Module 2 (part B)

Drivers of firm
internationalization

International Business Division

School of International Business and Marketing
UEH University
Learning objectives

1. Understand main types of MNEs

2. Examine the theories related to international investment

1. Types of multinational enterprises (MNEs)

• The centralized exporter

• Home-country-managed firm builds on a tradition of selling
products internationally and with minor value-creating activities
abroad
• Mainly export standardized products manufactured at home
• The foreign subsidiaries act largely as facilitors of efficient
home-country production.
• International activities occur mainly in the downstream, related
to marketing, distribution, and related logistics operations
1. Types of multinational enterprises (MNEs)

• International projector
• Early MNEs from developed countries established in a relatively
closed and domestically oriented world economic system
• They expand internationaly through mini versions of themselves as
more or less self-contained national subsidiaries to replicate their
domestic business operations
• They often exploit their ownership advantages to establish global
presence by transferring proprietary knowledge developed in the
home country to foreign subsidiaries
• Rely on professional managers to transfer home country’s success
recipes
1. Types of multinational enterprises (MNEs)

• International coordinator
• Managing international operations, both upstream and
downstream, through a tightly controlled but flexible logistics
functon
• International operations are specialized in specific value-added
activities and form vertical value chains across borders.
• They often search for relevant resources internationally,
manufacture in the most cost-efficient locations, and sell their
produts wherever there is demand for them
1. Types of multinational enterprises (MNEs)

• Multi-centered MNE
• The firm comprise of a set of entrepreneurial subsidiaries
abroad
• Can be view as a portfolio of largely independent businesses
connected by minimal shared foundation such as financial
governance, the identity and specific business interests of the
founders or main owners
• National responsiveness is the foundation of the international
strategy.
2. Firm-specific advantages (FSAs) and
internationalization

• FSAs are ‘a firm’s capacity to deploy resources, usually in

combination, using organizational processes and routines, to
create desired capabilities’ (Amit & Schoemaker 1993)
• FSAs determines a firm’s ability to compete in an international
context.
• The nature of FSA influences the internationalization of a firm.
2. Firm-specific advantages (FSAs) and
internationalization
Types of FSAs
• Asset advantage: the advantages stem from the exclusive privileged
ppossession of income generating assets
• Asset: machinery and equipment, technical expertise, reputation
• Transaction advantage: the firm’s ability to economize on transaction costs,
as a result of multinational coordination and control of assets.
• Resources: Human resources, financial resources, innovation, research and
development, technical resources, manufacturing, marketing, organizational
resourses
• FSAs have been identified in emerging MNEs:
• Capital, technologies, marketing capabilities, brand equity, R&D intensity,
management competencies
• Resilience to corruption practices: Experience with local bureaucratic and
corrupt officials
• A deep understading of the local rules of the game
2. Theories of firm internationalization

2.1 The Uppsala model - The process theory

• Firms adopts a step-wise approach to internationalize
• First internationalize with ad hoc exporting
• Subsequently use agents to formalize their international presence
• When sales grow, the firm replaces agents with their own sales organizations
• Oversea production can be established as growth continues
• Firms internationalization is likely to first occur in a market with close
“psychic distance” and progressively consider markets further away
• The revised Uppsala model
• Markets are networks of relationship which offer potential for
learning, building trust and commitment in a foreign market.
• Firms need to develop knowledge to overcome the liability of
foreigness
• ID: Institutional distance – the difference between the home
and the host countries in formal and informal terms
• LOF: liability of foreigness - Foreignness implies different
additional costs for the foreign firms compared to the local
firms
2. Theories of firm internationalization

2.2 The electic paradigm

• Three factors that encourage a firm to undertake international
operations
• Ownership advantage (O): possession of competitive advantages in
relation to its major competitors, such as human resource or ability to
innovate
• Internalization advantage (I): it’s in the firm’s best interest to add value
to its O rathan than sell those advantages
• Location advantage (L): relative advantages that a host country offers
in comparison to a firm’s home country
• These 3 advantages and their use are to increase the wealth-
creating capacity of a firm and hence the value of its assets.
2. Theories of firm internationalization

2.2 The electic paradigm

• Four primary reasons for a firm to internationalization
• Resource-seeking behavior: MNE make investments to acquire and
specific resources of a higher quality at a lower cost than could be
obtained in their home market
• 3 types of resource-seeking firms: Physical resources, skilled or unskilled labour,
technological ability, management or organizational skills
• Market-seeking behavior: to expand its business to new markets
• Efficiency-seeking behavior: to improve its economis of scale and
reduce risk
• Strategic-asset seeking behavior: to acquire assets from firms in
foreign markets
2. Theories of firm internationalization

2.3 Resource-based view

• The firm ownership of resources and capabilities that are
valuable, rare, inimitable, and non-substitutable can help a firm
make strategic choices when operating in an international
market and can therefore influence the performance of the firm
in that location.
• The value and amount or resources can further assist a firm
devise its strategies to expand its operations in a foreign
market.
2. Theories of firm internationalization

2.4 LLL model

• Linkage: the capacity of the firm to extend into new cross-
border activities via inter-firm relations
• Latecomer rely on external resources found in business relationships
• A firm seek to acquire resources and complementary assets in a
foreign market must overcome problems of market intelligence and
uncertainty
• Joint ventures, strategic alliances, collaborative partnerships are
means of entering a foreign market
• Leverage
• Learning
2. Theories of firm internationalization

2.4 LLL model

• Leverage: the capacity to secure more from a relationship than
the firm puts in
• Leverage helps a firm’s integration in the global supply chain by
creating and making use of connections to further their business
interests in foreign markets.
• Learning: the enhancement of capabilities that results from
repeated application of linkage and leverage strategies
• Learning is essential for any firm to adapt, improve and innovate to
surviv, especially in a foreign market
Activity: mini-case Dr. Reddy’s international
expansion (p. 48)

• Discuss the impotane of internationalization for Dr. Reddy’s

Laboratories
• What challenges faced by DRL when they interntaionalize?
• DRL’s global expansion can be explained by which
internationalization theories?