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?