Chapter 1 expanding abroad: motivations, means

and mentalities
The MNE definition, scope, and influence
MNE have substantial direct investment in foreign countries (not just the trading
relationships of an import-export business), and are engaged in the active
management of these offshore assets rather than simply holding them in a passive
investment portfolio
creates an internal organization to carry out key cross-border tasks and
transactions internally, rather than depending on trade through the external markets
Enormous influence in the global economy

The motivations: pushes and pulls to internationalize

Traditional motivations
- the need to secure key supplies
- market-seeking behavior when companies have a competitive advantage in
offshore markets through some intrinsic advantage, related to a companys
technology or brand recognition, or through economies of scale and scope
- the desire to access low-cost factors of production (labor, lower-cost capital)
Product cycle theory (most useful before 1980s) three stages in the
internationalization process:
- starting point: an innovation that a company creates in its home country and
export to similar markets (through an export unit within the home office)
production close to customer base, and close linkage between research and
production
- growing demand in the export markets set up production facilities in the
importing countries transition to MNE
- product becomes standardized more competitors move production to lowwage developing countries because of resource-seeking motive. Developing
countries become exporter, developed countries become importers

Emerging motivations
- increasing scale economies, ballooning R&D investments, and shortening product
life cycles transformed industries into global rather than national structures
worldwide scope is prerequisite for survival of companies
- global scanning and learning capability a company whose international strategy
was triggered by a technological or marketing advantage could enhance that
advantage through the scanning and learning potential inherent in its worldwide
network of operations
- advantages of competitive positioning cross-subsidization of markets use
leverage of successful investments in countries to support less successful
investments

The means of internationalization: prerequisites and

processes
Prerequisites for internationalization
- motivation: there must be foreign countries that offer certain location-specific
advantages
- strategic competencies: having some distinctive competency to overcome the
liability of foreignness
- organizational capabilities: having the organizational capability to leverage its
strategic assets more effectively through its own subsidiaries than through
contractual relations with outside parties

The process of internationalization

Foreign-market entry is a learning process through several cycles of investment,
the company develops the necessary levels of local capability and market
knowledge
Others invest in or acquire local partners to shortcut the process of building up local
market knowledge, or some are born globals establish significant international
operations at or near their founding
Important factors: assimilation of local market knowledge, overall level of
commitment, the required level of control of foreign operations, and the timing of
entry
Different modes of operating oversees in terms of market commitment and the level
of control indirect export > export > licensing > franchising > joint venture >
wholly owned subsidiary

The evolving mentality: international to transnational

Four stages that reflect the way in which management thinking has develop over
time as changes have occurred in both the international business environment and
the MNE as a unique corporate form:

International mentality
Domestic with some foreign appendages products are developed for the domestic
markets and exported distant outposts which support the domestic parent
company (for example with incremental sales)

Multinational mentality
Multiple, nationally responsive strategies of the companys worldwide subsidiaries
recognize and emphasize the differences among national markets and operating
environments more flexible modify products, strategies and management
practices for every country

global mentality
create products for a world market and manufacturing them on a global scale in a
few highly efficient plants national tastes and preferences are more similar
than different

transnational mentality

more responsive to local needs while capturing the benefits of global efficiency
resources and activities are dispersed but specialized, to achieve efficiency and
flexibility at the same time, and integrated into an interdependent network of
worldwide operations
administrative heritage: the unique and deeply embedded structural, process and
cultural biases that play an important part in shaping every companys strategic
and organizational capabilities

reading 1-2 distance still matters: the hard reality

of global expansion
managers routinely overestimate the attractiveness of foreign markets, dazzled by
the sheer size of untapped markets, they lose sight of the difficulties of pioneering
new, often very different territories.
analytical tools underestimate the costs, and focus too much on potential sales
opportunities in foreign markets should be evaluated by the different dimensions of
distance

Four dimensions of distance

Cultural distance
Determine how people interact with one another and with companies and institution
differences in cultural attributes like religious beliefs, race, social norms, language
etc create distance (visible), but also social norms: deeply rooted system of
unspoken principles that guide individuals in their everyday choices and interactions
(nearly invisible)
Cultural attributes influence consumer preferences

Administrative or political distance

Historical and political associations shared by countries greatly affect trade between
them preferential trading arrangements, common currency, and political union
increase trade. Unilateral measures of the domestic as well as the target countrys
government raise barriers (tariffs, quotas, restrictions)
Measures to protect the domestic industries are used when its a large employer, a
national champion, vital to national security, produces staples (hoofdproduct, like
food), produces an entitlement good or service (basic human right), exploits
natural resources, or involves high sunk-cost commitments

Geographic distance
The further away, the harder to conduct business
Other attributes: physical size, average within-country distances to borders, access
to waterways and the ocean, and topography, but also transportation and
communication infrastructures
Companies that find geography a barrier to trade often switch to direct investment
to access target markets

Economic distance

Wealth or income rich countries engage in relatively more cross-border economic

activity
Companies that rely on economies of experience, scale and standardization focus on
countries with similar economic profiles
Companies that rely on economic arbitrage (exploitation between cost and price
differences between markets) target countries with different economic profiles

A case study in distance

Once distance is taken into account, the size of the market opportunity looks very
different
Not only industry effects of distance should be taken into account, but also a
companys own characteristics