Theory of the International Firm

Fragen Ausarbeitung

 A. Explain the existence of the MNC by applying Hymer’s monopolistic theory! What is the role
of CONTROL in his framework?

Hymer argued that firms choosing to invest abroad must possess some type of firm-specific
advantages to outweigh the disadvantages a foreign investor has compared to host-country firms.
According to him and industrial organization theory, firm-specific advantages reflect market
imperfection (perfect markets and MNCs are not compatible!!!). Market imperfections offer some
firms the ability to exploit an asset in a more profitable way than host country firms do and this ability
constitutes a prerequisite for foreign direct investment (FDI). Furthermore, the “removal of conflict” is a
parallel driver of FDI.

Hymer argues that the costs of “liability of foreignness” must be more than compensated by the
owner-ship specific advantages. Control is necessary to transfer this firm-specific advantages to
foreign markets. He had an apprehension of the multinational firm as a clear hierarchy, in which the
corporate headquarters decides upon and implements the overall strategies, which are then
implemented by the lower levels. According to him, the corporate hierarchy is essentially a
structure to control the flow of information. His apprehension of the multinational firm as a
hierarchy also had consequences on how he considered that they were structured geographically.
He argued that the location of the different activities of the multinational firm reflected its hierarchical
structure.

B. What is the main difference between Hymer’s and Knickebocker’s view of foreign direct
investments?
Hymer argues that market imperfections offer firms the ability to exploit an asset in a more
profitable way than host country firms do and that this ability constitutes a prerequisite for FDI
and a trigger for such investments. Knickebocker on the other hand states that firms might invest in a
country to match a rival’s move, that they follow the internationalization of competitors in order to not
losing their strategic advantage.

 A. Characterize the Uppsala model of internationalization! Discuss the applicability of the

Uppsala model for traditional SMEs and for born-global companies (use an example!).
Studying the internationalization of Swedish manufacturing firms, the researchers at the University of
Uppsala developed a model of the firm’s choice of market and form to entry when going abroad.
According to the model, there are different stages of incremental market commitment:

Stage 1: no regular export activities (sporadic export)

Stage 2: export via independent representatives (sport modes)
Stage 3: establishment of a foreign sales subsidiary
Stage 4: foreign production/manufacturing units

gaining local market knowledge, slowly commit to internationalizing, market uncertainty reduction,
going first to markets with low psychic distance (language, culture, currency, political system)

The model implies that additional market commitment as a rule will be made in small incremental
steps, both in the market commitment dimension and in the geographical dimension. The
Uppsala-model is applicable for traditional SMEs.

In many ways the slow organic Uppsala-model process and the accelerated “born global”
pathways are the opposites of one another. A born global can be defined as a firm that from its birth
(or short after its birth) globalizes rapidly without any preceding long-term internalization period, so it
does not consider the small incremental steps of market commitment of the Uppsala model.

Example?
APPS are an example for born globals

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B. Based on the network model, which market entry forms should be chosen when the MNC is a
(a) Early Starter, (b) Lonely International, (c) Late Starter, (d) International among Others.

Market entry forms? Keine Ahnung

(a) Early Starter

no important international relationships
little international market
little knowledge of foreign markets, few opportunities (agents are needed to enter foreign market)
internationalizing by distributers or customers
gradual and slow involvement in the market via agent, leading to sales subsidiary and then
manufacturing subsidiary

(b) Lonely International

the firm has experience of relationships with others in foreign countries, high internationalized
level of the firm
the firm’s relationships with, and in, other national nets may function as a bridge to those nets for
its suppliers and customers

(c) Late Starter

firm has international customers and competitors, a less internationalized firm can be “pulled out”
of the domestic market by its customers or complementary suppliers to the customers
SMEs are more flexible
LSEs that have become large in the domestic market are often less specialized than small firms,
and their situations is often more complex than that of a small firm. One possibility is to get
established in a foreign production net through acquisition or joint venture.
 in general, it is probably more difficult for a firm that has become large at home to find a niche in
highly internationalized nets (it cannot, as the small firm can, adjust in the flexible way which may
be necessary in such a net)
difficult to enter closer markets (with less psychic distance), must start with more distant markets,
competitors have more knowledge

(d) International among Others

highly internationalized firms in a highly internationalized market
firm has international knowledge
 the firm has the possibility of using positions in one net to bridge over to the other nets, with
regard to both extensions and penetration
strong need for coordination of the international activities along the value chain
operations in one market may make it possible to utilize production capacity for sales in other
markets
establishment of sales subsidiaries is probably speeded up by high internationalization because
the international knowledge is higher and there is a stronger need to coordinate sales and
marketing activities in different markets

 A. Discuss the institutional view of MNC (according to Henisz & Williamson)! What is the
economic function of formal and informal institution rules?

The institutional environment (two levels: informal level = norms, customs, religion; formal level = polity,
judiciary, laws of contract and property) influences economic performance. Henisz and Williamson
emphasize the formal level in their paper and their work advances previous theories by considering the
effect of political and contractual hazards on economic organization.

They influence economic performance, reduce uncertainties by providing structure and form the
rules of the game (in society). They are considered as “guide to human interaction” as we know these
set of rules and how to perform tasks following these rules.

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main result from their analysis is that the impact of variation in property rights regimes (either
across countries or over time) on the relative costs of governance of partnership and ownership will
depend crucially on the level of contractual hazards posed by the individual transaction

B. Explain the change of the governance form from B to A, due to the reduction of political
hazards in the host country! Explain the change of the governance form from A to B to C, due to
the increase of political hazards in the host country! (Grafik)

H1H1 = added direct political hazards in the host country increase the cost of ownership
X1X2 = indirect political hazards posed by the partnering firm in the host country increase the cost of
contracting

The governance costs for partnerships decrease from B to A due to a lower amount of transactions with
lower levels of contractual hazards.

The governance costs for partnerships should increase (A to B to C) by a larger amount for
transactions with higher levels of contractual hazards.

 A. Explain the resource-based and organizational capability model of the MNC!

In this view, the firm is seen as a repository of knowledge. A principal belief is that the primary
advantage that a firm brings to foreign markets is its possession of superior knowledge. According to
this view, FDI is the transfer of an intermediate good, called knowledge, which embodies a firm’s
advantage, whether it be the knowledge underlying technology, production, marketing or other
activities. Multinational firms are considered to be the most efficient form of knowledge transfer.

The OC perspective also implies a more organic an sociological view of the MNC. In the main, the
core capability is a mixture of the multinational’s organizational processes, which have developed over
time, and its employees. Individuals are primarily treated as resources, not as sources of control
problems. The directives passed downwards and the information flow upwards, which are typical for
both Hymer’s model and internationalization theory, are substituted by both vertical and horizontal
exchange of know-how between individuals and subunits.

Five variables (codifiability, teachability, complexity, age of the technology at the time of transfer, and
the number of times transferred) are used to predict the choice of transferring the ability to manufacture
within the firm or by license.

B. Discuss the use of international joint ventures from a resource-based and organizational
capability perspective! Use the example of an Austrian company entering the Bulgarian market
by setting up a joint venture in Varna!

Joint ventures may be used as ways to transfer knowledge that is organizationally embedded and
difficult to transfer by licensing. Knowledge is transferred by joint ventures, but for highly tacit
knowledge, the preferred vehicle is transfer between wholly owned units.

For example, when an Austrian company sets up a joint venture, the know-how and the cultural
knowledge of Bulgarian employees (superior and international knowledge) is a competitive advantage.
Moreover, intrafirm transfer lowers the hazard of opportunism. On the Bulgarian side the opportunity for
a JV with an Austrian firm gives them better access to the European market through the geographical
position of Austria. In general, JV also generate cost advantages and faster and better controllable
industrial development. Mostly a JV is the only possibility for a company to address a new market due
to governmental regulations. This view also states the balance between the exploitation of existing
resources and the development of new ones which can be made through the creation of a JV.
Nevertheless, it could be challenging to transfer the know-how from one country to the other, because
of the distance and the cultural differences. Important when transferring knowledge is the coding and
decoding mechanism. Great distances and cultural barriers can lead to misunderstanding and this must
be prevented. Leading to additional communication costs. But finally, this developed communication
throughout the boundaries can be seen as advantage towards competitors.

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 A. Explain the Organization Design view of MNC by discussing the following proposition: “The
higher the MNC’s information processing requirements (due to environmental and strategic
factors), the higher is the information processing capacity of the organization design of the
MNC”.
According to this view, the firm is an information-processing system. The view is, that multinational
firms can exist in the long run if, and only if, they have the ability to adapt their organization and
control changes in the environment. In contrast to former theories this approach puts the
environment of the MNC much more at the centre of the analysis.

There is a relationship between the amount of uncertainty faced by an organization and the amount of
information processing that must go on in the organization. Effective organizations are therefore those
that FIT their information processing capacities (for gathering, transforming, storing and communicating
information) to the amount of uncertainty they face (= their information processing requirements due to
environmental and strategic factors).

B. Compare the information processing capacity of the geographic structure with the world-
wide product structure of the MNC! Under which situation is the product-structure more efficient
than the geographic structure?

Compared to the regional structure, the product structure has a high capacity to process product-
related information, because product managers are specialized around products and because the
product divisions interact intensively with their markets. Relating to process product-related and
product-synergistic information, the capacity in the regional structure is low, because regional
managers are more environmentally experts than product experts.

C. Explain the impact of the global, multinational and transnational strategy on the organization
design of the MNC based on the information processing view!

Keine Ahnung!!! Nur geraten:

4 information processing implications are particularly important to the future of transnational design:

1. The role and function of formal organizational structure may be changed.

2. The amount of strategic information-processing capacity for product matters must be greatly
expanded.
3. The use of non routine-reciprocal information-processing mechanisms will need to be significantly
expanded
4. There will be a much greater need for design rules at all levels of the organization.

 A. Discuss the main research results of the eclectic theory of Dunning!

Dunning’s eclectic paradigm seeks to explain why MNCs exist and why these firms may be more
successful than the domestic firms in the host countries where MNCs operate. The eclectic paradigm,
in its initial formulation, according to Dunning, seeks to explain why the MNCs decide to manufacture
internationally using the three criteria, or advantages.

In sum, according to Dunning (1988), the way MNCs act in a certain market is a combination of these
three factors that vary with the country, the industry and the firms’ characteristics. First, the firm must
hold ownership (O) advantages, that compensate the hazards of being foreign and provide a good
competitive position in the host market. Second, location (L) advantages of the host market must be
identified and evaluated in the lenses of the firm’s strategy. That is, it must take into account the
specific advantages that a certain location has and the factors that cannot be transferred, or traded, to
other locations (non-tradeable goods). Third, it is necessary to evaluate whether the ownership
advantages might be better than internalization (I) or whether it is preferable to engage in partnerships
with other firms or any other alternative market-based governance form.

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B. Under which conditions is exporting a more efficient internationalization strategy than

foreign direct investments by setting up a subsidiary?

Export is more efficient in the case if location advantages are not given, because Location
Advantages refer to the foreign place where the operations are conducted. In selecting the location the
MNC need to take into account location specific factors, such as: cost of the production factors,
accessibility, availability of knowledge, governmental industrial policies, size and potential of the
market, among others.

C. What is the relationship between internalisation (transaction cost) view and the eclectic
theory of internationalization?

The eclectic theory of internationalization is a further development of the internalization view. Eclectic
paradigm is a development of the internalization theory. The two key determinants of FDI in
internalization theory are country-specific advantages (CSAs), and firm-specific advantages (FSAs).
CSA can be compared with Dunning’s location advantage and ownership and internalization can be
matched with FSAs. So, both have kind of the same key determinants.

 Characterize the network model of internationalization!

The network model implies that the relationships of a firm in a domestic network can be used as
bridges to other networks in other countries. A basic assumption in the network model is that the
individual firm is dependent on resources controlled by other firms. The companies get access to these
external resources through their network positions.

The network model of internationalization depends on the current position of a firm in the international
market and the level of internationalization of other firms. The Model focuses on how firms develop
network relationships to internationalize (internal as well as external). The overall actors in forming
these business relationships are competitors, suppliers, customers, distributors and government.

The Uppsala internationalization model treated internationalization independently of the situation and
the competition in the market. Here are these important aspects combined.

In the network model, four different situations are distinguished, characterized by on the one
hand a low or a high degree of internationalization of the firm and on the other, a low or high
degree of internationalization of the market (the production network).

The early starter = low market internationalization/low firm internationalization

The lonely international = low market internationalization/high firm internationalization
The late starter = high market internationalization/low firm internationalization
The international among others = high market internationalization/high firm internationalization