Ch2 - General Frameworks in Intl Bus

Slide 2.
Chapter 2
General Frameworks in
International Business
Collinson, Narula and Rugman, International Business, 7th edition, © 2017, 2013, 2009 Pearson education, Inc. All Rights Reserved
Slide 2.2
Objectives
• Introduce some key conceptual frameworks from the
international business “toolbox,” including the eclectic
paradigm and the CSA–FSA framework, which
capture ownership advantages, location advantages,
and internalization advantages.
• Explain why firms become multinational enterprises
(MNEs)—what motivates them to expand abroad.
• Understand the internationalization process.
• Describe the international activities of small and
medium-sized enterprises (SMEs).
Slide 2.3
Lecture outline
• Introduction
• Firm-specific assets/ownership advantages
• Location advantages/country-specific assets
• The eclectic paradigm: putting it all together
• Strategic management of MNEs & Steps in the
strategic management process
• The FSA–CSA matrix
• Why firms become MNEs
• Entry modes
• The international activities of SMEs.
Slide 2.4
Introduction
• In order to understand international business activity
and its relationship to strategy and innovation, there
are two key frameworks that any student of IB
needs to master: the eclectic paradigm and the
FSA–CSA framework.
• The eclectic paradigm is a more general
framework, and finds use in understanding a variety
of different issues. It is a toolbox in its own right, and
helps us understanding countries, modes of
governance, government policies, and is used by
policy makers. It can be applied at a macro (country)
level, as well as at an industry and firm level.
Slide 2.5
Introduction
• The FSA–CSA framework finds its greatest
application in understanding the strategy of
firms. Both frameworks share two crucial
aspects—ownership advantages/Firm-specific
assets, and Location advantages/country-
specific assets. The third “leg” of the eclectic
paradigm is internalization advantages, which is
a concept that is acknowledged by the FSA–
CSA framework implicitly.
Slide 2.6
Figure 2.5 The basic components of international business
Slide 2.7
Firm-specific assets/ownership
advantages
Slide 2.8
advantages
• In order to generate income in foreign locations firms need
to possess certain assets, which can be regarded as
ownership-specific (O) advantages or firm-specific assets
(FSAs). Ownership advantages are firm-specific in nature,
and the competitiveness of firms is associated with the
strength (or weakness) of their O advantages.
– Firm-specific assets (FSAs): Unique assets, capabilities
or core competencies proprietary to the firm that determine
the firm’s competitive advantage
• It may be built upon product or process technology,
marketing or distributional skills.
• Ownership advantages allows the business to overcome
the barriers of entry into the host country
Slide 2.9
advantages
There are three types of O advantages:
• Asset-type (physical assets, proprietary
knowledge content, whether embodied in
intellectual, property, or in technical personnel).
• Transaction-type (ability to generate income by
the use of superior intra-firm hierarchies, both
intra-firm, and between firms and markets).
• Recombinant-type (ability to recombine
‘bundle’ the firms own assets with other internal
and external assets to improve their
performance).
Slide 2.10
Location advantages/country-specific
assets
Slide 2.11
assets
Location-specific (L) advantages or country-specific
assets (CSAs) refer to assets that are not specific to
a particular firm but are potentially available to all
actors. In essence, L advantages are about the
characteristics of specific locations which lead to
advantages.
Country-specific assets (CSAs): Country factors.
• Natural resource endowments (minerals, energy, and
forests), the labor force and associated cultural factors,
etc.
Slide 2.12
assets
• A classification of L advantages:
• Exogenous L advantages: These derive from natural assets:
Culture, norms, religion, political stability, accessibility to other
markets
• Fundamental L advantages: Basic infrastructure (Schools, Health
care, Transport), Legal infrastructure (Legal system, Security and
Police), Regulation & Policy (Incentives, Industrial policy, capacity to
enforce regulation), and Financial infrastructure (Banking, insurance,
stock exchange)
• Knowledge-related L-advantages: Knowledge infrastructure
(Tertiary education, universities, research institutes)
• Co-location L advantages: L advantages that derive from the
presence of other actors in the same location (Networks of suppliers,
Networks of customers)
Slide 2.13
assets
In principle, L advantages should be accessible to all. However, this may
not be the case as:
(1)full information about L advantages associated with a specific location
may not be readily available;
(2)even where information is available, there may be costs associated
with accessing this knowledge;
(3)L advantages may be made available (or denied) by the actions of
governments that seek to encourage (or restrict) the activities of a
particular group of actors by introducing barriers to their use of certain L
advantages.
Slide 2.14
The eclectic paradigm: putting it all

together
Slide 2.15

together
• Ownership factors (O): FSAs
• Location factors (L): CSAs
• Internalization factors (I): FSAs
• The combination of these theories helps explain
the existence of MNEs, and determines which
countries they expand to and how they are able to
compete against domestic firms
• O and I, in practice, are integrated features of
FSA management within the MNE that cannot be
decoupled in strategic decision making.
Slide 2.16

together
• It is easiest to think of the electric paradigm framework as
answering three questions:
• (1) Does the FSA of the firm provide it an advantage over
other firms operating in the intended destination location?
• (2) Can this FSA be used abroad, in conjunction with the
location advantages of the host location? And, Are the
location advantages of this location complementary to the
FSAs of the firm?
• (3) If there is a clear FSA, and there is a clear L advantage
of the destination location, the next question the firm has
to answer is: Are there any advantages for firm A from
manufacturing in Sri Lanka itself, rather than allowing
others to do so on its behalf?
Slide 2.17

together
• There are several reasons why a firm may want to keep its
activities internal instead of leaving them to the market
(e.g., outsourcing production):
– Outsourcing it to a third party could lead to some leakage to
competitors.
– It could be that the firm is able to do it at a cheaper price
internally
– or it could be that the company wants more control over
quality.
Slide 2.18

together
• The OLI
Framework:
a decision
model
Slide 2.19
Strategic management of MNEs &

Steps in the strategic management
process
Slide 2.20
Strategic management of MNEs &

Steps in the strategic management
process
• The strategic management process involves four
major functions: strategy formulation, strategy
implementation, evaluation, and the control of
operations.
The strategic management process in action
Figure 2.4 The strategic management process in action
Slide 2.21
Basic mission
• The following questions must be answered to
determine the firm’s basic mission:
– What is the firm’s business?
– What is the reason for its existence?
For example,
• Royal Dutch/Shell, BP, and ExxonMobil are in the
energy business, not the oil business.
• AT&T and France Telecom are in the
communications business, not the telephone
business.
Slide 2.22
Analysis of the external and

internal environment
• The goal of external environmental analysis is to
identify opportunities and threats that will need to
be addressed.
• The purpose of an internal environmental
analysis is to evaluate the company’s financial
and personnel strengths and weaknesses.
Formulation of objectives
and overall plan
• Internal and external analyses will help identify
long-term (2–5 years) and short-term (<2 years)
goals.
Slide 2.23
The implementation process

• Once goals have been established, the plan is
then broken into major parts and each affiliate
and department is assigned goals and
responsibilities.
Evaluation and control of operations

• Progress is periodically evaluated and changes
are made in the plan to accommodate changing
circumstances and new information.
Slide 2.24
The FSA–CSA matrix
Slide 2.25
The competitive advantage matrix

• The FSA–CSA matrix provides a useful
framework for the discussion of the relative
strengths and weaknesses of the CSAs and
FSAs that the MNEs possess. A strong FSA
implies that, under identical CSAs, a firm has a
potential competitive advantage over its rivals
Slide 2.26
The FSA–CSA matrix
Figure 2.6 The FSA–CSA matrix
Slide 2.27
The competitive advantage matrix

• Quadrant 1: Resource-based and/or mature,
globally oriented firms producing a commodity-
type product  cost leadership (improving FSA
can make them move to quadrant 3).
• Quadrant 2: Inefficient, floundering firms  no
alternative but to exit or to restructure.
• Quadrant 3: Follow any of the generic strategies
 both cost leadership and differentiation.
• Quadrant 4: Differentiated firms with strong FSAs
in marketing and customization  differentiation
(the CSA is not relevant).
Slide 2.28
Why firms become MNEs
Slide 2.29

• Firms become MNEs as they are
– (a) natural resource seeking;
– (b) market seeking;
– (c) efficiency seeking;
– (d) strategic asset seeking;
– (e) escaping investment
– (f) supporting trade investment.
Slide 2.30
Table 2.4 Internationalization motives

Source: A. Cuervo-Cazurra and R. Narula, “A set of motives to unite them all? Revisiting the principles and typology of internationalization motives,” Multinational Business
Review, vol. 23, no. 1 (2015).
Slide 2.31
The internationalization process

• Internationalization: The process by which a
company enters a foreign market.
• Not all international business is done by MNEs.
Indeed, setting up a wholly owned subsidiary is
usually the last stage of doing business abroad.
• Why do businesses wait to set up wholly owned
subsidiaries?
– Foreign markets are risky.
Slide 2.32
Entry modes
Slide 2.33
Entry modes
When the firm decides to enter a new market, the first step
is to decide whether it will opt for non-equity or equity entry
modes.
Non-equity entry modes: At the first stage, it may want to

avoid the risks of high commitment to unknown (foreign)
markets by arranging non-equity modes, such as exports,
contractual agreements, licensing or franchising
agreements.
The firm may later move to equity modes (FDI), such as

partial or full acquisition, which involve higher commitment
to the foreign markets and often require higher knowledge
or experience.
Slide 2.34
Entry into foreign markets: the

internationalization process
Figure 2.8 The internationalization process of the firm
Slide 2.35
Figure 2.9 Entry modes: benefits and drawbacks
Slide 2.36
A typical internationalization process
• Initially, the firm might license patents, trademarks

or technology to a foreign company in exchange
for a fee or royalty.
• The firm sees a potential for extra sales by
exporting and uses a local agent or distributor to
enter a foreign market.
• The firm may use exporting as a “vent” for its
surplus production and might have no long-term
commitment to the international market.
Slide 2.37
A typical internationalization process

(Continued)
• As exports become more important, the MNE will
set up an office for its sales representative or a
sales subsidiary.
• The firm might set up local packaging and/or
assembly operations.
• Finally, the firm will set up a wholly owned
subsidiary (FDI).
Slide 2.38
The international activities of SMEs
Slide 2.39
• Small number of SMEs sell products and services outside

their domestic market.
• Considering foreign direct investment (FDI), again SMEs
are less prominent than large multinational firms as
sources of FDI.
• In the European Union just a quarter of all SMEs export or
have exported at some point during the past three years.
Moreover, their international activities are mostly geared
toward other countries inside the internal European market
and only about 13 percent of EU SMEs are active in
markets outside the EU. However, SMEs are responsible
for a larger proportion of total exports from some countries
than we might expect.
Slide 2.40
• SMEs face limitations:

• they do not have the financial muscle to “buy” their
way into new markets, or spend on customizing
products and brands for local customers.
• They also lack the range of specialists to draw on
to shape and implement market-entry strategies, such
as legal experts or managers with experience of local
cultures.
• These limitations mean that small firms often need to
be that much more entrepreneurial and innovative
and/or take risky short-cuts, to expand across
national borders.
Slide 2.41

(Continued)
SMEs’ Internationalization Strategies
Table 2.6 SMEs’ internationalization strategies

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Slide 2.

Figure 2.5 The basic components of international business

The eclectic paradigm: putting it all

The eclectic paradigm: putting it all

The eclectic paradigm: putting it all

The eclectic paradigm: putting it all

The eclectic paradigm: putting it all

Strategic management of MNEs &

Strategic management of MNEs &

Figure 2.4 The strategic management process in action

Analysis of the external and

The implementation process

Evaluation and control of operations

The FSA–CSA matrix

The competitive advantage matrix

The FSA–CSA matrix

Figure 2.6 The FSA–CSA matrix

The competitive advantage matrix

Why firms become MNEs

Why firms become MNEs

Why firms become MNEs

Table 2.4 Internationalization motives

The internationalization process

Non-equity entry modes: At the first stage, it may want to

The firm may later move to equity modes (FDI), such as

Entry into foreign markets: the

Figure 2.8 The internationalization process of the firm

Figure 2.9 Entry modes: benefits and drawbacks

A typical internationalization process

• Initially, the firm might license patents, trademarks

A typical internationalization process

The international activities of SMEs

The international activities of SMEs

• Small number of SMEs sell products and services outside

The international activities of SMEs

• SMEs face limitations:

The international activities of SMEs

SMEs’ Internationalization Strategies

Table 2.6 SMEs’ internationalization strategies

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