2/16/2023

MGMT 29011 International Business Strategy and Corporate

Transformation

Week 4

International Business Theories and Corporate Strategies for

Competing in the International Markets

Professor Quamrul Alam

Dr. Arief Suharko
q.alam@cqu.edu.au

Learning Objectives
THIS CHAPTER WILL HELP YOU UNDERSTAND:
1. The primary reasons companies choose to compete in international
markets
2. How and why differing market conditions across countries
influence a company’s strategy choices in international markets
3. The five major strategic options for entering foreign markets
4. The three main strategic approaches for competing internationally
5. How companies are able to use international operations to improve
overall competitiveness
6. The unique characteristics of competing in developing-country
markets

© McGraw-Hill Education.

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WHY COMPANIES DECIDE TO

ENTER FOREIGN MARKETS

To gain access to To gain access to lower-

new customers and cost inputs of
meet current To further exploit core production
customer needs competencies

To achieve lower costs through To gain access to

economies of scale, experience, resources and
and increased purchasing power capabilities located in
foreign markets

© McGraw-Hill Education. Jump to Appendix 1 long image description

Mercantilism
• Mercantilism is a trade theory (that was dominant from
1500-1800).

• Country’s wealth was measured by its holding of treasures (gold).

• Main features:
✓ Countries should export more than they import.
✓ Restrictions on import
✓ Colonisation of commodities and economic resources.
✓ Trade surplus – was the objective

International Business Strategy and

Corporate Transformation

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Theory of Absolute Advantage

Adam Smith (1776).
• Country’s wealth is based on a country’s available
goods and services.
• Natural advantages –natural climate, resources
and labor force availability
• Acquired advantages –product or process
technology.
• Output will increase through specialization
• Free trade (will bring specialization, greater
efficiency and higher global output.

International Business Strategy and Corporate

Transformation

Theory of Comparative Advantage

(David Ricardo, 1817)
• Comparative advantage
• A country with absolute advantage in all
products should give up less efficient output to
produce more efficient output.

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Corporate Transformation

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Product Life Cycle Theory (Vernon)

• Location of production shifts as they go through
life cycle.
• Stage in the product life cycle.
• Innovation in response to an observed need.
• Export to nearby countries.
• Evolving of product characteristics.
• Demand variation.
• Capital intensity/competition.
• Cost of production.
• Diverse locations.
International Business Strategy and
Corporate Transformation

Product Life Cycle Theory

• Phase I: Export strength

• Phase II: Foreign production starts
• Phase III: Foreign production competitive in export
markets
• Phase IV: Import competition begins
• Phase V: Decline

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Corporate Transformation

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Product Life cycle Model (Raymond Vernon, 1966)

International Business Strategy and

Corporate Transformation

Product life cycle Theory

The Quarterly Journal of Economics, Volume 80,
Issue 2, May 1966, Pages 190–207,
https://doi.org/10.2307/1880689,
Published: 01 May 1966

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Corporate Transformation

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The Diamond of National Advantage

Porter, M (1980), National Competitive Advantages

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The Diamond Framework

Answers important questions about competing on an
international basis by:
– Predicting where new foreign entrants are likely to
come from and their strengths
– Highlighting foreign market opportunities where
rivals are weakest
– Identifying the location-based advantages of
conducting certain value chain activities of the firm
in a particular country

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Eclectic Paradigm (OLI)

An eclectic paradigm, also known as the

ownership, location, internalization
(OLI) model or OLI framework.
It is a three-tiered evaluation framework that
companies can follow when attempting to
determine if it is beneficial to pursue international
expansion

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Corporate Transformation

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Dunning, J. H
(1988), The
Eclectic Paradigm
of International
Production, JIBS,
Vol 19:1-13,

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Corporate Transformation

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OLI Model

• Ownership
– What we have
• Location
– Where do we go
• Internationalisation
– How do we decide our transactions?

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Corporate Transformation

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Investment Development Path

(Narula & Dunnings)
• 1. There is a systematic relationship between the structure, extent, and
nature of the FDI activities associated with a given location, and the
economic structure of that location.
• 2. There is an interactive effect between three groups of advantages: the
ownership (O) advantages of domestic firms; the O advantages of MNEs;
and the location (L) advantages of countries. This three-way dynamic
interaction is the essence of MNE-assisted development.
• 3. This relationship can be usefully analysed by categorizing their evolution
through five stages, and ceteris paribus this stage-wise progression can be
observed in all countries, although the rate of change and points of
inflection are unique to every country

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Corporate Transformation

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Path Dependency Model

Stage 1
Natural Resource-based
• Natural Resource Base.
• Primary sector economic
activity
• Few L advantages
• Unskilled human resources.
• Inadequate infrastructure.
• Low intra-industry trade &
investment.
• Little IFDI.
• No outward FDI.
• Few domestic firms with O
advantages.
Stage 2 Stage 3 Stage 4 & 5
Investment Driven Innovation Driven Increase in knowledge
& service intensity
• Growing L advantages • L advantages are .
• Low real; wage costs increasing. Strong L advantages.
• Natural resources • Entrepreneurship. Increased supply
• Supply capacity. • Sophisticated markets. capacity.
• The cluster of local industry • Economic restructuring. Market facilitation
• The growing importance of • Government policy services.
education, transport, and support.. Government support to
ICT. • Enforcing competitive minimize transaction
• Growing presence of markets. costs.
market-seeking FDI- labor- • Informal institutions Support innovation.
intensive sectors. (Support) Foster economic
• Negligible OFDI • Development of restructuring.
• Ability to produce low-cost contractual relationships. Informal institutions.
standarised products. • External linkages and Increasesd use of
outsourcing OFDI cooperative &
increasing contractual
• Increase of IFDI relationships.
• Increase in efficiency- Focus on core
seeking FDI competency.
• Strong domestic industry, Substantial I and O
infrastructure, and supply opportunities.
chain. Substantial trade &
investment
opportunities.
FDI (positive impact).
M&A and strategic
alliances
High value-adding
services

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COMPETING ACROSS NATIONAL BORDERS MAKES

1. Different countries with different home-country advantages

in different industries

2. Location-based value chain advantages

for certain countries

3. Differences in government policies, tax rates, and economic

conditions

4. Currency exchange rate risks

5. Differences in buyer tastes and preferences for products
and services

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Corporate Transformation

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