IB 368 International Business Strategy – Lecture Notes PDF

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IB 368 International Business Strategy – Lecture 1What is strategy?  Organizational goals, scope: what technology? Which sector/product/market? How to achieve those goals? Geographical scope and industry scope of the company?  Restructuring of the organization  How to identify a multinational fir...

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IB 368 International Business Strategy – Lecture 1 What is strategy? 

Organizational goals, scope: what technology? Which sector/product/market? How to achieve those goals? Geographical scope and industry scope of the company?

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Restructuring of the organization

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How to identify a multinational firm: two characteristics International trade, and international investment & organizational presence

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How does strategy in multinational firms differ from that in a domestic firm? Different law and jurisdictions, customer preferences, organizational culture, cultural differences, supply chains, HR policy, leadership style = creates complexity Company decisions to be made in two levels, headquarter levels and subsidiary levels Making different decisions in supply chains and prices International businesses are way more complex than local business

What is control? Financial control (because you have the equity), strategy control (control strategy choices of the company) 

The more you invested, the more control you have

Joint venture – creation of new organization and having stake Examples: Simmons and Nokia

Trends: International trade & FDI 

The trend of FDI has not increased too much; what has increased more is trade of goods and services

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During the 90s, globalization, FDI increased by 21% but after that in the next 8 years dropped to 8% and then later 1% (initially more economic integration, later disintegration)

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FDI was going traditionally in developing countries.

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Overall, in 70s and 80s decline of FDI (Cold War). Remarkable decline in developed economies.

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Why decline if the economy is doing well? Why US FDI declines? Political uncertainty, constitutional

screening (need to obtain approvals, esp. Chinese FDI to US) 

FDI outflows from developing countries in terms of shares – more from developing countries. Why? More multinational countries that go to foreign developed countries to learn. (tech companies) The biggest export is Japan, then China (UK is not one of the main exporters)

Macroeconomic theories: International trade & FDI What kind of economies does more exports than imports? What kind of firms goes to what countries? 

(Neo) mercantile theory – export-led economy; the rise of nationalism to colonization, trade war. National economic policy to strengthen country’s power at expense of other trading nations by maximizing exports, minimizing imports, accumulating foreign reserves, preferential resource-access to domestic actors State interventions: movement of capital, exchange rate Assumes international trade as zero-sum game: if other countries get more trades, you are at the receiving end

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Laissez faire: Smith, Ricardo, Heckscher-Ohlin Laissez faire Smith – more economic integration like EU, now nationalism is coming back Adam Smith in The Wealth of Nations: free trade Specialization and free trade create value. Smith: specialize in industries in which country has absolute advantage over others Ricardo: specialize in industry in which country has the highest comparative advantage over others Heckscher-Ohlin: comparative advantage arises from factor-endowment. If country has abundant resources, it should specialize in the industry and import the rest.

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New Trade Theory: first mover advantage, new industry First mover advantage and economy of scale predict trade’s direction in industry Emphasizes the role of – Technological innovation and entrepreneurship, size of the market, role of state’s technological and strategic trade polices Face recognition technology – state’s interest leads to their support

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Porter: competitive advantage of nations Strategy – learn technologies, innovation later to be imported back to their home countries Example: textile industry goes to Japan; oil drilling goes to North Sea,

Why do firms internationalise? 

Why firms invest abroad? Low switching cost Google decided not to enter into the Chinese market and comprise customer privacy. Tencent, Baido Motivation – marketing seeking, efficiency-seeking, strategic resource-seeking (cost) [real options: reducing risks, an Indian company goes to Europe in case of regulatory shock] goals: to improve competitive position in the foreign market, domestic market

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Who will do FDI? A firm with competitive advantage (technology

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Eclectic paradigm (OLI) – ownership (firm-specific) advantage, location-specific (host country) advantage (market, resources, sepcialisation etc)

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Ownership advantages – resources that can be transferred or leveraged in foreign markets

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Location-specific advantages – markets, strategic resources, complementary resources

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Internalization advantages – market failure/imperfections (TCE), Strategic control, resource/techtransfer, learning etc)

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Why internalize company or create subsidiary? Transactional cost economy Searching a partner, supplier – transactional cost when buying a business If the transaction cost is very high, market failure = it is better to buy a company Sometimes firms from developing countries learn technology in developed countries.

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Internationalization process (Uppsala) model – firm focus on home market before internationalizing. Firm’s internationalization in a country is an incremental process. As knowledge about host country increases, firm’s commitment increases. (the more you learn, the bigger you become) Firm sequentially internationalise, first into countries countries of lower distance, and then gradually into those with higher distance Rather than getting suppliers in different countries, they may be more capable to transfer their firm knowledge to their own organization to avoid spillover effect Liability of foreignness (factors preventing flow or processing of information): culture, language, legal & administrative systems, education levels, previous relationships etc.

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Mechanisms: liability of foreignness, learning. (smaller linguistic difference, easier) Network perspective:

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follow your customers

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network embeddedness helps firms identifiy and exploit opportunities

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innovation network/business network > wiki Competitive dynamics

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Hosts receive FDI in waves

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Imitation and multipoint competition, esp in oligopolistic industries

IB 368 International Business Strategy – Lecture 2 Mode of Entry Theories of internationalization 

two production platforms to mitigate against political and economic risks

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these theories help predict the firm’s business strategies

International entrepreneurship Born Global firms: internationlise within three years + significant revenue from foreign operation Significant global footprints (revenues, operations, resources) soon after inception. Examples: facebook, uber, google, amazon etc What are the similarities? They are all technology companies. target audience, similar service, global niche, fewer localization requirements Why these firms internationalise so early? 

Build scale, learn and develop organizational and technological capabilities (asset-seeking)

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Valuation over 1 billion > unicorn companies

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Ecosystem – drone, cloud (innovate as fast as possible and control the ecosystem) (HK company DJI)

Facilitating factors 

Economic integration

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Global niche markets with homogenous product demand

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Advances in ICT, logistics and production tech

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Global networks & alliances of suppliers, distributors (e-commerce)

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Availability of venture capital

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High minimum economy of scale (higher scale drives growth)

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Lower marginal costs of adding customers

Entry modes: build or buy organization

equity mode – your own organization Building your own organization Why? - Pre-existing Management style different if acquire another company - Market factors - Slow speed of entry - No integration risk

Why? - agency problem - conflicts with co-owners -

Adverse selection Winners’ curse - overpaid

institutions 

Prohibit certain operations and transactions; restrict ownership and controls

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Create a need for local knowledge

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Change relative transaction costs (search, dispute-resolution etc) of alternate strategies

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Motivate tariff-jumping FDI

International JV: ELR Eli Lilly Ranbaxy 1991-2001

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Eli Lilly: US-based big pharma. FDI in 25> countries Ranbaxy – largest Indian generic producer. Chemical synthesis & bulk-drug Ranbaxy wanted partner in the West to distribute generics and market proprietary drugs in India Ranbaxy approached EL for JV. EL considering entering generics segment

IB 368 International Business Strategy – Lecture 3 MNC strategy and structure Strategy in multinational companies Three stories

- CUMI India: concept of international strategy - Philips vs Matsushita: two extremes of MNC strategy and structure - Schindler’s India (Seminar): Problems in implementing strategy in a multinational firm CUMI: Abrasives, ceramics, electro-minerals

- Global business environment: B2B: no product customisatino by countries

In china – JV state-owned entreprises - After exit, labour problem - /higher raw material costs Three interesting economies for CUMI Raw material, access to market African economy has huge potential, may expand

Global competition Scale advantages play a huge role Export-based business model feasible

- CUMI Chennai-based Indian conglomerate Revenues: $2 billion by 2020

Why should CUMI stay in the market? - Not making profit, also need to learn from partners - Raw materials

Why Chinese subsidiaries has different advantages compared to Indian?

Availability of land/employees Different supply chain Availability of land/employees Different supply chain Most competitors are from china No idea what is going on in China when you sit in India

3G/telecom industry  technology development can be used, good at software you will be good for telecom industry (minimization of risk, switch option) Multinational structure – how you design the relationship between HQ and subsidiaries Should HQ be more powerful? If Russian and Chinese subsidiaries interact, they can make arrangements themselves?

Outsourcing – manufactured by other partners or companies  leverage the combability and cost advantages of other companies to compete better in your industry. (lower cost, better quality  supply chain decision)

Strategic orientation and HQ-subsidaries relationship

What the HQ is thinking about them?

In china for china, only for local customers. Low centralization Highly differentiated subsidiaries

Similar structures, and culture, same market and customer preference More adaptation

Highly integrated, adapted to global system.

The problem was – they focus on R&D, they start research for the sake of researching

Good at copying but bad at creating new products

Good at process – fewer defects in the product More integration + differentiation + flow of products  transnational

IB 368 International Business Strategy – Lecture 4 Technological Innovation in MNC Key issues Why do firms internatinoalise their R&D? How do they make their location choices? Knowledge flow in MNC Mandate of an R&D subsidiary

Why firms internationalise R&D? Customise products and processes to suit local markets Home-base augmentation: source valuable scientific & engineering knowledge Strong home-country bias in R&D: partners, policy makers, embedded in local eco system

Example: An Oxford-based skin-care company (anti-ageing wonder-drug) Different local preferences  modified products different development centres in different countries VS A South Korean electronics company: distributed research and concentrated development R&D location-choices

Openness, local support network Intellectual property, important If local market requires different products = find partners to share costs and production plan

Clusters: Silicon Valley

Project development is a social process – different organizations working together to develop something Patent – exclusive right to commercialise your innovation. For commercial purposes.

How MNC access cluster’s resources?

- Innovation labs, hire local scientists (Samsung) – to understand local culture - Hearing outposts to spot promising ventures and technologies, CVC investments, scout for acquisition (BT, Nokia)

- Outsource high-risk/costly innovation projects (GSK) - Join technology alliances and consortia - High rate of failure companies partly funded it, CVC – corporate venture capital fund – strategically investing in industry of the future / emerging markets  Embeddedness in community of knowledge workers

Where can you find technology talents? Agglomeration – in Italy there are textile centres – cheaper, more suppliers Competitive effects Spillovers – getting the knowledge to somewhere else

They should minimise their risk with their location strategy – don’t put your eggs in the same basket.

- Currency appreciates, raises cost [currency risks] - Companies tend to put their factories in different countries

Perhaps it’s a bad thing if your competitor is in the same city? Spill-over effect is beyond control

Knowledge flow – home base company transfer knowledge to subsidiaries When subsidiary knowledge goes back to home base  reverse knowledge flow Last 20 years  theorists think pipes as knowledge flow. What is the problem?

- Lower ability to understand external knowledge - Absorptive capacity means capacity of companies to leverage or use external knowledge - Inward Openness/open innovation: Use that innovation in your internal processes.

Companies cant do much – make better location decisions.

Lecture 5 – Politics & geopolitics and IB State and Political Risk

Nationalise companies

Once the knowledge is diffused  competing with local companies reduces bargaining power

Influence government policies Different levels of risk tolerance High national importance industry  ownership restriction Cant invest more than 49% in European airlines and 25% in American airlines State enterprise: state owned enterprises and sovereign wealth funds Logic: - A solution to market-failure [public goods, natural monopolies, externalities etc] - Ideologies [communism and nationalism (import substitution & resources independence)] - Political strategy: Social (healthcare, education, housing, energy etc) Economic (defense, communications, transportation) SOMNC – creating public goods SOE: financial and social objectives. Tax money Why do SOE internationalise? - Infusion of private money and professionalisation of management - Access to raw material, energy resources etc - Generate wealth (dividends) for the owner state - Create zone of influence and exercise political & economic clout in host country (geopolitical ends)

Lecture 7 – Competing in emerging economies 

Challenges associated with Ems

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EMNEs

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Strategies to adapt to EMs and overcome distance

Retailers  go to Vietnam and Bangladesh instead of Vietnam Brexit  intellectual property rights

The more control  more investment  more risk When you license(more about software) /francizing (more about restaurant)

What is the incentive to francize? Allow someone open a coffee shop in my name Unless you can codify  good option You lose control of your business but your business can grow

Sometimes you don’t have many options

Contractual because intangible knowledge Joint Venture  buy brand name, buy something that takes hundred years to build Emerging market  information about suppliers customers and franchiser are asymmetric Speed and control  merger, acquisition . if speed is not important go for your own subsidiary

Definition: Emerging Market Economy An economy where GDP per capital income is below US $12,297 per annum and that is experiencing rapid growth and economic transformation and where MNEs can seek lucrative opportunities for medium and long-term investment

Emerging markets: Brazil, Russia, India and China China, India, Brazil, Russia, Mexico, Indonesia, Turkey  go to world bank

Key assumptions

- A nation with an economy with low to middle per capital income and is moving towards becoming developed

- Emerging market economies are trasitioning from a closed market system to an open market system while developing economic reform programs

- EMNs experience rises in local and foreign investments - Emerging market economies carry a great risk for some investors as they are not yet stable or proven Why is FDI important

- A signal that the world has taken notice of the emerging market, and when international capital flows are directed toward an EME, the injection of foreign currency into the local economy adds volume to the country’s stock market and long-term investment to the infrastructure

- For the recipient country, employment levels rise, labour and managerial skills become more refined, and a sharing and transfer of technology occurs

- Home market may be saturated  an EME provides an outlet for expansion by serving as a new place for a new factory or new sources of revenue

- Learning from foreign expertise Implications of middle-class growth  country moves away from Emerging economies

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Expanding purchasing power Growth of urban areas Expectation of continued growth in well paid jobs with benefits Greater demand for public services (education, healthcare, insfrastucture) EM countries have accumulated significant wealth

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- What does this 76% mean?

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- In the past, producers have the most power; now suppliers have more power - Those who have access to these resoruces

A lot of collaboration between companies to get those resources Very difficult and expensive for US company to get access to these resources

China wants to grow their own players Government  lead to a change in policy

Level of corruptions  lobbying to get into the market

the supply gap for experienced managers is reaching crisis levels, driven by rapid growth in service industries

Failed to perform contracts  underdeveloped regulatory system  difficult to develop there

Market liberalisation  allow foreign companies to enter as they wish

Emerging markets multinationals (EMNEs)

- Why have relatively poor and underdevelopmed countries been able to spawn so many global firms in the last two decades

- Acquisitions! Strict rules about acquisitions from emerging markets now in some countries

- Are emerging market multinationals really different from successful multinationals from developed e...