UNIT 6: INTERNATIONALIZATION

1. The multinational firm

Globalization is a process of closer integration and exchange between different countries and
peoples worldwide, made possible by falling trade and investment barriers, advances in
telecommunications, and reductions in transportation costs. Combined, these factors reduce
the costs of doing business around the world, opening the doors to a much larger market than
any one home country (source supplies at lower costs, learn new competencies and
differentiate products).

2. International strategy

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 ADVANTAGES OF GOING GLOBAL

1. GAIN ACCESS TO A LARGER MARKET. Becoming an MNE provides significant opportunities

for companies, given economies of scale and scope that can be reaped by participating in a
much larger market. Companies that base their competitive advantage on economies of scale
and economies of scope have an incentive to gain access to larger markets because this can
reinforce the basis of their competitive advantage.

Opportunities to outcompete local rivals and it helps firms in smaller economies to achieve
growth and gain and sustain competitive advantage.

2. GAIN ACCESS TO LOW-COST INPUT FACTORS. MNEs that base their competitive advantage
on a low-cost leadership strategy are particularly attracted to go overseas to gain access to
low-cost input factors. Access to low-cost raw materials such as lumber, iron ore, oil, and coal
was a key driver behind Globalization. During Globalization firms have expanded globally to
benefit from lower labor costs in manufacturing and services. (China)

3. DEVELOP NEW COMPETENCIES. Some MNEs pursue a global strategy in order to develop
new competencies. It helps multinational companies that pursue a differentiation strategy:

Communities of learning, specific geographical regions (AstraZeneca) and locating value chain
activities in optimal geographies (Apple)

DISADVANTAGES OF GOING GLOBAL

1. LIABILITY OF FOREIGNNESS. Unfamiliar cultural/economic environment, coordinating

across geographic distances and it can result in additional costs.

2. LOSS OF REPUTATION. One of the most valuable resources that a firm may possess is its
reputation. A firm's reputation can have several dimensions, including a reputation for
innovation, customer service, or brand reputation. Globalizing a supply chain can have some
side effects: low wages, poor conditions, corrupt local government, no safety measures…

3. LOSS OF INTELLECTUAL PROPERTY. Difficult to protect intellectual property (copyright),

exposure.

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2. Entry strategies for international markets

The figure above displays the different options managers have when entering foreign markets,
along with the required investments necessary and the control they can exert. On the left end
of the continuum in the figure are vehicles of foreign expansion that require low investments
but also allow for a low level of control. On the right are foreign-entry modes that require a
high level of investments in terms of capital and other resources, but also allow for a high level
of control. Foreign-entry modes with a high level of control such as foreign acquisitions or
greenfield plants reduce the firm's exposure to two particular downsides of global business:
loss of reputation and loss of intellectual property.

Exporting: This is the simplest and most traditional way of accessing international markets, and
it tends to be used when firms take their first steps in internalization. It is often used to test
whether a foreign market is ready for a firm’s products. In the case of exporters, production

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remains in the country of origin, from where the different countries are supplied and the
product may be modified in some way if any one of the external markets so requires.

Contractual arrangements: these are forms of indirect investment , in which no capital is

contributed by the original firm, but instead rights are transferred to foreign companies,
according to specific terms and conditions, normally in Exchange for a financial consideration.
There are various kinds of contractual arrangements, with the most common ones being
franchises and licenses.

Establishing a joint venture with a foreign company has long been a favored mode for
entering a new market. Joint ventures are defined as those undertakings that operate in a
foreign country and are not fully owned by the parent company. This definition covers any
combination in which at least two shareholders are involved, when at least one of them is
undertaking operations outside its domestic scope. When the decision is made not to share
the investment the firm sets up its own subsidiaries to service local markets from within the
target countries themselves. This option is appropriate when a competitive advantage is based
on controlling certain technology skills, thereby reducing the risk of forgoing that control.

Advantages
Exporting -The amount of capital
needed to begin exporting is
quite minimal
- A manufacturer can limit its
involvement in foreign
markets by contracting with
foreign wholesalers
experienced in importing to
handle the entire distribution
of the product
Licensing -Avoid the risks of
committing resources to
country markets that are
unfamiliar.
- By licensing the technology
or the production rights to
foreign-based companies,
the firm doesn´t have to bear
the costs and risks of
entering foreign markets on
its own.
Franchising -The franchisee bears most
of the costs and risks of
establishing foreign
locations, so a franchisor has
to expand the resources to
recruit, train, support and
monitor franchisees.
Alliance and Join venture -Access to technical expertise
strategies and knowledge of local
markets
Disadvantages
- Adverse shifts occur in
currency exchange rates
(unfavorable in currency
exchange rates)
-Trade barriers
-High transport cost
- The risk of providing
valuable technological know-
how to foreign companies
and thereby losing some
degree of control over its
use.
- Lack of control over quality
In many cases, foreign
franchisees do not always
exhibit strong commitment
to consistency and
standardization, especially
when the local culture does
not stress the same kinds of
quality concerns
-High coordination
-lack of control over

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 -Shared development costs technology
and risks
Foreign Subsidiary - Companies that prefer -High costs
Strategies direct control over all
aspects of operating in a
foreign market can establish
a wholly owned subsidiary,
either by acquiring a foreign
company or by establishing
operation
-Protection of technology

Following our analysis of the factors with an impact on an industry´s degree of globalization,
the next step involves observing the strategic alternatives a firm must successfully compete in
its industry according to its degree of globalization. The dimensions determining how a firm
competes in the international stage are the pressure to lower costs and the pressure for local
adaptation.

In general, these two alternatives exert opposite pressures to one another, whereby each firm
will have to choose the combination it deems most suitable. The pressure to lower costs is
related to the concentrated geographical location of its production facilities in those areas
where the use of key production factors (labour, raw materials, etc..) is cheaper, with the aim
being to standardize the products in order to operate in a more uniform manner in the
different countries.

Moreover, firms need to react to the pressure for local adaptation, with a view to adjusting
their products and services to the demand in the local markets in which they are conducting
their businesses. This requires, on the one hand, rolling out different strategies for each
country, with the aim of catering for local preferences, needs and tastes, as well as making the
necessary changes in matters related to human resources, the features of products or services,

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marketing or compliance with the rules and regulations in each country. However, this local
adaptation of products incurs additional expenditure, thereby altering the firm's costs
structure.

Given the two opposing pressures of cost reductions versus local responsiveness, scholars have
advanced the integration-responsiveness framework, shown in the figure above this
framework juxtaposes the opposing pressures for cost reductions and local responsiveness to
derive four different strategic positions to gain and sustain competitive advantage when
competing globally. The four strategic positions, which we will discuss in the following sections,
are:

1. INTERNATIONAL STRATEGY. A strategy in which a company sells the same products or

services in both domestic and foreign markets. An international strategy is one of the oldest
types of global strategies and is frequently the first step companies take when beginning to
conduct business abroad.

2. MULTIDOMESTIC STRATEGY. Attempt to maximize local responsiveness, hoping that local

consumers will perceive their products or services as local ones. MNEs frequently use a
multidomestic strategy when entering host countries with large and/or idiosyncratic
domestic markets, such as Japan or Saudi Arabia. It can be costly and inefficient, and it is
common in the consumer products industry and food industry.

3. GLOBAL STANDARDIZATION STRATEGY. Attempt to reap significant economies of scale

and location economies by pursuing a global division of labor based on wherever best-of-
class capabilities reside at the lowest cost. The global-standardization strategy arises out of
the combination of high pressure for cost reductions and low pressure for local
responsiveness. MNEs using this strategy are often organized as networks. This lets them
strive for the lowest-cost position possible. Their business- level strategy tends to be cost
leadership. Because there is little or no differentiation or local responsiveness because
products are standardized, price becomes the main competitive weapon.

4. TRANSNATIONAL STRATEGY. Combine the benefits of a localization strategy (high local

responsiveness) with those of a global-standardization strategy (lowest-cost position
attainable). This strategy arises out of the combination of high pressure for local
responsiveness and high pressure for cost reductions. A transnational strategy is generally
used by MNEs that pursue a blue ocean strategy at the business level by attempting to

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reconcile product and/or service differentiations at low cost. Best practices, ideas and
innovations used everywhere. Difficult to implement: Duplication of efforts and
organizational complexity.