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MGX9660: International Business Theory & Practice
MGX9660: International Business Theory & Practice
OPENING CASE:
How did Spanish bank Santander become a common sight on British high streets?
FDI Vocabulary
There are 2 kinds of international investment: Foreign Portfolio Investment (FPI) > An investment in a portfolio of foreign securities such as stocks and bonds that do not entail the active management of foreign assets. FPI is foreign indirect investment Foreign Direct Investment (FDI) > Defined by the United Nations as involving an equity stake of 10% or more in a foreign-based enterprise.
Horizontal FDI duplicates its home country-based activities at the same value chain stage in a host country through FDI
If a firm through FDI moves upstream or downstream in different value chain stages in a host country, we label this vertical FDI
FDI Investment
John Batman bought 600,000 acres of land from Aborigines in return for blankets, knives, looking glasses and scissors and flour. Promise of a rent by Batman gave him the right to select a site for the City of Melbourne FDI forms:
Purchase of assets in a foreign country New investment in property, plant and equipment Participation of a joint venture with a local partner
Internationalisation Theory
Firms internationalise for gradual and increased involvement and commitment in international operations To integrate processes and efficiently use knowledge of foreign markets. A study of four Swedish firms
(Johanson & Vahlne, 1977)
Internationalisation Theory
Local market imperfections Attractiveness of foreign markets
(Caves, 1971, Chen 2010)
Offers a unifying framework for determining the extent and pattern of foreign owned activities. It posits that multinational activities are driven by three sets of advantages
Ownership Location Internalization
This has later been termed as (OLI) model It is the configuration of these sets of advantages that either encourages or discourages a firm from undertaking foreign activities and becoming an MNE.
OLI Model
O = Ownership Advantages
o Firm Specific Advantages
L = Location Advantages
o Country Specific Advantages
I = Internalization Advantages
o Transaction costs advantages
O = Ownership Advantages
Are related to firm Specific Advantages
This suggests that an MNE has one or more "firm specific advantages" (e.g. core competency) which allows a firm to overcome the costs and other impediments of operating in a foreign country.
Location Advantages
Internalization Advantages
OLI
When Dunning wrote his original work, manufacturing and trade was the main focus of MNE activity.
(providing most of the basis for the O and L aspects).
Three decades later, most MNEs value creation is related, directly or indirectly, to knowledge management. A major source of MNE competitive advantage resides in the valuecreating potential of relationships, i.e., critical resources that span its boundaries and are embedded in inter-firm routines and procedures.
OLI
O= Ownership issues will increasingly revolve around issues of intangible assets and intellectual property rights (IPR). L= The governance of IPR will dominate location issues, just as property rights and the rule of law dominated FDI flows over the previous half century. I= Internalization issues are related to managing the risk associated with ever-larger R&D budgets required by a higher technological frontier, as well as reconciling the conflict between the bureaucracy of large MNEs and the creative environment required for knowledge production and use.
2. Market seeking
o
Transaction Costs?
The costs, other than price, incurred in the process of exchanging goods and services. These costs include the costs of negotiating and enforcing contracts, and the costs of collecting charges for goods and services provided. The scale of economic and financial transactions costs can affect the market structure for a good.
Transaction cost theory, proposed by Ronald Coase, 1937, and Oliver Williamson, 1985
Transaction Costs
People began to organise their production in firms when the transaction cost of coordinating production through the market exchange, given imperfect information, is greater than within the firm.
Ronald Coase, 1937
Cavusgil, 1980 Johanson & Vahlne, 1977 Welch & Luostarinen, 1988
Internationalisation Theory (Uppsala-Model U model) International expansion is influenced strongly by managerial learning Internationalisation begins with low risk indirect exporting to psychically or culturally close or similar markets. Over time and through experience, a firms foreign market knowledge improves and, consequently, it increases its foreign market commitment and expands to more psychically distant markets. Johanson & Vahlne, 1977
Core Assumption of the Model is that Increased Market Knowledge will lead to increased market commitment
Market Knowledge
Commitment Decision
Market Commitment
Current Activities
ing
I-Model
The firms in each of the four stages are defined in the following way: Stage 1: Non-exporting firms, not interested in gathering export-related information Stage 2: Non-exporting firms, interested in gathering exportrelated information (roughly correspond to preinvolvement stage) Stage 3: Exporting firms, export less than 10% of their output. (correspond to limited experimental involvement stage), and Stage 4: Exporting firms, export more than 10% of their output. (correspond to active involvement stage)
Born Global
Internationalisation because of technological advances in transportation, communication, and computers permit entrepreneurial actors to form new ventures that internationalize rapidly.
Types 1. International new ventures 2. Global start ups 3. Instant exporters
How does IDP influence the process of upgrading of resources and capabilities at the level of the firm as a result of foreign affiliate and domestic firm interaction. A theoretical investigation of the types of non-equity resource transmission mechanisms (inter-firm linkages), and how these influence the ownership-location-internalization (OLI) configuration of a host economy and the subsequent progression through the stages of the IDP.