods to consumers.
• Identifying segments of consumers who differ
• Firms used to have separate ‘purchasing’ and
from others in purchasing behaviour.
‘sales’ units that would interact with
• Global consumers can be divided into four respectively suppliers and customers, and
categories: intermediaries on either side.
– Global citizens (who are in favor of • With changes in transportation, data-
buying global brands that signal processing and communication technologies,
prestige and cachet). these two aspects of business operations have
converged.
– Global dreamers (who may not be
able to afford, but nevertheless
admire, global brands).
Distribution: supply chain:
– Anti-globals (who prefer local goods
because of the perceived negative
side effects of globalization).
– Global agnostics (who don’t care
about the global nature of the brands
• Inbound logistics
they
– Purchasing and the coordination of
buy).
intermediaries on the supply side.
Marketing mix: Price:
• Outbound logistics
• Price
– Sales and the coordination of
– The expenditures that customers are
intermediaries on the customer side.
willing to pay for a product.
Supply chain management
• Price elasticity
• Marketing and supply chain management
– How demand changes when prices activities based on the VRIO criteria
change.
77
 – Managers need to ask: Do these
activities add value?
– Managers need to assess the rarity of
marketing and supply chain activities
– Managers need to ask: Is our firm
organizationally ready to accrue the
benefits of improved marketing and
supply chain management?
VRIO-reminder
• The Question of Value: "Is the firm able to
exploit an opportunity or neutralize an
external threat with the resource/capability?"
• The Question of Rarity: "Is control of the
resource/capability in the hands of a relative
few?"
• The Question of Imitability: "Is it difficult to
imitate, and will there be significant cost
disadvantage to a firm trying to obtain,
develop, or duplicate the
resource/capability?"
• The Question of Organization: "Is the firm
organized, ready, and able to exploit the
resource/capability?" "Is the firm organized to
capture value?"
Debates and extensions
• Market orientation refers to a way of thinking
that places priority on the creation of superior
customer value in the marketplace.
– A market-oriented firm listens to
customer feedback and allocates
resources accordingly to meet
customer expectations.
– The debate centres on how firms
benefit from market orientation
differently around the world.
• Relationship orientation is a focus to
establish, maintain and enhance relationships
with customers.
– Key to the debate is how firms benefit
from market or relationship
orientation differently around the
world.
Chapter summary:
3. Appreciate how international marketers can
handle cross-cultural differences in consumer
behaviour:
78
- Using marketing surveys and non-
conventional methods, international
marketers need to study consumer
behaviours in the markets they wish to enter.
4. Articulate the four Ps in marketing (product,
price, promotion and place) in a global
context:
- In international marketing, the number-one
concern on product is standardisation versus
localisation.
- Marketers care about price elasticity – how
responsive purchasing behaviour is when
prices change.
- In promotion, marketers need to decide
whether to enhance or downplay the country-
of-origin effect.
- The place of sales is central to decisions
where and in what sequence to enter foreign
markets.
6. Outline the triple As in supply chain
management (agility, adaptability and
alignment):
- The term distribution channel has been
replaced by supply chain management in
response to more outsourcing to suppliers,
contract manufacturers and 3PL providers
- Agility deals with the ability to quickly react to
unexpected shifts in supply and demand
- Adaptability refers to the ability to
reconfigure supply chain in response to longer
term external changes
- Alignment focuses on the alignment of
interests of various players in the supply
chain.
7. Discuss how institutions affect marketing and
supply chain management:
- Formal and informal rules such as advertising
standards and employment law significantly
impact these two areas.
8. Discuss how resources affect marketing and
supply chain management:
- Managers need to assess marketing and
supply chain management
based on the VRIO criteria.
8. Participate in two leading debates concerning
marketing and supply chain management:
- The debates are (1) market orientation versus
relationship. orientation, and (2) asset versus
liability of countries-of-origin.
9. Draw implications for action:
- Knowing the formal and informal rules of the
game will enable savvy managers to answer
challenges in marketing and supply chain
management.
 - To avoid marketing blunders, managers
should study consumer behaviour before
deploying their marketing mix.
- Managers can enhance supply chain
management by focusing on agility,
adaptability and alignment (the triple As).
Lecture 18: The impact of the macroeconomic
environment on business performance
 
https://papers.ssrn.com/sol3/papers.cfm?
abstract_id=3297543
 
 
The best measures for competitiveness is the
sustainable profit
Higher rate of return = higher cost of capital for the
firm = fewer possible investments
 
 
Macroeconomic uncertainty
 Exchange rates - relative price. One currency
expressed in another currency. USD vs NOK for
instance
 Interest rates - plural because you take one
interest rate compared to a interest rate
abroad. Interest rate comparisons are very
valuable for the firm. - the price of the money
 Inflation rates - (PPP) - the price of goods and
services. Which one to use depends on your
purpose. How much does it cost to produce my
product in France vs Norway? When you
combine interest and inflation = real interest
rate. If you have a negative interest rate it
encourage you to borrow money. Exchange rate
+ inflation rate = real exchange rate. Corrected
for the inflation.
 Political risk premia - is the
additional risk associated with investing in an
international company, rather than the
domestic market. 
o => a set of relative prices
 
Generated by International parity conditions, they
furnish us. If they derivate from the equibrillium - it´s
either a loss or a profit for the company.
 
Perspective
 Insider - staff, management
 Outsider - shareholder, bankers - how has the
macroeconomic factors influenced the firm?
 Researcher
With such a fragmented world it will be a tremendous
demand for knowledge of international business
79
Swizz central bank - 40% on the stock market. Had a
huge loss last quarter because they needed to sell
franc to cope with the exchange rates, bought stocks
in Apple and became the second largest shareholder
in Apple - Apple facing a huge loss and so is the Swizz
central bank.
 
 
What is new in the global economic order
 Increased economic integration - how are goods
and services transported, tourism, cross border
investment
 Increased financial integration - how you ca
trade cross border shares of the company,
different instruments
 But an increased number of countries and
idiosyncratic risks (exchange risk etc)! - it
develops all the time, many countries on the
waiting list

Investing in the growth of eastern africa
«MTI» is Swahili for tree - symbolizing MTI’s focus on
growing companies, with the potential to bear fruit
from long-term effort of investing, coaching,
mentoring and monitoring (5-66% ownership, debt,
management for hire).
How Can MTI Help local businesses?
- Access to Cheaper and/or more long-term
capital
- Access to competence....People with
education
- Access to experience...People in trusted
networks
Institutions – formal and informal rules of the game
Formal institutions – institutions represented by laws,
regulations and rules
Informal institutions – rules that are not formalized
but exist in or example norms, values and ethics
Regulatory pillar – the coercive power of
governments
Normative pillar – the mechanism through which
norms influene individual and firm behavior
Cognitive pillar – the internalized, taken-for-granted
values and beliefs that guide nidividual and firm
behaviour
Opportunistic behaviour – seeking self-interest with
guile
Institutional transition – fundamental and
comprehensive changes introduces to the formal and
informal rules of the game that affect organizations as
players
Economic system – rules of the game on how a
country is governed economically
Market economy – an economy that is characterized
by the «invisible hand» of market forces
Command economy - an economy in which all
factors of production are governemt- or state- owned
and controlled, and all supply, demand and pricing are
planned by the government
Varieties of capitalism – a scholary view suggesting
that economies have different inherent logics on how
markets and other mechanisms coordinate economic
activity
Liberal market economy (LME) – a system of
coordination primarily through market signals
Cordinated market economy (CME) – a system of
coordinating through a variety of other means in
addition to market signals
Apprenticeship system – vocational training system
for crafts and professions
Legal system - the rules of the game on how a
country’s laws are enacted an enforced
Civil law – a legal tradition that uses comprehensive
statutes and codes as a primary means to form legal
judgements
Common law – rules of law that have been created by
precedents of cases in court
Legal certainty – clarity over the relevant rules
applying to a particular situation
Property rights – the legal rights to use an economic
property (resource) ad to derive income and benefits
from it
Intellectual property rights - rights associated with
the ownership of intellectual property
Patents – legal rights awarded by government
authorities to inventors of new technological ideas,
who are given exclusive (monopoly) rights to derivce
income from such inventors
Copyrights – exclusive legal rights of authors and
publishers to publish and disseminate their work
Trademarks – exclusive legal rights of firms to use
specific names, brands and designs to differentiate
their products from others
Corporate governments – rules by which
shareholders and other interested parties control
corporate decision makers
Political risk – risk associated with political changes
that may negatively impact on domestic and foreign
firms
Chapter 3:
Informal institutions – rules that are not formalized
but exist in for example norms, values and ethics
Artefacts of culture – physical objects that represent
the visible surface of culture
Culture – the collective programming of the mind that
distinguishes the members of one group or category of
people from another
80
Cluster – countries that share similar cultures together
Civilization – the highest cultural grouping of people
and the broadest level of cultural identity people have
Western culture – an aggregate term for European,
north American, Australian and new Zealand cultures
Power distance – the ectent to which less powerful
members within a country expect and accept that
power is distributed unequally
Individualism – the perpective that the identity of an
individual is fundamentally his or her own
Collectivism – the idea that the identity of an
individual is primarly based on the identity of his or
her collective group
Masculinity – values traditionally associated with
male role, sich as assertive, decisive and aggressice
Femininity – calues traditionally associated with
female role, such as compassion, care and quality of
life
Uncertainty avoidance – the extent to which
members in different cultures accept ambiguous
situations and tolerate uncertainty
Long-term orientation – a perspective that
emphasizes perseverance and savings for future
betterment
Low-contect culture – a culture in which
communication is usually taken at face value without
much reliance on unspoken context
High-context culture – a culture in which
communication relies a lot on the underlying unspoken
contect, which is as important as the words used
Stereotype – a sets of simplistic often inaccurate
generalizations about a group that allows others to
categorize them
Secular societies – societis where religions do not
dominate public life
Ethics – the principles, standards and norms of
conduct governing individual and firm behavior
Code of conduct – written policies and standards for
corporate conduct and ethics
Ethical relavitism – a perspective that suggests that
all ethical standards are relative
Ethical imperialism – the absolute belief that “there is
only one set of Ethics (with capital E) and we have it”
Corruption – the abuse of public power for private
benefits, usually in the form of bribery
Organizational culture – culture shared by people
working in the organization
In-group – individuals and firms regarded as “part of
us”
Out-group – individuals and firms not regarded as
“part of us”
Cultural intelligence – an individual’s ability to
understand and adjust to new cultures
Chapter 4:
Resource-based view – a leading perspective in global
business htat posits that firm performanve is
fundamentally driven by firm-specific resources
Competitive advantage . the ability of a firm to
outperform its rivals
Primary resources – the tangible and intangible assets
as well as human resources that a firm uses to choose
and implement its strategies
Capability – firm-specific abilities to use resources to
achieve organizational objectives
Tangible assets – assets that are observable and easily
quantified
Intangible assets – assets that are hard to observe and
difficult (or sometimes impossible) to quantify
Goodwill – the value of a firm’s abilities to develop
and leverage its reputations
Human resources – resources embedded in
individuals working in an organization
Organizational culture – employees’ shared values,
traditions and social norms within an organization
Value chain – a chain of activities related in the
production of goods and services
VRIO framework – the resource-based framework
that focuses on the value creation (V), rarity (R),
imitability (I) and organizational (O) aspects of
resources
Temporary competitive advantage – the ability to
outperform rivals for a limited time
Casual ambiguity – the difficulty of identifying the
casual determinants of successful firm performance
Social complexity – the socially complex ways of
organizing typical of many firms
Sustainable competitive advantage – the ability to
deliver persistently above-average performane
Appropriability – the ability of the firm to
apporopriate the values for itself
Benchmarking – an examination of resources to
perform a particular activity compared against
competitors
Captive offshoring – setting up subsidiaries abroad –
the work done is in-house but the location is foregin
Original equipment manufacturer (DEM) – a firm
that executes the design blueprints provided by other
firms and manufactures such products
Original design manufacturer – a firm that both
designs and manufactures products
Original brand manufacturer – a firm that desgins,
manufactures and markets branded products
Dynamic capabilities – higher level capabilities that
enable an organization to continuously adapt to new
technologies and changes in the external environment
Chapter 5:
Trade deficit – an economic condition in which a
nation imports more than it exports
Trade surplus - an economic condition in which a
nation exports more than it imports
Balance of trade – the aggregation of importing and
exporting that leads to the country level trade surplus
or deficit
81
Classic trade theories – the major theories of
international trade that were advanced before the 20th
century, which consist of mercantilism, absolute
advantage and comparative advantage
Modern trade theories – the major theories of
international trade that were advanced in the 20th
century, which consist of product life cycle, strategic
trade and national competitive advantage
Theory of mercantilism – a theory that holds the
wealth of the world (measured in gold and silver) is
fixed and that a nation that exports more and imports
less would enjoy the net inflows of gold and silver and
thus become richer
Protectionism – the idea that governments should
actively protect domestic industries from imports and
vigorously promote exports
Free trade – trade uninhibited by trade barriers
Theory of absolute advantage – a theory that
suggests that under free trade, each nation gains by
specializing in economic activities in which it has
absolute advantage
Absolute advantage – the economic advantage one
nation enjoys that is absolutely superior to other
nations
Theory of comparative advantage – a theory that
focuses on the relative (not absolute) advantage in one
economic activity that one nation enjoys in comparison
with other nations
Comparative advantage – relative (not absolute)
advantage in one economic activity that one nation
enjoys in comparison with other nations
Opportunity cost – given the alternatives
(opportunities), the cost of pursuing one activity at the
expense of another activity
Resource (factor) endowments – the extent to which
different countries possesses various resources such as
labour, land and technology
Factor endowment theory (or Heckscher-Ohlin
theory) – a theory that suggests that nations will
develop comparative advantage based on their locally
abundant factors
Products life cycle theory – a theory that accounts for
changes in the pattern og trade over time focusing on
product life cycles
Strategic trade theory – a theory that suggests that
strategic intervention by governments in certain
industries can enhance their odds for international
success
First-mover advantage – advantage that first entrants
enjoy and do not share with late entrants
Strategic trade policy – government subsidies
inspired by strategic trade theory
Theory of national competitive advantage of
industries/diamond model – a theory that suggests
that the competitive advantage of certain industries in
different nations depends on four aspects that form a
diamond
Resource mobility – the ability to move resources
from one part of a business to another
Tariff barrier – trade barriers that rely on tariffs to
discourage imports
Non-tariff barrier (NTB) – trade barriers that rely on
non-tariff means to discourage imports
Import tariff – a tac imposed on imports
Deadweight loss – net losses tat occur in an economy
as the result of tariffs
Subsidy – government payments to domestic firms
Voluntary export restraint (VER) – an international
agreement in which exporting countries voluntarily
agree ti restrict their exports
Administrative practices – bureaucratic rules that
make it harder to import foregin goods
Anti-dumping duty – costs levied on imports that
have been dumped (selling below costs to unfairly
drive domestic firms out of business)
Infant industry argument – the argument that
temporary protection of young industries may help
them to attain international competitiveness in the long
run
Trade embargo – politically motivated trade
sanctions against foreign countries to signal
displeasure
Chapter 6:
Foreign direct investment (FDI) – investment in,
controlling and managing value-added activities in
other countries
Multinational enterprise – a firm that engages in
foreign direct investments and operate in multiple
countries
Foregin portifolio investment (FPI) – investment in a
portfolio of foreign securities such as stocks and bonds
Joint venture – an operation with shared ownership
by several domestic or foreign companies
Horizontal FDI – FDI that creates operations abroad
at the same position in the value chain as the operation
in the home country
Vertical FDI – a type of FDI in which a firm moves
upstream or downstream in different value chain stages
in a host country
Upstream vertical FDI – a type of vertical FDI in
which a firm enganges in an upstream stage of value
Downstream vertical FDI – a type of vertical FDI in
which a firm engages in a downstream stage og the
value chain in two different countries
FDI flow – the amount of FDI moving in a given
period
FDI stock – the total accumulation of inbound FDI in
a country or outbound FDI from a country across a
given period of time
OLI paradigm – a theoretical framework positing that
ownership O location L internalization I advantages
combine to induce firms to engage in FDI
82
Ownership advantages – resources of the firm that
are transferable across borders, and enable the firm to
attain competitive advantages abroad
Locational advantages – advantages enjoyed by firms
operating in certain locations
Internalization advantages – advantages of
organixing activities within a multinational firm rather
than using a market transaction
Agglomeration – the location advantages that arise
from the clustering of economic activities in certain
locations
Knowledge spillover – knowledge diffused from one
firm to others among closely located firms
Transaction costs – the costs of organizing a
transaction
Market failure – imperfections of the market
mechanism that make some transactions prohibitively
costly
Asset specificity – an investment that is specific to a
business relationship
Intra-firm trade – international trade between two
subsidiaries in two countries controlled by the same
MNE
Dissemination risks – the risks associated with
unauthorized diffusion of firm-specific know-how
Tacit knowledge – knowledge that is non.codifiable,
and whose acquisition and transfer require hands-on
practice
Local content requirements – requirement that a
certain proportion of the value of the goods made in a
country originates from that country
Bargaining power – the ability to extract a favourable
outcome from negotiations due to one party’s strength
Obsolescing bargain – refers to the deal struck by
MNEs and host governments, which change their
requirements after the initial FDI entry
Expropriation – government’s confiscation of private
foreign-owned assets
Emerging economy MNE – MNEs that originate
from an emerging economy and are headquartered
there
Sovereign wealth fund - a SWF is a state owned
investment fund composed of financial assets such as
stocks, bonds, real estate or other financial instruments
Chapter 7:
Exchange rate – the price of one currency in another
currency
Appreciation of a currency – an increase in the value
of a currency
Depreciation – a decrease in value of a currency
Purchasing power pairty PPP hypothesis –
hypothesis suggesting that, in the long run, baskets of
goods would cost the same in all currencies
Relative PPP hypothesis – hypothesis suggesting that
changes in exchange rates will be proportional to
differences in inflation rates
Interest rate parity – hypothesis suggesting that the
interet rate in two currencies should be the same after
accounting for spot and forward in exchange rates
Spot market rate – the exchange rate for immediate
payment
Forward transaction – a currency exchange
transaction in which participants buy and sell
currencies now for future delicery, 30, 90 or 180 days
after the date of transaction
Balance of payments – a country’s international
transaction statement, including merchandise trade,
service trade and capital movement
Current amount – exports and imports of goods and
services
Capital and financial account – sales and purchases
of financial assets
Bandwagon effect – the result of investors moving as
a herd in the same direction at the same time
Capital flight – a phenomenon in which a large
number of individuals and companies exchange
domestic currencies for a foreign currency
Gold standard – a system in which the value of most
major currencies was maintained by fixing their prices
in terms of gold, which served as the common
denominator
Bretton Woods system – a system in which all
currencies were pegged at a fixed rate to the US rate
International monetary fund – international
organization that provides financial assistance to
countries experiencing temporary imbalances in their
balance of payment, and helps securing
macroeconomic stability
World bank – international organization that provides
loans for specific projects in developing countries
Post-Bretton Woods system – a system of flexible
exchange rates with no official common denominator
Floating/flexible exchange rate policy – the
willingness of a government to let the demand and
supply conditions determine exchange rates
Free float – a pure market solution to determine
exchange rates
Managed float – the common practice of influencing
exchange rates through selective government
intervention
Pegged exchange rate – an exchange rate of a
currency attached to that of another currency
Crawling band – a limited policy of keeping the
exchange rate within a specified range, which may be
changing over time
Currency board – a monetary authority that issues
notes and coins convertible into a key foreign currency
at a fixed exchange rate
Strategic hedging – organixing activities in such a
way that currencies of revenues and expendtures match
Currency hedging – a transaction that protects traders
and investors from exposure to the fluctuations of the
spot rate
83
Forward discount – a condition under which the
forward rate of one currency relative to another
currency is higher than the spot rate
Forward premium – a condition under which the
forward rate of one currency relative to another
currency is lower than the spot rate
Currency swap - a currency exchange transaction
between two firms in which one currency is converted
into another in Time 1, with an agreement to revert it
back to the original currency at a specific time 2 in the
future
Counter party risk – the risk of a business partner not
being able to fulfill a contract
Chapter 8:
Copenhagen criteria – criteria that the new members
have to fulfill to be admitted as members of the EU
Central and eastern Europe CCE – the countries
east of the former iron curtain
Comecon – the pre-1990 trading bloc of the socialist
countries
Economic transition -the process of changing from
central plan to a market economy
Single European act – the agreement that established
the basis for the single European market
Single market – the EUs term of its common markets
Maastricht treaty – a major deepening integration in
Europe
European constitution – an ambitious project to
create a new legal foundation for the EU, which failed
Four freedoms of the EU single market – Freedom
of movement of People Goods, Services and Capital
Mutual recognition – the principle that products
recognized as legal in one country may be sold
throughout the EU
Subsidiarity – the EU takes action only if it is more
effective than action taken at lower levels
Schengen agreement – the agreement that laid the
bass for passport free travel
State aid – financial support from government to firms
through e.g. subsidies or tax rebates
Maastrictht criteria – criteria hat countries have to
fulfill to join the eurozone
European stability mechanism (ESM) – a fund to
support member countries with difficulties raising
money on the capital markets
European Council – the assembly of heads of
governments setting overall policy directions for EU
European Commission – the executive arm og the
EU, similar to a ministry of a national government
Lobbying – making your voice heard and known to
decision-makers with the aim of influencing political
processes
Chapter 9:
World Trade Organization – the organization
underpinning the multilateral trading system since
2005
General agreement on tariffs and trade (GATT) – a
multilateral agreement governing the international
trade of goods
General agreement on trade in services (GATS) – a
WTO agreement governing the international trade of
services
International monetary fund (IMF) – a multilateral
organization promoting international monetary
cooperation and providing temporary financial
assistance to countries with balance of payments
problems
IMF conditionality – conditions that the IMF attaches
to loans to bail out countries in financial distress
Gulf Cooperation Council (GCC) – political and
economic integration involving Saudi arabia, Kuwait,
Bahrain, oman, quatar and the united arab emirates
Shanghai cooperation organization – organization
facilitating military and economic cooperation among
china, Russia and four of the central Asian nations
Generalized system of preferences (GSP) – a system
of tariff reductions facilitating less and least developed
country’s access to EU markets.
International investment agreements (IIAs) –
agreements between states to protect foreign direct
investment between countries
Investor-state dispute settlement (ISDS) – legal
processes using tribunals that are outside the national
and supranational court systems
Trade diversion – a change in trade pattern away
from comparative advantages due to trade barriers
Development aid – a gift from generous donors
wishing to help developing countries
Risk rating agencies – agencies that assign ratings to
assets such as bond that indicate the level of riskiness
of the asset
Susatainability – the ability to meet the needs of the
present without compromising the ability of future
generation to meet their needs around the world
Triple bottom line – the economic, social and
environmental performance that simultaneously
satisfies the demands of all stakeholder groups
Stakeholder – any group or individual who can affect
or is affected by he achievement of the organization’s
objectives
Primary stakeholder group – the constituents on
which the firm relies for its continuous survival and
prosperity
Secondary stakeholder group – those who influence
or affect, or are influenced or affected by, the
corporation, but are not engaged In transaction with
the corporation and are not essential for its survival
Non-governmental organizations – organizations,
such as environmentalists, humar rights activists and
consumer groups that are not affiliated with
governments
Instrumental view – a view that treating stakeholders
well may indirectly help financial performance
84
Normative view – a view that firms out to be self-
motivated to “do it right” because they have societal
obligations
Shared value creation – an approach to CSR that
focuses on activities that are good for both the firm
and its stakeholders
Pollution haven – countries with lower environmental
standards
Race to the bottom – contries competing for foreign
direct investment by lowering environmental standards
Code of conduct – written policies and standards for
corporate conducts and ethics
Health, safety and environment (HSE) – a common
term to cover the areas for which companies have
mandatory standards
Compliance – procedures to monitor and enforce
standards for employees and suppliers
Compliance training – mandatory training and tests
designed to ensure that every employee knowns the
relevant codes of conduct
Explicit CSR – voluntarily assuming responsibilities
of societal concerns
Philanthropy – donations for purposes that benefit the
wider society
Implicit CSR – participating in the wider formal and
informal institutions for the society’s interests and
concerns
Hypernorms – norms considered valid anywhere in
the world
- Respect for human dignity
- Universally agreed basic rights
- Good citizenship in the host society
Defensive strategy – focuses on regulatory
compliance with little top management commited to
CSR causes
Accommodative strategy – many leading MNEs
nowadays at least pursue this, in which they
demonstrate their responsibility by applying norms and
standards advocated by NGOs even when they are not
yet enshrined in law. It is a strategy that is
characterized by some support from top managers,
who may increasingly view CSR as a worthwhile
endeavor
Proactive strategy – a strategy that endeavors to do
more that is required in CSR
Small and medium-sized enterprises (SMEs) – firms
with less than 500 employees
Direct exports – the sale of products made by firms in
their home country to customers in other countries
Fob (free on board) – contract clause: the seller has to
deliver the goods free on board of a ship or train
Indirect exports – a way for SMEs to reach overseas
customers by exorting through domestic-based export
intermediaries
Export intermediary – a firm that performs an
important “middleman” function by linking sellers and
buyers overseas
Sales agent – an intermediary reciving commission for
sales
Distributor – an intermediary trading on their own
account
Letter of credit (L/C) – a financial contract that states
that the importer’s bank will pay a specific sum of
money to the exporter upon delivery of the
merchandice
Turnkey project – a project in which clients pay
conrtactors to design and construct new facilities and
train personnel – common in the construction and civil
engeneering industries
Design-and-build DB contract – a contract
combining the architectural or design work with the
actual construction
Build-operate-transfer BOT – a contract combining
the construction and temporary operation of a project
eventually to be transferred to a new owner
Consortium – a project based temporary business
owned and managed jointly by several firms
Subcontracting - a contract that involves outsourcing
of an intermediate stage of a value chain
Management contract – a contract over the
management of assets or a firm owned by someone
else
Experiential knowledge – knowledge learned by
engaging in the activity and context
Uppsala model – a model of internationalization
processes focusing on learning processes. The essence
of the model is that internationalization is a dynamic
process of learning in which firms take decisions over
their net step based on what they know at the time
Born global (international new venture) – start-up
company that from inception, seeks to derive
significant competitive advantages from the use of
resources and the sale of outputs in multiple countries.
It is a business that from inception seek to derive
significant competititve adantages from the use of
resources and the sale of outputs in multiple countries.
Mimetic behavior – imitating the behavior of others
as a means to reduce uncertainty
Institutional distance -the extent of similarity or
dissimilarity between the regulatory, normative and
cognitive institutions of two countries
Cultural distance – the difference between two
cultures along some dimensions of value or subjective
affinity
Foreign subsidiary – an operation abroad set up by
foreign direct investment
Entry strategy – a plan that specifies the objectives of
an entry and how to achieve them
Natural resource seeking FDI – investors interested
in these aim to access particular resources, such as
minerals, oil or renewable resources that they need in
their production process. Their main questions are
where do we find these resources and how can be best
ensure access to them?
85
Market seeking FDI – investors aim to sell their
products or services to new customers. They wouls
identify the relevant market and then seek a central
location for sales, marketing and distribution
operations. Where are our potential future customers,
and what do we have to do to reach them better than
our competitors do?
Efficiency-enhancing FDI – investors aim to reduce
their overall costs of production. They often single out
the most efficient locations featuring a combination of
low-cost inputs – especially labour foce, economies of
scale and transportation linkages
Capability-enhancing FDI – investorts aim to access
new ideas and technologies that help them to upgrade
their own technological and managerial capabilities.
Location-specific advantages – advantages that can
be exploited by those present at a location
First-mover advantages – advantages that first
movers obtain and that later movers does not enjoy:
- Proprietary, technological leadership
- Pre-emption of scarce resources
- Establishment of entry barriers for late
entrants
- Relationships and connections with key
stakeholders such as customers and
governments
Late-mover advantages - advantages that late movers
obtain and that first movers does not enjoy:
- Opportunity to free-ride on first-mover
investments
- Resolution of technological and market
uncertainty
- First mover’s difficulty to adapt to
market changes
Modes of entry – the format of foreign market entry
Non-equity mode – a mode of entry that does not
involve owning equity in a local firm
Equity mode – a mode of entry establish an
organization overseas that the firm owns, at least
partially
Wholly-owned subsidiaries WOS – a subsidiary
located in a foreign country that is entirely owned by
the parent multinational. This gives the investors full
control over their operations
Greenfield operations – building factories and offices
from scratch
Joint venture – a new corporate entity created and
jointly owned by two or more parent companies
Partial acquisition – acquisition of an equity stake in
another firm
Scale of entry – the amount of resources committed to
foreign market entry
Platform investment – an investment that provides a
small foothold in a market or location
Brownfield acquisition – acquisition where
subsequent investment overlays the acquired
organization
Multiple acquisition – a strategy based on acquiring
and integrating multiple businesses
Stages acquisition – acquisition where ownership
transfer takes place over stanges
Dynamics of competition
Oligiopoly – a market structure with only a small
number of competing firms
Competitive dynamics – the actions and responses
undertaken by competing firms
Competitor analysis – the process of anticipating a
rival’s actions in order to both revise a firm’s plan and
prepare to deal with rival’s responses
Attack – initial set of actions to gain competitive
advantage, such s price cuts, advertising campaigns,
market entries, new product introductions
Counter-attack – a set of actions in response to an
attack
AMC framework – a conceptual framework of
awareness, motivation, capability indicating when
firms are likely to attack and counterattack each other
Blue ocean strategy – a strategy of attack that avoids
direct confrontation with incumbents
Competition and collusion
Collusion – collective attempts between competing
firms to reduce competition
Tacit collusion – firms indirectly coordinate actions
by signaling their interntion to reduce output and
maintain pricing above competitive levels
Explicit collusion – firms directly negotiate output, fix
pricing and divide markets
Cartel – an entity that engages in output – and price
fixing, involving multiple competitors
Prisoners dilemma – in game theory, a type of game
in which the outcome depends on two parties deciding
whether to cooperate or to defect
Game theory – a theory on how agents interact
strategically to win
Repeated game – a game plays over several periods of
time
Tit-for-tat – a strategy of matching the competitors
move being either aggressive or accommodative
Concentration ratio – the percentage of total industry
sales accounted for by the top four, eight or twenty
firms
Price leader – a firm that has a dominant market share
and sets “acceptable” prices and margins in the
industry
Capacity to punish – sufficient resources possessed
by a price leader to deter and combat defection
Multimarket competition – firms engage the same
rivals in multiple markets
Market commonality – the overlap between two
rivals’ markets
Cross-market retaliation – the ability of a firm to
expand in a competitor’s market if the competitor
attacks in its original market
Competition policy – policy governing the rules of
the game in competition in a country
86
Anti-trust policy – American term ofr competition
policy
Collusive price setting – price setting by monopolists
or collusion parties at a higher than competitive level
Leniency programme – a programme that gives
immunity to members of a cartel that first report the
cartel to the authorities
Market division collusion – a collusion to divide
markets amongst competitors
Anti-competitive practices (by a dominant firm) –
businesses practices by a dominating firm that make it
more difficult for competitors to enter or survive
Predatory pricing – an attempt to monopolize a
market by setting prices below cost and intending to
raise prices to cover losses in the long run after
eliminating rivals
Dumping – an exporter selling below cost abroad and
planning to raise prices after eliminating local rivals
Patent race – a competition of R&D units where the
one first to patent a new technology gets to dominate a
market
Survival strategy – a strategy designed to ensure
survival by ensuring liquidity and positive cash flow
Economic forecasting – aa technique using
econometric models to predict the likely future value
of key economic variables
Scenario planning - a technique generating multiple
scenarios of possible future states of the industry
Contingency plans – plans devised for specific
situations when things could go wrong
Defender strategy – this strategy centres on
leveraging local assets in areas in which MNEs are
weak
Extender strategy – centres on leveraging home-
grown competencies abroad
Dodger strategy – centres on cooperating through
joint ventures with MNEs and sell-offs to MNEs
Contender strategy – this strategy centres on a firm
engaging in rapid learning and then expanding
overseas
Global strategies – strategies that take advantage of
operations spread around the world
Economies of scale – reduction in unit costs achieved
by increasing volume
Global sourcing – buying inputs all over the world
Centres of excellence – specialized centres for
innovation that serve the entire MNE
Global key account – customer served at multiple
sites around the world, but that negotiates centrally
Risk diversification – reduction of the risk profile of a
company by investing in different countries and
industries
AAA typology – aggregation, adaption and arbitrage
strategies
Aggregation strategies – strategies that focus
on synergies between operation at different
locations
 Adaption strategies – strategies that deliver
locally adapted products in each market
Arbitrage strategies – strategies that exploit
differences in prices in different markets
Overseas listing – raising capital by listing on a stock
exchange abroad
M&A – popular shorthand for “mergers and
acquisitions”
Acquisition – the transfer of the control of
operations and management from one firm
(target) to another (aquirer), the former
becoming a unit of the latter
Merger – the combination of operations and
management of two firms to establish a new
legal entity
Synergies – value created by combining two
organizations that together are more valuavle than the
two organizations separately
Hubris – a manager’s overconfidence in his/hers
capabilities
Due diligence – the assessment of the target firm’s
financial status, resources and strategic fit
Strategic fit – the effective matching of
complementary strategic capabilities
Organizational fit – the similarity in cultures, systems
and structures
Post-acquisition integration – the process that aims
to integrate two formerly independent firms after an
acquisition
Strategic alliances – collaboration between
independent firms using equity-modes, non-equity
contractual agreements or both
Business unit JV – a JV in which existing business
units from two firms are merged
Operational collaboration – a form of strategic
alliance that includes collaboration in operations,
marketing or distribution
Input foreclosure – practice of a vertically integrated
firm to cut off a competitor from key suppliers
Output foreclosure - practice of a vertically
integrated firm to cut off a competitor from key
customers
Acquisition premium – the difference between the
acquisition price and the market value of target firms
Hidden champions – market leaders in niche markets
keeping a low public profile
Divestment – the sale or closure of a business unit or
asset
Globalfocusing – a strategic shift from diversification
to specialization which increases the international
profile
Integration-responsiveness framework – a
framework of MNE management on how to
simultaneously deal with two sets of pressures for
global integration and local responsiveness
Local responsiveness – the necessity to be responsive
to different customer preferences around the world
87
Home replication strategy – a strategy that
emphasizes international replication of home country-
based competencies such as production scales,
distribution efficiencies and brand power
Localization (multidomestic) strategy – a strategy
that focuses on a number of foreign countries/regions,
each of which is regarded as a stand-alone “local”
(domestic) market worthy of significant attention and
adaption
Global standards strategy – a strategy that relies on
the development and distribution of standardized
products worldwide to reao the maximum benefits
from low-cost advantages
Centre of excellence – an MNE subsidiary explicity
recognized as a source of important capabilities be
leveraged by and/or disseminated to other subsidiaries
Global key accounts – customers who themselves
operate at multiple sites where they expect delivery
International division – a structure bundling all
international activities in one unit, often associated
with a home replication strategy
Geographic area structure – an organizational
structure that organizes the MNE according to
different countries and regions
Country or regional manager – the business leader
of a specific geographic area or region
Global product division – an organizational structure
that assigns global responsibilities to each product
division
Global matrix – an organizational structure often used
to alleviate the disadvantages associated with both
geographic area and global product division structures,
especially for MNEs adopting a transnational strategy
Knowledge management - the structures, processes
and systems that actively develop, leverage and
transfer knowledge
Explicit knowledge - practice of a vertically
integrated firm to cut off a competitor from
keyknowledge that is codifiable (that is, can be written
down and transferred with little loss of its richness)
Tacit knowledge – knowledge that is non codifiable
and its acquisition and transfer require hands-on
practice
Organizational (team-embedded) knowledge –
knowledge held in an organization that goes beyond
the knowledge of the individual members
Community of practice (CoP) – group of people
doing similar or related work and sharing knowledge
about their practices of work
Virtual community of practice – community of
practice interacting via the internet
Knowledge governance – the structures and
mechanicmms MNEs use to facilitate the creation,
integration, sharing and utilization of knowledge
Absorptive capacity – the ability to recognize the
value of new information, assimilate it and apply it
Social capital – the informal benefits individuals and
organizations derive from their social structures and
networks
Worldwide (or global)mandate – the charter to be
responsible for one MNE function throughout the
world
Subsidiary initiative – the proactive and deliberate
pursuit of new opportunities by a subsidiary to expand
its scope of responsibility
National innovation systems – the institutions and
organizations that influence innovation activity in a
country
Ethnocentric approach – an emphasis of the norms
and practices of the parent company by relying on
expatriates
Expatriate – a non-native employee that works in a
foregin country
Parent country national – a employee who comes
from the parent country of the MNE and works at its
local subsidiary
Host country national – an individual from the host
country who works for an MNE
Polycentric approach – an emphasis on the norms
and practices of the host country
Geocentric approach – a focus on finding the most
suitable managers independent of nationality
Full immersion training – intensive exposure to a
foregin culture and language by living within the
culture
Performance appraisal – the evaluation of employee
performance for promotion, retention or termination
purposes
Commuter assignment – assignments that involve
regular stays abroad but witht the ain base remaining
back home
Inpatriate – employees of a foreign subsidiary
relocated to the MNEs headquarters for the purposes
of (1) filling skill shortages at headquarters and (2)
developing a global mindset for such inpatriates
Marketing – efforts to create, develop and defend
markets that satisfy the needs and wants of individual
and business customers
Supply chain – flow of products, services, finances
and information that passes through a set of entities
from a source to the customer
Supply chain management – actitivies to plan,
organize, lead and control the supply chain
Marketing mix – the four underlying components of
marketing: PPPP
- Product
- Price
- Promotion
- Place
Marketing segmentation – a way to identify
consumers who differ from others in purchasing
behavior
Multi-tier branding – a portfolio of different brands
targeted at different consumer segments
88
Price elasticity – how demand changes when prices
change
Total cost of ownership – total cost needed to own a
product, consisting of initial purchase cost and follow-
up mainaenance/service cost
Inbound logistics – purchasing and the coordination
of intermediaries on the supply side
Outbound logistics – sales and the coordination aof
intermediaries on the customer side
Agility – the ability to quickly react to unexpected
shifts in supply and demand
Adaptability – the ability to change supply chain
configurations in response to long-term changes in the
environment and technology
Alignment – the alignment of interest of various
players
Third party logistics – a neutral intermediary in the
supply chain that provides logistics and other support
serices
Standards in advertising – formal rules designed by
governments to protect customers
Les så du er helt sikker på institution based og
resource based
7
27. Which of the following is among secondary
stakeholders as defined by Peng and Meyer
(2011)?
(a) Customers.
(b) Government.
(c) Trade unions.
(d) Suppliers.
28. Which of the following is true about explicit and
implicit CSR as discussed by Peng and
Meyer (2011)?
(a) Explicit CSR is more beneficial to societies.
(b) Explicit CSR is are more common in coordinated
market economies.
(c) Philanthropy is an integral element of implicit
CSR.
(d) Implicit CSR is the result of values, norms and
rules defining expectations from
corporations.
29. Rangan, Chase and Karim (2015) describe three
theatres (areas) to classify companies’ CSR
programs. Which of the following is not among them?
(a) Focusing on philanthropy.
(b) Transforming the business model.
(c) Reducing environmental impact.
(d) Improving operational effectiveness.
30. Rangan, Chase and Karim (2015) describe the
characteristics of CSR initiatives of best
practice companies. Which of the following is false
about these initiatives?
(a) These initiatives are aligned with the balance of
power among stakeholders.
(b) These initiatives are aligned with the business
purpose of the company.
(c) These initiatives are aligned with the needs of the
communities in which the companies
operate.
(d) These initiatives are aligned with the values of
important stakeholders.

Multiple choice questions:

1. which of the following firms is a multinational enterprise? MNE
a. a firm that is only internationally active through majority acquisitions
2. peng and meyer discuss the antecedents and consequences of globalization. Consider
the following two statements about globalization:
a. globalization has created unprecedented contacts between cultures, thereby
significantly reducing clashes between them
b. globalization can be seen as a process leading to greater interdependence and
mutual awareness aong economic, political and social units in the world, and among
actors in general.
Which of the characterizations is correct?
- Statement a is false, statement b is true
3. the MNE «X» is headquartered ni the Netherlands. In 2014, the MNE derived 23% of its
sales from Europe, 55% from USA and 20% from Asia. According to Rugman and
Verbeke, the MNE can be classified as
a. Host region oriented

- Globalization, in terms of a balances geographic distribution of sales across the triad,

reflects a special, and rather unusual, outcome of doing international business
- «the common practice to pay customs offers a «facilitation fee» to obtain a visa» is a
example of a informal institution
- When people within a society consider their own culture, ethics and norms as «natural and
morally right» it is called ethnocentrism.
- A country in which employees expect to be listened to regardless of rank or background,
and they will reject leaders whom they percieve as autocratic or patrionixing is
characterized by low power distance
- Cheaper products and more choice for consumers is a benefit of the transatlantic trade
and investment partnership TTIP
- Horizontal FDI is when a firm takes the same business activity at the same value-chain
stage from its home country and duplicates it in a host country through foreign direct
investment (FDI).
- The question «why do so many firms become MNEs by engaing in FDI» can be answered
using a framework known as OLI paradigm. The OLI paradigm describes the importance of
ownership advantages, location advantages and internalization advantages. Which of
these three advantages is the most important factor explaining why MNEs engage in FDI?
o All three advantages are equally important
- According to peng and meyer, internalization advantages exist if market exchange comes
with high transaction costs. Consider the following two statements about internalization
advantages and trasaction costs:
a. Exporting is preferred over vertical FDI if one party needs to make an
investment with high asset specificity
b. Asset specificity is low i finvestments in productive assets are made in
close physical proximity to each other
o Statement a and b are both false.

89
- The uppsala model infers that, for smaller firms, internationalization is a dynamic
process of learning
- Start-up companies that from inception seek to derive significant competitive advantages
from the use of resources and the sale of outputs in multiple countries can be defined as
born globals. Born globals learn from others operating in the foreign country
- Greater distance leads to weaker transferability and exploitation potential of non-location
bound ownership advantages.
- The ownership advantage of Airbnb is platform strategy advantages
- Three pillars of institutional frameworks
o Cognitive
o Normative
o Regulatory
- Formal institutions:
o Political
o Economic
o Legal
- Liberal market economies provide less protection to employees than coordinated market
economies
- Shareholder protection is stronger in common law than in civil law
- Government regulation reduces the potential for market failures
- One argument against CSR: CSR implies that firms should apologize for doing business,
which is wrong
- It is an increasing importance of sustainability bc of the shift of power from governments
to MNEs and NGOs.
- Trade unions is among the secondary stakeholders defined by peng and meyer
- Stakeholder/shareholder?
- Implicit CSR is the result of values, norms and rules defining expectations from
corporations
- Hva inneholder informal/formal

- The institution-based view analyzes how formal and informal institutions affect firms and
other economic actors
- Corporate governance refers to the rules by which shareholders and other interested
parties control corporate decision makers
- Liberal market economy
- Long-term orientation
- Uncertainty avoidance
- Nearshoring
- Infant industry argument
- Dynamic capabilities are higher order capabilities that enable to renew their portfolio of
capabilities to react to changing markets
- Casual smbiguity is an important reason why competitors may find capabilities to
inimitable
- If a company sets up a subsidiary abroad to move some of its production overseas, then
we talk about captive offshoring
- A company that is producing products on behalf of brand name companies without itself
being involved in the product development is also known as original equipment
manufacturer
- Offshore outsourcing refers to relocating production to an independent firm abroad
- Embargo – ikke lov å handle med et spesifikt land
- Deadweight loss is referring to the net loss to society due to the introduction of tariffs
- Anti-dumping duties are levied on importers who are engaging in the following practice
deemed unfair in international trade: selling below costs with the intention to push
competitors from the market

90
- The factor endowment theory suggests that national resource endowments are the
foundation for comparative advantages in international trade
- FPI og FDI og OLI
- The expectation of knowledge spillovers is a major motivation for governemtns to attract
foreign investors to their country
- Reduced contract monitoring and enforcement costs are an example pf an internalization
- The shift in the relative bargaining power between MNEs and host governments after the
foreign investor incurred the sunk costs of their initial investment is known as obsolescing
bargain
- OLI paradigm:
o Locational advantages
o Ownership advantages
o Internalization advantages
- Asset specificity refers to investments that are specific to a business relationship
- FDI flows add to the FDI stock
- Under floating exchange rates, interest rate differences influence the movement of
exchange rates
- Counter party risk increases when engaging in financial hedging of foreign exchange rate
risk
- The 1-year forward rate for a currency can be estimated from the spot market rate, and
the 1-year interest rates in both currency areas
- Is a country has balance of payment deficit it means that the sum of its goods exports,
service exports and transfers received is less than the sum of its goods imports, service
imports and transfers send
- The relationship between European currencies and the US$ after 1973 can best be
described as a managed float
- In the “Bretton woods agreement” of 1944, the European exchange rate system and the
European central bank was established
- The common market of the EU is also known as EU single market
- Major elements of economic reforms in central and eastern Europe in 1990s
o Liberalization
o Privatization
o Stabilization
- Important principles for the functioning of the EU common market
o Mutual recognition
o Harmonized sectors
o Subsidiarity
- The IMF provides financial support to countries with temporary imbalances in their balance
of trade
o Lending to countries in temporary financial difficulties
o Monitoring the global economy
o Providing technical assistance to developing countries
- Free trade areas can have a negative effect on economic welfare because of the trade
diversion effect
- The world bank provides finance for large development projects in developing countries
such as transportation infrastructure, agricultural irrigation or banking sector reform
- The basel committee is setting standards for financial sector regulation, such as minimum
equity requirements
- An instrumental view of CSR argues that companies should engage in CSR if and only if it
has direct or indirect benefits for shareholder value
- The view that companies have a moral obligation to do more for society than maximize
shareholder value is generally known as normative view
- Primary stakeholders of a company are those who the company depends on for its
continuous survival and prosperity

91
- When companies form a consortium to “bid for a tender” they are competing for a contract
offered by for example a government agency
- The Uppsala model: commitments to higher degrees of involvement in a foreign market
depend on the knowledge acquired by the firm up to that time
- Companies engaging in brownfield acquisitions take over an existing firm and substantially
transform its operations
- Greenfield
o High investment risk due to large capital commitment and long pay-back
periods, yet no co-owner and integration risks
o Enables foreign investor to create a local operation in its own image
without the need to incorporate existing structures or demands by local
partners
- Institutional frameworks and foreign entry strategies:
o Regulatory institutions may prohibit certain types of operations oor
transactions
o Institutional idiosyncrasies may increase the need for acquiring local
knowledge
o Lack of contract enforcement institutions may increase the costs of arm-
length contracts
- Partial acquisitions are difficult to manage from an acquirer’s perspective; however they
have been observed frequently…
o In the context of privatization processes
o When previous owners have a continuing interest in the company
o Where the acquirers wish to provide incentives for a founding
entrepreneur to stay committed to the company after the take-over
- Collusion between firms is less likely if there is an industry price leader
- Globalfocusing is a form of strategic changes that involves divestment of peripheral
activities in the home country
- In the context of pre-acquisition due diligence, organizational fit refers to the cultural and
structural characteristics of the two organizations that affect the ability to integrate the
acquired company
- Hidden champions – small private firms that prosper in market niche which keeping a low
profile
- Global key accounts are customers that are served at multiple sites but with central
negotiation of contracts
- A geographical area structure emphasizes local adaption of products and processes
- The structures and mechanisms MNEs use to facilitate the creation, integration, sharing
and utilization of knowledge are known as knowledge governance
- MNEs that aim to combine the advantages of global integration and local adaption are
pursuing a transnational strategy
- MNEs in which most subsidiaries are headed by a third-country national are said to employ
a geocentric human resources strategy
- Total cost of ownership is the purchasing price plus the cost of supplies needed to operate
the item

92