Chapter

Seven

International Strategy:
Creating Value in Global
Markets
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Learning
After studying this chapter, you will have
Objectives a good understanding of:
• The importance of international expansion as a viable diversification
strategy
• The sources of national advantage, that is, why an industry in a given
country is more (or less) successful than the same industry in another
country
• The motivations (or benefits) and the risks associated with
international expansion
• The two opposing forces—cost reduction and adaptation to local
markets—that firms face when entering international markets
• The advantages and disadvantages associated with each of the three
basic international strategies—global, multidomestic, and
transnational
• The four basic types of entry strategies and their relative benefits and
risks that are associated with each of them

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Exhibit 7.1 The Extremes of Global Capitalism:

One Size Does Not Fit All
EXPORTS HAVE SURGED FOR TWO DECADES. . . . . . WHILE FOREIGN INVESTMENT HAS EXPANDED. . .
EAST ASIA EAST ASIA

LATIN AMERICA LATIN AMERICA

SOUTH ASIA SOUTH ASIA

SUB-SAHARAN AFRICA SUB-SAHARAN AFRICA

EASTERN EUROPE/CENTRAL ASIA EASTERN EUROPE/CENTRAL ASIA

0 100 200 300 400 500 0 15 30 45 60

BILLIONS OF DOLLARS MERCHANDISE EXPORTS BILLIONS OF DOLLARS FOREIGN DIRECT INVESTMENT

1980 1998 1990 1998

. . . BUT GROWTH HAS BEEN UNEVEN. . . . . . AND POVERTY IS STILL WIDESPREAD

EAST ASIA EAST ASIA
LATIN AMERICA LATIN AMERICA

SOUTH ASIA SOUTH ASIA

SUB-SAHARAN AFRICA SUB-SAHARAN AFRICA
EASTERN EUROPE/CENTRAL ASIA
EASTERN EUROPE/CENTRAL ASIA

Engardio, P. & 0 10 20 30 40 50
-2.5 0 2.5 5.0 7.5
Belton, C. 2000.
PERCENT PERCENT
Global
Capitalism: Can PERCENT AVERAGE PERCENT OF POPULATION
it be made to ANNUAL GDP GROWTH MAKING UNDER $1 A DAY
work better? 1980-90 1990-98 1990 1998
Business Week,
November 6: 72-
98.

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Exhibit 7.2 India’s Virtual Diamond in Software

No regulatory barriers to entry or startup;

Domestic rivalry 800 firms, mostly small, in fierce rivalry;
growing number of MNC software-
development centers in India

Factor Domestic U.S. demand

conditions demand conditions
conditions

Large pool of Large, growing market;

skilled labor; sophisticated customers; cutting-
low salaries; edge applications
English-
Related and
language supporting
capability Large network of public and private educational
industries
institutions; weak but rapidly improving
Source: Kapar, D. & communications infrastructure; duty-free access
Ramamurti, R. 2001.
India’s emerging
to imported computers and software, following
competitive advantage in economic liberalization
services. Academy of
Management Executive,
15(2): 20-31.

Note: Dashed lines represent weaker interactions.

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TRANSPARENCY-63

Exhibit 7.3 2001 Census Statistics

Country 2001 Census

China 1,273,111,290

India 1,029,991,145

Germany 83,030,000

United States 278,058,881

Japan 126,635,626

Sources: U.S. Bureau of the Census. World Population Profile; 2001. Washington: U.S. Government Printing Office, 2001.

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Exhibit 7.4 A Sample of International Country

Risk Rankings
Total of Credit
Total Total of and Access to
Debt Finance
Rank COUNTRY Risk Economic Political
Assessment Performance Risk Indicators Indicators

1 Luxembourg 99.51 25.00 24.51 20.00 20.00

2 Switzerland 98.84 23.84 25.00 20.00 20.00

3 United States 98.37 23.96 24.41 20.00 20.00

40 China 71.27 18.93 16.87 19.73 15.74

55 Poland 57.12 18.56 13.97 9.36 15.23

63 Vietnam 52.04 14.80 11.91 18.51 6.82

86 Russia 42.62 11.47 8.33 17.99 4.83

114 Albania 34.23 8.48 5.04 19.62 1.09

161 Mozambique 21.71 3.28 2.75 13.85 1.83

178 Afghanistan 3.92 0.00 3.04 0.00 0.88

Source: Adapted from http://worldbank.org/html/prddr/trans/so96/art7.htm

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Exhibit 7.5 Opposing Pressures and Three

International Strategies
High
Pressures to Lower Costs
Global
strategy Transnational
strategy

Multidomestic
strategy

Low
Low High
Pressures for Local Adaptation

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Exhibit 7.6
Strengths and Limitations of Various
International Strategies
Strategy Strengths Limitations

Global • Strong integration across various • Limited ability to adapt to local markets
businesses • Concentration of activities may increase
• Standardization leads to higher dependence on a single facility
economies of scale, which lowers costs • Single locations may lead to higher tariffs
• Helps to create uniform standards of and transportation costs
quality throughout the world

Multidomestic • Ability to adapt products and services • Less ability to realize cost savings through
to local market conditions scale economies
• Ability to detect potential opportunities • Greater difficulty in transferring knowledge
for attractive niches in a given market, across countries
enhancing revenue • May lead to “overadaptation” as conditions
change

Transnational • Ability to attain economies of scale • Unique challenges in determining optimal

• Ability to adapt to local markets locations of activities to ensure cost and
quality
• Ability to locate activities in optimal
locations • Unique managerial challenges in fostering
knowledge transfer
• Ability to increase knowledge flows
and learning

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Exhibit 7.7 Entry Modes for International Expansion

High
Extent of Investment and Risk Wholly
WhollyOwned
Owned
Subsidiary
Subsidiary
Joint
JointVenture
Venture

Strategic
StrategicAlliance
Alliance

Franchising
Franchising

Licensing
Licensing

Exporting
Exporting
Low
Low High

Degree of Ownership and Control

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